Islamic Banking - A Hedge Against Man-made Crisis

Islamic banking remained least affected by the global financial crisis. It experienced some problems only after this crisis had snowballed into a recession in developed economies affecting growth prospects of Pakistan and other developing countries. But the industry has almost overcome these problems and now most of its indicators are showing a “reversion towards the usual high growth trend,” according to the latest State Bank report. The share of the assets of Islamic banking in overall banking industry grew from 3.4 in June 2007 to 5.1 per cent in June2009: In terms of value, these assets increased 97 per cent—from Rs159 billion to Rs313 billion. Total deposits jumped 120 per cent—from Rs108 billion or 3.1 per cent of the banking industry to Rs238 billion or 5.2 per cent. And the total financing and investment rose from Rs90 billion to Rs195 billion showing a handsome growth of about 117 per cent. In the last two years, the share of financing and investment of Islamic banks in overall banking industry went up from 2.6 to 4.2 per cent. Three things have apparently helped in this phenomenal growth. “First, it had a narrow base in June 2007,” says the head of a large local Islamic bank. “Second, Islamic banking has a mass appeal. And third, it has some inbuilt characteristics that offer a better cushion against man-made crises.” That the unique features of Islamic financing do protect banks from the elements of man-made crises is all but evident: Total assets of top 100 Islamic banks grew more than 66 per cent to $580 billion in 2008 from $350 billion in 2007. In contrast, the asset of top 100 commercial banks in Asia (the region that was not in the centre of the financial crisis) posted only 13.4 per cent growth. And according to reports in international media. global Islamic banking is set to grow up to 30 per cent in 2009 as well. What has boosted the reputation of Islamic banks as the institutions that can shield their clients against crises is their conservative approach to business, a balanced and ordered appetite for growth, a more equitable risk sharing and focus on the basics of banking as opposed to rapid innovation. “All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress,” says a Moody’s report adding that in the short-term, in times of crisis, “clients may find it more comfortable doing business with an Islamic bank.” In Pakistan, clients have really begun to find it comfortable doing business with Islamic banks as is evident from the growing numbers of the Islamic banking branches across the country. In June 2007 there were 162 bank branches providing Islamic banking. These included the branches of six fully-fledged Islamic banks as well as those of the conventional banks. In June 2009, the number of Islamic banks shot up to 18 and the number of total bank branches providing Islamic bankingmore than tripled to 528. Islamic banking facilities are available in almost all parts of the country and they have a strong presence in Karachi—the hub of commercial banking. Besides, Islamic banking offers a wide range of products for both depositors and borrowers. The availability of suitable modes of financing has attracted corporates as well as consumers towards Islamic banks. These banks have also been able to attract deposits of various types and from different classes of bank clients. Lately, Islamic banks expanded their corporate clientele also because conventional banks became a bit averse to lending to the private sector after their non-performing loans (NPLs) went up. A conservative approach to banking has also kept consumer loans portfolio more stable than that of the conventional banks. And Islamic banks have a better mix of fixed and saving accounts than the conventional banks. This is primarily because it is possible for Islamic banks to design fixed deposits schemes without the element of Riba. Despite all these plus points of Islamic banking it did not entirely escape the after-effects of the global financial crisis and recession. The pre-tax profit of the industry declined about 18 per cent in the last fiscal year. But here again the rate of decline was lower than in case of conventional banks that saw their earnings fall by 31 per cent during this period. Officials of Islamic banks, however, point out that profitability of Islamic banking has picked up from April-June 2009 quarter wherein its pre-tax profit showed an increase of more than 150 per cent. They hope that the trend would continue as the economy is showing signs of improving after posting a growth of just two per cent in the last fiscal year. In case of Islamic banks, it is the domestic economic slow down that directly affects them. Islamic bankers say that Islamic banking would grow faster in future once they are able to penetrate into so far unexplored areas of agricultural financing and increase their portfolio of SMEs financing. Till June 2009, the industry had very negligible exposure to agricultural financing and the share of SMEs in overall financing was a mere 8.6 per cent. Islamic bankers admit that despite a rapid expansion of Islamic banking branches, rural areas are still least-served by them. Wherever Islamic banking outlets operate, they focus on consumer financing rather than on agriculture loaning. The State Bank has issued guidelines for agricultural financing by Islamic banks and they have made a modest Rs100 million agricultural financing, for the first time, in April-June 2009. Islamic banks are drawing strategies to tap this area of financing keeping in view the thorniest issue of recovery of loans.

