General Introduction to Islamic banking

Islam is not only a religion in the ordinary sense of the word, but a complete system of life. While other religious codes provide guidance only for the relation between man and his Creator, Islam guides man in his relationship with God, and gives him the norms which govern his temporal existence, since Islam is concerned with the spiritual, political, social economic, moral and all other material aspects of the human being.


Every social system has its own economic system. Islam being a comprehensive and distinct social system, possesses a corresponding economic system of its own. Islamic economics is fast developing into a different and distinct paradigm of economics.

 

Difference between Islamic and conventional banks:

There are a number of key differences between the products and services offered by a conventional bank in comparison to an Islamic financial institution.

 

Firstly, Islam is the back bone of interest free banking; moral principles and objectives play a more important role in its operations. As such it is organised on the basis of cooperation with each other as stated in the Quranic injunction: “Assist one another in righteousness and piety and do not assist one another in sin and trasgression” (Quran, 5:2). The Quran also calls for trade ” do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent”(Quran, 4:29). Honesty and trustworthiness is so essential in business, thus the Prophet salallahu alaihi wasallam had declared that dishonest transactions are illegal (reported by Bukhari).

 

Secondly, no gain is accepted without either effort or liability. Islam forbids receiving a monetary advantage without giving a counter value, but is not opposed to profit or financial gain as long as an effort is performed or (partial) liability is accepted for the financial result of a venture.

 

Thirdly, general conditions of a debtor should be evaluated genuinely. If one is in financial distress, and is not able to pay back the principal, one should be given an extension on humanitarian ground without any penalty. (Quran, 2:280)

 

Fourthly, certain business transactions are considered unlawful in Islam and cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs, gambling or producing pornography are contrary to Islam.

 

Fifthly, Islamic banks offer no interest-bearing products or services, and in its organisational structure and corporate governance, Islamic banks have Shariah board, to ensure that the bank practices are in conformity with the Shariah and do not oppress the disadvantaged client.

One comment on “General Introduction to Islamic banking

  1. Assalamu alykum!
    Thx fr this great post. I was looking for one for a long time to clear my doubts. First of all we all know that Islamic banking is interest free by d grace of almighty. Here my doubt or u can say ‘misunderstanding’ to understand a complex issue starts being a layman in the street.
    I would try to keep my question simple.:
    We all know that money is a virtual currency in the sense that it’s value fluctuates wrt gold. Means gold is d original currency (correct ne if m wrong). Now hw bout I keep my money in bank with intention of safety only. Say I deposit Rs. 10000 for d sake of discussion, in 2013 and intent to withdraw same amount in 2020. Now let’s say that due to inflation, in 2020, value of gold also changed. Say it was 5k per gram and now in 2020 it is 15k per gram. Does this mean I shud get d same Rs. 10k in 2020 or equal to the value of amount of gold I could buy in Rs.10k in 2013?

    Hope u understand my question.
    Allah bless!

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