Do Contributions of Islamic Banks Stakeholders Influence

Exclusively available on PapersOwl
Updated: Mar 28, 2022
Cite this
Date added
Pages:  3
Words:  890
Order Original Essay

How it works

Islam is the perfect religion. Islamic teachings govern all aspects of life from simple problems to the affairs of the nation and the universe (Rozin, 2016; Firdaus, 2017). In Sura Al-An’am verse 38, Allah Almighty explained that nothing was neglected in the Qur’an. Economics is one aspect of life that is often discussed both in the Qur’an and in the Hadith of the Prophet Muhammad.

Islamic Economics discusses human economic behavior which is governed by the religion of Islam and monotheism which is summarized in the pillars of Islam and the pillars of faith (Ahmad, 1981).

Need a custom essay on the same topic?
Give us your paper requirements, choose a writer and we’ll deliver the highest-quality essay!
Order now

The main uniqueness of Islamic economics is the Islamic values contained therein. This uniqueness also differentiates Islamic economics from conventional economics.

Afzalur (1995) explains that Islamic economics has ten main foundations. The foundation is monotheism, justice, leadership, brotherhood, work and productivity, ownership, freedom and responsibility, social security and nubuwah. This foundation makes the Islamic economy able to prosper the entire community. The main foundation underlying Islamic economics is Tawheed. This foundation shows the surrender of all things to God, so that all economic activity is based on obedience to God. This foundation is also a reference for Sharia Enterprise Theory.

Triyuwono (2007) explained that God is the center of everything. Handayati, Krisnawati, Soetjipto, Sudarmiatin, and Suharto (2017) explained that God has always been the main cause of the conduct of a business. God is also the main owner of all the resources in the world. All resources owned by humans are entrusted by Allah SWT who must be accounted for. Man is chosen by Allah SWT to be a world leader who has a mission to create and distribute prosperity to humanity and nature (Meutia, 2010). Islamic banks are one form of business established with Allah SWT as a cause of its establishment.

This bank was founded by Muslims as a form of devotion to Allah SWT. This bank is a solution for Muslims around the world to establish a foundation of justice and free from the mechanism of interest in the banking system. The interest called riba is prohibited in Islamic law.

However, Islamic banks are not established only to avoid bank interest. This bank was built to avoid unethical practices and actively participate in achieving Islamic economic goals and objectives (Ahmed, & Barikzai, 2016). An interest-free banking system is run using the basic principles of Islamic finance. The first basic financial principle is risk sharing, where each participant in a transaction must share the profit and the risk of loss from a transaction. The percentage of the distribution of profit or loss to each party that works together has been determined in advance.

The second basic principle is No Exploitation, there is no participant in the transaction that should be exploited in the operation (Bakar and Ali, 2008). This means that operations must be interest free (usury), do not contain uncertainty (gharar) and do not contain gambling (Rosly, 2005, Siddiqui, 2008). The third basic principle that must be upheld is that the bank does not give funds to activities that are prohibited in Islamic principles (Rosly 2005; Siddiqui, 2008; Bakar and Ali, 2008).

Three basic principles of Islamic finance become guidelines for Islamic banks in determining various financing products. Financing products are divided into two methods, namely fixed mark up method and profit sharing based financing. This classification is based on profit sharing and risk imposition. The best Islamic bank financing products are profit and loss sharing financing (Ascarya and Yumanita, 2005, Rosly 2005, Chong and Liu, 2009, Hanif and Iqbal 2010, Saad and Razak, 2013, Azmat, Michael and Kym, 2015).

In this financing product, two or more parties who are partnering can get a portion of the profit determined in advance. On the contrary, with this product, banks and other stakeholders share risks and do not exploit each other. Several studies have empirically proven that profit and loss sharing financing has the ability to bring economic benefits by promoting real sector growth (Abduh and Omar, 2012; Saad and Razak 2013).

Some research results stated that this financing benefits Islamic banks. Jaurino and Wulandari (2017) have conducted research on the effect of mudarabah financing and musyarakah financing on bank profitability. The research results obtained with SEM-PLS analysis techniques show the influence of mudarabah financing on the profitability of Islamic banks. Nevertheless, these facts have not been able to boost the amount of this financing. These two types of profit and loss sharing financing are still a minority financing in Islamic banks (Khan, 1995, Rosly, 2005, Chong and Liu, 2009). The composition of financing by Sharia Commercial Banks and Sharia Business Units in Indonesia can be seen in the following table: Table 1. 1. Sharia Banks and Sharia Business Units Financing for 2012-2016 ( in Billion IDR)

According to agency theory (Jensen and Meckling, 1976) these differences in interests motivate bank agents or managers to take actions that are different from their principal interests. Despite facing agency problems as well as companies in general, Islamic banks have Islamic values that are unique identities and become unifying stakeholders in achieving business goals and purposes of worship (Al-shamali et al., 2013).

Stakeholder Theory explains that stakeholders contribute together to provide the resources they have to the companies chosen to achieve common goals (Freeman, 2010). The management of a company that is trusted must be the protector of their interests. The attention and protection of the company to the interests of all parties must be balanced, so that no key stakeholders benefit more than other stakeholders (Donaldson et al., 1995).

The deadline is too short to read someone else's essay
Hire a verified expert to write you a 100% Plagiarism-Free paper

Cite this page

Do Contributions of Islamic Banks Stakeholders Influence. (2019, Sep 29). Retrieved from