Reservation about Islamic banking

Users of Islamic financial services say that Islamic Banking is only a change of name.
Some say they charge fee on the loan they give out which is as equal to the Interest other banks charge. So Islamic banks charging interest and giving it a name as profit. It seems the same thing as interest.


People expected Islamic Banking revolutionize the industry and take on a form of its own.

However, to the passerby, Islamic Banking appears to operate and give the similar sort of returns that Conventional Banking does, leading people to believe that Islamic banking is just another form of Conventional Banking.

Is Islamic Banks are Islamic

Islamic Banking is based on a system of ethics and moral values.

The principles of Islamic banking are widely misunderstood and misinterpreted due to many factors such as the use of Arabic language for products, incomplete information carried by people leading to confusion, and sometimes even an indirect dislike as the media has unfortunately coupled Islam with terrorism.

People don't go for Islamic Finance is because of low literacy rate they are not aware of the tools & the benefits they might get.

Islamic Banks are very new as compared to the conventional banks. But the fact that Islamic Banking is making progress that too real fast is a very good sign. The performance of the local Islamic Banks as has been stated in the previous post is outstanding.

Murabaha and Mudarabah are the only real modes of Islamic Finance and without their increased usage; the concepts of IB will always be disputed by the masses.

Industry Progress and Market Share

The State Bank of Pakistan has formed a comprehensive regulatory framework aimed at the establishment and promotion of an Islamic banking system in line with best international practices. These measures are primarily demand-driven and provide an option to the customers to choose between the two banking systems in accordance with their preference.

As a first step, a three-pronged strategy was laid out for the promotion of Islamic Banking in Pakistan which allows financial institutions, to decide at their discretion, to establish either full-fledged Islamic banks in the private sector; or Islamic Banking subsidiaries or stand alone Islamic Banking branches of the existing commercial banks. This is in sharp contrast to the earlier attempt, when Islamic Banking was required to be implemented by all banks across the board.

As on December 31, 2007 there were six full fledged licensed Islamic banks having 185 branches. In addition, 12 commercial banks are offering Islamic banking services through 103 branches. The increasing interest of conventional banks in opening Islamic branches and applications for opening full-fledged Islamic banks show the promising future prospects for the growth of Islamic banking in Pakistan

Islamic banking services in Pakistan have recorded a noteworthy progress during the quarter under review
Constituting an asset base of Rs. 178 billion and deposits of over Rs. 124 billion at end September, 07 as compared to Rs. 159 billion and Rs. 108 billion respectively at the end of June 07. Although, due to its nascent stage of development, the share of the Islamic Banking industry in the total assets (3.8%) and total deposits (3.6%) of the banking sector remains miniscule, it is expected that this share will grow considerably in the years to come.

Islamic Banks in Pakistan

The total number of banks having Islamic Banking License has increased last five years. Meezan Bank Limited, Dubai Islamic Bank Al Baraka Islamic Bank, Bank Islami Pakistan Limited and Emirates Global Islamic Bank Limited Dawood Islamic Bank are Full Fledge Islamic Banks. They are currently operating in Pakistan with 186 branches. In addition to these banks, 103 branches of 18 conventional banks are also providing exclusive Islamic banking services to their customers in all the four provinces of the country.





