islamic banking essays

INTRODUCTION The basic concept of Islamic banking which is also known as 'interest-free banking' is based on basic ethical standards with just one main difference- Muslims are not allowed to pay or receive interest. This does not mean that business activities or making a profit are not encouraged, they are but as long as they don’t involve interest in any form. To fulfil this purpose, financial instruments have been introduced by the Islamic financial institutions to satisfy these requirements. An example that can be seen is that equity financing is used instead of debt financing. Furthermore, instead of giving a fixed interest rate on the savings account, Islamic banks offer a share of the bank's profit, as a return on deposits and this is around 5% annually. HISTORY The modern banking system was introduced into the Muslim countries in the late 19th century when most of these countries were performing that well economically as well as politically. These banks founded branches in the capital cities of major Muslim countries to cater their business needs. However, the branches were limited to the capital cities and the other surrounding cities were totally ignored by the banking system. Nevertheless, most local businesses still refrained from engaging with these “commercial” banks, mainly for religious reasons. The reason behind this is that banks operate on the basis of charging interest, a concept totally forbidden by Islam. As time went by however, it became challenging to avoid commercial banks. They were more efficient in certain banking aspects such as money transfers and current accounts, but borrowing loans and opening saving deposits were still avoided due to the prohibited interest issue. As the second half of the 20th century has witnessed, any business-related transaction almost always involves a bank and hence, avoiding the modern banking system has.
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For millions of Muslims, banks are institutions to be avoided. Islam is a religion which keeps Believers from the teller's window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslims need banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to buy a car, to facilitate capital investment, to undertake trading activities, and to offer a safe place for savings. For Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamically legitimate ventures, not just to keep their funds idle. However, in this fast moving world, more than 1400 years after the Prophet (s.a.w.), can Muslims find room for the principles of their religion? The answer comes with the fact that a global network of Islamic banks, investment houses and other financial institutions has started to take shape based on the principles of Islamic finance laid down in the Qur'an and the Prophet's traditions 14 centuries ago. Islamic banking, based on the Qur'anic prohibition of charging interest, has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multi-billion dollar deposits world-wide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Exploding onto the financial scene barely thirty years ago, an estimated $US 70 billion worth of funds are now managed according to Shari'ah. Deposit assets held by Islamic banks were approximately $US5 billion in 1985 but grew over billion in 1994. The best known feature of Islamic banking is the prohibition on interest. The Qur'an forbids the charging of Riba on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. The Shari'ah consists of the Qur'anic commands as laid down in the.
Islamic banking has become an increasing trend nowadays. Not only Muslims use Islamic banks, however people from other religions also use them as they are believed to be an ethical way of banking. Others use them as they place money in the most profitable investments in order to avoid losing money. The difference between Islamic banking and commercial banking is that Islamic banking follows the shari'a, which prohibits charging interest rates on money which is called riba. According to the shari'a, money isn't a commodity, but it's a method of exchange that should keep circulating continuously for economic activities to take place thus creating more jobs. Islamic banks use Profit Loss Sharing (PLS) which is a contractual agreement between two or more entities, where they merge their resources and use them in a project then share profit and loss. (Dar) In Islamic banks, investment is done in three ways, whether Musharaka, Mudarabha or Financing on the basis of an estimated rate of return. First of all, Musharaka is when a bank forms a joint venture with another entity, where they share profit and loss according to a previously agreed upon distribution system. While Mudarabha is when a bank is responsible for money and the other party gives expertise management and labor. In Mudarabha profits are shared according to a distribution way that was set in advance, but the bank is responsible for the losses. Financing on the basis of an estimated rate of return, is where the bank assesses the expected profit of the project and provides the money where. In this case, if the project gets excess profit than the estimated one, the client takes the extra money and if the profit is less than expected, then the bank accepts the lower rate. (Abdul Gafoor, Islamic Finance & Information Service) As for trade financing, it is also done in different ways. First of all, mark-up, where.
By A.L.M. Abdul Gafoor (This is actually Chapter 4 of the book, Interest-free Commercial Banking, by the author, 1995) (Reproduced here for the benefit of those students and others, especially in developing countries, who find it difficult to obtain the book and who make frequent inquiries of the author if he could send them more information about Islamic Banking.) 4.0 Introduction 4.1 Historical development | 4.1.1 Interest-free banking as an idea | 4.1.2 The coming into being of interest-free banks | 4.1.3. The last decade 4.2 Current practices | 4.2.1 Deposit accounts | 4.2.2 Modes of financing | 4.2.3 Services | 4.2.4 Shortcomimgs in current practices 4.3 Problems in implementing the PLS scheme | 4.3.1 Financing | 4.3.2 Legislation | 4.3.3 Involvement in specialised non-bank activities | 4.3.4 Re-training of staff | 4.3.5 Other disincentives | 4.3.6 Excess liquidity | 4.3.7 Uneasy questions of morality 4.4 Islamic banking in non-Muslim countries | 4.4.1 Cenrtainty of capital and return | 4.4.2 Supervision and control | 4.4.3 Tax regulations 4.5 Discussion and suggestions | 4.5.1 Savings accounts and capital guarantee | 4.5.2 Loans with a service charge | 4.5.3 Investment under PLS scheme 4.6 Conclusions | Notes | 4.0 Introduction Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at a low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became.
Chapter.5 Conclusion: significance of Islamic banking, remarks and a few suggestions on it. 5.1 What is the significance of Islamic Banking in a post recession world? Islamic banking is gaining popularity in emerging markets after helping some financial institutions avoid the worst of the economic meltdown.Islamic banks have been less affected than many conventional banks in the current global recession. This is mainly because unlike conventional banks, the Islamic banks have not been exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds since these practices are not in accordance with the principles set out in the Sharia Law. Moreover, recent years have already indicated that there is an interest in Islamic banking beyond Islamic investors. The UK is one of the leading centres for Islamic banking in the world, yet only 5% of its population is Muslim. And lastly, governments and regulators in a variety of countries have already recognized the importance of Islamic banking as a feasible alternative to conventional banking. The global recession brought about by the collapse in credit supply saw many of the globally accepted models of investment disappeared almost overnight with the collapse of Lehman Brothers in September 2008. It is well accepted that the credit crunch was essentially caused by gambling and inadequate regulation. The radical change in the investment dynamics of the market and a clear question of the morality of the investment industry signify a clear turning point in the development of regional and global investment markets. That will provide new boost to the already burgeoning Islamic private equity and venture capital industries Thus, surely a system in which gambling is banned, where everything must be backed by tangible assets should be significant in a post recession world. In this era of scarred savers.