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PROJECT REPORT

ISLAMIC BANKING V/S CONVENTIONAL BANKING

Credit Assignment No.01

By
MUHAMMAD ASGHAR 07-MBA-(i) 2015

Credit Assignment
(Islamic Banking)

Under the supervision of

SIR MEHRAN TUNIO

Presented to

School of Business Administration

SHAHEED BENAZIR BHUTTO UNIVERSITY,


SHAHEED BENAZIRABAD
CHAPTER NO. 01
INTRODUCTION OF TWO BANKS
INTRODUCTION OF AL-BARAKA BANK
The origin of Islamic banking system can be traced back to the advent of Islam when the
Prophet himself carried out trading operations for his wife. The Mudarbah or Islamic partnerships has
been widely appreciated by the Muslim business community for centuries but the concept of Riba or
interest has gained very little diligence in regular or day-to-day transactions

Al Baraka Bank (Pakistan) Limited (ABPL) is the result of a merger between Al Baraka Islamic Bank
Pakistan (AIBP), the branch operations of Al Baraka Islamic Bank (AIB) Bahrain and Emirates Global
Islamic Bank (Pakistan). The merged entity commenced operations on November 1st, 2010.

The merger, a first in the Islamic Banking sector in Pakistan, positions ABPL to play an important role
in further growing an industry which has witnessed tremendous growth over the last 12 years. This
growth was further catalyzed in November 2016 when Burj Bank Limiteds operations were merged into
ABPL; making the Bank one of the leaders in the Islamic Banking sphere of the country.

With assets in excess of Rs. 120 billion; a workforce of over 2800 professionals and a network of 224
branches in 100 cities and towns across Pakistan, Al Baraka Bank (Pakistan) Limited is devoted in
providing customers with a range of Shariah compliant products to suit their banking needs.

Faced with growing challenges in this rapidly developing market, ABPL strongly relies on its ability to
be an effective and efficient market player through renewed focus on superior customer service,
development of Islamic alternatives to conventional financing facilities, and strict adherence to Shariah
rulings and principles.

Al Baraka Bank (Pakistan) Limited, offers a wide array of Islamic financing products such as Murabaha,
Ijarah, Musharaka and Islamic Export Refinance etc., catering to a diverse cross-section of the economy
including the Corporate, SME and Consumer sectors.
Moreover, various Shariah compliant deposit schemes are also available for customers to invest their
funds in, along with a variety of other ancillary services such as online branch banking, Al Baraka Union
Pay Debit Card, SMS banking, Interbank Funds Transfer, E-Statements, electronic statement of accounts,
safe deposit lockers and utility bill payments.

ABPL is a subsidiary of Al Baraka Banking Group (ABG), a Bahrain Joint Stock Company, listed on
Bahrain and NASDAQ Dubai stock exchanges. It is a leading International Islamic bank with Standard
& Poors at BB+ (long term) / B (short term) respectively and offers Retail, Corporate, Investment
Banking and Treasury Services strictly in accordance with the principles of Islamic Shariah. The
authorized capital of ABG is US$ 2 billion; asset base of US$ 24 billion and total equity of US$ 2.1

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billion. The group has Banking units and representative offices in 15 countries spanning from Europe to
MENA and Asia, with a network exceeding 700 Branches.

It is part of ABPLs commitment, to put the customers values foremost, hence providing them with a
banking solution that is in line with their beliefs.
Our Vision
We believe that society needs a fair and equitable financial system which rewards effort and contributes
to the development of the community.
Mission Statement
To meet the financial needs of communities across the world by conducting business ethically in
accordance with the Shariah, practicing the highest professional standards and sharing the mutual benefits
with the customers, staff and shareholders who participate in our business success.
Core Values

Partnership Our shared beliefs create strong bonds that form the basis of long term relationships
with customers and staff.
Driven We have the energy and perseverance it will take to make an impact in our customers lives
and for the greater good of the society.
Neighbourly We value and respect the communities we serve. Our doors are always open; our
customers always experience a warm-hearted, hospitable welcome and accommodating service.
Peace of Mind Our customers are rest assured that their financial interests are being managed by
us to the highest ethical standards.

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INTRODUCTION OF HABIB BANK

HBL was the first commercial bank to be established in Pakistan in 1947. Over the
years, HBL has grown its branch network and maintained its position as the largest private sector
bank with over 1,600 branches and 1,700 ATMs globally and a customer base exceeding eight
million relationships.

