Illustrate the Fundamentals of Islamic Banking Essay

IntroductionThis report seeks to bowl over an analysis of Moslem Banking and an organisational comparison to a corporate Global banking brass/ western one whilst identifying key issues and ch aloneenges that may arise for the use of such Muslim banking in the unify res publica.Muslim banking is a growing sector with its diversity in different segments and spectrum. It Caters to religious Muslims in Muslims societies as well as in countries w here(predicate) Muslims atomic number 18 in a minority. In addition, it is a broad standard non-Muslim individuals and communities that seek ethical financial solutions have alike been attracted to Muslim banking. It is uncontaminating from banking come that Islamic banking is equ exclusively(prenominal)y popular in all communities. (www.islamic-bank.com).The first Islamic bank was set up in the late 1960s in Egypt to fulfil the needs of Muslims who wanted to bank except tranquil live by Sharia law. An Islamic bank is not a religio us institution but caters for the needs of the Muslim and is also appealing to non-Muslims who embrace Islamic banking as an alternative to technical banking successful Islamic banks such as the Dubai Islamic Bank also known as (DIB) who opened in 1975 have set out a good public image for such choice of banking. Over recent years especially in the prevail decade Islamic banking has seen a rise in popularity and global development in western countries. Upon focusing on the UK The Islamic bank of Britain is United regions mainly recognised sharia compliant organisation, Usmani, (2005) defines sharia compliance as An act or activity that complies with the requirements of shariah Islamic law.Islamic bankingAs already declared Islamic banking is based on Islamic Shariah Law which sets out the principles of all banking activities for such Islamic banks this marrow all banking activity must be shariah compliant, a significant characteristic of this means interest is prohibited not onl y is this mentioned in the holy Quran as having bad affects on society but the main concept of Islamic banking is set upon the foundations of turn a profit-sharing instead of being interest based which is referred to as (Riba in Islam) which is highly known in conventional western banks in the UK such as NatWest, Lloyds tsb, HSBC etc.In a western bank form money will be lent/loaned to a guest with no real interest shown or involved in the outcome or line of work of the client obviously some risk assessment would be considered but not to the extent of which risk would be shared, Ridzwa, (2004) states the difference within Islamic banking is that cash/loans will not be given to the guest, first of all they purchase the commodity and canalise to client then all profit and loss will be distributed between parties harmonise to agreed terms and conditions.As Islamic banking is based strictly on Islamic ethics and Quran enforces Bown, (2005) states this also means loans/investing in projects or businesses that have haram significance which means forbidden activity in the holy Quran will not be invested upon for instance places that plan on serving alcohol or instigate gambling and sexual influences like nightclubs will not be agreed to investments. Upon analysing the financial side of Islamic banking the clear principle it is financially based on for its trading activity is the risk/gain is shared upon the provider of the loan (bank) and the expertise of business idea (customer) IBB, (2010) by this both parties have a uncouth agreement for the bank the money they are providing is being lent with a risk but also an agreement with the customer to share of any profits.The commercial law side of Islamic banking is rattling based on four basic principles (Bellalah and Ellouz, 2004) claim the of import of first Islamic business principle is profit and loss sharing and the second is based on fixed service fees and charges and third is based on free of cost and no charges. T e other principles are changing with the situation of the business and its operation.Methods of Islamic bankingIslamic banking has many a(prenominal) another(prenominal) different methods and Islamic approaches to what a conventional/western bank would give out a mortgage/loan. Dar and Presley, (2000) state that the key banking methods Islamic banks use are Ijara, Mudarabah, Murabahah and Musharakah.Ijara Is a form of rental contracts mainly for goods/property mortgaging it involves the sale and the transfer of pluss title to the customer lending at the end of Ijara. In a banking scenario the Islamic bank would buy a property lease it to a customer for a fixed price till the agreed price has been met through lease/ijara then the customer will become owner of such assets a rent contract by which the owner of the good rents it to another party can also be part of this. According to the (IBB) present the Home Finance and Islamic mortgage are based on the concept of Ij ara and it is very successful tool in Islamic financial system and popular amongst non Muslims too who are ever increasingly using this type of finance.Mudarabah khan, (1993) states this form of finance is mainly known as profit sharing and involves