3 Misconceptions about Islamic Banking

Misconceptions about Islamic Banking

Islamic banking and finance consist of many laws. These laws ensure that people get an honest approach to banking without any discrimination. There are many misconceptions about Islamic banking and it’s rules and regulations. We run down the basic principles of Islamic banking here:

We can break down Islamic banking/finance into the following categories:

  • Profit and loss sharing
  • Safekeeping
  • Joint venture
  • Cost plus
  • Leasing

The basic principles behind this particular banking system have been put in place in order to be sharia compliant (Islamic). The Islamic banking system first and foremost avoids any form of riba (interest). Earning profit without bearing risks is against Islamic principles additionally. This Principle is applicable to both the workers and the amount of money you invested.

Many people often contemplate that ‘Islamic banking’ has been introduced just for the sake of Muslims, but this is a misconception. Many non-Muslims from the UK, US and even European countries like Germany had participated and supported the concept of Islamic Banking. In Asia, Maybank is one of the largest Islamic financial institutions and has been offering a wide range of Islamic banking services to individuals and companies.

Non-Muslims and Islamic Banking

Non-Muslim individuals are allowed to open an account with an Islamic Bank. They can have an Islamic banking account without the need to learn about Islam, its rules and regulations when it comes to finance. They simply need to follow the rules of the Islamic Bank they want to join.

It is beneficial to them as it will preach the divine code and message of Islam and they will be enlightened by the role of Equality and Justice portrayed in Islam.

Concept of Interest And Islamic Banking

Riba is an Arabic word, derived from the verb ‘raba’ which literally means ‘to grow’,‘inflate’ or ‘excess’. The same fictional meaning has occurred in many instances in the Quran.

However it is not every growth or increase, which falls in the category of Riba prohibited in Islam. Riba can be translated as ‘usury or unjust’ and when it comes to conventional banking and simply refers to the Interest on your bank savings. But in fact, it has a much broader sense in the Sharia law. Riba technically refers to the ‘premium’ that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. The meaning of Riba in Islam is excess on what you deserve whether it is a commodity or money.

The Hadith in Muslim states that:

Ubida b. al-Simit (Allah be pleased with him) reported The Prophet (PBUH) said: ”Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.”

There is a group of people who raise the point that Riba and trade are the same. But the opponents to this point do not agree and claim that there is a wide difference between Riba and Trade which the Quran itself confirmed.

Loan System In Islamic Banks

Islamic banks use equity participation systems in order to earn money without charging interest. This means that if bank loans money to a business, the business pays back the loan without interest, but it gives the bank a share in its profit. If the business defaults on the loan or do not earn any profits, the bank does not receive any profit either.

The bill was presented in the parliament of India to operate Islamic banks in their Country but, the reserve bank of India denied pursuing a proposal for the introduction of Islamic banking in the country.

You can take a loan and return the loan without interest in Islamic Banks. You do not have to worry about the handsome amount of interest other banks ask for their own purposes.

Loans should be returned with honesty on time.

Narrated by Abu Huraira

The Prophet (PBUH) said, “Whoever takes the money of people with the intention of repaying it, Allah will pay it on his behalf, and whoever takes it in order to spoil it, then Allah will spoil it.

Sahih Bukhari volume 3, book 41.

See here a great book on Islamic Finance