Models of finance

Islamic Banking


An Introduction to Islamic Economics

The principles governing Islamic Economics are
• Prohibition of usury (Riba) in financial transactions. It is prohibited to deal by giving or taking interest or to give a loan with interest.
• Prohibition of all forms of monopoly and all forms of hoarding.
• Directing financial resources to the channels of economic activities that are useful or beneficial to society.
• Prohibition of investing financial resources in fields of prohibited activities such as trading in liquor or pork. - Realizing social solidarity through the revival of Zakat (legal alms giving).
• Full transparency in all activities.


Concepts of Islamic Banking

Islamic Banking is based on two main concepts
First: Money is not a commodity that can be bought and sold in kind by more than its value as other commodities but is governed by certain regulations included in a special section of the Jurisprudence entitled (The chapter on Exchange). This chapter points out that money is an usurious item and therefore it is prohibited to sell it at more than its value (in its kind) and may not be returned with more than its value in case of being loaned because both cases are cases of the legally prohibited usury (Riba).

Consequently, the function of money becomes restricted to being a means of concluding a transaction, a respository of value and a means of evaluating the price of products, therefore it is not a commodity that is governed by factors of supply and demand but is a measure of values only and its function is in facilitating the flow of financial transactions without directly affecting the value of goods and services. The activities of Islamic Banks are based on the exclusion of interest as a source of revenue on invested capital. The revenue is obtained through dealing by virtue of contracts governing real economic transactions that regulate the flow of money in channels of economic activity of value to society. These are the Islamic funding instruments applied in the framework of the Islamic Banking system.

Second: Acknowledging that there are differences in income between the different social classes, Islam does not take this as a ground for differentiating between people in rights, duties and status before Allah but such differences are deemed necessary in order that people will work in different capacities and interrelate as a team to set production in motion. Within this framework each individual receives an income and all reap a benefit (the employer as well as the employee). Furthermore, whenever there are people of limited income that is less than can fulfill their basic needs, the rich have to help them with their own money. That is why Allah prescribed Zakat (legal alms giving) which is a central function in Islamic banks that include specialized departments for Zakat within their main structures. In the Islamic Shari'a the concept of Zakat is not that of charity but the means of purification of the individual's capital assets and hence it is the condition, that he is worthy of owning these assets. Another avenue for supporting the less fortunate lies in the Qard Hassan which is the loaning of money with no interest or expenses to be paid back within an appropriate period of time.

Investment of Funds in Islamic Banks
Funneling funds into various investment channels is one of the most important roles played by Islamic Banks which depend on a number of investment instruments derived from Islamic jurisprudence, that are based on the concept of partnership and sale. The following is a detailed explanation of these instruments that determine the relationship between the bank and the enterprenures.
• Partnerships
• Mudaraba
• Sale
• Lease (Ijara)
• Salam contract
• Manufacturing contract
• Cultivation & Irrigation

 Organisations and Associations for the Islamic Banking Industry:
The organizers and concerned parties of the Islamic banking industry have successfully established a large group of infrastructure organisations and associations that help incubating and supporting the Islamic banking activity and its instruments. This infrastructure has developed channels of understanding and cooperation with other conventional banks, the monetary authorities, and international organisations supervising the financial and banking affairs worldwide.

The following is a list of these organisations and associations
• General Council for Islamic banks and Financial Institutions (www.cibafi.org).
• Accounting & Auditing Organisation for Islamic Financial Institutions (www.aaoifi.com).
• Islamic Financial Services Board - Malaysia. (www.ifsb.org).
• Islamic Development Bank. Jeddah (www.isdb.org.sa).
• Liquidity Management Centre. (www.imcbahrain.com).
• International Islamic Trade Finance Corporation.
• International Islamic Financial Market. (www.iifm.net).
• Islamic International Rating Agency. (www.iirating.com).
• Islamic Corporation for the insurance of Investment & Export Credit. (www.iciec.com)