Concept of banking in islam


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Concept of banking in islam

  1. 1. CONCEPT OF BANKING IN ISLAM BY Gulfraz wali BBA/MBA International Islamic University ISLAMABAD/H-10 E-Mail :
  2. 2. CONCEPT OF BANKING IN ISLAM <ul><li>وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا . </li></ul><ul><li>Al Baqarah (2):375 </li></ul><ul><li>`ALLAH (SUBHANAHO WA TA’ALA) HAS PERMITTED TRADING AND FORBIDDEN USURY”. </li></ul>
  3. 3. CONCEPT OF BANKING IN ISLAM يا ايها الذين امنوا اتقوا الله و ذروا مابقى من الربا ان كنتم مومنين فان لم تفعلوا فاذ نوا بحرب من الله و رسوله . Al Baqarah (2):278, O Believers fear Allah Subhanaho Wa Ta’ala and give up that interest which is still due to you, if you are true believers, but if you do not do so, then you are warned of the declaration of war against you by Allah Subhanaho Wa Ta’ala and His Messenger”.
  4. 4. CONCEPT OF BANKING IN ISLAM الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا . Al Baqarah (2):275 Those who take usury shall rise up before Allah Subhanaho Wa Ta’ala like Satan have demented, bewitched and maddened by his touch. They have been condemned to this condition because they say, &quot;Trade is just like interest&quot;.
  5. 5. CONCEPT OF BANKING IN ISLAM لعن الله اكل الربوا مؤكله و كاتبه و شاهديه و قال هم سواء . Muslim bin Hajaj Al Qasheery, Sahih, Baab Al Riba. Allah Subhanaho Wa Ta’ala has imprecated Usurer, the one who writes Usury Contract documents, and its witnesses and said all of equal in Allah Subhanaho Wa Ta’ala's imprecation”.
  6. 6. CONCEPT OF BANKING IN ISLAM اكل الربوا يبعث يوم القيامة مجنونا . Narrated by Ahmed Abu Dawood, Baab Al Riba . Usurer shall rise maddened before Allah Subhanaho Wa Ta’ala on the Day of Judgment”.
  7. 7. CONCEPT OF BANKING IN ISLAM <ul><li>Each of the three constitutions of Pakistan (1956, 1962, 1973), adopted so far, contains a clause making the elimination of Riba (Interest), an objective of the State. </li></ul>
  8. 8. <ul><li>State Bank prescribed 12 different non-interest-based modes of financing which the banks could use for extending finances with effect from April 1, 1985. </li></ul>
  9. 9. <ul><li>On the Liabilities side, all bank deposits, with the exception of foreign currency deposits, were to be on the basis of participation in profit and loss of the banks effective from July 1, 1985 </li></ul><ul><li>Modes of Financing </li></ul><ul><li>Musharakah </li></ul><ul><li>Mudharbah </li></ul>
  10. 10. <ul><li>Banking practices and procedures must base on principles of profit-loss sharing. </li></ul><ul><li>Banking practices and procedures must base on principles of profit-loss sharing in Consonance with the Islamic Legal Concepts of MUDHARABHA and MUSHARAKAH. </li></ul><ul><li>Interest can be replaced by Profit and Loss Sharing and Qard-e-Hasan. </li></ul>
  11. 11. <ul><li>Need for Shari‘ah Advisory Board and Shari‘ah Committees. </li></ul><ul><li>Mode of Financing to be used by banks: </li></ul><ul><ul><ul><ul><li>Structure of Banks’ deposits </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Profit-Sharing arrangements with depositors </li></ul></ul></ul></ul><ul><li>Need for Islamic Instruments for Banks Secondary Reserves. </li></ul><ul><li>Central banks role as “lender of the last resort”. </li></ul><ul><li>Inter-Bank flow of Funds. </li></ul><ul><li>Provident fund balances of the Employees. </li></ul><ul><li>Problems related to the foreign branches of Pakistani Banks </li></ul>MODEL OF RIBA-FREE BANK
  12. 12. Modes of Financing <ul><li>1-Financing by Lending (Bank may recover service charges). </li></ul><ul><li>2- Qard-e-Hasan (Loans on Compassionate Ground). </li></ul><ul><li>B. Trade Related Modes </li></ul><ul><li>3- Purchase of goods by bank and their sale to clients at appropriate mark-up in price on deferred payment basis. </li></ul><ul><li>4- Purchase of Trade Bills. </li></ul><ul><li>5- Purchase of movable or immovable property from clients with buy-back agreement or otherwise. </li></ul><ul><li>6- Leasing. </li></ul><ul><li>7- Hire-purchase. </li></ul><ul><li>8- Financing for development of property on the basis of development charge. </li></ul><ul><li>INVESTMENT TYPE MODES </li></ul><ul><li>9- Musharakah OR Profit and Loss Sharing. </li></ul><ul><li>10- Equity participation and purchase of shares. </li></ul><ul><li>11- Purchase of participation Term Certificates and Mudharabah certificates. </li></ul><ul><li>12- Rent-sharing. </li></ul>
