Islamic finance is a financial system governed by the rules of the Holy Quran. According to its teachings, the only trustee of Allah’s wealth is human and, therefore, should be managed according to his commands. Islamic banks have been using the loss and profit-sharing principle. The Islamic finance system is expected to meet the expectation of the Muslims by providing adequate financing means. Sharia laws do not agree with the legality of interest (Kepel, 2006).
History of Islamic Finance
Islamic banking is a monetary system that had been consistent with the values of sharia and the financial entities are governed by Islamic ethics. The finance began in the early 1960s with the first Islamic bank, Mit Ghamr Islamic Bank being established in 1964 in Egypt. However, the first bank to be completely grounded on Sharia codes was created in 1974 by the Organization of Islamic countries (OIC). The inflow of petrodollars following the 1973 oil crisis advanced the growth of the Islamic banking sector. The Islamic Development Bank was established with the aim to offer capital to ventures in the member states. Kepel (2006) revealed that a total of 144 Islamic monetary institutions had been opened by 1995.
Products Offered by Islamic Banks
Mudaraba is a contract whereby one party gives cash to another party. The receiving party trades with it and they share any profit made based on a pre-negotiated ratio and in case of loss only the investor loses money. Musharaka is another contract, a joint venture offering business skills and sharing the profit or loss of the venture. In Murabaha, an Islamic financial establishment vends a commodity to a customer inclusive of the proceeds’ margin, and both participants know the cost and the profit upfront. In a Salam contract, the purchaser pays for properties in full earlier, and the merchandise is delivered later. Ijara contract is a transaction involving a lessee and lessor. A lessee pays a fee after returning an asset to the lessor. A Wadia contract enables a property owner to give the property to another party for safeguarding which manages the current accounts and savings accounts of the bank. A Hawala is a debt that is transferred from one person to another. The bank has used these contracts to pay money between persons (Nomani & Rahnema, 1994).
Principles of Islamic Banks
Islamic finance has followed some principles that make it different from conventional finance. Sharia law forbids the receipt of interests known as riba, which is considered as making money from money. They have also been shunning investing in businesses contrary to Islamic principles as the companies tangled with alcohol, tobacco, and pornography. These foundations have avoided gambling and keeping away from transactions that are uncertain (Rammal & Zurbruegg, 2007).
The Kingdom of Bahrain
The first Islamic bank in Bahrain, the Bahrain Islamic Bank (BisB) founded in 1979 (Bahrain Islamic Bank, 2014). To date, it has the biggest number of Islamic financial institutions. Currently, there are 7 Takaful (Islamic insurance companies) and 2 Islamic reinsurance companies in the Nation. It has been offering numerous services such as investment advice, capital accumulation, and money markets. Besides the various Islamic financial institutions, Bahrain also has hosted a number of establishments essential to the expansion of Islamic finance. For example, AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), LMC (Liquidity Management Centre), IIFM (International Islamic Financial Market), IIRA (Islamic International Rating Agency), and Shariya Review Bureau. Hidayat & Abduh (2012) reported that recently the Central Bank of Bahrain had also put up a special fund, the Waqf Fund, to sponsor research, education, and training in Islamic finance and had been dynamic in collaborating with the industry and investors in raising commerce principles and the adjustment of market.
Bahrain Islamc Bank. (2014). Web.
Hidayat, S. E., & Abduh, M. (July 2012). Does Financial Crisis Give Impacts on Bahrain Islamic Banking Performance? A Panel Regression Analysis. International Journal of Economics and Finance, 4(7), 79-87.
Kepel, G. (2006). Jihad: the trail of political Islam. London; New York: I. B. Tauris.
Nomani, F., & Rahnema, A. (1994). Islamic Economic Systems. New Jersey: Zed books limited.
Rammal, H. G., & Zurbruegg, R. (2007). Awareness of Islamic Banking Products Among Muslims: The Case of Australia. Journal of Financial Services Marketing, 12(1), 65–74.