The Government of Pakistan privatized HBL in 2004 through which AKFED acquired 51% of the
Bank's shareholding and the management control. The remaining 41.5% shareholding by the
Government of Pakistan was divested in April 2015. AKFED continues to retain 51%
shareholding in HBL while the remaining shareholding is held by individuals, local and foreign
institutions and funds including CDC Group Plc which holds 5% and International Finance
Corporation which holds 3%.

With a global presence in over 25 countries spanning across four continents, HBL is also the
largest domestic multinational. The Bank is expanding its presence in principal international
markets including the UK, UAE, South and Central Asia, Africa and the Far East.

The key areas of operations encompass product offerings and services in Retail and Consumer
Banking. HBL also has the largest Corporate Banking portfolio in the country with an active
Investment Banking arm. SME and Agriculture lending programs and banking services are
offered in urban and rural centers.

VISION
Enabling people to advance with confidence and success.
MISSION
To make our investor(s) prosper, our staff excel and to create value for our stakeholders.

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CHAPTER NO. 02
PRODUCTS OF TWO BANKS
PRODUCTS & SERVICES A-BARAKA ISLAMIC BANK

Ijarah Financing (Commercial Vehicles)


Underlying Islamic Mode Ijarah

Type of Product Corporate, SME


Basis for Pricing KIBOR based fixed and variable rates
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors
3 Years
Maximum Tenors 5 Years
Target Customers All customers falling under corporate,
SME sector
Security/Collateral
Required Title of the leased asset on bank's name,
Security deposit and or any other
security as per PRs

Ijarah Financing (office equipment)


Underlying Islamic Mode Ijarah

Type of Product Corporate, SME


Basis for Pricing KIBOR based fixed and variable rates
As per PRs and subject to bank's
Minimum Financing Limit internal
assessment for allocation of limit
As per PRs and subject to bank's
Maximum Financing Limit internal
assessment for allocation of limit
Minimum Tenors 3 Years

Maximum Tenors 5 Years


Target Customers All customers falling under corporate,
SME sector
Security/Collateral
Required Title of the leased asset on bank's name,
Security deposit and or any other

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Ijarah Financing (Ijarah for Vehicle-Domestic)
Underlying Islamic Mode Ijarah

Type of Product Corporate, SME


Basis for Pricing KIBOR based fixed and variable rates
As per PRs and subject to bank's
Minimum Financing Limit internal
assessment for allocation of limit
As per PRs and subject to bank's
Maximum Financing Limit internal
assessment for allocation of limit
Minimum Tenors 3 Years

Maximum Tenors 5 Years


Target Customers All customers falling under corporate,
SME sector
Security/Collateral Required Title of the leased asset on bank's name,
Security deposit and or any other
security as per PRs

Ijarah Financing (Ijarah for Plant & Machinery)


Underlying Islamic Mode Ijarah

Type of Product Corporate, SME


Basis for Pricing KIBOR based fixed and variable rates
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 3 Years

Maximum Tenors 5 Years


Target Customers All customers falling under corporate,
SME sector
Security/Collateral
Required Title of the leased asset on bank's name,
Security deposit and or any other
security as per PRs

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Ijarah Financing (Ijarah for vehicle-domestic)
Underlying Islamic Mode Ijarah

Type of Product Corporate, SME


Basis for Pricing KIBOR based fixed and variable rates
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 3 Years

Maximum Tenors 5 Years


Target Customers All customers falling under corporate,
SME sector
Security/Collateral Required Title of the leased asset on bank's name,
Security deposit and or any other

Murabaha Finance
Underlying Islamic Mode Murabaha

Type of Product Corporate, SME,


Basis for Pricing KIBOR based fixed rates for each
transaction.
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 90 days

Maximum Tenors 1 Year


Target Customers All customers falling under corporate,
SME sector
Security/Collateral Required Cash, Collateral, Pledge, Mortgage or
hypothecation of asset or as per PRs or
bank's requirement.

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Export Murabaha & Murabaha Finance FE-25
Underlying Islamic Mode Murabaha

Type of Product Corporate, SME


Basis for Pricing Current interbank foreign currency rate
for export Murabaha: LIBOR based
current rates for Murabaha Finance
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 90 days

Maximum Tenors 180 Year

Import Murabaha & Murabaha Finance FE 25 Import


Underlying Islamic Mode Murabaha

Type of Product Corporate, SME


Basis for Pricing Current interbank foreign currency rate
for export Murabaha: LIBOR based
current rates for Murabaha Finance
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 90 days

Maximum Tenors 180 Year


Target Customers All customers falling under corporate,
SME sector
Security/Collateral Required Cash, Collateral, Pledge, Mortgage or
hypothecation of asset or as per PRs or
bank's requirement.

