Basic principles of islamic banking

This is usually translated as "gambling" but used to mean "speculation" in Islamic finance. Mohammed Ariff also found less exacting Shariah compliance in Iran where the Islamic government had decreed "that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest" and consequently would be permissible.

This should not be thought of as presenting a problem for borrowers finding funds, because — according to Usmani — it is in part to discourage excessive finance that Islam forbids interest.

In this case, the depositors are the providers of the capital and the bank functions as the manager of funds. The businessman borrows the capital from the capital-owner and invests it in his trade. According to noted Islamic scholar Taqi Usmanithis is because in Quran aya 2: The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit.

Riba The sharia law that forms the basis of Islamic banking is itself based on the Quran revealed to the Islamic prophet Muhammad and a hadith the body of reports of the teachings, deeds and sayings of the Islamic prophet Muhammad that often explain verses in the Quran.

Among the financial instruments and activities common in conventional finance that are considered forbidden or at least Islamically problematic by many Islamic scholars and Muslims are: As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks.

History of Islamic Banking The origin of Islamic banking dates back to the beginning of Islam in the seventh century.

From the s to the s, Islamic banking resurfaced in the modern world. Principles[ edit ] To be consistent with the principles of Islamic law Shariah -- or at least an orthodox interpretation of the law -- and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some not illegal in secular states: It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

The goods the saver wants will cost more in the future, so he is justified in charging a rent for the use of his loan. In practice, the fixed-return models, in particular murabaha model, became the industry staples, not supplements, as they bear results most similar to the interest-based finance models.

Mudarabah is the basis of modern Islamic banking on a two-tier basis. Western bankers have said that savings and investments would soon dry up if interest were not paid.

Islamic Banking

Islam argues that there is no justifiable reason why a person should enjoy an increase in wealth from the use of his money by another, unless he is prepared to expose his wealth to the risk of loss also.

The manager bears no financial loss, because he has lost his time and his work has been wasted. Islam views true profit as a return for entrepreneurial effort and objects to money being placed on a pedestal above labour, the other factor in production."While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have.

Basic Principles of Islamic Banking Essay Sample Wakalah (Agency) occurs when a person appoints a representative to undertake transactions on his/their behalf, similar to a power of attorney. It is an agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested).

Basic Principles of Islamic Banking Essay Sample

Islamic banking, also known as non-interest banking, is a banking system that is based on the principles of Islamic, or Shari'ah, law and guided by Islamic economics.

Two fundamental principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors.

In general, Islamic banking and finance has been described as having the "same purpose" as conventional banking but operating in accordance with the rules of shariah law (Institute of Islamic Banking and Insurance), or having the same "basic objective" as other private entities, i.e.

Islamic banking and finance

"maximization of shareholder wealth" (Mohamed Warsame). Fundamental of Islamic Banking - Principles of Islamic Banking Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising.

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Principles of Islamic Banking What is an Islamic Bank? There is no standard way of defining what an Islamic bank is, but broadly speaking an "Islamic bank is an institution that mobilises financial resources and invests them in an attempt to achieve predetermined islamically .

Basic principles of islamic banking
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