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The basics of Islamic banking
PRESENTATION BY ALEKSANDRA KOWALSKA
Introduction of the term
Islamic banking is a type of banking that is consistent with the principles of Islamic law (for which the Arabic term is sharia).
It is guided by Islamic economics. A more correct term for Islamic banking is sharia compliant finance.
Four principles of Islamic banking
Wealth must be generated from legitimate trade and asset-based investment. (The use of money for the purpose of making money is expressly forbidden)
Investment should also have a social and an ethical benefit to wider society beyond pure return.
Risk should be shared. All harmful activities (haraam) should be avoided.
Prohibited elements in Islamic banking:
Riba Investing in businesses that provide goods or services considered
haraam Maysir Gharar
Riba – definition and types
Literally, it means excess, expansion, increase, addition or growth. Technically, it refers to the “premium” that must be paid by the
borrower to the lender along with the principal amount as a condition for the loan or an extension in its maturity.
Types of riba Riba al-nasi’ah - pertaining to loan contracts. Riba al-fadl - pertaining to trade contracts.
Maysir (gambling) - definition
Also known as qimar. Refers to easily available wealth or acquisition of wealth by chance, whether or not it deprives the other’s right.
Qimar means the games of chance – one gains at the cost of other.
Gharar - definition
Literally, it means deception, danger, risk, and uncertainty. Technically, it means exposing oneself to excessive risk and danger in
a business transaction. Types of gharar:
Gharar yasir (minor/slight) – tolerated and will not invalidate a contract Gharar fahish (excessive/major) – not tolerated and may result in
invalidating the a contract Examples: the sale of fish in the sea - the sale of bird in the air - the sale of
unborn animals - lost items
Islamic banking – present and future
International Islamic banking assets with commercial banks set to exceed US$778b in 2014.
The global profit pool of Islamic banks is set to triple by 2019. Islamic banking assets in six core markets Qatar, Indonesia, Saudi Arabia,
Malaysia, UAE, Turkey on course to touch US$1.8t by 2019. Global Islamic banking assets witnessed a compounded annual growth rate
(CAGR) of around 17% from 2009 to 2013. Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%,
44.6% and 27.7% market share respectively. Positive progress has been has made in Indonesia, Turkey and Pakistan, with
43.5%, 18.7% and 22.0% CAGR respectively from 2009-2013.
International Islamic banking assets
Digitization: the future of Islamic banking
Plans for the future
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