The general objective of this study is to assess the factor affecting the implementation of IFB banking service in Ethiopia particular reference to CBE, OIB, and OCB and Awash bank of Jimma district in Jimma city.
The study will be employed descriptive research design based on the survey and the data collected. The study will use both primary and secondary data which are quantitative and qualitative in its nature and will have been collected through structured and semi structured questioner and interview .a total of 423 sample respondents will be taken through multistage sampling. Of the total sample interest free banking customer and staff of the bank constitute 381 and 42 respectively, the data will be analyzed using descriptive statics of percentage, tabulation, frequency and mean.
Contents
ABSTRACT
ACKNOWLEDGEMENT
List of figure
ACRONOMY
1.1 BACKGROUND OF THE STUDY
1.2 Statement of the problem
1.3 Objective of the study
1.3.1 General objective of the study
1.4 Research hypothesis
1.7 Organization of the paper
CHAPTER TWO
2.1 THEORETICAL LITIRATURE
2.1.1 Concepts of Interest Free Banking
2.1.2 Evolution of Islamic Banking
2.1.3 The Principles of Interest free banking
2.1.4 TYPES OF FINANCING IN ISLAMIC BANKING
2.1.5. Sources of Islamic legislation
2.1.6. Retail Islamic Banking Products
2.1.7. Islamic and conventional banking
2.2 EMPERICAL REVIEW
2.2.1 Studies related to Islamic banking in country specific studies
2.2.2 Studies related to Islamic banking in Ethiopia
2.2.3 Prospects of Islamic banking
2.2.6 Opportunities of Interest Free Banking in Ethiopia
2.2.7 IFB factors in Ethiopia
2.2.9 GAP IN THE LITRATURE REVIEW
2.2 CONCEPTUL FRAMEWORK
2.4 RESEARCH GAP
CHAPTER THREE
3.1 Research Design
3.2 Research approach
3.3 Source and type of data
3.4 Target population of the study
3.5 Sampling technique and sample determination
3.6 Method of data collection
3.7 Methods of data analysis and presentation
3.8. Data Analysis Method
4. COST AND TIME PLAN
4.1 Time Plan
4.2 Cost budget
References
ABSTRACT
The general objective of this study is to assess theFactor affecting the Implementation of IFB bankingservice in Ethiopia particular reference to CBE, OIB, and OCB and Awash bank of Jimma district in jimma city. The study will be employed descriptive research design based on the survey and the data collected. The study will use both primary and secondary data which are quantitative and qualitative in its nature and will have been collected through structured and semi structured questioner and interview .a total of 423 sample respondents will be taken through multistage sampling. Of the total sample interest free banking customer and staff of the bank constitute 381 and 42 respectively, the data will be analyzed using descriptive statics of percentage, tabulation, frequency and mean. The paper will examine theFactor affecting the Implementation of IFB bankingof CBE, OIB, and OCB and Awash bank jimma district in jimma city.
ACKNOWLEDGEMENT
First and for most, I would like to thanks the Almighty god who help me in my day to day activity. Next I would like to express my deepest sincerity and great full gratitude to my Main advisor Mrs. Wubishet M (Assistance proff)and co-advisor Mr. Chernet for his/her extensive scholarly and knowledgeable advice, as well as for his/her patience assistance support throughout the work of my proposal. Also I would like to express my deepest gratitude to District manager of CBE, OIB, and OCB and Awash bank jimma district for their support in all aspect
Tables Pages
Table 1.The major difference between Islamic and Conventional banking
Table 2.Sampling technique and sample determination
Table3 The Dancey and Reidy's (2004) categorize the value of correlation coefficient
Table 2 Validity Analysis
Table 3 Reliability analysis
Table 4 Time Plan
Table 5 Cost budget
List of figure
Figure 1. Conceptual frame work of the study
ACRONOMY
illustration not visible in this excerpt
CHAPTER ONE
This chapter deal with ,the background of the study ,statement of the problem ,objective of the study, the development of research hypothesis ,scope of the study and organization of the paper are presents in this section.
