To backing this perspective, around then Sarker found that the measure of awful obligation in Islamic banking is growing. This is conversely with the perspective of Aggarwal and Yousef, who assert that Islamic banks for the most part structure their loaning to fleeting and that it is vigorously secured.
Administration proficiency and risk weighted resources, for example, size of aggregate resources affect the credit risk of Islamic banks Hayati and Nizam, Standards of capital assurance, risk administration and risk supporting are basically satisfactory to general standards of Islamic Law as long they are free from taking and paying interest, instability in evaluating and any provision which negates the very reason for a hidden contract Bakar, Developing in Islamic financing and treasury instruments is the key driver behind the interest for Islamic risk administration devices Kandasamy, There is a need to outline and execute Islamic supporting and chance minimizing offices like Islamic prospects and Islamic swaps.
This will improve the gainfulness of Islamic banks while at the same time decreasing their risk introduction Ebrahim and Joo, There is a requirement for genuine thoughtfulness regarding be given to risk administration in Islamic banking and the foundation of the IFSB is opportune to address this issue.
Hayati and Nizam, The quick growth in the size and number of Islamic banks appears to have driven administrative powers to value the need to create proper measures that would empower them to control their operation, which contrasts from Western banks. In the UK, the significant issue confronting the improvement of Islamic banks is the legitimate structure. Moreover, they stand firm on their meaning of a bank as an establishment that can promise deposits and give a proclaimed profit for them Carlson, Makiyan found that in Iran, government mediation assumed an imperative part in Islamic banking, more so than any monetary elements.
In Thailand, the eventual fate of Islamic banking is all that much ward upon person Muslims and Islamic associations. Support from foundations, for example, Islamic private schools, mosques, Islamic focuses, zakat reserves and Islamic investment funds cooperatives are fundamental, particularly amid the growth stage Haron and Yamirudeng, In Malaysia, Islamic banking will confront less issues on regulation issues in light of the fact that the national bank of Malaysia empowers Islamic banking, which can be found in the targets of the MIFC.
The Malaysian government underpins Islamic banks as can be found in their anticipated ninth arrangement, where one of the key methodologies is to create Malaysia as an International Islamic Center for Islamic Banking and Finance.
In , Islamic fund exchanges were furnished with tax impartiality, whereby Islamic Finance would be tax unbiased contrasted and conventional financing products. Likewise, different tax exclusions and withholding tax exceptions given in accordance with conventional products Budget, Riba is prohibited in Islamic monetary statute fiqh and considered as a significant sin.
Essentially, treacherous increases in exchange or business, by and large through abuse. A portion from Surat Al-Baqarah from Ayah stated:. Inferring that an unwilling Obligation Servitude is a type of Riba. There are two sorts of riba talked about by Islamic legal advisers: The expression is a Quranic term.
The Quranic term is not restricted to cash yet also incorporates all exchanges in which the debt holder gives back an entirety of products in abundance or over the first concurred exchange, be it cash, ware, some other thing or merchandise or administrations; anything in overabundance of unique concurred assentation is considered riba if things traded are of the same kind, for example, gold for gold. Your capital, on the other hand, is all yours.
You will not cause or endure imbalance. There is no distinction of assessment between any school of thought on the denial of riba in Islamic shariah. Muhammad SAWW reviled the person who manages riba. Muhammad SAWW reviled the recipient and the payer of riba, the person who records it and the two witnesses to the exchange and said:.
Islamic Shariah considers riba as an apparatus of abuse and an intend to shamefully take the cash of others by misusing their needs and circumstances. Subsequently, it restricts a riba-based framework inside and out and advances philanthropy as an option. The law violations of managing in riba are serious to the point that God has announced war against the individuals who bargain in it.
Muhammad SAWW has reviled any individual who manages riba, the person who takes it, and the person who pays it and the person who records it, as their transgressions are viewed as equivalent under the Quran. Riba al Nasiah- here the increment or development is because of delay.
It can be indicated before all else of exchange or on development of obligation. On the off chance that the account holder is not ready to pay back the obligation on development and the bank provides for him some additional time as an exchange for an extra sum it is termed Riba al Nasiah.
It has no effect whether the return is a settled or variable percent of the rule or a flat out sum to be paid ahead of time or on development, or a blessing or administration to be gotten as a condition for the credit. Be that as it may, if the profit for standard can be either positive or negative relying upon the last conclusion of the business, which is not known ahead of down in Islam.
