Islamic Banking Essay

Another major principle of Islamic is fairness. In Islamic banking, fairness is highlighted through its operations which the dubious terms and condition transactions are not engaged with Islamic banks. Terms and conditions needed in a transaction are disclosed in the agreement. In addition, everyone in the transaction can make informed decision which are not misled or cheated. Besides, according to article for WIBC on Islamic Banking and Finance, there is a clear division between the allowed and forbidden of the activities. For example, transactions involving alcohol, gambling, armaments, pork related products, and other socially detrimental activities should be avoided in Islamic Finance.

In Islamic banking, there are still five main concepts

Under this principle, profits will be shared between owner of capital (financier) and the entrepreneur on the basis of contractual agreement. However, financier will lost it money invest if the business fail. This means that, income from the money invest by financier is not guarantee. For wadiah, refund of the principal is guarantee by the bank. Depositor under this principle might receive a share on profit of the bank’s business. Wadiah is safekeeping as their principal is guarantee in full of demand although the profit of investment by bank is not guarantee. Musharakah is a joint enterprise or partnership business which both parties will manage the business together. Under this principle, ratio of profit or loss pre-determined basic. After a certain periods, a party can terminate the joint venture gradually. Murabaha is another principle of Islamic banking. This

This new financial system distinguishes itself from conventional banking as it is operation by compliance with principles of Islamic law (Shariah). According to Dusuki and Abdullah (2007), Islamic banking and finance aim to having a fair and balanced society. In order to protect the interests and benefit of all parties who take a place in this market and encourage social harmony, charging an interest, gambling and excessive risk are prohibited. Pollard and Samers (2007) say that, Islamic banking emphasize on the prohibition of interest and the absence of interest in all lending. Therefore, in Islamic financial system, profit and loss (PLS), over expansion in the size of derivatives and “too big to fail” concept is found in Islamic banking system but not in conventional banking