As the world has recently passed through the global financial crisis that begun in 2008 in the USA with the banks’ collapsing, analysts are giving different opinions and making new economic hypothesizes about the origin of, as well as the process of different countries escaped from the crisis. Among all these new “theories”, the case of Islamic banks is interesting in terms of its nature and consequences. In my essay, I will try to highlight the basic principles of the Islamic finance, the reasons of the restriction of interest, the most important tools used by Islamic banks in economic activities and brief explanation of them, and finally my view point of the probable future improvement of the Islamic financial system.
First of all, let us outline how Islamic banks actually work and what their main differences are in comparison with conventional banks. In this banking system, banks are operated by Islamic laws (known as Sharia), so Islamic economic principles are considered as primary guidance. Two basic doctrines behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest . Hence unlike conventional commercial banks, Islamic banks do not pay or charge interest on lending or borrowing of money. This is because the Sharia’s strictly prohibits, among other things, the receipt and payment of riba (interest) /. The interpretations to clarify the meaning behind this restriction suggests that earning or charging extra amount of money from debtor has to be seen something as immoral behavior, because making pressure on your borrower is actually unfair from the view point of Islam. To make it clear, the religion of Islam basically promote the principle of justic...
... middle of paper ...
...ofit. Hence, in terms of risk management Islamic banks are more reliable. In addition, with the increasing population of Muslims all over the world, and the recent economic theories proving Islamic banks’ advantages over traditional banks especially during hard times, I believe that new financial system that are based on Islamic principles will play a very important role in the near future.
Works Cited
http://www.investopedia.com/terms/i/islamicbanking.asp (Accessed at Nov 10/10/2013)
R.A.A. Karim / The International Journal of Accounting 36 (2001) 169–193 (p.178)
Islamic Economic Studies Vol. 12, No. 1, August 2004, EFFICIENCY IN ISLAMIC BANKING:
AN EMPIRICAL ANALYSIS OF EIGHTEEN BANKS, p.1
Islamic Economic Studies, Vol. 8, No. 2, p.2
Mufti Muhammad Taqi Usmani, An Introduction to Islamic finance, p.31
Ibid., p. 31-33
Ibid., p.20
Ibid., p.65
"Follow what is revealed to you from your Lord" Qur’an 33:2 From this excerpt, it can be said that following the Lord is the primary building block for the Five Pillars of Islam, or an essential practice within the Islamic faith. According to the textbook “Living Religions” by Mary Pat Fisher, the Five Pillars of Islam are “the basic spiritual practices incumbent on all Muslims”. What is meant by this is that the Five Pillars function as a guideline that all Muslims are expected to follow in order to obtain an afterlife full of rewards in opposition to an afterlife that is full of suffering. Though there are five basic principles within this religion, each pillar is held to a high standard within Islamic communities. This is due to the common
Religion can be a very tricky subject to understand. There are many different religions in the world today. In addition to the many different religions, some of these religions have many different subgroups. There are people who spend their whole lives trying to wrap their head around religion and the idea of worshiping someone who cannot be seen. The purpose of this paper is to explore the Five Pillars of Islam so that we can have a better understanding of this religion that western culture doesn’t really understand all too well.
The modern Islamic Finance industry is young, its timeline begin only a few decades ago. However, islamic finance is involving rapidly and continues to expend to serve a growing population of muslims as well as conventional.
In the post-colonial context , there is a desire to change the current currency system to improve the management of money and credit ; and to foster a favorable climate for the development of domestic enterprises in which the World Bank proposed the establishment of the National bank of each country . A National bank is seen as a tool of control of financial freedom , which no political independence would not be complete . Therefore, Sir Sydney Caine , former Vice Chancellor of University of Malaya , and Mr. GM Watson , an executive of the Bank of England , has been appointed to carry out a detailed investigation on problems of central banking and to provide advice on the establishment of a center in Malaya , including law rules.