Article is sold on conceded installment premise. Time of installment is settled. Failure to pay on the stipulated time draws in additional sum and the installment date is broadened.
An entirety is loaned and it is resolved toward the starting that the borrower would give back an additional sum notwithstanding the sum credited inside a stipulated time. An entirety is loaned at an altered rate of enthusiasm for a stipulated time period. In the event that the borrower neglects to pay the time and also the rate of investment would increment.
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Our work is high quality, plagiarism-free and delivered on time. Registered Data Controller No: Accounting essays Architecture essays Business essays Coursework Economics essays Education essays Engineering essays English language essays English literature essays. Medicine essays Miscellaneous essays Psychology essays Religious studies essays Science essays Sociology essays Essays menu. Islamic Banking System Fredric Mishkin: The contention is based on the accompanying reason.
Knowledge about Islamic Bank: Lack of Standardization Karbhari et al. Expertise and knowledgeable staff in Islamic banking The staffs, or banking faculty, are vital components for the improvement of Islamic banking. The Importance of Marketing Islamic banks need to enhance their addressing so as to advertise adequacy the business sector lack of awareness about Islamic items and services Bley and Kuehn, Competition Conventional banking has been set up any longer then Islamic banking.
Tax Discrimination A study in the United Kingdom found that the tax framework in the UK appears to support conventional banks in light of the fact that the UK government urges and offers inclination to conventional banking. Accounting Standards Tahir remarked that bookkeeping speaks to one of the difficulties in the usage of the Islamic financial worldview.
He recognized a percentage of the issues in the Islamic banking bookkeeping system: A portion from Surat Al-Baqarah from Ayah stated: Riba is considered among the Seven grievous sins Al-Saba al-Mubiqat, namely: Muhammad SAWW reviled the recipient and the payer of riba, the person who records it and the two witnesses to the exchange and said: There are two main types of Riba: Takaful expenses, in addition to the risks and costs that a bank faces, they are justified in their demand i.
Nevertheless, financial experts have generally felt that even if these factors are considered, the pricing by these Banks is on the higher side. On the other side, in a profit and loss based model, it is agreeable that they assign weightage to different types of deposits in a manner that the total return on investment and financing pools is allocated amongst various depositors and the Bank working as a partner. Even then, it is generally noted that IFIs are paying less than the market.
We can only hope that in near future, with increasing competition in the Islamic banking industry, this effect will minimize because of market-forces except to the extent of pricing against actual additional risk elements.
Marketing Approach Of IFIs Another valid argument is about the marketing approach being used by these financial institutions, which adversely effects the public reliance on this mode. People raising objections on the marketing approach of IFIs have two grounds for the same. Second ground is the marketing strategy in which sometimes it is felt that false statements are made for promotional purposes. An example of the same is the claim by a leading Islamic bank that all its day to day activities are monitored by its Shariah Advisor.
Just imagine, if it is humanly possible, that a part time Shariah Advisor can look after all day to day activities of a full fledged bank with a number of branches even located at other cities.
Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one year earlier to subscription for such mutual fund.
This issue is raised particularly by the blend of people who feel that once they enter into such location, it should look like a sacred place instead of a commercial office. You generally feel that they have over-spent on the furniture, interior-decoration and publicity stuff, which apparently, is against the injunctions of Islam. In other words, environment does not make anything Haram. Needless to mention, from Shariah perspective, you can always buy a Halal product from a store where everything else is Haram although the same needs to be avoided if other options are available.
This argument, once again, has key significance from the perspective of the overall control environment of these banks with regard to the applicability of Shariah principles.
Particularly, it is astonishing when you deal with an Islamic banker, who knows very little about Islamic banking, but unfortunately, this is not very uncommon. The prime cause behind this issue is the fact that most of the IFIs have hired the conventional bankers and generally no or very little consideration is awarded to ensure that they are well conversant with the Shariah requirements with regard to the modes of finance being used by these Banks.
Similarly, the IFIs do not spend enough on their resource-building for Shariah compliance and training of their staff, in comparison to what they spend for marketing. This accordingly, is a strongest need that the IFIs should allocate more and more resources for staff training and Shariah compliance.
People have largely noted and discussed at various forums that the major contribution in this field in Pakistan is limited to a very small group of jurists most of whom relate to a single family and their pupils a single religious university. Besides this, another question is also being raised that generally the honorariums, consultancy fee and other benefits being offered to such jurists by the IFIs in Pakistan, as well as, abroad are quite high and this may jeopardize their independence.
