Concepts of Islamic Finance Essay

Recent achievements in Islamic banking do not indicate an advance in the jurists interpretation of riba. Writings on riba have been extensively concerned with the expositions of riba, but with disquisitions about riba. Thought about riba, and any other Qur’anic penetrative codes, must be a story of movements in outlook and ever-changing ideas, and developments taking place in contemporary social sciences. Its province is destined by God, may he be exalted, in a way to be determined and re-determined in the course of time by drawing insights from different branches of human science. The subject of riba, and other divine codes in Qur’an regarding dealings and transactions is such that no cohesive delineation of the scope can be regarded as final.

A rule making body issues authorative shari’a auditing standards for all Islamic banks and other Islamic businesses and it will be the most effective way to eliminate problems within the Islamic economy. The most effort to develop a body of consistent standards for shari’a audits has been undertaken by

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

11 Sheikh, N. A. and Karim, S., “Determinants of profitability of Islamic commercial banks: Evidence from Pakistan”, Pakistan Journal of Islamic Research, Vol. 17

'' Islamic banking '' is interest free asset backed banking governed by the principles of Islamic shariah.

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

Islamic banking refers to a system of banking that complies with Islamic law, also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between the provider of capital (investor) and the user of funds (entrepreneur). In other words, it ensures an equal contribution for all parties involved, whether in profitability or in case of any loss occurred. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited (Bank Negara Malaysia, 2010). Islamic banking is interest free banking; making it compulsory to take active part in business profit and loss sharing. Islamic banks prefer to take less risk (Shaikh & Jalbani, 2009)

Introduction: Muslims consider that everything they do in this life is to be done with the intention of pleasing Allah (God), in accordance with His guidance. The Islamic belief is built upon five pillars which are the framework of a Muslims life. Zakah is the third, of the five pillars of Islam. Zakah is the Arabic word زكاة which literally means to increase but technically means “that which purifies”. It is an obligation (Fard in Islamic terminology) prescribed by God (Allah) on those Muslims able to distribute a certain amount from their annual accumulated wealth among the needy and poor.

Sadly, Islamic banks and financial institutions are seen as the weak link in the Wes. The wrong perception is about inadequate anti-money laundering (AML) and internal controls. Moreover, in Islamic institutions, the heavy reliance of the industry on cash transactions and on trust within the business communities of Muslim countries have been key areas of concern for Western regulators and institutions.

The Central Bank of the UAE was established in 1980 (Crystal & Peterson,2017). It is the UAE’s highest financial regulator. The Central Bank works with the state by directing changes in Monetary, Banking, and Credit-based policies appropriately. It implements those policies in accordance to the state’s current Financial and Economic needs. Moreover, the Central Bank aims to stabilize the economy and the current exchange rate by maintaining gold and other foreign currency reserves. The UAE Central Bank, “prohibits lending an amount greater than 7 percent of a bank's capital base to any single customer” (United Arab Emirates - Banking System, n.d). Furthermore, Islamic banking in the UAE has shown a boundless level of progress due to no interest fees per Sharia Law. The UAE Islamic Financial Sector was estimated to be worth around 127 Billion US Dollars in 2014, it is also the third largest Islamic market by value after Saudi Arabia and Malaysia (John,2015). In November 2011, the Central Bank introduced the IBAN system, its main purpose was to ease the process of automatic money transfers and improve the accuracy and speed of payment transactions (Standard Chartered Bank of UAE, n.d).

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.

What is Islamic Finance? Islamic finance is any finance that is compliant with the principles of Islamic law Shari’ahs. In terms of finance, Shari’ah explains in detail the ethical concepts of money and capital, the relationship between risk and profit and the social responsibilities of financial institutions. A distinctive feature of Islamic finance is that it does not allow the creation of debt through the direct lending and borrowing of money or other financial assets. The debts

This is a multilateral financing organization. It has its headquarters in Jeddah, Saudi Arabia. Islamic Development Bank was formed in the year 1973 by the Finance Ministers of member states. It was formed during the Organization of Islamic Cooperation (formerly known as Organization of the Islamic Conference). The King of Saudi Arabia (Faisal) supported the creation of this organization. The Islamic Development Bank started operating on October 20th, 1975 (Schiavone, 2015). Currently, the bank has 56 member states who are the shareholders of the bank. By the year 2013, the bank decided to triple its authorized capital to $150 billion. This move was meant to better serve non-member countries and Muslim in members. The Islamic Development Bank has a good credit rating of AAA, which it got from Fitch and Standards & Moody’s. A large portion of the paid-up capital of the bank is held by Saudi Arabia. It holds approximately one-quarter of the capital. This bank also plays the role of observer at the United Nations General Assembly.

Despite of increased attention on Islamic banks, recent studies have evidenced mixed result on the stability of Islamic banks over its conventional counterparts (Belouafi et al. 2013; Kassim & Abd. Majid 2010; Rokhim & Gamaginta 2009; Bourkhis & Nabi 2013). Thus, indicates that there is non-consensus on the stability of Islamic banks over its conventional counterparts.

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.