In simple terms, Islamic banking is a banking system that functions according to the guidelines laid down by the Shariah (Islamic law). “Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat were incorporated from the Quran, the Sunnah and other secondary sources of Islamic law” (Banking Info par.1).
There are two basic principles on which the whole Islamic banking is based on. The first one is that in a partnership firm if the partners are ready to share the profits they should be ready to share the losses as well. In Islamic terms, this principle is called Mudharabah. The second principle prohibits the account holders to either pay or receive interest (Riba) on money borrowed or lent respectively. The Islamic banks also follow these principles in their own transactions.
One might think that if no interest is to be given or taken then how the Islamic banking functions. Well, for this problem there is a solution in the Islamic banking system that the borrower can pay an amount (as agreed upon by the two parties) to the lender as a benefit.
Now, since the Islamic banking is based on the Shariah, all the transactions are bound to follow the Islamic moral codes of conduct. As such, there is a prohibition to investments or doing businesses engaged in intoxicating products such as alcohol, games such as gambling and foods such as pork.
Historical context of islamic banking
The past of Islamic banking may be better understood if it is explained in two different parts; first, when there was only the idea of an interest-free banking and second, when the idea was conceived into being by some private inventiveness is some nations and by the government initiative in some others.
The earlier scholars (in 1950s) promoted the idea of interest free banking and called it the Islamic banking system. The ensuing two decades witnessed further interest among people towards this kind of banking.
The advent of 1970s witnessed the participation of institutions in this sector. “Conference of the Finance Ministers of the Islamic Countries was held. The involvement of institutions and government led to the application of theory to practice and resulted in the establishment of the Islamic banks” (Hannan par. 10). Owing to the efforts of the conference attendees, Islamic Development Bank (IDB) came into being in the year 1975.
‘The Islamic Banker’ claims that, “The first model of Islamic banking system came into picture in 1963 in Egypt. Ahmad Al Najjar was the chief founder of this bank and the key features were profit sharing on the non-interest based philosophy of the Islamic Shariah” (The Islamic Banker par. 3). Also, “In 1974, the Organization of Islamic Countries (OIC) had established the first Islamic bank called the Islamic Development Bank (IDB).
The basic business model of this bank was based on providing financial assistance and support on profit sharing basis” (The Islamic Banker par. 3). It further claims that, “By the end of 1970, several Islamic banking systems had been established throughout the Muslim world, including the first private commercial bank in Dubai (1975), the Bahrain Islamic Bank (1979) and the Faisal Islamic Bank of Sudan (1977)” (The Islamic Banker par. 4).
Table 1: Brief history of Islamic banking
Table 2: Detailed history of Islamic banking, Source: (Ariff and Munawar 75).
The basis of islamic banking and its organs
As mentioned earlier in the paper, Islamic banking is based on the principles laid down in the Shariah. The two main pillars of Islamic banking are profit sharing and taking or giving no interest. The process is very simple that a person deposits his/her money in an Islamic bank and the bank in turn gives an assurance of returning the money when required.
The depositor can withdraw his/her money from the bank whenever required (within the working hours of the bank). But since nowadays there are ATMs all over, money can be withdrawn whenever required. In lieu of offering services to their clients, Islamic banks charge a certain amount as fee and if the bank considers it feasible the depositors may be offered gift (Hibah) as well. Following are the different organs of Islamic banking:
Mudharabah or the profit sharing system. Mudharabah is basically a banking system that involves sharing of profit between two entities. In these two entities, one is the bank and the other may be either an investor or a borrower. There are two ways in which the transaction is carried out.
In the first method, the bank acts as an entrepreneur and accepts investment from an investor. In the second method, the bank acts as a lender and lends money to a borrower. In both the cases, the ratio of profit sharing is fixed prior to the commencement of the banking relation or transaction. “Losses suffered shall be borne by the capital provider” (Banking Info p. 6). Following is a flow chart that depicts the Mudharabah or the profit sharing system followed by Islamic banks:
Figure 1: Functioning of Islamic banks
Deferred payment sale system or Bai’ Bithaman Ajil (BBA). Under this system, the buyer of any goods sells the goods and then pays the seller the amount including a pre-decided profit margin. This amount may be paid either as a total amount or in instalments, whatever has been agreed upon. The actual practice is that an entity identifies the goods to be purchased and the bank is requested for a BBA (Bai’ Bithaman Ajil) or deferred payment sale.
The entity assures the bank to buy back the goods from the bank at an increased value. The bank in turn buys the goods and pays the seller. Now the bank is the owner of the goods. Reasonable profit (as agreed upon with the entity) is added to the cost of the goods and the goods are then sold to the entity. Now the entity is the owner of those goods and pays the bank in instalments within a stipulated time frame. Following is a flow chart of the deferred payment sale system followed by Islamic banks:
Figure 2: Deferred payment sale system
Murabahah or the cost plus system. We have seen that in BBA, the price at which the bank sells the goods to the entity is inclusive of a mutually pre-decided profit margin. But according to the Murabahah system, the seller (bank) has to make the buyer aware of the actual cost of the goods and the profit added to the cost. This has to be done at the time of making the agreement.
Musyarakah or the joint venture system . The Musyarakah system deals with the partnerships or joint ventures. Joint ventures are done in order to make profit but there are times when the joint venture has to face losses. In joint ventures, the parties involved invest in some proportion. The profits in a joint venture need not be shared according to this proportion but the profit sharing proportion can be different and pre-decided. On the contrary, in case of losses, the losses have to borne by the parties involves according to the proportion of their investments.
Ijarah Thumma Bai’ or hire purchase system. The Ijarah Thumma Bai’ system usually refers to consumer goods financing, vehicles more commonly. This system involves two different contracts; Ijarah and Bai’. The Ijarah contract is for leasing and renting and the Bai’ contract is for purchasing. Following is a flow chart that depicts the system of Ijarah Thumma Bai’:
Figure 3: Ijarah Thumma Bai’ system
Wakalah or the power of attorney system. The Wakalah system refers to an agency of any product or service in which the agency charges a pre-decided fee for the services being rendered. The agency acts as an agent of the principal party for performing explicit jobs.
Qard or interest free loan . The Qard system refers to the loan given by any lender for a specific duration to the borrower without any interest being charged. The borrower has to repay the loan amount within the specified time frame. Even though there is no interest levied in this kind of ending, the borrower can pay to the lender any amount of his/her will but there is no compulsion.
Hibah or the gift system . In Hibah system, any entity that has been benefitted from another person or a body may pay to that person or body any amount as a token of gratitude.
