Islamic

Banking

CHAPTER - 5
 Introduction
During the last two decades, the Islamic finance and banking industry has grown
tremendously, not only in countries with majority Muslim populations in the East,
but also in well-established secular financial centers in the West.
This has highlighted the commercial wisdom of Islamic Finance principles as well as
the ethical standards it supports along with growth, the Islamic Financial
institutions have experienced a fair share of challenges as well.
 Introduction-2
In the early stages of the development of Islamic products and services, Saudi
Arabia was a key participant because of its unique place in the Muslim world. Indeed,
one of the most famous Islamic Financial institutions, the Islamic Development Bank
(IDB), is also located in Jeddah, Saudi Arabia.
Demographic changes, new regulations aimed at improving transparency and the
rise of technology means that financial services organizations need to become
increasingly focused on the customer.
Islamic Banking In Saudi Arabia
In fact, Saudi Arabia’s banking sector consists of 12 domestic and 13 foreign
commercial banks. Four of 12 domestic banks operate as full-fledged Islamic
banks, they are:
1- Al-Rajhi Bank Saudi Arabia
2- Al-Bilad Bank
3- Al Jazeera Bank
4- Alinma Bank
 What Is Islamic Banking?

Islamic banking defined referred to as Islamic finance and banking or

Shariah-compliant finance, refers to financial activities that adhere to
Shariah (Islamic law).
Two fundamental principles of Islamic banking are the sharing of
profit and loss and the prevention of the collection and payment of
interest by lenders and investors.
 Islamic Banking in Present
Perspective?
Islamic banking in the present perspective, it is a form of modern banking
system based on Islamic legal concepts. It act in accordance with the
principles of Shariah law, and encourages risk-sharing, instead of
supporting financing based on a fixed pre-determined return.
SNB Corporate Banking supports the main needs of our corporate
customers, with Islamic banking solutions ranging from structured finance
and trade services to cash management products.
 Key Points of Islamic Banking
Islamic banking, referred to as Islamic finance or Shariah-compliant finance, refers
to finance or banking activities that adhere to Shariah (Islamic law).
Two fundamental principles of Islamic banking are the sharing of profit and loss
and the prohibition of the collection and payment of interest by lenders and
investors.
Islamic banks make a profit through equity participation, which requires a borrower
to give the bank a share in their profits rather than paying interest.
Some conventional banks have windows or sections that provide designated
Islamic banking services to their customers.
Principles of Islamic banking
A. sharing of profit and loss and
B. Prevention of the collection and payment of interest by lenders
and investors.
 KSA Perspective

The Kingdom of Saudi Arabia is an Islamic country in which Shariah law is

the guideline for many rules and regulations for life and business.
One main factor of the Islamic banking system is that it operates as non-
interest banking since taking interest on loans is forbidden according to
Islamic law.
Additionally, the three largest banks, the National Commercial Bank
(SNB), Al Rajhi Bank, and SABB, lead the banking industry accounting for
47.8% of total assets. Among these three banks, particularly Al Rajhi
Bank is the only bank that offers fully-fledged Islamic banking services.
 Features
An Islamic bank is entirely operated using Islamic principles, while an Islamic
window refers to services that are based on Islamic principles provided by a
conventional bank.
Some commercial banks offer Islamic banking services through dedicated windows
or sections.
To earn money without the typical practice of charging interest, Islamic banks use
equity participation systems. Equity participation means if a bank lends money to a
business, the business will pay back the loan without interest and instead give the
bank a share in its profits.
Features
If the business defaults or doesn't earn a profit, then the bank also doesn't
benefit.
In general, Islamic banking institutions tend to be more risk-averse in their
investment practices.
 As a result, they typically avoid business that could be associated with
economic bubbles.
 Basis of Islamic Banking?

