Islamic Micro Finance by Qazi Abdul Samad

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    International Conference onIslamic Microfinance

    CENTER OF ISLAMIC BANKING & ECNOMICS

    By :

    Held At:

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    What is Islamic Finance

    Abdul Samad

    Shariah AdvisorThe Bank of Khyber

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    Islam and ShariahIslam

    Aqidah

    (Faith & Belief)

    Shariah

    (Practices & Activities)

    Akhlaq

    (Morality & Ethics)

    IBADAT

    (Man to God Worship)

    Muamalat

    (Man to Man Activities)

    Political Activities Economic Activities Social Activities

    Banking & Financial Activities

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    Human Financial Needs

    Fulfillment of Financial Needs

    Own Capital Others Capital

    Equity Financing Debt Financing

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    Why Islamic Finance?The body which is promotedby Hiram sources is

    bound to hellfire.

    On the Day of Judgment, a person will not bemoved from the place where he stand until he isasked about the sources of his income and theyway he spent it.

    Purifying of the needs of life (food, drink, clotheshouse etc) is one of the most important reason forthe acceptance of prayers by Allah.

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    Most Important Islamic Teaching RelatedTo Business1. Elimination of Interest (Raba)

    2. The prohibition ofuncertainty (Gharar)

    3. The prohibition of Gambling (Qimar)

    4. The precipitation ofgames of chance (Maser)

    5. Honesty and Fair Trade (Ghishsh andKhilabah)

    6. Spending in the Good Cause7. Buy Back

    8. Two Mutually Conditional Contract

    9. Entitlement to profit depends on liability for risk

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    Interest

    Interest, Usury, or Riba is forbidden in almost allmajor religions of the world e.g.

    Judaism

    Christianity

    Islam

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    Riba in Quran God has permitted trade and forbidden interest.

    (The Cow Sura Al-Baqara 2:275)

    O believers, fear

    Allah, an

    dg

    iv

    eup what is still

    due

    to your from the interest (usury), IF [indeed] youare true believers[!!!]. If youdo not do so, thentake

    Notice of War from Allah and his Messenger. But, if you repent, you can have your principal.

    Neither should you commit injustice, nor should you besubjected to it.

    (The Cow Sura Al-Baqara 2:278-9)

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    Riba in Quran (Related in context to 2:278)The only reward of those Who make War upon Allah & his Messenger, and strive

    after corruption in the land, will be that they will be

    1. Killed

    2. Or, Crucified,

    3. Or, have their Hands and Feet on alternate sides Cutoff,

    4. Or, will be Expelled out of the land.

    Such will be their degradation in the world, and

    in the hereafter, theirs will be an terrible doom.

    (Quran: The Table Spread - Al-Maida Chapter 5: Verse 33)

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    Riba inH

    adithThe Prophet cursedthe receiverand

    thepayerof interest,

    the one who records it and

    the witnesses to the transaction

    and said: They are all alike (in guilt).

    (Sources: Jabir Ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed

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    Riba in Hadith

    The Prophet said: Riba has seventy

    segments, the least serious being equivalentto a man committing adultery with his own

    mother.

    (Sources: Aby Hurayrah, IbnMajah)

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    The prohibition ofuncertainty (Gharar)There are strict rules in Islamic finance against

    transactions that are highly uncertain or may cause

    any injustice or dishonesty against any of theparties.

    The concept ofGharar has been broadly defined

    by the scholars in two ways. First, Gharar implies uncertainty.

    Second, it implies dishonesty.

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    Classical Examples ofGharar

    Sellinggoods that the seller is unable to deliver

    Selling known orunknown goods against an unknownprice, such as selling the contents of a sealedbox

    Sellinggoods without properdescription, such as shopowner selling clothes with unspecified sizes

    Sellinggoods without specifying the price, such as sellingat the 'going price'

    Sellinggoods on the basis of false description

    Sellinggoods without allowing the buyer the properlyexamine the goods

    The Prophet (pbuh) prohibited the pebble sale and theGharar sale.

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    Qimar Qimar includes every form of gain or money, the

    achievement of which depends purely on luck and

    chance.

    O ye who believe! Intoxicants and gambling,

    sacrificing to stones, and (divination by) arrows, are

    an abomination, of Satans handiwork..: (5:90-91)

    He who pla yed Qimar ha s disobeyed Allah and HisMessenger.(Ibn Majah )

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    Honesty and Fair Trade (Ghishsh and

    Khilabah) Thus Manipulations and Mismanagement like Hoardings

    Black marketing

    Cheating Short weighting

    Hiding the defective quality of the goods are

    prohibited in Islamic Financial System. The prophet (PBUH) said: the truthfulhonestmerchants

    are with the prophets in the Day of Judgment.

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    Spending in the Good CauseThe Islamic economic approach is one, which is

    directed towards the achievement andactualization ofjustice in human relations.

    The result of this effort is falah or success andsalvation, and hayah tayyibah or good life inthis world and the hereafter.

    So IMFI dont permute to establish any relation

    with commodities, services and individualswhose moral practices are doubtful

    Some people spend Allahs wealth (i.e. Muslims Wealth)in an unjustmanner, such people will be put in the (Hell)

    fireo

    n th

    e dayofresurr

    ection

    (Bukhari andAhmad)

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    Buy Back

    The financier sells an asset to the customer on a

    deferred-payment basis, and then the asset isimmediately repurchasedby the financier for cash

    at a discount.

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    Two Mutually Conditional ContractTwo mutually contingent contract have been

    prohibited by the holy prohibited by the holy

    Prophet (pbuh).

    The sale of two item in such a way that one who

    intends to purchase good is obliged to purchase

    the other also at any given price. One sale transaction with tow prices.

