ISLAMIC BANKING: AN OVERVIEW

Islamic banking is based on the idea that all interest is riba and is therefore forbidden. In light of this many have questioned whether Muslims should even engage in any economic activity. However, thanks to the work of Islamic scholars and clerics, we now have a set of clear rules and guidelines based on the Quran’s teachings that we must abide by in order to refrain from engaging in any sinful financial activity. In this article, We present a concise summary of sharia-compliant banking and discuss its importance.

Islam advocates pursuing a living by hard work and recommends investing any excess income in worthwhile businesses so that the profits can be shared fairly. Hence, Islamic banking was conceptualized and then effectively implemented as an alternative financial system to enable people and businesses to achieve diverse financial goals in accordance with Shariah principles.

The booming demand for Shariah-compliant financial services from investors globally, as well as from financiers in the Middle East and other Islamic nations, has fueled the rise of the Islamic banking sector, making it a global enterprise. This is because Islamic banking offers numerous advantages when compared with traditional banking.

WHAT IS ISLAMIC BANKING?

Islamic banking is described as a kind of banking system that adheres to Islamic Shariah law and is in line with the teachings, ethos, and value system of Islam.

The concept of Islamic banking encompasses all forms of transactions, investments, lending, and exchange, that are carried out using financial means in accordance with Shariah principles, which forbids Riba (interest), Gharar (fraud), Maysir (speculation), Ihtikar (monopoly), and investment in sectors deemed to be sinful.

The fiqh al-muamalat are the regulations that control business dealings in Islamic banking. The Islamic banking system thrives on equity participation which involves sharing the profits and losses rather than charging interest — Murabahah. Hence Islamic banks also have a stake in the outcome of the loans lent out to customers. Thereby fostering the equitable distribution of wealth.

Islamic banking also includes practices such as Ijara (leasing), Wadiah (safekeeping), and Musharaka (joint venture).

SIGNIFICANCE OF ISLAMIC BANKING

The Islamic banking system is very similar to the conventional banking system, but it operates primarily in accordance with a set of moral and ethical standards that define what is deemed to be morally acceptable.

Islamic banking involves the sale of goods and services as well as the risky investment of cash in order to generate returns that are consistent with Shariah. It doesn’t operate on the same pricing and interest-generating principles as traditional interest-based banks. Hence, it protects Muslims from Riba, Gharar, and other unlawful behaviors.

As such, Islamic banks are held to a higher level of morality, and they don’t engage in reckless risk-taking. Also, Islamic banks, which cannot profit through interest, rely on linkages to material assets like stock and real estate and charge rent in place of interest. Hence, the profits are derived from recognizable assets rather than ambiguous derivatives and security combinations.

Since the returns on investments in Islamic banking are based on underlying economic activities or assets that define the contractual arrangement between parties to a transaction, Islamic finance can be better integrated with the real economy and its overall economic balance between the real and financial sectors by utilizing its asset-based structure and risk-sharing features.

STATUTES ON ISLAMIC BANKING

According to Islamic teachings, a Muslim must obey Allah’s instructions about how to make an honest living. Islam forbids us from engaging in riba, gharar, and maysir in any type of transaction. As a result, Muslims must refrain from engaging in any actions that have those forbidden aspects.

In order to be compatible with the principles of Islamic law, the following injunctions must be adhered to:

• All business dealings must be rooted in something tangible (possess material finality) as engaging in business dealings without material finality is haram. Hence, options and the majority of other derivatives are not permitted in transactions.
• Prohibition of all forms of interest yielding transactions including collection of defaulters fee (pertaining to fixed payment finance contracts, such as murabahah) as all types of interest are forbidden because they are riba.

Nevertheless, some Islamic clerics and sharia experts infer that defaulters’ fees may be imposed if they are donated to a charitable organization or if the buyer has “deliberately refused” to pay.

• Prohibition from investing in haram-related businesses such as the sale of alcohol, pork, production of porn, and whatsoever that is forbidden.
• An embargo on gambling and speculation — Maisir. As it is illegal to participate in bonds where the ownership of a thing depends on the occurrence of a predefined, unpredictable event in the future.

Maysir means getting something effortlessly or earning a profit without working for it.

• Prohibition of all facets of uncertainty or ambiguity — Gharar. As Islamic laws prohibit the execution of any agreement that has any elements of gharar and is therefore invalid from a Shariah perspective.

Gharar is described as the ambiguity that is present in the fundamental aspects of an agreement, namely the phrasing, subject matter, consideration, and obligations.

According to certain reports, Islamic banks are required to deduct zakat (religious alms giving required by law) from clients’ accounts.

Zakat refers to a person’s duty to contribute a set percentage of their annual wealth to charitable purposes. Zakat is a requirement for all Muslims and is viewed as a form of devotion as giving to the less fortunate is seen to purify annual income that exceeds what is needed to meet a person’s and their family’s basic requirements.

Since adhering to shariah law is the foundation of Islamic finance, Islamic banks and banking institutions that provide Islamic banking products and services ought to set up a Shariah Supervisory Board (SSB) to provide guidance on whether certain proposed transactions or products are compliant with the Shariah and guarantee that the banking institutions’ day-to-day business operations and activities are conducted in accordance with Shariah principles.

FINAL THOUGHTS

Islamic banking is fundamentally different from regular banking in that it is founded on Shariah principles and it aims to make it easier for both Muslims and non-Muslims to access money in a morally acceptable manner as it is free of the flaws and shortcomings of traditional finance, such as monopolies, unjust profits, individualism, and socio-economic unevenness.

In summary, an Islamic bank’s guiding principles include but are not limited to the following; exclusion of transactions based on interest, the abstention from business ventures that support injustice, the abstention from speculative economic activity, and actions and the suppression of the creation of goods and services that go against Islamic law.

As a result, every part of transactions, including product features and commercial strategies, is based on Shariah law, which makes them significantly different from those of regular banks.