IS ISLAMIC BANKING REAL OR FAKE

Presented By:Zeeshan Hyder 784/FMS/BBA-ITM18/F-10 Rizwan Mushtaq 754/FMS/BBA-ITM18/F-10International Islamic University Islamabad

Table of content Introduction to Islamic bankingHistoryPrinciple of Islamic bankingWhy Islamic banking Islamic banking products and servicesModes of Islamic bankingRiba and its prohibition in Islam Why Islamic bankingDifferent b/w Islamic and other bankingconclusion

Introduction Islamic banking refers to a financial

system which is consistent with principles of Islamic law (or ‘sharia’) and guided by Islamic economics.

An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest.

It does not invest in that kind of activities which are prohibited in Islam

Introduction (continued)Based on QURAN and SUNNAHDemands socio economic justiceProhibits all kinds of RIBAProhibits all forms of exploitationProvides equal opportunities to allCondemns accumulation of wealth in

few handsEncourages acts of benevolence

History of Islamic banking 1980 CII presents report on the elimination

of Interest genuinely considered to be the first major comprehensive work in the world undertaken on Islamic banking and finance.

1985Commercial banks transformed their nomenclature stating all Rupee Saving Accounts as interest-free.

1991 Procedure adopted by banks in 1985 was declared un-Islamic by the Federal Shariat Court (FSC). The Government and some banks/DFIs made appeals to the Shariat Appellate Bench (SAB) of the Supreme Court

History of Islamic banking (continued)1997 Al-Meezan Investment

Bank is established with a mandate to pursue Islamic Banking.

1999 The Shariat Appellate Bench of the Supreme Court of Pakistan rejects the appeals and directs all laws on interest banking to cease

WHY ISLAMIC BANKING

The primary objectives of Islamic Economic System are as under.

Equal Distribution of wealth

Social justice

These objectives can never be achieved in Interest/Riba based economic systems.

ISLAMIC BANKING PRODUCTS AND SERVICES

Currently available Islamic Banking Products and services are

a) Partnership based modes of financing

Musharaka Finance, Mudaraba Finance,

b) Trade based modes of financing

Murabaha Finance, Salam finance

c) Rental based modes of financing

Ijarah Finance, Diminishing Musharaka Finance

Modes Of Islamic Banking

MURABAHAMUSAWAMAHISTISNAMUDARABAHMUSHARAKAH

MURABAHA(mark-up sale) It comes from the Arabic word 'ribh'

means profit. Murabaha is selling a commodity as per the purchasing price with a defined and agreed profit mark-up. The bank shares in the risk of ownership. Rather than simply advancing money to a client, the bank itself buys the goods from a third party on request of a customer. The bank then sells it to the customer for a pre-agreed price through a deferred payment scheme, usually in the form of installments.

MUSAWAMAHAn Islamic finance term that describes

a sale in which the seller is not obligated to disclose the price paid to create or obtain the good or service. This defers from murabaha, where a buyer knows the cost of the underlying asset.

Musawamah usually occurs when it is difficult to determine what the cost of a particular good or service was, or when the good is comprised of a pool of products.

ISTISNALiterally istina means "request for

production". It is kind of sale where a commodity is

transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna‘ comes into existence

MUDARABAHMudarabah is a special kind of

partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.

Generally, the investor will not participate in the everyday management of things in this type of agreement.

MUSHARAKAH(profits and loss sharing system)It is an agreement between two

persons or more (bank and customer)sharing both profits and losses. It is a joint enterprise where all the partners contribute capital and the client bring in know how. Profit/losses are shared on agreed ratios.

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RIBAAll 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

additionExchange transaction – Monetary

transactions◦Lending – a virtuous act; not a business◦Hand to hand exchange of currencies

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RIBA - UNANIMITYBanu Thaqif of Taif, not to forego

interest on their receivables; Banu Amr ibnal Moghirah refused to pay interest; Referred to the H Prophet, the Revalation came:

“O you who believe. Fear Allah, and give up the Riba that remains outstanding if you are (in truth) believer”. (11:278).

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RIBA - UNANIMITY (CONTD)

“If you do not do so, then be sure of being at war with Allah and his Messenger. But, if you repent, then you have your principal”. (11:279)

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And if you repent, then you have your principal. Wrong not, and you shall not be wronged ”. {without inflicting or receiving injustice}

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And fear the day when you shall be brought back to Allah.

Then shall every soul be paid what it earned and none shall be dealt with unjustly.

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking1) Functions and operations are based on Sharia’h principles

Conventional Banking1)Functions and operations are based on fully man made principles

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking

2) Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs)

Conventional Banking

2) Investor is assured of pre-determined rate of interest

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking3) Aim at maximising profit but subject to Sharia'h restrictions

Conventional Banking

3) Aim at maximising profit without any restrictions

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking

4) Partners, investor and traders, buyer or seller relationship

Conventional Banking

4) Creditor-Debtor relationship

DIFFERENCE BETWEEN ISLAIC AND CONVENTIOANL BANKING

Islamic Banking

5) Encourage asset-based financing and based on commodity trading

Conventional Banking

5) Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam.

CONCLUSION Islamic banking and finance are a part of Islamic

economic system, the basis of which revolves around justice and morality. It is a very young concept in modern times yet it is emerging as one of the fastest growing areas of international finance. It facilitates the uplifting of economic standards of its clients by providing various types of lending contracts. Above all it is Shari'ah compliant, hence protects a Muslim from dealing with Riba, thus avoiding Allah's wrath and war. Let us all support Islamic banking venture, which is being provided by the establishment of Gulf African Bank. We pray and believe that the bank will strictly stick to Islamic principles and Shari'ah and uplift the living standards of all those who endeavour to do so in a decent manner – Amin.