This document provides an outline for a course on essentials of Islamic finance. It begins with an introduction to the economic system in Islam and key concepts like tawhid. It discusses Islamic principles around wealth, ownership and social justice. The outline then covers various Islamic financing instruments and terms. It aims to educate about Islamic finance based on 30 years of the author's experience and ongoing research.

1. RREADEAD IINN THETHE NAMENAME OFOF
AALMIGHTYLMIGHTY AALLAHLLAH
WWHOHO ISIS THETHE MOSTMOST BBENEFICIALENEFICIAL & M& MOSTOST
MMERCIFULERCIFUL
All praise is due to theAll praise is due to the Almighty AllahAlmighty Allah
Blessings & Peace be uponBlessings & Peace be upon
HolyHoly Messenger of AllahMessenger of Allah
The Leader of the MagnificentThe Leader of the Magnificent HonorableHonorable
EssentialsEssentials
ForFor
Islamic FinanceIslamic Finance
Yousuf Ibnul HasanYousuf Ibnul Hasan
PPROGRAMROGRAM CCONSULTANTONSULTANT
IISLAMICSLAMIC BBANKINGANKING & A& APPLIEDPPLIED FFINANCEINANCE
This document prepared through extensive research carried out since 1986. It isThis document prepared through extensive research carried out since 1986. It is
full of meaning and comprehensive information on the economic systemfull of meaning and comprehensive information on the economic system
guided by Almighty Allah for the mankind and for the better humanity.guided by Almighty Allah for the mankind and for the better humanity.
I dedicate this endeavor to myI dedicate this endeavor to my
IQRA UniversityIQRA University..
This is Islamic Economic & finance I am acquainted with in 30 years and stillThis is Islamic Economic & finance I am acquainted with in 30 years and still
searching its great extent and new dimensions.searching its great extent and new dimensions.
1

2. Essential of Islamic FinanceEssential of Islamic Finance
Course OutlineCourse Outline
1.1. Economic System in Islam, Concept & IntroductionEconomic System in Islam, Concept & Introduction
2.2. Islamic Finance Introduction & BackgroundIslamic Finance Introduction & Background
3.3. Concept of Riba & Other Prohibited ActivitiesConcept of Riba & Other Prohibited Activities
4.4. Saving ConductSaving Conduct
5.5. InvestmentInvestment
6.6. ParticipationParticipation
7.7. ModarabaModaraba
8.8. MorabahaMorabaha
9.9. MusharakaMusharaka
10.10. IjarahIjarah
11.11. Musaqa FinancingMusaqa Financing ((Irrigation Financing)Irrigation Financing)
12.12. Mussaja FinancingMussaja Financing (Agricultural Financing)(Agricultural Financing)
13.13. Havana FinancingHavana Financing (Animal Farming)(Animal Farming)
14.14. Sukuk A Financial InstrumentSukuk A Financial Instrument
15.15. Terms use in Islamic Financial SystemsTerms use in Islamic Financial Systems
16.16. Numerical:Numerical: Profit & Loss, Costing, Sharing, FinancingProfit & Loss, Costing, Sharing, Financing
TechniquesTechniques
17. Report
18. Quiz
19. Assignment
Marks DistributionMarks Distribution
•• Assignment/Quiz/ Class PerformanceAssignment/Quiz/ Class Performance 25%25%
• Report on topics of choice 10%
• Mid Term 25%
•• Final ExamFinal Exam 40%40%
TotalTotal 100%100%
2

3. Chapter 1
Economic System in Islam
What is Islamic Economics?
What are the principles upon which Islamic Economy, its monetary and
financial systems function?
Islamic Economics is a system that defines the available resources blessed by
Almighty Allah to the mankind. How these resources are utilized and distributed
by man keeping in it the social justice and seeking best of these in participation
and cooperation by applying the knowledge, experience, ability and efforts
through the power of the pen and book granted by Almighty Allah to men in
confirmation of “Unique among Creations” and “Custodian” to all the resources
that Almighty Allah owns it alone and absolute.
Islamic economics is as old as Islam itself”.
Islam is not a religion. It is a complete political, social, financial & an
economic system for Islamic & non Islamic communities.
Islam is “Deen”. It totally differs to the religions because of the definition,
depth and details and interpreted as a “Lifestyle”. Its principles are
comprehensively guided in the Holy Quran, explained in Hadiath and practice
by Holy Prophet Muhammad May Peace Be upon Him as Sharia’h”
Almighty Allah identified The Aims, Objectives, Purpose, Way and
Means of Islamic Economics
“READ (IQRA) in the name of your Lord, who has created you with the clot of
frozen blood and taught you with the power of the pen …………….
The word READ opens the chapter of an Islamic Economics; in
RATIONAL, EFFORTS, APPLICATION, DISCRIPTIVENESS.
20th Century Economists define Islamic Economics
Hasan-uz-Zaman
Islamic economics is the knowledge and application of injunctions and rules of
The Shari'ah that prevent injustice in the acquisition and disposal of material
Resources in order to provide satisfaction to human beings and enable them to
To perform their obligations to Allah and the society.
M. Akram Khan
Islamic economics aims at the study of human recovery achieved by organizing
the resources of the earth on the basis of cooperation and participation.
Dr. Nejatullah Siddiqi
Role of Shariah defines belief in justice and freedom, cooperation and sharing
3

4. which are the fundamentals of Islamic economic philosophy within the total
Islamic system. Key to the Islamic economic philosophy lies in man's
relationship with Allah, his universe and his people. The other human beings are
the nature and purpose of man's life on earth.
The concept of economics
It was established on the day Adam who was senseless to his needs and desires at
the time he was created, disobeyed Allah Almighty on the temptation of Iblees.
Adam’s act of disobedience created the principles of economics that revolveAdam’s act of disobedience created the principles of economics that revolve
aroundaround Theory of Need, Want and
Desire that lead to the Act, Acquire and Accept. Prophet Adam (Prophet Adam (MayMay
Peace Be upon Him)Peace Be upon Him) was sent to earth to develop mankind with a system of lifewas sent to earth to develop mankind with a system of life
that placed the Natural Economics as.that placed the Natural Economics as.
“Any activity that has a commercial, economic and financial purpose with the
priority of social benefit to mankind is classified as Islamic Economics and the
system that has basis for this classification leads to socio- economic
development and not just the economic development.”
The basis of Islamic economy
Resources are unlimited and efforts are limited.
Needs and wants does not effect on the supply or resources.
Availability of resources is dependent on efforts that develop the affordability in
satisfying the needs.
Nations were putting their efforts in achieving knowledge and seeking their rights
in the economic system are the leaders of economic growth.
Nation that merges the economics growth with social development
Develop Communities For the people, By the people, and Of the people
Social Economic Development converts Peoples into Nation.
Islamic Economic regards three factors of productions.
Man, Money and Commodity
These three basic factors bring other factors of productions keeping themselves
as guides to socioeconomic system. Economic activity travels in the triangle and
in a clockwise, the point of origin is the point of destination. Man is the source
behind all activities that leads towards Islamic Economic System and its abilities,
4
MAN
MONEYCOMMODITY

5. capabilities and control over is the key of efficiency and success that develop
healthy communities.
Role of Man & Money in Islamic Economics
1. The financial matters in the human life play a vital role
2. These identify principles of finance including earnings, income, and
distribution of wealth & utilization of the same.
3. Matters pertaining to money must be fair and transparent and useful for
developing socioeconomic life of the community.
4. The monopoly of a group or an individual who keeps a control on world
monetary policies and gets most out of these resources by blocking wealth,
crossing their jurisdictions to be eliminated.
5. It does not impose limits on the amount of wealth that an individual can
acquire.
6. It guides in maintaining of wealth in a proper form of distribution and
incentives for work and efforts.
7. It shows opposition & defends against misuse of exploitation in getting hold
of wealth through unfair means.
8. It clearly denies "free" market of Capitalism, which has led to the situation
of survival of a part of the society.
9. It emphasizes public revenue from natural resources is used to secure the
needs of the community and not to fill the pockets of casino owners.
10. It encourages states to provide public, essential resources to cover the needs
of every individual and family.
11. It outlaws hoarding of wealth and eliminate copyright or patent laws that
would open an avenue for potential monopoly to develop.
12. It protects the ownership of businesses and companies by restricting it only
to those who contributes both capitals or effort
13. It effectively puts a seal on such concepts as "corporate takeover" from ever
becoming a reality.
14. It classifies wealth in a systematic way to protect the rights of individuals to
access wealth.
15. It protects the society and secures the needs of the people.
16. It mandates vital and natural resources as public property while allowing for
unlimited access to luxury items.
17. It protects society by defining certain needs as a “prohibited needs”.
18. It disregards corrupt man-made systems and protects honor, the rights of
woman, minor and orphans.
19. It bans all forms of prostitution, pornography or any activities that exploit
charms and physical attractiveness of women.
20. It prohibits alcohol, gambling, spiral of corruption, social turmoil and moral
destruction
Relationship of Allah and Man
Tawhid (Oneness of Allah)
Total commitment to the will of Allah by submission & the mission to mold
5

6. human life in accordance with Allah’s will”.
4 Great Ways of excepting4 Great Ways of excepting TawhidTawhid
1st Look back and thank Allah.
2nd Look forward and trust Allah
3rd Look Around and believe in Allah
4th Look within yourself and find Allah
Life on earth
It is a test and its purpose is to prove successfully by doing Allah’s willed.
For man entire universe with all the natural resources and powers is open to
exploitation, which Allah owns it alone.
Provisions are available to man being the nature of trust in men.
Islam & Faith
Almighty Allah is absolute and Prophet Mohammad Peace be upon Him, was an
executive judge and Holy Quran is the code of conduct.
Islam organizes
Man’s life in its aspect of political, social, commercial, financial, legal,
commercial, monetary or economy.
Islamic Economics is an Application of Deen (Principles of Lifestyle).
Through the Theory “The Holy Quran”, By the explanation of theory “Hadiath”
and Practice and Implementation “Sharia’h”
Islamic economics is an independent system,
1. It enjoys a separate identity.
2. It is a self-contained system with its own economic policy,
3. It covers interests at Private and Public as well as Material or Spiritual.
4. It has given a complete system of lifestyle, Earning, Expenditure, Businesses,
and Relationship with Legal Framework.
5. It emphasizes for all bases on Social Justice, Equality, Unity, love,
Cooperation, Sharing, Transparencies in all affairs and respect.
Islamic Economics System guards
1. Rights of minorities and non-Muslims in the Islamic state.
2. Rights of Women and Orphan’s
3. Rights of employees
4. Rights of Lenders and Borrowers
5. Rights of everyone without Race-Religion-Language-Color or Sect
The Islamic Economics system is based on four principles
1. All wealth belongs to Almighty Allah
6

