ISLAMIC BANKING

Islamic Banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values

IDEA GENERATION OF ISLAMIC BANKING: Islamic banking is completely based on Islamic economics, which means an application of Islamic law to economic activity either where there Islamic rule is in force and an Islamic economic system may be created; or where it is not, i.e. where the state does not follow Islamic law and Muslims simply seek to integrate Islamic tenets into a non-Islamic economic system. The muslim economic model was developed by Mahmud Taleqani, and Mohammad Baqir al-Sadr (great SHIA scholars).

RATIONALE: Seeks an economic system based on uplifting the deprived masses, a major role for the state in matters such as circulation and equitable distribution of wealth and insuring participants in the marketplace are rewarded by being exposed to risk and/or liability.

Islamic banking work on Islamic law (Sharia), few tenets are given below:

• The payment of zakat (the "taxing of certain goods, such as harvest, with an eye to allocating these taxes to expenditures that are also explicitly defined, such as aid to the needy)charity by believers,

• Borrowing and lending without payment of fixed interest (Riba- referred to as usury),

• Socially responsible investing.

Contracts in Islamic banking:

Islamic Banking can operate in Profit and Loss Sharing or Non–Profit Sharing mode.

Profit and Loss Sharing contracts could be:

• Partnership (mudaraba)
• Equity Participation (musharaka)
• Farming Partnership (muzar’ah)
• Orchard Equity Participation (musaqat)
• Mudaraba Certificates
• Government Certificates

Non-Profit Sharing contracts could be:

• Cost plus Markup Purchase Sale (murabaha)
• Deferred Payment (bai - mua’jjal)
• Deferred Delivery (bai - salam)

Have a look at the graph above and analyze the population of muslims in world, Africa a hub of muslim dominant population followed by asia. As per world bank data poverty rate and population growth is very high in both the continents and condition of muslims in these countries is also not good.

IMF RECOMMENDATIONS:

• Islamic finance should be encouraged by regulation and supervision that accommodate its

forms while ensuring that their unfamiliarity is not exploited to defraud clients.

• Normal prudential and supervision norms should be adequate.

• suggest that higher capital adequacy ratios and more detailed disclosure requirements

may be appropriate.

• Modified CAMEL (capital adequacy, asset, quality, management, earnings, liquidity) system of banking supervision for Islamic banking.

POPULARITY : In 2004 the UK's first stand alone Sharia'a compliant bank was launched, the Islamic Bank of Britain. They offer products and services to its UK customers that utilise the Islamic financial principles; such as Mudaraba, Murabaha, Musharaka and Qard.

The Islamic finance sector was worth between 300 and 500 billion dollars (237 and 394 billion euros) as of September 2006, compared with 200 billion dollars in 2004. The number of Islamic retail banks and investment funds number in their hundreds and many Western financial institutions offer products that comply with Sharia law, including Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS.

CRITICISM: Its popularity notwithstanding, critics of Islamic economics have not been sparing. It has been attacked for its alleged "incoherence, incompleteness, impracticality, and irrelevance;" driven by "cultural identity" rather than problem solving.

as "a hodgepodge of populist and socialist ideas," in theory and "nothing more than inefficient state control of the economy and some almost equally ineffective redistribution policies," in practice.

In a political and regional context where Islamist and ulema claim to have an opinion about everything, it is striking how little they have to say about this most central of human activities, beyond repetitious pieties about how their model is neither capitalist nor socialist.

ISLAMIC BANKING & FIs