Islamic banking and finance
Islamic banking, Islamic finance (Arabic: مصرفية إسلامية masrifiyya 'islamia), or Sharia-compliant finance[1] is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic finance include mudarabah (profit-sharing and loss-bearing), wadiah (safekeeping), musharaka (joint venture), murabahah (cost-plus), and ijarah (leasing).
Sharia prohibits riba, or usury, generally defined as interest paid on all loans of money[2][3] (although some Muslims dispute whether there is a consensus that interest is equivalent to riba).[4][5] Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haram ("sinful and prohibited").
These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity,[6][Note 1] a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community.[8][9] Their number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles,[10] and around $2 trillion was Sharia-compliant by 2014.[11] Sharia-compliant financial institutions represented approximately 1% of total world assets,[12] concentrated in the Gulf Cooperation Council (GCC) countries, Bangladesh, Pakistan, Iran, and Malaysia.[13] Although Islamic banking still makes up only a fraction of the banking assets of Muslims,[14] since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.[11][15][16]
The industry has been lauded for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West,[6] and noted as the "most visible mark" of Islamic revivalism,[17] its most enthusiastic advocates promise "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented.[15][16] However, it has also been criticized for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters,[18] and instead merely selling banking products[19] that "comply with the formal requirements of Islamic law",[20] but use "ruses and subterfuges to conceal interest",[21] and entail "higher costs, bigger risks"[22] than conventional (ribawi) banks.
. This is usually translated as "gambling" but used to mean "speculation" in Islamic finance.[90] Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is maisir and forbidden in Islamic finance.
Maisir
. Gharar is usually translated as "uncertainty" or "ambiguity". Bans on both maisir and gharar tend to rule out derivatives, options and futures.[90] Islamic finance supporters (such as Mervyn K. Lewis and Latifa M. Algaoud) believe these involve excessive risk and may foster uncertainty and fraudulent behaviour such as are found in derivative instruments used by conventional banking.[99]
Gharar
Engaging in transactions lacking "'material finality'. All transactions must be "directly linked to a real underlying economic transaction", which excludes "options and most other derivatives".[100]
[94]
that they be composed of jurists specializing in fiqh al- i.e. Islamic commercial jurisprudence, (Accounting and Auditing Organization for Islamic Financial Institutions, AAOIFI);[216][217]
muamalat
that they have at least three members, (Institute of Islamic Banking and Insurance);
[214]
that their members not be employees of the financial institution they supervise;
modes – musharakah and mudarabah – where financier and the user of finance share profits and losses, are based on "contracts of partnership".[246] These have been called the "real and ideal" modes of Islamic finance[102] as Islam calls for sharing of rewards and losses by all who contribute capital to a commercial enterprise (according to Taqi Usmani[247] and other theoreticians of Islamic finance).
Profit and loss sharing
"Asset-backed financing", "debt-like instruments" such as mark-up (murabaha), leasing (ijara), cash advances for the purchase of agricultural produce (salam), and cash advances for the manufacture of assets (istisna').[156] These are based on "contracts of exchange",[248] and involve the "purchase and hire of goods or assets and services on a fixed-return basis".[214] The fixed return resembles the interest of conventional banking rather than variable profits and losses, but is called "profit" or "markup", not "interest".[16][249][250] Originally these modes were intended by Islamic banking advocates to be "interim" measures, or to be used for situations where participatory financing was not practical,[251] but now account for the great bulk of investments in many Islamic banks.[252]
[102]
a need for better regulation, better cooperation between Islamic and conventional financial standard-setters to deal with complexity and to "address the unique risks of the industry";
[427]
better Shariah compliance by regulators.
[426]
Economy of the OIC
Islamic economics
Islamic finance products, services and contracts
Muamalat
Riba
Murabaha
Sharia and securities trading
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