May 22, · Islamic banking gets its name from its compliance to Islamic laws (also known as Shariah laws) governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic blogger.comted Reading Time: 10 mins Feb 21, · The argument, as to whether Islamic banking is really Islamic, has two different facets. The first one is that whatever is being performed in the name of Islamic banking is apparently quite similar to the operations of a conventional financial institution hence creates doubts in people’s mind, as to on what grounds we can call it Islamic?Estimated Reading Time: 10 mins Essay On Islamic Banking Islamic banking gets its name from its compliance to Islamic laws (also known as Shariah laws) governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic laws
Islamic Banking Principles and Relevance
Islamic banking gets its name from its compliance to Islamic laws also known as Shariah laws governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic laws.
The rationale behind not charging interest comes from the Islamic finance concept, which states that interest or riba encourages circulation of wealth in the hands of a few essay on islamic banking entities and limits prosperity to reach to the masses in the society. However, Islamic banking is not limited to interest-free banking alone but adhering to all Islamic values such as charity, profit sharing, zakat essay on islamic banking Islamic tax collected for the destitute and not doing business in things classified as haram or forbidden under injunctions of Islam.
The first modern experiment of Islamic banking was carried out in Egypt. This experiment was not labeled as an initiative to establish Islamic banking because the idea holders feared to be labeled as Islamic fundamentalists.
The following banks were opened up; Nasr Social Bank in ,Amanah Bank inthe Dubai Islamic Bank inthe Kuwait Finance House inthe Faisal Islamic Bank of Sudan inFaisal Islamic Bank of Egypt inthe Bahrain Islamic Bankand the Qatar Islamic Bank However, it is only in the last few years that Islamic banking and finance has picked up pace and Islamic economists have come up with innovative financial products that are also Shariah compliant, essay on islamic banking.
Islamic finance believes that interest on consumer as well as investment or corporate loans is forbidden. It devises its rulings out of the events of Islamic history and financial transactions there in. Some salient foundations of these rulings are; the concept of profit as well as loss sharing with entities the loans are advanced to. There is no such thing as a confirmed profit in form of interest in Islamic finance.
Usmani If a custodian is handed money for safekeeping he does not have limited liability but a complete liability towards the clients that handed the money or assets for safe keeping. The custodian is allowed to invest these amounts in trade and business to earn profits on it.
However, is liable to share the profits with the clients according to the ratio of the share of their capital in the entire invested capital M, essay on islamic banking. Islamic financial practices believe only in asset backed financing and not in money as it does not have any intrinsic value.
Therefore, many Islamic banks believe in entering a valid contract with the clients and engage in actual purchase of things such as houses, automobiles or consumer goods and later sell it out to client. It is imperative to understand the essay on islamic banking of Islamic financial terms of contract and sales too.
Under these rulings a contract is void if it violates the Islamic principles governing economics, essay on islamic banking, is not formed through mutual agreement and negotiation, essay on islamic banking, is not part of the normal market transactions and benefits one party over another. Whereas, M, essay on islamic banking. Usmani describes sales in Islamic banking are considered essay on islamic banking if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction Essay on islamic banking Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, essay on islamic banking, Istijrar, Ijarah and Ijarah Wa Iqtina.
Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract M. The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest.
On the other hand, losses are to be shared according to the initial capital essay on islamic banking in the venture. If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any capital lent out. Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses.
However, in Musharakah it is responsibility of bank to share the losses as well. The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank. This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of essay on islamic banking venture they finance, essay on islamic banking.
Mudarabah is closely related to Musharakah but is another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business. This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i.
bank and client. However, a fixed lump sum amount irrespective of profits or losses is not allowed. Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset.
Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset. Salam is generally used for Islamic banks to finance agricultural ventures where in a seller agrees to supply particular goods or services to a buyer at a future date of delivery i.
mutually consented uponhowever, essay on islamic banking, the buyer the price of the transaction is completely paid at spot. In Istisnah, it is a essay on islamic banking transaction where a commodity is transacted before it comes into existence.
