Last Updated : 07 Sep 2010

Source By : www.aibim.com
Islamic Banking in the modern world, generally aims to promote and develop the application of Islamic principles, law and traditions to transactions of financial, banking and related business affairs. It is also to promote investment companies to engage in such business activities that are acceptable and consistent within the Shariah precept.

The main principles of Islamic banking are the prohibitions of interest (usury) in all transactions, the undertaking business and trade activities must be on the basis of fair and legitimate profit and the prohibitions of monopoly and hoarding. By doing so, Islamic banks will safeguard the Islamic communities and societies from activities that are forbidden in Islam.

Justice is such an indispensable ingredient of the Islamic faith that it is impossible to perceive the ideal Muslim society where justice has not been established. Islam wishes to eradicate from human society all traces of zulm, a comprehensive Islamic term referring to all forms of inequity injustice, exploitation, oppression and wrongdoing whereby a person either deprives offers of their rights or does not fulfill his obligations towards them.

As emphasis in earlier definition of Islamic banking system, Islamic Banks do not deal with loans (except for benevolent loan - Qardh Hassan). Instead, they introduce Musharakah (Partnership), Al-Bai Bithaman Ajil (deferred payment sale as a result from trading activity) and Mudharabah (Profit Sharing of gain and losses), which make the investments of the Islamic Banks depend on the usefulness and feasibility to the project in which the money is invested.

This is a contrast with traditional banks using the conventional system that loans out money for interest, without regard as to the usage to which the money will be put, because the bank knows that the client is able to repay the loan.

Goals of Islamic Banking

The Banking system should, like all other aspects of the Islamic way of life, be made to contribute richly to the achievement of the major socio-economic goals of Islam. The system should also continue to perform the usual functions that relate to its own special field which other banking systems performs.

Some of the most important goals and function necessary for an Islamic Banking system are socio-economic justice and equitable distribution of income and wealth as well as the stability in the value of money to enable the medium of exchange to be a reliable unit of account.

Mobilisation and investment of savings, coupled with effective rendering of all services normally expected from the banking system are equally important in achieving the goals of an Islamic banking services provider.

It may be argued that the goals and functions of the Islamic banking system are similar to those under capitalism but there is in fact a significant difference in emphasis, arising from the divergence in the commitment of the two systems to spiritual values, socio-economic justice and human brotherhood.

Basic Concept: How an Islamic Bank Accepts Deposits

Deposit taking is one of the sources of funds of an Islamic bank, whereby it may enter into a contract of mudharabah, wadiah or qard with a depositor.



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