﷽

Islamic Banking
Mehwish D.Zia
Learning Objectives

 Introduction to Shari'ah:
– Shari'ah rulings;
 Principles of Islamic Economics;
– Basic Concepts and philosophy of Islamic economics;
 Four basic prohibitions in financial system of Islam:
– General prohibitions;
– Riba (interest);
– Gharar (uncertainty);
– Violation of Islamic Law of contract;
– Islamic Banking Terminologies
Introduction

 What do we mean when we say ISLAMIC?

 ISLMIAC means according to ISLAM;
 When we say according to Islam we mean in conformity with
Shari'ah (‫;(ﺷﺮﻳﻌﺖ‬
 Again the same comes to us, what is Shari'ah (‫?)ﺷﺮﻳﻌﺖ‬
 Is Shari’ah (‫ (ﺷﺮﻳﻌﺖ‬a set of rules and laws set out by religion?
 Let us see what is it!
Introduction

 Shari’ah is not only a religious 'Law' as it supersedes Law in its inclusion substance
and form both;
 It deals with social and economic problem both;
 It give concept of another world that comes after this world – the day of judgment;
 So Shari’ah is “a system consisting of laws and rules for religious, political, social,
domestic and private aspects of life of individuals and groups”;
 Every individual is responsible for balancing between all these aspects in manners
required and guided by Shari’ah;
 The rules and guidelines of Shari'ah are:
– Commandments of Allah (SWT) revealed by Him upon His messenger Holy Prophet
(Sallallahu Alayhi Wa Sallam) as:
Recited Wahee – the nobel Qura'n; or
Un-recited Wahee – the Sunnah;
Islamic rules and guidlines

Our scope
Principles of Islamic Economics
Principles of Islamic economics

 ISLAMIC ECONOMIC MODEL

– ISLAMIC ECONOMIC MODEL is based on two underlying principles:
IMPORTANCE OF ECONOMIC GOALS:
►Economic activities of man are lawful and sometimes they become obligatory
and necessary;
►However economic activity is not the basic problem of human being;
►Therefore economic progress is not the be-all and end-all of human existence;
REAL NATURE OF WEALTH AND PROPERTY:
►Islam has a different viewpoint about the four Basic Economic Problems:
►Determination of Priorities:
Adherence to commandment of ALLAH should be the top priority;
►Allocation of Resources (Land, Labor, Capital, Entrepreneur):
No remuneration to Capital as it is rewarded under entrepreneur;
Principles of Islamic Economics

►Distribution of Income:
Both wealth creators and non creators have right in wealth. (Zakat, Sadaqaat, etc. etc.
are for non creators);
►Development:
Only through Halal (permissible) ways and for Halal purposes;
– Wealth creation and distribution:
Islam suggest a good mechanism of Distribution of Wealth;
The purpose is to establish a practicable Economic system under which
everyone benefits;
Islam accepts the following economic laws thing within a certain limits:
►Laws of demand and supply;
►Motive of personal profit;
►Market forces;
►Natural relation of employer and employee;
►Profit and loss distribution;
►Asset based system rather than speculation and document based system;
Principles of Islamic Economics

– Wealth creation and distribution:

Distribution of wealth:
►Enabling every one to get what is rightfully due to him;
►Elementary level of deserving wealth are factors of production;
►Secondary level of deserving wealth are poor and deserving people who did not
contribute in creation of wealth;
Eradicating the Concentration of Wealth
►Prohibition of:
Hoarding,
Interest;
Gambling;
Invalid speculation;
Uqood-e-Fasidah (invalid contracts), and
Gharar (excessive uncertainty);
►Encouragement of Sadaqah, Laws of Inheritance, Mehar etc.
Basic prohibitions in financial system
of Islam
Basic prohibitions

 Islam prohibits some economic activities and allow all other activities
that beyond these prohibited activities;
 We can categorize these activities in four basic types:
– General prohibitions;
– Riba (interest);
– Gharar (uncertainty);
– Violation of Islamic Law of contract;
– Basic Principles of Islamic Finance
– Socially beneficial Business
General prohibitions

 This type include all economic activities that involve in any things
which is declared disallowed in Islam;
 For example business of alcohol, pork and film industry is not
allowed in Islam;
 Therefore any involvement in such businesses fall under general
prohibitions;
 This type is easily understandable for all;
Interest – Riba

 Riba means:
– Any excess compensation over and above the principal which is without due
consideration. It is in fact a premium paid to the lender in return for his
waiting as a condition for the loan;
 It is an impermissible activity in Islam;
 In the words of Prophet (SAW):
– 'Every loan that draws any premium is Riba';

– [Hadith is reported by Hazrat Harith ibn Abi Usamah in his Musnad. (See Supreme Court Judgment December 23, 1999)]
Types of Interest with respect to implicitly and explicitly

 Explicit Interest:
– Main type of interest which is clear and easy to understand for everyone;
– Lending and borrowing on interest is simple example of it;
– Banking interest is also an example of it.
 Implicit Interest
– A type of interest that has both possibilities of being interest or not;
– It is not always surely interest but becomes if it is pre-agreed and common
in practice.
– Examples:
Premium charged against delaying or rescheduling;
Rebate on early payment;
Discount offered on payables in case of early settlement.
Gharar – excessive uncertainty

 Gharar is a comprehensive Arabic word which has a comprehensive

meaning;
 A near translation of Gharar may be 'uncertainty' or 'ambiguity';
 Selling a commodity/goods/thing without clear specification is sale
with element of Gharar;
 It has been narrated from Abu Hurayrah (RA), that He (SAW) said:
– 'The Messenger of God (S) forbade the ‘sale of the pebble’ [hasah] [sale of
an object chosen or determined by the throwing of a pebble], and the sale
of al-Gharar'. [Sahih Muslim];
Violation of Islamic Law of Contract

 Islam has clearly explained certain rules and laws for each type of
economic and financial contract;
 The contracts made in violation of these laws of contract are called
Uqood-e-Fasidah (invalid contracts);
 A detail discussion on the topic will come in coming lectures;
 Evolution of Islamic Banking in
Pakistan
From 1947 to 1960
From 1960 to 1977
From 1977 to 1980
 Islamic Banking Terminologies
ARBUN:

Down payment; a nonrefundable deposit paid by a buyer retaining a right to confirm or cancel the sale.
Gharar:

It means any element of absolute or excessive uncertainty in any business or a contract about the
subject of contract or its price, or mere speculative risk. It leads to undue loss to a party and
unjustified benefit to other party.

Halal : Anything permitted by the Shariah.

Haram : Anything prohibited by the Shariah.

 Islamic Banking Terminologies
Ijarah
Letting on lease. Sale of a definite usufruct of any asset in exchange of definite reward. It
refers to a contract of land leased at a fixed rent payable in cash and also to a mode of
financing adopted by Islamic banks. It is an arrangement under which the Islamic banks
lease equipments, buildings or other facilities to a client, against an agreed rental.
Mudaraba
A form of partnership where one party provides the funds while the other provides expertise
and management. The latter is referred to as the Mudarib. Any profits accrued are
shared between the two parties on a pre-agreed basis.
Musharakah
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of
profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds which
are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate
in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed
ratios, while the loss is borne by every partner strictly in proportion to respective capital contributions.
Islamic Banking Terminologies
Islamic Banking Terminologies