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Islamic banking and global financial market: signs of sustainable growth

Islamic Banking and Global Financial Market: Signs of growth economic

Introduction

The subject of my current research work is " Islamic Banking and global financial markets and how they interact to lead to sustainable economic development. Islamic finance is closely related to Islam's vision of economic development, which gives primary importance to the realization of socio-economic justice and welfare.
The topic of Islam and economic development poses a number of
questions, one of which is about the relevance of the topic in a
discussion forum on finance Islamic. This question is not difficult
response because the finance and development are intimately related.
Finance is not an end in itself it is one of the essential means
development which in turn leads to increased financial resources
accelerate development. The juxtaposition of Islam and economic
development in the title, it also raises some questions. One of these
is whether Islam is an asset or a liability for development and if
Islam and development can coexist without getting hurt. If Islam
is able to promote the development then the second and third questions
are the type of development Islam visually, and
reasons for the failure of Muslim countries to achieve development
this type.

Deepening economic crisis worldwide, global financial institutions have begun to re-evaluate the different systems and business models in place. It is no exaggeration to say that virtually all major conventional banks have been affected by the global financial crisis. In contrast, Islamic banking system has escaped largely the fallout from the financial crisis, thanks to rules that forbid the sort of risky business that major institutions are infected.

There is no doubt that the current global financial crisis has made the Islamic finance industry an excellent opportunity to expand its appeal beyond Muslim investors as safe haven from a speculative excesses. The message may have particular resonance in the West after the fall of the U.S. mortgage market left bank holding hundreds of billions of dollars of nearly worthless credit instruments tied to home loans by a web of complex structures. Investors traumatized by the credit crisis and seek security guarantees. The stricter rules imposed on lending by Islamic law to provide such guarantees and security. Many of the structures and high-risk speculative and financing methods that have proven to be the nemesis of Western financial industry are prohibited by Islamic laws. Islamic finance practices are certainly more fiscally conservative, requiring the direct participation of investors in plans that do not have to do with esoteric strategies such as parking assets off balance.

Although Islamic banking is no longer a novelty in the world international finance, the U.S. is yet to embrace that model. While some U.S. financial institutions are venturing into this market are few and far between yes. According to some experts and pundits, the U.S. is almost a decade behind the financial counterpart from Asia and Europe As the adoption and implementation of Islamic banking are concerned.

What is Islamic finance?

To understand how an Islamic banks have largely escaped unscathed from this financial crisis, it is essential to an understanding of the basics Islamic finance. Islamic finance is based on sharia, or Islamic law, which essentially requires that the profits are derived from ethical investments socially responsible and discourages interest-based banking and investments. Islamic finance is fundamentally different from conventional banking models, since it is based on a structure profit and loss (PLS) and the prohibition of riba (interest). This structure requires the financial institution to invest with the customer to finance customer transactions rather than lending money to the customer. Due to the risks inherent in any investment or financial institution is entitled to benefit from the transaction financial. This is in stark contrast to modern finance in which interest is one of the key ways banks make money through its products, such as mortgages and personal loans.

Another fundamental distinction of an Islamic bank is the absence of insurance to protect customer deposits are found in conventional banks. While the structure allows the reception of PLS depositors' money when deposits investments have earned a profit, they must incur losses when investments incur losses deposit to meet the mandates of the sharia. Deposit insurance, such as the protection provided by the Federal Deposit Insurance Corporation, against the very purpose of the PLS model, the depositor does not pose any risk. Deposit insurance is an integral part of the Western banking standards but is in direct conflict with the basic concepts of Islamic banking. The question of insurance deposits has proved a major obstacle to Western banks, mostly Europeans, who want and have chosen to offer products that comply with Sharia. Banks overcame this obstacle European deposit insurance, informing customers that the insurance is not Shariah-compliant [1].

Islamic banks have been marketing their services aggressively in the West. Conventional commercial banks are in direct competition with purely Islamic banks started to offer products Islamic structured its customers through "Islamic banking windows." However, there is confusion about Islamic banking. In the minds of many, the prohibition of interest is the defining feature of Islamic banking, but is indistinguishable from conventional banking concern with spiritual values and social justice.

The fact that interest is forbidden does not mean the capital is free. Islam does not oppose a return of capital. What prohibiting the predetermined price of capital. The owners of capital are not entitled to request an additional payment without sharing the risks. So, instead of fixed interest is forbidden, the lender will be a participant in the company. [2]

Islam and Banking

A. The prohibition of Riba (Interest): legal implications

The Quran or holy book of Islam, is the leading Islamic authority and prohibits riba. The ban appears in several passages in the Koran. One passage says that God does not see sights like the real wealth, accounting for unearned income. Another passage condemning Jews did not obey the Torah prohibition of interest. A third passage condemns the reconciliation of interests in case of default by saying "Oh believers, do not have a double interest intensified, and fear God so that it can thrive. The fear of fire that has been prepared for those who reject faith. . . . "The final sentence warns that those who receive riba make war with God and the" inhabitants of the fire and stay there forever. " Researchers have warned that the taking of usury is on par with the repeated adultery and it is considered more sinful than incest mother - two crimes in the criminal law Islam is punishable by death.