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Islamic Export Refinance Scheme
Underlying Islamic Mode Murabaha, Istisna, Musawama,
Musharaka
Type of Product Corporate, SME
Basis for Pricing As per SBP refinance rate
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors As per PRs.

Maximum Tenors 180 Year


Target Customers All customers falling under corporate,
SME sector
Security/Collateral Required Cash, Collateral, Pledge, Mortgage or
hypothecation of asset or as per PRs or
bank's requirement.

Housing Musharaka-Consumer
Underlying Islamic Mode Diminishing Musharaka

Type of Product Consumer


Basis for Pricing KIBOR
Minimum Financing Limit Rs. 300,000

Maximum Financing Limit Rs.20 million

Minimum Tenors 3 Years

Maximum Tenors 20 Years


Target Customers Customers falling under salaried, self
employed and businessmen categories
Security/Collateral Required properties are mortgaged in bank's favor,
personal Guarantee or any other
collateral.

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Commercial Construction and Purchase
Underlying Islamic Mode Diminishing Musharaka

Type of Product Corporate, SME


Basis for Pricing KIBOR
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors No

Maximum Tenors 5 Years


Target Customers All customer falling under Corporate
/SME sector.
Security/Collateral Required Properties are mortgaged in banks
favor, personal Guarantee or any other
collateral.

Personal Murabaha-Consumer
Underlying Islamic Mode Murabaha

Type of Product Consumer


Basis for Pricing Market based fixed rate
Minimum Financing Limit Rs. 25,000

Maximum Financing Limit Rs.500,00

Minimum Tenors 6 Months

Maximum Tenors 2 Years


Target Customers Customers falling under salaried, self
employed and businessmen categories
for consumer financing.
Security/Collateral Required Murabaha shall be secured by way of
hypothecation of items to the bank

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Export Musharaka
Underlying Islamic Mode Musharaka

Type of Product Corporate


Basis for Pricing KIBOR plus spread (pre-agreed ratio)
Minimum Financing Limit As per PRs and bank's internal
assessment
Maximum Financing Limit As per PRs and bank's internal
assessment
Minimum Tenors As per PRs and bank's internal
assessment
Maximum Tenors 180 days
Target Customers Corporate, SME

Security/Collateral Required Pledge, Mortgage or Hypothecation of


assets

LIABILITY SIDE PRODUCT

PLS Saving Account-Local


Underlying Islamic Mode Mudaraba
Acceptable Currency PKR
Type of Product Term
Minimum Balance Requirement (if NA
any)
Minimum Tenor 7 days
Maximum Tenor 5 years
Profit Calculation Daily Product Basis
Periodicity of profit calculation Half Yearly
Target Customers Individuals, Organizations, Firms,
Companies, businesses
Service charges Leviable (if any) No

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PLS Saving Account-Foreign
Underlying Islamic Mode Mudaraba
Acceptable Currency Euro, USD, GBP, Yen.
Type of Product Term
Minimum Balance Requirement (if NA
any)
Minimum Tenor 7 days
Maximum Tenor 2 years.
Profit Calculation Daily Product Basis
Periodicity of profit calculation Half Yearly
Target Customers Organizations, Firms, Individuals,
companies, businesses

Service charges Leviable (if any) No

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PRODUCTS Of HBL
Various products are segmented by ages, needs, wants and customers satisfaction. These
products are as follows.

1. DEPOSIT ACCOUNT
Current Account.
Foreign Currency Account
PLS Account
Term Deposit Account
HBL Freedom Account
HBL Business Value Account
HBL Advantage Account
HBL Value Account
Daily Munafa Account

2.CURRENT ACCOUNT
This type of account is made for the business current deposits to meet your daily banking needs.
Account Opening Amount: Rs. 1,000
Minimum Deposit: Rs. 5,000
Maturity Rate: NIL
Interest Rate: NIL
Features:
3.FOREIGN CURRENCY ACCOUNT
Offered in multiple currencies.
Account Opening Amount: 1,000$, 1,800
Minimum Deposit: 1,000$ OR
Interest Rate: min 0.1 and max 0.90
Features:
Loan up to 90%

