ISLAMIC BANKING

Islamic Banking

Islamic Banking

Introduction

What is Islamic Banking?

Islamic banking may not be a new concept. It appeared on a world forum as a giant player from more than two decades. The world has already accepted its principle from centuries rather than decades. Islamic banking system is existed in Muslim countries as well as non-Muslim countries in different shapes according to the Muslim population and situation of the time. This system is popular equally in all the communities in United Kingdom. (Ahmad, 2008, p. 10)

Islamic banking system has been defined as banking philosophy and value system of Islam. In addition to the risk management rules and conventional banking system, the principles are laid by Islamic Shariah. Islamic banking systems are the interest (Riba) free systems, based on the Islamic principles. The main principles of Islamic banking system comprise prohibition of interest in all forms of transactions, trade activities and business undertaking. (Haron, 1998, p. 23) Interest (Riba) free system is a narrow concept indicating the number of banking operations and instrument which prohibit interest because interest has a bad effect on society like increasing poverty, unequal distribution of wealth, and earning capacity in an economy. The purpose of introducing Islamic banking system is to make the value of money. Islamic banking system not only avoids interest (Riba) but also prohibits unethical practices and efficiently participates in achieving objectives and goals according to the Shariah law. According to Shariah law, finance depends on the idea of profit, loss, risk sharing on both the assets and liability side (Beck, 2010, p. 3).

Principles of Islamic banking operations

Islamic banking system based on the Quran and Sunnah preaching in more than 193 banks operating in 46 countries with billion dollars deposit world-wide. (Hameed and Ahmad, 2009, p. 5)

Following are the principles and prohibition in Islamic banking operations:

Prohibition of interest (Riba)

Riba is the fixed interest collected by a lender, on which he get the amount more than the principle amount. According to Shariah, “Any benefit drawn on a loan is Riba” (Shingeri, 2008, p. 03) Interest (Riba) represents the money itself being used to make money. It is the increment on a debt or loan. The taker and the issuer of Riba declare of war against ALLAH and his messenger.

Who consume Riba is standing like a person beaten by Satan. Riba is one of the seven major sin and those who takes Riba is under the curse of ALLAH. According to Shariah law, there are two types of Riba: Riba Al-Fadl Riba Al-Nasi'ah (Chapra, 2006, p. 2).

Riba Al-Nasi'ah

The word Nasi'ah derived from the term Nasa'a (Chapra, 2006, p. 02) which means defer, wait or delay and refers to the time at which borrower has to pay the load with the premium amount. So it clearly shows that it is equivalent to the loans and interest charged. In Quran, verse 2:275, “God has allowed trade and forbidden Riba” (Chapra, 2006, p. 2).

Riba Al-Nasi'ah basically means fixing of that amount which ...