Intan Larasati

2A
English For Syariah Banking
Islamic Banking and Finance
Context

The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12%
annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion,
covering bank and non-bank financial institutions, capital markets, money markets and insurance
(Takaful).

In many majority Muslim countries, Islamic banking assets have been growing faster than
conventional banking assets. There has also been a surge of interest in Islamic finance from nonMuslim countries such as the UK, Luxembourg, South Africa, and Hong Kong.

Over the past decade Islamic finance has emerged as an effective tool for financing development
worldwide, including in non-Muslim countries. Major financial markets are discovering solid
evidence that Islamic finance has already been mainstreamed within the global financial system
and that it has the potential to help address the challenges of ending extreme poverty and
boosting shared prosperity.

Islamic finance is equity-based, asset-backed, ethical, sustainable, environmentally- and sociallyresponsible finance. It promotes risk sharing, connects the financial sector with the real economy,
and emphasizes financial inclusion and social welfare.

The following key principles guide Islamic Finance: 1) Prohibition of interest on transactions
(riba); ii) Financing must be linked to real assets (materiality); iii) Engagement in immoral or
ethically problematic businesses not allowed (e.g., arms manufacturing or alcohol production);
iv) Returns must be linked to risks.

Strategy

The World Bank Group involvement in Islamic finance is directly linked to the Banks work on
reducing poverty, expanding access to finance, developing the financial sector, and building
financial sector stability and resilience in client countries.

By helping expand the use of Sharia-compliant modes of financing in World Bank Group
operations, we are helping deliver benefits to client countries in three areas:

The sustainable development of Islamic finance offers benefits for economic growth, reducing
poverty and fostering shared prosperity. Islamic finance can significantly contribute to economic
development, given its direct link to physical assets and the real economy. The use of profit- and
loss-sharing arrangements encourages the provision of financial support to productive enterprises
that can increase output and generate jobs. The emphasis on tangible assets ensures that the
industry supports only transactions that serve a real purpose, thus discouraging financial
speculation.
Islamic finance helps promote financial sector development and broadens financial inclusion.
By expanding the range and reach of financial products, Islamic finance could help improve
financial access and foster the inclusion of those deprived of financial services. Islamic finance
emphasizes partnership-style financing, which could be useful in improving access to finance for
the poor and small businesses. It could also help improve agricultural finance, contributing to
improved food security. In this regard, Islamic finance can help meet the needs of those who
dont currently use conventional finance because of religious reasons. Of the 1.6 billion Muslims

in the world, only 14% use banks. It can help reduce the overall gap in access to finance, since
non-Muslims arent prohibited from using Islamic financial services.
It helps strengthen financial stability. As the 2008 global financial crisis ravaged financial
systems around the world, Islamic financial institutions were relatively untouched, protected by
their fundamental operating principles of risk-sharing and the avoidance of leverage and
speculative financial products.

Despite its recent years of rapid growth, Islamic finance is still in its early stages of development,
and it will need to address several challenges. We are supporting our client countries to
strengthen the legal, regulatory and institutional foundations of Islamic finance. We have also
expanded our efforts in promoting the systematic and sustained use of relevant knowledge of
Islamic finance to raise awareness, build consensus and promote the worldwide use of Sharia
compliant financing instruments.

Recent Engagements

In recent operations in Egypt and Turkey, for example, the Bank Group helped governments to
design Sharia-compliant financing frameworks to expand financing for small and medium scale
enterprises.

Also, in July 2015, the World Bank and the General Council for Islamic Banks and Financial
Institutions (CIBAFI), the global umbrella of Islamic financial institutions, signed a
Memorandum of Understanding (MoU) to help foster the development of Islamic finance
globally and expand its use as an effective tool for financing development worldwide, including
in non-Muslim countries.

Islamic Finance Principles and Instruments

The term Islamic finance is used to refer to financial activities conforming to Islamic Law
(Sharia). One of the main principles of the Islamic finance system is the prohibition of the
payment and the receipt of riba (interest) in a financial transaction. The term riba covers all
forms of interest and is not limited to usury or excessive interest only. The most critical and
significant implication of banning interest is the indirect prohibition of a pure debt security.
The key point to bear in mind is that Islamic law doesnt recognize money and money
instruments as a commodity but merely as a medium of exchange. Hence any return must be tied
to an asset, or participation and risk-taking in a joint enterprise (such as partnerships). A pure
debt security is replaced with an asset-linked security, direct financing of a real asset, and
different forms of partnerships of which equity financing is the most desirable.

In addition to prohibition of riba, there are several other important provisions which may affect
financial transactions. These include the prohibition of gharar (uncertainty or asymmetrical
information), maysir (gambling, speculation), hoarding, as well as trading in prohibited
commodities (for example, pork and alcohol).

