Islamic Banking

1. Part II: Bank
Chapter 8
Islamic Banking
Money & Banking

2. Islamic banking
 Definition of Islamic banking
 Banking as per Shariah law particularly interest, (Maisar and
Gharar) free transactions
 Islamic banking is defined as banking transaction taken place
as per the Shariah law
 What is Shariah law? It is taken from:
1-Quran
2-Sunna (saying and actions ) of Prophet Muhammad (PBUH)
3-Ijtihad (Jurisprudences)
4-Ijma (consensus)
 The divine law taken from Quran, sunah or laws revealed by
Allah (SWT)

3. Islamic banking
Evidence from prophet and his companions:
1-propohet Mohammad (PBUH) was encouraging
his companions to avoid interest and do
Mudarabah and Musharakah and others
alternative principles of interest.
2-Muslims in Madina used to borrow money from
Jews with high interest rates.
3- Interest was declared as haram in 3rd year of
Hijri (
‫َا‬‫ب‬ِّ‫الر‬ َ‫م‬َّ‫ر‬َ‫ح‬َ‫و‬ َ‫ع‬ْ‫ي‬َ‫ب‬ْ‫ال‬ ُ َّ
‫َّللا‬ َّ‫ل‬َ‫ح‬َ‫َأ‬‫و‬
-
‫آیه‬
275
‫بقره‬ ‫سوره‬
)

4. Riba in factors of dealing and
production
Any earning, income, profit or benefits earned, taken
or received through wrong means, bad intentions,
shady practices or wicked participation. Such
earning, income, profit or benefits are RIBA.
1. Riba Al Garrar: Human acts for self benefits through
wrong mean, in fraud and forgery and in mis-
declaration and exploitation
2. Riba Al Nassia: Money increase in principle volume
by using the compounding method without any
economic activity.
3. Riba Al Fadai: Commodity trading & exchange of
without valuing the commodity in exchange against
volume of Money as in Barter Trade or using unfair
means of trade.

5. History of Islamic banking
 Amongst rich Ashab, Hazrat Abdu Rahman bin Awof,
Hazrat Usman and Abul Ayoub Ansari were giving
money to people for trade based on Mudarabah
 Number of other Ashabe karam were in joint
partnership in business based on Musharakah
 Later on, evidence shows that Aimae Kiram for
instance Imam Numan bin Sabet (Abu Hanifa) was a
trader
 He defined Mudarabah as open and close/restricted
 He also determines rules of profit sharing and profit
distribution
 Details are not well known and need to be
researched

6. History of Islamic banking
 Islamic banking is taken from the actions of
Prophet Mohammad (PBUH)
 Prophet was ameen(trustworthy), and used
to take Amanat from people
 Sometime the Prophet giving loans and
encouraged the people to do Mudarabah and
Musharakah
 Number of accompaniers(Ashabe Karam)
also were doing Mushakarah and Mudarabah

7. Modern history of Islamic banking
 Monetary world disregarded the Islamic finance in the
beginning of its birth.
 In 20th century Islamic finance is applied as parallel
system with new dimensions scope,
 For the first time in 1968 a small rural bank called “Mit
Gharar” was established in Egypt
 In 1975 first full pledged Islamic bank was established in
Dubai called Dubai Islamic Bank
 In 1980 some other banks were established in Iran and
many banks were converted into Islamic (Bank Milie Iran, Bank
Sadarat , Arian Bank)
 In June 1984 supreme leader of Iran, Khumaini announced
interest haram through his decree

8.  During the last two decades of 1900 Islamic
Banking was fully developed
 First time in 1986 Dr. Mahathir Mohammad
introduced the Islamic Banking in Malaysia
 Later on, as Prime Minister he introduced Islamic
Banking law and regulations in Malaysia
 A division of Islamic banking was established in
Negara bank of Malaysia (Central Bank)
Modern history of Islamic banking

