WORLD MUST BECOME INTEREST FREE ECONOMY

1. SUSTAINABLE BANKING SOLUTION-ISLAMIC BANKING
INSTITUTION: M.A.M COLLEGE OF ENGINEERING, SIRUGANUR
AUTHOR NAME: S.IKRAMULLAH (I MBA)
S.R AFTAB AHMED(I MBA)
Abstract:The purpose of this research is to develop a model of Riba Free Economy in the
world. A research, more inclined towards Islamic way of life needs to find out the principles,
Quranic and Hadith support. Islam as a religion presents novel systems for the welfare and
benefits of the society and prohibits a system where people earn profit without putting labour
or efforts. Islam believes in a business of commodities, changes with same commodity and
does not allow changing with precious commodity or with inferior commodity at the same
rate. In such a case the rate and wealth of commodity would be determined and then the
exchange would be made. Logic has been sought, taking riba as an economic issue and in the
perspectives in which it is condemned by Islam, Christianity and Judaism. References from
Quran and Hadith have also been forwarded. The conditions for riba has been laid down as
increase in principal amount and increase with respect to payment period, the more period
causes more increase. Riba generates various evils like moral evils, social evils and
economic evils. Many people argue that even if the interest is prohibited in Islam, interest
free banking system is not practicable in the modern world. Today banks play a very vital
role in economic development of a country. A brief analysis of economic systems i.e.
Capitalism, Communism and Islamic system, is made. Features, principles and objectives of
Islamic economic system have also been explained. The focus of our research and model has
been on the possible impact of riba free economy on savings, investments, growth rate and its
pattern, allocative efficiency and the overall stability of the Islamic economic system. This
research recommends that a riba free economy in the world will have positive effects on the
economy.
Introduction:
Islamic Banking is a system of banking that operates in accordance with the rules of Shari’ah
(Islamic Law), known as Fiqh al-Mu’aamalaat (Islamic Commercial Law). Islamic Banking
is based on Islamic Commercial Law, which was founded over 1400 years ago. Therefore
Islamic Banking was existent at that time.Modern Islamic Banking grew due to the desire of
Muslims to fashion all aspects of their life in accordance with principles of their faith.
The first modern experiment with Islamic Banking was undertaken in Mit Ghamr, Egypt by
Dr Ahmad Elnaggar. The pioneering effort, led by Ahmad Elnaggar, took the form of a
savings bank based on profit-sharing in 1963. In 1971, the Mit Ghamr Savings project
became part of Nasser Social Bank.
In 1975, the Islamic Development Bank was initiated with the mission of providing funding
to projects in the OIC member countries. The first modern commercial Islamic Bank, Dubai
Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic
and replicated conventional banking functions in a Shari’ah compliant manner. Within a ten
year period 1975-1985, 27 more Islamic Banks were established. Also by 1985, many
conventional banks offered Islamic Banking products or opened Islamic window banks. By
the year 2000 there were more than 200 Islamic Financial Institutions worldwide During the
past four decades, however, Islamic banking has grown rapidly in terms of size and the
number of players. Islamic banking is currently practiced in more than 50 countries
worldwide.1 In Iran, Pakistan, and Sudan, only Islamic banking is allowed. In other

