Advantages And Disadvantages Of Interest Based Finance

However, the Islamic banking system was not like any other banking system. The Qur’an strictly prohibited the use of riba, or interest, so all Islamic banks must be interest-free or else the system wouldn’t be an Islamic bank system. Yet, the most important development made by the

In early Islamic banking, a number of economic concepts and techniques were applied, including bills of exchange, partnership (mufawada) such as limited partnerships (mudaraba), and forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts, transactional accounts, loaning, ledgers and assignments. Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.

Becoming an expert in Islamic economics and finance field is one of my long-term goals in life. I started to organize and made a plan towards achieving that dream since senior high school. The concern towards Islamic economics and finance concept, and its application for society and the country began when I was reading a book entitled Islamic banking-theory and practice. After finishing reading the book, my interest in Islamic economic and finance topics rose and strengthen my own determination to become the expert of Islamic economics and finance. The main principle of Islamic economics and finance which offers the just and ethics in economic activity, poverty alleviation through income distribution mechanism, and prevention of economic and

DEFINITION OF MUDHARABAH A Mudharabah transaction is derived from a partnership based on risk and profit sharing. This partnership is a collaboration between an investor (Rabbul Mal) and an entrepreneur (Mudharib) under which the former provides funds to the latter for the purpose of investment and profit sharing. This is how it works in practice - you, the investor will deposit an amount of money with the bank, which acts as the entrepreneur. This investment is utilised as business capital by the bank. In this contract we have no authority to interfere in the management of our investment. On the other hand, the bank will have the right to manage our investments as it thinks fit by placing it into businesses that are permissible in

Islam means surrender before the GOD, because they have faith only in Allah and nothing else and Islam is the complete code of life of the human beings on the earth, it does not only cover the social life of the human beings but it covers also the economy. GOD means generator, operator and destroyer, Quran came through the Revelations made by God to the prophet Mohammed (P.B.U.H) and was compiled in a book form in the life of the third caliph and provides the direction to the human beings for the right actions on the earth. The business is also the part of the right actions for all the Human beings and for the first time on the earth the Mudarbah system meaning Profit and loss Sharing business was performed by the Prophet Mohammad (P.B.U.H) for his Wife khadija (Rajiallah anhu); before the commencement of the Islam the Mudarbah types of business was not performed by the world business groups and the business transactions were performed by the small and big Merchants on that time only for the sake of benefits and with the motive of acquiring unreasonable interest. In the holy Quran, the four chapters are governed for the business transactions relating against the interest such as Sura Baqra, Sura Nisa,Sura Al Rum and lastly Sura Al Imran and emphasize on the principle of the Free interest economy. In the Islam religion the interest word is used in the Arabic term” Riba” or usury which means excess,exorbitant,pre-determined and unreasonable, because it increases the

Petrodollar flows have been among the major factors supporting the growth of the Islamic finance industry ever since the 1960s GIFF (2010). The rising petrodollar flows in global markets imply continued and increasing petrodollar investments in the Islamic finance sector. This has led to a surge of interest in the Islamic Finance sector, with more and more countries positioning themselves as strategic locations to tap into part of this abundant pool of funds. For instance, a number of countries worldwide have announced their plans to issue Sukuk (Islamic bonds) and thus meet their financing needs by attracting high net worth investors (HNWIs) and wealth from the Middle East region. HNWIs are particularly on the look-out for efficient and secure jurisdictions for investing their funds, more so in the context of the present economic downturn . Operating in a facilitative business environment and reducing cost of operations are deemed instrumental factors for market players. Accordingly, a number of jurisdictions have actively encouraged the development of their Islamic capital markets as a key strategy for attracting both HNWIs and Islamic finance businesses . In particular, it has been observed that jurisdictions from across the world are developing their Islamic capital markets by utilising the efficiency provided by Offshore Financial Centres (OFCs) to structure Shari’ah compliant products which adhere to the

The prosperity and peace of a society much or less depends on its economy. While for the smooth running of both, there are several instructions in Islamic Shariah and allows what is right and forbids what is wrong. When we talk about financial issues, Islamic Shariah strictly condemns Riba. The question may arise why Islam prohibits Riba? While it was already in practice before the advent of Islam and still it is a part of different economic systems throughout the world. It is simply because Islam gives respect to human beings and condemns all the attempts that are harmful and disgraceful for humanity. Therefore, Riba is not only forbidden in Islam but economic experts are also in search of its substitute. Since borrowing on interest rate creates several issues including: less efficient allocation of resources, indebtedness, unemployment and economic instability. While in society it causes injustices, inequity, poverty and imbalance etc. In this paper we are discussing how Riba causes imbalance in the society and instead Riba what Islam demands from its followers.

