Introduction to Islamic

Banking and Finance

Presentation to Bosnian Parliament – May 8th
2006
Presented by :
Nizam Yaquby
Bahrain

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Introduction To Islamic Banking &
Finance

Nizam Yaquby
Bahrain
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 Importance of Purifying the
Source of Income in Islam
 The body which is nourished by non-pure sources
is bound to hellfire.
 On the day of Judgment, a person will not be
moved from the place which he stands until he is
asked about the sources of his income, and the
ways he spent it.
 Purifying the source of ones’ nourishment is one
of the important reasons for the acceptance of
supplications by Allah.

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 Historical Background
* Pre-colonial Era
(Partnership & Profit in Medieval Islam) by
Prof. Udovitch
* Colonial Era
* Post Colonial Era
(Dr. Najatuallah Siddiqi, Dr. Issa Abduh,
Abu-ala’la Mawdudi,….etc)

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 Prohibition of Interest

 Usury = Interest
 Judaism
 Christianity
 Islam

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 Latest Research And Literature
On The Subject
Teachings On Usury In Judaism,
Christianity And Islam

By: Susan L. Buckley

PhD Dissertation, University Of Aberdeen
The Edwin Mellen Press, Lampeter, UK,
2000

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 Inception of Islamic Banking
 Dubai Islamic Bank - 1975
- modest beginnings
- Initiated by businessmen who did not want
to deal with interest based system
- Hostile environment
- Challenged by conventional banking system
- Lack of public awareness

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 Success Story
 300 + Islamic financial institutions
 $ 500 - 800 bn in funds
 Post graduate degrees offered in Islamic
banking by major academic institutions
 Important database system (HIFIP)
 Standards for the Industry (AAOIFI)
 Recognition by IMF, World Bank and Basel
Committee

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 Important Reasons for Global
Interest in Islamic Banking

 Good opportunity for investment

 Challenge to the conventional interest-

based Capitalistic System
 Demand of Muslim population in many
countries outside the Muslim world.

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 Important U.K and Singapore
legislative efforts
 U.K waving double stamp duty laws
and recognition of ijara , musharaka
and murabaha for house finance.

 Singapore

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 Uniqueness of Islamic Banking
 Commingling between Finance & Religion and
ethics
 Sharia Supervisory Boards (SSB)
– Studies Articles of associations and bylaws
– Approval of all contracts
– Contribute in designing new products
– Audit the actual implementations
– Issuance of Fatwas (Responsas)
– Conferences - Research - Training

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 Basic Difference between Islamic and
Conventional Modes of Finance
Conventional
money
Bank Client

money + money (interest)

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 Basic Difference between Islamic and
Conventional Modes of Finance
Islamic

Bank Goods & Client

Services

money

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 Major Contracts Used in
Islamic Banking

 Buying & Selling

 Mudaraba: Investment management
 Musharaka: Partnership
 Ijarah: Leasing
 Wakalah: Agency
 Istisna’: Contract of works

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 Main Objective Of Islamic Banking:
Banking Without Riba
“The main objective of an Islamic Bank is to
prohibit Muslims from dealing with interest
or usury (Riba) which has been strictly
prohibited by Allah, and to protect them
from one of the biggest sins.”

Dubai Islamic Bank Statement

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 Theoretical & Conceptual
Considerations:
Social & Economic Justice
“The Islamic economic order is based upon a set of principles
found in the Quran. No matter what aspect of the Islamic
economic order is itroduced, for practical operations it has
to base itself on the Qur’anic concept of social justice. The
Islamic financial system, therefore, cannot be introduced
merely by eliminating riba, but only by adopting the
Islamic principles of social justice and introducing laws,
practices, procedures and instruments which help in the
maintenance and dispensation of justice, equity and
fairness.”
Muazzam Ali (1988)
“A Framework of Islamic Banking” Directory Of Islamic
Institutions, John R Presley (ed.), London, Croom Helm

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  The Objectives and philosophies of Islamic
banks must thus be in line with the teachings of
Quran and Sunnah of the Prophet (PBUH)
 Islamic banks must be guided by the entire
comprehensive principles and rules of Islamic
law derived from these two basic sources
 Holding tight to these principles indicates
whether a particular Islamic bank is acting
according to Shari’a or not

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 Principles of Islamic Business
 Eliminating riba is an important task, but
Islamic banks, by default, must conform to
all other Islamic business principles
 All teachings imposed on Muslim
individuals are also applicable to Islamic
banks

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 Most Important Islamic Teachings
Related to Business
1. Honesty & Fair trade: (Thus, trade
manipulations & malpractices like hoardings,
black marketing, cheating, profiteering, short-
weighting, hiding the defective quality of
merchandise and adulteration are all prohibited
activities).
2. The Prophet (PBUH) said: “the truthful honest
merchant is with the Prophets, the truthful and
martyrs [in the day of judgment].” Narrated by
Al-Tirmidhi

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 3. Spending in good causes for the benefit and
welfare of the people. Wastefulness and
overindulgence in pleasurable activities are not
allowed
4. Upholding justice in all dealings and
transactions with both friends and enemies
(Quran 4:29, 4:135). Thus, all customers must
be treated equally (e.g. when imposing charges
and fixing profit – sharing ratios).

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 5. The prohibition of Gambling and other
risk related purely speculative activities
based on mere luck (most derivatives are
prohibited)

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 Important Achievements
 Attracting depositors in under-banked societies
 Encouraging saving and investment activities
 Channeling depositors’ funds into productive and
commercially beneficial activities
 Relieving Muslims from trading in prohibited
sectors or activities (e.g. opening an LC for
alcoholic beverages
 Encouraging Zakat and charity
 Disseminating knowledge in the field of Islamic
transaction law (Fiqh al-Mu’amalat)

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  Educating Muslim scholars in modern
banking
 Encouraging Takaful (Islamic Insurance)
 Gaining wide acceptance in the
international financial community

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 The Way Ahead
 Islamic banks must develop the concept of
Musharakah (participating in profit & loss) and
Mudaraba, and use it more aggressively
 Adopt new financing policies to encourage
development and support for the small scale
traders
 Develop the Islamic liquidity management and
Islamic money market
 Must improve its services to be competitive with
the best in the market

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Thank You