The prohibition of usury reflect the Islamic view that the accumulation of wealth by collecting riba not is a legitimate way of "work." Islam values of capital when it is the product of work and risk taking. When a lender charges interest for capital, receives a reward, without adding their work and regardless of success or failure of the borrower's business. The benefit of the loan the lender is some while the benefit of the capital to the borrower is uncertain. Islam considers that these operations imply the inclusion of unfair allocation of risk and benefits that justify a return on equity of passively acquired. Riba, then compete to operate-a-competes the borrower and its prohibition limits the extent to which a party may be disadvantaged by the other party to financial transactions.

Prohibit the economic exploitation is important in Islam, for Allah to his followers to accumulate wealth in a manner that achieves social justice. Social justice, however, should not confuse the meaning that Allah willed that people are equal in wealth. Muslims believe that God deliberately created disparities in the distribution of goods in this world. "Rather, social justice with the support of legitimate employment means that "no one can claim more than he has earned" and can not use wealth to discredit the others. This thought, when applied to conventional banking, means that investments can not be viewed solely through the lens of maximizing the profit margin. Instead, Islam places accession to wealth in relation to costs for the individual spiritual and social costs to the community.

Out of justice social, Islamic scholars have also provided critical economic interest to support its ban. Scholars have argued that the unfair allocation risk between the borrower and the lender creates a sanction "for entrepreneurship." In a truly competitive market, Islamic scholars believe that there is little probable that an investment can result in gross profit also default interest. As the capital contribution would be unproductive without business, the disincentive to create wealth for economic growth [3].

ideological issues involved in Islamic banking mechanism

Twenty years ago, Islamic banks were not known, today there are hundreds around the world and have more dollars U.S. 160 billion in assets. In the world of global finance, this is not a big deal, but its growth rate is considerable. Moreover, the concept is discussed heatedly in all Muslim countries.

In the light of Islam is rapid development, especially in countries like UK, France and the United States, Islamic banks is likely to play a role in the development and globalization of the financial world markets. But most important Islamic banking provides a means to reintroduce ethics in the global financial system [4].

At a time when the forces global economic causing great difficulties for people around the world and the harsh demands of the market appears to replace the concern for the welfare human, Islamic banking can serve as a means of modern banking back to ethical standards permeate. Within the overall financial system, Islamic finance can play a role in re-establishing a sense of ethics that has been lost and to try to make your product concept and ethically acceptable for mind Muslims, Christians, Jews and others engaged in financial transactions.
As a religion of justice, Islam can serve as a framework ethics for the regulation of currency transactions between people and, thus, influence the global market.

The words "Islamic banking" has a strong emotional effect. In the Islamic world, individuals and representatives of the institutions speak as if patronizing Islamic banks makes them more compassionate that those who buy traditional banks. For many more, there is a certain pride in knowing that their institutions, religious under their jurisdiction, have been successful instrument modern appropriate financial and faithful to the tenets of their religion. Others, however, both Muslims and non Muslims, they feel some concern. To use an expression American, there is some sense of "in-your-face" on the term "Islamic banking", a certain defiance of Western secular building. This ideological bias Islamic banking largely obfuscates the true value of Islam to the financial world. As mentioned earlier, Islamic banking should not be applied from a strictly legalistic point of view, especially on interest. Rather, it should emphasize the application of social justice in the financial field a notion that has been forgotten by the Western banking institutions.
Much writing on Islamic banking has a strong ideological bias. There seems to be an assumption that Islamic banking is a new development thinking, a new form of Islamic ijtihad, or the exegesis of religious texts. [5] SH Homood noted that interest and usury are discussed in the Bible (Ezekiel 18:8, Deuteronomy 23:19). These paragraphs, which apply to Jews and Christians alike, clearly prohibits the use of usury in dealing with people. For centuries, Christians had a very strong bias against the interests, who used, albeit reluctantly.

A Despite the pride mentioned in Islamic banking, there is some ambivalence. While conservatives argue that it is impious for Muslims to participate in the west and Western-style financial institutions, others argue that there have been several types of active interest in style in the Islamic world for centuries. Given that previous generations of Muslims do not seem to have wrestled with his conscience about it, today many Muslims resent being described as sinners for similar activities

Trends in the Islamic banking system
Financial markets as a whole, including Islamic ones, are undergoing constant change. Globalization markets has put a premium on profits at all costs. Islamic banks are also going through changes. Of course, the concept of developing tools Islamic is very new, and this new industry, like any other, must find its own way.
Today, the trend in Islamic banking seems to be toward the development of Islamic investment banking boutique. In fact, a number of relatively new institutions are not banks in the traditional sense. They are closer than the U.S. Comptroller of the Currency called "nonbank banks." These institutions focus on a precise instrument. For example, the Islamic leasing company borrows money Bahrain from other banks, including but not limited to, his father, Al-Faisal Investment Bank. There is a private company held in Jeddah which offers consumer loans on an Islamic basis. As mentioned above, Al-Baraka invests the funds of sophisticated buyers, something as a privately owned commercial bank in Europe. Islamic investment funds are growing strongly. There is also a large number of Islamic funds in the United States U.S. to invest in a variety of instruments, ranging from mortgage fees [6].
Islamic institutions have been appearing almost everywhere Muslims. It seems that many of these emerging institutions in former Soviet Central Asia. It will be very interesting to follow the contribution of Islamic banks in the Community Development of Independent States, especially in countries like Kazakhstan and Uzbekistan.
In the world of international capital in the world, Islamic banking is not a great strength, but its role in the Muslim world and its influence around the world are potentially large. Beyond the rhetoric of piety surrounding Islamic banking and discussion legality of the use of interest, is a more important issue, the idea of justice. Practitioners and theorists in the field must go beyond these discussions and work to increase the visibility of Islamic banking to facilitate their most important contribution: the reintroduction of ethics in financial transactions.

