Slides Of IPBF

• Complete syllabbus For Final

 10. Islamic modes of financing:
Musharkah, Mudarbah, Ijara,
Murabaha, Salam, Istisna, Sukuk

Professor Dr Mian Muhammad Akram

 Islamic modes of financing
• Studying permissible modes of financing in
Islam
• Getting to know basic terminology
and
• functioning of various products of Islamic
 Meanings of Islamic Modes Of Financing
• Islamic modes of financing mean the way of supplying funds that
is acceptable in Islam.

• The word “Modes” literally means “methods”, or in other

words, it refers to systematic and detailed rules, stipulations
and steps to be followed for accomplishing a specific thing.

• The thing that needs to be accomplished in this context is,

however, the subject matter of each of the said modes, i.e. any of
the different types of investment activities (trade, leasing, real
estate, manufacturing, agriculture, agriculture production etc., or,
using Shariah expressions Murabaha, Mudarbah, Musharkah, Ijara,
Istisna, etc.)
 Islamic Modes Of Financing

‫ش‬
1-Musharkah(‫)م ا رکۃ‬
‫ض‬
2-Mudarabah ( ‫)م ا ربہ‬
3-Bai Murabaha ( ‫ی ع م ر با حہ‬ ‫)ب‬
4-Bai Salam ‫س‬
(‫)ب ی ع لم‬
5-Bai Muajjal (‫ی ع م وجل‬ ‫)ب‬
6-Ijarah (‫)اج ا رہ‬
Three Types Of Islamic Modes Of Financing

• There are three types of Islamic modes of

financing:
• a. Participation based modes of financing,
• b. Trade based modes of financing,
• c. Rental based modes of financing
 Participation Based Modes Of Financing

• 1-Musharkah(‫)م ش ا رکۃ‬
‫ض‬
• 2-Mudarabah ( ‫)م ا ربہ‬
 b. Trade based modes of financing

• 3-Bai Murabaha ( ‫ی ع م ر با حہ‬ ‫)ب‬

4-Bai Salam ‫س‬
(‫ی ع لم‬ ‫)ب‬
5-Bai Muajjal (‫م وجل‬ ‫)ب ی ع‬
 Rental Based Modes Of Financing
• 6-Ijarah (‫)اج ا رہ‬
 ‫ش‬ ‫ش‬
1-Musharkah/Shirakah ‫( راکۃ‬/) ‫م ا رکۃ‬

• The word Musharkah/Shirakah is derived

from the Arabic word Shirkah
‫ش‬
(‫) رکۃ‬meaning partnership.
• Islamic jurists point out that the legality and
permissibility of Musharkah/Shirakah is
based on the injunctions of the Qura'n,
Sunnah, and Ijma (consensus) of the scholars. 
 ‫ش‬ ‫ش‬
1-Musharkah/Shirakah ‫( راکۃ‬/) ‫م ا رکۃ‬
• Union of two or more persons in one concern is
Shirakah.
‫ت‬ ‫ہ ن ش‬ ‫ہ ش‬ ‫ف‬
‫ے‬ ‫ راکۃ کہال ا ہ‬،‫دو ی ا دو سے زی ادہ ا راد کا کسی معاملہ می ں ب ا م ری ک و ا‬
Or
• When two or more persons join to do business
with a fixed capital for the purpose of gaining
profit and for sharing in the profit or loss of
business according to a fixed ratio.
 ‫ش‬ ‫ش‬
Ahadith on Shirakah ‫( راکۃ‬/) ‫م ا رکۃ‬
• Holy Prophet (‫ )ﷺ‬said; “Allah’s (helping) hand is
with those partners who are not dishonest.” (Abu
Dawud)
• The Apostle of Allah (‫ )ﷺ‬said; “Conduct business
on the basis of equal share. This brings ample
returns.” (Abu Dawud)
• The Apostle of Allah (‫ )ﷺ‬had entered into
business partnership with Saib bin Sharik in
Makkah. When He (‫ )ﷺ‬met him in Medina, He
(‫ )ﷺ‬reminisced about their partnership with
approval.”
 TYPES OF SHIRAKAH
• There are two types of Shirakah:
‫ش‬
• 1. Shirakat-ul-Milk ‫لک‬(( ‫راکۃ ا لم‬
Joint ownership of two or more persons in
a particular property.
‫ق‬ ‫ق‬ ‫ش‬
• 2. Shirakat-ul-Aqd(‫ ا عل ود‬/ ‫) راکۃ ا عل د‬
A partnership affected by mutual
contract. It can also be translated as a joint
commercial enterprise
 ‫ش‬
(1) Shirkat-ul-milk (( ‫راکۃ ا لم‬
‫لک‬

• ‫ شراکۃاالختیار‬It means joint ownership • ‫ شراکۃ الجبر‬But there are

of two or more persons in a particular cases where this kind of
property.
"Shirkah" comes to
• This kind of "Shirakah" may come
into existence in two different ways:
operate automatically
• Sometimes it comes into operation
without any action taken
at the option of the parties. by the parties.
• For example, if two or more persons • For example, after the
purchase an equipment, it will be death of a person, all his
owned jointly by both of them and heirs inherit his
the relationship between them with
regard to that property is called
property which comes
"Shirkat-ul-milk." Here this into their joint
relationship has come into existence ownership as an
at their own option, as they automatic consequence
themselves elected to purchase the of the death of that
equipment jointly.
person.
 (2) Shirkat-ul-‘aqd
This is the second type of
Shirkah which means
"a partnership effected by
a mutual contract".
For the purpose of brevity it
may also be translated as
"joint commercial
enterprise."
‫ق‬ ‫ش‬
( ‫) راکۃ ا عل د‬
Shirkat-ul-‘aqd is further
divided into three kinds:
(i) Shirkat-ul-amwal‫اموا ل‬
(ii) Shirkat-ul-A‘mal‫ا مع ا ل‬
(iii) Shirkat-ul-wujooh ‫وج وہ‬
• (i) Shirkat-ul-amwal
where all the partners invest
some capital into a
commercial enterprise.
 ‫ش‬
(ii) Shirkat-ul-A‘mal ‫) راکۃ ا (ل‬
‫م‬‫ل‬‫ع‬

where all the partners jointly undertake to render some

services for their customers, and the fee charged from them
is distributed among them according to an agreed ratio.
For example, if two persons agree to undertake tailoring
services for their customers on the condition that the wages
so earned will go to a joint pool which shall be distributed
between them irrespective of the size of work each partner
has actually done, this partnership will be a shirkat-ul-a‘mal
‫ت ق‬
‫ اعم ا ل‬which is also called Shirkat-ut-taqabbul‫ابل‬ or
‫ن‬ ‫ش‬
Shirkat-us-sana’i‘ ‫ ص ا ءع‬or Shirkat-ul-abdan.‫راکۃ ا بالد ان‬
 ‫ش‬
(iii) Shirkat-ul-wujooh (‫) راکۃا لوج وہ‬

• (iii)The third kind of Shirkat-ul-‘aqd is

Shirkat-ul-wujooh.
• Here the partners have no investment at all. All
they do is that they purchase the commodities
on a deferred payment bases and sell them at
spot.
• The profit so earned is distributed between
them at an agreed ratio.
 Conditions of Partnership
• 1. Mutual Agreement : According to the precepts of the Quran mutual
agreement is the basic condition for mutual dealings. [4:29]
• Similarly, mutual agreement is an essential condition of Partnership.
• 2. Maturity of the Partners: It is an essential condition of the
Partnership agreement that the Partners should have attained the age
of maturity.
• 3. Sound Mind: Sound mind of Partners is also an essential condition
so that they may have the capacity to understand the affairs.
• 4. The Business Must be Lawful: Partnership in an unlawful business is
prohibited.
• 5. Fixing the Rate of Profit: Settling the rate of profit-sharing is
essential before starting the business.
• 6. Liability for Loss: The partners shall share the loss in proportion to
their capital investment in the business.
 (i) Partnership with Equal Shares (Shirakah Mafawada):

• When two or more parties enter into partnership with each

other with equal shares, it is called Shirakah Mafawada.
• The following are its conditions:
• The capital investment of the parties should be equal.
• Each party should represent the other.
• All parties should be of sound mind.
• (iv) adult
• (v)free
• (vi) Compatriots in faith.
• (vii) Each partnership should be accountable to the other
partner for his dealings and acts of omission or commission.
 (ii) Partnership with Unequal Shares (Shirakah-al-Anan)

• In this mode two or more parties can enter into partnership with unequal
shares. In this case there are no stringent conditions like the Shirakah tul
Mafawada (Partnership with equal partnership).
• For instance:
• The amount of capital investment by each party may be different.
• It is not essential that the parties should belong to the same faith. A Muslim
can enter into partnership with an infidel.
• A minor and an adult can enter into partnership.
• In partnership in ownership the powers and functions of business partners may
differ, but it is not essential that their capital investment should be equal.
• The profit is shared not in proportion to capital investment but in accordance
with the rates agreed lay the parties.
• The partners will share the loss in proportion to their capital investment.
• All the jurists declare Partnership with unequal shares as lawful.
 (iii)Partnership in Work or Partnership
in Action or Partnership in Craft or
Partnership in Art:

In this mode of partnership there are two or

more parties. Craftsmen like two or more
carpenters or iron smiths can enter into
Partnership. It is also of two kinds:
•Mafawada ‫م او ہ‬‫ض‬ ‫ف‬
•Anan ‫نع ان‬
The partnership in work is declared lawful by the
Hanafi, Malki and Hanbli jurists, while jurists of the
Shafii and Jaffria School regard it as unlawful.
 (iv) Partnership in Goodwill:
• In this mode of Partnership there is no capital
investment, but investment of goodwill of a
company or a firm.
• A firm on the strength of its goodwill
purchases goods on credit and sells them on
cash basis.
• Partnership with such a firm or company is
called Partnership in Goodwill.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

