Islamic banking : distribution of profit (case study)
An economic system based on the principles of the Islamic law is proclaimed feasible. Interest as an equivalent to Riba should be substituted. Profit-sharing financial institutions have been established. The research attempts to show how these institutions work, and what alternatives they rely on to substitute interest as a motivation for mobilising savings. The technique of investment of various deposits which are held in one pool, as practised by some Islamic banks, and the methods of determining each depositor's share in investment and in profit, are discussed. Profit generated from the investment is the alternative proposed to substitute interest. Risks surrounding investment environment and the difficulties embodied in the technique used to distribute profit are the major topics discussed. The research centres on a field study, following the case study approach, whereby methods for the distribution of profit used in three Islamic banks in the Sudan are explained in detail with illustrating numerical examples. A comparison between the various methods is made. The historical background to the establishment of Islamic banks is given as an introduction to the research. Furthermore, models of investment used in Islamic banking are explained and the difference between Islamic and conventional banks is shown. By way of introduction the concept of Riba in Islam is also discussed. Moreover, accounting postulates are scrutinised and verified from an Islamic perspective. A case study is made of FIBS and the models of finance used along with an empirical examination of its performance as the first and a leading Islamic financial institution in the Sudan, and as an example of Islamic banks. Other problems which arise as a result of introducing a profit-sharing technique are also assessed, classified and discussed. Among the recommendations drawn are investment in Limited Mudarabah, using different periods and values for Mudarabah certificates. Islamic banks should also concentrate on profit-sharing models of finance; the credit finance models used, although permitted, should gradually be abandoned.