The Function of Islamic Banking
Islamic banking, also known as Islamic banking or Islamic financial services, refers to non-interest bearing banking or financial activities that follow sharia (Islamic law). Two basic principles of Islamic banking are both the sharing of gain and loss, and the ban on the collection and repayment of interest. In Islamic banking, a company is said to be Islamic only when it follows the rules of Islamic law, which include having a share in the ownership of all properties and assets of the company, so that they benefit the whole community and not just the individuals. An Islamic company does not take part in any transactions that are forbidden according to Islamic law. All banking transactions between an Islamic bank and a non-Islamic business are handled according to Islamic principles. This is one of the main differences between Islamic banking and mainstream banking in many countries in the Western world.
Islamic banking started in the seventh century with the spread of Islam in the Middle East. Although there were some problems associated with banking at the time, as most transactions were not cash based, there have been no major problems with cash transactions since then. Today, almost all banks in the middle east have Islamic financing principles, as almost all of the money is kept in local currency, which is known as ‘riyad’. This is done to comply with Muslim law, which states that there should be no foreign intervention in any country, especially with regards to banking.
Islamic banking uses ‘aqueous cash’, which is to be dealt with on the basis of ‘khatas’, or specific transactions, without interest being charged. Most Islamic financial institutions use ‘paktubs’, which are specific local currency that is used in all transactions. A number of non-Muslim banks in the Middle East and North Africa do not use hats, while others charge interest on all transactions. This has caused many non-Muslims to form a parallel Islamic banking system, using the same currency.
The role of Islamic banking system was to provide local economies with the finance they required in order to conduct banking transactions. This meant that the banks had to be able to access the money of the clients in a timely fashion. This is possible due to the fact that the entire transaction takes place in local currency, rather than the use of foreign currency. There are also different types of ‘tabs’ available to the client banks, including ‘al-mal’, ‘al sharif’, ‘al janabah’ and ‘al sharif’. These relate to the different regions of the Islamic Empire and their respective banking systems.
There are different types of ‘tabs’ available from the Islamic Empire. This was one of the reasons that the forex market became so popular during the early days of the Islamic banking system. The market is known as “al sharif”. In the Islamic Empire the client banks operated in Arabic, and this allowed for the spread of the local languages across the Islamic Empire. At the time, local currencies were used, such as the Rajam, Persian Dinar and the Turkish Lira. “Rajam” means “Reduce”.
The functions of Islamic banking systems have changed over time. During the early days of Islamic banking, it was not unusual for a person to send his/her payment to another person by way of wire transfer. At the beginning of the 20th century, however, “web banking” was introduced, in which individuals were able to send their payment information between conventional banks using the internet. “Web based banking” has been described as “immensely convenient and safe”, due to the fact that it does not require security clearance of any sort.
Another principle in the Islamic banking system, that bears repeating, is “the principle of double taxation”. In a traditional banking system, the payment to the government or to the central bank of an individual is considered as being a payment to the individual, in the form of taxes. In the Islamic banking system, the payment to the individual is considered to be a payment to Allah, in the form of Interest. The principle of double taxation is necessary because the government may require individuals to pay taxes in two different ways – through the personal income tax (PITC) and through corporate income tax (IITC). “The principle of double taxation” states that the payment of both personal and corporate tax may result in individuals paying an equal amount of money to the government, or to a designated charity.
Islamic banking systems have changed since their inception. Two fundamental principles have remained constant over the years, however. They are: individual privacy and protection of investment capital. The choice between these two fundamental principles, however, is not an easy one. In recent years, however, certain banking systems have begun to offer products that are designed to circumvent both laws and principles of Islamic banking, in order to circumvent possible penalties that may be faced by individuals if they are found to be practicing financial fraud.
