Chapter 11: A Simple Guide to Islamic Banking and Finance
11 A simple guide to Islamic banking and ﬁnance Mohamed Ariﬀ This chapter is a guide to the essential principles and practices of Islamic banking in some 70 countries. The guide is a simpliﬁed introduction to what constitutes this special form of banking; the special form arising from its proﬁt-seeking through proﬁt and loss sharing deposits and loan contracts and fee and mark-up based lending for purchasing real assets, both modes replacing conventional, interest-based banking practices. The chapter describes the way in which this niche banking, which began in 1963, has grown to the present size of about US$500 billion in equity capital, successfully making proﬁts in some 50-odd legal jurisdictions. The organization, the working principles, and selected key terms used in this form of banking are explained. Also included are the philosophical basis on which this diﬀerent form of banking is constructed and brief comments on other forms that are yet to be experimented with. Introduction This chapter provides a simple introduction – a beginner’s guide – to the current practices of Islamic banking and ﬁnance, which is found in about one-third of the countries in the world.1 Islamic ﬁnancial institutions are legal entities that are licensed under banking laws of a given legal jurisdiction in a country, or economic entities that are authorized to operate in one or more of the following areas: banking, insurance, treasury, bond, equity, mutual funds and bills markets. These institutions originate and transact ﬁnancial activities that are designed with...
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