Conceptual analysis of Islamic Banking System

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment interest rates for the lending of money (Riba, usury) for specific terms, as well as investing in companies that supply goods or services deemed contrary to its principles (Haraam, forbidden). Although these principles were used as the basis for an economy in the past, it's just late 20th century that a number of Islamic banks were formed to apply these principles to private commercial entities or semi-private within the Muslim community.

the Islamic banking has gained momentum, the controversy has arisen about the role and methods of operation of financial intermediation. Acting as an Islamic bank means following the principles of Shariah financial transactions, but the definition is difficult because of the many ways that Islamic law is interpreted and applied.

Most critics point out that it is theoretically possible to act as an Islamic bank only in an entirely Islamic financial system. However, in all countries where they operate, Islamic banks are still in the minority and follow a system and practice that does not parallel that of other banks operating in the same community. To interact successfully with other financial institutions, Islamic banks may follow the laws of sharia to the extent that they remain competitive interest based financial institutions. Even in Pakistan, where Islamic finance is even proposed, the eventual success of Islamic banks depends on their success in international finance.

Definition of Islamic banks has become increasingly difficult in recent years because many have expanded their banking and financing methods to include the international market and non-banking companies. For example, a successful organization called al-Maal al-Islami Dar, "which is defined as an Islamic financial institution rather than Islamic bank.

While some bankers felt, Islamic banks act as intermediaries, buying and selling of raw materials and are identical to conventional banks in many respects. The difference is mainly cosmetic. Although Islamic banks can play an intermediary role, they do not necessarily Islamic [7].

History of Islamic Banking

Ø classical Islamic banking

During the Islamic Golden Age, the earliest forms of proto-capitalism and free markets were present in the Caliphate, which developed an economy market principles and an early form of mercantilism from 8 to 12 centuries, which some call "Islamic capitalism". Vigorous monetary economy was created on the basis of levels of expansion of the OFA flow stable high-value currency (the dinar) and the integration of monetary areas that were once independent.

A series of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of association (mufawada) such as limited partnerships (mudaraba), and most forms of capital (al-mal), capital accumulation (nama al-mal) checks, promissory notes, trusts, business start-up current accounts, loans, books and tasks.

companies similar to the corporate organization independent of the state also existed in the medieval Islamic world, while the institution also introduced the agency during that time. Many of these concepts capitalist principles were adopted and further advanced in medieval Europe from the 13th century [8].

Ø modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image, for fear of being seen as a manifestation Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based in profit sharing in the Egyptian town of Mit Ghamr in 1963. The experiment lasted until 1967 (Ready 1981), at which time there were nine such banks in the country [9].

In 1972, Mit Ghamr saving project became part of Nasr Social Bank, to date, is still in business in Egypt. In 1975, the Islamic Bank Development has been established with the mission to provide funding to projects in member countries. first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered are basic and strongly based on conventional banking products, but recent years the industry is starting to see strong growth in new products and services.

Islamic banking is growing at a rate of 10-15% annually and consistent signs of future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as Bank based in Michigan University, and an additional 250 investment funds that comply with Islamic principles. Conservative estimates indicate that over U.S. $ 500 billion of assets are managed in accordance with Islamic investment principles.

The World Conference of Islamic banking, held annually in Bahrain since 1994, is internationally recognized as the most important match and largest Islamic banking and finance leaders in the world.

The Vatican has presented the idea that "the principles of Islamic finance may represent a potential cure for patients markets. "[10]

Interest-free banking: the legal aspects involved

To better understand the logic and legal principles the operation of Islamic banks and how they relate to today's economy, it is best to focus first on certain aspects of Islamic law as provided by Islamic law ie the Shariah.

What is the sharia?

Sharia is the sacred law of Islam and is the set ethical and legal standards elucidated through the discipline of Fiqh (jurisprudence). The two main sources of Islamic law are the Qur'an (the Holy Scriptures) and the Sunnah (rules drawn from the sayings and conduct of the Holy Prophet, peace be upon him). The main sources are supplemented by two dependent sources namely, ijma (consensus) and Qiyas (reasoning by analogy), which is similar to the process of English law in so far as trying to extract the principles consequences of a decision by the particular facts and its application to similar cases that are presented below. The works of the four great jurists of the classical period, Abu Hanifa, Malik ibn Anas, Muhammad Al Shafi and Ibn Hanbal Ahmad, should be considered. The corpus of literature developed by these schools refers to methods that evolved to develop a route around the Sharia doctrines that are considered unsuitable or inappropriate for contemporary practice. The fundamental principles Sharia in shaping how Islamic finance has evolved are usury (interest), gharar (uncertainty), mais (speculation or gambling) and haram (Forbidden commodities).

Nature of Riba

The Qur'an categorically prohibits the granting or receipt of interest, regardless of the purpose for which the loan is made and regardless of the interest rate charged. Although there is no consensus among Muslim scholars that riba is prohibited, there is controversy about what really is the concept, and therefore that financial transactions are prohibited [11].

Islamic scholars differ on the scope of the prohibition of riba. Dr. Siddiqui in his book on Islamic banking attempts * to resolve the problem when, after reviewing and discussing the true nature of riba concludes that the banking interests in all its forms and the intention is usury [12].