In addition, it is felt that they are the only ones who are whole and sole responsible for Shariah compliance. They approve the products, they review the transactions and in the end; they perform Shariah audit themselves, which is, however, an indicative of a conflict of interest without any doubt on their personal independence and integrity. Most of the people conversant with the business and operations of Islamic finance do not agree with this observation, because the contribution of these people to the industry as a whole is remarkable and they deserve even more than that based on their contribution and efforts in the promotion of this industry.
If you are getting benefits from their efforts, their knowledge and skills, then they should be justifiably rewarded. Having said that, it is always agreeable that it is the right time that contributions from jurist from other schools of thought should also be sought and they should necessarily be provided opportunities to enter into the field.
For this purpose, it is a good proposition from the State Bank that a jurist should not be allowed to hold more than one remunerative position as a Shariah Advisor or member of a Shariah Board. This will ensure that fresh blood gets an option to enter into the field which will eventually improve the overall Shariah compliance in the field, as well as, will help these institutions to innovate fresh products.
This situation, Alhamdolillah has changed after introduction of Islamic mode of insurance Takaful in Pakistani market. Unfortunately, there are a still IFIs who have not yet switched to Takaful while to-date three Takaful companies and a family Takaful company have commenced operations in Pakistan and now this lame excuse of compulsion can not be exercised anymore.
As a conclusion to this debate, we may say that we are required by our religion to implement a complete Islamic way of living in our individual and collective lives and the society and the government as well. The Islamic banking and financial system is a part of such system and is not construed to be applicable in isolation while other laws and customs repugnant to the Shariah requirements are still in force. However, for the sake of our own benefits, in order to avoid interest by ourselves and providing interest-free opportunities to our brothers and sisters in Islam, we should promote and support the Islamic banking and finance in the country with all our possible efforts and endeavors.
We should not try to pull legs of an infant who is just trying to take his first step towards a long journey to go. However, we should try to ensure that he commences his journey on the right way, with strong footings. Such Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in augmenting a truly Islamic financial system, and more appropriately said, will serve as an experiment for the time when we will really be in a position to the implement the complete Islamic way of living in our beloved country.
May Allah accept our efforts and forgive us for our mistakes in this field in our individual capacities, as well as, as a society. Omar enjoys vast experience in audit, Shariah compliance and providing related services to Islamic finance industry in Pakistan. Faizan holds experience in the field of Shariah audits and product development. Home Banking Islamic Banking. This is just a sample. To get a unique essay Hire Writer. A limited time offer! Get custom essay sample written according to your requirements Urgent 3h delivery guaranteed Order Now.
How to Write a Critical Analysis. How to Write a Thematic Essay. How to Write Essay in Third Person. It follows conventional banking and deviates from it "only insofar as some conventional practices are deemed forbidden under Sharia. A broader description of its principles is given by the Islamic Research and Training Institute of the Islamic Development bank ,. In conventional banking, all this risk is borne in principle by the entrepreneur.
Some proponents Nizam Yaquby believe Islamic banking has more far reaching purposes than conventional banking, and declare that the "guiding principles" for Islamic finance include: Taqi Usmani describes the virtues as guiding principles in one section of his book on Islamic Banking, and benefits in another.
Nizam Yaquby, for example declares that the "guiding principles" for Islamic finance include: 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. On the other hand, Usmani preached that an Islamic economy free of the "imbalances" in society — such as concentration of "wealth in the hands of the few", or monopolies which paralyze or hinder market forces — would follow from obeying "divine injunctions" by banning interest along with other Islamic efforts.
Critic Feisal Khan argues that in many ways Islamic finance has not lived up to its defining characteristics. Risk-sharing is lacking because profit and loss sharing modes are so infrequently used. Underlying material transactions are also missing in such transactions as " tawarruq , commodity murabahas , Malaysian Islamic private debt securities, and Islamic short-sales". 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.
However, "the Islamic evaluation" of modern banking centers around the definition of interest on loans  as riba. Twelve verses in the Qur'an deal with riba , the word appearing eight times in total, three times in verses 2: A number of orthodox scholars point to Quranic verses 2: Those who devour usury shall not rise again except as he rises, whom Satan of the touch prostrates; that is because they say, 'Trafficking trade is like usury.
Whosoever receives an admonition from his Lord and gives over, he shall have his past gains, and his affair is committed to God; but whosoever reverts -- those are the inhabitants of the Fire, therein dwelling forever. God blots out usury, but freewill offerings He augments with interest. God loves not any guilty ingrate. Those who believe and do deeds of righteousness, and perform the prayer, and pay the alms - their wage awaits them with their Lord, and no fear shall be on them, neither shall they sorrow.
