Islamic Banking Essay Example | Topics and Well Written Essays - 1250 words

Islamic Banking - Essay Example Some recent developments, however, is presenting opportunities for Islamic banks. It should be noted that the Islamic finance market has already matured to $200 billion in assets. Therefore, companies should employ the accurate strategies to capture these markets. The operation of Islamic banks rests on two important tenets: no interest and socially responsible investing (Islamic Banking in UK 2006). These principles practiced by Islamic banks are dictated by the Quran. Usury or the process of lending funds at exorbitant interest rates is strictly prohibited. Also, money or financing acquired from banks can only be used for worthy cause. Financial resources should never be used to fund activities such as illegal drugs, weapons, alcohol, pornography, and terrorism. Analysing this system, we can see that Islamic banks will be more preferred by borrowers than depositors. As these financial institutions do not promise interest on the funds deposited by customers, non-Moslem investors will see it more profitable to utilize the services of conventional commercial banks. This type of product can only be targeted to the adherents of Islam which advocates this type of banking practice. The use of these principles in Islamic banking could have motivated businesses and entrepreneurs to use these financial services. It can be seen that the financing products and services offered by Islamic banks operates on profit and loss sharing (PLS). ... Islamic Mortgage Finance One of the products of Islamic bank which has gained wide acceptance and popularity in the United Kingdom is mortgage finance. As opposed to the conventional mortgage financing, Islamic banks buy and own the commodity for the client. The client then purchases the product from the bank at a markup within a specified period of time. After full payment has been made, the ownership of the property will be transferred from the bank to the client. The success of Islamic banking in the United Kingdom is indicated by t he report of Research and Markets. According to the agency, the market for Islamic banking now reached $164 million. The segment also shows fast paced growth at an average annual rate of 68.1%. This is over and above the industry average of 16.2%. If this trend will continue, the total value of Islamic mortgage banking will be equivalent to over $1billion in 2010 while conventional banking will suffer from intense rivalry. It should also be noted that currently, the profitability of Islamic banking is indicated by the participation of commercial banks like HSBC and Lloyds TSB in the market. It was found out that in 2003, there is only one Islamic lender in UK. Currently, this number has already increased to five. However, it should be recognized that the Islamic banking, specifically Islamic mortgages command only a small portion of the market in UK. One of the hindrance of mortgage finance is the stamp tax duty. Recommendations The success of Islamic banking in the United Kingdom together with the acceptance of the non-Moslem population implies that this type of financial intermediation can be embraced by other clients in the global market. After the above analysis, this report