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Reviewing Islamic Banking

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Review ing Islamic Banking

Reviewing Islamic Banking

By Asim Farooq Published 08/16/2007 Banking Rating:

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Rev i ewi n g Isl a mi c Ba n ki n g

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Introduction T he indispensable notion of Islam ic banking is furtherm ore identified as 'interest-free banking'. It is operates on the crucial principled v alues with merely lone major distinction that Muslims arent supposed to giv e or accept interest. This does not connote n any way that selling tricks or money spinning activ ities are not promoted. All of these activ ities are considered fine if they dont happen to inv olv e any kind of interest in the dealings. In order to ex ecute this principle, pecuniary dev ices hav e been launched by the Muslim financial institutions to gratify these necessities. Therefore a lot of equity financing is used instead of the debt financing. In order to keep their clients satisfied, interest free banks usually giv e a share from the bank profits instead of the interest on the sav ings account and this is usually up to fiv e percent. Why Was Islam ic Banking Introduced? T he contem porary depository structure was initiated into the Islam ic countries by the end of the nineteenth century at the tim e when a lot of these Muslim countries were perform ing pretty good on the econom ic as well as the political front. These financial institutions originated branches in the major cities of these countries in order to plunge into the business arena. On the other hand, these branches were restricted only to the capital cities and hence the other small cities surrounding these populated places were often ignorant of this banking sy stem. Then the major local trades ignored the traditional banking sy stem in order to adhere to the religious norms associated with Islamic banking as dealing with other banks inv olv ed a lot of interest and it was an idea totally ignored by Islam. Nev ertheless, the commercial banks were much more organized when it came to banking aspects like opening new accounts and transfers. Islam ic banking was m ore effectiv e with affairs like current accounts and all those aspects that did not inv olv e interest in any form . The latter half of the twentieth century saw a banking rev olution and at that tim e it cam e really im possible to av oid the com m ercial banks. These banks made it a point to v enture into a lot of

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Reviewing Islamic Banking

daily communities and forced themselv es into a lot of businesses. This is ex actly when the Muslim ex perts identified a want for a banking sy stem customized for the Muslims based on the strict principles of Islam. Such kind of Islamic banking has been around for more than twenty fiv e y ears howev er, such form of banking was also tried earlier but did not turn out to be as successful as this one. T here was one ty pe of bank in Malay sia that im plem ented this m odel and then there was one that was established in Pakistan in the forties. Both these banks couldnt surv iv e for long until the sev enties that also brought about a rev olution in the Islamic form of banking. An inter gov ernmental bank called the Islam ic Dev elopm ent Bank(IDB) was form ed along with the Dubai Islam ic Bank by a group of indiv iduals across v arious countries. Consequently , Islamic banks were formed in countries like Egy pt and Sudan. Since then, a hundred and twenty fiv e Islamic institutions hav e come into ex istence and countries in Western Europe, Asia and North America hav e started accepting this model of interest free banking. T he Present Policies of Islam ic Banking A m ajority of these Islam ic banks agree on three categories of depository accounts which are sav ings, inv estm ent and current. At the same time as the number of current accounts has progressiv ely turned down, the other two kinds of accounts hav e multiplied. This clearly shows the escalating confidence of users into this ty pe of banking. In a lot of these banks, the depositors usually let the banks use their money and in return get a guarantee to obtain the full amount of deposit. T hese banks inv est the m oney into sev eral short term projects that are beneficial to the bank and the Muslim com m unity .

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Besides these accounts there are also accounts that are called the trust deposits, which simply mean that the account is not under any restrictions when it comes to depositing or withdrawing funds. Furthermore there is the joint inv estment account that allows the depositor to participate in continuous inv estment plans of the bank. Such accounts ty pically receiv e a percentage of the profit from the bank. The Islamic banks inculcate v arious methods of possessing assets starting from inv esting, trading and lending. T he inv esting is known as Musharaka in which a bank would em ulate another body and set up a joint v enture with both parties agreeing to profits and losses in equal degrees. T rading is called the Mudarbha where in the bank prov ides money or the capital and the independent identity offers skills or labor. In this scenario, the profits are shared equally by both parties but the losses are incurred by the bank only . The third form of obtaining assets is through lending and financing based on an approx imate rate of return where in the bank estimates the project by itself first and then goes on by quoting a rate that can work out the best for the bank. Pitfalls Ev en though Islam ic banking has gained acceptance in the m ajor continents of the world it still need to ov ercom e som e of its shortcom ings. To begin with there is a scarcity of skilled professionals when it comes to interest free banking. As a result the lack of proficient workers has restricted the growth of Islamic banking. The ex isting banks should come up with the training and the academic curriculum required in ex celling this particular financial industry . Secondly , there is a sheer lack of specific accounting standards. Accounting is considered to be the most important aspect when it comes to banking and there are standards y et to be customized in the interest free format which brings in a lot of difficulties for the Islamic bankers. Lastly there is a requirem ent to set specific credit analy tics when it com es to interest free transactions. Howev er, with the kind of acceptance with Islam ic banking, it will be shortly adopted by m ost of the com m ercial banks of the present day . This article is the property of http://w w w .iGuides.org Copying and publishing any article from our site is strictly NOT allow ed.

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