O believers, fear you God; and give up the usury that is outstanding, if you are believers. But if you do not, then take notice that God shall war with you, and His Messenger; yet if you repent, you shall have your principal, unwronging and unwronged.
And if any man should be in difficulties, let him have respite till things are easier; but that you should give freewill offerings is better for you, did you but know. Nonetheless this is a minority view,   and according to the orthodox an "increase over the principal sum" in loans of cash are riba. An increase over the principal sum in financing a purchase of some product or commodity is another matter. These are not riba — according to the orthodox interpretation — at least in some circumstances.
According to noted Islamic scholar Taqi Usmani , this is because in Quran aya 2: The distinction between credit sales and interest has also come under attack from critics such as Khalid Zaheer and Muhammad Akram Khan — criticizing it from opposite points of view.
Zaheer considers profit from credit sales to be riba , the same as interest, and notes the lack of enthusiasm of orthodox scholars — such as the Council of Islamic Ideology — for credit sales-based Islamic Banking, which they the council call "no more than a second best solution from the viewpoint of an ideal Islamic system".
Taqi Usmani, however, explains that this is a "misconception". Paying more for credit when buying a product "an exchange of commodities for money"   does not violate sharia law, but exchange of "one unit of money for another of the same denomination" "an exchange of money for money"  and charging for credit is a violation of sharia. Other orthodox supporters such as Kahf have defended the sharia compliance of the practice saying that among other things, attaching commodities to money in finance prevents money from being used for speculative purposes.
One of the pioneers of Islamic banking, Mohammad Najatuallah Siddiqui , suggested a two-tier mudarabah model as the basis of a riba -free banking. The bank would act as the capital partner in mudarabah accounts with the depositor on one side and the entrepreneur on the other side.
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. Assets managed under these products far exceed those in " profit-loss-sharing modes" such as mudarabah and musharakah.
The opposite of credit sales i. This is considered haram by the four Sunni schools of jurisprudence Hanafi , Maliki , Shafi'i , Hanbali , but not by all jurists according to Ridha Saadullah. He notes that such reductions have been permitted by some companions of the Prophet and some of their followers. It does not constitute forbidden riba if it is not agreed upon in advance and as long as the creditor-debtor relationship remains bilateral. As noted above, the primary focus of Islamic banking is on financing without interest to avoid riba ,  while trade is not an issue per the Quranic statement that "God has permitted trafficking [trade] and forbidden riba [usury]".
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:. At least some in the Islamic finance industry use derivatives and make short sales, and permissibility of this is a subject of "heated debate". A "shariah-certified" short-sale had been created by some Shariah-compliant hedge funds. World Islamic Banking Competitiveness Report .
Sharia-compliant banking grew at an annual rate of As of , Islamic financial institutions operate in countries. Statistics differ on which country has the largest Islamic banking sector. In addition, their duties should include: Since the beginning of modern Islamic finance, the work of the Shariah boards has become more standardized.
The guidelines and standards are not regulations though, and each Islamic financial institution has its own SSB, which are not generally obliged to follow them. However, their home country many have a regulatory organization that they are required to follow. A number of Shariah advisory firms have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. We then phone up a Sharia scholar for a Fatwa If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa.
We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic. According to Foster, this practice of "shopping" for an Islamic scholar who will issue a fatwa testifying that a banking product obeys Shari'ah law has led to "top scholars" earning "six-figure sums" for each fatwa , and to Islamic financing mechanisms that appear to outsiders to be mortgages "dressed up in Arabic terminology"—such as Mudarabah , or Ijarah lease agreements.
Mahmoud El-Gamal believes that from the s to the s there has been an evolution of the industry towards "progressively closer approximations" of the practices of conventional banking, approved by "progressively smaller" numbers of jurists with only a small group for example approving "unsecured lending" to retail and corporate customers through the tawarruq mode in the early s.
One study found the 20 most popular shariah scholars holding sharia board positions,  — creating potential conflicts of interest. This scarcity also increases fees. Farooq calls a "certain changes in viewpoint" resulting in "over-stretching the rules of Shariah". A study of the practice of boards of financial institutions setting the pay and employment of SSB members found this arrangement "compromise s the independence of the SSB".
