On the other hand, losses are to be shared according to the initial capital invested in the venture. We can only hope that in near future, with increasing competition in the Islamic banking industry, this effect will minimize because of market-forces except to the extent of pricing against essay on islamic banking additional risk elements, essay on islamic banking. The Evolutions of Isamic Finance in Malaysia. This experiment was not labeled as an initiative to establish Islamic banking because the idea holders feared to be labeled as Islamic fundamentalists. Therefor, it gives problem to the agencies as there are different methodologies that are being proposed when elaborating the law. However, Islamic banking is not limited to interest-free banking alone but adhering to all Islamic values such as charity, essay on islamic banking, profit sharing, zakat or Islamic tax collected for the destitute and not doing business in things classified as haram or forbidden under injunctions of Islam. MT Gharm was a rural area and the people were religious.
Difference Between Islamic Banking And Islamic Banking
Islamic banking gets its name from its compliance to Islamic laws also known as Shariah laws governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic laws. The rationale behind not charging interest comes from the Islamic finance concept, which states that interest or riba encourages circulation of wealth in the hands of a few rich entities and limits prosperity to reach to the masses in the society. However, Islamic banking is not limited to interest-free banking alone but adhering to all Islamic values such as charity, profit sharing, zakat or Islamic tax collected for the destitute and not doing business in things classified as haram or forbidden under injunctions of Islam.
The first modern experiment of Islamic banking was carried out in Egypt. This experiment was not labeled as an initiative to establish Islamic banking because the idea holders feared to be labeled as Islamic fundamentalists, essay on islamic banking. Order custom essay Essay On Islamic Banking with free plagiarism report. The following banks were opened up; Nasr Social Bank in ,Amanah Bank inthe Dubai Islamic Bank inthe Kuwait Finance House inthe Faisal Islamic Bank of Sudan inFaisal Islamic Bank of Egypt inthe Bahrain Islamic Bank essay on islamic banking, and the Qatar Islamic Bank However, it is only in the last few years that Islamic banking and finance has picked up pace and Islamic economists have come up with innovative financial products that are also Shariah compliant.
Islamic finance believes that interest on consumer as well as investment or corporate loans is forbidden. It devises its rulings out of the events of Islamic history and financial transactions there in. Some salient foundations of these rulings are; the concept of profit as well as loss sharing with entities the loans are advanced to. There is no such thing as a confirmed profit in form of interest in Islamic finance, essay on islamic banking. Usmani If a custodian is handed money for safekeeping he does not have limited liability but a complete liability towards the clients that handed the money or assets for safe keeping.
The custodian is allowed to invest these amounts in trade and business to earn profits on it. However, is liable to share the profits with the clients according to the ratio of the share of their capital in the entire invested capital M. Islamic financial practices believe only in asset backed financing and not in money as it does not have any intrinsic value. Essay on islamic banking, many Islamic banks believe in entering a valid contract with the clients and engage in actual purchase of things such as houses, automobiles or consumer goods and later sell it out to client.
It is imperative to understand the nature of Islamic financial terms of contract and sales too. Under these rulings a contract is void if it violates the Islamic principles governing economics, is not formed through mutual agreement and negotiation, is not part of the normal market transactions and benefits one party over another. Whereas, M. Usmani describes sales in Islamic essay on islamic banking are considered void if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction The Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, Istijrar, Ijarah and Ijarah Wa Iqtina.
Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract M. The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest. On the other hand, losses are to be shared according to the initial capital invested in the venture. If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any essay on islamic banking lent out. Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses. However, in Musharakah it is responsibility of bank to share the losses as well.
The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank. This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of the venture they finance, essay on islamic banking. Mudarabah is closely related to Musharakah but essay on islamic banking another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business.
This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i. essay on islamic banking and client, essay on islamic banking. However, a fixed lump sum amount irrespective of profits or losses is not allowed. Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset. Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset, essay on islamic banking.