Islamic banking is grounded in the principles of the Islamic faith as they relate to
commercial transactions.
The principles of Islamic banking are derived from the Quran, the central religious text
of Islam. In Islamic banking, all transactions must comply with Shariah, the legal code
of Islam based on the teachings of the Quran.
The rules that govern commercial transactions in Islamic banking are referred to as
fiqh al-muamalat.
 Benefits of Islamic Banking:

The global finance market is dominated by the conventional banking system. However, due to the
advantages of Islamic banking, the industry has expanded rapidly over the last decade, growing at
the rate of 10 – 12%.
 Due to the growing benefits of Islamic banking, many international and local banks have stepped
into the Shariah-compliant financial industry by establishing Islamic units and wings in their existing
banking system.

 Islamic banking, initiated around 40 years ago was first limited to Middle Eastern countries. But
over the years, it has become an effective tool for finance development worldwide including in non-
Muslim countries by becoming a more than $2 trillion market at the global level.
Functions of Islamic Banking
The functions of the Bank are to participate in equity capital and
to grant loans for productive projects and enterprises besides
providing financial assistance to member countries in other forms
for economic and social development.
Advantages of Islamic Banking
1. Promotes Financial Justice:
2. Financial Inclusion:
3. Reduces the Impact of Harmful Products and Practices:
4. Strengthens Financial Stability:
5. Ethical and Moral Values:
 1. Promotes Financial Justice:

In Islamic Banking & finance, investments are approached cautiously and the
decision-making process is carried out thoroughly unlike the conventional banking
system.
The companies that appear risky are usually kept away from financial institutes.
This is why during the global 2008 financial crisis; the Islamic financial institutes
remained untouched. With careful audits and analysis, the Islamic finance institute
lessens the occurrence of the risk and enhances financial stability.
2. Financial Inclusion:

Muslims refrain from banking through the conventional banking system since
it is based on paying/receiving interest which is strictly prohibited by the
Shariah Law.
In fact, almost three-quarter of the world’s Muslims remains unbanked.
Islamic banking removes these barriers and allows Muslims to benefit from
the financial system.
3. Reduces the Impact of Loses

3. Reduces the Impact of Harmful Products and Practices:

Islamic banking restricts the goods and services that are restricted in Islam
such as alcoholic beverages, tobacco, gambling, pornography, etc.
4. Strengthens Financial Stability:

In Islamic banking and finance, investments are approached cautiously and

the decision-making process is carried out thoroughly unlike the conventional
banking system.
The companies that appear risky are usually kept away from financial
institutes. This is why during the global 2008 financial crisis; the Islamic
financial institutes remained untouched. With careful audits and analysis, the
Islamic finance institute lessens the occurrence of the risk and enhances
financial stability.
 5. Ethical and Moral Values:

The ethical and moral values within the Islamic banking system are one
of its salient features.
This plays an important role in promoting socially desirable investments
and better individual/corporate relationships as well as behavior.
Example: CSR
 Impact of Islamic Banking:

Islamic banking is a suitable option for both – Muslims and non-Muslims. It is

based on the principles of Shariah if we deeply evaluate Islamic banking vs
conventional banking, and the market demands for it is higher than ever. More
than 75,000 professionals will be required in the next five years, you can be
one of them too.
1. Monetary Expansion:
2. The Practice of Islamic Banking Institutions:
 Monetary Expansion:

Generally, central banks like to treat Islamic banks, at par with the deposits. The
Islamic banks’ products are different from conventional debt-creating products, so
they may not result in monetary expansion.
Money creation by Islamic banks is closely associated with the creation of wealth in
the real sector.
Islamic banks cannot liquidate their assets, as easily as conventional banks. So,
they keep more cash in their vaults than conventional banks, to meet withdrawal
obligations.
The Practice of Islamic Banking
Institutions:

Islamic banks do not allow overdrafts, so they don’t create money in a direct
way. Investment accounts in Islamic banks differ from conventional savings.
The need for keeping a reserve against any deposit arises essentially, and
the return of that deposit to the depositor is guaranteed.
In the case of an investment account, an Islamic bank owes the depositor
according to their investment.
Homework
Define Islamic banking and mention its important advantages in business.
 Debate
On
The Practice of Islamic Banking