Islamic finance, rooted in Shari'ah law, is defined as a modern banking system that relies on risk-sharing and prohibits practices such as usury (riba) and deception (gharar). It aims to mobilize Muslim savings for economic development, focusing on ethical investment and trade that adheres to Islamic principles. Key concepts include financial instruments like musharakah (joint venture) and murabaha (sale contract), designed to align with Islamic values of fairness and morality.

1. Islamic
Finance
ASIF JAMAL
Visiting Lecturer
University of Sindh
@ Mirpurkhas Campus.

2. The Principles of Islamic Finance
Islamic Banking (IB)
Definition:
Islamic banking can be defined as: a form of
modern banking based on Islamic legal concepts
using risk- sharing as its main method excluding
financing based on fixed pre- determined return.

3. The purpose of the Islamic
financial system:
The purpose of the Islamic financial system
is, as with conventional finance, to mobilize
global resources to promote and sustain
global and regional development.

4. Islamic Finance taps the vast pool of savings
held by Muslims, and puts these savings to
productive use for the benefit of Islamic and
other societies.

5. Can Economy and Religion mix
 The practice of religion is between the person and his God in
forms of pray or meditations, and in daily life such as marriage,
funerary service, public service and charities
 Economic systems are manmade system to regulate and
reform trade:
 Throw history economic systems have taken a form of trying and
testing of what to produce? How to produce? Who gets what is
produced?
 Efficacy, growth, liberty and equality are objectives to achieve in
good economic systems
 In capitalist economic system production carried out to maximize
profit, while in socialist systems labour and jobs is the goal
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6. Islam
 The five pillars of Islam:
1. Shahadat (profession of faith)
2. Salat (prayer)
3. Zakat (giving of alms)
4. Sawm Ramadan (fasting during the month of Ramadan)
5. Hajj (pilgrimage to Mecca for those who are able
physically and financially)
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7. Shari'ah law
Justice, fairness and morality
 Are values which underpin both the entire Islamic way of
life.
 Shariah gives guidance as to what is, and what is not,
acceptable behaviour in all areas of a Muslim’s life
 Shari'ah is developed by Shari'ah scholars (Known as Schools
of thoughts, Safaai, Hanafi, Hanbali, Malki, Sheaat ,etc. ) over
1000 years ago (over 400 years after Islam)
 The recent Scholars known as Shari'ah advisors or Shari’ah
board has studied Fiqh Al-Muaamlat able to explain Shari'ah
law for recent business dealings.
 The principal base of the Shari’ah Law is:
the permissibility, the prohibition is exceptional
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8. What is Islamic Finance?
 Islamic Banks Started in 1974 in Egypt with the first Islamic
Bank “Nasser social bank” followed by Islamic development
bank in 1975, now there are over 600 Islamic Banks globally
 Islamic Banks started as interest free bank to help the small
entrepreneurs to start business, the costs of managing the bank
charged the stack holder as expanses
 The framework of an Islamic financial system is based on
elements of Shari'ah(Islamic Law) which prohibit Riba (Usury)
and Gharar (Deception) and permit Risk sharing
 The fundamental concept is that the money has no inherent
value and should be used as a measure of worth
 Shari’ah compliant investment are structured on the exchange
of ownership in tangible assets or services with money acting
as the payment mechanism to effect the transfer of ownership
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9. Shari’ah Law
 Recent Islamic scholars who from time to time re-
examine the Shari'ah principals have structured new
financial instruments
 Those instruments must comply with principals of The
of Shari'ah law
 Ethics of the Shari’ah Law originate from:
 The Qur'an
 The Sunnah,
 Ijmaa - consensus among the jurists,
 Qiyyas – analogy
 Ijtihad - reasoning
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10. Prohibitio
n In
Islamic
financial
system
Riba
(Usury
) Short
Sale
(Future or
goods you
do not
own)
Monopoly
Unfair &
Unjust
Contracts
Unlawful
&
unethical
trade
Money
Trading
(money is
payment
mechanism)
Gamblin
g
Gharar
(Deception,
Speculatio
n)
10 Asif Jamal

11. Prohibitions
In Islamic financial system
 Prohibition of Unfairness & Unjust
 Prohibition of Riba (usury)
 Prohibition of Gharar (Deception & Speculation)
 Prohibition of Gambling
 Prohibition of Monopolies
 Prohibition of Short Sales
 Prohibition in money trading (Money is a medium not a
commodity)
 Prohibition of Dealing in Unlawful or Unethical Goods or
Services
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12. Shari'ah
Compliant
Products
Products that
exchangeabl
e for money)
Products
are not
prohibited
in Islam
Products
are not
traded
under
duress
Products
that are
free from
Riba
Products
are traded
in the open
market
Products that
are not
monopolized
by one party

13.  Islam has given an immense importance to trade
 The nobility of this profession is obvious from the
fact that it was the chosen profession of prophet
Muhammad (PBUH).

14. Musharakah
 Definition:
 A Musharakah is a joint venture where by all
partners (BANK /CLIENT) participate in providing
the financial resources for the business. the Client
to start and/or
 operate a business or industry, or undertake any
other type of business venture.
 The bank and the Client agree to manage the
business enterprise according to
 the terms of the agreement.

15. Basic Principles Of
Musharakah:
 Financing through Musharakah means participation in the business.
 An investor/financier must share the loss incurred by the
business to
the extent of his financing.
 The partners are at liberty to determine, with mutual consent, the
Ratio of profit allocated to each one of them, which may differ from
the ratio of investment.
 The loss suffered by each partner must be exactly in the
proportion of
his investment.

16. The usage of Musharakah in financing business :
Project
financing
Financing of a
single
transaction
Securitization of
Musharakah
Financing of
Working
Capital
Musharaka

17. Murabaha
 Definition:
 Murabaha is a sale contract between the
Bank as seller of goods and Client as purchaser, based
on the disclosure of initial price to client. Bank purchases
Goods on spot at the request of the Client, and then sells
same to him on credit at a mutually agreed marked-up
price.

18. Murabaha Financing Process
Customer Bank
1
Supplier
Price
Goods
Promise
to
Purchase
Sale
Contract
(Musawama
)
2
3
4
Customer Bank
Goods
Sale Contract
(Murabaha)
Installments
5
6
7
(Buyer) (Seller)
(Buyer) (Seller)
Price

19. Assignment
 Read out the banking system of different
banks which are presently working on Islamic
Account