Chapter 1 Introduction of IslamIt is of import to be cognizant of the history and regulations of Islam and to hold an apprehension of Islam’s place within the society which is non the same for the spiritual power among western states. Harmonizing to Samuelsson in 2001, he mentioned that it is non ever easy for persons who adopted in the western civilization to understand the construct of Islam. ( Samuelsson, 2000 ) .The word Islam is an Arabic term and can be defined as “submission to the will of God “which comes from another Arabic term viz. “salaam” that can be defined as peace. Therefore it is said that the faith of Islam demonstrates that in order to accomplish peace of head and bosom, one must populate harmonizing to God divinely revealed by jurisprudence.
Harmonizing to Samuelsson the Koran is the holy book of Islam and to be seen the clip words of Allah ( Samuelsson, 2000 ) .Aims of survey
- What are IB
- How IB is implemented in Different Countries?
- Measuring the factors that affect IB in Different states.
Organization of the surveyChapter 1 – Introduction on Islam2 – Concept of IB3 – Factors Affecting consciousness, perceptual experience and apprehension of IslamicBanking4 – Research and Methodology5 – Implementation of IB in Different states6 – Analysis on Factors impacting consciousness, perceptual experience and apprehensionof IB in different states.7 – IB in Mauritius8 – DecisionChapter 2: The construct of Islamic Banking.History of IBFollowing Khir, Gupta and Shanmugam ( 2008 ) , IB was merely a conceptual model until the first half of the 20th century. It has now world-wide became a fully fledged system. IB foremost gained its visual aspect in Egypt in 1963.
In the 1970ss, many Muslim states help to set up Islamic fiscal establishments. During this clip, some IBs came into being in the Middle East. Examples are The Islamic Development Bank ( IDB ) , the Dubai IB ( 1975 ) , the Faisal IB of Sudan ( 1977 ) , the Faisal IB of Egypt ( 1977 ) , the Bahrain IB ( 1979 ) . Later, IBs and fiscal houses were set up in Qatar, Sudan, Bahrain, Indonesia, Guinea, Denmark, Turkey, England, Jordan and Switzerland.
Now, it is estimated that there are around more than 250 IBs operating in over 75 states. Even in non-Muslim bulk states like the UK, Australia, United States of America, they are puting up Islamic Financial Institutions.Harmonizing to Al-Omar the method that was practiced in Egypt was based on Mudaraba and lasted until 1967. This bank was non called every bit IB as this clip for political grounds and the purposes of puting this bank is to win the trust of husbandmans and workers in Egypt as they were traditionally minded and were used to western Banking system. However, subsequently on due to political determinations, the IB shut down.
Definition of IBSIB must run harmonizing to the Islamic norms and rules and it is a mixture of both commercial and investing bank. This system is efficient as it must protect the client by supplying them the best rate.Harmonizing to Al omar et. al. , in 1996 IB expand the economic system and follow the SL. Therefore, such bank can non affect in involvement, alcoholic drink, chancing industry other activities that are restricted by Islam jurisprudence. ( Al-Omar et.
1996 ) .Principles of IBSFollowing Khiret Al.( 2008 ) , IB is based on Shariah rules and does non let the being of involvement in its operations while advancing profit-sharing. It has the same aim as CB except that it must follow with the SL. The rules for IB are as followsa ) Sharing of net income and loss ( equity engagement )In Islam, Muslims are encouraged to put their money and to go spouses in order to portion net incomes and hazards in the concern alternatively of going creditors. Net income is recognized as the wages for capital and as such a depositor in an IB can hence do net incomes on his or her sedimentation in several ways. First, through return on his capital ; through sharing of net income when his capital is portion of the capital that is employed in a partnership, and through rental net incomes on an plus that has been partly financed by his capital.B ) Prohibition ofRiba.
It is considered asharam( non-permissible ) . In the Islamic nomenclature, involvement agencies profit that increases the chief sum without seting any attempt.degree Celsiuss ) Shariah-based activities. In IB, trading minutess are restricted to islamically acceptable minutess, which exclude those affecting intoxicant and gaming.vitamin D ) Money as possible capital. Making money from money is non allowed and money is merely a medium of exchange. Thus, billboard of money is considered to beharam.
vitamin E ) Principle of certainty.The rule comprises that uncertainness, hazard or guess is besides prohibited in IB.Merchandises of IBDeposits HistoriesWhen opening an history in an IB is different from that of a Western Banking system. In IBs it is viewed as a spouse relationship. Harmonizing to Zineldin, IBS is built on a partnership footing which means that all the depositors, investors and borrowers need to take part in banking minutess.