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4.SAVING ACCOUNT
HBLs saving account cater to individual saving habits. After the Islamlization of banking system in the
country it has given the name as PLS account.
Account Opening Amount: Rs.100
Minimum Deposit: Rs. 20,000
Maturity Rate: NIL
Interest Rate: 5.06% annually
4.HBL VALUE ACCOUNT
Now dont worry about sudden finances.
Account Opening Amount: No charge
Minimum Deposit: Rs. 10,000
Maturity Rate: NIL
Interest Rate: 8% annually
Features: maddddoooooo
Moooomooooo
Shakoooorrrr
Mustakeemmm
Khubsurat
Shakeeerrraaa
Benazir
5.HBL BUSINESS VALUE ACCOUNT
Now for businesspersons there are different transactions account.
Account Opening Amount: NIL
Minimum Deposit: Rs. 10,000
Maturity Rate: NIL
Interest Rate: NIL
Features:
Free duplicate account statements

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2.HBL ID
HBL ID is to attract the age group of 18-24.to teach them how to manage their finances, how to
spend, how to save money etc. so that the finally get their desire item.
FEATURES:
Open an account with any amount and enjoy the flexibility of no minimum balance.
Saving buckets for 3 or 12 months. profit rate up to 9%
Free Cheque book teen age.
Mobile Top-ups facility.
3.MONEY CLUB
HBL offers money club younger saving account for age 6 to 7 years.

FEATURES:
Open an account with any amount.
Attractive profit rate.
Free Cheque book and debit card.
Welcome pack and gifts.
Savings rewards are given at monthly or annually bases.
4.PERSONAL LOAN
With HBL personal loan, gain the freedom to use hard cash for all your needs.

FEATURES:
Loan amount from Rs. 25,000 to Rs. 2,000,000.
Choice of 12,24,36,48,60 months for pay back.
Lowest mark-up.
Quick processing.
Mobile Top-ups facility
5.HBL CREDIT CARD
With HBL credit card, get more from life
FEATURES
Online shopping facilities
Exclusive discounts on using HBL credit card in various stores
Installment plans for generators, appliances, mobile handsets and more
Cash advances, balance transfer

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6.HBL DEBIT CARD
With HBL Debit Card, enjoy 24/7 access to your HBL account where ever you are
FEATURES
No need to carry cash
Maximum limit of transaction from ATM Card is Rs. 25,000
Access to over 30 million outlets and 1.4 million ATMs worldwide
No liability of lost/stolen card once HBL is notified
Statement generation via HBL ATMs, internet banking and branches.
7.HBL CAR TO CAR
With HBL car to car, upgrade your car frequently at half the monthly installment
FEATURES
Installment 0% to 0% less than conventional financing
Free upgrade to a new car every 2years
Security via insurance and tracking system
Buy back guarantee
8.PHONE BANKING
Call 111-111-425 for:

Bankers Cheque request.


Purchase mobile prepaid vouchers.
Balance enquiry.
Account information.
HBL debit card activation & de-activation.
HBL credit card activation & de-activation.
Stop Cheque payment request.

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9.MOBILE BANKING
With HBL mobile banking you can access your account through your GPRS enabled mobile phone and
perform important actions.

FEATURES:
Utility bill payment.
Mobile postpaid bill payment and top-up facility only for Ufone and Warid customers.
Purchase mobile prepaid vouchers.
HBL credit card bill payment.
Maintain account settings.
Ufone customers can access: mini statement, ufone postpaid bill payment, prepaid Uload etc.

10.PRESTIGE BANKING
Prestige banking is for old employees and customers having account in HBL.

FEATURES:
Personalized services.
Free Cheque book.
Free debit card with exceed limit.
Black color Cheque book and ATM card.
Facilities in airport lounge.
11.HOUSING FINANCE
Financing available for:
Purchase of house.
Home improvement and renovation.
Self-construction.
FEATURES:
Lowest mark-up, monthly installments.
5 years fixed rates.
Lowest processing charges.
Finance range is from 3-20 years.
Financing limit up-to RS.7.5million.
RS 30million for home improvement.

