Islamic banking in the GCC in the Next ten Years Essay

Islamic banking in the GCC in the Next ten Years - Essay Example These Islamic banks neither charged any interest nor paid it. The functioning of these banks was limited to the industries and trade in which they made investments either as the depositors’ partners, or using their own capital. Considering the functionality of these banks, they were more of financial institutions than the commercial banks we see today. The first commercial bank was opened in 1971 in Egypt with the name Nazir Social Banks. The charter of this bank did not refer to Shariah. The first bank that was entirely and overtly based on the principles of Shariah was made in the year 1974 by the Organization of Islamic Countries (OIC). The name of this bank was Islamic Development Bank (IDB). The function of this bank was to engage in the intergovernmental activities to provide funds to the member countries for developmental projects. The business model of IDB included fees for the financial services as well as financial assistance for the developmental projects through pr ofit sharing. During the 1970s, numerous Islamic banks were established across the world which included but were not limited to the Dubai Islamic Bank established in 1975, the Faisal Islamic bank of Sudan established in the year 1977, followed by the Bahrain Islamic bank established in the year 1979. Several Islamic banks were also successively opened in the Asia Pacific region. The basic foundation of Islamic banking and how it differs from other banking conventions. â€Å"The basic principles of Islamic banking originate in the axioms of justice and harmony with reality and the human nature† (Kahf, Ahmad, and Homud 7). The simplest and the most fundamental definition of financing is the provision of goods, services, or any kind of production factors without the demand of an immediate counterpart on the part of the receiver. For example, employees in an organization deliver their services throughout the month and get paid at the end of the month. Islamic banking in its direc t sense is very much based on the same principle. Islamic financing means provision of production factors for which payment is rescheduled. â€Å"Real-life exchange and production processes have, as part of their components or forms, the provision of goods to consumers as well as equipment, materials and other means of production to producers† (Kahf, Ahmad, and Homud 8). This lays the foundations of the practices of Islamic banking. Islamic baking provides funds in terms of goods, machinery, or equipment for payments that are deferred. Islamic banking also provides the option of profit sharing. Such financing is based on justice as both parties share the profit made from a productive project according to their investment ratio along with sharing the risks involved. Comparison between Islamic Banking and Other Banking Conventions It is odd to draw comparison between the Islamic banking practices and the conventional banking practices because of the immensity of difference betw een the two. The most fundamental difference between Islamic banking and other banking conventions is that the former is based on the Shariah foundation whereas the latter are not. Islamic baking is characterized by non-existence of transactions that are interest-based. Islamic baking is devoid of any economic activity that involves oppression or speculation. There is imposition of Islamic tax called as â€Å"zakat† in Islamic banking. Islamic banking does not allow production of such goods and services that are considered Haram in