Posted: February 6th, 2025

Can Sharia Banking Tackle Todays Global Financial Crisis Finance Essay

Leveraging Sharia Banking Principles to Mitigate the Global Financial Crisis: Opportunities and Challenges

The global financial crisis of today has many pondering where the breakdowns really are. In fact, we can mention several contributing factors. On the other hand, a better option claims that Sharia banking includes principle fields that are nearly contradicting conventional banking. Interest is not paid to institutions, and transactions must be backed by actual physical assets.
For many years, the traditional banking system that existed has provided an adequate medium for trade. Few, if any, Countries have prospered without the facilities provided and few, if any have complained about or criticized the system. The trade had gone on unhindered till today, thanks to this ostensibly fluent and faithful system.
Before the current financial crisis played out, an underlying question about whether or not the system might hit some speed bumps remained to be seen. This seemed a safe bet in light of the Great Depression of the 1930s. This of course was limited to the U.S. economy, and it was in an era when globalization and international trade was not existed in the current landscape.
This paper also goes ahead to highlight the alternatives that have been provided against the established monetary system, which was mainly a private banking method, as will be demonstrated in this paper. Many scholars were searching for alternatives instead of the private banking style after that, and tomorrow we are going to make a quick summary about Islamic / Sharia Banking since it was considered to be enough interesting to study.
The Islamic Banking methods appeared to provide fair amount of safety to users while also being a fair and just method for borrowers. It is the borrower’s rights that must be protected in this system of banking, because it is the right thing to do, and it will stabilize the system. All borrowers would be able to trust the system, and this would only restore confidence for all the users of the banking system. Furthermore, this system does not match with intangible assets. There are Quranic verses and examples that also prove this, which is quite also a common sense matter; probability, chance etc. are the things that must be minimised and located in order to achieve reliability. As such, all possible steps in Islamic banking have been taken to create stability and reliability, which ultimately => silver bullet solution ➔ economic prosperity.
Aims:
To determine:
The principles of Sharia banking to Offer Relief [from the current economic crisis], and to reshape the economic system to be more reliable.
Differences Between Sharia Banking And Conventional Banking
The Benefits of Sharia Banking vs Conventional Banking
Objectives:
To determine:
What are the fundamental principles of Sharia Banking.
Where Sharia Banking rules are thought to make the overall monetary business more solid and substantial because of its basic irregularity with ordinary western banking frameworks.
Sharia Banking concepts implemented in the west.
How ready consumers are to receive Sharia Banking as a new banking concept.
Some of the proxies to Sharia Banking
The basic principles of Sharia Banking.
Challenges faced by sharia banking
Problem of systems – Sharia – conservative Western – tends to be reckless – but which system best.
Sharia is a good look right now – but a collapse of the construction industry in the gulf will reveal weaknesses.
What evidence should we have of that now, and why would it not be commercial banking?
Mild – CH – China economy
UK banks
FACTIVA
* Look in the Financial Times about Islamic banking
Literature Review
Why Would the World Have Want for a Banking System?
For anything to act together, network and connect, there must be a medium through which operations are performed. For instance, cyberspace must exist for the Internet to work well with everyone working out of different places. Likewise, for trade to be executed properly a mechanism of facilitation must exist. Banks and other financial institutions provide this facilitation. But in order for these institutions to function smoothly and judiciously, there has to be a set of convention and governing rules.
Sure enough, there is a banking system that supports business operations. And, all those benefited from these banking systems, no matter whether it is contained to a particular region or extended worldwide.
Yes, a good tech supported banking system is very important in these times. This is because time and reliability are both key needs. Businesses must be fast as transactions are to be done on a long-distance basis. In contrast to demand for speed today, business in those days moved at a much slower pace and there was significantly less business activity. So you could say that speed and reliability are both in demand today, and the banking system was still yesterday there has been a definite need.
A banking system from day one guaranteed a single streamline process for business activity. This gave protection and security to everyone who got involved with banks. Without a banking system, it is unimaginable the lengths man would go to for trade. One case, which might be mentioned, is Mozambique in East Africa. It was not passed that business people or people who went there on tours had to keep their foreign currency on them. This is because there is no way to facilitate it through banks. This put them at considerable risk, as thugs are people generally desperate enough to pillage or assault them. But most of the developed and developing world is covered by the banking system and offers them a safe way to transact.
