Supervised by:
Contents
Preface
Chapter 1:
17
Chapter 2:
31
Chapter 3:
Chapter 4:
49
Chapter 5:
61
Chapter 6:
Islamic Contract
83
Chapter 7:
92
Chapter 8:
Sale
97
Chapter 9:
Khiyars
101
105
127
135
145
161
167
175
vi
179
197
207
212
223
235
239
247
255
267
279
287
303
315
323
Chapter 32: Shariah Audit and Compliance for Islamic Financial 327
Institutions
Chapter 33: Examining the Prudence of Islamic Banks: A Risk
Management Perspective
337
PREFACE
In the last few years, the world has witnessed a significiant growth in
Islamic Banking and Finance and has recognized the importance of
Islamic Banking system as one of the most viable and sustainable banking
system. Especially after the last financial crises of the world, where most
of the big conventional banks failed to sustain their existence, the steady
performance of Islamic Financial Institutions has shown the strength
and significance of this system to the masses.
Few years back, Islamic Banks could only facilitate limited financial
requirements of the customers but now solution is provided for almost
all financing needs of the customers. This encouraging growth of Islamic
Banking system now requires robust research in the field of Product
Development and other related fields like Risk Management etc, to
capitalize this rising demand and emerge as a system of first choice for
the whole world.
In order to rise to the level of becoming the financial system of first
choice, Islamic Bank now need to focus on developing products and
services that are unique in their nature rather than matching products
and services of Conventional Banking system. This will give Islamic
Financial system the real strength that is inherent in the modes of Islamic
Banking and Finance. All this cannot be achieved without seeking and
aligning knowledge about the Islamic Finance with the rapidly changing
financial requirements of the society.
A need was felt that literature about Islamic Financial concepts should
be available in such a language that is easily comprehendible by the
masses and that literature must not only be a theoretical literature but
also takes into account the recent developments in the financial world.
The arbic text of all the Quranic Ayahs and Hadiths that were
mentioned in the previous edition has been added in this book.
2)
3)
4)
The text of the old chapters have been updated and revised
wherever it was required.
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7)
Preface
Part 2: Concept of Riba, Gharar and Qimar and Other Prohibited Activities
By the end of this part, you should be able to:
Define Riba in the light sof Quran and Hadith (Covered in Chapter 4)
Explain the various types of Riba (Covered in Chapter 5)
Discuss the point of view of Islamic banking on interest (Covered
in Chapter 4 and 5)
Differentiate between the concepts of Gharar and Qimar and
explain why these are prohibited under Islamic Shariah (Covered
in Chapter 30)
Describe the other activities that are termed as prohibited under
Islamic finance (Covered in Chapter 30)
Part 3: Islamic Law of Contract
By the end of this part, you should be able to:
Define the Islamic law of contract (Covered in Chapter 6)
Explain the basic elements of an Islamic contract (Covered in
Chapter 6)
Explain the scenarios under which an Islamic contract is termed
void or valid (Covered in Chapter 6)
Analyze the scenarios under which an Islamic contract is termed
void or valid (Covered in Chapter 6)
Define Uqood Muawadha and explain its importance in Islamic
Law of Contract (Covered in Chapter6)
Define Uqood Ghair Muawadha and explain its importance in
Islamic Law of Contract (Covered in Chapter 6)
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Mudarabah
Explain the concept and characteristics of Mudarabah
(Covered in Chapter 11)
Describe the handeling of profit/loss distribution under
Mudarabah (Covered in Chpater11)
Difference between Mudarabah and Musharakah
(Covered in Chapter 11)
Explain the conditions of Mudarabah termination
(Covered in Chapter 11)
Describe how Mudarabah for banking system
(Covered in Chapter 11)
Discuss the scope of Mudarabah for banking system
(Covered in Chapter 11)
Identify the problems and risks for Islamic banks providing
Mudarabah based financing (Covered in Chapter 11)
Analyze the scenarios for possible problems and risks that may
exist for Islamic banks providing Mudarabah based financing
(Covered in Chapter 11)
Salam
Explain the concept, background and purpose of Salam
(Covered in Chapter 14)
List the rules for a valid Salam contract (Covered in Chapter 14)
Differentiate between Salam and Murabaha contract/ agreement
(Covered in Chapter 14)
Describe the underlying conditions for taking of Salam goods
(Covered in Chapter 14)
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CHAPTER 1
Haraam - All those actions that are prohibited and declared unlawful
by Shariah and their impressibility is derived from either the Holy
Quran or Hadiths Mutawatir or Ijma. Sunnah e Mutawaatirah as
the strongest narrations of the Holy Prophet
in terms of their
narrators, i.e. the narrators are in such a large number that it is
impossible for all of them to have agreed on a false issue.
