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Published by: TOHEED on Oct 12, 2010
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Write the history of Islamic banking in global perspective and Pakistan.
The Islamic banking today has become most popular and reliable financial systemin the world. It appeared on the world scene as active player over three decades ago.But as many of us know most of the principles which is based on Islamic Banking,commonly accepted by the all over the world goes for centuries than the decades.Islam as a religion very clearly prohibits the Riba -the interest, so the basic principleof Islamic banking is the prohibition of Riba (Usury or Interest) base transactions.
The objectives of this assignment is to know about1.The History of Islamic banking in global scenario.2. What is the impact of Islamic banking system?3. History of Islamic banking in Pakistan.4. What is the current situation of Islamic baking inPakistan?
Islamic banking has been defined as banking in consonance with the ethos and valuesystem of Islam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by Islamic Shariah. Interest free bankingis a narrow concept denoting a number of banking instruments or operations, which avoidinterest. Islamic banking, the more general term is expected not only to avoid interest- based transactions, prohibited in the Islamic Shariah, but also to avoid unethical practicesand participate actively in achieving the goals and objectives of an Islamic economy.
Islamic Shariah prohibits ‘interest’ but it does not prohibit all gains on capital. Itis only the increase stipulated or sought over the principal of a loan or debt that is prohibited. Islamic principles simply require that performance of capital should also beconsidered while rewarding the capital. The prohibition of a risk free return and permission of trading, as enshrined in the Verse 2:275 of the Holy Quran, makes thefinancial activities in an Islamic set-up real asset-backed with ability to cause ‘valueaddition’. Islamic banking system is based on risk-sharing, owning and handling of  physical goods, involvement in the process of trading, leasing and construction contractsusing various Islamic modes of finance. As such, Islamic banks deal with assetmanagement for the purpose of income generation. They will have to prudently handlethe unique risks involved in management of assets by adherence to best practices of corporate governance. Once the banks have stable stream of Halal income, depositorswill also receive stable and Halal income. The forms of businesses allowed by Islam atthe time the Holy Quran was revealed included joint ventures based on sharing of risks & profits and provision of services through trading, both cash and credit, and leasingactivities. In the Verse II:275, Allah the Almighty did not deny the apparent similarity between trade profit in credit sale and Riba in loaning, but resolutely informed that Allahhas permitted trade and prohibited Riba.Profit has been recognized as ‘reward’ for (useof) capital and Islam permits gainful deployment of surplus resources for enhancement of their value. However, along with the entitlement of profit, the liability of risk of loss oncapital rests with the capital itself; no other factor can be made to bear the burden of therisk of loss. Financial transactions, in order to be permissible, should be associated with
goods, services or benefits. At macro level, this feature of Islamic finance can be helpfulin creating better discipline in conduct of fiscal and monetary policies. Besides trading,Islam allows leasing of assets and getting rentals against the usufruct taken by the lessee.All such things/assets corpus of which is not consumed with their use can be leased outagainst fixed rentals. The ownership in leased assets remains with the lessor who assumesrisks and gets rewards of his ownership.
During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in theCaliphate, where an early market economy and an early form of mercantilismwere developed between the 8th-12th centuries, which some refer to as"Islamic capitalism". A vigorousmonetary economywas created on the basis of theexpanding levels of circulationof a stable, high-valuecurrency(thedinar ) and the integration of monetaryareas that were previously independent.A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, the first forms of partnership(mufawada) such as limited partnerships(mudaraba), and the earliest forms of capital(al-mal),capital  accumulation(nama al-mal),cheques, promissory notes,trusts(seeWaqf ),transactional  accounts,loaning,ledgersandassignments.Organizational enterprisesindependent from thestatealso existed in the medieval Islamic world, while theagencyinstitution was also introduced during that time. Many of these early capitalist concepts were adopted andfurther advanced inmedieval Europefrom the 13th century onwards.
The coming into being of interest-free banks
The first private interest-free bank, the Dubai Islamic Bank, was also set up in1975 by a group of Muslim businessmen from several countries. Two more private bankswere founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. Inthe same year the Kuwaiti government set up the Kuwait Finance House.

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