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Islamic Banking: Tools and Techniques Essay

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Updated: May 30th, 2020

Introduction

An Islamic bank may be defined as an organization with the sole responsibility of marshalling financial resources and investing them with the aim of meeting financial and social goals that are acceptable by the Islam religion. It is important to note, therefore, that the processes involved in the investment and marshalling of these resources have to conform to the Islamic Shari’ah law (Greuning, and Zamir, 153).

Principles of Islamic Banking

The principles of Islamic banking are based on the holy Islamic book; the Qur’an (Visser, 302). Muslims, therefore, believe that the inscriptions in their Qur’ans were the voice of God. The principles that guide Islamic banking can be simplified into four fundamental concepts. These include: –

  1. The second guiding principle for Islamic banking is based on ethical standards. It is the religious duty of Muslims to invest their cash on wholesome businesses without engaging in dubious transactions (Kettell, 184). As a result, their investments are based on comprehensive ethical considerations on the business, the products produced and services provided, the policies and strategies and the effects of the business to both the society and the surrounding at large (Wiedl, 69).
  2. Obtaining and charging interests is strictly prohibited. Islamic banking is guided by a strict law of absolutely no interests on loans. It is believed that money is not supposed to generate profits and if this is done, only negative results would follow (Walker, 173).
  3. Social and moral values form the basis of the third principle. The Islam religion demands that all its believers take good care of the needy in the society. For this reason, Islamic financial organizations are compelled to offer help to the destitute in the societies. This is not only done through charitable donations but also the exclusion of profits in the loans lent out to people by the banks (El, and Amr, 56).
  4. The fourth and last principle is based on business risk and liability. This concerns the notion of fairness. The Islamic law dictates that all parties engaged in a business transaction must share in both the risks and profits of the business. A financer, according to Shari’ah law, is considered as a sinner and an economic parasite if he or she does not agree to share in the business risks.

Significance of Islamic Banking to UAE

It is estimated that Islamic banking has captured an overwhelming 20% of the overall banking market share in the United Arab Emirates (Kettell, 68). Since its incorporation into the UAE in 1985, the Islamic banking has played an imperative role in financing infrastructural projects, corporate expansion and aiding in the development of residential places (Mohamed, and Munawar, 121). The Sheri’ah compliant policies embraced by these banks have liberalized the economy of UAE and made it flexible for people from all classes (Abdul-Rahman, 34).

Comparison Of Islamic Banks And Traditional Banks

The Islamic and traditional banks have many vivid differences. For instance, the profitability of both banks is quite different ((Kazarian, 87) and (Akgündüz, 19)). While depositors in traditional banks have a fixed interest rate for the funds deposited in their accounts, depositors in Islamic banks have a chance to get a potion of the profits collected by their banks. This implies that depositors in Islamic banks earn from their banks while depositors in traditional banks do not (Mullineux, and Victor, 69).

Commercial banks are anticipated to be considerably liquid so as to govern withdrawals from their deposits ((Clark, 98) and (Hassan, 91)). On the contrary, Islamic banks have unique profit sharing techniques and investment natures that invalidate this principle. Unlike the traditional banks, Islamic banks are more focused on aiding their clients than making money (Saeed, 100).

Works Cited

Abdul-Rahman, Yahia. The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking. Hoboken: John Wiley & Sons, 2010. Print.

Akgündüz, Ahmet. Studies in Islamic Economics: (Islamic Banking and Development). Rotterdam: Islamitische Universiteit Rotterdam, 2009. Print.

Clark, John O. E. Dictionary of International Banking and Finance Terms. Canterbury: Financial World, 2011. Print.

El, Tiby, and Amr M. Islamic Banking: How to Manage Risk and Improve Profitability. Hoboken, N. J: Wiley, 2011. Print.

Greuning, Hennie, and Zamir Iqbal. Risk Analysis for Islamic Banks. Washington, D. C: World Bank, 2008. Print.

Hassan, M K. Handbook of Islamic Banking. Cheltenham U. A: Elgar, 2007. Print.

Kazarian, Elias G. Islamic Versus Traditional Banking: Financial Innovation in Egypt. Boulder U. A: Westview Press, 2007. Print.

Kettell, Brian. Introduction to Islamic Banking and Finance. Chichester, U. K: Wiley, 2011. Print.

Kettell, Brian. The Islamic Banking and Finance Workbook: Step-by-step Exercises to Help You Master the Fundamentals of Islamic Banking and Finance. Chichester: John Wiley, 2011. Print.

Mohamed, Ariff, and Munawar Iqbal. The Foundations of Islamic Banking: Theory, Practice and Education. Cheltenham, U.K.: Edward Elgar, 2011. Print.

Mullineux, A W, and Victor Murinde. Handbook of International Banking. Cheltenham, U.K: Edward Elgar, 2006. Print.

Saeed, Abdullah. Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation. Leiden [u.a.: Brill, 2006. Print.

Visser, H. Islamic Finance: Principles and Practice. Cheltenham, U.K: Edward Elgar, 2009. Print.

Walker, George A. International Banking Regulation: Law, Policy and Practice. London: Kluwer Law International, 2001. Print.

Wiedl, Kathrin N. The Islamic Banking System – Not Conductive to the Start-Up of Young, Innovative Business Firms. München: GRIN Verlag, 2007. Print.

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