  13. 13. New Modes of Financing <ul><li>New Modes of Financing need to be added to the list of approved modes of Finance. </li></ul><ul><li>1- Ba‘ey Salam (Immediate Payment on Defferred Delivery of goods). </li></ul><ul><li>2- Ba‘ey Muájjal Certificate (instead of Term Finance Certificate). </li></ul><ul><li>3- Musharakah Certificate (instead of Participation Term certificate). </li></ul>
  14. 14. Structure of Banks Deposits <ul><li>Structure of bank deposits is important for the just an efficient functioning of an Islamic profit sharing bank. </li></ul><ul><li>All categories of deposits held by bank are treated as one common pool of funds. But income of these is appropriated under two heads (a) non-interest income (b) interest income. </li></ul><ul><li>Long-term and Short- term PLS should get different treatment. </li></ul><ul><li>Most efficient service must be provided. </li></ul><ul><li>There must be convenience of transaction (ATM, Merchant Account). </li></ul><ul><li>Surplus fund in banks must be invested in the most efficient manner. </li></ul>
  15. 15. Profit Sharing Arrangements With Depositors <ul><li>Income derived from the investment of PLS deposits should only be distributed among PLS depositors. </li></ul><ul><li>Income earned from foreign branches, current account deposits and non-fund based income earned from services rendered by banks should go to share holders only. </li></ul><ul><li>Banks should receive a specified portion of income earned from PLS deposits for meeting their expense and saving should be their profit for managing PLS deposits. </li></ul><ul><li>Income of the PLS account must be published. </li></ul>
  16. 16. Islamic Instruments for Secondary Reserves <ul><li>Simple solution is that entire liquidity reserve be maintained in cash which will not involve any interest. </li></ul><ul><li>Banks must be allowed to keep this reserve in the form of profit and loss sharing investment like the shares of the Joint Stock Companies. </li></ul><ul><li>Reserve requirement may only apply to current deposits. </li></ul><ul><li>Secondary or liquidity reserves should be kept in interest free securities which should be easily encashable with no risk of capital loss. </li></ul>
  17. 17. Central Banks Role As “Lender Of The Last Resort” <ul><li>This can be performed in more than one way i.e.; </li></ul><ul><ul><li>Qard-e-Hasan </li></ul></ul><ul><ul><li>Funds provided by Central Bank be treated as PLS deposits of comparable duration held by the said bank. </li></ul></ul><ul><ul><li>Entire Income be passed to the central bank after deducting the actual out-of- pocket expense. </li></ul></ul><ul><ul><li>Funs from central bank be treated as a special Musharakah arrangement and the profit may be shared according to the agreement. </li></ul></ul>
  18. 18. Inter-Bank flow of Funds. <ul><li>Inter-bank flow of funds may be treated in the same way as the funds received from the central bank are treated. </li></ul><ul><li>These should be handled on share holders account and should be separate from the Income account of the PLS depositors. </li></ul>
  19. 19. Provident Fund Balances Of The Employees. <ul><li>The provident fund and the pension fund balances of all the employees should by law be required to be deposited with a government agency to be created for this purpose. </li></ul><ul><li>Government may give retirement grant of the retiring employee according to the length of his service and the salary bracket. </li></ul><ul><li>Part of the provident and pension fund balances may be invested by the concerned agency in profitable ventures. </li></ul>
  20. 20. Problems Related To The Foreign Branches Of Pakistani Banks <ul><li>Banks work according to the law of the land where they are located. </li></ul><ul><li>Portion of the interest earned by foreign branches of Pakistani banks be surrendered for the charitable purpose so that it is not included in the dividend income distributed to the shareholders of Pakistani banks. </li></ul>
  21. 21. THANK U <ul><li>Q & A </li></ul><ul><li>May Allah Almighty Bless You All. </li></ul><ul><li>Aameen </li></ul>