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Islamic banking


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Islamic banking

  1. 1. INTRODUCTION OF ISLAMIC BANKINGWhat is Islam?According to Dr.ZakirNaik Islam come from Arabic word salam which means“PEACE” and give your will to ALLAH. In short peace acquired by submittingyour will to almighty ALLAH.According to Qur’an The word Muslim means aperson who submits his will to almighty Allah (Surah Ale Imran Ch: 3: V 19 andSurah Ali Imran Ch:3 V 85In other place in Qur’an (Surah Ali Imran Ch:3: V 64) there is a concept thatislam is a new religion in the world which came into existing 1431 years back andHazrat Muhammad ‫ ملسو هيلع هللا ىلص‬was the founder of this religion. HazratMuhammad ‫ ملسو هيلع هللا ىلص‬is not the founder of this religion. He is the Lastand final messenger of almighty Allah.(Ref. Surah Al Ahzaab Ch. 33 : V40)and Hazrat Muhammad ‫ ملسو هيلع هللا ىلص‬is not only for arab or Muslim butfor all the world human being. Hazrat Muhammad ‫ ملسو هيلع هللا ىلص‬is sent tothe whole of Humanity (Surah Al Ambiya Ch:21: V 107)All the revoluation before the Qur’an for specific group or for particular place, butQur’an is for the whole world and whole universe and comes all human kind(Surah Ibrahim Ch: 14 :V.1), (Surah Ibrahim Ch: 14 :V.52), (Surah AlBaqarahCh: 2 :V.185), and (Surah Al ZumarCh: 39 :V.41)According to Hadith Hazrat Muhammad ‫ ملسو هيلع هللا ىلص‬says that all theprevious messenger only for there peoples and there nations but I have been sendas a last and final messenger to whole of humanity(SahihBukhari Vol.1 Bk. Of salaah Ch.56 Hadith No. 429)(Ref. 1 ) the islam belief is most important. Muslim have concept that the whole universeis created and controlled by One, the only One and that is Allah. He created thewhole universe and create the human the amazing creation and the most powerfulcreation. Allah created man and appointed him as His vicegerent khalifa andnumber 2 on the earth to fulfil certain objectives rules and regulation and obeyingHis commands. These rules and commands are not narrow or effect the human life
  2. 2. negatively, but if human adopt these rules and regulation he become a happiestperson in the universe. Islam teaches us to adopt the middle way to go. Islam hasprovided a balanced approach to spend life. Allah not restricted us to do the work,but He saying to do the work within the limit and wit in prescribe format. Thisformat Allah give us through the last Messenger Muhammad ‫ملسو هيلع هللا ىلص‬. So we must follow the rules and regulation of Allah according to last MessengerHazrat Muhammad ‫ .ملسو هيلع هللا ىلص‬So one thing is clear that all th e humanactivities must always be subject to these commands and must work within thelimits prescribed by Qur’an and Allah through last Messenger Hazrat Muhammad‫( . ص لى اهلل ع ل يه و س لن‬Ref. 2 page 10) of the Quran:What is Quran? And Where did the Quran come from? The Quran claims Allah isits source of the Quran is a copy of an identical book is written in Heaven that wasgiven Gabriel to give to Mohammad .‫ ص لى اهلل ع ل يه و س لن‬in intervals. It is a truebook; Every word of this book is amazing truth, after 1431 years no one can findeven a single word wrong. According to Qur’an and sunnah Riba is one of the biggest gonah. Every person/muslim know the truth, that riba is the biggest gonah when the discussion start inthe quran and sunnah regarding riba the wording of quran and sunnah become veryhard. This type of business is un lawful according to quran and sunnah.For umat e muslima to follow the quran and sunnah and start the business or runthe business become to difficult. The credit goes to capitalistic economy.Ecpitalizameconomy covered and capture the whole world. For muslim have nooption to start the business with out any riba or interest.Allah give the special reward to mufti taqi usmani and Allama Shams ulhaqafghaniand others great scolars who started such a great work againt the capitalizam andsocializem. Allama shumsulhaqafghani started the work and then carry on afterhim mufti taqi usmani thanks to him. He did such a great work and still he is doingand accepting the challeengies from rest of the world.BACKGROUND OF ISLAMIC BANKING OR FINANCEIslamic finance is a community banking, a social banking and ethical banking. The main aimof is an ethical, and equal financial environment in the market. In Islamic banking have fivebasic principles.
