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Islamic banking Islamic bankingFrom Wikipedia, the free encyclopediaThis articleneeds additional citations forverification.Please helpimprove this articlebyadding citations to reliable sources. Unsourced material may be challenged and removed.(June 2013)

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Islamic banking(Arabic: ,Persian: ) isbankingor banking activity that is consistent with the principles ofshariaand its practical application through the development ofIslamic economics. As such, a more correct term for 'Islamic banking' is 'Sharia compliant finance'.[1]Sharia prohibits acceptance of specific interest or fees for loans of money (known asriba, orusury), whether the payment is fixed or floating. Investment in businesses that provide goods or services considered contrary to Islamicprinciples(e.g. pork or alcohol) is alsoharaam("sinful and prohibited"). Although these prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent unIslamic practices, only in the late 20th century were a number of Islamic banks formed to apply these principles toprivateor semi-privatecommercialinstitutions within the Muslim community.[2][3]By 2009, there were overUS$822 billion assets being managed in over 300banksand 250mutual fundsaround the world complying with Islamic principles.[4]As of 2005,shariacompliant financial institutions represented approximately 0.5% of total world assets.[5]Contents[hide] 1History 1.1Introduction 1.220th and 21st centuries 1.2.1Largest banks 1.2.2Expansion into services 2Principles 3Advisory councils and consultants 4Financial accounting standards 5Fundamentals 6Usury in Islam 7Islamic financial transaction terminology 7.1Bai' al 'inah (sale and buy-back agreement) 7.2Bai' bithaman ajil (deferred payment sale) 7.3Bai' muajjal (credit sale) 7.4Mudarabah 7.5Murbaah 7.6Musawamah 7.7Bai Salam 7.7.1Basic features and conditions of Salam 7.8Hibah (gift) 7.9Istisna 7.10Ijarah 7.10.1Ijarah thumma al bai' (hire purchase) 7.10.2Ijarah-wal-iqtina 7.10.3Musharakah (joint venture) 7.11Qard hassan/ Qardul hassan (good loan/benevolent loan) 7.12Sukuk (Islamic bonds) 7.13Takaful (Islamic insurance) 7.14Wadiah (safekeeping) 7.15Wakalah (power of attorney) 8Islamic equity funds 9Islamic derivatives 10Islamic laws on trading 11Microfinance 12Controversy 12.1Islamic Banking in Malaysia 13See also 14Notes 15Further reading 16External linksHistory[edit]Introduction[edit]

A Jordan Islamic Bank branch inAmman.An earlymarket economyand an early form ofmercantilism, calledIslamic capitalism, was developed between the eighth and twelfth centuries.[6]Themonetary economyof the period was based on the widely circulatedcurrencythegold dinar, and it tied together regions that were previously economically independent.A number of economic concepts and techniques were applied in early Islamic banking, includingbills of exchange,partnership(mufawada, includinglimited partnerships, ormudaraba), and forms ofcapital(al-mal),capital accumulation(nama al-mal),[7]cheques,promissory notes,[8]trusts(seeWaqf),[9]transactional accounts,loaning,ledgersandassignments.[10]Organizationalenterprisesindependent from thestatealso existed in the medieval Islamic world, while theagencyinstitution was also introduced during that time.[11][12]Many of these early capitalist concepts were adopted and further advanced inmedieval Europefrom the 13th century onwards.[7]The word "riba" means interest, usury, excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not includetime value of money). The definition ofribain classicalIslamic jurisprudencewas "surplus valuewithout counterpart", or "to ensure equivalency in real value", and that "numerical value was immaterial."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 orbase metalswere allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in a higher number of units of thisfiatmoney beingriba" was not relevant as the jurists only needed to be concerned with thereal valueof money (determined by weight only) rather than the numericalvalue. For example, it was acceptable for a loan of 1000 golddinarsto 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).20th and 21st centuries[edit]Further information:Islamic economic jurisprudence

Building housing the Islamic Banking & Finance Institute Malaysia (IBFIM) in downtownKuala Lumpur.In the 20th century, scholars, Naeem Siddiqi, Maulana Maududi,Muhammad Hamidullah, all recognised the need for commercial banks and their perceived "necessary evil," and proposed a banking system based on the concept of Mudarabha Means a relationship in which one contributes capital and other contribute expertise to earn profit and sharing the profit at 50:50 ratio. The Investor is called Rab ul Maal and the other party is termed as Mudarib .[citation needed]Further works specifically devoted to the subject of interest-free banking were authored by Muhammad Uzair (1955), Abdullah al-Araby (1967),Nejatullah Siddiqi(1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974).[citation needed]A pioneering effort, in sharia compliant savings banking was undertaken in 1963 in ruralEgyptby economistAhmad Elnaggarto appeal to people who lacked confidence in state-run banks. The profit-sharing experiment, in theNile Deltatown ofMit Ghamr, did not specifically advertise its Islamic nature for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to theGamal Nasser regime. The experiment was shut down by the government in 1968, but was considered by many a success.[13]By this time there were nine such banks in country.[14]In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, currently, is still in business in Egypt.The influx of "petro-dollars" and a "general re-Islamisation" following theOctober Warand1973 oil crisisgave great help to the development of the Islamic banking sector.[15]In 1975, the Islamic Development Bank was set up with the mission to provide funding to projects in the member countries.[16]The first modern commercial Islamic bank,Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.By 1995, 144 Islamic financial institutions had been established worldwide, including 33 government-run banks, 40 private banks, and 71 investment companies.[17]The involvement of institutions, governments, and various conferences and studies on Islamic banking (Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, The First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977) were instrumental in applying the application of theory to practice for the first interest-free banks.[18][19]By 2008 Islamic banking was growing at a rate of 1015% per year and with signs of consistent future growth.[20]Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as theMichigan-basedUniversity Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that overUS$822 billion worldwide sharia-compliant assets are managed according toThe Economist.[4]This represents approximately 0.5% of total world estimated assets as of 2005.[5]According toCIMBGroup Holdings, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24 percent to $25 billion in 2010.[21]Addressing the Oman Investment Forum in October 2011, all conventional banks inOmancan offer Sharia-based financial services upon approval from theCentral Bank of Oman(CBO).[22]The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."[23]The Catholic Church has always forbade usury, but in recent centuries has been forced to tolerate it due to non-Catholic capitalist dominance of the Western world.Largest banks[edit]See also:Islamic Development BankShariah-compliant assets reached about $400 billion throughout the world in 2009, according toStandard & Poor'sRatings Services, and the potential market is $4 trillion.[24][25]Qatar,Indonesia,Saudi Arabia,Malaysia,United Arab EmiratesandTurkeyrepresented 78% of the international Islamic banking assets (excluding Iran) in 2012. It is expected to grow at CAGR of 19.7% over 201318, significantly faster than rest of the Islamic finance world.[26]In 2009Iranian banksaccounted for about 40 percent of total assets of the world's top 100 Islamic banks.Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi Arabia'sAl Rajhi Bank,Bank Mellatwith $39.7 billion andBank Saderat Iranwith $39.3 billion.[27][28]Iran holds the world's largest level of Islamic finance assets valued at $235.3bn which is more than double the next country in the ranking with $92bn. Six out of ten top Islamic banks in the world are Iranian.[29][30][31]In November 2010,The Bankerpublished its latest authoritative list of the Top 500 Islamic Finance Institutions with Iran topping the list. Seven out of te