The Advantages of Islamic Finance and Banking

1173 Words5 Pages
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...

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...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
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