Islamic Banking System: Need, Dimensions and Function

Abstract

The Islamic Banks can do the business without being involved in the forward swaps of the exchange dealings. When we move to borrowing and lending activities, the matters become different. Any extra repayment rather than the original principle in any lending-borrowing relation is considered to be usury. Usury in Islam isconsidered to be one of the big sins. In Islam, there is no difference between usury as an excessive interest or the so-called legal interest itself. Therefore depositors who in fact are a lender to the bank cannot be allowed to take interest in the Islamic measures; but he can be an investor. The percentage of profit must not be offered the same conditions applied to other investors by receiving a portion of the profit that comes out of the pool of the investment portfolio managed by the bank. The relation with the user of funds is not a borrowing-lending relation; but it has a different type of contractual arrangement. Therefore this paper examines the structure, function and dimensions of an Interest free Islamic bank.