Introduction to Islamic Banking and Finance Harvard Case Solution & Analysis

Introduction to Islamic Banking and Finance

The Islamic banking and finance refers to the activities of the banking system which are in accordance with the basic rules and principle of Islamic Shariah. It is also called the interest free banking where there are no fixed rate of return as the Islamic Shariah not allows the acceptance of Riba .In addition to this, interest rate for the accepting and loaning of money are also disallow by the directions and standards set by the Islam .According to the Islamic shariah, the Islamic banking cannot contract in the transactions that involves interest / Riba and also they cannot contract in the transactions having the factor of uncertainity.The Islamic banking operates on the basis of profit and loss sharing.

Islamic banking and finance service are particularly developed to obey Islamic and Shariah laws. The activities of the Islamic finance system started in the mid of 1980s.Islamic finance has accomplished largely in the Muslim world during middle ages. The financiers and businessmen of the European countries adopted later many techniques and concepts of Islamic finance. The Islamic financial system not only limited to the banking sector, but also includes financial instruments, financial markets and all the types of the financial intermediation.

Islamic banking and finance showed great improvement and development in the world particularly across the Muslim world. The Islamic banking is growing in term of capital funds, deposits, branches and sources. The board of Shariah guides the financial institutions and also approves the products that whether they are Shariah compliant or not.

Literature Review

Many studies were conducted on the Islamic banking and finance activities across the world. The number of banks are created in the recent years to respond to the rising demand that determined by the globalization .Additionally, Islamic finance has shifted from the niche position in order to become a main component of the global banking system. Islamic banks are not allowed to offer the interest charge on loans and fixed rate on the deposits. The main difference of the Islamic banking from the conventional banking is that in Islamic banking person does not know about the amount of his future earnings. The funds are theoretically regarded as equity as the applicants are not allowed to receive the fixed inter rate on their deposits and funds (Archer & Karim 2009).

Islamic banking is fastest growing sector of the credit and financial market across the Muslim world. The market share of these Islamic financial banks has increased from 2 percent in the late 1970s to 15 percent in the mid-1990s that was determined by the resources in the banking system (babai, 1995). The institutions that offer the services of Islamic finance, establish a substantial and growing market share of the financial system in many countries. The number of the Islamic financial institutions around the world has increased from the one institution that was operated in one country in the year 1975 to more than 300 institutions that are now working in more than 75 countries since the beginning of the Islamic banking approximately three decades before. However, it was also determined that Islamic institutions that are operating in more than 75 countries, Financial Islamic banks have a very small market share in most of these counties              (El Qorchi, 2005).

The financial system has a significant role in enhancing the development of the world economy mostly after the Second World War. A continuous increase in the innovation of the financial system that includes the revolution in information and communications technology has played a vital role in this development. Even though the Islamic banks have performed better than the conventional banks in term of the growth over the past decades, but the Islamic banks have not outperformed the conventional banks in term of the profitability. As various small Islamic banks have been struggling to turn profitable for several years and some other Islamic banks are badly impacted by the regional economic crisis (Chapra, 2008)

During the three decades, the number of Islamic banks have developed both in quantity and in size   internationally. The Islamic banking and finance activities are being accomplished on an even more intensive scale.  Few countries have transformed their entire banking system into Islamic banking structures such as Sudan and Iran. Furthermore, in other countries where conventional banking is still leading the Islamic Banking is functioning alongside. Islamic banking and finance sector should supposed to offer the instrument with the consistent religious beliefs and characteristics. Islamic financial institutions emphasize profit and loss sharing (equity) where debt contracts are prohibited by the Islamic Shariah. Islamic banks are also not allowed to pay and receive interest on the investments by the Islamic law (Aggarwal and Yousaf 2000).

The cost and profit efficiency between Islamic and conventional banks was examined across the world, particularly Gulf cooperation council countries from the time period 1999 to 2007.The showed that the efficiency of banks in Gulf countries is more substantial than the rest of the world. In addition to this, the efficiency of the conventional banks is more in term of the cost and profit than Islamic banks (Srairi, 2010)...............

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