How does Islamic Banking address the world's financial problems?

There are multiple economic issues facing the world. The Financial Challenge is a method for implementing progressive adjustments that will build a solid financial foundation and result in rising wealth. The Islamic banking approach is based on our core life principles. The challenges listed below have been discussed along with their Islamic banking solutions.

Removal of Riba from the Economy

Islamic banking is a component of the Islamic financial system and should be remembered. Because OIC defined Islamic banking as a financial institution whose statutes, rules, and procedures expressly state its commitment to the principles of Islamic Shariah and the prohibition of the receipt and payment of interest on any of its operations, Islamic banking is the only answer to this problem. In the opinion of the researcher, a riba-free replacement method is necessary. The Islamic finance system may be a good substitute. However, various arguments have been made against the riba-free economy, claiming that it will confront challenges and be impractical. Therefore, specialists assessed the nature and importance of these arguments, showing the justification for the riba ban. Experts concluded that the economic case for doing away with riba is founded on fairness, efficiency, stability, and growth principles.

Instability of the Economy

Why may Islamic banking be a remedy for economic unrest? In terms of their fundamental modes of operation, it has been discovered that Islamic banks are distinctive from their conventional equivalents. Islamic banks' operations are founded on Shariah compliance principles such as profit-sharing foundation, actual asset transactions, and rigorous adherence to no theoretical aspect, which are guarded with the conviction that interest or riba is entirely inappropriate.

Banks' liquidity holdings run according to Islamic principles, are higher than conventional banks. This is partly because there aren't many Shariah-compliant investing options available. This is in line with those who believed that the appeal of Islamic banks' products, such as Mudaraba, Musharakah, Murabahah, and Ijarah, and investment strategies based on profit and loss, was the primary driver of the increased liquidity holdings. Islamic banks prioritize profit-sharing finance and investing, where risks are shared equally—illustrating how Islamic banks presently use advanced qualitative and quantitative methodologies in Bangladesh to address credit risk issues. Islamic banks also differ from conventional banks in funding and equity involvement. As a result, they focused more of their investing efforts on less hazardous industries. Because Islamic banks were barred from engaging in speculative activities and excessive leverage, the main contributors to the current global financial crisis, they were less affected than many conventional banks.

Challenging existing values

The answer to this problem is credit allocation, which is value-oriented. It has been said that since public monies fund bank credit, they should be provided to promote overall social welfare. As with other resources provided by God, the achievement of Islamic society's (Maqasid Al Sharia'h) aims should come first, followed by the maximization of individual wealth. It might be achieved by ensuring that credit is allocated in a way that maximizes the production and distribution of products and services that are needed by the majority of society and maximizes the number of businesses in the community that profit from credit. The strategy should adopt the institutional procedures required for this aim after first clarifying to the commercial banks what sectors and areas of the economy are to be fostered by commercial bank funding and what goals are to be realized. Operating a value-oriented plan and then integrating it with the commercial banking system for effective execution would be the correct technique to accomplish the goal.

Conclusions

Shariah governance has to be strengthened to make Islamic banking more robust to the world's economic problems. The current structure for corporate governance is improved by it. Transparency, trust, moral behavior, credibility, philosophy, values, and underlying beliefs are taught. Once more, interest-based debt financing harms the financial and monetary systems at the national and international levels, impoverishing the poor while enriching the wealthy. Therefore, even if the importance of non-interest-bearing financial instruments is recognized, equity-based and risk-sharing instruments should also receive more attention. Additionally, the industry's stability, trustworthiness, and transparency might be further improved by standardizing Islamic financial products, reinforcing the notion that Islamic banking is a viable response to the current economic crisis.