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1

Wel Come
Islamic Finance & Economics
By
Dr. Uzair Albazi
Dean
GIFT Business School

GIFT University, Gujranwala


Pakistan

======================================
Ph: (042) 3756 8430 / Mob: 0300-4426440
Email: uzairbazi@hotmail.com / uzair.bazi@gift.edu.pk

ISLAMIC FINANCE & ECONOMICS


COURSE OUTLINE
Topic 01
Introduction & Purpose of the Course
Topic 02
Definition of Interest (Riba), History, Verses of Holy Qur'an, Ahadith
Topic 03
Economics, Commerce, Business & Trade

VS

Topic 04
Major Principles of Islamic Economics, Commerce, Buss & Trade
Topic 05
Verses of Holy Qur'an, Ahadith, Islamic Jurisprudence, Terms &
Conditions
3

Islamic Finance & Economics


Topic 06
Definition of Banking, Origin, Different Types & Stages
Topic 07
Types of Conventional Banks, Banks' Businesses, Role of Banks in
Economy
Topic 09
Daily Functions of Conventional Banks, Types of Bank Accounts
Topic 10
Functions of a Joint Stock Co., Limited Co., Stock Exchange
Topic 11
Views of Scholars, Permissible & Prohibited Functions & Islamic
Solutions
4

Islamic Finance & Economics

Topic 12
Stock Exchange, Stock Market & Shares
Topic 13
Islamic Conditions For Dealing with Stocks, Shares and Cos.
Topic 14
Banks Financing, Types, Sources
Topic 15
State Bank Of Pakistan Circulars

Islamic Finance & Economics

Topic 16
Islamic Modes of Financing, Bai, Types, Islamic Conditions

Topic 17
Musharakah (Basic Rules, Terms & Conditions)

Topic 18
Muzaribah (Basic Rules, Terms & Conditions)

Topic 19
Murabahah, Ijarah, ORIGIN (Basic Rules, Terms & Conditions)

Topic 20
Sallam, Istisnaa (Rules, Conditions)

Islamic Finance & Economics


Topic 21
Possible Role of Islamic Banks in Imports & Exports, Views,
Topic 22
Changes, Effects of Islamic Banking on Global Economy & Their
Solutions
Topic23
Insurance, Solution & Global Scenario of Islamic Banking

Reference Books

Islam Ka Qanoon-e-Tijarat
by Dr. Noor Mohammad Ghaffari
Qasas-ul-Ambiya
Syed Sulaiman Nadvi rt
Al Farooq
Allama Shibli Nomani rt
An Introduction to Islamic Finances
by Mufti Taqi Usmani
International Trade, Investment & Debt Management
Institute of Bankers, SBP
Bab-e-Umar
Encyclopedia of Islam
Bab-e-Moawiyah bin Abu Sufiyan
___do___
Bab-e-Omar Bin Abdul Aziz
___do___

Reference Books
Islam Ka Muashi Nizam
by Dr. Noor Mohammad Ghaffari

Imam Abu Hanifa ke Siyasi Zindagi


by Syed Manazir Ahsan Gillani

Al Iqtisaad fil Islam (Economic Thought)


Dr. Allama M. Iqbal rt

Reconstruction of Religious Thought in Islam


___do___
Kuliyaat-e-Iqbal (Political & Islamic Welfare Thought)
___do___
Sikkay Ke Tareekh (History of Coin)
Dairat ul Muarif
9

Reference Books

Central Banking
Commercial Banking
Practice of Banking

by DeCock
by Prof. Sayers
by Sheldon / Tannan

Development of Islamic Banking


by Saleh Kamal

Challenges Facing Islamic Banking


by Munawar Iqbal, Ausaf

10

Reference Books

Circulars of State Bank of Pakistan


SBP

SBP Act
Banking Companies Ordinance
Banking Recovery Laws
Principles of Islamic Financing

SBP
SBP
SBP

by Mouzar Kalif & Tariqullah

11

Reference Books

Suud
By Anjuman Khuddam-ul-Quran Sindh, Karachi

Bahishti Zewer
By Maulana Ashraf Ali Thanvi

Targheeb-ul-Muslimeen
By Maulana Mohammad Musa Albazi

Gulistaan-e-Qanaat
By Maulana Mohammad Musa Albazi

12

Reference Books

Halal & Haram (shariat ki rooshni mei)


By Hafiz Abdus Salam Bin Mohammad

Masla Suud
Mufti Shafi rt

Islami Bankari Ki Tashkeel-e-Jadeed


Ishtiaq Ahmed Farooq

13

Web Sites

www.statebank.org
www.islamcity.com
www.islamonline.com
www.lariba.com
www.islamicbanking.com

14

Islamic Finance & Economics

Purpose:
To Eliminate Riba (Interest) based Transactions from the current
Banking, Economics, Finance and Trade Sectors

15

INTERNATIONAL OVERVIEW

Global Research Estimations:

Number of Islamic Institutions:


