Islamic Banking A Modern Day Business Perspective - Case Study Example

Islamic Banking – A Modern Day Business Perspective Introduction Islamic Banking refers to the banking activities conducted in consistency with the Islamic laws and Principles called Sharia. Islamic Banking supports the development of Islamic economic system through the implementation of different Islamic rules and guidelines for running an economy. There are some major differences in the Islamic Banking and commonly practices banking all over the world mainly due to prohibition of fixed and floating acceptance and payment of interest while lending money. If the transaction is done contrary to the Islamic principle than it is regarded Haram or forbidden according to Islam (Warde, 2000). Historically, the Islamic principles are often applied to the economies operated under the Muslim rules but it is also a fact that proper Islamic banking was initiated in the late 20th century when several Islamic Banks were established in order to implement Islamic principles of economics to the private and semiprivate financial institutions operating within the Muslim communities. There are some basic modes of Islamic banking that guide different financial and commercial activities like mudarba (limited partnership), mufawada (partnership) and trusts etc. (Siraj and Hilary, 2006) At present there are numerous Islamic banks operating across different Muslim countries of the world that are promoting the practice of Islamic banking principles to support the creation of economic system based upon Islamic rules. The following essay aims to examine the current practice of Islamic banking principles in the modern day economic system. The essay presents the modern day perspective of Islamic banking to illustrate the implication of Islamic principles to the banking system being practices across the modern world. The essay briefly explains the basic principles and foundation of Islamic banking and moves towards describing the real world practice of these principles in the present day business world (Mahlknecht, 2009). Basic Principles of Islamic Banking The Islamic banking system differs from the other banking system on the basis of some basic principles that act as foundation stone of Islamic economy. At first, Islamic banking is based upon the same purpose as conventional banking system. It is meant to make money for the banking institution by landing out the capital money. However, Islam prohibits landing money at fixed interest and there have been some Islamic rules formed to avoid the practice of fixed interest for landing money. There is a basic technique applied to avoid fixed interest according to which the lander gets sharing in the profit as well as loss received through the business done from that money (Mahlknecht, 2009). The profit sharing is promoted by Islamic Banking on percentage basis rather fixing an amount regardless of accumulation of profit or loss. This process of landing money on the basis of sharing the profit and loss could be done through different modes of finance including Mudharbah that allows profit sharing with decided ratio, Wadiah means safekeeping; Musharikah that allows transaction through joint venture and Ijar that refers to leasing (Warde, 2000). In all of these modes of finance the money has been landed but there is no fixed amount decided by the parties to be paid for the money landing but they select any of these modes and share profit and loss with the decided ratio and method. The Islamic mortgage system also differs from the conventional mortgage system. The mortgage transaction done according to the Islamic rules allows the bank to buy an item from the seller and re-sell it to the buyer while keeping its profit margin. The buyer could pay the bank in instalment but there is no additional payment required by the buyer to the bank because the bank has already included its profit in the total price of the item and is not allowed to take any additional amount from the buyer. There is another mode of finance practices by the Islamic banking institutions names as Musharaka al Mutanaqisa. In this mode, the bank and borrower creates a partnership entity and then they both provide decided amount of capital for buying a property. The partnership entity then rent out the property to the borrower and charges rent from him. The borrower could buy the share of bank from the partnership and could get relief in the payment of loan by having more shares in the collected rent. There are many other approaches and techniques applied within the Islamic banking system to make it more practice and applicable to the business world while also following the Islamic principles of economy. For instance, the money has been landing by the banks at floating interest rate pegged into individual rate of return of the company. It is also an important point to mention that Islamic banking strictly prohibits dealing with transactions that involve alcohol, pork, gambling or any other activity that is not liked in Islam. This principle is to motivate Muslim towards making their investments more ethical and moral rather taking part in non-Islamic activities (Mahlknecht, 2009). The Islamic banks have been established by the governments of different Islamic country and at present there are several Islamic banks operating in different countries of the world. However, the Islamic banks have no considerable share in the global banking system because several conventional banking principles are not in compliance with the Islamic banking system and several Islamic modes of finance are unacceptable for the traditional and current system of banking practices worldwide. The global banking system is mainly run by the banks having no label of Islamic banking and questions are often raised regarding the implication of Islamic banking participles to the business world and banking system of present time (Rosly and Azhar, 2006). Islamic Banking in the Modern day business world The Islamic banks have been making their position in the modern day business world despite of some major differences in the banking principles and concepts of economy explained by Islam and other school of thoughts. In the Muslim world the Islamic banking is getting momentum and the growth of Islamic banks has also increased over the time. However, it is also a fact that at global level there is little representation of Islamic banking principles through the Islamic bank and as compared with other fixed interest based banking system; the Islamic banks are very low in number and amount of transactions. In most of the Muslim nation the conventional banking is in practice and several micro lending financial institutions have been founded in the Muslim countries like Grameen Bank where Muslims got involved in the conventional banking practiced despite the fact that it is not considered true Islamic banking by many. On the other hand, the founder of Grameen bank and several other scholars and microfinance advocates argue that there is no excessive interest involved in the micro-landing due to which it could be sought as true mode of finance complying with the Islamic banking principles. The distinct feature of Islamic banking is interest free financial transactions that are regarded as basic requirement of banking system according to Islam. Recently, the concept of interest free banking has been evolved all over the world and Muslim economy experts have elaborated the conceptions related with Islamic banking so that the commercial banks could implement those principles within the working patterns and could make them true Islamic banks. The main principle of profit and loss sharing has been explicitly explained by the experts because the entire financial system is supposed to be based upon this basic rule (Rosly and Azhar, 2006). The young Muslim economists have also realized that there is need of making the Islamic principles more clear and descriptive so that the banks could adopt them by finding them applicable to the modern day business world. As a result