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 become virtually impossible. Banks extended into local communities and thus, forced themselves into almost every kind of business and their related transactions. This is when many Muslim intellectuals recognized the need for an Islamic banking system that will serve the needs of Muslims from the business point of view and at the same time respecting the codes of Islam.
Islamic banking as an institution has been around for 25 years but interest-free banks have also been tried before. ...
... middle of paper ...
...system yet it has already been implemented many Muslim and a few non-Muslim countries. Despite the successful acceptance there are problems which are mainly in the area of financing.
Islamic banks, however, can eliminate the doubtful forms of financing and offer a clean and efficient interest-free banking. This can be put into effect by making use of only two forms of financing -- loans with a service charge and Mudaraba (or participatory financing) -- both of which are fully accepted by Islam. Such a system will create a competitive advantage where Islamic banks and conventional banks both co-exist. In addition, Islamic banks will have no difficulty in establishing and operating in non-Muslim countries.
Mudaraba is a unique feature of Islamic banking, and can offer responsible financing to socially and economically relevant development projects. This is an additional service Islamic banks offer over and above the traditional services provided by conventional commercial banks.
Therefore, Islamic banks have the potential to compete with perhaps even outperform the common commercial banks that are currently available if they follow the Shari’ah rulings and put it in effect.
But most people within the economy do not know enough about the complexities of the banking system to voice their opinion in opposition to the bankers, politicians, and regulators. This is a central concern of Admati and Hellwig and one of their main motivating factors for writing The Banker’s New Clothes. Admati and Hellwig aimed to “demystify” the banking system in order to raise awareness to weaknesses in banking policies in hopes of triggering necessary reforms to banking principles that only benefit the bankers and politicians. They state, “Expanding the policy discussion beyond the circle of bankers and banking specialists is very important, because more action is urgently needed and yet has not been taken. The banking system is still much too fragile and dangerous. This system works for many bankers, but exposes most of us to unnecessary and costly risk, and it distorts the economy in significant ways (pg. 4).” Admati and Hellwig look to level the playing field for the general public by explaining the banking system and it’s flaws in clear terms that most people can understand. By doing this Admati and Hellwig hope to reduce the recurrent economic booms and busts that have such harsh consequences for people in compromised economic situations; which are
Banking theory and practice, as immobilizing and fixating forces, fail to acknowledge men and women as historical beings; problem-posing theory and practice take the people’s historicity as their starting point
.... If the Islamic finance needs to imposed higher risk to their customers, but still follow the rules and regulations that include in Al-Quran and Al-Sunnah. From this, the Islamic finance still can focus on the well being of their customers and wealth.
Islamic finance is a term that reflects financial business that is not contradictory to the principles of Sharia. Conventional finance, particularly conventional banking business, relies on taking deposits from, and providing loans to, the public. Therefore, the banker‑customer relationship is always a debtor‑creditor relationship. A key aspect of conventional banking is the giving or receiving of interest, which is specifically prohibited by Sharia. For example a conventional bank’s fixed deposit product
Based on the concept of usury and gharar under the wisdom of the prohibition of usury and gharar can say that is forbidden in the Islamic concept requires that the damages should exceed the interest and usury, reflects this clearly. Gharar illustrates the flexibility of Islamic law in terms of it being permissible when its benefits outweigh the harms. Through these findings we see a question emerge that deserves to be the focus of a discussion: are all contracts in Islamic banks completely free of usury?
In general terms, banking involves the business activity of accepting customer’s deposits at a small cost to the bank and then lending those funds to customers at a cost high enough for the bank to earn a profit. The business of lending is very risky, therefore lenders are encouraged to apply the principles of good lending or canons of lending. Though the canons of lending do not prevent the risks associated with lending it does mitigate risks involved.
It is impossible to against with the universal banking system. This essay is divided into two sides: the banking side and the customer side. I would argue that both banks and customers need the universal bank. This essay will discuss why both need the universal
1. The functions and operating modes of Islamic banks are based on the principles of IslamicShariah.
The principle of Islamic is Syariah, it is developed through four main Islamic juristic schools which is Hanafi, Maliki, Shafi and Hanbali. However, Quran and Sunna is the two main sources which the Shariah derived from. In Islamic finance, there are three major principles. Firstly, the prohibition of usury or interest (riba). In the words of Maulana Maudoodi, page 139, Riba can be defined as the stationary increase on the capital which collected against a fixed period. This means that interest is consider as riba if the amount loaned is going doubled and re-doubled and it is given as consumption needs instead of productive needs. One of the examples of riba is rental income.
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...
Patmawati (2008) argues that zakat distribution has the ability to develop the economic well-being of Muslim society based on the evidences by a number of empirical studies of zakat. A more specific study on the impact of zakat on distribution of income for the two categories of the asnafs, the poor and the needy people in Malaysia was carried out by Patmawati (2006) whereby she finds that zakat has reduced the income inequality and poverty.
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.
...ation, for the whole idea is a myth and cannot be introduced in a country where normal banking exists, and which claims to be secular. To create a legislation which allows no interest to be paid or received would mean subjecting ordinary savers to enormous risks - which surely cannot be the intention of Islamic banking. If Islamic banks cannot invest in bonds, T-bills, and commercial paper, or lend to finance inventory or projects for interest, it defeats the whole purpose of banking. Even in Muslim countries, what is called Islamic banking is - to put it in the dismissive words of one western critic - "normal banking sprinkled with holy water." At best, Islamic banking is a way to deny the existence of interest and make it easier for Muslims to accept the idea of banking since the Qur’an includes strong injunctions against the giving or taking of "riba" - interest.
According to Shari’ah, which is the guidelines underlined by Islam, there is several principles of Islamic Banking that are in accordance to its practices. They are :-
The study is primarily designed to find out the continuous issue of the banking system in