What is Private Banking?
The phrase ‘private banking’ seems to directly imply that it is a system of banking that involves the private finance of individuals. It also highlights the absence of social responsibility accompanying it. So long as it is legal, private banking in effect means what an individual does regarding banking or financial transactions is a private matter. While it is essentially one where many people pump their dollars into and mutually benefit using it as an aggregate, the idea of gain versus some one else remains in this notion. For hemat, when many people put their money into a private bank, then this money moves to be lent or lent to people or other financial institutions or companies which then they have to repay with additional payments [interest] Hence, collectively, they earn at the expense of interest-paying borrowers simply by storing their money in a bank that would be private.
All banks handling private wealth are mainly engaged in trust services, banking services, investment services and tax services. Private banking simply refers to a broad variety of banking, investment and other financial services that banks offer to high-net-worth individual clients.
The term “private” has also been used to describe the customer service that is provided on an individual basis, rather than mass-market retail banking. You are trained on data SC001 private bank itself is incorporated banking institution so this process must not be confused with private bank. Whereas private banking was previously considered a super exclusive banking service that catered specifically to HNW clients with liquid cash upwards of $2 million, today even individuals with as little as $250,000 can open an investment account with certain private banks. It will include a diverse range of services including inheritance, wealth, savings, and tax planning.private banking division Wealth management (Mullineux & Murinde, 2003, 23-25) is high-level kind of private banking for the affluent individuals a.
Trainer Some of the Major Concepts of Islamic Banking
Islamic banking in its basic sense is different from conventional banking based on some principles. This especially applies to its functions. Islamic Finance is governed by Islamic values that are reflected in Islamic economic principles. They are described briefly below:
Predetermined Payment that Exceeds an Actual Amount Of Principal Is Prohibited: Islam allows only one type of loan, known as ‘qard-el-hassan’. It literally translates to ‘good loan’, and is meant to represent a loan in which a lender does not impose any additional charge or interest on the principal amount.
An interest-based bank must share profits or losses Islamically: The commercial interest-based banking system made it double pressure on the borrower. Islamic finance, on the other hand, is built on the principle that all parties to the transaction −the depositor, the bank and the borrower− need to share in both the risks and the rewards arising from the financing of business ventures.
ISLAMIC TEACHINGS: Money Is for Purchasing Power, Generating Money Directly Using Money Is Unacceptable. It must not be used to consolidate purchasing power (money). If used as such, there needs to be an intermediary phase in which it has to be used to buy goods and services (Maurer, 2005, 41-73).
Strictly Prohibited Uncertainty, Risk Or Speculation, Also Called ‘Gharar‘: It is a prerequisite for the parties involved in a contract to have all necessary knowledge about the counter values that will be exchanged during the transaction process. They should, furthermore, be insulated from uncertainty, risk and speculation.” The very fact of ‘uncertain gains’ as a principle is why no party in a contract can decide in advance what profit will be guaranteed. ‘Uncertain gains’ does not allow for a deal in which the customer could pay the borrowed principal back, but also an additional amount for protecting the principal against inflation (Maurer, 2005, 41-73)
Investments Should Only Support Practices Or Products Which Are Not Prohibited Or Discouraged By Islam: An Islamic Bank would not finance trade in alcohol. In addition, real-estatefinance cannot be offered for constructing a casino. Also, banks cannot lend money to other bankswith an interest levied.
To the above ideas, the opposite are the following, which have been what we've seen in traditional banking. E.g. the borrowing against non-physical assets that turned to be an evil idea that cost most of us the global economic recession.
Brief Overview about Sharia Banking [Islamic Banking]
The primary distinction between Islamic and conventional banking regimes is in how deposits are handled. Under Islamic Banking system, deposits are considered as shares. These deposits or shares are not promise of nominal value (Mullineux & Murinde, 2003, 23-25).