a type of partnership agreement between two sides in this scenario the bank and the person lending the money (customer) the bank will provide the funds and the customer will provide the business venture and idea however all profits will be shared amongst both parties with an agreed fee. It can also be say some characteristics of western banking are still exquisitely involved with this type of financing as the entrepreneur must guarantee plentiful refund in case of contract breaching and negligence.Murabahah This type of banking is referred to as cost plus/mark-up sale this involves a sale of which he buyer (customer) offers to purchase a commodity at a price equal to its cost to the seller plus an agreed profit margin. It is a trust o r a logical sale in which the cost of acquiring the goods by the seller must be disclosed. The cost to the seller includes the price he had paid plus all other expenses. Payment of price can be made against the delivery of the goods sold or deferred as lump-sum or instalments Islamic bank of Britain, (2010). Murabahah usually starts with the buyer signing a promise to purchase. The seller then acquires the goods and takes their possession. Finally, the buyer signs the Murabahah sale contract and receives the good in return for comportment or an obligation to pay later. It is one of the most popular modes used in Islamic banking system in different countries to promote interest-free proceedings.Musharakah this method of banking is mainly for mortgages similar to the ijara method with slight differentiations both have forms of agreements from both parties but difference in this method rather than rent instalments covering the cost to have full ownership of a property or goods insta lment payments will be for shares of the product/property which once fully covered will fulfil full ownership to the customer giving them 100% ownership.Comparison of Islamic banking to western/conventional bankingIt can be verbalize that Islamic and conventional/western banking Islamic and traditional banking actually are not different in what they supply but to how they supply such services Shahin, Z, (2004). Islamic banking has the said(prenominal) features as western/conventional banking and provides the same services as conventional banking for example current accounts, saving accounts, insurances, mortgages and investment opportunities in the society.Upon compare Islamic banking and conventional/western banking for example like the Islamic bank of Britain compared to Barclays bank there some evident differences not only is the main one being that of the shariah law principles that are followed by the Islamic banks which wherefore means business approaches in forms of inves tments, responsibility and product features will all be based upon the Islamic faith and must stay within the limits of Islamic Law or the Shariah. However other key significant differences in the two types of banking are factors such as interest, taxation, risk/profit sharing and the labor of investments.Comparison towards the use of interest within Islamic banks and western/conventional banks Lending money and getting it back with compounding interest is the main fundamental function for a western/conventional bank it is a main source of profit making for major high street banks in the United Kingdom almost some time criticised for their high rates of such interest. However this is in contrast to Islamic banking where interest is forbidden and deemed as Riba but a more partnership approach is given to the customer and agreed payments with profit sharing agreements set upon the provider and lender.When comparing the two methods the main difference here is that western/conventional banks follow the principle that interest is the price of credit, therefore reflecting the chance cost of give the money. Whereas in Islamic banking the creditor (bank) should not take reward of the person lending the money as this in Islam is perceived as injustice where the first Islamic principle underlying for such kind of transactions is deal not unjustly, and ye shall not be dealt with unjustly 2279, Holy Quran.Comparison of taxation and additional charges for Islamic banks and western/conventional banks In the United Kingdom all organisations/businesses must pay tax commodities including Islamic banks and non Islamic banks however in Islamic banking such additional charges are approached with caution and compliance to sharia law and have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to benevolence which is known as zakat claims often enough is welcomed by the Muslim population of customers as it is the Islamic term of charity. When comparing this type of additional zakat charge many western/conventional banks state this as normal VAT and APR charges which vary in price and cost from bank to bank it can be said for Islamic banking this type of charge still exists but named and dealt with differently in the form of zakat.Comparison of Risk sharing in Islamic banking and money loaning in a western/conventional bank Islamic banking involves risk and profit sharing with the person lending the banks somewhat forming a partnership olfactory modality with the customer Bhatti, I.M, (2008) which