350
Islamic Deposit Pool
US$ 1200 B.
Islamic Assets Pool
US $ 400 B
Islamic Financial Investments
US$ 1000 B
(Sukkuk, Mutual Funds, TFCs, etc.)
Average Annual Growth Rate ranges between 20-25%
Number of Countries :
48

16

INTERNATIONAL OVERVIEW

MAJOR COUNTRIES HAVING ISLAMIC BANKING INSTITUTIONS


MUSLIM COUNTRIES:
Bahrain, Kuwait, UAE, Saudi Arabia, Iran, Malaysia, Brunei,
Indonesia, Sudan, Egypt, Bangladesh & Pakistan.
NON MUSLIM COUNTRIES:
USA, UK, Canada, Switzerland,Australia, Germany and Sri Lanka

17

INTERNATIONAL OVERVIEW
Cont/d

MAJOR INTERNATIONAL CONVENTIONAL BANKS


HAVING ISLAMIC WINDOWS:
Citibank
ANZ Grindlays
ABN Amro
HSBC
Saudi American Bank
Saudi British Bank
American Express
Standard Chartered
JP Morgan

18

ISLAMIC BANKING IN
PAKISTAN

Developments in SBP:
Has already announced a scheme in January 2003 for opening
of Islamic Banks, subsidiary or dedicated Islamic Banking
Branch.
Establishment of an Islamic Banking Department.
Formed Sharia Board.
Recently announced issuance of Bank Licenses only to Islamic
Banks, hence, no new license shall be allowed to Conventional
Bank
Has prepared Essentials as Standards and Agreements to be
used by Islamic Financial Institutions (IFIs).
Governor SBP himself approves issuance of Licenses for
Islamic Banking Branches.

19

Overview of the Differences between


Islamic Banks and Conventional Banks
.

1)
Conventional Banks borrows funds from the depositors paying
interest on the liability side of the its balance sheet.

Islamic Banks makes Partnership, Mudarabah or Profit & Loss sharing


arrangements between the bank and the depositors.

2)
Conventional Banks lends the funds to the borrowers charging
higher interest on the asset or the investment side.

Islamic Banks arranges Musharakah or the trade based financing


arrangements (Mudharabah) between the bank & its investment
clients.

20

Overview of the Differences between


Islamic Banks and Conventional Banks

3)
There is iron-wall between the conventional banks and their
depositors.

Islamic Bank entitles the depositors:


-To be informed of what the bank does with their money.
-To have a say in where there money will be invested.

4)

In Islamic banking, the profit or the return is based on the actual


investment outcome.

5)

In Islamic Banking, transactions are real asset based.

The interest or the return in predetermined or fixed in advance

In Conventional banking, transactions are financial asset based.

21

Sources of Islamic Finance & Economics


Major Sources:

Hadith (Sunnah)

Holy Quran

Ijma of Ummat

Fiqh (Islamic Jurisprudence)

22

Riba
(Interest)

O Ye Who Believe, Fear from Allah and leave whatever is


from Riba, if you are (true) believers.
(Al-Baqarah: 278)
Time of Revelation:
Ahadith of Prophet Peace Be Upon Him:

23

RIBA
(Interest)

The

interest which you give to increase the wealth of


people, will have no increase with Allah: But that which
you lay out for charity, seeking favor of Allah (He will
increase): it is these who will get a recompense
multiplied.
Ar Rum 39 (First Revelation)

24

RIBA
(Interest)

Because of their abuse, we forbade the Jews good things which were
formally allowed to them: because time after time they debarred others
from the path of Allah: Since they practice Riba although they were
forbidden and cheat others of their possessions. We have prepared a
painful torment for those of them who disbelieve.
An Nisa 160-161 (Second Revelation)

25

RIBA
(Interest)

O believers, devour not Riba, doubling its rate many times.


Fear Allah, and you will prosper.
Al-e-Imran 130 (Third Revelation)

26

RIBA
(Interest)

Those who devour Riba shall rise up before Allah like men whom
Shaitan has demented by his touch: for they claim that trading is
like usury. But Allah has permitted trading and forbidden usury. He
that receives an admonition from his Rabb and mends his ways may
keep what he has already earned: his faith is in the hand of Allah.
But he that pays no heeds shall be among the people of fire and
shall remain in it forever.
Al-Baqarah 275 (Fourth Revelation)
27

RIBA
(Interest)

Allah has laid His curse on Riba and blessed charity with
increase. He bears no love for the ungrateful sinners
Al-Baqarah 276 (Fourth Revelation)

28

RIBA
(Interest)

O you who believe, Fear Allah and give up what remains of your
demand for interest, if you are indeed a believer. If you do not, then
you are warned of the declaration of war from Allah and His
Messenger, But if you turn back you shall have your principal. Deal
not unjustly and you shall not be dealt with unjustly.
Al Baqarah 278-279 (Fourth Revelation)

29

RIBA
(Interest)
Al-Baqarah 278-279

If you are indeed believers: Prove your claim with your deeds and
actions.

Threat in the strongest words: Not used for any other crime.

Principle amount should be paid back.