Salam is generally used for Islamic banks to finance essay on islamic banking ventures where in a seller agrees to supply particular goods or services to a buyer essay on islamic banking a future date of delivery i. mutually consented uponhowever, the buyer the price of the transaction is completely paid at spot. In Istisnah, it is a sale transaction where a commodity is transacted before it comes into existence. It is necessarily for manufactured goods, part or whole of payment is made in advance the bank has right to cancel the contract before manufacturer starts the work. Istijrar involves two parties, a buyer which could be a company seeking financing to purchase the underlying asset and a financial institution, essay on islamic banking.
It has two forms; first where the price is determined after all transactions of purchase are complete and second where the price is determined in advance but the purchase is executed from time to time, essay on islamic banking. Ijarah Islamic leasing is where in the leaser who also is the owner of things transfers the use of thing to another person or the lessee for a mutually agreed time period and on a mutually agreed consideration, essay on islamic banking. Ijarah wa Iqtina leasing and promise to gift is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i. the ownership is completely transferred.
Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law, essay on islamic banking. Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country. American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan. American banks do not encompass any religious taxes to support the community but just the state taxes apply.
However, essay on islamic banking, Islamic banks collect the zakat Islamic tax for benefitting community essay on islamic banking disperse it among the needy segments of the society. Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive. However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if an installment is not paid on time or defaulted a compounded interest charge is levied on it.
However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter. If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged. American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i. clients and keeping public interest at heart of future objectives. American banks can borrow money from money markets easily. However, Islamic banks face constraints towards such actions because any borrowings they make have to be Shariah compliant, essay on islamic banking.
American banks give greater weightage to the credit ratings of their clients to assess the advancement of loans. Whereas, Islamic banks emphasize the project viability while deciding upon advancing loans. A typical American bank while financing projects mainly functions as a creditor to its clients or debtors. On the other hand, Islamic banks become partners, investors, and sellers to their clients which depend upon the modes of finance taken up. Conventional American banks need to guarantee all the deposits they accept. However, Islamic banks only guarantee saving deposit essay on islamic banking in their portfolio.
Their clients have to share the losses as well depending upon the nature of the contract Rahman. bond issue, share certificate etc investopedia. Islamic banks have now ventured in securitization of Musharkah, Murabaha, Mudarabah and Ijarah, essay on islamic banking. Many countries now have Mudarbahs listed at stock exchanges to be traded in. Islamic bankers are also bringing investment funds that are compliant with Shariah laws to the financial services market. Some of the funds established include equity fund, commodity fund, ijarah fund, murabaha fund, Bai-Al-Dain, and Mixed fund.
Therefore, it can be seen that Islamic banking sets its foundations in Islamic laws governing financial transparency. These are very different from conventional American banks essay on islamic banking their economic concepts, financial products and services offered to clients. Furthermore, Islamic banking is relatively a new concept as compared to the conventional banking and economic concepts that have developed over ages. Islamic bankers and scholars are working upon deriving more products and services based upon Shariah to offer a greater range of financial products in the financial industry.
It holds appeals in its concept of community care and client care. However, the complete implementation of this form of banking on a large scale seems a questionable and daunting task. Retrieved 28th April from www. pdf Rahman, Zaharuddin A. Karachi Pakistan :Darul-Ishaat This essay was written by a fellow student. You can use it as an example when writing your own essay or use it as a source, but you need cite it. Explore how the human body functions as one unit in harmony in order to life. Essay On Islamic Banking. Free Essays - PhDessay. com, May 22, Accessed January 7, comMay The history of Islamic Banking also known as Islamic Finance dates back to the 70s, with the establishment of Dubai Islamic Bank, essay on islamic banking.
Essay on islamic banking then the Islamic Financial system has prevailed. The basic principles on which the Islamic banks function are prohibition of Rib I. Collection and payment of interest and prohibition of investment in organization involved in unethical and. The impact of risk management on profitability in Islamic banks against conventional banks Introduction Background of the study Since s Islamic banks is essay on islamic banking on the feet and leg.
obstacle essay
Usmani describes sales in Islamic banking are considered void if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction The Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, Istijrar, Ijarah and Ijarah Wa Iqtina. Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract M. The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest.
On the other hand, losses are to be shared according to the initial capital invested in the venture. If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any capital lent out. Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses. However, in Musharakah it is responsibility of bank to share the losses as well. The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank.