  3. 3. 1 Freedom from Riba 2 Risk-and-Return Sharing 3 Shari’a Approved Activities 4 Sanctity of Contract 5 Avoidance of Gharar 1 Freedom from RibaRiba comes from Arabic word “Growth” or “Increase” in simple words money onmoney. In the Holy book Quran expressly forbids riba.Allah saying in Quran “Oyou who believe! Fear Allah and give up what remains of your demand for usury,if you are indeed believers.”(P-8) (Book A Primer on Islamic Finance).Riba is the greatest gunah in all the greatest gunah. But for riba Allah use very hardwords, which are not use for other greatest gunah. This wording not used forZenah, for Alcohal, and not for other greatest gunah. Before 80’s different scolarswrote that bank interest is not come under the riba condition. Which is Hiramaccording to quran and sunnah.According to them “RIBA” actually comes the transaction between two poorpeople. But the heave transaction between rich persons and heavy business are notcomes under this law.Hazrat mufti taqi usmani did a great job an against those scholars. So after longdiscussion the result come that for business every type of interest either small orbig is HARAM.ISLAMICNAZRIYATICONCELIslamic nazriyaticoncel become in 1977 when Zia ulhaq was the presendent ofPakistan In that council have greatest scolars like Hazratmulanasyedmohammadyusufbenori and after him Hazrat molana shamsulhaqafghaniturangzai comes and made a report to remove the ribe from banks.atthat time the following main scolors included in the committee. Chairman HazratAllama Shams Ul Haq Afghani Turangzai, Hazrat Mufti Syah UD Din Kakakheland Hazrat Mufti Mohammad HussainNaeemi.Contract of InvestmentMusharakah (Partnership)Musharakah comes from the Arabic word “sharaka” which means to start combineany business the example of the Musharakah is joint venture between two or more
  4. 4. parties when they start any business. (P-157)(Islamic Banking and Finance byTarek El Diwany) MUSHARIKAH Shirkat-ul- Shirkat-ul-Milk Aqd Shirkat- Shirks-ul- ulWujooh Shirkat-ul- aqd (Partners A’mal hip in (Partnersh (Partnershi Optional Compulsory good will) ip in p in Trade) Services)Shirkah means “Sharing” and in the terminology of Islamic fiqh. It has divided into two kinds. 1 Shirkat-ulMulkIt is means ownership of two or more persons in a particular party and business.The main example of the shirkat when two or more than two persons purchaseproperty, and pay combine so we can called to that property is “ Shorkat-ul-Milk”. 2 Shirkat-ulAqdThe second type of shirkah which means “A partnership effected by a mutualcontract” It is also called “Jjoint commercial enterprise”Further we divided the shirkat-ul-Aqd in to three part. a. Sharkat-ul-AmwalIn this type all the partners invest the money into the business.
