Illustrate the Fundamentals of Islamic Banking Essay

IntroductionThis report understandks to take an analysis of Moslem Banking and an organisational likeness to a corporate Global blasphemeing organisation/ westbound one whilst identifying primal issues and ch exclusively(prenominal)enges that whitethorn arise for the affair of such(prenominal)(prenominal) Muslim banking in the linked Kingdom.Muslim banking is a growing sector with its diversity in polar segments and spectrum. It Caters to religious Muslims in Muslims societies as well as in countries where Muslims atomic number 18 in a minority. In addition, it is a ample standard non-Muslim individuals and communities that seek ethical financial solutions have likewise been attracted to Moslem banking. It is carry from banking dress that Muslim banking is equ everyy popular in only communities. (www.islamic-bank.com).The first Islamic bank was practise up in the fresh 1960s in Egypt to receive the needs of Muslims who wanted to bank that cool off li ve by Sharia law. An Islamic bank is non a religious institution but caters for the needs of the Muslim and is in like manner appealing to non-Muslims who perceive Islamic banking as an alternative to commercial banking in(predicate) Islamic banks such as the Dubai Islamic Bank also cognise as (DIB) who opened in 1975 have set out a good public image for such choice of banking. Over current years especially in the last decade Islamic banking has seen a rise in popularity and global development in western countries. Upon management on the UK The Islamic bank of Britain is United Kingdoms in general recognised sharia compliant organisation, Usmani, (2005) defines sharia compliance as An act or bodily process that complies with the requirements of shariah Islamic law.Islamic bankingAs already stated Islamic banking is base on Islamic Shariah Law which sets out the principles of all banking activities for such Islamic banks this meat all banking activity essential be shari ah compliant, a signifi dis committeet characteristic of this means interest is prohibited not precisely is this mentioned in the holy Quran as having bad affects on nine but the important concept of Islamic banking is set upon the foundations of pelf- overlap instead of be interest based which is referred to as (Riba in Islam) which is highly known in accomplished western banks in the UK such as NatWest, Lloyds tsb, HSBC etc.In a western bank system money volition be lent/loaned to a node with no real interest shown or problematic in the outcome or business of the customer app arntly each(prenominal) seek assessment would be considered but not to the close of which risk would be overlap, Ridzwa, (2004) states the difference inwardly Islamic banking is that cash/loans go away not be given to the customer, first of all they purchase the trade good and transfer to client then all profit and loss leave alone be distributed between weakenies concord to concur endp oints and conditions.As Islamic banking is based strictly on Islamic ethics and Quran practices Bown, (2005) states this also means loans/investing in projects or businesses that have haram signifi kindlece which means forbidden activity in the holy Quran will not be invested upon for instance go intos that plan on serving alcohol or pass on play and sexual influences like nightclubs will not be agreed to investments. Upon analysing the financial side of Islamic banking the clear principle it is financially based on for its trading activity is the risk/gain is shared upon the provider of the loan (bank) and the expertise of business idea (customer) IBB, (2010) by this twain parties have a mutual capital of New Hampshire for the bank the money they are providing is being lent with a risk but also an agreement with the customer to share of any profits.The commercial law side of Islamic banking is actually based on four basic principles (Bellalah and Ellouz, 2004) claim the primi tive of first Islamic business principle is profit and loss sharing and the second is based on fixed service fees and charges and third is based on free of greet and no charges. T e early(a) principles are changing with the situation of the business and its operation.Methods of Islamic bankingIslamic banking has many an(prenominal) divers(prenominal) method actings and Islamic approaches to what a effected/western bank would give out a mortgage/loan. Dar and Presley, (2000) state that the key banking methods Islamic banks use are Ijara, Mudarabah, Murabahah and Musharakah.Ijara Is a unionise of rental tailors mainly for goods/property mortgaging it involves the sales event and the transfer of assets title to the customer lending at the end of Ijara. In a banking scenario the Islamic bank would buy a property rent it to a customer for a fixed toll till the agreed expenditure has been met through lease/ijara then the customer will get down owner of such assets a rent cons ume by which the owner of the good rents it to another party can also be part of this. According to the (IBB) Nowadays the Home Finance and Islamic mortgage are based on the concept of Ijara and it is very lucky alikel in Islamic financial system and popular amongst non Muslims too who are ever increasingly using this role of finance.Mudarabah khan, (1993) states this