report on islamic banking

8/8/2019 Report on Islamic Banking

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OVERVIEW ON BANKING SYSTEMS

The practice of banking was of great necessity in all ages, and theinvention of Islamic banking permits a Muslim to take theadvantages of a bank, and to adhere with the Islamic Shariah aswell. The main difference between Islamic and non-Islamicbanking is that an Islamic banking system is an interest freebanking system, which emphasizes the prohibition of Riba -interest. Its the basic difference between the both bankingsystems.

MainstreamBank

Bank is a financial intermediary profit makinginstitution.

MainstreamBankingsystem

Banking is the functions of a bank, which isconveyed through the activities of a banker.

IslamicBank

A shariah based bank which follows the principlsof Islam and avoids receipt and payment of interest.

IslamicBankingsystem

Islamic banking means banking according to theprinciples of Islam.(Ribah-free banking)


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History:

In World: The first modern experiment with Islamic banking was

undertaken in Egypt under cover without projecting an Islamicimagefor fear of being seen as a manifestation of Islamicfundamentalism. The pioneering effort, led by Ahmad Elnaggar,took the form of a savings bank based on profit-sharing in theEgyptian town of Mit Ghamr in 1963. This experiment lasted until1967, by which time there were nine such banks in the country.In 1975, the Islamic Development Bank was set-up with the

mission to provide funding to projects in the member countries.Islamic Development Bank (also known as IDB ), is amultilateral development financing institution locatedin Jeddah , Saudi Arabia . It was founded by the first conference of Finance Ministers of the Organization of the Islamic Conference(OIC), convened 18 December 1973. The bank officially began itsactivities on 20 October 1975. The present membership of the

Bank consists of 56 countries

In Bangladesh :

Bangladesh is one of the largest Muslim countriesin the world. The people of this country are deeply committed toIslamic way of life as enshrined in the Holy Qur'an and the

Sunnah. Many people in Bangladesh are not interested to involvein banking as they offer interest. To provide banking facilities tothese Islamic minded people, Islami Bank Bangladesh Limited wasestablished in March 13, 1983 , which started functioning witheffect from March 30, 1983.
http://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Mit_Ghamrhttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conferencehttp://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Mit_Ghamrhttp://en.wikipedia.org/wiki/Islamic_Development_Bankhttp://en.wikipedia.org/wiki/Jeddahhttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Business_conferencehttp://en.wikipedia.org/wiki/Organisation_of_the_Islamic_Conference


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Principles

Islamic banking has the same purpose as conventional banking

except that it operates in accordance with the rules of Shariah ,known as Fiqh al-Muamalat (Islamic rules on transactions). Thebasic principle of Islamic banking is the sharing of profit and lossand the prohibition of riba (usury ). Common terms used in Islamicbanking include profit sharing ( Mudharabah ), safekeeping(Wadiah ), joint venture ( Musharakah ), cost plus ( Murabahah ), andleasing (Ijarah ).

The common Shariah concepts are as follows:

Wadiah (Safekeeping)

Wadiah means custody or safekeeping. In a Wadiah arrangement,you will deposit cash or other assets in a bank for safekeeping.

The bank guarantees the safety of the items kept by it.

Mudharabah (Profit sharing)

Mudharabah is a profit sharing arrangement between two parties,that is, an investor and the entrepreneur. The investor will supplythe entrepreneur with funds for his business venture and gets areturn on the funds he puts into the business based on a profitsharing ratio that has been agreed earlier.

Murabahah (Cost plus)

A Murabahah transaction involves the sale of goods at a pricewhich includes a profit margin agreed by both parties. However,in Murabahah, the seller must let the buyer know the actual cost
http://en.wikipedia.org/wiki/Shariahhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Murabahahttp://en.wikipedia.org/wiki/Leasinghttp://en.wikipedia.org/wiki/Shariahhttp://en.wikipedia.org/wiki/Ribahttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Murabahahttp://en.wikipedia.org/wiki/Leasing


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for the asset and the profit margin at the time of the saleagreement.

