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Islamic Banking and Economics: Concepts and Instruments, Features, Advantages, Differences from Conventional Banks, and Contributions to Economic Growth

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Abstract

The aims of the paper is to narrow the knowledge gap on Islamic banking and economics through analyzing concepts, instruments, features, significance, and contributions to economic growth and its difference from conventional banks. Islamic Banking is guided by shari’a law which derived from the holly Qur’an (Allah’s revelation) and Sunnah of the prophet Muhammed (Peace be up on him). Definitions, concepts, and instruments guiding Islamic Banking are clearly presented in this paper. The characteristics features of Islamic banking are divinely sourced, shari’ah compliant banking system, rich with numerous financial concepts, riba (usury) free banking system, garar (uncertainty) free banking system, prohibits injustice, and enjoys benevolence in transactions. Islamic banking is also advantageous over conventional one due to its more efficiency in operations, stabilize the economy, less moral hazard, and conveniences in poverty alleviation. Islamic banking is different from conventional one, with its emphasis on risk sharing and, for certain products, collateral-free loans, is compatible with the needs of poor and microentrepreneurs which promotes entrepreneurship, and hence, expanding Islamic banking to the poor could foster development under the right application. Islamic banking also offers loan products based on intangibles such as a businessperson’s experience and character. Bonds both Islamic bonds (sukuk) and conventional bonds are another deal of this paper. The sukuk market is the fastest growing area of Islamic finance. A major difference between the two kinds of bond is that conventional bond issuers pay interest to investors at regular intervals, whereas sukuk issuers share profits and losses with the parties to the business transaction. In addition, Islamic banking contributes more for economic and business growth like other conventional banks especially in rapidly growing interest of using Islamic banking due to its services.

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Notes

  1. See Samira Saya definition of Islamic banking, summer 2006.

  2. Iqbal M. and Molyneux P., Thirty years of Islamic banking, p. 27

  3. Omar (2013). Islamic banking and finance, https://ebookcentral.proquest.com/lib/haaga/reader.action?docID=1336760. (6/2017)

  4. For more detail, see Altiby (2010).

  5. Ibn-Qayyim (2003). Zad al-ma’d hadyu khayr al- ‘Ibad. Bayrut: Dar al-Fikr

  6. Chapra (1992). Islam and the economic challenges. Leicestershire, UK: The Islamic Foundation and International Institute of Islamic Thoght (IIIT).

  7. Qur’an (An-Nisa’, 4: 161): Translation

  8. Samira saya (2006)

  9.  Samira saya (2006)

  10. For example, see Chapra (1998), Schaik (2001), and AAOIFI (2010).

  11. El-Galfy and Khiyar (2012): Islamic banking and economic growth. The Journal of Applied Business Research – September/October 2012 Volume 28, Number 5

  12. See Schaik (2001), Alam (2003), and AAOIFI (2010)

  13. AAOIFI (2010). Accounting, Auditing and Governance Standards for Islamic Financial Institutions

  14. Pomeranz (1997)

  15. Ali (2004)

  16. AlMawseli (1963), Al-Gzaairi (1979), Al-Jinde (1986), and AAOIFI (2010)

  17. See for instance, Al-Shirazi, Vol. 1; Ibn Rushd, Vol. 2; Ibn Aanas, Vol. 4; Al-Kasani, Vol. 5; and Ibn-Qudama, Vol. 4

  18. Al-Qaradawi (1987), Shehatah (1987), El-Galfy (1991), and Suleiman (2000)

  19. Prabakaran and Premkumar (2019): Islamic Banking Fundamentals and Contemporary Trends. IJRAR19J1583 International Journal of Research and Analytical Reviews (IJRAR) www.ijrar.org, © 2018 IJRAR, January 2019, Volume 6, Issue 1, www.ijrar.org (E-ISSN 2348–1269, P- ISSN 2349 5138)

  20. Prabakaran and Premkumar (2019): Islamic banking fundamentals and contemporary trends. IJRAR19J1583 International Journal of Research and Analytical Reviews (IJRAR) www.ijrar.org, © 2018 IJRAR, January 2019, Volume 6, Issue 1, www.ijrar.org (E-ISSN 2348–1269, P- ISSN 2349 5138)

  21. Prabakaran and Premkumar (2019): Islamic banking fundamentals and contemporary trends. IJRAR19J1583 International Journal of Research and Analytical Reviews (IJRAR) www.ijrar.org, © 2018 IJRAR, January 2019, Volume 6, Issue 1, www.ijrar.org (E-ISSN 2348–1269, P- ISSN 2349 5138)

  22. Look at AAOIFI (2003)

  23. Mahmoud Amin El-Gamal, (2006): Overview of Islamic finance • Office of International Affairs Occasional Paper No. 4 • June 2006 Mahmoud Amin El-Gamal is Professor of Economics and Statistics at Rice University. He is Chair of Islamic Economics, Finance and Management in the Department of Economics. From May 2004 until December 2004 he was Islamic Finance Scholar-in-Residence at the U.S. Treasury Department.

  24. For more detail take a look of this link: https://www.researchgate.net/publication/272236489

  25. Rahul Dhumale and Amela Sapcanin, A technical note, An application of Islamic banking principles to microfinance

  26. See the work of Salman Sayed Ali (2011) to enrich the paragraph if necessary for you.

  27. Abdel Hamid Abdouli (1991) said more on this area you can take a look to improve your knowledge of this issue

  28. See Nidal El-Ghattis (2011) to add more information

  29. See for detail, AAOIFI (2003)

  30. Muatuz (2017): Islamic banking and finance. Haaga-Helia, University of applied sciences. Bachelor’s Thesis Degree Programme in Finance and Economics.