The following table depicts the principles followed by some of the major countries where Islamic banks function:
Table 3: Islamic banking principles in different countries.
Legal and illegal banking practices based in islamic banking
Except Sudan, Iran and Malaysia, there are no other countries where Islamic banks have legal cover. “In general, legislative needs for Islamic banking can be minimized by legislating the Shariah principles and the Shariah restrictions for contracts while leaving practical details for adjudication by the courts” (Tahir p. 8).
Tahir further suggests that, “Registration requirements associated with agreements need to be simplified as the associated costs may impede lease financing. There is also need for special legal cover in order to facilitate and implement Musharakah (partnership) agreements by Islamic banks” (Tahir p. 8).
Since the Islamic banking system is governed by the Shariah, the framework is different from the non-Islamic or conventional banks. Since the Islamic banks follow the no-interest policy, the documentation of financial instruments is totally different and as such they cannot be compatible with the non-Islamic banks.
The need of the hour is that the governments of countries where Islamic banks are functioning should come out with some legal cover for the Islamic banks in order to make the Islamic banks more sustainable. Only then the Islamic banks will be able to function worldwide. But as a matter of fact, Islamic banks have improved their standards during the years.
Anees Sultan claims that, “Investments into some Islamic funds are not always 100 percent ‘Islamic’. Some of the terms under which some funds operate state that interest income shall constitute less than a certain percentage of total income, but some interest income is accepted” (Sultan par. 6).
One might wonder that if interest is prohibited in Islam, how such instances are occurring. The board members of the Shariah are paid compensation for favouring judgements (Sultan par. 7). “Also consider the word Sukuk – now used to describe Islamic structured bonds. The word itself has nothing Islamic or religious about it; it is simply Arabic for a promissory note. Likewise, both Murabah and Takaful are just Arabic nouns for various commercial or social activities” (Sultan par. 7).
Another action of the Islamic banks that raise eyebrows is their dealings with the commercial or conventional banks. There are some conventional banks that have started Islamic banking branches and in these branches, conventional banking products as well as Islamic banking products are being offered. Now how can one believe that the transactions in such banks would be interest-free?
Comparison of islamic banking and conventional banking
In some countries, due to the cosmopolitan nature, there are Islamic banks as well conventional banks. These banks perform all the financial transactions as may be expected from a financial institution. The Islamic Financial Institutions support the world economy by providing all the required services. The basic concept of Islamic banks and conventional banks is the same.
Both are engaged in providing their customers banking products such as saving and current accounts, fund transfer, safety lockers, international trading, etc. Islamic banks don’t have any objection in performing such tasks because they are not against the Shariah. The main difference between Islamic banks and conventional banks exists in the manner in which funds are mobilized in Islamic banks and conventional banks. By mobilizing funds it is meant the investments and loan disbursements.
For the purpose of comparison of conventional banking system and Islamic banking system, we have considered the following two banks: Faysal Bank as the conventional bank and Meezan Bank as the Islamic bank.
First let us know about Faysal Bank. “Faysal Bank Limited was incorporated in Pakistan on October 3, 1994, as a public limited company under the Companies Ordinance, 1984” (Faysal Bank). The bank is presently engaged in commercial activities and banking products such as deposit accounts, vehicle loans, loans on property, etc.
Vision of Faysal Bank: “Excellence in all that we do” (Faysal Bank).
Mission of Faysal Bank: “Achieve leadership in providing financial services in chosen markets through innovation” (Faysal Bank).
Talking of Meezan Bank, “Meezan bank Limited, a publicly listed company, is the first and largest Islamic Bank in Pakistan and one of the fastest growing banks in the history of banking sector of the country” (Meezan Bank).
Vision of Meezan Bank: “Establish Islamic banking as banking of first choice to facilitate the implementation of an equitable economic system, providing a strong foundation for establishing a fair and just society for mankind” (Meezan Bank).
Mission of Meezan Bank: “To be a premier Islamic bank, offering a one-stop for innovative value-added products and services to our customers within the bounds of Shariah, while optimizing the stakeholders’ value through an organizational culture…” (Meezan Bank).
In order to compare the products of both the banks, the following table will be helpful:
Table 4: Banking instruments of Meezan Bank and Faysal Bank
Now we shall study these different instruments separately.
This kind of account is generally for business owners. They may deposit or withdraw amount as many times as they want. But a certain charge is levied on the transactions. Let us now compare the current accounts of the two banks in question:
Table 5: Current account features of Meezan Bank and Faysal Bank
Unlike current account, saving account can be opened by individuals and not business organizations. Saving bank offers some interest or profit to the account holder. This kind of account is the most preferred one by people of all genders and age groups because of its simplicity and easy access. Let us now understand the various features of different kinds of saving accounts being offered by the two banks:
Table 6: Saving account features of Meezan Bank and Faysal Bank
As the name suggests this kind of financing is for customers who want to purchase some consumer goods. Such goods may include vehicle loan, credit cards, etc. Let us now understand the salient features of this kind of banking instrument in both the banks:
Table 7: Salient features of saving account of Meezan Bank and Faysal Bank
The table below will further make us understand the differences between conventional banks and Islamic banks:
Table 8: Salient features of conventional banks and Islamic banks
In addition to the aforementioned points, the statement of the financial positions of Meezan Bank and Faysal Bank are at Appendices 1 and 2 respectively.
Instruments of islamic banking
Islamic banks as well as conventional banks accept deposits but the difference is in the manner of return on the deposits. While in conventional banking system, the return on deposits is predetermined, in Islamic banks it is according to the Musharaka and/or Mudaraba system. The return on deposits in Islamic banking system is not fixed.
Another difference between these two banking systems is that while in conventional banking system the risk is borne by the bank, in Islamic banking system, the risk and reward are both shared by the bank and the investor. In conventional banking, since the return on deposits is predetermined, any excess benefit out of the deposits is for the bank. However, there is a similarity between the two kinds of banking system that for long term deposits the return is higher and for short term deposits, the return is lower.
Investments & Financing
Both the conventional and Islamic banking systems offer loans or credits to business organizations. This is done in order to gain some profit out of the credit facility being provided. But there is a difference in the terms and conditions of financing in both these kinds of banking systems.
Conventional banks disburse loans at a predetermined rate of interest but since the interest is involved, the Islamic banks cannot do so. But it’s not that the Islamic banks don’t offer loans. They do offer loans but then there is no interest factor; the loans are interest free (Qarz-e-Hasna). In Islamic banks loans are given under the profit sharing system.
