islamic trade and fiance

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Islamic trade and finance

Islam encourages trade because trade is the way to generate revenue. Trade is the lifeline of

the world to go on with its economic affair. Business and trade in Islam are very different

from what we see in the world today.

First of all, there is not interest or usury on money supported by Islam, it is rather

discouraged and a sin.

Second thing is that Islam does not excluded or erases the morals and values even from the

business unlike the today‟s business where a new concept of “CSR” has been introduced to

protect consumers and costumers considering them a “social responsibility” of businesses.

ALLAH (swt) says in Holy Quran: 23: 7

“But those whose desires exceed those limits are transgressors”

So, it is a must to be fair in trade. ALLAH swt says;

Islam does not allow interest-based debt financing but it allows investment institutions based

on equity and economic justice. Al-Quran condemns the institution of riba in very strong

words (2: 275-279) and prohibits charging interest on the use of money capital in any and all

forms. Our Prophet Muhammad ( ) cursed the person who accepts interest, the one who

pays interest, and the one who records the transaction. From the injunctions of Quran and

Sunnah of the Prophet ( ), it is absolutely clear that any excess earnings on money capital

is riba, which is prohibited regardless of the rate of interest, purpose of the loan, and the

terms and conditions of the transaction. Islam makes no distinction between interest and



usury, nor does it make any distinction between consumption and production loans, insofar as

the prohibition on riba is concerned.

Definition of business in Islam

Any business arrangement based on fairness and legitimacy and on one's labor, skills and

lawful earnings, where the people involved assume fair business risk, is quite lawful in Islam

Business Ethics is the branch of ethics that examines ethical rules and principles within a

commercial context; the various moral or ethical problems that can arise in a business setting;

and any special duties or obligations that apply to persons engaged in commerce. Generally

speaking, business ethics is concerned with the study of what is good and bad, right and

wrong, and just and unjust in business.

Says the Holy Qur’an:

You are the best nation that has been raised up for mankind; You enjoin right conduct,

forbid evil and believe in Allah. (3:110)

The Prophet (sws) also says:

I have been sent for the purpose of perfecting good morals. ( I bn Hamba l

[1]

, No: 8595)

Purpose of Business in Islam

To gain profit

To serve Humanity

To cooperate with others

http://www.renaissance.com.pk/Mayviewpoint2y5.htm#_ftn1






To create a just and fair society for mankind.

Slide 11 data not putting.

Prophet pbuh use to visit market to educate/guide people.

And they say: “Why does this Messenger (Muhammad peace be upon him) eat food, and

walk about in the markets (as we). Why is not an angel sent down to him to be a Warner

with him? (Al Furqan, verse 7, Chp 18)

Permission of business during the hajj in Islam

There is no sin on you if you seek the Bounty of your Lord (during pilgrimage by trading).

Then when you leave Arafat, remember Allah (by glorifying His praises, i.e.. prayers and

invocations) at the Mash ar il Haram. And remember Him (by invoking Allah for all good)

as He has guided you, and verily, you were, before, of those who were astray.



(Al Baqarah Chp: 2, V:

198)

Al-Bukhari reported that Ibn Àbbas said, "Ùkaz, Mijannah and Dhul-Majaz were trading

posts during the time of Jahiliyyah. During that era, they did not like the idea of conducting

business transactions during the Hajj season. Later, this Ayah was revealed:

﴾مك

رب

ضف اوغت ن يكم جح يس ع ﴿

(There is no sin on you if you seek the bounty of your Lord.) During the hajj season ''Abu

Dawud and others recorded that Ibn Àbbas said, "They used to avoid conducting business

transactions during the Hajj season, saying that these are the days of Dhikr. Allah revealed:

'' Ibn Jarir narrated that Abu Salih said to Ùmar, "Ò Leader of the faithful! Did you conduct

trade transactions during the Hajj'' He said, "Was their livelihood except during Hajj”

Sign of a true businessmen

Men whom neither trade nor sale (business) diverts from the remembrance of Allah (with

heart and tongue), nor from performing as salat nor from giving the zakat. They fear a day

when hearts and eyes will be overturned (out of the horror of the torment of the Day of

Resurrection).

(Al Noor Chp: 18, V: 37)



However, the Islamic ethical system substantially differs from the so-called secular ethical

systems as well as from the moral code advocated by other religions and societies. In the

Islamic scheme of things, adherence to moral code and ethical behaviour is a part of I%

man (faith) itself. According to the Islamic teachings, Muslims have to jealously guard their

behaviour, deeds, words, thoughts, feelings and intentions. Islam asks its believers to observe

certain norms and moral codes in their family affairs; in dealings with relatives, with

neighbours and friends; in their business transactions; in their social affairs, nay in all spheres

of private and public life.

