How to expand the role of Islamic banking in trading
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Ever since the establishment of Islamic banks in the 1970s, the difficulty in executing actual buy and sell transactions as the Quran commanded in the verse "Allah has permitted al-bay but prohibits riba" (Al-Baqarah 275) has spurred the industry into using questionable products that resemble interest-bearing loans as evident now in tawaruq munazzam and earlier in bay al-enah. Much of this unfortunate development in Islamic banking has to do with its deposit-taking function. Doing so requires the bank to follow stringent Basel Accord capital requirement against any risky positions it took in the business such as equity, leasing and trading positions. The trading business, namely buy and sell is the focus of this discourse. In addition to high capital charges, it is also besieged by inventory costs that can escalate bank overheads. These two problems can justify the lack of interest in the buy and sell model also known as murabaha by purchase order (MPO) or true sale murabaha financing (TSMF) as it requires the bank to hold risk of ownership of the purchased asset before making the credit sale to the customer.
Islamic banking , Capital charges , Inventory costs , Drop ship murabaha financing (DSMF)
Rosly, Saiful Azhar. (2018). How to expand the role of Islamic banking in trading. Wahed Invest, (August 2018). Retrieved from https://journal.wahedinvest.com/how-to-expand-the-role-of-islamic-banking-in-trading/