Overdrafts and Credit cards
In conventional banking system, the customers are allowed to withdraw cash from their overdraft account or the credit cards. Credit cards may be used either for purchasing goods or for withdrawing cash. The conventional banks charge interest on the amount used under these two schemes. On the other hand, in Islamic banks there is no credit card.
The customers of Islamic banks are offered debit cards whereby they can purchase goods or withdraw cash provided there is sufficient credit balance in their accounts. However, Islamic banks do offer credit but that is under the Murabaha system wherein although there is no interest factor but profit margin is added to the amount to be returned. In case of default by the customers to repay the credit availed, conventional banks charge extra amount (penalty) whereas in Islamic banks this is not the case.
The defaulters have to make another agreement with the conventional banks for the repayment of the overdue amount with penalty but in Islamic banks this is not possible. In Islamic banks, even if there is any defaulter, the bank cannot charge any excess amount other than the original amount that was utilized by the customer. The only thing that Islamic banks can do in such cases is to blacklist the defaulter and abstain from lending any further credit facility to that particular customer.
Leasing is a banking instrument wherein the Lessee is allowed to use the facility or product for a predetermined rent. The ownership in such cases may or may not be transferred to the lessee. In Islamic banking system, this is done under the Ijara system. Under Ijara, the ownership is not transferred to the lessee unless the lease term is completed. In Islamic banking system there are certain rules pertaining to Ijara that the banks have to abide by.
Firstly, the rent is applicable only after the lessee gets custody of the asset. Secondly, in case of default in rent payment, the banks cannot charge any extra rent but a penalty may be imposed. This penalty cannot be kept by the banks as their profit but it has to be given to some charity. Thirdly, in case there is any major repair required or is going on the banks cannot claim the rent. And lastly, in case of lost of asset, the Islamic banks cannot claim the remaining instalments. It means that the Islamic banks have to bear the ownership risks.
Agriculture loan is of two kinds; short-term and long-term. Short term agriculture loans are required by farmers in order to purchase seeds, fertilizers, etc. The long-term agriculture loans are meant for expansion, purchase of irrigation equipments, etc. It is a usual practice of farmers to return the loan amount once their crops are sold. The conventional banks charge some predetermined interest on the extended loan facility.
In Islamic banks, there are different systems for different purposes. For purchasing seeds, fertilizers, banks offer credit to farmers in return of the crops. This is called the Bai Salam system wherein the farmers have to give the agreed quantity of crops to the banks in lieu of the credit facility availed by them.
The Murabaha system is for extending credit facility for the purchase of irrigation equipments. For expansion or purchase of further land, the Musharaka and Mudaraba systems come into effect. But in order to avail all these facilities from an Islamic bank, the farmers have to convince the bankers on the viability and profitability of their farming venture.
Housing finance is the best form of financing for any financial institution whether it is a conventional bank or an Islamic bank. But as mentioned earlier, there is a difference in the terms and conditions of financing in both the banking systems.
In conventional banking system, housing loan is offered on a predetermined interest rate whereas in Islamic banks the housing finance is offered according to the reducing Musharaka system. Under the reducing Musharaka system, the house to be financed is purchased by the bank and the customer as joint owners. The bank then offers its share in the property to the customer for a predetermined rent.
The share amount of the bank is segmented into small amounts and the customer has to pay this amount along with the rent to the bank as instalments. As the customer keeps on paying the instalments, his/her share or stake in the house keeps on increasing while that of the bank keeps on decreasing. When the last instalment is also cleared by the customer, the bank has no claim over the house and the ownership of the house is transferred to the customer.
The good thing (beneficial for the customer) in house financing according to the reducing Musharaka system is that if by chance there is any devaluation of the property, the customer doesn’t have to bear the brunt alone. The bank will also share the loss according to its share in investment.
Advantages and disadvantages of islamic banking
The following table depicts the advantages and disadvantages of Islamic banking:
Table 9: Advantages and disadvantages of Islamic banking
Economic crisis and islamic banking
The economic crisis has turned out to be disastrous for the financial sector. Banks have started to abstain from lending. This has increased the borrowing rate. “The value of bonds issued worldwide against mortgages, for example, crashed from $1.9 billion for the year to $500 million in the year 2008”. (Hassan par. 3). The third world countries were the most affected since they had drawn inspiration from the idea of free market.
This situation was mostly limited to the conventional banking sector. The Islamic banking sector was not affected much. The reason was that Islamic banks function on a partnership basis with their customers. “The Islamic economic and financial system is based on a set of values, ideals and morals, such as honesty, credibility, transparency, clear evidence, facilitation, co-operation, complementarities and solidarity” (Hassan p. 4).
Such moral conducts provide protection, constancy and protection to the parties involved in the transactions. Also, as per the Shariah, taking or giving interest is not allowed. Also businesses such as gambling are prohibited. All such factors have made the Islamic banking system a reliable source for making financial transactions.
“Beginning in 1998 and 1999, the bank failure rate began to climb again, with a failure rate accelerating in 2008, 2009, and 2012. In 2008, 25 banks were closed. This number jumped to 140 bank failures in 2009” (Amran p. 8).
The following two tables will further make us understand the effect of the financial crisis on Islamic banks and conventional banks:
Table 10: Capital Adequacy Ratio (CAR) of Islamic banks before and during the financial crisis
Table 11: Capital Adequacy Ratio (CAR) of conventional banks before and during the financial crisis
From the aforementioned tables it may be concluded that the Islamic banks performed better than their conventional counterparts before as well as after the crisis. After analyzing the different ratios it makes us understand that the Islamic banks had greater profitability as compared to the conventional banks.
Islamic banking is the solution to economic problems
If all the banks follow the guidelines of the Shariah, financial crisis can never happen. For example if the conventional banking sector adopts the risk-sharing system of the Islamic banks, there would never be any problem because then the banks will take great care while investing the funds.
Likewise the Islamic banks, the conventional banks will also do proper survey before investing anywhere. By investing also means lending money to borrowers. Before lending money to such borrowers, the banks will do a thorough viability study and only after being convinced of the profitability they will offer the financing of the project.
“Islamic banks act as venture capital firms collecting people’s wealth and investing it in the economy, then distributing the profits amongst depositors. Islamic banks act as investment partners for those who need money to do business”. (Hassan p. 4).
“The collapse of leading Wall Street Institutions, notably Lehman Brothers, should encourage economists worldwide to focus on Islamic banking and finance as an alternative model” (Amran p. 9).
