Islamic Banking Products: Regulations, Issues and Challenges

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Islamic Banking Products: Regulations, Issues and Challenges

The Islamic society has witnessed vigorous economic activity since the Prophet (SAW) first came to Medina. In fact, the Islamic banking system as an organization only made an impact on the modern banking in Pakistan in the late 1950s and the Mit Ghamr in Egypt by 1963. As in the same year, there is the establishment of Tabung Haji in Malaysia which is still in business, profitably investing money being saved to meet the cost of pilgrimage to Mecca. Essentially, the Islamic banking system is established to contribute to the accomplishment of the socio-economic goals of Islam. The aim of the Islam banking system is fundamentally to promote and develop the practices of Islamic principles, laws, and traditions to financial and banking transactions. In addition, the Islamic banking aims to eradicate all kinds of Zulm (aggression) which are related to business activities and financial dealings, as it is in all other aspects of the Islamic way of life.

In essence, both the conventional and Islamic banks are institutions that serve as financial intermediaries. A financial intermediary can be defined as an institution that acts as middleman between the cash surplus units (savers) and deficit spending units (users of the fund). In fact, the relationship between the conventional bankers with the clients is akin to a "borrower-lender", where these institution operations involve interest taking in their systems which allow the bank to survive in the dynamic environment. For Islamic bank, on the other hand, is considered as an equity-based system whereby the structure of the contract can be Ijarah-based, partnership-based or sale-and-purchase-based. Islam encompasses Aqidah, Mu'amalah, and Akhlaq, where the Islamic banks are supposed to comply with these spiritual values of Islam and operate in a way that the objectives of Shari'ah can be achieved.

There are several Shari'ah principles which are vital for the...