ISLAMIC BANKING THE FUTURE OF THE BANKING INDUSTRY
Modern bankers have been irresponsible in their operation which has led to their blame in every financial crisis. The current crisis at Wall Street was as a result of a deficit in liquidity in the United States banking system. This crisis would have been avoided if the banks had anticipated and prepared for an imminent liquidity risk. These are some of the issues that are making borrowers and investors lose their trust in the banking system all together which clearly predicts the doomed fate of non-Islamic banking.
Bankers are out there to make a fortune from the borrowers and depositors. They charge unjustified interest loans and other hidden charges which makes borrowing from banks unsustainable. Exorbitant profits and wealth created by Italian bankers supported the rebirth of painters such as Botticelli.
After realizing economic, political and cultural heights due to Central Banking and joint stock companies the Dutch promoted Rembrandt and Vermeer who were assemblers of the finest paintings in the Golden age.
Britain’s greatness was pioneered by its earlier financial revolution. The Bank of England lowered its interest rates and provided a ready market for government bonds which enabled the government to finance the expensive wars. This lowering of interest rates promoted inflation which in future caught up with the economy adversely affecting the bond holders
Countries like China that failed to develop modern monetary methods dragged behind in the 18th and 19th centuries.
Ferguson clearly says that Economies that had a combination of banking, insurance, secure property rights, bonds and stock markets performed better in the long run than those which did not.
Financial innovations have however proven risky to most of the countries that embarked on financial experimentation. A good case study would be France after the establishment of a national bank in Paris that supported a business venture to take over the great French trading companies. Loans from the bank supported the value of the shares that were issued to pay for the acquisitions. When deflation occurred the share price fell despite the banks attempt to save the situation. This collapse created a dislike of the central banking system by the French peasants who now preferred to hoard gold at home rather than deposit their savings in the banks.
The ability of banks to originate loans and sell the m to willing buyers was celebrated by regulators and economists on the basis that risks were said to be better distributed through the system and thus economic cycle was less volatile. Many people benefited from cheap credit, but this did not last long. A tragedy broke out in the summer of 2007 that changed all these great believes. In a matter of weeks the financial system was in the edge of collapse and was only saved by huge investments from the government. The innovation of modern financial system greatly compares to the national bank of France which further discredits modern banking in the eyes of the peasant investor.
The crisis of the French National bank compares to the modern bank in that Law deliberately promoted inflation of the Mississippi Company’s stock by lending huge amounts of money to speculators who bought shares at ever increasing prices, this system could not survive deflationary pressures and thus collapsed the system.
In conclusion finance is an evolutionary process and the fittest activity survives says Ferguson. Those who accumulated debts during the late boom benefited the most thus the next generation of financiers will be less ambitious and earn smaller bonuses which clearly favors Islamic Banking that operates on the principle of profit and loss thus will be the most favored banking institution in the future.
Islamic banking also known as participant banking is a banking activity that is governed by Sharia Law. It is governed under the foundation and opinions and theories of Shariah and steered by the Islamic. The two essential codes behind the Islamic banking: the prohibition of the collection of interest (even if its collection is not prohibited under the Islamic law) and the dividing of profits and losses.
Islam prohibits payment or acceptance of interest fees from loans of money. It also prohibits investment in activities that produce the forbidden goods according to the Sharia law. In earlier times these principles were used as the basis for developing the economy because they were more lenient to the borrowers. Islam believes in banking system based on profit sharing rather than interest. The modern Muslim has recognized the need for commercial banks and have proposed a banking system based on profit and loss sharing.
Interest free banking has attracted more attention because of the political interest it created in Pakistan and the emergence of young Muslim economists. The first modern Islamic bank known as Dubai Islamic Bank opened its doors in 1975 in Egypt. The initial products offered were basic and founded on conservative banking products but over the years the years the industry is starting to develop new products and services. Islamic banking is growing at a rate of 10-15% per annum and has clear signs of consistent future growth. Islamic finance is the fastest growing segment of financial system and sales of Islamic bonds have risen by 24% according to CIMB group holdings. The founding of an investment based on the Islamic policy either for institutions or personal investment purposes commences with a board spearheaded by a the Sharia, the Sharia Board. It is an assembly of scholars and academicians of Islamic origin (jurists) who vest the investment merchandise to heed and go hand in hand with Islamic law. Places from which they can get interpretation services follow a series of steps that range of administrative or authoritative power that is: the holy book of Quran, under which is the basis of the beliefs by Muslims who belong to Allah as disclosed to Allah’s prophet Muhammad back in the seventh century; the Hadiths (the Sunnah) which are the rules from the sayings and actions of the prophet;Qiyas that are academician legal conclusions; and lastly from Ijma,the consensus of the academicians of a given issue or subject. The Islamic investments are of their own kind because they are communally accountable investments as in Islam does not divide on secular or spiritual.However,there are additional challenge such as the lack of uniform vetting processes and secondary markets for this products in the vetting processes all over the Muslim places.xxxx
Principles of Islam Banking
Islamic banking serves the same purpose as the classical banking except that it operates in accordance to Sharia law. The basic principle is the sharing of profit and loss and the prohibition of interest. The common terms in Islamic banking are profit sharing, joint venture, cost plus and leasing.
In Islam mortgage transaction instead of loaning money to the buyer the bank purchases the item the bank purchases the item and sells it to the buyer at a profit which is paid to the bank in installments. Since the bank’s profit cannot be made explicit therefore there are no additional penalties for late payment. To prevent defaulting the bank asks for strict collateral and the good or item is registered in the name of the buyer since the start of the transaction.
Islam banks issue loans to companies by issuing a floating rate interest that is pegged to the company’s individual rate of return. By so doing the bank ensures that its profit is a percentage of the company’s profit generated from the utilization of that loan. Once the full amount has been remitted the profit sharing agreement comes to an end.
Islamic banking restricts the transaction involving goods that are forbidden by their faith. Some of these goods are pork, alcohol and gambling. Islamic banking in practice is not a full reserve banking system as portrayed in theory.
In the accounts for trading customers, their accounts are planned in such a way that all their essential business banking needs are met. The bank offers to its client’s expediency and recommendable security. Nevertheless, they assure their clients that their money will not be the expenditure in investing in assets of which do not comply with the Sharia law (non-Sharia)
Non Islamic banking system has by far discouraged the borrower due to the numerous hidden charges and the penalties that attract huge amounts of interest rates just in case a borrower defaults.
I believe the reason that most people are still banking in the non Islamic Banking Institutions is due to the lack of knowledge of the benefits that arise in Islamic banking. With time more and more people are going to learn and understand this benefits and when they do Islamic banking will take over the banking Industry.
From this argument it is very clear that the only way the banking systems will survive is by lowering their interest rates. This is a difficult scenario for the banking sector because by so doing it will be losing their main source of income that is profits. The only option therefore would be to leave the industry all together or start operating on the Sharia laws and when they do this the entire banking system would end up in the control of the private sector.