Introduction to Islamic economics and finance system
Evolution of the Islamic Financial
System in the International
RESEARCH & PRESENTED
YOUSUF IBNUL HASAN
PROGRAM CONSULTANT & FACULTY
ISLAMIC BANKING & APPLIED FINANCE
IQRA UNIVERSITY PAKISTAN
Monetary World Disregarded The Islamic Finance In
The Beginning Of Its Birth.
In 20th Century Islamic Finance Is Applied As
Parallel System With New Dimensions Scope,
Benefits With A Unique Classification To The
Riba Free Financial System
Movement for Islamic finance was accused in the
beginning of its birth in 1956 by Economists,
Bankers Jurists & Monetary Pundits, as a program
of Islamic Fundamentalists, that is initiated to
unite a funding source for international terrorism &
linked the first Social Bank to a movement which
was gaining momentum against the then Egyptian
government during the period of 1958-65 which was
also the growing period of Islamic Financial System.
ISLAMIC FINANCIAL SYSTEM
Importance , Approach, Scope & Benefits to Socio
Today rationality of Islamic Finance, its concept, power & values
are changing banking & finance as the world’s fastest developing
It is sad to observe that international press still projecting Islam
as an orthodox religion where Islam brings out most modern
lifestyle and Monetary system for the world that have effective
solution for all economic crises.
In reality, Muslims are devoted people and peace lovers, following
a very dynamic system that lead to socio economic growth instead
of economic growth.
Myths, Mysteries, Magnificent,
Develop a Question
What is Islamic Economics & Finance ?
Simply this is a System that develop
Man, Money & Commodity
Into Participation & Cooperation
For all socio economic activities and to
gain the resources to satisfy the needs
Islamic Economics is the theory.
Islamic finance is the application
Both are applied in accordance to Islamic
Jurisprudence and in the guidance of
Holy Quran. Whereas Shariah is the
practice on the guidance of Holy Quran
Prophet Muhammad (PBUH)
Islamic Economic System
Islamic Economics is a system that identify Available
Resources blessed by Almighty Allah to the Mankind.
How these resources are distributed, utilized & consumed
by man keeping the importance of Social Justice.
Seeking best of these resources through Participation and
Cooperation by applying knowledge, experience, ability and
efforts through the power of pen and book, granted by
In recognition and confirmation of the men’s status on earth
As “Unique among all Creations” & appointing man as
“Custodian” to all the resources, that Almighty Allah owns
solely, exclusively and absolute.
Islamic Economics is a complete System for
Political, Social, Traditional, Commercial,
Financial, Business & Economic affairs for
Islamic & Non Islamic communities without
Discrimination, with Freedom of Choice, Act
and Speech but within defined limits.
ORIGIN OF ECONOMICS CONCEPT
The creation of Adam & the creation of Eve, from the ribs of Adam is
the allocation of Genders to two human bodies.
The role of these two genders as specified
Men to be Responsible & Women to be Obligatory to
Cooperate & Participate in achieving maximum benefits from the
Blessings of Allah.
Both genders were empowered with Senses
Need, Want & Desire that lead to
Act, Acquire & Acceptance
for their basic needs
Employing best of their Efforts & Abilities
Human mind having power to think, act, achieve and
integrated with these senses. is the supremacy to convert
planet “The Earth” into “The World”
World was given a unified system of lifestyle
Socio Economics System.
Socio Economics System develop community for People
People develop geographical boundaries around their
community & organize themselves into Nation *
Those Nations accepted Allah as
Almighty & Absolute
Holy Messengers as Guide
Books of Revelation
as Manuals of System “DEEN”.
Thus These Nations Declaring themselves as
Definition Of Islamic Economics
“Any activity that has a commercial,
economical & financial purpose within priorities
of social benefit to mankind is classified as
System that has foundation in this classification
leads to socio- economic development rather
just economic development.”
Islamic economics is an independent system having a separate
identity & effective economic policies to benefits humanity with Social
Justice by covering individual interests at Private, Public, Material as
Sacred and identify human lifestyle for Earning, Expenditure,
Business, Relationship, Right and Duties Responsibility, in Legal
Islamic economics emphasis in the Unity, Faith Discipline, Moral &
Ethical Values, Equality, Love, Transparencies, Cooperation & Sharing
in all the Economics, Business, Social and Commercial affairs for and
in the best interest of humanity.
4 Principles Islamic Economic System
wealth belongs to Almighty Allah.
is the trustee of the wealth.
of wealth is prohibited.
must be in circulation.
Islamic Economic Believes
Does not accept theories for Scarcity of Resources and
declare availability of unlimited resources attach to
extreme of Human Efforts.
Do not accept Inflation and link resources as Seasonal
Products to be consume within the season of its
production for maximum benefits.
It identify holding of wealth & resources as a causes to
the origin of crimes in the society.
