MIDDLE EAST: ISLAMIC BANKING
Today, Islamic banking appears as a growing and successful industry, not only in the Middle East but also in some western countries.
1. Explain what Islamic Banking is and its background.
The Islamic banking is a system and activity that follows the Islamic principles, which prohibit the acceptance and payment of riba (interest charges), and forbid other activities that are against Islamic main beliefs. (Institute of Islamic Banking and insurance, 2010) The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money)[1].
The philosophy of the contemporary Islamic banking system started since the beginning of the Islam, when the Islamic partnerships were used in the business world and the concept of interest was little applied. During a period of time from the mid 1940s until de end of 1960s many authors explained the need of a commercial banking system reorganization of banking on the basis of profit sharing rather than interest that gives importance to profits and loss sharing and not to interests. These ideas resulted in the creation of the first Islamic banking in the early 1970s. (Ökte, 2010). The earliest references to the are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952), followed by a more elaborate exposition by Mawdudi in 1950 (1961).2 Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings should be included in this category. They have all recognized the need for commercial banks and the evil of interest in that enterprise, and have proposed a banking system based on the concept of Mudarabha - profit and loss sharing.
2. What are the key principles of Islamic banking?
The philosophy of the contemporary Islamic banking system started since the beginning of the Islam, when the Islamic partnerships were used in the business world and the concept of interest was little applied. During a period of time from the mid 1940s until de end of 1960s many authors explained the need of a commercial banking system reorganization of banking on the basis of profit sharing rather than interest that gives importance to profits and loss sharing and not to interests. These ideas resulted in the creation of the first Islamic banking in the early 1970s. (Ökte, 2010). The earliest references to the are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952), followed by a more elaborate exposition by Mawdudi in 1950 (1961).2 Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings should be included in this category. They have all recognized the need for commercial banks and the evil of interest in that enterprise, and have proposed a banking system based on the concept of Mudarabha - profit and loss sharing.
2. What are the key principles of Islamic banking?
Islamic banks loan with no interest or additional amount of money over the lent; also, Islamic banks invest and lend money and become a partner by sharing profits, risks and losses; in addition, financial transactions have to avoid uncertainty, risk and speculation, because business parties need to have a perfect knowledge of the monetary values; and finally, The Islamic banking system can invest only in activities that are not forbidden by the Islam. (Ökte, 2010)
3. Islamic law forbids institutions from charging interests on loans. How do they make profits when lending money?
For the Islam, profits are obtained after an entrepreneurial effort and not with an interest rate:
Islamic banks create a partnership with its investors and lenders and both business parties agree the proportion of profits that will share after a period of time. For example, when an investor provides capital to an Islamic bank who at the same time manages the funds, both share profits. (Institute of Islamic Banking and insurance, 2010) another example Islamic Development Bank (also known as IsDB), the main functions of the Bank are to participate in equity capital and grant loans for productive projects and enterprises besides providing financial assistance to member countries in other forms for economic and social development. The Bank tries to foster the economic development and social progress of member countries and Muslim communities in non-member countries individually as well as jointly in accordance with the principles of Shari'ah or Islamic jurisprudence[2].
4. Explain the concept of ethical investments under Islamic law. Who is to determine whether an activity is allowed or not?
The concept of ethical investment under the Islamic law seeks for financial sustainability investing and making activities that benefits the society and the environment, because of the importance of equity and fairness in the money distribution. The Islamic banks benefit the society because allow to people who are in need the opportunity to access to loans and share its profits and losses. Islamic banks also compensate companies that show social responsibility. (Saidi, 2009).
There are additional prohibitions that are monitored by a Shari´ah Supervisory Board (SSB) who are religious advisors who are in almost every Islamic bank and determine whether an activity is allowed or not. (Ökte, 2010).
5. How does Islamic banking influence the economy in the Middle East?
The Islamic banking motivate the development of Islamic economy due to the philosophy of create a partnership, which makes savings and loans more attractive because give the opportunity to share profits and losses. This system in the Middle East is helping to solve key problems of underdevelopment, by giving the opportunity to people with needs, to access into the financial market. (Ökte, 2010).
6. Based on the research and knowledge about this topic, what is the future of Islamic Banking in terms of global expansion and growth?
According to the success and fast growing of Islamic banks in the world during the past three decades, not only in the Muslim world, but also in countries as Britain, France, United States and Japan (Siddiqi, 2008). I think Islamic Banking will achieve more expansion and growing into non-Islamic countries, because it is important for the economic development of every country to give financial participation to all the people, with fairness and equity.
REFERENCES
[1] http://en.wikipedia.org/wiki/Islamic_banking
[2] Taylor & Francis Group and Dean, 2003, p. 1328.
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