An Introduction to Islamic Banking

It is not always easy to get the right things near our reach time passes. Civilization may be overthrown. Things change day by day. But sometimes it becomes so hard to reach the destiny.  In case of Islamic Banking the same thing happened. After 1400 years the world started thinking about this very necessary financial system. Though the system of banking is as old as the human civilization it is really a matter of great regret as well as failure for us.

In the middle of 20^th century some Islamic scholars of pakistan at first thought of this system. They tried it locally but failed due to lack of proper effort as well as support. In 1963 Ahmed al Naggar started Islamic bank in a pastoral area in Egypt.  A good number of Islamic banks were established there at that time. But the then govt. of Egypt banned all the banks. The effort collapsed at the very outset.

In 1975 IDB was established. Then the Dubai Islamic bank was formed as its first initiative. In 1983, The Islamic Bank Bangladesh Ltd. was established. Then many a number of banks was established in our country. Now we are enjoying a very strong Islamic banking system in our country as we see all over the world. The root of Islamic banking lies in the midst of the Holy Quran and the Sunnah. The Islamic scholars gathered knowledge from the eternal sources of Islam. It includes the holy Quran, hadith, Ijma and Qiyas.

The weakness of Islamic banking also lies here. Theory is available but its implementation is quite hard as it has no mechanism of its own. It adopts its methods from traditional banking.

That is why the real essence of Islamic banking is still untouched. So, research and analysis is still the prime necessity. All out support from Govt. can take a good part to its success. The rule of Islamic banking comes from the divine source of Islam. So, the knowledge of its roots is very necessary to understand it thoroughly. Islamic economy is the real field where we can do real Islamic banking. It is a complete method. So, for its implementation a complete environment is necessary. In an incomplete environment we can only execute some of its methods only which is commemorating with the exiting system. But this is not all about it.

The necessary islamic conduct like Zakat, Sadakah, Ushr, Jiziya, Kharaj, benevolent, qard etc still do not established in our society. We are still thinking through our capitalistic view. So, how we can expect that a true Islamic system will be in vogue. The matter needs further theory. Islamic banking is not a process of money lending. Money is a tool here which is widely used has a medium of our business. So, the business is also our main concern. It deals with buy and sell and generate profit for the parties related to the operation. So, things are different. It deals with profit which is the margin or outcome of buy and sell. Islam allows buy and sell but prohibits interest which is the excess of our principal. Money over money is nothing but riba. It is haram in Islam. Islamic banking works through all the system. It provides financial transactions, service related affairs and also manufacturing field. It is a complete system. Islamic scholars invented shariah compatible methods in order to cope up with the modern banking system. But in the way of doing this it never allows any methods which is prohibited in Islam. When shariah disagrees the scholars researched and finally find out a shariah permitted method. This is the success of Islamic banking.

There are many misconceptions about Islamic banking. But at first we should know that it differs generally from conventional banking. Conventional banking does not consider loss. But Islamic banking share profit and bear loss. It never transfer the risk and uncertainly to another party. It is a participatory method. In Islamic banking all are partners and share the same joy and sorrows. Its essence lies within the heart of its cooperation. It is a contact which is conformed by both the parties. We should know it at the very outset that we are not going to deal with our money. We are going to do our business. We can only sell the goods which is still in our possession. So, at first we buy and they sell and in this way we make profit.

In order to doing this mammoth job especially in such a modern world we are in need of applying various fools. But it is a matter of great pleasure Islamic banking develops all the necessary tools and models in the last few decades. All banks accept deposit for the customer. Islamic bank also do the same job. But it does this task through Mudaraba system. There is a valid Mudaraba contract between bank and the customer. Here bank is the Mudarib and depositor is the saheb al mal. Depositor gives permission to use his fund to the bank through a Mudaraba contract. That is why bank can enjoy the facilities of using this money and it is called deposit. There are another thing named amanah which bank can not use in its business. Here bank is only the custodian of the goods and liable to refund it to the customer as it was received earlier.

Islamic banking also uses various tools for accepting deposit from the customer. Considering time, amount, feature the mode of taking deposit varies. A specific size of shirt does not fit every body. So, Islamic banking introduced a lot of modes of taking deposit form the depositor. Islamic banking also attends in the job of making profit. That is why sometimes it advances the fund to help doing others business as well as itself does the business through participation. The main method of making profit of Islamic banking is mudaraba and Musharka. Murabaha may be used as a medium of the both the system we already mention. Besides it also use Ijara, Mujara, Salam, Istisna, Istijrar and so many modes of investment.

It also use financial instrument in order to attend money market. It also uses various types of bonds in order to survive in the capital market. It also provides its support in setting up capital machinery for industry. Here it uses IBB method which is almost identical to Ijara. It also does its service related works. It can be called Wajirat bill Wakala.

Islamic banking has an advantage over conventional banking as it is a participatory method. Here both the parties have same liability and responsibility. That is why both feel ownership in his or her heart. As there is a buy and sell that is business also, there is little chance to involve in a falls business. It always provides products not cash. So, the transaction is a confirm action and there must be a result.

