FINANCIAL INSTRUMENTS

Islamic Banking and Finance



Islamic Banking and Finance

Introduction

The functioning of the Islamic banking might seem quite similar to that of the conventional banking system, but the matter of fact is that the world we are living in today is totally based on interest and any transaction or act done without it is mere impossible. It is still an ambiguity wether the Islamic banks as being Islamic just by name or following the patterns that are almost similar to that of the conventional banks. Many comparisons have given to show that there are not many differences in the functions and systems of an Islamic bank and a conventional bank which, will give an idea of the interest benchmarking followed in Islamic banks.

Discussion

For most large Islamic banks, however, at least three-quarters of dormitories - in some cases, almost all - trade name only Islam, according to a study (Khan, 2010). In fact, they resemble the traditional bank products, are forbidden to devout belief in limited membership. "If you are satisfied that 'tags' instead of 'interest.” Islamic Banking focuses on sharing of loss and profits with investors based on their share in the investment pool (Rosly, 2006). Islamic banking principles disregard the concept of interest and confirmed return to investor. It emphasize on directly taking the risk through equity participation and does not ensure confirm guarantee of return, therefore, returns for shareholder change subsequently based on returns derived from investment.

Islamic banking in practice emphasize on adopting the sharia principles to run the financial matters of the banking system. It disregards the concept of confirmed return on investment and, therefore, focuses on return on pool. Investor may take several forms in Islamic financing mode. He is not required to be involved in the financial management activities. He is only required to share his capital, for which skills, and resource of the other person be sued to generate profits. Non-participatory Islamic financing modes may include Modarba, Murabaha, and Ijarah. In any of these modes, financer is not required to play his role except sharing of money in the form of capital

Interest Benchmarking

Central to the concept of Islamic finance is the prohibition of paying or receiving interest, or riba. Islamic finance is asset-based and requires the sharing of risk. Speculation and extreme positions of leverage are not allowed under Islamic law. In addition to riba, sharia prohibits ghar, or deception; maisir, or gambling; and haram, or investing in prohibited industries such as pork products, alcohol, and pornography (Ahmad, 2003).

Another concern in Islamic interest free rate, is that the number of qualified people who can issue approval on Islamic financial instruments is extremely small. It is reported that only 20 people qualified to make such judgments, given the need for extensive knowledge of Islamic law, training in advanced finance, and language proficiency. This shortage of qualified evaluators means that shariah compliance boards of financial institutions have little choice for selection, and fees for such services can be high. It is also common for these elite scholars ...