Basic principles of islamic banking

A Euromoney Publication, Theoretical Basis for Islamic Banking A popular belief persists that Islamic banking is simply an interest-free financial structure.

Islamic Banking

Principles[ edit ] To be consistent with the principles of Islamic law Shariah -- or at least an orthodox interpretation of the law -- and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some not illegal in secular states: Bans on both maisir and gharar tend to rule out derivatives, options and futures.

Western bankers have said that savings and investments would soon dry up if interest were not paid. God loves not any guilty ingrate. God blots out usury, but freewill offerings He augments with interest. Get Full Essay Get access to this section to get all help you need with your essay and educational issues.

Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice.

When more information or guidance is necessary, Islamic bankers turn to learned scholars or use independent reasoning based on scholarship and customs. The businessman borrows the capital from the capital-owner and invests it in his trade. This payment is due irrespective of whether the businessman has made a profit using the borrowed money.

O believers, fear you God; and give up the usury that is outstanding, if you are believers. It follows conventional banking and deviates from it "only insofar as some conventional practices are deemed forbidden under Sharia. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan without promising it as a token of appreciation to the creditor. From the s to the s, Islamic banking resurfaced in the modern world. Mudarabah is the basis of modern Islamic banking on a two-tier basis.

Another Islamic principle is that there should be no reward without risk-bearing. If, on the other hand, the provider of the capital violates any of the stipulated conditions, for example, by withdrawing his funds before the stipulated time, or by not providing part or full funds at the promised time, etc.

Gharar is usually translated as "uncertainty" or "ambiguity". A number of orthodox scholars point to Quranic verses 2: The capital-owner is not involved in the actual day-to-day operation of the business, but is free to stipulate certain conditions that he may deem necessary to ensure the best use of his funds.

The manager bears no financial loss, because he has lost his time and his work has been wasted. Nor do these theories answer the question as to why interest should be the market regulator for the supply and demand of money. Whosoever receives an admonition from his Lord and gives over, he shall have his past gains, and his affair is committed to God; but whosoever reverts -- those are the inhabitants of the Fire, therein dwelling forever.

Thus, under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. And if any man should be in difficulties, let him have respite till things are easier; but that you should give freewill offerings is better for you, did you but know.

They can co-operate in either of two ways: This principle is applicable to both labour and capital.

Islamic banking and finance

The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit. Taqi Usmani describes the virtues as guiding principles in one section of his book on Islamic Banking, and benefits in another.

Debt-financing the western loan system. Consequently, much of the literature on the theory of Islamic banking has grown out of a concern as to how the monetary and banking system would function if interest were abolished by law."While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have.

Fundamental of Islamic Banking - Principles of Islamic Banking Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. If you continue browsing the site, you agree to the use of cookies on this website. Principles of Islamic Banking What is an Islamic Bank?

There is no standard way of defining what an Islamic bank is, but broadly speaking an "Islamic bank is an institution that mobilises financial resources and invests them in an attempt to achieve predetermined islamically.

Islamic banking, also known as non-interest banking, is a banking system that is based on the principles of Islamic, or Shari'ah, law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors.

In general, Islamic banking and finance has been described as having the "same purpose" as conventional banking but operating in accordance with the rules of shariah law (Institute of Islamic Banking and Insurance), or having the same "basic objective" as other private entities, i.e.

"maximization of shareholder wealth" (Mohamed Warsame). Basic Principles of Islamic Banking Essay Sample Wakalah (Agency) occurs when a person appoints a representative to undertake transactions on his/their behalf, similar to a power of attorney. It is an agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested).

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Basic principles of islamic banking
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