  31. , 26 Abiodun (2020): Islamic banking system: Concept and features. Post-graduate student, Al Hikmah University, Ilorin. Contact address: 9, Titilola Adegboyega Street, Igbe-laara, Ikorodu, Lagos, Nigeria. Email address:jumahabiodun@gmail.com,

  32. Iqbal M. And Molyneux P, thirty years of Islamic Banking, pp.,27

  33. Suratu-Shurah Quran 42 vs13: Alhilali M.T and Khan M.M., Translation of the meanings of the noble Quran in the English language, King fahd complex for the printing of the holy Quran, Madina, 1418 A.H, chapter 42 vs. 13.

  34. Suratul-Baqarah Quran 2 vs. 278. Translation by Alhilali M.T and Khan M.M, Quran 2 vs. 278.

  35. Suratul-Baqarah Quran 2 vs. 195. Translation by Alhilali M.T and Khan M.M., Quran 2 vs. 195.

  36. Abiodun (2020): Islamic banking system: Concept and features. Post-graduate student, Al Hikmah University, Ilorin. Contact address: 9, Titilola Adegboyega Street, Igbe-laara, Ikorodu, Lagos, Nigeria. Email address:jumahabiodun@gmail.com,

  37. Have more understanding from Iqbal et al.

  38. This hadith is recorded by Abu Daud in his Sunan, the book of judgment, the chapter of reconciliation, Hadith no 3120.

  39. This Maxim is cited in Ibnu Taymiyyah’s work “Alqawaidu-Nuraniyahfiqhiyyah” p. 261.This maxim is a controversial maxim although Ibn Taymiyyah supported it. For more clarification on this maxim, see As-Suyuty A.A., Al-ashbau wanathair, Darul-kutubi- ‘ilmiyyah, 1990, vol., 1, p. 60.

  40. Ibn Taymiyyah A.H (2000), Alqawa’idu-Nuraniyah-alfiqhiyyah, Daru-Ibni-jawzi, Saudi Arabia, 1422,170.

  41. Al-Qardawi (2007), Alhalal-wal-Haram, maktabatu wahbah, Cairo, 29th edition, p. 23.

  42. Iqbal M. And Molyneux P, Thirty years of Islamic banking, p. 27

  43. See Jumah H.A.

  44. An-Naysabury,M.H, Sahih Muslim, The book of transactions, the chapter prohibiting stoning sales and sales with element of uncertainty, Hadith No1513, Vol, 2, DaruTawfiqiyyah, Cairo, N.d, 40.

  45. As-Shawkani (1999), Naylul-awtar-sharhmuntaqa-akhbar, Vol, 3, Maktabatui-iman, Cairo, 179.

  46. Referring to this Hadith “Abdullah bn Mas’ud related that the prophet ﷺ said:’Do not sell fish while in the water as that constitutes (the prohibited) uncertainty}. This hadith is recorded in the Musnad of Ahmad hadith No 3676 but adjudged weak by scholars of hadith. See: As-Shaybani A.H (edited by Al-Arnaut S. Et al), Al-Musnad, Vol, 6, Mu’assasatu-Risalah, 2221, pp. 197–199.

  47. An-Nawawi (2003), Sahih Muslim Bisharhi- Nawawi the book of transactions, Hadith No1513, Vol,10,Darul-manar,Cairo, 120.

  48. An-Nawawi (2003), Sahih Muslim Bisharhi- Nawawi the book of transactions, Hadith No1513, Vol,10,Darul manar, Cairo,120.

  49. Suratu–Fusilat, Q: 41 verse 46. Translation by Alhilali M.T and Khan M.M., Q: 41 verse 46.

  50. An-Naysabury, M.H, Sahih Muslim, Vol. 2, The book of good deeds and manners, the chapter on prohibition of injustice, Hadith No 2577.

  51. Suratul-Mutaffifun, Q: 83 verses 1–4: Translation by Alhilali M.T and Khan M.M., Q: 83 verse 1–4.

  52. Suratu-Rahman Q: 55 verses 7–9: Translation by Alhilali M.T and Khan M.M., Q: 55 verse 7–9.

  53. See Jumah H.A.

  54. Suratul-Qasas Q: 28 verse 77: Translation by Alhilali M.T and Khan M.M., Q: 28 verse 77.

  55. Suratu-Nahl Q: 16 verse 90:Alhilali M.T and Khan M.M., Q: 16 verse 90

  56. Algazali M.M, ihyahu’ulumidin, volume 1, p. 517.

  57. Algazali M.M, ihyahu’ulumidin, volume 1, p. 517 as summarized by Rafik Isa

  58. For more detail, see (Goaied & Sassi, 2020; El-Galfy & Khiyar, 2012)

  59. See Alshammari (2003) and Al-Jarrah and Molyneux (2005)

  60. See Goaied and Sassi (2020).

  61. See Goaied and Sassi (2020).

  62. See Dusuki (2008).

  63. See Al Quran (28: 77).

  64. Chapra (1992).

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Acknowledgements

First of all, I thank the Almighty Allah for his merciful support. Next, my families share special thanks for their support and appreciation through guiding me to write on Islamic banking especially for my wife and son for their patience when I left them alone during this paper preparation. Finally, Wollega University is acknowledged for its facility.

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  1. Faculty of Resource Management and Economics, Department of Agribusiness and Value Chain Management, Wollega University, P.O. BOX: 395, Nekemte, Oromia, Ethiopia

    Nasir Ababulgu Abasimel

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Abasimel, N.A. Islamic Banking and Economics: Concepts and Instruments, Features, Advantages, Differences from Conventional Banks, and Contributions to Economic Growth. J Knowl Econ 14, 1923–1950 (2023). https://doi.org/10.1007/s13132-022-00940-z

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