What is an Islamic
Bank?
There is no standard
way of defining what an Islamic bank is, but broadly speaking an "Islamic bank
is an institution that mobilises financial resources and invests them in an
attempt to achieve predetermined islamically -acceptable social and financial
objectives. Both mobilisation and investment of funds should be conducted in
accordance with the principles of Islamic Shari'a".
1-
Prohibition of Interest or Usury
The principles of
Islamic finance are established in the Qur'an, which Muslims believe are the
exact Words of God as revealed to the Prophet Mohammed. These Islamic
principles of finance can be narrowed down to four individual concepts.
The first and most
important concept is that both the charging and the receiving of interest is
strictly forbidden. This is commonly known as Riba1 or Usury. Money, on its
own, may not generate profits. When Riba infects an entire economy, it
jeopardises the well-being of everyone living in that society. When investors
are more concerned with rates of interest and guaranteed returns than they are
with the uses to which money is put, the results can only be negative.
2- Ethical Standards
The second guiding
principle concerns the ethical standards. When Muslims invest their
money in something, it is their religious duty to ensure that what they invest
in is good and wholesome. It is for this reason that Islamic investing includes
serious consideration of the business to be invested in, its policies, the
products it produces, the services it provides, and the impact that these have
on society and the environment. In other words, Muslims must take a close look
at the business they are about to become involved in. In all facets of the
financial system, Islam has certain rules, certain regulations as to how
Muslims should go about participating in these activities.
3- Moral and Social
Values
The third guiding
principle concerns moral and social values. The Qur'an calls on all its
adherents to care for and support the poor and destitute. Islamic financial
institutions are expected to provide special services to those in need. This is
not confined to mere charitable donations but has also been institutionalised
in the industry in the form of profit-free loans or Al Quard Al Hasan. An
Islamic bank's business includes certain social projects, as well
as charitable donations. Islamic banks provide profit-free loans. For example,
if an individual needs to go to hospital or wants to go to university, we give
what is called Quard Al Hasan. This QuardHasan is normally given for a short
period of one year and the Islamic bank does not charge anything for that.
4- Liability and
Business Risk
The final principle
concerns the overarching concept of fairness, the idea that all parties
concerned should both share in the risk and profit of any endeavor. To be
entitled to a return, a provider of finance must either accept business risk or
provide some service such as supplying an asset, otherwise the financier is, from
a Sharia'a point of view, not only an economic parasite but also a sinner.
