Islamic Banking

Islamic banking has just started recently when the first modern Islamic bank opened in 1975. Surprisingly, the first Islamic bank is Dubai Islamic bank, and as you can see today the market have experienced a huge growth in a very short period. In many cases, we have witnessed scholars saying that they don’t like to be called banks because they act as a company, because they say Islamic banks become partners in a business and not money lenders.

The principles of Islamic banking are very simple and they are as follow. First of all, by Islamic laws it is forbidden to lend money at interest as it is considered as usury (riba). Islam doesn’t allow people to make money out of money as the prophet (peace be upon him) said: “Allah has cursed the one who consumes Riba (i.e. usury or interest), the one who gives it to others, the one who records it and the one who witnesses it.”

In Islam it is prohibited to have a predetermined payment over and above the actual payment. The only way Islam allows a loan is by what is called as qard-alhassan. Such a loan doesn’t have any interest on it. For example if you take 10,000 from the bank you have to only pay back 10,000 and they do it for helping people out after studying their case.

Another principle that Islamic banks follow is that there shouldn’t be any uncertainty, risk or speculation in their business. In addition, there shouldn’t be any account to increase the repayment of the principle by adjusting it to inflation.

Finally, businesses that have to be done through an Islamic bank should be acceptable by Islam. To elaborate more, an Islamic bank can’t deal with a counterparty that deals in alcohol or gambling.

Any Islamic bank becomes a partner in a business where he becomes the one with the capital and the other party who will actually use the money is the

 

So now you are wondering how Islamic banks do business with all these restrictions. The answer is very simple there are different types of ways that an Islamic bank can do business and the most common ways are as follows:

Murabahah: the purchase and sale of goods with an added profit margin that is agreed on by both parties.

Mudarabah: is a partnership where the capital investment comes from one party whereas the hard work and knowledge comes from the other party and they agree on profit sharing.

Musharaka: (partnership) is a joint venture between the bank and the client where they act as if they both own the company together.

Ijarah: is a method of financing where the bank buys the property for the client and rent it on them. Ijarah actually means leasing.

These are the most used and most common types of Islamic financing and there are much more.

Islamic banking and its relevance to the UAE

As I mentioned earlier, the first modern Islamic bank to be established is Dubai Islamic Bank in 1975. Islamic banking has witnessed a dramatic growth in the past twenty years and it proved itself by surviving the last financial crisis and being the least affected financial corporations. After reading a few articles about Islamic articles I will just post the most surprising facts I found.

“Islamic banking assets in MENA rose to $416bn in 2010. This represented a cumulative annual growth rate of 20% over five years, compared with less than 9% for conventional banks.”

“UAE Islamic banks account for 30% of global Islamic banking industry”

"UAE Islamic banks play an important role in the development of the global Islamic banking industry which is now valued at more than $1 trillion.” ADIB CEO

"Although there are similarities in the nature of work of Islamic and conventional banks, there is a vast difference in their financial mechanisms and transactions. In Islamic banking for example, the rates of Murabaha are fixed and known to the client from the moment the contract is signed. Islamic Banks cannot increase that rate even in the event that the client is unable to meet monthly payments on time," ADIB CEO

In conclusion, I totally believe in Islamic banking and to me I see it is going to the right direction the only thing that is missing is that Islamic banking is based on good will. If all the people have the Islamic characters and values that Prophet Mohammed (PBUH) said that we should have as humans, people will be more honest and they will pay their debts as they promised. Islamic banking is the best way to do business and it is the bright future for a stable economy.

 

Sources of information:

http://en.wikipedia.org/wiki/Islamic_banking

http://www.ameinfo.com/287581.html