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Islamic Banking as a banking system that follows the ways of Islam - Essay Example

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Islamic Banking as a banking system that follows the ways of Islam

As such, financial products are also designed according to such principles. Accumulating wealth is not against the law, but making money through unfair or fast means is not supported. Although Islamic banking is conservative in many ways, it is also safe. In Islamic banking, all transactions must be interest-free. There are several sets of rules for transactions, leasing, joint ventures, and partnerships. These laws are formulated with the Islamic religious sayings of the Quran and religious scholars in mind. In Islamic Banking, an Ijarah denotes the activity of leasing a property, is conducted by the bank. The bank takes possession of the property from its owner and leases it to a third party for rent; no interest is charged, as per the stated norms of Islamic banking. Even the maintenance cost is borne by the bank. The Islamic regulation is against making money through unfair means. For example, if the lessee pays a fine for late payment, the money goes to charity, not to the bank. Transactions in Islamic banking are considered Salam if the buyer pays the full amount to the seller. It is important that the buyer demonstrate that he is not in debt. Islamic banking offer many products that must be passed by the Shariah Supervisory Board. This board regulates and coordinates the operational activities of banking institutions functioning under Islamic banking rules (Hassan & Lewis, 2006, p. 1-4). Ijarah The term Ijarah refers to a lease, wage, or rent. It denotes the opportunity to use an asset or service at a predetermined price or wage. Under this type of contact, the bank makes the asset available to the customers by lending them for a fixed time period and at a fixed price or rent. Ijarah is derived from the word Al Ajr, which means compensation, substitutes, or counter value. It involves transferring the usufruct but not the ownership, of the asset. In Islamic banking, the bank and the customers are involved in the lending contract. The bank transfers the usufruct to another person for a predefined period of time and consideration. Under Ijarah, the asset to be lent should be non-perishable and non-consumable. Any assets that do not follow the criteria cannot be treated as subjects for lending. Ijarah is used in two different kinds of situations: first, for providing services to other people in exchange for wages, and second, as hired services, where the employer is called 'musta jir' and the employee is called 'ajir'. The second situation deals with the lending of assets by banks to the third party in return for fixed rental charges from the party. Both types of Ijarah are formulated according to the laws of Islam. Ijarah is not only a mode of financing but also a medium for sales. This form of transaction is also followed in other, non-Islamic western countries (Ahmed, I. & Shabbir, n. d., p. 26). Ijarah wa Iktina In this type of lease, the leasor enters into an agreement with the lessee and agrees to buy the property after the completion of the leased period. The contract can be terminated even before the due date for the completion of the lease. The lessee can also buy the property before the date of commencement. The purchase price is determined by the market value of the asset. Ijarah Thumma Al-Bai This combines both the contracts that are Ijarah, meaning leasing and Bai, which means the purchase of the asset. Ij ...Show more

Summary

Islamic Accounting Table of Contents Introduction 3 Ijarah 3 Usage of Ijarah Contract in Islamic Financial Institutions 4 Similarities and Differences Between Conventional and Ijarah Leasing 6 Accounting Treatments for Ijarah 8 AAOIFI Standards and IFRS for Ijarah Contract 8 Conclusion 9 Introduction Islamic Banking involves a banking system that follows the ways of Islam…
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