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pm | | Sharia law compliant banks (8th Dec 23 at 10:56am UTC) | | Sharia law or simply Islamic law is part of the Islamic traditions and is derived from such religious prospects of Islam as the Hadith and the Quran. This law defines every aspect of a person’s life who has chosen to follow Islamic religion and finance and banking is not an exception. Generally, banks and other financial institutions operating according to Islamic law are said to be Sharia-compliant. While all Islamic banks are operated according to Sharia law, more and more Western banks are also making sure to become Sharia-compliant and therefore entering new customer base and partners.
Differences between traditional and Islamic banking
The most important difference between the traditional banking model and Sharia-compliant banking is that Quran does not allow collecting interest or charging fees during any monetary transaction. This mainly derives from the fact that contrary to the traditional banking, Islamic law perceives money as a tool of measurement for value rather than an asset and therefore no one should receive profit from money. Meanwhile, the collection of any interest is described as usury – a practice of making immoral and unethical monetary loans that are unfair to the borrower and enriches the lender.
Islamic banks are typically governed by a Sharia Advisory Board, which consists of Islamic clerics and scholars and their main responsibility is to ensure that every activity done by the bank is in strict compliance with the Sharia law. Those who prefer Sharia law compliant banks believe that Islamic banking system is superior to the Western capitalistic banking system, mainly due to the fact that it is structured around a “strict code of ethics” based on the Quran and prohibits exploitative practices. According to the proponents of Islamic banking, this allows banking to fill an integral role in a moral society that is governed by Quran. In contrast, they see capitalism to be solely focused on profit, which incites exploitation of others and greed, which in turn leads to such Western social problems as unequal distribution of wealth and division of classes.
Meaning of Sharia law compliant banks
According to Islamic Bank USA, Sharia law compliant banks must offer products and services that are:
Interest-free,
Trade-related – with a genuine need for funds in its purest form,
Ethically directed – funds cannot be provided for pork, liquor, pornography, gambling or anything else that Islamic law considers unlawful.
Typically, Sharia law compliant banks instead of charging interest on the offered products, include a mark-up on the amount at risk. Sharia law also prohibits trading in debt, which means that compliant banks do not issue conventional bonds. Instead of interest attributed to bonds, returns are calculated with a mathematical formula that is used to link the cash flow that is generated by the asset to the asset’s cost. Additionally, Sharia law compliant banks are required to donate 2% of their profits to Muslim charities.
Islamic banking in the Western world
Islamic banking system has developed significantly during the last decade and has become a noticeable part of the international financial system. While Islamic financial system in the Western world is at a relatively embryonic stage, it has become the fastest growing international financial system’s segment.
Sharia law compliant banks position themselves as a moral alternative to Western banks and currently 75% of all Muslims in England prefer banking products that are compliant with Sharia law. But Islamic banking model is reaching beyond the Muslim community – it is looking to become the preferred option also of non-Muslims for banking transactions. In London, approximately 20% of all inquiries for Islamic banking products and services come from non-Muslims. | |
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