Monday, December 11

Basic Principles of Islamic Banking

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Basic Principles of Islamic Banking


S J Tubrazy

The half a century long experience in the field of Islamic banking has brought to the fore a number of basic principles on which the edifice of Islamic banking and finance rests. Without having a clear perception of these fundamental axioms, no meaningful or worthwhile progress can be made in the direction of establishing Islamic banking. Before discussing the alternative modes of financing and investment suggested or put to operation so far, the suggested restructuring of banks and financial institutions and other necessary steps to be taken, it is appropriate that these axioms are enumerated in clear and specific terms:

The banks under the Islamic system shall continue to perform their primary functions of receiving money from the savers and making it available lo various enterprises, entrepreneurs, business and businessmen. This exercise will be totally free from any involvement of Ribs, Qimar, Gharar and such other practices which have been prohibited by the Shariah.

Riba is prohibited in all its forms. There is no difference between usury and interest, simple and compound interest, interest on nominal rate and interest on exorbitant rates, All these forms of interest fall under the category of Riba and are prohibited,

All transactions should be in exchange of commodities, goods, services or labour, No purely monetary transaction should be made because such transactions eventually lead to opening the door of Riba.

Loans should be avoided as far as possible in all commercial and business transactions. Financing on the basis of loaning and lending has no place in Islamic Shariah because the enterprise undertaken on the basis of lending and borrowing creates loopholes for usurious practices,

Lending and borrowing may be resorted to in exceptional cases to meet any emergency or contingency; but it should always be by a way of Qard‑i‑Hasan.

Banks under the Islamic system shall be primarily financial intermediaries to finance through equity, participation or partnership. Banks may also work as holding companies and may, where feasible, also directly engage themselves in commercial, industrial agricultural and other enterprises and businesses.

Any transaction or enterprise which is free from the fundamental prohibitions enumerated in the Shariah is Islamically allowed subject to other requirements laid down by the Shariah or the law,

Banks may render their services and undertake their operations in accordance with any of the forms or alternatives hereinafter enumerated; subject to the fundamental consideration of equity and risk participation:

(a)        Mudarabah.

(b)        Musharakah.

(c)        Leasing.

(d)       Murabahah.

(e)        Bai Salam.

(f) Bai‑Muajjal.

(g) Istisna (Pre‑production sale).

(h)        Muzaraah.

(i) Musaqah.

(j) Agency.

(k) Service charges.

(l) Qard‑i‑Hasan.

(m)       Buy ‑ Back Agreement (subject to certain conditions).”

(n)        Hire‑purchase.

(o)        Sale on instalments.

(p)        Developmental charges.

(q)        Equity participation.

(r)        Refit sharing.

(s)        Sale and purchase of shares in such companies which have tangible assets.

(t) Purchase of trade bills.

(u) Financing through Auqaf.

There might be some duplication and over‑lapping in some of these modes mentioned above but these are some of the examples which only show how different scholars and experts tried to develop modes of financing and investment keeping in view the framework of the Shariah. These modes, even if the list is expanded, will not in any way be exhaustive because new modes and techniques will keep on coming into existence. It is always the need of the entrepreneurs and the requirements of the market which give rise to new and novel modes and techniques. The approach of Shariah is not to lay down a set of exhaustive modes or techniques and prohibit the rest. The approach of the Shariah is just the other way round. It prohibits certain practices and permits the rest. These and any other Shariah modes are to be understood and applied in the light of this observation. Alternatives do exist which are being practised in Islamic banks and can easily be developed into viable alternatives. .


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