Principles of Islamic Banking
Is Islamic Banking Really Islamic?
Yes, we must say that Islamic banking is really Islamic, if it is being practiced on the basis of rules and regulations defined by Islamic Sharia. In case any organization is not following the rules defined in Quran, Hadith, Ijma or Qayas, they are not allowed to claim themselves an Islamic bank. To lessen hazard, the bank just affirmed around 40% of its business credit applications, yet the default proportion was zero.
Major Principles of Islamic Banking
Fig 1: Presentation on principles of Islamic Banking
Courtesy: Academy for International Modern Studies
Profit and Loss Sharing
It is one of the best principles of Islamic finance where the partners will share their profit and loss according to the part they played in the business. There will be no guarantee on the rate of the returns that the Muslims will play the part of a partner and not a creditor.
In the economic transactions, the risk sharing is promoted by the Islamic banking. When two or more parties will share the risk following the principles of Islamic banking the burden of the risk will be divided and reduced in the parties. So it will improve the economic activity of the state.
It can be regarded as the prohibition of interest:
- The wealth will get the return without any risk or effort.
- Regardless of the outcome of economic activity the person who gets the loan has to return the money and Riba to the lender.
- In principles of Islamic banking, taking advantages of the issues that other are facing is unjust.
According to the Islamic finance principles, Muslims are not allowed to participate in the ambiguous and uncertain transactions. According to Islamic rules, both parties should have a proper control over the business. As well as the complete information should be shared with both parties so that the profit and loss will be equally shared.
In Islam, the acquisition of wealth through evil means or participation in gambling is prohibited. It will protect the Muslims from the conventional insurance products because that is a type of gambling. On the other hand, Islamic banking works in Takaful that involves mutual responsibility and shared risks.
No Investment in Prohibited Industries
The industries that are harmful to society or have a threat to the social responsibilities are prohibited in Islam. They include:
According to the Islamic finance principles, you are not allowed to invest in such industries. You cannot even participate in the mutual funds that will help the industry to flourish.
There is a property tax included in the rules of Islam that it known as Zakat, which allows the balanced distribution of wealth. According to the Islamic banking principles the fair amount of Zakat is deducted from the accounts of Muslim in the holy month of Ramadan. Islamic banks promote this social responsibility and distribute the amount among the needy.
So we can say that the principles of Islamic finance guide us to invest in an industry that will help us to achieve the financial and social objectives that have been determined by Islam. The Islamic finance principles have been designed to make an economy successful. So it is a way of saving our money from being invested in a wrong path.