1. Definition of 'Islamic Banking'
A banking system that is based on the principles of Islamic law
(also known Shariah) and guided by Islamic economics. Two basic
principles behind Islamic banking are the sharing of profit and loss
and, significantly, the prohibition of the collection and payment of
interest. Collecting interest is not permitted under Islamic law.
During the past several decades hundreds of valuable books and
research papers have been published on the justness and
completeness of Islamic economic system and about two hundred
Islamic banks have been established and many web sites have been
opened for dealing with Islamic finance. But most unfortunately for
the Muslim ummah professional Islamic economists and bankers
have not yet come up with any practicable Islamic alternative of
interest with the result that in spite of having mobilized billions of
dollars of Muslim ummah Islamic banks do not have any system of
advancing interest-free loans which should be their main function
and therefore for meeting their own short-term needs of liquidity
they get loans on interest from conventional banks.
Fortunately for the Muslim ummah, a non-professional and little
known but most outstanding economist and Islamic research
scholar late Professor Shaikh Mahmud Ahmad devised a financial
instrument based on Qard Hasan and named it Time Multiple
Counter Loan-TMCL which can perform in Islamic way all the
financial intermediation functions as are performed by interest in
the modern banking system. He pleaded for eliminating interest by
replacing it with TMCL in the banking system.
explains 'Islamic Banking'
Here's an example of how the Islamic banking system uses methods
of profit/loss sharing to facilitate financial transactions: for some
types of loans, the borrower only needs to pay back the amount
owed to the lender, but the borrower can choose to pay the lender a
small amount of money to serve as a gratuity.
Since this system of banking is grounded in Islamic principles, all
the undertakings of the banks follow Islamic morals. Therefore, it
could be said that financial transactions within Islamic banking are
a culturally distinct form of ethical investing (for example,
investments involving alcohol, gambling, pork, etc. are prohibited).
2. The Dubai Islamic Bank has the distinction of being the world's first
full-fledged Islamic bank, formed in 1975.
Describing the Islamic financial system
simply as "interest-free" does not provide a true
picture of the system as a whole. While prohibiting
the receipt and payment of interest is the nucleus of
the system, it is supported by other principles of Islamic
teachings advocating individuals' rights and duties, property
rights, equitable distribution of wealth, risk-sharing, fulfilment
of obligations and the sanctity of contracts. Similarly, the Islamic
financial system is not limited to banking but covers insurance,
capital formation, capital markets, and all types of financial
intermediation and suggests that moral and ethical aspects in the
regulatory framework are also necessary in addiiton to prudent
and sound controls.
Islamic finance may be viewed as a form of ethical investing, or
ethical lending, except that no loans are possible unless they are
interest-free. The general objectives (maqsid) of Islamic finance
transactions may be summarised as below:
· To be true to the Shari’ah principles;
· Should be free from unjust enrichment;
· Must be based on true consent of all parties; must be an integral
part of a real trade or economic activity such as a sale, lease,
manufacture or partnership.
• Islamic Financial System
• The global financial crisis: can Islamic finance help?'
• Stability of the Islamic Financial System
• Conventional and Islamic Financial Systems
• Quotes about Banking and Monetary System
• Islamic Banking