The role of sharia in structuring transactions

All current concepts of Islamic banking are drawn from Islamic financial practices, which is unobjectionable and then institutionalized in the law Islamic. The law itself is clear but its modern translation rapidly changing financial products and practice is inevitably open to various interpretations. Although there is extensive literature on methods of financing, there is a practical guide to Islamic financial instruments and manual are not universally recognized for the Islamic banker to follow. Indeed, there is considerable divergence in practice among financial institutions.

The answer to the problem of structuring Islamic financial products is to understand, in particular, the part of Islamic law known as "Muamallat, fiqh", which pertains to transactions commercial. modern Islamic banking derives its legitimacy from the reasoning that goes back to medieval Islamic jurists. It draws heavily on the specific financial instruments that had legal sanction in the exercise of medieval commerce.

Legal principles involved in Islamic Banking

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the distribution of income and the prohibition of riba (Usury). Common terms used in Islamic banking include benefit-sharing (Mudharabah), custody (Wadiah), a joint venture (Musharakah), plus the cost (Murabahah) and leasing (Ijarah).

In an Islamic mortgage transaction, instead to lend money to the buyer to purchase the item, a bank can buy the same item from the seller and the buyer resold at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is the benefits are not explicit and therefore no additional penalties for late payment. With the To protect against default, the bank asks a security objective. The property or land is registered in the name of the buyer from the start of the transaction. This arrangement called Murabaha.

Another approach is EIjara EIqtina wa, which is similar to the leasing of real estate. Islamic banks handle loans vehicles in a similar way (selling the vehicle at a higher price than the market to the debtor and then retaining ownership of the vehicle until the loan is paid).

An innovative approach used by some banks for home loans, called al-Musharaka Mutanaqisa allows a variable interest rate form of rent. The bank and the borrower is a partnership entity, both providing capital at a rate agreed to buy the property. The association entity then leases the property to the borrower and the rental payment. The bank and the borrower will then share the proceeds of this income on the basis of the share capital current association. At the same time, the borrower in the state of association is also involvement of the bank buys the property on terms agreed to full equity is transferred to the borrower and the association is ended. If failure occurs, both the bank and the borrower receives a share of revenue from the sale of property based on current equity of each party. This method allows for floating rates according to the current market rate, as the BLR (base lending rate) especially in a dual banking system like in Malaysia.

There are several other approaches used in commercial transactions. Islamic banks lend money to companies loans by issuing floating interest rate. The floating rate is linked to the company's individual rate of return. Thus, the benefit bank on the loan is equal to a percentage of the profits of the company. Once the principal amount of the loan is repaid, the profit sharing agreement concludes. This practice is called Musharaka. In addition, Mudaraba venture capital funding is an entrepreneur who provides labor while that funding is provided by the bank so that both the benefits and risks are shared. Such sharing arrangements between capital and work reflect the Islamic view that the borrower should not assume all risks and costs of failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

And finally, Islamic banking is restricted to Islamically acceptable transactions, which excludes those related to alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and the purchase of moral encouraged. In theory, Islamic banking is an example of all bank reserves, the banks achieving a 100% reserve ratio. However, in practice, this is not is the case, and examples of bank reserves to 100 percent are observed. [13] The Islamic banks have grown recently in the Muslim world, but they are a very small part the global banking system. The micro-lending institutions founded by the Muslims, particularly the Grameen Bank, use conventional lending practices and are popular in some Muslim countries, especially Bangladesh, but some do not consider the true Islamic banking. However, Muhammad Yunus, Grameen Bank founder and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic ban of usury (Riba).

Shariah Advisory Council / Consultant

Islamic banks and banking institutions that offer products and Islamic banking services (IBS banks) are required to establish a Council of Supervision of the Shariah (SSB) to advise and ensure that transactions and activities of the bank comply with Shariah principles. On the other hand, there are those who believe that any form of banking can always meet with Shariah. In Malaysia, the National Advisory Council for Sharia, also created in the Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of operations of these institutions and their products and services. In Indonesia, the Ulama Council serves a similar purpose.

A number of Sharia consultancy firms (or independent or subsidiaries of large financial groups) have emerged to provide Shariah advisory services to institutions offering Islamic financial services. Question of independence, impartiality and conflicts of interest have also been expressed recently.

Islamic financial terminology transaction

• Bai 'al-INAH (sale and repurchase agreement)

The financier sells an asset to the customer on a deferred payment, and then the asset is immediately repurchased by the financier to cash in on the asset ownership to to protect against default explicitly, without charging interest in the event of default or insolvency. Some scholars believe that this is not compatible with the principles of Sharia.

• "Bai Bithaman AJIL (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price that includes a profit margin agreed by both parties. This is similar to Murabaha, unless the debtor makes only one payment on the date of maturity of the loan. By applying a discount rate, an Islamic bank can charge market interest rate

• Bai muajjal (credit sales)

Bai muajjal literally means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of muajjal murabaha. This is a contract in which the bank earns a profit margin on the purchase price and allows the purchaser to to pay the price of the commodity at a future day in a lump sum or in installments. It should be mentioned explicitly cost of goods and the profit margin is by mutual agreement. Price set for the goods in such a transaction may be the same as the spot price or higher or lower than the spot price.

