Page 1 of 1

Islamic Financing

PostPosted: Tue Aug 07, 2012 11:16 pm
by Anup V
Uncontrolled capitalism has caused the global economy into a plunge into an unprecedented crisis. Adding to the distress, economists worldwide are expecting the global economy to experience a double dip in the near future. This calls in for a need for eradicating huge bubbles of fiat money and assets brought in by capitalism and build up a real and stable economy. In this project, we try to study Islamic banking and financing as an alternate mode of financing as a remedy. In the wake of crisis, world has slowly started to shifting to this alternate financing model which offers a wide range of complexly engineered tools viz., Mudaraba, Murabaha, Musharaka, Istisna, Musaqat, Ijara and a lot more as has been discussed in the upcoming chapters. Salient features of each have also been studied.

Islamic finance is based on principles of shariah, or “Islamic law.” Major principles of shariah are a ban on interest, a ban on uncertainty, adherence to risk- sharing and profit sharing, promotion of ethical investments that enhance society, and asset backing. The international market for Islamic finance has grown between 10% to 15% annually in recent years. Islamic finance historically has been concentrated in the Persian Gulf countries, but has expanded globally to both Muslim and non-Muslim countries. There is huge and growing market potential for Islamic finance in the India. Through international and domestic regulatory bodies, there has been effort to standardize regulations in Islamic finance across different countries and financial institutions, although challenges remain.

Islamic banking is essentially banking in consonance with the ethos and value system of Islam and governed in addition to the conventional good governance and risk management rules, by principles laid down by Islamic law, Shariah. It is, however, not confined to interest free banking, which is a narrow concept. In addition to non-acceptance of interestbased transactions, the fundamental tenet is that of fairness. It envisages ethical practices, contributions towards a more equitable distribution of income and wealth and active participation in achieving the goals and objectives of an Islamic economy.

Need for Islamic Banking

The collapse of major Wall Street institutions, notably Lehman Brothers, and the subsequent global financial crisis and economic recession, Islamic banking is seriously being considered and has emerged as a possible alternative to the conventional banking because of the following reasons:

• It is based on Ethical and Socially Responsible Investments (SRI) • It aims at Equity and Justice and leads to poverty alleviation

• It acts to new imension to assets andactual projects aiming to support real economic growth instead of financial engineering

• It provides services to under banked populations ignored by conventional banks

Basic Tenets of Islamic Banking and Finance

The basic tenets of Islamic banking and finance can be put down as under;

1. Prohibition of interest-based (riba) transactions;
2. Ban on speculation and excessive risk taking (gharar);
3. Islamic tax system (zakat);
4. Discouragement of the production of goods and services which contradict the value pattern of Islam (haram)