1.1 BACKGROUND OF THE STUDY
Now a day Islamic banking business is growing at a faster rate because of the interest free system and money developed countries have started to look at it as the alternative from their conventional banking system (Abduljelil and Khalilur 2014).Islamic bank is an institution that mobilizes financial resources and invests them in an attempt to achieve predetermined Islamic ally-acceptable social and financial objectives. In addition to this Islamic banking is a system that mobilizes savings on the basis of profit /loss sharing that is considered to be fairer and more conducive to investment and development (Hassen& Lewis, 2007). Each bank competes to attract the customers by providing various types of services to retain those potential customers and attract the new ones to work with them. These competitions lead the existing banks as well as new entrants innovative to provide new type of services to the public. The main reason to do this is attract and meet the resource they lack liquid funds to their basic requirements. Interest free banking is a banking system which operated based on the teaching of the Islamic faith.
It is unique feature is that it is free of interest beside this characteristics, the IFB system has other objectives, such as equitable distribution of income and wealth and increased equity participation in the economy (Clifford, 2010).it is not allowed investing in a business that provide goods and service considered contradict to its principle, Haraam, such as business that sell alcohol or pork, or business that produce median such as gossip column or pornography, which are contrary to Islamic value (Mohammed, 2014).
According to the information obtained from the national census Agency, the Islamic population comprises around 33.9% of the total population, this offer the opportunity for substantial customer that would patronize Islamic banking product. The national census shown in Ethiopia there is a huge potential for interest free banking service .The study made by Abdulkadir (2014) has found out that there is a significant need for Islamic banking product and service in our country Ethiopia. Beyond satisfying the need of Ethiopian customer Islamic banking will also create for Ethiopian government to gain diplomatic advantage financial dealing with Muslim dominated nation (Usmani, 2002).
Islamic banking are significantly different from that of conventional bank in many aspect: in Islamic bank the compensation is always a price(Thaman) but in the conventional bank the compensation is always interest, in the Islamic bank the relation of the bank-customer is as seller-buyer and partner but under conventional the relation is creditor-debtor. Also Islamic bank can be different from that of the conventional bank, it do not permitted to finance things that harm the society like alcohol ,tobacco but there is no such restriction in conventional bank.
The Islamic banking are face with serious problem to practice Islamic law, proper interbank money market is not available and poor regulation framework for IFB system (Erfan, 2014). To fulfil the demand of the Ethiopian Muslim customers ,national bank of Ethiopia in 2008 amended Ethiopian banking business proclamation (592/2008) to include provision of IFB and pave the way for the establishment of Islamic banking in Ethiopia .However the declaration was amended by other declaration (51/2011)which prohibited the establishment of full-fledged Islamic financial institution ,but give the right to open the door for existing commercial bank to create on interest free banking as (Yobdar 2018)explanation. Currently different Islamic bank are expected to join the banking industry as a full –fledged interest free banking ,such as zemzem,Hijira,Nejashi and zad bank, but currently zemzem bank are already started its operation and the left other are on the way to start their operation this create an opportunity for the development of the counters economy.
After the issuance of working directive s, SBB/51/2011 different commercial bank granted the license in order to deliver IFB service to their customers. Some of the bank which are started to provide IFB service such as CBE, OIB, OCB, AB, NIB and so on have joined IFB business by giving depositary product for the time being. However the purpose of this study will be to assess the prospect of interest free bank and the Affect that bank face in implementing interest free banking service in case of CBE, OIB, OCB and Awash bank jimma district Jimma city.
1.2 Statement of the problem
The banking industry in Ethiopia has been operating in the country for over a period. But interest free banking had never been practiced even though around one third of Ethiopian identify as Muslim according to the 2007 national census. they had been precluded themselves from dealing with commercial banking activity considering its dependability on interest .Recently many commercial bank started using interest free banking transaction ,tools and technique in their operation. This is really encouraging and motivating for the banking industry as a whole particularly interest free banking since significant amount of adult population does not access to formal banking because of their unavailability of formal banking frame work or paying or receiving interest prohibited in the religion. There is a fact that there are sufficient Muslim investor and borrower in both Islamic and non- Islamic country to warrant the concentration of traditional bank who seek to serve such clients are still relatively untapped market (Mohammed,2012).
