Islamic Finance

A surge in Islamic financial services in Sri Lanka has seen a host of companies offering Sharia (or Islamic Law) compliant services to the market.
Recent entrants include LOLC and LB Finance. They seem to have sprung up in response to burgeoning demand for Sharia compliant financial services expected to increase from the North and East.
Amaana, Sri Lanka’s biggest Islamic finance service provider to date offers nine different financial solutions under the segments of leasing, financing, leasing and investment. Other service providers also offer pawn broking services.
A 2005 IMF working paper indicated that the markets targeted by Islamic financial institutions are largely untapped by regular commercial banks; and with a potential market of almost two billion Muslims, this explains to a certain extent the growth in the sector worldwide and why many commercial banks are hurrying to develop Sharia compliant divisions of their own.
Islamic Banking and Finance have to adhere to certain fundamental principles as laid down by Islamic law (or fiqh). It prohibits the use of interest (riba) in monetary transactions and also prohibits dealing in any item considered to be haraam (forbidden) by the word of God and the example of the Prophet (pbuh). These principles formed the basis of a “robust” economy in the Islamic world, but it was not until the late 20th century that entities calling themselves banks were established commercially in Islamic Communities.
The sector since then has seen fast growth.  The IMF paper said that the sector was growing at 10-15% yearly with signs of consistent future growth. CIMB group, Malaysia’s second largest financial service provider recently estimated that Islamic finance was the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24% to $25 billion in 2010.
In addition to prohibiting interest, Sharia law also stresses the importance of profit sharing and asset backed financing as cornerstones of Islamic finance. The original modes of financing since ancient times has been Mudarabah and Musharakah; cost plus financing and partnership financing. Other modern forms of financing such as ijarah (leasing) and murabahah (pawn broking) have been recommended by contemporary jurists to apply to areas where conventional methods may not have had been suitable. Whatever the mode, all Sharia based financing have to adhere to certain fundamental principles (Mohammad Taqi Usmani 2008); Profit Sharing-Financing does not take the form of cash advancement. In the case of Mudarabah and Musharakah. It means participating in the business and in the case of the latter, also sharing in the assets.
Profit and loss-Both financier and entrepreneur must share the loss incurred to the extent of his financing.
Ratio Determination-Partners have the right to determine the rations of sharing profits which can exceed the ratio of capital invested except in the case of a sleeping partner. Loss sharing-The loss suffered by each partner must be exactly the proportion of his or her investment.
Together with policies of not using interest and investing in things deemed forbidden by the religion, these basic tenets form the cornerstones of Islamic financing and its proponents have adapted its various forms to meet many modern finance requirements.
The foremost belief around which Islamic concepts revolve is the belief in one God and in his commandments. These commandments both set down by the Quran as well as the life and example of pbuh cover many areas of almost every aspect of a Muslim’s life. They are neither exhaustively restrictive nor are they ambiguous. Rather, it has a balanced approach to govern human life.

Capitalism and Islamic economy
The basic difference here is the exercise of divine injunction. Capitalism’s unrestricted faith in the market system where private ownership and the profit motive is given unbridled power is reigned in to a certain extent. It does not however deny the action of market forces; it only lays down some guidelines with which to regulate them. Interest, speculative transactions and the lack of ethics has undeniably caused a lot of problems and contributed to the increase in income gaps. A statement issued soon after the financial meltdown by the Vatican’s official newspaper Osservatore Romano said that, “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.”
Regulation is good, but  still causes imbalance in society simply because humans are not capable of knowing all the consequences of their decisions. The fundamental tenet then, is a religious one. This is reflected in the market structures that have emerged after decades of operation of Islamic banks.
The IMF paper cited above also said that “small Islamic banks tend to be financially stronger than small commercial banks and large commercial banks tend to be financially stronger than large Islamic banks. Further, small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not have a significant impact on the financial strength of other banks.”

25 Comments for “Islamic Finance”

  1. Psycho

    Islamic Finance is rubbish, thambiyas hoodwinking the world and charging more for so called profit sharing (we call it interest in digsuise).

    • a new convert to islam

      my psycho b4 u comment 1st knw wat islamic system is .plz check

      http://www.youtube.com/watch?v=G-dxAXR4DXQ

      the banks which used islamic banking system wernt affected by the financial crisis last n early this year.
      tats y countires like malaysia, Indonesia, brunai n other European countries are trying to adopt the islamic system with a another name

    • Dishan

      You wont be a Psycho anymore if u bend down and smell Mrs SembuKUNDIarachchi.That smell will cure you.Try for a change.She sounds like a real tart.

    • Ilankai Thamizhan

      THE LANNGUAGE USED BY PSYCHO IS UNCIVILIZED BUT WHAT IS MEANT IS CORRECT. EVEN THE OLD TESTAMENT HAS RULES ON LENDING. AT THE END OF THE DAY ONLY PROFITS ARE SHARED. WHEN A PERSON BORROWS, WHERE DOES PROFIT COME FROM? IF THE ISLAMIC WORLD WANTS TO IMPLEMENT IS FARCE IT IS THEIR RIGHT. BUT IN A SO CALLED CIVILIZED SOCIETY WE CANNOT LET THIS SCAM GO ON. IF IT IS A BETTER INSTRUMENT THEN IT CAN BE MADE UNIVERSAL

    • azath

      Psycho,
      You are hoodwinked by the western thoughts which are utterly failing.and also suffering from Islamophobia (a kind of Psychiatric condition).
      Your ignorance is exposed by saying ” interest in disguise”. Study the system in full before penning the childish comments.