It can be said in Islamic finance, interest is prohibited, so on and so forth, but the reason is why interest in Islam is prohibited, which is a very good reason for that. Interest is forbidden because of its impact. In order to price Islamic finance & conventional finance, one has to comprehend this effect.
Interest provides disparate benefits to one party in a contract more than to another party. It is known to give one party an advantage over another or others. Interest would necessarily create a situation wherein a party is assured of a principal sum back as well as a substantial advantage over others in a contract.
According to Umar Chapra, writer of ‘Towards a Just Monetary System’ derived from the Qur’an and the Hadith of Prophet Muhammad assist Muslims manage and comprehend what is proper, correct and fair —especially with regards to their income. One of such sources of unjustified earnings is “receiving any monetary advantage in a business transaction without giving a just countervalue”, says Chapra.
Simply, Islamic finance is an equitable system versus conventional finance. What it is Islam finance wants to eliminate unfavorable exploitative financial situations, products or services. This principle of fairness doesn't just apply to your loan transaction – it applies to anything that could be predatory in nature in the finance world.
The outcome of this simple intent is asset-based financial services as a ‘just countervalue’ for everyone involved. Which is why Taqi Usmani writes in An Introduction To Islamic Finance about asset-backed financing; about the fact that it is a financing that creates real assets. They can then be sold for money. Thus, it thus makes a rightful profit. This is quite different from the idea in the traditional systems which are creating money out of money (‘interest’).
Because, in Islamic finance, money alone doesn't create profit, there has to be an asset that creates the profit. The logo that is strictly disallowed in Islamic Finance: ‘Money + Interest = More Money’ Instead, the formula that should apply is: ‘Money + Factor of production/Real asset = More money’.
Islamic banking involves more than just traditional banking because its products need to comply with the secular laws as well as the holy Qur’an. That is to say, it should be tailored fit to each nations to consistently build a complete framework which can be worked in overall.
Riba, the prohibition of interest, is one of the main laws of Shari’ah. And Islamic law does not allow funds to be used for investment or purchase that may relate to practices that it considers impermissible (haram). Alcohol use and gambling are two of them. ImageElegibilityBasedOnImageguilty Based on Guilty Pleasure As a rule of thumb, anything that is undescribed haram by Shari’ah law is halah. It needs to be stated, however, that since Shari’ah interpretations can differ depending on the geographical regions in which applied, essentially, local Islamic scholars defining what may be appropriate for specific regions. Banks interested in pursuing Islamic Banking will be required to work with local scholars who will form part of the bank’s Shari’ah board or committee. These scholars help the bank to know the design and execution of Shari’ah-compliant bank goods and processes. Now traditional banks also most are develop functions that educate them with respect to obeying to sharia compliant.
The Concept of ‘Musharakah’:
The prohibitions against interest rest on the Islamic theory of property, which holds that property can only be attributed to a person’s creative labor, trade, or property. Neither of these two concepts encompasses interest on money loaned, so interest cannot be justified (Mullineux & Murinde, 2003, 23-25).
To legally and religiously address this issue, Islamic banking relies on the common terms: musharakah or co-operation for production, mudharabah or as a silent partnership might say, where one party provides capital and the other the labor, and murabbahah or deferred/post payment on purchases, more practically similar to an bill of exchange and the most desirable Islamic banking contract in Sudan. To determine the prohibition of interest, an interest-bearing overdraft would be converted into a murabbahah contract.
Islamic and Traditional Banking: Same Operations but Different Methods
A vast amount of Islamic banking literature acknowledges that even though Islamic banks perform functions similar to those of conventional banks, they carry them out in a different manner (Ahmad, 2000; Chapra, 2000; Iqbal and Molyneux, 2005; Iqbal and Mirakhor, 2007). In order to show some of fundamental features of Islamic banking and finance that differ it from other methods; it should be noted that, firstly, the Islamic banking goal is a just and fair society, which is not possible without the institution of Islam, that is Islamic economics (Mirakhor, 2000; Warde, 2000). Thus, the several restrictions (interest, gambling, undue risks, etc.) to be performed a flat playing grand to guard the interests and benefits of everybody involved in market exchanges and to enhance social concord (Ahmad, 2000; Chapra, 2000). For example, the fact that the interest system is still accepted is because  the current tradition of interest in the traditional banking system consists of inequality to the borrowers, where the interest earned at their loans has to be paid even with unfruitful business outcomes. Interest-bearing contracts are similarly unfair to lendersespecially when their deposits return as per the profits generated over time when such returns do not even begin with the actual returns from the investment (Lewis and Algaud, 2001; Iqbal and Molyneux, 2005).