7. 2. Man is the trustee of the wealth
3. Hoarding of wealth is prohibited
4. Wealth must be in circulation at all time
Three parameters for day-to-day affairs and problems.
IJMA (Gathering), QIYAS (Discussion) AMAL (Act)
Islamic Economic considers difference with other systems
1. Islamic Economics is specifically considering distributing as an economic
problem.
2. It differs application to capitalist & communist systems in production.
3. It differentiates between basic needs and luxuries.
4. It does not accept the concept of effective scarcity of resources.
5. It does not accept the concept of inflation
The Holy Quran identifies the resources are sufficient, unlimited and a number
of qualities to fulfill the basic needs like food, clothing and shelter for over fifty
billion human beings at all time and conventional economics misguides this
reality with starvation, poverty, & economic backwardness because of
misdistribution originated from man-made laws and systems.
Basic Principles of Islamic Economics
1. The principle of adaptable ownership
2. The principle of economic freedom within a “defined limit”
3. The principle of social justice.
Islamic law permits three types of ownership,
The individual ownership.
The state ownership.
The public ownership.
Economic Freedom within a Defined Limit
1. Islamic law prohibits all such social and economic activities that differ to the
teachings of Islam and principles and values approved by Islam. Such social
and economic activities fall under the category of Riba
2. It defines the principles on which ruler sworn in for supervision of general
activity intervenes in any anti-Islamic economic activities.
3. It guides State to protect and safeguard the public interest through the control
of individual freedom in the illegal and non-permitted actions they involve
due to which the economic activity of the community and society suffer.
4. Men have no right to possess unlimited wealth and the desire to obtain wealth
by any means and way he may choose.
5. Right is given to every member of the society by appointing each one as a
guardian of the public trust and the ownership is limited to the public welfare
and for the betterment of mankind.
Social Justice in Islamic Economics
7

8. 1. To give-and-take responsibility
2. To keep social balance
3. Prohibits growth in differences
Few live in extra luxury and rest were deprived of basic necessities of life and
forced to live a life of misery, hunger, without shelter, illness and as neglected
class of the society.
Tawhid (monotheism)
• Definite acceptance of Almighty Allah’s relationship with man and man’s
believes in the supremacy of Almighty Allah with a clear vision of the Day of
Judgment.
• The accomplishment of man depends on the belief and obeying the teachings
of Islam and bringing healthy and peaceful community by synchronizing
between morality and the material characteristic of life.
Ijtehad:
• Emphasize on independent legal judgment, effort and ability to figure out
rules from sources that carry out social justice in accordance with Islamic
Economics.
• Economic and social problems can be solved only through Ijtehad,
particularly issues in regard to which, no definite injunction is available in the
Quran, or Sunnah.
Ethics
1. It is the third element in the enforcement of social justice.
2. Islamic economics considers ethics in relation to human lifestyle or religion.
3. Islamic Sharia’s defines social justice in Islamic Economic as the pillar of the
concept that functions with a valid reason.
4. The concept of Zakat and prohibition of Riba practices in daily life of Islamic
society brings the stability, peace, harmony and social development.
5. It gives the real value of Money
6. It defines the state responsibilities for income distribution as the basic
principles of social justice
Muslim contributes for Economics
Ibn Khaldun,
Muslim Philosopher, Scholar & Economist and respected as the father of the
Economic System of all times, Adam Smith accepted him as the "father," of
economics. Authenticated name in Islam for defining different fields of
knowledge, specially science of civilization. He contributed theories and concept
in economics that placed him aboveboard in the history of economics thought as
a major predecessor.
• Planted seeds of classical economics in production, supply and cost
• Pioneered in consumption, demand, and utility, the bases of modern
economic theory
• Believes in free market economy.
• Introduced labor theory of value.
8

9. • Free economy & for freedom of choice.
• The analyzed relationship of economic study, which are demanding,
supply, prices and profits
• First to put a seed of modern demand theory which was further developed
by Thomas Robert Malthus, Alfred Marshall
• Logically role of cost of production on supply and prices
• Theory of profit as a reward for undertaking risk in a future of
uncertainties
• Concept for traders maximize profits, "Buy cheap and sell valued,"
• Concept of macroeconomics
• “Theory of Growth” based on capital accumulation through man's efforts
• Economic Development through Migration
• Tax Theory in history
• Theory for the best Rate of Taxation
• Explain advantages of trade among nations through foreign trade with
people's satisfaction, merchants' profits, and country’s wealth and how all
increased.
9

10. Chapter 2
Islamic Financial System
Introduction & Background
MAN, MONEY & COMMODITY
The three factors of production give birth to the exchange system and practice in
the fulfillment of needs. The two exchange system is classified as
1. Lending and Borrowing
2. Financing and Participation
Lending is based on the principle amount in a transaction by pricing it with
the time value without the concept of utilization of money and its impact on
economic activity.
Financing is made available on the basis of Man’s ability to use the money and
to multiply, divide, subtract and add the amount realize through the exercise of
money.
Definition of Finance and FinancingDefinition of Finance and Financing
1.1. Finance is the intermediary source having a value to act in production, tradingFinance is the intermediary source having a value to act in production, trading
and exchange of commodities, services and assets.and exchange of commodities, services and assets.
2.2. Financing is the source that makes the money service for specific purposesFinancing is the source that makes the money service for specific purposes
within a specific period, in between person to person, person to institution orwithin a specific period, in between person to person, person to institution or
institution to institution with an understanding to share the result in profitinstitution to institution with an understanding to share the result in profit
and loss.and loss.
3. Financing is the source that develops ownership, support entrepreneurship
and line-up procurement, production, distribution, utilization through
participation and cooperation between skill and capital on the basis of profit
and loss acceptability upon the maturity.
4. Financing is the use of money by one who owns it and the other who has the
ability to use it for a common purpose to make profit from participation and
cooperation.
5. Financing is the act of money without the concept of liability, collateral or the
guarantee. Its origin is an investment and its end is ownership.
6. Financing is an act of money which is classified as the opposite to lending.
10

11. Difference of Financing & Lending
1. Financing is Equity and not Liability
2. Lending is liability and not participation.
3. Financing is made and Loan is given
4. Loan is secure financing is supported.
5. Financing is an investment and loan is facility.
6. Loan cannot be financed until it is agreed on the Profit and loss sharing
7. Financing cannot be a loan till return is guaranteed.
8. Loan is given at a price of money with the application of the Rate
9. Financing ultimate outcome is profit that is shared in an agreed Ratio.
10. Loan has to be secure by external factors of collateral
11. Financing is collateralize within its own system
12. Financing cannot be made until the user is able to use it
13. Lending is given against the confirmation of guarantee.
14. Lending leads to inflation and liquidation
15. Financing ends at ownership
16. Financing increase the capital base and net worth
17. Lending increase the liability, cost and decrease the net worth.
18. LENDING of money is given normally for unstated purposes against the
security without going through pros & cones of activity (Example; Betting,
Gambling etc.) money is spent on. This gives fixed return either in cash or in
the term mortgaged movable or non-movable property/properties.
19. FINANCING is joining in the profitable operation like a commercial vehicle
purchase, acquiring business operation etc. for the acquired with proper
verification / validation of data submitted by the seeker. In short the financier
becomes the indirect partner in that venture with fixed guaranteed returns.
The world of Money
First is the Monitory Market where money is bought and sold. In this system
money is treated as the commodity and not the medium of exchange. This system
which is based on Interest and according to the Islamic financial system it is
commonly known as a one category of Riba.
Second is the Financial Market that emerged on factual and authentic
principles of Islam on the guidance of the Holy Quran, explained in Hadith. In
this market the money is being served on the basis of capital or by skill with a
clear understanding of participation in responsibilities, duties, obligations,
earnings, income, risk and profit sharing.
FINANCIAL MATTERS in a Post Islamic era were commonly practiced on the
basis of social priorities and Prophet (PBUH) too was involved in commercial
and financial activities considering social obligations in financial matters
11

12. It is authenticated by archives of the Islamic world that with the introduction of
financing and discarding lending the most powerful community development on
the basis of social development in the first Islamic state under the guidance of
Prophet Muhammad (Sall La Ho Wa Alay Wassalam) in the rule of four Caliphs.
Interest based system was dominating 98% monetary markets, controlling the
market with its powerful grip and titled as the
CConventional Monetary Systemonventional Monetary System
Now reduce to almost 75% and it is gaining the momentum on a daily basis.
Financial system derived from the Quran, Sunnah and Hadith has a well-defined
title that signifies motive and the concept of the system as
Socio-Financial System.
1. Islamic Finance was practice for the most part of the Muslim world
throughout the middle ages.
2. In Spain, the Mediterranean and Baltic states, Islamic merchants became vital
intermediaries for trading activities.
3. European financiers and businesspersons later adopted many concepts,
techniques, and instruments of Islamic finance.
4. Term "Islamic finance” is relatively new to the commercial money market in a
sense as it appears only in the early 1960’s through a movement that started
from Egypt when the fist Social Bank was established to bring the change in
the money activities and unite money with the ability with propose and
period.
5. Commercial or business activities conforming to Islamic principles are made
under the umbrella of either "interest-free" or "Islamic Banking which
Islamic financial system simply as "interest-free" does not provide a true
picture of the system as a whole. Prohibition of receiving and paying interest
may be the base of this system, not all.
6. It works on Islamic set guidelines consisting of Risk Sharing, Individual
Rights & Duties, Property Rights, Purity of Contracts, Commitments,
Transparencies, Fair Deals and Employment Growth.
7. Not limited to banking only but covers the capital formation, capital markets,
and all types of financial settlement.
8. The philosophical roots of an Islamic financial system originate from the
relations of factors of production and economic activities.
9. Conventional financial system deals primarily with the economic lending and
borrowing aspects of transactions.
10. Financial system equally emphasizes on the ethical, moral, social & religious
proportions for enhancing equality and fairness for an ideal society.
11. It fully appreciates the context of Islamic teachings on the work ethic, wealth
distribution, social and economic justice as well as the role of the state and
responsibilities and duties of the citizen. .
12. It is established on the absolute prohibition of payment or receipt of
predetermined and guaranteed return rate.
12