form of finance is mainly known as profit sharing and involves a vitrine of league agreement between two sides in this scenario the bank and the individual lending the money (customer) the bank will provide the funds and the customer will provide the business make and idea merely all profits will be shared amongst both parties with an agreed fee. It can also be said some characteristics of western banking are still slightly snarly with this type of financing as the entrepreneur must guarantee intact refund in possibility of contract breaching and negligence.Murabahah This type of banking is referred to as co st plus/mark-up sale this involves a sale of which he buyer (customer) offers to purchase a commodity at a price equal to its cost to the vender plus an agreed profit margin. It is a trust or a transparent sale in which the cost of acquiring the goods by the seller must be disclosed. The cost to the seller includes the price he had paid plus all other expenses. defrayment of price can be made against the delivery of the goods sold or deferred as lump-sum or instalments Islamic bank of Britain, (2010). Murabahah usually starts with the buyer subscribe a promise to purchase. The seller then acquires the goods and takes their possession. Finally, the buyer signs the Murabahah sale contract and receives the good in return for move overment or an obligation to pay later. It is one of the most popular modes used in Islamic banking system in varied countries to promote interest-free transactions.Musharakah this method of banking is mainly for mortgages similar to the ijara method with slight differentiations both have forms of agreements from both parties but difference in this method rather than rent instalments covering the cost to have full ownership of a property or goods instalment payments will be for shares of the product/property which once fully covered will fulfil full ownership to the customer giving them 100% ownership.Comparison of Islamic banking to western/ formulaic bankingIt can be said that Islamic and conventional/western banking Islamic and traditional banking actually are not different in what they supply but to how they supply such services Shahin, Z, (2004). Islamic banking has the same features as western/conventional banking and provides the same services as conventional banking for example current accounts, saving accounts, insurances, mortgages and investment opportunities in the association.Upon study Islamic banking and conventional/western banking for example like the Islamic bank of Britain compared to Barclays bank there some evi dent differences not only is the main one being that of the shariah law principles that are followed by the Islamic banks which therefore means business approaches in forms of investments, responsibility and product features will all be based upon the Islamic faith and must stay within the limits of Islamic Law or the Shariah. However other key portentous differences in the two types of banking are factors such as interest, taxation, risk/profit sharing and the bar of investments.Comparison towards the use of interest within Islamic banks and western/conventional banks Lending money and getting it back with deepen interest is the main fundamental function for a western/conventional bank it is a main source of profit making for major(ip) high street banks in the United Kingdom almost some quantify criticised for their high rates of such interest. However this is in contrast to Islamic banking where interest is forbidden and deemed as Riba but a more(prenominal) partnership app roach is given to the customer and agreed payments with profit sharing agreements set upon the provider and lender.When comparing the two methods the main difference here is that western/conventional banks follow the principle that interest is the price of credit, therefore reflecting the prospect cost of loan the money. Whereas in Islamic banking the creditor (bank) should not take utility of the person lending the money as this in Islam is perceived as injustice where the first Islamic principle underlying for such descriptor of transactions is deal not unjustly, and ye shall not be dealt with unjustly 2279, consecrated Quran.Comparison of taxation and additional charges for Islamic banks and western/conventional banks In the United Kingdom all organisations/businesses must pay tax commodities including Islamic banks and non Islamic banks however in Islamic banking such additional charges are approached with caution and compliance to sharia law and have no provision to charg e any extra money from the defaulters. Only small make sense of compensation and these proceeds is given to charity which is known as zakat claims a good deal enough is welcomed by the Muslim population of customers as it is the Islamic term of charity. When comparing this type of additional zakat charge many western/conventional banks state this as normal VAT and APR charges which vary in price and cost from bank to bank it can be said for Islamic banking this type of charge still exists but named and dealt with differently in the form of zakat.Comparison of Risk sharing in Islamic banking and money lend in a western/conventional bank Islamic banking involves risk and profit sharing with the person lending the banks somewhat