Islamic finance - Research Paper Example

Islamic Finance History of Islamic banks Islamic banking can be described as a business activity that is formed under the principlesof Sharia. Its practical application is done through the development of Islamic economics, and therefore Islamic banking can be referred to as a Sharia-compliant finance. Islamic banks were established during the initiation of Islam when Prophet carried operation for his wife. Secular Islamic modernists and historians view Islamic banking as a recent situation whereas revivalists view it as old as religion as its principles were derived from the Quran.

Early market economy and mercantilism are sometimes referred to Islamic capitalism and it was established between 8th and 12th centuries. However, there were banking activities that existed before this period although the operations were conducted in Mecca. From the historical perspective, Islamic banking can be categorized into three eras. The first era was in the early year of Islam until the time of Caliph ArRashidin. The second era of Islamic banking extends from the period of Caliphates to the fall of Uthmaniyah Empire.

The third period which is the modern era is current Islamic banking. Prophet Muhammad got divine revelations that Mecca was a city of trade. There were a number of economic techniques and concepts that were used in early Islamic banking such as partnership, bills of exchange, cheques, promissory notes among others (Ahmad, 2010).How the Islamic bank worksIslamic banks products exclude the use of Interest which is prohibited in Islam. Rather, the Islamic banks provide an anticipated profit rate for rental rates and savings.

According to Islamic Law, money should not be used to create more money. Islamic banks are required to offer services in return for a profit. Instead of the traditional accounts that have interest rates, Islamic banks offer accounts that provide profits or losses. The bank buys property with the customer money, which creates a return to the bank. In case of savings, a customer makes deposits in Al Rayan banks for an expected profit rate. Unlike interest, expected profit rate is not fixed as the profit is made through Sharia compliant investments.

There is an element of risk carried in the expected profit rate, but it is usually managed by Al Rayan Bank. Islamic banks Home Purchase Plans are on the basis of leasing and co-ownership, whereby the bank and the customer purchase the property jointly. The monthly payments made by the Customer little by little boost their share in the property. At the maturity of the finance term, the title of the asset is transferred to the client and they own their home right away without involving interest (Munir, 2013).

Functions of Islamic banksThe role of the Muslim world to the upcoming international economic order originates from the renewed implementation of Sharia law in the current financial and economic transactions. The measures established in the finance sector are viewed as essential attempt to develop an ideal Islamic economy and society. This ideal Islamic economy and society is based upon Islamic values of social humanity and justice. The removal of interest from the economy is meant to promote an economy that is socially fair, just and that is ethically correct according to the Islamic principles.

The other function of the Islamic banks is to promote the cohesion and solidarity of the Muslim Ummah, make strong economic incentives, harmonize trade and bring co-participation and cooperation in all aspects of life. The Islamic banks provide working capital and equity to its customers to fund their project, and they share any profits and losses made by the entrepreneur. Islamic banks are also involved in buying raw materials, equipment or goods at cost price and sell them to their clients at a profit (Ahmad, 2010).

Operation structure of Islamic banksIn the Islamic bank structure, the Sharia supervisory team may be required to report directly to the shareholders. In other cases, the Sharia supervisory team may have some sub-divisions like local Sharia committee. In the Islamic banks, stockholders are usually the people at the top. The stockholders are the depositors and primary resource that supports the bank. The board of directors follows in the structure, whereby the directors oversee the activities of the bank.

They are also responsible for managing the dealings of the bank by practicing corporate governance. Islamic banks also have a Chief Executive Officer, who plays a significant role in leadership and reports directly to the directors. The CEO must have adequate knowledge of Sharia law. Islamic banks have compliance units that are headed by members of Sharia supervisory board.Conclusion In conclusion, Islamic banks can be defined as a banking activity that is formed under the principles of Sharia.

Early market economy and mercantilism sometimes referred to Islamic capitalism was established between 8th and 12th centuries. Islamic banks products exclude the use of Interest, which is prohibited in Islam. Rather, the Islamic banks provide an anticipated profit rate for rental rates and savings. The role of the Muslim world to the upcoming international economic order originates from the renewed implementation of Sharia law in the current financial and economic transactions.ReferencesAhmad, A. (2010). An Analysis of Functions Performed by Islamic Bank: A Case of Pakistan.

European Journal of Social Sciences, 7-11.Munir, K. (2013, October 29). Explainer: how does Islamic finance work? Retrieved from The Conversation: http://theconversation.com/explainer-how-does-islamic-finance-work- 19670