What is Islamic Banking
Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari’ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasise moral and ethical values in all dealings have 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 activities that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. (more…)
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Murabahah was originally an exchange transaction in which a buyer purchases items from a seller at a specified profit margin payable to the seller. It is assumed that the seller will divulge his costs accurately, such that the profit-margin can be agreed accurately. Hence this type of sale is a form of ‘trust sale’ since the buyer must trust that the seller is disclosing his true costs. Where a trader acts on behalf of another party in buying goods, the murabahah mark-up may be seen as a payment for the trader’s service in locating, transporting and delivering the goods.
There are an estimated 1.61 billion Muslims worldwide, making Islamic banking one of the fastest growing segments of the financial industry. Banks serving the Islamic population must comply with several very specific principles of Islamic law if they hope to retain existing customers and attract new ones. Banks must be ready with specialized products and services and they must put programs in place to train their personnel to support these products and services in order to exist in this competitive marketplace.
