Islamic Banking – A perception

Islamic law or Sharia prohibits the payment and receipt of interest, as it is intended that the money will make money.  However, that does not mean that the Muslim community does not need financial instruments, as the Muslim community also needs to cover its financial needs, although it should look like and avoid paying interest charges.

The major obstacle is in Islamic finance is the prohibition of usury or Riba. Apart from the prohibition of interest, the Islamic rule prevents investing in certain sectors, such as alcohol, pork products, casinos, pornography etc..  For this reason the areas where an investment fund that follows Islamic law can invest is limited.

The most common contracts of Islamic finance are Ijara, Murabaha, Sukuk and Musharakah.  This type of financial products are common in Islamic countries, although they are becoming more common in the West due to immigration.

• Ijara is a contract type that is often used as an alternative to a mortgage, or any type of loan that is intended for the acquisition of an asset.  In a traditional mortgage a person buys a house and asked for a loan whose interest consists of the property, something not allowed.

In ijara the bank acquires the property at your request, agreeing a final price of sale and periodic payments (equivalent to rent).  The property can be sold, but implies that the Ijara contract is sold with it.  As I have discussed this type of agreement can also be performed for any durable good, such as a car.  There is also a loan Qardo-al-Hasan, who is a benevolent loan without interest.  But usually need some kind of warranty.

• Another example is the Murabaha financing, a type of financial product in which a contract is agreed repurchase of an asset depending on its cost plus a commission has been agreed.  However is limited to commercial transactions, and not be seen purely financial product.

• To finance a project, such as the construction of a residential complex, normally tends to borrow money, although in Islamic finance is often opt for Musharakah.  Basically it is a joint venture in which the bank and client come together to fund a project, both parties may be involved in project management, but that does not mean they are obliged to do.

• Like all not going to be loans, there are also investment vehicles, such as Sukuk.  They are technically a type of contract, but in practice a kind of promissory notes are equivalent to bonds.  Such bonds must be invested only in areas accepted and can not charge interest, so the rate of Sakkara (the Sukuk individual) will prevent these two prohibitions in one way or another.  Thus the Sukuk can be quite heterogeneous and before investing in them should be studied individually.

Although Islamic finance usually associated with Arab sheikhs typically not all Muslim countries have adopted, for example Morocco, Geographically its peak is in the Middle East and Southeast Asia, Singapore being one of the largest centers in the world of Islamic finance and Malaysia among the countries which succeed in retail banking.  Besides the United Kingdom have Abora from commercial banking and investment banking.  Commercial banks typically offer halal finance (which comply with Shariah) in some of its branches, especially those with large percentage of customers who preactican Islam long politicians who seek to convert the city of London into a major center of Islamic finance , which investment banks seem to like.

When asked if Westerners can access these products, the answer is yes, of course.  However, we should take into account the lack of experience in our country (of advisers, judges, etc.) and lack of regulation, which leaves us to grant a private contract or legal system of a foreign country whose laws may be very different.

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3 thoughts on “Islamic Banking – A perception

  1. Islamic Finance and Banking is not only avoidance of Riba. It is avoidance of debt and other things also. Like it looks for investment in Halal ventures. There is no bankruptcy in Islam as per Aya 2:280. There is a condemnation of loan in Islam. Here is a Hadith

    Narrated Abu Huraira

    Whenever a dead man in debt was brought to Allah’s Apostle he would ask, “Has he left anything to repay his debt?” If he was informed that he had left something to repay his debts, he would offer his funeral prayer, otherwise he would tell the Muslims to
    offer their friend’s funeral prayer. When Allah made the Prophet wealthy through conquests, he said, “I am more rightful than other believers to be the guardian of the believers, so if a Muslim dies while in debt, I am responsible for the repayment of his debt, and whoever leaves wealth (after his death) it will belong to his heirs.” Sahih Bukhari 3.495

    Narrated Aisha

    Allah’s Apostle used to invoke Allah in the prayer saying, “O Allah, I seek refuge with you from all sins, and from being in debt.” Someone said, O Allah’s Apostle! (I see you) very often you seek refuge with Allah from being in debt. He replied, “If a person is in debt, he tells lies when he speaks, and breaks his promises when he promises.” Sahih Bukhari 3.582

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