In the name of Allah(j.

j) Chapter # 5 Interest Free Banking

By Kokab Manzoor

LOGO

Contents 
Definition of interest 
Economic importance of prohibition of interest 

Islamic banking 
   Definition and need of Islamic banking Supremacy of Islamic banking Bill of exchange & Interest free loans Comparison of conventional & Islamic banking 

Insurance 
Definition, Evolution, importance and Islamic Concept of insurance

Definition of Interest

LOGO 

Interest is the price of capital. The Holy Quran uses the word Riba to denote interest which means increase, growth, addition, raise, excess. 
Allah deprives interest of all blessing and develops charity [Al-Baqara; 276]

. CAPITALIST ECONOMY Factors LAND LABOR CAPITAL ENT Compensation RENT WAGES INTEREST PROFIT LABOR RISK CAPITAL WAGES PROFIT ISLAMIC ECO SYSTEM Factors LAND Compensation RENT .Why did Islam forbids Interest.??? LOGO In Capitalist Economy there are four factors of Production while Islamic Economic system recognizes only three Factors of Production.

Economic Importance of Prohibition on Interest 1 Interest and investment ‡ ‡ LOGO Capital investment depends on the one hand on the rate of interest and on other hand on MEC. and vice versa« MEC 24 % 22 % 20 % 18 % Interest-Rate 18% 18% 18% 18% Investment 100 mn 200 mn 300 mn 400 mn . The process of investment in a country will continue as long as MEC is higher or equivalent to rate of interest.

.Cont`d«. 2 3 4 5 6 7 8 9 Interest and Price Interest and Distribution of Wealth Interest and Trade Cycle Interest and Allocation of Resources Interest and business Interest and Efficiency Interest and Economic Stability Interest and International Loans LOGO .

BANK LOGO Bank is an institution which deals in credit Functions of banks        Accepting deposits Advancing loans Providing agency services Money transfer Safe deposit lockers Investment Credit creation .

so it is necessary to reform the banking system according to the principles of Islam. waste of resources and inequitable distribution of resources among nations. oppression. .Need for Interest Free BankingLOGO  Modern banking system gives rise to injustice. And as modern banking system is based on Riba (interest) and Islam forbids interest. Meanwhile the utility of Banks is acknowledged.

LOGO What is Islamic Banking ?? Since interest is forbidden by Islam. Shirakah (partnership) and Modarbah will be the only alternative basis of banking in Islamic economy. A bank will be established by two or more individual making investments according to a fixed ratio  Islamic banking has been defined as banking governed by the principles laid down by Islamic Sharia·h .

2 They can not withdraw their money without notice as their amount will be invested in short term projects.MECHANISM OF ISLAMIC BANKING LOGO Under Islamic scheme of banking there may two types of depositors. 1 The one who deposit surplus amount and can withdraw at anytime. The depositors will share in profit and loss. bank will charge Zakat or service charges for safeguarding. .

LOGO Business of the Bank The business of the Bank may assume three forms. 1 Services on which a charge is made 2 Investment on the basis of Shirakah (partnership) or Modarbah basis 3 Free services .

commission or fixed charges on various services like.1 Services on which a charge is made LOGO Like modern banks. a) b) c) d) Facility of lockers Transfer of Money Receiving and Forwarding of trade Goods Services as financial and legal consultants to business corporations . the Islamic banks will also receive fee.

Modarbah A contract between partners in which one provides capital and other provides services. Shirakah A contract between partners on both capital and profit.2 Investment on the basis of LOGO Shirakah or Modarbah basis The interest free banks will enter into Shirakah or Modarbah transaction with businessmen.  Note these two will be discussed in detail in next chapter .

Issue of Loans in interest free LOGO Banking system 1. 2. The debtor will provide guarantee 4. Banks shall also be entitled to take charge free loans from Central Bank. The bank will issue loans without any charge to businessmen for short period. Such loans will be issued by the bank out of ³Loan Account´ 3. 5. Bank have right to invest the available sum in ³Loan Account´ in profitable venture. .

