Comparison between Muslim and conventional Bankss
What is Muslim banking?
The beginning and bases of Islamic banking banking is governed by the Islamic law Islamic jurisprudence sometimes referred to as Islamic law, Islamic Islamic law jurisprudence provides regulations that encompass the allotment of resources capital market activities and the distribution of income and wealth.
Islamic non merely a faith it ‘s a manner of life, the Qur’an and the life of the prophesier and his comrades have give Muslims a elaborate manual by which to populate every facet of our lives, from how we greet each other to the manner we pray and even the nutrient we eat. Therefore it makes sense that our pecuniary traffics are besides governed by this across-the-board faith this is called Islamic banking.
Islamic banking refers to a system of banking which is consistent with Islamic jurisprudence besides called shari’a and guided by Islamic economic sciences, in peculiar Islamic lawprohibits the payment and aggregation of involvement besides normally called Riba ( vigorish ) , the chief statement against involvement is that money is non used as a trade good with which to do a net income but that it should be earned on goods and services merely non on control of money itself.
Features of Islamic banking
Muslim economic system is based on specific characteristics, the most of import of which are as follows:
Its credo -based: Islamic shari’a allows all economic sciences activities in the model of protecting public involvement and safe guarding it.
Its realistic: Muslim regulations fulfill all the demands of existent life. That is why we find that Islamic shari’a dose non prohibit minutess except those affecting unfairness, unless there is an express proviso forbiding it and every bit long as it serves the involvement of people and fulfills the realistic demands of life every dealing is lawful.
In the ethic-based: adult male may do net income from making concern nevertheless when this runs against Islamic moralss and morality, it is outlawed. In add-on for investing to be legitimate one of the most of import demands is that is outcome must carry through the world of investing dealing and that it enables the Islamic fiscal establishment to province what it expects to do in net incomes whatever this can non be determined as a certainty or can one commit one ‘s ego to it or bear any loss sustained.
If an Islamic fiscal establishment ( ifi ) gives such a warrant the investing becomes improper and the addition made from it becomes dirty and improper because vouching the rule of the investing of stipulating it net income as a certainty make the IFI ‘s activity similar to the involvement based activities undertaken by conventional Bankss and this is declared improper in poetries of the Qur’an and Hadiths which deal with Riba ( vigorish ) .
Main conditions regulating Islamic investing:
Money does non bring forth or engender money in itself but it becomes productive if its affecting an activity or work
Investing is capable to the regulation of net income and loss sharing.
Investing in concern activities is lawful, but prohibitions should be avoided.
Contracts must be free of gharar ( uncertainness, ignorance and the conditions which lead to differences )
The two chief types of vigorish to be avoided are as follows:
Riba al-nasiah or differed vigorish, is related to extension of the refund period for extra payment of money its besides called riba Al jahiliyah which was a pre-islam from of vigorish and the worst of its sort.
Riba al-fadl means the surplus which is taken in exchange of specific homogeneous trade goods such as selling gold with another gold.
Manners of funding
As with conventional banking Islamic finance requires tools or instruments through which to run below is a brief account of each of the most normally used manners of Islamic funding.
Murabaha is a sale whereby the bank purchases a trade good on the order of a client and so sells it to the client on a cost plus net income footing the cost incurred by the bank for the trade good and the intended net income rate is pre-agreed by client murabaha is no considered as a personal loan but commercial dealing based on following two cardinal rules:
The bank buys the goods and trade goods from its proprietor and possesses them either really or constructively and the sells the goods or trade goods to the purchaser at a net income border a greed on purchase the two parties.
The monetary value of the sale is fixed and must non increase in instance of hold in payment its besides non duty for the bank to give discount if payment is made prior to the adulthood day of the month.
Mudharaba: is a partnership where one spouse gives money to another for puting in a commercial endeavor while the other utilizes his or her concern accomplishments. The net incomes generated are shared in a ratio by common understanding bur loss if any is borne merely by the proprietor of the capital in which instance the enterpriser gets nil for his labor
Musharaka: literally means sharing in Islamic finance musharaka means a joint endeavor ( partnership ) in which all spouses portion the net income harmonizing to a specific ratio loss is shared harmonizing to the ratio of the capital part each spouse invested.
Ijara and ijara wa lqtina: ijara merely means a leasing or employment contract. There are two types of ijara the first being the contract of leasing hiring or renting the 2nd is ijara Washington laqtina which is besides called ijara muntahiya bitamleek which is renting with an project from the leasor to sell the equipment or the installation at the terminal of the rental term or to supply the chartered belongings as a gift to the leaseholder provided the leaseholder pays the full required lease within a specified period.