13. 13. Pre-agreed/ estimated share of profit or growth had been noticed in the
archives, way back to post Islamic era and was practiced by Muhammad (May
Peace Be Upon Him), the Caliphs and the Asahab (close associates of
Prophet May Peace Be Upon Him).
14. This ended the concept of interest and ruled out use of debt-based
instruments.
15. The system encourages risk sharing, promotes entrepreneurship, discourages
speculative behavior, and emphasizes the sanctity of contracts
16. The basic framework for Islamic financial system is enforcement of the rules
for handling of economic, social, political, and cultural characteristic of
Islamic societies
Basic principles of Islamic finance
Prohibition of Riba
Any unjustifiable increase of capital through the use of the capital whether in
financing, lending or sales are central belief of the system.
Any positive, fixed, predetermined rate tied to maturity and the amount of
principal etc. i.e. guaranteed regardless of the performance of the investment is
prohibited
Risk sharing
Interest is prohibited and owner of funds becomes investors instead of creditors.
The provider of capital and entrepreneur shares business risks and shares profits
and loss according to the ratio of investment and participation by way of their
Capital or Skill.
Money as "potential" capital
1. Money is treated as "potential" capital
2. It becomes actual capital only when it joins hands with other resources to
undertake a productive activity.
3. Islam recognizes the time value of money, only when it acts as capital, not
when it is "potentially" capital
4. Money cannot be treated as Capital if it is not in circulation.
Prohibition of speculative behavior
An Islamic financial system discourages exhibition of wealth and prohibits
transactions featuring extreme uncertainties, gambling, and risks
Transparency of contracts
Islam upholds contractual obligations and disclosure of information as a sacred
duty. This feature is intended to reduce risk of information and moral hazards.
Shariah Approved Activities
Only those business activities that do not violate the rules of Shariah qualify for
investment. For example, any investment in businesses dealing with alcohol,
gambling, and casinos would be prohibited
13

14. Concept of Finance defines “Interest” as the price of money where lender charges
borrower pays. Islam accepts that agreement between financier and user to be
pre agreed on the terms of the transaction and fulfills the obligations in the
rightful manner.
Transactions encounter a difference of opinion, when it starts entering into non
transparent acts. Thus it affects the relationship and harmony of two parties. In
this condition monetary and financial affairs are forbidden.
Salient features of this order
1. Islam clearly characterizes the difference between lawful and forbidden
economic activities and permits the Muslims to make all efforts for their right
in seeking their economic benefits.
2. Islam prohibits financial, economic, social and legal actions, which are
morally, financially and socially damaging to the community life.
3. The Islamic financial system employs the concept of participation in the
enterprise, utilizing funds at risk on a profit-and- loss-sharing basis.
4. It implies a Careful investment policy, diversification of risk and careful
management by Islamic financial institutions.
5. Potential profit in proportion to the risk assumed and to satisfy conflicting
demands of participants in the current environment and within the guidelines
of the Shariah.
How Finance has appraised
Financing appraisal is based on straight line method, applying 12-P Formula
12-P Formula is pre-financing activities
1. Person who is financing to whom?
2. Purpose for which financing works out?
3. Project for which financing is required?
4. Period for which finances to stay as financing?
5. Product that development through financing?
6. Process to be used for financing?
7. Price is the volume of finance require?
8. Place locations where finance shall be utilized?
9. Participation, relationship and responsibilities of financier and user?
10. Pact terms and condition of financing between parties of financing?
11. Professionalism, ability, experience, knowledge and expertise in
purpose?
12. Perfectness in Performances?
13. Profitability by the application of twelve “P” formulas which is the RISK
base perimeters
14

15. Chapter 3
Riba- Profit & Interest
Introduction & Difference
Almighty Allah clearly defines the principles and means of goods and services,
weight and measurement, time and period, increase and decrease, profit and loss,
buying and selling, giving and taking, efforts and lethargy, success and failure,
defeat and a winner, richness and poverty, knowledge and ignorance, civilized
and orthodox, traditions and customs, morals and ethics, transparencies and
malice, honesty and fraud, crime and punishment, reward and penalty.
The performance in the man’s daily life is defined only and only in the will of
Almighty Allah for which the holy books are given to mankind and the
messengers is sent to explain the evil and sins, the losses and distraction and the
health wealth and happiness of mankind.
For the betterment of humanity Allah have defined the limits of everything that
the men have in this daily life. Men have given unlimited power through
achieving knowledge and store in human mind and act according to an organize
system that is clearly explained in the Holy Quran, Hadith and Shariah
Almighty Allah prohibited any object or any act that is harmful to humankind
that creates instability, bring injustice, become injurious to human life and
considered as unconstructive to Socio Economic System.
RIBA.
Riba is an Arabic word drive from word RIBH which means Profit.
Riba means excess, increase or addition in accordance to the Islamic guidance
for commercial and business practices and correctly interpreted according to
Shariah terminology as Profit.
Riba is any earning, income, profit or benefits being earned, taken or received
through wrong means, bad intentions, shady practices or wicked participation.
Such earnings, income, profit or benefits are classified as RIBA earnings,
income, profit or benefits
Such earnings, income, profit or benefits are not only treated as immoral, unjust
and filthy but furthermore threat to the social economic life of society.
Such earnings, income, profit or benefits leads to crimes of various nature,
cruelty, exploitation & self-importance.
How Riba is seen in daily practice
15

16. 1. Riba is as a combination of evil and sins.
2. Riba is bad practice to earn & gain.
3. Riba bring instability in the community life.
4. Riba is the source of the increase of inflation.
5. Riba create classes in the society.
6. Riba create injustice in seeking the rights.
7. Riba is non transparent economic activity.
8. Riba is the most hated practice of Islam
9.9. Riba is the social crimeRiba is the social crime
Riba is immoral, unethical, unjustified commercial, economic,Riba is immoral, unethical, unjustified commercial, economic,
political, social, cultural and traditional practices and activities topolitical, social, cultural and traditional practices and activities to
gain benefit at individual, collective or institutional levelgain benefit at individual, collective or institutional level
Holy Quran Al-Baqarah 2:275-6
People who indulge in Riba shall be raised like those who have been
Driven to madness by the touch of the Devil. That is because they say that Riba-
based transaction is just like trading, while Allah has permitted trade and
prohibited Riba. Hence those who have received the warning from Allah and
have stopped accordingly, may have what has already passed, their case being
entrust to Allah but those who revert to Riba-based dealings, shall be the
inhabitants of the hellfire and abide therein forever.
(You must know that) Allah deprives Riba from all blessings and blesses
charity; He loves not any ungrateful sinners.
Hadith reinforces the concept of Quranic RibaHadith reinforces the concept of Quranic Riba
The Prophet Muhammad (Sall La Ho Walay Wassalam) Said:
"There is no Riba except in loaning." (Nasaeea 4504)
"Verily Riba is in loaning." (Muslim 2991)
"There is no Riba in hand to hand (spot) transactions." (Muslim)
At the last Pilgrimage,
"All of the Riba of Jahilliya is null and void. In this respect, the first Riba I (Sall La
Ho Walay Wassalam) withdraw is the Riba that the borrowers owe to my uncle
Abbas; it is cancelled completely. (Muslim) 3 See Shafi (1996).
The Prophet (Sall La Ho Walay Wassalam) cursed all those who take Riba, who give
Riba, who write a Riba contract and the two witnesses to a Riba contract. He (Sall
La Ho Walay Wassalam) further said:
"They are all alike (in fault)." (Muslim 2995)
RIBA IN FINANCIAL AFFAIRS
16

