Islamic Banking and Financing System


From the point of view of banking and finance, the international baking industry can be stated that is quite equipped and can yield benefits from the Islamic banking system which is quite helpful in the context of establishing a business in the Islamic world. The concept of the Islamic banking system is developing for a couple of decades now. It could be mentioned that Islamic banking is a different approach to conventional banking and financial institutions. This is because the fundamentals of Islamic banking and financial specifications that based on religious norms and regulations. It could also be mentioned that behind the formulation of Islamic banking and financial institutions the major reasons were instrumented by demography, historical and political influences.


The major financial instrument of the Islamic banking and financial institutions could be enumerated as Sukuks. The term Sukuk is an Arabic word that is identical to the aspects of a financial instrument and is an equivalent instrument such as a bond under the Islamic perspective of banking. But contrary to the usual financial instrument Sukuk is different as there are no fixed incomes as under the laws of Islam interests are seen as a crime. Therefore as an alternative, it has been instrumented to use such non-tangible or tangible assets that are could be classified according to the basic non-tradability or credibility. But once again, under the principles of Islam, these formulations could only be used in the secondary market. (Syyed 2007)

According to the estimation of the ‘An introduction to Islamic finance: theory and practice’ published in 2007, there is around $521 billion worth of financial assets that are circulating in the financial market as per year ending March 2005. The entire amount of this investment regulated by principals of Islamic investment plans could be enumerated that the entire procedure is regulated by the moral and spiritual obligations of the ‘Shari’ah’. (Iqbal 2007)

Islamic financial instruments in GCC

Therefore it is seen that the Islamic financial instruments traded on GCC financials markets are huge and there are a number of countries that regularly use this form of banking. The countries can be enumerated as USA, UK, Yemen, UAE, Turkey, Tunisia, Switzerland, Sudan, Sri Lanka, South Africa, Senegal, Saudi Arabia, Russia, Qatar, Palestine, Pakistan, and around 150 countries all over the world. Malaysia is one of the key players in this form of banking. (Iqbal 2006)

Alongside, Dallah Al Baraka (Malaysia) Holding Sdn Bhd, Malayan Banking Berhad (Maybank), Kuala Lumpur, Islamic banking & Takaful Dept, Bank Negara Malaysia, United Malayan Banking Corp. Berhad, Kuala Lumpur, Labuan Offshore Financial Services Authority (LOFSA) and Lembaga Urusan Dan Tabung Haji (Fund), Kuala Lumpur are the few most important financial institutions of the country. (Arthur 2007)

The financial institutions that that deal with the instruments can be enumerated as International Islamic Financial Markets, Mudaraba Companies, Takaful Companies (These are basically insurance companies), Islamic Mortgage Companies, Islamic Windows, Islamic Investment Funds and Banks, and Islamic Banks.

Under these institutions, there are different plans such as Mudaraba which are basically Capital trust financing where the basic implementation is the contact that accumulates the capital along with the cost. However, there are also other schemes that are marked up. Then there are also other plans under which leasing comes into consideration. This is called Ijara. There is also another technique that is defined Ijara was Iktin way which is basically the contract of hire purchase.

Key Differences between Conventional Banking and Islamic Banking

Islam forbids making money on money, but it allows you to rent, and to trade, and from these net proceeds dividends are given to the bank customers. Conventional Banks make money on money, by keeping the money as fixed deposits and other various methods and pays interest in simple, compound methods. This is the key difference between conventional banking and Islamic banking techniques. (Iqbal 2006)

Several institutions operate under the principles of Takaful with is actually insurance law under the Islamic banking and financial system. Under these institutions, there are different plans such as Mudaraba which are basically Capital trust financing where the basic implementation is the contact that accumulates the capital along with the cost. However, there are also other schemes that are marked up. Then there are also other plans under which leasing comes into consideration. This called Ijara. There is also another technique that is defined Ijara wa Iktin wa which is basically the contract of hire purchase. (Asif 2005)