  5. 5. b. Sharkat-ul-A’malThis is regarding to services the partners do the work and service for the customerand get the fee and then distribute it in the agreed ratio according to agreement. c. Shirkat-ul-WujoohThe third kind of shirkat-ul-wujooh. In this type of business the partners purchasesome product like fruit, or other commodity on less price and then sell it in thehigher price on the spot. And the profit distribute between the partner in agreedratio.(P-31to 33) (An Introduction to Islamic finance by Mufti Muhammad TaqiUsmani)Musharakah is a mode of financing which can be securitized easily. If there is a bigproject and need to manage it with money. So without Musharakah we cannot startany business, because it is so difficult to manage it and no one can arrange the bigportion of money. For this purpose the management issue the MusharakahCertificate which shows the share of that person in the business. And after startingthe business/ project these certificate use as negotiable instrument and can bebought and sold in the secondary. Market. It is different from advancing a loan. (P-39)(An Introduction to Islamic finance by Mufti Muhammad Taqi Usmani).Distribution of ProfitThe most important thing in any business is profit. In the partnership, distributionof profit is very important. Before starting the business all the partners should haveto agree on the distribution of profit. Before starting the business if they are notagree on distribution of profit, so this contract will not valid in Shari’ah.Ratio of ProfitIn the agreement, it is very necessary to mansion the share of each partner clearly.In theShari’ah we have four Imam (Four school of though). They have differentview point. According to Imam Malik and Imam Shafi, the partner get there profitaccording to there investment in the business.According to Imam Ahmed , if if there are two partners one invested 70% of total capital and secondinvested 30% of total capital, but if both the partners are agree and write it in the agreement thatthe partner who invested 30% will take 60% of the total profit and the second one who invested 70%will take 40%. For this issue both the partner have to agree.According to Imam abu Hanifah says that the ratio of profit may differ from the ratio of investmentin normal conditions. However if a partner invest money and start the business. If the 30% onepartner working for organization, so he will be get more than the other partner who is not working
  6. 6. for the business. In simple words if one partner invest money and take active part in the businessand the second partner invest money and become sleeping partner, both cannot equal. The partnerwho is taking active part will get more than the other. But the loss will be charge according to theirinvestment.(P-37 an introduction to Islamic finance by taqi usmani).Sharing of LossFor sharing of loss all the Muslim jurists are agree and have one opinion that is each partner willsuffer the loss according to his share in capital.That why it is necessary for every partner when they start business they must agree on profit andloss sharing. Otherwise this partnership will not start.So in short according to Imam Shafi’i that the profit and loss ratio must conform to the ratio of hisinvestment, but according to two other imams, Imam Ahmed and Imam Abu Nanifah The ratio ofprofit may differ from the ratio of investment according to the agreement but the loss must bedistribute according to their capital ratio which is most suitable to the modern world.(P-37 anintroduction to Islamic finance by taqi usmani).Nature of CapitalCapital must be in liquid form. But we have different view of different scholar.According to Imam Malik and Hanbal in the Musharakah capital in the form ofgood in not prohibited, but the best thing is to evaluate it according to the latestmarket price.According to Imam Abu Hanifah and Ahmad capital in the shape of good are notaccepted. Their view have more Taqwa, according to them goods are not the same,sometime its look like same but actually it not the same the example is Machinery,Furniture etc. it look like same but some time they are not same inside. And it isalso difficult to calculate when the time of repay the capital to the partner.Sometime partner get loss and other profit and sometime one get profit and otherget loss. The main example is building and land.The price of the land increasingday by day so the partner bring that building and land will get profit at the time offinishing.Type of CommoditiesThere are two type of commodities one is Dhawat-ulamthal which , if destroyedcan be easily convert or replace similar commodities the examples are wheat, riceetc.and the second is Dhawat-ul-Qeemah which is not convert easily the mainexample animal etc. According to Imam Malik the first type of commodities can bepart of capital. But is should be on the basis of current market price.