List of Islamic Banks

Sr. No. Name of Bank Branches
Full Fledge Banks
1 Meezan Bank Ltd 100
2 Albaraka Islamic Bank 18
3 Dubai Islamic 17
4 BankIslami Pakistan Ltd 36
5 Emirates Global bank 10
6 Dawood Islamic Bank Ltd 5
Sub Total 186
Islamic Banking Division
7 Bank Alfalah Ltd 32
8 MCB Bank Ltd 8
9 Bank of Khyber 17
10 Habib Metropolitan Bank Ltd 4
11 Habib Bank Ltd 1
12 Standard Chartered Bank 8
13 Bank Al Habib Ltd 4
14 Soneri Bank Ltd 4
15 Askari Commercial Bank Ltd 11
16 National Bank of Pakistan 3
17 United Bank Ltd 5
18 ABN Amro Bank 3
Sub Total 103
Grand Total 289

Musawamah

Musawamah is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell.

Qard al Hasan

A loan extended without interest; gracious loan without interest in which the benefit to be derived is gifted by the owner to the beneficiary without this charitable act, the use of the money for a period would be consid¬ered an unjustified excess transferred to the beneficiary also called Ribaal-nasiah.

Islamic Banking in Pakistan

Government steps
As the part of the Islamization of economic structure the all commercial bank convert their some work to non – interest basis. But the procedure by their selves was un – Islamic declared by Federal Shariat Court (FSC) in 1991, the government and other banks were to go appeal in Supreme Court of Pakistan. The Shariat Appellate Bench of Supreme Court of Pakistan upheld the previous decision in 1999. In the light of this order government of Pakistan form a committee to judge the strength and risks of conversion of the interest based system in to Islamic finance system. Because it was not possible to implement this in short term. The State Bank of Pakistan issued criteria for the establishment of Islamic banks in private sector and it decided to promote Islamic banking parallel with the conventional banking.

10. 2 - Role of State Bank of Pakistan


Since 1991 verdict by Supreme Court that initially sought a conversion of the banking and finance system along with Islamic principles. On appeal, the court's ruling was toned down but central bank officials say that rather than converting the entire financial system to an Islamic one, the authorities are now working to create either a network of new Islamic banks or "windows" offering Islamic services within conventional banks.

Islamic Banking Department was established on 15th September, 2003 and has been entrusted with the huge task of promoting & developing the Shariah Compliant Islamic Banking as a parallel and compatible banking system in the country.

Islamic Banking is one of the emerging field in global financial market, having tremendous potential and growing at a very fast pace all around the world. The progress of Islamic Banking in Pakistan has also been commendable during the last three years. Islamic Banking is a high priority area for State Bank of Pakistan. Steps are being taken to make Islamic banking industry in Pakistan robust enough to offer a viable alternative to conventional banking, should the market decide that Pakistan should have an exclusively Islamic banking system in the country.
State Bank of Pakistan wants to develop a progressive and sound Islamic banking system that is in line and compatible with the global financial sector, providing innovative Shariah compliant products and services so as to achieve equitable economic growth.

One of the biggest challenges being faced by this growing industry is the dearth of professional Islamic Bankers and capacity building in this regard is one of the top most priorities for the promotion of Islamic Banking. In order to play our regulatory and supervisory role more efficiently we are working on the areas like Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc. regarding Islamic Banking


Currently the Islamic Banking Department (IBD) consists of following four divisions:
1. Policy Division
2. Shariah Compliance Division
3. Business Support Division
4. Shariah Board Secretariat
1. Policy Division:

Objectives:
• Devise a vision and strategy paper and work for the promotion of the Islamic banking industry.
• Study the best international practices being applied in the field and work upon their possible application in local market.
• To deal with legal, regulatory, taxation and accounting issues faced by IBIs.
• To steer the Task Force on R&D and deal with issues relating to Islamic economics.
2. Shariah Compliance Division

Objectives:
• To strengthen the supervisory aspect of Islamic banking industry through implementation of Shariah Compliance Inspection Manual.
• To analyze the financial data received from the banks and review the same.
• To coordinate with different departments in preparing various SBP publications.
• To develop new products for liquidity management and interbank market
• To liaison with international institutions involved in Islamic finance
3. Business Support Division

Objectives
• To provide administrative support to the department.
• To make arrangements for various meetings
• To make arrangements for the training and video conferences
4. Shariah Board Secretariat:

Objectives:
To arrange Shariah Board meetings, preparing agenda and minutes of the meetings and conduct due diligence of Shariah Advisors of IBIs

IJARAH/ISLAMIC LEASING

It means to employ the services of a parson on wages. Another type of ijarah relates to paying rent for use of an asset or property
Ijarah is a contract of a known and proposed usufruct against a specified and lawful return or consideration for the service or return for the benefit proposed to be taken, or for the effort or work proposed to be expended. In other words, Ijarah or leasing is the transfer of usufruct for a consideration which is rent in case of hiring of assets or things and wage in case of hiring of persons.
Ijara(Islamic) & Leasing(conventional) are not same at all.

