Article Review: A Study on Conventional Banking, Islamic Banking and its Treatment of Profit and Loss
By Asst. Prof. Sameena Begum
Justice is the unique law of Islamic banking, a basic requirement
for all sort of Islamic financing. Profits or loss are being shared with the
investor and receiver rather than putting the entire burden to the
entrepreneur. When the investor shares the profit, he will also has to bear the
loss in accordance with proportional share. The principle of fairness and
justice is important between two parties in order to have a fair distribution
of output. Because of profit sharing, Islamic banks gives a higher rate of
returns as oppose to conventional banking that gives a fixed return to the
depositors without looking at the performance of banks.
Islamic banks are
offers the contract of Mudarabah. In Mudarabah partnership, Rabbul Mal[1]
and Mudarib[2]
are to agree on the proportion of profit sharing between them with mutual
consent. The profit ratio has to be decided at the time of contract. They can
agree on equal sharing or different proportions. If profit goes beyond a
particular ceiling, one party can have the larger amount of profit only with
mutual consent. In case the profit is below or at the stipulated ceiling, it
will be distributed according to the ratio agreed during contract. The financer
has to bear everything in case of loss. In this Mudarabah contract, the
financers are the only that bears any loss. However, if Mudarib also has
contributed to the capital, he can also bear the loss with mutual consent.
Apart from
Mudarabah, there is also Musharakah partnership. Which means company business.
It is a partnership between two or more partners who contributes to the capital
in a business. Partners may not contribute in the management but they direct
with the follow up in order to maintain the effective and efficient progress of
the business. The partner who works actively is called active partner and the
partner who does not is called as sleeping partner. The active partner
participates in profit and at the same time receives monthly salary. However, a
loss must be shared exactly according to the ratio each partners invested. This
is legal according to Imam Abu Hanifa and Imam Ahmad. With this contract, the
bank pools deposits from investors and invests in company business or
partnership. The profit gained from that investment is treated as income, not
interest.
The profit and
loss mechanism of Islamic banks are known as Mudarabah plus Musharakah model.
The bank will create an investment pool with categories based on different
tenors of deposits. Each depositors of the bank will deposit its funds in
specific category of the investment pool. All members will have a Musharakah
relationship with each other. The bank will then invests in the pool as
depositors. Now all partners of the pool collectively enter Mudarabah contract.
The pool acts as Rabbul Mal and the bank will be Mudarib. The bank undertakes
the business with funds from the pool and the earned profit shared between the
parties in an agreed ratio.
Murabahah is the
last type of contract. In this type of transaction, the bank will deal with
commodities. The customer will select the type of goods and the bank will
purchase it on behalf of the customer then later sell the goods to him after
mentioning the profit margin. The customer then will pay the bank in
instalments. This type of transaction is free from interest and is acceptable
by Shariah principles.
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