Islamic Banking: An Overview
“Oh, believe! Fear Allah and give up what is left of your usury (interest) demand, if you are indeed a believer.” -The Koran
INTRODUCTION:
All religions have their own sets of Divine values and norms regarding human behavior in general, economic behavior being a part of it. They all call on human beings to observe and implement religious guidance both individually and collectively for the welfare of the nation.
The basic principles of Islamic Banking originate from the axioms of justice and harmony with reality and human nature. The concept of Islamic Banking is developed on the basis of Sharia principles. One might wonder if Islamic Banking and Finance is an alternative approach to modern banking.
The most important development in modern banking is the art of mobilizing funds for investment. It turned out that the method of collecting and using funds in the West was based on interest paid and collected. On the contrary, Islamic Banking is a system that provides financing and attracts savings on the basis of profit and loss distribution. The central feature of Islamic Banking is that no interest would be charged or paid and the returns would be in the form of profits from the trade in which the borrowed or borrowed money is invested. For Muslims, this profit-sharing system coincides with their ban on interest and helps mobilize unused funds for investment and creating new job opportunities. As for non-Muslims, the Islamic banking system does not contradict their faith, while providing society with alternative ideas for venture capital and other investment tools.
EVOLUTION
The first modern experiment with Islamic Banking was carried out in Egypt covertly, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad El Najjar, took the form of a profit-sharing savings bank in the Egyptian town of Mit Ghamir in 1963. This experiment lasted until 1967, by which time there were 9 such banks. in the country. These banks, which did not charge or pay interest, invested mainly in commerce and industry directly or in partnership with others and shared their profits with depositors. Thus, they functioned essentially as savings and investment institutions rather than commercial banks.
GROWTH OF ISLAMIC BANKS:
pre-islamic arabia
The early days of man were very simple and not as sophisticated as today. His needs were simple and the treatment was direct. It involved the exchange of goods for goods. This was popularly known as the barter system that was prevalent throughout the world. There was no common measure of value and no common medium of exchange.
Due to drawbacks in the barter system, the need for a common measure of value gave rise to money in the form of coins and later in the form of foreign exchange. In Islamic Arabia there were no barriers to the type of goods produced, including wine. Interest on money was accepted and there were no divine definitions for trade formats.
prophetic introduction
There were many religious definitions in each and every aspect of trading after the prophetic introduction. There were many procedures that were fully followed, such as:
o Debt without interest
o Promote economic mobility and not hoarding
o Prohibition on the manufacture of wine and restrictions imposed on gambling
o Creation of a fiscal framework
A quick reading of Islamic history tells us that the practices of certain forms of banking go back 1,200 years in Baghdad, Damascus, etc. However, the first contemporary Islamic banking institutions arose in the early part of the 1960s with the Pilgrims Fund and the Mit Ghamt Savings Bank 1963 in Egypt. Although the experiment was localized, it attracted a large number of customers and generated much popular enthusiasm.
According to the International Association of Islamic Banks, the number of Islamic Banks and financial institutions registered with it reached 186 by the end of 1995, of which statistical information is available for about 144. If we look at the geographical dispersion, we find that 47 Islamic banks and financial institutions Institutions are established in South Asia, 30 in Africa, 24 in Southeast Asia, 22 in the Middle East, 17 in GCC countries* and 4 in Europe and America. Financial indicators show that in 1995, the total capital of the 144 banks is slightly above 6 billion dollars, total assets reached 166 billion dollars, reserves are around 3 billion dollars, and net profits reached almost one and a quarter billion dollars.
PRINCIPLES OF ISLAMIC BANKING:
or without interest
o Multipurpose and not purely commercial
o Equity oriented
o PLS- Profit and Loss Distribution
o Buy shares on behalf of a client and sell them at a profit on the purchase price
PROBLEMS, ISSUES AND CHALLENGES
o The gap between the Islamic Banking Model and its application
o A misconception that Islamic finance is essentially communist in nature and there is no room for innovation.
o PLS (Profit Loss Sharing) not suitable for short-term financing or for the non-profit sector
o Lack of a legal and institutional framework that facilitates appropriate contracts, as well as regulatory mechanisms to enforce them
o The lack of an adequate range of financial instruments to satisfy the different investment needs.
* GCC-Gulf Cooperation Council
REVIVE
Islamic financial institutions have undergone tremendous changes over the years and the goal of these financial institutions is globalization. They have simplified credit-granting procedures and come up with new innovations, such as interest-free student loan financing and the creation of acceptable contract formats.
CONCLUSION
Although Islamic Banking is still in the development stage, it has gained popularity and acceptance in many countries, including the West, as many banks such as HSBC and Citigroup plan to offer their services to their Muslim clients. Islamic banking and financial institutions are very popular in Bangladesh. It has been described by a Bahrain-based General Council of Islamic Banks and Financial Institutions as one of the fastest growing and most innovative financial industries in the international capital markets.
