Holder Din

11Aug/09Off

Holder Din

Islamification of finances

Islam is a religion that follows principles and rules guided by the Koran under the Islamic laws (sharia laws). It should be noted that, these laws are also applicable in Islamic banking systems and activities. In this case, Islamic banking are consistent with the sharia laws and principles which states that; there should be no imbursement or receipt of interest fees in case of lending or acceptance of money correspondingly (Abdallah, 1987). A point worth noting is that, modern banking system was introduced in Islamic economies at the time when they were low in terms of political and economic matters. On this basis, most of the introduced banks did not serve the local people as they were restricted in the cities. As a result of nationalistic and religious reasons, foreign banks were avoided by the local trading community. Development in industrialization and civilization led to most of the traders engaging in utilization of commercial banks but strictly avoided borrowing from the banks and depositing their savings (Abdallah, 1987).

Emergence of interest fee banking

The emergence of young Muslim economists attracted more attention on the interest free banking in the early seventies. Additionally, the involvement of institutions and governments like what happened in 1970 where there was a conference of the finance minister of the Islamic countries that was held in Karachi; led to the founding of interest-free banks in these countries (Ali, 1982).

According to Harram, venturing into businesses that provide goods and services that are considered to be going in contradiction with its teachings; is prohibited (Choudhury, 1986). In the 20th century, many banks have used these banking principles to flourish economies in private and semi-private commercial institutions in Muslim economies. On this basis, the concept of profit making and payment or acceptance of interest fees has been considered as ‘necessary evil' by Muslims in their banking principles (Choudhury, 1986). It is of importance to note that, Islamic banking currently is growing at a rate of 10-15% annually and shows signs of consistent future despite the fact that there are no practices of making profits through paying or receiving interest fees. A point worth noting is that, there are more than 300 institutions of Islamic banks spread over 54 countries all over the world in addition to 250 joint funds that conform to Islamic principles. According to Standard and Poor's Rating Services, sharia compliant assets were found to be over $4ooo billion all over the world in the year 2009 with a potential market of $4 trillion (Choudhury, 1986).

It is of importance to note that, Islamic banking serves the same purpose as conventional banking except its operation in accordance with the sharia laws and rules referred to as Fiqh-al-Muamalat which means Islamic laws of transaction (DiVanna, 2006). On this basis, the sharing of profits and losses and the exclusion of the charging of profits and interests among the Muslims is the basics Islamic banking principle (DiVanna, 2006). In this case it can be argued that, rather than an Islamic bank giving loan to a buyer so that he/she may purchase an item; the bank purchases the item and sells it to the buyer at a reduced profit. On this basis, the buyer is supposed to repay the bank at installments even though there are no penalties in case of late payments. This approach in Islamic terms is called Murabaha (DiVanna, 2006).

On the other hand, Eljara wa Elqtina is an approach similar to leasing where an Islamic bank sells an asset to the debtor at a higher price than the market price but hold on to the possession of the asset until the loan is fully settled. Additionally, the Musharaka al-Mutanaqisa approach is a case whereby; a floating rate is allowed in the form of rental. In this case, the bank and the borrower contribute certain percentage of money in the purchase of a certain entity through a partnership (El-Asker, 1987). On this basis, the joint venture rents the bought property and charges rent after which; the bank and the borrower will share the profits from this rent based on the existing impartiality share of the joint venture. From this example it can be revealed that, Islamic banks loan their capital to companies by the issue of suspended rate interest loans. In this relation, the profit of the bank on the lend money is equivalent to a specific proportion of the company's profit and the profit sharing agreement is cancelled once the principal amount of the lend money is paid (El-Asker, 1987).According to Islamic principles in banking and financing, Salam is a sale transaction whereby a product or a commodity is usually sold even before it comes into being. This mode of transaction is most commonly used in horticultural products which are paid earlier before possession to make the deal legitimate (El-Asker, 1987).

Islamic principles on gabling

It should be noted that, Islamic teachings and principles in the Koran prohibits gabling and indemnifying ones health as well as possessions. Additionally, the Koran does not allow Muslims to trade in risks or extreme uncertainty (El-Din, 1986). According to Muslims, these risks and uncertainties include the sale of fish while still in water or the sale of an unborn calf. Importantly, microfinance in Islamification of finance is an essential tool in enhancing security of possession and changing the lives of the poor (El-Din, 1986).

Even though Muslims have been evading practices of depositing their savings into the banks and borrowing from them, operations have been made in such a way that; the savers allow the banks to use their money but get an assurance that they will get all their money from the bank if need be. It should be noted that, banks have their different ways of lending their money to Muslims without acceptance of interests (Homoud, 1985). Among these ways is ‘the loan with a service charge' method where the bank loans money interest-free but recover their operating cost by taxing a service charge. On the other hand, the bank is supposed to share the profits of the deposited money with the savers as provided under the Musharika category. Additionally, the bank is obliged to secure the assets of the savers on their behalf as well as getting the maximum returns from them (Homoud, 1985).

It is of importance to note that, in Islamic banking each and every client is a partner with the Islamic Financial Institution (IFI) where this relationship is classified as Mudarib partnership. On this basis, all the profits realized from this account are shared among the parties. Importantly, there are two different accounts referred to as current accounts and investment savings accounts (Khan, 1986). In current accounts, the account holder loan the bank money on interest free basis but get them back whenever he/she demands. On the other hand, investment savings account is where the bank allows the account holder to place some finances in secure environments until when the account hold wants to withdraw it. Unlike in current accounts, account holders in investment savings account get profits or losses ensued on the minimum monthly period (Khan, 1986). In the islamification of finances, there are key principles that govern Islamic investments which include; no generation or begetting of money by itself unless that finance is involving an activity or work, profits and looses should be shared in investments, legalization of investment in businesses with avoidance of prohibitions, and there should be gabling in contracts (Khan, 1986).

Differences between Islamic Financial Institutions and conventional banks

In the comparison of Islamic banks and conventional banks, there are two major differences which can be outlined. On this basis, the Islamic Financial Institution follows the principles stated in the Quranic rule that; the debtor should be given adequate time to clear his/her debts in the case he/she is facing difficulties in paying. In this case, the bank will only apply sharia acquiescent rules to assurance its right with the absence of resorting to interest fee in the case the debtor is delaying payments (Shahid, 2007). The other difference is that, finances have to be spent in legal areas that help in achieving social and financial developments avoiding areas prohibited by the sharia law. In the case of investments, funds are invested on a partnership basis between the entrepreneur (bank) and the depositor. It has been observed that, in Islamic banking system allows the clients to share profits accounted as a result of their deposits. On the other hand, in the case that the bank experiences some losses it is equally shared between the bank and the depositors (Shahid, 2007).

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