Introduction to Islamic Banking
- Islamic Banking, otherwise also called the Islamic finance, is another banking convention that follows the Islamic law called shariah, for the purpose of assuming social responsibility and fulfilling them ethically.
- The main objectives of this kind of banking includes the sharing of all profits and losses (mudarabah), safekeeping (wadiah), prohibition of returning or taking back money at a value that is not at par with the original value, i.e. interest (riga) is usually not permitted, among others.
Understanding Islamic Banking
- Islamic finance underscores that all financial obligations are met ethically and in cooperation towards eliminating exploitation of faith and funds. While the concepts are mostly monotheistic and guide all of its practitioners strictly, the guidelines through time are molded to suit the needs of the people of faith living in various regions of the world. As of 2009, nearly 300 banks and 250 mutual funds work in adherence to the Islamic principles of financial management (Fiqh al-Muamalat).
- Though only a blooming industry by market terms, representing a 1% of the total world’s assets, this system has been present for more than many centuries. It has a 400+ year old banking history, complying with the shariah, and established on moral principles deriving from sources like the Qur’an, Hadith, Ijma or Qayas. The sector is said to increase to $3.5 trillion by 2021.
Highlights of Islamic Banking
The earliest ways of abolishing unjust collection of interest on overpriced goods in ancient Arabia were replaced with the demand for leniency and transparency in monetary obligations under the shariah.
Therefore, shares of the establishment were offered to the borrowed at the time of returning the payment and principal amount.
What primarily distinguishes conventional banking from Islamic banking is the clear distinction between usury/interest-charging and speculation in the likes of gambling, as opposed to the modern/western banking systems.
Asset-trading and leasing in adherence to the shariah heavily involve the virtue of equity holding. This is what is referred to as the profit-and-loss sharing system. These are participatory methods known as Musharakah and Mudarabah.
