Islamic Banking’s Role in Controlling Pumpiing Essay

ISLAMIC BANKING'S ROLE IN CONTROLLING INFLATION

ABSTRACT

Inflation has become a fact of life in nearly all countries, but it is an extremely serious problem inside the developing countries. As far as business banking is concerned, it erodes the value of the depositor's savings as well as that from the bank's financial loans. Yet the banking system would not seem to particularly address this problem. This daily news makes an attempt by finding a means of compensating to get the loss endured by capital due to pumpiing. Identifies the transactions in the commercial banking businesses that are affected by inflation, thinks several feasible ways of counteracting the negative effects, and then shows one procedure as most suited to implementation. The technique presented this is the general one particular, universally relevant to all lending-borrowing operations, to neutralize the effect of inflation on this kind of transactions. It can be simple and straight forward, but needs the Central Bank to experience a crucial role in its implementation. The strategy has unique relevance to Islamic banking. For whereas in a standard system the interest paid to the depositor might fully or perhaps partially compensate for the loss, as well as the bank may include it in the interest that they charge the borrowers, within an Islamic program the depositor will have to endure the full reduction. Therefore a procedure for compensation intended for the loss becomes even more important.

INTRODUCTION

The dual banking program in Malaysia has empowered banks to supply two varieties of financing method, the conventional loan and Islamic financing. In recent years, over a period of many years, financial institutions possess offered numerous financing features from which consumers could choose. It is well-known that the main difference between Islamic banking institutions and standard banks can be interest rates (Haron and Shanmugam, 2000). In Islamic banks, interest rates happen to be forbidden and unlawful to become practiced. Therefore , a new answer has to be made in order to guarantee Islamic banks do not is very much similar to the interest-based conventional financial system. The solutions will be twofold; first, Islamic banking institutions employ hibah rate or profit posting ratio when providing income to depositors of the financial institutions. Second, Islamic banks use profit rate when recharging the customers in Islamic auto financing. No interest rates will be offered. The hibah rate has based on Islamic banks' efficiency. It is not an assurance by the bank. However , rate of interest is a guarantee by conventional banks, whether or not the banking companies gain revenue or not. This is a burden in the case of conventional banks. In the event they incur loss inside their banking procedure, the loss will be borne by them alone. However , regarding Islamic banking institutions, the loss will be shared by both parties; the depositor plus the banks.

Shaharuddin and Safian (2005) undertook a report on Islamic variable price financing which can be acceptable coming from Islamic perspective. This examine has exposed an innovation of Islamic financing. Yet , in this present study, a spotlight is only to get flat level rather than Islamic variable rate financing.

In this conventional paper, the main objective is to argue Islamic financing's performance with regards to the economic situation such as in inflation and deflation. An evaluation between the Islamic financing and conventional financial loan is unavoidable in the work to analyze its performance. Shariah has allowed Islamic banks to utilize the toned rate the industry free-market level in order to provide a different sort of feature of Islamic bank system when compared with conventional financial system. Islamic Banking is superior to standard banking mainly because Islamic Financial has a fixed rate of payment regardless of economic state and any risk can be shared between the bank plus the customer.

DEBATE 1: Economic situation and its impact on Islamic home financing

Monetary instability can have a great impact on the interest price but with Islamic banking, the rate of repayment is...

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