Aspects of Islamic banking

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There are aspects of Islamic banking that appeal to wider audience, once the basic tenets are understood.  Islamic banking and conventional banking are different in some major aspects:

1.      Islamic financial institutions work on a philosophy of prohibiting transactions involving riba, immoral activity and promoting greater social justice by sharing risk and rewards.

2.      Islamic banking is a system governed by syariah law.

3.      Considers social implications which is very much in line with Islamic values and principles.

4.      it’s mandatory for financial transactions to be based on its primary sources and most of the financial transactions are on real economic activity.

5.      Making money with no actual assets or value as the underlying is strictly prohibited.  Money is simply a medium of exchanges.

6.      Islamic banking use the concept of value creation on exchange of real assets or goods and service as the basis for earning profits.

7.      Islamic banking prohibits transactions from investments in industries such as tobacco, alcohol and gambling.

Islamic banking also depends on depositor’s money as a major source of funds.  From profit-sharing to partnership and leasing, the Islamic banking system offers a wide range of services founded on the concept of social health and mutually beneficial contracts.

Islamic Banking Service

Mudharabah (profit-sharing)	- a contract between 2 or more parties (capital owner and an investment manager) - profit is distributed between the 2 parties in accordance with the ratio agreed upon - financial loss is borne by the capital owner   -provided there is no negligence/wrong doing on the investment manager’s part
Mushakarah (partnership)	- a contract between 2 or more parties - both participate in the management and provision of capital - share in the profit and loss - Profit is distributed based on pre-agreed ratios - losses are distributed proportional to the share of each in the total capital
Murabaha	- sale of a commodity/asset for cash or deferred price - purchase of commodity by a seller, sold on a cost-plus-profit basis to the buyer - seller discloses its cost and profit margin to the buyer
Wadiah	- bank is deemed as a keeper and trustee of funds - guarantees refund of the entire deposits made by depositor, or any part, when the depositor demands it - Depositor maybe rewarded with Hibah (gift) as a form of appreciation for the use of funds by the bank
Ijarah (Leasing)	- basically a lease (equipment, car, etc.) - bank holds and maintains its title to the assets - debtor only owes periodic payments
Ijarah Thumma Al-Bai	- is a lease that include the option to buy back - legal little of the leased asset will be passed to the end of the lease period pursuant to the buy-back transaction

Yahya Ibrahim

My Investment: The Islamic Option

Malaysian Business: March 16, 2011