Banking system has to avoid interest

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

From the viewpoint of Islamic Shariah, in order to be justified Islamic ally the banking system has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and the bank on the other. Interest is regarded by conventional banks as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, commercial banking in an Islamic framework could not be based on the creditor debtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labour and capital. According to this principle, as no payment is allowed to labour, unless it is applied to work, no reward for capital should be allowed, unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature. Based on the theoretical background, business practices of Islamic bank.

Conventional banking system is totally based on interest. There main motive and activities to paying and taking interest. The conventional banking system do not concern about client business condition, whether is earning profit or loss. For that reason economic market facing lot of problems like inflation.

By discussing various aspects of the IBBL, it is shown in detail how interest-free bank functions besides many established conventional banks in the country .Although conventional banks are rendering financial services in Bangladesh for a long period still, the innovation of interest-free banking systems, proved its worth in the country's money market, since IBBL started rendering banking services without any interest in the nation's financial market in recent years. The dissertation mainly consists of two sections. In the first section, an introduction of Islamic banking systems and various financing modes or techniques used by Islamic banks, are discussed.

What Is Islamic Banking System?

Islamic banking has been defined in a number of ways. The definition of Islamic bank, as approved by the General Secretariat of the OIC, is stated in the following manner. An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations. Shawki Ismail Shehta viewing the concept from the perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines: It is, therefore, natural and, indeed, imperative for an Islamic bank to incorporate in its functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy (Ibid).

Islamic Banking is a form of modern banking based on Islamic legal concepts (Shari'a) developed in the first centuries of Islam, using risk-sharing as its main method, and excluding financing based on a fixed, pre-determined return.

Islamic Banking believes in sharing profits and risks in the business instead of becoming creditors. In Islamic Banking the depositor, the Bank and the borrower all share the risks and rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower; he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture. Islam encourages investment in order that the community may benefit.

Why Islamic Banking System:

Interest, Usury, or Riba is forbidden in almost all major religions of the world e.g.




Judeo Christian Tradition

“In thee have they taken gifts to shed blood; thou hast taken usury and increase, and though hast greedily gained of thy neighbours by extortion , and hast forgotten me, said the Lord God.” [Ezekiel 22:12]

The word used by the Quran concerning ‘interest' is Riba. The literal meanings of Riba are money increase, increase of anything or increment of anything from its original amount (Maududi 1979, p.84). However, all increases are not considered as Riba in Islam. Money may increase in business activities as well. This increase is not at all considered as Riba. The increase, instead of being prohibited (Haram), is approved (Halal) in Islam. Islam prohibits only those increases that are charged on the loan in prefixed rate.

  • The Quran
  • The Sunnah

Riba In The Quran

That which you give as interest to increase the people's wealth increases not with God ; but that which you give in charity , seeking the goodwill of God, multiples manifold . (The Rome - Sura al-Rum 30:39)

And for their taking interest even though it was forbidden for them and their wrongful appropriation of other peoples' property. We have prepared for those among them who reject faith a grievous punishment (Woman - Sura Al-Nisa' 4:161)

“O Believer, take not doubled and redoubled interest [interest on interest] , and fear God so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy” (The family of Imran - Sura Al-Imran)

“Those who benefit from interest shall be raised like those who have been driven to madness by the touch of devil ; this is just BECAUSE THEY SAY: “Trade is like interest” while God has permitted trade and forbidden interest . Hence, those who have received the admonition from their Lord and desist, may keep their previous gains, their case being entrusted to God' but those who revert shall be inhabitants of fire and abide therein forever” (The Cow - Sura Al-Baqara 2:275) “... God has permitted trade and forbidden interest... ” (The Cow - Sura Al-Baqara 2:275)

Riba in Hadith

The Prophet cursed:

The receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: “They are all alike (in guilt).” (Sources: Jabir ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed)

“A dirham of riba which a man receives knowingly is worse than committing adultery thirty six times.” (Sources: Abdallah ibn Hanzalah. Mishkat al-Masabih.Bayqahi)

The Prophet said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.” (Sources: Aby Hurayrah, Ibn Majah)

The Holy Prophet said: “Even when interest is much, it is bound to end up in paltriness.” (Sources: Ibn Mas`ud, Ibn Majah, Musnad Ahmad)

1.2 Objective of the report

In this report, I have attempted to give on overview of Islamic Bank Bangladesh Limited in general. Also in the major part, I have shown the practical approach of General Banking, Investment & Foreign Exchange. Some following objectives of the report are as shown.

  • To observe the economic condition.
  • To explain the general banking activities.
  • To explain the investment policy.
  • To explain the activities of foreign exchange.
  • To identify the problems of IBBL prevailing in its banking system
  • To suggest some possible recommendations to overcome the problems.
  • To conduct interest free banking.
  • To establish participatory banking instead of banking on debtor creditor relationship.
  • To invest through different modes permitted under Islamic Shariah.
  • To accept deposits on profit-Risk sharing basis.
  • To establish a welfare-oriented banking system.
  • To extend co-operation to the poor, the helpless and the low-income group for their economic uplift.
  • To pay a vital role in human development and employment generation.
  • To contribute towards balanced growth and development of the country through investment operations particularly in the less developed area.
  • To contribute in achieving the ultimate goal of Islamic economic system.
  • To conduct Interest Free Banking.
  • To accept deposits on Mudaraba & Al-Wadeah basis.

1.5 Importance of the study

Islamic Banking operations in the country. All the government-approved securities in Bangladesh are interest bearing. Besides, Islamic Money Market in Bangladesh is yet to develop. As a result the Islamic banks, which are committed to avoid interest, cannot invest the permissible part of their Statutory Liquidity Reserve and Short Term Liquidity in those securities.

Inspire of the present limitations, Islamic-banking system has tremendous potentiality and prospect in Bangladesh. Firstly, the successful launching and needs to an Islamic Money Market in the country. To achieve practical knowledge of banking side of IBBL.

  • To observe inter-related activities of general banking of IBBL.
  • To gain practical knowledge about over all banking system & especially general banking investment and foreign exchange.

1.6 Limitation

Objective of the practical orientation program is to have practical exposure for the students. My tenure was for eleven weeks only, which was somehow not sufficient. After working whole day in the office it was very much difficult, it not impossible to study again the theoretical aspects of banking. On the other hand to prepare my internship report I have faced some limitations as follows.

  • To collect data and information, It is a common tendency of any departments to keep back their departmental data and information.
  • Unavailability to required published documents.
  • Lack of my experience and efficiency to prepare the standard report.
  • I observed that unskilled persons are available in IBBL; they are not able to teach us various aspects.