Topic:

Islamic Banking
 Presented by:

• Raza Chaudhry Roll No 339

• Afzaal Ali Roll No 322
• Faizan Butt Roll No 371
• Bilal Roll No 276
• Ahtasham Roll No 361

Subject of :

Money BANKING & FINANCE

Presented To :

Miss Uzma Batool

 Acknowledgment :

Firstly we would like to thank Almighty

Allah for all His blessings and giving us the
power to complete this assignment.

Secondly we want to thank to miss Uzma

Batool for her kind suggestions and her
help, as without her; this project can’t be
made this better.

Islamic Banking
Contents:
• Introduction to Islamic Banking
• The Sharia Law of Islamic Banking
• Islamic Banking Principles for Interest
• Acting in Accordance with Sharia Law in a New
Age of Islamic Banking
• The Fast Paced Future of Islamic Banking
Governing Boards of Islamic Banks
• Islamic Banking Trends - the Future of Arab
Banking

• Common Terms Used in Islamic Banking

• Islamic banks in Pakistan

Islamic Banking
• What is Islamic banking?

Islamic banking is banking based on Islamic law

(Shariah). It follows the Shariah, called fiqh
muamalat (Islamic
rules on transactions). The rules and practices of
fiqh muamalat came from the Quran and the
Sunnah, and
other secondary sources of Islamic law such as
opinions collectively agreed among Shariah
scholars (ijma’),
analogy (qiyas) and personal reasoning (ijtihad).

Islamic Banking
• The Sharia Law of Islamic Banking

Sharia law is the law of Islam. The rules

concerning financial transactions are known as
Fiqh al-Muamalat. The most prominent of these
laws are the laws concerning the charging of
interest or fees on loans or usury fees. This is
known as Riba. Islamic banking laws also forbid
investing in financial unknowns, such as trading
in futures, and in businesses that participate in
ventures that are against Islamic principles.

Islamic Banking
• Islamic Banking Principles for Interest

To comply with the laws concerning interest, Islamic

banks often require a large down payment on property or
goods being purchased. They may also require collateral
equal to the value of the transaction. Instead of granting
“loans” in the conventional way, a bank will purchase the
goods or property from the seller and enter into an
agreement with the buyer to sell it to them at a higher
price. Since this is an exchange of goods, not money, the
banks are allowed to enter into this transaction and make a
profit. This is known as Murabaha (cost plus) and is how
all property is purchased through a Sharia compliant bank.
Islamic banks do not issue mortgages.

Cont…

Islamic Banking
• Islamic Banking Principles for
Interest

These transactions can fall under specific categories and

practices. Safe Keeping (Wadiah) is where the customer
transfers funds to the bank to hold (Keep) until their debt is
repaid. During that time the bank is allowed to invest those
funds to generate a profit for the bank. The bank may also
charge a service fee for keeping the account safe during this
period. The bank is allowed to give a gift (Hibah) on the
account in the form of a monetary payment at the end of the
term if it wishes. The bank, however, must have all deposited
monies readily available should the debt be repaid and the
deposit claimed.

Islamic Banking
• Acting in Accordance with Sharia Law in
a New Age of Islamic Banking

One of the most distinguishing practices in Islamic banking is

the lending of money interest-free. Sharia law prevents the
charging of interest on lent money. To comply with these
laws, Islamic bankers have designed many different programs
that allow for the lending of money, making of bank profits
and compliance with Sharia law.
Some Islamic banks found in Asia, most notably Bangladesh,
participate in micro-lending programs, but some banking
regulators find that this practice is not in accordance with
Sharia law.

Islamic Banking
• The Fast Paced Future of Islamic
Banking

With Islamic banking and investing growing at such an

expediential rate is easy to understand why one set of
regulations is necessary. It is estimated that nearly 200 billion
dollars a day transact through Islamic banking, a considerable
amount for such a new industry.
With an estimated 2 billion Muslims world wide it is easy to
see that there is a huge potential for growth in this industry. A
single set of regulations guiding this industry is a surefire
way to ensure the continued growth of the industry as well as
stability in the regions they serve.

Islamic Banking
• Governing Boards of Islamic Banks

Each banking institution employs a special governing board

that makes sure that all Sharia laws are complied with within
the institution. This board will review all practices and
investments prior to a transaction being finalized. They are
also responsible for reviewing any potential investments the
bank may make to ensure they comply with investment rules.
While many of these practices may seem strange to western
bankers, Islamic banking has taken its hold in the Middle
East. Deposits into Islamic banking institutions have been
growing between 25 and 40% a year since 1975. Currently it
is estimated that almost 200 billion dollars a day transacts in
Islamic banks world-wide.