It declare money as Medium of Exchange in Volume *
against the Value of commodity and services.
Three Factors of Production.
These factors execute all economic activities
keeping the socio economics growth as priority
in exploring, generating and producing all the
resources to satisfy all human needs, wants
and desires and develop affordability level of
Man, Money & Commodity develop the exchange system that put
money to act as bridge between two system classified as
Lending and Borrowing
Financing and Participation
Pricing money with the Rate applied on Principle with time value
declaring Value of money as commodity
Participation of Man’s ability to use the Money to multiply,
divide, subtract and add by exercising the money for specific
purpose with socio economics and commercial reasons. *
Riba in Factors of Production
Riba Al Nassia: Money increase in principle volume by
using the compounding method without any economic
Riba Al Fadai:
Commodity trading & exchange of
without valuing the commodity in exchange against volume
of Money as in Barter Trade or using unfair means of trade.
Riba Al Garrar: Human acts for self benefits
Islamic Shariah identify Riba
in all Economic Affairs
Any earning, income, profit or benefits being earned, taken or received
through wrong means, bad intentions, shady practices or wicked
participation. Such earning, income, profit or benefits are classified as
Such receivables and acts are not only treated as is immoral, unethical,
unjustified commercial, economical, financial, political, social, cultural
& traditional practice and activity to gain benefit at individual,
collective or institutional level but furthermore threat to socio
economic life of society.
The above receivables and acts leads to crimes, develop cruelty &
exploitation, create self- importance & monopoly, discrimination,
inflation & convert pluralistic community into singular society.
Impact of Riba on Financial
Riba is as a combination of evil and sins.
Riba is bad practice to earn & gain.
Riba bring instability in the community life.
Riba is the source of inflation.
Riba create classes in the society.
Riba create injustice in seeking the rights.
Riba is non transparent economic activity.
Riba is the most hated practice in Islam
Riba is the social crime
Riba develop scarcity of resources against
Interest is a Category Of Riba
Fix rate of principle amount charged in excess without
risk, efforts, activity, in guaranteed success with fixed
period making determining with forced return in Interest.
This return, income, earning on fixed term & fixed
percentage on principal amount is a price of money
whereas money is an medium of exchanges in volume
against value of goods and services
Principle X Rat X Time / 100 = Interest
Financing outcome Profit
Profit is a success result on financing achieve by
using Principle Finance, deducting from Proceeds
of Sales & Services, realizing Gross Profit, deducted
by Cost of Transaction, declaring Net Profit which
realize “as free from all liabilities of the transaction”
Experience, Knowledge, Purpose, Will & Sprit are
business ethics that act in realizing profit on the
APPLICATION OF PROFIT
Principle- Sales=Gross Profit -Cost= Net Profit
/ Ratio Of Participation
At Ratio of Investment 10: 20: 30: 40
Less Sales Proceeds
DEFINITION OF FINANCING
Finance is an intermediary source of money in
volume in exchange of the values for ability,
commodity, equity & property in production,
manufacturing & trading.
Financing makes the volume of money to support
for specific purpose within specific period, in
between person to person, person to institution or
institution with group or institution on an
understanding to share the results of transaction in
profit and loss.
Financing develops the ownership, support the
entrepreneurship, line-up the procurement, production,
distribution, consumption and the utilization in
participation & cooperation between skill & capital on the
basis of profit & loss at maturity.
Financing is use of money by one who owns it and other
who has an ability to use it for a common purpose to make
profit by participation and cooperation.
Financing is the act of money without the concept of
liability, collateral or the guarantee. Its origin is investment
and its end is ownership.
Difference Of Financing & Lending
is liability and not the participation.
is Equity and not the Liability
is made and Loan is given
is secured and financing is support.
is an investment and loan is facility.
cannot be financing until it is agreed on Profit and
o loss sharing
Financing cannot be a loan till return is guaranteed.
is given at a price of money on application of Rate
has to be secure by external factor of collateral
cannot be made until the user is able to use it
leads to inflation and liquidation
is securitized within its own system
is given against the confirmation of guarantee.
outcome to be profit, shared in an agreed Ratio.
ends at ownership
increase liability, cost and decrease the net worth
increase the capital base as well net-worth
is an act of money which is classified as the opposite to
Term "Islamic finance” appeared in 1960’s from Northern
African Region, Egypt by the establishment of First Social
Bank, to clean Money as EQUITY, Man in ABILITY,
Commodity for NEEDS from Riba through by using the
Participation & Cooperation for achieving maximum
resources by employing the Human Knowledge, Efforts,
Experiences & Reputation for all commercial and noncommercial purposes in socio economic activities, project or
transactions in satisfying the human needs.