3)
4)
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6)
Nawafil (All those actions that are made optional and reward able
on Muslims by Shariah).
Sources of Shariah
The rules and regulations laid down by Islamic Shariah are derived from
the following sources:
1) Quran
2) Hadiths
3) Ijma
4) Qiyas
5) Ijtihad
Quran
Quran is the word of Allah Taala revealed over Prophet Muhammad
. The Holy Quran is the primary source of knowledge and Shariah
rulings for Muslims. The injunctions mentioned in the Holy Quran are
mandatory to follow and anyone who denies express injunctions of
the Holy Quran is regarded as Non-Muslim. Most of the injunctions
mentioned in the Holy Quran are prescriptive in nature such as Order
for offering Salah but information about method and other descriptive
information about offering Salah may be obtained from other sources
of Shariah such as Sunnah:
And obey Allah and His Messenger, if you are believers. (8:1)
Sunnah
Sunnah is defined as a word spoken or act done or rectified by the Holy
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Prophet
.The Sunnah provides detailed information about the code
of conduct for every spheres of life and is also considered as Divine
Revelation. The details about Sunnah are preserved in the form of
Ahadiths. On the basis of clear injunctions of Holy Quran, Sunnah can
thus be regarded as the second source of Islamic Shariah after Quran
e.g. Rules for Riba al Fadal has been extracted from Sunnah.
Ijma
Ijma means consensus of scholars of Ummah on a particular
issue. It is one of the most authoritative sources of Islamic Shariah
since it encompasses the unanimous opinion of the scholars of
a particular era over the interpretation of Quran and Hadiths on
some particular issue. The status of Ijma as an authoritative
source of Shariah has also been ascertained from the following
saying of Holy Prophet :
"My Ummah shall never be combined on an error."
Qiyas
Qiyas means to apply a recognized rule of Shariah expressly
mentioned in the Holy Quran and Sunnah, to a similar thing or
situation by way of analogy.
Ijtihad
Ijtihad litrary means Utmost Effort and technically it means to
exert utmost effort to discover the ruling of Shariah regarding a
particular situation. The practice of Ijtihad has been duly endorsed
by the Prophet Muhammad in following narration:
When the Holy Prophet
intended to send his
companion Mu'adh
, to Yemen as a ruler and
as a judge, He asked him: How will you adjudicate
a matter when it will come to you?
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And be aware that your possessions and your children are but
a trial." ( 8:28).
The Holy Quran has enunciated this basic truth very precisely in
a brief verse:
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Well, tell Me about that (seed) which you sow:[63] Is it you who
grow it, or are We the One who grows?[64] (56:63-64)
And in another verse:
"Did they not see that We have created for them cattle, among
things made (directly) by Our hands, and then they become their
owners? (36:71)
All these verses throw ample light on the fundamental point that
"wealth", no matter what its form, is in principle "the property
of Allah", and it is He who has bestowed upon man the right to
exploit it. So Allah has the right to demand that man should
subordinate his exploitation of this wealth to the commandments
of Allah.
Thus, man has the "right of property" over the things he exploits,
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