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Islamic Banking
Musaed Yousef Al-Mahfouz
200901354
Money & Banking
Section 102
Dr. Mohamed Magableh
Introduction and Background:
Islamic bank is banking with an activity that is consistent with the principles and rules of
Islamic law and also in line with “Al Sharia”. Islamic bank agree or deals and its practical
whole applications through the development of Islamic economics. The first appearance or
instance of the Islamic banking was in 8th and 11th centuries but the first Islamic bank came in
a picture in Egypt in 1963, also the development of this kind of bank was between these
centuries, which some refer to as "Islamic capitalism". After several years the Islamic bank
developed until it is become to these banks these days. The pioneering efforts by Ahmad El
Najjar brought this bank into existence, whose key principle was profit sharing (non-interest
based on philosophy of Sharia). By the end of 1976 there were 9 such banks in the country.
These banks neither charged nor paid interest but their activities were mostly limited to trade
and industries where these banks invested directly or as partners of depositors.
The money and banking system should, like other aspects of the Islamic way of life, not
only contribute to the achievement of the major socio-economic goals of Islam but also
perform the functions that relate to its own special field. The principal goals and functions
are:
1- Broad-based economic well-being with full employment and optimum rate of
economic growth.
2- Socio-economic justice and equitable distribution of income and wealth.
3- Stability in the value of money to enable medium of exchange to be a reliable unit of
account with standard of deferred payments and stable store of value.
4- Generate adequate savings and mobilized these efficiently goals.
5- Render effectively all services normally expected from the banking system.
Shari' a:
The System of Islamic banking is based on the Shari' a and it must not pass the limits of
Shari' a law in all of dealings. Shari' a is an Arabic word and it means "the moral code and
religious law of Islam" this term become known for Muslims and non-Muslims. Shari' a
control Muslim life all the time and it comes from three sources the first one and the basic is
the Quran (Muslim Holy Book) then HADITHS, what prophet Mohammad (peace upon him)
said, finally the FATWAS the rules of Islamic scholars.
In Shari' a there are five rules that control investments dealings; the first one is the
removing of the RIBA (interest). The Quran Forbid the transactions and payments within
RIBA. RIBA meaning the additional amount of the principal loan according to the time in
which it is loaned with the amount of loan previously. Many people ask whether RIBA
relates to interest or the usury. But the Islamic scholars agree that it refers to all types of
interest. The reason Islam forbid RIBA, is to develop an environment based on fair and
justice. A loan gives a fixed return to the lender depending of the revenue of the borrower’s
project. From an Islamic aspect, it is fairer to share in the profits and the losses. The idea of
fairness in this condition has more than one point of view. The supplier of capital has the
right to revenue, but this revenue should be equal to the risk and effort within the project for
which the finances are supplied. Because of that, the Shari' forbid not fixed returns but also
predetermined returns.
The second basic rule that control investment dealings is the forbidding of financial
transactions that include speculations. This means that purchasing goods and Services at a
lower price then selling them for a higher price in the future. Also, immediate Sales to avoid
future losses are also forbidding. Why Shari' a don’t allow this kind of behavior because
speculators get their revenue at the expense of the community at large. Thus, “Whenever a
commodity is speculated upon, RIBA would appear. With the avoiding of interest,
Speculative demanding for money that motivated by interest would abolish. Speculation
which necessary entails artificial risk in any market is it in money, Bonds, gold, commodities
and the like, is not approval in an Islamic law.”
The third rule include in the Islamic law is amanat, which is mean accountability. this
mean that Each Muslim is responsible for his or her behaviors and what they had done.
Depend on this rule, Islamic banks system keep funds to help allocate and distribute them in
the best possible ways. This also shows that the management of an Islamic bank will not only
be responsible for their activities to the system but also to ALLAH.
The fourth major principle that controls the investors in Islam is the mandatory payment
of Islamic tax, Zakat. The word ‘Zakat’ comes from the Arabic word meaning pure. This tax
is one of the five billers of Islam, and its equal 2.5 percent of a Muslim’s annual income. It is
consider as a way for the redistribution of income and wealth among a community to have
equality and a fairness standard of living. All Islamic banks should establish a Zakat, fund for
gathering the tax from investors and depositors and distributing it to the poor people directly
or through other religious headquarters.
Principle number five indicate that the activates that are forbidden by Islam are not
allowed to be finance in Islamic banking, any businesses that involve pork farming,
producing alcoholic. The important goal is to produce goods and service that benefit
economy. The community must be satisfied first than other issues come. To make sure that
Islamic banking is applying Islam law, government employ an assistance. This could be an
individual Sharia’a advisor or board of scholars.
The Meaning of RIBA:
RIBA simple meaning is addition and increase, RIBA meaning in Islamic to increase or to
grow to add, however, not every increase or growth which has been prohibited in Islam
.RIBA technically refers to premium that must be paid by the borrower to the lender along
with the principal amount as a condition for the loan or for an extension in its maturity, RIBA
it is used in the Arabic language means to excess or increase. In Islamic view interest means
effortless profit or that profit that comes free from compensation or that extra earning
obtained that is free of exchange.