This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of the venture they finance. Mudarabah is closely related to Musharakah but is another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business. This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i. bank and client. However, a fixed lump sum amount irrespective of profits or losses is not allowed. Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset.
Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset. Salam is generally used for Islamic banks to finance agricultural ventures where in a seller agrees to supply particular goods or services to a buyer at a future date of delivery i. mutually consented upon , however, the buyer the price of the transaction is completely paid at spot. In Istisnah, it is a sale transaction where a commodity is transacted before it comes into existence. It is necessarily for manufactured goods, part or whole of payment is made in advance the bank has right to cancel the contract before manufacturer starts the work. Istijrar involves two parties, a buyer which could be a company seeking financing to purchase the underlying asset and a financial institution.
It has two forms; first where the price is determined after all transactions of purchase are complete and second where the price is determined in advance but the purchase is executed from time to time. Ijarah Islamic leasing is where in the leaser who also is the owner of things transfers the use of thing to another person or the lessee for a mutually agreed time period and on a mutually agreed consideration. Ijarah wa Iqtina leasing and promise to gift is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i. the ownership is completely transferred. Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law.
Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country. American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan. American banks do not encompass any religious taxes to support the community but just the state taxes apply. However, Islamic banks collect the zakat Islamic tax for benefitting community and disperse it among the needy segments of the society.
Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive. However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if an installment is not paid on time or defaulted a compounded interest charge is levied on it. However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter. If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged.
American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i. Accordingly, one can easily imagine that in an economy whereby most of the businessmen are not honest in fairly presenting the financial statements of their businesses, how difficult it is to introduce a profit and loss sharing based financial solution. Similarly, in most of the cases payment of Zakat and Sadaqat depends on the individual and particularly, in view of the gigantic volume of the black economy in the country, what can be expected even if a good system for Zakat and Ushr is introduced?
It needs to be emphasized that only the change in banking system is not a solution to the overall revolution of economic system unless other facets of Islamic economic system, as well as, Islamic social system are not implemented simultaneously. Accordingly, the complete transition of economy to an Islamic economic system can be performed, when and only when, the overall consensus of the society is developed towards practical application of Shariah in all the facets of human life, particularly including the governmental, political and legislative structures.
Despite such an unsatisfactory and rather discouraging attitude of the society towards application of Islamic Shariah, it should be noted that such a situation do not relieve a Muslim from the applicability of Shariah principles, but rather increases his responsibilities in the way that it becomes his duty not only to try to abide by all applicable Shariah requirements in his personal capacity but also to put his endeavors towards improvement in such system. Consequently, in case the Islamic banking, in your opinion, is not contributing enough towards betterment of society, you cannot blame the same alone. The responsibilities of the Muslim Ummah as a whole or of the State can not be expected to be borne by a single sector only, which, at this point of time is in its infancy stages.
Is It Heela Banking? This is a general discussion at various forums that contemporary Islamic banking is based on Heelas. From Shariah perspective, a Heela is an option utilized to disobey the divine guidance through engineering the circumstances and playing with the facts and intentions. Having an insight into the industry, one can not disagree with this argument to certain extent, as it has been observed in a number of cases that in-fact, certain transactions are practically applied on this basis. Having said that; this argument should, however, not be used to blame the entire industry. We should acknowledge that the foundations of the industry have been built using the pillars which are directly derived from the Holy Quran, Sunnah and Fiqh.
Accordingly, it needs to be emphasized that in order to support the growth of Islamic banking and finance on right footings, we need to strengthen the Shariah compliance mechanism for the industry. In addition, in the longer run, we need to eliminate the Islamic financial products which have the potential of misuse. Use Of Interest-Rate As Benchmark; Is It Halal? Economists feel further issues and that and are of he view that this thing makes these financial institutions a part of the prevailing capitalistic economic systems, hence this sort of transactions are absolutely not desirable by Islam. Here it would be worthwhile to have a look on the arguments by the Islamic banking for better understanding of the pricing issue.