9.  Later on, Islamic insurance or takaful was
introduced to support Islamic baking activities
 Later on in final during the 1990s Islamic
Insurance or Takaful system was introduced
 In the 1990s Islamic Capital Market and Security
Exchange Commission was established in Malaysia
 They issued number of Sukkuk in 1990s and
determined itself as leader in Islamic Banking and
Economic Market
Modern history of Islamic banking

10.  Islamic banking has the fastest growth rate in on
global level
 It is annual growth rate is up to 15%
 Islamic banks were established in Saudi Arabia,
Bahrain, united Arab emirates, Oman, Jordan,
Egypt, Syria, Iraq, Lybia, Moroco, Kazakhstan,
Pakistan etc.
 In 1988 supreme court of Pakistan has given
historic decision of determining all types of
interest as forbidden or haram
 Pakistan General Ziaul haq issued a decree
allowing banks to Shariah based banking (Meezan
bank, Albarakah bank, Faisal bank)
Modern history of Islamic banking

11. Islamic banking is following in the world:
1-Saudi arabia, Iran, uae, Pakistan, Afghanistan,
Oman, Bahrain, Egypt, Syria, morocco, Tunisia,
Somalia, Sudan, Bangladesh, Kazakhstan,
Azerbaijan, Malaysia, Indonesia and others
2-Non-Muslim countries
United kingdom, France, USA, Singapore, Taiwan,
Germany, Italy, Spain, south Africa, Russian
federation .
Modern history of Islamic banking

12. Structure of Global Islamic Finance
I- Islamic Banks including:
1. Islamic Banks
2. Islamic Banking branches
3. Islamic Banking windows
4. Global Islamic Banks like
(HSBS, CITI Bank, Barclays
Bank, Royal Scotland Bank)
II- Islamic Finance Subsectors
1. Islamic banks
2. Islamic Finance Institutes
3. Islamic Microfinance Institutions
4. Islamic Capital Markets (Sukkuk)
5. Islamic Insurance (Takaful)
6. Islamic Funds
7. Islamic Infrastructure Institutes
Islamic finance is the core part of Economy consisted up of:

13. Size of the Global Islamic Finance Market
 Islamic Finance Per Assets Estimates of the current
size of the Islamic Finance market range from
$1.66 Trillion to $2.1 Trillion
 Based on $2.1 Trillion, Islamic Finance assets
represented 2% of the global financial market of
$127 Trillion in assets.

14. 4 Principles Islamic Economic System
1. All wealth belongs to Almighty Allah.
2. Man is the trustee of the wealth.
3. Hoarding ‫احتکار‬of wealth is prohibited.
4. Wealth must be in circulation.

15. Islamic alternatives to interest
 Islam provides best solutions for humanity and its
principles provide the vast scope for banking and
finance as alternative to interest.
 These principles are taken either from Quran, or Sunna
or from Ijma or described by imams that includes:
1-Musharakah,
2-Mudarabah
3-Murabahah
4-Bai Mawajjal
5-Bai Salam
6-Bai Musawama
7-Bai Tawaroq
8-Amanah
9-Tabarru
10-Alwadia
11-Qardul Hassana
12-Takaful
13-Kafalah

16. Islamic alternatives to interest
1-Musharakah
Musharakah means a relationship established under
a contract by the mutual consent of the parties
for sharing of profits and losses in a joint
business. It is an agreement under which the
Islamic bank provides funds which are mixed
with the funds of the business enterprise and
others. All providers of capital are entitled to
participate in management, but not necessarily
required to do so. The profit is distributed
among the partners in pre-agreed ratios, while
the loss is borne by every partner strictly in
proportion to respective capital contributions.

17. Islamic alternatives to interest
2-Mudarabah
A form of partnership where one party provides
the funds while the other provides expertise
and management. The latter is referred to
as the Mudarib. Any profits accrued are
shared between the two parties on a pre-
agreed basis, while loss is borne by the
provider(s) of the capital.

18. Islamic alternatives to interest
3-Murabahah
It means a sale on mutually agreed profit.
Technically, it is a contract of sale in which
the seller declares his cost and the profit.
Murabaha has been adopted by Islamic banks
as a mode of financing. As a financing
technique, it can involve a request by the
client to the bank to purchase a certain item
for him. The bank does that for a definite
profit over the cost which is stipulated in
advance.

