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
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The early seventies saw the institutional involvement. The Islamic Development Bank, an inter-governmental bank was established in 1975. The first private interest-free bank, the Dubai Islamic Bank was also setup in 1975 by a group of businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and Sudan. Twenty-five years since the establishment of the first Islamic bank, more than 150 Islamic institutions have come into existence. Though most of these are in Muslim countries, there are some in Western Europe as well as in North America and Asia. PRINCIPLES OF ISLAMIC BANKING
The Islamic banking system follows certain, yet simple, rules set by the Qur’an and the Shari’ah (Islamic law), which if deviated from the system becomes un-Islamic. These are summarized as follows:
1. Any predetermined payment or benefit over and above the actual amount of principal is prohibited:
Islam allows only the type of loan in which interest of any form is not charged. Interest in this case is in either monetary form or other beneficiary forms such as using the borrower’s property, etc. in return for the lent money. In other words, any type of benefit received by the lender from the borrower in return for lending the money is prohibited. This is different however from the concept of ‘profit-sharing’ which will be explained next. This is different from the typical loan types of commercial
Have you ever wondered what it means to be human? Or what it means to dehumanize one another? As humans, we have the ability to think and use our brains. We are subject to an evolving education and to require an education. When someone is deprived of these human qualities, they are dehumanized. Everyone strives to live in an environment that enables them to learn, discuss, and act similarly.
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
The accounting standards of Iran banks are conventional banking, but in theory, the banks use provisional interest-based transactions. Overall Iran 's banking system run on an Islamic interest-free basis and it has changed following the Islamic Revolution.
No concept or application of interest rates, because interest or riba (in Arabic / Islam) is against the Shariah law (Sapp, 2010, p. 3)
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
Islamic banking is a structure that allows conducting banking activities and trades in line with the Islamic Shari’ah laws and principles by avoiding all the haram (prohibited) activity such as interest and financing prohibited businesses.
All the transactions and dealings of Amana bank is well monitored internally, and also then also renewed externally. The clients of Amana demand this auditing, so the banks carry out their day-to-day business in a Sharia compliant way which means in an ethical way. By going beyond that as well as social responsibility, Amana bank provide confidence.
Islamic banking is the banking that is guided by Islamic law (Shariah) principles and guided by Islamic economics. Islamic law forbids the usury, the collection and payment of interest which commonly called as Riba in Islamic term. Islamic banking finds its roots in Islamic finance and all type of transactions are interest is prohibited in Islamic ways of banking as it is also obvious from Quran.
'' Islamic banking '' is interest free asset backed banking governed by the principles of Islamic shariah.
The main difficulties of applying IFRS in Islamic countries are driven by the difference treatments of interest. Under the conventional accounting, the interest is charged commonly as compensation to the lender, while under the Islamic law, Riba, which refers to the interest, is forbidden and considered as a major sin. Prohibition on charging interest gives rise to several different treatments in Shariah-compliant companies. For instance, in Islamic banking, due to the fact that the interest is forbidden with lending or depositing of capital, in order to prevent the default, the bank may ask for strict collateral, which refers to the concept of Murabahah. In general, Shariah-compliant companies conduct on the risk-sharing principle, while the traditional accounting is more rely on risk-transfer. (PwC,
11 Sheikh, N. A. and Karim, S., “Determinants of profitability of Islamic commercial banks: Evidence from Pakistan”, Pakistan Journal of Islamic Research, Vol. 17
Revenue focus. Any lending model can only succeed with the injection of adequate capital. The focusing of stagnant funds on revenue effectively removes funds that could be used for lending. The challenge will be to have the lender forego a profit yielding investment. Islamic scholars have identified this predicament as a negative attribute associated with interest; it prevents the creation of interest-free loans as the lender expects to realize a gain (Al-Fawzan, 2005). The
The second type of banking in Saudi Arabia is commercial or conventional banks as any country which is rely on non participation of risk. In fact, conventional banks in Saudi Arabia are more likely to produce products that are acceptable and suitable of Islamic banking or Islamic products because it is attracted the majority of customers (International Business Publication 2011).
Credit cards are currently probably one of the most popular methods of payment when it comes to consumer transactions. From an Islamic Finance perspective, credit cards generally have one major drawback in that they charge interest on
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.