Islamic financial and banking system

Have you ever heard of it? No, it’s not your conventional banking and financial system. It’s something different.Here we look at some concepts in Islamic finance and banking system to give you an idea of what the subject’s all about.

DEFINITION- Islamic banking refers to a banking system that is in agreement with the rules and values set by Islam known as Sharia.Islamic banking system doesn’t allow acceptance of interest for borrowing and lending money.This interest is known as RIBA.

 DIFFERENT ACCOUNTS IN THIS SYSTEM- In Islamic banking system,there exists a partnership between the customer and the Islamic financial institution (IFI) and this relationship is known as MUDARIB PARTNERSHIP.

Current Accounts-These are a kind of loan by account holder to the Islamic bank and they are interest free.They are payable to customers on demand.The customer doesn’t get any profit in this account and neither bears any loss.

Investment Savings-Customers can place their funds safely in these accounts till they wish to withdraw them.After the expiry of the financial year,the net profits are determined by paying profits and deducting losses.

PRINCIPLES OF ISLAMIC BANKING-In Islamic banking, the investor and the investee share the results of the project.Where a project makes a profit, both parties share this profit in agreed ratio. On the other side, if a project makes a loss, the investor bears the loss by way of no repayments, with the investee bearing the loss by receiving no wage or salary Islamic banks have to follow the following 6 principles of the Sharia law-

1)The receipt and payment of interest is strictly prohibited.

2) The sharing of profits and losses is main in Islamic banking system.

3) All financial transactions must be based on assets. In other words, making money out of money isn’t allowed in Islamic finance because under Sharia law money is only a medium of exchange – a way of defining the value of something – and it has no value in itself.

4) Speculative behavior is forbidden (and so options and futures are prohibited in Islamic finance).

5) Only contracts approved by Sharia are acceptable.

6) An emphasis is placed on the holiness and sacredness of contracts. Islamic laws strictly prohibit investments connected with gambling, liquor or tobacco.

DO YOU KNOW?-Seven out of ten top Islamic banks in the world are Iranian. Islamic Bank Bangladesh Ltd is the First and the largest Islamic banking network in Southeast Asia. The Dubai Islamic Bank has the distinction of being the world’s first full-fledged Islamic bank, formed in 1975. The Institute of Chartered Accountants of Pakistan issues Islamic Financial Accounting Standards (IFAS).

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