Group Group Members:Members:

•Noureen Noureen MushtaqMushtaq•Sadia AhmedSadia Ahmed•Hafsa TariqHafsa Tariq•Saliha AnumSaliha Anum

Project And Group Profile

Submitted to:Submitted to:

Sir Javed Sir Javed KareemKareem

The importance of banks cannot be denied in the development of the economy of any country…..

The involvement of Interest in the current conventional system of banking has closed several doors of opportunities for not only Muslims, but also for the world development of economic sustainability ….

In such times, the need of an Islamic Ideal Body is obvious….Let us try to know the reasons and basics upon which islamic banking is considered as Halal…and different from Interest/conventional banking….

Islamic BankingIslamic Banking

A step forward, towards A step forward, towards Islamic Economic SystemIslamic Economic System

IntroductionIntroduction

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the

rules of ShariahShariah, known as:

 Fiqh al-MuamalatFiqh al-Muamalat (Islamic rules on transactions).

Basics of Islamic BankingBasics of Islamic Banking

The basic principle of Islamic banking is:

• The sharing of ProfitProfit and Loss Loss • The prohibition of Riba Riba (usury)

DefinitionDefinition

“Islamic banking has been defined as banking in consonance with the ethos

and value system of Islam and governed, in addition to the

conventional good governance and risk management rules, by the principles laid down by Islamic

Sharia’h”

What are We Focusing Upon?What are We Focusing Upon?

We will be focusing on the Concept of Islamic Banking and upon which bases, it has been considered as

HalalHalal and PermissiblePermissible on the basis of Shariah

HistoryHistory• Interest-free banking seems to be of very recent origin.• The earliest references to the reorganization of banking

on the basis of• Anwar QureshiAnwar Qureshi (1946), • Naiem SiddiqiNaiem Siddiqi (1948) • Mahmud Ahmad (1952) • MawdudiMawdudi (1950)• Muhammad Hamidullah (1962) • They have all recognized the need for commercial banks

and their perceived "necessary evil" "necessary evil" have proposed a banking system based on the concept of Mudarabha - profit and loss sharing

Philosophy of Islamic Banking & FinancePhilosophy of Islamic Banking & Finance

risk-sharingowning handling of physical goodsinvolvement in the process of tradingleasing and construction contracts

using various Islamic modes of finance

Need of a New SystemNeed of a New System

Why Islamic Banking needed?Why Islamic Banking needed?Before explaining the concept

““what is Islamic Banking”what is Islamic Banking” the elaboration of concept

““why Islamic Banking” why Islamic Banking” is very important.

Principles Governing Principles Governing

IslamIslam

AqidahAqidah(Faith and Belief)(Faith and Belief)

Shariah(Practices and

Activities)

AkhlaqAkhlaq(Moralities and (Moralities and

Ethics) Ethics)

Objectives of Islamic BankingObjectives of Islamic Banking

• Main Objectives of Islamic Banking:

(Banking Without Riba)(Banking Without Riba)

““The main objective of an Islamic Bank is to The main objective of an Islamic Bank is to Prohibit Muslims from dealing with interest Prohibit Muslims from dealing with interest

or usury (Riba) which has been strictly or usury (Riba) which has been strictly prohibited by Allah and to protect them prohibited by Allah and to protect them

from one of the biggest sins”.from one of the biggest sins”.

RibaRibaWhat is Riba or interest?What is Riba or interest?Before moving to an easier definition of riba, for a

definition of interest we can refer to the work of J M Keynes:

““Interest in economics denotes the price Interest in economics denotes the price paid on money in exchange for the use of paid on money in exchange for the use of a sum of money, the premium, obtained a sum of money, the premium, obtained

on current cash over deferred cash”on current cash over deferred cash”(Keynes, 1937)

No Interest than???No Interest than???What to do then?• There is nothing wrong in the business of banking. A modern

society can not do without it.• All we have to do is to change the business as to make it

acceptable in Islamic framework. • Islam not only stresses on acceptability of

what we do (The Ends),(The Ends), it also emphasizes on

how we do ( The MeansThe Means) certain things.