What form of gain is the best? [The Prophet] said, „A man‟s work with his hands, and

every legitimate sale‟. (Ahmad , No: 1576)

From the above it is clear that a Muslim trader must be determined to earn only through

legitimate means. He should not only avoid illegitimate means in earning his provisions and

livelihood but also distance himself from matters dubious and doubtful.

Business by Companions of Prophet PBUH:

All Four Caliphs were Businessmen

1. Abu Bakr

2. Omar ibn al-Khatab,

3. Othman ibn Affan,

4. and Ali ibn abi Talib



Ashara-e-Mubashirrah were Businessme

NameofAshraMubashraare

1. Abu Bakr Siddiq,

2. Umar ibn Al Khattab,

3. Uthman bin Affan.

4. Ali bin Abi Talib.

5. Saad bin Abi Waqqas.

6. Abu Ubaydah ibn Al Jarrah.

7. Talha ibn Ubaydullah.

8.

Az Zubair ibn Al Awwam.

9. Abdur Rahman ibn Awf.

10. Said ibn Zaid.

First Muslim Lady Khadija rt were a Business woman

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• Traveling of Quresh for Business:

• Syria in Summer

• Yemen in Winter

•

Because Quraish was made to incline. He made them incline in their journeys of winter

and summer both. They should therefore worship the Lord of this House. Who gave them

food in hunger, and bestowed them security from a big fear.

(Ref: Surah Quresh, Juzz 30, surah 106)

• History:

• These journeys started by great grandfather of Prophet Pbuh, Hashim. Once during

a sever drought in Makkah. First time, he traveled to Palestine and brought Wheat

and Flour and served his nation.

• Then he started traveling on continues basis to Palestine & Syria.

(ref: Tarikh by Ibn Tabri. P. 1089)

• Quresh Traveling to other Areas:



– Africa

– Egypt

– Sudan

– India

– Iran (Persia)

– Rome

– Quresh means Businessman

• Security issues/measures of these Caravans

•

Custodians of Kaaba

• Belongs to Spiritual Land

• 100-300 Guards

• Abu Sufiyan Caravan (100 guards + 2500 camels loaded with merchandise goods

worth of 50,000 gold coins)

• Exports of Makkans:

– Leather

– Animals Skins

– Dates

– Raisons

– Imports of Makkans:

– Fragrances (Yemen)

– Spices (India & Africa)

– Herbal Producs (India & Africa)



– Wheat (Syria & Palestine)

– Silk (China)

– Clothes (Adan)

– Labor, Slaves, Army (Africa)

– House Decoration Items (Syria & Egypt)

– Industrial Products like Silk, Cotton, Thread, Velvet Clothes

(Roome)

– Military Equipments, Oil (Syria)

Gold, Gold mixed Sand, Elephant Teeth (Africa

????/????

What is Riba:\

The word riba has been used in the Holy Qur‟an on several occasions. So it is

necessary to know what it means or what it really stands for. Riba has been extracted

from Raba. It means addition, increase. So, riba literally means to increase, to grow to

rise, to add, to swell. It is, however, not every increase or growth which has been



Islamic days . Muslim jurists have classified riba in two types: 1. riba al-nasi‟ah, and 2. riba

al-fadl.

RIBA AL-NASIA

The term nasi‟ah means to postpone or to wait and it refers to the time period that is allowedfor the borrower to repay the loan in return for the addition of the premium. Hence it refers to

the interest on loans. The prohibition of riba al nasi‟ah essentially implies that the fixing in

advance of a positive return on a loan as a reward for waiting is not permitted by the Shari‟ah

RIBA AL FADAL

Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an

addition by the debtor to the creditor in exchange of commodities of the same kind. The

following tradition of the Prophet Muhammad (saw) is cited as evidence. It is related that

Abu Said al-Khurdi said: “the Prophet Muhammad (saw) has said that gold in return for gold,silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, can be

traded if and only if they are in the same quantity and that is should be hand to hand. If

someone gives more or takes, then he is engaged in riba and accordingly has committed a

sin.”

To sum up, riba al-nasi‟ah and riba al-fadl are both covered by the verse, “Allah has

allowed trade and prohibited riba” (2:275), while riba-al nasi‟ah relates to loans and

riba al-fadl relates to trade. Although trade is allowed in principle it does not mean that

everything in trade is allowed.