They generally give examples like; suppose you enter into a supermarket in UK and see that the pork, the beef and the Halal beef are all being sold for GBP 2 per kg. Do you think that this similarity of price or the fact that these products are being sold under the same roof renders the Halal beef as Haram? Or for example; in the same superstore you note that they are using the same balance for weighing these three types of meat. Do you think that using the same balance will render the Halal beef, as Haram?
If not, then we should better understand the principle that it is the substance and legal form of the transaction that makes it Halal or Haram and not its pricing, rate or the cash-flow model or the institution, or even the environment that offers such transaction. This issue, however, needs to be addressed by the government, as well as, the market players. A strong Islamic inter-bank market will InshaAllah provide us opportunities to develop our own benchmarks for Islamic banking operations. Dealing of Islamic Banks with Conventional Banks Another strong argument against Islamic banking is against dealing with conventional banks. These dealings are of two types i. sharing of services and commercial transactions.
As far as services are concerned, where the Islamic Banks are facilitating the foreign businesses of their customer or helping out their customers to transfer the money from safe channels. For these services, the remuneration or expense of Islamic banks is service charges which are allowed by Shariah jurists, although they recommend that such interaction should be avoided wherever IFIs are available. The second argument which is much strong is regarding the commercial transactions with conventional financial institutions. These transactions generally relate to the treasury side of the Bank whereby either the IFIs place their excess liquidity with the conventional banks or obtain financings from them to meet their own liquidity requirements.
Although, most of the Shariah scholars have allowed these transactions duly considering the Shariah requirements, however, nobody can argue that it is a must to avoid all such transactions. For this purpose, however, we need to strengthen the Islamic inter-bank market and to provide further liquidity management options to the IFIs particularly, in form of strong Shariah-compliant government securities and a stable capital market with plenty of Halal investment options available. All dealings with conventional financial institutions should remain limited to the necessities which reach the extremes of compulsion. Cost Of Being A Muslim Those who have bad memories of dealing with Islamic banks are in front-line of critics with this remark.
People feel that there are serious doubts on the honesty and integrity of IFIs. On the financing side, they charge higher than conventional banks. In other words, internal rate of return on Islamic financial products is higher than the conventional products. On the contrary, it is observed that on the deposit sides they pay less as compared to the conventional banks. In addition, it is generally observed that the expected rates, as well as, the actual rates of return offered by these financial institutions are fairly equivalent to generally slightly less than the rates being offered by conventional financial institutions.
A justification against the first argument is that since IFIs are subject to the commodity risk, asset destruction and holding risks and the price risk, as well as their relevant costs e. Takaful expenses, in addition to the risks and costs that a bank faces, they are justified in their demand i. higher internal rate of return. Nevertheless, financial experts have generally felt that even if these factors are considered, the pricing by these Banks is on the higher side. On the other side, in a profit and loss based model, it is agreeable that they assign weightage to different types of deposits in a manner that the total return on investment and financing pools is allocated amongst various depositors and the Bank working as a partner.
Even then, it is generally noted that IFIs are paying less than the market. We can only hope that in near future, with increasing competition in the Islamic banking industry, this effect will minimize because of market-forces except to the extent of pricing against actual additional risk elements. Marketing Approach Of IFIs Another valid argument is about the marketing approach being used by these financial institutions, which adversely effects the public reliance on this mode. People raising objections on the marketing approach of IFIs have two grounds for the same. Second ground is the marketing strategy in which sometimes it is felt that false statements are made for promotional purposes.
An example of the same is the claim by a leading Islamic bank that all its day to day activities are monitored by its Shariah Advisor. Just imagine, if it is humanly possible, that a part time Shariah Advisor can look after all day to day activities of a full fledged bank with a number of branches even located at other cities. Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one year earlier to subscription for such mutual fund. This issue is raised particularly by the blend of people who feel that once they enter into such location, it should look like a sacred place instead of a commercial office.
You generally feel that they have over-spent on the furniture, interior-decoration and publicity stuff, which apparently, is against the injunctions of Islam. In other words, environment does not make anything Haram. Needless to mention, from Shariah perspective, you can always buy a Halal product from a store where everything else is Haram although the same needs to be avoided if other options are available. This argument, once again, has key significance from the perspective of the overall control environment of these banks with regard to the applicability of Shariah principles.
