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HOW ISLAMIC BANKS EARN PROFIT WITHOUT INTEREST Toshpulatova Sh.Sh. (Republic of Uzbekistan) Email: Toshpulatova450@scientifictext.ru
Toshpulatova Shakhrizoda Shukhrat kizi - Student, FACULTY OF BANKING, TASHKENT INSTITUTE OF FINANCE, TASHKENT, REPUBLIC OF UZBEKISTAN
Abstract: this article analyzes what is Islamic banking, its functions and objectives, different sides of Islamic banks from conventional banks and how Islamic Banks can earn profit without interest and what kind of instruments they use for doing these operations, how they make an agreement between investors and clients. Article shows how Islamic banks earn profit with several methods as murabaha, ijara, musharakah, takaful, sukuk and etc. and it gives detailed information about these methods. Moreover, given statistical data indicates about average growth of Islamic Banking in countries.
Keywords: islamic banking, shariah, murabaha, ijara, musharakah, takaful, mudharabah, sukuk certificates.
КАК ИСЛАМСКИЕ БАНКИ ЗАРАБАТЫВАЮТ ДЕНЬГИ БЕЗ
ПРОЦЕНТОВ Тошпулатова Ш.Ш. (Республика Узбекистан)
Тошпулатова Шахризода Шухрат кизи - студент, банковский факультет, Ташкентский финансовый институт, г. Ташкент, Республика Узбекистан
Аннотация: в этой статье анализируется, что такое исламский банкинг, его функции и задачи, отличия исламских банков от обычных банков, а также, как исламские банки могут получать прибыль без процентов и какие инструменты они используют для выполнения этих операций, как они делают соглашение между инвесторами и клиентами. В статье показано, как исламские банки получают прибыль несколькими способами, такими как мурабаха, иджара, мушараках, такафул, сукук и т.д., а также приводится подробная информация об этих методах. Более того, приведенные статистические данные свидетельствуют о среднем росте исламского банкинга в странах.
Ключевые слова: исламское банковское дело, шариат, мурабаха, иджара, мушараках, такафул, мударабах, сукукские сертификаты.
In recent years, Islamic banking has been experiencing rapid development due to high interest in its business mechanisms and growth of globalization. About 500 Islamic financial institutions offer a wide range of services, from simple retail financing to fund-raising through corporate-issued securities. In Islamic banking, the profit of banks and their depositors is formed by the investment in various projects, in the course of entrepreneurial activity, creating goods and services. Capital works only for commercial and industrial purposes. The bank is mainly a partner (a contract of partnership) or a trust fund. Both parties - the bank and the client - distribute profits and losses from the project according to the agreement and, accordingly, seek to profit.
Islamic banking, otherwise called non-interest banking, is a framework dependent on the standards of Islamic or Sharia law and guided by Islamic financial matters. Islamic banks make a benefit through value support which requires a borrower to give the bank an offer in their benefits as opposed to paying premium. Some business banks have windows or areas that give Islamic financial administrations to clients. There are some 350 Islamic financial institutions operating in 75 countries. Modern Islamic banking system was started in Egypt in 1963 by
Ahmad El Najjar. Dubai Islamic Bank, established in 1975, is considered the first Islamic bank to have incorporated the principles of Islamic economics in its practice [1; p. 2].
In general, the activities of Islamic banks are based on the following principles:
- money should not come from money, capital growth cannot be achieved in the area of net cash flow;
- investor income should be related to investment in trade and production;
- the relationship between the parties to the agreement should be built on a partnership basis;
- Money is not a commodity, it is only a measure of value.
Methods of mobilizing funds are equity participation (equity investment) and sukuk certificates. Only commodity-based transactions are based on commodity-money circulation. The nature of the activities of Islamic banks is characterized by the following aspects:
- Establishment of corporate governance with internal controls over Islamic jurisprudence (the Shariah Supervisory Board, Internal Audit Task Force);
- The role of risk management reflects the nature of the products (services) and the relationship between the bank and the client;
- Reflects the Shari'a description of the bank's assets, especially the short-term (current) liquidity of the bank, to which the liquidity management function will be formed;
- Participation of the bank in the results of activities of clients and depositors (profit and loss), clients and depositors in the results of banking activities (profit and loss);
- Banking Accounting Standards, which characterize Islamic banking products and services;
- Complete awareness of depositors about the bank's activities openness. As one of the partners of the savings bank will be considered.
