Middle East

Islamic banking is based on the principles of Sharia. The fundamental goal of Sharia is to establish an ethical social and economic order in which a pluralistic government can check the power of the ruling authority. It standards are communicated to Muslims through the Koran and are meant to serve as a source of guidance for the ummah as it strives to formulate the community’s fiscal and public policies (Askari et al, 2005).

Islamic Banking functions and has the same objective as any other financial entity except that it runs accordance with the law of Sharia. These philosophies are commonly accepted all over the world. The two key principle of the Sharia are: forbids the payment of interest charges for the lending and investment in activities that could be opposite to its principle.

So if they prohibit interest how they make profit?  They charge an operative fee and they do not act as lenders but they become shareholders of any project finance by them, meaning by that, they have the right to receive a percentage of the profit. Hence the revenue comes from the ethical investments and not from the interest.

An ethical investment does not go against the Sharia’s principles; those investments are harmonized with the Koran. The ones who decide whereas a investment is ethical or not is the Sharia Supervisory Board which is a committee of academic and religion advisers responsible for reviewing and approving the acceptability of an investment.

The Islamic Bank System influences the Middle East in the way that as they share almost the same religion, it is important for people from there to follow Muhammad rules. The Islamic banks are generally profitable as conventional banks. Therefore if they could make profit and please their religion at the same time, it will be perfect for them.

It is kind of hard to predict the future of Islamic banks, but in my opinion they would continue to be successful and they would gradually expand around the world. Because Muslims are too conservative and attached to their customs, as they are spread everywhere, the model would be also broad with them.

References

• Hossein Askari, Roshanak Taghavi. The principle foundations of an Islamic economy. Rome, 2005.
• Taufic Hassan et al. Efficiency of conventional versus Islamic banks: evidence from the Middle East. Bingley, 2009.
• Institute of Islamic Banking and Insurance. www.islamic-banking.com
• Photo taken from  www.yahyasheikho786.wordpress.com May 12th 2010