Islamic Banking

Islamic Banking
A banking system that is based on the principles of Islamic law (also known Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law.
Here's an example of how the Islamic banking system uses methods of profit/loss sharing to facilitate financial transactions: for some types of loans, the borrower only needs to pay back the amount owed to the lender, but the borrower can choose to pay the lender a small amount of money to serve as a gratuity.

Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investing (for example, investments involving alcohol, gambling, pork, etc. are prohibited).

Economic and Financial
After a series of financial crises that hit many Arab countries and others, some countries faced the effects by adopting an appropriate policies and strategies to remedy the situation and with that achieved varying degree of success in many fields, including the reduction of government spending and consumer demand, and thereby reducing budget deficit and Public Debt.

In addition to recommit in applying of Basel III, even in stages , for some Gulf banks and others in the Middle East, to be able to contain the big and consecutive implications of the global financial crisis and increase the ability to absorb losses, decrease indebtedness, and increase the available banking reserves, capitals, and liquidity to enhance the capital adequacy and financial position.

The banking sector is of vital importance in the economy it represents the engine that provides the necessary funding; supporting various economic sectors, and accelerates the rates of economic growth, in particular in the field of investment as well as attracting in flow of foreign investments. Also, it supports the infrastructure, projects, and the structure of business and banking activity which helps to keep up with external developments and globalization, building self-abilities, ward off the dangers of imported inflation and the implications of the external financial crises, and brings benefit from media globalization in the exchange of experts and information in terms of openness to the experience of nations and concepts of good governance including transparency, integrity, responsibility, and strengthen the financial control procedures.

At the domestic level, the Iraqi economy have witnessed great development in Gross Domestic Product (GDP) and achieved the highest growth rate, where increase in oil production and exports reflected in the increase of imports. The total budget for the year 2014, is the highest compared to previous years, was about (140) billion dollars.This means increased opportunities for growth and investment in Kurdistan Region and in Iraq in general, especially an additional revenues are expected to achieved by the increase of the Region’s oil exports which requires a future plan to invest these revenues in strategic projects to expand existing infrastructure. Taking into consideration; developing the agricultural sector mainly, offering facilities for foreign industries in the Region through encouraging free zones, and providing financial privileges for such projects. Also the Region will be able to supply part of Iraq imports of consumer goods which represents the greatest burden on the Iraqi balance of payments .

In order to reinforce the market mechanisms, improve performance efficiency, and develop the financial management of resources, Iraq generally should proceed in its restructuring. This require increase the role of private sector and private banks in the internal and external operations depending on recommendations evolved through banking conferences and committees held recently.

The continued growth has led international institutions to increase their operations and open branches in Iraq like Bank of International Settlements (BIS) that announced its readiness to accept deposits, which enhanced expectations for growth, prosperity, and credit worthiness to enable the country to obtain facilities from international banks, and this led to expansion in finance and investment , so banks could continue their business with the best international banking practices after increase in their capitals and financial capabilities. In particular, activate the commodity sector and real output by investing in different industrial, agricultural, commercial, and banking projects; and the optimal distribution of the bank’s assets and methods of use among various activities to achieve better returns for shareholders and depositors.

KIB had increased its capital to (400) billion dinars, and is expected to be increased in 2015, which will lead to the expansion of the investment activities and according to the principles of Islamic Banking ;(Murabaha, Musharaka, and Mudharaba).

In addition, investing in the infrastructure of the Bank buildings and constructions, and adopting the latest technologies of prevalence in the banking industry; including Master Card Department and electronic banking systems integrated with the environment and the compatible means of communications.

An Islamic financing structure, where an intermediary buys a property with free and clear title to it. The intermediary and prospective buyer then agree upon a sale price (including an agreed upon profit for the intermediary) that can be made through a series of installments, or as a lump sum payment.

Explains "Murabaha"

Murabaha is not an interest-bearing loan, which is considered riba (or excess). Murabaha is an acceptable form of credit sale under Sharia (Islamic religious law). Similar in structure to a rent to own arrangement, the intermediary retains ownership of the property until the loan is paid in full. It is important to note that to prevent riba, the intermediary cannot be compensated in addition to the agreed upon terms of the contract. For this reason, if the buyer is late on their payments, the intermediary cannot charge any late penalties.

A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

Explains 'Musharakah'

Musharakah plays a vital role in financing business operations based on Islamic principles, which prohibit making a profit on interest from loans. For example, suppose that an individual (A) wants to begin a business but has limited funds. Individual (B) has excess funds and wishes to be the financier in musharakah with A. The two people would come to an agreement to the terms and begin a business in which both share a portion of the profits and losses. This negates the need for A to receive a loan from B.

In Islamic finance, mudaraba is a trust financing contract.

Mudaraba may be conducted between investment account holders as fund providers and the Islamic bank as a mudarib. It may also be conducted between the Islamic bank, as fund provider, on behalf of itself or on behalf of investment account holders, and business owners and other craftsmen or traders etc. Mudaraba is a partnership where capital is provided, in cash or assets (no debt is accepted) by one party - the fund provider - and labour is provided by the other party - mudarib.

Both parties can appoint agents on their behalf. A mudaraba contract could be terminated unilaterally except when a term has been agreed by both parties, in which case the mudaraba could only be prematurely terminated by mutual agreement. In addition, if the mudarib has already started the business, in the mudaraba contract, it becomes binding until actual or constructive liquidation.

As mudaraba is a trust-based contracts, the mudarib is not liable for losses except in case of breach of the requirements of trust or misconduct. Guarantees against negligence or misconduct could be taken from the mudarib as long as they are not excessively used by the capital provider. The contract should specify whether the mudaraba instrument is unrestricted or restricted (to specific location or type of investment as agreed between parties). It should also indicate the distribution ratio of profit between both parties (which cannot be a lump sum or a percentage of capital). The distribution ratio could be revised at future dates by agreement of both parties
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