    Combining sale and lending in one contract.

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    What is Microfinance?Microfinance is usually defined as the provision of

    financial services and products to those whose low

    economic standing excludes them from

    conventional financial institutions.

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    MFI ENGAGE IN TH

    EFOLLOWINNNG ACTIVITIESMicro-finance offer of financial services

    such as loans, savings, insurance, and training topeople living in poverty.

    And to those typically unable to gain such services

    in the normal finance markets

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    What Islamic MF

    To provide all these services under the umbrella of

    Shariah.

    Shariah compliant MFI, to enable Muslims to do

    theirtransaction a Halal way.

    Achieving the goals andobjectives of an Islamic

    economy.

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    Message of Islam regarding poverty

    Islamic jurists have unanimously held the view

    that it is the collective obligation (fard kifayah) of

    a Muslim society to take care of the basic needs of

    the poor.

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    Economic Empowerment

    Islam strongly encourages charity from the givers

    point ofview, it seeks to minimize dependence on

    charity from the beneficiarys point ofview.

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    Economic Empowerment

    A man of the Ansar community came to the

    Prophet (peace be upon him) andbegged from

    him.

    He (the Prophet) asked: Have you nothing in your

    house? He (the man) replied: Yes, a piece of cloth,

    which we wear, or which we spread (on the

    ground), and a wooden bowl from which we drink

    water.

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    Economic Empowerment He (the Prophet) said: Bring them to me. He (the man)

    thenbrought these articles to him and he (the Prophet)

    took them in his hands and asked to the assembly ofpeople: Who will buy these? A man said: I shallbuy them

    for one dirham. He (the Prophet) asked twice or thrice:

    Who will offer more than one dirham? Another man said:

    I shallbuy them for two dirhams. He (the Prophet) gave these to him and took the two

    dirhams and, giving them to the man of the Ansar, he said:

    Buy food with one of them and hand it to your family, and

    buy an axe andbring it to me.

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    Economic Empowerment He then brought it to him. The Prophet (peacebe upon

    him) fixed a handle on it with his own hands (#5) and

    said: Go, gather firewood and sell it, anddo not let me see

    you for a fortnight. The man went away andgathered firewood and sold it.

    When he had earned ten dirhams, he came to him and

    bought a garment with some of them and food with the

    others.

    The Prophet (peacebe upon him) then said: This is better

    for you than thatbegging should come as a spot on your

    face on the Day of Judgment.

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    Source of Fund Collection of IMFI

    The Shariah option fordeposit mobilization can be

    worked out by respecting two principles:

    The aim of the exchange at hand must be

    recognizes in Shariah.

    The modalities to achieve the said must be

    Shariah Compliant.

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    Source of Fund Collection of IMFI

    Zakat

    1. Zakah is the third among five pillars of Islam andpayment of zakah is an obligation on the wealth

    of every Muslim based on clear-cut criteria.

    2. These funds are meant mostly for the extremely

    poor and function as a safety net for meeting their

    immediate and basic needs

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    Source of Fund Collection of IMFI

    Suddqa

    1. Charity occupies a central position in the Islamic scheme

    of poverty alleviation.

    2. Suddqa kind of Charity which is not obligatory.

    Waqf (trust)

    The term waqf literally means detention. The legalmeaning of Waqf according to Imam AbuHanifa is the

    detention of specific thing in the ownership of waqif and

    the devoting of its profit or products "in charity of poors

    or othergood objects".

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    Source of Fund Collection of IMFI

    Islamic banks generally use Musharakah and

    Mudarabah based product for obtaining investment

    account.

    These deposits are based on the Shariah principles

    of profit and loss sharing, and the banks use them,

    along with its own funds in businesses which areShariah compliant.

    Wakala model can also be used for Investment

    Account.

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    WHAT IS MUSHARAKAH?

    The literal meaning of Musharakah is sharing. Theroot of the word "Musharakah" in Arabic is

    Shirkah, which means being a partner.

    Under Islamic jurisprudence, Musharakah meanswhere two or more than two persons agree to

    contribute funds for conducting some business inwhich all partners share the profit according to aspecific ratio while the loss is shared according tothe ratio of the contribution.

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    Management of Musharakah Each partner has right to take part in Musharakah

    management.

    The partner may appoint a managing partnerby mutualconsent.

    One are more of the partners may decide not to work for

    the Musharakah and work as a sleeping partner

    If one or more partners choose to become no-working orsteeping partners. The ratio of their profit cannot exceed

    from the ratio of their capital investment.

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    Capital of Musharakah

    All partners must contribute their capital in terms

    of money or species at an agreedvaluation.

    Share capital in a Musharakah can be contributed

    either in cash or in the form of commodities. In the

    letter case the market value of the commodities

    shall determine the share of the partner in thecapital.

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    Distribution of Profit The ratio of profit distribution must be agreed at the time

    of execution of the contract.

    The ratio mu

    stb

    ed

    etermined

    as a proportion on the

    actual profit earnedby the enterprise.

    1. Not as percentage of partners investment.

    2. Not in lump sum amount

    A sleeping partner cannot share the profit more than

    the percentage of his capital.

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    Rule for loss

    In the case of loss all the Muslim jurists are

    unanimous on the point that each partner shall

    suffer the loss exactly according to the ratio of

    investment

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    Islamic Microfinance Contracts

    Qariz

    MusharakahMubarabah

    Murabaha

    Ijarah Salam

    Istisna

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    Thank You

    CENTER OF ISLAMIC BANKING & ECNOMICS

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    192- Ahmad Block, New Garden Town , Lahore, Pakistan

    Ph: +92-42-35913096-8, 35858990, 38407850

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