Basically Ijara is based on Partnership Basis(which is purely HALAL).
An example of car financing.
In Leasing, you have to pay a certain amount as down payment and the remaining amount is to be paid in installments.
While in Ijara, bank & you purchase a car together in which bank has 80% share (investment). Now u r supposed to pay 2 type of amounts:
1-since u r the owner of only 20%, u have to acquire bank's 80% share so that u could become the owner of car. For that, you pay a certain mutually decided amount.

2-you have to pay RENT for using 80% of bank's investment. This rent will be decreasing because every month you will be acquiring bank's share & rent is paid according to bank's share.

Leasing or IJARA are in NO WAY partnership based modes, in Islamic Banking partnership modes are only and only Musharaka & Mudaraba BUT NOT IJARA. In IJARA the bank has the ABSOLUTE ownership of the leased asset. And the customer [lessee] pays rentals for the use of this asset.

Istisna’a / Istisna

This is a kind of Sale where a commodity is transacted before it comes into existance. It means: To order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer under takes to manufacture the goods for him with material from the manufacturer, the transaction of Istisna’a comes into existence. But it is necessary for the validity of istisna’that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them. This kind of Sale also is used as a mode of financing which also called “Parallel Istisna’a”.
It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. Istisna'a can be used for providing the facility of financing the manufacture or construction of houses, plants, projects and building of bridges, roads and highways.

SALAM

“The modern banks and financial institutions especially to finance the agricultural sector can use this mode of financing. In Salam, the Seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The price is in cash but the supply of purchased goods is deferred”.

”Istisna is a sale transaction where a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture a specific commodity for the purchaser. The manufacturer uses his own material to manufacture the required goods”.

MUDARABA

A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis, while loss is borne only by the provider of the capital.

 Mudaraba is a partnership agreement in which the investor (the Rab-ul-mal) provide the necessary finance
 While the recipient of the funds (the mudarib or the manager) provides the know how towards carrying out the venture

MUSHARAKA

Musharaka is a form of partnership between two parties where each party contributes to the capital of the partnership in equal or varying proportions, either to establish a new venture or share in an existing one”.
Musharaka means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds, which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions.

Diminishing Musharaka

Another form of Musharaka developed in recent years. According to this concept, a financier and his client participates either in the joint ownership of a property or equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share until all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.

MURABAHA

Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and profit. Islamic banks have adopted this as a mode of financing. As a financing technique, it involves a request by the client to the bank to purchase certain goods for him. The bank does that for a definite profit over the cost, which is stipulated in advance.

ISLAMIC MODES OF FINANCING

This module will introduce the following basic Islamic modes of financing:

9.1- Murabaha

9.2- Mudaraba

9.3- Musharaka

9.4- Diminishing Musharaka

9.5- Ijarah

9.6- Salam

9.7- Istisna

9.8- Muswamah

9.9- Qard al Hasan

How do Islamic banks make money

Islamic Finance works with the help of different tools such as Murabaha, Musharka, Ijara etc. They are not interest based they are profit oriented & in Islamic Finance Banks bear the maximum risk which is not their norm but they have to do it because Shariah advice them to do such act.

Conventional banks earn money through margin spread by taking deposits form public enlarge and advancing loans to the companies limited.
Islamic banks earn money through mutual investment deposits and special investment deposits by taking an agreement through the investors.

Islam justifies it on equitable basis. i.e. you can get money for investment but should make the bank partner in whatever business that you are doing. Islamic banks when offer you funds in fact participate in your business as a partner, where you and they invest on equitable basis. Profits/Losses are shared as the business performs (not fixed).

