Islamic banking is an islamic financial system conducting banking and business activities in line with the provisions and principles of islamic sharia. The conventional banking system is based on interest payments at a rate preset on the deposits of money. When the concept of islamic banking with its ethical values was propagated, financial world were very skeptical and treated the idea as a utopian dream. Principles of islamic banking free download as powerpoint presentation.
Let us first understand the major difference between islamic banking and conventional banking system. Islamic banking system as an effective element of economy. The islamic banking has not been applied the fully procedures as described by the pillar ii of the new basel accord. Islamic banking asks why islam has been able to maintain its stand. It then considers the analytical basis of islamic banking and financing in the light of modern theories of financial intermediation, and identifies the. Even years of successful islamic banking operations and its phenomenal growth around the. It is not an historical account of the evolution of islamic banking and finance in theory and practice. In contrast to the islamic banking system, the conventional banking system has no incentive to. Islamic banking performance muslim population, islamic assets, revenues and profit pool breakdown by region, 2007 middle east account 80% of islamic finance market. Middle east is the centre of islamic banking with contribution of approximately 80% while 20% share is contributed by rest of the world. Since the behavior of early islamic banks seemed to casual observers to be. Islamic banking, enlightened with the guidance of islamic sharia principles, emerged as an alternative financial system that neither gave nor took interest, thereby introducing a fair system of social justice and equality, while fulfilling the financial needs of people and maintaining high standards of ethics, transparency and a sense of. The ribafree judeochristianislamic system and business ethics 144 the market system 145 management ethics 145 justice and fairness on both sides.
The dual banking system is prevailing in a number of asian countries such as malaysia, indonesia, bahrain, and pakistan. Due to the fact, that in the last decade, the islamic banking. Prudent press principles of the islamic banking system. Introduction the concept of islamic banking can be traced back to the origin of islam itself. It has been analyzed that conventional banking system is prevailed in all over the world but as. The book explores the intricacies of islamic law and the religious and ethical principles underpinning islamic banking. During the golden age of islamic civilization, it was proved that muslims were competent to establish islamic. Difference between islamic banking and conventional banking. An islamic bank is a financial institution which identifies itself with the spirit. Islamic banking is the operation of banks which are consistent with the sharia law. Local savings banks were established in mit ghamr, egypt, in 1963. The islamic banking systems adherence to sharia law is precisely the reason they avoided engaging in transactions involving risky derivatives, and toxic assets. The application of the said proposals does not create barriers for the islamic banking and finance kahf, m. Definition of islamic banking it is a shariah compliant banking which provides and uses financial services and products that conform to islamic religious practices and laws which in particular, prohibits the payment and receipt of interest riba kettell 2010.
Islamic banking and finance the islamic banking and finance is a system designed to allow muslims to deal with their financial affairs in accordance with their faith. Islamic banking practices from the golden age of islam nasser 1996, p. Some of the modes of islamic bankingfinance include mudarabah profitsharing and lossbearing, wadiah safekeeping, musharaka joint. Introduction to islamic banking and finance is supported by a detailed, easy to use instructor manual, powerful test bank generator and dynamic powerpoint slides. In theory, islamic finance differs significantly from conventional finance. Islamic banking system, islamic banking concept, islamic. To the banks lending is a form of investment where the capital and a. The history of banking is as old as 2000 bc when there were trading system and the gold coins. A very few of them are knowledgeable about banking or the needs of the customers. Developing the art of islamic banking and finance 245 the approach used. Islamic banking and finance to take stock of the situation and plan for the future. Islamic banking is a concept that is based on shariaah principles and the structure is different than conventional banking from its essence, nature and spirit.
There are different banking systems in the world but the most famous ones are conventional banking and the islamic banking. In pakistan islamic banking is at infant stage although last 6 years growth is marvelous. Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of islam and governed by the principles laid down by islamic shariah. Islamic banking specific standards have been developed by specialized standardsetting bodies, but regulatory and supervisory frameworks in many jurisdictions do not yet cater to the unique risks of the industry. Islamic scholars active in researching islamic banking and finance, on the other hand, typically have a normative approach, i. The concept of islamic banking economy thoughts and. The following points summarize the events that took place during this period. These foreign banks included the bank of oman, the arab emirates bank, abu dhabi national bank, international bank of credit and commerce, city bank, the. The history of banking can be traced back to the times before 2000 bc.
