Islamic Banking System: Basic Concepts -Hamidur Rashid Jamil


A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Banking is a business that deals with cash, credit, and other financial activities for both individuals and businesses. One of the main engines of the U.S. economy is banking, which provides the liquidity needed by individuals and businesses to make long-term investments. Banking consists of many activities that can be done through a number of financial institutions that accept deposits from individuals and other entities, and then use this money to offer loans and to invest and earn profit. Banks can be placed into certain categories based on the type of business they conduct. Commercial banks provide services to private individuals and businesses. Retail banking provides credit, deposit, and money management to individuals and families.

The Conventional bank is an interest-based banking system. Bank loans and bond issues are commonly referred to as debt in the conventional Banking, although this is incorrect. Pure Islamic finance does not fit into any of these categories. Islamic banking is a system that adheres to the rules and regulations of Islamic law (Sharia), which are referred to as’fiqh al- mumalat ‘ (Islamic laws on transaction) and are found in the ‘Quran’ and various’Hadiths ‘. Islamic banking, also referred to as Islamic finance or shariah-compliant finance, refers to financial activities that adhere to shariah (Islamic law). Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors.

Basisof Islamic Banking:
Islamic banking is based on the Islamic faith’s tenets about commercial transactions. Islamic banking concepts are taken from the Qur’an–major Islam’s holy source. All transactions in Islamic banking must adhere to shariah, Islam’s legal system (based on the Qur’an’s precepts). The Islamic banking principles governing commercial transactions are referred to as fiqh al-muamalat.

History of Islamic Banking:
Islamic banking is thought to have its roots in businesspeople in the Middle East who started trading money with Europeans in the Middle Ages. At first, they used the same money rules as the Europeans. But as trading systems evolved and European countries started setting up local branches of their banks in the Middle East, some of these banks started adopting local customs, such as no-interest financial systems that worked on a profit and loss method. In this way, these European banks could also meet the needs of local businesspeople who were Muslim by following these rules.
Islamic banking emerged in the modern world in the 1960s, and numerous new interest-free banks have opened since 1975. While the majority of these organizations were created in Muslim countries, in the early 1980s, Islamic banks opened in Western Europe. Additionally, the governments of Iran, Sudan, and (to a lesser extent) Pakistan has built national interest-free banking systems.

Differences between Conventional and Islamic Banking:
One of the most significant distinctions between conventional and Islamic banking is that Islamic banking forbids usury and speculation. Shariah outlaws all forms of speculation or gambling, referred to collectively as maisir. Additionally, Shariah prohibits charging interest on loans. Additionally, any ventures involving prohibited commodities or substances in the Qur’an—including alcohol, gambling, and pork—are prohibited. Islamic banking can thus be thought of as a culturally different kind of ethical investing.

Advantages of Islamic Banking:
Justice and Fairness
The Islamic Banking concept is founded on a profit-sharing basis, in which the bank and the consumer share the risk. This financial intermediation mechanism contributes to more equitable income and wealth distribution.
Banking for All
While Islamic Banking is based on Shari’a principles, it is not limited to Muslims and is also open to non-Muslims.
Islamic banking is based on the principle of conducting business in an ethical and transparent manner. Our primary responsibility is to guide you through the process to ensure that you fully understand the risks and expenses connected with the products and services.
Ethical and Moral Dimensions
The strong ethical and moral components of business and the selection of business operations to finance contribute significantly to the promotion of socially desirable investments and improved individual and corporate behavior.
Discouraging Speculation
Speculative transactions are unstable and, by definition, result in capital misallocation. Islamic banks are barred from engaging in such operations, preferring to invest in the actual economy in order to advance socioeconomic justice.
Some of the Basic concepts of Islamic Banking:
Wadiahor Amanah (Safe keeping)
Mudharabah (Profit sharing)
Murabahah (Sale of goods at a price which include profit margin)
Musyarakah (Joint venture between bank and entrepreneur)
Istisna (Intermediary)
Salam (Advance payment)
IjarahThumma Bal (Hire Purchase)
Rahn (Mortgage and Pledge)
Kafalah (Guarantee)
Hawalah (Transfer of payment responsibility)
Wakalah (Agent)
Quard (Interest free loan)
Islamic investments are distinct from other forms of socially responsible investing in that Islam makes no distinction between spiritual and secular life. This means that investment methods are scrutinized considerably more closely, as religion is a factor in all financial decisions. Investments that adhere to Islamic Investment Policy must adhere to a specified set of standards.
The writer is a student of Department of Arabic, Dhaka University.