Middle East

Islamic Banking is and its background.

Islamic banking is a system that controls banks following the Islamic principles, which prohibit the payment of interest charges and forbid other activities that are against Islamic main beliefs. They believe that an execess of compensation doesn't include time value of money and they call it Riba.

This philosophy isn't new, it started since the beginning of the Islam, when partnerships was used in the business world and interest merelly existed. Many economists and authors replied to the traditional model of interests used by the commercial banks durind the 50's and argued that the system needed to be reorganized. Someproposed that instead of using interests it shold've benn based under profit sharings or losss. This helped tocreate the first islamic bank in the 70's. For the people who believe in Islam, interests are seen as a way of robbery, robbery that affects the entire population, that's why they also consider it as evil.

Pinciples:

Islamic banks base their system principles on giving the population loans with no interest over the money lent. Islamic banks use to invest, lend money and become a partner by sharing profits, risks and losses in their model. Financial transactions have to avoid uncertainty, risk and speculation, because business parties need to have a perfect knowledge of the monetary values and the bank is allowed to invest in activities that are not forbidden by Islam.

How they make profits?

As it was mentioned above, Islam banking doesn't make profits from charging interests, they preffer to have entrepeneural partnership where both share risk, profits etc. The profit for banks is made after a profit agreement between the two sides is arranged, they agree the way they will share the profits and the ammount of time the project will take.

Islamic banks create a partnership with its investors and lenders and both business parties agree the proportion of profits that will share after a period of time. Banks have to ensure the investors that the projects in which their money will be placed, are projects that have been well studied by financial experts and that they are productive. The banks always look to gain profits in their projects,not only for their own benefit, but also to contribute in social activities.

Ethics under Islamic law.

Ethics in the Islamic Banking system are pretty much related to what was mentioned above, tey look to gain profits, but this profits are are used to invest in social activities, things that have a good impact in the society and the environment. They believe in equity, fairness and in the wealth distribution. They try to benefit the most needed ones by giving them the opportunity of having a loan and these type of banks usually give benefits to those companies that have commitment with society and the environment.

The way for them to control wether an action is allowed or not, wether to give a loan or not, is based on monitoring the projects and the people. They have religious advisors, the ones who are encharged of giving their point of view about any project and then take the decision.

Islamic banking influence :

This system in the Middle East is helping to solve key problems of underdevelopment, by giving the opportunity to people with needs, to access into the financial market. This is motivating the development of Islamic world's economy and is seen with alot of hope. Each time this banks are gaining more space in the Islamic countries.

what is the future of Islamic Banking in terms of global expansion and growth

In the short term the Islamic Banking could experience a huge expansion, and as a fact it has been seen during the last decade. How long this process will last,it isn't known, but from my point of view it won't last long because it is a model that manages a lot of risk and if the bank fails every body who believed in it will do too.In my opinion this is a very idealistic model of how should banks be, but the truth is that this model isn't sustainable.

Bibliography:

http://en.wikipedia.org/wiki/Islamic_banking

http://www.islamic-bank.com/

http://www.islamicbankingnetwork.com/index.shtml