Summary

Philosophy of Islamic FinanceGroup membersAsad Mehmood

Hamza Bhatti

Sulaiman Akram

Hisan Asif IntroductionBanking according to Islamic valuesInterest free bankingProhibit unethical practicesBasic features of Islamic finance that effect the productsThe Philosophy of Islamic FinanceBased on prohibitions and encouragementsAsset backed transactionStructure revolves around riba and profitExchange transaction allowedFungibleNon fungibleInvestment consider when it is part of real activityDeposits, Government bonds and other financial document consider un IslamicContinueExcessive risk taking not allowedTransparency issuesAbove discussion three rules stem from it:Avoiding InterestAvoiding GhararAvoiding GamblingAvoiding InterestTwo verses serves as fundamental building block of Islamic theoryCharge premium on loan or look for compensationPricing the goods Once debt created you wont demand for more

Avoiding GhararMeans uncertaintyThree ways it could be usedCurrent practices of institutions is un Islamic; Futures and optionsProhibits speculative tradingIFIs should disclose informationTrading derivatives grey areaAvoid GamblingPrize bond and lotteries comes under itChance and disproportionate prizesCertain schemes are prohibitedFutures and options are prohibited

Alternative Financing PrinciplesIn absences of interest following tools are there to do business:Mudharbah Musharka Murabaha Salam Ijarah IstisnaaSecurity/CollateralBank can ask for collateralBank can ask for securityBank not entitled to itIslamic banks products are non liquid Valid Gains on InvestmentProfit is rewardAssociation with tangible real assetMoney is not capital

All pre-fixed returns are not RibaNot necessary income is variableLook nature of transactionGood could be sold at higher pricesVarious transaction are discussed below:BaiHibahRibahIjarahVariables Rates on InvestmentShirkah provides variable returnInvestor could get quasi fixed returnMore riskyLiberty to determine profit and lossBenchmarksEssential for the regulation of contractMakes effective and transparentUjrat ul mithlRiba al mithlQirad al mithl Musaqat mithl Mithl means compensationContinueOnly one reference for conventional bankTwo reference used in IFIsBoth system use same benchmarkIntroductionAl Kharaj bi-al-Daman the criteria of legality of any return on capital

one has to bear loss, if any, if he/she wants to attain profit over any investment.

Investment is not merely the financial one, rather financial investment will be considered only if it is part of a real activity.

Important pointsReward should depend on the productive behavior of the investment.

E.g in loans, there is not entitlement to any profit as the creditor goes back to the original amount irrespective of the amount which the debtor incurred as loss in the business.

Important pointsIslamic banks deal with documents with particular attention to Shariah compliance, they use documents to facilitate sales and lease transactions.

Transfer of ownership: For the transfer of an assets ownership, there must exist separate sale and gift agreement.

Important pointsIslamic banks cannot accept fees against lending operations but they can/may offer services against service charges or management fees.

Important pointsIslamic banks have to ensure transparency in documentation in the process of conducting its transactions. The Islamic bank disclosure system is rigorous as their role is not limited to that of a passive financier but they also finance for physical assets like machinery, etc. Asset risks involved in Modarba and Ijara

Important pointsInternal controls and Risk Mitigation needs to be upgraded, etc. Mitigation of Risk would require sound Islamic Financial expertise and Shariah board compliance. Debt has to remain a part of Islamic financial institutions while providing financial facility through trading activities, create a debt that is genuinely shown in their balance sheets.Important pointsThe only point that should be kept in mind is that in debt there should not be any interest incurring. (Islamic perspective example) EXCHANGE RULES: the famous Hadith of the Holy Prophet (PBUH) has laid the foundation of these rules. (for the exchange of six commodities) (explanation with Islamic terms, continued).TIME VALUE OF MONEY IN ISLAMIC FINANCEThere is concept of time value of money in Islam, but within some limitations.

Credit price of commodity can be greater than the cash price, but price should be settled before separation. (clearly define in Sharah)

The only prohibition is any addition to the price once agreed because of any delay in its payment.

The difference between cash and credit price of commodity should be considered on the genuine market practice.

Both time and place have impact on the price of commodity, but it is acceptable in Sharah if done by genuine market forces.

Sharah also prohibits mutual exchanges of gold, silver or monetary values except when it is done simultaneously.There is also forward contract known as Salam.

In Salam commodity is bought for immediate payment but delivery is done in future.

Time valuation can only be done in business and trade Goods not in the exchange of monetary values and loans or debts. IslamicMONEY, MONETARY POLICY AND ISLAMIC FINANCEThe status, value, role, function of money is different in Islamic finance as comparing to conventional finance.

In conventional finance money is considered as commodity, while in Islam it is taken money as a medium of exchange.Status of Paper MoneyMoney only for exchange and payments and not for itself, as it has no intrinsic value.

Notes of any particular currency can be exchanged equal for equal

Linking money to productive purposes brings into action labor and other resources bestowed by Allah (SWT) to initiate a process from which goods and services are produced and benefits passed on to society.Trading in CurrenciesIts is conformed that paper money cannot be sold or bought like goods.

The Sharah treated money in two scores money (of the same denomination) is not held to be the subject matter of trade, like other commodities.

If for exceptional reasons, money has to be exchanged for money or it is borrowed, the payment on both sides must be equalFluctuationCurrency rate effect of currency appreciation & depreciation

Settlement of debts Islamic point of viewSummaryIslamic Finance ???

Conditions that contract should not contain.RibaGhararQimarSummaryIslamic Shariah does not prohibit all the gains on capital.

The prohibition of risk free return and permission to trade.

The Islamic banking system is based on risk sharing.

SummaryOnce the bank have stable stream of halal income. Depositor will also receive stable and halal income.

Demand deposit vs. Investment depositDemand : no participation in PL.Investment: mobilize on the bases of PLSSummaryPermission w.r.t cash

Prohibition w.r.t loaning

Permission w.r.t leasing

Silent Features Of Islamic FinanceAll gains on principal are not prohibited.Lending is a virtuous act.Entitlement to profit is linked with the liability of risk of lossDifferentiating TradingLoaningLeasing

MAJOR FINDINGSA fixed return in the pricing of goodsIslamic banking is also a business.The cash and credit prices of commodities are different, its normal in trade.Trade profit is permissible.Preferable modes of financing.