Islamic Banking

Islamic Banking

Islamic banking has been defined in a number of ways. The definition of Islamic bank, as approved  as by the General secretariat of the OIC, is stated in the following manner. ” An Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to banning of receipt and payment of interest on any of its operations”.

Dr. Shawki Ismail Shehta viewing the concept from the prospects of  an Islamic  economy and the prospective role to be played by an Islamic bank therein opines that ” It is therefore, natural and, indeed, imperative for an Islamic bank to incorporate in its  functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy.”

Dr. Ziauddin Ahmed says, ” Islamic banking is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam.”

It appears from the above definitions that Islamic banking is a system of financial inter-mediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, it is a banking system, which operates on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature and ensures justice and equity in the economy. That is why Islamic banks are often called PLS-banks.

Investorwords.com says “Islamic banking  is a system of banking based on the statutes of Islamic law and economics. Paying or collecting interest, or riba, is prohibited by Islamic law. Sharing profit and loss is a banking principle and shareholder capital and deposits are kept separate to ensure fair revenue sharing.”

Financial-dictionary defined “Islamic Banking is a system of banking that only offers products that conform to the sharia, or Islamic law. For example, in Islamic banking, checking and savings deposits do not accrue interest. They either lie dormant until withdrawal or are invested. Because this involves higher risk than conventional banking services, various highly technical products have been developed to mitigate risk and generally imitate “regular” banks as much as possible while still complying with Islamic law. Considerable debate exists as to whether these Islamic banking products are in fact sharia-compliant.”