17. 1. Riba must be eliminated from the financial transactions.
2. Nothing is more horrific as compared to Riba that Islam has prohibited.
3. Nothing is more dreadful than Riba, is remains in widespread threatening
social economic activities in both theory and practice.
4. Riba convert financing system into lending system that make the money as a
commodity and owner of the wealth, a seller and user of the same as the
buyer.
5. Riba does not justify money to be a medium of exchange and brings the love
of money instead of respect for the money.
6. Riba create love of money instead of respect.
7. Riba move in one direction that create classes in the society that ultimately
develop privilege and neglected class of the society.
8. Riba develop inflation, black marketing, blackmailing and mismanagement in
the business, commercial and social life of the community.
Timothy 6:10Timothy 6:10 ""The love of money is the root of all evil."The love of money is the root of all evil."
Islam for Money Matter
Riba does not justify money to be a medium of exchange and develop the love of
money in several ways that disrupt the entire system of mankind.
Islam stresses a respect of money by disregard lending and borrowing and guide
to financing with participation by uniting money and skill as equal in effort and
utilization and value.
Islam guides the point of origin and limit of destination of monetary transaction.
Islam defines duties and responsibilities between money owner and money user.
The combination and participation of money and effort brings the result which is
share according to the pre-agreed terms of understanding is the creation of the
prophet
Interest
When money becomes a commodity and bought and sold with guaranteed results
of profitability or increase in volume of money being used for the transaction,
such increase is the price of the money and this price of the money is classified as
Interest which is the part of Riba
1. Any amount, earning or income that is taken over and above the principal
amount, without any risk, efforts, activity, without loss sharing and the return
is guaranteed within a specific time is called interest.
2. The compulsory return, income, earning on a fixed term & fixed percentage,
upon principal amount, is an Interest.
3. Interest is the price of money whereas money is just an intermediary between
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18. exchanges of the transaction.
4. Interest is an increase in the principle by way of
5. Exploitation
6. Non-transparency
7. Future success of the transaction in presence by involving guarantee or
promise ignoring the uncertainty in the transaction.
8. Humiliation or cruelty in case of non-performance by borrower.
9. There are many categories of Riba, interest is one of the categories of Riba.
10. Interest is Riba where is Riba is the manager of Interest
There is confusion in understanding for the terms Interest & Riba (Usury).
The question arises “Interest is Riba or Riba is Interest”?
To make a distinction of terms with rational reasoning, Islam through definitions
and interpretations, provides in the Holy Quran and Hadith, Riba is clearly
explained where Interest is defined by the scholars.
Abul Ala Maududi,
Interest is an earning through the lending of money by a lender from the
borrower on condition that the lender shall charge a fixed amount of money in
addition to the principal. Interest is prohibited in Islam and people are not
allowed to make money by lending their capital on interest. Capital is to be
invested in a productive manner that increases the profits.
“Aristotle”
Greek researcher & philosopher define Interest in his book “Money &
Politics”.
“Interest is an artificial profit, which does not enter into legal trading. Using
money as a commodity is selling, just a forged artificial transaction. Money has
to be used as a means of sale and purchase and a measurement of a commodity
to be sold or purchased. Money is just a means to ascertain the value of
commodity and it cannot be sold or purchased within similar quantities”.
FACTS AND GUIDANCE AGAINST RIBA
Prophet Moses (May Peace be upon him) Torah 22nd versus of the “Exodus”Torah 22nd versus of the “Exodus”
If you lend money to any of my people with you who are poor, you shall not be
to him as an exact Riba from him.”
Deuteronomy verse 23rd
“You shall not lend upon Riba to your brother, Riba on money, Riba on virtual,
Riba on anything that is lent for Riba.”
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19. Leviticus 25:35
"'If one of your countrymen becomes poor and is unable to support himself
among you, help him as you would an alien or a temporary resident, so he can
continue to live among you.
Judaism
Inn several Biblical passages in which the taking of interest is either forbidden,
discouraged or disliked.
Roman Catholic Church
In the fourth century AD prohibited taking of interest by Church Scholars.
In the eighth century under Charlemagne it was declared usury to be a general
criminal offense.
Ancient Hindu Religion
Vasishtha, a well-known Hindu lawmaker made a special law which forbade
higher castes of Brahmans (priests) and Kshatriyas (warriors) from being
usurers or lending at interest. Vedic texts of Ancient India (2000-1400BC)
In the Jatakas, (600-400 BC).
Usury is referred to in a humiliating manner:
“Two-faced Elites accused of practicing Usury”.
Anti-usury movements gained momentum during the early middle ages and
reached its peak in 1311 when Pope Clement V forbade on usury absolutely and
declared all secular legislation in its favor, null and void
Profit DescribeProfit Describe
Income on financing is determined not on financing amount, but takes a
principal amount, cost of transaction and applicable fee & charges as a part.
Profit is the aim of financing and loss is “acceptable”.
Appraisal, Precaution, Trust, Confidence, Experience, Knowledge, Purpose, Will
and Sprit is business ethics that result in realizing profit on the transaction.
Profit is an amount appreciates over and above to the principle amount of
investment on the basis of profit and lost sharing between the two participants of
the transaction upon the maturity as gross return.
This gross return over to the principal amount of the investment then be
deducted with applicable and agreed fee, expenses and charges which is classified
as the cost of the transaction brings out Net Income on the transaction.
The Net Income which is to be shared on an agreed ratio instead of confirming
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20. and guaranteed rate is the Profit.
The profit is shared in ratio and not divided into rates applied in
principle.
Now the question? If Interest is eliminated from the monetary system,
would it be possible that system & transactions would become transparent
and clear?
The answer is simple and straight: “Filth remains in its hard and powerful grip
irrespective of other factors”.
Interest alone cannot be eliminated without eliminating categories that fall under
the term called Riba.
Categories of Riba
Some of the categories are mentioned and clearly defined in Islamic Economics.
Islam strictly prohibits these as well as society disregards them due to their
dreadful effect on social, moral, cultural, economical, financial and legal life
styles of the society.
The main classes of
RIBA are as follows:-
1. Exploitation by taking advantage of status and position,
2. Irregular weight & measures for profitability,
3. Wrong declaration for higher return,
4. Misconduct (misbehavior),
5. Crime & Law breaking,
6. Mistrust,
7. Commit a breach
8. False commitment,
9. Manipulation of affairs for benefits at a cost and efforts of another,
10. Gambling in all forms,
11. Promising to secure the benefit of covering honorable, nearest, dearest
12. Falsehood and Lies
13. Betting and gambling
14. Speculation, Conjecture, unfounded information,
15. Trading in commodities prohibited by Islam and the law of the land,
16. Income from the practices or activities that are prohibited by Islam,
17. Breaking and abuse of state law for self benefit or for any purpose that is
declared as punishable act.
18. Disobedience to the state law by declaration and submission of wrong
information for self-benefits.
19. Disturbing the peace of the community by using force.
20. Committing and involving in the illegal acts.
21. Interest that is the price of money taken in cruelty, exploitation, wrong
means, false declaration, and advantage based on weak or wrong
calculation,
22. Taking and giving a return on loans or fixing the amount without appraising
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21. the use of funds that are given to the user.
23. Keeping deposit with the person or institution having involved in Riba
practices,
24. Using deposits as investments and declaring non-transparent results that
lead to discrimination of sharing in accordance with investment percentage,
25. Holding and storing of currency that affects economic activities negatively.
26. Holding commodities that lead towards scarcity in the supplies against
market demand.
27. Monopoly and monopolization of activity, transaction and business to
taking sole benefit, stopping the growth of employment and earnings
28. Grabbing the wealth,
29. Illegal encroachment on the property that is not owned by encroaching. For
example, construction of Mosque on the property that was not purchased,
gifted or legally transferred to title made,
30. Using public money for luxuries and self-usage,
31. Misusage of rights belonging to minors, orphans, widows and women,
32. Misappropriations among share division of inherited wealth,
33. Miscalculation of share for inherited wealth under law of inheritance,
34. Income by power and cruelty,
35. Misuse of power and status,
36. Theft,
37. Burglary,
38. Smuggling,
39. Adultery,
40. Human trading,
41. Pressurizing and influencing of earning situation and taking benefits,
42. Misuse of public representation and obtaining benefit through status as
Public Representative,
43. Misuse of ownership right on the commodity by charging over and above the
prevailing price, furthermore, avoiding payment of state, that is its right
toward revenue, by hiding the earning to such transaction. (Premium on
commodity for extra benefit),
44. Abuse of labor, specially child and women.
Above classes differentiate between status of Interest vi's-à-vis Riba
Fundamental Facts on Riba
Basis of Islamic thoughts conflict directly with the Riba based system. As “No
Islam exists in a place where there is Riba based system”.
1. Riba based system is a misery not only on humanity, faith, morals or
imagination of life, but also in every core of economic and practical life.
2. It is the most hateful system, which eradicates human satisfaction and
frustrates its civilized and neutral developments.
3. Islam has a complete ethical system supported by the realistic system as
interlink.
4. Ethics & reality cannot be separated in Islam & cannot be practiced alone.
5. Islam has clearly stated benefits of following of ethics and reality that
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22. followers follow in daily life.
6. Successful Islamic economics does not rise without Ethics which cannot be
separated to reality of life and its rational approach.
7. Practical life of people cannot prosper without proper ethics.
8. Riba practices corrupt the individual’s ethics, behavior, and feelings towards
the community and the society.
9. It also corrupts the human life, culture and the relationship by spreading the
spirit of greed, selfishness, sneakiness and gambling in general.
10. Today investing capital on the minimum risk basis over guaranteed return is
commonly practiced including funds as a deposit, invested on no risk with
guaranteed return.
11. Interest is paid at lower to the depositor’s investment and higher to
investment managers and shareholders.
12. Money lent to somebody on higher return or interest does not grow useful
projects but seeks the most lucrative opportunity even if profit comes from
the lower nature and the meanest tendency.
13. Islam is a connected system; it prohibits the dealing with Riba.
14. It also defines all its systems based on providing the need for it.
15. It organizes the aspects of social life of giving out means of dealing without
touching growth of humanity, social & economic development.
16. A true Muslim should have a firm belief that whatever Almighty Allah has
prohibited, can develop human life in a better and fairer way.
17. It must be kept as a firm belief to restrain from false and evil acts for the
betterment of life with its development and growth in harmony.
18. Almighty Allah is the Creator of this life and makes man, custodian to all the
blessings for humanity.
19. Mans determination towards the Almighty Allah overcomes all and guides
the man to the right path.
20. It is also impossible for the Muslims to raise the community in prosperity or
the perception that wickedness can show the way to advancement, going
against the prohibitions of Almighty Allah.
Riba Al Nassieah
• Riba al Nassieah practiced before Islam as man paying his money to
another for a pre agreed period.
• In return, he took from him a certain amount every month without
taking the principal amount.
• When date of payment came, he asked him for his capital and if he
was unable to repay would increase in his fund and the term of repayment.
Riba Al Fadi
1. A man sells an article in exchange of another article having the same
quality and nature with an increase or decrease like gold sold for gold,
rupee for a rupee, corn for corn and barley for barley.
2. This kind is considered as Riba, as commodities are similar to each with
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23. different values not ascertain.
3. Such transaction has the involvement of exploitation and injustice on any
one’s part of the two.
4. Riba system emerges initially on a rule that there is no relationship
between the determination of Allah and the life of man.
5. Riba creates the false feeling in the mind of men that wealth ownership
would bring the power to become the master of this earth. It instructs the
men to not to get bound by a pledge himself from Allah and to ignore the
importance of following the commandments of Allah.
6. Riba establishes a feeling of liberty among humans for ways and means of
obtaining wealth, encouraging to adopt more unfair means to multiply it.
7. Riba provides an individual a feeling that he is free to enjoy his wealth
without abiding the contract of faith and trust in Almighty Allah or
obeying any condition as holder of wealth, for which he is not bound to
keep the interest of others.
Gharar is uncertainty, hazard, chance or risk and technically it is sale of a
thing which is not present at hand or the sale of a thing whose consequence or
outcome is not known or a sale involving risk or hazard in which one does not
know whether it will come to be or not. Such as fish in water or a bird in the air
which are dishonesty through ignorance by one or more parties to a contract.
There are several types of Gharar, all of which are Haram. The following are
some examples:
1. Selling goods that the seller is unable to deliver
2. Selling known or unknown goods against an unknown price
3. Selling goods without proper description
4. Selling goods without specifying the price
5. Making a contract conditional on an unknown event
6. Selling goods on the basis of false description
7. Selling goods without allowing buyers to properly examine the goods
8. Gambling is a form of Gharar because the gambler is ignorant of the
result of his gamble
Chapter 4
SAVING AND SAVING CONDUCT
Saving leads to investment through participation and goals in the Islamic
financial System in spreading the saving awareness and developing it Saving,
investment and participation is an individual decision which change into profit
and loss sharing in economic activity that leads toward socioeconomic
development.
1. Saving deposit is a decision that is taken by an individual.
2. Saving is a part of income that is kept aside for spending in a later time.
3. Islamic Finance gives particular importance and care of saving deposits. .
4. Reasons that encourage taking decision for avoiding un-necessary
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24. spending of income and use saving for better purpose.
5. Saving distinguishes a commitment that defines individual of realizing his
own interest and the betterment of economic activities.
6. Islamic Financial System defines a way to save funds.
7. Saving is employed according to the requirements and means of incentives
that give individual to practice saving application.
8. It does not neglect individual and guided to lead his saving motives as a
caution to ensure safety for him for the future.
9. It rises to the individual standard of living.
10. They caution towards wastage and guide to make a profit.
The cross road
Saving is one of the qualities of the member of healthy and welfare community.
Saver do not spend wastefully in regards to what he receives funds in his hand.
Saving Conduct is the saving for the future of community for common goals.
To apply the directives Islam called for in Holy Quran IX, 34 Chapter the Regret
means:
And as for those who store up gold and silver and do not spend those in
Allah’s cause announce to them a painful destiny
1. Islamic Financial System does not neglect saving motives of saving.
2. It does not stick on to Islam and the nature of human beings and their
character.
3. It makes clear to an individual step by step as when he makes his saving
interest.
4. It exercises a practical devotion of worshipping.
Savings operations in Islamic Finance
1. Do not differ with conventional that system that focus all efforts on class of
savings.
2. It does not care about the size of savings that is a conventional system practice
of discouraging savings which are below a minimum limit.
3. It stresses on the continuous and timely investment savings that are collected
in any size of the amount.
4. Islamic System emphasis on benefit for the community and does not remain
to make profit in all ways through funds collected.
5. It cares saving conduct and not the individual interest by guiding the ways
and benefits of saving.
6. Saving and Spending are the social conduct and un-necessary saving is
discouraged and moderate spending is encouraged.
7. Saving is a part of the broad Islamic Financial System and provide individual
to take part in shaping its individual character to adapt himself to welfare of
the community as a whole.
8. More saving activity becomes a habit; it expands large number of community
balance to community requirements and increases community in becoming
strong and number of needy persons decreases.
Conventional system better than Islamic System for Savings?
24