From Haram to HalalFrom Haram to Halal

How to change it?1stwe simply remove those aspects of banking

that contradict Islamic standards.2ndwe can keep those elements of banking that

don't violate Islamic norms.3rdwhile making these changes, we refer to a set

of Islamic norms, collectively known as

ShariahShariah, which is based on the: QuranQuran and The SunnahSunnah (the Prophet’s tradition.

Importance of Trade in IslamImportance of Trade in Islam

Islam has given an immense importance to trade.

• The nobility of this profession is obvious from the fact that it was the chosen profession of prophet Muhammad (S)

Most important Islamic Teachings Most important Islamic Teachings Related to BusinessRelated to Business

• The Prophet (PBUH) said:

“The truthful honest merchant is with The truthful honest merchant is with the Prophets, the truthful and the Prophets, the truthful and

martyrs (in the day of judgment)” martyrs (in the day of judgment)” Narrated by Al-Tirmidhi)

Forms of Forms of BBusinesses Allowed by usinesses Allowed by Islam Islam

1. Joint ventures based on sharing of risks & profits

2. Provision of services through trading, both cash and credit,

3. Leasing activities.

Uniqueness of Islamic BankingUniqueness of Islamic Banking

Commingling between Finance and Religion and ethics

Sharia Supervisory BoardsSharia Supervisory Boards (SSB)Studies Articles of associations and by lawsApproval of all contractsAudit the actual implementations Issuance of Fatwas (Responses)Conferences – Research - Training

Islamic Banking

Finance Religion Ethics

Structure of HierarchyStructure of Hierarchy

Shari’ah Supervisory BoardShari’ah Supervisory Board

Shariah Advisory Shariah Advisory Council/Consultant Council/Consultant

Basis of Shariah ApprovalBasis of Shariah Approval

TerminologiesTerminologies• Bai' al 'inah • Bai' bithaman

ajil • Bai' muajjal • Musharakah• Mudarabah • Murabahah • Musawamah • Bai salam • Hibah

• Ijarah • Musharakah • Qard hassan/

Qardul hassan • Sukuk • Takaful • Wadiah • Wakalah

Major Contracts Used in Major Contracts Used in Islamic BankingIslamic Banking

• Mudaraba:Mudaraba: Investment management

• Musharaka:Musharaka: Partnership• IjarahIjarah:: Leasing• WakalahWakalah:: Agency• Istisna’:Istisna’: Contract of works• WadiahWadiah : : safekeeping

Basic Difference between Islamic Basic Difference between Islamic and Conventional Modes of Financeand Conventional Modes of Finance

Conventional BankConventional Bank

ClientBank

Money + Money (interest)

Money

Islamic Bank Islamic Bank

Bank

Money

Islamic

GoodsAnd

Services

Client

Islamic BankingIslamic Banking

1) Functions and operations are based on Sharia’h principles

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

3) Aim at maximizing profit but subject to Sharia'h restrictions

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

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

6) No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss.

1) Functions and operations are based on fully man made principles

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

3) Aim at maximizing profit without any restrictions

4) Creditor-Debtor relationship5) Based on money trading.

Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam.

6) It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.

Conventional Conventional BankingBanking

Deposit ProductsDeposit Products

Current AccountCurrent Account

– It is organized as wadiah or safe-keeping.– The deposits are held in trust and utilized

by the bank at its own risk.– There is no big difference here between

conventional and Islamic banks, as normally no interest is paid on such account.

Savings AccountSavings Account

• This account is based on Mudharaba principle.

• Depositors are owners of funds and the bank is owner of labor.

• Profits are shared by both parties as per pre-agreed ratio fixed through negotiation.

• If loss occurs, it is borne by depositor only as owners of fund. The bank loses its effort.

Investment AccountInvestment Account

Core deposits of an Islamic bank. Based on the concept of Mudharaba Islamic counterpart of the Islamic counterpart of the conventional fixed deposit products.

1. General Investment Deposits:  Open to any project as selected by the bank.2. Special Investment Deposit:  Tied to any specific project agreed upon by

both parties.

