The document provides an overview of Islamic finance and banking. It begins with definitions of Islamic finance and an introduction to Islamic banking principles. It then contrasts conventional and Islamic banking, outlining some key differences such as the prohibition of interest in Islamic banking. The document outlines several principles of Islamic finance including risk sharing and ensuring economic activities are permissible. It also defines several common Islamic financial instruments and provides a brief history of Islamic banking since the 1960s.

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Islamic Finance
Submitted by Mehnaz
Roll no: 020
MBA 3rd semester
Submitted to Sir Ahmed Shafique
Shaheed Benazir Bhutto University
11th May 2015

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Table of contents
Islamic Finance---------------------------------------------------------------------------------3
Introduction of Islamic Banking------------------------------------------------------------3
Difference between conventional banking and Islamic banking----------------------4
The Principles Of Islamic Finance----------------------------------------------------------5
Basic Principles of Islamic Banking--------------------------------------------------------6
 Sanctity of contracts.
 Risk sharing.
 No Riba / Interest.
 Economic purpose/ activity.
 Fairness.
 No valid subject matter.
Islamic Mode of Financing------------------------------------------------------------------6
Financial Instruments------------------------------------------------------------------------6
 Mudarabah
 Murabaha
 Musharkha
 Ijarah
 History of Islamic Banking and Finance-------------------------------------------7
 References---------------------------------------------------------------------------------------------10

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Islamic finance
refers to the means by which corporations in the Muslim world, including banks and other lending
institutions, raise capital in accordancewith Sharia, or Islamic law. It also refers to the types of
investments that are permissible under this form of law.
Introduction of Islamic Banking
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 is interest free banking, in which there is no fixed rate of return. Islamic
banking is the banking system which is run in accordancewith the Islamic laws and the Shari a`
board;that guides the institutions. This Shari a` board authorizes the products that whether these
are Shari a` compliant or not. Islamic banking is the banking that is guided by Islamic law ( Shari
a`) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the
collection and payment of interest, also commonly called Riba in Islamic discourse”. Islamic
banking also finds its roots in Islamic finance and all type of transactions are interest free and of
risk sharing. The interest is prohibited in Islamic ways of banking as it is also obvious from Quran.
In Quran, in Sura Al-Imran, Allah said that; “O you who believe! Do not devour Riba multiplying
it over and keep your duty to Allah that you may prosper”(3:130). Same kind of prohibition regard
fixed interest is also lead in Sura Al-Rum(39) , Al-Nisa(160-161) and Al-Baqarah(275-281) of
Quran. Riba and Gharar are illegal under Islamic law. Riba refers to fixed rate of interest. Gharar
refers to speculation. Islamic banking shows dramatic improvements and developments in
Pakistan. Islamic banking is taken as national policy and it is supported butthere exist dual
banking structure in the Muslim countries. Mostly the banks of conventional system are also
opening their separate Islamic banking divisions and branches.
The expectation of increase in growth of networking of Islamic banking system is increasing. The
Islamic banking has increased in terms of branches, deposits, capital funds, sources. The ratio of
income to expenses is high which indicates increasing profitability of the sector.

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Riba in Hadith
"Every loan that derives a benefit (to the creditor) is riba."
This Hadith is reported by Hazrat Ali Radi-AllahuAnhu
Difference between conventional banking and Islamic banking

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Conventional Banks Islamic Banks
Money is a commodity besides medium of
exchange and store of value
Money is not a commodity thought it is used as a
medium of exchange and store of value
Time value is the basis for charging interest on
capital
Profit on trade of goods for charging on providing
service is the basis for earning profit
Interest is charged even in case the organization
suffers losses by using bank’s fund
Islamic bank operates on the basis of profit and
loss sharing
While disbursing cash finance, running finance
or working capital, no agreement for exchange
of goods & services is made.
The execution of agreements for the exchange of
goods & services is a must while disbursing funds
under Murabaha, salam & Istisna contracts
Conventional banks use money as a commodity
which leads to inflation
Islamic banking tends to create link with the real
sector of the economic system by using trade
related activities.
The Principles Of Islamic Finance
Wealth must be generated from legitimate trade and asset-based investment. (The use of money for
the purposes of making money is expressly forbidden)
 Investment should also have a social and an ethical benefit to wider society beyond pure
return.
 Risk should be shared.
 All harmful activities (haram) should be avoided