It later moved its headquarters to Bahrain. The International Islamic Financial Market — a standardization body of the Islamic Financial Services Board for Islamic capital market products and operations — was founded in November through the cooperation of the governments and central banks of Brunei, Indonesia and Sudan. Its secretariat is located in Manama Bahrain.
It is not a regulatory body and its recommendations are "not implemented by most Islamic banks". Individual countries also have accounting standards. The Islamic Interbank Money Market was established by Bank Negara Malaysia on 3 January , and has developed instruments to manage the liquidity needs of the Islamic financial institutions -- "funding and adjusting portfolios over the short term". It complements the task of the Basel Committee on Banking Supervision.
It is sponsored by 17 multilateral development institutions, banks and other rating agencies. It has 15 Islamic indices for various regions. It is constructed from the conventional MSCI country indices and covers 69 developed, emerging and frontier markets, including regions such as the Gulf Cooperation Council and Arabian markets. The "most prominent" research and training institutions listed in alphabetical order, "exclusively devoted to Islamic economics and finance", according to Muhammad Akram Khan are: Although no Muslim country has yet banned interest on loans completely, suggestions have been made as to how to deal with monetary policy when central banks operate in an interest-free environment and there are no longer any interest rates to lower or raise.
Siddiqi has proposed that central banks offer "refinance facilities" to expand or contract credit as needed to deal with inflation or deflation. According to economist and Islamic finance critic Feisal Khan, a "true" or strict Islamic banking and finance system of profit and loss sharing the type supported by Taqi Usmani and the Shariah Appellate Bench of the Supreme Court of Pakistan would severely cripple central banks' ability to fight a credit crunch or liquidity crisis that leads to a severe recession such as happened in This is because if credit was provided by taking "a direct equity stake in every enterprise" the PLS approach it would contract in a credit crunch.
But situations like this — when financiers are "less and less sure of the creditworthiness of their financial sector counterparties" and essentially stop lending to even the biggest and most stable borrowers or even other banks — is exactly the time when credit expansion and "flooding" the economy with liquidity is needed to prevent widespread business bankruptcy and unemployment.
Banking makes up most of the Islamic finance industry. Banking products are often classified in one of three broad categories,   two of which are "investment accounts": Most Islamic finance is in banking, but non-banking finance such as sukuk , equity markets, investment funds, insurance takaful , and microfinance ,   is also fast-growing,   and as of represented about one-fifth of total assets in Islamic finance.
These products — and Islamic finance in general — are based on Islamic commercial contracts and contract law,  with many products named after a particular contracts e.
While the original Islamic banking proponents hoped profit-loss sharing PLS would be the primary mode of finance replacing interest-based loans,  long-term financing with profit-and-loss-sharing mechanisms is "far riskier and costlier" than the long term or medium-term lending of the conventional banks — according to critics such as economist Tarik M. Yousef  — and has "declined to almost negligible proportions".
A mudarabah or mudharabah contract is a profit sharing partnership in a commercial enterprise. One partner, rabb-ul-mal , is a silent or sleeping partner who provides money. The other partner, mudarib , provides expertise and management. If there is a loss, the rabb-ul-mal loses the invested capital, and the mudarib loses the invested time and effort. The sharing of risk reflects the view of Islamic banking proponents that under Islam, the user of capital — labor and management — should not bear all the risk of failure.
Sharing of risk, according to proponents, results in a balanced distribution of income, and prevents financiers from dominating the economy. Like mudaraba , musharakah is also a profit and loss sharing partnership, but one where investment comes from all the partners, all partners are given the option of participating in the management of the business, and all partners share in losses according to the ratio pro rata of their investment.
Musharakah may be "permanent" or "diminishing". It is often used in investment projects, letters of credit, and the purchase or real estate or property. Use of musharaka is not great. In Malaysia, for example, [Note 16] the share of musharaka or at least permanent musharaka financing declined from 1.
Musharaka al-Mutanaqisa , literally "diminishing partnership" , is a popular type of financing for major purchases such as housing. In it, the bank and purchaser customer have joint ownership of a purchased asset with the customer also leasing the asset. Asset-backed or debt-type instruments also called contracts of exchange are sales contracts that allow for the transfer of one commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money.
Murabahah or murabaha is an Islamic contract for a sale where the buyer and seller agree on the markup profit or " cost-plus " price   for the item s being sold.
Murabahah has also come to be "the most prevalent"  or "default" type of Islamic finance. Economists have questioned whether Murabahah is "economically indistinguishable from traditional, debt- and interest-based finance. In Islamic jurisprudence fiqh , Bai-muajjal , also called bai'-bithaman ajil ,  or BBA, is a credit sale or deferred payment sale, i.