Development of Islamic financial institution is advantageous to every economy because it enhance equitable distribution of income, operate interest free transaction and invest in only lawful investment and in real sector of the economy (Habib2001).
A number of studies have been conducted worldwide in the Islamic banking sector and many studs exist in Factor that affects the implementation of IFB. From the few studies iqbal,et.al (2000)show that the factors hindering Islamic banking are institutional as well as operational factors in Arab country. The institutional factors are poor institutional framework, inadequate legal framework and supervising policy, absence of organized secondary market and lack of short term market placement fund.
While the operational factors are improper financial engineering, lack of teaching, training, research development in this institution, lack of profit sharing finance, inability to adequate mobilize deposit competition and globalization.
Saleh et al (2005) show the Lebanese experience with Islamic banking since the foundation of the first Islamic bank. They find that lack of public awareness and acceptance, lack of research and development institution, inadequate manpower and high competition from conventional bank offering Islamic activity are the major factors of Islamic banking in Lebanon.
In Ethiopia, however, few studies were conducted on the attributes of IFB. Among these studies Debebe (2015) has conducted a study on „Factors Affecting Customers to Use Interest Free Banking in Ethiopia‟. The study is cantered on „customers‟ intention and willingness to use interest free banking‟. The result showed that perceived relative advantage, perceived compatibility, customers‟ level of awareness and subjective norm have a significant positive impact on the attitude towards interest free banking in commercial bank of Ethiopia. This study is about impact assessment on the attitude towards IFB usage which does not address the current problem at hand. On the other hand Teferi‟s (2015) study is about „Contribution of IFB to economic development and its prospect in Ethiopia‟. The study has assessed the contribution of including the Muslim population in to the banking (financial system) to the economic development and GDP growth.
The researcher focused on this case area due to large number of Muslim society are live on it, knowing the Factors that affects the implementation of IFB banking are very important for the development of the country’s economy as a whole .In order to achieve the objective of the study in to effect the researcher limit its study are to some selected commercial bank of Ethiopia in jimma city (CBE, Awash Bank, OIB and cooperative Bank of oromia).
Research questions
1. What are the prospects in delivering interest free banking system in some selected commercial bank in jimma city?
2. What is the level of demand for interest free banking product other than those currently provided by the bank?
3. What are the factors which the bank and its customer face in using and delivering interest free banking system?
4. What are the types of service offered by Islamic banking and their consistency with Islamic law (sharia)?
5. How Islamic banking service will have an effect on deposit mobilization effort of the bank?
1.3 Objective of the study
1.3.1 General objective of the study
The general objective of the study is to examine the factors that affect the implementation of IFB activity especially in some selected commercial bank in jimma city (CBE, Awash Bank, OIB and cooperative Bank of oromia).
1.3.2 Specific objective of the study
- To investigate the prospect of interest free banking system in some selected commercial bank jimma city.
- To evaluate the level of demand for interest free banking product other than currently provided by the bank
- To identify the factors affect the bank and its customer will face in delivering and using interest free banking system.
- To identify the types of service offered by Islamic banking and their consistency with Islamic law (sharia)
- To revel out how Islamic banking service will have an effect on deposit mobilization effort of the bank?
1.4 Research hypothesis
Based on the empirical review the following hypothesis were formulated
H1: Huge Amount of Potential Customer has a significant positive effect on IFB practice.
H2: Deposit Mobilization and Profitability of IFB service has a significant positive effect on IFB practice.
H3: Directive 0f NBE related to IFB banking service has a significant positive effect on IFB practice.
H4: Lack of Awareness and understanding has a significant negative effect on IFB practice.
H5: Regulatory factors have a significant negative effect on IFB practice.
H6: Absence of liquidity instrument has a negative effect on IFB practice.
