Introduction

Islamic banking derives its rule and compliance mechanics from the rulings of the Sharia, the divine law of God. Islamic banking came to be as a result of conventional banks dealing in usury (interest), which is sternly forbidden in Islam. Muslims are required to live a life of Godliness; there is no separation of religion and other activities. Islam is a way of life that encompasses every dynamics of human dealings.
Money is not considered as a commodity or having a time-line which moves according to interest rate fluctuations. Money is measured according to the value of goods and services for which it is exchanged during buying and selling. This is sanctioned by the Sharia.

Islamic banks operate on the basis of profit and loss sharing, the term "profit is for that which bears risk". Islamic banks completely reject interest as a cost for the use of money and loans as an investment vehicle. (aaoifi 26-27). This means interest as the central tool used by banks across the globe is illegal as an item for pricing money.

The Qur'an states that "trade is allowed and riba (usury or interest) is haram (forbidden)". Muslims live by the commandment of Allah. The forbidden things are avoided at all cost. Interests are the key determinant of modern banking in measuring and valuing transactions in the West and else where. The prohibition of riba is very clear in the Qur'an, just like alcohol or engaging in act of fornication or adultery. Why is it that riba or usury is part and parcel of the banking systems in muslim countries?

Dr. Umer Chapra stated that "due to the historical foreign occupation of most muslim countries, and particularly because of the domination of the world financial markets by Western interest-based system". Umer Chapra's statement touches on the fact that, the global super powers control the markets of the global economy. Money being a medium in trade, the measurement of money is also a vital factor in valuing individual nations' currency. This means even if muslim countries wish to avoid interest rate system, they have to design other tool of valuing their currency.

Clarifying the issue of interest or riba is paramount in Islamic countries to eliminate usury in their economy. Interest is the same as riba according to the consensus of muslim jurists across the world.

What tools are Islamic financing offering as alternatives to modern conventional interest regulated banking? Advocates of Islamic banking and the muslim economists have deviced tools that are halal or compatible with the teachings of Islam. The Islamic financial system bases its operation on equity type of dealing instead of debt. There are fundamental differences between debt and equity.

The Islamic finance operates on trade; profit and loss sharing. Muslim economists put forward the following primary and secondary mechanisms as tools for conducting legitimate transactions.

The primary Islamic finance tools are: Mudaraba (passive partnership), musharakah (active partnership),

The secondary tools are Murabahah (cost plus service charge), Ijarah wa iqtina (hire-purchase), salam (forward delivery contract), and Istisna (contracted production). The former are equity-based and relatively riskier because they involve profit-and-loss sharing, the rate of return on them is not stipulated in advance and may be either positive or negative. The latter involves credit and is relatively less risky because profit-loss-sharing is not involved.

The secondary mode of financial tools are similar with interest regulated tools, but there are big differences between the two.

The three key differences are that: secondary modes are sales or leases, rather than outright borrowing and lending. Also, the Sharia forbids the selling of properties or commodities that one does not own or possess, the financiers take risk once the ownership and possession of property for sale or lease is complete. And finally, it is the price, not the interest rate that is stipulated in the course of the transaction and once the price is fixed, it cannot be changed if there is delay in repayment due to unexpected circumstances. (Dr Umer Chapra,the future of economics, 258-261).

The avoidance of interest and over-burdening poor borrowers make Islamic banking worthwhile and rewarding. Loans advanced to customers are interest free. The deposit funds of wealthy Muslims are invested in ventures that are islamically acceptable. For instance, the bank avoid investing in forbidden projects and stocks such has alcohol companies, pornography, weapon manufacturing, conventional banking stocks, etc. The banks do business with companies and institutions whose transactions are sanctioned by Islam - for example, food products, medicine, media, cloths, energy, etc. The first sample Islamic banks are the Bank Al-idakhar Al-mahalliyah 1950, this was set up by Ahmad Al-Najjar. The bank mobilised local savings and invest in rural development projects. The activities of the bank conform to agreed Islamic injunctions. Their transactions included opening deposit accounts for customers that did not pay interest; profit-loss share service accounts provide people with the opportunity to contribute a portion of the gains in charitable activities. This bank was closed down by the Egyptian government due to fear that the bank was undermining the secular government economic policies. The bank was actually a success attracting over a million customers in a short period of time.

The second successful Islamic financial institution was the Malaysian Tabung Hajji. This was a hajj fund where members saved up for their pilgrimage to Mecca. The bank attracted large number of small deposits. The savings of customers were also invested in Islamicaly sanctioned institutions. This bank provided the catalyst for the first Malaysian Islamic commercial bank.

The petrol dollar flowed into the Middle East has provided the people with much needed resources to transact their wealth on investment ventures more islamically acceptable. People wanted to be comfortable with the activities of their banks. They did nott want interest or haram activities. So the policy makers were pressured to device means of engaging investors in a religious compliance financial method.

The economic tools provided by dominant conventional economic order is not acceptable to Muslims. The expectations of Muslim leaders became intense and resounding. In 1970, the idea of strong Islamic financial institution was negotiated by the ruling members of the Gulf States and Saudi Arabia. The Islamic Development Bank was set in 1975. The funds for this bank were provided by Saudi Arabia, Libya, The United Arab Emirates and Kuwait. The bank's main duties were to provide interest free loans that complies with the profit and loss sharing principles of Islamic banks, directing development funds to poor areas, train individuals on the mechanisms of Islamic finance and above all, show the world that there is an alternative financing economic methods available that are more ethical and caring. (Tripp. Charles, 2006 Islam and the moral economy).

Islam encourages the seeking of wealth. Islam considers wealth seeking an act of worship. It is desirable. Classical Christianity encourages abstinence from worldly activity. Islam is against monastic life style.

Wealth is a blessing from Allah the Almighty. Pursuing economics activity in the legal and acceptable ways is pleasing to God.

If islam encourages accumulation of wealth, what is wealth? All things having monetary value. Another definition is all goods and services having economic value. Qur'anic definition of wealth is Maal. Maal is defined as anything that has a material value.

- To be continued -