Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.
These principles are supported by Islamic banking’s core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited. Moreover, Islamic banking is secular, it is open to everyone, not just Muslims. Here, we will try and examine some of the main benefits of Islamic benefits:
1. Islamic banking places an emphasis on the need for financial transactions to be supported by genuine trade or business related activities; this provides an active boost for economic activity and consequently, the economy.
2. Since Islamic banking prohibits transactions involving excessive uncertainty (Gharar) or speculation, it helps mitigate the effects of speculation on the economy.
3. Malaysia has a robust, shariah-compliant regulatory system, a 30 year track record of building a successful Islamic banking and financial industry (managing banking assets worth US$65.6 billion), the presence of an Islamic interbanking system, the world’s largest Sukuk (Islamic bonds) market accounting for 60% of the global total and a reputation as one of the leading innovators of Islamic financial products through the use of concepts like Wadiah, Hiba, Halal and Haram, Ijarah, Mudharabah, Murabahah, Wakalah, Musyarakah etc. This has helped attract institutions from across the world and an associated pool of cash.
4. Islamic agreements carry a 20% stamp duty discount. In case of refinancing from a conventional to an Islamic package there will be a 100% stamp duty waiver on the existing refinance loan balance (not applicable to amounts over the loan balance).
5. Islamic loans are subject to a ceiling rate, the maximum profit that they can earn. This may prove advantageous in case of floating rate loans that depend upon the Islamic Base Floating Rate (BFR) since the Base Lending Rate has historically gone up to 12.27%. Conventional loans, on the other hand do not have a ceiling on floating rates.
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