of their efforts there are several new and excited possibilities are opened within the sphere of Islamic banking. However, still it is very challenging task for the banks to work purely within the Sharia based banking system and strictly follow the distinct banking practice divulged by Islam. There is always gap between the conventional banking and Islamic banking. The growing awareness among the Muslims regarding the need of implanting Islamic principles to their banking system has made them more concerned and conscious about building bridge between Islamic banks and business world so that the banking activities could be used to promote the creation and maintenance of Islamic rules based economy (Mahlknecht, 2009). The Islamic banks are widely looking for the technology partners all over the world so that they can have better understanding of the market and could use some of the track records of other banks in their delivery and services in order to evolve as practical banking approach for the businesses. During the last decades of the 20th century the Muslim economists have dedicatedly worked for the promotion of Islamic banking principles. There are some notable Muslim economists like Muhammad Uzair, Abdullah Araby, Baqir al Sadr and Nejatullag Siggique that have made great contributions to the literature focusing upon Islamic banking and as a result of their work it has become possible for the people to understand the practical implication of Islamic banking principle to the business world. As a result of these efforts, the practice of Islamic banking principles has also been promoted across the Muslim world (Siraj and Hilary, 2006). The institutional involvement also works to build bridge between Islamic banking and business world. There have been several conferences and studies conducted in different Muslim countries where the Muslim scholars and economists sit together and worked to answer the question and concerns of people regarding the practicability of Islamic banking principles and also stressed upon the importance of aligning the banking practice with the Islamic rules. As a result there were some interest free banks established in different countries of the world claiming the practice of Islamic principles (Rosly and Azhar, 2006). Though the Islamic banks are currently not have major share in the global banking practice but it is also important to notice that the Islamic banking has been growing with the rate of 10-155 per year and there are some positive signs that indicate the consistent growth of Islamic banks in future. Now the major Islamic banks have established over 300 financial institutions in 51 different countries of the world including several non-Muslim countries like United States etc. These institutions are created with the help of companies like University bank based in Michigan etc. In addition to these, there are over 250 mutual funds also created that claim to comply with the Islamic banking laws. According to The Economist the amount of over US$822 billion is managed by the sharia-complain assets across the world that is almost 0.5% of the total world estimated asset. Though this share is very small but it is also observed by the experts that Islamic finance has evolved is the fastest growing segment within the global financial system and there is considerable increase recorded in the sale of Islamic bonds in 2010 (Siraj and Hilary, 2006). Before the popularity and practice of Islamic banking there was modern conventional banking practiced within the Muslim countries. The economically and politically weak Muslim world was not in position to resist against banking based upon non Islamic principles. The imperial power established the banks of their homes counties in their occupied lands and in this way the western banking system found their ways inside the Muslim world in the late nineteenth century. The western banks were basically established to meet the business requirement of the people having business links with UK and other western countries but soon these banks became popular among the population of these countries. There were many people opposing these banks in religious and political base but they found it difficult to get involved in trade with the western businesses without having the support and services of them foreign banks. However, there were many people who avoided to deposit their money in these banks and didn’t land money from these banks in order to avoid receiving and paying the amount of interest that is strictly prohibited by the Islamic banking laws and principles. Along with time people found it difficult to remain away from the foreign banks if they want to take part in any economic activity. The interaction with the banks became necessary while getting engaged in any business activity. There were several banks established in the Muslim world that were created in the same lines as interest based foreign banks. The local banking network was expanded in these countries and people got option for banking activities by getting engaged with these local banks that were also based upon conventional banking principles and didn’t deserved to be called as Islamic banks. As the Muslim countries started getting independence they also observed removal of political and economic pressure of the powerful western powers from them. After getting independence, the Muslim countries gradually started establishing its banking system on the base of Islamic principle because the Muslim economists has also realized that there was need of introducing Islamic banking with extensive information and explanation so that the people could adopt the system after having complete information about it. Conclusion It is unveiled that Islamic Banking refers to the mode of finance that strictly follows the rules and laws formulated to create Muslim economic system. Islamic Banking has deep roots inside the history however, before the late 20th century the Muslim countries widely used to reply upon the western banking where there was no fulfilment of Islamic rule. Eventually, the Muslims got involved in interest based banking that is strictly not allowed in Islam. The establishment of Islamic banks across the world is positive sign for the Muslims and they are now able to conduct business transitions while remaining within the boundaries of the religion. The above discussion also clarifies that there is great implication of Islamic banking principles to the business world of the present day because there are several modes of finance offered by Islamic banking and the businessman could choose the most suitable one from them. In this way, the Muslim businessmen would be assuring of the fact that that will not be involved in the banking practice that is against their religious beliefs. The work of Muslim scholars and economics has played great role in promoting the practice of Islamic banking in different countries of the world and there is still need of further elaborating and promoting the Islamic laws and principles of economics to make people aware about their details and differences as compared with the traditional banking. The minor share of Islamic banks in the total world banking transactions indicate that there is great need of further improving the Islamic banking system so that it will get considerable proportion in the world banking transactions and eventually it will also play an important role in strengthening the creation of Islamic economy across the Muslim world as well as in other countries where the Muslim live they could be able to avail the Interest free banking services provided by these banks. . References Rosly, P. and Azhar, S. (2006). Critical Issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Investments, Takaful and Financial Planning. NY: AuthorHous Mahlknecht, M. (2009). Islamic Capital Markets and Risk Management. London: Risk Books Siraj, S. and Hilary, L. (2006). Land, Law and Islam. New York: UN-HABITAT. Warde, I. (2000). Islamic Finance in the Global Economy. Edinburgh: Edinburgh University Press. Read More