Islamic Banking

Islamic Banking

Islamic finance is an old form of financial transactions on the basis of Sharia’h, which was used in the days of the Ottoman Empire where they used trade with Spain on interest free principles and use the profit –loss sharing basis. The Islamic finance practice was used and formed first in Malaysia, but we all know that the market for Islamic finance is rising but still young compared to the conventional banking.

Islamic finance is based on Sharia’h and Fiqh, this means that the moral framework of Islamic finance depends on honesty, fairness and avoids anything that is prohibited by Sharia’h. The main practices that are prohibited by Sharia’h are Riba (interest rate), Gharar (uncertainty) and Maysir (speculation).  Islamic finance offer different services and products for customers but on basis of risk-sharing and complied with Sharia’h. There is still a misunderstanding between both conventional and Islamic finance, people say that Islamic finance offers exactly same products but with different name which is totally untrue. The framework, legal obligations and process are totally different, even the prospective and spirit behind it. In every Islamic financial institution there must be a Sharia’h board that makes sure that the services and products offered are in compliance with Sharia’h rules, as well as the approval for certain process and documentation. There is a higher power of Sharia’h board that controls the whole Islamic countries, where Islamic finance takes place. In Islamic finance every loan is backed up by assets, they don’t exchange money with money where it is totally against the principles of Islam and fairness in risk distribution.

The main products and services are Murabaha, where the seller sells commodities to another party with a mark-up or profit margin but have to provide “Honest declaration of cost” and sign and approve the commodities information in full details, as well as installment payment could be arranged with the bank. Mudarabah and Musharaka contracts are partnership arrangements in which either one (Mudaraba) or more partners (Musharaka) provide capital and/or skill and expertise to a Sharia’h-compliant project or business. There are more products and services for example Zakaat calculation, Qard Hasan (no interest loan), Ijara (leasing) and many more.

The practice of Islamic finance is till new and it needs to evolve and for people to get the full benefit and awareness. The market is expanding in Saudi, Malaysia, Indonesia and UAE. But it is still a small part compared to conventional market. We saw banks in UAE are opening Islamic finance windows for example HSBC, First gulf bank and many more. We hope to see people wither they are muslims or non-muslims to engage more in Islamic banks products and services to get the full benefit and realize the true practice behind them.

References:

·        - Islamic Finance, http://en.wikipedia.org/wiki/Islamic_banking, Accessed on 19^th of November,2012 

·         -Islamic Banking, http://www.islamic-banking.com/what_is_ibanking.aspx, Accessed on 19^th of November,2012

·         -Murabaha, http://www.investopedia.com/terms/m/murabaha.asp, Accessed on 19^th of November,2012

·        - Musharaka and Mudaraba, http://www.daganghalal.com/Directory/ProductDetails.aspx?cid=922&pid=6497, Accessed on 19^th of November,2012