Question

A relative of yours had a frank discussion with you about the Idea of Islamic banking.

After a lengthy and heated debate, they openly share with you their strong views on the concept of Islamic banking and its practicality and tell you the following:

Honestly speaking, I don’t believe in the idea itself because of the following reasons:

1.it is just a copy paste of conventional finance or in other words, it is a conventional finance in Islamic costume.

2.Equtiy –based Islamic financial contracts such as Mudaraba and Musharaka are not practical and can’t be applied by Islamic banks which defeats the objective

3. Islamic banks are purely profit-oriented and do not do well on the corporate social responsibility front

How would you respond to them? Please tackle each point separately

Answer 1

1. Islamic banking differs significantly from conventional finanace. Five main principles set Islamic banking apart from conventional fianace . The three main prohibitions of Islamic banking are against interest, speculation, and investing in banned industry sectors. Shari’a-compliant transactions also need to be based on profit- and loss-sharing principles and need to have an underlying tangible asset. These principles result in a different business model from that of conventional finance.

2.

Mudarabah is the first financial structure that was proposed to apply in Islamic
banking business at the early stage of Islamic economic and financial system reclamation. As
theory explanation, Islamic banks or other Islamic financial institutions can use two tired.
Mudarabah and mushraka structure as backbone of their operation. The Islamic institution on one hand
would receive deposits fund as agent or mudarib of its customer and on the other hand
provide finance to its client to act as rabb al mal or sleeping partner. Thus a banking system

3. Islam bank has very specific rules and guidelines concerning economic life. Notions of corporate social responsibility is in many ways consistent with an Islamic view of society
could run on profit and loss sharing and remove interest out of system.CSR in the world view of Islam banks requires both individuals and organisations to be guided in the development of a moral self that distinguishes between right and wrong and never loses sight of its responsibilities towards God and mankind. Islam banks has not lost its general influence on societies where it is practiced and constitutes a ‘complete way of life' for the followers with specific implications for economic life and hence the role that responsible business can play in the development of a community/society/economy based upon the principles of social justice and equity rather than efficiency or profit generation.