25. 1. In their ability to attract savings by offering interest on savings rather an
Islamic system does not offer any interest
2. Risk free investment
3. It is easy to invest in any form of currency and in any product or services.
4. Verity of saving products that gives a choice to saver to save.
5. Inter-lending support in investment of savings
6. Multi currency conversion of saving funds.
7. Saving on the basis of earning on compound interest return increases the
volume of saving returns and it is the attraction and temptation.
8. Saving in conventional system does not need obligation on declaration of
details of saving results by saving managers
BUT …… in Islamic Financial System
1. Restrict saving to be invested in illegal form.
2. Compounding of saving return is prohibited.
3. Savings are invested on Profit & Loss Basis.
4. Restricted saving products are available to the saver.
5. Limited numbers of financial institutions operating on Riba free.
6. Saving cannot be invested in prohibited products and practices.
7. Savings results are transparent, short tenure and with a clear understanding
of Profit & Loss.
8. Human ego avoids pain whenever it finds the way to that.
9. Conventionally it is found that savers have a higher participation in
investment and lesser in receiving in return.
10. Savers are less important in saving operation whereas the savings are the real
players that generate the interest.
11. The conventional system restricts higher ratio of saver on the saving return
and allow higher return to the saving fund operators.
12. Besides social and educational effects of spreading saving conduct, are there
are economic reasons in which Islamic Financial play great notice to spread
the saving conduct.
13. Voluntarily an individual savings are a part of an individual’s income for
which he temporarily postpones his spending.
14. The saving he made, help in financing the economic activities for socio
economic development.
Chapter 5
INVESTMENT
There are common apprehension & economic principles which can be taken as
guiding rules of the Islamic Financial System for investment.
Saving leads to Investment
1. Rule of Profit & Loss sharing is Participation.
2. Loan leads to seeking price of money that increase in capital.
3. Financing is made on the principle of safety of capital and obtaining profit.
4. Expenditure is deducted from profit and not from the capital.
5. The profit which can be distributed is net profit and not gross profit.
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26. 6. Islamic Financial System allows participation in Joint Stock Companies or
Limited Liability Companies from its accounts or can participate in a
part of the capital of existing companies
7. It implies financing the working capital in the projects for short term
financing on the basis of participation which is not the lending on
interest, but made on profit and loss sharing on Net Earning on
investment.
8. Legitimate participation is a way of seeking profit through money from the
money owner and work close of participator at a common purpose
among each participant for earning profit.
9. Riba Free Financial House can may be the money owner and saver the
participator or vice versa.
10. The Riba Free Financial Houses are permitted to be a participator from
employer to re-participate with the previous participated funds on a
Profit & Loss basis.
11. The Riba Free Financial Houses can be the second participator if it
receives a participation from the first participator.
12. The Riba Free Bank may be the second participator if it receives a
participation from the first participator.
13. The Riba Free Finance House as money owner bears loss alone as long as
the participator does not exceed his role.
14. If the Riba Free Finance House works as a participator it does not bear
loss as is sufficient that the Riba Free Finance House’s effort and work
are of no return.
15. It is allowed that the profit between money owner and participator is pre
agreed. But if it is determined sum of the principal amount of money
with the condition of no less then participation becomes null and void.
16. Riba Free Finance House can trade its funding precious stone and in
foreign currencies on its conditions written down in the exchange
contract.
17. Investment in financial securities is only valid in shares and not in
debentures.
In Conventional System traditions do not approve the Finance
Houses or the lenders to perform investments by it whereas Riba
Free Finance House breaks the tradition in three stages.
Firstly
A rule known to us that every person is taken by his words. Allah’s word revealed
in written form and by the traditions of the Prophet (May Peace be upon him) as
considering Riba Free Finance Houses and their systems are the blessings and in
purity which cannot be broken, provided these are followed in according to its
pure soul.
Secondly
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27. With no doubt Finance Houses with their present forms and existing functions
rose up in response to different environments and non Islamic philosophies in
their present form and they serve these environments which are not necessarily
convenient for serving Islamic communities in achieving the Rules approved by
Almighty Allah
Thirdly
1. Riba Free Financial System guide to perform direct investments or financing
by participation and stop all practices of other nature that deviate to its
system.
2. In case if continues its operations in the style of usurious banks and follow the
lending of saving funds by covering its administrative expenses from these
funds, this damage the investment and create a difference between the two
systems.
3. Financing by participation means sharing Investor (bank’s) capital of
productive project becomes a partner in the ownership project, partner in
management, running and supervision and partner in all what it yields from
profit or loss according to proportions agreed upon.
4. The Investor (bank) can sell its share to a limit restore only the price agreed
upon in the selling contract either it is less or more than its capital.
5. Justice must be secured and there should not be exploited as in the case of
loan at interest where the lender obtains all its capital completely with an
increase in its capital equal to the mount of interest either the project which
borrowed makes a loss or profit.
6. Participation should exist on joint liability between the financier and the
financing in case of loss and in case of profit.
7. Financier or Islamic Bank is a partner in the financing on the condition to
accept loss or profit as the condition of participation.
8. From here come the glorious reference and great wisdom, thus this
participation in the two cases (loss and profit) obliges the two partners (every
of them) to make the project prosper, and to make every effort to supervise it
to participate in its success and therefore the efforts of the two partners
should be faithfully directed to its developer
Chapter 6
PARTICIPATION
Participation operations lead at the end to an ownership that is applied in
projects or transactions. Islamic Financial System through its Banking System
contributes in solving the problems.
• Diminishing participation or participation leading at the end to ownership.
• In participation were the financier or bank gives the partner the right to
replace it by ownership.
• It is either at once or in parts according to pre-agreed conditions on a basis
of organized arrangement by keeping a part of income as an installment to
repay the financing.
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28. Method of diminishing participation
1. Entrepreneur presents the project to Financier.
2. Financier sees its viability of the project.
3. Financier finances as the partner of the project.
4. Entrepreneur pay through the earning of profit in parts.
5. If the entrepreneur owner keeps its own to him, the profit is distributed
between financier and entrepreneur according to the proportions agreed
upon.
6. In case entrepreneur pay the financing either at once or in installments
financier has no right to obtain any privilege because of the increase in
prices.
7. The financier or bank invests in projects with the capital and therefore it is
treated as a partner in the transaction either equally or in part and any
change in value of the transaction the working partner has always choice
either to sell and earn profit or buy himself according to market price.
8. In hire selling method the finance has to participate in construction on the
land then rents the housing units.
9. The landowner pays the ownership and rent and finally become an
ownership to its hirer after a period of time.
10. Rent installment includes a calculated part of the costing.
Rules for the participation which financier follows with
partner in the project or in transactions.
1. Each participation transaction is under a contract and conditions that
specify investment and profit in proportion of each partner and instruct
two matters:
2. First: The participator should keep accounts for the business operation.
3. Second: The accounts of the participation transaction should be checked
by the expert accountant to approve their results.
4. Islamic Finance has a social target.
5. Participation in the course of financing for the purpose is to enlarge
economic base and to open doors for all who wish to work in production,
distribution and services.
6. For small worker who needs a small financing forcing him to keep
accounting books is asking him impossible act which could make him
reject financing.
7. Keeping accounting books and auditing exceed the value of the financing.
8. The expense of this check is treated as the cost of the transaction.
How financier determines profits on investment
First stage: Every participation understanding determines the share according
to the rules of participation contract.
Second Stage: By preparing Profit & Loss account of investment operations
and determining the portion resulting from participation transactions and from
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29. the results of the investment projects which the financier operates alone.
Third Stage: The distribution of net profit and loss of investments among the
group of investors and the financier or bank and everyone according to his share
in investment, as the shares with a sum of its funds in transactions. After that it is
distributed among every one of the investors.
A profit portion of every investor from the profit
determined
1. Every investor obtains his portion of the profit according to pre-agreed
terms as regards to investing operations.
2. By mixing of total fund participated or deposited by the investor in the
bank at the time of investment:
3. The profit is only shared for the period in which the funds are being
invested.
4. Mixing of fund that forms the capital of the transaction leads to a fair
distribution as regards the share of investors from profit distributor.
Is it possible that the result of investment is a loss
There are chances that the fund managers (Islamic Bank) for the sake of
eliminating the possibility of loss from investment operations. Keeping such
possibility there are ways to keep investors secure and in banking provisions are
made for the purpose of safeguarding such possibilities by way of.
1. Technical pre- study of the investment projects before their execution.
2. The qualitative and geographical distribution of investments is kept as
important to the pre-study.
3. The refusal of conditional investment in a certain project that has whole
operations of is a distribution of risk.
4. Formation of appropriate provisions and reserves
Forming appropriated provisions & reserves.
1. Provision or reserve is a part of the profit that is put aside to encounter
probable loss or to strengthen the financial standing.
2. The reserve is on the right of the profit owner from which the reserve is
deducted.
3. Reserve or provision made to encounter losses and is deducted from
investment profits before distribution.
4. Reserves are the right of investors and the bank (participators) together.
5. The investor is not a permanent and may finish his participation is a
natural matter.
6. Casual problem is seen on withdrawal but it could be overcome with in-
build a system of diminishing ownership.
7. In order of investment operations without disputes, the bank makes a
reserve or an investment provision from the preparation the bank charges
in return for its efforts and for managing investments.
8. Therefore this reserve is employed to encounter any emergency and the
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30. balance is still being owned by the bank.
Chapter 7
Riba Free Mode of Financing
MODARABA
Modaraba –Commenda- Qarad the three distinct concepts appropriate for
Riba Free Economic Activities.
Three names with an ancient background of transactions used for economic
activities classified as business activities under a contract of “Money and Ability”
The owner of money, the financier is called Rab-Al-Maal and the worker is
called Modarib
Commenda It is a pre-Islamic word from Italy
Qarad It is a Hegari word generally found in Imam Malik’s and Imam Shafei’s
schools of thought.
Modaraba It is of Iraqi origin and found mostly in Imam Abu Hanifa’s and
30