1.5 Scope of the study
The study will be conducted on the factors that affect the implementation of IFB banking system in our country context. Moreover the study area will be limited to some selected commercial bank located in Jimma city(CBE, Awash Bank, OIB and cooperative Bank of Oromia).Additionally the study includes the IFB employees and the customer of IFB in (CBE, Awash Bank, OIB and cooperative Bank of Oromia).
1.6 Significance of the study
This study will have both theoretical and practical contribution. Theoretically, the study will contribute to the existing pool of knowledge concerning interest free banking particularly in Ethiopian context. It also helps as a basis for further research in the felid of interest free banking. Again it provides the understanding of the factors that affect the implementation facing interest free banking system. The study also will assist the bankers in formulation different strategies and policy to eliminate challenge related to interest free bank
1.7 Organization of the paper
The research proposal contains four chapters. the first chapter deal with the introduction part such as; background of the institution , background of the study, statement of the problem, objective of the study, scope of the study, significance of the study, and organization of the paper.
The second chapter discusses the theoretical and empirical literature about interest free/Islamic banking.
The third chapter is about the methodology of the research that is the research design sampling technique, method of data collection tools, method of data analysis and so on the fourth chapter deal about data analysis and presentation and fifth chapter all about recommendation and conclusion.
CHAPTER TWO
This section reviews the literatures written by different author and researchers conducted by different scholars in relation to the study and present a summary of the factors that affect the implementation of IFB banking practice, such as definition, principle and major concept regarding factors that affect the implementation and review of empirical literature .The study also describe the conceptual framework and research gap.
2.1 THEORETICAL LITIRATURE
2.1.1 Concepts of Interest Free Banking
Interest free (Islamic) banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasize moral and Ethical values in all dealings have wide universal appeal. Shari'ah prohibits the payment or Acceptance of interest charges (Riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its Principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims.
Islamic banking appeared on world forum as a prominent player over two decades ago. But actually many principles of Islamic banking system have been generally accepted all over the world for centuries rather than decades Islamic financial system is existed in Muslim community in different shapes according to situation of time. Actually Islamic financial system has a capability to fulfil the society requirements in respectable way. Islamic banking is a growing sector with its diversity in different segments and spectrum. It caters to religious Muslims in Muslim’s societies as well as in countries where Muslims are in minority. In addition, it is a broad standard: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking. It is clear from banking practice that Islamic banking is equally popular in all communities (Iqbal, M., 1998).
It is clear from above statements that Islamic banking is not only Islamic or specific banking.
But actually it is a system which provides more ethical and moral concept of financial issue as
Well as it is really helpful to create a peaceful, economically prosperous and welfare society.
The Organization of Islamic Conference (OIC) defined an Islamic banking as “a financial Institution whose statutes, rules and procedures expressly state its commitment to the Principles Of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations” (Hassan, 1999).
According to this statement it is clear that interest is fully prohibited in Islamic law due to its bad effects on human being and more badly effects on overall society and economy. In an Interest based economy a trend arises that rich people create the methods to increase their wealth through effecting the middle and lower classes. In interest based economy the middle Class cannot contribute positively in economic system then gradually the economy travel toward financial crises such as credit crunch. An Islamic bank is an intermediary and trustee of other people’s money with the difference that it shares profit and loss with its depositors. In practice the most Islamic banks have an Organizational set-up very matched and similar to their conventional counterpart banks (Dar and Presley, 2000). “Islamic banking is phenomenally profitable because, although it’s underlying Funding mechanism is the same as conventional banking, its default experience is better, and its charges higher and less transparent” (Cook, 2006).
It is resulted from above statements that Islamic banking is not totally different from Conventional Banking. They are doing same practice such as saving deposits and consumer Finances but there are some fundamental differences of its practice and objectives. Islamic Banking is Interest free and its main objectives are the equal distribution of wealth, decreasing the poverty and increasing the investment opportunities. It is very beneficiary for Muslim population who want to solve all their financial matter according to their religion, because a number of Islamic and some high street commercial Banks from all over the world offer products and Services that are according to Sha’riah Compliant. “Although the western media frequently Suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic Practices and principles date back to the early part of the seventh century”(Shaista, W. & Umadevi, N. G., 2013).
