Islamic Banking

ISLAMIC BANKING

HISTORY AND DEVELOPMENT

The objectives of Islamic banking:

To promote and develop the application of Islamic principles, law and traditions to business and commercial affairs.

To promote commercial activities that are consistent with Shariah principles.

To safeguard the Islamic communities from activities which are forbidden in Islam.


The advantages of Islamic banking :

Do not deal with loans (except Qardh hasan).

Practice the principles of Musharakah and Mudharabah.

Prohibition of interest (usury) in all transaction.


The advantages of Islamic banking :

Prohibition of monopoly and hoarding.

Emphasize in fair and legitimate profit in business activities.


The motive of Islamic banking?

Profit Profit

or or

non-for-profit non-for-profit organization?organization?

PHILOSOPHY OF ISLAMIC BUSINESS AND BANKS

Based on the principles of mudharabah.

Free from usury.

Making profit and conform to Islamic business principles.

Practice honesty, justice and equity.

PHILOSOPHY OF ISLAMIC BUSINESS AND BANKS

To balance between earning and spending. earning must be lawful. Spending for the welfare of the people-not for wasteful or

pleasurable activities.

OBJECTIVES OF ISLAMIC BANKS

To promote, foster and develop the banking services and products based on Islamic principles.

To promote the establishment of investment companies or business enterprises-the activities are not forbidden in Islam.

OBJECTIVES OF ISLAMIC BANKS

Prohibition of interest, fair and legitimate profit undertaking. Profit and morality principles.

To give alms tax. To promote and develop the Islamic community.

To develop an environment beneficial to the society.

THE UNLAWFUL INVESTMENT

Trades that promote obscenity Prostitution and adultery Manufacture, sale and transportation of liquor Fortune-telling and drawing lots Business which involves usury Making and sale of idols and services rendered in or

to pagan places of worship

THE UNLAWFUL CONDUCTS

Bribery Misappropriation Embezzlement Larceny Unfair use of property of an orphan ]gambling Short weight and measure

PRINCIPLES OF SYARIAH IN IB

Profit and loss sharing principles Mudharabah Musyarakah

Fees or charges based principles Murabahah Bai mu’azzal Ijarah Ijarah wa-iktina


Free service principle Qard hassan

Ancillary principles Wadiah Rahn


Mudharabah An agreement whereby the owner of some property (the

financier) gives a specified amount of capital to another person (the entrepreneur).

The profit will be shared between both parties according to the terms of their agreement.

Losses will be borne by the financiers. However if the losses is due to the negligence of the

entrepreneur, he must be responsible for the loss.


Al-musyarakah A joint venture agreement between two parties to engage

in a specific business activity with an aim of making profit.

Both parties will provide capital and they will participate in the management.

In the event of loss, all parties bear the loss in proportion to their share in the financing.


Murabahah The sale of goods at a price covering the purchase price

plus a profit margin agreed upon by both parties. The lender buys goods wanted by borrower for resale to

the borrower at a higher price, agreed upon by both parties.


Bai-mua’zzal The borrower is allowed to defer settlement of payment

for goods purchased within the period, and in a manner determined and agreed by both parties.

Al-ijarah The bank purchases the asset required by the customer

and then leases the asset to the customer for a fixed period on a lease rental basis, agreed by both parties.


Ijarah wa-iktina The bank purchases an asset for the purpose of renting

the same to the customer against the agreed rental. Involves agreement that the client will make payment

which eventually lead to the transfer of ownership from bank to customer.


Qard hassan Borrower is obligated to repay the lender the principal

sum borrowed on maturity of the loan.

Al-wadiah The owner of funds will deposit and give consent to the

custodian to make use of their funds as long as these assets remain in the custodian’s hands.


Rahn A contract of pledging a security and becomes binding

when possession of the pledge has taken place. The ownership of the security is not transferred to the

pledgee.

Documents

Islamic Banking