The success of Islamic banks can be understood from the fact that the number of such banks is increasing incessantly and the amount they are dealing in is touching the skies. “Furthermore, Islamic banking provides a viable alternative to conventional banking and is less cycle prone. The spread of Islamic finance into western markets demonstrates that it is now being treated seriously by regulators and finance ministers” (Amran p. 12).
The growth of Islamic banks can be gauged by Thomas Grose’s statement that, “London now is home to 25 companies offering some form of Islamic financing. BLME is the largest of five wholly Sharia-compliant banks operating in Britain. The first, the Islamic Bank of Britain, opened in 2004, and the number is expected to double within five years” (Grose par. 4). The Islamic banking has become popular because people have started understanding that only Islamic banking system can save them from the severe financial crisis in future.
Mr. Adnan Ahmed Yousi, who is the CEO of Albaraka Group, Bahrain, claimed that “Islamic banks do not rely on bonds or stocks, and are not involved in the buying and selling of debt unlike most conventional banks…Islamic banking is distinguished by the fact that it is prohibited from buying debts under Islamic Sharia law” (as cited by Al-Hamzani par. 3).
This is the reason that Islamic banks are unaffected to a great extent by the global economic crisis. So it is advisable for the conventional banks to follow the banking systems of Islamic banks and avoid further and future risks.
Network of islamic banks around the world
Following is a consolidated list of the main Islamic banks in different countries around the world:
Table 12: Islamic Banks in various nations
Challenges and problems being faced by islamic banks
Majority of the Islamic banks are located in Muslim countries. The non-Muslim world is not much aware about Islamic banks and their principles. The Islamic banks are bound by the guidelines of the Shariah law. As such, they have to work according to the Musharaka and Mudaraba systems. It has been observed that the Islamic banks face problems in their functions and the bankers owe these problems to the following reasons:
There is a shortage of serious and genuine people who want to do business. People take loans from Islamic banks for the sake of it. Due to the lenient rules of repayment, people approach such banks for loans and advances. There are numerous instances wherein people have taken loan from Islamic banks and haven’t returned because they are aware of the loop holes that no penalty can be levied on them.
Within the bank, there is a shortfall of well trained professionals who are well versed with the Islamic banking system. Each one of us wants to do the best in life and so do the banking professionals. Even though Islamic banks are doing well, their business is not at par with the volume of business handled by the conventional banks.
And since size does matters, the fresh banking professionals prefer the conventional banks rather than the Islamic banks. They are worried about their profession and future promotions. Secondly, Islamic banking needs professionals who are well aware of the nature of business in their banks. There is a dearth of such professionals. Young graduates do not see any future in the Islamic banking sector. It needs a lot of moral and religious understanding on the part of the employees of Islamic banks.
It is very ironic to state that due to the vast advancements in science and technology, young students have ample opportunities that are more lucrative and challenging than being an Islamic bank professional. The professionals of Islamic banks are required to have a greater perspective of the banking industry; Islamic in particular, and at the same time, they have to have a proper understanding of their customers and their projects.
There are only limited banking instruments with the Islamic banking professionals that they can offer to the customers. It is a human tendency to go to shops where there is a large variety of things that they want to purchase. Similarly, when a person wants to do banking, he/she will like to have more options to choose from.
According to the Shariah guidelines, forward booking of currency is not allowed. So there is always a risk of currency fluctuation. Under such circumstances, the exporters are at a loss and the foreign importers are the beneficiaries. Suppose for example an exporter takes order for a particular item at $100 per piece.
During the time of finalization of the order, the currency exchange rate is say $1 = Rs.50. It means that the exporter has agreed on a rate of Rs.5000 per piece. But due to the currency rate fluctuation, the rate may come down to say $1= Rs.45. It means that the exporter has to sell goods at a loss of Rs.500 per piece. This issue sometimes forces business people to opt for the conventional banking system.
It’s a normal practice by exporters that as soon as their goods are loaded, they approach their respective banks for bill discounting. In conventional banking, bill discounting is preferred because the banks get good commission and sometimes interest as well on the amount discounted. On the contrary, Islamic banks are bound by the Shariah guidelines and though they are allowed to do bill discounting, they cannot charge any interest and moreover, the charges are also very nominal.
In spite of the fact that Islamic banking system has been prevalent for more than 35 years now, majority of the people are unaware of the basic principles of Islamic banking or what exactly Islamic banking is. If the Islamic banks want to prosper, it is very crucial for them to spread awareness among the people about Islamic banking. It is an added portfolio for the Islamic banks to teach each and every new customer about the principles of Islamic banking.
Islamic banks are not fully established and are still in the learning and experiencing phase. It is a common practice in Islamic banks to use the short term deposits of their customers for long term financing. This is done because the banking professional are under the impression that certain short term deposits won’t be withdrawn, even on maturity. This belief of theirs sometimes backfires when some of these short term deposits are withdrawn.
In such circumstances, the bank has funds problem and as per the banking culture, it has to borrow from some other bank for a couple of days. The banks those are ready to transfer funds don’t do it as a courtesy or a friendly gesture. They charge a certain amount of interest. Here the problem arises for the Islamic banks since they are bound by the guidelines of the Shariah law and can neither pay interest nor take interest.
As mentioned above, most of the Islamic banks do not have the variety of instruments that conventional banks have. Due to the advancement in technology and science, conventional banks have gone far ahead in bringing innovative products for their valued customers.
Islamic banks, on the other hand, are banking on the same old banking instruments or products. Moreover, most of the Islamic banks do not have their own research and development department so that they may devise new products. This hampers the progress of Islamic banks to a great extent.
In today’s world, advertisement is a must for any product’s success. But ironically, Islamic banks do not do much of advertising and avoid the media to a great extent. Actually, the world should know what Islamic banking is about and for this advertisement or the media are the best options.
It’s not impossible to have solutions for all the problems mentioned above. It’s just a little understanding and initiative that is required. It has to be accepted that the working conditions for Islamic banks will never be the same in Muslim and non-Muslim countries. It’s not that these problems are faced by all the Islamic banks. The Islamic banks in Muslim countries such as the Kingdom of Saudi Arabia, United Arab Emirates, Qatar, etc, are doing quite well.
It’s only the newer ones in non-Muslim countries that are facing the major problems. Since the Islamic banks follow the values of Islam in their banking operations, they should also be humble and extend help to the new Islamic banks. At least they can provide feedback, experienced professionals etc. So that the newcomers are not stuck and may perform better and come up to the expectations of the principles of Islamic banking.