Islam emphasis on justice: Deal not unjustly and you shall not be dealt
with unjustly.

After the revelation of this verse, Prophet (SAW) in his last sermon at
Hajjat-ul-Wada, which is called the charter / blue print of Islam,
declared: Interest claim in respect of transactions during the days of
ignorance are null and void and would not be claimed. To begin with,
we forego the entire interest amount due to my uncle Abbas bin Abdul
Muttalib (rt)
30

RIBA
(Interest)

What is Riba:
Riba means any excess compensation over and above the
principal which is without due consideration. Its a premium paid
to the lender in return for his waiting as a condition for the loan.

In the words of Prophet (SAW), by Ali Ibn Abi Talib.


Every loan that draws interest is Riba.
Every Premium paid over and above the Loan is Riba

31

RIBA
(Interest)

Riba Selected Ahadith


By Hazrat Jabir ibn-e-Abdullah (RT): The Prophet peace be upon
him, cursed the receiver and the payer of interest, the one who
records it and the witnesses to the transactions and said, They
are all alike (in guilt).
(Muslim, Tirmidhi and Musnad-e-Ahmad)
- By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him,
said, Riba has seventy segments, the least serious being
equivalent to a man committing adultery with his own mother.
(Ibn Majah)

32

RIBA
(Interest)
Riba Selected Ahadith
By Hazrat Amr bin Al Aas (RT): When interest based dealing
becomes common among people, they will start facing draught
and shortage of food. And when bribery becomes norm among
people they will live under constant fear of their enemy.
By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him
said,
There will certainly come a time for mankind when everyone will
take Riba and if he does not do so, its dust/smoke will reach him.
(Abu Dawood, Ibn Majah)

33

RIBA
(Interest)

The prohibition of interest is not limited to Islam,


but it is shared by Judaism and Christianity.

Some of the old testaments have rendered Riba as Haram. (See


Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5,
Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8, 13,17 & 22:12)

Agibi Bank was established circa 700 B.C in Babylonian and


functioned exclusively on equity basis.

34

RIBA
(Interest)

Hadith prohibiting Riab-al-Fadl

(By Abu Saeed Khudri (RT)

Sell gold in exchange of equivalent gold


Sell silver in exchange of equivalent silver
Sell dates in exchange of equivalent dates
Sell wheat in exchange if equivalent wheat
Sell salt in exchange of equivalent salt
Sell barley in exchange of equivalent barley
(Reported in Muslim)

35

RIBA

Definitions:

Imam Abu Bakr Jassaas Razi (rta):


that kind of loan where specified repayment period and an
amount in excess of capital is predetermined.

Summary:
- All conditional benefits on loan falls in the category of (Riba)
interest

36

TYPES OF RIBA

Al-Nasa (Al-Nasiah) or Riba-al-Jahiliya


Al-Fazal or Riba-al-Bai

Riba Al-Mufrad (Simple Interest):


Interest calculated only on the initial investment

Riba Al-Murakkab (Compound Interest):


Reinvestment of each interest payment on money invested to
earn more interest.

37

TYPES OF RIBA

Interest (Commercial Interest):


Interest paid on loan taken for productive and profitable purpose.

Usury (Sarafi Interest):


Interest paid on loan taken for personal needs and expenses.

38

Riba
Quran strickly forbids all kinds of RIBA

Examples:

Jews of Madinah

Ansars dealings of interest with Jews for agricultural purposes

Merchants of Makkah

39

Riba

Muslim Khilafah

Loans from Bait-ul-Maal

Business dealings of Sahabas among themselves

40

Riba

LAWS BY ALMIGHTY ALLAH:

Quranic Laws & Principles:


( Interest, lottery, gambling, unlawful businesses and products)

Ahadith of Prophet peace be upon him


(Sunnah actions, dealings)

Moral Responsibilities for a Muslim


(Services to Humanity & focus towards the success in the world
hereafter)

41

ISLAMIC BANKING & FINANCE

History:

Zubair bin Awam rta

Usman bin Affan rta

Bait-ul-Maal

Caravans of Makkah

Imam Abu Hanifa

42

Loan & Trust

Difference between:
Loan (Qarz)
&
Amanat (Trust)

Conditions of Aqad / Agreement of Qarz

43

Bank Accounts

Current Account / Checking Account

PLS Account / Savings Account

Fixed Deposit Account / PLS Fixed Account / CDs

Foreign Currency Account

Lockers

44

Islamic Banking

Islamic Point of View about depositing money into those Accounts

45

Economics

What is Economics?
To utilize the limited resources in a way that maximum needs
and wants are met to ensure the well being of all members of
the human society.

46

Economics

Problems Faced by Economy:

Determination of Priorities
Allocation of Resources (land, Labor, Capital, Entrepreneur)
Distribution of Wealth / Income
Development

We will compare how Capitalism, Socialism and Islamic Economic


System addresses to these problems.

47

Determination of Priorities
(Problem 01)
Capitalism

Every Individual has an


unconditional and absolute
right to participate in any
business to maximize profits.

Concept of selfish interest.

