Islamic banking can crack the imponderables of world economy

 

THANKS to the kindness and mercy of Allah, who has bestowed Arabs with independence, sovereignty and by and large emancipated them economically from the Western yoke. Muslims, not only those who are born Arabs but also living all over the world are looking for a dedicated approach to Islamic finance and investment. In little more than two decades Islamic banking has grown from nowhere to a big business.
In addition to banning interest as a form of usury, Islamic banks follow a host of strict rules prohibiting them from earning money from activities that Muslims regard as unclean. The strict code has not stopped Western banks from entering into the fray. Citicorp, for example has set up Citi Islamic Investment Bank in Bahrain in 1996 after serving the market in other forms for more than 20 years. J. P. Morgan & Co. who were long time advisers to Gulf Muslim rulers, as well as Deutsche Bank and ABN Bank have Islamic units.
Islamic banking took off during the Mid 1970s when a surge in the world oil prices poured billions of dollars into the coffers of the oil producing Gulf States. Today however Islamic banking is topping a new demographic ‘reality.’ Islam is the world’s fastest growing religion in the world. At the same time more Muslims in Europe and USA want financial services that reflect their religious beliefs. That’s why some Islamic banks have set up shops not only in Europe but also in USA.
Islamic banks are limited by Sharia screens, which prohibit investment in such vices like gambling or weaponry. Every thing is governed by Sharia mirrors or areas sanctioned by Islamic laws including education, food production and biotechnology. So Islamic banks should be barred from speculating which otherwise also has been proved to be the main cause of the meltdown of many strong economies recently.
Bankers have devised numerous ways to get around the Islamic ban on earnings from the interest. For instance imports and exports of raw materials rely on a technique that is known as Murabha (Cost Plus Financing). This technique has also been approved by New York FED (Federal Reserve Bank) to validate the ban on interest.
In this arrangement, bank buys goods and sells them for a customer who then pays the bank at a future date and at a mark-up agreed upon by the bank and its customers. Repayment usually in installments is specified in the contract. Investment can involve the sale of debt, which has to be scrutinised. Debt can arise out of the contract of exchange called (Aqad al Muawadhat) such as trade. Trade financing based on the underlying contracts of Murabaha. It can be based on asset sale. These securities are traded in the secondary market under the concept of Bai-Al-Day. Maturities of these securities range from as little as one month. Another form of financing is known as Mudaraba (Trust Financing), under which investors might supply capital for projects while their bank provide the projects with management. The investor and the bank then share the profit or loss.
A consumer who wants to finance a new car under Islamic principles might lease it or agree to make a series of payments that total more than the sticker price with a loan until the contract is fulfilled, the bank still owns the car. Just because the contract never refers to interest does not mean that an Islamic bank cannot make money. One of the most important agreements is Musharaka (partnership financing). This technique involves a partnership between two parties who both provide capital towards the financing of a project. This might be a bank and investors putting money into an infrastructure project.
Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. Either parties or just one party may carry out management of the project.
Adhering to interest-free Islamic approach to finance under the global interest laden economic order is not easy.  However, despite the constraints, practitioners of Islamic banking have achieved impressive results

 
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