Islamic Banking
• Islamic Banking Trends

Since the early 1970’s, Islamic Banking practices have been

gaining popularity and showing steady growth at an
astounding rate of 10-15% annually in recent years, despite
the world-wide economic downturn. Islamic banks base all
their rules and regulations on the Sharia law of Fiqh al-
Muamalat (rules of transactions).
Islamic banks are now located in over 51 countries around
the world, including the United States, and there are over 300
institutions that qualify as Islamic Banking institutions.
Islamic finance and investing institutions are the largest
growing sector in this industry, growing at 25 % in the year
2010.

Islamic Banking
• Common Terms Used in Islamic
Banking

One of the most distinguishing practices in Islamic banking is

the lending of money interest-free. Sharia law prevents the
charging of interest on lent money. To comply with these
laws, Islamic bankers have designed many different programs
that allow for the lending of money, making of bank profits
and compliance with Sharia law.
Some Islamic banks found in Asia, most notably Bangladesh,
participate in micro-lending programs, but some banking
regulators find that this practice is not in accordance with
Sharia law.

Islamic Banking
• 1. Sharia (path or way).

Muslims believe that the Sharia is the sacred laws of Allah.

These laws must be abided to above all others. While the
different religious sects often have separate interpretations of
these laws, they remain the guiding force of the religion.

• 2. Fiqh al Muamalat (Rules of Transaction).

These are the Sharia laws that govern all financial

transactions. It is under these guidelines that all Islamic
Banking regulations are created.

Islamic Banking
• 3. Riba (Interest or Usury).

Riba is strictly forbidden in monetary transactions. Muslims

believe it is against Allah to collect interest on money
borrowed. Therefore all financial transactions must be
performed in a very specific way so that banks can render a
profit without breaking Riba laws. Late fees are also
considered a form of Riba and must not be charged by the
banks.

• 4. Rabal-maal (lender).

The bank is considered the rabal-maal in financial

transactions. This is generally only used in financial
transactions concerning business ventures

Islamic Banking
• 5. Mudarib (borrower).

The entrepreneur in a business venture is refered to as the

Mudarib.

• 6. Mudharabah (profit sharing).

When an entrepreneur approaches a bank to borrow money

for a business venture they will most often enter into a
Mudharabah agreement. This agreement provides the
business owner all the money necessary to start the business
and the new owner manages and runs that business. Profits
are split between the parties until all the original funds are
repaid. The bank is also paid an additional amount of the
profits for a specific period agreed on to compensate for risk.
If the business fails, the bank takes on full responsibility of
that debt.

Islamic Banking
6. Mudharabah (profit sharing).

Islamic Banking
• 7. Musharakah (joint venture).

This type of agreement is exactly like the Mudharabah except

there is more than one business owner involved so the profits
are divided differently.

• 8. Wadiah (safe keeping).

The bank, as part of a lending program, may require a large

form of collateral in the form of a bank deposit. This deposit
is used for “safe keeping”. During the period that the loan is
out the bank is allowed to use that account to invest in other
opportunities to generate wealth for the bank. However, the
bank must have the ability to repay the customer immediately
if the loan is paid. Wadiah must be returned immediately
upon payment of the debt. Banks may also offer the client
Hibah as a reward.

Islamic Banking
• 8. Wadiah (safe keeping).

Islamic Banking
ijara thuma

Islamic Banking
• 9. Hibah (monetary gift).

When another person’s money is used to generate income for

the bank the bank may offer the customer Hiba as a form of
thanks. Not to be confused with interest, Hiba is 100% at the
option of the bank.

• 10. Bai al inah or Murabahah (sell and buy or cost plus).

Both of these terms are interchangeable in the Islamic

banking field. The basis of this practice is to allow for the
purchasing of property without the charging of interest. It is
the Islamic form of mortgages. When a piece of property is to
be purchased the borrower must approach the bank with
details of the sale. The bank will purchase the home for a set
price from the seller. It will then resell the property to the
buyer at a higher price. This will be the final price and no
interest is attached.

Islamic Banking
• 11. Ijarah (leasing).

The banks will lease equipment or services to a business for a

set price.

• 12. Bai salam (advance payment contract).

These ventures are very tricky in Islamic banking because

they possibly involve “futures” a practice strictly forbidden in
Sharia investment rules. Bai salam can only be performed on
goods that can be described specifically for quality and
quantity. A product that has any room for variance cannot be
used in these contracts.

Islamic Banking
There are almost 2 billion Muslims
worldwide, a statistic that cannot be
overlooked even in the banking
industry. However, Muslims have very
strict laws governing financial
transactions. Islamic banking must
adhere to the laws of Sharia to be true
Islamic banking centers.
Islamic Banking
 Islamic Banks in
Pakistan :
1. Al Baraka Bank (Pakistan) Limited
2. Bank Islami Pakistan Limited
3. Dubai Islamic Bank Pakistan limited
4. Dawood Islamic Bank Limited
5. Meezan Bank Limited

Islamic Banking
The End 