By Muhammad Sheeraz Javed
The concept of Islamic financing system was started in the second half of the 20thcentury. Islamic scholars started looking that how the existing social and economic system of the world converts into the Islamic point of view. Islam is against the capitalist structure of the conventional banking system where reward is fixed and all risk is borne by the one party.The main source of revenue and cost of funds to conventional banks is charging interest through lending and accepting deposits for interest. And Islam is against of conducting business by charging interest.so, Muslim have to come up with that system which addresses the above problem.
In 1973 the Muslim countries’ leaders decided in organization of Islamic conference (OIC) to build an Islamic development bank. Islamic finance is mainly designed for meeting the requirements of a large Muslim population scattered around the globe. Islamic financing is supposed to accomplish with Shari’a.in Shari’a there is no concept of fixed rate of profit and profit rate is treated according to Islamic teaching and that is the main thing which differentiates Islamic finance from conventional finance.The common terms that are used in Islamic banking system are profit sharing (Mudharabah), safekeeping (Wadiah), a joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In Contrast to conventional bank loan system, an Islamic financial institution (IFI) customer request to IFI for a supply of any physical product and bank purchase of that product for customers and sell at a profit, while allowing the buyer to pay the bank in installments. This type of contract is called Murabahah and has no additional penalties for late loan payment.IFI insures their investment by asking the collateral which is under the ownership of the buyer. The nature and risk associated with a contract loan are different for IFI as compared to conventional banking institution where there is only a default risk, but for IFI they bear certain other risks, including price, technology, transportation, security, foreign exchange in addition to credit risk. A latest approach applied by some banks for mortgage loans, called Musharakah, allows for a floating rate (interest rate that changes on a periodic basis) in the form of rental.in that contract both party bank and borrowers purchase land jointly with agreed percentage of capital. Then bank leases their part to borrow for rent and provide chance to borrower to purchase the bank share in agreeing installment in case of default during the joint capital both, parties get a portion of the sale of property. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy.
In last two decades, Islamic banking system showed an impressive growth rate of about 15 to 20 present per year with more than 700 IBI around the globe which attract the attention of Muslims as well as significant part of non-Muslim world also. And this trend shows that the Islamic banking system has a great potential to become an alternative system of banking especially in view of the global financial crises. With all the success and growth – Islamic Banking Industry is still in its evolutionary stage and required time to develop an economic system which truly reflective of the sacred principles of Islam and get the maturity level of the interest bases banking system which take hundreds of years for reaching that stage.
Sep 28, 2016 0
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