Islamic
banking or Islamic finance or share-compliant finance is banking or financing
activity that complies with sharia (Islamic law) and its practical application
through the development of Islamic economies. Some of the modes of Islamic
banking/finance include Mudarabah (Profit-sharing and loss-bearing), wadiah
(safekeeping), Musharaka (Joint Venture), Muabahah (Cost-plus), and Ijara (leasing).
Islamic banking
popularity in the world: Islamic banking has gained
popularity for several reasons, reflecting a growing global interest in
alternative financial systems that adhere to Islamic principles. Here are eight
reasons why Islamic banking has become popular:
1.
Ethical and Sharia-compliant principles:
Islamic banking operates in accordance with Sharia, Islamic law, which
prohibits activities such as charging interest (usury of "riba"
engaging in excessive uncertainty (gharar), and investing in businesses that involve
prohibited goods or services (e.g. alcohol, gambling) Many individuals
appreciate the ethical and socially responsible nature of Islamic finance.
2.
Financial inclusion: Islamic banking
promotes financial inclusion by providing services that are accessible to a
wider range of people, including those who may be excluded from conventional
banking due to religious reasons or ethical concerns. This inclusivity aligns
with the principles of justice and fairness in Islam.
3.
Risk-sharing and fairness: Islamic
finance emphasizes the concept of risk-sharing. In Islamic banking, both
profits and losses are shared between the bank and the customer in various
financial arrangements. This approach is seen as more equitable and fair
compared to conventional banking, where the burden of losses often falls solely
on the borrower.
4.
Asset-backed financing: Islamic
finance is typically asset-backed, meaning that transactions must be linked to
tangible assets or services. This ensures that the financial system is grounded
in real economic activities and discourages speculative practices, contributing
to a more stable and sustainable financial system.
5.
Social justice and wealth distribution:
Islamic finance aims to promote social justice and wealth distribution. Through
zakat (obligatory almsgiving). Islamic banks contribute to the welfare of
society by redistributing wealth to those in need. This emphasis on social
responsibility resonates with individuals seeking a more equitable economic
system.
6.
Long-term stability: The prohibition
of speculative and excessively risky transactions in Islamic banking
contributes to long-term economic stability. The focus on ethical and
sustainable business practices is believed to reduce the likelihood of financial
crises and promote economic resilience.
7.
Global demand and market growth: The
demand for Islamic financial products has increased globally, leading to the
expansion of Islamic banking services and institutions. Many countries with
significant Muslim populations, as well as non-Muslim-majority countries, have
recognized the potential benefits of Islamic finance and have facilitated its
growth.
These
factors, among others, have contributed to the global popularity and growth of
Islamic banking as a viable and ethical alternative in the financial industry.
Innovation
is also one of the factors driving the growth of Islamic finance. A few years
back, the Islamic bond market was small and Sukuks were five years or less.
Lately bonds with long-term offers, perpetual bonds, and hybrid capital issues
that allow a mix of debt and equity launched by Islamic banks have started
attracting more and more investors.
Negative sides of
traditional banking:
·
Operating expenses. Move to offices at
certain times.
·
Slow processes.
·
High commissions.
·
Low stimulus to savings.
·
Lack of permanent ATM network.
·
Limitations in online or virtual banking
·
Conducting interest-based Banking