2. countries, such as Bangladesh, Egypt, Indonesia, Jordan andMalaysia, Islamic banking co-
exists with conventional banking. Islamic banking, moreover, is notlimited to Islamic
countries. In August 2004, the Islamic Bank of Britain became the first bank licensed by a
non-Muslim country to engage in Islamic banking. Islamic banking is banking based on
Islamic law (Shariah). It follows the Shariah, called fiqh muamalat (Islamic rules on
transactions). The rules and practices of fiqh muamalat came from the Quran and the Sunnah,
and other secondary sources of Islamic law such as opinions collectively agreed among
Shariah scholars (ijma’),analogy (qiyas) and personal reasoning (ijtihad).
The first time interest bearing loans were widely used in the Muslim world, especially in the
Middle East, was during the Ottoman Empire's rule in the 15th century. Mehmet Ebusuud
Efendi, the senior Islamic cleric of the Ottoman Empire, issued a fatwa (ruling) allowing the
charging of interest and considering it halal (permissible) as long as it was below 10% . Even
though it was clear in The Holy Quran that interest was strictly prohibited, almost no one
could challenge the senior Islamic cleric's ruling because challenging him would mean
challenging the Ottoman Empire's rule. Bankers back then were mostly Jews and Christians;
many of them were Greeks. Islamic countries nationalized their banks and established
development banks to help governments fund the public sector and expand different
industries. Back then, banks in Muslim countries were not addressing the need of devout
Muslim customers, who held on to their money and avoided putting it in banks because of
their interest-based system, This led to the underbanking of a big and important segment of
the population whose savings were not used efficiently.some shariah scholars and bankers to
work together and try to establish a new banking system that is more efficient.
Definition of Islamic Finance?
•The Islamic Finance is a system of financial activities consistent with “Islamic Banking
Regulations (IBR)”.
Islamic Banking Values, Ethics & Principles of Islamic Economics
General Islamic commercial ethics:
*Ensure honesty & fair trade, abstain from hoarding, cheating & illegal activities.
*Do not lie, or make false promises to sell your goods.
*Do not deceive others.
*Abstain from goods and services that have a negative influence on society.
*Maintain justice in all dealings, and treat all equally.
*Disclose the faults of goods been sold.
*Avoid hoarding and creating a monopoly.
*Avoid the sale of Haraam (prohibited) items
Important principles of Islamic Economics
1.Freedom to contract.
2.Freedom from price control.
3.Entitlement to equal, adequate and accurate information.
4.Freedom from Riba.
5.Freedom from Gharar.
6.Avoid hoarding.
7.Avoid selling forbidden (Haraam) items

3. What is Islamic banking?
Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh
muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat came
from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions
collectively agreed among Shariah scholars (ijma’), analogy (qiyas) and personal reasoning
(ijtihad).
The Islamic Banking Conditions.
•Complete segregation of funds.
•The existence of a sharia supervisory board.
•Management committed to Islamic Financial Concepts (IFC).
•Safeguarding investors’ funds from negligence, trespass, and fraud.
•Compliance with the Standards of the Accounting and Auditing Organization for Islamic
Financial Institutions.
Shariah concepts in Islamic banking
The common Shariah concepts are as follows:
Wadiah (Safekeeping)
Wadiah means custody or safekeeping. In a Wadiah arrangement, you will deposit cash or
other assets in a bank for safekeeping. The bank guarantees the safety of the items kept by it.

5. Murabahah (Cost plus)
As in a Murabahah transaction involves the sale of goods at a price which
includes a profit margin agreed by both parties. However, in Murabahah, the seller
must let the buyer know the actual cost for the asset and the profit margin at the
time of the sale agreement.
Musyarakah (Joint venture)
In the context of business and trade, Musyarakah refers to a partnership or a joint
business venture to make profit. Profits made will be shared by the partners based
onan agreed ratio which may not be in the same proportion as the amount of
investment made by the partners. However, losses incurred will be shared based on
the ratio of funds invested by each partner.
Ijarah Thumma Bai’ (Hire purchase)
Ijarah Thumma Bai’ is normally used in financing consumer goods especially motor
vehicles. There are two separate contracts involved: Ijarah contract (leasing/renting)
and Bai’ contract (purchase). The contracts are made one after the other as shown
in the diagram.

6. Wakalah (Agency)
This is a contract whereby a person (principal) asks another party to act on his behalf (as his
agent) for a specific task. The person who takes on the task is an agent who will be paid a fee
for his services.
Example
A customer asks a bank to pay someone under certain terms. The bank is
therefore the agent for carrying out the financial transaction and the bank
will be paid a fee for its services.
Qard (Interest-free loan)
Under this arrangement, a loan is given for a fixed period on a goodwill basis and the
borrower is only required to repay the amount borrowed. However, the borrower
may, if he so wishes, pay an extra amount (without promising it) as a way to thank the lender.
Example
A lender who lent RM5,000 to a borrower on Qard will expect the
borrower to return exactly RM5,000 to him at a later date.
Hibah (Gift)
This refers to a payment made willingly in return for a benefit received.
Example
In savings operated under Wadiah, banks will normally pay their Wadiah
depositors hibah although the accountholders only intend to put their
savings in the banks for safekeeping.

