The document provides an introduction to Islamic banking, explaining why it exists, what it is, and how it differs from conventional banking. It states that Islamic banking operates according to Sharia principles of equal distribution of wealth and social justice. It then defines Islamic banking as banking compliant with Sharia law and defines some of its key features, including profit and loss sharing and asset-based financing. The document proceeds to contrast Islamic and conventional banking and outlines some common Islamic banking services like partnership, trade, and rental-based financing structures.
3. Why Islamic Banking
What is Islamic Banking
Difference b/w Islamic and Conventional
banking
Islamic Banking offerings
4. Before explaining the concept “what is Islamic
Banking” the elaboration of concept “why
Islamic Banking” is very important.
Islam is a complete code of life that provides
guidance regarding each aspect of life.
5. 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.
6. WHAT IS ISLAMIC BANKING
Islamic banking is banking activity that is consistent with
the principles of sharia and its practical application
through the development of Islamic economics. As such, a
more correct term for 'Islamic banking' is 'Sharia
compliant finance'
8. Islamic Banking
1) Functions and
operations are based
on Sharia’h principles
Conventional Banking
1)Functions and
operations are based on
fully man made
principles
9. 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
10. Islamic Banking
3) Aim at
maximising profit
but subject to
Sharia'h restrictions
Conventional Banking
3) Aim at
maximising profit
without any
restrictions
11. Islamic Banking Conventional Banking
4) Partners,
investor and
traders, buyer or
seller relationship
4) Creditor-Debtor
relationship
12. Islamic Banking Conventional Banking
5) Encourage asset-
based financing and
based on commodity
trading
5) Based on money
trading. Money is a
medium of exchange
and not a commodity,
its sale and purchase is
prohibited in Islam.
13. Islamic Banking Conventional Banking
6) No right of profit if
there is no risk involved.
The profit and loss
sharing depositor may
lose money in case of
loss.
6) It is almost risk free
banking and depositor
has no risk of losing its
money because interest is
guaranteed.
14. ISLAMIC BANKING SERVICES
Currently available Islamic Banking services are
a) Partnership based modes of financing
Musharaka Finance, Mudarabah Finance,
b) Trade based modes of financing
Murabaha Finance, Salam finance
c) Rental based modes of financing
Ijarah Finance, Diminishing Musharaka Finance
16. A joint enterprise or partnership structure
with profit/loss sharing implications that is
used in Islamic finance instead of interest-
bearing loans. Musharaka allows each party
involved in a business to share in the profits
and risks. Instead of charging interest as a
creditor, the financier will achieve a return in
the form of a portion of the actual profits
earned, according to a predetermined ratio.
However, unlike a traditional creditor, the
financier will also share in any losses.
17. "Mudarabah" is a special kind of partnership where one partner
gives money to another for investing it in a commercial enterprise.
The Mudarabah (Profit Sharing) is a contract, with one party
providing 100 percent of the capital and the other party providing
its specialized knowledge to invest the capital and manage the
investment project. Profits generated are shared between the
parties according to a pre-agreed ratio. If there is a loss, the first
partner "rabb-ul-mal" will lose his capital, and the other party
"mudarib" will lose the time and effort invested in the project
19. An Islamic financing structure, where an
intermediary buys a property with free
and clear title to it.The intermediary and
prospective buyer then agree upon a sale
price (including an agreed upon profit
for the intermediary) that can be made
through a series of installments, or as a
lump sum payment.
20. Seller agrees to supply specific goods to
the buyer at a future date in exchange of
an advanced price fully paid at spot.
Price is in cash but the supply of goods is
deferred.
21. Before prohibition of interest farmers
used to get interest based loans for
growing crops and harvesting. After
prohibition of interest, they were allowed
to do Salam transactions.This helped
them to get money in advance for their
needs.
22. To meet the needs of small farmers who
need money to grow their crops and to
feed their family up to the time of
harvest.
To meet the need of working capital
To meet the needs of liquidity problem.
24. Ijarah means:‘to transfer the usage of a
non-consumable asset by the owner (the
lessor) to another person (the lessee) for
an agreed period, at an agreed price
(rent).’
25. Diminishing Musharka is a type of Shirkah
where one partner purchases the other partner’s
share gradually
26. There are two types:
Shirkat-ul-Milk (Joint Ownership)
Shirkat-ul-Aqd (Joint Venture)
27. Two partners start business in Shirkah to
EARN PROFIT One of the partners
undertakes to
purchase the share of another partner gradually
every month or each
year.
28. Two or more partners purchase any asset
(machinery, property, etc.) and their intention
is that one or both partners will use this
asset or rent out their share and one partner
undertakes to purchase the share of other
gradually.