Fundamentals of Islamic Banking

What do you know about Islamic Banking? I am fascinated by the way they do business so I organized this tour last year. Unfortunately, due to the economic crisis, all the financial institutions refused to give us a guided tour. This book is the closest substitute that I could get in Dubai. Thanks also go to one of my students who introduced this book to me in a bookstore.

Hey! Don’t be scared by the cover of the book. Let’s see what’s inside. This is a comic book!

This book clearly tells us how an Islamic Financial Institution different from a conventional banks elsewhere. When doing their business, all Islamic Financial Institutions have to observe Islamic Law called Shari’ah. Shari’ah has laid down rules for the economic life of Muslims.

(1) Socio-economic justice is central to the Islamic way of life;

(2) The principles of Islam aim at establishing a society where everyone will behave responsibly and honestly; and

(3) Brotherhood of Islam serves to make people live together in peace and harmony, minimizing the social differences between them (p.13).

Islamic Financial System concerns about the moral implications of he business for which the money is used. For instance, Islam prohibits gains from activities which are morally or socially injurious. Wealth by fraud, theft, gambling, and lotteries are not allowed. Dealing in liquor, prok, pornography, and other immoral services are also prohibited (p. 16). While selling an escaped animal, a stolen property, a bird in the sky, fish in the water, or a contract in which the price is not finalized or future performance date is not known are illegal transactions.

The relation of investors/depositors is that of partners. They share the profits and risks together. Interest, Riba, is forbidden. Thus depositors cannot demand any fixed return on their deposits or investments. As Muslims believe that an interest-based economy would lead to exploitation of the poor and widen the income gap.

However Islamic banks can get the time value on a cost-plus-profit basis. When buying cars or villas, Islamic Banks normally purchase assets with cash and sell or lease to their clients on a mutually agreed date and rate. An earlier settlement of the debt would not guarantee a rebate. As the agreed prices have to be fixed once and for all. A rebate is not a right of the client. It can only be taken as an act of benevolence.

In the case of leasing, the ownership of the property remains with the banks. The client has only the right to use the property. During the leasing period, Islamic Banks will bear all the necessary risks, like flood and earthquake. If the property has totally lost the function, and no repair is possible, the least shall terminate. At the end of the lease period, the title can be transferred to the client as gift.

Muslim is obliged to fulfill his promise and pay on time. However, a penalty for non-payment is allowed but this would go to charity and not to the lender of the bank.

There is also another borrowing called “Qard”. It is a contract of virtue by a party who helps the other out of difficulty. The party who receives Qard is required to repay only the original amount of the transaction. The lender can demand the amount of a Qard at any time, if he wants the money for himself.

Want to learn more about the Islamic Banking? This book is available in the school library.

Ayub, Muhammad. (2009). Fundamentals of Islamic Banking. Carillon.