Prohibition of interest in Islam and introduction of Islamic banking

1. Dr. Mufti Wasie Butt
wasiefasih@hotmail.com
linkedin.com/in/dr-mufti-wasie-fasih-butt-83290b51

2. Outline
 Economics
 Capitalism & Socialism Vs Islamic Economic System
 The four basic economic problems
 Basic Concept of islamic economic system
 Riba and Interest
 Difference b/w Conventional & Islamic Banks
 Modes of Islamic Finance
 Partnership-Based Financing
 Musharakah
 Sale-Purchase-Based Financing
 Murabahah
 Rental Based Mode Of Financing
 Ijarah

3. The Need…

4. What is Economics?
 Economics is a branch of Social Science that deals with
production, distribution & consumption of goods and
services

5. Purpose of Economics (in General)
To utilize
limited resources
in a way that
maximum needs of all human beings
and
maximum wants of all human beings
are met so that
prosperity is ensured
in human society

6. Economics in Islamic Perspective
To utilize
adequate resources
in a way that
basic needs of all human beings
and
lawful wants of maximum human beings
are met so that
disorder be reduced
from human society

7. Economics in Islamic Perspective –
Adequate Resources
ُ‫ه‬ُ‫ل‬ِ‫ز‬َ‫ن‬ُ‫ن‬ ‫ا‬َ‫م‬َ‫و‬ ُ‫ه‬ُ‫ن‬ِ‫ائ‬َ‫ز‬َ‫خ‬ َ‫َن‬َ‫ند‬ِ‫ع‬ َّ‫ال‬ِ‫إ‬ ٍ‫ء‬ْ‫ي‬َ‫ش‬ ‫ن‬ِ‫م‬ ‫ن‬ِ‫إ‬َ‫و‬ٍ‫وم‬ُ‫ل‬ْ‫ع‬َّ‫م‬ ٍ‫ر‬َ‫د‬َ‫ق‬ِ‫ب‬ َّ‫ال‬ِ‫إ‬
And there is not a thing but its (sources and) treasures
(inexhaustible) are with Us; but We only send down
thereof in due and ascertainable measures.
(Hijr 15:21)

8. Economics in Islamic Perspective –
Basic Needs of All Human Beings
... َ‫ه‬ُ‫ق‬ْ‫ز‬ِ‫ر‬ ِ‫اّلل‬ ‫ى‬َ‫ل‬َ‫ع‬ َّ‫ال‬ِ‫إ‬ ِ‫ض‬ْ‫َر‬‫أل‬‫ا‬ ِ‫ِف‬ ٍ‫ة‬َّ‫ب‬‫آ‬َ‫د‬ ‫ن‬ِ‫م‬ ‫ا‬َ‫م‬َ‫و‬‫ا‬
And no (moving) living creature is there on earth but its
provision is due from Allah.
(Hud 11:6)

9. Economics in Islamic Perspective –
Lawful Wants of Maximum Human Beings
ْ‫و‬َ‫غ‬َ‫ب‬َ‫ل‬ ِ‫ه‬ِ‫اد‬َ‫ب‬ِ‫ع‬ِ‫ل‬ َ‫ق‬ْ‫ز‬ِ‫الر‬ َُّ‫اّلل‬ َ‫ط‬َ‫س‬َ‫ب‬ ْ‫و‬َ‫ل‬َ‫و‬َ‫ق‬ِ‫ب‬ ُ‫ل‬ِ‫ز‬َ‫ن‬ُ‫ي‬ ْ‫ن‬ِ‫ك‬ََٰ‫ل‬َ‫و‬ ِ‫ض‬ْ‫َر‬ْ‫األ‬ ِ‫ِف‬ ‫ا‬ُ‫ه‬َّ‫ن‬ِ‫إ‬ ۚ ُ‫اء‬َ‫ش‬َ‫ي‬ ‫ا‬َ‫م‬ ٍ‫ر‬َ‫د‬
ٌ‫ري‬ِ‫ص‬َ‫ب‬ ٌ‫ري‬ِ‫ب‬َ‫خ‬ ِ‫ه‬ِ‫اد‬َ‫ب‬ِ‫ع‬ِ‫ب‬
If Allah were to enlarge the provision for His Servants, they
would indeed transgress beyond all bounds through the
earth; but he sends (it) down in due measure as He
pleases. For He is with His Servants Well-acquainted,
Watchful.(Ash-Shura :42:27)