Supply & Demand will


determine the priorities.

Socialism

No individual has the right to


participate in any business
independently.

State will determine the


priorities as per the overall
planning.

Concept of collective interest.

48

Allocation of Resources
(Problem 02)

Socialism

Capitalism

Market force will decide where


to invest resources.

Govt. will decide where to


allocate resources

49

Development
(Problem 03)

Capitalism

Market forces will decide

Socialism

Govt. will decide

50

Distribution of Income
(Problem 04)

Capitalism

Land
Labor
Capital
Entrepreneur -

Rent
Wages
Interest
Profit

Socialism

Land Rent fixed by Govt.


Labor Wages fixed by Govt.

51

Right to Wealth

Capitalism

Right to wealth is with the


factors of production only

Socialism

Right to wealth with the Govt.


which then distributes it among
the factors of production

52

Flaws of Capitalism

No bindings / restrictions while maximizing profits.

Blindly follows market forces that creates exploitation of labor and


poor people.

No moral values limitations

Monopolies are created that exploit the society as a whole.

Govt. & Industrialists join hands for mutual benefits and make laws
that exploit common people.

Imbalance in the distribution of Income due to which concentration of


wealth takes place.
53

Flaws of Socialism

The other extreme of not even giving the natural freedom.

Perfect planning is assumed to be the Cure of all ills.

Govts. are assumed to be the angels which cant commit a


deliberate mistake.

Can not work without a forceful dictatorship.

Creates overall inefficiency in the society. There is no incentive


to work efficiently as there is no individual profit motive

.
54

Economics

Capitalism:

Freedom of business
Law of supply & Demand helps
Resources (land, labor & capital) will be used
Competition will force to improve, create and gain maximum.
Distribution of wealth among producers of wealth only
(law of supply & demand will help to decide their share)

55

Economics

Producer of Wealth:

Land
Labor
Capital
Owner

will get
will get
will get
will get

Rent
Wages
Interest
Profit

56

Economics

Socialism:
No Freedom
No Private Ownership
Govt. will decide about
Allocation of Resources
Determination of Priorities
Distribution of Income
Development
It is also called Planned Economy

57

Economics

Principles:

Collective Property
Planning
Collective Interest
Equitable distribution of Income

58

Economics

Islam:

Everything belongs to Allah


Private ownership is accepted
Some restrictions applied to run your economy
Law of supply & demand is accepted

59

Economics

Restrictions:
Halal & Haraam (through Wahi)
(Interest, gambling, lottery)
State Restrictions
(Smuggling, dealing in any restricted business etc)
Moral Restrictions / Responsibilities

60

Economics

Direct Producer of Wealth:

Land
Labor
Capital
Owner

Rent
Wages
(Not Interest) Profit & Risk of Loss Through
Musharikah & Mudahiribah
Profit or Loss

61

Economics

If everything belongs to Allah, then He decides to share your wealth with


others (their right) through:

Zakaat

Khiraaj

Ushr

Sadaqah

Kaffarah

Sacrifice / Qurbaani

Wirasaat
62

Summary of the Comparison

Capitalism: gives unbridled and un conditional right to profit motive


and private ownership.

Socialism: goes to other extreme by assuming that perfect planning


by the Govt. is the cure of all ills.

Islam:

gives a balance view among the two extremes by


recognizing the right to private ownership, market forces and profit
motive but the restrictions of:
-Halal & Haram

-Govt. restrictions

-Moral values

Islam ensures equitable distribution of wealth through the concept of


primary ownership of Allah and secondary ownership of factors of
production.
63

Terms

Definitions:

Bai

Mabeea

Saman

Qadar

Price

Ijab

64

Terms

Tarkah

Dain

Madyun

Daiin

Muzarib

Rab-ul-Maal

Rasul Maal
65

Islamic Concepts

Legal Person

Shares

Under Writing

Limited Company

Kick Back

Roll Over

Libor / Kibor
66

Types of Bai
(according to validity)

Definitions:

Bai Sahih

Bai Batil

Bai Fasid

Bai Mauqoof

67

Islamic Sales Contract

Bai Sahih (Valid Sale):


A sale is valid if all elements together with their conditions are
present
Elements of a valid sale are:

Contract (Aqd)
Subject Matter (Mabeea)
Price (Saman)
Possession or delivery (Qabza)

68

Islamic Sale Contract

Aqd
(Contract)

Possession

(Qabza)

Bai Sahih
(Valid Sale)

Subject
Matter
(Mabeea)

Price
(Saman)
69

Islamic Sales Contract

Elements of Bai Sahih (Valid Sale):


Contract (Aqd):
Offer & Acceptance (Ijab-o-Qabool)
Oral (Qauli)
Implied (Hukmi)
Buyer and Seller must be:
Sane
Adult / Muture
Wise
Conditions of Contract:
Sale must be non contingent
Sale must be immediate
70

Islamic Sales Contract

Elements of Bai Sahih (Valid Sale):


Subject Matter (Mabeea)

