Islamic Banking – A Theoretical Perspective

It is called riba, shows that is equivalent to borrowing money at interest.  Islamic economy is a key term.  The Koran forbids the payment of interest by forbidding any claim exceeding the amount paid.  The interest is therefore ineligible for the loans is invested in productive activities that lending accounts. 

Unlike interest, business and the profit resulting there from are lawful.  You can search using equity or profit through trade agreements such as the mudaraba contract whereby the owner of capital funds the member if he returns to the lender a percentage of profits made.  It is also permissible to achieve profit in company with other people.  In these three cases, the risk is borne by the owners of capital.  In the seventh century Arabian Peninsula direct funding and forms of self-eranole popular in economics.  Loans with interest were frequent as agreements mudaraba. After the prohibition of interest, commercial activities were financed from funds owned by dealers.  The credit merchant remained in force but without the charging of any interest in the event of delay in repayment of credit. 

Agricultural activities were carried out based on agreements on the division between owners and farmers crops. The system of sharecropping was derived from agreements of various kinds.  It is likely that the farmers that lessees of land use bai salam, that orders with payment in advance, to finance agricultural activities. ‘hadith (tradition) on the bai salam suggests that this funding was in use at the time of Prophet.  For example, people anticipated cash for dates that were delivered after two or three years. 

Islamic banks, unlike traditional ones, the interest are replaced with bonuses.  To finance the debt is required to repay the sum loaned, plus a predetermined percentage of the profits.  If there are profits, the borrower must repay the funds obtained.  Another type of activity is the provision of short-term interest-free loans to a very limited extent.  We must go back to 1945 to find the first references to banking activities halal (lawful) in the full respect of religious principles.  Only in 1963 was born in Egypt, the first bank based on Islam.  In the seventies, the Islamic financial system become famous with the creation of several banks in the Middle East and spread in the Southeast Asia and South Asia.  In Malaysia in ’63 is created the Muslim Pilgrims Savings Corporation or Organization to finance pilgrimages to help the faithful to save the money towards the hajj (pilgrimage).  In 1973 he opened a bank in the Philippines and was born in ’75 the first international financial institution (Islamic Development Bank) to promote the economic development of Islamic countries in respect of share. It has been operational since 1976 with headquarters in Jeddah.  In 1978 in Luxembourg is the first Islamic bank established in the West (now known as the Islamic Financial House).  Pakistan, Iran and Sudan in 1985 adopted laws inspired by the Quranic precepts.  All banks have financed Muslim projects based on agreements mudaraba although the most common is musharaka (the two parties have both capital shares) because it gives the bank the right to participate in the management company that invests the funds.  In the late seventies there were twelve banks in 1985 were Muslim and more than sixty.  Both the number and the size of the deposits have been increasing and the banks have financed a growing number of projects.  Banks have thus proven over the years that you can play without a financial interest by eliminating those expenses.  For those assets, banks have had to refer to murabaha (trading with profit margin). 

Islamic Banking must scrupulously observe the principles of sharia , the Quranic law.  There are six main rules governing share to financial transactions and Islamic Economy.  The first rule strictly forbids charging interest.  Allah says in the Quran, has allowed trading and forbidden riba (usury and interest) and what is the fundamental principles that govern is trading of Islamic banking.  The second rule of share  to condemn the non-utilization of financial resources.  It is forbidden, in essence, hide money at home or keep it in bank without using it in any way because this is tantamount to hoarding it.  This type of saving is discouraged by the imposition of zakat, alms mandatory and fourth pillar of Islam, in order to enter the money in a production process.  Follows, the Sharia law, the equitable sharing of risks and profits between capital and enterprise and the fourth rule concerns the use of resources to ensure the owner the advantage because, in the form of a gross profit margin.

 Sharia to admit, under certain conditions, the use of leasing as a form of long-term financing.  The fifth is to Sharia law in question concerns the use of non-profit financial resources to achieve social goals and moral respect the Islamic religion and in the interest of the whole community. For the Quran a leading role lies with qardhasan ie loans-for-profit.  Another rule of Islamic law prohibits the financing of projects is not legitimate from a religious perspective and devoid of ethical and social priorities such as, inter alia, the establishment of factories on the territory of birra.Ma return to “riba” ie the payment exceeds the amount of the loan and therefore the interest is paid or collected.  According to the sacred book of Muslims any payment in addition to the sum paid is “riba” and therefore “haram,” forbidden. 

Muslims economist interprets the Quran in context prohibition.  It is therefore not pay the wealth in itself but its primary research objective of human activities.  Having said that does not mean that funds have no cost. Islam stipulates that owners of capital to be recognized as a part of production that cannot be predetermined.  The latter can also leverage on certain types of agreements that we review. Mudaraba The already mentioned that the owners of capital invest for productive purposes by the intervention of mudarib, agents or contractors, which are split profits.  The mudaraba (you can compare with our joint venture) must agree with the position of Islam inherent function of capital as a factor of production.  Banking system is primarily used to provide credit to businesses.  As an alternative, the owners of capital can be a musharaka, ie a company to share profits and losses.  From all this we realize that the Islamic banking system stands as an alternative to the traditional system because it does not resort to riba (interest) while performing all the functions of a commercial bank.  Agreements must be added the murabaha cited: the bank buys the goods or merchandise on behalf of the customer and sell them to him at cost and achieve a predetermined profit margin.  This is a commercial operation widely used in the Muslim world which, however, there are doubts and scholars are asking whether murabaha is not really a disguised version of interest. Its operation is very similar to that of loans on interest.  Theorists and practitioners of Islamic banking sector are worried that the replacement interest with mechanisms such as the gross profit margin represents a change more formal than substantive.

 Consequently, the new system would be less unfair than that based on the interest. Among the various methods of financing from non-charged by banks, the murabaha is the most popular.  And it is precisely the one just described, the number one problem for the banks even if Muslim is not the only one.  Other obstacles relate to how to address delays in payments to certain deadlines and misconduct of customers. The chickens come home to roost.  Can indeed act as an Islamic bank in the event of late payment because it is forbidden to charge interest on late payments?  Proposals and suggestions are not served to loosen the knot.  Some, like Pakistan, has imposed a monetary penalty for late comers but, in fact, the fine was ignored by national legislation. It was thought therefore to establish that the proceeds of the fine but do not go to the lender state coffers.  Would still be appropriate – market experts point out – that the central bank to refinance all creditors with clients too late.  An Islamic bank may also execute leasing (Ijara). Industrial machinery or houses are intended to be leased out at a certain price. Among other activities carried out by Islamic banking institutions, the figure quoted bai salam, sale contract in which the price of goods shall be paid upon signing the contract, while delivery takes place later. It is used for agricultural and manufactured goods.  Non-bank financial intermediaries play an important part in the Islamic economy and are specialized in trading of financial instruments without interest.  Among the most significant, certificates of investment, leasing and banking. 

The economy in Islam, as we have seen, is closely linked to reality and religious doctrine and this creates, not infrequently, disagreements and misunderstandings explained by the fact that the Western world has long separated the commercial law by religious principles. The difference between the last two economic systems, Islamic and Western, with only a view of some religious and secular dimensions of the other.

 Philip King – centro

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