Objectives Of Islamic Banking System

Introduction:

Nowadays we cannot imagine our life without banks because they fulfill the needs of the economy in fund sharing between creditors and investors. But conventional banking systems are not satisfying the Muslim population which is very large and the reason is that conventional system is not shariaa compliant and it doesn’t fit with Islamic law. So Islamic banks are very important nowadays. The reason of creating Islamic banking system is to provide financial products that are shariaa complied in Islamic countries but after that it has been recognized by all of the world as an international system. More than 57 countries provide the Islamic banking services (Hamedian, 2013). The main objective of the first Islamic bank was lending

And the main principles of the Islamic banking system is that: Riba which is (usury) is prohibited. Usury is any excessive increase charge on the principal amount or the rate of interest. Also the profit should not be predetermined that means that the exact number of profit must be uncertain until the action is done.

The second principle that is prohibited is Gharar which is the (trading risk). Trading risk is any trading occurs when the price, object or time of the payment in sale are not identified in advance clearly to the purchaser or in the contract.

The third prohibited principle is Maysir which is (speculating). Speculating is any return that is not guaranteed. And in any Islamic bank there must be a shariaa board committee.

Islamic Banking

First there is Mudaraba which is (passive partnership). It is a form of partnership between the bank as a provider of fund and the customer or investor as project manager. And the contract will determine the proportion of profit sharing, as we mentioned before that any fixed amount as profit is forbidden. The second product is Musharakah which is the (long-term partnership) when there is a profit and loss sharing and contribution in running the business for a long-term relationship. And based on the contract the bank and the investor will share in labor and the project management and in the supplying the capital. The third product of the Islamic system is Murabaha which is (mark-up or cost plus) and this form is the most popular one in Islamic finance and it is the replacement of the ‘interest’ in conventional banks. Basically it is the sale for a commodity with a profit. And this sale requires three parties which are the customer who request the commodity, the Islamic bank who will purchase this commodity and the third one who owns the commodity. And then the Islamic bank will resell the commodity to the customer with higher price in order to get profit. Another Islamic product is Qard hasan which is (free loan) in this type the loan will be free interest so the borrower will only repay the principal amount that he took from the bank without any extra amount. And there plenty of products such as lease to buy,