Islamic finance is the best tool as bank will study your proposal, your experience in the field, history and if deemed attractive they will offer you finance just as a partner. This is a good way of prosperity in a country as the business proposal will need to be feasible, legitimate; employment generating, fruitful and both parties will get their shares from the outcome accordingly. Islamic banks also offer management services in the companies (two minds think better than one). Bank will not just lend money to make money as they normally do by taking collateral from people in shape of property and giving funds.

Difference between interest and profit

Interest is the excess money to the principle.

Interest is any money over a credit/loan, whereas profit is any money you charge over your cost price.eg. If I give you 10,000 rupees and demands 12,000 in return than this is interest but if I sell you an motor bike specifying you that its cost price is 10,000 and I am selling it to you on 12,000. Than this is profit. In both the cases the incremental amount is 2000. So it doesn’t matter if the profit rates of Islamic banks match with the interest rates of conventional banks as long as the mechanism remains Islamic.

“You don’t need to work to earn interest but you need to work to earn profit.”

Deposit accounts

All the Islamic banks have three kinds of deposit accounts: current, savings and investment.
6.1 - Current accounts
Current or demand deposit accounts are virtually the same as in all conventional banks. Deposit is guaranteed.
6.2 - Savings accounts
Savings deposit accounts operate in different ways. In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank. Banks adopt several methods of inducing their clients to deposit with them, but no profit is promised. In others, savings accounts are treated as investment accounts but with less stringent conditions as to withdrawals and minimum balance. Capital is not guaranteed but the banks take care to invest money from such accounts in relatively risk-free short-term projects. As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands.
6.3 - Investment account
Investment deposits are accepted for a fixed or unlimited period of time and the investors agree in advance to share the profit (or loss) in a given proportion with the bank. Capital is not guaranteed.

Islamic Banking Products

The most common products that the Islamic banking system is offering
• Consumer products
o Car Ijara
o Home Financing Musharaka (Diminishing Musharaka)
• Corporate Products
o Murabaha (most widely used),
o Musharaka and
o Ijarah

Mortgages Concept in Islamic Banking

According to documented Shariah jurisprudence opinion which is known as Fatwa, the proposed arrangement is having the following transactions:


 To create joint ownership in the property (Shirkat-al-Milk)
 Giving the share of the financier to the client on rent.
 Promise from the client to purchase the units of share of the financier.
 Actual purchase of the units at different stages.
 Adjustment of the rental according to the remaining share of the financier in the property.

It's a transaction in which a buyer purchases a home through a rent-to-own agreement. A conventional mortgage, in which a buyer repays a loan with interest, violates the Quran, which forbids the payment or receipt of interest.
The Holy Quran forbids "riba", which is interest, or usury. Yet Muslims need money and banks need to make a living. Systems are devised to get round the ban. For example, instead of a Muslim holding a mortgage for a house, the bank can own the house and make arrangements for the Muslim gradually to buy it off the bank over a period of years.

3- Islamic Banking distinguishes from Conventional banking

3- Islamic Banking distinguishes from Conventional banking

Conventional banks use interest as a tool of profit but in Islamic banks use assets as a tool Profit, they don’t charge interest.
The basic difference between conventional and Islamic banking is that Islamic banks is asset based banking. An Islamic bank doesn't give loan but provides you with your required asset and add up its profit in their incurred cost.


Islamic Banking distinguishes from Conventional banking in four basic principles


3.1 - Interest Free Transactions

“The interest which you give to increase the wealth of people, will have no increase with Allah: But that which you lay out for charity, seeking favor of Allah (He will increase): it is these who will get a recompense multiplied.”
Ar Rum 39 (First Revelation)


“O you who believe, Fear Allah and give up what remains of your demand for Interest, if you are indeed a believer. If you do not, then you are warned of the declaration of war from Allah and His Messenger; But if you turn back you shall have your principal: Deal not unjustly and you shall not be dealt with unjustly.”
Al Baqarah 278 - 279 (Fourth Revelation)

RIBA IN HADITH

From Hazrat Jabir Ibn-e-Abdullah (RA)

”The Prophet, may peace be upon him, cursed the receiver & the payer of interest, the one who records it and the witnesses to the transaction & said: “They are all alike [in guilt].”