• Mudarabah (distribution Utility)

Mudarabah is an agreement or arrangement between the bank, or a capital provider and an employer whereby the employer may mobilize funds for their first business. The employer will provide the expertise, workers and employers. The profits are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital while the entrepreneur loses its supply of labor. This is the risk Financial, according to the Sharia, which justifies the bank's claim to a share of profit. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of money in the form of a floating rate that is linked to the debtor's profits

• Murabahah (cost more)

"Mudarabah is a special type of partnership in which a person gives money to another to invest in a business enterprise. Investment comes from the first couple to be called "rabb-ul-Mal, while management and labor is the sole responsibility of the other, called" mudarib. This concept refers to the sale of goods at a price that includes a profit margin agreed by both parties. The purchase and sale price and other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of money in the form of profit margin. This is a loan for debt Buying a real asset (such as real estate or a vehicle), with fixed profit rate determined by the profit margin. The bank is not compensated for the time value of money ie hired later (the bank can not charge additional benefits of delay), but the asset remains as a mortgage with the bank until the Murabaha payable in its entirety.

This type of transaction is similar to leasing agreements to purchase furniture or appliances that are very common in North American stores.

• Musawamah

Musawamah is negotiating a sale price between two parties without reference by the seller cost or selling price. While the seller may or may not be fully aware of the cost of the item being negotiated, they have no obligation to disclose these costs under the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah all other rules described in Murabaha rest of it. Musawamah is the most common type of trade negotiations recently in Islamic trade.

• Bai salam

Bai salam means a contract in which advance payment is for goods to be delivered later. The seller undertakes to supply specific products to the buyer at a future date at a price previously paid in full at the time of the contract. It is necessary that the product quality plans to buy fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and can not be gold, silver or currencies based on these metals. Except this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality and workmanship.

• Hibah (gift)

This is a sample given voluntarily by a debtor to a creditor, in exchange for a loan. Hibah usually arises in practice when banks Islamic voluntarily pay their customers a 'gift' on savings account balances, which represents a portion of the benefit derived from use of those savings account balances in other activities.

It is important to note that although it appears similar to that of interest, and may in fact have the same result, is Hibah voluntary payment made (or not done) at the discretion of the bank, and can not be "guaranteed." However, the opportunity to receive high Hibah be based on customers savings, provided the bank with initial capital needed for their benefits and if companies are profitable, then some of these benefits can be equipped with new customers as Hibah.

• Ijarah

Ijarah means rent, lease or salary. In general, the concept means ijarah the sale of profit or use or service for a flat fee or salary. Under this concept, the Bank makes available to the client using the service of goods / equipment, such as facilities, office automation, motor vehicles for a fixed period and price.

• Musharakah (joint risk)

Musharakah a relationship between two or more parties, which provides capital to a company, and divide the net profit and proportional loss. This is often used in investment projects, letters of credit, and the purchase or movable or immovable property. In the case of movable or immovable property, the evaluates a bank and the share imputed rent as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily obligation to do so. The profit is distributed among the partners in previously agreed proportions, while the loss is borne by each partner strictly in proportion the respective capital contributions. This concept is different from fixed-income investment (ie, the issuance of loans).

• Qard Hassan / Qardul Hassan (Good Loan / benevolent loan)

It is a long-term loan on a basis of goodwill, and the debtor is only obliged to repay the amount borrowed. However, the debtor may, at its discretion, pay an extra amount above the principal loan amount (Without promising it) as a thank you to creditors. In the event that the debtor fails to pay an additional amount to the creditor, this transaction is an interest free loan true. Some Muslims believe it is the only type of loan that does not violate the prohibition of usury, as it is the only type of loan that really is not worth the creditor for the time value of money.

• Sukuk (Islamic bonds)

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bail. However, fixed income, bonds pay interest are not allowed in Islam. Therefore, sukuk are the values that comply with Islamic law (Sharia) and its investment principles that prohibit the charging or paying interest. Assets financial compliance with Islamic law can be classified according to their tradability and non-negotiable in the secondary markets.

• Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can claim against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very Similar large individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage offered by the law of large numbers.

• Wadiah (custody)

In Wadiah, a bank is seen as a guardian and trustee of funds. A person deposits funds in the bank and the bank guarantees the repayment of the total amount of the deposit, or any portion of the outstanding amount, when the depositor required. The depositor, at the discretion of the bank, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank.

• Wakalah (Power)

This occurs when a person appoints a representative to carry out transactions on their behalf, similar to a power of attorney.

• Islamic equity funds

equity of Islamic investment funds market is one of the fastest growing sectors in Islamic finance. Currently, there are approximately 100 equity funds throughout the Islamic world. The total assets managed through these funds currently exceed U.S. $ 5 billion and is growing at 12-15% per year. With the continued interest in the system Islamic finance, there are positive signs that more funds will be launched. Some Western commanders have just joined the fray or are thinking of launching products Islamic capital similar.

Despite these successes, this market has witnessed a record of poor marketing as emphasis is on products and does not respond to the needs of the investors. In the past few years, a number of funds have closed. Most funds tend to focus on individuals high net worth and business institutions, with a minimum investment ranging from $ 50,000 Up to U.S. $ 1 million. Target markets Islamic funds vary: some are suited to their local markets, for example, Malaysia and Gulf investment funds-based. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to meet the Muslim communities.