10. Economics in Islamic Perspective –
To reduce apparent disorder
ُ‫وب‬ُ‫ل‬ُ‫ق‬‫ال‬ ُّ‫ن‬ِ‫ئ‬َ‫م‬ْ‫ط‬َ‫ت‬ ِ‫اّلل‬ ِ‫ر‬ْ‫ك‬ِ‫ذ‬ِ‫ب‬ َ‫ال‬َ‫أ‬…
…Without doubt in the remembrance of Allah hearts find
satisfaction
(Ra’d 13:28)
…ً‫ا‬‫نك‬َ‫ض‬ ً‫ة‬َ‫يش‬ِ‫ع‬َ‫م‬ ُ‫ه‬َ‫ل‬ َّ‫ن‬ِ‫إ‬َ‫ف‬ ‫ي‬ِ‫ر‬ْ‫ك‬ِ‫ذ‬ ‫ن‬َ‫ع‬ َ‫ض‬َ‫ر‬ْ‫َع‬‫أ‬ ْ‫ن‬َ‫م‬
He who turns away from remembrance of Allah, verily for
him is a life of hardship…
(Taha 20:124)

11. Capitalism
 Capitalism is an economic system which is based on the of
concept of the private and uncontrolled ownership of
wealth
 Synonyms:
Laisses-faire; free economy; free market system; self-
regulating market; unplanned economy; interest-based
saving system

12. Socialism
 Socialism is an economic system which is based on the
concept of state ownership of wealth
 Synonyms:
Marxism; Leninism; collectivism; state ownership;
planned economy; controlled economy

13. The Four Basic Economic Problems
 Determination of Priorities
 Allocation of Resources
 Distribution of Income
 Development

14. Comparison of Capitalism & Socialism
Capitalism Socialism
1. Determination
of Priorities
2. Allocation of
Resources
• Every individual has
unconditional right to
participate in any
business to maximize
profits
• Concept of Selfish
Interest
• Supply & Demand will
determine the priorities.
• No individual has the
right to participate in
any business
independently.
• Concept of collective
interest.
• State will determine the
priorities as per the
overall planning.
• Market forces will
decide where to
invest resources
• Govt. will decide
where to allocate
resources

15. Comparison of Capitalism & Socialism
Capitalism Socialism
• Land - Rent
• Labor - Wages
• Capital- Interest
• Entrepreneur- Profits
3. Distribution of
Income
• Land – Rent fixed by
Govt.
• Labor – Wages fixed by
Govt.
.
3. Development • Market forces will
decide
• Govt. will decide

16. Flaws of Capitalism
 No bindings/ restrictions while maximizing profits.
 Blindly follows market forces that creates exploitation of labor &
poor people.
 No moral value limitations.
 Monopolies & Cartels are created that exploit the society as a
whole.
 Government & Industrialists join hands for mutual

17. Flaws of Socialism
 The other extreme of not even giving the natural freedom.
 Perfect Planning is assumed by Govt. ?
 Governments are assumed to be angels which can’t commit a
deliberate mistake.
 Cannot work without forceful dictatorship.