7. Why India needs Islamic banking?
Islamic banking seems an alien concept in India’s conventional banking world. Despite its
impressive growth in other parts of world such as the Middle East, South East Asia (which
primarily include Malaysia and Indonesia) and Europe, it is yet to find favor with the Indian
authorities.
Islamic banking presence in world economy During the past decade, the assets of Islamic
banks have grown at an average rate of 15% (1). Many developed countries of the world,
such as Germany, UK, USA, France and Singapore have embraced Islamic Banking to take
the tally of countries where this form of banking is already operational as an alternative
system(2) to over 75. The robust performance of the Islamic Banking and Finance sector
during therecent financial downturn has attracted the attention of several other nations.
Islamic banking growth in a nutshell.
• Islamic banking is operational in more than 75 countries in the world(1).
• During the past decade, the assets of Islamic Banks have grown at an average rate of
15%(2).
• According to estimates, global Islamic Banking assets have touched $ 1.1 trillion in 2012
as against $826 bn in 2010(5).
• The market share of Islamic Banking by assets is 14% in the Middle East and North African
region and 25% in the Gulf(5).
• For 2006-10(5), the Compound Annual Growth Rate of the top 20 Islamic Banks in the Gulf
is 20% as compared to 9% for the region’s conventional banks.
• In the Gulf region alone, Islamic Banking assets are expected to grow to $990 bn in 2015
from $ 416 bn in 2010(5).
Conclusion Growth of Islamic finance depends on two important factors:
domestic demand and India’s role in the globalization of the financial sector. By not
introducing Islamic finance, India is losing the opportunity of garnering capital from a large
section of the Muslim population as well as from Islamic nations in the Middle East and
elsewhere. Islamic finance is an idea whose time has come. It is time the Indian Government
recognized this significant opportunity.
Is Islamic banking meant for Muslims only?
No. Islamic banking is for all individuals regardless of their religious beliefs.
What are the differences between Islamic and conventional banking?
The most important difference between Islamic and conventional banking is that Islamic
banking must follow the Shariah. Islamic banking must also avoid activities such as riba’ or
gharar (excessive uncertainty). For example, instead of charging interest on financing given
out, Islamic banks give financing based on musyarakah and will share any profit and loss.
How do Islamic banks and IBS banks reward their depositors since payment of interest is not
allowed?
In Shariah, there are many ways to share profit or returns between a bank and its
customers. For example, in a deposit product, profits from a deposit arrangement will be
shared between a bank and its depositors based on an agreed ratio and paid as
dividends.Shariah also allows a bank to give hibah (gift) to its depositors as it deems fit.
Where can I get Islamic banking products and services?
Islamic banking products and services are offered at any bank that carries the Islamic banking
logo shown below.

8. Where can I make a complaint if I am not satisfied with the services provided by an Islamic
bank or an IBS bank?
You should contact your bank if you have any complaints. All Islamic banks and IBS banks
have set up a Complaint Unit to deal with customers’ complaints.
Glossary
Gharar - An unknown fact or condition. An element which must be avoided in Islamic
banking dealings as excessive gharar may make the contract null and void.
Riba’ - The amount paid or received over and above the principal in a loan contract.
Shariah - The Islamic law which came from various sources – the Quran, the Hadith, the
Sunnah,ijma’ (views collectively agreed by Muslim scholars), qiyas (analogy) and ijtihad
(personal reasoning) of the Muslim jurists.
References
1.www.bankinginfo.com.my/system/media/downloadables/islamic_banking
2.www.infosys.com/finacle/solutions/thought-papers/Documents/why-India-needs-islamic-
banking
3.islamic banking wikipedia
4.Dr.M Basha H.O.D of finance and accounts department(islamiah college)vaniyambadi.