The Islamic banking model


The origin of Islamic banking dates back to the very beginning of Islam in the 7th century. The Prophet Muhammad’s first wife, Khadija, was a merchant, and he acted as an agent for his business, using many of the same principles used in contemporary Islamic banking. In the Middle Ages, commerce and business activities in the Muslim world were based on Islamic banking principles, and these ideas spread throughout Spain, the Mediterranean, and the Baltic States, arguably providing part of Western banking principles. In the 1960s to 1970s, Islamic banking resurfaced in the modern world.

This banking system is based on the principles of Islamic law, also known as Sharia law, and guided by Islamic economics. The two basic principles are profit and loss sharing and the prohibition on the collection and payment of interest by lenders and investors. Islamic banks do not charge or pay interest in a conventional manner where the payment of interest is fixed in advance and regarded as the predetermined price of credit or the reward for deposited money. Islamic law accepts capital reward for lenders only on the basis of profit and loss sharing, working on the principle of a variable return linked to the productivity and actual performance of the financed project and the real economy. Another important aspect is its entrepreneurial characteristic. The system is focused not only on financial expansion, but also on the physical expansion of production and economic services. In practice, there is a stronger focus on investment activities such as equity finance, trade finance and real estate investments. Since this banking system is based on Islamic principles, all banking companies follow Islamic morals. Therefore, one could say that financial transactions within Islamic banking are a culturally distinct form of ethical investing. For example, investments involving alcohol, gambling, pork, etc. are forbidden.

Over the past four decades, the Islamic banking system has undergone tremendous evolution from a small niche visible only in Islamic countries to a profitable, dynamic and resilient competitor internationally. Their size worldwide was estimated at nearly $ 850 billion at the end of 2008 and is expected to grow by around 15% per year. While the banking system remains the main component of the Islamic financial system, other elements, such as Takaful (Islamic insurance companies), mutual funds and Sukuk (Islamic financial bonds and certificates), have also experienced a decline. strong global growth. According to a reliable estimate, the Islamic financial industry now stands at over $ 1 trillion. In addition, the growth opportunities in this sector are considerable. It is estimated that the system could double in size within a decade if past performance continues into the future.

Source by Afsheen Noorbakhsh

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