18. Islamic Economic System
 Islam accepts the market forces of supply and demand-
َ‫ب‬ ‫ا‬َ‫ن‬ْ‫م‬َ‫س‬َ‫ق‬ ُ‫ن‬َْ‫َن‬ َ‫ك‬ِ‫ب‬َ‫ر‬ َ‫ت‬َْ‫ْح‬َ‫ر‬ َ‫ن‬‫و‬ُ‫م‬ِ‫س‬ْ‫ق‬َ‫ي‬ ْ‫م‬ُ‫َه‬‫أ‬َ‫ي‬َْ‫ٱْل‬ ِ‫ِف‬ ْ‫م‬ُ‫ه‬َ‫ت‬َ‫يش‬ِ‫ع‬َّ‫م‬ ‫م‬ُ‫ه‬َ‫ن‬ْ‫ي‬‫ا‬َ‫ن‬ْ‫ع‬َ‫ف‬َ‫ر‬َ‫و‬ ‫ا‬َ‫ي‬ْ‫ُّن‬‫ٱلد‬ ِ‫ة‬َٰ‫و‬
َ‫ذ‬ِ‫َّخ‬‫ت‬َ‫ي‬ِ‫ل‬ ٍ‫ت‬ََٰ‫ج‬َ‫ر‬َ‫د‬ ٍ‫ض‬ْ‫ع‬َ‫ب‬ َ‫ق‬ْ‫و‬َ‫ف‬ ْ‫م‬ُ‫ه‬َ‫ض‬ْ‫ع‬َ‫ب‬َْ‫ْح‬َ‫ر‬َ‫و‬ ۗ ‫ا‬‫ًّي‬ِ‫ر‬ْ‫خ‬ُ‫س‬ ‫ا‬ً‫ض‬ْ‫ع‬َ‫ب‬ ‫م‬ُ‫ه‬ُ‫ض‬ْ‫ع‬َ‫ب‬‫ا‬َِّ‫ّم‬ ٌ‫ر‬ْ‫ي‬َ‫خ‬ َ‫ك‬ِ‫ب‬َ‫ر‬ ُ‫ت‬
َ‫ن‬‫و‬ُ‫ع‬َ‫م‬َْ‫َي‬
 “Is it they who distribute the Mercy of your Lord? It is We Who
have distributed their livelihood among them in the life of this
world, and have raised some above others in rank that some of
them may harness others to their service. * Your Lord's Mercy is
better than all the treasures that they hoard. *”( al-zukhruf:32)
 In fact Islam gave the concept of Market Forces 1300 years before Keynes
presented the modern model of Economics in 1927.

19. Islamic Economic System- Prohibitions
To protect the real demand and supply
equilibrium
1. Divine Prohibitions:
Islam has prohibited some economic activities that are not allowed
at any time at any place.( Interest, Gambling, Gharar)
2. Govt. Restrictions:
Interference of state to control unjust prices, to impose duties on
import and export of luxury items and to subsidize need based
items for public benefit is allowed on temporary basis
3. Moral Considerations & Restrictions
Maximum benefit in the life for hereafter. ( residential flats for
poor vs. cinema)

20. Riba,
its Prohibition

21. Liquid/Currency
 Same characteristics
 No intrinsic utility
 Only a medium of Exchange
 No different qualities
 Same units have same value
Conclusion
 Can only be exchanged with same units
 Any excess in case of exchange of currency
or loan is for nothing
 Can not be treated as a Commodity [i.e.,
can not be sold out]
 Profit on exchange of
liquidity is Haram
Asset /Commodity
 Various Characteristics
 Intrinsic utility
 Various purposes & uses
 Different qualities
 Same items have diff value
Conclusion
 Can be sold or exchanged at different
units
 Any excess in case of exchange or sale is
for its utility or quality
 Can also be treated as a Currency [i,e.,
item of exchange like gold & wheat]
 Profit of asset-based
transaction is Halal
Differences b/w Commodity & Currency

22. Riba- A Shariah Term
 The word “Riba” means excess, increase or addition.
 In Shariah, it is an agreed excess compensation
without due consideration.
 “Every loan that draws any benefit is Riba”. (Hadith)

