Islamic Banking Theory

The bank comes from the word bangue in French and banco in Italian, which means a chest, cupboard, or bench. The word coffin or cupboard implies a function as a place to store valuables, such as gold crates, diamond crates, money crates, and so on. Istila bank is not mentioned explicitly in the Qur’an. If the intention is something that has elements such as structure, management, functions, rights and obligations then all of them are clearly called, such as zakat, shodaqoh (almsgiving), ghanimaah (booty), bai ‘(buying and selling), dayn ( trade debts), maal (assets), and others that have functions performed by certain roles in economic activities (sudarsono, 2008: 27).
Banks based on Islamic sharia (Islamic banks) are banking institutions whose operating systems are based on Islamic sharia. This means that banking operations follow business procedures and business agreements based on the Qur’an and the Sunnah of the Prophet Muhammad. In its operations the Islamic Bank uses a system of profit sharing and other benefits that are in accordance with Islamic Islamic guidance, not using interest (Aziz, 1992: 1).
According to Law No. 10 of 1998 from amendments to Law No. 7 of 1992 concerning banking, it is stated that Islamic banks are commercial banks that carry out business activities based on sharia principles which in their activities provide services in payment traffic.

b. The Function of Islamic Banks

Islamic banks have three main functions, namely collecting funds from the public in the form of deposits and investments, channeling and to the people who need funds from banks, and also providing services in the form of Islamic banking services (Ismail, 2011: 39).

c. The Purpose of Islamic Banks

Islamic banks have several objectives including the following (sudarsono, 2003: 45):
1) Directing the economic activities of people to muamalat in Islam, especially muamalat related to banking, so as to avoid usury practices or other types of business or trade that contain the element of gharar (deception), where this type of business is not only forbidden in Islam, it also has a negative impact on people’s economic lives.
2) To create a fairness in the economic field by leveling income through investment activities, so that there is not a very large gap between the capital owner and those who need funds.
3) To improve the quality of life of the people by opening up greater business opportunities, especially the poor, who are directed at productive business activities, towards creating business independence.
4) Sharia bank efforts to alleviate poverty in the form of customer coaching are more prominent in the nature of togetherness from a complete business cycle such as a producer entrepreneur training program, fostering intermediary traders, consumer development programs, working capital development programs and joint business development programs.
5) To maintain economic and monetary stability. With the activities of Islamic banks will be able to avoid economic warming due to inflation. Avoid unhealthy competition between financial institutions.
6) To save the people’s dependence on non-Islamic banks.

d. Basic Principles of Sharia Bank Operations

Broadly speaking, economic relations based on Islamic sharia are determined by the contract relationship which consists of five basic concepts of the contract. From these five basic concepts can be found Islamic bank products. The five concepts are (Muhammad, 2005: 86-87):

1) The Principle of Pure Deposits (al-Wadi’ah)

The principle of pure savings is a facility provided by Islamic banks to provide opportunities for parties who excess funds to save their funds in the form of al-Wadi’ah. The al-Wadi’ah facility is usually provided for investment purposes in order to obtain benefits such as savings and deposits. In the world of conventional banking al-Wadi’ah is identical with demand deposits.

2) Principles of Profit Sharing (syirkah)

This system is a system that includes procedures for the distribution of results of operations between fund providers and fund managers. The division of profits can occur between the bank and the depositors of the funds, as well as between the bank and the customers receiving the funds. Forms of products based on this principle are mudaraba and musharaka. Furthermore, the mudharabah principle can be used as a basis for both funding products (savings and time deposits) and financing, while musharaka is more for financing or inclusion.

3) Principles of Sale and Purchase (at-Tijarah)

This principle is a system that applies the procedure of buying and selling, where the bank will buy the goods needed first or appoint the customer as an agent of the bank to buy goods on behalf of the bank, then the bank sells the goods to the customer at the price of a purchase price plus profit (margin) ). The implication can be murabaha, salam, and istishna ‘.

4) The Lease Principle (al-Ijarah)

This principle is broadly divided into two types, the first is pure ijarah rental, as is the rental of tractors and other product tools (operating leases). In banking technical, banks can buy equipment needed by the customer first, then rent it in time and only what has been agreed to the customer. Second, bai al-takjiri or ijarah al-muntahiyah bit tamlik is a combination of rent and purchase, where the lessee has the right to own the goods at the end of the lease period (financial lease).