Particularly, it is astonishing when you deal with an Islamic banker, who knows very little about Islamic banking, but unfortunately, this is not very uncommon. The prime cause behind this issue is the fact that most of the IFIs have hired the conventional bankers and generally no or very little consideration is awarded to ensure that they are well conversant with the Shariah requirements with regard to the modes of finance being used by these Banks. The organization must internalize the teachings of Islam. It will involve moral elements by the virtue of the factor of Imaan. Faith and Believe. in the business operations.
If the moral factors alone is given importance, there is possibility that the bank would experience losses and forced to ceased operations, so Islamic Banks also give dimensions to the business and also importance. Shariah prohibits Riba. Investment in business that provide goods or services contrary to Islamic principles is Haram. This prohibition is applied in many Muslim countries to prevent Un-Islamic Banking system. Bank should strictly follow Shariah and uplift the living standards of those who try to do so in Islamic way. The concept of Islamic free banking is becoming widely popular in the non Islamic countries too.
The interest free bank work with the rule that the lender must have a share from the profits or the losses. The lender and the borrower are like partners and that plays a major role in characterizing the social order. The Islamic banking was introduced in july, in the banking and financial system of Pakistan. The government of Pakistan decided that only Islamic system can ensure better standard of life. To make easy the introduction of interest free banking some necessary rules were made in the banking laws in June in Pakistan. Different companies start the business on the basis of interest free system. Islamic Banking In Late 20th Century number of Islamic banks formed to apply the Islamic principles.
Islamic law is derived from the following four sources. The Holy Quran The Sunnah of Holy Prophet P. H Ijma Qiyas The Holy Quran Quran is one of the primary source of Islamic law. It includes many commandments, rules and principles for the behavior and relations of individuals in the society. Most of its principles are general in nature through some of them are well defined. The words of Quran are final and no one can change its text. The Sunnah Equally important the Sunnah the secondary source of Islamic law.
The Sunnah are path or way of Prophet Muhammad P. The Sunnah consists of the sayings, deeds and words ,action or even silence of Prophet Muhammad P. Ijma Ijma means the agreement of mujtihad of Ummah on an issue requiring the exercise of ijtihad. For Example: The institution of khilafat is established on the basic of ijma among the Islamic jurists. Qiyas Qiyas is the process in which Mujtihad extends sharia where there is no such guidence from sharia similarity of cases Deep insight is needed For Example: From wine, the jurists concluded and generalized that all things causing unconsciousness are prohibited by Islam. Holy Prophet P. If you repent even now, you have the right of the return of you principal; neither will you do wrong nor will you be wronged.
According to Mufti Taqi Usmani a mudarabah arrangement differs from the musharakah in three major ways. The investment in musharakah comes from all the partners while in mudarabah, investment is the sole responsibility of rabb-ul-maal. In musharakah all the partners can participate in the managements of the business and can work for it, while the mudarabah the rabb-ul-maal has no right of participate in the management which is carried out by the mudaribonly. In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss ,if only suffered by the rabb-ul-maal only, because the mudarib does not invest anything Musharakah Musharakah is the type of Shirkat-ul-Amwal which literally means sharing.
In the context of business, It refers to a joint enterprise share profit and loss of enterprise. Musharakah has far reaching implications for Islamic Banking and finance in the modern context and provides an excellent alternative to the interest based economy. In a musharakah, the party investing the capital shares equally in both the profit and loss, which is different from an interest based system where the upside is limited while the downside is very nearly nonexistent. These are two references clearly show that the profit leading to Riba is haram and against shariah Islamic Banking Transactions are Riba-free transactions.
It ensures mutual benefit, covering and spreading risks of both counter parties. Islamic Banks do not provide any assistance and strictly discourages the production of goods and services which are against the Islamic values. Islamic banks should ideally have their own bench mark system for determination of profit. Since the industries in its initial stage of development; it is using the available bench mark for the banking industry. It is expected that once it is grown to a sizeable level it would have its own bench mark.
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