• Riba Al-Mufrad (Simple Interest):

“Interest calculated only on the initial investment”

• Riba Al-Murakkab (Compound Interest):

“Reinvestment of each interest payment on money invested to

earn more interest.”

• Interest (Commercial I nterest):



“Interest paid on loan taken for productive and profitable purpose.”

• Usury (Sarafi I nterest):

“ Interest paid on loan taken for personal needs and expenses.”

Riba prohibition verses:

“Allah has laid His curse on Riba and blessed charity with increase. He bears no love

for the ungrateful sinners” Al-Baqarah 276

“O you who believe, Fear Allah and give up what remains of your demand for interest,

if you are indeed a believer. If you do not, then you are warned of the declaration of war

from Allah and His Messenger, but if you turn back you shall have your principal. Deal

not unjustly and you shall not be dealt with unjustly

Al Baqarah 278-

279



(Time: Dispute between Banu „Amr b, „Umeyr of Banu Thaqif [who embraced Islam in

9AH] and Banu Mughirah over vast outstanding claims of interest earned prior to prohibition.

“O‟ believers, devour not Riba, doubling its rate many times. Fear Allah and you will

prosper.”

Al-e-Imran

130

(Time: According to Ibn Hajar -revealed in 2AH as preceding and succeeding verses are

about the Battle of Uhud

• Prevented Muslims from usurious loans to equip their armies in response to the action of the

pagans

• Explicit prohibition of compound interest

• Qualification is not exclusive but rather suggestive of prevalent practice)

“The interest which you give to increase the wealth of people, will have no increase with

Allah: But that which you lay out for charity, seeking favor of Allah (He will increase):

it is these who will get a recompense multiplied.”

Ar Rum

39

(Time: Revealed in Makkah

• Not prohibitive in nature



• According to the majority of exegetes, refers to the gift that is extended to another with the

intention that the latter will return it with a better gift)

That they took riba, though they were forbidden …

(Time: • Enumeration of the iniquity and wickedness of the Jews

• Exact time of revelation is uncertain

• Context indicates before 4th

year AH as most Jews had by the departed Madinah

• According to al-Tabari – refers to predetermined excess taken upon the lending of a

specified amount for a specified period

• Not explicitly prohibitive for Muslims

• Prohibition for Muslims is inferred, otherwise Jews would not be blameworthy)

Prohibition of Riba in Ahadith



The Fuqaha have given two interpretations of the word, Riba: Riba-al-Nasia ( ر

ۃ ی س ن

) and Riba al Fadl (ل ض ف ر

).

Riba al-Nasia is defined as,

قزض ا ھزق ت ا یع لب ۃدب س و جا ہ طرا

This is translated as:

"Any lending arrangement that obligates the borrower to pay a certain extra amount

over and above the payment of the principal amount against the specified deferment"

Similarly, Imam Baihaqi reports the interpretation of Riba by Hazrat Fuzalah Ibni Ubaid

(R.A):

ل ض ر ق رج ۃ ھ ہ ن ف جو ب ر ا

"Any lending arrangement which results in some benefits to the lender is one of the

kinds of Riba". It is important to note that the Ayahs of Holy Qur'an prohibiting interestrelate to Riba al-Nasia



At the time of revelation of the above Ayahs, the prevalent form of Riba was Riba al-Nasia.

Therefore, the companions of the Holy Prophet (S.A.W) understood the meaning of these

Ayahs in terms of Riba al-Nasia. Thus Riba al-Nasia was categorically regarded Haram in

matters of Qarz. (Loan transactions QARD)

Riba al-Fadl occurs in those commodity exchange contracts where a contract provides

payment of any extra quantity of the commodity.

For instance, one kilogram of wheat is exchanged for more than one kilogram of wheat,

regardless of quality consideration. What matters is that a given quantity is to be exchanged

for the same quantity. In this case, the Hadith of the Prophet (S.A.W),

ث

ث

بز

از و

ث

ث

بتز

اتز و

ث

ث

ب

ا و

ث

ث

ھذب

ھذ ا

ب

ھذ ا

ا

أری

ق

اد د سا

أو

ساد

ه

ث

ث

بز

از و

ث

ث

بح

واح

از

ا و

ا

ئتم ش

كف

ا

تم ئ ش

كف

بتز

Sell gold by gold, silver by silver, dates by dates, wheat by wheat, salt by salt, and barley

by barley like for like and equal for equal so he who made an addition or who accepted

an addition committed the sin of taking interest. But sell gold for silver as you like but

hand to hand and sell barley for dates as you like but hand to hand.

