Islamic Banking Or Finance

An Egyptian Bank ‘Myt Ghamr’ introduced Islamic Banking in the late 1960s. During an Early-stage it faces many challenges from suspicious to mistrust about their intention. Currently, Islamic finance worth $2.5trillion in the industry. More than 80 countries including Saudi Arabia, Malaysia, Kuwait, Qatar, Turkey, etc. have Islamic Banking System.

RBI rejects Raghuram Rajan's Proposal
RBI rejects Raghuram Rajan’s Proposal

The concept of Islamic Banking

Islamic Bank (IB) is also known as Islamic Finance or Shariah-Compliant Finance adheres to Islamic law or Shariah. The principle of IB accompanied by the Qur’an– the central religious text of Islam. Meanwhile, all transactions in IB must compliant with Shariah, the legal code of Islam (based on the text of the Qur’an).

Furthermore, the Islam law or Shariat prohibits paying any fee or interest for renting of money (called riba) to investor and borrower. This bank makes a profit through equity participation.

Fundamental Principles of Islamic Bank

Islamic laws have set values and goals that meet all the economic and social requirements of human life. Presently, RBI denied incorporating the provisions relating to Islamic banking. Because the Banking Regulation Act requires payment of interest which is against the principles of Islamic Banking.

Here are seven major principles of Islamic Banking and finance:

  1. Profit and loss sharing – Profit/loss of the business should be shared with these banks.
  2. Shared Risk – In order to improve the economy, IB indulged in risk-sharing. The risk is getting divide and reduce between the parties.
  3. Riba – It regards as the prohibition of the collection and payment of interest.
  4. Gharar – In this principle, Muslims consider Haram to participate in ambiguous and uncertain transactions. Complete information provided to Islam banks (both parties) so that the profit and loss will be equally shared.
  5. Gambling – Islam prohibits the acquisition of wealth through evil means or participation in gambling. Islamic banking works in Takaful (a type of Islamic Insurance) that involves mutual responsibility and shared risks.
  6. No Investment In Prohibit industry – Islam promotes Corporate Social Responsibility activities. It prohibits investment in industries that are harmful to society. It includes:
    • Pornography
    • Prostitution
    • Alcohol
    • Pork
    • Drug
  7. Zakat – It’s a property tax includes in the rules of Islam for a balanced distribution of wealth. A fair amount of Zakat is deducted from the accounts of Muslims in the holy month of Ramadan. Later, they distributed among the needy.

So we can say Islamic finance principles have been designed to make an economy successful!

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