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Tele-printer service
Introduced in 1952, this system helped the Bank to improve its services.
Rupee Travelers Cheques
It was introduced in 1957. Here the customers are provided the facility of encashment of
their travelers cheques through any branch of the Bank.
Small Factory Owner Scheme
In 1959, the Bank offered loans to small scale producers under the small factory owner
scheme in order to boost the economy of Pakistan.
Foreign Tele printer Service
It was introduced in 1961. The idea behind this scheme was to provide quick and prompt
Banking services to customers in foreign countries.
Gift Cheques schemes
It was launched in 1962. Under this scheme, the Bank provided customers with preprinted
Cheques of various denominations which could be used to send gifts to their loved
one on various occasions.
School Banking
This scheme was introduced in 1962 to provide Banking services to children in a number
of schools, though out the country.

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Mode of financing
The fundamental objective of Islamic finance is to fulfill the teachings of the Holy Quran, as opposed to
capitalist approach to get maximum return from financial assets. The operations of markets based on Riba
or unfair contracts, the risk of speculation (Gharar) are inapplicable as the basic principle of the Shariah.
The Holy Quran does not contain any condemnation regarding the investments which are morally
acceptable and have the benefits of fair and legitimate profit. Islamic law reflects the general spirit of
Allahs commands that control all the aspects of Muslim life. Islamic finance is directly related to spiritual
values and social justice. In Islam, there is no separation between religion and the state of business.
Receiving and paying interest is prohibited for Muslims as per the injunctions of Shariah law which
prevents vigilant Muslims from involving in prohibited economic transactions. Some conditions
governing Islamic investment can be described as follows: Money does not make money in itself, but it
is effective only if it involves in a task, activity, or job. All the investment must be made on the basis of
profit and loss sharing; investment is lawful only in those business activities which are not prohibited.
There will be no gharar in business contracts, it means that uncertainty, and ignorance and the conditions
which lead to disputes are strictly prohibited. Islamic Modes of Financing: In pursuant to the judgment of
the supreme court on Riba dated December 23, 1999 the commission for Transformation of Financial
System was set up in the State Bank of Pakistan. The commission gave approval for the Islamic modes of
financing on the basis of Musharaka, Mudaraba, Murabaha, Musawama, Leasing, Salam and Istisna. The
Shariah board also gave approval of these financial modes in order to circulate the business of Banks
conducting Islamic banking in Pakistan. Details of these essentials are given below.
1. Murabaha
It is the most frequently exercised mode of Islamic financing which is
practically implemented in financial institutions and in other financial
transactions.
It is defined as:
Murabaha is particular kind of sale where the seller expressly
mentions the cost of the sold commodity he has incurred, and sells it
to another person by adding some profit (1)
For financial transactions by using Murabaha, it is very important that
all conditions of sale defined by the Islamic jurists should be fulfilled.
For example:
I) Before sale, the commodity of sale has to be in the possession of
vendor.
II) If the sale is attributed to a future date or event, it will be
regarded as void and if parties want to effect sale, a fresh sale
contract is required.
III) Price should be certain for the validity of the sale
IV) The delivery of the commodities must be certain etc.
Now we can explain financial transactions by using Murabaha in
following points
1: On the time of sale the cost of goods sold is expressed in
mudaraba and sells the commodity by adding profit with the
mutual consent of both parties
2: Cost include all expenses like carrying charges and other taxes
etc, but the administrative expenses like salaries of staff and rent
are not included.
3: The validity of Murabaha depends on the fact that parties should
know about the exact cost otherwise Musawamah is used.

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4: Most preferred way is that the financier himself purchase
commodity but due to non-applicability of the concept, they can
also, higher agent for purchasing commodity on their behalf.
5: Commodity should be purchased from the third party
6: Payment can be made on differed basis with the mutual consent
of both parties.
So, we can conclude by saying that this Islamic instrument is not a
loan that bears interest but it practiced as a sale of commodity by adding
some agreed profit whose payment can be made in some future date.
Ijara:
It is also a term used in Islamic Fiqh, which means to give some
thing on rent
Ijara has two different types:
1: If a person provide services and wage is given as compensation,
in this sense employee is called Mustajir and the employee is
called Ajir.
2: Other type is regarding the usufruct of assets and properties. So
Ijara means to transfer the usufruct of a particular property to
another person in exchange for rent claimed from him. (3)
For this concept the term Leasing is used in English, lessor is called
Mujir and the lessee is called Mustajir and the rent payable is called
Ujrah.
Now we briefly explain some basic Islamic rules for second type of
Ijara
1: For valid lease contract property must be in the possession of
lessor.
2: The liabilities rising from owner ship of property shall be born
by lessor.
3: Lease asset is only used for purpose mentioned in lease contract.
4: Damage to the leased asset by misuse or negligence must be
born by lessee.
5: Properties of two or more persons can be leased out and the
leasing amount is dispersed according to the respective share in
the property.
6: Rent amount must be fixed, but it is permitted that for different
phase, different rent is fixed.
7: If the rent is not paid on agreed time the lessee can be
accountable to pay price calculated in approved rate. (4)
So these concepts are used for financing of this type.
Salam:
As it is known very well, according to the jurisprudence of Islam it
is compulsory for the validity of contract that the physical ownership is
necessary for the seller. But it has two exceptions based on some
defined conditions we will discuss both separately.
Salam:
A sale where by the seller undertakes to supply some specific
goods to the buyer at a future date in exchange of an advanced price
fully paid at spot.(5)
Holy prophet (PBUH) allowed Salam on following circumstances: (6)
1: Full payment should be made from the end of buyer because
salam is allowed with keeping in mind the unavailability of
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finance of the seller like farmers.