Existing
Valuable
Usable
Capable of ownership / title
Capable of delivery / possession
Specific & Quantified
Seller must have title & risk

71

Islamic Sales Contract

Elements of Bai Sahih (Valid Sale):


Price (Saman)
Quantified (Maloom)
Specified & Certain (Mutaiyan)

72

Islamic Sales Contract

Elements of Bai Sahih (Valid Sale):


Qabza (Delivery / Possession)
Physical (Haqiqi)
Constructive (Hukmi)

73

Basic Rules of Bai


(buying / selling)

Nobody can sell such Product / Commodity which:

Does not exist

No ownership

Not in the possession

Note:
Exceptions are:
(1) Bai Salam
(2) Bai Istisna

74

Sale Agreement

Difference between Actual Sale & Promise of Sale

75

More Rules of Bai

Bai must be on unconditional basis & implemented right away. If the


sale of any product is attached with a condition of any future incident
or date, it will not be valid.

Bai must be done of such product which has a value/price in the


market

Bai of a product is not permissible, which has no use other than


Haram

76

More Rules of Bai

Product must be identified, clear with all demanding qualities

Selling product must be given in the possession of buyer. It should


not be based on any incident, struggle etc.

Price of the product must be clearly mentioned and identified

There should be no unusual condition in Bai otherwise


it will not be valid

77

Modes of Financing

Musharakah

Mudharibah

Murabahah

Ijarah (Lease or Hire)

Ijarah Wa Iqtinah (Hire-Purchase)

Bai Salam

Bai Istisna
78

Modes of Financing

Musharakah:
It is the same financing contract as Modarabah except that client also
provides a part of capital in addition to management participation. On
the other hand, Islamic bank may also contribute in the management
in addition to its capital. In that case, management fees and
distributable profit form the enterprise are shared by the client and
Islamic Bank in accordance with ratios fixed under the Musharakah
contract.

79

Modes of Financing

Modharibah:
Modaribah is a contract between an Islamic Bank and the client
whereby the Islamic bank provides specific amount of funds to the
clients for an enterprise for defined purposes in exchange for a
reasonable and highly predictable profit. The client receives a share in
the profit as compensation or fee for his management.

80

Modes of Financing

Murabahah:
Under this deal, Islamic Bank purchases goods, raw material,
equipment, machinery or any other items of economic significance
from a third party at the request of a client and sells such goods to the
client on spot or deferred payment basis at it s own sale price. The
difference between the purchase cost of the Islamic bank and the sale
price to the clients forms the profit called Mark Up.

81

Modes of Financing

Ijarah (Lease or Hire):


The bank acquires machinery /equipment, building etc for his client
and charges a certain rental for their use.

Ijarah Wa Iqtinaa (Hire-Purchase):


The bank finances the purchase of equipment and the client uses
them under a contract. The contract provides that the client will pay
the cost of the instrument and a share in the net rental value of the
equipment which is proportional to the outstanding shares in the total
investment.

82

Modes of Financing

Bai Salam:
Seller undertakes to supply specific goods to the buyer / bank at a
future date in exchange of an advanced price fully paid at the spot of
agreement.

Purpose:
-To meet the need of small farmers who need money to grow their
crops and to feed their family up to the time of harvest.
-To meet the need of traders for import and export of goods.

83

Modes of Financing

Bai Istisna;
The Bank enters into an agreement with the client for purchase of any
goods before it comes into existence.
It is an order to producer to manufacture a specific commodity for the
purchaser.

84

Condition for a Valid Deal

Conditions for Islamically Valid Dealing:

All/both parties must have the ability of dealing

Deal must be done with free will

No intention of cheating / fraud

No false statement

85

Conditions for Musharakah Dealing


. All given 4 conditions must be applied, Also

Profit ratio for each party must be decided in the beginning of


agreement

Profit sharing ratio must be based on the percentage of actual


outcome of the business, not on the basis of actual investments
percentage

86

Profit Sharing Ratio of


Musharika
Q: Is it necessary to have the profit sharing ratio according to the
actual investment ratio?

Ans: Three Opinions:

According to Imam Malik rt, Imam Shafi rt, it should be according the
investment ratio.

According to Imam Ahmed rt, it could vary, if it is decided with a free


will of all parties.

According to Imam Abu Hanifa rt, it could vary except the sleeping
partner.

87

Loss Sharing Ratio


of Musharikah

According to all Imams, loss sharing ratio of each partner


must be equal according
to the percentage of their investment.

88

Dissolving Musharakah

Any party can dissolve the Musharakah agreement by give


notice to the other party.

Upon the death of any partner.

If a partner is not in sane anymore (for long time)

89

MUZARIBAH
Features of Muzaribah:

Investment from (one party) Rab-ul-Maal only.

No participation in business or management

All loss must be suffered by Rab-ul-Maal only.

Rab-ul-Maal must carry all liabilities of Business

All assets will be the property of Rab-ul-Maal

90

MUZARIBAH

MUZARIBAH AL MUQAYYIDAH:

-Investment for a specified business only

MUZARIBAH AL MUTALLAKAH:

-Free option to do any business

91

MUZARIBAH

NOTE:

All four Imams agree that no salary will be given to Muzarib on his/her
services.