2.1.2 Evolution of Islamic Banking
The origin of Islamic banking as a major player in the financial domain was in the early 1970_s. But the rules and regulations governing Islamic banking system has been present in the world for many centuries.
During the middle ages, Islamic finance was popular and was widely accepted and practiced.It helped in furthering the trade and business in the Muslim world. The Islamic merchants began to play a very important role in the European region (Mediterranean, Spain and Baltic States).Islamic finance has become a global system spreading as far as Asia, the Middle East, and the western world. Islamic banking is not limited only to the Muslim nations in the Middle East But also exists in the developed economies such as USA, Europe, and the Far East. Today, More than four hundred and fifty (450) Islamic banks are operating from China to USA, having Assets in excess of one trillion US dollars.
2.1.3 The Principles of Interest free banking
2.1.3.1 Principles of IFB
As Iqbal and Molyneux (2005), Banks which participate in the Islamic banking system should follow the shariah (Islamic law) principle. This principle deals with the moral and ethical values which should be considered in dealing with business transaction. The main principles are riba (usury), Gharar (risk and uncertainty), profit or loss sharing and prohibited transaction.
1. RIba (USURY)
Based on the doctrine of Holy Quran which is pointed out in (2:275-280, 3: 130-132, 4:161-etc) and Hadith as riba (interest) is prohibited. Ali and Sarkar (1995), Islam prohibits its followers to receive or provide usury even for the purpose of getting a loan or the charged interest rate is low. In Islam, only a number of loans are allowed, such asQard al-Hasan(benevolent loan), where the borrower is not charged any interest or additional
2. Risk and uncertainty (GHARAR)
“Ghararmeans risk, uncertainty, and legal ambiguity or uncertainty that any one of the parties to a contract can exploit at the expense of the others as Khalifa M. (2016). Activities or transactions like (sale of unborn-she-camel or sheep, conditional sale, sale with loan, selling of agricultural produce before mature, selling the fish in the water etc.) are not permissible/permissive Ajagbe T. S. et al (2013).Though business transactions are generally plagued by a certain level of uncertainty, the excessive one is not welcome under Islamic finance. Hence, contracts forming the basis of business transactions and Islamic banking services should be known to a large extent about their consequence, Latifa and Mervyn (2007).
3. Profit and loss sharing (PLS)
Based on Dusky and Abdullah (2007) study, since interest is prohibited in Islam, the providers of funds and the entrepreneur in an Islamic banking settings share the business risk and profits based on mutual agreement. This act will equitably distribute income, enhance social justice, and alleviate poverty etc. Chong and Liu (2009) also identify y that a unique feature of Islamic banking is its profit-and-loss sharing (PLS) paradigm, which is predominantly based on themudaraba(profit-sharing) andmusharaka(joint venture) concepts of Islamic contracting in which the assets and liabilities of Islamic banks are integrated in the sense that borrowers share profit and losses with the banks.
4. Prohibited transactions
Islamic banking system is known as a system free of business activities that violate Sharia regulations such as investment in business related to liquor and gambling. Therefore Islamic banks in Malaysia in particular have established their own Shariah Advisory Council, which comprises Sharia experts who act as auditors and advisors to the bank. They are wholly responsible in ensuring that operations and activities of the bank do not breach the values of Islamic ethics as Mohammad Taqiuddin et al. (2013).
2.1.4 TYPES OF FINANCING IN ISLAMIC BANKING
IFB banking does not finance speculative activity that are focused on making money out of money ,based on speculation in the difference financial, commodity and real estate market. Islamic bank offer broad spectrum of financial structure ranging from simple sharia compliant retail product such as saving and current account to large scale infrastructure financing (bala et.2009).