Though the above Hadith mentions the incidence of Riba in six things but the Fuqahah have

extended the application of this Hadith to all commodity transactions characterized by the

same underlying reason. Whenever the same commodity is exchanged for more (Quantity),

the Riba al-Fadlwill arises.

In the light of above explanation, it is clear that the word 'Interest' as commonly understoodin context of banking/financial pertains to the Riba al-Nasia. Therefore, any extra payment

specified in Qard relating contract over and above the principal amount, falls under the

definition of Riba, al-Nasia, irrespective of the rate/amount of the extra payment. Hence, both

the Simple and the compound interest are prohibited as being Riba al-Nasia.

Some people, perhaps have misunderstood the meaning of the verse, "O ye who believe,

devour not usury doubled and multiplied but fear Allah that ye may (really) prosper" (3: 130)



And have tried to argue the permissibility of the simple interest. This is totally wrong

conclusion.

As a matter of fact, the Holy Qur'an wants to root out an interest mentality as appears from

verse (2:279). Ibn-e-Jareer has reported the interpretation of Hazrat Qatada (RA) in his tafsir.

وؤ ر ا وذخ ب نا م هد ه م نب ب

م ھ ا ا ا و و د ا د ز ی ع ب ش

"That the Holy Qur'an permits the lender to receive the principal amount only and does notallow any addition (however small it may be) ".

Bank accounts

PLS Account / Savings Account

Savings accounts are often the first official bank account held by consumers. Children may

open an account with a parent to begin a pattern of saving. Teenagers open accounts to stash

cash earned from a first job or household chores. The majority of Americans use a savings

account to park emergency cash. Opening a savings account also serves as a way to establish

a working relationship with a financial institution.

Good For: First bank account, kids, adults looking for a place to park savings or extra cash.

Drawbacks: Savings accounts typically yield a low interest rate in comparison to money

market accounts and CDs. Typically, they do not come with a debit card for purchases, and

the number of withdrawals per month is limited.



Current Account / Checking Account

Checking accounts provide the consumer with a basic account to deposit checks, make

withdrawals, and pay bills. Paper checks, though slowly losing popularity, are issued from

checking accounts. More recently, the debit card (or check card) has taken over as a primary

form of payment from checking accounts. Most banks now offer online bill pay services

through checking accounts, helping to streamline payments.

Good For: Anyone who needs a place to deposit a paycheck or cash and maintains a balance

under $5,000, people who enjoy convenience of a check card.

Drawbacks : Checking accounts are subject to a variety of fees, which can become expensive

quickly. Many checking accounts charge a maintenance fee or require a minimum balance.

Options vary widely from bank to bank.

Fixed Deposit Account / PLS Fixed Account / CDs

A money market account earns more interest than either a savings or checking account, but

combines features of both. For those who tend to carry higher balances in checking accounts,

these can be a great option to park cash. The higher rates mean the cash is working for you

and earning interest.

Good For: People who hold average balances in their account of $5,000 or more and want to

earn higher interest rates.

Drawbacks: Most money market accounts have significant minimum balance requirements

ranging from $5,000 to $10,000. Interest rates may be low, and fees can still be charged on

money market accounts. Withdrawals are often limited to a certain number per month.

Foreign Currency Account



Foreign Currency Account (FCA) is a transactional account denominated in a currency other

than the home currency and can be maintained by a bank in the home country (onshore) or a

bank in another country (offshore).

Foreign currency accounts are generally not covered by national deposit insurance schemes.

Lockers

Safe deposit lockers facility is one of the ancillary services extended by bank. The

relationship between the banker and the customer of a locker is that of lessor and lessee. The

locker units leased out to customers who have been properly introduced to the bank.

COMMON PRACTICES OF ISLAMIC BANKS

IN THE SOURCES OF FUNDS

The common practices of Islamic banks in the sources of funds may be describedas follows:

2.1 Current Accounts

All Islamic banks operate current accounts on behalf of their clients: individualsand business firms. These accounts are operated for the safe custody of deposits and forthe convenience of customers. There is little difference between conventional banks andIslamic banks as far as the operation of current accounts is concerned. However, themain characteristics of these accounts, as operated by Islamic banks, are listed below:19i)Current accounts govern what is commonly known as call deposits or demanddeposits. These accounts can be opened either by individuals orcompanies, in domestic currency or in foreign currency, if the bank isallowed to operate in the foreign exchange market and the holding ofcurrent balances in foreign currency is legal under the law of the land.

