Islamic Banking

Case Study on the Islamic Banking System

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Literature Review

Meaning and concept of Islamic banking

As per the view of Arshad, Yusoff and Tahir, (2016) Islamic banking is also known as Sharia complaint finance and it is a kind of banking activity which implies with Islamic law. It aids in practical application of the development of Islamic economics. It includes some models about the finance like mudarabah, wadiah, musharaka, murabahah and ijar. In a simple word it can be said that Islamic banking is a system which refereed by the Islamic law and sharih. It has main aim is to provide an effective financial services to the people and it does not take any interest along with banking and financial services. On the contradicting view of Hassan, (2010) Islamic banking is a banking activities under which Gulf Cooperation council have big marketed share. This banking is consisted with principles of Islamic law that is called as Shariah compliant finance. Lebdaoui and Wild, (2016) stated that Islamic banking and financing assist in preventing re-occurrence of economic downturn and depression that is known as global financial crisis. This financing is occurred in the historical year in 2007 and 2008. The leading variation between the conventional banking and Islamic banking is that profit sharing investment account holders share return any pre guaranteed without risk and return in the Islamic banking. On the other hand, in the conventional banking, there is a guarantees specified return for the depositors and take risk. Furthermore, in the Islamic banking, Mudharabah and musharakah conduct sales contract and share risk in order to discussing utilisation and financial resources. In the conventional banking, it is great responsibility of the borrowers to pay the interest as monetary reward to investors. As per the view of Hassan, (2010) Islamic banking are closely related with productive and financial flow. Islamic baking is very important financing and banking which provides great financing services to customers. It has great role in the baking industries as it does not take any interest for its customer who take loan under Islamic baking services. The principle of Islamic banking adopt shariah law through which quran and hadith involved. As per the view of Arshad, Yusoff and Tahir, (2016) Islamic banking is also known as Sharia complaint finance and it is a kind of banking activity which implies with Islamic law.s who wants to follow and adopt the Sharia that is Islamic low. In the view of Khorshid, (2012) The major aim of the financial system which is to accomplish the precept of Holy Quran which implies to collect an effective interest along with financial assets. The basic principles in this Islamic law is that exploitative contracts based on Riba or unfair contracts that included risk which is unenforceable. The major difference between the conventional banking and Islamic banking is that profit sharing investment account holders share return any pre guaranteed without risk and return in the Islamic banking. On the other hand, in the conventional banking, there is a guarantees specified return for the depositors and take risk.

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As per the view of Arshad, Yusoff and Tahir, (2016) there are major two kinds of principles under the Islamic banking. First is that Islamic law represent and reflected the totality of Allah orders which includes all principles and aspect of the life of Muslim. One another principle under the Islamic banking is that Islamic finance represent and involved in the social justice and spiritual value. stated that Islamic law prohibited Muslims people about to paying or receiving any interest rate which incurred in attractive out security interest, pickings balances on credit card, finance any income like T-Bills, T-bounds that promises guaranteed return. Thus, in the Islamic banking it can be said that all parties who involved in the financial transaction shares the risk and profit or loss of a venture. In addition to this, under this no party is liable to gets specified return under the financial contract.

As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013) the principles of Islamic banking have major objective is to welfare of the whole society. It is no ;longer confined to concepts and idea only. It started in 1963 while Mit Ghambr saving bank began offering interest free banking in Egypt. In the initial time in 1980, there are various Islamic banks and Islamic financial institution have begun their operation in various Islamic countries. When in the Iran and Pakistan Islamic banking is implemented the Islamic banking system and practices in the entire banking sector then at that time Islamic banking operates in the other countries and delivers an effective banking and financial services to its customers.

Comparison between the Islamic banking with conventional banks

As per the view of Islamic banking is refereed as fastest growing market and in the present time Islamic banks are organised in the various countries and according to the reserch it has been founded that its annual growth rate is about the 10% to 15%. As per the investigation it has been analysed that Islamic banks are established in more than sixty countries and its estimated value is about $166 billion. In the opinion of Morrison, (2015) in the Islamic banking, money is not a thing or item though it can be used as a medium of exchange and store of value. Hence, it can not sell at a price higher than its face value or rented out. On the other hand in the conventional banking, there is used money for the exchanging among the community. There are used money for the exchange among the parties. They have main objective is to generate the profitability. Thus, it can be sold at a price higher than its face value. Furthermore, in the Islamic banking, profit on trade of goods is the major source or ways to get the profitability. On the other hand interest is source of profitability which is charged according to time. Arshad, Yusoff and Tahir, (2016) stated that Islamic bank survive according to earned profit and loss sharing. If the business man has faced losses then in this condition bank is responsible to share that losses of that businessman according to used finance. On the other hand in the conventional banking, bank will charge the interest from the company even it is suffered from losses. Thus, it can be said that it is not based on the earned profit and loss by the organisation. It has major obligation to charge the interest. As per the view of Morrison, (2015) in the Islamic banking when disbursing funds under murabah, salam and istisna contracts, then it is very important to execution of agreement for exchange of commodities. On the other hand in the conventional banking, there is not any agreement for exchanging commodities when there is conduct financial services for only the purpose of profit making. On the other hand in the islamic baking, there is not main aim to develop the progiotability and they charge the amount for the charity event. They do not charge any interest along with financial services. Its major objective is to maximising the profitability but subject to shariah restrictions. On the other hand in the conventional banks its aims at maximising profitability without any restrictions. In the Islamic bank there are not any kind of policies and practices under which bank charges the extra money from the customer who involved in the islamic banking. The people who involved in the islamic banking have major benefit is that they are not supposed to pay interest along with banking and financial services. There is only charge the compensation which goes to the charity work.