In Islamic finance, the bai' muajjal product also involves the price markup of a murabahah contract, and a murabahah product involves a bai-muajjal deferred payment. Thus the terms and are often used interchangeably, according to Hans Visser ,  or "in practice However, according to another Bangladeshi source, Bai' muajjal differs from Murabahah in that the client, not the bank, is in possession of and bear the risk for the goods being purchased before completion of payment.
Bia'muajjal as a finance product was introduced in by Bank Islam Malaysia Berhad. The asset is then sold back to the customer who pays in installments over time, essentially "repaying the loan". Since loaning of cash for profit is forbidden in Islamic Finance, some scholars do not believe Bai' al 'inah is permissible in Islam. According to the Institute of Islamic Banking and Insurance, it "serves as a ruse for lending on interest",  but Bai' al inah is practiced in Malaysia and similar jurisdictions.
Istisna also Bia Istisna or Bai' Al-Istisna and Bia Salam also Bai us salam or just salam are " forward contracts "  — customized contracts where immediate payment is made for goods in the future — goods not yet manufactured, built, or harvested. Bia salam and istisna contracts should be as detailed as possible to avoid uncertainty. Examples of use of istisna in the Islamic finance world include use by the Kuwait Finance House  and the Barzan gas project in Qatar. Ijarah , literally "to give something on rent"  is a leasing or renting contract.
In Islamic finance, al Ijarah usually refers to a leasing contract that also includes a sales contract. Property such as plant, office automation, or motor vehicle, is leased to a client for stream of rental and purchase payments, so that the end of the leasing period coincides with completion of purchase payments and transfer of ownership to the lessee, and otherwise follows Islamic regulations.
Among the complaints made against ijara are that in practice some rules protecting the customer are overlooked,  that its rules provide weaker legal standing and consumer protection  and less flexibility   than conventional mortgage loan or car finance , as well as higher costs.
The bank resells the iron to the supplier. Like Bai' al inah mentioned above, the greater complexity of this transaction means more fees and higher costs than a conventional bank loan, but in theory compliance with shariah law because of the tangible assets that underlie the transactions.
However, critics complain that "billions of dollars" of putative commodity-based tawarruq transactions have evaded the required commodity trades;  and Islamic scholars both contemporary  [Note 18] and classical  have forbidden the practice. Taqi Usmani insists that "role of loans" as opposed to investment or finance in a truly Islamic society is "very limited", and that Shariah law permits loans not as an ordinary occurrence, "but only in cases of dire need".
It is often described as an interest-free loan extended to needy people. Quoting the Islamic prophet Muhammad, some sources insist that lenders may not gain "any advantage or benefits" from the loan, let alone interest.
These contracts are intended to help individual and business customers keep their funds safe. Hawala also Hiwala , Hewala , or Hundi ; literally "transfer" or "trust" is a widely used, informal "value transfer system" for transferring funds from one geographical area to another, based not on wire transfers but on a huge network of money brokers known as "Hawaladars" throughout the Muslim world.
In the first half of the 20th century it lost ground to instruments of the conventional banking system, but regained it starting in the late 20th century with the economic migration of Muslim workers to wealthier countries in the West and the Gulf and their need to send money home. Hawala is based on a short term, discountable, negotiable, promissory note or bill of exchange called "Hundi",  transferred from one debtor to another.
Kafala literally "guarantee ,  is called "surety" or "guaranty" in conventional finance. Rahn collateral or pledge contract is property pledged against an obligation. Wakalah should be a non-binding contract for a fixed fee.
The agent's services may include selling and buying, lending and borrowing, debt assignment, guarantee, gifting, litigation and making payments, and are involved in numerous Islamic products like Musharakah , Mudarabah , Murabaha , Salam and Ijarah. An example of wakalah is found in a mudarabah profit and loss sharing contract above where the mudarib the party that receives the capital and manages the enterprise serves as a wakil for the rabb-ul-mal the silent party that provides the capital [Note 20].
From the point of view of depositors, "Investment accounts" of Islamic banks — based on profit and loss sharing and asset-backed finance — play a similar role to the "time deposits " of conventional banks. At least in one Muslim country with a strong Islamic banking sector Malaysia , there are two main types of investment accounts offered by Islamic banks for those investing specifically in profit and loss sharing modes   — restricted or unrestricted.