Second, Islamic banking is founded on the principle of brotherhood and cooperation, which stands for a system of justice exposure, risk sharing and stake holding. It promotes sharing and co-operation between funds giver (investor) and funds user (entrepreneur) (Iqbal and Molyneux, 2005).
Third, Islamic banking is also embodied by ethical norms and mores and social obligations (Ahmad, 2000; Mirakhor, 2000; Warde, 2000) as system founded on the ethics and morals of the Islamic law of Shariah. Based on the descriptions of Halal (permissible) and Haram (forbidden and undesirable) one can think there is a moral monitoring mechanism functioning at different levels and holding the conscience of the entrepreneur and the firm, an attractive positive social climate for the society, and providing a convenient and practical legal framework (Chapra, 1992). In line with this Islamic banks cannot -and must not- finance any project conflicting with moral values of Islam. Such activities could, for instance, include the financing of a brewery factory, a night club, and a casino, etc., which Islam forbids or is known to be harmful to society (Ahmad, 2000).
How Competitive is Islamic Banking in Particular the Current Era?
Financial profit functions in the Islamic banking industry have made them runners up in the Middle East regional participants. These banks have positioned themselves well, with attractive returns on financial capital, irrespective of their capital size. Islamic banks must improve functional capabilities to dominate the forecasted demand for Islamic banking products and services, to ensure they remain competitive with their conventional competitors. This forces them to revise their current business models and fixate on consolidation and strategic alliances. They also have to systematize their functions and outsource non-core operations to confirm sustainable growth.
Islamic finance sector is quickly achieving prominence in rapidly changing landscape. The IFSI has been behaving with bright colors on one side but we also face several challenges which are of industry specific (Saeed, 1999, 24-45).
High Liquidity
The absence of a sound Sharia compliant alternative for conventional interbank money markets has been a major hindrance to the growth of the IFSI [Institutions offering Islamic Financial Services]. This is one of the major reasons behind the leap for IFSIs to sacrifice excess funds, which are otherwise being transferred to the traditional banking system. The short term and low risk opportunities has limited the prospects for Islamic investment  due to lack of variety, investment opportunities are usually limited, and it leads to the availability of less tradable financial instruments.
Human Resources
Due to the infancy stage of the Islamic finance industry, there was lack of experienced professionals, which unfortunately hindered the industry in carrying out its plans for developing innovative and high-quality products and services for its cherished clients (Saeed, 1999, 24-45).
Global Shari’a Compliance
IFSIs has been plagued by issues like Largely differing responses with respect to the Fatwas given by various Shari’a Supervisory boards on various occasions. These responses arise from differences in opinions of the Shari’a emerging from different interpretations of the Fiqh (Islamic jurisprudence). It highlights the importance of keeping a balance in Shari’a views so as to create a smooth transition in product evolution and ultimately a uniform industry.
Risk Management
Shari’a compliance, more legal and asset risk, fiduciary risk and the displaced commercial threat are some of the risks faced by IFSIs. These risks increase the importance of developing and implementing more extensive and powerful risk management systems to periodically track and mitigate them. Not only this but also enabling IFSIs to validate better rating in the global nokia to guide them to compete with conventional equals must be a part of this.
Islamic banking and finance is an important part of the Islamic economic system which its fundamental basis relies on justice and morality.  Therefore the moral dimension is the raison d’etre of Islamic banking and finance. In this scenario based on the model of Sudan and Bahrain, sincere efforts are required. (This relates to Musharaka, Ijarah and Salam Sukuk, and Malaysia in context of Mudarabah based Islamic money market).
It is necessary to document the economy, replace the corporate sector income tax with a spending tax and reform other relevant laws. A sense of a well laid plan with firm commitment and tenacity could translate into deliverance and eventually a change of the economy (Lewis & Algaoud, 2001, 77-109).
