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Islamic Banking in India

Islamic Banking in India

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Published by Umar Farooqui

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Published by: Umar Farooqui on Dec 18, 2011
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ISLAMIC BANKING
1
INTRODUCTION
Contrary to Islamic principles is alsoHaraam(forbidden). While theseprinciples may have been applied to historical Islamic economies, it is only in the late 20thcentury that a number of Islamic banks were formed to apply these principles toprivateor semi-privatecommercialinstitutions within the Muslim community
 Islamic banking
isbankingor banking activity that is consistent with theprinciples of Islamic law(
Sharia
) and its practical application through thedevelopment of Islamic economics.Sharia prohibits the fixed or floating paymentor acceptance of specific interest or fees (known asRibaorusury)for loans of  money. Investing in businesses that provide goods or services considered
DEFINITION
“Islamic Banking is interest free
 Asset Backed banking governedby
the principles of Islamic Shariah”
 -
 
S
HARIAH
A
DVISORY
C
OUNCIL
 
WHAT IS ISLAMIC BANKING?
 
Islamic banking refers to a system of banking or banking activity that is consistent with theprinciples of the Shari'ah (Islamic rulings) and its practical application through the developmentof Islamic economics. The principles which emphasise moral and ethical values in all dealingshave wide universal appeal. Shari'ah prohibits the payment or acceptance of interest charges(riba) for the lending and accepting of money, as well as carrying out trade and other activitiesthat provide goods or services considered contrary to its principles. While these principles wereused as the basis for a flourishing economy in earlier times, it is only in the late 20th century thata number of Islamic banks were formed to provide an alternative basis to Muslims althoughIslamic banking is not restricted to Muslims.Islamic banking has the same purpose as conventional banking except that it operates in
accordance with the rules of Shari‘ah, known as
Fiqh al-Muamalat 
(Islamic rules on
transactions). Islamic banking activities must be practiced consistent with the Shari‘ah and its
practical application through the development of Islamic economics. Many of these principlesupon which Islamic banking is based are commonly accepted all over the world, for centuriesrather than decades. These principles are not new but arguably, their original state has beenaltered over the centuries.The principle sou
rce of the Shari‘ah is The Qur‘an followed by the recorded sayings and actions
of Prophet Muhammad (pbuh)
 – 
the Hadith. Where solutions to problems cannot be found in
 
 
ISLAMIC BANKING
2
these two sources, rulings are made based on the consensus of a community leaned scholars,independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate
from the fundamental teachings in The Qur‘an.
 It is evident that Islamic finance was practiced predominantly in the Muslim world throughoutthe Middle Ages, fostering trade and business activities. In Spain and the Mediterranean andBaltic States, Islamic merchants became indispensable middlemen for trading activities. It isclaimed that many concepts, techniques, and instruments of Islamic finance were later adoptedby European financiers and businessmen.The revival of Islamic banking coincided with the world-wide celebration of the advent of the15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources oMuslims particularly those of the oil producing countries, received a boost due to rationalisationof the oil prices, which had hitherto been under the control of foreign oil Corporations. Theseevents led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam.Disenchantment with the value neutral capitalist and socialist financial systems led not onlyMuslims but also others to look for ethical values in their financial dealings and in the Westsome financial organisations have opted for ethical operations.
O
RIGIN
 
The origin of the modern Islamic bank can be traced back to the very birth of Islam when theProphet himself acted as an agent for his wife's trading operations. Islamic partnerships(mudarabah) dominated the business world for centuries and the concept of interest found verylittle application in day-to-day transactions.Such partnerships performed an important economic function. They combined the three mostimportant factors of production, namely: capital, labour and entrepreneurship, the latter twofunctions usually combined in one person. The capital-owner contributed the money and thepartner managed the business. Each shared in a pre-determined share of the profits. If there was aloss, the capital-provider lost his money and the manager lost his time and labor.
 
 
ISLAMIC BANKING
3
HISTORY OF ISLAMIC BANKINGINTRODUCTION
An earlymarket economyand an early form of mercantilismwere developed between the 8th- 12th centuries, which some refer to as "Islamic capitalism". Themonetary economyof the periodwas based on the widely circulatedcurrencythedinar,and it tied together regions that were previously economically independent.A number of economic concepts and techniques were applied in early Islamic banking, includingbills of exchange,partnership(
mufawada
mudaraba
), and forms of capital(
al-mal
nama al-mal
),transactional accounts,loaning,ledgersandassignments.Organizationalenterprises independent from thestatealso existed in the medieval Islamic world, while theagency institution was also introduced during that time. Many of these early capitalist concepts wereadopted and further advanced inmedieval Europefrom the 13th century onwards.RIBAThe word "Riba" means excess, increase or addition, which according to Shariah terminology,implies any excess compensation without due consideration (consideration does not include timevalue of money). The definition of  
 in classicalIslamic jurisprudencewas"surplus value without counterpart", or "to ensure equivalency in real value", and that "numerical value wasimmaterial."Applying interest was acceptable under some circumstances. Currencies that were based onguarantees by a government to honor the stated value (i.e.fiat currency)or based on othermaterialssuch as paper orbase metalswere allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in ahigher number of units of this
 fiat 
money being
riba
" was not relevant as the jurists only neededto be concerned with thereal valueof money (determined by weight only) rather than thenumericalvalue. For example, it was acceptable for a loan of 1000 golddinarsto be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).
 

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