ii)The bank guarantees the full return of these deposits on demand and thedepositor is not paid any share of the profit or a return in any other form.iii)Depositors authorize the bank to utilize funds at the bank's own risk. Hence,if there is any profit resulting from the employment of these funds, itaccrues to the bank and if there is any loss, it is also borne by the bank.iv)There are no conditions with regard to deposits and withdrawals.v)Usually, account holders have a right to draw checks on their accounts.There are two dominant views about current accounts. One is to treat demanddeposits as am_nah (trust). This view is adopted by the Jordan Islamic Bank whichoperates a "Trust Account" instead of a current account. A trust deposit is defined by theJordan Islamic Bank as "cash deposits received by the bank where the bank is authorizedto use the deposits at its own risk and responsibility in respect to profit or loss and whichare not subject to any conditions for withdrawals or depositing".10



Thus, these deposits are handed over to the bank by depositors as a Trust and the bank does not have the authority to use them without first obtaining the specific permission of the owner of the funds.The other view is to treat demand deposits as qard hasan (interest-free loan).This view has been adopted by Iranian Islamic banks which call the current account

"qard hasan current account".11 According to this view, money deposited in theseaccounts is a benevolent (or interest free) loan (qard hasan) from the depositor to the

bank. The bank is free to utilize these funds at its own risk without any return to thedepositor and without needing any authorization because in the case of qard hasan, thedebtor does not need the specific permission of the creditor to use the borrowed funds.The debtor owes the creditor only the principal amount borrowed. This condition isfulfilled as the amount deposited in these accounts is fully underwritten by the bank.

2.2 Savings DepositsAlthough all Islamic banks operate saving accounts, there are some differencesin the operation of these accounts. A typical example is that of the Bank Islam Malaysia,which defines savings deposits in the following way:

"The Bank accepts deposits from its customers looking for safe custody of their fundsand a degree of convenience in their use together with the possibility of some

profits in the form of Saving Accounts on the principle of Al Wad_a. The bankrequests permission to use these funds so long as these funds remain with the

bank. The depositors can withdraw the balance at any time they so desire andthe Bank guarantees the refund of all such balances. All the profits generated bythe Bank from the use of such funds belong to the portion of the Bank.However, in contrast with the current account, the Bank may, at its absolutediscretion, reward the customers by returning a portion of the profits generatedfrom the use of their funds from time to time".12

It must be pointed out that any return on capital is Islamically justified only if thecapital is employed in such a way that it is exposed to a business risk. If savingsdepositors are guaranteed that their amounts will be refunded in full, if and when theywant them, as is the case with traditional banks, then, they are not participating in a

business risk. Under these circumstances, it has to be made clear that savings depositorsare not Islamically entitled to any return. If an Islamic bank refunds some portion of the

profits generated from the use of saving deposits to the depositors, it is absolutely at thediscretion of the bank concerned and it must be treated as a gift. It is quite clear from theabove quotation that this is exactly the course of action adopted by the Bank IslamMalaysia.In contrast to this, the Bahrain Islamic Bank calls these accounts "Savings

Accounts with Authorization to Invest". Depositors provide the bank with anauthorization to invest their money. Depositors have the right of withdrawal, but profitsare calculated on the basis of the minimum balance maintained for a month.13

Similarly, savings accounts at the Dubai Islamic Bank operate as follows:i)Savings accounts are opened with the condition that depositors provide the

bank with an authorization to invest.ii)Depositors have the right to deposit and withdraw funds.iii)The profits in savings accounts are calculated on the minimum balancemaintained during the month. Depositors participate in the profits of19savings accounts with effect from the beginning of the month following

the month in which the deposits are made. Profits are not calculated witheffect from the beginning of the month in which a withdrawal is made



from the account.iv)A minimum balance has to be maintained in order to qualify for a share in

profits.

The Iranian Islamic banks include saving accounts in "Qard Hasan

Accounts" and call them "Qard Hasan" deposits. The operation of these accounts is

similar to that of savings accounts in the conventional system as far as the deposit andwithdrawal of money by means of a savings account passbook is concerned. Althoughno dividends are due in the case of qard hasan depositors, Iranian banks use different

promotional methods in order to attract and mobilize deposits. These include giving thefollowing incentives to depositors:i)Non-fixed bonus either in cash or in kind.ii)Exempting depositors from or granting discount thereto, in the payment ofcommissions and/or fees.iii)According priority to customers in the use of banking facilities.15

The Jordan Islamic Bank has adopted yet another way to operate savingsaccounts. It includes the savings deposits into an investment pool called joint investment

accounts.