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As per the view of Hassan, (2010) a commercial bank is a kind of retail bank which delivers services related to investment products, business loans, accepting deposit. In addition to this in the Pakistan, commercial bank can be bifurcate into four class that are nationalized commercial bank, privatized banks, private banks and foreign banks. On the other hand in the Islamic banking system, it is based on the Islamic banking law and directed by the Islamic economics. There are major two kinds of principles incurred that are collection and payment of interest and profit and loss. Islamic banking assist in understanding the relationship between financiers and borrowers via profit loss sharing contracts. Islamic banking changes that for involve into the partnership contract. In this aspect both parties agree to exchange risk and return with each other.

Stability of Islamic banking specifically the aftermath of the GFC

As per the view of Khorshid, (2012) As per the report of 2013 Islamic financial services industry have huge scope and it has strong growth of 38.4% in the duration of 2011.Due to this growth, other industries and people have earned greet benefit because it assist financially to the people. In the 2008 there has financial crisis led to difficulties in many conventional bank across the national borders. Islamic finance growth rate and its stability in the financial crisis attempts consideration of the various advisor who provides financial advise to the people.As per the view of Abedifar and et.al., (2015) Islamic finance industry in the beginning of 2014 will be grown and its volume will pass through US $ 2 trillion where Islamic banking keeps 78%. As per the view of Ferhi and Chkoundali, (2015) Islamic finance and banking have great scope through which it increased continuously in the global level. The mentioned aspect major objective is to provide an effective banking services to the customer without any interest rate. In the 2008, financial crisis has been started under which liquidity and capital adequacy is full fledged in the UK Islamic bank. Scope of Islamic Finance in UK and European countries stated that Shariah Finance which was developed more than a decade but was involved in recent years. It was found that they have more than $750 billion and has been found that they are developing with more than 20% rate. They are able to expand globally. Those who are following the business will continue their investment in the company as they will be getting more advantages. There are large scope of Islamic finance but in the restricted areas. Islamic culture doesn't allow to support the investment in the firms like tobacco plantation or use, beverages, fashion, gambling and formal finances like banks and others. Their are more than a million Muslims residing in UK. As Muslims are the fastest growing religion so it can be considered that there is large scope of Islamic finance in UK. Furthermore, UK government is also supporting the Islamic Finance as they are helping and supporting in the improvement of the UK. They are able to more contribute and support the organization. This helps to develop the opportunities in providing better economic system and jobs. In west UK is the first company to use the Islamic finance in 2004.

Analysing the Principles and Scope of Islamic finance

According to the view of Wild, (2009)Islamic bank is corporation which involve in the financial services and it has main objective is to protect the people and given them interest free services about banking and finance. On the basis of principles of Islamic Sharia, mobilisation and investment of funds should be conducted. Following are some major principles of the Islamic finance and baking-

The prohibition of interest

As per the view of Ferhi and Chkoundali, (2015) it is one of the most important Principle in the Islamic banking by which it is prohibited of usury or interest. As per the principle of Islamic finance which are established in Quran stated there is not right to charge the interest from people who involve in the Islamic banking. This terms is known as riba and quran. According to the Islam, paying and receiving money should not generate unjustified income. In addition to this, Beck, Demirgüç-Kunt and Merrouche, (2013) stated that owner of the wealth gets return without making any efforts and bears. With help of this principle about the Islamic banking, people can able to get the benefit from the banking services as in this regulation bank will not charge any interest along with financial services.

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Profit and loss sharing

As per the view of Iqbal and Molyneux, (2016) this is another major important principle of the Islamic banking under which among the partner's profit and loss can share and they have to disclose each and every information to each other. As per the Islam view, Muslim will not act as a nominal creditor in any investment, but they can act as a partner.

Liability and business risk

As per the view of Ferhi and Chkoundali, (2015) the idea that all parties concerned should involved in both risk and profit. In order to authorize returning, a provider of money entitled to accept business risk and deliver service like delivering assets. In order to ensure that principle of Islamic banking followed by the each Islamic bank and institution, there is established advisory council that is known as Sharia board.

Moral and social value

As per the view of Demiralp and Demiralp, (2015) third principle is very important which assist to financial sector and services of banking in society. This principle is related to the concerns moral and social value. According to the Quran it is disciple to protect, secure and care for people so as they can keep secure themselves and Islamic banking provides an effective protection to that people. As per this principle, this banking is obligated to deliver profit free loan to society. In addition to this, Islamic banks also works on certain social projects and charitable donations. The major work of these banks is to deliver the profit free loan to society who needed for this.

Ethical standards

As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013) it is another most important principle which is concerns the ethical standards. In the fact of financial system, there are several rules and regulation about the financial system as Muslim people can attend the activities through which they can get benefit. This is very essential and helpful principle of the Islamic finance and banking by which Muslim people can able to participate in the activities.\Avoiding Gambling- As per the view of Abedifar and et.al., (2015) in the Islam there are both acquisition of wealth by chance and games of chance are strictly prohibited due to their uncertainty. In this Islamic law, there is prohibited gambling as they prevent Muslim from purchasing conventional insurance products because conventional insurance is a gamble. Thus, principle assist in keep securing to the people from the illegal activities.

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Avoiding investment in prohibited industries

As per the view of Arshad, Yusoff and Tahir, (2016) Islam strictly prohibits investment in those industries which considers harmful to society and a threat to social responsibility. For instance, Islam does not allow investing in the tobacco, illegal drugs, weapons of mass destruction, pornography, prostitutions etc. As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013)This principle have major objective is to protect the society and human being from the illegal activities like tobacco, illegal drugs, weapons of mass destruction, pornography, illegal drugs etc. With help of Islamic banking, people have able to get full protection from the illegal activities.

References

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