- Demand Deposits Account
In the demand deposits histories, it means that backdown can be done without any status and limitations.
Normally, client open this type of history in order to maintain their excess money and non to gain any net income. Banks do non pay any involvement on these sedimentations. ( Zineldine, 1990 ; Warde, 2000 ) .Normally when the sedimentations capital under this type of history can non be used for hazardous ventures or to put any other activities such as loans, investing and others. But this sedimentations can be used to supply short term loans to those who is severely in demand of capital provided that the client gives permission to the bank. At the terminal the net income that the will belong to the bank. ( Al-Omar et al. , 1996 ; Zineldin,1990 ; Akacem Er.
al. , 2002 ) .
- Savingss Account
Savingss can happen in assorted ways and client who want to salvage their money can utilize such type of history. The sedimentation sum can be used for other purposed provided the client gives permission to the bank. But is it of import to cognize that the bank guarantee its client that full sedimentation sum will be paid back to them. Normally if net income is obtained, they are paid to depositors and in instance loss occurs no premium will be paid to the customertom
- Investing History
Investing Account is a signifier of fixed sedimentation history and is hold for fixed period of clip known as the Net income and Loss sharing sedimentations.
The purpose is to gain net income instead than keeping the money but the capital is non guaranteed. The net income and loss ratio is guaranteed which means that all net incomes and losingss must be shared to both the bank and the depositor. Harmonizing to Akacem et.
al. , in 2002, the ratio is agreed upon in progress and can non be changed during the life of contract ( Akacem et. al. , 2002 ) .Contracts of IBSince SL include particular jurisprudence and ordinance therefore it is of import to find which contracts are valid to carry on banking minutess. It is critical to hold a clear regulations about the contracts since it avoids struggles, misconstruing and confusion between parties.Hazard sharing is of import under Islamic regulations therefore it is compulsory for both parties to hold with the hazard sharing ratio upon set up of contract.
A contract must be an understanding where both parties agree on all footings and conditions.The contract must be good defined, clear and well-structured to avoid all sorts of differences and misinterpretation.Types of ContractTo acquire a better perceptual experience of IB.
The contacts of IB is categorized into 3 chief classs
- Trading Contracts.
- Engagement Contracts.
- Supporting Contracts.
Harmonizing to Khir et Al ( 2008 ) , categorization of contracts in IB is of import as moving of financess in footings of sedimentations are done through contracts based with Shariah rulesTrading ContractsTrading contract known as sale contract that is selling of goods, hard currency and debt is possible. Harmonizing to Khiret Al (2008 ) these types of contracts are based on the rule of purchasing and merchandising of assets.
Trading contracts are categorized as follows
- Murabahah ( cost-plus sale )
Murabahah is used by many fiscal banks.It refers to a peculiar sort of sale holding nil to make with funding in its original sense. If a marketer agrees with his buyer to supply him a specific trade good on a certain net income added to his cost, so it is called murabahah dealing.
Murabahah is when the marketer discloses the existent cost he has incurred in geting the trade good and so adds some net income thereon. The net income may be in lump amount or may be bases on a per centum.Murabahah is merely a sale but what differentiate it from other sort of sale is that the marketer in Murabahah expressly tells the buyer how much cost he has incurred and how much net income he is traveling to bear down in add-on to the costThe payment may be at topographic point or many be subsequent day of the month agreed upon by parties and usually does non connote the construct of deferred payment.
Murabahah can be applied in banking minutess where the bank may fund the client by purchasing the plus from the seller and so sells it to the client at cost asset.Khan ( 2010 ) stated that it is a sale contract in which Customer recommends the bank to purchase a merchandise for him from 3rd party. Bank resells it to the client on the cost plus net income footing one time bank receive it
- Bai Bithaman Ajil ( deferred payment sale )
It can be defined as sale of goods with deferred payment that is non the topographic point sale and this method is used for belongings, vehicle or other consumer goods. The advantage of this funding is based on the activities of purchasing and merchandising. The plus that the client wishes to purchase is purchased by the bank and ownership base on ballss to the bank and the bank will reassign ownership to the client by selling the assets at grade up.Khiret Al( 2008 ) this type of contract can be described as Sale of goods on a deferred payment footing at a monetary value that includes a net income border agreed upon by both purchaser and marketer
- Ijarah ( Renting )
Ijara is a contract which is accepted under the SL. It can be defined as to give something on rent and occurs between the bank and a client where the Bankss purchase an plus that is required by the bank. Ijara can be defined whereby the proprietor of an plus transfers its assets to another party for an in agreement clip and at in agreement considerations.