It should be the endeavour of the International Islamic Banking Organization, the Islamic Development Bank, and other Islamic banks governing agencies to put more efforts and professionals in the research and development field. I am sure experts on Islam religion must have been employed by such organizations but such experts should have a vast and broad mindset and identify new products for the masses.
According to Dr. Salah Al-Shalhoub, head of the Centre of Banking Studies and Islamic Finance (CBSIF), the trend of Islamic banking is changing and “The Islamic banking system, which used to design products on purely Islamic basis, began to expand these products to meet requirements of customers who felt more secured about their investments, not only in terms of finance but also from the Shariah perspective” (as cited in Arab News par. 9).
It’s true but more efforts are required. Like regarding the problem being faced by the Islamic banks due to the bill discounting and booking of foreign currency, the governing bodies can devise some way to overcome the problem. This way they will be able to attract more and genuine customers because as such Islamic banking system is an excellent one and people will prefer Islamic banking if their requirements are met.
The Islamic banks, on their part, should hire more professional people who are experts in banks and have the knowledge of the principles of Islamic banking as well. Customer service is very important in any service organization. Customer service doesn’t only mean welcoming the customers and offering them a glass of cold water. The Islamic banking professional should go out of the way and explain to their customers what Islamic banking is all about and how they will be benefitted.
The Islamic banks should rely on the media and should have a separate budget for advertisement. After all, this is a kind of business and businesses prosper due to advertisement. This way, two purposes will be served. Firstly, the advertisement will spread the awareness of Islamic banking and secondly the bank’s popularity will grow.
People will come to know about the specialities of Islamic banking system and will automatically be attracted towards doing business with such banks. Even if initially the business people hesitate to come due to the strict guidelines regarding various products and instruments, at least the banks can garner many customers for their saving bank accounts. Nowadays even children want to open their saving accounts.
Gradually, as there will be more innovative products and the banks will have better professionals, it is beyond doubt that Islamic banks won’t succeed. The future of Islamic banks is very bright.
It has been only 37 years since Islamic banks have come into the banking scenario and as compared to the conventional banks, they are quite new. As such, it is quite early to decide whether or not Islamic banking industry is a success or not. Looking at the response and feedback that Islamic banks are getting from foreign countries that are non-Muslim it may be understood that the even though slow yet there is some progress.
The popularity is increasing gradually. Moreover, the world economists have been quite impressed by the performance of Islamic banks during and after the economic crisis. There have been symposiums and conferences to discuss this issue. The number of Islamic banks in non-Muslim countries is increasing gradually and it is estimated that within the next five odd years, the number will double.
There are certain drawbacks of Islamic banks but these are due to the strict guidelines of the Sharia. But if we look at these drawbacks from the Sarah’s point of view, it will be understood that it is actually for the good of the masses. Sharia law doesn’t want to harm anyone due to its principles. Islam doesn’t allow earning money from money.
The only ways of earning allowed in Islam through business are trading, manufacturing, and service oriented jobs. There are restrictions to such businesses also. Certain things cannot be dealt with such as gambling, pork, intoxicating items, etc. If we think optimistically, such guidelines are better for the society as a whole because all malpractices can be avoided by such guidelines.
Children learn what they see. If we start following the same path as the Islamic banks and abstain from all those things that are banned according to Sharia law, our future generation is sure to become a decent and civilized and God-fearing one. Then our earth will be a better place to live in.
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Statement of financial position of Meezan Bank
Statement of financial position of Faysal Bank
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IvyPanda. (2023, November 17). Islamic Banking. https://ivypanda.com/essays/islamic-banking/
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Home — Essay Samples — Economics — Banking — Overview of the History of Islamic Banking
Overview of The History of Islamic Banking
- Categories: Banking
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Words: 1833 |
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Published: Oct 11, 2018
Words: 1833 | Pages: 4 | 10 min read
Table of contents
Introduction, islamic banking, model of islamic banking, commercial banks in muslim lands, islamic banks in 20th century.
- The Holy Quran
- The Sunnah of Holy Prophet (P.B.U.H)
- Qiyas The Holy Quran
- The investment in musharakah comes from all the partners while in mudarabah, investment is the sole responsibility of rabb-ul-maal.
- In musharakah all the partners can participate in the managements of the business and can work for it, while the mudarabah the rabb-ul-maal has no right of participate in the management which is carried out by the mudaribonly.
- In musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarabah the loss ,if only suffered by the rabb-ul-maal only, because the mudarib does not invest anything
- To accept commercial banking ,arguing that the interest charged by them, did not contain the element of the Riba prohibited in the Quran
- To accept that interest charged was Riba and try to develop an alternative system of banking.
- Deposit banks, which would maintain 100% Reserves. They could not fail the depositors and could not create or destroy effective money. They would simply accept deepest.
- investment trusts, which would perform the lending functions of existing banks such companies would obtain funds for lending by selling their own stock.
- saving accounts
- investment accounts
- zakat account
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Analysis of Islamic Banking and Finance
The primary component of Islamic Banking is that the risks of financial dealings should be equally shared between the depositor and the investor, who are bank and its customers. Contrary to the practice of charging interest on any loaned money by most financial institutions, under Islamic banking, it is illegal for financial institutions to charge their client’s interest on any loaned amount, so long as such clients are not running any risks on their own. In addition to this, Islamic banking also prohibits any form of speculative contracts, for example, futures and options. One direct effect of these banking principles is that the nature of the relationship maintained between investors and depositors always remains that of reciprocity.
Under this scenario, banks are very much involved with dealing with their customers’ activities. Contrary to a scenario where a non-Islamic bank can loan some amount to its customers and never bother to monitor how much clients will spend the loaned amount, as long as such clients pay the required interest within the set time limits, Islamic banks always make follow up on their client’s activities to ensure they invest the money well. This is the case primarily because Islamic banks usually lay a strong emphasis on maintaining a profit-sharing relationship with their clients.
On the other hand, Islamic banking is primarily rooted in standard contracts. One of such contracts is the Mudaraba contract. This form of contract involves investing of funds either by the bank or its clients, whereby any profit earned is shared among the two entities in a contract, but in case of a loss, only the investor is supposed to bear it all. The second example of a standard contract is the Musharaka Contract.
Contrary to the Mudaraba contract, here the two parties in a contract must divide any profits of risk of loss o the basis of the amount they have invested. A third example of a standard contract is the Muharaba contract. This form of contract involves the trading of goods and equipment between a bank and its customer for a price that is normally more expensive than their price. The client is supposed to pay this amount in installments depending on the agreed rate and within the set time limits. This type of contract is the easiest and the less risky form of all Islamic contracts because the lending banks always know in advance the number of returns any contract of this form is supposed to earn((Iqbal 18-21).
