By Adnan Opeyemi Salaudeen – Muslims and non-Muslims have ceaselessly requested this query, resulting in some misconceptions about Islamic Banking and Finance (IBF).
The query is at all times “how Islamic is Islamic banking and finance?” and “how are they completely different from typical banks.”
Some modern Islamic banking and finance critics argue that IBF is only a change in terminologies and title. Nonetheless, the system stays the identical as the traditional banking system (e.g., substituting ‘revenue’ for ‘rate of interest’).
It’s nothing new to say that IBF operates in the identical surroundings and aggressive state of affairs as the traditional banking system. It additionally makes use of nearly the identical merchandise. So what are the variations?
Variations between Islamic banking and finance vs typical banking and finance
Firstly, one of many rules of Islamic Jurisprudence (Usul-fiqh) states: “all transactions are allowed till we discover a textual content (Quran, Hadith or another supply) that prohibits the transaction,” as Sheikh Taqi Usmani has noticed.
The purpose by Sheikh Taqi proves that IBF can even function typical banking merchandise supplied they don’t contain any of the prohibited parts corresponding to Riba (usury or curiosity), Maysir (playing), Gharar (uncertainty), hoarding, and dealing in illicit items and companies, that are among the many divinely instituted restrictions.
All these prohibitions have a complete impact on sustaining steadiness, distributive justice, and equality of alternatives in comparison with typical banking, which makes use of curiosity as the first capitalist software.
In a paper, Dahlia El Hawary states that regulating Islamic monetary establishments defines and differentiates IBF from the traditional banking system as a result of IBF should adhere to the next 4 rules:
(1) Danger-sharing: the phrases of economic transactions have to replicate asymmetrical danger/return distribution amongst every participant within the transaction;
(2) Materiality: all monetary transactions will need to have “materials finality,” i.e., are straight linked to an precise underlying financial transaction; thus, choices and most different derivatives are banned;
(3) No exploitation: neither celebration to the transaction must be exploited;
(4) Not financing sinful actions: transactions can’t be used to supply items banned by the Quran (e.g., alcohol, pork, merchandise, playing, and many others.).
Associated: How Worldview and Ethics Form Islamic Economics and Finance
How do Islamic banks earn cash?
Islamic regulation holds that being profitable from cash is improper, and Shariah-compliant establishments are inclined to chorus from partaking unsure or hypothesis. As an alternative of lending cash to their shoppers at a revenue, they purchase the underlying product—the home, the automotive, the fridge—after which lease it or re-sell it on installment to the consumer for a set value usually larger than the preliminary market worth.
The important notion right here is risk-sharing. The banks revenue from the transaction as a reward for his or her danger to the client. As an alternative of thriving off rates of interest, Islamic banks use their prospects’ cash (Islamic Deposits) to accumulate property corresponding to property or companies and revenue when the mortgage is efficiently repaid.
Merchandise in Islamic banking and Islamic finance
As everyone knows, the traditional banking system’s essential product is a mortgage with curiosity with depositors’ cash. In distinction, the IBF system presents quite a few Shariah-compliant merchandise, that are of two varieties: Supply of Funds and Utility of Funds.
Supply of Funds consists of Wadiah (Islamic Deposit -CASA-), Mudarabah (Funding Account), Murabahah (Mounted/Time period Deposit), and extra. In distinction, the appliance of funds consists of Musharakah, Tawaruq, Istisna, Ijarah, and extra, and contract companies like Ujra, Wakalah, Jualah, and the like.
These said and extra merchandise are Shariah-compliant as every of those merchandise and contracts creates a special relationship between the financial institution and the client.
For instance, Wadiah builds depositors and custodian relationships, Murabahah is the vendor and purchaser, whereas Musharakah is the Partnership. The connection modifications from one product to a different, in comparison with the traditional system that solely has a Debtors and Collectors relationship in all contracts.
Associated: 6 Essential Elements of the Islamic Monetary System
Conclusion on Islamic banking and finance
Islamic Banking and Finance works inside the Shariah regulation and rules, following sure restrictions:
- IBF can not present finance for an exercise prohibited by Shariah (Islamic Legislation), e.g., companies dealing in alcohol, pork, and extra.
- IBF can not give any mortgage in money for curiosity; however, IBF prospects’ monetary wants are met by way of the provision of required property on a revenue and loss sharing foundation.
- Underneath the Islamic Monetary System, when financing is supplied below a profit-sharing contract, revenue is shared in response to the settlement between the 2 events. Nonetheless, two events should share the loss in response to capital/possession.
