Islamic Banking
Research Report of Money and Banking
Issues and Problems in Islamic Banking
Abstract:-
Three decades have passed since the first Islamic bank began its operations in MitGhamr, Egypt, and more than a decade has passed since the Islamic Republics ofIran and Pakistan adopted a non-interest-based financial system. Profit Loss Sharing (PLS) dominates the theoretical literature on Islamic finance. Broadly, PLS is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Islamic economists contend that PLS based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward-sharing is related to risk-sharing between transacting parties. Depositors in Islamic banking can be compared to investors or shareholders, who earn dividends when the bank makes a profit or lose part of their savings if the bank posts a loss. The rationale is to link the return in an Islamic contract to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth. Like conventional banks, an Islamic bank is an intermediary and trustee of other people’s money with the difference that it shares profit and loss with its depositors. This difference introduces an element of mutuality in Islamic banking, making its depositors as customers with someownership rights in it. Most Islamic banks work as joint stock firms whose shares are easily tradable. Growth of PLS requires that the ‘ownership rights’ should not be easily transferable or tradable. Today, Islamic banking is spreading and gaining acceptance in non-Muslim countries as well as Muslim ones. Islamic Banking an alternate to interest-based banking is not banking in the traditional sense of the word. It derives its inspiration and guidance from the religious edicts of Islam and has to conduct its operations strictly in accordance with the
Issues and Problems in Islamic Banking
Abstract:-
Three decades have passed since the first Islamic bank began its operations in MitGhamr, Egypt, and more than a decade has passed since the Islamic Republics ofIran and Pakistan adopted a non-interest-based financial system. Profit Loss Sharing (PLS) dominates the theoretical literature on Islamic finance. Broadly, PLS is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Islamic economists contend that PLS based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward-sharing is related to risk-sharing between transacting parties. Depositors in Islamic banking can be compared to investors or shareholders, who earn dividends when the bank makes a profit or lose part of their savings if the bank posts a loss. The rationale is to link the return in an Islamic contract to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth. Like conventional banks, an Islamic bank is an intermediary and trustee of other people’s money with the difference that it shares profit and loss with its depositors. This difference introduces an element of mutuality in Islamic banking, making its depositors as customers with someownership rights in it. Most Islamic banks work as joint stock firms whose shares are easily tradable. Growth of PLS requires that the ‘ownership rights’ should not be easily transferable or tradable. Today, Islamic banking is spreading and gaining acceptance in non-Muslim countries as well as Muslim ones. Islamic Banking an alternate to interest-based banking is not banking in the traditional sense of the word. It derives its inspiration and guidance from the religious edicts of Islam and has to conduct its operations strictly in accordance with the