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What is Islamic Banking System and Why every Muslim needs to know about it?

Story: Islamic banking system all you need to know ; 14-11-2023;

What is Islamic Banking System?

Islamic Banking System is also known as Islamic finance or Sharia-compliant finance. Meaning, banking, and finance related activities are controlled under Islamic law (Sharia law). It has principles of fairness, justice, and transparency.

“Islamic banking system prohibits usury (riba), which is the charging of interest on loans (This can help to protect borrowers from exploitation). It also prohibits speculation and gambling. It has a transparent system, as transactions are based on clear and concise contracts (which helps avoid disputes and misunderstandings.)”

Islamic banking system runs mainly with programs like partner or, where banks allow investment of money of the depositors in business venture which are according to Shariah-compliant. Profit or loss share are returned to the depositors. The other way Islamic banking functions, is by trading, the bank trades and purchase assets, and subsequently lease or sell it.

Here are some of the top Islamic banks around the world:

Qatar International Islamic Bank, Al Baraka Bank Egypt, Saudi Arabia-based Al Rajhi Bank Qatar-based Masraf Al Rayan, Malaysia-based MBSB Bank and Hong Leong Islamic Bank (the two most efficient Islamic banks in Asia.) Qatar Islamic Bank Dubai Islamic Bank (United Arab Emirates), Kuwait Finance House (Kuwait), Maybank Islamic (Malaysia), Türkiye Is Bankasi (Turkey), Saudi National Bank (Saudi Arabia), Abu Dhabi Islamic Bank (United Arab Emirates), Bank Muamalat Indonesia (Indonesia), CIMB Islamic Bank (Malaysia.)

How Islamic Banking works?

Current accounts: No Interest is given or collected from the customers or account holders. These accounts allow customers to deposit and withdraw money. Savings accounts: These types of account holders gets a profit-sharing arrangement, meaning that they earn a portion of the bank's profits.

Investment accounts: These accounts allow customers to invest in Sharia-compliant businesses and projects. Financing: Islamic banks offer financing options as well, with murabaha (cost-plus financing) and mudaraba (profit-sharing financing).

A report by theasianbanker describes a well economical evaluation of the effectiveness and efficiency rates of Islamic Banking system, as compaired to wesstern banking system. This report states, how Qatar Islamic Banking system and its bank, has proven to be the most efficient Islamic bank among the top 50 largest of such financial institutions in the world. Example of which are Qatar-based Masraf Al Rayan and Al Baraka Bank Egypt.

Top Islamic Banks around the world?

The report depicts how Qatar's Islamic Bank has achieved steady improvement in operational efficiency in the past few years, driven by its continuous investment in digital transformation, along with strict cost management measures. The report states that how Qatar based bank has achieved a significant drop in CIR, the reports states- “the cost to income ratio (CIR) has dropped gradually from 26.6% in 2017 to 20.1% in 2020, which was significantly lower than the weighted average CIR of the world’s 50 largest Islamic banks, at 38.4%.”

The report also has a top 10 list of the most efficient Islamic Banks, according to the report, it comprises four Islamic banks from Qatar, three from Malaysia and one each from Egypt, Turkey, and the United Arab Emirates (UAE).

According to data available in public domain, Islamic banking is a growing industry, with global assets expected to reach $3 trillion by 2024.

Why Islamic Banking System is not used as standard, worldwide?

Brief Historical context: Prior to the emergence of the western powers, and their dominant global effects in terms of cultural conduct, financial and banking system, standard language (i.e. English), common attire, etc, the Islamic cultural dominance, was significant worldwide.

Such as the usage of Arabic language as standard language worldwide, and the widespread adoption of the Islamic Banking System, according to many evidence and historical writings. This was due to many large Islamic empires in the past, like Ottoman Empire and Mughal Empire.

Due to fall of Islamic empires and due to western colonialism specially British, and western countries developing their own banking system (which is interest based), western banking system, alongside other cultural influence, became a norm in general worldwide. And many Muslims gradually accepted the western banking system, though not all of them have accepted the idea.

There was no Western banking system in the Ottoman and Mughal empires at their peak. The Western banking system only began to spread to worldwide in the 19th century.

Why all Muslims need to know about Sharia way of Banking?

It's a matter of cultural values and identity for a person who follows and believes in a certain way of life. One simply needs to be educated, made aware of what his/her religion teaches about each aspect of his/her life and the activities that they conduct.

Today the cultural and identity loss is predominant, in Muslims, living in various part of the world, as many of the new generation, even do not know what is an alternate a religiously preferred way of banking is, or was it ever dominant in the day-to-day life.

Recent talks:

For the first time in their life, many Muslims have encountered the term Islamic way of banking. This was due to Russian President Vladimir Putin, who launched Islamic banking for the first time as part of a two-year pilot programme, in Russia on September 1.

Russian President Vladimir Putin signed a law introducing Islamic banking to assess its “feasibility”: reports.

Russia has an estimated 25 million Muslim population, and Islamic financial institutions have existed in Russia for long now, but this is the first time the country’s legislation has officially endorsed its launch, though it was under discussion since 2008, according to Russian officials.

Islamic banking sector has an annual growth rate of 40 percent and is the country's largest lender: According to the senior vice president, Oleg Ganeev, of Sberbank. It is expected that the value of Russia’s Islamic banking system would reach $7.7 trillion by 2025.

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