Understanding Islamic Banking And Finance

Money has taken many different forms throughout history, and human relationships to economics have developed greatly over time. Anthropological studies of money aim to illustrate our interactions with these financial networks. A financial network is a collection of financial institutions and the relationships that exist between them, preferably through direct transactions or the ability to mediate a transaction. These transactions are made possible by the Islamic banking and finance approach, which I will be using to refer to financial operations which adhere to Sharia, Islamic religious law.

Islamic banking, often known as Islamic finance or shariah-compliant finance, refers to financial or banking operations which are compliant with Islamic religious laws. In traditional Western banking, banks borrow money in the form of deposits and lend this money to earn interest. However, Islamic banking has two basic principles which contradict this practice. The first principle is profit and loss sharing. The second prohibits lenders and investors from collecting or paying interest.

Scholar Bill Maurer has conducted a critical analysis of Islamic banking and finance, which has become a global phenomenon. (The primary hubs of these global financial operations are in Iran, Saudi Arabia, and Malaysia, as well as Europe, Switzerland, and the United Kingdom.) Islamic banks have a very short history. The first bank was established in Egypt in 1963, in the years leading up to the Partition which divided British India into two independent dominions, and arose from the anti-colonial mission of Islamic modernists on the Indian subcontinent. Maulana Maududi, an Islamic scholar, aimed to build a new kind of economy that would modernize Islam and challenge Western dominance. The modernists attempted to theorize an economy that planned for wealth redistribution and was not reliant on interest-bearing debt. They hoped that this new economic structure would suit the necessities of modern society while remaining loyal to Sharia and the Quran.

Like the Christian Bible, there is only one Quran, yet this holy book has numerous interpretations. As a result, different kinds of Islam may take an assortment of diverse meanings from the text, even within the same state. However, some of the Quran’s ideals are global, contributing to Islam’s universality. This has been built upon and reinforced by the products and services that Islamic banks throughout the world provide.

The bank’s function in Islamic banking is not to make money for itself or to increase client income, but to encourage entrepreneurship and local development. Money has no intrinsic worth and cannot be multiplied simply by spinning it – the rule “money produces money” does not apply in Islam. Rather, Islamic banking is based on partnership: shareholders, depositors, and borrowers all share profits and losses. The primary reasons Islamic economics are structured this way are the duties to pay zakat, translated “gifts” or “charity,” and avoid riba, “interest” or “usury.” Riba is a fundamental regulation in the Islamic finance system. It is about keeping a percentage of a loan or giving interest-bearing loans and is wholly concerned with social justice. An example of social justice is when a bank makes loans to firms for investments, and the businesses want to return a profit. In this case, neither the bank nor the consumer has a competitive advantage. As a result, both partners bear the expenses of the unsuccessful enterprise, and the bank must also take a risk.

Regulations against gharar, which is connected to risky sales or gambling, are also essential in this system. For example, you cannot sell an item or commodity which has not yet been manufactured; the product you are selling must exist. You also cannot sell a product until you have it. All Islamic bank products must be monitored and recognized by the Council for Islamic Banks, as well as by lawyers and clerics.

Murabaha is the most common commodity in Islamic banking. It is a form of sale in which the bank purchases a specific product, or has previously bought one from the consumer, and specifies the precise amount spent on it. This way, both the bank and the consumer are aware of what is going on and what is being sold. There is an additional profit, but this profit is obvious and negotiated by both parties. There are certain crucial guidelines to follow here. As previously stated, the product must exist. A legitimate contract must exist, stating any faulty items, and it must be immediate, absolute, and unconditional.

Islamic banking demonstrates how religious laws and ideals may be translated into practical solutions in everyday life. Everything in the Islamic banking system must adhere to Sharia, both for what is permissible (halal) and prohibited (haram). The bank is unable to invest any of its funds in products, services, or areas that are prohibited by Islam. Customers of an Islamic bank may be certain that their money will not be invested in the manufacturing or trafficking of alcohol, nicotine, narcotics, or pornography, for example, or in casinos or nightclubs. Islamic banks do not offer bonds, either. Because keeping a percentage is unjust, it is strongly tied to riba.

Compared to Islamic financing, Western accounting methods have three challenges: the thin boundary between bank owners and firms, the separation of bank management and bank ownership, and the increasing interweaving of bank shareholders and bank managers. Islamic banks provide employment, generate revenue, and encourage economic growth and social stability.

Analyzing Islamic banking and finance illustrates how financial networks are implemented in different societies. Our understanding of money is impacted, not just by Western countries, but also by non-Western societies, whose religious and cultural values have had significant impacts on their economies and our own.

Mia Heaphy


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