What is Islamic banking? What is the fundamental difference between the Islamic model of finance and the Western system? What does Shariah law say about credit and insurance? What does the future hold for Islamic finance in Russia?
How is Islamic banking different from traditional one?
It is noteworthy that the fundamental difference between Islamic banking and classical one is total absence of the concept of loan interest. The very notion of Islamic banking means priority of Islamic ethical norms in the establishment of such a bank and in internal banking processes. The fundamental difference between Islamic banking and non-Islamic one is total rejection of bank interest, which is equivalent to usury, and, as a consequence, receipt and payment of interest is forbidden in Islam.
And what is money in Islam? It is worth mentioning the fact that Islamic and capitalist models have a lot of differences. Whereas in the capitalist model money is a commodity, in Islam it is only a means of exchange (hence the prohibition of usury – riba).
Money can only be lent under three conditions. Firstly, it can be an act of compassion or charity. Another option is that money is lent to the borrower for the purpose of preservation (a kind of ‘safety cushion’). Thirdly, money is lent for the purpose of investment, when a special agreement, mudarabah, is made whereby the investor determines the areas in which money can be accepted. In turn, the entrepreneur takes responsibility. This is how profits and losses are divided up. The percentage of the division must be clearly stipulated between people. It should be mentioned that when there is a loss in business, only the investor bears the financial loss, while the person who manages the money does not lose anything except for the possibility of the image loss.
What are the basic principles of Islamic business?
The principles of running business in accordance with Shariah law are based on the observance of the two rules: inadmissibility of prohibited actions and achievement of God-pleasing behavior by carrying out permissible and desirable actions. As far as the Quran is concerned, the holy book for all Muslims outlines the basic rules of proper business conduct. These are justice, adherence to the law, charity work, mercy and ethics in the behavior of both employees and superiors.
Let us pay special attention to the principle of justice. What is meant by it? First of all, this is fulfillment of all promises made and terms of a contract; it is honest work and quality salary; honesty; competence; checking commercial information received for truthfulness and reliability of goods characteristics in sale.
It is also very important to refrain completely from cheating in the conduct of any business – ‘Woe to the stinters; those who, when they take from others by measure, take their full share; but who, when they measure or weigh for others, give less than they due’ (Surah Al-Mutaffifin, ayats 1 -3). We must not forget the main requirement on which all entrepreneurial activity should be based – business should by no means interfere with the observance of religious requirements by a Muslim.
What is at the heart of Islamic finance?
Islamic economy has a social orientation, leaving priority to the observance of moral and ethical principles, as the most important task of Shariah is to ensure welfare of people through preservation of their religion, life, mind, honor and property.
It is important to understand that Islamic economy is not a religious sphere of activity, but only a different economic system that is not only for Muslims, but also for people of other religious beliefs. Following the precepts of Shariah, Islamic economy emphasizes the principles of justice and equity and does not tolerate illicit enrichment by any party. Thus, economic relations in Islam are based on the following principles:
- Pursuit of benefit and approval of only those profits that have been earned as a result of useful activities;
- Promotion of respect for people’s rights and partnerships;
- Prohibition of anything that harasses people, causes enmity between them and anything that is harmful to religion, life and their honor.
Islamic finance is based on the same principles and is represented by the following institutions:
1. Islamic banks are financial institutions that take deposits and invest accumulated funds. They also include auxiliary banking units or Islamic ‘windows’ of conventional banks.
2. Islamic financial institutions that are not banks. These may include Islamic housing and construction cooperatives, leasing and factoring companies, microfinance institutions, private investment and venture funds, financial companies, as well as institutions related to religious performance and charity.
3. Islamic insurance (takaful).
4. The Islamic capital market and its participants. These include brokerage firms, investment banks, etc.
5. Islamic financial infrastructure, which includes payment system; screening, trading and clearing systems, Internet business infrastructure; organizations that help ensure economic security and maintain liquidity; regulators; financial reporting standards enforcement bodies; rating agencies; statistical information providers; educational institutions and research organizations.
Instruments of Islamic finance
The main instruments include:
Murabahah is trading at a mark-up. Purchase of an asset is financed for a profit, with the asset being purchased on behalf of a customer and resold at a predetermined price. Payment can be one-time or in instalments and ownership of the asset remains with a bank until full payment.
Ijara is when a bank acquires an asset on behalf of a client and allows the asset to be used for a fixed rent. Ownership of the asset remains with the financier, but may gradually pass to the client, who eventually becomes the owner.
Mudarabah is a contract of trust. One party contributes capital while the other one contributes effort or expertise. Profits are distributed according to a predetermined ratio.
Musharakah is an equity contract. Various parties contribute capital and profits are distributed in accordance with a predetermined ratio.
Sukuk is a certificate of ownership. Sukuk are certificates of equal value representing indivisible ownership interests in tangible assets or services. Returns on certificates are directly related to returns on underlying assets.
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