2.1.4.1 Murabah Financing
Murabah financing is a popular method used by Islamic banks to meet short term trade financing needs for its customers. It is often referred to us “cost Plus-financing “or mark up financing. In this type of financing the bank agrees to fund the purchase of specific asset or goods from a supplier at the request of customers up on acquiring the asset, the bank sells it to the customer at the predetermined mark up. Murabah financing is the back bone of contemporary Islamic banking. Bala et.al, (2009: 30) an advantage of murabaha is that an Islamic bank is usually sounder financially than its customers, so it can obtain discounts on purchases for its clients. If goods were purchased for several clients at one time, the discount may be even larger, which controls costs for clients and contributes to the overall success of murabaha (Roy, 1991:434)
2.1.4.2 Musharakah Financing
Musharakah is a type of partnership financing in which one of the partners is an Islamic bank. Profits and losses are shared on predetermined formula. Profit sharing need not be based on the proportion of the shares owned, but liability of loss is Limited to the contributions of the shareholders. In other words, investors cannot be liable for more than the amount of capital they invest in the partnership. (Shanmugan and Gupta, 2007) Musharakah is an Arabic word which means sharing, and relates to the sharing of profits or losses resulting from joint ventures or partnerships. In the business environment musharakah is a partnership contract based upon equity participation, by which partners provide capital under joint venture. The sharing of profits and losses resulting from such partnerships is pre-determined and partners may co-manage the enterprise. The bank may act as a passive partner while the customer manages the venture (South Africa art; 281:35)
2.1.4.3 Mudarabah Financing
It is a commercial activity in which an Islamic bank entrusts funds to an entrepreneur. Which is also known as trust financing. The arrangement enables the entrepreneur to carry out business projects. Profits are distrusted between the bank and entrepreneur on predetermined ratio. All losses are born by the supplier of the fund (bank) as long as there has been negligence on the part of the entrepreneur. (Bala et.al (2009: 34)
2.1.4.4 Ijarah
Ijara means to give something on a lent. Under the ijara arrangement the bank purchases a tangible asset based on the clients’ specification and leases it to the client. The bank gives the right to use the asset to lease as well as physical position of the asset. In return the lessee makes rental payments based on the agreed schedule. Up on the expiration of the lease the lessee returns the asset to the bank (lessor). Ijara is typically used for high cost assets with long life span. (Bala et.al (2009: 32)
According to Delwin A. Roy, (1991:434) Ijara is a source of short or medium-term finance that is used by businesses in fields such as construction, for the financing of heavy machinery or other equipment. The bank purchases goods such as construction equipment and then leases them to the client on a specified sum, fixed-period basis. Monthly payments by the client are fixed at rates which cover all or most of the original purchase price of the item over the period of the contract. A contract can 17 Incorporate both murabaha and ijara if the eventual sale to the client is agreed upon at the time the original contract is made.
2.1.4.5 Bai’bithmanAjil (BBA)
Bala et.al (2009: 28) defines bai”bithmanajil is the sale of goods by the bank to a customer on a deferred payment basis over a specified period at a price that included a mark-up or profit margin agreed to by both parties. Bai’bitmanajil plan is commonly used for financing the purchase of real property, vehicle or consumer goods.
2.1.4.6 Al-Ijarathumna al bai (AITAB)
Financing on this modality essentially an Ijara (leasing) contract combined with bai-purchase contract. Under the first contract, the purchaser (customer) leases the goods from the owner (the Bank) at an agreed rental price for specified period. Upon expiration of the leasing, the purchaser enters into a second contract to purchase the goods from the owner at an agreed price. (Bala et al (2009: 34)
2.1.4.7 Istisna
In istisna financing, a commodity is purchased or sold before it comes in to existence, which is an exception to the sharia principle requiring that an underling asset be present in order for a financial transaction to be taken (Bala et al (2009: 34)
2.1.4.8 Tawaruk
In this structure the bank directly or indirectly buys an asset and immediately sells it to a customer on a differed payment basis. The customer then sales the same asset to a third party for immediate delivery of and payment. (Bala et al (2009: 34)
2.1.4.9 Bai Salam
Financing is a forward financing transaction frequently used in the agriculture industry. In this structure, the bank purchases specified asset in advance of a predetermined delivery date. Typically the bank receives a discount for the advance payment plus a profit margin. (Bala et al (2009: 34) 18
2.1.4.10 Qard Hassen
This refers a gratuitous, or charitable, contract in which the borrower is required to repay only the amount borrowed with no profit (mark up) to the lender. It is a form of benevolent financing extended on a good will basis. Quad hassen literally mean good loan. (Bala et al (2009: 34)
2.1.5. Sources of Islamic legislation
It is essential to understand the source of Interest free banking before the discussion on fundamentals principles and challenges of Interest free banks. In Islam, the faith and daily activities are linked together unlike any other religion (Alamgir et al, 2017). There is no concept of an economy functioning independently of the religious criteria that inform every single aspect of human life (Olanipekun, Brimah, and Ajagbe, 2014). According to Novethic (2009), the principles of Islamic finance and motivations behind Islamic finance as laid down by the Shariah, or Islamic law that is based on the writings of the Qur’an and sayings of the Prophet and which also acts as a framework for different aspects of day-to-day life for Muslims. Since banking is part of daily activities, banking practices are guided by Shari’ah, known as Fiqh al-Muamalat (Islamic rules on transactions).
