The fact that Islamic laws prohibit paying or receiving interest does not imply that they prohibit earning money or encourage a return to an economy based solely on cash or barter. They encourage all parties to a transaction to share the risk and the profit or loss. One can compare the depositors of Islamic banks to investors or shareholders, who receive dividends when the bank makes a profit or lose part of their savings when it suffers a loss. The principle is to link the yield of the Islamic contract to the productivity and quality of the project, to ensure a more equitable distribution of wealth. (Islamic finance course)
The regulation and control of Islamic finance
Undoubtedly, one of the biggest problems is to create a framework for the management, control and regulation of Islamic banks. First of all, countries where there are Islamic banks do not all have the same approach. According to one of the two main approaches – applied by the authorities in Malaysia and Yemen, for example – Islamic banks should be subject to a regime of central bank supervision and regulation entirely different from that applied to banks. The second recognizes the special character of Islamic banking activities, but prefers to place them under the same regime of central bank control and regulation as for conventional banks, with slight modifications and special guidelines which are usually formalized by circulars from the central bank. Bahrain and Qatar are examples of countries that apply the latter form of control and regulation.
Several countries and institutions like Diploma pengurusan maklumat have adopted the accounting standards, which complement those of international financial reporting standards. The IFSB aims to facilitate the development of a prudent and transparent Islamic financial services industry and advises on the supervision and regulation of institutions that offer Islamic financial products. The IFSB has recently developed standards on the level of capital required and risk management and is advancing in the design of standards on the governance of institutions. When these international standards are developed and accepted, they will help supervisors verify the soundness, stability and integrity of Islamic financial institutions.
The adoption of a common position on certain instruments would contribute to the development of Islamic finance and strengthen its competitiveness in the world. For example, several issues relating to speculation and the use of derivatives will need to be resolved for a true Islamic stock market to function. While arbitrage and short selling are not acceptable under Sharia law, other transactions are in practice subject to various interpretations. For example, transactions that involve buying and selling debt contracts on the secondary market are only permitted in Malaysia.
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