Islamic Bank THEORETICAL FRAMEWORK

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CHAPTER II THEORETICAL FRAMEWORK

A. Islamic Bank

Islamic Banking act 2008: “Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam.” While Ariff 2007:3 defines Islamic bank as an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits, make loans, derive a profit from the difference in the profits-shares, and fee incomes that are consistent with the Shari’ah common law principles governing such a bank. According to Haniffa and Hudaib 2007: 99 Islamic banking refers to a system of banking which is consistent with the principles of Islamic law. Shari’ah bank is one of national banking which operates according to shari’ah principle. Shari’ah prohibits transaction involving interest riba, uncertainty gharar, and unlawful haram and it requires muslim to pay zakah . Riba refers to the addition in the amount of the principal of a loan. The prohibition of interest means that Islamic banks cannot incur or earn interest in any of their financial transactions. Beside that, riba is prohibiting in Islam because it’s established injustice and exploitation in economic system. Sulaiman 2003: 6 argue that the moral motive behind the prohibition of interest is based on the principle of not exploiting the poor and the needy through charging interest on loans extended to them. According to Haniffa and Hudaib 2007: 99 Shari’ah concern with promoting justice and 20 welfare in society Al-adl and Al-ihsan and seeking God’s blessings Barakah, with the ultimate aim of achieving success in this world and hereafter Al-falah. It describes that the purpose of Shari’ah is to promote and protect the interest of individuals and societies by bringing benefits and preventing harm in relation to their necessities needs and wants. Consequently, the various financial instruments develop by Islamic bank base on two principles: the profit-and-loss sharing principle and the mark-up principle Aggarwal and Yousef, 2000: 95. According to Haniffa and Hudaib 2007: 100 Financing instruments based on the former principle include mudharabah venture capital and musharakah partnership arrangement ; While instruments based on the latter include murabahah resale with stated profit, bay’al-salam forward sale contract, ijarah and ijarah wa iqtina operating and financial lease ; 1. Mudharabah is a form of partnership where one party provides the funds and the other provides the expertise and management. Mudharabah is based on profit sharing. 2. Musharakah is involving places capital with another person and both sharing the risk and reward. Musharakah is based on profit and loss sharing. 3. Murabaha is a contract of sale between a buyer and a seller in which a seller purchases the goods needed by a buyer and sells the goods to the buyer on a cost-plus basis. Both the profit and the time of repayment are specified in an initial contract. 21 4. Salam is a sale of goods where the price is paid in advance and the goods are delivered in the future. 5. Istisna’ is a contract for manufacturing or construction whereby the manufacturer seller agrees to provide the buyer with goods identified by description after they have been manufactured or constructed in conformity with that description within a pre-determined time-frame and price. 6. Ijara operating lease is a form of leasing. It involves a contract where the bank buys and then leases an item. The duration of the lease, as well as the basis for rental, are set and agreed in advance 7. Ijarawa- igtina lease with optional ownership is another form of Ijara, except that included in the contract is a promise from the customer to buy the equipment at the end of the lease period, at a pre-agreed price.

B. Islamic Value