Islamic Banking and Finance

History of Islamic Banking and Finance

Islamic banking and finance has its roots in the ancient history. Islamic golden age is considered to be from 8^th century till mid of 13^th century. It is believed that it was during this era that trade and business developed considerably among Muslim Community. It was during this era; the community opened up and started trading with many other partners and countries. It was during this era that scholars, traders, engineers, artists and others contributed to the development of pillars of civilizations. During this period the Muslim culture and development influenced many other countries and religions existing at that time (Siddiqi, 1983). 

Due to this advancement in the trade and business, dominance of the Islamic trade gained currency during that period. This created large surplus of the Islamic Currency – Dinar in the world market. Also as trade kept on increasing and stabilizing the currency gained value and largely became stable. The currency became more trade able and started to be recognized as a serious currency worldwide. And as the liquidity of the currency increased it created large pool of surplus currency (Archer, Karim, 2007).

This surplus fund gave rise to Islamic Banking and Finance.

Many modern day theories and economic concept were developed during this golden Islamic era which later kept on evolving as the years passed by. The major economic concepts that developed were:

• Mufawada
• Mudarabh
• Murabahah
• Musawamah
• Al-mal
• Nama Al-mal
• Waqf
• Musharakah

Fundamental of Islamic Finance

Principle

 

Islamic Banking and Finance is based on the same premise and need as our normal banking and financial institution except for the bank or an institution that deals in Islamic banking and Finance has to follow Sharia Laws – sacred laws of Muslims. It has to follow Fiqh Al-Muamalat the basic rules and regulation on trading.

Islamic Banking differs from the traditional banking in many ways, chief points are as follows:

1)    It is based on the sharing of profits and loss between the buyer and the seller. In the normal banking parlance as practiced elsewhere, there is generally no sharing of profits or losses. The onus of the loss or profits lies entirely with one person either buyer or seller. Thus this separated the Islamic banking from the normal banking

2)    Charging of undue Interest rate (Riba) – As per  Sharia, the sacred Islamic Law, it is improper to charge undue or higher interest on the loan, whereas in our banking system we find that there is no restriction the rate of interest charged by the lender from the borrower. Islamic law prohibits charging of improper interest rate.

3)    Companies that want to deal in the Islamic Finance cannot do trading in gambling, and other speculative activities. (Gharar)

4)    Banks or institutions dealing as per Islamic code of conduct cannot trade in the selected few items that are considered illegal as per Sharia (Haram). Pork, Alcohol and other such item are considered inconsumable as per Sharia whereas in our day to day banking we don’t see such kind of restriction being imposed on any banking or a financial company.

5)    A compulsory Islamic tax must be paid (Zakt). We find that such a tax is non existent in out day to day to day banking. Also to collect tax in the name of Religion is unheard of in normal banking practices.

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