(Muslim, Termidhi & Musnad Ahmad)

From Hazrat Abu Hurayrah (RA)
The Prophet (PBUH) said:
“Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.”

(Ibn Majah)
From Hazrat Abu Hurayrah (RA):
The Prophet (PBUH) said:
“There will certainly come a time for mankind when everyone will take Riba & if he does not do so; its dust will reach him.”
(Abu Dawud, Ibn Majah)


3.2 - Risk Sharing
Islamic banking is all about asset financing. In Islamic banking, we cannot give personal finance as in conventional banking. we have to finance some product (mostly raw material),,, For Example
In conventional: if you require raw cotton worth Rs.100,000/- then the conventional banking would provide you the money so that you can buy the cotton yourself, whereas In Islamic, would pay the supplier of the raw cotton Rs.100,000/- and ask him to deliver the cotton at the buyer's premises, so this is the basic difference.
In between if the raw material destroys (catch fire, etc) then the risk will be faced by the bank as the asset is under bank's ownership, but if it destroys due to mishandling then you will be responsible for that.

3.3 - Asset & Service Backing
For example if you booked a car through conventional Bank & the delivery would be in the next six months plus you can't revoke the contract you need to pay the installment from the day you get into contract. But in Islamic Finance Bank you'll get into contract as soon you get the car in your possession & if the car is lost it is not your loss it is the loss of the Bank they will provide you another one or they would end up with the contract. Plus you can revoke the contract before you get into it legally. What ever the losses are of banks only for keeping there funds Idle but the only clause is that bank would sell the car at market rate if it is sold below Cost price then bank would deduct this loss from your security because you signed an undertaking for this. This is one way It might help you all to understand Islamic Finance.

3.4 - Contractual Certainty( Gharar free contracts)


Uncertainty, hazard, chance or risk, ambiguity and uncertainty in transactions. Technically, the sale of something which is not present at hand; or the sale of something where the consequences or outcome is not known. It can also be a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air; or an event where assurance or non-assurance is subject to chance and thus not known to parties of a transaction. Can also mean uncertainty or a hazard that is likely to lead to a dispute in a contract.

Conventional Banking

A bank is a financial institution, which deals with money and credit. It accepts deposits from individuals, firm and companies at a lower rate of interest and gives at a higher rate of interest to those who need them. The difference between the terms at which it borrows and those at which it lends from the source of it profit. A bank, thus, is a profit earning institution.

Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks.

Islamic Banking

Islamic Banking is a Financing Format, as an association of capital owners, as shareholders, and investors, as depositors, who are initiating the path to cure the financing ills in the areas of Investment, Banking, Insurance and Economic Development.

Islamic banking system consistent of Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits interest (usury). Islamic law also prohibits investing in businesses that are considered unlawful, or haraam.

Islam permits the interest free banking and believe on the profit sharing both for the depositors and as well as borrowers. Especially in case of mortgages the bank create joint ownership of the property with the buyer and convert the bank’s finance amount into units by dividing the contribution of finance amount over the total months. And give the opportunity to the borrower to purchase these units within a specified period of time and against this service it charges the rent on the units which are held by the financial institution. In the other words (Islamic term) ‘Murabaha’ is the sale on profit, means cost plus profit. If a person has no funds to purchase a home or property it comes in financial institution and requests it then after checking his credit worthiness and credibility the bank and the borrower jointly purchase the property and financial institution gives the right to further purchase the units of the property into different part within specified period of time. On the other hand it is observed in the conventional banking the bank grant the loan to the borrower and he solely purchase the property and he paid the principal amount and the interest thereon.

Many Islamic Banks have sprung up over the last few years. These changes are occurring both in Muslim and in western countries, and are driven by a global trend amongst Muslims to become more observant of their faith. It might have been the reason why Islamic Banking emerged; however, today Islamic Banking is sought by Muslims and non-Muslims due to the benefits it offers.