The Islamic banking system is a relatively young institution that gains influence not only in the Islamic world but also in non-Muslim countries with big Muslim communities. The first Islamic bank, Dubai Islamic Bank, was erected in 1975; today about 265 Islamic finance institutions operate in more than 70 countries, and their assets have increased more than 40-fold since 1982 to exceed $230 billion. More and more western banks erect Islamic branches; the first was Citibank in 1996.
This paper discusses the influence of an Islamic banking system on the start-up of young, innovative businesses. A negative influence would hinder these businesses to develop – if not counterbalanced by other measures like state involvement. In non-Muslim countries it would constrain religious Muslims from participating in the contemporary economical changes, determined by an opening-up of markets and privatization, which requires the start-up of new businesses.
The Islamic banking system operates according to Islamic law; hence several Islamic restrictions, the most important is the prohibition of riba (=interest), limit its freedom to develop suitable financing instruments for the support of young, innovative businesses.
These restrictions enlarge the risk of the bank especially when financing these businesses, so the bank either avoids these businesses or tries to bend the Islamic law and operates – de facto – like a conventional bank. In this case, however, the bank is facing problems with the Religious Supervisory Board, an integral part of every Islamic bank, which will stop the bank from deriving from the Islamic law (sharī´a).
After discussing these determinants, I will discuss the existing interest-free financing instruments of Islamic Banking suitable for the start-up of young, innovative enterprises.
On the example of the PLS-concepts musharaka and mudaraba, I will analyse the factors that make these financing concepts not attractive for banks, especially when financing young, innovative business. On the example of the Mark-up activities murabaha (Trade Financing) and ijara/ijara al-waktina (Leasing) I will analyse, why these concepts are only suitable for financing very special cases of young businesses and are not a suitable alternative to Western banking concepts for the majority of young entrepreneurs.
Finally I will show ideas how to improve the system without violating Islamic law, but also discuss the limits of the Islamic banking system.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- The Problem of the Prohibition of Interest (riba) and Alternatives
- The Meaning of the Higher Supervisory Religious Board for Young Enterprises
- PLS Concepts: Mudaraba and Musharaka
And Why Banks Shy Away From These Concepts
- Mudaraba - "Sleeping Partnership"
- Musharaka - "Sharing"
- Other Forms of Loans in Islamic and their Limited Applicability for Young,
Innovative Enterprises
- Qard Hasan - “Credit Without Interest\" - Not Available for Business Financing
- Ijara – “Leasing\" / Ijara wa-Iktina - \"Hire-Purchase\" - Just Suitable in Exceptional Cases
- Murabaha – “Trade Financing” – Feasible Just for a Minority of Entrepreneurs - and at the Cost of Deriviation from the Original “Halal” Concept
- Conclusion and Proposals for Improvements Inherent to the System
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
The primary objective of this paper is to examine the influence of the Islamic banking system on the financing of young, innovative businesses during their start-up phase. The paper focuses specifically on the challenges and limitations posed by Islamic restrictions, particularly the prohibition of interest (riba), and explores the suitability of existing interest-free financing instruments for this specific business sector. It aims to understand how the Islamic banking system, with its unique rules and principles, affects the development of new ventures.
- The impact of the prohibition of interest (riba) on Islamic banking practices.
- The role of the Higher Supervisory Religious Board in shaping the financial landscape.
- The suitability and feasibility of Profit-Loss Sharing (PLS) concepts (Mudaraba and Musharaka) for young, innovative businesses.
- The limitations and challenges associated with other interest-free financing instruments like Murabaha and Ijara.
- Potential avenues for improvement within the Islamic banking system to foster greater support for innovative entrepreneurs.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter provides an overview of the Islamic banking system, its global reach, and the relevance of its impact on young, innovative businesses, both within and outside Muslim countries. It highlights the need for understanding the influence of this system on the development of new ventures.
- The Problem of the Prohibition of Interest (riba) and Alternatives: This chapter discusses the central principle of Islamic banking: the prohibition of interest (riba). It explores the historical and religious context behind this prohibition and its implications for the development of interest-free financing instruments, highlighting the challenges it poses for young entrepreneurs.
- The Meaning of the Higher Supervisory Religious Board for Young Enterprises: This chapter examines the role of the Higher Supervisory Religious Board in Islamic banking. It analyzes the impact of this institution on planning reliability, transaction costs, and the overall dynamics between banks and entrepreneurs, particularly in the context of young, innovative ventures.
- PLS Concepts: Mudaraba and Musharaka: This chapter delves into the core Profit-Loss Sharing (PLS) concepts of Mudaraba (silent partnership) and Musharaka (partnership). It analyzes their theoretical foundations and examines why these concepts may be unattractive to banks, especially when financing young, risky ventures, leading to a reluctance to engage in such funding.
- Other Forms of Loans in Islamic and their Limited Applicability for Young, Innovative Enterprises: This chapter explores other interest-free financing instruments available in Islamic banking, including Qard Hasan (credit without interest), Ijara (leasing), and Murabaha (trade financing). It evaluates their suitability for financing young, innovative businesses, highlighting their limitations and the specific scenarios where they might be applicable.
Schlüsselwörter (Keywords)
The primary keywords and focus topics of this paper encompass the Islamic banking system, interest prohibition (riba), Profit-Loss Sharing (PLS) concepts (Mudaraba and Musharaka), young, innovative businesses, financing challenges, and potential avenues for improvement within the Islamic banking system. It explores the intersection of religious principles, financial practices, and entrepreneurial development, aiming to shed light on the unique dynamics of this economic model in a contemporary context.
- Quote paper
- Dipl. Paed. Kathrin Nina Wiedl (Author), 2006, The Islamic banking system - Not conductive to the start-up of young, innovative business firms, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/50897
