BUSINESS MATHEMATIC (MAT 402) ASSIGNMENT
ISLAMIC BANKING CONCEPT
COMPARISON BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING
NAME MUHAMMAD AMIRUL BIN MOHD ZAIN
STUDENT ID 2018206312
LECTURER ZAMMARIYAH BINTI MUSTAFA KAMAL
ISLAMIC BANKING CONCEPTS
Islamic banking or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking include Mudarabah (Profit sharing and loss bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost plus), and Ijara (leasing).
Common Shariah concepts used in Islamic Banking
We shall now define a few of the Islamic banking terms that people- associated with it and not-will hopefully now be able to grasp a greater understanding of the topic and type of banking.
•Mudharabah – involves the relationship between an investor and the entrepreneur. Profits between the two parties will be shared according to an agreed percentage while losses are all exclusively taken on by the investor.
•Musharakah – is practical for business partnerships where profits are shared on an agreed ratio while losses are divided based on the equity participation ratio.
•Murabahah – means that the purchase, selling price as well as profit margin and other costs must be clearly stated at the time and place of the transaction arrangement.
•Wadiah – permits the secured looking after of the customers deposits in the bank with a guaranteed reimbursement when the depositor requires it.
•Wakalah – is when a person employs someone else to complete transactions on their behalf.
•Hibah – is a token that is given voluntarily in return for a loan given or due to some benefit that was obtained.
Sharia prohibits riba, or usury, defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles is also haraam .The basic principle of Islamic banking is based on risk-sharing. This is viewed as a component of trade as opposed to a risk-transfer which is how conventional banking is regarded. Sharia forbids the Riba, it is prohibited in different chapters of Al-Quraan and there are different Hadith as well in which our prophet has prohibited Interest and hold it as a curse and sinister activity to the society. We can have a look into following Al-Quraan regarding Riba:
“O, Believers fear Allah and give up what is still due to you from the interest, if you are a true believers. (2:279)
‘From Anas Ibn Malik, the Prophet said: “if a man extend a loan to someone he should not accept a gift”
Interest is not only prohibited in Islam but it is not permissible in every renowned religion including Jewism, Christianity, Buddhism, etc. the Islamic philosophy behind the prohibition of Riba is that it is an unjust transaction which only makes the investor earn more and the business or entrepreneur suffers. In this mechanism the business has to give a fixed rate on the loan to the investor without considering the profitability of the business. The business may be in loss but it has to pay the loan and the interest that has been fixed to the investor. The interest based transactions helps the wealth to be accumulated in fewer hands in the society and the businesses or entrepreneurs are victimized. This create misbalance in the society by which the rich grows rich and the poor falls down the line, the situation may lead to chaos, fraud, juristic and economic turbulence in the society.s riba.
Simply put, payment of charges for the renting of money is prohibited under Sharia. Further, there should be an avoidance of;
Speculation – GhararAvoidance of oppression – ZulmDiscouragement of the production of goods and services that contradicts the Islamic principles – Haram
COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC BANKING
ISLAMIC BANKING CONVENTIONAL BANKING
Interest is charged even in case, the organization suffers losses. Thus no concept of sharing loss Loss is shared when the organization suffers loss
Real growth of wealth does not take place, as the money remains in few hands Real growth in the wealth of the people of the society takes place, due to multiplier effect and real wealth goes into the ownership of lot of hands
Islamic bank takes the risk of the asset No risk of underlying assets
Income is earned through sale or leasing contracts Income through Interest
In case of late payment or default by the client, there will be no penal charges. However, to instil a payment discipline, Bank is authorized to recover an amount at a predetermined percentage as compulsory contribution to Charity Fund constituted by the bank approved Shariah Board. This contribution to Charity Fund shall not constitute income of the bank. Late Payment charges on delayed payments and shall constitute bank’s income.
Islamic banking are in line with the principles of Islamic business as highlited in the Al Quran and hadith. As institution whose foundations are based on Islamic rules and regulation. Conventional banking practices are concerned with elimination of risk when involve in any transaction. In transaction, conventional banks take the liability from their customers but they do not get the benefits to their customer where as Islamic banks bear all the liability when involve in transction with consumer. Getting out any benefit without bearing its liability is declared Haram in islam.
Concept Of Islamic Banking and Why Islamic Banking https://www.linkedin.com/pulse/concept-islamic-banking-why-ali-mushtaq
Islamic Banking and Finance
The principles of islamic banking: thesis
Cheikh Soumare – Xlibris Corp. – 2008
Difference Between Islamic Banking and Conventional Banking | Aims