Islamic Banking Global ScenarioIslamic Banking Global Scenario

Focus Areas Focus Areas

Worldwide StatisticsWorldwide Statistics

Market PerformanceMarket Performance

Interest Vs. RentInterest Vs. RentProfit and Fees• Not every known income is interest. Rent is a known payment to use a leased item. Fees are a known payment to buy services. Interest is a known payment to use money.• Profit is the difference between revenue and costs.

It is, however, not known in advance. It is therefore not fixed, but variable.

• Interest forms part of production costs. Profits are the difference between revenues and costs.

So So “Loan”“Loan” can’t be a business can’t be a business tool!tool!

• Islam does not allow anyone to give and take anything extra on a loan.

• But, today banks make money from the loan business.

• Depositors receive interest on their loan to banks. Banks receive interest on their loans to Entrepreneurs (Finance-seekers).

• Islamic banks can’t make use of such loans.

FatwaatFatwaatJamia Darul 'Ulum Karachi remains firm upon its previous

fatwa. It is permissible to perform financial transactions with banks which are not based on interest that are working under the supervision of authentic scholars while keeping with the principles of the Shari'a. The profit earned from such transactions is halal (lawful)

and it is not interest or haram (unlawful).

Mufti Taqi UsmaniMufti Afzal Ali Rabbani

Mufti Abdurrauf SakkharwiMufti Mahmud Ashraf Usmani

Mufti Muhammad Abdul Mannan

Dr. Zakir NaikDr. Zakir Naik

• In Islam there is no different entity such as capital and organization, on land you pay rent, to labour, you pay wage, capital has profit and loss sharing and same is for organization while modern banking defines interest for capital. This is the basic difference of modern banking and Islamic banking

Guidance from Rules of Islamic Jurisprudence- Rule of Positive Approach:

““Everything in this world is Halal Everything in this world is Halal except that which is declared as except that which is declared as

Haram”Haram”

And then we looked at the Pakistani And then we looked at the Pakistani scenario now….scenario now….

The Islamic Banking CustomerThe Islamic Banking Customer

Definition:Definition:

““People who don’t want to compromise People who don’t want to compromise on their principles, But they want Top on their principles, But they want Top

Quality, High Standard Shariah Quality, High Standard Shariah Compliant Products/Services from Compliant Products/Services from

Institutions that care for the community Institutions that care for the community as a whole”as a whole”

Professor Saleem saysProfessor Saleem says

"There is a good future for Islamic banks, "There is a good future for Islamic banks, provided they improve services and provided they improve services and

focus on real economy, infrastructures focus on real economy, infrastructures and do not invest in credit cards and and do not invest in credit cards and

derivatives," derivatives,"

"Conventional banks encourage people to "Conventional banks encourage people to spend more. Islamic banks can put a spend more. Islamic banks can put a

break on this negative trend," break on this negative trend,"

CriticismCriticism• Many Muslim scholars are not happy with the present Islamic banking

system due to the absence of a comprehensive law.

"Islamic banks should prove that they are totally different from "Islamic banks should prove that they are totally different from conventional ones to attract faithful Muslims,"conventional ones to attract faithful Muslims,"

• Muhammad Yousuf Saleem told Arab News that

““At present there is no law defining what is Islamic banking and At present there is no law defining what is Islamic banking and finance. We need a complete set of rules and regulations. In the finance. We need a complete set of rules and regulations. In the

absence of such a law, discrepancies will continue,“absence of such a law, discrepancies will continue,“• The deficiency of educated and qualified scholars in the field of banking,

one of the expert said:

““"These bankers think the mothers are going to give born "These bankers think the mothers are going to give born graduated sharia scholars, obviously we need to develop themgraduated sharia scholars, obviously we need to develop them””

ConclusionConclusion

• On the basis of the above it can be said that supply and demand of capital would continue in an interest free scenario with additional benefit of greater supply of risk-based capital along with more efficient

• Allocation of resources and active role of banks and financial institutions as required in asset based Islamic theory of finance.