• The term Mudaraba refers to a contract between two

parties in which one party supplies capital to the
other party for the purpose of engaging in a business
activity with the understanding that any profits will
be shared in a mutually agreed upon. Losses, on the
other hand, are the sole responsibility of the
provider of the
‫ ق‬capital. Mudaraba is also known a
‫ض‬ ‫ق‬
Qirad ‫ض‬ ( ‫) ر ا‬and Muqaradah ( ‫)م ا ر ہ‬
(Shirazi 1990, p.31).
 Definition of Mudarbah
• “Two or more persons enter into a deal in which
one party provides capital and the other party
conducts business with this capital under an
agreement of receiving a fixed share in the
profit.”
• In this mode of business the financier (Rab-al-
Mal
‫ربما ل‬
‫ ) لا‬provides capital and the Mudarib‫رب‬ ( ‫) ضم ا‬
by adding his labour to it increase it. The increase
(or profit) is then shared by the parties in
accordance with an agreed ratio.
From Sunnah of the Prophet (‫)ﷺ‬
•Abu Naeem reported that before his call to
Prophethood, the Apostle (‫ )ﷺ‬had conducted
business in Syria with the capital provided by
Khadija (Allah be pleased with her) on terms of
Mudarbah. [Al-Mabsoot]
•The Apostle of Allah (SAW) is reported to have
said that there is blessing in Mudarbah.
[Abu Dawud]
•Hazrat Uthman (Allah be pleased with him) used
to conduct business on Mudarbah.
[Al-Shirkat Fi al-Fiqh al-Islami]
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

Mudarabah has been derived from

‫ض‬ َ ‫ض‬
theَ word
‫ف‬ ‘AL-DARB ‫رب‬ ‫ل‬ ‫۔ا‬ ’ or
‫رب‬ PARTIES INVOLVED IN
‫ ِیا الرض‬, which means to travel . MUDARABAH
This is related to trade because
trade usually involves travelling.
• Mudarabah is a form of
 Rabb-ul-mal‫)ربما (ل‬
‫ال‬
partnership in which one of the
contracting parties provides a (The Financier)
specified amount of capital and acts
like a sleeping or dormant partner ,
while the other party provides the
entrepreneurship and management
‫ضم ارب‬
 Mudarib
for carrying any venture , trade ,
industry or service with the (Entrepreneur)
objective of earning profits.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

1 .It is a condition in Mudarabah that the capital be

specific in nature. In other words, the amount of
capital must be known at the inception of the
contract. The purpose of this rule is to ensure that
there is no uncertainty about the amount of capital
and, thus, no uncertainty about the division of profits.
2 .It is a condition that capital must be in the form of
currency in circulation. However, merchandise can be
contributed, so long as both parties to the business
arrangement agree upon its value.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

3. It is a condition that the capital cannot be subject to

indebtedness.
4. It is permissible for a Mudarib to mix his private capital
with the capital of the Mudarabah, thus becoming a
partner.
In addition, it is also permissible for the Mudarib to
dispose of capital on behalf of the Mudarabah. 
5. It is a condition that the capital of the Mudaraba is
delivered to the Mudarib. Some of the jurists permit the
capital owner to withhold capital and release it
gradually according to the needs of the Mudarib since
the Mudaraba adjudges unrestricted disposal.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

6. It is permissible for the capital owner to deliver capital to

two Mudaribs in a single contract.  It is permissible for the
capital owner to vary the in profit sharing agreement
between the two Mudarib based upon differences in the
services provided  
7. It is permissible to impose restrictions on the Mudarib as
long as the restriction is beneficial and does not hinder the
agent’s ability to make a profit. 
8. It is permissible for the Mudarib to hire an assistant to
perform difficult work that he is unable to perform on his
own.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

9. The disposal of capital by the Mudarib is restricted

to reasons that are conducive to the Mudaraba.
The Mudarib must not lend or donate any of the
Mudaraba capital. Further, he is not allowed to
enter into indebtedness nor enter into another
partnership agreement with the Mudaraba capital.
However, these activities are permissible if the
capital owner consents and authorizes the agent to
use his discretion.
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

• The Mudarib is not required to contribute any capital to

the Mudarabah contract except when he is found to be
negligent in the way the funds are handled. It is
permissible to take a surety or mortgage from the
Mudarib to guarantee payment in the event of negligence
violation of the contract conditions. However, it is
impermissible to take a mortgage as a guarantee of
capital or profit.
• It is a condition that profits be carefully and properly
accounted for to avoid confusion by the parties to the
contract. The contracting parties should stipulate how
profits are to be shared on a percentage basis. It is
impermissible to stipulate a fixed lump sum as profit.   
 2-Mudarabah ‫ض‬
( ‫)م ا ربہ‬

• Profits in a Mudarabah relationship are

distributed according to the agreement
of the two contracting parties. It is a
condition that the capital owner be
solely responsible for any losses. 
 Rules of Mudarbah
• So long as the Mudarib, having received the capital, does not invest it
in business, the capital remains with him as trust. It is, therefore, the
responsibility of the Mudarib to safeguard this trust. It is also his
duty to return the capital to the Rab-al-Mal on demand. If the capital
is lost, destroyed or wasted, the Mudarib is not liable to fine.
• When the Mudarib invests the capital in the business he becomes the
agent of the Rab-al-Mal.
• In the case of the business yielding a profit the Mudarib becomes a
party to a financial agreement in which each party shares in the
profit according to an agreed ratio.
• If for some reason the contract of Mudarbah is dissolved it will turn
into a contract of employment and the Mudarib will become an
employee of the Rab-al-Mal. In this case profit or loss will belong to
the Rab-al-Mal. The Mudarib shall receive his pay only.
 Rules of Mudarbah
• If the Mudarib does not accept any term of the contract
of Mudarbah, he shall be deemed an embezzler and shall
be held liable to return the capital.
• If the contract of Mudarbah contains the term that the
whole profit will go to the Mudarib, it will not be a
contract of Mudarbah, but a contract of debt. The
Mudarib will become a debtor. The Mudarib will take the
profit and bear the loss. If the capital is lost, the debtor
shall be liable to pay the whole of it to the Rab-al-Mal.
• If the contract of Mudarbah contains the term that the
entire profit shall go to the Rab-al-Mal, it will be a
contract of al-bazaata.
 b. Trade based modes of financing

• 3-Bai Murabaha ( ‫ی ع م ر با حہ‬ ‫)ب‬

4-Bai Salam ‫س‬
(‫ی ع لم‬ ‫)ب‬
5-Bai Muajjal (‫م وجل‬ ‫)ب ی ع‬
 4-Bai Salam ‫س‬ ‫ی‬
(‫) ع لم‬‫ب‬

• “Bai Al-Salam denotes that mode of

transaction or contract of sale in which
price is paid before the delivery of goods.”
• Advance payment for future delivery of
commodity is Bai Al-Salam.
 3-Bai Murabaha ( ‫)ب ی ع م ر با حہ‬

• “The word MURABAHAH ( ‫ )م ر با حہ‬has been

‫ب‬
derived from ‘RABAH’( ‫ )ر ح‬which means
profit.
• Technically , Murabaha means selling a
commodity at a price which is the sum total of
the purchasing price or cost of that commodity
and an increase or profit”.
5-Bai Muajjal ‫ی‬
(‫) ع م وجل‬‫ب‬
 ‫ی‬
5-Bai Muajjal (‫) ع م وجل‬‫ب‬

• “ In the classical fiqh literature , BAI

AL-MUAJJAL refers to a sale of
goods or property against deferred
payments . (Either in lump sum or
installments)”
• Bai Muajjal is a sale under which the
price of the item involved is payable
on a deferred basis either in lump sum
5-Bai Muajjal ‫ی‬
(‫) ع م وجل‬‫ب‬
 ‫ی‬
5-Bai Muajjal (‫) ع م وجل‬‫ب‬

• “ In the classical fiqh literature , BAI

AL-MUAJJAL refers to a sale of
goods or property against deferred
payments . (Either in lump sum or
installments)”
• Bai Muajjal is a sale under which the
price of the item involved is payable
on a deferred basis either in lump sum
 Justification of Bai Muajjal
• Referring to Bai Muajjal, Mufti Syah ud Din Kakakhel
writes:
• “Just as a contract of sale between the seller and
buyer on the condition that the price will be paid on
the spot is lawful,
• It is also lawful if in a contract of sale the two parties
agree that the buyer shall pay the price later.
• However, it is necessary that the period of payment
should be known and pre-determined. This is called
Bai Muajjal, that is a bargain in which a time period is
fixed for the payment of the price.”
 Justification of Bai Muajjal

Another ground for its justification is furnished by an unsound Hadith.

Hazrat Ayeshaؓ narated that the Apostle

of Allah (‫ )ﷺ‬bought some grain (30 sau
‫ص اع‬of barley) from a Jew on deferred
payment for a period and mortgaged an
iron coat of mail with him as guarantee
for the payment of the price.”
[Bukhari Sharif Vol.I p.177/Muslim Sharif Vol.II]
 Justification of Bai Muajjal
• Hence justification for Bai Muajjal is proved by the
precedent of the Holy Prophet (‫)ﷺ‬.
• But the venerable jurists have not made it clear
whether the price fixed by the seller and the buyer is
higher than the current market rate, so that this may
also be included in the Bai Muajjal as a lawful
condition.
• Bai Muajjal, it is valid in the Shariah.
• However, there is a difference of opinion whether in
Bai Muajjal whether it is right or wrong to charge a
higher price on a credit sale than on a cash sale.
 Conditions of Bai Muajjal