For interest-free banks, the mode for financing personal loans and pushing their own type of banks forwards is filled with hurdles due to the profit/loss sharing rule. Same percentage of returns is being offered by both the banks to their respective depositors, and largest fraction of their funds is forwarded towards the financing of durables. Murabaha is the mode of finance that interest-free banks make use of. Samad (2004) made contribution to the field through his comparative study of Bahrain Islamic bank’s performance against that of other conventional banks. Making use of the T-test, he explored same outcomes in terms of profitability and risk, whereas no variation was detected in liquidity of the two types of banks.

The gale of economic liberalization currently sweeping across the globe provides another reason for looking into the efficiency of Islamic banks since it poses a further competitive challenge to the Islamic banking institutions. It is expected that by the year 2007, trade liberalization will require Malaysian domestic banks to compete with other global players on an equal playing field. Such a change implies that local Islamic banking institutions will have to be efficient, innovative, competitive and resilient players in the market. This is particularly important since foreign banks that are arguably more efficient may also offer Islamic banking products to take advantage of brisk demand for Islamic banking products.

We have by now considered that this method should confront no objection from banking confidences in non-Muslim countries, and afterwards it is attuned with the conventional method it is comfortable to establish and work such banks with the minimal of hold and difficulties (including staff training). Moreover, dissimilar the conventional method, this method is transparent, leans on a firm theoretical basis, and furnishes management information that is very helpful for effectual supervising and control. The final is a very practical instrument both to the referred bank’s internal management and to the Central Bank authorities. The main concerns of the bank were the protection of its funds and the power of the borrower to give the interest not the final function of the lent money. Whether it was meant for founding a new enterprise, to elaborate a subsisting one, to overpass a cash flow trouble of a functioning concern, or to be employed by a small business, by a sole-owner initiative, or for consumption aims, etc. was not the major concern of the bank. The borrower must get all the

This study is about Investment Management System of Al-Arafah Islami Bank Limited (AIBL), Investments are operating by this bank with Islami sharia formula as no interest payment system but give profit from client deposit amount. Investment practice consists of some stage like Selection of the client, Application stage, Processing and appraisal, Sanctioning stage, Documentation stage, Disbursement stage, Monitoring & Recovery stage. It has been found that the investment process is lengthy and tiresome for the clients. AIBL investment process should become easier and should increase their investment ratio by reducing lengthy time process of investment and reducing required return on investment. It should also increase

Development of the Islamic equity market typically involves having in place a Sharī`ah stock-screening process which facilitates the identification of Sharī`ahcompliant stocks and therefore attracts wider participation from investors that seek Sharī`ah-compliant products. At the same time, it can facilitate the construction of Islamic equity indices.

In addition, Islamic bonds are still far superior as compared to conventional binds, underpinned by the following factors: • Fairness and transparency. The financier and customer share the risks and rewards based on an agreed profit-sharing ratio. The roles and responsibilities of the parties to a contract are also explicitly disclosed and transparent. Asset-backed transactions. Islamic financial transactions must be backed by an underlying tangible asset or legitimate productive activity. This discourages over-exposure of the financing facility beyond the value of the underlying asset, and hence provides continuous security to the investors Ethical investment. Islamic finance prohibits the charging or paying of interest, and imposes restrictions on unethical and speculative financial activities

Shahjanaz Kamaruddin begins this article by stating that Malaysia has developed into becoming a full-fledged Islamic financial system operating in parallel to its conventional counterpart. Islamic finance is based on the Islamic principle of Syariah which is relevant in today’s world. According to the Islamic Finance Development (IFD) Report 2014, Malaysia is the undisputed in sukuk(bond) with a 63% of global market share. Malaysia performs very well across 5 indicators which are quantitative development, knowledge, governance, CSR (corporate social responsibility) and

Financial equity is a standout amongst the most critical lessons of Muslims. As indicated by the Qur 'an, the essential mission of all messengers of God was to set up equity in this world (Al-Hadid 57: 25). Most the Qur 'anic lessons are guided towards empowering individuals to live with each other in peace and to satisfy their shared commitments genuinely and steadfastly to guarantee equity and general prosperity (falah). Inside the domain of this mission of the Messengers, the Qur 'an predicts, and which is all well and good, that treachery drives eventually to demolition (Ta-ha 20: 111).