Islamic banking has gained tremendous momentum and has been growing rapidly over the years. Islamic banks now offer products in various areas such as banking, insurance, The basic concept of Islamic banking which is also known as 'interest-free banking' is based on basic ethical standards with just one main difference- Muslims are not allowed to pay or Islamic Banking is a banking system that based on Islamic Law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat
Essay On Islamic Banking - blogger.com
In simple terms, Islamic banking is a banking system that functions according to the guidelines laid down by the Shariah Islamic law. It follows the Shariah, called fiqh muamalat Islamic rules on transactions. 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 islamic banking essay. 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, islamic banking essay.
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. 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 s promoted the idea of interest free banking and called it the Islamic banking system, islamic banking essay. The ensuing two decades witnessed further interest among people towards this kind of banking. The advent of s witnessed the participation of institutions in this sector. Owing to the efforts of the conference attendees, Islamic Development Bank IDB came into being in the year 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.
But since nowadays there are ATMs all over, money can be withdrawn whenever required. In lieu of offering islamic banking essay 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, islamic banking essay. 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. Following is a flow chart that depicts the Mudharabah or the profit sharing system followed by Islamic banks:. Islamic banking essay 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, islamic banking essay. 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 islamic banking essay 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:. 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 islamic banking essay the partnerships or joint ventures.
Joint ventures are done in order to make profit but islamic banking essay 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. Wakalah or the power islamic banking essay attorney system. The Wakalah system refers to an agency of any product or service in which the islamic banking essay charges a pre-decided fee for the services being rendered.
The agency acts as an agent of the principal party for performing explicit islamic banking essay. 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, islamic banking essay. The borrower has to repay the loan amount within the specified time frame. Hibah or the gift system. Islamic banking essay 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, islamic banking essay.
The following table depicts the principles followed by some of the major countries where Islamic banks function:. Except Sudan, Iran and Malaysia, there are no other countries where Islamic banks have legal cover. 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 islamic banking essay 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. One might wonder that if interest is prohibited in Islam, islamic banking essay, how such instances are occurring. The board members of the Shariah are paid compensation for favouring judgements Sultan par. The word itself has nothing Islamic or religious about it; it is simply Arabic for a promissory note. 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? In some countries, due to the cosmopolitan nature, there are Islamic islamic banking essay 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. 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. The bank is presently engaged in commercial activities and banking products such as deposit accounts, vehicle loans, islamic banking essay, loans on property, etc.
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:. Unlike current account, islamic banking essay, 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:. As the name suggests this kind of financing is for customers who want to purchase some consumer goods. Such goods may include vehicle loan, islamic banking essay, credit cards, etc. Let us now understand the salient features of this kind of banking instrument in both the banks:. The table below will further make us understand the differences between 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.
Islamic banks as well as conventional banks accept deposits but the difference is in the manner of return on the deposits, islamic banking essay. 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, islamic banking essay, in Islamic banking system, the risk and reward are both shared by the bank and the investor. In conventional banking, islamic banking essay, 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, islamic banking essay.
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.
Is Islamic Banking any different from Conventional Banking? Watch this video to enlighten yourself
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Essay On Islamic Banking 1) Riba’ (interest-based transaction) is prohibited. 2) Avoidance of Gharar (uncertainty) 3) Avoidance of Zulm (opression) 4) Promotion of socio-economic justice Islamic banking has gained tremendous momentum and has been growing rapidly over the years. Islamic banks now offer products in various areas such as banking, insurance, 9/06/ · Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called 'qh muamalat (Islamic rules on transactions) After fourteen centuries of Islam
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