Sharia law compliant banks
Sharia law, or simply Islamic law, is part of Islamic tradition and derives from such religious perspectives of Islam as Hadith and the Qur'an. This law defines every aspect of the life of a person who has chosen to follow the Islamic religion, and finance and banking are no exception. In general, banks and other financial institutions operating under Islamic law are considered Sharia compliant. While all Islamic banks are operated according to Sharia law, more and more Western banks are also making sure to become Sharia-compliant and thus open up new customer groups and partners.
Differences between traditional and Islamic banking
The most important difference between the traditional banking model and Sharia-compliant banking is that the Qur'an does not allow interest or fees to be charged during a monetary transaction. This stems mainly from the fact that, unlike traditional banking, Islamic law sees money as a measure of value rather than an asset, and therefore no one should profit from money. Collecting interest is now labeled usury - a practice of making immoral and unethical money loans that are unfair to the borrower and enrich the lender.
Islamic banks are typically governed by a Sharia Advisory Board, made up of Islamic clerics and scholars, whose primary role is to ensure that all activities conducted by the bank are conducted in strict accordance with Sharia law. Those who prefer Sharia-compliant banking believe that the Islamic banking system is superior to Western capitalist banking, largely due to the fact that it is built around a "strict code of ethics" based on the Qur'an that prohibits exploitative practices. According to proponents of Islamic banking, this enables banking to play an integral role in a moral society governed by the Qur'an. In contrast, they see capitalism as purely profit-oriented, which incites exploitation of others and greed, which in turn leads to Western social problems such as wealth inequality and class division.
Importance of Sharia Compliant Banks
According to Islamic Bank USA, Sharia-compliant banks must offer products and services that:
interest free,
Trade related – for real financial need in its purest form,
Ethical – Funds cannot be allocated to pork, liquor, pornography, gambling or anything else that Islamic law deems unlawful.
Usually, Sharia-compliant banks charge a surcharge on the risk amount instead of interest on the products offered. Sharia law also prohibits debt trading, meaning compliant banks do not issue traditional bonds. Instead of interest attributed to bonds, yields are calculated using a mathematical formula that is used to relate the cash flow generated by the asset to the cost of the asset. In addition, Sharia-compliant banks must donate 2% of their profits to Muslim charities.
Islamic Banking in the Western World
The Islamic banking system has evolved significantly over the past decade and has become a notable part of the international financial system. While still in a relatively embryonic stage in the western world, the Islamic financial system has become the fastest growing segment of the international financial system.
Sharia compliant banks position themselves as a moral alternative to Western banks and currently 75% of all Muslims in England prefer Sharia compliant banking products. But the Islamic banking model extends beyond the Muslim community – it's trying to become the preferred banking option for non-Muslims as well. In London, about 20% of all requests for Islamic banking products and services come from non-Muslims.
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