The Shariah Council, which operates under the Islamic Bank, controls the compliance of banking transactions with Islamic financing rules. The results of these studies can serve as an additional means of attracting customers' funds, which is a guarantee of adherence to Islamic principles in their use. How Islamic banks make money if they cannot charge interests? The principal means of Islamic finance are based on trading, hence, banks can profit from the buying and selling of Shari'ah Compliant goods and services. Islamic financial institutions trade in Shari'ah-compliant investments with the money deposited by customers, sharing the risks and the profits between them [2; p. 4]. Here are several methods that help Islamic Banks make profit are: [3; p. 4].
Fig. 1. Methods of making profit in Islamic Banks
Mudharabah (profit sharing) is a profit sharing agreement between two parties—an investor and the entrepreneur. In Islamic banking, the investor funds the entrepreneur for business ventures and the returns will be based on profit, on the ratio that has been agreed upon earlier. Mudharabah works in two ways—when a bank plays the role of an entrepreneur the customer becomes a capital provider. When customer plays the role of entrepreneur, the bank becomes a capital provider. In both cases losses suffered will be borne by the capital provider.
Musharakah (joint venture) refers to a partnership or a joint business venture to make profit. All the partners contribute capital to undertake a business activity. The partners share profits on a pre-agreed ratio, while losses are shared according to capital contribution.
Ijara or leasing: Instead of issuing a loan for a customer to buy a product like car or other things, the bank buys the product and then leases it to the customer. The client gains the item at the end of the lease contract.
Murabaha or cost in addition to selling: This is the most well-known item in resource portfolios and applies just to product buy. Rather than taking out a premium advance to purchase something, the client requests that the bank buy a thing and offer to the person in question at a more significant expense on portion. The bank's benefit is resolved already and the selling cost can't be expanded once the agreement is agreed upon.
Takaful is a type of Islamic insurance where members put money into the system to protect one another from loss or damage. Takaful's trademark insurance is based on Sharia or Islamic religious laws, which explain how people are responsible for cooperating and protecting one another. Takaful's policies cover health, life and general insurance needs.
Analysis of country-level growth rates16 shows 11 jurisdictions, out of 17 included in this year's analysis, achieving double-digit asset growth rates in the year to 2Q18. This can be attributed, in at least nine of these countries, to financing growth that was also in the double digits. Deposits, on the other hand, grew by at least 2 digits in eight countries, out of 14 for which data were available, with one country, Sudan, reporting more than a doubling in its deposit base [4; p. 5].
Fig. 2. Islamic Banking Average Annual Growth by Country (y-o-y) (2017 and 2Q18)
To conclude, Islamic banks provide services and accounts that offer profit or loss sharing mechanisms. Islamic Banks give financial inclusion that individuals and businesses have access to useful and affordable financial products and services that meet their needs -transactions, payments, savings, credit and insurance - delivered in a responsible and sustainable way. Moreover, in Islamic finance, the investments are approached cautiously and the decision-making process is carried out thoroughly unlike the conventional banking
system. The companies who appear risky are usually kept away from financial institutes. This is why during the global 2008 financial crisis; the Islamic financial institutes remained untouched. With careful audits and analysis, the Islamic finance institute lessens the occurrence of risk and enhances financial stability. In most cases, Islamic banks combine their savings with their own funds, then invest it and distribute the profits between the depositor and the bank. If investment accounts are offered in various forms, the bank will have to distribute profits. With its risk sharing principle, Islamic banks are getting more popular among all countries and this principle is considered their strength side as we compare them conventional banks.
References / Список литературы
1. How Islamic banking works without interest. By Jomy M. Joseph. September 8, 2016.
2. [Electronic Resource]. URL: https://rakbank.ae/blog/posts/how-do-islamic-banks-work/ (date of access: 14.02.2020).
3. Made by the author according to information from the website. [Electronic Resource]. URL: https://www.gfmag.com/topics/blogs/what-products-does-islamic-finance-offer/ (date of access: 14.02.2020).
4. Islamic Banking Average Annual Growth by Country (y-o-y) (2017 and 2Q18) taken from "Islamic Financial Services Industry Stability Report 2019". Published by Islamic Financial Services Board. P. 5.
