Islamic Banking and Finance: An Introduction

 “Allah has allowed (profit from) trade and prohibited Riba”( 2: 275, Holy Quran). 

Islamic banking and finance is considered as a banking and finance system in consonance with the philosophy of Islam. Hence, in addition to the conventional good governance and risk management rules,  it is governed by the principles laid down by the Islamic Sharia.

As an alternative system to the conventional interest-based financial system, some describe it as “interest-free banking” which is a narrower tern than what Islamic finance actually is.  Islamic finance, a more general term is expected not only to avoid interest-based transactions but also to follow all sharia rules and principles related to financial transactions such as to avoid Gharar, Maisir, to share profit and loss and to be involved in permissible business only.

 Islamic finance is generally based on some prohibitions and encouragements. “Allah has allowed (profit from) trade and prohibited Riba”( 2: 275, Holy Qur’¯an ). 

Islamic finance never considers loan as a financial product; it is considered as a monetary or financial transaction where the money is exchanged with a guarantee for repayment in full without any increment. Investment in the Islamic context is not merely a financial or monetary transaction of fund transfer, but to be permissible in Islam for the purpose of earning a profit, it should be associated with tangible real assets.

Property rights in Islam:

Private ownership of resources is recognized in Islam as God has created the world with natural resources for people to enjoy.  Private owners are entitled to returns on their labor and capital investments.  Also, individuals involved in free trade must be rewarded for their investments and willingness to take risks. But, they all must contribute to the betterment of the community by making tax and charity payments.  Unproductive hoarding of resources is prohibited and profit-making is encouraged.  The government is responsible to provide public goods, redistribute income, and protect individual property rights.

       Sources of ownership in Islam

•       Physical and Mental Work
•       Landed property and rent
•       Mining and minerals
•       Inheritance and Bequest
•       Trade and Commerce

       Property obligations

•  Prohibition of Riba (interest)

The taking of interest is forbidden. Usury is said to be sinful exploitation for three reasons: (1) it concentrates of economic wealth with wealthy people and makes needy people poorer (2) it offers a riskless economic venture, and (3) it is an attempt to maximize the money without any labor activity and hard work. Accumulation of wealth must be attained with personal effort and labor and capital investment. In an Islamic banking system, depositors are partners who share the profit or loss.

•  Prevention of Gharar (uncertainty ) for assuring transparency in contracts 
• Prevention of Mysir (gambling) for avoiding wasting of money expecting the easy wealth.
• The legal obligation of Zakat
• Prohibition of unjustified means in the business.