The financial infrastructure, including standards setting and regulatory institutions, has also been catching up with the rapid growth of islamic financing. Differences and similarities in islamic and conventional. A basic guide to contemporary islamic banking and finance. Islamic banking, shariah compliance, islamic banking activities introduction the worldview, goals and strategy of economic system in islam are derived from the shariah. Former professor, center for research in islamic economics, king abdulaziz university, jeddah.
It follows the beliefs and principles of islamic jurisprudence pertaining to trade and business, socalled fiqhalmuamalat or islamic rules on transactions. Islamic banking is an ethical banking system, and its practices are based on islamic shariah laws. History of islamic banking system in iran as with pakistan, iran has also converted its entire financial system to islamic banking system. The practice of islamic banking system in sudan 29 midseventies, private foreign banks were allowed to operate in sudan again, sidebyside with the nationalised banks. Currently as many as 53 countries have islamic banking institutions and iran, pakistan and sudan have reorganized their entire banking system along the islamic lines. Interest, known as riba it is compulsory for muslims to. Payment and receipt of interest is prohibited under shariah law, so muslims abstain from banking. While there is a large practitioner literature on islamic finance, in general, and specifically islamic banking, there are few academic papers. Banking is a concept that has been used in our society in different form and shapes. In conclusion, the islamic banking system is a rapid growth one and the switch to islamic banking will be a difficult task. The experts were drawn from practitioners and academicians based on their knowledge and fieldwork experience in shariah and islamic banking and finance. Islamic banking has unfortunately been misunderstood in india as a religious charitable venture restricted to the countrys povertyridden and economically downtrodden muslim community.
The banks interest comes before the clients as opposed to the islamic banking system. However, through islamic banking, financial inclusion can be promoted and bring a larger pool of savings in the local and global economy. Of interest to this study is the dual banking system of pakistan, where the islamic finance had captured a market share of 4. Banking is a practice that has long been in prevalence in our society in different forms and shapes.
Conventional banking follows conventional interestbased principle, whereas, islamic banking is based on interest free principle and principle of profitandloss pls sharing in performing their businesses as intermediaries muhamed and manarvi, 2011. Lending and investing in conventional banking, depositing is a form of investment for the savers where the capital remains intact while a known income in the form of interest is promised. Islamic banking, also known as noninterest banking, is a banking system that is based on the principles of islamic or sharia law and guided by islamic economics. Toward new understanding to islamic bankingthe concept of islamic banking 1 today, the world is suffering a major economic crisis which included all banking sectors. Fundamentally the difference between islamic banking and conventional banking is that the idea fairness to the clients is theoretically focused on the idea of islamic banking itself.
The aim and focus of the foundations and principles of the modern islamic finance is to revive the justice and equity in the society, and that formulates the core objective of the islamic system. Interest in completely prohibited in islamic banking. Today, islamic banking still accounts for only a tiny fraction of the global banking industry. Conventional banks aim to maximize returns and minimize risk. The concept of islamic banking from the islamic worldview. Difference between islamic banking and conventional. While islamic banking has a broader scope and meaning, it is generally referred to the transformation of conventional money lending system into assetbacked financing. An alternative banking system international journal of research granthaalayah, vol. It extended to include the other economic sectors which increased the suffering of poor communities which mainly suffered other economic diseases, such as. Islamic banking today is an industry that is still evolving. The term islamic banking may sound exotic especially since it is not a financial product that is prevalent in our financial system and is an alternative form of finance that is as old as the existence of the religion itself. The history of islamic bank chap 1 islamic banking. Since the sharia law prohibits the collection of interest as well as any transactions which allow speculation, it is in conflict with the basic tenets of banking. Partly as a consequence, the practice of islamic banking ib has, in some.
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