Islamic Banking

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Transcript of Islamic Banking

Project on

Islamic Banking Bachelor of Management Studies Semester Vth 2009-2010

Submitted In Partial Fulfillment of the Requirements for the Award

of the Degree of Bachelor of Management Studies

By Tanveer Ali Roll no.

50

BIRLA COLLEGE OF ARTS, SCIENCE, COMMERCE Murbad Road Kalyan (W)

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BIRLA COLLEGE OF ARTS, SCIENCE, & COMMERCE, KALYAN (Conducted by Kalyan Citizens Education Society) (Affiliated by University of Mumbai)

BACHELOR OF MANAGEMENT STUDIES (BMS) CERTIFICATE This is to certify that Tanveer Ali. Roll No.50 has satisfactorily carried out the project work on the topic Islamic Banking for the Vth semester of T.Y.B.M.S., in academic year 2008-09. Place: - __Kalyan___________ Date: - _____________ ____________________ ________________

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Signature of Examiner coordinator

BMS Co-

CERTIFICATE

I, Ms. Hema Tahilramani hereby certify that Tanveer Ali Student of T.Y.B.M.S (SEMESTER V), Roll. No.50 has completed project on Islamic Banking in the academic year 2009-10.The information submitted is true and original to the best of my knowledge.

Place: Kalyan. Date: ___________ Signature of project guide.3

DECLARATION

I, Tanveer Ali, student of T.Y.B.M.S Semester V (2009-2010) hereby declare that I have completed the project on Islamic banking. I further declare that the information contained in this project report is genuine, true and the fair to the best of my knowledge.

Signature

Tanveer Ali

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Roll No. 50

ACKNOWLEDGEMENTI take this opportunity to express my deep sense gratitude to Ms. Hema Tahilramani for her valuable guidance, encouragement and support extended to me during the course of completion of this project report. It has been an honor to work under her guidance throughout the project span. I am very grateful to my parents, friends, and relatives for helping in my project. I am also thankful to all who have either directly or indirectly supported me in shaping the project very well. At last, I would also like to thank our coordinator Mr. Anil Tiwari for his timely co-operation and support extended all the way.

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Index Contents.1. Preface. 2. Islamic banking in detail. 3. Islamic banking from theory to practice. 4. Prohibition of usury in Islam. 5. Islamic banking: A variation of conventional banking? 6. Responsibilities of Islamic banking. 7. Growth of Islamic Banking. 8. Islamic of banking is not for Muslims alone. 9. India is the best contender for Islamic Banking. 10. Islamic banking gain momentum. 11. Islamic banking Resistant to crisis. 12. Islamic banks, future of financial industry. Conclusion. 10 26 30 34 52 54 56 58 62 71 78 Page no

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PREFACE

The Islamic banking experiment is still new and is still in the early stage of application. So it is not surprising that members of the public have many questions to ask as they are keen on understanding Islamic banking principles and interested in dealing with Islamic institutions. The Islamic banking experiment is not an innovation but is indeed a continuation of economic thought that has prevailed and survived for many years during which it proved its success in the filed of practical application for many centuries during the early Islamic era. Islamic economic thought has been characterized by the continuation and variety of its interpretation and development of its tools. During the last fourteen years Islamic banks underwent a number of tests, some of which were fairly difficult that could not be overcome by well-established banks which rely on usury in their transactions. However, with the grace of God, foresight of Islamic bankers and hard work of the bank employees such tests were successfully overcome which proves the sound principles and foundations of the Islamic banking experiment. Since the problems faced by certain Islamic banks influence other similar banks either in a negative or positive manner. Such problems also influence the Islamic economic pursuits in general, and the activities of Islamic banks wherever, and the activities of Islamic banks where they based in particular. Therefore, there is a need for Islamic banks to adopt a position, reflecting the unity and solidarity of Muslims and demonstrating their profound belief. Their attitude is one which reflects their common destiny and their pursuit of an economic and financial strategy that is based upon their Islamic religion which regulates, in a 8

comprehensive way, their financial life. but it is a concept that has been put in practice. Nowadays Islamic banking. . There are Islamic banks effectively operating in three continents of the world. As they entered the second decade, the Islamic banking experience has proved its existence in the financial activities involving both the private and public sectors. Through the adoption of Islamic finance methods, they have been able to introduce financial tools that are acceptable in today's world and these facilities are less burdensome to the owners of development projects. Through encouraging participation in projects, Islamic banks have highlighted the key to Third World developing efforts. Short term finance aiming at making secure quick profit that is remote from accepting any risks is not in any way appropriate for development. Without participation in risks, Western Europe for example would not have accomplished this level of development nor would the dreams of the earlier generation of the Japanese people have become a reality. Islamic economists look forward to establishing a dynamic global economy in which capital interacts with human efforts and thought without depending on rates of interest fixed well in advance. With this aspiration, the soundness of which is confirmed by many western and eastern thinkers, the whole world will enjoy greater economic prosperity. This project throws some light on the activities of Islamic banks while outlining the philosophy of these activities.

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OBJECTIVES TO STUDY:

1. To know about ISLAMIC BANKING. 2. To know whether Islamic Banking will be beneficial for the country in future. 3. To know about Islamic finance sector. 4. To know about development and growth in Islamic banking. 5. To know whether Islamic Banking will be beneficial for the

customer in future. METHODOLOGY The sources used for collecting the data are as follows: 1. Books & Magazines. 2. Newspaper. 3. Internet. 4. Visited Islamic Research Foundation (IRF).

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CH. 1 . Islamic bankingIslamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment of fees for the renting of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semiprivate commercial institutions within the Muslim community.

History of Islamic banking Classical Islamic bankingDuring the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate, where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism". A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. A number of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see Waqf), startup companies, transactional accounts, loaning, ledgers and assignments Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.

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RibaThe definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).

Modern Islamic bankingThe first modern