ISLAMIC BANKING

ASSIGNED BY: KUNDAN KUMAR

2K19/BBA/86
ASSIGNED TO: MA’AM PARAS CHANNAR

UNIVERSITY OF SINDH JAMSHORO

INTRODUCTION:
Islamic banking is the conduct of banking based on Syariah principles and does not allow the paying and
receiving of interest while promoting profit-sharing. It has exactly the same purpose as conventional
banking except that it operates under the Syariah law.
Islamic banking has emerged as one of the most important alternate forms of funding in the financial
world. There has always been a growing demand amongst Muslims for financial products and services that
conform to the Syariah (Islamic law). The basic principles underlying Islamic banking transactions are that it
must not be tainted with elements of interest and that risk must be shared between banker and customer
based on a profit and loss sharing (PLS) principle. Islamic banking is not a new phenomenon and its
principle was practiced during the time of Prophet (Saw). Islamic principles merged with creativity and
innovation have evolved into a guideline for Islamic banking institutions to meet the financing needs of
Muslims and Non-Muslims.
HOW DOES ISLAMIC BANKING WORK:
Historically, the practice of ‘Usura’ - or interest lending - was considered immoral, and was once outlawed
by several English kings. The term ‘ursury’ once referred to financial interest of any kind, though it is now
commonly used to denote an unreasonably high interest rate which enriches the lender.
The approach taken by mainstream banks towards ethical or responsible banking has varied throughout
the years, however. We are familiar with banks offering savings accounts, credit cards, and mortgages with
competitive rates of interest.
These financial products tend to conflict with Islamic finance - which is also sometimes known as Shari’ah-
compliant finance - in a number of key. In particular, these bank accounts do not give or receive interest, in
accordance with Shari’ah principles.
HISTORY:
• The practice of prohibiting interest stems from the Islamic tenet that money is only a medium of
exchange; that it has no value in itself, therefore cannot generate more money – either through lending,
or earning interest simply sitting in an account. Islamic finance is principally based on trading, therefore
banks can profit from the buying and selling of Shari’ah-compliant goods and services.
• When customers deposit money, the banks select Shari’ah-compliant investments, then profits and risks
are shared with the bank equally. The practices of Islamic banking have some clear ethical advantages
over more traditional banking systems, which can be seen as unscrupulous.
HOW DOES ISLAMIC BANKING MAKE PROFIT:
• Despite Islamic banks being prohibited from giving or taking interest, they are able to generate profit through
a number of Shari’ah-compliant means:
• Ijara is when banks buy an asset, such as a car, and lease it to the customer. Ownership remains with the
bank until the lease is paid off by the customer. During this time, the bank is responsible for maintenance of
the asset.
• Murabaha means the bank acts as an intermediary to buy the asset, which is then sold to the customer, plus
profit. The customer buys the asset with deferred payments.
• Wakala refers to a contract of agency or delegated authority in which the bank is appointed much like an
individual agent to carry out a specific task on the customer’s behalf. The bank lends its expertise for a set
duration for an agreed upon profit.
• Salam could be considered forward-financing, or as a kind of debt – the institution pays for specified assets
in advance, which the seller will then supply to a quality, quantity, and time the parties have pre-agreed.
ETHICAL BANKS SERVICES:
Shari’ah banks, and other Ethical Banking Systems are commonplace in many countries including the UK, though
many conventional banks also offer Shari’ah compliant current accounts. These are also protected under the
Financial Services Compensation Scheme in the UK, much like any other account.
Whilst not all ethical banks comply exactly with the banking principles of Islam, there are key similarities in how
they operate; many ethically-inclined financial institutions conduct their business according to transparency
principles, ensure sustainability, and aim to put customers’ money to productive use by reinvesting their profits
in society.
Whilst Islamic banks represent a significant percentage of the banking population, in recent years, other ethical
banks also report growing customer numbers and far greater profit per employee.
If you count on your career in banking, or are simply interested in Alternative Banking methods, such as Islamic
banking, then look at MA in Finance & Investment (Islamic Banking and Finance) or Dual MSc & MA in Finance &
Investment (Islamic Banking and Finance) as a way to invest in your future.