According to Imam Ahmed rt, compensation for daily food allowance


can be given.

According to Ahnaf, compensation for daily food can be given only,


if the Muzarib travels out of town.

92

Murabihah

Features:

Basically, its not a mode of financing but a source to avoid interest


dealing. It should be used only where Musharaikah and Muzaribah not
workable.

Just using the name of Mark Up or profit instead of interest does not
make it permissible until all the terms and conditions set by Islamic
Jurisprudence are fulfilled.

93

Murabihah

Its not a type of loan but a deal (Bia/Agreement).

Murabihah can be used as a source of financing only when the


client needs funds to purchase any product/machinery/equipments
etc.

The product which is given on Murabihah basis must be in the


possession of owner.

94

Murabihah

Sharing of risk of loss differentiate Murabihah from the interest


category.

It is important for a Murabahah dealing that the product must be


bought from a third party. On buy back basis, Murabihah deal will
not be valid.

Roll Over is not valid in Murabihah.

If the actual cost can not be identified, then Murabihah deal is not
possible. In that case, we must use Bai Musawamah.

95

Murabihah
(Agreement)

Client & Bank


(Agreement)
Bank & Wakeel
(Agreement)
Product Pocession
By Bank

Wakeel & Seller


(Deal)
Bank & Client
(Deal)

Liability of Client

96

Murabihah
(Agreement)

Bank
&
Client

Client
&
Bank

Wakeel
&
Bank

Bank
&
Wakeel
Wakeel
&
Seller
97

Ijarah

Features:

Lessor stays as owner and the lessee has the right to use the
item/good.

Leasing is not permissible for consumable goods.

Lessor will be responsible for all liabilities related to that


property/good etc like taxes. Lessee will be responsible for those
liabilities only, which can be used/benefited while using that good/item
etc. like Bills, etc.

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Ijarah

Risk of loss of that property/good will stay with lessor. If Lessee is


responsible for any Loss/damage, he/she has to afford it.

Leasing Time, Duration, Rent etc must be decided in the beginning


of the contract.

Lessor cant increase the percentage/share of rent by himself.

99

Salam

Conditions:

It is necessary to pay the lump sum amount in the beginning of Bai


Salam contract.

Salam is permissible only on those items which can be quantified or


measured.

Salam is not valid for a specific farm/land/garden etc.

The product must be identified, quantified clearly with all qualities.

The date of delivery, time, and the place must be mentioned clearly.

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Istisna

Features:

Not necessary to pay the amount in Advance like Bai Salam

Price must be decided in the beginning of the contract

Qualities, features of that product must be clearly identified

101

Istisna

Canceling Istisna:

one party can cancel the Istisna deal by giving notice to the other
before starting production/purchasing etc

if the production/work has already started, then it cant be cancelled


from one side.

102

Difference between
Istisna & Salam
Istisna

Salam

Istisna is permissible for any item


/ commodity which need to be
produced / manufactured.

But in Salam, it could or could


not be. Or Subject can be
anything.

In Istisna, advance payment is


not necessary.

In Salam, it is necessary to
make full payment in advance.

In Istisna, it could be cancelled, if


the production is not started yet.

In Bai Salam, it can not be


cancelled one sided.

Date, Time of delivery does not


have to be fixed.

In Salam, it is the basic part of


the deal.

103

Project Financing
Proposed Methods:
Musharikah
Mudharibah

Basic Principles:
Financing through Musharikah and Mudharibah does not mean the
advancing of money. It means participation in the business in the
case of Musharikah, sharing in the assets of the business to the
extent of the ratio of financing.
An Investor must share the loss incurred by the business to the
extent of his financing.
The partners can determine with mutual consent any ratio of profit
which may differ from the ratio of investment. However the partner
who has excluded himself from the responsibility of work for the
business cannot claim more than the ratio of his investment.
104

Project Financing

Project Financing:
If the financier wants to finance the whole project, the form of
Mudharibah can come into operation.
If investment comes from both sides, the form of Musharikah can
be adopted. In this case:
If the management is the sole responsibility of one party, while
the investment comes from both, a combination of musharikah
and Mudharibah can be brought into play according to the
rules.
Since it would be a new project, no problem with regard to the
valuation of capital should arise.
105

Project Financing

The distribution of profits according to the normal accounting


standards is not difficult.

If the financier wants to withdraw from the Musharikah, while the other
party wants to continue the business, the later can purchase the
shares of the former at an agreed price. In this case, the financier may
get back the amount he has invested along with a profit, if the
business has earned a profit.

The price of his share would be determined through valuation of the


assets called as constructive liquidation with mutual consent of the
parties.

In the case of loss, however any decrease in the total value of the
assets would be divided between them in the ratio of their investment.

106

Project Financing

Since financial institutions do not normally want to remain partner of a


specific project for good, they can sell their share to other partners of
the project.

