Islamic Banking Essay

Islamic Banking is interest free banking, in which there is no fixed rate of return. Islamic banking is the banking system which is run in accordance with the Islamic laws and the Shari a’ board; that guides the institutions. This Shari a’ board authorizes the products that whether these are Shari a’ compliant or not. Islamic banking is the banking that is guided by Islamic law (Shari a’) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called Riba in Islamic discourse†. Islamic banking also finds its roots in Islamic finance and all type of transactions are interest free of risk sharing. The interest is probihited in Islamic ways of banking as it is also obvious from Quran. In Quran, in Sura Al-Iman, Allah said that; â€Å"O you who believe! Do not devour Riba multiplying it over and keep your duty to Allah that you may prosper† (3:130). Same kind of prohibition regard fixed interest is also lead in sura Al-Rum(39), Al-Nisa (160-161) and Al-Baqarah (275-281) of Quran. Riba and Gharar are illegal under Islamic law. Riba refers to fixed rate of interest. Gharar refers to fixed rate of interest. Gharar refers to speculation. Islamic banking shows dramatic improvements and developments in Pakistan. Islamic banking is taken as national policy and it is supported but there exist dual banking structure in the Muslim countries. Mostly the banks of conventional system are also opening their separate Islamic banking divisions and branches. The expectation of increase in growth of networking of Islamic banking system is increasing. The Islamic banking has increased in terms of branches, deposits, capital funds, sources. The ratio of income to expenses is high which indicates increasing profitability of the sector. Riba in Hadith â€Å"Every loan that derives a benefit (to the creditor) is riba†. (Hazrat Ali Radi-AllahuAnhu). Abu said al Khudri Radi-AllahuAnhu narrated that Holy Prophet ( peace be upon him) said: â€Å"Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, payment made hand by hand. If anyone gives more or asks for more, he has dealt in Riba. The receiver and giver are equally guilty. If the creditor received a goat as mortgage from the debtor, the creditor may use its milk to the extent he has spent in providing fodder to the goat. However, if the milk is more than the price of the fodder, the excess is riba. â€Å"Usmani, para 99). For Usamah ibn Zayd : â€Å"There is no riba except in nasi’ah (waiting). â€Å"Bukhari, Kitab al-Buyu, Bab Bay al-dinari bi al-dinar nasa’an, ( : 386); also Muslim and Musnad Ahmad). There is no riba in hand-to-hand (spot) transactions. † (Muslim, Kitab al-Musaqat, Bab bay’I al-ta’ami mithlan bi mithin; also in Nasa’i). What is the significance of Islamic Banking in a post recession world? Islamic banking is gaining popularity in emerging markets after helping some financial institutions avoid the worst of the economic meltdown. Islamic banks have been less affected than many conventional banks in the current global recession. This is mainly because unlike conventional banks, the Islamic banks have not been exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds since these practices are not in accordance with the principles set out in the Sharia Law. Moreover, recent years have already indicated that there is an interest in Islamic banking beyond Islamic investors. The UK is one of the leading centres for Islamic banking in the world, yet only 5% of its population is Muslim. And lastly, governments and regulators in a variety of countries have already recognized the importance of Islamic banking as a feasible alternative to conventional banking. The global recession brought about by the collapse in credit supply saw many of the globally accepted models of investment disappeared almost overnight with the collapse of Lehman Brothers in September 2008. It is well accepted that the credit crunch was essentially caused by gambling and inadequate regulation. The radical change in the investment dynamics of the market and a clear question of the morality of the investment industry signify a clear turning point in the development of regional and global investment markets. That will provide new boost to the already burgeoning Islamic private equity and venture capital industries. Thus, surely a system in which gambling is banned, where everything must be backed by tangible assets should be significant in a post recession world. In this era of scarred savers and investors, everyone shall move their money over to this low-risk system. A post-crisis market is more realistic and searches for an ethically based approach to investment. The new investment markets, after the crash, will see a growing demand for a far more partnership approach to private equity and venture capital investment. In private equity, the investor shares both the risks and the rewards, which replicates the basic principles of Islamic investment. Even before the full attack of the global downturn, the characteristics of Islamic private equity and venture capital ensured the sectors enjoyed increasing attention from regional and global investors. The merger of companies, as a means of meeting the operational and strategic challenges of the economic downturn, will show a growing demand for a far more partnership approach to private equity and venture capital investment. Islamic investment should be made on the basis of partnership and investment also to be made in largely infrastructure-orientated projects, such as transport, energy, healthcare and education, as these sectors not only offer asset backed investment but also long term investment into societies. Thus, in the post recession world, where the market and society is demanding that the investment industry provide a responsible form of investment, Islamic private equity and venture capital are both ideally suited to meet this demand.