There are two types of Riba in Islamic view:
Al Nasiah: Nasiah means to postpone or to wait. To refers to the time period that is allowed
for borrower to repay the loan in return for the addition of the premium. It makes no
difference whether the return is fixed or variable percentage of the principle, an absolute
amount to be paid in advance or on maturity, or gift or service to be received as condition for
the loan.
Al Fadl: the excess over the loan paid in kind. It lies in the payment of an addition by the
debtor to the creditor in exchange of commodities of the same kind. Arises if gold, silver,
wheat, barley and dates are exchanged against themselves with unequal proportion. They
should be exchanged on the spot and equal and alike, otherwise any change in transactions
will create Riba Al Fadl.
Modernists tend to emphasis the moral aspect of the prohibition of riba, and argue that
the rationale for this prohibition as formulated in al-Quran was injustice and hardship. They
also find some support for their views in the works of some early scholars like Imam Razi
and Ibn Qayyim for whom it appears that what is prohibited is the exploitation of the needy,
rather than the interest itself. Many writers of this trend attempt to differentiate between
various forms of interest practiced under the conventional banking system, advocating the
lawfulness of some while rejecting other.
DISADVANTAGE OF RIBA:
1.Riba driver to inflation (rising prices) because when the person takes a loan interest-based,
it will lead to increased production costs, which compels him to increase prices of goods
and services and when you rise in the prices of goods and services the trader to increase the
interest rate on money it lends to maintain profit lasting affected by high prices and the
increase on the interest rate causes the increased cost of the product, which raises prices.
2. Hurt the poor and the needy to double their debt when their inability to pay.
3. Disable the gains and trades and business.
4. Accumulation of money in the hands of a particular class of owners of capital.
Islamic Financial Transaction Terminology:
Mudarabah
Mudarabah/‫ مضاربۃ‬is a kind of partnership where one partner gives money to another for
investing. The capital investment comes from the first partner, who is called the "rabb-ulmal", while the management and work is the exclusive responsibility of the other party, who
is called the "mudarib".
Musharakah (joint venture)
Musharakah/‫ مشاركة‬is a relationship between two parties or more that contribute capital to a
business and divide the net profit and loss. All providers of capital are entitled to participate
in management, but not necessarily required to do so. The profit is distributed among the
partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to
respective capital contributions. This concept is distinct from fixed-income investing.
Murabahah
Murabaha/‫ مرابحة‬this concept refers to the sale of goods at a price, which includes a profit
margin agreed to by both parties. The purchase and selling price, other costs, and the profit
margin must be clearly stated at the time of the sale agreement. The bank is compensated for
the time value of its money in the form of the profit margin. This is a fixed-income loan for
the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit
determined by the profit margin. The bank is not compensated for the time value of money
outside of the contracted term (i.e., the bank cannot charge additional profit on late
payments); however, the asset remains as a mortgage with the bank until the default is settled.
This type of transaction is similar to rent-to-own arrangements for furniture or appliances that
are common in North American stores.
Bai Salam
Bai salam/‫ بيع سالم‬means a contract in which advance payment is made for goods to be
delivered later on. The seller undertakes to supply some specific goods to the buyer at a
future date in exchange of an advance price fully paid at the time of contract.
Ijarah
Ijarah/‫ اإلجارة‬means lease, rent or wage. Generally, the Ijarah concept refers to selling the
benefit of use or service for a fixed price or wage. Under this concept, the Bank makes
available to the customer the use of service of assets / equipments such as plant, office
automation, motor vehicle for a fixed period and price.
Istisna`a
Istisna`a/‫ استثناء‬is a contract of exchange with deferred delivery, applied to specified madeto-order items. General agreement upon principles of practice is difficult to identify.
Istisna`a differs from ijara in that the manufacturer must procure his own raw materials.
Otherwise the contract would amount to a hiring of the seller's wage labour as occurs under
ijara. Istisna`a also differs from bay salam in that a) the subject matter of the contract is
always a made-to-order item, b) the delivery date need not be fixed in advance, c) full
advance payment is not required and d) the istisna`a contract can be canceled but only before
the seller commences manufacture of the agreed item(s).
Conclusion:
As we mention above we can see that Islamic banking is powerful and well help in solving
and developing many problems and tactics in the world banking that will provide an equal
and fairness distribution of profits and resources. And be sure that Islamic banking is the only
system that can manage the financial processes.
Refrences:
http://www.islamic-finance.com/item_istisna_f.htm
http://www.badralislami.com/glossary/a-h.asp
http://www.azmilaw.com/Article/Article_8_&_9/Article_9_Tawarruq_00093603_.pdf
Nomani, Farhad; Rahnema, Ali. (1994). Islamic Economic Systems. New Jersey: Zed books
limited. pp. 99–101.
www.wikipedia.com