Islamic financing is the way of banking that is consistent with the Islamic laws (sharia). Islamic laws do not allow a fixed rate of interest that is usually known as markup. Islam prohibits the fixed profit. This fixed interest is known as RIBA. Islam also prohibits from investing in such a business which is unlawful, as well as gambling. In the early years, many Muslims did not like banks and preferred to save their amounts at their homes. Others liked to save in accounts where only service charges were deducted and no profit or loss was given. In Islamic finances, assets are usually backed.
Islamic banks also work for the same purpose as conventional banks. Their purpose is to create money by lending capital. They also have some other purposes, which is to follow Islamic laws. Islamic banking works on the principle of risk sharing rather than risk transfer as used by conventional banks. The financing introduces some new terms like MUDARABA, MUSHRIKA, and IJARA. Islamic banks also provide financing services to their clients. Instead of issuing a loan on interest, they buy the commodity from the seller and then resell it to the buyer at a slightly higher price. Commodity is transferred to buyer at the start of the contract. This concept is known as MURARBA. This has removed the problem of RIBA. Islamic banks can also give their money to companies at floating rates of interest. This rate of interest is pegged to the company’s rate of return.
Another term used in Islamic financing is AMMANAH. It means a situation in which one party keeps the property of the other as a trust. It also describes other financial terms of Islamic law. ARBUN is another term used. It describes the down payment and is non-refundable. At the time of contract, this amount is given to the seller by the buyer. GHRAR is also a finance term. It refers to the uncertainty of some event. IJARA means leasing contract. Banks can earn profit from IJARA by charging lease rentals. In Islamic Financing, MAYSIR means gambling, this is prohibited under Sharia. TAKAFUL is known as the Islamic insurance. Its plans are used to avoid interest and gambling in the transaction.
Modern Islamic banking was first started in Egypt. Mostly Islamic banks are found in the Middle East and other Islamic countries. These countries include Saudi Arabia, Malaysia, Pakistan, Bahrain and United Arab Emirates. These Islamic banks offer investment in Islamic stock and trade. Many other banks also offer Islamic banking services. Some countries have also issued new accounting standards for financing. In Pakistan, the Institute of Chartered Accountants of Pakistan (ICAP) has issued Islamic Financial Accounting Standards (IFAS). All the Financial statements of Islamic banks are based on these standards. Islamic banking has a very small share in international market, and the largest Islamic bank in the world is the Islamic Development Bank.
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