Friday, 22 July 2016

Islamic Banking

Islamic Banking and Finance- Global growth trends.
Islamic banking and finance growth has generated considerable interest in the financial world in recent years. The concept of Islamic banking has received encouraging response from different corners of the globe as one discovers its ideological dimensions and practical significance.

Given its ability to offer innovative financial solutions for basic financial needs in under-served markets espacially in the Muslim world and to meet complex financial requirements of the modern times, it is seen as a socially responsible and ethical banking model with considerable growth potential. In the Muslim world and increasingly in the West,  significant segments statements of the institutional and retail markets are choosing Islamic finance for their financing and investment needs. Islamic financial system also draws its strength from it being asset backed nature and directly linkage to the real economic transactions and avoidance of any element of interest and speculative activity.

Understanding the difference:

When we look at the difference between Islamic Financial Institutes and the interest based conventional institutions, we find out that the differences are on three levels:

1. Conceptual and Socio religious level.
2. Business model and governing framework.
3. Product Level Implementation.

Without a clear understanding of these differences, some people, even experts tend to make a common mistake of equating Islamic banks with other conventional banks with mere change of name.

Key difference.

1. In a conventional Bank the relationship between the bank and customer is that of creditor and debtor and any benefit available to either party falls under the ambit of interest since it is a gain on Debt/Loan. In Islamic Banking, the relationship between bank anf customer differ as per the modes of finace and thenature of the facility.
2. In Sale based transaction modes, Islamic Banks and the customer assume the role of seller and buyer respectively and any benefit available to either party is profit on Sale Trannsaction.
3. In rental based modes, the relationship between Islamic bank and customer is that Lessor and Lesssee respectively and any benefit available to bank is in the form of Rent.
4. In Participation based modes,  the relationship between Islamic bank and customer is that of partnership and the gain is raken by either party is profit on Musharakah.
In Service based mode, the relationship between Islamic bank and customer is of Mustajir (Service Provider) and Ajeer( To whom service is given) respectively and islamic bank gets remuneration in the form of fees(Ujrat).

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