• The price of the item must be fixed

in advance.
• The date or period of payment of
the price must be fixed.
• The mode of payment, whether
lump sum or in instalments, must
also be fixed.
 The Sharii orders of Bai Muajjal
In order that Bai Muajjal be valid, the following Sharii orders must be
complied with:
• The item on sale must be owned and in physical or constructive possession
of the seller.
• The seller is authorised to hold some property of the purchaser in
mortgage.
• The seller has the right to take profit on an item or property if that item or
property is at his risk and not at the risk of someone else.
• It is essential according to the definition of Bai Muajjal that the possession
of the sold item should at once be transferred to the purchaser.
• Otherwise Bai Muajjal would not be valid.
In other words if both the payment of the price and the delivery of the sold
goods were deferred to some future date, Bai Muajjal would be invalid.
 The Sharii orders of Bai Muajjal
• In the light of an order of Fiqh a report of the Islamic
Ideological Council recommended to the Banks to
invest in Bai Muajjal transactions. The report said:
• “This system (the Bai Muajjal) could be of considerable
use in financing current input requirements of
industry and agriculture as well as in the financing of
domestic and import trade”.
• This mode of business is quite consistent with Shariah.
• It is essential, however, that the sold commodity
should, before delivery to the purchaser, come into
the possession of the seller/Vender/bank.
 Use of Bai Muajjal for Internal & External
Trade
• The following procedure has been prescribed for internal and external
trade.
• A business firm intends to buy certain items from a stockiest or
industrial unit inside the country or wishes to import them from abroad
and needs finance from a bank.
In this case the recommendation of Islamic Ideological Council is that
“instead of discounting a bill or making `an advance, the bank under an
agreement with the firm concerned may purchase or import the
commodity on its own account and sell it to the firm at a price, to be
settled in advance, which includes a mark up over the cost price for a
reasonable profit margin for the bank.
• Payment from the firm would be receivable by the Bank after the
agreed period.
Precautions in the Use of Bai Muajjal

• Though the Shariah allows the use of Bai Muajjal as a

mode of financing trade, yet its indiscriminate and
universal application is fraught with danger.
• Hence necessary precautionary measures must be taken
and this mode may only be adopted in inevitable
circumstances.
• Furthermore the Banks need to exercise great care lest
interest in any form should not creep into Bai Muajjal.
• In this connection the Islamic ideological council has
proposed that the State Bank should identify the sub-
sectors and items which can be traded through Bai
Muajjal.
 Justification of Bai Muajjal
• Referring to Bai Muajjal, Mufti Syah ud Din Kakakhel
writes:
• “Just as a contract of sale between the seller and
buyer on the condition that the price will be paid on
the spot is lawful,
• It is also lawful if in a contract of sale the two parties
agree that the buyer shall pay the price later.
• However, it is necessary that the period of payment
should be known and pre-determined. This is called
Bai Muajjal, that is a bargain in which a time period is
fixed for the payment of the price.”
 Justification of Bai Muajjal

Another ground for its justification is furnished by an unsound Hadith.

Hazrat Ayeshaؓ narated that the Apostle

of Allah (‫ )ﷺ‬bought some grain (30 sau
‫ص اع‬of barley) from a Jew on deferred
payment for a period and mortgaged an
iron coat of mail with him as guarantee
for the payment of the price.”
[Bukhari Sharif Vol.I p.177/Muslim Sharif Vol.II]
 Justification of Bai Muajjal
• Hence justification for Bai Muajjal is proved by the
precedent of the Holy Prophet (‫)ﷺ‬.
• But the venerable jurists have not made it clear
whether the price fixed by the seller and the buyer is
higher than the current market rate, so that this may
also be included in the Bai Muajjal as a lawful
condition.
• Bai Muajjal, it is valid in the Shariah.
• However, there is a difference of opinion whether in
Bai Muajjal whether it is right or wrong to charge a
higher price on a credit sale than on a cash sale.
 Conditions of Bai Muajjal

• The price of the item must be fixed

in advance.
• The date or period of payment of
the price must be fixed.
• The mode of payment, whether
lump sum or in instalments, must
also be fixed.
 The Sharii orders of Bai Muajjal
In order that Bai Muajjal be valid, the following Sharii orders must be
complied with:
• The item on sale must be owned and in physical or constructive possession
of the seller.
• The seller is authorised to hold some property of the purchaser in
mortgage.
• The seller has the right to take profit on an item or property if that item or
property is at his risk and not at the risk of someone else.
• It is essential according to the definition of Bai Muajjal that the possession
of the sold item should at once be transferred to the purchaser.
• Otherwise Bai Muajjal would not be valid.
In other words if both the payment of the price and the delivery of the sold
goods were deferred to some future date, Bai Muajjal would be invalid.
 The Sharii orders of Bai Muajjal
• In the light of an order of Fiqh a report of the Islamic
Ideological Council recommended to the Banks to
invest in Bai Muajjal transactions. The report said:
• “This system (the Bai Muajjal) could be of considerable
use in financing current input requirements of
industry and agriculture as well as in the financing of
domestic and import trade”.
• This mode of business is quite consistent with Shariah.
• It is essential, however, that the sold commodity
should, before delivery to the purchaser, come into
the possession of the seller/Vender/bank.
 Use of Bai Muajjal for Internal & External
Trade
• The following procedure has been prescribed for internal and
external trade.
• A business firm intends to buy certain items from a stockiest or
industrial unit inside the country or wishes to import them from
abroad and needs finance from a bank.
In this case the recommendation of Islamic Ideological Council is
that “instead of discounting a bill or making `an advance, the bank
under an agreement with the firm concerned may purchase or
import the commodity on its own account and sell it to the firm at
a price, to be settled in advance, which includes a mark up over
the cost price for a reasonable profit margin for the bank.
• Payment from the firm would be receivable by the Bank after the
agreed period.
Precautions in the Use of Bai Muajjal

• Though the Shariah allows the use of Bai Muajjal as a

mode of financing trade, yet its indiscriminate and
universal application is fraught with danger.
• Hence necessary precautionary measures must be taken
and this mode may only be adopted in inevitable
circumstances.
• Furthermore the Banks need to exercise great care lest
interest in any form should not creep into Bai Muajjal.
• In this connection the Islamic ideological council has
proposed that the State Bank should identify the sub-
sectors and items which can be traded through Bai
Muajjal.
C. Rental Or Leasing Based Modes Of Financing

• 6-Ijarah (‫)اج ا رہ‬

6-Ijarah (‫)اج ا رہ‬
C. Rental Or Leasing Based Modes Of Financing

• 6-Ijarahhh (‫)اج ا رہ‬

 Ijarah (‫)اج ا رہ‬
• The literal meaning of Ijarah is wages or work.
• This word is used to denote work for wages.
• In Fiqh terminology Ijarah means to gain fixed profit from a
known thing.
• In the Dictionary Ijar ‫ یا ج ار‬means to hire out and Istijar ‫ا تسی ج ار‬
means to hire.
• Ajir ‫ٓاج ر‬is a person who has hired a thing.
• Mustajeer ‫م س ت اج ر‬is a person who hires a thing from someone.
• The thing which is hired out is also called Majoor ‫م اج ور‬.
• Ajeer (worker) is a person who has hired himself out for
wages.
 Rules of Ijarah (‫)اج ا رہ‬
• The purpose of Ijarah is to gain profit from a
thing.
• According to the nature of the deal, Ijarah is
of two kinds.
A. To gain profit from the thing.
B. To gain profit from the service or action of an
individual.
 Rules of Ijarah (‫)اج ا رہ‬
(A) In this case the thing from which profit is gained
is called Ain Majur and the person who gains profit
is called Ain MustAjeer.
• This case has three forms:
i. Renting out property, immovable land and houses.
ii. Renting out goods such as garments, pots and pans.
Iii. Hiring out animals (or some other kind of
conveyance or carriage or vehicle.)
 Types of Ijarah (‫)اج ا رہ‬
(B) To gain profit from the service or action of an
individual.
• In this case the worker is called Ajeer ‫ اج ی ر‬such
as a servant in a house or a shop or a skilled
worker engages in his business or is employed
by Industrialists.
• The transaction with a tailor to stitch
garments is an Ijarah, but this is an Ijarah of
work not of a thing.
 Kinds of Ajeer (Worker)

There are two kinds of workers:

‫خ‬
a. Ajeer Khas ) ‫( ( جا ی ر اص‬a bonded worker)
‫ت‬ ‫ش‬
b. Ajeer Mushtrik )‫( ( جا ی ر م رک‬a common worker)
• a. Ajeer Khas is a person with whom the Ajir enters into a
deal that he will work exclusively for him such as a servant,
an employee.
• b. Ajeer Mushtrik is not bound to work for one man only,
for example a Railway coolie, broker, tailor, watch
mechanic, taxi-driver, boatman etc. But if any of them has
been bound to work for one man for a particular period at
a particular place, he cannot work for any other person.
 Kinds of Ajeer (Worker)

• Ajeer Mushtariq shall be entitled to his wages

only if he performs the assigned task.
• On the other hand if the Ajeer Khas (bonded
worker) reports for work at the appointed
time or within hours of work, he will be
entitled to wages, whether or not he is
assigned to do any work.
• However, if he shirks work, he shall not be
entitled to wages.
 Rent Deal
• In Ijarah (or a rent deal) a person is entitled to take full or
partial advantage of the hired thing, but he has no right
to take more advantage than has been agreed upon by
the parties.
• For example a building has been rented to serve as a
perfumery. The tenant has no right to set up a foundry in
it.
• Nothing should be done to change the state of affairs by
sub-letting a thing or by letting anyone else to use it.
• Person A hired an animal for riding. A has no right to let
anyone else to ride the animal.
 Conditions for the Validity of an Ijarah Deal

1. Consent of the parties is essential for the validity of an

Ijarah deal.
2. The thing hired out must be exactly determined.
3. Wages or rent must be settled.
4. The utility of the thing hired out must be known
beyond dispute.
5. The purpose of hiring out an animal or carriage must
be settled.
6. For example, whether the purpose is to ride on the
animal or to use it to carry burdens and also the
distance and period of hire should also be settled.
 Conditions for the Validity of an Ijarah Deal

• However, if there is no possibility of a change in the state

affairs, clause no.6 will not apply. For example, a man
rents a house. He has a right to let home one else live in it.
• A is a joint owner of a house, but his share has not been
divided yet. A has a right to rent out his share of the house
to his joint owner B, whether the share is divisible or not.
• However, he cannot rent out his share one who is not a
joint owner.
• However, if all the joint owners take advantage of it by
turns, he is entitled to rent it out in his turn.
 Conditions for the Validity of an Ijarah Deal

• The renting out of an undivided jointly owned

house is not invalid.
• For instance A rents out a house. Later it is
found that B is the owner of half of this house.
The rent deal can be continued in force to the
extent of half the share owned by A.
• The joint owners can join in hiring or renting
out their property.
 6-‫ ۔۔۔‬RENT ( ‫)ک رایہ‬

