islamic banks - Hamad Mohamed

Islamic banking is a banking activity that is in compliant with sharia laws and Islamic principles. According to sharia, usury or riba is prohibited so Islamic banks can’t charge interest on any loan unlike conventional banks. Therefore, other products have been developed which are sharia compliant. The Islamic banks today provide the Islamic products that have the same purpose of the products available in conventional bank but the only difference is that they have been developed to be sharia compliant.

In order to be able to understand the Islamic banking and the way it operates, the sharia principles that the Islamic banking is based on must be understood:-

1-      Interest is prohibited in Islam, so no extra amount of money could be charged on a loan.  Any extra penny over the loan amount regardless of the reason it is charged for is considered to be prohibited

2-      The bank must share the profit and loss with the borrower, unlike conventional banking were the bank gets his fixed interest even if the borrower defaults.

3-      Uncertainty or speculation is prohibited. Any risky sale that is considered to be risky because the specifications of the good sold is unknown is prohibited in Islam.

4-      Financing should only be made for practices and products that are not prohibited in Islam.

 
Some of the main Islamic products available currently in the Islamic industry are:

· Istisna: a contract in which funding is given now and the delivery date of a certain good with certain specifications is agreed upon later

· Ijarah: is equivalent to leasing, share is transferred to the other party as they pay the rent

· Murabaha: a contract where the seller buys something and resells it at a higher price to the buyer. The buyer knows the cost and the profit that the seller is getting from this contract.

· Musharaka: like a joint venture between the bank and the borrower, they both contribute to the capital and in which they share profit and loss

· Mudaraba: a contract in which a party provides all the funding and the other party runs the operations and they share the profit and loss.

· Qardh al Hassan: a loan that is interest free. Like taking 100 and giving back 100 without interest or charges.

 

There are almost 8 Islamic banks operating in the UAE in which anyone could go to take funding. The products they offer are similar to the products in the conventional banks the only difference is that they have been derived to be sharia compliant. A major difference between conventional and Islamic banks is that the conventional bank lends out money and charge interest on it. The relationship between the bank and the borrower is like a creditor and debtor relation while Islamic banks tend to enter as partnerships with the other party and therefore share all the profit and loss.

Currently the global Islamic finance industry is estimated to be $1 trillion and it is forecasted to grow to $2 trillion by 2015.