Istisna’a: is a gross revenues dealing where a trade good is sold before it come into being for illustration this manner of funding may be used for place funding where the client owns land and seeks funding for the building of a house the moneyman can supply him with a constructed house on a specified piece of land the monetary value must be fixed with the consent of all parties involved all other necessary specifications of the trade good must besides be to the full settled the payment of an istisna’a may be made in progress or episodes or in a ball amount at the terminal of the period.
Salam: is a gross revenues dealing where a trade good normally horticultural or agricultural goods is sold before it comes into being the monetary value of the trade good must be paid in progress to do the dealing valid.
Types of histories in an Islamic fiscal establishment ( IFI )
In Muslim banking each client is a spouse with the Islamic fiscal establishment ( IFI ) this relationship is classified as a mudarib partnership net income ensuing from the history are divided between the parties an IFI receives a certain per centum of the net net incomes as a return for the sum deposited in different investing histories as its portion being a mudarib as a greed between client who is the investing history holder and the IFI.
Current histories: are an involvement -free loan by the history holder to the Islamic bank which maintains these financess and pays them to the client on demand these histories are similar to a loan in warrant and the payment of the same sum.
An IFI has the right to put the financess its retention in current histories without the client bearing any loss for this ground the client does non acquire any net income on this type of history but he besides does non bear any loss.
Investing nest eggs histories: many Islamic Bankss offer nest eggs histories to their clients this history allows the history holder to put financess in a safe environment boulder clay such clip when they may wish to retreat them net incomes and losingss under investing nest eggs histories accrue on the minimal monthly balance net incomes are paid or losingss are deducted after the termination of the fiscal twelvemonth and the net net incomes are determined and the balances under investing economy histories are invested on the footing of unrestricted mudharaba an Islamic bank has the right to make everything necessary to recognize common involvement. An history holder authorizes the Islamic bank to put the net incomes made from the minute they are registered in his ain history with the Islamic bank.
-Differences between Islamic and conventional Bankss
There are a figure of cardinal differences between the merchandises and serviced offered by a conventional bank in a comparing to an Islamic fiscal establishment ( IFI ) Muslim minutess are created in position of the jural regulations of Islamic shria’a and the differences can be highlighted as follow
In conventional bank
Fundss generate financess and the spread between the loan and adoption is used by the bank
A debit history that accrues involvement
See loan petitions for concerns and supply loans with involvement payments to be paid back to the bank in installments in the dealing of interchanging loans among Bankss these are capable to involvement both giving and having
A loan is extended and an addition is charged on the loan by subjecting it to involvement and compound involvement in instance of delayed refund.
Investing of financess
Conventional Bankss pool financess through sedimentations and extend loans profiting from the spreads without being straight involved in hazards associated with the undertakings
A differed check is bought at a lower value which is a signifier of involvement based dealing and non allowed in Islamic banking
The sum paid is an interest-based loan, because its an overdraft in Islamic Bankss what the bank pays on the overdraft client ‘s behalf is an involvement free loan in conventional Bankss involvement is paid on the sum due to the client – In Islamic Bankss
Based on the rule that financess do n’t bring forth financess unless they are coupled with an activity or work.
A guaranteed loan that ‘s paid on demand without addition or lessening
Actively encourage enterprisers by funding little endeavors by manner of partnerships that end with ownership Islamic Bankss loans are extended to other Bankss without taking or giving involvement
Qur’anic regulation if the debitor is in a trouble grant him clip boulder clay it is easy for him to refund nevertheless if he is stalling the bank applies shari’a compliant regulations to vouch its right but without fall backing to involvement
Investing of financess
Fundss must be invested in lawful countries that achieve societal and economic development countries outlawed by shari’a must be avoided, the capital is invested on a partnership footing between the bank or enterpriser and the capital supplier.
A differed check is en cashed against its value on encashment day of the month and it may non be bought before its due day of the month at a price reduction.
Murabaha is used whereby a murabaha-based recognition is opened with the bank. The bank owns the trade good and so sells it to the client by manner of murabaha.
Finally, in most states Islamic of the Muslim universe. The populace ‘s credence of Islamic finance has been faster and much greater than is appreciated by must outside perceivers. Islamic finance is so perceived by many of its users as an improved system in many regard. In add-on many of the smaller Bankss and fiscal establishment in the GCC may detect that Islamic finance represents a alone distinction scheme because of its focal point on a niche market section. For case there are presently 17 commercial Islamic Bankss in the GCC, yet a recent study by standard & A ; hapless ‘s suggests that the sector is non yet crowded and there is a room for some of the little bank to reassign themselves into Muslim Bankss. ( Muslim retail banking and finance by Sohail Jaffer )