23. Riba – Prohibition in the Holy Quran
ِ‫اط‬َ‫لب‬ِ‫َب‬ ِ‫َّاس‬‫ن‬‫ال‬ َ‫ال‬َ‫و‬ْ‫َم‬‫أ‬ ْ‫م‬ِ‫ه‬ِ‫ل‬ْ‫ك‬َ‫أ‬َ‫و‬ ُ‫ه‬ْ‫ن‬َ‫ع‬ ْ‫ا‬‫و‬ُ‫ه‬ُ‫ن‬ ْ‫د‬َ‫ق‬َ‫و‬ َ‫َب‬ِ‫الر‬ ُ‫م‬ِ‫ه‬ِ‫ذ‬ْ‫خ‬َ‫أ‬َ‫و‬َ‫ذ‬َ‫ع‬ ْ‫م‬ُ‫ه‬ْ‫ن‬ِ‫م‬ ََ‫ن‬ِ‫ر‬ِِ‫ا‬ََ‫ل‬ِ‫ل‬ ََْ‫د‬ََْ‫ع‬َ‫أ‬َ‫و‬ ِ‫ل‬‫ماا‬ِ‫َل‬‫أ‬ ً ‫َب‬‫ا‬ًً
“That they [Jews] took riba, though they were forbidden and that they devoured men’s
substance wrongfully – We have prepared for those among men who reject faith a
grievous punishment.” (Quran 4:161)
َّ‫ب‬َ‫خ‬َََ‫ن‬ ‫ي‬ِ‫ذ‬َّ‫ل‬‫ا‬ ُ‫وم‬ُ‫ق‬َ‫ن‬ ‫ا‬َ‫ا‬َ‫ك‬َّ‫ال‬ِ‫إ‬ َ‫ن‬‫و‬ُ‫وم‬ُ‫ق‬َ‫ن‬ َ‫ال‬ َ‫َب‬ِ‫الر‬ َ‫ن‬‫و‬ُ‫ل‬ُ‫ك‬َْ‫َي‬ ََ‫ن‬ِ‫ذ‬َّ‫ل‬‫ا‬َّ‫َن‬ِ‫ِب‬ َ‫ك‬ِ‫ل‬َ‫ذ‬ ِ‫س‬َ‫امل‬ ََِ‫م‬ ُ‫ن‬‫ا‬َ‫ط‬ْ‫م‬َّ‫الش‬ ُ‫ه‬ُ‫ط‬ُ‫ل‬‫ا‬َ‫ق‬ ْ‫م‬ُ‫ه‬ُ‫ع‬ْ‫م‬َ‫الب‬ ‫ا‬ََّ‫َّن‬ِ‫إ‬ ْ‫ا‬‫و‬
ِ‫ع‬ْ‫و‬َ‫م‬ ُ‫اءه‬َ‫ج‬ ََ‫ا‬َِ َ‫َب‬ِ‫الر‬ َ‫م‬َّ‫ر‬َ‫ح‬َ‫و‬ َ‫ع‬ْ‫م‬َ‫الب‬ ُ‫اّلل‬ َّ‫ل‬َ‫َح‬‫أ‬َ‫و‬ َ‫َب‬ِ‫الر‬ ُ‫ل‬ْ‫ث‬ِ‫م‬َ‫ف‬َ‫ل‬َ‫س‬ ‫ا‬َ‫م‬ ُ‫ه‬َ‫ل‬َِ َ‫ى‬َ‫ه‬ََ‫ان‬َِ ِ‫ه‬ِ‫ب‬َّ‫ر‬ َِ‫م‬ ٌ‫ة‬َ‫ظ‬ُ‫ر‬ْ‫َم‬‫أ‬َ‫و‬ََْ‫م‬َ‫و‬ ِ‫اّلل‬ َ‫َل‬ِ‫إ‬ ُ‫ه‬
َ‫ن‬‫و‬ُ‫د‬ِ‫ال‬َ‫خ‬ ‫ا‬َ‫مه‬ِِ ْ‫م‬ُ‫ه‬ ِ‫ر‬‫َّا‬‫ن‬‫ال‬ ُ‫اب‬َ‫ح‬ْ‫َص‬‫أ‬ َ‫ك‬ِ‫ئ‬َ‫ل‬ْ‫ُو‬‫أ‬َِ َ‫اد‬َ‫ع‬
“Those who charge riba are in the same position as those controlled by the devil's
influence. This is because they claim that riba is the same as trade. However, Allah
permits trade, and prohibits riba. Thus, whoever heeds this commandment from
his Lord, and refrains from riba, he may keep his past earnings, and his judgment
rests with Allah. As for those who persist in riba, they incur Hell, wherein they
abide forever.” (Quran 2:275)

