Sample Coursework Paper on Islamic Banking

Discuss briefly the differences between Islamic and conventional financial systems

Islamic financial system is guided by both Shariah and finance industry rules regulating conventional financial systems. In conventional financial system, profit maximization is a core objective which is contrary to Islamic where it maximizes on profits while observing Shariah restrictions. For example, restrictions on borrowing or collecting money with exorbitant interests and restrictions on conducting illegitimate business in Islamic and this is not the case for conventional financial system (Muhammad 1).

  1. What are the salient features of Islamic banking and finance?

Salient features of Islam banking and finance includes the following; Islamic banking and finance integrates ethical and moral values with its banking operation. Operations where interest charges are restricted for example restriction in investing in government securities that earn interests. Conducting of economic activities and strictly avoid oppressing all involved parties. Strictly observes participation in contributing to the Islamic tax, Zakat (Muhammad 2).

  1. List down the main principles of Shariah applicable in Islamic banking

Main principles of Sharia applicable in Islamic banking include; Riba where banks are restricted from borrowing or collecting money charging riba to the borrower or paying interests to depositors. Avoiding zulm which are economic activities involving oppression for example, minimum standing balances in accounts. Avoiding speculation activities, for example, holding customers deposits to invest in predictable high income generating securities or derivatives transaction (Kettell 27).

  1. Define the term riba

Riba refers to exploitive and unjust benefits made by an individual or organization carrying out business transaction. Riba can also refer to an exchange of uneven qualities or unequal amount of a given commodity thereby oppressing one party. In the financial and banking system, riba refers to an excessive charge of interest for loans, for example, banks charging high interest rates to their customers or exchanging a mature camel with a young one.

  1. What is usury and interest? Is there a difference?

Usury refers to the practice unethical and morally unaccepted monetary loans with core objectives of benefiting the lender while oppressing the borrower. Usury refers to the charging of abusive and excessive interest rates. Usury is illegal and there are legal repercussions for the practitioners. Interest refers to a fee charged by the lender when borrowing money. The difference is that interest is legally and morally accepted while usury is prohibited and illegal (Kettell 38).

  1. What is Gharar?

Gharar refers to a risky and injurious transaction where the information concerning the sale item is not known by the parties and are uncertain. Gharar refers to participating in business transaction that are prone to have high risks as a result of uncertainty connected with trade for example selling camels sperms or unfertilized eggs.

  1. Give an example of a gharar contract, not given in the lecture.

An example of gharar contract that is not mentioned in the lecture includes sell of sperms and or selling of unfertilized eggs of camels. This could result to deceit to the party selling and risky to the buyer since the fertilization into a camel offspring is not assured.

  1. Why is gharar transactions prohibited?

Gharar is prohibited in order to protect any involved party from committing injustice, deceit and being ignorant. Prohibition is meant to steer openness, accuracy and full disclosing of all necessary information to avoid one party taking advantage over the other. Prohibition ensures full consent and participation of the parties involved in any business transaction, for example full disclosure of benefits and shortcoming of an investment project (Kettell 55).

  1. Why is jahl prohibited?

Jahl refers to one party lacking information or is ignorant. Prohibition is intended to restrict informed individuals from taking advantages of ignorant parties. Jahl is prohibited to prevent ignorant parties from making wrong decisions for example, investing in a company that is going under, for example selling sterile horse to uninformed party.

  1. You are a new bank officer in an Islamic bank. A customer approaches you. She says, ‘I am a non-Muslim, how can Islamic banking benefit me?’ How would you respond to this question?

Islamic banking applies the concept of linking financial market closely with existing real economic activities. The banking encourages moral and ethical transactions, openness, justice and fairness and discourages speculation The Islamic banking also benefits the account holder from being exploited through paying exploitive interests on loans, for example full disclosure on all charges on account holders deposit (Kettell 57).

  1. There are so many conventional banks and financial institutions. Why is there a need for an Islamic bank?

Need to operate an Islamic bank is to ensure Muslim communities continue adhering and observing sharia rules when carrying out all business activities. For instance, conventional banks core objective is to make profits while Islamic bank makes profit while still observing sharia principles (Kaleem, and Isa 8)

Works Cited

Kaleem, Ahmad, and Mansor Md Isa. “Casual relationship between Islamic and conventional banking instruments in Malaysia.” International Journal of Islamic Financial Services 4.4 (2003): 1-8.

Kettell, Brian. Introduction to Islamic banking and finance. Vol. 1. Hoboken, NJ: John Wiley & Sons, 2011.

Muhammad, Hanif. “Differences and Similarities in Islamic and Conventional Banking.” International Journal of Business and Social Science 2.2 (2011): 1-2.