ISLAMIC BANKING

Islamic Banking in the modern world, generally aims to promote and develop the application of Islamic principles, law and traditions to transactions of financial, banking and related business affairs. It is also to promote investment companies to engage in such business activities that are acceptable and consistent within the Shariah precept.

The main principles of Islamic banking are the prohibitions of interest (usury) in all transactions, the undertaking business and trade activities must be on the basis of fair and legitimate profit and the prohibitions of monopoly and hoarding. By doing so, Islamic banks will safeguard the Islamic communities and societies from activities that are forbidden in Islam.

Justice is such an indispensable ingredient of the Islamic faith that it is impossible to perceive the ideal Muslim society where justice has not been established. Islam wishes to eradicate from human society all traces of zulm, a comprehensive Islamic term referring to all forms of inequity injustice, exploitation, oppression and wrongdoing whereby a person either deprives offers of their rights or does not fulfill his obligations towards them.

As emphasis in earlier definition of Islamic banking system, Islamic Banks do not deal with loans (except for benevolent loan – Qardh Hassan). Instead, they introduce Musharakah (Partnership), Al-Bai Bithaman Ajil (deferred payment sale as a result from trading activity) and Mudharabah (Profit Sharing of gain and losses), which make the investments of the Islamic Banks depend on the usefulness and feasibility to the project in which the money is invested.

This is a contrast with traditional banks using the conventional system that loans out money for interest, without regard as to the usage to which the money will be put, because the bank knows that the client is able to repay the loan.