Islam world Essay

European countries colonized most of the Islam world in eighteenth and the premiere half of the twentieth century. They were able to manage the finances and economies of these countries which barely catered on their knowledge pertains and in their declare ways. Banks all over the world capture their own system in operating their organization. They set policies to attain their specific objectives and goals. One of these is the Islamic banking. Islamic banking as defined in Wikipedia, the free encyclopedia refers to a system of banking or banking activity which is consistent with Islamic law (Sharia) principles and guided by Islamic economics.In Islamic law, it forbids usury, the collection and payment of worry which is unremarkably called as riba in Islamic discourse. In general, the Islamic law forbids trading in financial gamble which is seen as a establish of gambling. It excessively forbids investing in businesses that are considered haram such as businesses which invo lve in alcohol or pork, or businesses which produce un-Islamic media. Numerous of Islamic banking was founded in the late twentieth century to cater to this specific banking market. History of Islamic Banking During the time of Prophet Muhammad, the Muslim communities have limited banking activity such as acceptance of deposits.In those days, the Muslims deposited their money with the Prophet or with the First Khalif of Islam whose name is Abu Bakr Sedique. The first Islamic bank was founded in Egypt which was put into under cover without giving around(prenominal) hint of Islamic image for having the fear of being seen as a manifestation of Islamic fundamentalism. In 1963, at that place was a pioneering effort made by Ahmed El Najjar who took the form of savings bank based on profit-sharing in Egyptian town of Mit Ghamr as an experiment. But the experimentation was ended in 1967 beca habit during those days, on that point were nine banks in the country which had the same system as his.Principles in Islamic Banking Just like other banking systems, Islamic banking follows same purpose get out that it ope pass judgments in accordance with the rules of sharia law which is known as Figh al-Muamalat (Islamic rules on transactions). The sharing of profit and loss and the prohibition of riba which means interest is the basic principle in Islamic banking. There are common Islamic beliefs which are used by the Islamic banking and these are the Mudharabah ( profit sharing) , Wadiah (safekeeping), Musharakah (joint venture), Murabahah ( cost plus) and Ijarah (leasing).Islamic banking uses many approaches in operating the system, if someone would like to loan the buyer money for him to purchase the selected breaker point he chooses, the bank might be the one to buy that item to the seller and re-sell it to him at a profit by allowing him to pay the bank in installments but before his loan will be approved, the bank would wonder him to have his strict collateral fo r banks protection against default. The land or goods which are registered in his name from the start of the transaction are the come-at-able collateral. However, if he has late payment, there will be no additional penalties.This kind of administration is known as Murabaha. Ijara wa Iqtina is another approach use by Islamic banking. It is just similar to real estate leasing. All Islamic banks have the same approaches when it comes to vehicle loans. They sell the vehicle at a higher rate than in the market price to the debtor and have his/her possessorship of the vehicle until the loan is paid. Islamic banks also used several approaches in business deals. They lend money to the some companies by issuing floating rate interest loans. This floating rate of interest is pegged to the companys single(a) rate of return.In other words, the banks profit on the loan has equal ratio to a certain percentage of the companys profit. There will be profit-sharing arrangement if the principal am ount of the loan is repaid. This kind of approach is called Musharaka. Another approach is the Mudaraba. It is a venture capital support which the bank provides financing while a certain entrepreneur provides labor so that both risk and profit are commonly shared. This kind of arrangement reflects the Islamic view that the borrower must not only be the one to bear all the risk or cost of a failure.Islamic banking only finance the Islamic acceptable deals and it doesnt involve in alcohol, pork, gambling and other form of businesses that are against in their beliefs. The only acceptable form of investing is the ethical investing and moral purchasing is encouraged. Recently, there are numerous Islamic banks opened in the Muslim world but they still have a very small share of the global banking system. Concepts in Islamic debt banking *Wadiah (Safekeeping) The bank is entrusted as a keeper and trustee of funds.An individual deposits fund in the bank and the bank will guarantee and assu re refund of the entire amount of the deposit, or any amount of outstanding balance whenever the depositor