It is necessarily for manufactured goods, part or whole of payment is made in advance the bank has right to cancel the contract before manufacturer starts the work. Istijrar involves two parties, essay on islamic banking, a buyer which could be a company seeking financing to purchase the underlying asset and a financial institution.
It has two forms; first where the price is determined after all transactions of purchase are complete and second where the price is determined in advance but the purchase is executed from time to time. Ijarah Islamic leasing is where in the leaser who also essay on islamic banking the owner of things transfers the use of thing to another person or the lessee for a mutually agreed time period and on a mutually agreed consideration.
Ijarah wa Iqtina leasing and promise to gift is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i. the ownership is completely transferred. Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law. Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country.
American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan. American banks do not encompass any religious taxes to support the community but just the state taxes apply. However, Islamic banks collect the zakat Islamic tax for benefitting community and disperse it among the needy segments of the society. Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive.
However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if essay on islamic banking installment is not paid on time or defaulted a compounded interest charge is levied on it.
However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter. If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged.
American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i. clients and keeping public interest at heart of future objectives. American banks can borrow money from money markets easily. However, Islamic banks face constraints towards such actions because any borrowings they make have to be Shariah compliant, essay on islamic banking.
American banks give greater weightage to the credit ratings of their clients to assess the advancement of loans. Whereas, Islamic banks emphasize the project viability while deciding upon advancing loans, essay on islamic banking. A typical American bank while financing projects mainly functions as a creditor to its clients or debtors. On the other hand, Islamic banks become partners, investors, and sellers to their clients which depend upon the modes of finance taken up.
Conventional American banks need to guarantee all the deposits they accept. However, Islamic banks only guarantee saving deposit accounts in their portfolio. Their clients have to share the losses as well depending upon the nature of the contract Rahman.
bond issue, share certificate etc investopedia. Islamic banks have now ventured in securitization of Musharkah, Murabaha, Mudarabah and Ijarah. Many countries now have Mudarbahs listed at stock exchanges to be traded in. Islamic bankers are also bringing investment funds that are compliant with Shariah laws to the financial services market, essay on islamic banking.
Some of the funds established essay on islamic banking equity fund, commodity fund, ijarah fund, murabaha fund, essay on islamic banking, Bai-Al-Dain, and Mixed fund. Therefore, it can be seen that Essay on islamic banking banking sets its foundations in Islamic laws governing financial transparency. These are very different from conventional American banks in their economic concepts, financial products and services offered to clients.
Furthermore, Islamic banking is relatively a new concept as compared to the conventional banking and economic concepts that have developed over ages, essay on islamic banking. Islamic bankers and scholars are working upon deriving more products and services based upon Shariah to offer a greater range of financial products in the financial industry. It holds appeals in its concept of community care and client care, essay on islamic banking. However, the complete implementation of this form of banking on a large scale seems a questionable and daunting task.
Retrieved 28th April from www. pdf Rahman, Zaharuddin A. Karachi Pakistan :Darul-Ishaat Essay On Islamic Banking Islamic banking gets its name from its compliance to Islamic laws also known as Shariah laws governing financial transactions. Karachi Pakistan :Darul-Ishaat Need this custom essay written urgently? Order Essay. Calculate your order price. Type of paper. Academic level. Calculate the price of your paper Type of paper needed. You will get a personal manager and a discount.
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Jun 03, · Islamic banking is strongly rooted in the Muslim countries; but other countries are opening up (Ahmad 15). Haron (25) explains the four categories of Shariah principles within which the Islamic Banking principles are encapsulated on. We will write a custom Essay on Islamic Banking Principles and Relevance specifically for you Islamic Banking 1. The accountability process should be viewed as a social, and not only as an economic Concept. The find providers' 2. The accountability process should be viewed as a mechanism that lays down the ethical foundations for accounting and 3. The accountability process should Feb 21, · The argument, as to whether Islamic banking is really Islamic, has two different facets. The first one is that whatever is being performed in the name of Islamic banking is apparently quite similar to the operations of a conventional financial institution hence creates doubts in people’s mind, as to on what grounds we can call it Islamic?Estimated Reading Time: 10 mins
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