Agreement In Islamic Finance

The Islamic bank refers to the methods used to carry out commercial, banking and financial transactions in accordance with Shariah principles. If banks or financial institutions are not governed according to Sharia principles, they cannot be classified as Islamic banks and/or Islamic financial institutions. The Islamic nature of the banking system differs on many fronts from the conventional banking system. It sticks to certain aspects of social, moral and economic values, rooted in the principles of Sharia and religion itself. One of the main differences between conventional banks is that the conventional banking sector is not involved in trade and activities and that depositors benefit from a fixed interest rate, regardless of the bank`s profitability, thus isolating them from the bank`s actual performance. While the Islamic bank actively participates in trade and production, where profits are shared with depositors and the bank`s profits are higher, depositors` income is even higher. Others describe these benefits (or similar) as “principles” or “goals” of Islamic finance. Nizam Yaquby, for example, states that the “guiding principles” of Islamic finance include “equity, justice, equality, transparency and the pursuit of social harmony.” [34] Some distinguish sharia finance from more holistic, pure and demanding funding based on Sharia law. [35] [36] [37] “Ethical financing” has been described as necessary or at least desirable for the islamic finance world, as well as a “golden currency”.

[39] Zubair Hasan argues that the objectives of Islamic financing, as envisioned by its pioneers, “promote growth with equity … poverty reduction… [and] a long-term vision to improve the state of Muslim communities around the world. [40] Modernist/minimalist critic Feisal Khan argues that Islamic finance has not in many ways lived up to its defining characteristics. Risk sharing is absent because profit-loss sharing methods are so rarely used. Transactions such as tawarruq, Commodity Murabahas, Malaysian Islamic private debt securities and Islamic Short-Sales are also lacking in underlying material transactions. Exploitation is at stake when high fees are charged, when “nothing is more important than imitating traditional banking/financial products.” Haram activities are not avoided if banks (as usual) simply think of customers/financial/borrowers as not using funds for non-Islamic activities. [41] Unfortunately, several studies have shown that Islamic microfinance affects relatively few Muslims and falls short of conventional microfinance in Muslim countries. Chiara Segrado wrote in 2005 , found “very few examples of real MFIs [microfinance organizations] active in the field of Islamic financing and Islamic banks participating in microfinance.” [275] In a 2012 report (by Humayon Dar and co-authors),[276] it was found that Islamic microfinance accounts for less than one percent of global microfinance, “despite the fact that nearly half of microfinance clients live in Muslim countries and that demand for Islamic microfinance is very high.” [272] However, other sources indicate that the borrower may pay a surcharge if the supplement is optional and not contractual. [153] Some financial institutions offer lenders products called qardh-ul hasan, which do not charge interest but charge additional administrative fees. [154] There are also savings account products called qardh-ul hasan (the “credit” is a deposit into a bank account) in which the debtor (the bank) can pay an additional amount beyond the main amount of the loan (known as Hibah, literally gift) as a sign of revaluation to the creditor (depositor).