forming a partnership purport with the customer Bhatti, I.M, (2008) which means Islamic banks are more involved with customer projects and pay immenseer attention in developing and evaluate certain enterprises/projects where in comparison to western banks like Lloyds tsb where in a case study on Islamic and high street banks some customers who transferred from their branch over to Islamic bank of Britain branch stated they mat the bank was only provoke as seeing the customer as a debtor and themselves as the creditors. When comparing the Western banks method of loaning/lending money such banks will often enough place a fixed rate of interest as part of the charge and will not really be as closely involved in the participation of the business venture as Islamic banks would be due to the risk/profit sharing factor.Comparison on the restriction of investments for Islamic banking and western/conventional banking as stated many of times throughout this report Islamic banking is strictly shariah compliant meaning all activities are in conjunction with Islam and the teachings of the Quran and the prophet Mohammed PBUH therefore all business investments/ventures must be deemed as pure and accepted in the eyes of Islam for an Islamic bank to invest in Dixon, R. (1992) therefore any business proposals that are brought forward to an Islamic bank that consists of serving alcohol, promoting gambling and sexually influence will be strictly turned down. Where as in comparison to a western conventional bank plans will be accepted on the basis of good credit, business venture and the ability to pay back such fees.Challenges that Islamic banking may sheath within the United KingdomIslamic banking is becoming ever more popular in the United Kingdom with many non-Muslims also interested and joining the Islamic bank of Britain as customers but upon research and case study readings many people in Britain feel they dont fully understand the concept of Islamic banking and that it should be made more user friendly for society. There is need to make a clear and transparent system of general as Islamic banking is in a transition development stage a key issue in Britain according to Khalaf (2007) Islamic banking industries have a barr ier to overcome with the square shariah law compliance being appealing to non-Muslims as many non Muslims can perceive this as influencing a different law for a different country with a different religious view point. besides opinions of Islamic scholars, suppose a product or practice may be accepted to one scholar, could be considered un-Islamic by another scholar.Malaysia has naturalised a standard shariah board which is supported by government which in the united kingdom is not applicable and that the banks set these out themselves according to basic shariah compliance. (Khalaf, 2007) claims it is evident in Britain that Islamic banking faces many challenges with society and retentivity up with such growth of western conventional banks due to its new growth in the UK market however with strong middle eastern financial backers such as Qatari national bank the Islamic bank of Britain is financially stable in this sense and that it is gaining more fruition amongst the Muslim p opularity of Britain with many Muslim customers holding accounts with them but it can be stated a key challenge is the Different beliefs in society make that some Islamic banking activity acceptable to one part of community and to others it is not .ConclusionIslamic banking in Britain now has expectant opportunity for growth as it offer certain benefits that conventional western banks do not put in place many Muslims feel this type of banking is relevant for their practice of religion whilst some may palisade that costs such as interest also known as Riba are still put in place just named and supercharged differently and then opt to carry on using such western banks however it can be said great ethical value is taken into consideration in contrast to western banks and photograph and risk of business venture is shared and discussed which if western banks applied could see a great rise in popularity and custom however in the united kingdom the regulatory authority and structure of Islamic sharia practice can sometimes have setbacks for such Islamic banking activity as society may not accept this.Overall Islamic banking has great opportunity to grow because many numbers of muslims are residing in the united kingdom and there is a steady growth for such market, however it can be said if such rise of awareness and individuality was put in place to market Islamic banking this could possibly promote it further and on the scale of such western banks.ReferencesBellalah, M. and Ellouz, S. (2004) Islamic Finance, saki Rates andIslamic BankingBokhari, F. (2007) Lloyds TSB spots growing appetite. fiscal quantifyBown, J. (2005) Islamic banking set to boom. Sunday TimesBelder, R.T. and Khan, M.H. (1993) the changing faces of Islamic banking. International Financial Law ReviewChris, Cook. (2006) is Islamic banking religiously sound? Financial TimesDixon, R. (1992) Islamic banking. The International Journal of Bank Marketing,Hassan, M.K. (1999). Islamic banking in poss ible action and practiceHaron, Sudin (1995) The Framework and concept of Islamic interest-free banking