As Muslims, we will face five questions on Judgement Day and one of them is; “How did you earn your wealth and how did you spend it? ” Our earnings must come from halal means (permissible according to Islamic Law), and must be spent on halal categories of expenditure. The Qur’an (2:30) says that man was created as the representative of God on earth. This concept has a considerable effect on Islamic business, since the lack of a sense of absolute ownership promotes a sense working for society, especially the needy.Islamic scholars have profound influence on the practice of Islamic banking and finance – No equivalence in other religions. Islamic banking is an Islamic financial system conducting banking and business activities in line with the provisions and principles of Islamic Shari’a ‘. The industry is growing day by day and has become a $ Trillion industry in the world.
Most economists often considered banking as a modern device of recent origin (12th Century AD Italy), but a glance, at the origin and development of financial operations throughout history, will dispel the notion of novelty. Traders and business people in the Middle East engaged in financial transactions since the medieval era (1,000–1,500 AD). Then, these transactions used the same financial principles as the Europeans.
Bay’ al-musawamah (bargaining), Bay’ al-muzayadah (auctioning), Bay’ al-amanah (trust sale), Al-murabahah (resale with profit), Al-tawliyyah (resale at cost) and Al-wadiah (resale at a loss or below cost) were common trading based arrangements in Arabic financial and economic system before the advent of Islam.
During this same period barter trade was popular such as Al-sarf (money exchange), lack of standardization, for example 10 grams of gold in coin form = 15 grams of gold in bracelet form, organized riba and widespread gharar and maysir such as monopoly, fraud and economic injustice.
Charging Riba (interest) is forbidden under Islamic Law in which verses of the Holy Quran and the “Hadith” proved it. Our Lord Allah says in the Quran (Surah Al-Baqara, Verse 275):
الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَن جَاءَهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىٰ فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللَّهِ وَمَنْ عَادَ فَأُولَٰئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ
Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it) — these are the inmates of the fire; they shall abide in it.
The Hadith of the Prophet went further that: Jabir ibn ‘Abdallah , giving a report on the Prophet’s Farewell Pilgrimage, said: The Prophet, , addressed the people and said “All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to ‘Abbas ibn ‘Abd al-Muttalib [the Prophet’s uncle]; it is being cancelled completely.” (Muslim, Kitab al-Hajj, Bab Hajjati al-Nabi, ; may also in Musnad Ahmad). The benefit which renders the transaction prohibited may be a sum of money, or any goods of a value.
Thus, the introduction of Islam eradicate riba institutions and practices, gharar transactions while institutionalizing fair and equitable markets without monopoly and fraud. Money and commodity exchanges standardization is based on the six commodities. Which are islamization of many business organizations and institutions with introduction of Mudarabah, musyarakah, salam, muzara’ah (sharecropping or partnership in agriculture), musaqah (irrigation). Later, new organizations and institutions were introduced for example Zakah, waqf and manihah, Baitul-mal.
Islamic economic principles offers a balance between extreme capitalism and communism. It offers the individual the freedom to produce and create wealth, while surrounding the individual with an environment controlled, not by human rulers, but by Divine Guidance, which sets moral rules and norms of behaviour that must require the utmost sincerity of intention. When these rules and norms are internalised and acted upon by people, peace and prosperity result for the wider society.
Islamic banking follows the beliefs and principles of Islamic jurisprudence pertaining to trade and business, so-called fiqhal-muamalat or Islamic rules on transactions. The Quran, Sunnah and other sources of Islamic law such as Ijma’ (opinions collectively agreed among Shari’a scholars), Qiyas (analogy) and Ijtehad (personal reasoning) collectively form the basis, from which rules and practices of fiqhal-muamalat (Islamic jurisprudence) are derived.
The system of Islamic Banking is one of the famous banking systems in the world which is backed by assets. The system is a regulated system regulated by Central Bank. Dedicated Sharia Compliance and Sharia Audit departments work to oversee and review the processes and products offered by Islamic Banks. Due to strong foundations and asset backing, Islamic banks are less exposed to market risks, liquidity risks and reputational risks, as compared to conventional banking system.
The initiation of modern Islamic Banking dates back to 1963 and started fully in Egypt in 1963, the present-day practice debuted in 1975, when banks were established and mandated to operate in adherence to Shari’a rules and principles. Since then, Islamic Banking has emerged as a notable alternative source of financing in the globe, and has spread to Malaysia, Indonesia and United Kingdom who are now major centers for Islamic Finance. Meanwhile, Iran and Saudi Arabia remain by far the largest markets when it comes to sharia-compliant assets, with both markets having more than $400bn in assets. Six of the 10 largest Islamic lenders come from those two countries, with only one, Malaysia’s Malayan Banking Berhad (Maybank), coming from outside the Middle East.
Today, there are approximately 520 banks and 1700 mutual funds around the world that comply with Islamic principles. Between 2012 and 2019, Islamic financial assets grew from $1.7 trillion to $2.8 trillion and are projected to grow to nearly $3.7 trillion by 2024, according to a 2020 report by the Islamic Corporation for the Development of Private Sector (ICD) and Refinitiv. This growth is largely due to the rising economies of Muslim countries (especially those that have benefited from the increases in the price of oil). Thus, as new geographies continue to open up to Islamic Banking, industry forecasts suggest that Islamic Banking assets held by commercial banks globally will continue to grow.