When it comes to finances, everyone is cautious about where and what they invest in or how they choose to multiply their money. Financial awareness is key towards making the best decisions that are applicable to a family or an individuals’ needs. Have you ever heard of Islamic Banking? Read on to learn more about this interest-free banking system based on Shariat Law.
What is Islamic Banking?
Islamic Banking is a kind of banking system that is based on the principles of Islamic law or Shariat. While most financial systems are centred around profit-making, a distinct feature of the Islamic banking system prohibits making sales on profit manner and is allowed to be practised as per the Shariat only. The Islamic Law or Shariat prohibits collecting of interest fee of any sort (called Riba) for fixed periods. It also prohibits any kind of speculation in businesses that are considered haraam (prohibited in the Quran or beside the practice principles of Islam).
The initial triumphant pattern of an Islamic Bank was possibly a financial foundation called Tabung Haji in Malaysia which formerly came into existence due to high command of interest-free money for the pilgrimage (Hajj) since this was not feasible by way of the conventional banking system. Thus, since 1963, Tabung Haji had a total of 1,281 depositors which improved to 8,67,220 depositors with a net worth of over one billion Malaysian dollars. This covered the way for the formation of more Islamic banks particularly in Egypt where small scale Islamic Banks thrived in the 1960s, catering primarily to the rural areas. The achievement of these banks led to the configuration of the Naseer Social Bank in Cairo in the year 1972. In the same decade, an International Islamic Bank for Trade and Development was projected, which led to the formation of Islamic Development Bank to supporting the economic development of the Muslim neighbourhood with the unity of the Shariat law.
Through Shariat law, the Islamic banking system follows the principles of interest-free banking riba or interest beneath of Islamic Law means what everything in “excess” – the depositor should not construct an “undue” income from the hard work of the other. But it is legalized to follow a structure of realistic profit and return from deposit where the depositor takes a well-calculated risk. Thus, Islamic banks create accessible accounts which offer profit or loss as a substitute for interest rates. The banks utilize this money composed by them and spend in rather that is Shariat acquiescent, that is not haraam and does not engage towering risks. Thus, any businesses concerning alcohol, drugs, war weapons, etc. as well as all other high risk and speculative activities are forbidden. Therefore, Islamic Banking acts as a mediator by collecting the money on behalf of its customers, depositing them in Shariat compliant developments and sharing the income or losses with them. The Dow Jones Islamic Market Index came into operation in the year 1999 for depositors willing to deposit their money investment in Shariat compliant developments.
There are various schemes in Islamic Banking that cover the requirements and wants of the consumers. Some of them are Mudarbah (profit sharing – one party offers finances, the other offers expertise), Musharaka (joint venture – both parties share the whole thing equally), Murabaha (cost plus profit), Ijara (leasing), Istisna among others.
While Islamic Banking is popular and is ordinary in Islamic countries, there are ample examples of non-Islamic countries that are now starting Islamic “windows” in conservative banks. These are subdivisions within the banks and they present Shariat compliant schemes to the depositors. China, United Kingdom, United States, Germany are some of the countries that provide Islamic windows.
For example, in the US, the American finance house LARIBA is a riba-free and Shariat compliant financial group that is involved in auto, business, trade financing, hedge fund investing, etc. The United Kingdom, which was the foremost non-Islamic country to permit an absolute Shariat compliant bank called the Islamic Bank of Britain, brought in Islamic Bonds known as Sukuk in the year 2014.
The idea of Islamic banking has habitually been criticised by both purists as well as contemporary conventional bankers. It is known that the products in Islamic banking are the same as the ones in customary banking and have a similar principle with simply different vocabularies. It is frequently stated that in today’s time of revenue maximisation, there is a thin line between riba and profit. The recent Islamic banks have established habits to work around the conventional mechanisms and include them in Islamic banking mechanisms. One such model is an instrument called Mudarabah, which is in essence of nothing else but a mortgage and the banker trimming up earning an interest in the figure of mortgage interest rate on it. There are some opinions that say that Islamic Banking was based on high moral principles which no longer stay the same. A World Bank paper states that conservative and Islamic banking processes are very comparable to each other. An additional censure is that the Islamic bankers locate their way in the region of the system and “manage” to acquire a Shariat compliance certificate from an academic to put in.
Transversely the world is at a moderately budding stage and there are plenty of explanations as specified by scholars worldwide which look upon a variety of Islamic finance products. One cannot stick to the purist move alone; as the Islamic economic system is centuries old and the contemporary Islamic Banking system is a recent evolution. The Islamic finance system has to develop with time without violating the essentials of Islamic Finance system as per the Shariat.
Degree of Thought is a weekly community column initiated by Tetso College in partnership with The Morung Express. Degree of Thought will delve into the social, cultural, political and educational issues around us. The views expressed here do not reflect the opinion of the institution. Tetso College is a NAAC Accredited UGC recognised Commerce and Arts College. The editors are Dr Hewasa Lorin, Dr. Aniruddha Babar, Dr. Pfokrelo Kapesa, Rinsit B Sareo, Meren and Kvulo Lorin.
For feedback or comments please email: dot@tetsocollege.org
You must be logged in to post a comment.