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.
Flaherty, Edward. 1997. A Brief History of Banking in the United States <http://odur.let.rug.nl/~usa/E/usbank/bank03.htm> (accessed 12-12-99)
The first one was they were overconfident and adopted aggressive lending behavior, which relaxed the standard of lending significantly. These financial institutions includes commercial banks. Out of the fact that the more money they lend out, the more profit they would make, those lenders had less incentives to check the credit ability of borrowers.
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
What happened was that the bank was opening accounts, such as saving, credit card, for customers without their knowledge or consent (Zarroli).
Historically, banks link savings to investment. Deposits are paid in by savers, the bank’s liabilities, some of that money is held in capital reserve and the rest is lent to businesses and entrepreneurs as loans, the bank’s assets. The savers will be paid interest on their deposits, and the enterprises will have to pay interest on their loans, higher than the interest paid to depositors; the difference in interest is the banks revenue. This is a fairly mundane business model which banks have been doing for over 600 years. Recent declines in interest rates have led to decreased profit margins on this type of intermediation. Banks needed to diversify, and the deregulation of UK banks in 1986, and the emergence of light touch regulation, allowed them to do such. Retail banks from here on offered services such as mortgages, pension plans and insurance. Investment banks, traditionally offering corporate services like merger and acquisition advice, now operate in proprietary trading in wholesale markets. OECD reports that non interest income accounts for 40.7% of credit institutions income in 2003, up from 25.5% in 1984. All this change in how banks operate, fuelled by declining margins and self-regulation, has led to the us...
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
Shariah is an essential section of Islam. It is frequently described as ‘Islamic law,’ triggering some to presume that it comprises primarily of criminal laws and penalisations. Nevertheless, Shariah comprises far beyond the conventional way of comprehending law. Although Shariah offers the legal structure for the establishment and functioning of humanity, it too specifies moral, ethical, social and political guidelines for Muslims at an individual level as well as at the collective society level.
In 1975, the Islamic Development Bank opened in Saudi Arabia and gave the islamic finance industry an international presence. It recruited member countries and offer them financial products to promote economic and comunity development.
Another major issue that they had to face was that Central Bank did not give approval to open branches in other locations.
This paper explores about the case of Bank Century that happen in 2008, in that case Bank Century get injected money from Bank Indonesia because of several reasons, one of the reasons is because there are a lot of customers want to withdraw their money, and those customers could withdraw any of their money. Moreover, this paper will explain how and why that problem happen and what is the government do to facing that problem.
There are a number of features or principles which are attributable to the Mudarabah contract. These include nature of contract, capital, profit sharing right and treatment of losses.
The overall discussion of risk management based on the Islamic law or maqasid al-shariah. Chapra quotes al-Ghazali in defining maqasid as promotion of “the well-being of the people, which lies in safeguarding their faith, self, intellect, posterity, and wealth (ISRA, 2011). Economic activities are not judged by their inherit risks, but by whether they add value and/or create wealth from an islamic perspective. To makes risk management an imperative for a flourishing financial system, wealth protection is being one of the major shariah objectives.
It is a known fact that the banking industry plays a huge role in today’s society, the industry has grown rapidly of many decades and still growing. The banking sector is that sector of the society that is actually responsible for the handling of financial assets for other sector of the economy, they do this by investing the financial assets in order to create more wealth in the society while regulating all the activities involved in the process. (What is the banking Sector 2015)
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.
This is followed in section 5 by an analysis of the recent changes in the banking industry. With the development of the financial system, declining entry barriers and the deregulation of the banking industry make banks no longer the monopoly suppliers of banking services and reduce their comparative advantages which they usually hold in the past. Whether the reasons give rise to the existence of banks are still powerful will be examined here, while section 6 offers a way of considering whether banks are declining by looking at the value added by the banks. When the value added by banks is examined, banks are not a financial intermediation, which not only conduct the traditional services but also provide more diversified