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Islamic Banking and the Financial Crisis - Essay Example

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Case Study: Islamic Banking and the Financial Crisis By Candidate’s Name 2012 FACULTY OF BUSINESS, DEPARTMENT OF FINANCE (This page intentionally left blank) Introduction Rashwan (2010, pp. 1 – 2) states that the original teachings of Judaism, Christianity and Islam prohibit charging an interest on money lent to others and although Jews and Christians have presented a certain degree of compromises on such issues to follow ‘natural and practical’ inclinations, the followers of Islam have been less inclined to make any compromises…
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Islamic Banking and the Financial Crisis
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Download file to see previous pages The following verses of the Quran illustrate Islamic prohibitions on riba or usury: “And for practicing usury, which was forbidden, and for consuming the people’s money illicitly, We have prepared for the disbelievers among them painful retribution.” Al-Nisa 4:161 “Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce and prohibits usury.” Al-Baqarah 2:275 “The usury that is practiced to increase some people’s wealth does not gain anything at God. ...
Background and Key Concepts of Islamic Banking Holden (2007) states that riba was a pre-Islamic practice that required that when a borrower could not repay a loan owed to another by a specified date, the amount of the loan increased in lieu of an extension in the repayment date. However, such an arrangement presented a problem because borrowers who could not repay a loan were in danger of owing huge sums in perpetuity to lenders. Thus, those that turned to moneylenders in an informal barter economy of the pre-Islamic era at times of famine, disasters or crop failure were in danger of entrapment in a vicious cycle of indebtedness, poverty and deprivation that could result in perpetual slavery for those that could not repay their loans. High risks associated with entrapment in a vicious cycle of indebtedness did not encourage risk-taking in commerce, and this was not beneficial for the society. It is important to note that the concept of a limited liability company in the United Kingdom had evolved due to a societal need for managing better business risks for the betterment of the society and Islamic response for risk management related to the removal of the concept of riba from society. Holden (2007) goes further to suggest that the Quran prohibits profiting from idle money, and a prohibition exists for the practice of riba in Islam. In addition, Islamic law or the Shariah prohibits transactions that carry substantial risk or uncertainty at the time of inception, such as gambling or other forms of risk that present a potential for exploitation. Prohibition under the Shariah also extends to transactions that involve immorality, ...Download file to see next pagesRead More
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