Islamic Banking Principles and Relevance

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Operations of Islamic banking are aligned in accordance with the legal code of Islam popularly known as the Shariah (Hasan and Dridi 7; Khan 806). Shariah is not limited only in the banking sector alone (Alam 125). The Shariah codes have their root origin in the Quran (Szczepanowicz 2; Kahf 2). The main principle of Islamic banking entails the prohibition of interest throughout all the transactions, business operations as well as trade activities (Haron 23). Islamic banking is strongly rooted in the Muslim countries; but other countries are opening up (Ahmad 15). Haron (25) explains the four categories of Shariah principles within which the Islamic Banking principles are encapsulated on.

These are ancillary principles, profit and loss sharing, free services as well as fees based. Within these categories, there are as many as fourteen principles applied in Islamic banking. However, in UAE only five of the principles are in practical application (Haron 25). With reference to the UAE, Hameed and Ahamed (5-7) comprehensively detail the five principles applied by Islamic banks to include participatory financing principle, principle of prohibition of usury, principle of ethical investing and moral purchasing, principle of acceptable transactions as well as the principle of certainty. With regard to the heritage of Islamic banking, the UAE which hosts the Abu Dhabi Islamic Bank that became the first of its kind to operate worldwide (Al-Tamimi and Al-Amiri 131). Al-Tamimi (1) observes that by the end of 2008, there were five Islamic banks operating in the UAE.

UAE populace is Muslim dominated; considering the rate of growth of Islamic banking and the championing of equitable reward to the factors of production in the Islamic financing system. these gains include achieving country wide and balanced economic and social development (Dhumale and Sapcanin 1; Furqani and Mulyany 59). Take for instance the facilitation of monetary arrangements for Muslims during their pilgrimage visits to Mecca and other Islamic sites at favourable cost (Rahman 1). Hasan and Dridi (7) view that the business model of Islamic banking played a significant role of cushioning against plummeting of profits during the financial recession of 2008. During the same period, most traditional banking system were unable to service strong demands for credit as well as stabilize there external rating.

Stability of the Islamic banks makes them reliable to huge and financially sensitive national projects such as residential property development, infrastructure constructions as well as corporate expansion. Thus, Islamic banks have local and national attraction, especially in Muslim states like the UAE. There are tenets underlying the Shariah such as ethics, morality and religious factor champion equality and fairness for general good; thus such disciplined approach makes Islamic banks be the trusted partners who may not misappropriate public funds. The UAE government may require a bank to handle its financial operations for the lucrative oil sells.

Traditional banks have their main aim of mobilizing financial resources from savings for the purposes of economic and social (Martan 29). While, Islamic banking is packaged to suit the Muslim world by domesticating into the banking systems the Islamic code. A stand out difference between the traditional banks and the Islamic ones is the charging of interests (Kahf and Kahn 14). Islamic banks prohibit on the receiving and payment of interest commonly known as Riba (Siddiqi 2). In commercial banks interest is treated as a price of credit in the form of forgone opportunity cost of money.

Works Cited

Ahmad, Waseem 2008, Islamic Banking in the United Kingdom: Opportunities and Challenges. PDF file. Web.

Alam, Hassan Mobeen, Mamoona Rafique, and Muhammad Akram. Prospects Of Islamic Banking: Reflections From Pakistan. Australian Journal of Business and Management Research. 1. 2 (2011): 125-134. ajbmr. Web.

Al-Tamimi, Hussein Hassan. “Factors Influencing Performance Of The UAE Islamic And Conventional National Banks.” Global Journal Of Business Research. 4. 2 (2010): 1-9. SSRN. Web.

Dhumale, Rahul, and Amela Sapcanin. “An Application of Islamic Banking Principles to Microfinance.” 2012.

Furqani, Hafas, and Ratna Mulyany. “Islamic Banking and Economic Growth: Empirical Evidence from Malaysia.” Journal of Economic Cooperation and Development. 30. 2 (2009): 59-74. SESRIC. Web.

Hameed, Shahul, and Ahamed, Fayaz. n.d. Development Of Islamic Banking With Reference To UAE. Web..

Haron, Sudin. “A Comparative Study of Islamic Banking Practices.” Islamic Econ.10 (1998): 23-50. JKAU. Web.

Hassan, Maher and Jemma, Dreda, 2010, The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study. Web.

Kahf , Monzer 2004. “Success Factors Of Islamic Banks: Based on a study of the actual conduct of some Islamic Banks. Web.

Khan, Feisal. “How ‘Islamic’ is Islamic Banking?” Journal of Economic Behavior & Organization. 76 (2010): 805–820. Science Direct. Web.

Martan, Said, A. F. Abdul-Fattah, Anwar A. H. Jabarti and H. Sofrata. Principles of Islamic financing: A Survey Islamic vis-a-vis Traditional Banking A “fuzzy-set” Approach. J. Res. Islamic Econ. 2. 1 (1984): 29-44. Islamic Center. Web.

Rahman, Khalid. n.d. Towards Islamic Banking: A Case Study of Pilgrims Management & Fund Board, Malaysia. Web.

Szczepanowicz, Andrzej 2010. Unconventional Banking In A Conventional Environment: Islamic Banking And Finance In The Usa. Web.

Siddiqi, Mohammad Nejatullah 2006. “Islamic Banking And Finance In Theory And Practice: A Survey Of State Of The Art.” Islamic Economic Studies. 13.2: 1-47. Takmili. Web.

Suleiman, Nasser. n.d. The Muslim banking world faces the challenge of expanding internationally while remaining true to Islamic principles. Web.

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Islamic Banking Principles and Relevance

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