Renting is done for an agreed upon amount by episode and for reciprocally agreed upon limited period of clip into a nest eggs account held with the same bank. ( Zineldin, 1990 ; Al-Omar et. Al. , 1996 )Nanava ( 2007 described Ijarah as an where the bank purchase the point needed by the client it can be equipment or belongings and so leases it to the client on preset fixed rate, as agreed by both parties ( Appendix )
- Bai Salam ( Future Delivery )
It means the fiscal establishment that is the bank will purchase the goods and wage in full sum in progress and the goods is delivered in hereafter.The payment is used to ease the the undertaking of husbandmans long ago as it allows them to purchase seeds so as to be able to bring forth fruits. Therefore, salaam was both advantageous to the purchaser and marketer. The marketer receive the monetary value in progress and on the other manus the purchaser benefit from lower monetary value that monetary value in topographic point rates. ( Appendicx for conditions ofsalam )
- Istina ( Sale by Order )
Istina’s can be defined as inquiring person to manucfacture and it is a forward contract sale that allows Islamic Financial Institution to purchase a undertaking that is under building of edifice and fabrication of aircrafts to be delivered on future day of the month.
The monetary value must be agreed by both parties every bit good as specification Most significantly the maker has the duties to fabricate the goods, the contract can merely be cancelled before the work begins otherwise the work has to go on at any cost.Istina will play a major function in the short term investing and working capital strategies in the hereafter and that Istina will replace the Murabahah as the short term financing strategy particularly when used in International trade ( Al Omar et. al. , 1996 )Engagement ContractsEngagement contracts focus on the equal based engagement between loaners and borrowers on the net income and loss sharing. In this manner bankers and loaners do non go the creditors of borrowers but alternatively they become their spouses by puting their portion of their money.Engagement Contracts can be classified as follow
It is a contract that creates that a joint venture between the bank and other parties for a dealing to take topographic point and it an old manner of funding. All concerned parties must be agreed on all footings and conditions made when the contract is set up else it is considered to be invalid. Under musharakah contract parties is puting the capital portions in both net income and loss which differs from CB.
Al Omar et. The capital is provided on the status that the capital proprietor portions the net income from the concern ( Al Omar et. Al. , 1996 ) .Net income is shared among parties that must be determined and agreed upon at the clip of contract and is shared harmonizing to the proportion of initial investing. If losingss occurs, the sum is shared every bit among spousesKhiret Al (2008 ) merely stated that this type of contract is used for long term and medium investing.
Mudarabah is a contract between the capital supplier and the entrepreneur.The capital supplier will supply all the money required for the dealing to take topographic point while the enterpriser will lend professional accomplishments, experience and commercial attempts needed for the minutess to happen.After the dealing has occurred, either net income or loss will happen. If net income is made, the sum will be shared between the parties at the preset ratio that has been agreed upon the apparatus of the contract. But in instance it consequences to loss, the capital supplier will endure all the loss in footings of money and on the other side the enterpriser will besides be every bit loss every bit good as his experience and accomplishments did non turn out to be utile for the dealing to be successful. Therefore under the SL, both net income and losingss must be shared among spouses.( See more in Appendix ) .
Khan and Mirakhor ( 1987 ) held that the construct of PLS is theoretically more effectual. Uzair ( 1995 ) said that mudharabah is the cardinal thought behind ‘interestless banking’.Naqvi ( 1981 ) argued that merely replacing involvement by unsure net incomes is non sufficient to do a dealing Islamic since inordinate net incomes can besides be exploitatory.Supporting ContractsThese are extra contracts which can are used to ease all activities occur under SL.
- Kafala ( warrant )
It is whereby a 3rd party accepts a current duties and the duty of person else liability. Khiret Al., ( 2008 ) stated it is an understanding warrant by the parties.
Third party becomes the surety of the debitor for the payment of debt assures that the debitor will refund the debt to the creditor.
Wadiae can be defined where a client comes to lodge hard currency and assets in an IB for safekeeping and whereby the bank guarantee the security for the safety of the point kept by it.
It is whereby debt is transferred from one debitor to another and after this dealing occurs the first debitor is free from duties.