Early Islamic era rejected lending of money as it involve
pricing of money by applying RATE on Principle Amount by
confirming results GUARANTEED which is SHIRK
Financing is taken as Equity for all Socio Economics
Ventures through Input Method
Issuance, Subscription & Contribution of Monetary Resources to
Structure Capital for Output methods through
Modaraba ………….Ability Financing
Morabaha……… Commodity Financing
Ijarah………Property (Asset) Financing
Musharka. Equity/ Venture Financing
work ethic, wealth distribution, Social &
Defines role of the state, responsibilities & duties of the
Established absolute prohibition of payment or receipt of
fixed & guaranteed returns.
Discourages speculative behavior
Emphasizes sanctity of contracts
Enforce rules for handling economic, social, political, and
cultural characteristic of Islamic societies
Risk Indicator & Perimeters for Financing
Application of 12-P for pre-financing activities
who is financing to whom?
for which financing is work out?
for which financing is required?
for which finances to stay as financing?
that develop through financing?
Process to be use for financing?
Price volume of finance require?
Place locations where finance shall be utilize?
Participation, relation & responsibilities
Pact terms & condition between participators?
Professionalism repute, ability, experience, knowledge
Perfectness at all levels of methods and operations ?
Islamic Finance Growth In Six
In Mid of 19th Century Northern African Region saw the
Islamic Financial System up-and-coming parallel against
the running Conventional System in the monetary world
Egypt is the pioneer of Islamic Finance and so far Egypt
has the highest volume of contribution in the development
of Islamic Finance System which is now recognized by the
21st Century’s bankers, Jurists Economists, Bankers and all
those who are link to Money Business.
Egypt Influence on financial system
Finance from Egypt penetrated in the other regional
countries and number of personalities enter as researchers,
scholars, Advocator, professors, jurists and economist in the
Islamic Financial Movement .
Egypt now has 14 Islamic banking licenses and several
Islamic finance windows, with approximately 120 Billion
Egyptian Pounds of assets in Egypt's Islamic banking
industry out of Total assets of the entire banking sector are
about 1.3 Trillion Pounds, according to Egypt Central Bank.
In 1977 Pakistan Military Dictator General Zia-ul-Haq
on the advice of Mr. Moazzam Ali one of the pioneering
source took the initiative in converting Pakistan economic
system into ZERO Rate of Interest.
The then President of Pakistan ask Counsel of Islamic
Ideology to draft recommendations which drafted a
remarkable report on Islam and Finance in contribution of
over 400 leading Pakistan and international reputed
personalities as contributors to the assignment for almost
Birth of Modaraba in 19th Century
The report presented at Finance Committed of OIC which
was declared as one of the most authentic documents
covering Islamic Economics, Finance, Banking, Takaful and
In 1984 in guidance of report Pakistan moved Modaraba
Ordinance & declared Modaraba Financing as NBFI (Non
Banking Financial Institution) in Pakistan with the vision
to develop SME role in economy.
SME penetrated in the international monetary market as
solution for economic crises due to Riba Free & Transparent
way for Ability support through Capital.
Egyptian Scholar Dr. Ahmed Al Naggar
goes to Egyptian Economist and Scholar Dr. Ahmed Al Naggar
& his associates for their tiring efforts to develop infrastructure for the
In 1963 Dr. Ahmed Al Naggar, made the pioneering efforts in
establishing a saving bank which was based on profit-and loss sharing
at Egyptian town of Mit Ghamr.
1972, this Mit Ghamr Savings project became part of Nasr Social
Bank which expanded to establishment of 9 banks in Egypt till 1976.
Naggar organize the first International conference on Islamic
Banking and Islamic Economic in 1978 to start the program of
awareness for leading personalities of Islamic countries which agreed
to form a platform Human Resource Development on the Islamic
Institute of Islamic Banking & Islamic
Economics (IIIB&E) was established in Cairo, Egypt in the mid of
seventy in 19th Century for Human Resource Development on Islamic
Economics & Finance.
bring the Islamic Finance Houses under single umbrella,
International Association of Islamic Banking (IAIB) with
Headquarter in Heliopolis Cairo was formed and initial Membership was
taken by Egypt, Pakistan, Sudan, Turkey, United Kingdom, UAE, Saudi
Arabia, Malaysia, Iran, Morocco, Algeria, Senegal, Niger and then with
passage of time Kuwait, Bahrain, Qatar, Oman and Indonesia enter into
what mention above was the achievement of Egyptian Scholar Dr.
Ahmed Al Naggar & his team
Islamic Finance Institutions
In 1974 on the request of IAIB, the Organization of Islamic
Countries (OIC) OIC took the IAIB proposal to shape it in
Islamic Development Bank (IDB) to be operated on Shariah
principles for intergovernmental activities in providing funds
for development projects running into member countries with
Headquarter in Saudi Arabia
Dubai Islamic Bank established in 1974 was the second Big
achievement after IDB.