The foregoing discussion makes it clear that Islamic banks adopt one of thefollowing practices in operating savings accounts:a)Accepting savings deposits on the principle of Al Wad_a (trust) requestingdepositors to give permission to the bank to use these funds at its ownrisk, but guaranteeing full return of deposits and sharing any profitsvoluntarily.

b)Accepting savings deposits with an authorization to invest and share profits inan agreed manner for the period in which a required balance ismaintained.c)Treating savings deposits as qard hasan from depositors to the bank andgranting pecuniary or non pecuniary benefits to depositors.d)Accepting savings deposits as part of an investment pool and treating them asinvestment deposits.

2.3 Investment Deposits

Investment deposits are Islamic banks' counterparts of term deposits or timedeposits in the conventional system. They are also called Profit and Loss-Sharing (PLS)Accounts or Participatory Accounts. However, they can be distinguished fromtraditional fixed term deposits in the following manner:i)Fixed term deposits in the conventional system operate on the basis of interest,

while investment accounts in Islamic banks operate on the basis of profitsharing. Instead of promising depositors a predetermined fixed rate ofreturn on their investment, the bank tells them only the ratio in which itwill share the profits with them. How much profit each depositor earnsdepends on the final outcome of the bank's own investment.ii)While fixed term deposits are usually distinguished from each other on the

basis of their maturities; investment deposits can be distinguished on the basis of maturity as well as on the basis of purposes, as it is possible togive special instructions to the bank to invest a particular deposit in aspecified project or trade.The main characteristics of investment deposits can be described as follows:

i)Investment accounts can be opened by individuals or companies either indomestic or foreign currency provided that the bank is allowed to operate



in foreign exchange.ii)Deposit holders do not receive any interest. Instead, they

participate in the share of the profits or losses.iii)Usually these accounts are opened for a specific period, e.g. three months, sixmonths, one year or more.

iv)The return on investment is determined according to actual profits frominvestment operations of the bank and shared in an agreed proportion bydepositors according to the amount of their deposits and the period forwhich they are held by the bank. As an accounting practice, the amountheld in the account is multiplied by the period for which it has beenemployed and profits are distributed on a pro rata basis.v)Generally speaking, depositors do not have the right to withdraw from theseaccounts as is customary in time deposits in conventional banks.

However, withdrawals may be made under special circumstances withthe depositor forfeiting his share of the profit for the withdrawn amount.

vi)Usually, banks insist on a specified minimum amount to open and maintainthe investment account.vii)Most banks issue an investment certificate to depositors stating the terms andconditions of the deposit.Islamic banks have been experimenting with different kinds of investmentdeposit schemes in order to satisfy the needs and requirements of different kinds ofinvestors. some of these are described in this paper, but it is necessary to mention thatmost of these innovations are bank-specific. Hence, all of the different kinds ofinvestment deposit may not be found in any given bank.

Joint/General Investment AccountThe most prevalent practice among Islamic banks is to establish some kind ofinvestment pool in lieu of fixed term deposits. The investment pool takes the form of ageneral investment account in which investment deposits of different maturities are puttogether. These are not tied to any specific investment project but are utilized indifferent financing operations of the bank. Profits are calculated and distributed at theend of the accounting period, which is either three months, six months or one year.Another variation of the investment pool is the establishment of a "JointInvestment Account" which is defined by the Jordan Islamic Bank as "cash depositsreceived by the bank from persons desiring to participate with the bank in multilateraland continuous investment and financing operations, whereby such deposits will receivea certain percentage of annual profits realized in accordance with the conditions of the

account under which they are entered".17Furthermore, Section 13(A) of the Law governing the Jordan Islamic Bank statesthat "cash deposits in investment accounts opened by the bank shall constitute part of thetotal cash resources of the bank to be used in financing operations" and shall bedesignated as "Joint Investment Account.18 Joint investment accounts of the JordanIslamic Bank are further classified into savings accounts, notice accounts and fixed termaccounts.19 It is also necessary to mention that profits and losses relating to financingfrom joint investment accounts are kept separate as an accounting practice from otherincome and expenditure resulting from other activities and services offered by the

bank.

Limited Period Investment DepositsThese deposits are operated by the Bahrain Islamic Bank and the Kuwait Finance



House. Investment deposits under this scheme are accepted for a specified period whichis mutually determined by the depositor and the bank. The contract terminates at the endof the specified period but profits are calculated and distributed at the end of the financialyear. Unlimited Period Investment Deposits

These investment deposits differ from limited period deposits in that the period isnot specified. Deposits are automatically renewable unless a notice of three months isgiven to terminate the contract. No withdrawals or further deposits are permitted in thiskind of contract, but customers are allowed to open more than one account. The profitsare calculated and distributed at the end of the financial year.22

Specified Investment DepositsSome Islamic banks have developed an investment deposit scheme with specificauthorization to invest in a particular project or trade. In this case, only the profits of this

particular project are distributed between the bank and its customers according tomutually agreed terms and conditions.In the case of specified investment accounts, Islamic banks function as an agent

on behalf of depositors. This is evident in the provisions of the Jordan Islamic Bankwhich declares that the bank will accept cash deposits into specific investment accounts"from persons desiring to appoint the bank as agent for investment of these deposits in aspecific project or in a specific manner on the basis that the bank will receive a part ofthe net profits realized but without liability for any losses which are not attributable toany violation or default by the bank".

