Islamic banking interest free or interest based

2.  Shams-Ur - Rahman class no :32
 Hassan Murad class no :23
 Waheed Jamali class no :
Class : MPA 3rd Semester
Department : IMS
University of Peshawar

4.  The origin of Islamic banking can be traced
back to the advent of Islam when the Prophet
himself carried out trading operations for his
wife.
▪ Islamic banking has been defined as banking
in consonance with the ethos and value
system of Islam and governed by Islamic
Shariah.

5. ▪ If we go into detail introduction of Islamic
banks this will take a long time, we will
just discuss the unique feature of Islamic
banks the profit and loss sharing
features, prohibition of riba, dealing in
real assets or asset based financing.

6.  Riba which literally means "excess or addition".
Why Riba is prohibited in Islam ?
 It causes inequality.
 It creates inflation.
 it leads to Passive behavior.

7.  A traditional bank makes money by lending people money
and charging interest on that. And they provide various
services and charges money for that also. Again they take
money from other people and pay them interest, with lesser
rate.
 An Islamic bank also lends money to people. But it is kind of
a business agreement between the bank and the borrower.
The borrower will run the business while bank will look over.
The profit of that business will be shared between the bank
and the borrower in a prefixed rate documented earlier in
the agreement. Islamic bank also provide services and
charge money.
 When people keep money in an Islamic bank, they become
kind of share-holder of the bank's overall business.

8.  Working of Islamic banking and conventional
banking are quite different with one another.
In Islamic Banking the concept of profit and
loss sharing, ownership and risk bearing
matters are the vital elements of Islamic
banking that differentiate it from the
conventional banking.

9.  Murabaha
 Istisna
 Bai Muajjal
 Mudarabah
 Musharakah
 Bai Salam
 Qard Hassan (Good Loan)
 Ijarah-Wal-Iqtina

10.  Ijarah-Wal-Iqtina
A contract under which an Islamic bank
provides equipment, building or other assets to
the client against an agreed rental together
with a unilateral undertaking by the bank or the
client that at the end of the lease period, the
ownership in the asset would be transferred to
the lessee.The undertaking or the promise
does not become an integral part of the lease
contract to make it conditional.

11.  There is a difference of opinion among the
Muslim jurists about the Ratio of Profit.
 In the view of Imam Malik and Imam Shafii, it is
necessary for the validity of Musharaka that
each partner gets the profit exactly in the
proportion of his investment.
 On the contrary, the view of Imam Ahmad is that
the ratio of profit may differ from the ratio of
investment if it is agreed between the partners
with their free consent of his investment.

12.  The third view is presented by ImamAbu
Hanifah. He says that the ratio of profit may
differ from the ratio of investment in normal
conditions. However, if a partner has put an
express condition in the agreement that he
will never work for the musharkah and will
remain a sleeping partner throughout the
term of musharkah, then his share of profit
cannot be more than the ratio of his
investment.

13.  Critics most commonly claim that Islamic
banking essentially mimics conventional
banking in terms of interest based financial
transactions.They suggest that by simply
renaming interest to “profit” or “compensation
for deferred payment
 Muslim scholars generally agree that monitoring
cost as well as cost of writing and enforcing
contracts would be higher in Islamic banking
than in the interest based system.

14.  Not all-Islamic banks are members of the
International Association of Islamic Banks.The
Association has neither been able to unify their
regulations, nor build bridges of confidence and
promote understanding among them.
 Islamic bank fails to appropriate high profit from
high-return projects since the owners of these
projects prefer borrowing from conventional
banks where cost of borrowing turns out to be
lower.

15.  Conventional banks can invest their excess liquid
amount in approved securities and or in other bank in
crisis. Islamic banks cannot take this opportunity due
to the existence of interest element in the transaction
process
 Traditional banks can meet up loss arising from delay
in repayment by the clients through charging
compound interest. Islamic banks cannot do that.
What it does it realises comprehension at the rate of
profit. But the compensation so realised is not added
to the profit income rather credited
to Sadaqa account .