Islamic Bank Is Not Islamic? This question is quite common among people who want to learn more about Islamic Finance and the principles of Islamic Banking. In today’s article, we will briefly cover this topic.
Some Statistics on Islamic Finance
Since its inception four decades ago, the Islamic financial services business has experienced rapid expansion. Islamic finance has developed at a rapid speed over the previous decade. The number of Islamic financial institutions in the world has increased from one in 1969 to over 500 in 2009, spread across more than 75 countries, with Bahrain in the Middle East and Malaysia in Southeast Asia serving as the most important centres.
Since its inception in the 1970s, Islamic financial organizations that provide Islamic financial services have grown considerably. There are about 500 Islamic financial institutions in 75 countries around the world. The world’s 100 largest Islamic banks have set an annual asset growth rate of 26.7%, according to the Asian Banker Research Group, and the worldwide Islamic finance industry is growing at a rate of 15% – 20% yearly (McKinsey, 2008).
The data appears to be optimistic, but the industry is still too small in comparison to today’s financial markets. Furthermore, it is insignificant when we compare it to the Muslim income in the Middle East, which is around USD3 trillion. The 1.6 billion Muslims who make up the Muslim population are a significant motivator.
Is Islamic Finance Truly Islamic?
Interpreting the system as “interest-free” can be complex. An Islamic financial system’s philosophical base goes beyond the interaction of production variables and economic behavior. The traditional financial system, on the other hand, is primarily concerned with the growth of the economy. The Islamic system emphasizes both the economic and financial sides of transactions.
The payment or receipt of any predetermined, guaranteed rate of return is strictly unpermissible in the Islamic financial system. This effectively eliminates the concept of interest and the use of debt-based instruments. The system emphasizes the sanctity of contracts, encourages and promotes entrepreneurship, discourages speculative activity, and emphasizes risk-sharing.
Because Islam considers profiting from an exchange of money for money to be sinful, the Syariah laws prohibit giving or receiving interest and require that all financial transactions be based on real economic activity. Excessive profit, and other non-Islamic behaviors like cigarettes, alcohol, and gambling, are forbidden. Islamic financial institutions provide many financial services, such as capital mobilization, asset allocation, and exchange settlement services, as well as risk transformation and mitigation. However, these specialist financial intermediaries conduct transactions utilizing shariah-compliant financial instruments.
Additionally, Islamic financial products are structured using Islamic commercial contracts such as Mudarabah, Musharakah, Ijarah, etc. Every Islamic financial institution must have Shariah advisors that will ensure that its financial products meet Shariah standards. Islamic banking products, for example, instead of using loan contracts, Islamic banks structured such products using Islamic contracts to provide similar features that conventional banks offer. As a result, the Islamic bank and customer relationship is based on partnership instead of creditor-debitor relationship. Moreover, the goal of Islamic finance is not to maximize profit; and instead, it aims to distribute the wealth among the people equally.
The answer to the question of “Does Islamic bank really Islamic” goes beyond its structure. Islam promotes justice and peace, and Islamic finance is a tool to achieve this goal. Islamic finance has been designed in such a way to benefit humankind. Riba is an impermissible activity in Islam because it can cause injustice and even oppress the poor. Therefore, Islamic finance offers various features through contracts that are compliant with Shariah principles.
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