The Muslim man is bound, in any place and at any time, to refer to the basic rules: Sharia, or basic duty, which is the set of fundamental rules as issued by the Quran or laid down by Hadith – sayings of the Prophet – duly authenticated. In both, there are also a variety of topics such as taxation, public expenditure, interest, landed property, natural resources, wage rates or also finances.
The interest and income provided by the virgin lands or natural resources are considered, by Islam, as a Riba under the pretext that the interest and usury promote wealth concentration and thus reduce the consideration to be brought to his fellowmen. Prosperity of the individual must not result from an “unjust enrichment” but it must be the result of a transaction, thus a personal activity and efforts. Islam recognizes the right to private property provided that the owner of these natural resources use them productively.
Characteristics of our Islamic financial institutions
Thus the bank, in Islamic society, must be limited to its essential role as an outlet for savings and investment designer. The Islamic bank will prefer to systematically associate with its customers in profitable operations rather than to lend its funds to them. The emphasis on acquisition of holdings affects the very nature of banking techniques and involves the essential existence of a department responsible for evaluation of projects.
The characteristic of funding Islamic financial institutions lies essentially in three aspects :
- it encourage participation;
- they use funding methods very little known by conventional banks and very rarely experienced.
- partnership system requires both parties to go through all the risks while sharing profits and losses,
and this considering the objectives which are assigned to them and that can be summarized in three points:
- promote and encourage compliance with the principles, Islamic laws and traditions in the world of finance, banking and similar business sectors by creating and managing investment Modarabas (see below).
- offer modern financial services to all Muslims of the sub-region enabling them to carry out financial transactions while respecting the instructions of Islamic Sharia and without violating the Koranic prohibitions of “Riba”.
- help the Islamic community of the sub-region in the collection and use of resources necessary for real economic development while respecting the Islamic principles.
Islamic banking proposes two forms of investment :
- either DIRECT, by which it handles capital investment in the projects which bring in a dividend to it.
- Or by PROFIT SHARING where it takes part in the capital of a production company as a partner both in investment and in management. In this specified case, the bank shares the risks with the client while sharing profit according to an agreed percentage in the profits as in the losses.