The document provides an overview of Islamic banking concepts and practices. It defines Islamic banking as a system based on Islamic law that follows the rules of Fiqh Muamalat. The key practices discussed include Murabahah, Mudarabah, Musharakah, Ijarah, Istisna, and Qard which are based on trade, equity participation and service. The document also contrasts Islamic and conventional banking, highlighting that Islamic banking prohibits interest and involves profit and loss sharing.

2. 2
Islamic Banking Concepts
&
Practices
Abdul Sattar Laghari
Resident Shariah Board Member

3. Agenda
• Introduction
• Concept Developing
• History of Islamic Banking in HMB
• Practices
• Riba

4. Introduction To The Topic
Islamic banking

5. Introduction
Islamic finance, despite its name,
is not a religious product. It is
however a growing series of
financial products developed to
meet the requirements of people
Shariah way.

6. Conventional finance includes elements
(interest, gambling and uncertainty)
which are prohibited under Shariah law.
Developments in Islamic finance have
arisen to allow Muslims to invest savings
and raise finance in a way which does not
compromise their religious or ethical
beliefs.
Introduction

7. Islamic Finance
• Islamic finance is a term that reflects
financial business that is not
contradictory to the principles of
Shariah.

8. Traditional Finance
Traditional finance, particularly
conventional banking business, relies
on taking deposits from, and providing
loans to, the public.
Therefore, the banker-customer
relationship is always a debtor-creditor
relationship.

9. What Is Islamic Banking
• Islamic banking is a system 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).

10. 10
BANKING AND ISLAM
• Islam is a complete Code of Life
• Quran Majeed says, “Today I have completed for
you your Deen and I have done my blessing over
you in full” (Al Baqarah)
• Allah Taa'la says,” I have chosen for you Islam as
a Complete Code of Life”. (Al Baqarah)
Thus Islamic finance shall be discussed in Islam.

11. Islamic Banking is Trade
Trade is Allowed in Islam
• Allah Taa’la Says: O you who have believed, when
the call is made to the prayer on Friday, hasten to
the remembrance of Allah and leave off your trading.
This is better for only if you know.
• Then, when the Prayer is over, disperse in the land
and seek Allah’s bounty, and Allah much: maybe you
achieve success.(Surah Al Juma’ah)
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12. Banking Concepts In Islam
• Holy Prophet (SAW) himself, also known as Al Ameen, was
entrusted by the people of Makkah with safekeeping their
money.
• Holy Prophet (SAW) travelled for business offered by Hazrat
Khadeejah (RA) on Mudarabah.
• Hazrat Abbass (RA) used to finance the traders on
Modarabah basis.
• Hazrat Zubair bin Al Awwam, choosed to only receive money
as loan.

13. Frequently Asked Questions
• Q: How do Islamic banks reward their
depositors since payment of interest is not
allowed?
• A: 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.

14. History of Islamic Banking
• During the last three decades an immense research and efforts
have been made to confine the system for Pakistani
environment.
• In the present decade the Islamic banking system has gained a
good position in Pakistan & in the world around with target of
$ 3 tr. In 2018.
• HMB Islamic Started its operations in 2002 and now it is with
network of 28 stand alone branches + 217 Desks with deposit
size of Rs. 45 billion as of December 31, 2016.
• We eye 30 stand alone branches in 2017 Insha Allah.
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15. The salient features of Islamic finance
• Islamic finance, especially Islamic banking, enjoys
certain peculiar features that are not found in
conventional banking. These features are as follows:
1. Interest free
Islamic banking is interest-free, meaning that all banking
business and activities must prima facie be free from any
element of interest.
• A good example of the avoidance of interest in kind is
the prohibition of any advertisement of gifts for
prospective current account holders when these
accounts are based on a Qard (loan) contract.

16. The salient features of Islamic finance
2.The Need for Underlying Assets
• Islamic finance requires that all banking business based
on sale or lease must have an underlying asset. As the
Islamic bank either acts as a seller or a service or
usufruct vendor, or Lessor.
• The asset or service is of paramount importance. The
absence of an underlying asset will render the contract
void (FASID).
• This is in contrast to conventional banking where the
asset element is not a necessary requirement rather
than a security.
• Islamic finance is asset base.
• Traditional Finance is asset backed.

