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PERISCOPE
Islamic banking in contemporary perspective
By Saeed Suhrawardy

Islamic finance was practiced predominately in the Muslim world throughout the Middle Ages, in trade and business activities. In Spain and the Mediterranean and Baltic States, Muslim merchants were indispensable middlemen in commercial activities. It is claimed that European financiers and businessmen later adopted many concepts, techniques and instruments of Islamic finance.

The revival of interest in Islamic banking coincided with the worldwide celebration of the advent of the 15th century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims, particularly those of oil producing countries received a boost due to rationalization of the oil prices, which had been so far under the control of foreign oil corporations. These events motivated Muslims to model their lives in accordance with the ethics and philosophy of Islam.

Islamic banks appeared on the world scene as active players over two decades ago. However, many of the principles upon which Islamic banking is based, have been commonly accepted all over the world for centuries.

The basic principle of Islamic banking is the prohibition of Riba (Usury or interest). The term should not be taken in a strictly narrow sense. Disenchantment with capitalist and socialist financial systems, having no concern with ethical norms and values has led not only Muslims but others also to look for ethical values in financial operations.

Economic philosophy of Islam is comprehensive and universal. Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which Shari’ah (Islamic law) deems Haram (unlawful).

Islamic banking is an instrument for the development of an Islamic order. Some of the salient features of this order may be summed up as:

1. While permitting the individual the right to seek his economic well being, Islam makes a clear distinction between what is Halal (lawful) and what is Haram (forbidden) in pursuit of economic activity. Broadly speaking, Islam forbids all forms of economic activity, which are morally and socially injurious.

2. While acknowledging the individual’s right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not hoard it, keep it idle or to squander it.

3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of surplus for the well being of community as a whole, in particular for the destitute and deprived sections of society by involvement in the process of Zakat.

4. While making allowance for propensities of human nature and yet not yielding to its consequences, Islam seeks to prevent accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.

5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

Islamic financial system employs the concept of participation in the enterprise, utilizing funds at risk on a profit-and-loss sharing. This does not mean that such investments are speculative. That can be avoided by careful investment policy, diversification of risk and prudent management by Islamic financial institutions. The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and mediocre. It encourages better resource management in contemporary environment and within the guideline of Shariah.

Islamic banks are structured to retain a clearly differentiated status between shareholders capital and clients’ deposits in order to ensure correct profit sharing according to Islamic law.

Islamic Banking is estimated to be managing funds to the tune US$100 billion. It is growing 15 per cent annually. Its clientele are confined not only to Muslim countries but are spread over Europe, United States and the Far East. Because of its value-oriented ethos, Islamic banking continues to draw finances from both Muslims and non-Muslims alike.

Islamic bankers, keeping pace with sophisticated techniques and latest developments have evolved instruments that are not only profitable but are also ethically motivated. More than one hundred and fifty Islamic institutions are operating worldwide.

According to Institute of Islamic Banking and Insurance, London, there is a growing demand for Islamic investment instruments from middle-income Muslims living in the West. Taking advantage of the demand, 10 Islamic mutual funds made their appearance a decade ago. At present there are over 90 Islamic mutual funds in the market and at least 10 new funds are likely to be added to the list. Recently western banks too have realized the potential of global Islamic financial service market. However, a lot has yet to be done for employment of funds generated by Islamic banking for alleviation of poverty of Muslims and development of the least developed Muslim countries.
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