Islamic Banking
Chapter 1 Introduction
1.1 Background Islamic legal principles regulate the conduct and content of commercial transactions in Islamic Banking. The most important of these principles is the prohibition of riba, any predetermined or fixed return in financial transactions. As stated in Quran: “Allah forbids riba and permits trade.” While there is much debate about the exact nature of this prohibition on riba, there exists a widespread perception that the ban on riba implies ban on interest. Alternative “interest-free” financing techniques have been developed by Islamic Banks. The term interest free implies that banks cannot indulge in activities that involve payment and receipt of interest. Therefore Islamic Banks cannot give fixed predetermined return to their depositors and on the other hand they cannot provide financing to others on the basis of fixed predetermined return. Being a Muslim student, I have always been interested in studying the systems adopted by Islamic Banks that make them different from conventional banks. Also the success of Islamic Banks rather the fast growth of Islamic Banks despite their departure from the existing interest based banking has led me to see Islamic Banks in more detail. In this dissertation I will look at the financial structure of Islamic Banks. It will be studied that how the principle of “interest-free banking” affects the financial structure of Islamic Banks and Islamic Banks exhibit what kind of financial structure.
1.2 Objective The objective of this dissertation is to study the financial structure of Islamic Banks as they operate on a totally different basis from conventional banks. It will be seen that whether Islamic Banks are prudent in making their financing decisions. Another aim is to compare Large and Small Islamic Banks to find out differences between them and to see which group is more cautious in maintaining its particular financial structure.
1.3 Methodology The methodology
1.1 Background Islamic legal principles regulate the conduct and content of commercial transactions in Islamic Banking. The most important of these principles is the prohibition of riba, any predetermined or fixed return in financial transactions. As stated in Quran: “Allah forbids riba and permits trade.” While there is much debate about the exact nature of this prohibition on riba, there exists a widespread perception that the ban on riba implies ban on interest. Alternative “interest-free” financing techniques have been developed by Islamic Banks. The term interest free implies that banks cannot indulge in activities that involve payment and receipt of interest. Therefore Islamic Banks cannot give fixed predetermined return to their depositors and on the other hand they cannot provide financing to others on the basis of fixed predetermined return. Being a Muslim student, I have always been interested in studying the systems adopted by Islamic Banks that make them different from conventional banks. Also the success of Islamic Banks rather the fast growth of Islamic Banks despite their departure from the existing interest based banking has led me to see Islamic Banks in more detail. In this dissertation I will look at the financial structure of Islamic Banks. It will be studied that how the principle of “interest-free banking” affects the financial structure of Islamic Banks and Islamic Banks exhibit what kind of financial structure.
1.2 Objective The objective of this dissertation is to study the financial structure of Islamic Banks as they operate on a totally different basis from conventional banks. It will be seen that whether Islamic Banks are prudent in making their financing decisions. Another aim is to compare Large and Small Islamic Banks to find out differences between them and to see which group is more cautious in maintaining its particular financial structure.
1.3 Methodology The methodology
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