The Shariah is the Divine Law that lists moral, ethical and legal principles and promotes a certain code of behaviour described by the Holy Quran and describes or lists both the unwritten and written code of obligations toward every sphere of Human activity. The Shariah includes a set of duties and practices such as prayer, manners, ethics, marriage, conducting business, finance transactions, contracts and other rules of Allah (Szczepanowicz, P.26, 2011). The Shariah also offers several ethical and social criteria for exclusion regarding the investment targets and financial products allowed for Muslims (AAOIFI, cited in Szczepanowicz P.26, 2011).
The rules and practices of Fiqh Muamalat are derived from the Holy Quran, the Sunnah,Ijma,Qiyas,and Ijtihad (Olanipekun et al., 2015; Gait and Worthington, 2009; and Pasha, 2014). Although the classification of these sources as well as their level of acceptance may vary among the Islamic Schools of thought, all schools regard the first two resources as the most important sources of sharia. More specifically, two sources have been identified for Shariah: Qur’an and Sunnah are the primary sources of Shariah. According to Gerrard and Cunningham (1997), the Qur’an (Muslim Holy book), clearly deals with economic- related matters and how they apply in Islam. The Holy Quran also says that commerce and trade includes three basic principles (i) Risk Taking (ghorm); (ii) Work and Effort (kasb) and (iii) Responsibility (Damam) (Pasha, 2014). Furthermore, the Quran contains explicit rules regulating personal status, contracts, property, civil and criminal law, and the economic system. The main prescriptions relating to financial transactions are: the prohibition of riba (i.e. the payment of a fixed or determinable interest on funds); and the prohibition of economic practices that involve the concept of gharar (deceptive uncertainty), maysir (speculation) and harām (prohibited behavior) (Aziz, 2012 cited in Olanipekun et al., 2015).Sunnah generally refers to all that is narrated from the Prophet (PBUH), his acts, his sayings, whatever he tacitly approved, plus all the reports that describes his physical attributes and characters (Kettell, 2011).The Holy Qur’an and the Sunnah of the prophet, which is known an Al-wahyain (the two revelations), are the only primary sources of Islamic law (shafi’i, 1940 cited in Baej, P.9, 2013).
The secondary sources are opinions collectively agreed among Shariah scholars Ijma,Qiyas and Istihad. These secondary sources are Islamic jurisprudence (fiqh), based on the interpretations (Istihad) of experts in particular cases (e.g. ones of implicit or unclear rules), on deductive reasoning (qiyas), (Abedifar, Molyneux, and Tarazi, 2012)and on the expert consensus of various schools of thought (ijma‘) (Aggarwal and Goodell, 2009).
[...]
- Quote paper
- Kero Gano (Author), 2023, Factors Affecting the Implementation of Interest Free Banking (IFB). The Case of Selected Commercial Bank in Jimma District, Munich, GRIN Verlag, https://www.grin.com/document/1353193
-
-
-
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X. -
-
Upload your own papers! Earn money and win an iPhone X.