The activity of Islamic banking system

seems that the history of interest-free banking could be divided into two parts. First, when it still remained an idea;

The activity of Islamic banking system

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to continue on the old basis. In Iran, certain administrative steps were taken in February 1981 to eliminate interest from banking operations. Interest on all assets was replaced by a 4 percent maximum service charge and by a 4 to 8 percent profit rate depending on the type of economic activity. Interest on deposits was also converted into a guaranteed minimum profit. In August 1983 the Usury-free Banking Law was introduced and a fourteen-month change over period began in January 1984. The whole system was converted to an interest-free one in March 1985.subject matter of writings and conferences in the eighties have changed from the concepts and possibilities of interest-free banking to the evaluation of their performance and their impact on the rest of the economy and the world. Their very titles bear testimony to this and the places indicate the world-wide interest in the subject. Conference on Islamic Banking: Its impact on world financial and commercial practices held in London in September 1984, Workshop on Industrial Financing Activities of Islamic Banks held in Vienna in June 1986, International Conference on Islamic Banking held in Tehran in June 1986, International Conference on Islamic Banking and Finance: Current issues and future prospects held in Washington, D.C. in September 1986, Islamic Banking Conference held in Geneva in October 1986, and Conference Into the 1990s with Islamic Banking held in London in 1988 belong to this category. The most recent one is the Workshop on the Elimination of Riba from the Economy held in Islamabad in April 1992. [3] Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies. The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in 1978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia.

Currently the world market for Islamic financial services has been growing considerably. The development of Islamic finance in the world and their stability during the global financial crisis, growing demand for Islamic financial products among population, and increasing need for the investments to real sector created favorable conditions for the industry development in Kazakhstan. Now Kazakhstan takes the leading role among the CIS countries and Central Asian region in the development of Islamic finance. One of the necessary conditions for a nations effective economic development is a vigorous investment policy that pursues development of industries, support of social welfare systems, introduction of new technologies, and promotion of competitiveness. In this regard, one of the priority directions of the Kazakhstan governments economic policy is strong support for investment activities and creation of a favorable investment climate in the country.recent global financial crisis has revealed an acute problem of insufficient liquidity that has impacted the development of investment processes across the world. The inflow of foreign direct investment to Kazakhstan decreased by 20% in 2009. In this connection, Kazakhstan welcomed Islamic financing as an additional source of funding that proved its sustainability during the crisis.

Chapter II. Financial analysis of Islamic banks activity


Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah. The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of Riba. The main implication of the Shariah rules is that Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus, ethical investing is the only acceptable form of investment. In addition, financial transactions are structured to reallocate risk-sharing and profits by using the concepts such as Murabaha (cost plus), Musharakah (joint venture), Mudarabah (profit sharing), Wadiah (safekeeping), and Ijarah (leasing). , in an Islamic loan transaction, instead of loaning the buyer money to purchase the item, an Islamic bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that this profit cannot be made explicit and therefore there are no additional penalties for late payment, Islamic banks use the concept of Murabaha to protect itself against default, by asking for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. Another approach applied by Islamic banks is Musharaka where they lend their money to companies by issuing loans in a way that the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is completely repaid, the profit sharing arrangement is concluded. Further, Mudarabah is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. In this transaction, an owner entrusts funds to a trustee, who returns the principal and a share of profits after using the funds for a specified purpose. Such participatory transactions between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income. In the case of Musharakah, the joint venture which allows partners to share losses based on the proportion of their capital contributions; And in Ijarah, the transaction allows a bank to purchase equipment or machinery and lease it to clients who may ultimately take absolute ownership. [4], exchange transactions can be for immediate or deferred exchange. Yet, it is recommended that future contracts be evidenced in writing. Spot transactions need not be evidenced in writing but witnesses are recommended. And the item for sale should be under ownership of the seller and in his physical or constructive possession at the time of contracting the sale. However, Islamic banks may agree to sell defined goods to the customers which they have not yet purchased provided that it does not involve Gharar. Therefore, in Salam and Istisnaa transactions, where a price is paid at the time the contract is formulated, but delivery takes place at a future date, goods must be defined, quantified and available in the market at the agreed time of delivery.

Generally speaking, all interest-free banks agree on the basic principles. However, individual banks differ in their application. These differences are due to several reasons including the laws of the country, objectives of the different banks, individual banks circumstances and experiences, the need to interact with other interest-based banks, etc. In the following paragraphs, we will describe the salient features common to all banks.

Deposits from savers are an important source of financial strength for the Islamic banks. They use it to increase their capacity for financing operations and thereby increase profit for the shareholders. Islamic Banks raise funds generally based on Amanah or Wadiah arrangements, on Mudarabah and on Wakalah for Fund Management. There are two main bases of mobilization of deposits by Islamic banks that are Current account deposits and Savings deposits. Banks may also get permanent or redeemable equity capital through investment deposits that practically take the form of a running partnership between the depositors. Depositors in Islamic finance can be compared with investors/shareholders in companies, who earn dividends when the investment makes a profit or lose part of their capital if the investment posts a loss. The contractual agreement between depositors and Islamic banks does not pre-determine any rates of return, it only sets the ratio according to which profits and losses are distributed between the parties to the deposit contract. In Islamic banks, Current Account deposits are based on the principle of Amanah / Wadiah or that of Qard. In the first type, interest-free deposits are held by the banks either in trust (Amanah), or in safe-keeping (Wadiah). Under Amanah arrangement, the Islamic bank treats the funds as a trust and cannot use these funds for its operations; it does not guarantee the refund of the deposit in case of any damage or loss to the Amanah resulting from circumstances beyond its control. In Wadiah, the bank is deemed as a keeper and trustee of funds and has the depositors permission to use the funds for its operations in a Shari´ah compliant manner. Deposits under Wadiah take the form of loans from depositors to Islamic banks and the bank guarantees refund of the entire amount of the deposit. While these deposits can be withdrawn at any time, the depositors have no right to any return/profit on such deposits. However, depositors, at the bank's discretion, may be rewarded with a Hibah provided such gifts do not become a custom or a permanent practice. In the second type, the client gives the bank authority to use current accounts funds to invest in its operations, in that case, the deposit amount is considered as a non-interest loan by the depositor to the bank. The bank has the obligation of to return the credit balance upon demand clients who have no right to receive any profit on their balances. The liability to return a Qard deposit is not affected by the banks solvency or otherwise. [5]

Savings deposit accounts operate in a different way. The depositors allow the banks to use their money invested in profitable business ventures which are legal and Shari&#

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