Friday, January 23, 2009

Basic Features of Islamic Banking

A review of Islamic banking in Malaysia reveals specific features which are different to conventional banking. The first feature is interest free. Interest (al-riba) is totally prohibited under the Islamic law. Nevertheless, the Islamic law recognises contract of sale (al-bay’). Thus, the Holy Qur’an for instance clearly recognises contract of sale and prohibit interest (wa ahal Allah al-bay’ wa harram al-riba). This is different to conventional banking which recognises interest for instance in money-lending. The second feature is free of uncertainty. Uncertainty (al-gharar) in contract is prohibited under the Islamic law based on evidence from the Holy Qur’an and the Sunnah. For instance, one of the Sunnah indicates that the Prophet Muhammad (s.a.w) prohibited contract of sale of fishes in the sea without firstly ascertaining the amount due to uncertainty. Thus, such contract may involve negative elements such as fraud, misrepresentation, and undue influence. The third feature is profit and loss sharing. Profit and loss sharing can be proved by referring to the management of Islamic banking. The management provides products which involve profit and loss sharing such as al-wadi’ah, al-mudharabah, and al-bay’ al-muajjal. For instance, in al-mudharabah it involves profit and loss sharing between the investor (rab al-mal) and the manager (al-mudharib). The fourth feature is fixed in payment. For instance, in one of the Islamic banking products known as deferred payment sale (al-bay’ bi thaman ajil), the profit margin must be fixed unless there are exceptional circumstances allowed under the Islamic law. Nevertheless, under conventional banking the margin is not fixed and changeable based on current worldwide economic turbulent. The fifth feature is free of lender borrower relationship as adopted by conventional banking. This is to ensure that Islamic banking is interest free. Thus, a new relationship may be created as allowed under the Islamic law such as investor manager relationship. In short, the above features are changeable and can be varied to suit times and changes because the Islamic Banking Act allows such change and variety. Nevertheless, features under conventional banking are fixed and cannot be changed because the Banking and Financial Institution Act prohibits such change and variety.

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