It can well be stated that Islamic fund and bond specified in today’s world are an extremely important factor for any individual or social establishment within the parameters of Islamic world. This is where instruments like Islamic fund and bond come into play. The company offers various modes of social systems based primarily on the developments of dynamic and ever changing society. They negotiate the social developments well enough to formulate systems that would help the researcher to monitor the needful areas. (Iqbal 2006)

The basic concept of the events regarding their market structure is to become the leading supplier of materials. Alongside, it is the mission to become the best possible that would be responsible to employ every arrangements of events that would be at par with the satisfaction limit of the most demanding customer. Similarly, Islamic fund and bond strategy analysis of their successes and failures of their strategy hold its belief to become the most developed sector in the perimeter of financial section. Alongside, the organizers want to become the leader in the area of installation and support of integrated event with a commitment to total customer satisfaction. Broadly speaking the financial organizers’ concept of business is based on these firmly stated principals. (Hood 2006)

Advantages and disadvantages

The basic limitations of these plans are based on the contracts between the parties but the over all scenarios are based on the principals of Islam where a financial instrument like Musharaka is treated as long termed investment under the parameters of equity arrangement. The capital supplied in this case is the bank and the clients. The profit in this case is shared among the concerned parties in according to prior agreement whereas the loss is shared in accordance to the capital invested. On the other hand another financial instrument like Mudaraba is treated as a financial credit on a short termed basis. Here the capital is supplied by the bank and the investor. The profit in this case is shared among the concerned parties in accordance to the agreed ratio and the loss is bearded by the investor alone. (Iqbal 2007)

Therefore it could be termed that the advantages and the disadvantages along with the limitations of the market are based on different aspect of the Islamic law but in an over all sense this system is working quite well and the turn over and the volume of the entire formulation seems to develop over time. Further more it can be enumerated that the success of the GCC market is not only based on the religious beliefs but it has its financial values too that enables the uses to enjoy certain notion of tax free up to a limit and it works fine under controlled environment of the finance sector.

Islamic Banking in International scenario

In the greater economic concept it could be stated that Islamic Banking in International scenario is well aligned with the development of the outer world. In economics, a wide description is that globalization is the union of prices, wages, products, profits and rates of interest in synchronization with developed nation norms. Globalization of the financial system depends on the position of international business, human migration, incorporation of pecuniary markets, and mobility of capital. (Iqbal 2006)

The International Monetary Fund observes the increasing financial interdependence of countries all over the world through rising quantity and multiplicity of cross-border dealings, gratis international capital flow, and comparatively faster and extensive dissemination of technology. As a result, Islamic Banking and finance is well aligned o fit into the International financial scenario in near future. (Hutt 2001)


In contemporary economic scenario the prevailing trend is expansion in the global market. Global market expansion is nothing but a concept of serving customers beyond the limits of domestic market and in economic scenario considered a key growth strategy. Global market expansion is a business reality that every company encounters at some point in its evolution. The companies, which are looking for sustainable ways to grow and diversify their revenue streams, consider global expansion as a strategic option.


Arthur, D. (2007) ‘A Conceptual Model of the Corporate Decision-Making Process’ Journal of Financial Management, vol. 3 no.11, pp. 223-233.

Asif, M.A.L. (2005) Islamic Banking and Financial Institutions: The Progress and Probability; Auckland, Book Resonance.

Hood, J. (2006) ‘Financial Management systems in UAE’, Journal of Risk Research vol.6 no. 3, pp. 233–251.

Hutt, M. (2001) Business Financial Management: A Strategic View of Industrial and Organizational Markets, Philadelphia, Harcourt Collage Publishers.

Iqbal, D. (2006) Birth of Islamic Banking; Part II, Wellington, HDT Ltd.

Iqbal, Z. (2007) An introduction to Islamic finance: theory and practice, Dubai, John Wiley & Sons (Asia).

Syyed, S. (2007) Thinking and Acting in Islamic Finance Market, Kolkata, ABP Ltd.

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