Most of the derivatives under Islamic banking contain some form of gharar (absolute risk), taking chances, and interest and support estimated activities. Islamic legal rules, more so those that prohibit gharar and the trading of debt for debt does not permit any business deal, which lacks real or productive activities. Any derivatives that involve any form of financial contracts are illegal according to Shariah.
For example, according to the Shariah precepts, it is illegal for a financial institution to trade in Riba-based bonds and forward foreign exchange, which lacks a synchronized mutual exchange pattern. In scenarios where the said assets are equities and commodities, considerations must be made to ascertain whether Riba or Gharar are involved. As indicated by some scholars, ‘arbun’ may be used as the main basis of formulating some type classes of Shariah-compliant alternatives. Arbun is a form of contract where one entity in a contract purchases the right to buy from the other entity certain items for a defined price on a specific date.
This form of contract is a void one according to the three schools of Islamic laws and the Hadith. However, according to the Hanabalah, it is a legal contract; although it also embraces the concept that time should be specified for any option taken. The OIC (Organisation of the Islamic Conference) also accepts it as a legal contract, so long as the time limit concept is taken into consideration. Although some sections of the Islamic organizations accept this type of contract to be a legal one, most derivatives that exist in present markets are not satisfactory when analyzing them from a Shariah point of view, as most of them encompass riba and gharar concepts.
It is assumed that a call option is usually near Bai al-Arbun because the seller is not required to return the premium or down payment to the buyer. This happens when purchasers are unable to exercise the purchase option, which can make them lose the option premium, although such an option has been exercised and the agreement has been ascertained. The case is different when it comes to a Bai al-Arbun because the option premium is normally catered for in the selling price, during the confirmation of the agreement (Iqbal 1-19 and Benlafquih 1).
When it comes to insurance, Islam has its ideology of the entire concept, because of the significance, it places on the need for insurance to operate under principles that comply with provisions of the Shariah Law. As white argues “Islamic insurance has three primary characteristics namely cooperative risk-sharing through the use of charitable donations aimed at ensuring that gharar and riba are eliminated, the well-defined financial separation between the insured and the insurance company, and Shariah-compliant underwriting policies and investment schemes” (White 2).
Within Co-op insurance, the attributes of a cooperative comprise self-responsibility, democracy, fairness, even-handedness, unity, truthfulness, ingenuousness, social responsibility, and being concerned about others. Although mutuality or cooperative risk sharing is the primary principle embraced by Islamic insurance, on its own it cannot form insurance. Hence, Islamic insurance is rooted in numerous relationships, the primary one is a mutual insurance contract between policyholders, them being the primary contributors.
This is the same as a pure mutual insurance relationship while noting the idea of donations instead of premiums. The primary characteristics of cooperative insurance include; firstly, policyholders are supposed to give premiums to a cooperative fund, which should be used as donations to those who may suffer losses (tabarru). A second characteristic is that all policyholders are supposed to receive any surplus, which may be realized from any activity where the cooperative insurance fund has been used. Lastly, all policyholders are legally responsible to make up for any shortfalls, which may result from any transaction involving the use of the cooperative fund (3).
In normal scenarios, an insurance organization is a profit-making entity whose main aim is to ensure that it maximizes the number of returns from any venture through bearing losses of others. In addition, shareholders are the primary owners of this organization, because they are the main recipients of an insurance company’s income at the same time, the main loss bearers or financiers. Contrary to this, Islamic insurance’s primary duty is to manage porpthe portfolios invest wisely in any insurance shares on behalf of its members. The last issue under Islamic banking and finance is the use of Shariah-compliant policies and strategies.
Any Islamic ethical insurers always invest their funds in the most dependable method, mostly in sectors of the economy that are ethically sound and promote environmental stability and the wellbeing of citizens, such as the Norwegian pension fund. Islamic insurance almost resembles conventional insurance, except that its ethical principles must conform to the Islam religion. They are usually under close supervision of the Shariah board; a board that is an integral part of any Islamic insurance company. As per the ethical provisions of this board, any investment or underwriting insurance policies must be free from any form of illegal activities, for example, gambling, tobacco, loans, and pork (White 3-4).
Benlafquih, Christine. The prohibition of interest and the Usury in Islam. Suite101 . 2009. Web.
Iqbal, Mazhar. A broader definition of Riba . (n.d). Web.
White, Suzanne. Islamic insurance markets and the structure of Takaful. QFinance (n.d). Web.
- The previous group works done by my group ( James, Hassan, Ali, and me).
- Handouts are given in class (a short review of the historical critique of usury) by Wayne A.M Visser and Alastair McIntosh, searching for the Mecca of finance. ( used them to gain more understanding).
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StudyCorgi. (2022, November 11). Analysis of Islamic Banking and Finance. Retrieved from https://studycorgi.com/islamic-banking-and-finance/
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Islamic Banking, Essay Example
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Islamic banking is a concept which emerges from the contemporary desire to participate in the global capitalist economy while at the same time not sacrificing a deeper religious and spiritual commitment to the Muslim faith. Accordingly, “an Islamic banking and financial system exists to provide a variety of religiously acceptable financial services to the Muslim communities” (Hassan & Lewis, 2007, p. 2). However, the very concept of Islamic banking remains problematic from two major perspectives. Firstly, the interpretation of which kinds of financial systems and banking systems are consistent with Islam requires an understanding of Islam. In other words, different Islamic scholars will offer different interpretations of which financial practices are acceptable to the Muslim faith and which are not. To the extent that unified interpretations of Islam are non-existent – this is evident from the sectarian divisions of Islam, from Sunni to Shia, to within the Sunni faith itself, movements such as Wahhabism – so to would be a coherent conception of Islamic banking. A Twelver Shia vision of Islamic banking, accordingly, could radically different than a Wahabbi Sunni vision of Islamic banking. From this perspective, within Islamic banking, not only is the concept of economics and finance crucial, but also a religious, sacred, and hermeneutic dimension. Secondly, Islamic banking, even if it is proposed according to the Islamic faith, may find itself completely at odds with the dominant world global system of capitalism. Critical scholars have written and commented extensively on the incompatibility of Islam with modern capitalism, above all because of the reliance of the latter’s financial system on paper and electronic currency and the concept of interest. (e.g., Hosein, 2007, Masudul Alam Choudhury, 2007) In so far as this latter view is correct, the clear problem regarding the effectivity of any Islamic banking system is the following: the proposed Islamic banking system must conform itself to the financial system of global capitalism and not vice versa. Namely, since the current global system is dominated by a capitalist system which actively uses paper money and interest, financial concepts which according to some interpretations of Islam are forbidden, it is the financial system that will determine how Islamic banking works. In other words, from an Islamic perspective, the ideal situation would be that the financial system emerges organically from the Muslim faith.
