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08 September 2011

Islamic Banking and Finance

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Islamic banking and finance has its foundation in Shari'ah Law or Islamic Law. Mandatory compliance with Shari'ah Law and Islamic religious beliefs is what defines the theories and practices behind the Islamic finance world, and distinguishes it from conventional money economies around the world. The Islamic financial system is based on equity whereas the conventional banking system is loan based.

Shari'ah prohibits the acceptance or payment of conventional usury or Riba for loans of money. As Islamic banking forbids simply lending money for interest, Islamic rules on transactions take a different approach and several Islamic finance products like Murabahah, Mudarabah and Ijarah have been created which work within the framework of Shari'ah rules. To make a profit, Shari'ah promotes trade while prohibiting all forms of Riba.

Islamic Law also prohibits investing in businesses which are considered unlawful or haraam (for example, businesses that involve the sale of pork, or alcohol). The system is concerned about the moral implications of the business in which the money is used. Any transactions involving uncertainty or excessive risk and speculation are also considered haraam. Gains made from games of chance or gambling, are also ruled out, as also is any form of immoral activity, or anything that promotes fraudulent behaviour.
The underlying principle behind Islamic Financial laws is Socio-economic justice. The system attempts to minimize social and economic differences between all classes of people, and the Shari'ah laws emphasize this.

Islamic Banking therefore is seen to be a very ethical form of financial practice, which serves to foster a spirit of brotherhood while keeping religious beliefs intact. It meets the needs of the market without offending the religious sentiments of devout Muslims. Islamic Banks are required to establish a Shari'ah Supervisory Board to control and regulate their activities and ensure that all operations are deemed to fit within the Shari'ah religious framework of laws. The principles of Islam aim at establishing a just society where everyone will behave responsibly and honestly.

Islamic Finance Banking has grown recently in the Muslim world and is now poised to take advantage of four decades of unprecedented growth to become a global player in ethical banking systems. Today, even non Muslims are drawn to the ethical nature of these unique financial products and this has fuelled keen interest in Islamic Finance in the developed world as well. Shari'ah compliant Banking products like Murabahah, Ijarah, Tawarruq are fast gaining popularity in the non-Muslim world too.

(Courtesy: ArticleBase)

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