Essay on Islamic Banking

 Islamic Banking

Introduction: Islamic banking is banking or banking activity that is consistent with principles of Islamic law and its practical application through the development of Islamic economics. Shariah prohibits the payment or acceptance of specific interest or fees known as usury for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also forbidden (Haram). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20^th century that a number of Islamic banks came into being to apply these principles to private or semi-private commercial institutions within the Muslim community.

Principles of Islamic Banking: Islamic Banking has the same purpose as conventional banking to make money for the banking institute by lending out capital. Since Islam forbids simply lending out money at interest, Islamic rules on transactions have been created to avoid this problem. The basic technique to avoid prohibition is the sharing of profit and loss.

History: A number of economic concepts and techniques were applied in early Islamic banking including bills of exchange, partnership (Mufawada) such as limited partnership (mudaraba) and forms of capital (al-mal) capital accumulation (namaal mal) cheques, promissory notes, trusts, transactional accounts, loaning, ledgers, and assignments. The first modern experiment with Islamic banking was in Egypt. The pioneering effort took the form of a savings bank based on profit sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 by which time there were nine such banks in the country. The early 1970s saw institutional involvement. The conference of the Finance Ministers of the Islamic countries held in Karachi in 1970, the Egyptian study in 1972, the First international conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977 were the results of such involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the interest-free bank Islamic Bank.

Islamic Banking in Bangladesh: Islamic or Shariah banking in Bangladesh began under the banner of Islamic Bank Bangladesh Limited. The bank started its operation on March 13, 1983, with an authorized capital of Tk 10,000 million, and has in the past 27 years, invested more than Tk 255, 178 million in various projects and businesses in the country. It now has more than 500 branches in Bangladesh, with a number of overseas outlets in several Middle Eastern countries.

Following the huge success story of Islamic Bank Bangladesh Limited a number of private banks opted for either Shariah banking or opened several branches with Shariah banking provisions. According to the central bank of Bangladesh, more than 45% of the total financial institutions in the country have already gone over to the Shariah finance system.

Islamic Banking Techniques: The basic technique to avoid the prohibition of lending out money at interest in sharing of profit and loss that is Madarabah (profit sharing). ‘Mudarabah’ is a special kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called Rabbul-mal; while the management and work are the exclusive responsibility of the other, who is called ‘mudarib’. The ‘Mudarabah’ (Profit sharing) is a contract with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to the pre-agreed ratio.  ‘Murabaha’ is another term used in Islamic Banking. It refers to the sale of goods at a price that includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The asset remains as a mortgage with the bank until the default is settled.

Controversy:   Islamic banks are now criticized by some for not applying the principle of ‘Mudarabah’ in an acceptable manner. Where ‘Mudarabah’ stresses the sharing risk these banks have little tolerance for risk. They are only eager to take part in profit sharing. The majority of Islamic banking clients are found in the Gulf States and in developed countries with 60% of Muslims living in poverty. Islamic banking is of little benefit to the general people. Their impression regarding the Islamic bank is that Islamic banking is simply another means for banks to increase profit through the growth of deposits and that only the rich derive benefits from the implementation of Islamic banking principles.

Conclusion: Despite some controversy, non-payment of interest still remains a pivotal part of Islamic banking. It is true that Islamic banks working in our country are functioning very satisfactorily contributing a lot to our national economy. They have become a phenomenal success story and a role model for other banks winning the trust of the common people of Bangladesh.