The indispensable notion of Islamic banking is furthermore identified as ‘interest-free banking’. It is operates on the crucial principled values with merely lone major distinction that Muslims aren’t supposed to give or accept interest. This does not connote n any way that selling tricks or money spinning activities are not promoted. All of these activities are considered fine if they don’t happen to involve any kind of interest in the dealings. In order to execute this principle, pecuniary devices have been launched by the Muslim financial institutions to gratify these necessities. Therefore a lot of equity financing is used instead of the debt financing. In order to keep their clients satisfied, interest free banks usually give a share from the bank profits instead of the interest on the savings account and this is usually up to five percent.
Why Was Islamic Banking Introduced?
The contemporary depository structure was initiated into the Islamic countries by the end of the nineteenth century at the time when a lot of these Muslim countries were performing pretty good on the economic as well as the political front. These financial institutions originated branches in the major cities of these countries in order to plunge into the business arena. On the other hand, these branches were restricted only to the capital cities and hence the other small cities surrounding these populated places were often ignorant of this banking system. Then the major local trades ignored the traditional banking system in order to adhere to the religious norms associated with Islamic banking as dealing with other banks involved a lot of interest and it was an idea totally ignored by Islam. Nevertheless, the commercial banks were much more organized when it came to banking aspects like opening new accounts and transfers. Islamic banking was more effective with affairs like current accounts and all those aspects that did not involve interest in any form.
The latter half of the twentieth century saw a banking revolution and at that time it came really impossible to avoid the commercial banks. These banks made it a point to venture into a lot of daily communities and forced themselves into a lot of businesses. This is exactly when the Muslim experts identified a want for a banking system customized for the Muslims based on the strict principles of Islam. Such kind of Islamic banking has been around for more than twenty five years however, such form of banking was also tried earlier but did not turn out to be as successful as this one. There was one type of bank in Malaysia that implemented this model and then there was one that was established in Pakistan in the forties. Both these banks couldn’t survive for long until the seventies that also brought about a revolution in the Islamic form of banking. An inter governmental bank called the Islamic Development Bank(IDB) was formed along with the Dubai Islamic Bank by a group of individuals across various countries. Consequently, Islamic banks were formed in countries like Egypt and Sudan. Since then, a hundred and twenty five Islamic institutions have come into existence and countries in Western Europe, Asia and North America have started accepting this model of interest free banking.
The Present Policies of Islamic Banking
A majority of these Islamic banks agree on three categories of depository accounts which are savings, investment and current. At the same time as the number of current accounts has progressively turned down, the other two kinds of accounts have multiplied. This clearly shows the escalating confidence of users into this type of banking. In a lot of these banks, the depositors usually let the banks use their money and in return get a guarantee to obtain the full amount of deposit. These banks invest the money into several short term projects that are beneficial to the bank and the Muslim community.
Besides these accounts there are also accounts that are called the trust deposits, which simply mean that the account is not under any restrictions when it comes to depositing or withdrawing funds. Furthermore there is the joint investment account that allows the depositor to participate in continuous investment plans of the bank. Such accounts typically receive a percentage of the profit from the bank.
The Islamic banks inculcate various methods of possessing assets starting from investing, trading and lending. The investing is known as Musharaka in which a bank would emulate another body and set up a joint venture with both parties agreeing to profits and losses in equal degrees. Trading is called the Mudarbha where in the bank provides money or the capital and the independent identity offers skills or labor. In this scenario, the profits are shared equally by both parties but the losses are incurred by the bank only. The third form of obtaining assets is through lending and financing based on an approximate rate of return where in the bank estimates the project by itself first and then goes on by quoting a rate that can work out the best for the bank.
Pitfalls
Even though Islamic banking has gained acceptance in the major continents of the world it still need to overcome some of its shortcomings. To begin with there is a scarcity of skilled professionals when it comes to interest free banking. As a result the lack of proficient workers has restricted the growth of Islamic banking. The existing banks should come up with the training and the academic curriculum required in excelling this particular financial industry. Secondly, there is a sheer lack of specific accounting standards. Accounting is considered to be the most important aspect when it comes to banking and there are standards yet to be customized in the interest free format which brings in a lot of difficulties for the Islamic bankers. Lastly there is a requirement to set specific credit analytics when it comes to interest free transactions. However, with the kind of acceptance with Islamic banking, it will be shortly adopted by most of the commercial banks of the present day.