Investment Deposits in Iran*

*The information reported here was collected in 1988 and describes the situation as it prevailed between 1984 and

1988. However, there is no evidence available to the author, which might suggest that these practices have either been

abandoned or modified.

Under the system of usury-free banking introduced in 1984, Iranian banks areauthorized to accept both short - and long-term investment deposits.The duration of short-term investment deposits is three months and long-termdeposits have a duration of one year or more. According to prevailing practices, shorttermdeposits are left with the banks for an initial period of three months which cansubsequently be extended by one month. The duration of long-term investment depositsis extendable by a multiple of three months. A minimum balance of Iranian Riyal 2,000and 50,000 is required for short- and long-term investment deposits respectively.24

Investment deposits are used by Iranian banks in any one of the following ways:i)Banks can combine their own resources, i.e. their capital, with investmentdeposits to finance an investment project. In this case, the resulting

profits are shared between the depositors and the banks. In calculatingthe return to depositors, the required reserves are subtracted from the base amount. The banks announce their profit rates every six months.The share of profits to depositors is also distributed accordingly. No

profits are earned by depositors if the amount is either withdrawn beforethe required time or falls below the required minimum.25

ii)Iranian banks are only allowed to invest their depositors' funds, i.e. withoutmixing these funds with their own resources. In this case, the bank actsonly as an agent on behalf of the depositors and the profits earned as aresult of the bank's investment of such funds are distributed among thedepositors after the deduction of the bank's fees for acting as an agent.

Furthermore, the return of the principal of these deposits is guaranteed bythe bank.26



It is also worth noting here that according to Article 4 of the Law for Usury FreeBanking of 1983, "banks ..... may undertake and/or insure the principal of the terminvestment deposits".

Deposit Management in PakistanCommercial banks in Pakistan began accepting deposits from the public on the

basis of Profit and Loss Sharing (PLS) in 1981 when the Islamization of banking wasmade compulsory for nationalized commercial banks.28 However, in the initial stages,Pakistani banks continued to accept interest bearing deposits in addition to PLS deposits.From July 1985, banks in Pakistan were asked not to accept any interest bearing deposit.19From that date, all deposits (other than foreign currency deposits held in Pakistan)accepted by Pakistani banks were to be on the basis of participation in profit and loss.29

The main features of deposit management under the Islamic banking system inPakistan may be described as follows:*

i)Deposits in current accounts continue to be accepted as before. No interest or profit is allowed on such deposits.

ii)Deposits, other than current accounts, are classified into three categories:special notice deposits, savings deposits and fixed term deposits. Underthe Islamic banking system adopted in the country since 1985, alldeposits are accepted only on the PLS basis.iii)Special notice deposits are further classified into two types: those requiring anotice of 7 to 29 days and those requiring a notice of 30 days or more.Savings deposits also are of two types: with checking facilities andwithout. There are seven types of fixed or term deposits classified on the

basis of their duration ranging from three months to five years or more.Thus, 11 different types of PLS deposits are offered by nationalized

banks in Pakistan.iv)In March, 1986, PLS deposits constituted 65 percent of the total bankingdeposits in Pakistan. v)All banks and development finance institutions accepting PLS deposits arerequired to declare rates of profit on a half-yearly basis on variouscategories of deposits after obtaining the necessary clearance from theState Bank of Pakistan which is the central bank of the country.vi)Only non-interest income earned by the banks is distributed to PLS depositholders.vii)Banks are required to maintain separate accounts for interest and non-interestoperations. Establishment expenses, provisions for bad and doubtful

debts, etc. are divided between interest and non-interest incomes in theratio that the two incomes bear to each other.viii)The non-interest income of the bank, after making the above and otherappropriate deductions, is first distributed among various types ofdeposits accounts and then to individual depositors using a specificformula developed by the State Bank of Pakistan, which assigns differentweights to different deposit categories.

*The information reported here relates to year 1986.