• According to the Islamic concept of ownership a man has the

right to derive benefit from his property. A lawful means of
deriving benefit from a property is to rent it out.
• Now only those things can be rented out which are used, not
consumed,
• for example, land, house, machinery, furniture, Pots and Pans
and other things of long-lasting use and animals etc. (Badia Sanaie
Vol.4, p.173)
• In contrast to consumable goods/perishable goods, the
consumable goods lose their entity with use, i.e. food and
drink, bread, leatherwork.
• The rented property depreciates in value and gets old with use.
 6-ijara/RENT ( ‫)ک رایہ‬

• In Islamic Law rent is the price paid for benefits derived

from the use of a thing. The owner retains his right of
ownership over the rented property, while the benefits
of its use pass into the ownership of the tenant.
• Allama Ibn Masood Kasani writes:
• “The Meaning of Ijara:
• The literal meaning of Ijara is the sale of benefit.
• That is why the people of Medina call it Bai, that is sale
of benefit. The compensation is called “Ujrat” which
literally denotes “compensation for deriving benefit”.
 6-ijara/RENT ( ‫)ک رایہ‬

• Allama Kassani writes:

• “Rent deals in Dirham or Dinar or in their metals are not
lawful. The Ijara of brass or lead is also invalid. Similarly the
renting out of all those things, which are measured or
weighed, is wrong, because benefit can be derived from them
only when these things are used up and lose their entity. The
object of Ijara is benefit, not the thing itself, so Ijara of these
things is invalid.”
• The above statement makes it clear that currency cannot be
let out on rent, for no benefit can be derived from the currency
without using it up. The currency while transferring its benefits
to the user cannot at the same time remain in his hand.
 ‫ش‬
6-Conditions 0f Ren ( ‫) روط ک رایہ‬

• Only those things can be let out on rent from which benefits
can be definitely and certainly derived; otherwise Islam does
not allow them to be let out.
• For instance barren land cannot be let out for purposes of
cultivation.
• If the hire thing needs repairs the liability for repairing it lies
on the owner, not on the tenant.
• If the hired thing is destroyed or damaged due to a calamity
or accident, the loss must be borne by the owner. However, if
the loss is caused by the wrong use by the tenant or his
deliberate carelessness, its liability lies on him.
Ref.[Badia-ul-Sania vol.4 p.173/and Hidayatal Mujtihad Vol.II p.119]
Ijara (Rent) and its use in Islamic Banking
• In Islamic Banking Ijar or Leasing is used as a mode of
investment.
The following is an illustration of how it works:
• An industrial needs some tools or machinery for an
industrial project. He turns to a Bank for financial assistance.
The Bank purchases the required tools or machinery leases
them out to him. The period of the leasehold is fixed at
minimum three months or at maximum five years. In the
lease contract a schedule for the payment of rent is agreed
upon by the parties in which the period of the lease and the
capital investment of the Bank are duly taken into account.
 Ijara and its use in Islamic Banking
• The Bank has the power to invite other investors to join the leasing.
• The need for this usually arises when a large capital investment is
required. For instance an Islamic Bank wants to buy a ship to lease out to
a company. The deal requires capital investment of millions of dollars.
• The Islamic Bank can invite several investors to join in this project all of
whom will share in the profit earned through rent.
• The Bank can also reserve the right to buy the shares held by any partner.
• The Bank Islam, Malaysia and some other Islamic Banks use lease
purchase scheme for investment. The State Bank of Pakistan has granted
permission to use lease purchase scheme. It has directed Commercial
Banks to purchase tube-wells, tractors, fishing boats, transport
machinery and equipment for producing solar energy and lease it out to
farmers.
 Ijara and its use in Islamic Banking
The Islamic Banks use two modes of Leasing:
1. Lease Purchase Scheme. (Ijara-wa-Iqtina)
2. Hire Purchase Scheme.
 1. Lease Purchase Scheme
• Under this scheme an asset is leased out to the tenant. At the same time the
tenant is given the option to purchase it at an agreed price.
• Using this Scheme of Leasing, the Al-Barka Investment Company provides capital
for high investment projects like building plazas and purchase of industrial plants
and heavy engineering machinery. The investors are paid monthly installments out of
the income from rent. At the end of the lease period the leaseholder purchases the asset.
• The Bank Islam, Malaysia uses the same mode with some modification. The Bank
inserts a condition in the lease-hold agreement that at the end of the lease period
the lease-holder will purchase the asset at an agreed price and the total sum which
he has already paid as rent shall be deducted from the price.
• The Islamic Banks of Iran also lease out machinery, tools and movable and
immovable property to business firms with the proviso that the lease period
cannot exceed the useful life of the asset.
The period of ‘useful life of the asset’ is determined by the Central Bank of Iran.
• Similarly, under a 1983 Law, the Banks with the cooperation of Ministry of Housing
and Urban Development build low-cost houses and sell them to the public through
the Lease Purchase Scheme.
 2. Hire-Purchase Scheme
This mode is also based on the principles of Lease Purchase Scheme.
• Under this scheme a man applies to the bank to finance his
project. The Bank opens an account of hire purchase in his name.
The cost of the asset and the amount of the rent are entered in
the account. The installments paid by the leaseholder are divided
into two clear parts: First, the agreed amount of rent; Second, a
part of the profit. The asset remains the property of the Bank till
all the installments have been paid.
• When full payment has been made ownership of the asset is
transferred to the leaseholder. The Installments are so scheduled
that the full price of asset is paid up within its useful life.
 6-Ijarah‫) ۔۔۔‬LEASING( (‫)اج ارہ‬

• LEASING can be classified as :

 The operating lease
 The financial lease
 The security lease
 ‫ن‬ ‫س‬ ‫ی‬
Bai AL-ISTISNA (‫) ع ا ت ص اع‬‫ب‬

• “BAY AL-ISTISNA refers to a contract

whereby a manufacturer agrees to produce
and deliver a certain agreed good in
specified quantity on a given date in
future.”
 Diminishing Musharakah

 Diminishing Musharakah is kind of Shirkat-ul-Milk

 It involves taking share in the ownership of a specific asset
and then gradually transferring complete ownership to the
other partner.
 This concept is based on Declining ownership of the financier
 Three components
 Joint ownership of the Bank and customer
 Customer as a lessee uses the share of the bank
 Redemption of the share of the Bank by the customer
Diminishing Musharakah
Musharakah-Introduction
 Musharakah is a form of partnership (Shirkat) between two or
more parties whereby each party contributes to the capital of
the partnership in equal or varying proportions either to
establish a new venture or share in an existing one
There are two types of Shirkah:
1. Shirkat-ul-Milk

Joint ownership of two or more persons in a particular property

2. Shirkat-ul-Aqd

A partnership affected by mutual contract. It can also be translated

as a joint commercial enterprise
Diminishing Musharaka-Introduction
Diminishing Musharakah is kind of Shirkat-ul-Milk
It involves taking share in the ownership of a specific asset
and then gradually transferring complete ownership to the
other partner.
This concept is based on Declining ownership of the financier
Three components
Joint ownership of the Bank and customer
Customer as a lessee uses the share of the bank
Redemption of the share of the Bank by the customer
Lease of Mushaa

 Musha means undivided ownership

 It is allowed to lease Musha to other joint
owner.
Mode of Fixed Asset Financing
Diminishing Musharakah is commonly used for the
purpose of financing of fixed assets by various
Islamic banks.
House financing
Car Financing
Plant and machinery financing
All other fixed Assets
Basic Structure
 Joint
BANK Ownership CUSTOMER
Rent
Musharaka
 The customer approaches the Bank with the request for
Project/Machinery financing

 The Bank enters into a Musharakah (Joint Ownership) agreement with

the customer and both of them pay their respective shares to the seller of
the asset.

 Customer pays rent for the use of banks share in the property
 Joint
BANK Ownership CUSTOMER
Gradual Transfer of Ownership
Musharaka
 The customer approaches the Bank with the request for
Project/Machinery financing

 The Bank enters into a Musharakah (Joint Ownership) agreement with

the customer and both of them pay their respective shares to the seller of
the asset.

 Customer pays rent for the use of banks share in the property

 Ownership of the asset is gradually transferred to the customer upon

payment of asset price.
Redemption of units at a Fixed Value?
 If it is based on Shirkatul Milk the redemption is
allowed on Fixed Value/pre-agreed value.
 In Shirkatul Milk all joint owners are considered as
stranger or irrelevant with other partner.
  If it is based on Shirkatul Aqd it is allowed to redeem
at NAV or market value not fixed value.

 NAV=Net Asset Value

Documentation of the Arrangement

Joint ownership (Musharakah Contract)

Lease Contract

Undertaking to purchase by the joint owner/client

Diminishing Musharakah-Illustration

1. Customer request financing for the Generator costing

Rs. 300 million.
2. Islamic Bank agrees to provide financing up to 90% of
the cost.
3. Joint Ownership Agreement is executed between the
bank and the Customer.
4. Bank will purchase 90% share in the Generator by
paying Rs. 270 million to supplier.
5. Customers pays its share of Rs. 30 million.
Diminishing Musharakah-Illustration

6. Bank’s share is divided into five units.

7. Customer agrees to buyout Bank’s share (units) on yearly
basis and the Undertaking is executed by the customer.
8. Customer pays the rent for the usage of the Bank’s units
after .
9. Rental reduces after purchase of each unit by the
customer.
10. After five years ownership of the generator is completely
transferred to the customer.
Diminishing Musharakah-Considerations
 
Consideration Flexibility Available

 Title Holder  Joint Title

Profit Rate Fixed/Variable

Prepayment Allowed Yes
 
Refinance Available Yes
 
Asset Risk Joint
Late Payments Control able
Some Important Issues
 Title transfer
 Double Stamp Duty
 Property Tax
 Maintenance Expenses
 Variable lease rentals
 Securitization and issuance of Islamic Sukuk
ISLAMIC BANKING

PAST, PRESENT & FUTURE

PROF. Dr. MIAN MUHAMMAD AKRAM
Ph.D., M.Sc. B.Sc.(Hons.) Economics, M.A. Islamic Studies
Principal & Head Of Economics Department (Retd.)
Govt. College Of Science, Wahdat Road, Lahore.
 ‫ق‬
‫سورہ الب رہ‬