demands or withdraws it. The depositor whitethorn be rewarded with hibah also called as gift as a way of showing gratitude for the use of funds by the bank. The bank compensates depositors for the time-value of their money an example of this is the interest but refers it as a gift. *Mudharabah (Profit Loss sharing) It is an agreement or arrangement between an entrepreneur and a capital provider which the entrepreneur cornerstone use funds for his/her business activity.The capital provider and the entrepreneur will share the get according to an agreed ratio but if ever there are losses, only the capital provider will bear them. The profit-sharing continues until the loan is repaid. The bank will be compensated for the time value of its money through and through the form of floating interest rate which is pegged to the debtors profits. * Musharakah (Joint Venture) This kind of approach is usually applied for joint ventures and business partnerships. They share same profits according to their agreed ratio and divide incurred losses based on the equity participation ratio.This concept is different from fixed-income investing. *Murabahah (Cost Plus) This concept is referring to the sale of goods at a price, which include a profit margin agreed to by both parties. At the time of sale agreement, the purchase and selling price, the profit margin and other costs must be clearly stated. The bank will be compensated for the time value of its money in the form of the profit money. It is a fixed-income loan for the purchase of a real asset such as real estate or a vehicle having a fixed rate of interest. The bank cannot have an additional interest on late payments.The asset remains in the monomania of the bank unless it is fully paid. This kind of concept is also similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores. * Bai Bithaman Ajil (Deferred Payment Sale) This concept is almost the same with Murabahah but the debtor in this concept makes only a single installment and will pay on the maturity date of the loan. It also refers to the sale of goods on a deferred payment basis at a price including the profit margin agreed to by both parties.*Wakalah (Agency) The concept happens when an individual appoints a representative to do the transactions on his/her behalf which is just similar to a power of attorney. *Qardhul Hassan (Benevolent Loan) Of all form of loans mentioned, only Qardhul Hassan has an excellent effect to the debtors because in this loan, the debtor is only necessitate to repay the principal amount lent. However, the debtor may pay an extra amount (any amount that is in his heart) beyond the principal amount of the loan as a way of gratitude to the creditor.But this transaction is a true interest-free loan because there are debtors who do not give an extra amount to the cre ditor. For some Muslims, they consider this loan as the only type of loan that does not go against with the prohibition on riba which is a type of a loan that does not compensate the creditor for the value of money. *Ijarah Thumma Al Bai (Hire Purchase) In this concept of loan, there are deuce contracts involved. Ijarah contract is into leasing/renting and the other contract is called Bai contact which means to purchase. These two contracts are undertaken one after the other.An example of this is in a car financing facility. A node enters in an Ijarah contract where he/she leases the car from the owner which is the bank at an agreed amount over a particular period of time. When his contract in Ijarah expires, the Bai contract comes into effect which enables the customer to purchase and own the car at an agreed price. With this, the bank sells the car to the customer at an above market-price profit in return for agreeing to receive the payment over a period of time. The profit margi n is equal to the interest earned at fixed rate of return. * Bai al-Inah (Sell and Buy back Agreement)In Bai al-Inah, the financier sells product to the customer on a long-term payment basis and then the financier immediately repurchased the product for cash with a discount. This agreement permits the bank to assume the ownership over the product or asset in order to protect default without charging interest in late payments or insolvency. *Hibah (Gift) The debtor in this concept voluntarily gives a hibah (gift) as a token given to the creditor in return for a loan. This concept is practice when Islamic banks voluntarily pay their customers interest on their savings account balances.* Takaful (Islamic Insurance) This concept is not new for it had been practiced by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. Takaful is also an alternative form of cover which a Muslim can avail himself the risk of loss due to misfortunes. Nowad ays, in the modern business world, one way to minimize the risk of loss due to unavoidable circumstances is through insurances. The idea behind insurance is the sharing of risk. This concept of insurance does not go against in Shariah concept where resources are accumulated to help those who are in need.