31. Imam Ibn Hambal’s schools of thought.
According to Fuqaha Modaraba It is a partnership contract between two parties,
persons or organizations in which one brings the capital, the other shares his
time and skill for a specified project or transaction. Upon the maturity, profit is
divided according to the agreement, which will either be equal or one third, in
proportion. In case of loss the Rab-Al-Maal (financier) looses the capital
investment and Modarib (skill) lose its time, efforts and reputation
The history of Modaraba reveals that the business under the concept of
Modaraba was in practice before the rise of Islam, emerging from Italian city of
Rome, which was the center for trade and culture in the Christian world. When
Christian traders entered the Arab world, they chose Baghdad as the place for
business. As a capital of Iraq, Baghdad was the center of trade, education and
culture. Business communities of Iraq acknowledged the Commenda mode of
business and started practicing it. Iraq developed the system and named it
Quard, which spread in the Arab and Persian world, and eventually penetrated to
all places where the religion of Islam reached, either through traders or by the
Muslim conquerors. Credit goes to Islam in the developing a proper shape for the
concept of Modaraba by prohibiting Riba in financial dealings.
The Holy Quran says,
“Whereas Allah permitted trading forbid Riba ”.
The Prophet Mohammad (Peace Be Upon Him) left on a trading trip to Syria and
used Modaraba method by making a contract with Hazrat Khadija Al Kubra, who
financed the transactions before the Prophet Mohammad (Peace Be Upon Him)
married her. Therefore, Modaraba is treated as Sunnah Al Ijma.
In Islamic jurisprudence
Modaraba is a contract between persons, between persons and institutions,
and between institutions, through which finances are given for trading or
manufacturing purpose. Profit sharing is agreed upon beforehand at a
predetermined ratio and not the rate.
In case of loss, the financier loses the money used to finance and the worker loses
his time, efforts and talent.
Islamic jurisprudence show the legal demonstration in accordance with the
Quran, Hadith, Seerat of the Prophet (May Peace Be Upon Him) and the practice
of Ashab (companions of Prophet May Peace Be upon Him).
The Great Fuqaha (Religious Scholars)
Modaraba on the basis of Qiyas (fixed return or wages) is not allowed. The
reason for this is the unknown salary for an unknown activity.
Al KASSANI says Modaraba becomes invalid if it is on the basis of Qiyas as it
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32. involves an unknown salary for an unknown amount of work. Qiyas is only
allowed in accordance with the teachings of the Holy Quran, Sunnah and Ijma.
IBNE TAYMIYA Modaraba is valid on the basis of Qiyas. Fuqaha had
invalidated Modaraba on the basis of Qiyas (wages).
IBNE GHAZI says Modaraba is permissible as an exception to Gharar (fraud)
and unknown remuneration
Modaraba falls in the partnership type of contract, which has a vague similarity to
Mufawadah. It differs because money is the main objective in Modaraba and
work in the second. Rab-Al-Maal (the financier) does not have to take an active
part in the daily operations as in the case of employment.
There will be no return for Modarib if a profit does not result in the transaction.
In case of loss Rab-Al-Maal has the right to investigate the cause of loss, whereas,
in case of any negligence or misappropriation or a purposeful mistake by the
Modarib, financier can claim the financing.
Al-Baghi’s definition
“Money that can be fructifying through work should not be lent for higher
return, but can be traded for generating a profit”.
Modaraba Formation
1. Only money in shape of Dirham, Dinars, Rupees, Dollars or any other
currency is used as a medium of exchange in the Modaraba mode.
2. Commodity in exchange of another commodity (i.e. barter trade) is not
permissible. On the other hand, Modaraba contract cannot be established
with just anybody.
3. Experience, knowledge and skill of related business processes are an
essential condition of the contract.
4. Return on financing with a condition of profit & loss sharing is the
legitimate and allowed by Shariah.
5. There is no harm in investigating the cause of loss in Modaraba.
6. Modarib is bound to provide the justification to the satisfaction of Rab-Al-
Maal on loss.
7. In case of any dispute over the causes of a loss, the jurists permit the
arbitration clause in the agreement.
8. Capital is the soul of Modaraba and it should be in the form of currency
instead of a commodity.
As the Modaraba mode penetrated in the economic activities and Shariah
accepted the mode, scholars laid down Modaraba conditions & rules.
Though rules and conditions of Modaraba are in accordance with the
teachings of the Holy Quran and Sunnah, different scholars have interpreted
them differently.
The Four School of Thoughts
32

33. IMAM ABU HANIFA
He was flexible on the conditions of Modaraba. He was a trader and made
several transoceanic voyages in connection with trading & preaching. He faced
countless problems of hardship of traveling; Imam Abu Hanifa’s justified the
flexibility in certain conditions. His teaching on the legal framework of
Modaraba is treated as the most rational approach
IMAM MALIK and IMAM SHAFEI
The two were more rigid in terms of the limitations of economic activities. They
had adhered to the Shariah rules theoretically. The Four Imams agreed on
certain conditions and differed on some.
Currency of Modaraba
Currency is the origin of price and value of goods. The Market value of currency
does not change that is why almost all Fuqaha had invalidated Modaraba with
commodities.
This condition is explained an example:
Superior quality dates presented to Prophet (Peace Be Upon Him). These dates
obtained in exchange with inferior quality dates. Prophet (Peace Be upon Him)
refused to accept the gift and asked to return the superior dates to its original
owner. Prophet (Peace Be upon Him) stressed on sale of inferior dates, first.
Then, with the amount received from the sale of the inferior dates, superior dates
were to be purchased. When transaction was completed, quantity was lesser then
it was before.
• Accordance to Prophet’s (Peace Be upon Him) a commodity cannot be the
capital of a Modaraba contract.
• As far as coins are concerned, their restrictions are due to involvement of
metal, which is also a commodity.
• Any commodity should be exchanged with another of the same quality and
the same quantity, or it has to be bought through a currency that acts as a
medium of exchange in the economic affairs of Islam.
• Islamic economics does not treat money as a commodity. All the Four
Imams have forbidden Modaraba between coins and commodities
• Metal Coins too cannot be the capital of Modaraba as coins are restricted
due to involvement of metal, which is also a commodity.
• Commodity must be exchanged by another of same quality & quantity.
• It has to be bought through a currency that acts as a medium of exchange in
the economic affairs of Islam.
All Four Imams forbidden Modaraba between coins and commodities and with
this clarification, it is set that the capital of the Modaraba must be in currency
and not in coin form and the most preferred form of currency should be paper
because it establishes value that is easily traded and the market value is
infrequently changed
33