So far we know, Islamic Banking has some difficulties to implement as it is dependent on real buy-sell method. The buyer should posses the title of the goods at least for a moment. So, bank should buy the product at first and to sell it later. The question of ownership is a great issue. The customer buys the goods on behalf of the bank. For this he is engaged as a buying agent. In doing the total process or mechanism bank is liable to adjust it to ensure the ownership as it can not buy and sell the product practically. So, the steps should be done carefully to ensure the norms of a valid buy and sell.

In taking deposit bank widely applies mudaraba method. The main principal behind this method is providing fund from one party to another party to do business. The provider of fund is called shahib al mal and the person or institute who will do the business is called Mudarib. There will be a mudaraba agreement which will ensure the conditions. How the proportion of profit will be distributed. It actually depends on some conditions. Suppose the Mudarib can do his business near or far. He can deal with various types of products. So, percentage varies on the basis of skill, location, time, products, market, risk and so many conditions. As per the principle of Mudaraba the mudarib will not bear any loss. So, this can be called a profit sharing loss bearing method. The question of honesty of the Mudarib is a great concern.

Both the parties will be beneficial if they can do the business comfortably and honestly. There are two types of Mudaraba:

They are:

    i.            Al Mudarabah al Maqayyadah

 ii.            Al Mudarabah al Mutlaqah

Bank takes its deposits through this method. At this stage bank is Mudarib and the depositor is shahib al mal. But when bank do the business with the customers with this deposit then bank is shahib al mal and the customer who is taking advance from the bank is Mudarib. The process is simple. But now a day due to dishonesty of the people and existing social unrest it is very hard to implement this method.

By using this method Bank take deposits through varios modes: They are:

a)    Mudaraba Savings Deposit

b)    Mudaraba Scheme Deposit

c)     Mudaraba Term Deposit

Besides, bank also uses Al-wadeeah method. The jest of the method is to permit anyone to use fund without any return. The depositor also provide maintenance cost to the bank. The bank is bound to return the whole of the deposited fund if it is demanded by the customer.

There are various types of methods for advancing fund. They are:

           i.            Murabaha

        ii.            Musharaka

     iii.            Bai Muajjal

      iv.            Bai Salam and parallel Salan

         v.            Bail istisna and parallel istisna

      vi.            Ijara

   vii.            Ijara Bill Baia

viii.            Hire Purchase Under Shirkatul Melk (HPSM)

      ix.             Qard

         x.            Invesment Auctioning

      xi.            Wazirat Bill Wakala

(i)      Murabaha: A cost plus financing with the option of deferred payment. Actually it is not mandatory that the payment should be deferred payment method. The payment can be made at the time of the transaction. But due to facilitate the customer the method of deferred payment is applied.

In Murabaha, the customer has the right to know the amount of profit. So, it is called Mark up method. It is widely used in various steps of export and import financing under the modes MIB, MPI and MTR and different types of this method.

There are two main types of Musharaka. They are:

    i.      Shirkat al Melk and

 ii.      Shirkat al Aqd

iii.      Shirkat al Melk: It is a participatory method of buying and selling. A specific good for the basis of partnership.

There are two types of this method:

 i.         Shirkat al Ain

 i.            Shirkat al Dain

ii.            Shirkat al Aqd.

There are three different types of every type of this method. They are:

 i.            Shirkat al Amwal

ii.            Shirkat al Amal

iii.            Shirkat al wujooh

Each of the above three types of Shirkat-ul Aqd are further divided into two types:

i.            Shirkat-ul-Mufawada (Capital & labour at par)

ii.            Shirkat-ul-Ainan (Capital not equal)

(ii)   Musharaka: A real Islamic banking mode of operation is Musharaka. It is derived from the term shirkat which also comes from the origin shirk or partnership.

(iii) Bai Muajjal: It is a deffered payment method with cost plus principle.          The bank sells the desired product with a differed payment facility after adding profit over its principal. The bank may not disclose the amount of the profit to the customer.

iv.            Bai Salam: It is a forward purchasing method. The payment will be made on the spot and the goods will be supplied within a future date. Bai Salan be used in different situation. But it is widely used in the in cultural field. The specification of the goods in a great concern. So it should be basely mentioned in the agreement.

v.            Bai Istisha: It is also a method of forward purchasing. Bai Salan the payment fund is made a spot and the good will be divided in a future date. In the manufacturing sector it is widely used.

vi.            Ijara: Ijara means leasing or Hiring any physical asset as per a predetermined rental. The bank may is the owner of the asset and the customer is the leasee or Hirer of the asset.

vii.            Ijara bill Baia: In case of Islamic banking it is a combination of there different methods. Shirkat, rent and sell. The bank purchases a goods jointly with the customer and to rent it to the customer and finally sell it to the customer. The customer pays the principal as well as rent in installment basis and the right of ownership increase day by day. Finally after the end of the payment of installment the bank sell the goods to the customer at a nominal price. In purchase a vehicle or making a house the customer get fund thorough this method.

viii.            Bai Istijrar: It has come from the Arabic word Bai and zana. It is a contract between a client and a supplier. To use the source with supply the goods ongoing basis suppose weekly, monthly, quarterly on the basis of any fixed price or any agreed mode of payment.

ix.            Wajirat Bill wakala:

It is a method of providing consultancy services this is a method of doing some specific jobs can behalf of any customer. No direct us  miderate financial involumat Bank only gets service charge.