means Islamic banks are more involved with customer projects and pay greater attention in developing and appraising certain enterprises/projects where in comparison to western banks like Lloyds tsb where in a case study on Islamic and high street banks some customers who transferred from their branch over to Islamic bank of Britain branch stated they felt the bank was only interested as seei ng the customer as a debtor and themselves as the creditors. When comparing the Western banks method of loaning/lending money such banks will often enough place a fixed rate of interest as part of the charge and will not really be as closely involved in the participation of the business venture as Islamic banks would be due to the risk/profit sharing factor.Comparison on the restriction of investments for Islamic banking and western/conventional banking as stated many of times throughout this report Islamic banking is strictly shariah compliant meaning all activities are in conjunction with Islam and the teachings of the Quran and the prophet Mohammed PBUH therefore all business investments/ventures must be deemed as pure and accepted in the eyes of Islam for an Islamic bank to invest in Dixon, R. (1992) therefore any business proposals that are brought forward to an Islamic bank that consists of serving alcohol, promoting gambling and sexually influence will be strictly turned down . Where as in comparison to a western conventional bank plans will be accepted on the basis of good credit, business venture and the ability to pay back such fees.Challenges that Islamic banking may face within the United KingdomIslamic banking is becoming ever more popular in the United Kingdom with many non-Muslims also interested and joining the Islamic bank of Britain as customers but upon research and case study readings many people in Britain feel they beginnert fully understand the concept of Islamic banking and that it should be made more user friendly for society. There is need to advance a clear and transparent system of general as Islamic banking is in a transition development stage a key issue in Britain according to Khalaf (2007) Islamic banking industries have a barrier to overcome with the whole shariah law compliance being appealing to non-Muslims as many non Muslims can perceive this as influencing a different law for a different country with a different religious view point. Also opinions of Islamic scholars, suppose a product or practice may be accepted to one scholar, could be considered un-Islamic by another scholar.Malaysia has established a standard shariah board which is support by government which in the united kingdom is not applicable and that the banks set these out themselves according to basic shariah compliance. (Khalaf, 2007) claims it is evident in Britain that Islamic banking faces many challenges with society and keeping up with such addition of western conventional banks due to its new growth in the UK market however with strong midsection eastern financial backers such as Qatari national bank the Islamic bank of Britain is financially stable in this sense and that it is gaining more scholarship amongst the Muslim popularity of Britain with many Muslim customers holding accounts with them but it can be stated a key challenge is the Different beliefs in society make that some Islamic banking activity acceptable to one pa rt of community and to others it is not .ConclusionIslamic banking in Britain now has great opportunity for growth as it offer certain benefits that conventional western banks do not put in place many Muslims feel this type of banking is relevant for their practice of religion whilst some may argue that costs such as interest also known as Riba are still put in place just named and charged differently and then opt to carry on using such western banks however it can be said great ethical value is taken into consideration in contrast to western banks and vulnerability and risk of business venture is shared and discussed which if western banks utilise could see a great rise in popularity and custom however in the united kingdom the regulatory authority and structure of Islamic sharia practice can sometimes have setbacks for such Islamic banking activity as society may not accept this.Overall Islamic banking has great opportunity to grow because many numbers of muslims are residing in the united kingdom and there is a steady growth for such market, however it can be said if such rise of awareness and identity was put in place to market Islamic banking this could possibly promote it further and on the surmount of such western banks.ReferencesBellalah, M. and Ellouz, S. (2004) Islamic Finance, Interest Rates andIslamic BankingBokhari, F. (2007) Lloyds TSB spots growing appetite. Financial TimesBown, J. (2005) Islamic banking set to boom. Sunday TimesBelder, R.T. and Khan, M.H. (1993) the changing faces of Islamic banking. International Financial Law ReviewChris, Cook. (2006) is Islamic banking religiously sound? Financial TimesDixon, R. (1992) Islamic banking. The International Journal of Bank Marketing,Hassan, M.K. (1999). Islamic banking in theory and practiceHaron, Sudin (1995) The Framework and concept of Islamic interest-free banking