Banking on Sharia Principles - Islamic Banking and the Financial Industry

There are an estimated 1.61 billion Muslims worldwide, making Islamic banking one of the fastest growing segments of the financial industry. Banks serving the Islamic population must comply with several very specific principles of Islamic law if they hope to retain existing customers and attract new ones. The basic principle of Islamic banking follows the laws of Sharia, known as Fiqh al-Muamalat (Islamic rules on transaction).

The term "Islamic banking" is synonymous with "full-reserve banking" and "Sharia-compliant banking." Banks that comply with Islamic law are forbidden to charge interest or late payment fees, which is also considered a type of riba. Sharia-complaint banking products include Mudharabah (profit sharing), Wadiah(safekeeping), Musharakah (joint venture), Murabahah (cost plus) and Ijarah (leasing).The Mudharabah is a partnership between an entrepreneur and the bank. Wadiah is a system in which a person deposits money into a bank and receives a "gift" from the bank. The hibah is similar to interest, but lawful according the Islamic law.

An Islamic bank does not lend money to a borrower to buy properties; rather, the bank will purchase the property at the borrower's request at a freely disclosed price, and mark up the price for the borrower to pay back, therefore making a profit from the investment. While each Islamic bank has its own board which rules on ethical banking principals, Islamic banking organizations have been establishing standard regulations and policies. The Islamic Development Bank has been working on international standards, policies and procedures, and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Finance Service Board (IFSB), International Islamic Financial Market, Liquidity Management Center and International Islamic Rating Agency are in development to ensure accurate and fair banking practices.

According to Standard and Poor's surveys, 20% of the customers in the Gulf Area and Southeast Asia would choose an Islamic banking product over a similar conventional product. There are significant middle-class urban and suburban populations that already use conventional banking, and therefore present ripe opportunities for Islamic banks. The evidence is clear: Islamic banking is big business and it is growing every day.
Additionally, Islamic banks must educate their personnel to understand the tenets of Islamic law that pertain to banking, and to train them to comply with Sharia as they serve their Islamic customer population


Home Financing Under Islamic Banking


Quite simply, American Banks had been over financing home buyers. Suppose a potential home buyer approached his Banker for a home loan, and his credit rating and financial standing would entitle him to a home loan of, say, USD 100,000.00, his Banker would gleefully advance him say USD150,000.00! Typically, under the Islamic Banking system, home loan financing is based on the principle of Profit Mark Up on the cost of the property, by mutual consent of the Bank and the Borrower. Suppose you are interested in buying your dream home (who's not!).

You approach the Islamic Bank with your requirements with regard to the financing. Let us say the Bank fixes a home loan limit of USD100, 000.00 for you.
That means the net amount of your home loan is USD90, 000.00. The above example is a simple type of home loan under the Islamic Banking System.