REFERENCE(CONTEMPORARY PRACTICES OF ISLAMIC FINANCING TECHNIQUES AUSAF

AHMAD*)



Loan & Trust

Definition of loan

A thing that is borrowed especially a sum of money that is expected to be paid back with

interest. In finance, a loan is a debt evidenced by a note which specifies, among other things,

the principal amount, interest rate, and date of repayment. A loan entails the reallocation of

the subject asset(s) for a period of time, between the lender and the borrower .

In a loan, the borrower initially receives or borrows an amount of money, called the principal,

from the lender, and is obligated to pay back or repay an equal amount of money to the lender

at a later time. Typically, the money is paid back in regular installments, or partial

repayments; in an annuity, each installment is the same amount.

Definition of trust

Allah says in His Glorious Book: "Those who faithfully observe their trusts and their

covenants," (23:08), and: "Surely Allah commands you to make over trusts to their owners

and that when you judge between people you judge with justice; surely Allah admonishes you

with what is excellent; surely Allah is Seeing, Hearing," (04:58), and: "O you who believe!

Be not unfaithful to Allah and the Messenger, nor be unfaithful to your trusts while you

know." (08:27).

http://en.wikipedia.org/wiki/Debt



http://en.wikipedia.org/wiki/Promissory_note



http://en.wikipedia.org/wiki/Asset



http://en.wiktionary.org/wiki/lender



http://en.wiktionary.org/wiki/borrower



http://en.wikipedia.org/wiki/Money



http://en.wikipedia.org/wiki/Annuity_(finance_theory)












Difference between loan and trust

Loan Trust

• Something lent for temporary use.

• A sum of money lent at interest.

• An act of lending; a grant for temporary

use.

• A temporary transfer to a duty or place

away from a regular job:

Aqad

Definition of aqad

Literally „aqad refers to the Arabic word, mean an agreement and aqad might also refers to

„the rope‟ which is connecting some people which are involved in a certain agreement.

Syari‟ah also defines „aqad as the inter -connection among the people‟s and covenant.

Types of aqad

I. aqad munjiz/direct aqad means; the contract that directly being actualizes a soon

after the Aqad is taken.



II. Qaad mu‟alaq/pre-determined aqad means; the contract that requires same pre-

determined requirements such as on-line shopping that generally requires the pay-pal

orfull payment before the stuffs delivery.

III. Aqad mughaf/determined „aqad means; the contract that being determined its

actualization period, it means that this kind of contract has no laws barrier uo-to the

determined period of contracts actualization.

Condition of Aqad

Here is some general condition of Aqad

The one who take any; aqad should be compatible in their action. They couldn‟t be

unconscious „aqad

The syari‟ah allowance on the objects of Aqad

The syari‟ah allowance on the „Aqid to take some Aqad

The Aqad on the forbidden sales

The Aqad should be caused into some advantages.

A complete ijab and qabul.

Difference between trade and interest

THE DIFFERENCE BETWEEN TRADE AND USURY

There remains a crucial difference between trade and usury. To assert that they are at times

synonymous has been rebuked by the Quran in no uncertain terms.



002.275

"Those who consume usury will not stand except as stand one whom the Satan has

confounded by his touch. That is because they say: "Trade is like usury," but God has

permitted trade and forbidden usury. Those who after receiving direction from their Lord,

desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat

(the offence) are companions of the Fire: They will abide therein.

To cite an example of trade, if one bought a commodity for x and then sold it for x+10

(profit), then that would amount to trade. On the other hand, if one 'lends' 10 bags of sugar

and two months , expects 15 bags of sugar in return, the excess of 5 bags of sugar would

amount to 'Riba'.

Similarly, if a loan is granted today attracts a specific rate of interest (beyond currency

inflation), that is Riba. It is to be noted, that on the strength of verse 2:279, a creditor is

entitled to their capital back. Therefore, if money is the commodity that is lent, one could

arguably expect to recoup a fair 'inflationary' element, so as not to be in a state of loss on the

principle. In today's economy, currency seldom holds the same value over a period of time.

It can therefore be argued, that any lending which has a predetermined return, or a 'rate of

interest', regardless of the circumstances of the borrower, would amount to 'Riba'. However,

if both the lender and borrower share in any prospective gains and losses, the nature of the

contractual agreement is considerably altered.

The latter point underscores the difference between a contractual trade agreement and that of

usury. In trade, both parties are involved in the assessment of the transaction and agree

suitable profit and loss terms. In the case of usury, the debtor is at the mercy of the creditor



who will not only charge a fixed return but also usually impose a financial penalty if a

payment is not met.

Major Principles of Trade (Bai

islamic trade and fiance

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