The beginning of 80’s saw a tremendous growth in Islamic
Banking and Finance when two groups entered in Islamic*
Finance namely DMI Group and Al-Baraka Group.
North African Region
In the mid of 80’s in the 19th Century Algeria entered into the
Islamic Finance with the introduction of one Banks affiliated with
Egypt and Tunisia and 2nd bank affiliate to an Islamic Bank of
With the two bank in thirds Northern African country entered
into Islamic Financial System after Egypt and Tunisia.
By the end of 1999 Islamic Finance reach to almost all the
five continents and their member countries.
Conventional bank started introducing Islamic Banking &
Finance window at their institutions.
After a secular rule, Tunisia's government aims to
develop Islamic banking and central bank plans to Allow
the banks to operate "Islamic windows" to segregate
money from conventional operations.
Tunisia adopted Islamic Finance in late 70’s by
establishing 2 offshore Banking & 1 Financial House
In 2010 Bank Zitouna establish in banking community
for domestic market with active financing in real estate
projects under Musharka, equipments on Ijarah and
Trade Finance Morabaha for commodity & stock.
In 1990 IDB, Central Bank of Morocco and Bank AlMaghrib hosted a conference on Islamic finance which was
the initiative to bring change in the banking sector.
In 2007 Morocco began introducing Islamic banking
products in through Moroccan Central Bank by allowing
certain types of Islamic financial products in response to
growing consumer demand.
To mobilize Islamic financial products a draft bill with was
place before parliament for approval. It will add a chapter to
the Morocco's Banking Law, providing a set of regulations
on all Islamic finance products.
Moroccan government finally detailed how it intends to
develop Islamic finance in the country and enter into project
under Islamic mode of financing.
Kenitra Power Plant Project a 300 MW worth $180.05
was structured as an Installment Sale (Morabaha).
Water Supply Expansion project in Taza Province
through an Ijarah Istisnah facility worth US$37.83
Libyan government under the previous regimen have
always been to keep the financial matter isolated from
the international monetary markets.
In the last part of previous regime there have been moves
to open up the largely state owned banking system but
political turmoil did not allowed to do so.
Recently Gumhouria Bank had declared its intention
to establish an Islamic banking subsidiary which will add
Libya as member in Islamic Financial Market .
Trade Financing in Northern Africa
Morocco has been the largest beneficiary of trade finance facilities
from the IDB at ID1.67 billion (US$2.38 billion), followed by Algeria
with ID1.49 billion (US$2.13 billion), and Egypt with ID1.38 billion
In February 2012, Egyptian Financial Services Authority support the
issuance of Sukuk in the country. A legislations has also passed in
support to developed Sukuk market in Egypt which is most likely be
facilitated by the parliament. Other countries in the north such as
Morocco, Libya, Algeria and Tunisia have also slowly but surely
begun to open up the markets to Islamic finance, with draft
legislations and tax exemptions for the issuance of Sukuk on *
agenda, especially following the change in political regimes in Libya
and Tunisia. Nazneen Haleem for Islamic Finance Journal August 2012
Islamic Finance Development
in Global Aspect
International Banks that took initiative in
introducing Islamic Windows Between
80’ & 90’
Standard Chartered Bank
Equity Participation to structure Capital
Base an opportunity to common saver
Islamic finance actively enter into Sukuk issuance
for some of the key projects in Gulf
Department of Civil Aviation, Dubai: $1 Bil
Qatar: $700 mil
Pakistan: $600 mil
Malaysia: $600 mil
Bahrain: $79.5 mil
German State of Saxony-Anhalt: €100 mil
Islamic Development Bank: $400 mil
World Bank: $200 mil
Islamic Finance Conclusion
Islamic finance and conventional finance are quickly
come together in the Gulf region for single purpose.
As conventional investors gain more comfort with
Islamic structures, cost differential between Islamic
products and conventional products have almost
As a result, Islamic products may be more practical
because they appeal to both Islamic and conventional
Issuers, public & private, may consider tapping
the Islamic capital markets as Islamic finance is
asset-based industry and business can fit with
the structures developed in Islamic finance.
High-liquidity of Islamic banks & Islamic
investment funds, issuers who tap this market
may be able to obtain relatively favorable pricing
relative to the conventional market
Almighty Allah is the Creator of this life & makes man,
custodian to all the blessings for humanity.
Man’s determination towards Almighty Allah overcomes all
& guides man to the right path.
It is also impossible for the Muslims to raise the
community in prosperity or the awareness that evilness can
show the way to advancement, going against the
prohibitions of Almighty Allah.
Prime Importance for
Almighty Allah prohibited any object or any
act that is harmful to mankind that creates
instability, bring injustice, become injurious
to human life and considered as
Socio Economic System that
leads to Islamic Finance.