‫ون ِإاَّل َك َما يَقُو ُم الَّ ِذي‬ ‫ون ال ِّربَا اَل يَقُو ُم َ‬ ‫ين يَْأ ُكلُ َ‬ ‫الَّ ِذ َ‬
‫ك‪ o‬بَِأنَّه‪ْ ُo‬م قَالُوا‬ ‫س َذلِ َ‬ ‫ان ِم َن ْال َم ِّ‬ ‫يَتَ َخبَّطُهُ ال َّش ْيطَ ُ‬
‫ِإنَّ َما ْالبَ ْي ُع ِم ْث ُل ال ِّربَا َوَأ َح َّل هَّللا ُ ْالبَ ْي َع َو َح َّر َم‬
‫الربَا فَ َم ْن َجا َءهُ َم ْو ِعظَةٌ ِم ْن َربِّ ِه فَا ْنتَهَى فَلَهُ َما‬ ‫ِّ‬
‫ف َوَأ ْم ُرهُ ِإلَى هَّللا ِ َو َم ْن َعا َد فَُأو‪o‬لَِئ َ‬
‫ك‬ ‫َسلَ َ‬
‫ون(‪)275‬‬ ‫ار هُ ْم فِيهَا َخالِ ُد َ‬ ‫ِ‬ ‫َّ‬ ‫ن‬‫ال‬ ‫ابُ‬ ‫ح‬
‫َ‬ ‫ْ‬
‫ص‬ ‫َأ‬
 ‫ق‬
‫سورۃ الب رۃ‬
‫(‪)276‬‬ ‫ار َأثِ ٍيم‬ ‫ٍ‬ ‫َّ‬ ‫ف‬ ‫َ‬
‫ك‬ ‫َّ‬
‫ل‬ ‫ُ‬
‫ك‬ ‫بُّ‬‫ُح‬
‫ِ‬ ‫ي‬ ‫اَل‬ ‫ُ‬ ‫هَّللا‬ ‫و‬
‫َ‬ ‫ت‬
‫ِ‬ ‫ا‬‫َ‬ ‫ق‬ ‫د‬
‫َ‬ ‫َّ‬
‫ص‬ ‫ال‬ ‫ي‬ ‫ِ‬ ‫ب‬ ‫رْ‬‫ُ‬ ‫ي‬ ‫و‬
‫َ‬ ‫ا‬‫َ‬ ‫ب‬ ‫ر‬
‫ِّ‬ ‫ال‬ ‫ُ‬ ‫هَّللا‬ ‫يَ ْم َح ُ‬
‫ق‬
‫صاَل ةَ َوآتَ ُوا ال َّز َكاةَ لَهُ ْم‬ ‫ت َوَأقَا ُموا ال َّ‬ ‫ين آ َمنُوا َو َع ِملُوا الصَّالِ َحا ِ‬ ‫ِإ َّن الَّ ِذ َ‬
‫ون (‪)277‬‬ ‫ف َعلَ ْي ِه ْم َواَل هُ ْم يَحْ َزنُ َ‬ ‫َأجْ ُر‪o‬هُ ْم ِع ْن َد َر‪o‬بِّ ِه ْم َواَل َخ ْو ٌ‬
‫ين آ َمنُوا اتَّقُوا هَّللا َ َو َذرُوا َما بَقِ َي ِم َن ال ِّربَا ِإ ْن ُك ْنتُ ْم‬ ‫يَا َأيُّهَا الَّ ِذ َ‬
‫ين(‪)278‬‬ ‫ُمْؤ ِمنِ َ‬
‫ب ِم َن هَّللا ِ َو َر‪o‬سُولِ ِه َوِإ ْن تُ ْبتُ ْم فَلَ ُك ْم ُر ُءوسُ‬ ‫فَِإ ْن لَ ْم تَ ْف َعلُوا فَْأ َذنُوا بِ َحرْ ٍ‬
‫ون(‪)279‬‬ ‫ظلَ ُم َ‬ ‫ون َواَل تُ ْ‬ ‫ظلِ ُم َ‬ ‫َأ ْم َوالِ ُك ْم اَل تَ ْ‬
 What is a Bank
A bank is
• a financial institution and
• a financial intermediary that
• accepts deposits and
• channels those deposits
• into lending  activities,
• either directly by loaning or
• indirectly through capital markets.
• A bank links together customers that have capital
deficits and customers with capital surpluses.
 What is a Bank

A bank is an institution which

gets loans from depositors,
gives loans to the investors and
in this way creates credit money.
 Accepts deposits like

Current Fixed Deposits Saving

Deposits Deposits
 Advances loans by

a. Opening a loan account

b. By means of overdraft
c. By discounting bills of
exchange
d. By purchasing bond and
securities
e. Finance foreign trade,
f. Create credit money (credit creation).
 Payment Services
• Provide lockers facilities
•Collection of dividend and Utility bills,
•Clearing agent for other banks ,
•Provide agency services
•Transfer money
• 1-DD,
• 2-TT,
• 3-CC,
• ON lineS
• Issuing letters of credit, and
• Acting as trustee, executor or attorney.
 BASE OF BANKING SYSTEM

• The whole of the banking system is

based on interest. which is
prohibited (Haram) in Islam.
• On the other hand in this age of big
industries and huge business the
need of a banking system is
unchallengeable.
 Al-Quran & Interest
Those who consume interest cannot stand [on
the Day of Resurrection]Except as one stands
who is being beaten by Satan into insanity. That
is because they say “Trade is [ just] like interest”.
But Allah has forbidden interest. So whoever has
received admonition from his Lord and desists
may have what is just, and his affairs rests with
Allah. But whoever, returns [to dealing in
interest or usury] – Those are Champions of the
Fire they will be abide eventually therein. [ Al-Quran: 2-275 ]
 Riba and 1973 Constitution of Pakistan

Article 38 ( f ) of Constitution :
“The State shall ……. Eliminate Riba as
early as possible”.

Nation is eagerly awaiting the happy moment when Riba

will be totally eliminated from our social and economic
life to usher in an era of Islamic Society where dividends
can be reaped by the common man and all other persons
across the board in our country.
 BASIC DIFFERENCE B/W ISLAMIC
BANKING AND CONVENTIONAL BANKING

CONVENTIONAL BANKING

MONEY

BANK CLIENT
MONEY+MONEY
(INTEREST)
 ISLAMIC BANKING

BANK GOODS & SERVICES

CLIENT
MONEY
 ISLAMIC BANKING OPERATIONS

A Bank performs as an
intermediary between
 Depositors of funds and
 Those who seek funds for
investment
 ISLAMIC BANK
DEPOSITORS INSTITUTIONS
(INFLOW) (OUTFLOW)

MUDARBAH PAYMENT LEASING

A/C SERVICES QARD E BASED
HASANA
1.BAI’,
MURABHA
MUSHARKAH CURRENT A/C 2. BAI
A/C TRADE SALAM
BASED 3. BAI
MUAJJAL
BAI ISTISNA
IJARAH A/C
MUSHARKA PARTNERSHIP MUDARBAH
BASED
 MOBILZATION OF FUNDS
ISL.

DEPOSITORS BANK
LOAN
PRINCIPAL
TRAD
ITION
AL

LOAN
DEPOSITORS BANK
PRINCIPAL
 MUDARBAH DEPOSITS

FUNDS FOR INVESTMENT

DEPOSITORS BANK

PRINCIPAL + SHARE IN
PROFIT
 MUSHARKAH ARRANGEMENT

PRINCIPAL + SHARE IN PROFIT

DEPOSITORS
FUNDS FOR INVESMENT

JOINT
BANK’S CONTRIBUTION
FUND
PRINCIPAL + SHARE IN PROFIT
BANK
TRADITIONAL TIME/INVESTMENT DEPOSITS

DEPOSITORS INTEREST BASED LOANS

PRINCIPAL +INTEREST BANK

 BAI’ MUAJJAL

CASH
PAYMENT

BANK
GOOD

BANK CLIENT
DEFFERED PRICES

SUPPLIER
GOOD
 TRADITIONAL

LOAN BANK CLIENT

BANK PRINCIPAL+INTEREST CASH
PAYMENT
GOODS

SUPPLIER
 BAI’ SALAM

FINANCING

BANK
GOODS PRODUCED
BANK CLIENT
GOODS
CASH
PRODUCED
REVENUES PAYMENT
NEEDS

GOODS MARKET NEEDS

 TRADITIONAL

GOODS MARKET

GOODS REVENUE
PRODUCED

PRINCIPAL +INTEREST
BANK LOAN
BANK CLIENT

CASH
NEEDS PAYMENT

NEEDS
 MUDARBAH FINANCING

FUNDS

BANK PRINCIPAL
+PROFIT
APPLICATION
OF FUNDS

MUDARBAH ECONOMIC
CAPITAL
+PROFIT
ACTIVITY
BANK
CLIENT PROFIT

EFFORTS
 MUSHARKAH FINANCING

FUNDS

BANK PRINCIPAL
+PROFIT
APPLICATION
OF FUNDS

MUSHARKA ECONOMIC
CAPITAL
+PROFIT
ACTIVITY
BANK PRINCIPAL
CLIENT +PROFIT
FUNDS+
EFFORTS
 GROWTH OF ISLAMIC BANKS
Some Important Indicators (December 2003- to June 2011)
 GROWTH OF ISLAMIC BANKS

