Islamic Banking Systems and Their Characteristics Directed by the Shariah Free Essay Example, 7250 words

In order to understand the theoretical background of Islamic banking, it is first necessary to define Islamic banking. To this end, Aburime and Alio (2009: 321) define Islamic banking as A system of banking or banking activity that is consistent with Islamic law Shariah principles and guided by Islamic economics. Broadly, Islamic law Shariah principles govern the daily lives and activities of Muslims and this includes financial transactions (Anas Mounira, 2009: 124). Under Islamic law Shariah principles, all behaviour and business or financial transactions must be conducted in accordance with what is fair to all parties involved and must be consistent with ethical and religious conduct as prescribed by the Qur an and Sunnah (teachings of Muhammad) (Ainley et al, 2007: 4). Informed by the Qur an and Sunnah, Islamic banks generally commit to a prohibition against interest also known as riba (Nejatullah, 2004: 36). It has been theorized that a lot of the problems such as inflation and unemployment, associated with capitalism are connected to the practice of lending on interest (Nejatallah, 2006: 4). Islamic banking theory, therefore, dictates that Islamic banks share profit and loss with its depositors and include an element of mutuality (Jaffar Manarvi, 2011: 61). We will write a custom essay sample on Islamic Banking Systems and Their Characteristics Directed by the Shariah or any topic specifically for you Only $17.96 $11.86/page With safety/risk management as a significant rationale for banking regulation, there are two relevant theories applicable to banking regulation: positive and normative.