24. Riba-ul-Quran – Increase in Return on Loan
. ‫ن‬ِ‫إ‬ َ‫َب‬ِ‫الر‬ ََِ‫م‬ َ‫ي‬ِ‫ق‬َ‫ب‬ ‫ا‬َ‫م‬ ْ‫ا‬‫و‬ُ‫ر‬َ‫ذ‬َ‫و‬ َ‫اّلل‬ ْ‫ا‬‫و‬ُ‫ق‬َّ‫ات‬ ْ‫ا‬‫و‬ُ‫ن‬َ‫آم‬ ََ‫ن‬ِ‫ذ‬َّ‫ل‬‫ا‬ ‫ا‬َ‫ه‬ُّ‫َن‬‫أ‬ َ‫َي‬َ‫ي‬ِ‫ن‬ِ‫م‬ْ‫ؤ‬ُّ‫م‬ ‫م‬َُ‫ن‬ُ‫ك‬
. ْ‫ب‬ُ‫ت‬ ‫ن‬ِ‫إ‬َ‫و‬ ِ‫ه‬ِ‫ول‬ُ‫س‬َ‫ر‬َ‫و‬ ِ‫اّلل‬ ََِ‫م‬ ٍ‫ب‬ْ‫ر‬َِ‫ِب‬ ْ‫ا‬‫و‬ُ‫ن‬َ‫ذ‬ْ‫أ‬َِ ْ‫ا‬‫و‬ُ‫ل‬َ‫ع‬ْ‫ف‬َ‫ت‬ َّْ‫َّل‬ ‫ن‬ِ‫إ‬َُِ‫ا‬ِ‫ْل‬‫ظ‬َ‫ت‬ َ‫ال‬ ْ‫م‬َُِ‫ال‬َ‫و‬ْ‫َم‬‫أ‬ ُ‫وس‬ُُُ‫ر‬ ْ‫م‬ََُ‫ل‬َِ ْ‫م‬َُُ‫ت‬ َ‫ال‬َ‫و‬ َ‫ن‬‫و‬َ‫ن‬‫و‬ُ‫ا‬َ‫ل‬ْ‫ظ‬
O you who believe, you shall observe Allah and refrain from all kinds of riba,
if you are believers. If you do not, then expect a war from Allah and His
Messenger. (Quran 2:277-279)

25. Riba in Hadith
 Hazrat Jabir Ibn-e-Abdullah has reported the Prophet to have cursed
those:
o who charge interest,
o those who pay it,
o those who write documents pertaining thereto,
o those who keep the accounts of such matters and
o those who sign as witness.
He said that they are all equal in this crime. (Muslim)
 The Prophet (SAW) said,
“The ill affects of interest are of 73 kinds, the last intense of these is
like someone committing adultery with his mother. This has been
reported by Hakim and considered by him authentic based on the
criteria laid down by Imam Bukhari and Imam Muslim.” (Hakim)

26. Does ONLY ISLAM prohibits
Interest?
 Prohibition of interest is not limited to Islam it is
prohibited in Judaism and Christianity
 Exodus 22:25, Leviticus 25:35-36, Deuteronomy
23:20,Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and
Ezakhiel 18:8,13,17 & 22:12
 "Thou shalt not lend upon usury to thy brother;
usury of money, usury of victuals, usury of any
thing that is lent upon usury." [Deuteronomy 23:19]

27. Why riba is prohibited
 Imam Al-Ghazali pointed this out 900 years ago in the
following words:
"Riba (interest), is prohibited because it prevents
people from undertaking real economic activities. This
is because when a person having money is allowed to
earn more money on the basis of interest, either in
spot or in deferred transactions, it becomes easy for
him to earn without bothering himself to take pains in
real economic activities. This leads to hampering the
real interests of the humanity, because the interests of
the humanity cannot be safeguarded without real trade
skills, industry and construction.