• Pakistan has recorded a 30% growth in Islamic banking

assets during the 2020 fiscal year.
• According to a report released by the SBP, the overall
deposits of the Islamic banking industry have also shown
a growth of 27.8%, in 2020.
• The assets of the Islamic banking industry increased to
4,269 billion Pakistani rupees ($27.50 billion),
• While deposits reached 3,389 billion rupees ($21.3
billion) by the end of December 2020.
• Financing of the Islamic banking industry has also grown
by 16% during 2020.
 Islamic banks working in Pakistan
• Currently, apart from five full-fledged Islamic banks, over a dozen
conventional banks are offering Islamic banking services in Pakistan. The
list of banks is given below:
• Meezan Bank Limited Soneri Mustaqeem Islamic Bank
• Dubai Islamic Bank Al Baraka Bank
• Bank Alfalah Islamic BankIslami Pakistan Limited
• Askari Bank Ltd MCB Islamic Banking
• UBL Islamic Banking HBL Islamic Banking
• National Bank of Pakistan Bank Al Habib Islamic Banking
• Bank of Punjab Islamic Banking Faysal Bank (Islamic)
• HabibMetro (Sirat Islamic Banking) Silk Bank (Emaan Islamic Banking)
• These are the names of Islamic banks having accreditation license from
the state bank of Pakistan.
ISLAMIC BANKING BRANCH NETWORK IN
PAKISTAN
SOME MODERN
CONCEPTS IN
ISLAMIC
PERSPECTIVE
1. TAKAFUL
2. Sukuk
Dr Mian Muhammad Akram
 ‫ف‬
1. Takaful ‫( ت ک ا ل‬Islamic insurance)

• Takaful, sometimes called "Islamic insurance",

• It differs from conventional insurance in that it is based on 
mutuality so that the risk is borne by all the insured rather
than by the insurance company.[386] 
• Rather than paying premiums to a company, the insured
contribute to a pooled fund overseen by a manager, and
they receive any profits from the fund's investments.[84] 
• Any surplus in the common pool of accumulated premiums
should be redistributed to the insured. (As with all Islamic
finance, funds must not be invested in haram activities like
interest-bearing instruments, enterprises involved in alcohol
or pork.)[386]
 RISK & INSURANCE
All human activities are subject to risk of loss
from unforeseen events, which may lead to
financial or physical losses to him.
Risk and uncertainty are fundamental facts of life.
Insurance has existed since at least 215 BC.
 Practiced in various forms for over 1400 years.
Insurance is a device to cover the losses arise due
to occurrence of some undesired event.
 Definition of Insurance

– Insurance is an economic device whereby

the individual substitutes a small certain
cost (premium) for a large uncertain
financial loss (the contingency insured
against) that would exist if it were not for
the insurance.
 Advantages of Insurance
• Safeguard against sudden losses and
assurance of smooth functioning of business
activities
• Improvement in the saving habits in the
society and making funds available for
productive investments
• Help of individuals in case of unforeseen
financial Loss
 Major Arguments Against Insurance

– Element of Riba (Interest) ‫رب ا‬

‫ق‬
– Element of Qimar (Gambling) ‫م ا ر‬
‫غ‬
– Element of Gharar (Uncertainty, Doubt, Risk) ‫ر ر‬
– Unlawful appropriation of others’ property
– Violation of law of inheritance in case of life
insurance.
Rulings of Collective Fiqhi Bodies about
Insurance

– Islamic Research Institute of Al-Azhar Uni.

– Council of Grand Ulama of Saudi Arabia
– Majlis Tahqiqat-e-Shari'yah Lucknow, India
– Islamic Fiqh Academy of Rabita al-Aa'lam-e-
Islami
– Al Majma’ Al-Fiqhi Al- Islami of OIC
– Council of Islamic Ideology, Pakistan
Establishments of Islamic Insurance (Takaful) Companies

• In 1979, the first Islamic Insurance Company was

established in Sudan – the Islamic Insurance company of
Sudan. After that many Islamic Insurance companies
started business under the title of Takaful.
• There are about 85 companies presently undertaking
Takaful business in 25 countries of the world in 2005.
• A broad estimate of the total Takaful industry in 2005 is
approximately US$3 billions for both life and non-life
business.
• Takaful industry in 2018 is approximately US$ 46 billions for
both life and non-life business.
• There are about 324 companies presently undertaking
Takaful business in 47 countries of the world in 2018 .
 Types of Insurance
By Type of Products
i) Life insurance
ii) General insurance
iii) Liability insurance
 ORIGIN OF TAKAFUL?
 It originates from the Arabic word KAFALAH
‫ف‬
‫ ک ا ۃل‬means guaranteeing each other or joint
guarantee.
 Takaful originated within the ancient Arab tribes
as a pooled liability that obliged those who
committed offences against members of a
different tribe to pay compensation to the victims
or their heirs.
 This principle later extended to many walks of
life, including sea trade, in which participants
contributed to a fund to cover anyone in a group
who suffered mishaps on sea voyages.
 Meanings of Takaful
• The word Takaful means joint guarantee.
• The objective of Takaful is cooperation and mutual help
among the members of a defined group.
• In a practical sense Takaful can be visualized as a method of
joint guarantee among a group of members or participants
against loss or damage that may inflict upon any of them.
• The members of the group agree to guarantee jointly that
should any of them suffer a disaster, he would receive
certain sum of money to meet the loss or damage.
• All members of the group pool together their efforts to
support the needy.
 Takaful Models

• There are basically two different types of Takaful

models for the management and investment of
funds by a Takaful operator, namely,
• The Mudarabah model, and
• The Wakalah model.
‫ق‬
• Other business models such as Waqf‫ و ف‬model,
‫ت‬
Tabarru’ ‫ ب رع‬model and combination of models
are also adopted by some Takaful operators on a
slighter extent.
WORKING OF THE TAKAFUL BUSINESS: The Malaysian Case

• Takaful Business is based on the concepts

‫ت‬
of Mudarabah and Tabarru‫ب رع‬
(contribution).
• Involvement of these two Islamic forms of
business eliminate
‫غ‬ the elements of Riba
and Gharar ‫ ر ر‬from the insurance
contract‫۔‬
 WORKING OF THE TAKAFUL BUSINESS: The
Malaysian Case

• In Family Takaful each Takaful installment is

divided and credited into two separate
Accounts namely, the Participants'
Account(PA) and the Participants’ Special
Account(PSA). A substantial proportion of
the installments is credited into the PA
solely for the purpose of savings and
investment.
• The balance of the installments is credited
into the PSA as `tabarru' for Sharikah Takaful
 WORKING OF THE TAKAFUL BUSINESS: The Malaysian
Case

• The amount accumulated in the PA is invested in

various business according to Islamic financing
techniques, and the resultant profits are divided
between the company and the participants
according to the agreed upon ratio, e.g., 30-70.
• The participant's share is calculated according to
their individual share in the PA, and credited
into their respective accounts, the PA and the
PSA.
 Criticism
• Like other Islamic finance operations,
the takaful industry has been praised by some for
providing "superior alternatives" to conventional
equivalents;[387] 
• and criticized by others for not being significantly
different from them in its use of the "
law of large numbers" to spread risk,[388]
•  or its use of conventional corporate (not mutual)
management practices.[389][390]
• The industry is projected to reach $25 billion in size by
the end of 2017.[391]
 2. Sukuk (Islamic bonds)
• Sukuk, (plural of ‫ك‬oo‫ ص‬Sakk) – often called "Islamic" or "sharia
compliant" bonds.
• Definition : Sukuk are financial certificates developed as an
alternative to conventional bonds.
• Different types of Sukuk are based on different structures of Islamic
contracts mentioned above
(murabaha, ijara, wakala, istisna, musharaka, istithmar, etc.),
depending on the project the Sukuk are financing.
• Like conventional bonds, Sukuk have expiration dates. But instead
of receiving interest payments on money lent as bonds
do, Sukuk holders are given "(nominal) part-ownership of an asset"
from which they receive income "either from profits generated by
that asset or from rental payments made by the issuer".
 2. Sukuk (Islamic bonds)
• The part ownership element and (at least in theory) the lack of a
guaranteed repayment of initial investment resembles equity
 instruments.
•  However, in practice, most Sukuk are "asset-based" rather than
"asset-backed"—their assets are not truly owned by their 
Special Purpose Vehicle, and (like conventional bonds), their holders
have recourse to the originator if there is a shortfall in payments.
• The Sukuk market began to take off around 2000 and as of
2013, Sukuk represent 0.25 percent of global bond markets.
•  The value of the total outstanding Sukuk as of the end of 2014 was
$294 billion, with $188 billion from Asia, and $95.5 billion from the
countries of the Gulf Cooperation Council.
•  Demand for Sukuk should able to support further growth.
 Sukuk‫ص ک وک‬
• It is an Islamic bond which is structured by bundling
leasing transactions, but behaves in practice like any
highly-rated bond.
• “Investment Sukuks are certificates of equal value
representing, after closing subscription, receipt of the
value of the certificates and putting it to use as planned,
common title to shares and rights in tangible assets,
usufructs, and services, or equity of a given project or
equity of a special investment activity”.
)Accounting and Auditing Organisation for Islamic Financial Institutions
(Aaoifi)(
 Importance of Sukuk

• Sukuks are important because:

• Firstly, they represent a new source of funds, generally at
attractive rates. And
• Secondly, they are vital to developing a deeper and more
liquid Islamic capital market.
• There is a great deal of surplus cash sitting in Islamic
financial institutions waiting to be tapped by new financial
instruments.
• If Sukuk can be competitively structured according to
Shariah law and a market for them is developed, the
economy will benefit.
 Structure of Islamic Sukuk
• Structure of Islamic Sukuk and their features differ
from a conventional bond or securities.
• Sukuk products are asset-backed, stable-income,
tradable and Shariah-compatible trust certificates.
• The primary condition of the issuance of Sukuk is
the existence of assets on the balance sheet of the
government, the monetary authority, corporate
bodies, banking and financial institutions or any
entity which wants to mobilise financial resources.
 Types of Sukuk
• 1. Pure Ijara Sukuk
This certificate is issued on stand-alone assets identified on the balance sheet.
The assets can be parcels of land to be leased or leased equipment such as
aircrafts and ships. The rental rates of returns on these Sukuks can be both fixed
and floating, depending on the particular originator.
• 2. Hybrid/Pooled Sukuk
The underlying pool of assets can comprise of Istisna, Murabaha as well as Ijara.
Indeed, having a portfolio of different classes of assets allows for greater
mobilisation of funds.
Murabaha and Istisna assets can comprise a portfolio of funds. However, at least
51% of the pool must be made up of Ijara assets. Due to the fact the Murabaha
and Istisna receivables are part of the pool, the return on these certificates can
only be a pre-determined fixed rate of return. The above-mentioned two types of
Sukuk would partially represent the strength of the issuer’s balance sheet.
7. Fundamentals and significance
of Zakat