17. The salient features of Islamic finance
3. The Avoidance of Uncertainty or Gambling
All transactions made by Islamic financial institutions (IFIs)
must be free from elements of uncertainty (Gharar) and
gambling (Maisir). This is because Gharar might lead to
disputes caused by an unjustified term in the contract arising
from misrepresentation and fraud. Gambling is seen as an
action that always enriches one party at the expense of the
other; a zero-sum-game.

18. The salient features of Islamic finance
4. Profit and Loss Sharing
• Profit and loss sharing is possible in some
Islamic banking activities. The bank will share
the profit made with its customers either on a
proportionate basis or on an agreed profit
sharing ratio.
• In the case of a loss, the loss will be borne by
the bank under a Mudarabah contract or by both
parties proportionately in the case of a
Musharakah contract.
• This concept is in direct contrast to fixed-
income-based products as in traditional banking.

19. The Salient Features Of Islamic Finance
5. Rights And Liabilities Of Banks And Customers
• An Islamic bank is neither a lender nor a
borrower, but is instead a bona-fide trader
licensed under banking law.
• This aspect of the transaction has not been
given proper attention until now, although certain
amendments to various legal systems have
been made.

20. The Salient Features Of Islamic Finance
6. Shariah Compliance
• The central focus of Islamic finance is Shariah
compliance. To ensure compliance a distinctive feature
of Islamic finance is the establishment of a Shariah
advisory or supervisory board to advise IFIs, Islamic
insurance companies, Islamic funds and any other
providers which offer Islamic financial products.
• An institution cannot claim to be doing Islamic financial
business until and unless it sets up a Shariah board or
committee consisting of qualified scholars who are of
high reputation and who possess the necessary skills.

21. The Salient Features Of Islamic Finance
7. Unlawful Goods Or Services
• An important feature is that Islamic finance must not be
involved in any activities pertaining to unlawful goods and
services.
• These prohibited goods and services include:
• Non-halal foods such as pork,
• Non-slaughtered animals
• Animals which were not slaughtered according to Islamic
principles
• Intoxicating drinks
• Entertainment and pornography
• Tobacco-related products
• Non-involvement is not only limited to buying or selling but
also includes all chains of production and distribution, such
as the packaging, transportation, warehousing and
marketing of these prohibited goods and services.

22. The Salient Features Of Islamic Finance
• 7. Overriding Principles Of Islamic Law
• Islamic finance essentially refers to Shariah Compliant
financial activities. In addition to observing the above-
mentioned features, Islamic financial products and
services must not contain any principles, terms and
conditions which are contradictory to established legal
maxims or legal principles.
• These legal maxims are the overriding principles and
essential parameters of Islamic law, widely accepted by
Muslim jurists.
• Example: The capital in equity-based financing or
investment cannot be guaranteed by the manager or
other partner. But equity investors must bear the risk of
loss of capital.

23. PROHIBITIONOF
INTEREST(RIBA)
NOFINANCINGOF
ACTIVITIESPROHIBITED
BYISLAM
RISKSHARING
SANCTITYOF
CONTRACTS
MATERIALITY,
ECONOMICPURPOSE
FAIRNESS/NO
EXPLOITATION
ISLAMIC FINANCIAL SYSTEM

24. Islamic Bank vs. Conventional Bank
24
Islamic Bank Conventional Bank
1-The relation between Islamic
bank & Customer is one of
participation in risks and
rewards.
2- There is no previously fixed
return on the funds invested
with the bank, and same is the
case when banks provide funds.
1-The relationship over here
b/w bank and customer is that
of debtors and creditors.
2-There is pre-agreed fixed
return on the funds either
provided by the bank or
invested by the customer.

25. Islamic Bank vs. Conventional Bank
25
Islamic Bank Conventional Bank
3-An Islamic bank keeps
capital funds and investors’
funds segregated, in order not
mix up the profit earned on its
own funds (capital & current
up) balances.
4-Islamic banks do not provide
finance by offering cash loans,
but through Musharakah etc.
3- The conventional banks pool
together all the funds.
4- The conventional banks
offer provide finance totally
by offering cash loans.

