Introduction To Islamic Banking

Islamic banking is banking based on Islamic law (Shariah). It follows from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions collectively agreed among Shariah scholars (ijma’),analogy (qiyas) and personal reasoning (ijtihad). The first Islamic bank was established in Malaysia in 1983 while In 1993, commercial banks, merchant banks and finance companies begun to offer Islamic banking products and services under the Islamic Banking Scheme (IBS banks).

The common Shariah banking concepts include:

• Safety Deposits

• Profit sharing

• Mortgage

• Higher Purchase

• Joint venture

• Agency

• Interest-free loan

Islamic banking is not meant for Muslims only and the most important difference between Islamic and conventional banking is that Islamic banking must follow the Shariah.

 

Advantages of Islamic Banking

1. Islamic banking is becoming a very popular amongst international investors. Having committed itself to a text accessable to all and Prophetic precedents available easily, Islamic banking is open to any innovations that are in congruence with its fundamentals. It is not a closed system. It has no regional, ethnic or class affiliations.

 

2. In Islam banking, only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent.

 

3. In Wadiah (safekeeping), a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it.

 

4. Islamic banking is more efficient in that it allocates investable funds on the basis of the expected value productivity of projects rather than on the criterion of the creditworthiness of those who own the projects, which is the case in debt-based finance.

 

5. Islamic banking is less prone to inflation and less vulnerable to speculation, which are currently being fueled by the presence of huge quantities of debt instruments in the market.

 

6. Islam encourages people to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. As defined in the Shari’ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals.

 

Disadvantages of Islamic Banking

1. Investments should only support practices or products that are not forbidden or considered unlawful, or haraam, by Islamic law. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino; and the bank could not lend money to other banks at interest.

 

2. Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else.

 

With the CBN’s controversial introduction of Islamic banking in Nigeria, there has been many controversies, while some are in keen support others are vehemently against it. Others are just interested in knowing if all current banks would have to become Islamic banks or would Islamic banks be established along side commercial banks.

There is a certain gray area however that is attributed to this form of banking.I would like those who have any idea or  theories about this so called gray areas to kindly comment and enlighten us about them.

 

By Adedunmade Onibokun Esq of http://adedunmadeonibokun.blogspot.com

www.twitter.com/dunmadeonibokun

2 COMMENTS

  1. I like the way you have broken everything down to show the positives and negatives. The islamic banking method is not an unthinkable idea, it actually sounds good to me. The problem as you have stated though, is their inability to give out loans on ventures they see as a taboo. In lagos alone, we have many social ventures that necessitate the sale of alcohol, cigarettes et al… refusing to loan them start up capital or continuity sums, is the bane of this banking method.

    That is enforcing the islamic rules on a country with different religious sects. There is bound to be serious efforts to reject this.
    If this method of banking could be modified to suit every religion, fine, but I do not see that happening. I think Mallam Lamido should leave the banking industry the way it is with some improvements, but not enforce the islamic banking on nigerians.

  2. IT IS UNBELIEVABLE FOR SOMEONE TO BE THINK THAT THE ESTABLISHMENT OF ISLAMIC BANKING WILL ONLY LEFT SOME BUSINESS(UNLAWFUL, HARAM) WITHOUT BEEN FINANCE, I WANT TO URGE ALL MY FRIENDS OUT THERE THAT ANY BUSINESS BEING EXCLUDED FROM GIVING OUT FINANCE TO BY THIS ISLAMIC BANKING SHOULD APPROACH CONVENTIONAL BANK TO SEEK FOR FINANCE. PLEASE LET US STOP RELIGIONS VIOLENCE IN NIGERIA

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