  7. 7. Imam Malik view is more powerful and very to the modern world, when we see itin the eye of Taqwa the Imam abu Hanifah view is more powerful.ManagementEvery partner have to right to take part in the business, but for the success ofbusiness if one or some of them who have skill can take part or the partners mayagree to follow the method at the time of contract.TerminationMusharakah can be terminated easily at any time if any one partner died or want toleave, become mad etc. the Musharakah will be terminated.Comparison of Diminishing Musharakah and Conventional Banking Particulars Islamic Banking Conventional BankingCommencement Profit Rate is payable after Without position of theof Agreement possession of the house by the property contract started client. from first day.Termination of 1. If the bank disobeys any 1. If the client doesContract term of the agreement, the not pay the interest client can terminate the as well as principle contract. And the bank can amount the bank also terminate the contract can terminate the if the client does not pay contract. profit on time. 2. In case of the death 2. In case of the death the contract will be contract will be finished finished and and renewable by his renewable by his successors. successors. 3. When client purchase all 3. If the clients pay the share of the bank whole principal + contract will be terminated interest due at that time, the contract will be finished.Risk of Loss In the Diminishing Musharaka the the bank participates in client will face both profit and profit only. loss.Sale Transfer In Musharaka bank and client In this banking system purchase the property combine bank has mortgage deed and according to debt equity ratio. of client’s property and It depend some on the bank loan divided in the equal
  8. 8. sometime 80:20 and sometime instalments with fixed 60:40 ratio, after that bank rate of interest by the distribute it in to share and thebank. Client pays interest client purchase it. as well as principal. After completion the instalments bank give the papers to client. Total Loss If the property destroyed the In this case the client will client will not pay rent. pay until the insurance claim are received. Early Settlement If the customer purchase all the In conventional ban king shares in the property just opposite. Comparison with other Islamic and Conventional Banking as wellNo Terms and Standard Meezan ALBaraka Mybank Standard MCB conditions Chartered Bank Islamic Chartered (Islamic Bank (Traditional) Banking)1 Rate “Profit” 14% to 15% 12% 12% 14.45% 11% Interest for 15% (Salaried) clients2 Rate “Profit” 14% to 17% 12% 12% 14.95% 11% Interest for 15% Businessmen3 Age of borrower 25 to 65 25 to 65 25 to 60 25 to 65 25 to 65 years 25 to (Salaried) years years years years 65 years4 Age of borrower 25 to 65 25 to 65 25 to 60 25 to 65 25 to 65 years 25 to (Businessmen) years years years years 65 years5 Income (min) Rs. 20000 Rs. Rs. 20000 Rs. Rs.20000 Rs. 25000 20000 (Salaried) 18000 Rs.50000 I chose the bank for my coursework Habib Bank limited (HBL-Islamic Banking). I collect the primary data from the bank.
  9. 9. IntroductionCurrently over 1.5 billion Muslims in the world today who live and workpredominantly in muslim countries. The Islamic banking segment has been in theprocess of evolving over the last three decades. HBL like to provide Islamicbanking product and services to their customers who want to follow theshariahethod of banking. HBL have twenty two Islamic banking branches and Twohundred and thirty Islamic windows.HBL’S Shariah CommitteeMuhammad yahyaAsim (Shariah Advisor). He works over 20 years in the field ofIslamic studies, he has specialization in an Islamic Fiqh and Fatwa.Dr.EjazahmedSamdani (member) spend over 15 years. He is a distinguishedscholar and has PHD from the university of Karachi. His PHD thesis (2005)covered the topic of “Ghararits nature and financial implications under theumbrella of shariah”Is Islamic banking is true Islamic?This is a very long discussion but I short I has two main duties. First take thedeposit and second give the loan. Conventional bank do these two type of works.If the bank take or give the interest on that money is called Riba (sood).Islamic banking balance sheet have both side (Assets and liabilities) are Reba free(interest free).Conventional bank invest the money in any type of business but Islamic bankinginvest the money only shariah complaint businesses (Cannot invest in Alcoholmanufacturer or Casino etc).In shariah transaction have no speculation, that why Islamic banking cannot workwith insurance company.HBL is also conventional bank is it possible to deal the fund in Islamicmethod?HBL IB has I separate entity in the HBL. The funds of IB is not mixing withconventional banking funds. And the usage of funds in the order of shariahcomplaint. This is also check by sharia advisor as well as state bank.