If the sale of the share on one time basis is not feasible for the lack of
liquidity in the project, the share of the financier can be divided into
smaller units and each unit can be sold after a suitable interval.

Whenever a unit is sold, the share of the financier in the project is


reduced to that extent, and when all the units are sold, the financier
totally comes out of the project.

107

Import Financing

Import Financing:
Conventional Banks charge two types of fee for the service of
letter of credit which the bank provided to the importer. They are:
Service Charges for the opening an LC
Interest charged on the LCs not opened on full margin.

108

Import Financing

Collecting service charges for this purpose is allowed, but as interest


cannot be charged in any case, scholars have proposed two methods
for financing LCs.

These methods are:


Musharikah
Morabihah

109

Import Financing
Musharikah:
The appropriate substitute for LC is Musharikah. Bank and importer
can make an agreement of Mudharbah or Musharikah while opening
LC. If LC is being opened at zero margin then an agreement of
Mudharbah can be made, in which bank will become Rabb-ul-maal and
importer will be regarded as Mudarib. Bank will own the goods that are
being imported and profit will be distributed according to the
agreement.
If LC is being opened at some margin then Musharikah agreement can
be made. Bank will pay the remaining amount and the goods that are
being imported will be owned by both of them according to their share
of investment. Bank and importer, with their mutual consent can also
include a condition in the agreement, whereby, Musharikah or
Mudharibah will end after a certain time period even if the goods are
not sold. In this case, importer will purchase the banks share at the
market price.
110

Import Financing

Murabihah:

At present Islamic banks are using Murabihah to finance LC. These


banks themselves import the required goods and then sell these
goods to the importer on Murabihah agreement. Murabihah
financing requires bank and importer to sign two agreements
separately. One for the purchase of goods and other for appointing
the importer as the agent of the bank (that is agency agreement).
Once these two agreements are signed, importer can negotiate
and finalize all the terms and conditions with the exporter on
behalf of the bank.

111

Murabihah
(Agreement)

Bank
&
Client

Client
&
Bank

Wakeel
&
Bank

Bank
&
Wakeel
Wakeel
&
Seller
112

Export Financing

Two important roles of bank in Exports:


They act as a negotiating bank and charge a fee for this purpose
which is allowed in Shariah.
They provide export financing facility to the exporters and charge
interest on this service.

These services are of two types:


Pre Shipment Financing
Post Shipment Financing

113

Export Financing
Pre Shipment Financing:
Pre Shipment Financing can be fulfilled by two methods:
Musharikah
Murabihah
Musharikah:
Bank & Exporter can make an agreement of Musharikah
or Mudharibah, if exporter is not investing, otherwise
Musharikah agreement can be made. Agreement in this
case will be easy, as cost and expected profit is known.
Exporter will manufacture or purchase goods and profit
that will be obtained by exporting, will be distribute
between them according to the pre determined ratio.
114

Export Financing

Problem:
If the exporter is not able to deliver the goods according to the
terms and the conditions of the importer then importer can refuse
to accept the goods and in this case exporters bank will ultimately
suffer.

Solution:
it can be rectified by including a condition in Mudharibah or
Musharikah agreement that if exporter violates the terms and
conditions of import agreement then the bank will not be
responsible for any loss which arises due to this negligence.
This condition is allowed in Shariah as the Rabbul Maal
is not responsible for any loss that arises due to the negligence
of Mudharib.
115

Export Financing

Murabihah:
Murabihah is being used in many Islamic Banks for export
financing. Banks purchase goods that are to be exported at
discounted (less) price than the agreed price between the exporter
and the importer. Bank exports goods at the original price and thus
can earn profit.
Murabihah Financing requires bank and exporter to sign at least
two agreements separately.
One for the purchase of goods
Second one for appointing the exporter as the agent of the bank
Once these two agreements are signed, the exporter can
negotiate and finalize all the terms and conditions with the
importer on behalf of the bank.
116

Export Financing

Post Shipment Financing:


It is similar to the discounting of Bill of Exchange. Its alternate
Shariah compliant procedure is as follows.
Exporter with Bill of Exchange can appoint bank as his agent
to collect receivable on his behalf. Bank charges a fee for this
service.
Bank can provide interest free loan to the exporter equal to the
amount of bill and exporter will give his consent to the bank
that it can keep the amount received from the bill as a payment
of loan.

117

Export Financing

Here two procedures and


two different agreements will be made.
One will authorize the bank to collect the loan on his behalf as an
agent, for which he will charge a fee.
Second will be for providing interest free loan to the exporter and
authorizing bank for keeping the amount received through bill as a
payment for loan.

This method is valid in Shariah because:


collecting fee for service and giving interest free loan is
permissible in Islam.

118

Islamic Ways of Insurance

Conventional Insurance Principles

Pooling of Risk
Payment of fortuitous loss
Risk Transfer
Indemnification
Profit for the share holders from underwriting results and
investments

119

Islamic Ways of Insurance

Why NO to conventional Insurance?


Is something wrong with the concept?
Risk Aversion
Assuring others
Risk sharing
Q:
Ans:

What is wrong with the practice?


