Islamic finanace an analysis of compaitibility of its objectives and achievements

Abstract

Islamic finance is finance under Islamic law (or Shari ah) principles. The basic sources of Shari ah are the Qur an and the Sunna, which are followed by the consensus of the jurists and interpreters of Islamic law. The central feature of the Islamic finance system is the prohibition of interest (or riba). The strong disapproval of interest by Islam and the vital role of interest in modern commercial banking systems led Muslim thinkers to explore ways and means by which commercial banking could be organised on an interest-free basis. newlineIslamic financial institutions are relatively recent creations: one of the first Islamic banks was set up in Egypt in 1963. Although the origin of modern Islamic banking was in Egypt, it probably would not have developed as an important financial force without the strong support of Saudi investors. The Islamic Development Bank (IDB) was established in 1975 and gave momentum to the Islamic banking movement. It was the first time in modern Muslim history that an international financial institution committed itself to conduct its activities in conformity with the Shari ah. Instead of working on the basis of interest, the bank was authorized to levy a service fee to cover its administrative expenses. Since the creation of the IDB, a number of Islamic banking institutions have been established all over the world and some countries have taken the necessary steps to organize their banking systems along Islamic lines. The first private Islamic commercial bank, the Dubai Islamic Bank, was founded in 1975. The main principles of Islamic finance include: (1) the prohibition of taking or receiving interest; (2) capital must have a social and ethical purpose beyond pure, unfettered return; (3) investments in businesses dealing with alcohol, gambling, drugs or anything else that the Shari ah considers unlawful are deemed undesirable and prohibited; (4) a prohibition on transactions involving masir (speculation or gambling); and a prohibition on gharar, or uncertainty about the subject-matter