Professor Dr Mian Muhammad Akram

Fundamentals and significance of Zakat

• Understanding system of Zakat,

• its importance,
• implications
• Historical context on welfare state during rule
of Hazrat Umar (R.A.)
• Understanding basics of Islamic financial
system, its underlying principles, and
implications
 Meaning of Zakah ‫زک و ۃ‬
ٰ
• Zakat is one of the five basic pillars of Islam
and is next to Salah (Prayer) which is the principal
pillar of Islam.
• Zakat denotes purity and cleanliness.
• The literal meaning of Zakat is to grow (in
goodness) or 'increase‘ and 'purifying' or
'making pure‘.
• In terminology it means to give out of one’s
wealth or property in the way of Allah to help
the needy and poor.
 ‫ف ض‬
OBLIGATION of ZAKAT‫تو ۃ‬‫ر ی زک‬
ٰ
• The Holy Quran gives the order in Sura Al Tauba (4:103)
َ ‫ص َدقَةً تُطَ ِّه ُر ُه ْم َو تُ َز ِّك ْی ِه ْم بِ َها َو‬
‫ اِ َّن‬-ؕ‫ص ِّل َعلَ ْی ِه ْم‬ ْ
َ ‫خذ ِمنْ اَ ْم َوالِ ِه ْم‬
‫س ِم ْی ٌع َعلِ ْی ٌم۔‬ ‫و هّٰللا‬-ؕ‫ص ٰلوتَ َك س َك ٌن لَّهم‬
َ ُ َ ُْ َ َ
• “Of their goods take alms that so thou might
purify and sanctify them; and pray on their
behalf. Verify thy prayers are a source of
security for them; and Allah is one hear and
know”.
 ‫ف ض‬
OBLIGATION of ZAKAT‫تو ۃ‬‫ر ی زک‬
ٰ
In Surah Al-Baqara, Allah Says:
)2:43(‫َو اَقِ ْی ُموا الص َّٰلوةَ َو ٰاتُوا ال َّز ٰكوةَ َو ارْ َكع ُْوا َم َع ال ٰ ّر ِك ِعی َْن‬
“And keep up prayer and pay the poor-rate and bow
down with those who bow down.”
In Surah Al-Tauba, Allah Says:
‫ َو‬-ؕ‫فَاِ ْن تَاب ُْوا َو اَقَا ُموا الص َّٰلوةَ َو ٰاتَ ُوا ال َّز ٰكوةَ فَاِ ْخ َوانُ ُك ْم فِی ال ِّدی ِْن‬
ِ ‫ص ُل ااْل ٰ ٰی‬
‫ت لِقَ ْو ٍم یَّ ْعلَ ُم ْو َن‬ ِّ َ‫نُف‬
• "...if they repent even now, and establish Salat and
pay Zakat dues, then they shall be your brethren in
faith." (9:11)
 Narrated by Ibn Abbas (R.A.)
When Allah’s Prophet (PBUH) sent Muadh to
Yemen, he said (to him). “You are going to people
of a (Divine) Book. First of all invite them to
worship Allah and when they come to know Allah,
inform them that Allah has enjoined on them, five
prayers in every day and night; and if they start
offering these prayers, inform them that Allah has
enjoined on them, the Zakat. And it is to be taken
from the rich amongst them and avoid (don’t
take) the best property of the people as Zakat.”
 Narrated by Huraira (R.A.)
Allah’s Prophet said, “The Kanz (money, the
Zakat of which is not paid) of anyone of you
will appear in the form of bald-headed
poisonous male snake on the Day of
Resurrection.”
 ‫ف ض‬
OBLIGATION of ZAKAT‫تو ۃ‬‫ر ی زک‬
ٰ
• Zakat is mandatory (‫رض‬999‫)ف‬on every
Muslim who possesses the minimum
Nisab, whether the person is man,
woman, young, old sane or insane.
• Holy Quran assigns the second most
important position to Zakat.
• Ibn Umar Said: “The messanger of Allah said:
Whoever acquires wealth, there is no Zakat on
it untill a year has passed over it.”
 INCREASE IN WEALTH
• "Giving away something in charity does not
cause any decrease in a person's wealth, but
increases it instead. The person who adopts
humility for the sake of Allah is exalted in
ranks by Him." (Muslim)
 Punishment of Non-paying Zakat
Allah says in Quran
ِ ‫يل هَّللا‬ َ ‫ضةَ َواَل يُنفِقُونَ َها فِي‬
ِ ِ‫سب‬ َّ ِ‫ب َوا ْلف‬ َّ ‫ون‬
َ ‫الذ َه‬ َ ‫ين يَ ْكنِ ُز‬َ ‫َوالَّ ِذ‬
ٍ ِ‫ب َأل‬
‫يم‬ ٍ ‫فَبَش ِّْر ُهم بِ َع َذا‬
"And those who hoard up gold and silver [Al-
Kanz: the money, the Zakat of which has not
been paid], and spend it not in the Way of
Allah, -announce unto them a painful
torment." (9:34)
 TWO TYPES OF WEALTH
There are two types of wealth subject to Zakat
1) Visible wealth
2) Invisible wealth
Visible wealth means which can not be easily
hidden to avoid Zakat levy.
Example: Agriculture produce and cattle .
Invisible wealth means which can be easily
hidden to avoid Zakat levy.
Example: Gold, Silver, Industrial and Commercial goods.
 ASSESSMENT RATE (NISAB)
All types of wealth which remains in possession of the owner for one
year are subject to Zakat, provided they exceed a prescribed limit.
Islam has prescribed for each type of wealth, a minimum
exemption limit called “Nisab”.
1) Gold 7-1/2 Tolas
2) Siver 52-1/2 Tolas
 One fifth (1/5) or 20% of mines and treasure-trove is to be paid to
Zakat fund.
 Animals are subject to Zakat .
 Ushr (Zakat of crops) varies between 5% to 10% of the land
produce.
 Zakat is levied at the rate of 2.5% on all commercial and Industrial
goods
 ZAKAT ON TRADING GOODS
All goods excepting gold and silver come under
the definition of trading goods.
The apostle of Allah (PBUH) had commanded
us to pay Zakat on every thing which may have
in stock for buying and selling that is for trade
and commerce.
 ZAKAT is applicable on

 Agricultural Produce and fruits, such as wheat,

barley etc.
 Cattles, including camels, cows, sheep and goats.
 The nisaab of camels is five,
 of cows 30,
 of sheep and goats, 40.
 Merchandise and goods of trade and commerce.
 Gold and silver, whether used for commerce or
jewellery.
 Paper currency Many scholars are of opinion that
silver should be the standard for the paper currencies.
 Exempted from Zakat
• Zakat is not due from infant or mad person,
(makatib)
• Insolvent debtor,
• From the necessities of life such as dwelling
houses, articles of clothing, household
furniture
• Cattles kept for immediate use
• Armors and weapons, and
• from uncertain property
• These articles are totally exempted from zakat.
 RECIPIENTS OF ZAKAT (‫زکوۃ‬
ٰ ‫)مستحقین‬

‫سا ِك ْي ِن َوا ْل َعا ِملِ ْي َن َعلَ ْيـ َها َوا ْل ُمَؤ لَّفَ ِة‬ ُ َ‫ص َدق‬
َ ‫ات لِ ْلفُقَ َرآ ِء َوا ْل َم‬ َّ ‫اِنَّ َما ال‬
‫سبِ ْي ِل اللّ ٰـ ِه َوا ْب ِن‬َ ‫ب َوا ْل َغا ِر ِم ْي َن َوفِ ْى‬ ِ ‫قُلُ ْوبُـ ُهـ ْم َوفِى ال ِّرقَا‬
)9:60( ‫م‬ ٌ ‫ضةً ِّم َن اللّ ٰـ ِه ۗ َواللّ ٰـهُ َعلِ ْيـ ٌم َح ِكـ ْيـ‬ َ ‫سبِ ْي ِل ۖ فَ ِرـ ْي‬
َّ ‫ال‬
"The 'Sadaqaat' shall go to the poor, the needy, the
workers who collect them, the new converts, to free
the slaves, to those burdened by sudden expenses,
in the cause of Allah, and to the traveling alien.
 This is a 'Farida' (commandment) from Allah. Allah
is Omniscient, Most Wise."  (9:60)
 RECIPIENTS OF ZAKAT (‫زکوۃ‬
ٰ ‫)مستحقین‬

There are Eight recipients of zakat:

1) The poor (Faqeer)
2) The needy (Miskeen)
3) Employees of the Zakah (Amileen) Persons appointed by
Government
4) Taleef Qalab (Mu,allafat e Quloob) Persons’ whose hearts
need to be reconciled
5) To free slaves (Riqab)
6) For the gharimeen -those who are in debt
7) Fi sabeeli_llah (for the Cause of Allah)
8) Ibnu s sabeel (Wayfarers)
 OBJECTIVES & IMPORTANCE OF ZAKAT
• Purification of Soul
• Economic growth and rational wealth distribution in
economy
• Opportunities and source of employment
• Mobilization of resources
• Reduction in Poverty
• Way of preaching Islam
• Spirit of Mutual Help
• Promotion of social Justice in society
• Economic growth
• Betterment of poor
 Conditions on Which Zakat Becomes an Obligation

• It is obligatory only upon a Muslim.