However, the capitalist and global system with which Islamic banking must engage because of the hegemony of the former has emerged in non-Islamic Western countries. This entails two possibilities. Firstly, that the effectivity of the Islamic banking system will require liberal interpretations of Islam that conform the religion to economic principles. This is clearly an approach prone to objection, as Hosein (2007) has written, since the economic principles are informing the interpretation of the religion. Secondly, Islamic banking could emerge as an alternative to the dominant capitalist model. (Choudhury, 2007) The problem with this approach is that the capitalist Western model is hegemonic in world finances. Effectivity thus in the context of Islamic banking has a difficult dilemma to address: does effectivity in this case mean that Islamic banking must strive to survive in capitalism and therefore make compromises of religious tenets? Or does effectivity instead mean prioritizing the religious and trying to offer an alternative to the main financial system? It appears that Islamic banking has tried to take a middle path to this Scylla and Charybdis, one, however, which may ultimately be a compromise of the Islamic faith itself. Accordingly, an Islamic banking system must above all one that remains authentically Muslim: defining precisely what this requires is the key challenge for Islamic banking in the 21 st century.
The incompatibility of any authentic form of Islamic banking with the modern finance system is arguably most explicitly demonstrated in the disagreement over the concept of interest ( riba ). As Hassan and Lewis write, “financial systems based in Islamic tenets are dedicated to the elimination of the payment and receipt of interest in all forms. It is this taboo that makes Islamic banks and other financial institutions different in principle from their Western counterparts” (2007, p. 2). This creates an immediate tension between Islamic banking and the dominant Western form of banking. Hence, in so far as “modern commercial banking is based on interest which is against the Sharia (Islamic law), for all the believers in Allah SWT (God) dealings with these institutions do not suit well” (Hanif, 2011, p. 167). The implication of this choice is radical: not only does Islamic banking forbid interest, but it also forbids, by logical consequence, dealing with financial institutions that use interest. In this case, this means that any authentic Islamic banking cannot have any dealings with modern commercial banking. Since modern commercial banking is the dominant form of banking, this places Islamic banking in a position where its effectivity will, from the very outset, be minimized, as Islamic banking must, by definition, operate outside of the remit of global capitalism and its reliance on interest.
Some proponents of Islamic banking have tried to navigate this tension by suggesting that the concept of riba given in the Qu’ran is not equivalent to the concept of interest in modern commercial banking and the world of capitalism. (Ariff and Iqbal, 2011) The logic for this reasoning is clear: it is only through this compromise or re-definition that Islamic banking can interact with the hegemonic Western financial institutions. This is clear in “ age-old issue, still smouldering with no consensus of opinion in Islamic banking, the concept of usury ( riba ) and its connection to interest rates….the reader will learn that it is difficult to equate usury and interest as interchangeable if one looks at the historical positions of Islamic or other jurist on this question.” (Ariff and Iqbal, 2011, p. 2) This argument is based on two key points: firstly, the authors draw a distinction in the English language between the terms usury and interest. In English, the latter term is dominant, whereas the former is no longer used in public discourse, according to its negative connotation. However, in the Arabic of the Qu’ran, there is no such difference: there is only the one term, riba. Secondly, the authors use the notion of a lack of consensus to advance an argument that since riba is itself ambiguous, contemporary Islamic scholars cannot equate riba with modern interest, and therefore exclude the dealings with the modern commercial institutions, which are necessary for the survival of Islamic banking.
Another strategy used to avoid the prohibition of riba in Islam is to utilize concepts which take the role of riba in the Islamic banking system. Hence, the concept of murabaha has become one of the key mechanisms used to overcome the prohibition of riba , described by El-Gamal as follows: “if a customer needed to borrow $1,000,000, and the “Islamic bank” was willing to lend him $1,000,000 at 5 percent interest, a simple intermediary trade solved the problem of Islamicitiy: the bank bought $1,000,000 worth of a commodity with relatively stable prices over the short term (e.g., some metal traded on a commodity exchange) and then sold the commodity to the customer on credit, with a deferred price of $1,050,000.” (El-Gamal, 2006, p. 34) However, there are clear religious problems with murabaha : as the premise states, the Islamic bank in question is only “willing” to lend the sum in question at a given rate of interest. Trade, in this example, replaces the form of interest – however, it is still a form of interest or riba . As Talib Jaleel (2014) writes, “what is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of shari’ah injunctions.” (p. 170) Accordingly, this crucial issue in Islamic banking is the following. Even in cases where the murabaha concept is being introduced, contrary to Ariff and Iqbal’s (2011) assertion that no consensus on what riba means exists, the very use of muarbaha as an alternative to riba , suggests a very clear understanding of what riba means. Namely, murabaha has emerged as a popular alternative to riba because riba has been clearly associated with interest. Yet even murabaha appears to fall short of reaching the standards needed for Islamic banking to not fall into riba practices, as Jaleel (2014) argues. (p.5)
In this regard, concepts such as murabaha are an implicit recognition that the fundamental economic world-view that emerges from the Islamic faith is incompatible with the dominant Western vision. However, in order for Islamic banks to remain effective in the contemporary economic globalization, they require precisely such a compromise of their religious principles. Yet this compromise seriously places in doubt the extent to which they can be called “Islamic” banking institutions. The problem with riba is one of the symptoms of this same incompatibility. In the words of Choudhury (2007) , “Islamic banks have mushroomed under an Islamization agenda, but the system has not developed a comprehensive vision of an interest-free system, nor has it mobilized financial resources for enchancing social wellbeing by promoting economic development along Islamic lines.” (p. 22) In other words, the desire to remain effective in the global economy, dominated by a Western vision of capitalism, has led the Islamic banks not to promote an alternative vision in accordance with Islam, but rather to interpret Islam in a way that will render Islamic banking feasible in a Western context.