Since the launch of Islamic equity funds in the decade 1990 has been to establish credible benchmarks for equity Dow Jones Islamic Market Index (Dow Jones Indexes pioneered the investment index Islamists in 1999) and the World Series FTSE Islamic Index. Failaka.com Web site monitors the performance of Islamic investment funds and offers a complete list funds throughout the Islamic world. [14]

Understanding the Islamic ban on interest

• Why is there the need for Islamic Banking System

Both the sources of law regarding the prohibition of usury and the interpretation of the prohibition required for universal application showing riba is in direct conflict with Islamic ideals and precepts. Much of the confusion that occurs in non-Islamic world concerning the interest of the prohibition of Islam is based on an isolated view of the ban. In In other words, unless the whole of Islam as a religion is taken into account an analysis of attrition from a peripheral perspective will remain inadequate. Examination previous objectives of Islam, the specific textual prohibitions of usury, and interpretations as to its application to all forms of interest should lay the basis for a sufficient understanding of Islamic banking and finance.

With a deeper understanding, you can go to a specific analysis the need for Islamic banking, its principles, and alternative banking methods derived from these principles. Such an analysis will illustrate that the systems Islamic and non Islamic banking can not only coexist, but also can benefit from each other.

• The Necessity and Principles of Islamic Banking and Finance

Islamic banking and finance movement is the result of a recent resurgence feel throughout the Muslim world, one that emphasizes strict adherence to Sharia in all spheres of government. According to some, this resurgence of religious conservatism by far is the "result of an identity crisis as long as current passes through the Muslims. The pride of Muslims who came from being conquerors and rulers for over a millennium was battered by the horrible reality of Western military and technological superiority. "This sociological phenomenon is explained in the context Islamic history. Once the prohibition of usury came into conflict with existing modes of banking and finance (which were based on Western models), Muslims devotees were and still are, very embarrassed. The prohibition of interest had a limited effect as evidenced by the variety of loopholes (Hiyala) that were created to move by the ban. More importantly, "most non-Muslims writing on Islamic law was the only negative aspect of the issue and Muslims were quick to tax shallow and religious hypocrisy. "In addition, the success of socio-economic ideologies such as capitalism has contributed to the weakening of self-esteem. Perhaps in an attempt to develop a strong Muslim identity, Muslim communities have reacted through the banking and movement Current Islamic finance and attempts to strictly enforced.
While the goal of strict compliance is clear, there are significant problems in their implementation. As mentioned earlier, the Islamic system of banking and finance was based on capitalist models of interest-based banking. Although there was a strong resurgence in the revival of Islamic values, Muslims were hard pressed to find a "quick fix" to problems associated with these practices that did not comport with the Sharia. In a sense, the Muslims were in a position inherently unfair because of unrealistic expectations to refrain from participating riba transaction because the dominant economic order of the day was based on interest. The Islamic world, therefore, requires a completely new system is entirely based on the value and purpose of Islam and sharia law, which is the source.

This need led to the problem of determining a method of banking and finance that would provide incentives similar to those of the alternatives based on bank interest "(ie, incentives for the lender and the borrower for banking) while adhering strictly to the Sharia. As mentioned earlier, Islam encourages the accumulation of wealth as long as you use for the benefit of society as a whole in accordance with the objectives of Islam. [15] Foreigners are not familiar with the Islamic paradigm is impossible to believe that manage effectively an interest free system of banking and finance because of the broad application of the long-term interest. After all, anything above of the principal amount could be considered of interest, and as such may be prohibited by Sharia. This view, however, is too restrictive, since it does not into account the fact that the Islamic system of capital values when the work product. It is also noted that the term "connotes broad and includes the concepts of risk, which is essential for the effective functioning of Islamic banking and financing methods. "To put it another way, investors in the Islamic order have no right to demand a fixed rate of return. Nobody is entitled to any addition to the principal sum, not sharing in the risks involved. "Therefore, the basis for Islamic banking and finance operations is the primary risk-sharing allocation.
In terms Overall, for both parties to a financial transaction to receive any benefits, including the capital invested, must share the risks involved in the transaction. In other words,

"... An Islamic bank should share the risk with the employer that is in sharp contrast the interest-based bank. Islamic banking involves no interest, but not zero rate of return that the Islamic banks do not deal in money, but operate on funds. "The general idea of shared risk allocation buttresses the viability of the Islamic economic model, and gives rise to a range of banking methods that have been used in an attempt to offer alternatives that are compatible with Shariah to traditional banking. One can better understand these alternative methods, tracing the evolution of Islamic banking from its beginnings to its present [16].

Comparative analysis of Islamic banks and commercial

Now, the question arises, what is the effect of "interest" on capitalism and Islamic banks.

Financing methods currently used by Islamic banks are very useful in clarifying many issues that obscure the understanding necessary for non-Islamic countries need to achieve economic cooperation with the Islamic world. It should be obvious by now that not only are interest-free financial solutions are very successful. However, a comprehensive understanding of Islamic banking and finance would not be complete without a comparative analysis of the two systems. The following comparison between the systems of capitalism and the Islamic financial system, as applied to interest, should contribute to this comprehensive understanding of the banking system Islam.

