Finance is an equity and lending is a liability. The fact is what it say about financing which is opposite to the lending

1. Research & Written
YOUSUF IBNUL HASAN
Program Consultant Islamic Banking & Applied Finance
IQRA University Pakistan
Design by
SAIRA ALI Student MBA Program 2010-2014
IQRA UNIVERSITY

2. MAN, MONEY & COMMODITY
Three factors of production give birth to the exchange
system and practice in the fulfillment of needs.
The two exchange system are classified as
Lending and Borrowing
Financing and Participation
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Lending is base on principle amount in 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
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use the money and to multiply, divide, subtract and add
the amount realize through the exercise of money.
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3. DIFFERENCE OF FINANCING & LENDING
Financing is Equity and not Liability
 Lending is liability and not participation.
 Financing is made and Loan is given
 Loan is secure financing is support.
 Financing is an investment and loan is facility.
 Loan cannot be financing until it is agreed on Profit and
loss sharing
 Financing cannot be a loan till return is guaranteed.
 Loan is given at a price of money on application of Rate
 Financing outcome to be profit, shared in an agreed Ratio.
 Loan has to be secure by external factor of collateral
 Financing is collateralize within its own system
 Financing cannot be made until the user is able to use it
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 Lending is given against the confirmation of guarantee.

yousuf ibnul hasan

4. LENDING AND FINANCING DIFFERENCE
Lending leads to inflation and liquidation
 Financing ends at ownership
 Financing increase the capital base as well net-worth
 Lending increase liability, cost and decrease the net worth
 LENDING money given for unstated purpose against the
security without going through pros & cones of activity for
which money is spent on and return is fixed either in cash
or in term liquidation of mortgaged movable or non movable
property/properties.
 FINANCING is joining in the profitable operation, like
equity participation, venture finance, acquiring business
operation with proper appraisal of purpose, verification,
validation of data submitted by the two partners in which
financier becomes direct or indirect partner in that venture
with un-guaranteed profit and loss in returns.
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
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5. DEFINITION OF FINANCING
Finance is the intermediary source in shape of money
having a value to act in production, trading and exchange
of commodities, services and assets.
 Financing is the source that makes the money service for
specific purpose within specific period, in between person
to person, person to institution or institution with group
or institution on an understanding to share the result in
profit and loss.
 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.

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6. (CONT…)
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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 by participation
and cooperation.
Financing is the act of money without the concept
of liability, collateral or the guarantee. Its origin
is investment and its end is ownership.
Financing is an act of money which is classified
as the opposite to lending.
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7. 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
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 Holy Quran, explained in Hadiath. In this
market the money is been served on the basis of capital
or by skill with clear understanding of participation in
responsibilities, duties, obligations, earning, income,
risk and profit sharing.

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8. HISTORICAL BACKGROUND
Financial matters in Post Islamic era were commonly
practiced on the basis of social priorities & Prophet (PBUH)
too was involved in commercial & financial activities
considering social obligations in financial matters
 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 first Islamic state under the
guidance of Prophet Muhammad ( May Peace Be Upon
Him) in the rule of four Caliph.
 Interest based system was dominating 98% monetary
markets, controlling the market with its powerful grip and
titled as Conventional Monetary System

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9. (CONT…)
Now reduce to almost 75% and it is gaining the
momentum on daily basis.
 Financial system derived from Quran, Sunnah and
Hadiath has a well defined title that signifies motive and
concept of the system as
Socio-Financial System.
 Islamic Finance was practice for the most part in the
Muslim world throughout the middle ages.
 In Spain, the Mediterranean and Baltic states, Islamic
merchants became vital intermediaries for trading
activities.
 European financiers and businesspersons later adopted
many concepts, techniques, and instruments of Islamic
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finance.

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10. (CONT…)
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Term "Islamic finance” is relatively new for commercial
money market in a sense as it appearing only in the
early 1960’s through a movement that started from Egypt
when the fist Social Bank was establish to bring the
change in the money activities and unite money with
ability with propose and period.
Commercial or business activities confirming 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.
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11. (CONT…)
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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.
Not limited to banking only but covers capital formation, capital
markets, and all types of financial settlement.
The philosophical roots of an Islamic financial system originate
from the relations of factors of production and economic
activities.
Conventional financial system deals primarily with the
economic lending and borrowing aspects of transactions.
Financial system equally emphasizes on the ethical, moral,
social & religious proportions for enhancing equality and
fairness for an ideal society.
It fully appreciates context of Islamic teachings on the work
ethic, wealth distribution, social and economic justice as well as
role of the state and responsibilities and duties of the citizen. .
It is established on absolute prohibition of payment or receipt of
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predetermined and guaranteed return rate.
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12. (CONT…)
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 Asahaba (close associates of Prophet
May Peace Be upon Him).
 This ended the concept of interest and ruled out use of
debt-based instruments.
 The system encourages risk sharing, promotes
entrepreneurship, discourages speculative behavior, and
emphasizes the sanctity of contracts
 Basic framework for Islamic financial system is
enforcement of the rules for handling of economic, social,
political, and cultural characteristic of Islamic societies

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13. 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 is
central belief of the system.
 Any positive, fixed, predetermined rate tied to maturity
and amount of principal etc. i.e. guaranteed regardless of
performance of the investment is prohibited
Risk sharing
 Interest is prohibited and owner of funds become
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.
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yousuf ibnul hasan

14. (CONT…)
Money as "potential" capital
 Money is treated as "potential" capital
 It becomes actual capital only when it joins hands with
other resources to undertake a productive activity.
 Islam recognizes the time value of money, only when it
acts as capital, not when it is "potential" capital
 Money cannot be treated as Capital if it is not in
circulation.
Prohibition of speculative
 An Islamic financial system discourages exhibition of
wealth and prohibits transactions featuring extreme
uncertainties, gambling, and risks
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15. (CONT…)
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

Concept of Finance defines “Interest” as price of money
where lender charges borrower pays. Islam accepts that
agreement between financier and user to be pre agreed on
terms of transaction and fulfills obligations in rightful
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manner.
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16. (CONT…)
Salient features of this order
 Islam clearly characterizes difference between lawful and
forbidden economic activities and permits the Muslims to
make all efforts for their right in seeking their economic
benefits.
 Islam prohibits financial, economical, social and legal
actions, which are morally, financially and socially
damaging to the community life.
 The Islamic financial system employs concept of
participation in enterprise, utilizing funds at risk on a
profit-and- loss-sharing basis.
 It implies Careful investment policy, diversification of risk
and careful management by Islamic financial institutions.
 Potential profit in proportion to the risk assumed and to
satisfy conflicting demands of participants in the current
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environment and within the guidelines of the Shariah.
yousuf ibnul hasan

17. HOW FINANCE IS APPRAISE
Financing appraisal is base on straight line method,
applying 12-P Formula
12-P Formula in pre-financing activities
 Person who is financing to whom?
 Purpose for which financing is work out?
 Project for which financing is required?
 Period for which finances to stay as financing?
 Product that develop through financing?
 Process to be use for financing?
 Price is the volume of finance require?
 Place locations where finance shall be utilize?

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yousuf ibnul hasan

18. (CONT…)
Participation, relationship and responsibilities of
financier and user?
 Pact terms and condition of financing between parties of
financing?
 Professionalism ability, experience, knowledge and
expertise in purpose?
 Perfect ness in Performances?
 Profitability by the application of twelve “P” formulas
which is the RISK base perimeters

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