28. Why riba is prohibited
 Riba is considered a form of injustice and
exploitation, which contradicts the core Islamic
teachings of social justice.
 It is unjust for lenders to guarantee return with
no involvement in risk.
 Because riba entails taking advantage of a
man’s inferior economic position it breeds
hatred, jealousy and ill-will towards the rich
 This behavior kills the spirit of cooperation in
the society and discourages people from doing
good to each other.

30. Basic Difference between Islamic and
Conventional Modes of Finance
Conventional
Bank Client
money
money + money (interest)

31. Basic Difference between Islamic and
Conventional Modes of Finance
Islamic
Bank ClientGoods &
Services
money

32. - Conventional banking
prices money.
- Islamic banking prices
goods and services which
creates real wealth in the
society leading to economic
well-being.
Conventional Banking Islamic Banking
- Is based on fixed
return on both Sides of
the balance sheet.
- Is based on profit
sharing on deposits side,
and on profit on assets
side.
Distinguishing Features

33. - Does not involve itself
in trade and business
- Actively participates in
trade and production.
Conventional Banking Islamic Banking
- Depositors get a fixed
rate regardless of the
bank’s profitability, thus
insulating them from
the bank’s true
performance.
- Profit is shared with the
depositor, higher the
bank’s profit, higher the
depositors income.
Distinguishing Features

34. PRODUCT TREE
Islamic Banking Modes
Trade Based
Modes
Partnership Based
Modes
Rental Based
Modes
Musharaka
(Joint Venture Profit Sharing )
Mudaraba
( Trustee Profit Sharing)
Murabaha
(Cost Plus Profit Sale)
Musawama
(Bargain sale )
Salam
(Commodity Sale)
Istisna
(Sale on Order)
Ijarah
( Leasing )
Diminishing
Musharaka
( Transfer of Ownership)

36. Musharakah
 Characteristics
 All parties share in the capital
 All parties share profits as well as losses
 Profits are distributed as per agreed ratio
 Loss is borne by the parties as per capital ratio
 Every partner is agent of other

37. MUSHARAKAH
PARTNER A PARTNER BVENTURE
Rs.1000 Rs.1000
PROFIT
Rs. 100
LOSS
Rs.100
Rs. 60 Rs. 40
Rs. 50 Rs. 50
May be in any
agreed ratio
Must be according to
capital ratio

38. MUSHARAKAH Vs INTEREST BASED-FINANCING
No predetermined fixed return
Return is based on actual profit
earned
All partners contribute in risk
and reward
All partners have concerns with
growth of business
Predetermined fixed return
Return has no concern with the
profit earned
Only debtors take the risk in the
business
Only debtors have concern with
growth of business

41. IJARA/LEASING:
•Ijara is an Arabic word used for leasing
•Leasing is an agreement that permits one party (the
lessee) to use an asset or property owned by another
party (the lessor) for an agreed-upon price over a
fixed period of time.
• It is a form of asset finance which has the benefit of
using assets without the requirements of ownership.

42. • Subject of Ijarah should be valuable, fully identified and
quantified.
• The period of Ijarah must be defined with clear boundaries.
•In case of any harm due to misuse/ negligence of Ijarah asset
lessee is liable to compensate lessor
• Any harm or loss affecting Ijarah asset due to circumstances
beyond control of the lessee will be borne by lessor.
• The rent must be determined for whole period of Ijarah at the
time of Ijarah contract
• The lessor cannot increase the rent unilaterally

44. Trade Based Modes of Islamic
Banking

45. • There kinds of Trade-based modes of financing
which are very common.
MURABAHAHA
SALAM
ISTISNAA

47. • Murabahah means selling a commodity
or asset on disclosure of cost and profit.
• So the distinguishing feature of
Murabahah from ordinary sale is that the
seller is bound to discloses the cost and
profit both to the buyer.

49. For Details