• The differences in the sources of law
  The most appropriate starting point for a comparison between the two systems and produces a great number of differences, is an examination of the origin of the law. The sources of law in Islam are fundamentally different from most of the countries operating under a capitalist paradigm. The Western legal tradition is totally dependent on individual motivation of judges, lawyers, legal scholars and the like. For example, countries that adopt a common law approach, a particular class of people makes the law, and the law developed on the basis of the opinions of people that apply to particular circumstances. The Sharia, however, puts little faith in man's ability to reason, that evidenced by the fact that governance through individual reasoning is an option only as a last resort.
  Another marked difference between the Islamic system and its Western counterpart was evidenced in the relationship between the practice of Islam and the economy. Unlike many companies based on a capitalist paradigm, where the economy and religion are separate entities, Islam can not and does not separate religion from the economy or any other aspect of society. Islam is not just a religion but a system of government. In fact, Western concepts such as separation of church and state in the United are in direct opposition to the goals of Islam. Islam is a religion that permeates all aspects of the life of a Muslim, and the countries ruled by Sharia must adhere to this penetration. The Sharia is not only a mandate from God on how to live one's individual life, but also a symbol of how individuals living in a partnership. It is vital to understand this philosophical divide between the West and the Islamic world. After all, without this basic appreciation Vision of the Islamic world, it is impossible to have a real vision system.

• Interesting conceptual differences

T he next point of comparative analysis of the differences in conception of interests between the two systems. As mentioned above, the capitalist West, a way of banking and finance in the absence of the concept of interest is almost impossible. In a capitalist society, one's ability to reap the benefits of the investment is the single most valuable of the economy. This benefit is usually at any rate. [17] The incentive to invest in a mutual fund, for example, is that the principal amount of money invested over time, produce a value equal to certain percentage of the initial investment, ie, interest. Similarly, when a bank loans money to an individual, it does so on the basis that receive benefits by adding a certain percentage of money to the initial loan amount back which is also an interest.
In fact, the very entrepreneurial spirit of a capitalist society is totally dependent on the concept of interest. It would be very difficult to imagine how the United States, a country who embodies capitalism can survive if credit institutions were not given an incentive for the funds available for those who dream of owning their own business. In fact, interest is a concept so fundamental to the capitalist system that a mere mention in one way or another in relation to the raising or lowering interest rates in the Federal Reserve, Alan Greenspan, has the potential to cripple the entire economy. [18] Most Americans have a significant amount of capital invested in bearing accounts interests, such as stocks, bonds, mutual funds and savings accounts, that any minor fluctuation in interest rates could have a very damaging impact. These views of interest are in direct opposition to the fundamentals of Islamic banking and financing interest strictly prohibited. In his book, which illustrates this point by noting that the huge amount of capital banks hit by billions of depositors (the small players in the system) are given only a small percentage of the population (the great powers in the system.) [19]

Comparison of characteristics of a Prospective:

The importance of these conceptual differences is the fact that it is the differences that make the difference between the two systems and that economic cooperation difficult. A comparison between the two systems beyond conceptualism show that differences can be overcome and that economic cooperation between the system Islamic Capitalism is achievable. A useful study is applicable to the present comparative analysis is a comparison of the features that can be by usually found in all economic systems. [20] The eight factors used in the study are (1) the level of economic development of the system, (2) resource base, (3) ownership control of the means of production, (4) the center of economic power, (5) the motivational system, (6) organization of economic power, (7) the social process of economic coordination, and (8) the distribution of income and wealth. When the comparison is From this perspective, there are surprisingly few differences. The main differences are in the motivation system, the organization of economic power and income distribution.
This suggests that both systems are geared to the achievement of profit, although for different purposes. The capitalist system does not seek profit as a means but an end to the satisfaction of the person, while the Islamic system uses the profit as a means to achieve their ends spiritual. Seen from this perspective, it appears that this difference is not insurmountable. In fact, both systems can work very well together to make a profit. Once they reach the benefits may use for their respective purposes and for different purposes contemplated.

Then, the organization of economic power refers to "the centralization versus decentralization in the field of government administration. "In the capitalist system, this factor is characterized by a wide discretion of individual choice and a highly decentralized government administration. The Islamic system is similar, but adds restricted areas for the selection of companies harming the interests of society. After all, "the general aim of Islamic banks is the economic development within and in accordance with Islamic principles. In any event, therefore, these banks can participate in the trade of alcoholic beverages ... "Once again, this difference can be overcome by taking into account that cooperation between the two systems in regard to training and financing of companies should respect the interests of Islamic society imposed by the Sharia. A clear example of violation of respect would be the case of a joint business between the two systems that directly or indirectly funded trade in alcohol. This would be a clear violation of the interests of Islamic society and as such, the transaction should not happen and therefore should be avoided.

The third important difference between the two systems is the criterion of income distribution, which "distinguishes the systems according to how people get income (labor, capital) and the degree of inequality in income, property and / or opportunity. "Income distribution in the capitalist system is described as distribution according to market-determined contributions to the production, with the possibility of considerable inequality in income and property. "The system Islam is very different and is characterized by "equitable income distribution and decentralization of wealth in society with the recognition of differences in wealth of individuals. "While this represents a significant difference between the two systems, it is clear that the differences only concern within the administration system of society. In other words, cooperation is possible between the two systems for profit (which is appropriate in both systems), and then every system can manage or not to administer the allocation of those benefits entirely independent of each other. Therefore, this difference should not be a limiting factor in the ability of the two systems for commercial transactions.
This form of comparative analysis is useful in diluting the details involved in examining the question of cooperation and understanding between the entities that are based on opposing systems. The distilled essence of this analysis is that although there are significant differences between the two systems in areas such as sources of law, the meaning of interest, the social objectives involved and the characteristics of the systems, the difference is not significant to avoid the coexistence and cooperation of the two systems in a global economy [21].