Baitulmal means the Treasury, Baitulmal according to Fiqh is the exchequer of an Islamic state. Being public property, all the citizens of an Islamic state have some beneficial right over the Baitulmal, yet, nobody can claim to be its owner.
Just like any other financial institution, Islamic banks are compelled to take into account the issue of risk management. Thus, it is imperative to this debate to discuss the issue of agency or contract enforcement problem within Islamic finance; one of the most discussed risks faced by Islamic banks today. Due to an apparent ‘low level of transparency’, it is argued that PLS contracts are inherently vulnerable to agency problems such as entrepreneurs. This can primarily be attributed to the fact that Islamic banks as investors, fear borrowers will in some cases withhold crucial information. Due to a lack of exhaustive information on borrowers, banks are unable to discriminate against risky borrowers. This is commonly referred to information asymmetry. In conventional banking, lenders charge elevated interest rates to negate the higher inherent risk in lending. However, due to a lac...
1. The functions and operating modes of Islamic banks are based on the principles of IslamicShariah.
First effort of Islamic finance is in 1960’s. In 1963, Mit Ghamr Local Saving Bank was established in Eygpt. The operation is based on German Saving Bank. The purpose of the bank is to mobilize the idle saving of Musl...
As we know the financial service are of two types 1. The depository institutions 2. Non-depositary intuitions. In this let us consider depository intuitions and let discuss on it. The major example of financial depository institutions is banks. As banks accepts deposits from its customers. Banks play very virtual role in developed economy, like Oman. In this assignment let us take National bank of Oman as an example. National bank of Oman is very famous and busy bank in Oman majority of citizens of Oman bank with it.
In the Shari’ah, “riba” technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. Riba is clearly explained in Quran and Hadith while interest is explained by scholars Greek Scholar Aristotle defines Interest in his book “Money and Politics” as “Interest” is an artificial profit which does not enter into legal trading. Using money as a commodity is selling, just a forged artificial transaction. Money has to be used as a means of sale and purchase and measurement of a commodity to be sold or purchased within similar quantities and qualities.
2. The justice and brotherhood of man; Islam aims to form a society in a 'solid-form'. Each individual is bounded by the brotherhood and affection as a family.
Our group have been assinged to discuss on the topic above but in Islamic Banking perspectives. Therefore, before going any further, let us clarify definition of the Principles of Islamic Banking and clarify what are the elements involve in the Principles of Islamic Banking. Beside, we will also do some comparison of product or services offered by both banks which are conventional and Islamic banking. Apart from that, we will also clarify the problems or challenge faced by the agency which practices the Islamic banking in their agency.
The study is primarily designed to find out the continuous issue of the banking system in
Sharing is the literal meaning of Musharakah and it came from an Arabic word ‘Shirkah’ which means being a partner. The term ‘shirk’ is also used in the same context which bring the meaning partner of Allah. Under Islamic jurisprudence, Musharakah is defined as a partnership or enterprise structure with profit or loss which sharing implication that is used in Islamic banking rather than interest bearing loans. Basically, the nature of Musharakah is the allocation of profits must be determined and specified beforehand by a profit and loss sharing partnership. The evidence that shows the nature of Musharakah can be seen in Al-Quran which says “But if they are more than two, they share a third”. It also stated in Al-Quran that “Many partners oppress one another, except those who believe and do righteous deeds, and very few they are” . In hadith it is stated that the Prophet S.A.W said “Allah had said that: “I am the third of the partners, as long as any one of them does not betray the other. If he/she
The Traditional Theory of Banking In this paper author review the traditional theory of banking and attempt to examine the theoretical reasons for why banks exist. As a financial intermediation, the natures of the banks are to provide financial services and conduct the intermediary functions in the whole financial system by accepting deposits and making loans. The question raised here are how they conduct these roles and why the borrowers and lenders do not come together without the banks for the saving of intermediation costs, why both of the two parties are ready to pay for their services and what’s the value added by the banks? The paper proceeds as follows. Section 2 offers a traditional view of banks and describes the nature of them.