Islamic Finance And Banking Harvard Case Solution & Analysis


Islamic finance was normally exercised in the Muslim world all over the middleages, fostering trade and business trading with the development of credit. The term Islamic financial system is comparatively new, appearing only in the mid-1980s. All commercials or mercantile activities relating to the Islamic Financing were made under the sunshade of either Islamic Banking or Interest-free. If we only describe Islamic Financing System as Interest-Free Financing System, It does not provide the correct picture of Islamic Financial system. It is estimated that more than 100 financial institution in over 45 countries practices some form of Islamic finance. For the past years, this has been growing at a rate of more than 15% per annum(Iqbal, n.d.). Why did Muslim inaugurate a various project in the field of Banking and Financing rather than doing it in the way everybody was doing? After all, they feel indifferent in various fields such transportation, engineering and medicine, and communication, among others. The answer is an inclusion of Riba in the traditional system. Riba term used as Interest in Islamic Financial System.  Riba is strictly prohibited in Islam. (Siddiqui, n.d.)

Riba in Islam is considered as “HARAM”. Riba is thought in Islamic Financial System as It makes Financial and Banking System unfair and inadequate of ensuring the best interest of people. Explaining the system as Interest-free tends to create confusion. The deep thinking foundation of an Islamic system goes away from the interaction of factors of production and economic behavior. On the other hand,Traditional Financing System focuses mainly on the economic and financial part of a transaction.(Iqbal, n.d.)

The principles of an Islamic Financing System.

The fundamental Structure for an Islamic Financial system is a set of laws and rules, referred to as Shariah, political, social, governing economic, and cultural part of Islamic societies. The word Shariah originates from the rules dictated by “Quran”, and its practices, and explanations (known as Sunnah) by the Prophet Muhammad S.A.W.Traditionally when an organization wants to make an investment in the project that shows positive Net Present value. In contrast, Islam considers the project whether this project is Halal or Haram. There is no concept of Haram or Halal In traditional System but in Islam only Halal projects should be opted. In Islam, in case of late payment penalty is not charged. Shariah approves only those business whose activities do not violate the rules of Shariah qualify for investment. For example if an entity invest money in “HARAM” projects such as alcohol and relates to gambling and casinos then it would not be approved according to Shariah, since it is strictly prohibited in Islam. We can easily trace cash for what purpose is being used since cash must be used for Halal work.

The basic principles of an Islamic financial system can be categorized as follows:

  • Prohibition of Riba (Interest)
  • Murabaha
  • Ijara
  • Sukuk
  • Mudaraba
  • Musharaka

Prohibition of Riba (Interest)

Riba is strictly prohibited in Islam. Islam does not allow the interest in any Transactions.  Social fairness demands that, lenders should not charge interest from borrowers, Lenders and borrowers share risk and reward as well as losses in fair fashion that the process of wealth distribution and accumulation in the economy be fair and representative of true fruitfulness. Because of the absence of interest in Islam, the one who supplies funds become investor instead of creditors. Provider of Financial capital and provider of services share business risks in return for the share of profit.


Murabaha is an interest free loan. Under shariah, it is an acceptable form of sale that is made on credit.

Under the contract of Murabaha, if borrower settles its financial obligation late, then there is no penalty would be charged. There is no concept of penalty. Similarly, there is no discount available on early payment (which normally occurs in traditional financial system). In Murabaha, the lender and borrower agree upon a sale price, that includes an agreed upon the profit for the lender. The payment of the amount is made on installments, or as lum sum payment. In Murabaha, owner retains the ownership of goods and property until the amount is fully paid.For example if Mr.A wants to purchase equipment and he is not having cash, he would go to Islamic bank and ask for finance. Bank would provide wiht him money and ask for purchasing that equipment on bank’s behalf. Once equipment has come under the custody of bank, Bank will sell that equipment to Mr. A on desired amount. Payments are made on installment basis. All these things are predetermined. .............................

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