ISLAMIC BANKING

Islamic Banking

Table of Contents

Chapter 1: Introduction5

Background5

1.1History of Islamic banking5

1.2Introduction to Islamic Finance7

1.3 Scope of the Study13

1.4Why Islamic Banking15

1.5Brief concept of Islamic Banking15

1.6What is Interest - Riba17

1.7Islamic modes of Financing19

1.7.1 Mudarabah19

1.7.2 Musharaka19

1.7.3 Murabaha19

1.7.4 Salam20

1.7.5 Istisna20

1.7.6 Istijrar20

1.7.7 Ijarah21

1.8Distinction between Islamic banking and Conventional banking21

1.9Scope in UK and Europe22

1.10Islamic Banking in UK24

1.11Aims and objectives of the research paper24

1.12Framework of the research25

Chapter 2: Literature Review28

2.1Introduction28

2.2 Riba in the Quran28

2.3Does only Islam prohibits interest?33

2.4Different views on Islamic Banking system34

2.5 Principles of Islamic Finance35

2.5.1Prohibits distribution of Interest - Riba35

2.5.2 If no interest then…Profit sharing36

2.5.3 If not profit sharing…are there alternatives?38

2.5.4 What are the Risks of Islamic Banking?39

2.5.5 Prohibits involvement in certain products and services48

2.5.6Shared Profit and Loss49

2.5.7Asset backed financing50

2.6Vicious cycle of debts50

2.7Strategies for Islamic banking to face Global Challenges51

2.8Analysis of short term Asset Concentration in Islamic Banking53

2.9Islamic Banking - A Study in Singapore54

2.10Islamic Banks and Financial Stability an Empirical Analysis55

2.11 Comparison of Islamic Banks and Conventional Banks56

2.11.1 Efficiency56

2.11.2 Equity56

2.11.3 Liquidity57

2.11.5 Sustainability59

2.11.6 Integrity66

Chapter 3: The Methodology69

3.1 Describing the Approach69

3.2 Identify the Data Gathering Method75

Chapter 4: Findings Of The Study79

4.1 Islamic Banking in Practice79

The United Kingdom - A Modern Economy80

4.2 Islamic Home Financing: Current Impediments83

4.2.1 Risk Weighting83

4.2.2 Taxation84

4.2.3 Legal Fees85

4.2.4 Benefits for the British Exporter86

The Turkey - A Developing Economy90

4.2.5 An Interest-free banking model…Can it work?95

4.2.6 An interest free commercial bank99

4.2.7 Misconceptions about an interest free bank102

Chapter 5:Conclusion106

Chapter 1: Introduction

Background

Bank is the institution for accepting deposits and lending money. Initially, banks used to channel saving deposits to lender and charging for their fee. In the modern banking a lot of new products have been offered by the bank to facilitate the customer and contribute towards healthy business environment. [Siddiqui, 1983]

Banks channel individuals' savings to business where this is needed for long investment projects carrying high returns.

Banks act as financial intermediary for individuals and corporate clients resulting into improved efficiency in business processes and thus contribute towards economic development. Such services include safe deposit vault, letter of credits, electronic payments, consumer financing, deposit insurances, asset financing and invoice discounting etc

Bank also performs non-financial intermediary services as well like insurance, electronic payment, hedging and funds management services. [Iqbal, 1998]

1.1History of Islamic banking

History of banks can be traced to development of human society and use of money as a medium of exchange. Modern banking started in Muslim countries during 19th century when these countries came under the control of foreign nations as their colonies. Before that they were not so developed economically and politically. Banks were initially found in the capital cities and were mainly involved to facilitate import and export transactions. Local community initially resist banking system due to national or religious reasons. As the time passed it turned difficult to avoid commercial banks in trade and other activities. However, community still continue to avoid borrowing from banks and deposit into saving accounts in order to resist involvement in interest related transactions. As time passed, involvement in the financial and economic market grew and it became impossible to avoid banking system. It was the time when local participation in ...