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Basic Principles of Islamic Banking
 Sanctity of contracts.
 Risk sharing.
 No Riba / Interest.
 Economic purpose/ activity.
 Fairness.
 No valid subject matter.
Islamic Mode of Financing
Financial Instruments
The most common forms of Shariah compliant investment funds are equity funds, real estate funds
and money market funds.Theseinvestment funds employ Islamic contracts which ensure that the
terms and rights of all parties are safeguarded in conformity with Islamic principles (examples and
definitions are given below).
 Mudarabah
 Murabaha
 Musharkha
 Ijarah
Mudarabah:
An investment partnership under which the investor (the “Rab-ul-Mal”) provides capital to the
investment manager (the “Mudarib”) in order to undertake a business or an investment activity.
While profits are shared on a pre-agreed ratio, losses are borne only by the investor.

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Murabaha
Murabaha: Purchase and resale of an asset. Instead of lending money, the investor purchases the
desired asset from a third party and resells it at a predetermined higher price to the user. By paying
this higher price over instalments, the user of the asset has effectively obtained credit without
paying interest. The classical equity instruments in Islamic commercial law (musharakah and
mudarabah) require partnership and profit sharing. In financial markets, investing in stocks and
equity funds is permitted but must conform to certain guidelines. Conventional interest-based
lending or bonds are ruled out in Islamic finance becauseit relies on interest. Instead, asset-backed
financing is encouraged with the risk being shared by the provider and the user of the asset.
Musharkha
A partnership where profits are shared according to a pre-agreed ratio while losses are shared in
proportion to the capital investment of each partner. This equity financing arrangement is widely
regarded as the purest form of Islamic financing.
Ijarah:
An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows the
investor to earn profits by charging rentals on the asset leased to the user.
History of Islamic Banking and Finance
The history of banking begins with the first prototypebanks of merchants of the ancient
world, which made grain loans to farmers and traders who carried goods between cities. This
began around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the
Roman Empire, lenders based in temples made loans and added two important innovations:
they accepted deposits and changed money. Archaeology from this period in ancient China
and India also shows evidence of money lending activity.
Banking, in the modern sense of the word, can be traced to medieval and early Renaissance

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Italy, to the rich cities in the north such as Florence, Venice and Genoa. The Bardi and
Peruzzi families dominated banking in 14th century Florence, establishing branches in many
other parts of Europe.
Perhaps the most famous Italian bank was the Medici bank, established by Giovanni Medici
in 1397.
The oldest bank still in existence is Monte dei Paschidi Siena, headquartered in Siena, Italy,
which has been operating continuously since 1472.
The development of banking spread from northern Italy throughout the Holy Roman Empire,
and in the 15th and 16th century to northern Europe. This was followed by a number of
important innovations that took place in Amsterdam during the Dutch Republic in the 17th
century, and in London in the 18th century. During the 20th century, developments in
telecommunications and computing caused major changes to banks' operations and let banks
dramatically increase in size and geographic spread. The financial crisis of 2007–2008
caused many bank failures, including some of the world's largest banks, and provoked much
debate about bank regulation.
• Islamic banking and finance (IBF) is relatively new compared to conventional banking and
finance
• Earliest Islamic financial institution can be traced to a savings institution based on profit
sharing in Mit Ghamr, Egypt in 1963
• Oil boomin the 1970s triggered a rapid growth of Islamic financial institutions
• Establishment of the first Islamic bank (Dubai Islamic Bank in the UAE) in 1975, as well as
the Islamic Development Bank (IDB) in Saudi Arabia
• First attempt in the West to establish Islamic banking was in Luxembourg in 1978.
• Arabic financial and economic system pre-Islam
– Trading based arrangements were common
• Bay’ al-musawamah(bargaining)
• Bay’ al-muzayadah (auctioning)
• Bay’ al-amanah(trust sale)

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– Al-murabahah(resale with profit)
– Al-tawliyyah (resale at cost)
–Al-wadiah (resale at loss or below cost)

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