There are an estimated 1.61 billion Muslims worldwide, making Islamic banking one of the fastest growing segments of the financial industry. edges serving the Islamic population must comply with several very specific principles of Islamic law if they hope to retain existing customers and attract new ones. edges must be ready with specialized products and sets and they must put programs in place to aim their personnel to sustain these products and sets in order to exist in this competitive marketplace.
The basic rule of Islamic banking follows the laws of Sharia, known as Fiqh al-Muamalat (Islamic rules on transaction). The term “Islamic banking” is synonymous with “complete-save banking” and “Sharia-compliant banking.” The most noticeable characterize of these laws is usury – the prohibition of paying or collecting interest on funds. The Islamic terminology for this is riba or ribaa. The Sharia also forbids engagement in investments that include financial unknowns such as buying and selling futures, in addition as businesses that are haraam – dealing in products that are contrary to Islamic law and values such as alcohol, pork, gossip or pornography. These principles apply to all individuals, companies and governments.
edges that comply with Islamic law are banned to charge interest or late payment fees, which is also considered a kind of riba. To minimize risk, edges will often require a large down payment on goods and character, or insist upon large collateral. It is lawful for the Bank to charge a higher price for a good if payments are deferred or collected at a later date since it is considered a trade for goods instead of collecting interest. Sharia-complaint banking products include Mudharabah (profit sharing), Wadiah (safekeeping), Musharakah (joint venture), Murabahah (cost plus) and Ijarah (leasing). Another way that edges work within Islamic laws while trying to turn a profit is by buying an item that the customer wants, and then selling the item to the customer at a higher price.
The Mudharabah is a partnership between an entrepreneur and the bank. The bank is known as the rabal-maal and the entrepreneur as the mudarib. The bank provides all of the necessary capital to start a business and the entrepreneur does the work of managing the business. Profits are divided at an agreed ratio until the initial funds of the rabal-maal are paid off. The rabal-maal is also compensated with additional funds based on the profits of the business in terms before agreed on. In the event that the business folds, the rabal-maal shoulders the cost and the mudarib is not compensated.
Musharakah is similar to Mudharabah, in which an entrepreneur seeks funds for a business venture and pays the bank back with a ratio of profits. However, there are often more than two parties who contribute funds and become partners who can influence the business depending on the amount of money invested. The entrepreneur also contributes funds and shares in the risk. Any loss is proportional to the amount of capital invested in the business.
Wadiah is a system in which a person deposits money into a bank and receives a “gift” from the bank. The bank is the keeper of the funds and will refund the complete amount at the need of the depositor. The bank rewards the amount of time the depositor keeps the money in the bank with a hibah or gift, which is not guaranteed. The hibah is similar to interest, but lawful according the Islamic law.
Murabaha governs the issuing of home loans or any other kind of goods needed by a borrower. An Islamic bank does not lend money to a borrower to buy similarities; rather, the bank will buy the character at the borrower’s request at a freely disclosed price, and mark up the price for the borrower to pay back, consequently making a profit from the investment. The borrower is named on the title and allowed to utilize the character closest and pays the bank back in installments.
Another kind of loan is the Ijara, in which the bank buys the home or item and leases the character to the borrower while retaining ownership of the character. The borrower can either use the character for a pre-determined period of time, or pay off the buy price and buy out the Bank to reach complete ownership of the character.
There are sometimes controversies surrounding the interpretation of the riba, which certain scholars argue was meant to prevent petty money-lenders from abusing borrowers, instead of a modern bank charging a reasonable, agreed upon interest. The general consensus, however, is that any interest is a direct violation of the law of Sharia and consequently unethical.
While each Islamic bank has its own board which rules on ethical banking principals, Islamic banking organizations have been establishing standard regulations and policies. The Islamic Development Bank has been working on international standards, policies and procedures, and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Finance Service Board (IFSB), International Islamic Financial Market, Liquidity Management Center and International Islamic Rating Agency are in development to ensure accurate and fair banking practices.
Today, Islamic financial institutions exist worldwide, participating in the $180 billion/day industry. In 1975 there was one Islamic bank; today there are over 300 in more than 75 countries. Islamic edges have become more common worldwide and can be found in high numbers in such countries as Indonesia, Pakistan, Bangladesh, Nigeria, Egypt, Turkey, Iran, Sudan, Algeria, Morocco, Iraq, Uzbekistan, Afghanistan, Malaysia, Saudi Arabia, Yemen, Syria and Kazakhstan. The total amount of deposits in Islamic institutions, balance sheets, assets under management and private wealth are growing at a rate of 25-40% yearly.
Because oil prices and liquidity are expected to stay at the same levels throughout 2007, budget surpluses will keep high, pushing both public and private sectors to be involved with the Islamic market. Many Islamic countries are investing in large infrastructure projects, creating more than a trillion dollars in investments. There is also a huge possible customer base. According to Standard and Poor’s surveys, 20% of the customers in the Gulf Area and Southeast Asia would choose an Islamic banking product over a similar traditional product. There are meaningful middle-class urban and suburban populations that already use traditional banking, and consequently present mature opportunities for Islamic edges. Most important to observe, outside of the religious and political allure of Islamic edges, is that people are choosing their sets for the safeties they offer. The evidence is clear: Islamic banking is big business and it is growing every day.
However, in order for Islamic edges to be competitive with traditional products and attractive to customers, Islamic financial products must meet the risk/reward profiles of investors and issuers while fulfilling the tenets of the Sharia and remaining sufficiently cost-effective. Additionally, Islamic edges must educate their personnel to understand the tenets of Islamic law that pertain to banking, and to aim them to comply with Sharia as they serve their Islamic customer population