• The person should possess a prescribed amount of
wealth (Nisab).
• The prescribed amount (Nisab) of wealth should be
‫ص‬ ‫ض‬
the surplus of a person’s real need ( ‫اتل یہ‬
‫) روری ا‬.
• The person should be free from debt.
• The person should have held the prescribed amount
of wealth for a whole year.
• The person should be sane.
• The person should be an adult.
 Benefits of Zakat in this world
• Allama Muhammad Iqbal wrote:
• “Islam is a way of life in which the poor tax the
rich. It is not alms or charity, but a legal right
of the poor, the destitute and the deprived
upon the rich. The rich are the culprits and
debtors of Allah, His Messenger (SAW) and all
the poor and the destitute till they have
discharged this right to the full.”
 Benefits of Zakat in this world
• The System of Zakat halts the process of concentration of wealth.
According to Syed Abu Ala’ Maududi:
• “In contrast Islam decrees that in the first place money should
not be hoarded; but if it has been accumulated, it should be
spilled into the channels of Zakat so as to irrigate dry land and
turn the whole surrounding area into a green pasture.” [The
Economic System of Islam]

• “It is a cooperative society, an Insurance Company, a Provident

Fund of the Muslims. It is a fund for the assistance of the
unemployed. It is a means of livelihood for the disabled, the
sick, the orphans, the widows and the jobless. It is a guarantee
that no one shall lack necessaries of life in the Muslim
Community.” [The Economic System of Islam, p.132]
 Benefits of Zakat in this world

• Zakat is a backbone of a Muslim nation's financial

system;
• Zakat keeps money in circulation;
• Zakat discourages hoarding;
• Helps the poor;
• Helps and supports Islam;
• Purifies the heart of love for money and wealth,
purifies the money itself;
• Protects the Muslims from many other vices; love
of wealth is the root of many immoral actions.
 Benefits of Zakat in the Hereafter
Allah says in Quran:

"If you lend to Allah a goodly loan (i.e. spend

in Allah's Cause) He will double it for you,
and will forgive you. And Allah is Most Ready
to appreciate and to reward, Most
Forbearing." (64:1)
 IMPACT OF ZAKAT ON BUSINESS AND
FINANCE
• Zakat and consumption function
Due to Zakat the income is transfer from rich to poor and this results
increases aggregate demand and in this results income of poor increase
and for this there is not only balance in distribution of wealth but there is
also economic development and stability.
• Impact on Investments
Islam discourages non produce activities so in this case the
people invest more in more in productive activities and with this
is expansion of economy.
• Influence of Zakat on Savings
Zakat increases saving and this results better economic
development.
• Zakat and economic Development
Zakat play an important role in economic development.
 ZAKAT SYSTEM IN PAKISTAN
• In 1980, as a part of his Islamization program,
President Zia ul Haq introduced a welfare system,
known as the Zakat and Ushr Ordinance.
• The Zakat and Ushr Ordinance set abroad
parameters for eligibility for Zakat which is
determined by local Zakat committees.
• Priority is given to widows, Orphans, The disabled
and students of traditional religious schools. By
1983 the Zakat program had disbursed more than
Rs. 2.5 billion to some 4 million people.
 ISLAMIC STATE or STATE of MADINA
Islam provides guidance in all matters، material &
spiritual and other activities of life including state affairs.
"An Islamic state is essentially an ideological state, and is
thus radically different from a national state.“
The conception of Islamic State is that of a World State, for God is the
Sovereign of All:
“Command is for none but God” (12:40)(‫ )سورۃیوسف‬  ‫ِاَّل‬
‫ا‬ ‫الُكْم‬
ُ ‫ِنِ ْ ح‬
‫ا‬
ِ
‫ٰه‬‫ّـ‬ ِ
‫لل‬
‫ض )سورۃ ال‬ ِ‫َات‬
‫َااْلَر‬
‫و‬
‫ماو‬ ٝ
(‫حدید‬ ِْ ََّ‫س‬
‫ْكُ ال‬
‫مل‬ُ ‫لـه‬
َّ
“His is the sovereignty of the Heavens and the Earth”(57:5);
 ZAKAT & ISLAMIC STATE

ٰ
‫صاَل ةَ َواتَ ُوا‬ َ
َّ ‫ض اقَا ُموا ال‬ ْ‫ر‬َ ‫اْل‬ ‫ا‬ ‫ى‬ ‫ف‬ ‫م‬ ‫ُـ‬ ‫ه‬ َّ ٰ
‫ن‬ َّ
‫ك‬ ‫م‬ ْ
‫ن‬ ‫ا‬ ‫ْن‬
َ ‫ي‬ ‫ذ‬ ‫ـ‬ َّ ‫ل‬َ ‫•ا‬
ِ ِ ْ َّ ِ ِ
‫ف َونَـهَ ْوا َع ِن ْال ُم ْن َك ِر ۗ َولِلّ ٰـ ِه‬
ِ ‫ال َّز َكاةَ َواَ َمر ُْوا بِ ْال َم ْعر ُْو‬
22:41(( ‫ر‬ ِ ‫و‬
ْ ‫م‬
ُ ُ ‫اْل‬ ‫ا‬ ُ ‫َعاقِـبَة‬
“(They are) those who, If We established them
In the land, established regular prayer and
give Regular charity, enjoin The right and
forbid wrong: With Allah rests the end (And
decision) of (all) affairs.Surah Al-Hajj : 41)
 ISLAMIC STATE or STATE of MADINA

þ Establishment, maintenance and

development of virtues like salat and
zakat.
þ Prevention and eradication of those evils in
human life which He finds abhorrent.
þ All kinds of exploitation and disorder
should be suppressed and prevented.
þ To use power and authority for the
establishment of justice
 Objectives & Responsibilities of Islamic
State
• Safeguard the religion, defense of the Islamic State and its citizens,
struggle for the dominance of Allah’s Decree.
• Establishment of a state administrative machinery, maintenance of
law and order and setting up of courts.
• To provide suitable employment opportunities for the people; to
work for public welfare, to take steps for the general prosperity of
the citizens of the state.
• To maintain economic balance and stability and resolve the
problem of the distribution of wealth.
• To administer state property in the collective interest of the society.
• Carrying out the task of bidding good and forbidding evil at the
individual and collective level.
 Objectives & Responsibilities of Islamic
State
The state must take appropriate steps to avoid
economic injustice like:
ð     Unequal distribution of wealth.
ð     Hoarding.
ð     Short weights and measures.
ð     Deception.
ð     Fraud.
ð     Interest.
ð     Speculation.
ð     Gambling.
ð     Monopolies.
 Objectives of the Fiscal Policy of the Islamic State

The Fiscal Policy of the Islamic State has the following

objectives:
• Efficient Allocation of resources.
• Eradication of unemployment (Full Employment).
• Equitable and just distribution of wealth.
• Economic stability.
• Faster economic growth and progress.
• In the Islamic Economy the chief
instrument of Fiscal Policy is Zakat.
 Moral elevation & Islamic State
• Moral elevation is an essential ingredient in
the creation of a virtuous Islamic state.
• Islamic state legislates against all acts of
immorality like :
• Gambling, including state controlled lotteries and all
types of frauds.
• Fornication , such as prostitution.
• Drinking, including the production of and business
based on intoxicants.
• Prohibition of interest (Usury)
 Hazrat Umar's (R.A) Caliphate
• The Califhate of umar ibn al-khattab (634-644) was the
continuation of the Madina state established by the
Messenger of Allah.
• During the reign of Umar, the Islamic power grown very
rapidly. Islam took over most of Mesopotamia and the
Persian Empire and take over Egypt, Palestine, Syria, North
Africa and Armenia from the Roman Empire (Byzantium).
• Hadrat Umar’s caliphate undoubtedly is the "Golden Age"
of Islam in every respect.
• Hazrat Umar (RA) used to draw dresses for winter and
summer and a salary equal to the expenses of a middle class
family.
 Hazrat Umar's (R.A) caliphate
• Management of Umar bin Khattab was neat in the country took
financial management policy.
• Umar (RA) established of a board of treasury,
• Founding board of al-ombudsmen, and
• Reformede land ownership.
[Kitab ul-Amwal: 355]……..
• “A children’s fund was inaugurated in the reign of Hazrat Umar
(RA).
• Hazrat Uthman (RA) had fixed state allowance of fifty Dirhams for
new-born babies and hundred Dirhams for one-year-old babies.
• Besides, Islamic states granted subsistence allowances to
orphans, widows and the disabled”.
 Hazrat Umar's (R.A) caliphate

He enforced Divine Law (Shari'a)

He safeguarded the internal safety by introducing the
police force:
 He gave stipends to the poor;
He constructed cantonments and forts for the safety of
Islamic armies;
He founded new cities for the growth of Islamic
culture and civilization;
He improved agriculture and economics of the Islamic
State;
He founded the educational system in an Islamic State.
 Hazrat Umar's (R.A) caliphate
• A full-fledged department of Bait-al-Mal was organised
under Caliph Umar (RA). At the advice of the illustrious
Companions a separate building for Bait-al-Mal was
also constructed.
• Hazrat Abdullah bin Arqam (RA) was appointed
secretary.
• Hazrat Umar’s (RA) reign was a time of conquests.
Tremendous amount of wealth and goods were
pouring in Madina from all directions.
• So in 20H Hazrat Umar (RA) attached a Dewan
(Accountant’s office) to the Bait-ul-Mal.
 Hazrat Umar bin Abdul Aziz (RA)
• With regard to surplus wealth in the Bait-al-Mal Hazrat
Umar bin Abdul Aziz (RA) wrote to Abdul Hameed bin
Abdul Rahman in Iraq,
• “Disburse allowance to the people.”
• Abdul Hameed wrote back: “I have paid all the
sanctioned allowances and there is still a surplus in the
Bait-al-Mal.” Hazrat Umar bin Abdul Aziz (RA) then
directed: “Look for the people who owe a debt, but
who have not squandered this debt in extravagance or
sinful activities clear their debt from the Bait-al-Mal
surplus.”
 Hazrat Umar bin Abdul Aziz (RA)
• Abdul Hameed then wrote:
• “I have paid up the debts of all debtors. The Bait-al-Mal still has a
surplus.”
• This time Hazrat Umar bin Abdul Aziz (RA) directed him: ‘Find out poor
bachelors who want to get married. Pay dowers on their behalf and get
them married.”
• Abdul Hameed again wrote: “I have got as many bachelors married off as
I could find. The Bait-al-Mal account is still in the surplus.” Hazrat Umar
bin Abdul Aziz (RA) then issued the following directive:
• “Now trace the people who are liable to pay Jazia, but are unable to
manage their lands. Lend these Dhimmis enough money to manage their
lands, for our concern with them is not of one or two years only.”
[Kitab ul-Ammwal, pp.374-375]