Middle East: The Islamic banking

According to the bibliographic texts, it would be answered the following questions:

1. Explain what Islamic Banking is and its background.

The Islamic banking is a system and activity that follows the Islamic principles, which prohibit the acceptance and payment of riba (interest charges), and forbid other activities that are against Islamic main beliefs. (Institute of Islamic Banking and insurance, 2010)

The philosophy of the contemporary Islamic banking system started since the beginning of the Islam, when the Islamic partnerships were used in the business world and the concept of interest was little applied. During a period of time from the mid 1940s until de end of 1960s many authors explained the need of a commercial banking system that gives importance to profits and loss sharing and not to interests. These ideas resulted in the creation of the first Islamic banking in the early 1970s. (Ökte, 2010).

2. What are the key principles of Islamic banking?

 

Islamic banks loan with no interest or additional amount of money over the lent; also, Islamic banks invest and lend money and become a partner by sharing profits, risks and losses; in addition, financial transactions have to avoid uncertainty, risk and speculation, because business parties need to have a perfect knowledge of the monetary values; and finally, The Islamic banking system can invest only in activities that are not forbidden by the Islam. (Ökte, 2010)

3. Islamic law forbids institutions from charging interests on loans. How do they make profits when lending money?

For the Islam, profits are obtained after an entrepreneurial effort and not with an interest rate:

Islamic banks create a partnership with its investors and lenders and both business parties agree the proportion of profits that will share after a period of time. For example, when an investor provides capital to an Islamic bank who at the same time manages the funds, both share profits. (Institute of Islamic Banking and insurance, 2010)

Image taken from: Getty Images

4. Explain the concept of ethical investments under Islamic law. Who is to determine whether an activity is allowed or not?

The concept of ethical investment under the Islamic law seeks for financial sustainability investing and making activities that benefits the society and the environment, because of the importance of equity and fairness in the money distribution. The Islamic banks benefit the society because allow to people who are in need the opportunity to access to loans and share its profits and losses. Islamic banks also compensate companies that show social responsibility. (Saidi, 2009).

There are additional prohibitions that are monitored by a Shari´ah Supervisory Board (SSB) who are religious advisors who are in almost every Islamic bank and determine whether an activity is allowed or not. (Ökte, 2010).

5. How does Islamic banking influence the economy in the Middle East?

The Islamic banking motivate the development of Islamic economy due to the philosophy of create a partnership, which makes savings and loans more attractive because give the opportunity to share profits and losses. This system in the Middle East is helping to solve key problems of underdevelopment, by giving the opportunity to people with needs, to access into the financial market. (Ökte, 2010).

6. Based on your research and knowledge about this topic, what is the future of Islamic Banking in terms of global expansion and growth?

 

According to the success and fast growing of Islamic banks in the world during the past three decades, not only in the Muslim world, but also in countries as Britain, France, United States and Japan (Siddiqi, 2008). I think Islamic Banking will achieve more expansion and growing into non-Islamic countries, because it is important for the economic development of every country to give financial participation to all the people, with fairness and equity.

Image taken from: Getty images

 

BIBLIOGRAPHY:

Getty images, “profit”, [Online] Permanent URL: http://www.gettyimages.com/Search/Search.aspx?contractUrl=2&language=en-US&family=creative&assetType=image&p=profit#. Last accessed: April 12, 2010.

Institute of Islamic Banking and insurance, “Islamic banking” [Online] Permanent URL: http://www.islamic-banking.com/islamic_banking.aspx. Last accessed: April 12, 2010

Ökte, M. K. S. (2010). Fundamentals of Islamic economy and finance: theory and practice. Retrieved April 10, 2010, from EbscoHost Database: http://search.ebscohost.com.ezproxy.eafit.edu.co/login.aspx?direct=true&db=a9h&AN=48722879&loginpage=Login.asp&lang=es&site=ehost-live.

Siddiqi, M. (2008, March). Islamic Banking. Retrieved April 10, 2010, from EbscoHost Database: http://search.ebscohost.com.ezproxy.eafit.edu.co/login.aspx?direct=true&db=a9h&AN=35405415&loginpage=Login.asp&lang=es&site=ehost-live

Saidi, T. A. (2009, March). Relationship between ethical and Islamic banking systems and its business management implications. Retrieved April 10, 2010, from EbscoHost Database: http://search.ebscohost.com.ezproxy.eafit.edu.co/login.aspx?direct=true&db=f5h&AN=36674737&loginpage=Login.asp&lang=es&site=ehost-live