An evaluation of Islamic banking in shaping economic growth.

Byline: Zuhaib Khokhar

Islam is the most spreading religion that believes in equal distribution of income, therefore, there is a concept of Zakat (instantly comes after prayer (Salat) in its priority in Holy Quran) in Islam for those who does not have sufficient access to the economic resources, hence supports in equivalence between the well-off and the underprivileged segment of the society. It means that Zakat endorse much equitable redistribution of wealth.

Islam shows the equal justice for all. So does Islamic Banking? Is there any growth of an economy through Islamic banking, how can it grow economy, why economic growth through Islamic banking sector is crucial, what specific role does Islamic banks play to boost an economy up, and under what circumstances, Islamic Banking sectors can grow any economy? These questions can be answered by reading this detailed version of work.

Main factors for the growth and development of an economy in Islamic Banking are: profit-loss sharing, prohibition of Riba (usury), exclusion of speculation, exploitation, prevention of monopoly, concentration of wealth, limiting control and investment in gambling and alcohol, empower individual to work according to his likes and wants, provide feasible system so that every individual can function according to his or her capability, enable everyone to get what is due and elimination of limitation of wealth to only in few hands.

This exploratory work will provide adequate knowledge to explore the relationship between an economic growth and Islamic banking and their key factors resulting in prosperous economic conditions. In order to explain the growth of economy through Islamic Banking it is fundamental to recognize the background of emergent Islamic Banking sector and their terminologies.

Firstly, banks were used only for funds for foreigners and to enhance foreign-based industries. These banks provide the excessive amount in the form of interest which is Haram (forbidden) under the umbrella of Islamic perspective. For this reason, utmost number of Muslims population left conventional banks because of involvement of Riba (usury) as religious people were of the view, it is against Shariah and religious belief.

This is how a need was arisen to setup such a bank that must be Shariah-compliant and runs under Islamic rules and regulations. In order to be Shariah-compliant, they created products with a philosophy quoting; "no any person will be benefited from another person's loss, there will be a profit-loss sharing among the number of partners and prohibition of Riba (usury). This is how concept of Islamic Banking was appeared.

It is stated in Surah Al-Baqarah, verses 278-279;

"O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (Usury) (from now onward), if you are (really) believers. And if you do not do it, then take a notice of war from Allah and His Messenger".

In one Hadith, Ali ibn Abi Talib narrated quote of Holy Prophet (P.B.U.H):

"Every loan that draws interest is Riba".

The word "Islamic Banking" symbolizes that a system, either financial or banking or any financial/banking activities, must comply with Islamic rules, regulations and Islamic law (Shariah). Whereas, "Economic Growth" refers to an increase in the level of productive output of a country or any economy over a period of time. A country's economic growth and development is showed by an increase in Gross Domestic Product (GDP). According to Oxford dictionary of Economic Growth which illustrates that an increase or expansion of the goods and services produced per head over a period of time. Economic growth can be calculated by comparing Gross Domestic Product (GDP) of a year to that of Gross National...

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