34. SAMARKANDI has given his views that capital should consist of consummate
value. Here is the reason:
“Modaraba transaction with paper currency is permissible. Even gold, silver
and precious metals are not permitted for the capital of Modaraba”
RESTRICTIONS AND PERMISSIONS
1. Liabilities cannot be the capital.
2. Return on capital is not guaranteed.
3. The capital of Modaraba should be deposited in cash with the Modarib in
full trust and confidence
4. Modaraba becomes invalid if the return of finance is guaranteed.
5. It should be of known in quality and quantity.
6. Ignorance leads to differences and disputes.
7. Profit Sharing should be at maturity of transaction.
8. It should not be paid in parts before the maturity of the transaction
because payment might exceed the share and any one of the two partners
might devour all the profit.
9. Modaraba is only achieved through participation because of profit & loss
sharing contract, based on justice and trust among the partners.
10. It is not justice that all profit goes to one and other suffers.
Imam Malik
1. Refund of liabilities that could be delayed purposely for making more
money is prohibited.
2. Modarib has to return the capital and Rab-Al-Maal has a choice to invest
money that is returned on maturity of Modaraba.
3. Capital cannot be Roll-over under same agreement.
4. Modarib in a monetary constraint and wish to keep money for longer has
to first end the agreement and enter into fresh agreement either with same
terms or additional mutually agreed upon.
AL BASHI says that it might be Modarib intention for benefit in order to
prolong payment of his liabilities which cannot be permitted. Almost all scholars
have forbidden the usage of debts as Modaraba capital.
IBN KADAMA There is no wrongdoing if the Liabilities taken as Modaraba
Capital with the permission of Rab-Al-Maal who has settled the price with a
clear conscience”.
• In another way, it is like a commodity given to Modarib which can be used
as a capital of the transaction.
• All Fuqaha agreed that only capital be in the form of cash as it is the
Participation of Rab-Al-Maal.
• The debts remain in the possession of debtor.
• Participation with Cash is different from debts, as it remains the property
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35. of Rab-Al-Maal even when it is with Modarib.
• Cash Participation is the capital of Modaraba and remains with Modarib
in trust.
Essential conditions of Modaraba financing
1. For differentiating Modaraba mode of financing and interest mode of
loans, principals should be kept in mind before establishing financial
transaction that in normal banking and lending practice, money is made
available to borrower against guaranteed return of principle with profit.
2. In such practice collateral is the cover against the lending that ultimately
liquidated in case of loss by lender.
3. In Modaraba, profit and loss is the end of the contract and profit and loss
sharing is the key
4. In case of a loss, the Rab-Al-Maal suffers the financial loss and Modarib
faces loss in time, effort and his name.
5. Capital has to be surrendered to Modarib who is free to utilize it in
business mutually agreed between Modarib and Rab-Al-Maal.
6. According to Imam Ibn Hambal, this condition satisfies Modarib for his
free actions to Capital utilization and can take better way to earn best.
7. Rab-Al-Maal interference in the working disrupts the connection between
Capital and Modarib. But the cooperation of Rab-Al-Maal is accepted.
8. Relationship as an employee and an employer between the two parties
which are Rab-Al-Maal and Modarib invalidate Modaraba transaction.
9. Share of profit has to be pre-agreed at the pre-agreed ration and not the
rate applied on the principle amount but on Net Profit.
10. Modarib is entitling for Modaraba management fee out of Gross profit and
not from the capital of Modaraba.
11. Modarib fee must be pre- agreed and terms have to in the agreement.
12. Rab-Al-Maal cannot impose the amount of percentage.
13. The ignorance and discriminative distribution share of profit invalidates
the Modaraba. Profit is the essence of contract and its ignorance invalidate
the terms of the contract.
14. Profit has to be divided by half or by third after deduction of pre-agreed
Cost and Expenses including Modarib fee.
15. Rab-Al-Maal gets share of his Capital investment and Modarib gets the
share for his efforts.
16. In loss, Modarib has no share nor can’t Rab-Al-Maal claim his capital.
17. Assets shall be the right of Rab-Al-Maal.
Classification of Modaraba
1. Modaraba can be classified as, General purpose and Specific Modaraba.
2. In General purpose Modaraba, the operation is not restricted to activity,
partner and place.
3. General purpose Modaraba is mostly used between Modarib and Rab-Al-
Maal in which Rab-Al-Maal empowers, Modarib to act, invest or activate
capital for earning profit.
4. Specific Modaraba is limited by one or several aforementioned
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36. restrictions. Modaraba can be restricted to certain conditions and has to
commit for the non-compliance.
Multiple Modaraba
1. One Rab-Al-Maal finances several Modarib at one time with different
terms and conditions of contract.
2. Several Rab-Al-Maal finance to one Modarib as an individual worker or as
in group by pool of capital under single agreement between Modarib and
Rab-al-Mall either in group or by proxy to single person in representation.
3. One Rab-al-Maal finance to several Modarib and each Modarib using the
financing amount investing in several transaction for specified period
under single agreement.
HAKIM IBN HAZAM Close Companion of Prophet (May Peace be upon him)
Says and it has to be taken as the authentic condition in the present practices
“ I lay down conditions in Modaraba that if my money is left in a humid place
or taken across the sea or washed between fast-moving water, Modarib will be
responsible for the non-compliance of the conditions.”
Fuqaha Belief
1. All activities pertain to Modaraba should be agreed in witting including
functions and operation in proper record, supported with documentary proof.
2. Modarib can invest the Capital by self or by making similar contract with
other person, institute or organization without the permission of Rab-al-Maal
but keeping him in confidence.
3. Modarib status could be change to Rab-al-Maal and Rab-al-Maal could be
Modarib too with the condition of contract and agreement in transaction.
Banking & Financial Institutes
1. Banks can finance their funds or from their deposits for financing someone
to carry out Modaraba.
2. Banks can be Modarib for their Depositors and Rab-al-Maal for Modarib
seeking financing.
3. The contract shall be two separate.
4. The first contract with the Depositor as Modarib and second contract with
Modarib whom financed.
5. The contracts can have different terms and different profit sharing.
6. Both the contract should be matured on the pre agreed date and bank cannot
pay-off without realizing the profit of its financing or from own source.
7. Banks can specify the purpose of Modaraba to safeguard depositor’s capital.
8. Bank can enter into a General Purpose Modaraba. But in case of being a Rab-
al-Maal it only enters into Specific Modaraba Contract.
9. Banks are not permitted to ask for guarantee against the loss of capital, but
participate in the transaction as partner by holding the assets of transaction
excluding Capital.
10. Modaraba can be in consolidation with other mode of financing permitted
like Musharaka, Morabaha, Ijarah, Havana, Musaqa or Mussaja.
36