5) Principles of Services (al-Ajr wal Umulah)

This principle covers all non-financing services provided by banks. Forms based on this principle include bank guarantees, clearing, collections, transfer services, and others. Sharia is based on the principle of the concept of al-Ajr wal Umulah.

e. Sharia Bank Operational Products

In the Islamic bank’s operating system, the owner of the funds invested their money in the bank not with the motive of earning interest, but in order to obtain profit sharing. The customer’s funds are then distributed to those who need it, with an agreement of profit sharing according to the agreement.
Broadly speaking, the development of Islamic bank products are grouped into three groups, namely (Muhammad, 2005: 88-103):

1) Fund Collecting Products
a) Wadi’ah Principles Wadi’ah
principles have the same legal implications as qardh, where the customer acts as the party lending money and the bank acts as the borrower.
b) Mudharabah Principle The
application of this principle is that the depositor or deposit acts as shahibul maal and the bank as mudharib. These funds are used by banks to finance the sale and purchase agreements and syirkah. If a loss occurs, the bank is responsible for the losses incurred.

2) Fund Distribution Products Fund
distribution products in Islamic banks can be developed with three models, namely:

a) Principles of Sale and Purchase (Tijaroh)

The mechanism of sale and purchase is an effort made to transfer property and the level of profit of the bank is determined in advance and becomes the selling price of goods. The principle of buying and selling is developed into the following forms of financing:
(1) Murabaha
Islamic banks act as sellers and customers as buyers. Goods are delivered immediately and payment is made in a robust manner.
(2) Greetings
Salam is a contract of buying and selling goods with delivery at a later date by the seller and the payment is made by the buyer when the contract is agreed in accordance with certain conditions. Glance transaction greetings similar to bonded transactions. But overall greetings are not the same as bonded transactions, and are therefore permitted by sharia because there is no gharar. Even though new items are to be delivered at a later date, the price, specifications, characteristics, quality, quantity and time of delivery have been determined and agreed upon when the contract occurs.
(3) Istishna ‘
Sale and purchase agreement is like a salam contract, but the payment is made by the bank in several payments. Istishna ‘is applied to manufacturing and construction financing.

b) Rental Principle (Ijarah)

Ijarah transactions are based on the transfer of benefits. So, basically the principle of ijarah is the same as the principle of buying and selling, but the difference lies in the object of the transaction. If the sale and purchase object of the transaction are goods, the transaction object of ijarah is a service.

c) Principles for Profit Sharing (Syirkah)

The principle of profit sharing for financing products in Islamic banks is operationalized with the following patterns:

(1) Musyarakah A
musyarakah agreement is a contract of cooperation between two or more parties for a certain business, where each party contributes funds provided that profits are divided based on the agreement while losses are based on the portion of the fund’s contribution. Musyarakah is a contract of cooperation between capital owners who mix their capital with the aim of making a profit. In musyarakah, the partners together provide capital to finance a particular business and work together to manage the business. Existing capital must be used in order to achieve the goals that have been set together so that it cannot be used for personal gain or lent to other parties without the permission of other partners.

(2) Mudharabah
Mudharabah agreement is a business cooperation agreement between the fund owner and fund manager to carry out business activities, profit is divided based on profit sharing ratio according to the agreement of both parties, whereas if there is a loss will be borne by the owner of the fund unless caused by misconduct, negligence or violation by the fund manager.

3) Product Services
a) Transfer of Receivables (al-Hiwalah)
In banking practice, al-Hiwalah facilities are commonly used to help suppliers obtain cash capital in order to continue production. The bank gets reimbursed for the transfer of accounts receivable services.

  1. b) Pawn (Rahn)

Used to provide guarantees of refinancing to banks in providing financing. Mortgaged goods must meet the criteria, including the customer’s own, clearly the size, nature and value are determined based on the real market value and can be controlled but may not be used by banks.

  1. c) Good Loans (al-Qardh)

Al-Qardh is used to help customers finance quickly and in short term. This product is used to help small businesses and social needs. Qardh funds given to customers are obtained from zakat, infaq and shodaqah funds.

  1. d) Power of Attorney (Wakalah)

The customer authorizes the Islamic bank to represent itself in carrying out certain service work, such as transfer services.

  1. e) Bank Guarantee (Kafalah)
    Kafalah is used to guarantee payment of a payment obligation. Islamic banks can require customers to place a certain amount of funds for this facility as rahn. Islamic banks can also receive these funds with a wadi’ah. The bank gets reimbursed for the services rendered.


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