Instruments

Basic instruments include: cost-plus financing (murabaha), profit-sharing (mudaraba), leasing

Murabaha Trade with markup or cost-plus sale. The purchase of an asset is financed for a profit
margin, with the asset purchased on behalf of client and resold at a pre-determined price.
Payment could be in lump sum or in installments and ownership of the asset remains with bank
till full payments are made

Ijara Operational or financial leasing contracts. Bank purchases asset on behalf of client and
allows usage of asset for a fixed rental payment. Ownership of the asset remains with the
financier but may gradually transfer to the client who eventually becomes the owner (ijara wa
iqtina).

Mudaraba Trustee financing contract. One party contributes capital while the other contributes
effort or expertise. Profits are shared according to a predetermined ratio and the investor is not
guaranteed a return and bears any financial loss.

Musharaka Equity participation contract. Different parties contribute capital and profits are
shared according to a pre-determined ratio, not necessarily in relation to contributions, but losses
are shared in proportion to capital contributions. The equity partners share and control how the
investment is managed and each partner is liable for the actions of the others.

Sales contracts. Deferred-payment sale (bay muajjal) and deferred-delivery sale (baysalam)
contracts, in addition to spot sales, are used for conducting credit sales. In a deferred-payment
sale, delivery of the product is taken on the spot, but delivery of the payment is delayed for an
agreed period. Payment can be made in a lump sum or in installments, provided there is no extra
charge for the delay. A deferred-delivery sale is similar to a forward contract where delivery of
the product is in the future in exchange for payment on the spot market.

Sukuk Certificates of Ownership. Sukuk are certificates of equal value representing undivided
shares in ownership of tangible assets, usufruct and services, or (in the ownership of) the assets
of particular projects. The returns on the certificates are directly linked to the returns generated
by the underlying assets.

OPINION
I think Islamic banking has grown and developed not only in the above countries , but
Indonesia was a country that has the most developed Islamic banking . I 've heard these words
when the seminar , Ahmad ifham Sholihin said " Indonesia is the most advanced countries and
most developed in terms of Islamic banking . so wrong all along if people said Malaysia was the
country most developed in terms of banking syaiah . Indonesia today is a country that became
mecca of the world in terms of islamic banking . "
in this case Islamic banking is very helpful to us, especially the Muslims to avoid " riba "
because Allah is very forbids " riba " . according Perwataatmadja and antonio (1992 : 8 ) Apa dan
Bagaimana Bank Islam . the practice of " riba " which avoided are practices required payments
on the money and the goods are entrusted or in owes as in the Quran and Hadist.1



People who eat ( take ) riba can not stand but as stands one whom possessed devil because of the
( pressure ) insanity . Their circumstances were such that, is because they say ( argued ) , the
actual buying and selling is the same as riba , whereas Allah has permitted trading and forbidden
usury . People who have an admonition from his Lord and stops ( from taking riba ) , then for
him what he has taken in advance ( before coming ban ) ; and affairs ( up ) to Allah . The
returnees ( riba ) , such are the dwellers of Hell ; they will abide therein .(Q.s Al Baqarah:275)
Mudarabah and musyarakah is also a contract agreement that makes us not hesitate to borrow
money , because their profit-sharing system. According to the experts of Islamic Economics at
the moment murabaha products already dominate the Islamic banking portfolio, either in the
form of Commercial Bank, Rural Bank Syariah (SRB) even to the Baitul Mal wat Tamwil
(BMT). Why banks prefer murabaha? Because in Fiqh never set up a product portfolio Islamic
financial institutions such as banks, No terms of proportions lawful or unlawful in the setting of a
portfolio of Islamic banking products or services. Therefore, it is lawful and allowed only when
an Islamic bank prefers to sell products murabaha financing it. In other languages, it is more of a
1 Karnaen Perwataatmadja dan Muhammad SyafiI Antonio , Apa dan Bagimana
Bank Islam, (Yogyakarta:Dhana Bakti Wakaf, 1992), hlm.8

business policy of an Islamic financial institutions, and subject of course to the benefit of what is
behind the policy.
Then, according to the experts of Islamic Economics Murabaha product in addition to already
dominate the Islamic banking portfolio, Murabaha product is more attractive compared with
products Mudaraba and Musharaka. Why? Because there are several reasons the first being that
the product is easy diekivalenkan Murabahah with a pattern of conventional banking.
Consequently, these products are easily understood by the banks and the society as well. Hence
also, these products are easily socialized. Both because of its easy to understand, it is also easy to
do the calculations, so that the products murabaha relatively easy to sell, and it also contains a
small risk in the eyes of the bank. Therefore, it is reasonable to prefer Islamic banking and
raising the portfolio in the form of murabaha products.

But in fact the product profit and loss sharing is not less important than the product of Murabaha,
because the two products are the two Islamic banking products which have enormous potential in
creating a balance of the monetary sector and sharia. Why is that? Because both of these products
actually involve two parties who are engaged to manage the business sector can be no doubt add
value to the direct economic movement.2

2 https://tialuthfiah2013.wordpress.com/2014/02/26/perbandingan-mudharabahmurabahah-dan-musyarakah-menurut-para-ahli-2/. On Saturday, 25 june 2016 at