37. Al Mighty Allah instruct
Oh you misuse your wealth in self-importance among them. This wealth
should be used for trade on mutual consent”. Those who believe in Allah
should observe their duty to Allah and give up what remains from Riba, if
they are true believers. If they do not, then they are warned for a war with
Allah and his Prophet (Peace be upon him) and if you ask forgiveness, then
you have your principal without interest. Wrong not and you shall not be
wronged.”
Summary
• A profit-sharing agreement between two parties, in which one provides the
finance, and the other provides entrepreneurial and management skills.
• Profits are divided on a pre-determined ratio.
• Losses are borne by the provider of capital and Modarib loose its reputation,
time and efforts.
• Financing is made in the absolute trust on the skills, experience, reputation,
capability and feasibility of Modaraba transaction or project.
• Modaraba agreement is made only to the transaction purely based free from
all the classifications and categories of the Riba.
Chapter 8
Morabaha Financing
“Trade Financing”
The word Morabaha is taken from the Arabic word Ribh which means Profit.
Originally, Morabaha is a contract of sale in which a commodity is sold on profit.
The seller tells the buyer his cost price as well as his profit he is adding to the cost.
Modern form of Morabaha has become the single most popular technique of
financing all over the world.
• Morabaha is a financing mode for trading activities on basis of sale on profit.
• Technically, it is a contract of sale in which seller declares his cost and profit.
• It is an ancient practice which was seen in archives prior to horizon of Islam.
• Morabaha practice developed in Islamic financial system with guidance of
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38. Islamic Shariah.
• Morabaha is a financing technique that involves a request by the Morahib
(Worker) to the financier (Rab-al-Maal) for the purchase of a certain goods or
equipment for him.
• The financier after the appraisal of the price and cost estimates its profit over
the cost which is settled as purchase price in advance.
• The financier pay on behalf of the Morahib and deliver the goods after taking
acceptance of receiving the goods as per request
• There is a question on the legality on Morabaha financing technique due to its
similarity with Interest of Riba.
• In reality it is wise to settle all the terms in pre-agreed as saying of Prophet
Muhammad, May Peace Be Upon Him.
“You must settle your terms in writing and in agreeing prior to your
trading and in trust and for better profitability.”
Confirmation
Conference on Islamic Banking held at Dubai in 1979 endorsed the terms &
condition of contract between two parties of Morabaha as:
“This conference concluded that the Morabaha transaction comprises a
promise to purchase on behalf of the Morahib according to condition agreed
upon and promise by the financier to conclude the sales after purchasing the
commodity based on the decided condition”.
Morabaha Key Notes
• Financier is Rab-al-Maal & financing is made for the procurement of
goods and commodities.
• Morahib is the party of contract to sell the goods that Rab-al-Maal
financed under the contract.
• It is not capital base contract and funds are use as financing for purchases
of goods.
• Morahib has to prove and satisfy the Rab-al-Maal of capabilities know-
how of goods requested and marketing and selling plans of the goods that
are financed.
How Morabaha mode of finance operates?
• Morahib needs goods and approaches financier to get the required goods
or commodities through financing
• In interest-based system, money is landed on interest to the borrower who
would go and buy the required commodity from the market.
• This option is not available in Morabaha.
• Money cannot be lent directly to Morahib.
• Financing against the procurement of goods or commodity requested,
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39. directly paid to supplier in accordance to request of Morahib.
• Morahib approach Rab-al-Maal with his request to acquire goods for
trading purpose.
• The request must be in writing with clear specification of goods required
along with the supplier identification and prices declare by the supplier.
• Rab-al-Maal by self or through agent enters into purchase deal with the
supplier of Morahib and negotiates the price to a minimum possible level.
• Supplier final price and Morahib declare price if differ this difference is
part of earning for Rab-al-Maal as efforts involve to be compensated
• Morahib cannot claim a part of this earning, however Rab-al-Maal as good
gesture can reduce the profit on the commodity that he add on procured
price declare by Morahib.
• Morahib upon receiving the goods from supplier issue an acceptance
confirming the quality and quantity of goods received from the supplier as
well as issue detail of stock kept at place.
• Rab-al-Maal can also appoint its Moqqadum (agent) who is allowed to
receive the delivery of goods and commodities on behalf of Rab-al-Maal.
• Moqqadum (agent) may keep the goods and commodities under his
control and release upon the delivery order issued by Rab-al-Maal to the
Morahib either upon the payment or under differ payment terms.
• It is compulsory that goods transfer from Rab-al-Maal to Morahib should
be on the pre-agreed price which was incorporated in the Morabaha
Financing Contract supported by Local or Foreign Purchase Order duly
signed by Morahib..
Morabaha transaction completed in two stages!
• Firstly, the Morahib requests the Rab-al-Maal to undertake a Morabaha
transaction and promises to buy the commodity specified by him.
• The promise is not a legal binding and Morahib may go back on his
promise and the Rab-al-Maal takes the risks of the amount financed.
• In this situation the Arboon amount is kept as the stake of Morahib,
subsequently is used to cover the price margin where Rab-al-Maal can sell
the goods by reducing the price to attract the buyer.
• Secondly, Morahib purchases good acquired by Rab-Al-Maal on a deferred
payments basis and agrees to a payment schedule on various dates.
• On such arrangements the profitability of Rab-Al-Maal shall not be change
and pre-agreed price of resale of goods between the two parties of
Morabaha contract shall remain constant.
• Morabaha sale contracts allow the commodity sold it to the Morahib or in
case if these are refuses to purchase by Morahib then Rab-Al-Maal can sell
buy at best suitable price taking the advantage of Arboon.
• This prime clause of the contracts and it should be accepted by Morahib.
Morabaha mode of financing is widely used by Islamic banks for
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40. various financing requirements.
• To provide finance in various and diverse sectors
• To consumer finance for purchase of consumer durable such as cars and
household appliances
• To real estate to provide housing finance
• To the manufacturing sector for the purchase of machinery, equipment
and raw material etc.
• To finance short-term trade for which it is eminently suitable.
• To issue letters of credit for local and international procurements on
behalf of Morahib.
• To finance import trade in today form of FIM (Finance Imported
merchandise)
Fuqaha (Islamic Scholars)
Imam Malik Both parties in Morabaha Contract are legally bound to fulfill the
terms of contract. Any mis-declaration or mis-commitment from any party
towards the contract, offender would be liable to legal proceedings. Other schools
took it as religious obligation and legal binding if it is to the interest of the public.
Contract of such nature needs great technical accuracy and a sound knowledge of
Shariah. The binding nature of the Morabaha contract might require the
endorsement of the legislations in some Islamic countries where such
transactions are in practice.
Imam Baghi Contract concluded toward who purchases the camel because
of need of others and then sell at a higher price. Such contracts end in two sales,
• Firstly, they are purchased in cash.
• Secondly, they are sold on credit.
Financier pays cash for commodity at the request of Morahib then sells same to
Morahib on credit after adding its profit. In other words, financier by adding its
profit loan excess to original purchase price as interest which Morahib will have
to pay even if price of commodity falls. Such transactions fall under
classification of Riba as interest.
Imam Al Shafai
• If a man sees a commodity in the possession of another and agrees to
purchase the commodity with the profit set by seller; such transaction is
valid, as it is not binding to any of the party of the contract till the close of
the transaction.
• If a man purchases the commodity and agree to pay the profit, then sale is
valid as the purchaser himself agrees to offer the profit.
• If Morahib requests Rab-al-Maal to purchased separately the goods on
cash and then he shall buy in installments at later stage. The cash based
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41. sales accepted.
• Under second installation scenario sales would become valid provided
Morahib purchase on installment or at cash at an agreed price of contract
Imam Ibn Rashid
• Morabaha sales are approved sales, but sales by mutual consent are
preferable. “Sales by mutual consent are permitted because Morabaha
sales according to Imam Ahmed require honesty and integrity on the
part of the seller”.
• Temptations have the possibility of being led into inaccuracy in one’s favor
of sales which is agreed by mutual consent.
• In case seller cheats with price or capital, sale remains valid, but buyer get
entitlement to claim the difference from the seller or drop the sale.
• Some Fuqaha say that the buyer has no choice but is entitled to deduct the
difference.
• Morabaha sales are governed by the same conditions applied to sales in
general with most important aspect that both buyers and sellers should
know the amount of the financing and the yield.
The seller must declare,
• I bought for 100 and claim it for with a profit of ten which then is 110.
Selling in Installments of Differed Sales
• Time has to be agreeing on the price based on the period of credit term.
• Morahib must agree to pay on maturity.
• If unable to fulfill financier has the right to claim the goods by confiscating
his Arboon which ultimately covers the price including the compensation
for the loss of time.
• Morahib have to reveal quantity of stock in hand to financier.
• Any discrepancy to original delivered quantity would be paid by Morahib.
• In case of failure to pay, Morahib can be legally punished for
misappropriation and theft.
Some Fuqaha forbid such types of sale, considering the increase in price as
Interest, a category of Riba. While some of the Fuqaha permit such sales as it is
based on mutual agreement, and agree with Allah as said in Holy Quran:
Whereas Allah permitted trading and forbidden usury and O’ ye who believe!
Misuse not yours wealth among your selves in pride, except it be a trade by
mutual consent”.
Financial institutions use Morabaha financing in both ways,
• Differed sales of cost price for those who need the commodity for their
personal use and not for trade as seen in Consumer Financing.
• On short term basis with limited installments provided to those who
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42. cannot afford to pay in one go but with an ability to pay in installments.
Morabaha Cost-plus Financing
• This is a contract of sale between Financier and Morahib at a price which
includes a profit margin agreed by both parties.
• As a financing technique, it involves the purchase of goods by financier on
requested by Morahib.
• Goods then sold to Morahib with a built-in profit.
• Repayments in installments are specified in the contract as Morabaha
Cost-Plus Financing.
Selling in Installments of Differed Sales
• Differed sales or sales by installment could be carried out on the basis of
the cost price of commodity.
• No disagreement on such type of sale carried out and allowed.
• Differed sale could be at a higher price than actual one of the commodity.
• Some Fuqaha disagree on that type of sale. But most agree to such sales as
seller informs the buyer of cash price and price on deferred payment terms
as clear terms for two types of sales transaction.
Islamic jurists proposed forms of partnership to provide credit & finance for
Agricultural, Manufacturing and for trading purposes. These are:
Consecutive Partnership
• This instrument of financing is a real innovation on part of Islamic banks.
• Islamic banks take depositors of one financial year as partners in the
proceeds of that financial year without matching with the periods of
projects in which depositors funds are invested.
• Pending proceeds from previous years, for which accruals or provisions
were made, are included in the proceeds of the year in question.
• Yields corresponding to the same financial year are excluded if they are
not yet due and left to a future year.
• This accounting system is necessary to reconcile the depositors' withdraw
regardless liquidation of investment in which their funds are used.
• Continuity of the bank's investments which constantly flow in a mixed
basket to make regular accounts every financial year, as an accounting unit
for this basket
Agricultural Partnerships
Privately owned agricultural land could be utilized one of the three ways:
• Directly by the owner,
• Indirectly by renting it (Ijarah)
• Through agricultural partnership.
The two main frameworks in traditional Islamic law for agricultural enterprise
and both these techniques typically afford a partnership between capital and
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43. labor. These techniques are
Muzara’ a (share cropping)
Musaqa (water partnership or tree-sharing).
Sharecropping
Muzara' a (sharecropping or crop partnership) is a contract whereby landlord
puts his agricultural land at farmer's disposal to farm. Farmer undertakes to give
owner an amount of agricultural products. This framework is based on a
partnership between capital and labor.
Tree-sharing
Musaqa (water partnership or tree-sharing) is a contract whereby one person
trim and water fruit trees own by other person or are at his disposal, in exchange
for an amount of realize through the sale of the fruits on pre-agreed upon.
If a contract of Musaqa or tree sharing is related to fruitless trees, like willows
and sycophants, it is not valid. However, it would be valid in such trees as henna
whose leaves are used or trees whose flowers are used.
Chapter 9
Musharka financing
(Equity Participation or Venture Financing
Introduction
Musharka or Shirkah can be defined as a form of partnership where two or more
persons combine either their capital or labor together to share the profits &
enjoying similar rights and liabilities. It is a contract between two or more
persons who launch a business or financial enterprise to make profit.
Introduction & Back ground
43

44. 1. Dilemma in this modern world for entrepreneur is his capability to initiate
his idea for a new business.
2. He look to raise equity, capital or financing to enter business venture.
3. Firstly loan need collaterals arrangements, keeping in mind the impossibility.
4. Secondly borrowing that is made for the purpose is subject to the cost to be
paid in shape of interest ranges to 6% to 20% or more.
5. Thirdly cost to be paid on loan has to be determining on the volume of risk
and success.
6. If interest rate is 6% but the venture has a 10% chance of failing within a year,
the lender will probably charge interest at a rate of 16%.
7. High interest on compounding imposes heavy costs on the venture from the
start.
8. It increases the danger of failure and rise interest rate. If venture's prospects
can not be predicted with confidence, it is difficult to calculate an appropriate
interest rate.
9. Alternative for entrepreneur is admitting a partner to the business that is
entitled to receive a portion of profits from the venture in exchange for
contributing capital.
10. The partner's contribution and participation is pre determined.
11. There is no need to compute an interest rate and there are no fixed costs of
debt.
12. The partner will receive profits only if earned
Condition of Musharka
1. Musharka is a technique of financing used as a partnership.
2. Two or more parties provide finance for a project.
3. All partners are entitled to a share in the profits resulting from the project in a
ratio which is mutually agreed upon.
4. In case of loss it is shared exactly in the proportion of capital.
5. All partners have a right to participate in managing the project.
6. Any one can waive the right of participation in favor of partner or partners.
Historical Background Musharka
1. From the beginning of human society methods to meet day to day needs have
been changing with the change of social, economic, scientific, cultural and
political circumstances.
2. Especially habits, fashions and the standard of living.
3. These methods regulate the commercial activities and vary from place to place
and time to time.
4. The Arab society at the time of the rise of Islam had very simple financing
methods and forms of business peculiar to that society
5. Birth of Islam saw Musharka practice in Arabia in commercial activities.
6. Islam endorse and Prophet May Peace be upon Him perform business on the
basis of Musharka.
7. After Hijra Muhajireen and Ansar were declared by Prophet May Peace be
44

45. upon Him to be brothers.
8. Subsequently they joined as partners on Musharka, Muzara and Mussaqa
form trade and commerce.
9. Nature of transactions in the different forms was identical. These forms were
so developed that they became independent institutions.
10. Jurists formed detailed rules about the form.
11. There is a consensus of opinion among the jurists of all schools- of thought
that Musharka is a valid and legitimate contract in Islam.
12. The jurists, however differ over its form conditions and other details
Islamic Perspective
1. Islam stress on the socio economic development that tie individuals with
brotherhood and care like members of one single family.
2. This brotherhood is universal and not narrow-minded.
3. It is not tie by any geographical boundaries and take whole of mankind group,
tribe or race into one relation and that is universal partners for better earth.
4. The concept of brotherhood and equal treatment in society and before the law
is not meaningful unless accompanied by economic justice.
5. Receiving dues for individual who contribute to economic activity in society or
to the social product without any kind of exploitation of one by another.
The Prophet May Peace Be Upon Him warned:
"Beware of injustice for injustice will be equivalent to darkness on the Day of
judgment".
1. This warning is against injustice and exploitation and to protect the rights
of all individuals whether consumers, producers, distributors, employers
or employees with aim to promote welfare and ultimate goal of Islam.
2. Special significance is given to the relationship between the employer and
the employee which Islam places in a proper setting and specifies norms
for the mutual treatment of both so as to establish justice between them.
3. An employee is entitled to a "just" wage for his contribution to output and
it is unlawful for the employer to exploit his employee.
In case is with trader and consumer the dealing fair and transparent.
Two main forms of Musharka
Permanent Musharka
1. In this form the parties of Musharka participates in the equity of a project or
transaction and receives a share of profit on a pro rata basis.
2. The period of contract is not specified.
3. It can continue so long as the will of the parties.
4. This technique suits for long terms projects as funds and development are
committed and protracted.
Diminishing Musharka –
1. It allows equity participation on a pro-rata basis
2. System by which equity of parties keeps on reducing ultimately the ownership
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