26. Islamic Bank vs. Conventional Bank
26
Islamic Bank Conventional Bank
5-Islamic banking is
primarily equity-
based.
6-The Islamic system
is value-oriented.
5- The conventional
system is as a whole
interest-based.
6-This system is
value-neutral.

27. Conventional Banking
Asset Side Products
Conventional Banking
Liability Side Products
27
Bank is
the lender
Client is the
borrower
Bank is the
borrower
Client is
the lender

28. Islamic Banking
Assets Side Products
Islamic Banking
Liability Side Products
28
Musawama
h
Murabahah
Salam
Istisna’a
Musharaka
h
Modarabah
Ijarah
Equity/Participato
ry Based
Modarabah
Musharakah
Sale / Trade
Base
Participatory
Base
Service
Base
Wakalah

29. Islamic Financial Transaction Practices

30. Bai Mujjal

31. Mudarabah

32. Mudarabah

36. Bai Mujjal

37. Murabahah

39. Musawamah

40. Bai salam

42. Istisna
Istisna’ is a sale transaction where
commodity
is transacted before it comes into existence.
Definition
It is an order to producer to manufacture a
specific commodity for the purchaser.

43. • Conditions of Istisna
• (1)the subject of Istisna is always a thing
which needs manufacturing
• (2)Manufacturer use his own material
• (3)Quality and Quantity should be agreed in
absolute term
• (4)purchase price should be fixed with mutual
consent

44. Hibah
Hibah usually arises in practice when Islamic
banks voluntarily pay their customers a 'gift' on
savings account balances, representing a portion
of the profit made by using those savings
account balances in other activities.

45. Ijarah

48. Financial Ijarah
2

50. Ijarah-wal-iqtina
• A contract under which an Islamic bank
provides equipment, building, or other assets
to the client against an agreed rental together
with a unilateral undertaking by the bank or
the client that at the end of the lease period,
the ownership in the asset would be
transferred to the lessee.

56. Qard ul Hassan

57. Sukuk

59. Takaful

60. Sources Of Shariah
● All the Shariah Rulings regarding Islamic
finance & every aspect in human life, are
derived and understood from the four
sources.
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61. •SOURCES OF SHARIAH
• QURAN MAJEED
• SUNNAH
• IJMA,A
• QIYAS

63. DEFINITION OF RIBA
● Earning any kind of profit on any debt falls under the category of
RIBA as defined in the Hadith
● Any stipulated profit on any debt is Riba
63
DEFINITION OF RIBA
DEFINITION OF RIBA

65. AHILIYYAH
L FADAL
L NASIAH
Classification of Riba

66. FORMS OF RIBA
• Conditional or customary increase in loan (Qarz) or debt
(Dayn)[Payables/Receivables];
• Banking interest is Riba.
• Financial penalty on delay payment of loans and debts.
• Pre agreed discount on early payment of loans and debts.
• Exchange of debt with excess in cash or debt or kind.
• Interest on debts (dues in a credit transaction).
• Rescheduling of debt with increase in rate of return.
• Sale of debt is not allowed in view of majority however some
scholars allow if it is exchanged at par.
• Time based valuation of money is not acceptable.

67. QIMAR
Pure Games of Chance
● Qimar means gambling. Technically, it is an
arrangement in which possession of a property is
contingent upon the happening of an uncertain event.
By implication it applies to a situation in which there is
a loss for one party and a gain for the other without
specifying which party will lose and which will gain.
● Gambling and wagering contracts fall in ambit of Qimar
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68. GHARAR ‫غرر‬
Gharar is an Arabic word which means 'risk',
'uncertainty', and hazard.
• Technical meaning of Gharar is: “any bargain in which
the result of it is hidden”.
This includes uncertainty, cheating, ambiguity and non
transparency.
• Gharar is 'excessive uncertainty' about subject matter
or its quantity / quality or price or maturity of the
contracts.
• 'Excessive uncertainty' means uncertainty that
generally leads to disputes between parties.

69. ‫ا‬ً‫کر‬ُ‫ش‬