Professional Documents
Culture Documents
Introduction To Islamic Banking & Finance
Introduction To Islamic Banking & Finance
Introduction To Islamic Banking & Finance
1
Topics to be Discussed
To avoid:
Riba –Earning returns from loans and debts or
Selling debt contracts at discount
Gharar – Absolute Risk or Excessive uncertainty
in contracts, Gambling and chance-based games
(Qimar)
General Prohibitions
unethical practices
Financial Liability:
Qard (Loan) : to give anything in ownership of other
by way of virtue - same or similar amount of that
thing would be paid back on demand or at the
settled time.
Dayn (Debt) : Incurred by way of trade or rent or any
other credit transaction - ought to be returned at
the settled time without any profit.
Verse 2: 279 guides that whatever is over and above
the principal of loans or debts is Riba.
5
Riba?
All increases in wealth or benefits accruing
to a person without any labour, risk, or
expertise.
One who wishes to earn profit on his
monetary investment must bear the loss or
damage accruing to the business where his
money capital is to be used.
Nature of transaction important.
Trading- Bai- Risk taking, value addition
Leasing – Ijarah - Risk taking, value addition
Exchange transaction – Monetary transactions
Lending – a virtuous act; not a business
Hand to hand exchange of currencies 6
Misconceptions - Myths
Any Return on deposits is Riba;
Any prefixed return – Riba
Islamic banking: cost-less money
available – Approach of Businesses
Repayment of loans not a serious issue
–be waived of
Trade profit similar to interest on loans /
debts
7
Reality
Differentiating: Trading, loaning and
leasing
Return by way of pricing of goods and their
usufruct needs to be fixed: permissible.
Islamic banking is also a business, It does
not mean availability of cost free money.
Repayment of debts is must.
Time value of money is accepted to the
extent of pricing of goods but not in the
form of conventional opportunity cost
concept.
8
Riba - Unanimity
10
And if you repent, then you have your
principal. Wrong not, and you shall not be
wronged ”. {without inflicting or receiving
injustice}
11
And fear the day when you shall be brought back
to Allah.
12
Riba versus Bai
13
Some other Myths
15
They used to say that it is all equal whether we
increase the price in the beginning of the sale,
or we increase it at the time of maturity. It is
this objection which has been referred to in the
verse by saying “They say that the sale is very
similar to Riba.” (Ibn-Abi-Hatim)
16
Types of Riba
Riba Al-Fadl - sale transactions,
Quality premium in exchange of low
quality with better quality goods of same
kind; prohibited e.g. dates for dates,
wheat for wheat etc.
17
Overall Consensus
Council of Islamic Ideology (CII): Preliminary Work
CII Report on Elimination of Interest from the
Economy (June, 1980) – Unanimously Endorsed
Representation of all Muslim sects in Pakistan
Justice Dr. Tanzil-ur-Rahman (J Afzal Cheema)
Mawlana Zafar Ahmad Ansari
Mufti Sayyahuddin Kakakhel
Khawaja Qamruddin Siyalvi
Mawlana Muhammad Taqi Usmani
Mawlana Muhammad Hanif Nadvi
Allama Syed Muhammad Razi
Mr. Khalid M Ishaq 18
Other Prohibitions
Benevolence
Purification of income
23
Businesses / Modes of Arabs
24
Impact of contracts
Bai: Definite transfer of ownership of goods against
payment of price-spot, delayed and forward; Profit
permissible
Ijarah (leasing): Transfer of usufruct of goods. Any
thing which cannot be used without consuming its
corpus, or whose corpus changes its form in the
process of its use, cannot be leased out like money,
edibles, fuel, etc. Rental permissible
Riba: Exchange transactions involving temporary
transfer of ownership of assets against payment. Any
return prohibited.
To avoid:
Riba –Earning returns from a loan contract or
Selling debt contracts at discount
Gharar – Absolute Risk or Excessive uncertainty in
contracts, Gambling and chance-based games
(Qimar)
General Prohibitions
unethical practices
27
Principles of Islamic Finance
Lending a virtuous act – Not a business.