Major Islamic banking institutions

Islamic institutions use various mechanisms to mobilize funds from the public sector, depending on the institutional, geographical location, market strategy, capital resources and rent. These include Islamic banks, investment companies and companies in solidarity.

• Islamic banks: the banks (massarif al Islamiya, al) may accept Islamic investment and current accounts. Current accounts are not paid, customers benefit by receiving certain services free of charge banks. investment account client permissions to place funds for selected and designated times at risk, clients receive a range of financial services on a charge.
• investment Islamic companies: These companies offer people the opportunity to participate in investment funds (mudaraba) in the form of participation certificates (Sukuk). The net profit is divided in the ratio of 9:1 for holders of certificates and the company respectively. Ten public mudarbas have launched in recent three years and have generated substantial benefits.
• Islamic solidarity companies: these trusts solidarity (al-takatul mudarabat) offer the public the Islamic alternative to insurance. The funds mobilized through these instruments are handled similar to investment companies.

Taking into account two basic conditions: interest-free financing and equitable allocation of risks - Islamic foundations can participate in various activities such as musharaka, mudaraba, murabaha, ijarah, iqtina ijarah wa ", which we had already discussed.

The scope of regulating the market (whether local, regional or international), regulates the range of activities and types of banking practices that institutions undertake Islamic Republic really. An important rule is that work more sophisticated and internationally oriented activities of Islamic institutions, the more likely to have to adopt or reinterpret their commitment to the principles traditional Shariah. If, however, Islamic banks limit their activities in the local context of Islamic character is more likely to adhere to the interpretation and rigorous enforcement of banking activities according to the Sharia.

Even in the local context outlined above, it is likely that the conditions of market practices that limit membership. For example, profit and loss sharing is the guiding principle of Islamic banking and finance the project is the primary means through which PLS is implemented.

There are 40 Islamic financial institutions currently in operation. Each bank has tried to meet the requirements of sharia to divide its operations between the various economic financing agreements as murabaha and mudaraba. In addition, banks are linked by a complex set of partial mutual ownership, project financing and the Board of Director membership. For example, DMI enter into joint ventures with Faisal Islamic banks in Egypt and Sudan. The Kuwait Finance House enjoys a warehousing of reciprocity with other financial institutions and is associated with increased 150 correspondent banks, including the Dubai Islamic Bank, Bahrain Islamic Bank, the Islamic Investment Company of Bahrain and the Islamic Development Bank.

In addition to the presence of Islamic banks and financial institutions throughout the Middle East, parts of Africa, South and Southeast Asia and to an extent well confined to Europe, Islamization of the entire banking system has taken place in Pakistan and Iran. In such cases, all banks, regardless of the employer before the operation, must correspond to the new regulations governing the activities in accordance with sharia. The majority of Islamic institutions were established as the efforts cooperation between the private and government employers. For example, Dubai Islamic bank is 10 percent of its founders, 20 percent by the government of Dubai, and 10 percent by the government of Kuwait. The remaining equity is controlled by shareholders in general.

In general, there is great variation in the composition of the portfolios of Islamic banks. The main investment for most is in real estate, trade promotion and industrial products imported into the financing options the next largest component of the portfolio. [22]

Islamic banking and its spread in the economy world

• The spread of Islamic banking

The first modernization Islamic banking institutions farmer credit cooperatives in Pakistan in the 1950s, and Mit Ghamr Savings Bank, a small institution rural founded in Egypt in 1963. The latter was the model of local savings banks in Germany, which had impressed Ahmad Al Najjar, founded the bank. influential elements Nasser's political party, the Arab Social Union, and some of the senior managers of the nationalized banks in the country did not like the initiative of Al Najjar, and the Islamic character of the institution. In 1971, he joined a new government-controlled institution, the Nasser Social Bank, which was responsible for the collection of zakat, the Islamic wealth tax. Many saw this new institution as a state agency instead of a bank.

The significant expansion in Islamic banking came in 1970 with the establishment of Dubai Islamic Bank in 1975, the Faisal Islamic Banks in Egypt and the Sudan in 1977 Kuwait Finance House the same year, the Islamic Bank of Jordan in 1978 and the Islamic Bank of Bahrain in 1979 [23]. The momentum partly the rise in oil revenues in the Gulf and muscle of economic growth in the most conservative Muslim states of the Gulf, at the expense of movement more secular Arab nationalist. There was in any case, growing dissatisfaction with the Arab socialism, especially among young people, and a feeling that there should be a greater emphasis on Islamic values in all spheres, including economic and financial.

• Current role of Islamic banking and internalization:

Commercial interests Gulf strongly supported the new movement of Islamic banking. Prince Mohammed bin Faisal of Saudi Arabia was the instigator of the Faisal Islamic banks. Sheikh Saleh Kamel Group Jeddah-based Dallah help of the Jordan Islamic Bank and Albaraka financed by Islamic banks that extended from Turkey to Tunisia, and even London. The group of Al Rajhi Exchange requested an Islamic banking license in Saudi Arabia and Islamic financial services offered internationally through its investment company based in London. Prince Mohammed founded Dar al Mal al-Islami, the house of Islamic funds, as an international financial institution based Geneva [24].

New Islamic banks had to compete with conventional banks based on Riba-most of the Mu

About the Author

Author is a student of LLM(Iyear) in National law School, BAngalore.