Importance Of Islamic Banking

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The importance of banking is paramount in an economy. There is a clear distinction between conventional and Islamic banking. Conventional banks are charging interest through lending and accepting the deposit for interest. But interest (Riba) is strictly forbidden in Islam as evident in this verse “And because of their charging riba while they were prohibited from it.” (Quran, An-Nisaa 4:161). So Muslims established their own Riba free financial institutions separately to the conventional banking system. The growth of Islamic Financial Institutions became strong at the Conference of Foreign Ministers of Muslim countries to establish Islamic Development Bank in 1975 (Islamic Development Bank [IDB], 2017). The Islamic banks have gone through tremendous …show more content…

Modern banking reached Muslim countries at the end of 19th century and early 20th century, primarily through European trading companies which engaged in trade with Muslim merchants and their enterprises. They required banking facilities in Muslim countries to provide the medium for exchange (moneys) for trading transactions. Although Muslim traders avoided the use of “foreign banks” for religious and sometimes nationalistic reasons, the growth of trade did, in time, require them to maintain current accounts and use bank transfers systems. Borrowing and saving with a bank continued to be avoided in order that there was no dealing in interest. The issue of interest-free banking came to the attention of Muslim intellectuals in the 1940’s and 1950’s. By this time economic and financial influences had produced a number of local and national banks established along the lines of interest-based foreign banks. They had started to bring the banking system and its services to the local population. By this time Governments of Muslim countries, particularly those, which gained political independence, had of necessity to engage in international financial transactions using banking systems. The requirement for commercial banking was recognized. The challenge was to avoid the concept of interest within commercial banking. The route to this was the development of the concept of profit and loss sharing (Mudaraba), the key concept from which the structure of most Islamic Banking products and services are derived. The 1960’s and 1970’s provided the political background and platform by which to attract the attention of Muslim Governmental and National Financial Institutions. Through a number of high profile conferences, where the theory of Islamic Banking was brought to the practical application the Islamic

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