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It is a new approach towards financial system and requires a totally different attitude from the financial institutions. They feel that since Islamic banking is also based on profit motive and in present form, it generally works on “virtually-fixed” return basis; hence the same cannot attribute anything-positive towards the socio-economic changes that Islam desires. Public borrowing will either come in the form of risk-bearing capital for commercially productive projects or it will come in the form of qard-e-hasan to the government. In this way, the financing needs of A have been met and B also ends up making profit on his financing. They were, however, restricted to use these funds only in such avenues where the return did not accrue to the bank by way of interest. People feel that there are serious doubts on the honesty and integrity of IFIs. Is It Heela Banking? The financing in trade and industry on hire-purchase basis was also allowed with full flexibility to mutually determine the terms and conditions of such contract. So they feel that it is merely a change in name and documents and in fact, it is nothing different from conventional banking. The fact that State Bank assumed loo much in this respect is reflected from the fact that soon after the introduction of PLS counters in 1981, the influx of deposits in PLS accounts put the banks in serious problem of how to deploy these funds in an Islamic way and the State Bank started receiving inquiries from the banks about what to do with their surplus PLS funds. (2018, Feb 21). All finances provided by a banking company to any entity including the individuals would be only in the 12 modes specified in the circular. 1.00+0.05 for each month on the basis of the deposits. Until A makes this contract, A also has the option to change his mind. State Bank circulars provided both. Islamic banking, additionally known as Islamic finance or shariah-compliant finance, refers to finance or banking actions that adhere to shariah (Islamic regulation). The leasing-based modes work in the following way: A approaches B to finance a certain purchase. This fact can very clearly be ascertained by seeing the documentation being currently used by the banks in connection with the so- called Islamic financing techniques. The lessor is not certain for how much of its active life the item will remain on lease at the rent he expected to repay him the investment and a certain return on it. Islamic banking today is an industry that is still evolving. They simply have to have their Shari’ah advisory board to help them adopt mark-up financing models of existing renowned Islamic banks in order to suit local conditions. It was, therefore, strongly recommended that the use of these methods should be kept to the minimum extent that may be unavoidably necessary under the given conditions and that their use as general techniques of financing must never be allowed. Several countries of the Muslim world are now trying to switch over to the Islamic banking system, and some of them have succeeded in introducing the Islamic banking order in their economy. Introduction to Islamic Banking and Finance is supported by a detailed, easy to use Instructor Manual, powerful T est Bank Generator and dynamic PowerPoint Slides. Hence, we try to identify some basic gaps in the blueprint that are not allowing the desired building to come up in the form of the right structure. Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The process was planned to be completed in two main phases. However, for the sake of our own benefits, in order to avoid interest by ourselves and providing interest-free opportunities to our brothers and sisters in Islam, we should promote and support the Islamic banking and finance in the country with all our possible efforts and endeavors. From the Islamic teachings, we can identify two categories of permissible forms of financial accommodation. The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. Despite such an unsatisfactory and rather discouraging attitude of the society towards application of Islamic Shariah, it should be noted that such a situation do not relieve a Muslim from the applicability of Shariah principles, but rather increases his responsibilities in the way that it becomes his duty not only to try to abide by all applicable Shariah requirements in his personal capacity but also to put his endeavors towards improvement in such system. These banks will receive demand on very short-term deposits and will perform other banking activities such as transfer of money, exchange of currency, safe deposits, etc. Any attempt to eliminate the entire risk, for example, binding A to repurchase the goods from the beginning of entering into the deal will be against the spirit and fundamental principle of the financial accommodation in Islam. Such Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in augmenting a truly Islamic financial system, and more appropriately said, will serve as an experiment for the time when we will really be in a position to the implement the complete Islamic way of living in our beloved country. Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one year earlier to subscription for such mutual fund. Some of these are or have been in practice and some more may be discovered or identified in future. However, we should keep in mind that the prime objective of Islamic finance, is to ensure that “financial” matters are dealt with in line with Islamic Shariah. Islamic Banking The principle of Islamic banking Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Islam prohibits interest, so the Islamic banking system involves the products which do not include riba (interest) and which are according to Shari’ah principles, therefore it is also called the interest-free banking. We have been tracking this area for 10+ years through our research, the Islamic SLT and consulting engagements. Under deferred payment form, the permissible financing would be as given below: A needs financing to purchase certain goods. Marketing Approach Of IFIs Another valid argument is about the marketing approach being used by these financial institutions, which adversely effects the public reliance on this mode. The risk-bearing for B in this case is that he may not be able to realise the expected margin of profit that he had in mind while agreeing upon the price of the goods. In the second phase, the interest-based banking was claimed to have been eliminated and non-interest-based banking was claimed to have been introduced throughout the banking system. The system is developing with the passage of time as the demand of interest-free products is also increasing. But if the bank’s income that they are sharing is a prohibited (haram) income, mere legitimising form of contract or the method of sharing income will not suffice. The main difference between conventional finance and Islamic finance is that some of the practices and principles that are used in conventional finance are strictly prohibited under Sharia laws. The banks, however, can have their own policies and strategies to make maximum benefit out of the new system within the regulatory framework of the central bank. Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. The Islamic banking and financial system is a part of such system and is not construed to be applicable in isolation while other laws and customs repugnant to the Shariah requirements are still in force. State Bank should consider declaring the existing banks as deposit banks only. Although the system follows stricter standards in other ways, you can have a tarnished credit score and still qualify with the Islamic version. XITE, Gamharia Banking Concepts & Practice [Paper 11: Elective II, Academic Session 2011-12] 1. In Islamic framework, loan cannot be the basis of banking operations. It needs to be emphasized that only the change in banking system is not a solution to the overall revolution of economic system unless other facets of Islamic economic system, as well as, Islamic social system are not implemented simultaneously. In past, he has worked with a leading Islamic bank as Shariah Coordinator and Shariah Auditor. A fundamental difference is that the charging and receipt of interest is forbidden in Islamic law (Usury). This spirit is not prevailing in the mark-up-based financing now in vogue in Pakistan. In addition, it is felt that they are the only ones who are whole and sole responsible for Shariah compliance. Introduction to Islamic Banking and Finance is supported by a detailed, easy to use Instructor Manual, powerful Test Bank Generator and dynamic PowerPoint Slides. And broadly in line with conventional banks Another strong argument against Islamic requirements! 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