Musyarakah (Joint venture)

In the context of business and trade, Musyarakah refers to apartnership or a joint business venture to make profit. Profitsmade will be shared by the partners based on an agreed ratiowhich may not be in the same proportion as the amount of investment made by the partners. However, losses incurred willbe shared based on the ratio of funds invested by each partner.

Ijarah (Leasing)

Ijarah means lease, rent or wage. Generally, Ijarah concept meansselling the benefit of use or service for a fixed price or wage.Under this concept, the Bank makes available to thecustomer the use of service of assets / equipments such asplant, office automation, motor vehicle for a fixed period andprice.

Services of Islamic Banks:

Islamic Banking Institutions are offering a wide range of Shariah

Compliant products & services in the following areas:

General Banking: General services of a bank areperformed by Islamic banks like collecting deposit, giving loan,discounting bills etc.


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Consumer Banking: Islamic banks in Banks alsoprovide loans for consumer products.

Corporate /SME Banking: In Bangladesh, Islamicbanks also start corporate and SME banking.

Investment Banking: Islamic Banks also works asinvestment banks by providing short and long term loans to

various industries.

Trade Finance: Islamic Banks also helps our importexport trade by giving loan, issuing Letter of credits, givingassurance and transferring money.

Others Services:Islamic banks in Bangladesh are also providing people with thefollowing services-

Bonds & Guarantees,

Letters of Credit

Remittances

Online banking

ATM/debit card

Safe deposit lockers and

Utility bill payments


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Collection of export bills

Inter-Bank funds transfer facility through ATM,

Lockers

Deposit accepting ATMs etc.

Problems and Challenges of Islamic Banking

The Islamic banks in the world have been facing a number of challenges. Side by side, the Islamic banking in Bangladesh is alsofacing numerous problems of challenges.

First, they have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. Theyface the same problem in financing consumer loans andgovernment deficits.

Second, the risk involved in profit-sharing seems to be so highthat almost all of the Islamic banks in Bangladesh have resortedto those techniques of financing which bring them a fixed assuredreturn. As a result, there is a lot of genuine criticism that thesebanks have not abolished interest but, they have, in fact, onlychanged the nomenclature of their transactions.

Presently 60%-70% investments of Islamic banks are made onmark-up basis (Murabaha and Bai-Muajjal etc.). As a result, theideal modes of investment (Mudaraba and Musharaka) are quiteabsent in their practices .


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Third, the Islamic banks do not have the direct support of theCentral bank in Bangladesh, do not have the necessary expertiseand trained manpower to appraise, monitor, evaluate an audit theprojects that are required to finance. As a result, they can not

expand despite having huge excess financial liquidity. Theimplementation of an interest-free banking in Banking raises anumber of questions and potential problems.

However, some of the topical problems being facedby the Islamic banks are:

Absence of an organized Islamic inter-bank money market

Absence of full-fledged legal framework for Islamic banking

Lack of co-ordination and co-operation among the Islamicbanks

Lack of Shariah-compatible regulatory and supervisorystandards

Inappropriate organization of the Shariah Councils and weakfollow-up of

the Shariah implementation status of the Islamic banks

Lack of corporate governance in the Islamic banks


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Lack of Coordinated Research Work on Islamic Economics,Banking and finance

The above problems are some of the burning problemsconfronting the Islamic banks in Bangladesh. However it is feltthat much operational work and in-depth research work has to beundertaken to allow the Islamic banks to flourish with highestquality and strength

Some Islamic Banks in Bangladesh : Islamic bankingsystem in Bangladesh has begun with the establishment of IslamiBank Bangladesh Ltd and now there are eight Islamic banks inBangladesh of which two are owned by foreign groups. All of theIslamic banks in Bangladesh are commercial banks and no bank isowned or operated by the government. The names of the Islamicbanks in Bangladesh are given below:

1. Islami Bank Bangladesh Limited

2. Shahjalal Islami Bank Limited

3. Export import Bank of BangladeshLimited

4. Al-Arafah Islami Bank Limited

5. Social Islami Bank Limited

6. Bank Al-Falah Limited


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7. First Security Isalmi Bank Limited

8. ICB Islamic Bank Limited

Aims and Objectives:

Islamic banks have some unique aims andobjectives. Some of these are described below-

To conduct interest-free banking:

As taking interest is forbidden inIslam, Islamic Banks have offered interest free banking whichhelps pious people participate in banking business.

