Final answer:
Private finance refers to the individual or non-governmental management of funds, where financial institutions offer services like savings and loans and profit through the interest charged.
Step-by-step explanation:
The correct answer to understanding private finance and interest-free banking involves looking at the roles and functions they play in modern economies. Private finance refers to the management of finances by individuals, businesses, or non-governmental entities, different from public finance which deals with government funds. In private finance, financial institutions such as banks, provide services to save, borrow, and manage money. Banks make money by issuing loans and charging interest on those loans, which is the spread between the interest earned from borrowers and the interest paid out to depositors. It involves assessing interest and risk in allocating savings efficiently and examining the types of accounts available to consumers and the associated monetary costs and benefits.
On the other hand, interest-free banking is a banking system that operates without charging interest on loans. Instead, it is based on profit-sharing or fee-based models, aligning with the principles of Islamic finance that consider charging interest as unethical. In interest-free banking, banks still make a profit, but through other mechanisms such as sharing in the profits of a business they financed or by providing services for a fee.