19. Islamic alternatives to interest
4-Bai Mawajjal
Literally this means a credit sale. Technically, it is
a financing technique adopted by Islamic banks
that takes the form of Murabaha Muajjal. It is a
contract in which the seller earns a profit
margin on his purchase price and allows the
buyer to pay the price of the commodity at a
future date in a lump sum or in installments.
The bank has to expressly mention the cost of
the commodity and the margin of profit is
mutually agreed. The price fixed for the
commodity in such a transaction can be the
same as the spot price or higher or lower than
the spot price.

20. Islamic alternatives to interest
5-Bai Salam
Salam means a contract in which advance payment is
made for goods to be delivered later. The seller
undertakes to supply some specific goods to the buyer
at a future date in exchange for being paid in advance
a price fully paid at the time of contract. According to
the normal rules of the Shariah, no sale can be
effected unless the goods are in existence at the time
of the bargain, but Salam sale forms an exception
given by the Prophet himself to the general rule
provided the goods are defined and the date of
delivery is fixed. It is necessary that the quality of the
commodity intended to be purchased is fully specified
leaving no ambiguity leading to potential disputes.

21. Islamic alternatives to interest
6-Bai Musawama
Musawamah is a general kind of sale in which
the price of the commodity to be traded is
bargained between seller and the
purchaser without any reference to the
price paid or cost incurred by the former.

22. Islamic alternatives to interest
7-Bai Tawaroq
Tawarruq is a transaction where one party
buys some goods on credit at a marked-up
price and sells the same at a lesser value
for the purpose of getting cash (i.e. the
spot value of the goods). The purpose of
this transaction is not the possession of the
goods, but the obtainment of liquidity.

23. Islamic alternatives to interest
8-Amanah
This refers to deposits in trust. A person can hold
a property in trust for another, sometimes by
express contract and sometimes by implication
of a contract. Amanah entails an absence of
liability for loss except in breach of duty.
Current Accounts are regarded as Amanah
(trust). If the bank gets authority to use
Current Account funds in its business, Amanah
transforms into a loan. As every loan has to be
repaid, banks are liable to repay the full
amount of the Current Accounts. Therefore
ulema advice using qardul hassana for opening
current accounts.

24. Islamic alternatives to interest
9-Tabarru
It means a donation/gift the purpose of which
is not commercial but is done to seek the
pleasure of Allah. Any benefit that is given
by a person to other without getting
anything in exchange is called Tabarru’ It is
absolutely at the lender’s own discretion
and without any prior condition or
inducement for reward.

25. Islamic alternatives to interest
10-Alwadia
Literally Al-Wadiah means amanat (like
Bailment) where the Depositor (Bailor, who
offers amanat) authorizes the Bank
(Bailee, who takes amanat) to use the
deposit given as amanat in Shariah
compliant modes and the Bank (Bailee) is
liable to return the same to the depositor
(Bailor) on demand.

26. Islamic alternatives to interest
11-Qardul Hassana
Qard hassan is a loan extended on a goodwill
basis, mainly for welfare purposes. The
borrower need only pay back the amount
they borrowed, with no interest.

27. Islamic alternatives to interest
12-Takaful
Islamic insurance is a term used for takaful
that is a form of insurance based on
principles of mutuality and co-operation,
encompassing the elements of shared
responsibility, joint indemnity, common
interest and solidarity.
Under takaful, people and companies
concerned about hazards make regular
contributions ("donations") to be
reimbursed or repaid to members in the
event of loss, and managed on their behalf
by a takaful operator.

28. Islamic alternatives to interest
13-Kafalah
Literally, Kafalah means responsibility,
amenability or suretyship. Legally in Kafalah
a third party become surety for the payment
of a debt. It is a pledge given to a creditor
that the debtor will pay the debt, fine etc.
Suretyship in Islamic law is the creation of an
additional liability with regard to the claim,
not to the debt or assumption only of the
liability and not of the debt.