Islamic Banking and Finance - End of Bank Interest Rate
78Islamic Banking and Finance
The concept of Islamic banking and finance differs fundamentally from conventional western banking and finance. It may shock some to realize that the introduction of Islamic banking and finance means the end bank interest rate.
The world is dominated by the conventional western system. Islamic banking is still in its infancy. But the growing economies of Islamic countries and the wish of Muslims to adhere where possible to Islamic principles have recently led to an increasing interest in Islamic banking and finance.
This has also led to greater efforts to implement Islamic banking not only in Islamic countries but also in the West, often within the conventional banking and financial institutions themselves.
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Bank Interest Rate
The basic premise of conventional banking is bank interest. We put money in the bank and we expect the bank to pay us some interest while the money sits there. In fact the money is meanwhile being utilised by the bank, a lot of which is lent out, with an interest charge, to various types of borrowers. Bank interest rates have a great effect on our lives, and we anxiously anticipate news of any change in interest rates. They not only affect our deposits, but also our loans.
We borrow for all kinds of purposes, one major purpose being the purchase of a home - mortgages. Mortgage interest rates are a major concern for everyone, and have an impact nationally and internationally, as can be seen in the current problems stemming from the so-called sub-prime mortgages. These problems are not going away soon.
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Riba
In Islam interest -riba -is prohibited. To those unfamiliar with Islam, that seems a shocking idea. How could one lend or borrow money without interest? What's in it for the lender? And why is it forbidden?
Actually it is not so alien a concept even in the Western tradition. Loan-sharking is clearly a deprecated practice. Usury is condemned in Christianity. It is also condemned in Judaism (save where it is practised against non-Jews). Interest is forbidden because it is a gain not resulting from any expenditure of effort or from any trading or commerce.
Usury is now usually seen as lending at exorbitant interest rates. But this concept is derivative from its meaning simply of interest or lending with interest. In fact there is no real distinction between interest and usury, save that some would try to argue that it is a matter of degree. But probably no one has convincingly shown or justified where such a demarcation line lies.
In Blackstone's Commentaries on the Laws of England, published in 1765-1769, it was said,
"When money is lent on a contract to receive not only the principal sum
again, but also an increase by way of compensation for the use, the
increase is called interest by those who think it lawful, and usury by
those who do not." That seems to say that the distinction between interest and usury is entirely arbitrary and a mere foible of man to suit his own convenient purpose.
In Islam interest/usury is called riba, and is prohibited.
From this simple prohibition against riba, flows many implications as to the proper practice of banking and finance.
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First ever U.S Islamic Banking Subsidiary
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These are just some very basic introductory remarks. Apart from interest, other activities are also illegal, such as gambling, prostitution, alcohol. The interplay of these considerations lead to the construction of a financial and banking system, that sometimes resemble and sometimes differ significantly from the traditional Western system.
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Thanks for your comment, prems4u. The basics are straightforward, but the working out of the implications is complicated. It's quite a fascinating subject.
Very interesting subject. The tax implications must get sticky since mortgage interest is deductible in the US, and it appears that in Islamic banking this deduction would be lost.
I liked that article: That is very accurately talking of the Islamic Banking in my opinion.
very great hub jazakAllah.
A rose by any other name is still the same - or sometimes worse. My husband and I researched Islamic banking for our house and talked to lenders. The so called Islamic loans end up charging much more than the regular bank loans. It's a different concept calling the high interest rent for part of the house that they say they own. They also charge a exorbitant amount up front. In a true Islamic loan that's mentioned in the Quran, a lender is not supposed to charge any extra money to the lender. The lender is not supposed to demand or make money out of the borrower. So please let's not call this kind of banking "Islamic."
i stumbled upon your hub looking for something loans related. I had no idea about all this but now i am a bit worried.
You are made a mistake in the basis of this article which made it completely wrong. The Riba is not at all equal interest, but equal to fixed predetermined interest. For instance if one's put money in the bank and the bank share its interest proportionally to the account holder, there is no Riba. On the other hand, the account holder should accept that if the bank had some loss, he has share in the loss.
Then, I believe that the interest rate in Islamic point of view is not determined but is randomly changeable according to the benefit or loss of the bank.
I believe that there are ways not to change western banking and financial system to a Islamic one.
why islamic bank saved for recession?
Since islamic banking prohibites riba,how then do they make profit?
Many islamic countries are considering diversifying out of US Dollar holdings into Gold holdings.
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how they get the profit in the islamic bank
In Islamic Finance - Any type of exploitation is "Forbidden".
Interest / Usury is taking more money (By whatever name it is called) for the money lend to someone.
Now, confusion arises only when the name is Profit rate. The Banks do not lend the "Money", but they buy the commodity (House / car etc) and "Sell" it to the needy person - adding a profit of the Bank.
This in my opinion is trying to fool the law.
An example clarifies this:
Mentioned in the Islam from excerpts the total meaning of which translates to as follows:" Jews were prohibited from catching fish during Sabbath. God tested their faith by bringing shawls of fish on that day - and it was told that the fish even used to be seen edging its head near water. So, the Jews made pathways which lead into inland water ponds. On the day of Sabbath - they used to see the abundance of fish, and they lead these fishes into the water ponds inland. Trap them inside. The next day they used to catch the fish ot of water. And they fooled none but themselves because they were wrong doers"
We have to understand that the motive is what underlies behind any action. Its to your hearts that God looks.
Selling of something that you own is allowed in Islam. (Provided it does not belong to the Haram items)
Taking a profit for something that you own while selling is also allowed in Islam (there is limitation on the amount of profit that you can take - Eg: You should not cross double the original value of the commodity etc).
But, buying (a commodity) for the sake of the "Borrower" and then charging him a profit is something similar to the above incident. If the Banks really needs to be compliant, they should be owning the property before the Borrower approaches them. then it could be legitimate trading. otherwise, this is just similar to the example above.
Islamic Banks make profit by doing halal business - and eventually making profits from such businesses. They can buy a property and resale with profit. they can rent out the properties on long term adding profit provided they owned it before and not for the Borrower. However, what we see is that the profit rate almost coincides witht he interest rate or is higher - which is exploitation and hence prohibited.
May Allah help us all in following the right path of Islam.
Underline: The principle is simple - No exploitation of the person in need of Money. its to your heart that Allah looks and your intentions are what matters.
Nice introduction to this concept.
Over the last few decades, the Muslims have been trying to restructure their lives on the basis of Islamic principles. They strongly feel that the political and economic dominance of the West, during past centuries, has deprived them of the divine guidance, especially in the socio-economic fields. Therefore, after acquiring political freedom, the masses are striving for the revival of their Islamic identity to organise their collective life in accordance with the Islamic teachings.
In the economic field, it was the biggest challenge for such Muslims to reform their financial institutions to bring them in harmony with the dictates of Shari‘ah. In an environment where the entire financial system was based on interest, it was a formidable task to structure the financial institutions on an interest free basis.
i think that the only difference is use of arabic words and phrases .Islamic banks talk a lot and tell that they are not taking any interest but practically there is no difference. I wanted to take some loan for building house and I was astonished that the so called islamic bank was charging more .Everything is predetermined just like traditional banks.but they say it rent. they have fixed that if we will invest this much money we will take this much money as rent.
Very informative.
most practical
prems4u 4 years ago
Nice Work On Alternatives For western finance and banking