31
Alternative Financing Principles
Combination of contracts
32
Wealth and trading rules
Forms of Classification Trading rule
Wealth (Mal)
Goods, durable
assets, shares Pooled assets
of companies are traded in
Non-debts Market prices accordance
with the rule of
the dominant
Services
assets
Usufructs
37
Main Financial Contracts
A. Debt creating Modes (Low Risk Category)
1. Qard Al-Hasan (interest-free loan)
2. Bai Muajjal (Price deferred sale)
3. Murabaha and Musawama
4. Salam (Commodity sale)
5. Istisna´a ((Order to Manufacture)
B. Semi-debt Modes
1. Ijara
C. Sharing or Non-debt Modes (Full Risk
Category)
1. Musharaka (Close to Venture Capital)
2. Specific Purpose Mudaraba
3. General Purpose Mudaraba 38
conditions for Valid sale
General Rule:
Commodity should have come into
existence.
It should be in ownership of the seller.
The commodity should also be under
physical or constructive possession of
the seller.
Two exceptions to this rule- Salam & Istisna´a
39
Contract of Valid Bai
V a lid B a i
P r ic e S u b je c t M a t t e r D e liv e ry / C o n v e y a n c e
T h a m a n ( M a b e 'e ) (Q a b z a )
K n o w n E x is t e n t/ P h y s ic a l
( M a lo o m ) e x i s t a b le ( H a q iq i)
C e r t a in V a lid f o r C o n s tr u c t iv e
M u t a 'a y y a n O w n e r s h ip / ( H u k m i)
P o s s e s s io n
O w n e r s h ip /
r is k o f
s e lle r
V a l u a b le
U s e a b le
( n o t p r o h ib it e d
in S h a r ia h ) 40
Principles of Credit Sale
Installments Sale permissible, even if the deferred
price exceeds the spot price.
42
Rules in Murabaha
Basic concept: Sale on mutually agreed profit margin on
the known cost of goods; payment of sale price is
deferred.
45
Salam and Parallel Contracts
(Future Sale)
Prepayment of price in full for goods to be delivered in
future.
49
Istisna’a (Order to Manufacture)
50
Istisna’a (Contd)
51
Salam, Istisna Differentiated
ISTISNA’ SALAM
The subject on which Subject can be
transaction of Istisna’ anything; Agri
is based, is always a produce,
thing which needs to Manufactured goods
be manufactured. all units of which are
Price must be fixed, normally of the same
but need not to be .
paid in advance Price has to be paid
in full in advance
52
Salam, Istisna Differentiated
ISTISNA’ SALAM
Time of Delivery Time of delivery is an
does not have to be essential part of the
fixed ; can be sale
delivered before the The contract cannot
settled time. be cancelled
The contract can be unilaterally.
cancelled before the
manufacturer starts
working.
53
Distinction of Istisna
Penalty on default
Shart-e-Jazai
54
Ijarah Rules
Subject Matter:
The corpus of the leased asset should exist till the
expiry of lease period;
The corpus of the leased asset should remain in
the ownership of the lessor during the whole
period of lease; in case of Shirkah pro-rata
ownership.
The lessor must accept responsibility of any
defect in leased asset (without negligence of the
lessee) which hinders the intended use of asset.
Sale – Separate and independent contract
55
Flexibility in Ijarah
56
Shirkah - Partnership
Commingling by two or more persons
either their money or work or obligations
to earn a profit or a yield or appreciation in
value and to share the loss if any
according to their proportionate
ownership.
Musharakah, Mudarabah, Diminishing
Musharakah
57
Types of Partnership
Musharakah: All partners provide funds not
necessary equally, and all have right to wok;
Shirkatulmilk: Partnership in Ownership
Automatic –compulsory
Arranged - Optional
Shirkatulaqd: General / Commercial
partnership – for joint business
Musharakah – general contractual
partnership
One party provides capital and the other
management
58
Profit / Loss Sharing
Profit distribution: as per agreed ratio;
Loss: in proportion to the investment of
each party.
Profit allocation: in percentages of earning
(profit) and not a sum of money or a percentage
of the capital or investment.
No guarantee of the capital
Loss?
59
Structures of Musharakah
60
Reference Rates
Reference rates needed for executing and pricing the
contracts.
63
Thanks
64