Some have complained that UIA accounts lack transparency, fail to follow Islamic banking standards, lack of customer representation on the board of governors,  and have sometimes hidden poor performance from investors. Islamic banks also offer "demand deposits", i. Because demand deposits pay little if any return and Qard al-hasana mentioned above loans are forbidden to pay any "stipulated benefit", the Qard mode is a popular Islamic finance structure for demand deposits.
In this design, customer deposits constitute "loans" and the Islamic bank a "borrower" who guarantees full return of the "lenders" deposits. Farooq,  Mohammad Hashim Kamali  see conflicts between qard's roll in demand deposits and the dictates of traditional Islamic jurisprudence. Qard al-hasana loans are intended to be acts of charity to the needy who are allowed lenient repayment. The means that has been used is Hibah literally "gift" ,  in the form of prizes, exemptions, etc.
Two other contracts sometimes used by Islamic finance institutions for pay-back-on-demand accounts instead of qard al-hasanah ,  [Note 22] are Wadi'ah literally "safekeeping"  and Amanah literally "trust". Sources disagree over the definition of these two contracts. According to at least one report, in practice no examples of per cent reserve banking are known to exist. Different types of sukuk are based on different structures of Islamic contracts mentioned above murabaha , ijara , wakala , istisna , musharaka , istithmar , etc.
Like a conventional bond, a sukuk has an expiration date. But instead of receiving interest payments on money lent as bonds do, a sukuk holder is given " nominal part-ownership of an asset" from which they receive income "either from profits generated by that asset or from rental payments made by the issuer". The sukuk market began to take off around and as of , sukuk represent 0.
Takaful , sometimes called "Islamic insurance", differs from conventional insurance in that it is based on mutuality so that the risk is borne by all the insured rather than by the insurance company. As with all Islamic finance, funds must not be invested in haram activities like interest-bearing instruments, enterprises involved in alcohol or pork.
Like other Islamic finance operations, the takaful industry has been praised by some for providing "superior alternatives" to conventional equivalents;  and criticized by others for not being significantly different from them in its use of the " law of large numbers " to spread risk,  or its use of conventional corporate not mutual management practices. Islamic funds are professionally managed investment funds that pool money from many investors to purchase securities that have been screened for sharia compliance.
For equity mutual funds, companies whose shares are being considered for purchase must be screened. At least from to , Islamic equity funds under-performed both Islamic and conventional equity benchmarks, particularly as the —08 financial crisis set in according to a study by Raphie Hayat and Roman Kraeuss.
As mentioned above see Islamic laws on trading , "almost all conservative Sharia scholars" believe derivatives i. As of the Islamic derivatives market was "in its infancy" and its size was not known.
Contracts or combinations of contracts for derivatives  include swaps and options:. The Islamic finance equivalent of a conventional call option [Note 24] is known as an urbun lit. These two Islamic options also have a different name for a "premium", called a "down-payment" and for the "strike price" "preset price". Microfinance seeks to help the poor and spur economic development by providing small loans to entrepreneurs too small and poor to interest non-microfinance banks.
Its strategy meshes with the "guiding principles" or objectives of Islamic finance, and with the needs of Muslim-majority countries where a large fraction of the world's poor live, [Note 25] many of them small entrepreneurs in need of capital, and most unwilling or unable to use formal financial services.
According to the Islamic Microfinance Network website as of circa ,   there are more than Islamic microfinance institutions in 32 countries,  The products used in Islamic microfinance may include some of those mentioned above — qard al hassan , musharaka , mudaraba , salam , and others.
Unfortunately, a number of studies     have found "very few examples" of Microfinance institutions "operating in the field of Islamic finance" and few Islamic banks "involved in microfinance".
Critics have complained of Islamic banking and finance closely resembling the conventional sort but having "higher costs, bigger risks",  — a situation that has not been remedied by "learning" over the decades. A number of scholarly supporters such as Taqi Usmani, D.
This has happened first by the sidelining risk-sharing finance in favor of murabaha and other fixed-markup financing of purchases,  and further by distorting the rules of that fixed-markup murabaha see also Ignoring required commodities below  to effectively provide conventional cash interest loans with "profit rates" that follow conventional interest rates,      the "net result" being "not materially different from interest based transactions".
Following Islamic principles, "Islamic banks were supposed to adopt new financing policies and to explore new channels of investments" to encourage development and raise the standard of living of "small scale traders", but Taqi Usmani complains "very few Islamic banks and financial institutions have paid attention to this aspect".
