09 November 2008

Pin It

Know and understand Islamic banking

Know and understand Islamic banking .
Easy approach to understand islamic banking.
what is islamic banking system ?
A banking system which is based on Sharia muslim law and principles is called as islamic
banking system.
This banking system do not allow to give interest . this banking system do not allow to invest
money in the business which are contrary to islamic principles and law ,the term is harram
is used in islam for this.
this banks currently operate in muslim community mainly.
The first islamic bank was started ,savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975.
The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of
riba (usury).
Islamic or Shariah-compliant banking provides and uses financial services and products that
conform to Islamic religious practices and laws, which, in particular, prohibit the payment
and receipt of interest at a fixed or predetermined rate. In practice, this means that instead
of loans, Islamic banks use profit-and-loss sharing arrangements (PLS), purchase and
resale of goods and services, and the provision of services for fees form the basis of
In an Islamic bank, the rate of return on a deposit is directly dependent on the quality of the
bank's investment decisions.If the bank records losses as a result of bad investments, depositors may lose some (or all)
of their deposits.
The contractual agreement between depositors and the Islamic banks
does not predetermine any rates of return, it only sets the ratio according to which profits
and losses are distributed between the parties to the deposit contract.
understand the islamic banking through example :
suppose Mr john wants a loan to purchase a car or say house and he goes to islamic bank,then bank will purchase the car and keep the ownership with the car and give that car to
mr.john .The ownership remains with the Bank until Mr.john pays the loan amout to the bank.same rule is applied to nearly everything just they use differet names for transactions.there are no late fees,penalites etc if john is not able to pay on time.

And finally, Islamic banking is restricted to Islamically acceptable deals, which exclude
those involving alcohol, pork, gambling, sex,movies, etc.

When islamic bank is smaller it works very good as depositers and management of bank
can watch ,monitor every activitiy very closely.
But when islamic bank becomes bigger crosses the state borders it becomes very difficult
to monitor .
current banking system is good but what happend in usa and fallout of all
economies is a result of greddyness of politicians, bankers,executives.
To over this problem there should be international monitoring bank or body which will watch
and detect the frauds,greedyness.laziness of banks .