Islamic Banking Basics
Banking is a concept that has been used in our society in different form and shapes. The history of banking is as old as 2000 BC when there were trading system and the gold coins. There are different banking systems in the world but the most famous ones are conventional banking and the Islamic banking. The main function of conventional bank can be summed up in one sentence: The banks borrow to lend. They borrow in the form of deposits and lend this money to earn interest. In contrary, Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors and the borrowers-all would participate on profit-loss sharing basis. Here you will get the complete information about what is Islamic banking, how does Islamic banking work, and is Islamic banking really Islamic?
This lesson will walk you through core principles of Islamic financial system. B by the time you complete thus lesson, you should be able to:
- explain key features and foundational concepts of the Islamic financial system
- identify significant phases in the development of Islamic banking and finance
- distinguish Islamic financial system and its institutions from the conventional financial system
Islamic Banking Concept
Islamic banking is a financevmanagement system that is based on the Islamic rules of Shari’ah (شريعة). The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. Banking in Islam is a saving money framework that depends on the standards of Islamic law, additionally known as Shariah law, and guided by Islamic financial matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefit and misfortune. Gathering interest or Riba (ربأ) isn’t allowed under Islamic law.
Islamic banking concepts have an indistinguishable reason from traditional managing an account aside from that it works as per the guidelines of Shari’ah, known as Fiqh al-Muamalat (فـقـه الـمـعـامـلات). Banking in Islam as an account exercises must be polished reliable with the Shari’ah and its pragmatic application through the improvement of Islamic financial aspects. A significant number of these standards whereupon banking in Islam is based are regularly acknowledged everywhere throughout the world, for quite a long time as opposed to decades. These standards are not new but rather their unique state has been changed throughout the hundreds of years.
History of Islamic Banking
A large number of the teachings of Islam deal with economic affairs. One of the five questions Muslims will face on Judgement Day will be: “How did you earn your wealth and how did you spend it?” Our earnings must come from halal means (permissible according to Islamic Law), and must be spent on halal categories of expenditure. The necessities of governing an expanding empire led early Muslim writers to discuss halal methods for raising revenues for the state, as well as the obligations of the state (according to Islamic law) to spend on the public. Thus, public finance is a sophisticated and well developed field within Islamic scholarship. Modern Islamic economics is based on this history of Islamic banking and on these early Islamic teachings, but has also been strongly shaped by the colonization of Islamic lands, struggles for independence, and the need to respond to assertions of the superiority of Western knowledge.
A video presentation on Islamic Banking is shown in Figure 1, courtesy of Academy of Modern Studies (AIMS), UK.
Fig 1: History of Islamic banking. Credit: AIMS
The history of banking in Islam goes back to the earliest reference point of Islam in the 7th century. The first spouse of prophet Muhammad’s, Khadija, was a dealer, and he went about as a specialist for her business, utilizing a significant number of similar standards utilized as a part of contemporary concepts of Islamic banking.
In the Middle Ages, exchange and business activity in the Muslim world depended on Islamic rules as account standards, and these thoughts spread all through Spain, Baltic States, and Mediterranean, giving a portion of the premise to western standards. From the 1960s to 1970s, the modern world accepted the Islamic banking system.
How Islamic Banking Works
It is important that you understand the rules to know how does Islamic banking work. There is consensus among the Shariah scholars that credit price of a commodity can genuinely be more than its cash price. The Islamic Fiqh Academy of OIC and Sharia Boards of all Islamic banks, approve the legality of this difference. However, no addition to price once mutually agreed.
Keeping in mind the end goal to procure cash without charging premium, Islamic banks utilize value support frameworks. This implies if a bank credits cash to a business, the business pays back the advance without premium, yet it gives the bank an offer in its benefits. In the event that the business defaults on the advance or do not win any benefits, the bank does not get any benefit either.
Academy for International Modern Studies. (2020). History of Islamic banking. Retrieved October 10, 2020 from https://aims.education/study-online/history-of-islamic-banking/
Ijara community Development Corp. (n.d.). History of Islamic banking. Retrieved October 12, 2020 from https://ijar/acdc.com/history-of-islamic-banking/