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What Is Islamic

Finance And Banking?

Islamic scholars at Cairo’s Al-Azhar University, an influential source of religious authority in the Muslim world, declared in 2002 that the Qur’an did not prohibit all interest payments and charges, only those that were exorbitant and crossed the line into usury.  However, others regard the whole concept of interest as riba, and thus unlawful.


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Islamic Finance

Islamic finance — shorthand for “banking transactions in compliance with Islamic
principles” — is a form of modern banking that has evolved in the context of modern-day global financial markets.  
Claiming to abide by the prescriptions of Islamic law, Islamic finance is arguably the most important area where Muslim economic doctrines are tested and put into


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Banks And Banking

Modern banking was first established in the Islamic world in the mid-nineteenth century. Financial intermediaries were not, of course, new to the region, as the sophisticated Muslim trading
economies had long used specie as a means of exchange, and money changers and money lenders carried out their business in most urban centers. Money changers were especially active in the
cities of the Hejaz, such as Mecca and Medina, catering to the needs of the pilgrims, demonstrating that there was no Islamic objection to currency dealings and the exchange of precious metals.  The prohibition of ribā (interest) in the Qur
ʿān, however, meant that
there was much suspicion of conventional commercial banking in the form in which it had developed in Europe.


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Muārabah is a form of profit– loss-sharing joint-venture between two parties, one being the financial-capital provider (āib al-māl or rabb al-māl) and the other, the entrepreneur or the investment manager (muārib).  In this sense, it is a specific form of partnership (shirkah or mushārakah) that allows those who have financial capital but are unable to involve themselves directly in trading or business activity to receive a share of the profit from the activities of entrepreneurs who have the skills but may not have the financial capital.  (The muārabah is sometimes called muqaraah [loan].)


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Economic Development

In the course of the second millennium, the Islamic world failed to match the institutional transformation through which western Europe greatly expanded its capacity to pool resources, coordinate production, and conduct exchanges. By the nineteenth century it had become “underdeveloped” relative to western Europe and its offshoots in the New World.  The key indicators of this state of economic backwardness lay primarily in the private economy.  In 1800 credit practices in Cairo, Istanbul, and Lahore hardly differed from those of the Middle Ages.  Investors, producers, and merchants pooled
resources mainly through small and short-lived partnerships based on classical Islamic law. 

Trade with the outside world, and increasingly also local trade, was under the control of foreigners and foreign protégés.  Public goods
continued to be delivered mainly through waqfs (Islamic trusts), which lacked the flexibility of corporations.


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Three complications arise in assessing trade by Islamic countries in the modern period.  First, the identification of countries as Islamic is a recent development, dating back to the establishment of the Organization of the Islamic Conference (OIC) in 1969.  Second, there is a dearth of data on Islamic countries for most of the modern period. Third . . . click the green box below.


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Commercial Law


Within the context of providing Muslims with guidance about the commands of Allah, jurists devote a large portion of their works of fiqh to commercial law.  Broadly speaking, the chapters of commercial law focus on defining the types of property that may be legally owned, the rights and obligations that attach to contracts and property, the modalities of transferring ownership of property, the methods of organizing resources and commercial ventures, and the analysis of ribā and gharar, which are7 usually translated respectively as “interest” and “risk.”  The premodern works of fiqh reflect their savior ways that jurists synthesize these topics in order to articulate their visions of an Islamic commercial system and society.


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Payment of Islamic taxes is considered a religious duty.  The most important tax is zakat, which is based on wealth and paid annually.  Cash holdings, asset disposals, and inventories are subject to tax at a standard rate of 2.5 percent.  Zakat is to be paid by those with surplus liquid wealth for the benefit of the poor and needy, typically via spending on social and humanitarian causes.  The collection of zakat is usually organized separately from that of state taxes.  Another traditional Islamic tax was the jizyah, or poll tax, paid by non-Muslim residents of a Muslim state to the government in exchange for government protection.  The Islamic land tax (kharaj) is applied to both Muslims and non-Muslims according to acreage of land, with the rate depending upon output potential and a maximum rate of half of the crop value.


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The question of whether interest is a legitimate financial instrument has long been a source of controversy throughout the Islamic world. The origins of the controversy lie in Qurʿānic verses that prohibit ribā, the ancient Arabian practice whereby borrowers saw their debts rise precipitously if they defaulted, and rise further if they defaulted again.  Over the centuries, many Muslims have inferred from these verses that any loan contract specifying a fixed return to the lender is immoral, regardless of the loan’s purpose, its amount, or the prevailing institutional framework.  They have also condemned an array of common business practices as un-Islamic.


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Islamic Development

The Islamic Development Bank (IDB) is the principal organ of the Organization of the Islamic Conference (OIC) in the economic field. The IDB is basically an international financial institution but its scope of activities is limited to the Muslim world, i.e., OIC member states and the Muslim communities in the non-Muslim states.  Nearly all members of the OIC are also members of the IDB.  In fact, the Bank follows the OIC decisions in suspension and expulsion of members as well.


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Capitalism And Islam

Debates over Islamʾs economic implications are even more heated and inconclusive than debates over its social and political implications. Traditional texts and authorities provide countless blueprints for an ideal Muslim family and polity but not for an Islamic economy.  The Qurʿān explicitly endorses few economic values beyond private property, commercial honesty, and competition tempered by concern for the disadvantaged.  The adīth extol the virtues of pious merchants in tones that would be familiar to any reader of Poor Richardʾs Almanack.  Yet these adages hardly amount to a business-class creed or an Islamic counterpart to Calvinism.  The sharīʿah (divine law) lays down firm rules both protecting personal wealth and discouraging excessive profits.  However, the more rigid the rules, the more ingenious were the loopholes that judges devised to avoid enforcing them.


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Islamic Finance

In Southeast Asia

Sharīʿa, as it does in everything else, provides the basis of Islamic banking.  The teachings of Islam include the essence of economic well-being and the development of the Muslim at the individual, family, society, state, and ummah (Islamic universal community) levels (Bank Islam Malaysia Berhad, 1994; Saiti, et al., 2017).


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