Dhaka,  Tuesday
15 October 2024

From conventional to ethical

The evolution of Banking through Islamic principles

Published: 08:34, 24 May 2024

The evolution of Banking through Islamic principles

Photo : Collected

Islamic Banking, rooted in the principles of Sharia'h, emerges as a distinctive financial system guided by the ethos and values of Islam. To comprehend the significance of Islamic Banking, one must delve into the core concepts that distinguish it from conventional banking, reflecting the comprehensive code of life outlined by Islam.

Islamic Banking, a system grounded in ethical principles, has its roots in the teachings of Islam. Its origin can be traced back to the early days of the Islamic civilization, where the economic and financial practices were shaped by the principles outlined in the Quran and the Hadith.

The concept of Islamic Banking finds its foundation in the prohibition of Riba (usury or interest) in Islam. The Quran explicitly condemns the practice of charging interest, emphasizing fairness, justice, and equitable distribution of wealth. These principles provided the impetus for Islamic scholars and jurists to develop a financial system that aligns with Islamic teachings.

Why Islamic banking?

The primary objectives of the Islamic economic system are centered on equal wealth distribution and social justice. These goals, crucial for a just and equitable society, remain elusive in interest-based economic systems. Islamic Banking, designed in harmony with the principles of Sharia'h, aims to bridge this gap, ensuring financial practices align with the broader societal welfare envisioned by Islam.

Defining Islamic banking

Islamic Banking is succinctly defined as banking in consonance with the ethos and value system of Islam. It is not merely a financial institution; rather, it operates under the principles laid down by Islamic Sharia'h, distinguishing it from conventional banks. The adherence to good governance and risk management rules is augmented by a commitment to ethical principles inherent in Islamic teachings.

Distinguishing features between Islamic and conventional banking

•    Foundational principles:
Islamic banking: Functions and operations are rooted in Sharia'h principles.
Conventional banking: Functions and operations are based on fully man-made principles.

•    Profit sharing and risk management:
Islamic banking: Investors are assured of profit-sharing between capital providers and users of funds, guided by Sharia'h restrictions.
Conventional banking: Aims at maximizing profit without restrictions and promotes risk-free banking where the depositor faces no risk of losing money.

•    Financial relationships:
Islamic banking: Emphasizes partnerships, creating relationships akin to creditor-debtor or investor-trader dynamics.
Conventional banking: Operates on buyer-seller relationships, devoid of the partnership element found in Islamic Banking.

•    Medium of financing:
Islamic banking: Based on asset-backed financing, discouraging commodity trading, and positioning money as a medium of exchange.
Conventional banking: Encourages commodity trading, using money as an asset-based medium of financing.

•    Profit and loss sharing:
Islamic banking: Focuses on profit and loss sharing, ensuring a fair distribution of outcomes.
Conventional banking: Guarantees interest, providing a risk-free environment for depositors, but limiting their participation in profit and loss sharing.

Islamic banking products and services
The array of Islamic Banking products and services reflects a commitment to ethical financing:

•    Partnership-based Modes of Financing: Musharaka Finance and Mudaraba Finance

•    Trade-based modes of financing: Murabaha Finance and Salam Finance.

•    Rental-based modes of financing: Ijarah Finance and Diminishing Musharaka Finance.

The origin and evolution of Islamic banking reflect a continuous journey to create a financial system that not only adheres to Islamic principles but also addresses the broader societal concerns of fairness and justice. As the world navigates the complexities of modern finance, the roots of Islamic Banking serve as a reminder of the enduring relevance of ethical financial practices inspired by the teachings of Islam.

In essence, Islamic Banking stands as a beacon of financial inclusivity, striving to create a system that not only thrives economically but also aligns with the principles of justice and equality as outlined in the teachings of Islam. As the world continues to evolve, the relevance and importance of Islamic Banking become increasingly evident, offering a paradigm shift towards a more ethically grounded financial future.

The author is the Managing Director & CEO of National Bank Limited. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.

Messenger/Fameema