The contract between the insurer and the insured is
technically wrong from the Shariah perspective because
of:
Gharar & Riba

120

Islamic Ways of Insurance

Gharar:
Lexically it means uncertainty and technically it means the
uncertainty of the counteract or the subject matter or the period
in a commutative contract.
The element of Gharar in the commercial insurance contract
The insurer does not know how much he would owe to an
individual.
Some times an insured does not know either how much he
would pay ultimately to the insurer
In case of no claim from the insured in general insurance, then
Qimar emerges.
121

Islamic Ways of Insurance

Riba in Commercial Insurance:


Direct Riba
Excess on one side in case of exchange between the amount
of premium and the sum insured
Indirect Riba
The interest earned on interest based investments

122

Islamic Ways of Insurance

The concept of Takaful:


Features:
Taburro (contributions) from the participants (Policy Holders)
to create a fund which will provide financial help at the
occurrence of certain losses
Partnership among the participants
Need of an operator
The management contract between the participants and the
operator
Investments in Shariah compliant modes

123

Islamic Ways of Insurance

Different Models:
Pure Mudharabah Model:
The participants and the operator enter into an Mudahrabah contract
from the beginning of the relation, for indemnification and share of the
underwriting results

Wakalah Model (hybrid of wakalah & Mudarabah):


An agency agreement is made between an individual willing to
participate in the fund and the operator working as the manager of the
fund. The operator earns an upfront deductible fee and shares the
profit of investments, it does not share the results of underwriting.

Wakalah based on Waqf:


The share holders create a waqf fund to extend the help to those who
want to cover against financial loss. The participants contribute to the
fund and the operator manages the fund. All under writing results
belong to the fund which itself has a legal entity.
124

Business Ethics In Islam

Definition of Business In Islam:

Verses of Holy Quran

Ahadith of Prophet Peace be Upon Him

125

Evidences

Permission of Business In Islam:

Through Holy Quran

Through Ahadith of Prophet pbuh

Companions of Holy Prophet

Four Caliph of Muslims

Ashara Mubasharrah

Muhajreen of Makkah
126

Halal & Haram

Eating Halal:

Verses of Holy Quran:

127

Halal & Haram

Ahadith of Prophet pbuh:

Examples:

Zabiha and Non Zabihah


Muslim And Non Muslim
128

Duties of Muslims

Duties of Muslims in Business World

Verses of Holy Quran

Ahadith of Prophet pbuh

e-g:
Oil
Gold
Man Power
Land
129

Forbidden Earnings

Definition of Haram Earning

Verses of Holy Quran

130

Forbidden Earnings

Ahadith of Holy Prophet pbuh:

131

Forbidden Earnings

Details of Forbidden Earnings:

Stealing

Robbery

Swearing

Offense

Lies

Cheating

Unjustly

Haram Business

Deal Without Permission & Authority

132

Attributes of Business & Businessmen

Verses of Holy Quran

133

Attributes of Business & Businessmen

Ahadith of Holy Prophet pbuh

134

Major Principles of Business in Islam

Everything belongs to Almighty Allah

Trust in Allah

Understanding of Business Issues Avoiding Israaf

Well behaved

Trust Worthy

Hard Working & Sincerity

No greediness

135

Major Principles of Business in Islam

Keep Purity

Charity & Zakaat

Clarifying defective products

Fulfilling Promises & Agreements

Accepting returned goods

136

Forbidden Action in Business:

No loss of Islamic Practices

No Swearing

No Cheating

No Fake Praises

No Buying / selling of stolen goods

No Buying / selling of Haram goods

No mixing (for cheating), (B into A quality)

137

Forbidden Action in Business

No storing for higher profit

No selling of goods without having possession (except Bai Salam)

No selling of goods without owners permission

138

Forbidden Business

Wine

Pig

Dead Animals & Birds

Interest Based Business

Lottery

Stolen Products

Business in Masjid
139

Forbidden Business

Deal Upon Deal

Idols/Pictures of Living Beings

Unavailable Products

Selling Products without permission

140

Summary

Business Ethics in Islam

Verse of Holy Quran

(Surah Al Qisas, verse 77)

141

Summary

Four Major peaces of Advice:

Achieving Success in the world hereafter

Take your share from this world

Do Ehsaan (Favors)

No Offense (Fasad)

142

Working Plan for Islamic Banking

Working Plan for Islamic Banking:

Structure of Bank Funds


Structure of Public Deposits
Modes of lending
Modes of Financing & Products of Investment
Specialized Financial Operations
Industrial Banking
Agricultural Banking
Trade/Commercial Banking
Co-operative Banking

143

Working Plan for Islamic Banking Cont:

Monetary Policy & Central Banking

Inter & Intra Govt. & Banks Transactions

Policy of National Savings Schemes

Insurance Policy

Policy regarding existing internal interest based debts

Policy regarding external interest based debts

Changes in the taxation system


144

Islamic Economics Course

The End
Jazakumullahu Khairan
Thank You
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