The defenders of Islamic banking, however, will argue that it is only through such an interpretation that Islamic economies will remain vibrant in the modern global financial system. Accordingly, key components of the latter system, such as interest, without which this system would not function, must now be re-interpreted through concepts such as murabaha, so as to ensure the viability of Islamic banking. Furthermore, transactions between Islamic banking institutions and non-Islamic banking institutions must be maintained so that the former remains vibrant, even though the latter explicitly uses concepts such as riba interest. In an EY (2013) report on the future success of the Islamic banking system, it is concluded that “banks with strong connectivity across key markets and sectors are set to gain….a major challenge for Islamic banks is to adjust the propositions, opereating models, systems, tools and processes to understand and fully capitalize on the international opportunities provided.” (p. 2) In line with the above, however, from a more critical perspective, even if one accepts that current Islamic banking practices are authentic to the Qu’ran and the sunnah , financial analysts suggest that these practices are not sufficient for Islamic banks to remain viable. Namely, banks must emphasize connectivity across “key markets and sectors”; furthermore, key elements of the system, such as operating models, tools and processes, must be revised so as to remain viable. While from the perspective of some Islamic scholars and economists, current Islamic banking are not at all Islamic, from the opposite perspective of the EY report, these institutions are not even capitalist enough to fully survive.
For this reason, the effectivity of Islamic banking appears to rest entirely on a necessary re-evaluation of what effectivity means in this context: does it mean participating in the global economy at any cost, or does it mean maintaining the religious commimtnet? Any authentic Islamic banking must side with the latter choice. This, however, does not mean that Islamic banking itself must necessarily be ineffective. For example, Choudhury (2007) suggests that “the rediscovery of a worldview founded on the doctrine of Tawhid (the oneness of God) as enunciated by the Holy Qu’ran and sunna, a social wellbeing function for Islamic banks in terms of social security, protection of individual rights and resource mobilization in keeping with the Islamic faith” (p. 21) is necessary. What is required, is an alternative to “a mere deepening subservience to neo-liberal economic and social doctrines.” (Choudhury, 2007, p. 21) In other terms, the vibrancy of the Islamic banking phenomenon is not ultimately determined by its “subservience” to Western principles, but rather by the extent to which it is able to present a viable alternative. For example, “Islamic banks have not constructed a programme of comprehensive development by rethinking the nature of money in Islam in terms of the intrinsic relationship between money as a moral and social necessity linked enogeneously with real economic activities.” (Choudhury, 2007, p. 34) This vision of Islamic banking is in radical contrast to neoliberal hegemony: namely, money is not a speculative tool, but must be tied to “real economic activities” (Choudhury, 2007, p. 34) and possess an “endogenous” whereby “money is a systemic instrument that establishes complementarities between socioeconomic, financial, social and institutional possibilities towards sustaining circular causation between money, finance, spending on the good things of life and the real economy.” (Choudhury, 2007, p. 34) This entails that the overall aim of Islamic banking, not to “capitalize” in the words of the 2013 EY report, but, rather, to be based on the worldview of a “social wellbeing function.” (Choudhury, 2007, p. 34) This means that the aim of the Islamic bank is not the success of the bank itself, as in the neoliberal system, but rather the society. According to Choudhury (2007), for Islamic banking to be truly effective, it must understand that its definition of effectivity is determined by this concept of the greater social good which is fundamental to Islam: “Islamic banks become investment-oriented financial intermediaries and agencies of sustainability of the socioeconomic order, the sociopolitical order and institutions of preservation of community assets and wellbeing.” (p. 34) The effectivity of Islamic banking, in short, must be judged not on its own endemic effectivity, but rather on the extent to which it is effective in preserving the community. Crucial to this system, therefore, is the sense in which standard bank practices, such as investment opportunities, are now looked at in terms of concept of greater social sustainability to the community as opposed to concepts of profit.
The effectivity of an Islamic bank, in conclusion, cannot be judged in terms of Western principles, without betraying the religious commitments of the Islamic bank itself. Approaches which have attempted to assimilate Islamic banks to Western practices have become instances of what Choudhury terms “subservience.” Explicit impasses between Islamic banking and neoliberal banking – such as the concept of riba – mean that Islamic banking should prevent itself as an alternative to the dominant model. This is the only possible option for an authentic Islamic bank, in so far as it wishes to remain authentic to the Muslim faith as opposed to the modern market. This, however, requires systematic adjustments which are radical in comparison with the capitalist system. Nevertheless, precisely such adjustments are demanded by the religious foundation of Islamic banking.
Ariff, M. & Iqbal, M. (2011). The Foundations of Islamic Banking: Theory, Practice and Education. Northampton, MA: Edward Elgar.
Choudhury, M.A. (2007) “Development of Islamic economic and social thought.” In K. Hassan & M. Lewis. Handbook of Islamic Banking . Northhampton, MA: Edward Elgar. Pp. 21-37.
El-Gamal, M. (2006). Islamic Finance: Law, Economics and Practice. Cambridge, MA: Cambridge University Press. 14, (2013). World Islamic Banking Competitiveness Report 2013-14. UAE: EY.
Hanif, M. (2011). “Differences and Similarities in Islamic and Conventional Banking.” International Journal of Business and Social Science . Vol. 2, No. 2. pp. 166-175.
Hassan MK, Lewis MK. (2007). Handbook of Islamic Banking. Northampton, MA: Edward Elgar Publishing, Inc.
Hosein, I.N. (2007). The Gold Dinar and Silver Dirham: Islam and the Future of Money . San Fernando, Trinidad and Tobago: Masjid Jami’ah.
Jaleel, T. (2014). Notes on Entering Deen Completely: Success, Ummah, Renewal. EDC Foundation.
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A potential bottleneck for economic growth, essay, 2011, 8 pages, grade: 1,0, b.a. georg körnig (author).
Abstract or Introduction
Malaysia is one of the largest and fastest growing markets for Islamic Finance and Banking worldwide. The current market-share of Islamic banking (IB) accounts for ca. ten 10% of the total banking sector, compared to about 0.1% in 1994. The total share of bank assets held by Islamic banks worldwide amounts to 0.5%. On the one hand this outstanding growth stems from the initiative of Malaysia’s central bank, Bank Negara Malaysia (BNM). BNM provided for an Islamic Inter-bank money market (IIMM) in January 1994. On the other hand the opportunity to invest in Shari’a-compliant financial products is more and more embraced by the Muslim community all around the globe. This consensus is not argued about, but the influence of the Islamic Banking-specific properties on the financial system and the real economy is a field of scientific quarrel. The author tries to analyse the influence of Islamic Banking with regard to Malaysia and its dual financial system. This essay is structured as follows: In the beginning the author will outline a short history of Islamic Banking, followed by a comparison between conventional and Shari’a-compliant financial services. The question, if Islamic Banking could prove as a bottleneck for economic development is answered in the concluding section of this essay.
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