    • muzammil

      I was under impession that just few more days you’ll be back in form.But
      you look pale and nearly no blood running in your veins! Thambiyas won’t
      hoodwink anyone,you know why? They only deal with hoodblanks,meaning
      hoodless! Still confused? That’s why you are still psycho.

  2. Mrs Sembakuttiarachchi

    Psycho you are so correct. Islamic fianance and Sharia law wow! yep they are trying to creep into the finance sector in disguise and preach their gospel. No Al Haj we do not need 72 virgins especially ones with their faces covered and smell baaaaad! ooooh!

  3. This is yet another white wash job the Hamabayas like to perform not only to control the rest of Third World countries but also rest of the world. If they are so clever by now they do NOT have to depend on the West for all the technical and material support.No doubt you saw the million $ worth new air craft, how the Arab pilots smashed even before it was taken delivery, yes it was brand new!!! and now a write off !!!!. This is why Mohamed used the camels and they should stick to the camels. They will be best off. They should cover not only the women in back in full, but men too, and give up sex so that the world population can be reduced..

  4. Why so much hate people.. it beats me why u cant look at things more objectively. Don’t believe everything the media feeds you

  5. guru

    Tamil people didnt creat an LTTE or other terror groups. Its people such as the above three racist who are full of hatred and jealousy. These people must be eliminated not only from the society but from this world. If not these racist elements will saw and spread this virus again.

  6. san

    In my opinion, Islamic Finance is some sort of banking system. There is no harm having such system in Sri Lanka if there will be a benefit for Sri Lankan. Even Europeans and Americans are going to have such banking systems as per media. It does not make any different how it comes or with what name it comes. First the Sri Lankan government has to see and research the benefit of this banking system. Then to be promoted if there is any good for the country.

  7. azath

    This article deals mainly with Islamic Banking which is part of Islamic economy or finance. It is really a vast subject itself.

    Islam is a way of life giving explicable solution to the problems of the mankind all the time. Islamic economy proceeds to define a framework so that justice and fairness is ensured for all concerned. provides ways to eliminate the inequalities whereas the interest based economy widens the gap.

    Islamic economy is neither socialistic nor capitalistic. it is people friendly, unique. it is fully applicable and compatible in all era. simply because it was prescribed by Almighty Allah the all wise and knower and was successfully implemented by Prophet Mohamed PBUH, an all time good.

    Islamic Banking is the only system could provide courageous, viable solutions for the modern challenges and patch of economic recession the world undergoes now where the conventional banks which run on interest and usury.

    I earnestly request all of you to study the system in an unbiased manner than just slander and mock at the Islam.

    • Kris

      Please listen to an intellectual Arabian Muslim woman on YouTube. Her name is Dr.WAFA SULTAN. Click on google and watch ‘ wafa sultan’s introductory first video’. Examine the system to have a fair view!

  8. Marlon

    Mr Azath – Some of the above comments are from few racists. They dont care to read the article in order to analyse if its good or not, They only love to give their racist comments and show their ignorance and their heart full of hatred. People of this nature are failures.

  9. mohamed asfar

    psycho, mrs. semb, ranjith gamini, i never imagined you people can carry this much hatred towards muslims. it is really frightening to know people like you living among all these decent, peace loving people. this article is about a finance system. all these finance companies are registered with the central bank. sri lanka will benefit immensely since more investments are coming through islamic finance system. when your hearts are filled with hatred and jealousy you won’t be able to think right and get the facts clearly. marlon, san, guru i salute you guys for the positive comments and i know we are the winners. RACISTS WILL NEVER WIN IN A DECENT SOCIETY LIKE OURS.

    • muzammil

      It’s not hatred and jealousy.IT IS HATRED AND ENVY.Envy is different from
      jealousy although it sounds like similar.

  10. Rose

    Well, a good article. But some very bad comments from our usual ignorant group. This system is successfully implemented in many countries.

    • muzammil

      At least in this globe,we hear and see something different is happening in
      the world finance system,even slightly different in tone.Shouldn’t we try it on
      our soil? Great Britain and USA and many more are experimenting.Those
      who are ill conceived should find through reading history,that the banking
      system is not the brainchild of the west.It belongs to muslim finance invent.

  11. I Hussein

    Mrs Senbukuttiarachchi – You didnt even stick to the subject. You have been waiting for a oppotunity to show your true colours. Psycho at least, although he too made racist comments, was critising the system while you were talking total crap. Your upbringing your class your education backround maybe such.

    Its clear that you dont have the slightest idea about this system. If you dnt know something its better to keep shut than opening your catostphic mouths.

    I was under the impression that we all are trying to eleminate racism and hatred among us. Its good to know that still there are venomous people like you around.
    I dont see any difference between Prabakaran & You. Same idiology! Ilankai Thamilan will be an ideal sidekick for you with that other plonker.

  12. MOHAMED ASFAR

    bro muzammil, you are absolutely right. i was wrong. yes it is envy and not jealousy. these ignorant people are utter disgrace to the whole mankind.

    • Jehan Usman

      Yes I too agree that its ‘Envy’. Envy usually involves wanting other individuals/peoples Wealth, Socio-economic status or Beauty.

      These above people will live with it and die with it, no remedy or cure! Its their KARMA.

  13. The ultimate goal is to be an ideal Islamic financial and economic system which requires the consent Poad for their institutional structures, implementation of social consensus and political will and commitment for implementation. Since the ideal Muslim countries is to take well-planned transition to the ideal system.

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