ISLAMIC BANKNG THEORY

Islamic banking theory

Islamic banking theory

Introduction

The functioning of the Islamic banking might seem quite similar to that of the conventional banking system, but the matter of fact is that the world we are living in today is totally based on interest and any transaction or act done without it is mere impossible. It is still an ambiguity wether the Islamic banks as being Islamic just by name or following the patterns that are almost similar to that of the conventional banks. Many comparisons have given to show that there are not many differences in the functions and systems of an Islamic bank and a conventional bank which, will give an idea of the interest benchmarking followed in Islamic banks. (Khan, 2010)

Discussion

For most large Islamic banks, however, at least three-quarters of dormitories - in some cases, almost all - trade name only Islam, according to a study (Khan, 2010). In fact, they resemble the traditional bank products, forbidden to devout belief in limited membership. "If you are satisfied that 'tags' instead of 'interest.” Islamic Banking focuses on sharing of loss and profits with investors based on their share in the investment pool (Rosly, 2006). Islamic banking principles disregard the concept of interest and confirmed return to investor. It emphasize on directly taking the risk through equity participation and does not ensure confirm guarantee of return, therefore, returns for shareholder change subsequently based on returns derived from investment. (Abdel-Magib, 2010)

Islamic banking in practice emphasize on adopting the sharia principles to run the financial matters of the banking system. It disregards the concept of confirmed return on investment and therefore, focuses on return on pool. Investor may take various forms in Islamic financing mode. He is not required to be involved in the financial management activities. He is only required to share his capital, for which skills, and resource of the other person be sued to generate profits. Non-participatory Islamic financing modes may include Modarba, Murabaha, and Ijarah. In any of these modes, financier is not required to play his role except sharing of money in the form of capital. (Al-Arabi, 2003)

Mudarbah

Mudarabah is a contractual relationship executed between two parties, one supplying the capital (rabbulmal) and the other supplying the labor and skill as agent or manager (mudarib), for investing in a predetermined activity, which grants each party a share of the earnings as determined at the time of the investment. This practice existed in the pre-Islamic period, and Muslim jurists of all the major legal schools agreed on the legitimacy of Mudarabah transactions. Mudarabah business can be of two types: restricted, if the capital-provider specifies any business in which the capital is to be invested, and restricted if the capital-provider authorizes the mudarib to invest the funds in any business he deems fit. (Al-Arabi, 2003)

Profit shared between Both the parties according to a predetermined profit sharing ratio. The profit sharing ratio has to be mutually consented upon and explicitly stated at the time of contracting a to be a ...