To establish participatory banking:

In normal banking system therelationship between banker and client is that of debtor andcreditor but in Islamic banking, banks participate in their clientsbusiness as partners.

To invest on profit and risk sharing basis:Islamic banks provide

money to their client as capital and deal in the financial activitiesof clients in profit and loss sharing process instead of charginginterest.


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To establish a welfare-oriented banking system:

These banks strive to establish a welfare-oriented banking system by providing wadiah, mudarabah and other facilities.

To extend co-operation to the poor, the helpless and the low-income group for their economic upliftment:

islamc banks offer interest free PLS banking that helps the poor tohave money in easy condition thats how

To play a vital role in human development and employmentgeneration :

These banks give loans to unemplyoed people like investor as profit loss sharng basis which help them to achieve this aim.

To contribute towards balanced growth:

Development of the country through investment operations particularlyin the less developed areas these banks try to contribute towards alancedgrowth.

To contribute in achieving the ultimate goal of Islamic economic

system: Proper sharing out of assets which is the crucial aim of the Islamic

banks of Bangladesh, is also the ultimate goal of Islamic economy. It enablesthem to contribute in achieving ultimate goal of islamic economic system.


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Contribution to the economy of Bangladesh

Islamic banking system is contributing to the economy of ourcountry through many Islamic banks by various economic andsocial activities. These activities are described at below:

1. Collecting savings and forming capital : Islamic bankscollect savings of people by promising of safety and profitthrough different schemes and they lend the money in needof business.

2. Proving loan : Islamic banks provide loan through variousschemes to the people. These loans are used in manyconstructive fields which strengthen our national economy

3. Agricultural development : In order to buy fertilizer, seedsand essential instruments Islamic banks provide loans to the

farmer at easier conditions. Such kinds of assistances help toincrease agricultural productivity .

4. Investment : As a major sector Islamic banks makeinvestment in the fields of trade and business and it helps toincrease nations productivity and Gross Domestic Product(GDP).

5. Employment : Many unemployed people get employment inthe Islamic banks. Moreover many employment scopes arecreated through the expansion and establishment of businesses and industries with the help of Islamic banks.


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6. Industrialization : Industrialization is very significant to theeconomy of any country. Islamic banks provide assistance in

establishment, expansion and modernization of various kindsof industries.

7. Maintaining economic stability : Central bank sometimestakes various kinds of policies to maintain economic stability.Islamic banks help the central bank in maintaining economicstability by following the policies.

8. Assistance to government : Islamic banks provideimportant information about the money circulation in thebanks individually which play a very important role inmaking economic decision.

9. Developing living standard : Through creatingemployment directly and indirectly and increasing per capitaincome, Islamic banks help to develop living standard.

10. Others : Besides above Islamic banks contribute to theeconomy by creating exchange medium, loan-deposit andadvising respective parties.


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PEOPLES VIEW TOWARDS ISLAMIC BANKING IN BANGLADESH

Positive view:

1. Lower level of risk of investment

2. Reduced chance for devaluation of money

3. Profit provided through various accounts is Halal

4. Beneficial to society

5. Beneficial to national economy

Negative view:

1. No difference between modern and Islamic banking

2. Gets more advantages using the name of Islam

3. Unclear Conception of Islamic banking4. Provides lower profit

Conclusion:

Because of the prohibition of interest in Islam, IslamicBanking had been introduced which enables the pious Muslim

people to involve in banking system. Avoiding interest andconducting banking business in profit and loss sharing basis,Islamic banking have been successful to attract clients andexpand its activities all over the world since its introduction in1963 in Egypt.


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report on islamic banking

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