Question

Q1 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 conventional finance in Islamic costume.

2.Equity –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.

Q2. Explain how Mudaraba application would enhance economic prosperity for everybody and why its application by Islamic banks is minimal

Answer 1

About one fourth of the world population is of Muslims.Hence the concept of Islamic finance based on Islamic principles and value cannot be ignored
Since under Islamic finance money is considered as only a mean of carrying out transactions any earnings on the same in form of interest(Riba) is strictly prohibited
1.it is just a copy-paste of conventional finance or in other words, it is conventional finance in Islamic costume.
Basis	Islamic finance	Conventional finance
Promotion	Islamic Finance promotes just fair and balanced society and hence interest is prohibited	Based on commercial objective and interest must be paid irrespective of outcomes of business
Ethical framework	structured on ethical and moral framework of sharia,verses from holy quran and tradition from As-Sunnah are two divine guidance	No such framework
Speculations	The financial transactions should be free from the element of uncertanity and gamblings	No such restrictions
unlowful goods and services	Islamic finance must not be involved in any transactions relating to unlawful goods and services such as alcohol armaments pork and other socially determental products	There are no such transactions
2.Equity –based Islamic financial contracts such as Mudaraba and Musharaka are not practical and can’t be applied by Islamic banks which defeats the objective
Mudaraba:It is a kind ofprofit sharing arrangement where in one party provides 100% of the capital invoked and the other party provides specalized knowledge and entrusted with exclusive responsibility of working .In case there is profit it is shared amoung them in the pre dexcided ratioo and if there is loss, it will be completely borne by the financier
Musharaka:It is a kind of joint business venture where in all parties provide the capital in the business in agreed ratio and also have right to participate in the business.While the loss is strictly restricted in the ratio of their capital contribution, the profit is shared as per pre agreed ratio.
3. Islamic banks are purely profit-oriented and do not do well on the corporate social responsibility front.
Ethical framwork of islamic finance is structured on ethical and moral framework of sharia,verses from holy quran and tradition from As-Sunnah are two divine guidance.To ensure that all islamic finance products and services offered follow the principles of sharia rules there is a board called sharia board which overseas and reviews all new products offered by financial institution
Numerous ethical banks (as well as some conventional banks) allow customers to contribute to organizations that have positive societal/environmental impacts either in the local community or in developing countries. Examples include an evaluation of the energy efficiency of a home and potential improvements in this; carbon-offsets credit cards that benefit charities or lower interest rate loans for low emission cars
The World Bank defined corporate social responsibility to be the commitment of owners of commercial activities to contribute in sustainable development through working with their employees and their families, local community and the society as a whole to upgrade the people's living standards in a certain way that serves commerce and development in the same time. As for the international chamber of commerce, it has defined social responsibility to be all the attempts that contribute to the volunteering of co-operations to achieve development for ethical and social reasons. Hence, social responsibility depends on good initiatives of businessmen without any legal obligations. And therefore social responsibility is achieved through convincing and educating.
Q2. Explain how Mudaraba application would enhance economic prosperity for everybody and why its application by Islamic banks is minimal
Islamic finance is a finance that is very ethical and is based on a balance between personal interest and the general interest but also on values of fairness of transparency and sincerity(islamic finance and banking).It’s a finance that is based on five principles that we could call the five pillars of financial Islam so there are first three prohibitions that are interest, speculation and unlawful, the sharing of profits and losses and the obligation to associate any transaction a tangible asset.
Mudaraba:It is a kind ofprofit sharing arrangement where in one party provides 100% of the capital invoked and the other party provides specalized knowledge and entrusted with exclusive responsibility of working .In case there is profit it is shared amoung them in the pre dexcided ratioo and if there is loss, it will be completely borne by the financier
Some of the common and popular products/instruments are as follows
1.Sukuk 2.Salam3. Istisna 3.Murabaha 4.Ijra