Benefits of Islamic banking and finance
There were also several major transformations in the financial environment that took place over the recent few decades in the twentieth century, accompanied with the emergence of Islamic banking and financial institutions. This includes reducing in the intermediation activities, as well as participating in a dynamic and vigorous management of investment and integration of financial markets in context of globalization.
This is a retraction of Glass-Steagall Act in the US Islamic finance Edwards of the principles that was Intermediation Finance based on interests Banks and other financial organizations took a larger part in the investment administration and focused more on understanding the greater scope of Islamic financial methods both in terms of sharing profits as well as mark-up financing and therefore the advantages those methods brought in long periods to the organization and the customer.
But in the fast which took place at twenty century the need of time was also not only to devising of interest free financial intermediation tools but also developing Islamic risk management tools and ensure they are free from any nuisance which was connected with traditional financing tools (Lewis & Algaoud, 2001, 77-109).
Islamic Setup is Equipped with Risk Management
Never more so than in the body of each and every viewing of the world, especially in business industrialization brought with it none grasses of risks unprecedented in commerce and agribusiness. The longer the time frames and the more sophisticated the period of production, the greater the uncertainty. Market local range has expanded and on the way to creating a global village that brought new types of risk. When Islamic laws were dictated ages ago, the nature and extent of risk and uncertainty was different. But one need to acquire knowledge with a subset of contemporary experiments in order to remember Shari`a objectives of justice, fairness and effectiveness.
The Prophet (P.B.U.H.) prohibited selling unborn calves. There was no assurance regarding the future, and the outcome could not be ascertained. He also prohibited the sale of fish that subsisted in a pond. This time, the justification was similar to the previous one; one does not see the future; one does not know the quality and the quantity of the produce being sold.
The Prophet forbade the selling of a commodity and documentation until it have developed entirely yet on the other side permitted undertaking Salam – including an early stage hair down cash paid towards farming produce at the period once the agreement was marked, long before the genuine harvest. It must be conceded that this is an advantage to the farmer as well as to the grain-wholesaler. It also allows a certain degree of indecision to become part of the defined transaction.
Hence, detailed information should be gathered at the time of any understanding to nullify any possibility of confusion between parties in future and loss of any on these backdrops. But nevertheless, to secure benefits, in some examples, a modicum of doubt should be encouraged, given joint consent (Lewis & Algaoud, 2001, 77-109).
Globalized Financial Markets
The world’s financial markets with more integration have set in motiona f low of money across countries with less cost and instantly. Such a change is instrumental for Islam where there exist no concepts of accepting national borders. However, such implementation only partially occurred in practice and posed two fundamental challenges for Islamic finance trajectory. Middle Eastern, South Asian and South East Asian nations who have stunted economies with less complicated financial systems compared to the developed assuaging negative factors such as imprecision. Second, Islamic financial institutions have disadvantages of their small size and very few operate across borders as does the main players. Few major conventional financial institutions have ventured into the world of Islamic finance, establishing Islamic Divisions/subsidiaries, revolutionising the way things are done. However, this has also become more boring for the old Islamic financial institutions as the same have to be the subject of merger and acquisition to survive in this competitive and fast paced world (Lewis & Algaoud, 2001, 77-109).
Globalization has increased the volatility of almost all financial variables particularly the exchange rates. It has also weakened the efficiency of economic macro-management with respect of the extractive the countries that put their organations in the route of transforming their occupation structure into one based on mostly Islamic prositious. The only way to amend this would be to implement international treaties and pacts which focus on eliminating speculation from financial markets. For Islamic finance, therefore, the motion, and emphasis, emphasizes profit-loss sharing modes of financing, commodity-based financing, such as murabaha, and reducing the role of debts to reduce the possible inherent perils of such moves (Lewis & Algaoud, 2001, 77-109).