This financing being "largely concerned with the financing of goods already produced, and not with the creation or increase of production capital or with facilities like factories and plants, infrastructure etc. The world in reality is full of exploitation: Interest is probably, if any, a small component in accounting for global exploitation. Yet, the proponents of Islamic economics and finance are fixated with interest. While profit-loss-sharing modes or at least mudarabah , were originally envisioned as "the basis of a riba-free banking"  — with fixed-return financial models only filling in as supplements — a number of studies, of banks in Saudi Arabia and Egypt, [Note 31] Malaysia, [Note 32] and of large Islamic banks in general [Note 33] have shown fixed-return products now far exceed profit-loss-sharing modes in assets under management.
Explanations offered by two authors, Humayon A. Presley , for why PLS instruments — namely mudaraba and musharaka financing — have declined to almost negligible proportions include:. Aside from disadvantages to lenders, one critic of Islamic banking, Feisal Khan, argues that widespread use of PLS could have severe harm to economies by preventing central banks from expanding credit — buying bonds, commercial paper, etc.
Often the commodity is completely irrelevant to the borrower's business and not even enough of the relevant commodities "in existence" in the world "to account for all the transactions taking place". The original Islamic banking proponents called for "keeping distinct accounts for various types of deposits so that return can be assigned to each type". Critics complain that the compliance with sharia regulations by banks often is nothing more than the taking of the word of the bank or borrower that they have followed compliance rules, with no effective auditing to see if this is true.
Al Nasser complains that "Shariah authorities demonstrate excessive confidence in their subjects when it comes to dealing with parities in the industry", and Shariah audits are needed "to bring about transparency and ensure" that the institutions "deliver what they have committed to their customers".
Furthermore, when external Shariah audits are carried out, "many of these auditors frequently complain about the amount of violations that they witness and cannot discuss" because the records they have examined "have been tampered with".
Although Islamic banking forbids interest, its "profit rates" often are benchmarked to interest rates. Islamic banker Harris Irfan states "there is no question" that benchmarks such as LIBOR "continue to be a necessary metric" for Islamic banks, and that the "overwhelming majority of scholars have come to accept this, however imperfect a solution this may seem",  but Muhammad Akram Khan writes that following the conventional banking benchmark LIBOR "defeats the very purpose for which the Islamic financial products were designed and offered" in the first place, .
In addition skeptics have complained that the rates of return on accounts in Islamic banks are suspiciously close to those of conventional banks, when in theory their different mechanisms should lead to different numbers. Islamic Banks "significantly cointegrated" with those of the conventional banks. Islamic banking and finance has lacked a way to earn a return on funds "parked" for the short term, waiting to be invested, which puts those banks a disadvantage to conventional banks.
Conventional banks are able to borrow and lend by using the interbank lending market — borrowing to meet liquidity requirements and investing for any duration including very short periods, and thereby optimize their earnings. While Muslim countries such as Bahrain, Iran, Malaysia   and Sudan have started to develop an Islamic money market, and have been "issuing securitized papers on the basis of musharaka , mudaraba and ijara ", at least as of , the "lack of an appropriate and efficient secondary market" has meant the relative volume of these securities is "much smaller" than on the conventional capital market.
Regarding non-PLS, "debt-based contracts", one study found that "the business model of Islamic banking is changing over the time and moving in a direction where it is acquiring more liquidity risk. To deal with the problem of earning no return on funds held for the sake of liquidity or because of a lack of investment opportunity, many Islamic financial institutions such as Islamic Development Bank and the Faisal Islamic Bank of Egypt  have "been explicitly and openly earning interest on their excess funds, often invested in safer, debt-like or debt instruments overseas".
Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued fatwas opinions allowing Islamic banks to deposit funds in interest-bearing accounts.
The four schools Madhhab of Sunni fiqh Islamic jurisprudence apply "Islamic teachings to business and finance in different ways", and have not come closer to agreement. Furthermore, shari'a boards sometimes change their minds, reversing earlier decisions. Differences between boards as to what constitutes shariah compliance may raise "doubts in the minds of clients" over whether a given bank is truly shariah compliant, and should be given their business.
Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable.
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Islamic Economics Essay. The idea of Islamic banking was initiated and brought up by some economists who were conscious about socio economic development of Muslim nations based on Islamic . Keywords: islamic banking essay, islamic banking malaysia Chapter 1 Introduction. Background of Studies. Islamic Banking is a banking system that based on Islamic Law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic rules on transactions).