Bill of exchange & interest-free LOGO Loans Discounting Bills of Exchange would not be permissible. and will recover the full amount on the date of the maturity of the bill of exchange. however following procedures may be adopted  Instead of bill of Exchange the businessmen should take loans from Banks on Modaraba basis.  Bank will advance charge free loans  The bank will make no deductions. .

Process of Credit Creation in Islamic banking LOGO Bank will keep 10% as reserve of Loan Account for meeting daily needs Loan advanced. will be again deposited in bank Bank will hold large amount of deposits and rest will be invested in Modarbah That amount will be deposited in various other banks. hence bank receives back a large part of the money it lent out or invested. Hence the process of credit creation is similar to conventional banking but the technique is different .

charging interest on the asset side.  Lends the funds to the borrowers. LOGO Islamic Banking  Partnership (Mudarabah) or profit and loss sharing arrangement between the bank and the depositors  Profit and loss sharing (Musharaka) or trade and leasing based financing arrangement between the bank and its clients users of funds) .COMPARISON Conventional banking  Borrows funds from the depositors paying interest on the liability side of its balance sheet.

COMPARISON Conventional banking  Between the depositors and the bank. there is an iron wall. .  The interest or the return is predetermined or fixed in advance LOGO Islamic Banking  Islamic bank entitles the depositors --to be informed of what the bank does with their money --where their money would be invested  The profit or the return is based on the actual investment outcome.

COMPARISON Conventional banking Islamic Banking LOGO Money earning money Transactions are real without real sector asset based as per business: Transactions defined principles of are financial asset trading or leasing based .

can easily be countered.chance of unhealthy investment²leads to depression and ultimately unemployment± also acts criminally if borrower fails to repay. Islamic banking  Interest free loans± banks interested in investment rather than loan--so healthy investment takes place± reduces unemployment rate--less chance of depression-even if.SUPERIORITY OF ISLAMIC CONCEPTION OF BANKING LOGO Conventional banking  Loan on interest-. .

Riba.Summary & Conclusion LOGO 1. Saving is the function of investment not the interest. Short term and long term financing can be made through system of guarantee. 5. usury. . 4. 6. Islamic banking is based on principles of partnership. Islamic banks can contribute better to economic development by performing extra banking activities. Strong relationship of banks with depositors and entrepreneurs. Interest are prohibited. 2. 3.

LOGO Islam and Insurance .

 This specified event must have some element of uncertainty about it. . in return for the agreed consideration. on the happening of a specified event. called the ³insurer´ undertakes. called the ³premium´.Definition of Insurance Definition LOGO  ³a contract whereby one person. called the ³assured´ a sum of money. to pay to another person.

Importance of insurance Risk and uncertainty are part of daily life of human being Risk is of two types 1 (Risk of loss) In any economic activity a person may gain profit or suffer loss LOGO 2 Breakage of crockery. sinking of ships etc« . or accidents. Hazards. injuries. glassware etc.

LOGO Importance of insurance In business the second kind of risk is the greatest target of insurance. It gives sense of security to businessmen Improves efficiency Raise morale to face risk .

Arab traders launched a system of insurance on a Shirakah basis. .Evolution of Insurance LOGO Started to meet risk of traders whose ships were often wrecked by storms Muslims maritime traders during the Islamic rule in Spain were the pioneers.

This is a pact among a participants who agree to guarantee among themselves against loss or damage to any of them. It is a system of Islamic insurance based on the principle that ³the risk will be shared collectively by the group Voluntarily´.Takaful Islamic concept of insurance Takaful is an Arabic word that means "guaranteeing each other". LOGO .

. but help ye not one another in sin and rancor". 2.The principle of ³fortunate many helping the unfortunate few" is a concept recognized by Islam.LOGO Basic Principle behind Takaful 1.The Quran states in Surah Al-Maidah verse # 2: "Help ye one another in righteousness and piety.

Profit will be shared on agreed ratio.LOGO Operation of Takaful Fund The contribution collected by company will be further invested on the principle of Al ±Modarbah. All premium holders will participate in pofit and loss. . through which the element of interest (riba) will be replaced.

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