Essay On Islamic Banking System

Islamic Banking system is banking system that guided by principles of Islamic laws (Sharia). In Islamic banking system, the most important feature is prohibited of interest (Riba), no matter what type of form or source it is.

Riba is the fixed increase on the capital, collected against a fixed period. According to Qur’an, in all type of transactions, both receipts and payment of interest is prohibited. People who dealing of lending money in three conditions which are addition in the principal amount or capital, increment to the additional amount fixed in advance and the dealing made conditional to the two mentioned clauses are consider dealing of Riba. It is regardless of its usage whether it is a personal need or for a useful purpose or either the borrower is poor or rich. However, mark-up for delayed payments and trade-financing commissions are allowed. The prohibited of Riba is to avoid the unbalanced distribution of income in society if interest is involved in credit system.

Risk sharing is another principle for Islamic banking system. Although interest is prohibited in Islamic banking system, they still can operate by the concept of profit and loss sharing which is utilizing the funds at risk. When there is no guarantee of return, people will be encouraged to involve in maximize their exertion to contribute justify into production process. Mudarabah and Musharakah are two types of forms which are most desirable in profit and loss sharing concept. Under these two forms, financier makes the funds available as an investor instead of as a lender. The funds they invest do not guarantee will bring them income, they might need to share the loss in proportion to his share. Under Mudharabah, that will be two parties involve who are ...

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...s creditor and debtor. However, no matter what type of dealing a client with an Islamic bank, their relationship will never be debtor and creditor. For example, under Mudharabah basic, the relationship between a bank and a client is investor and entrepreneur only. Moreover, when doing investments in conventional banks for example doing an savings in conventional bank for a certain period, the bank has to guarantee all its deposits when maturity, regardless the bank is loss money in an unexpected business failure. However, for Islamic bank, if based on al-wadiah principle, Islamic bank will only guarantee deposits for all deposit accounts but if under mudharabah principle, client have to share the loss if loss exist. Therefore, both Islamic and conventional banks have a totally different way in their operation although the service they provide is almost the same.