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Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasize moral and ethical values in all dealings have wide universal appeal.
Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. Basic principles of islamic banking Elimination of Riba Economic Matters
Financing for Legal activities Islamic Objectivity
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as FIQH AL-MUAMALAT(Islamic rules on transactions). Islamic banking activities must be practiced consistent with the Shariah and its practical application through the development of Islamic economics.
Regarding principles of SHARIAH 3 modes of financing Lending without interest (Qard-e-Hasna) Sale and trade Profit and loss(musharka & modarba) No.of Islamic banks working in Pakistan under SBP
Prohibition of Interest (Riba) Asset-Backed Financing Prohibition of Uncertainty (Gharar) Prohibition of Speculative Behavior Shariah Approved Activities Risk Sharing Social justice
Any amount, big or small, over the principal, in a contract of loan or debt is Riba prohibited by the Holy Quran,
regardless of whether the loan is taken for the purpose of consumption or for some production activity.
ASSET-BACKED FINANCING
Under the concept of money as a potential capital, money has on intrinsic utility. Therefore, unlike conventional financial institutions, financing in Islam is always based on illiquid assets which creates real assets and inventories.
Literal meanings: Indeterminacy, Speculation, Risk or Hazard. Technical meanings: Gharar takes place where the consequences (of a transaction) are concealed. (Imam Sarkhsi; Al Mabsut, Vol 13 p 194).
Usually, the riskiness deals with the variation of outcome (i.e. possibilities of profit & loss). Islamic commercial law does not disapprove risk & uncertainty when it refers to business outcomes as they constitute a law of nature. But Islamic commercial law requires absolute certainty about the terms and conditions of contractual obligations.
Examples of Gharar:
Sale of a car which has been stolen by someone. Sale of goods yet to be acquired by seller. Sale of fish in water & birds in the air.
FEATURES
Every form of money acquisition of which depends upon luck or chance (zero-sumgame). Qimar & Maysir literally means getting something too easily. In other words you gain what you have not earned. Maysir is used in Quran & Qimar in Hadith.
All moral and ethical value systems would naturally promote higher ideals such as fairness and justice for all mankind. However, it is fascinating to note that the primary source for Shariah rules and principles, namely Quran and Sunnah of Prophet Muhammad S.A.W, more than 1400 years ago,
have explicitly ordained in a comprehensive and concise manner certain code of ethics that can be universally applied even in the modern day, undeterred by time, space or race.
Example:
(al-Maidah: 1);
There are specific Quranic injunctions that calls for honest fulfillment of all contracts.
(al-Anfal: 27);
Prohibits the betrayal of any trust.
(an-Nisaa: 29);
Forbids the earning of income from cheating, price manipulation, dishonesty or fraud.
RISK SHARING
Risk sharing is encouraged rather than risk transferring. So suppliers of funds become investors rather than creditors.
Islamic banking requires Risk-sharing than Risk transferring, Moreover A person is entitled to profit only when he bears risk of loss.
Example:
A businessman is entitled to Profits & Gains in his business because he is ready to bear Loss.
Taqi
Hire-Purchase
Nature of the Islamic banking is saviour. Safe heaven for secured liquidity Significant global inflation and Islamic banks Less investment in conventional western banks Alternatives to conventional banking Reversed picture in 2009
CONCLUSION
In Global Financial Crisis 2008, the performance of Islamic Finance Industry was much satisfactory. Conventional banking groups such as CitiGroup, HSBC, Standard Chartered etc are offering Islamic financial services. Islamic banking is not restricted to Muslims.