Obstacles To Development/Management Of Islamic Banking
Standards for Islamic financial products are being developed. There is widespread acceptance for standardized base components of Islamic finance such as Mudaraba [limited partnerships]. If you are not aware, you can also pay in Murabaha and Ijara. Murabaha is a known markup price that is announced to the buyer, while Ijara is a sharia compliant type of mortgage that has no down payment similar to rent to own. So as to co-ordinate the works of the different Shari`a advisory boards of Islamic financial institutions, certain measures are undertaken. The obedient actions are chiefly being taken in a bid to reduce mis-conduct as well as contain un-coordinated activities.
Lack of information is the major roadblock towards growth of IFSI which results in adverse impact over the work undertaken towards establishment of this field on solid ground.
In addition, there are currently no institutions that can perform a rating process. In particular, this applies to those that must be created to evaluate products and institutions on the principles of Shari`a compliance.
Even though the above mention odds are few the industry continues to grow but at a snail’s pace largely in the Gulf countries. It has now spread to the Balkans and newly independent Central Asian Islamic Republics. Owing to shaky economic conditions in these countries, actually causing hassles in the Islamic financial institutions, it becomes barriers to them (Lewis & Algaoud, 2001, 77-109).
Competitive Drives for Islamic Banking
Islamic banks enjoyed a high level of ‘monopoly’ over the financial resources of Islamically motivated depositors. The landscape has changed, with Islamic banks facing ever greater competition. In recent years, however, and particularly in the last few years, one of the most crucial developments for Islamic banking has been the realization by some conventional banks operating in that market. The actual number of conventional banks worldwide that have adopted Islamic banking methods is difficult to ascertain. But some of leading names in international banking business are Citibank, ANZ Grindlays, Klienwort Benson, Chase Manhattan etc. Some indeed commercial banks in different Muslims countries provide Islamic banking services. Islamic Branches were opened at Bank Misr - Egypt and National Commercial Bank - Saudi Arabia. Islamic Banking present in Malaysia as well and conventional banks in Malaysia are also enabled to launch the Islamic Banking procedures to enrich themselves into the Islamic Financial Industry (Venardos, 2006, Pp 32-55).
Generally speaking, competition is always considered as a positive phenomena making any industry grow. It forces inefficient firms either to adapt themselves to industry standards or get out of the way. It attenuates prices and alleviates services to clients and advances innovation and welcomes improvements in product quality." But marketing needs to be protected from all the cruel, rigid and aggressive competition from traditional till they are in position to grow up and still ready and able to face the competition from their industry competitors.
Islamic banks have a lot of advantages from conventional banks due to their long presence and experience in the market. Islamic banks do not have the corresponding functions of the systems, methods, techniques of product innovations, strategic marketing and their diversification in repertoire, which are far superior than Islamic banks systems. Consequently, Making Islamic banks vulnerable to uneven competition and rivalry. On the other hand, conventional banks can be cash mingled to Islamic banking in terms of efficiency, research data and main abilities, complex banking and result-driven strategies. All these would lead to the creation of new products and better customer service facilitation (Venardos, 2006, Pp 32-55).
Methodology
Data Sources:
This research takes a large number of sources into account. These will help anyone get the job done. In this study, a methodological mix of primary and secondary source data was conducted. In order to make an appropriate selection, the researcher must pay special attention to the ways of the sources available to him.
To address the specific question [How Can Islamic Banking Be Used to Mitigate Today's Global Financial Crisis?] one has to look into the procedures at any of the Islamic financial organizatiuons. These institutions will provide the researcher a better understanding of the Islamic Baking dynamics that can help in developing a solution to tackle the contemporary financial crisis.
The first phase of the research will be secondary source searches. This is typically done now so that you can gain an impression of what sorts of information being used to be had on a specific theme.
The data collection for this researcher paper will include secondary data retrieved from records managed by variety of organizations. These will be carefully considered, as numerous sources of data, such as journals, reports and books are readily available.
In addition to the secondary data compiled, primary data will also need to be collected.
Questionnaires will help obtain primary data on this research. By using this approach, the investigator can reach multidimensional information. Note that this data will be collected randomly from employees and departments' supervisors [respondent] without considering their gender, age, etc.
Quantitative and qualitatively, there is an even more appropriate methodology to be included the role

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Tags: conventional banking, global financial crisis, Islamic finance, Sharia banking