Istisna:
Istisna is a mode of finance it is defined as:
Kind of sale where a commodity is transacted before it comes into
existence.(7)
We can say in current era of global business a party orders to
manufacture a product and for this some time he/she have to pay
advance payment.
The important point in the case of Istasna that the manufacturer uses
its own material for production otherwise the contract will be of Ijara
rather than Istisna.
Also it is important to fix the price with the approval of concerned
people and specification of product should also be settled.
There are some differences between Istisna and Salam:
1) In Istisna manufacturing of commodity is necessary
2) In salaam, full price is paid in advance but in Istisna there is no such
condition
3) Delivery time is important time of Salam and not of Istisna.(8)
Musharaka:
The term of Musharkaha is used in Islamic mode of financing it comes
from word Sharika, that means sharing. It can be separated into two
kinds.
1) Sharika ul Milk:
It refers to combined ownership of the property by two or more
parties; it has two ways.
1. At the option of parties, such as jointly purchase of
equipment.
2. It comes automatically for example heirs ownership of
property after the death of concerned person.
2) Sharikat ul Aqd:
It means partnership by mutual contract
It has further three sub divisions:
1. Sharikat-ul-amaal
2. Sharikat-ul-amwaal
3. Sharikat-ul-wajooh.
We can explain some rules of Musharkaha on over all basis as under.
All the valid conditions of sale should be present in the Musharkah
for its validity.
Investment comes from all parties
Percentage of profit should be determined when contract is made
Lumpsum amount is not allowed in Musharaka
Ratio of profit distribution is a contradictory point in Musharakah.
According to Imam Malik and Shafi profit is shared according to the
percentage of investment. According to Imam Ahmad profit sharing
ration can be different from investment. Imam Abu Hanifah make a
coordination between the both point of views. According to him if
the partner will remain sleeping through out the contract the profit
should not exceed from its investment.
On the point of loss all the Islamic jurists are given one view that
loss will be distributed according to the share of investment.
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Any partner can exercise its right for the termination of contract.
If the partner dies or insane then the contract is automatically
terminated.
Mudaraba:
Mudaraba is a special kind of partnership, where one partner gives money
to another for investing it in a commercial interprise. The investment comes
from the first partner who is called Rabul Mall and the management is
exclusively done by Mudarib.
I) Rabul Mall may specify a specific business and Mudarib have to do
that business.
II) Rabul Mall can contract with more than one person
III) Islam has not specify the percentage of profit it depends upon the
parties mutual consent, but it is prohibited strictly to allocate lump
sum amount to any party.
IV) Any party can terminate the contract only condition is a notice to
other party.
Islamic Scholars have consensus that Sharikah and Mudarabah are
the real modes of Islamic finance. Murabaha, Ijarah, Salam and Istisna were
adopted modes of finance temporarily for interim periods. When Sharikah
and Mudarabah are established, others will be withdrawn. But it can not be
made possible up till now. Ijarah and Murabaha are the major modes of
Islamic finance which are being used. Main cause of not using Sharikha and
Mudarabah as mode of finance in our financial institutions is that the
partner and Mudariba in Sharikah and Mudarabah are Ameen not Dhamin
of investment (Capital) according to the Shariah. Most of the investors are
not investing their capital in Sharikah and Mudarabah based instruments
and products in financial institutions because they do not trust others about
their investments. They want to ensure the security of their capital.
Without implementing teachings and injunctions of Islam in our individual
and collective life, we cannot have the true results from any system which is
presented in Shariah to solve our problems. Until we do not adopt Sharikah
and Mudarabah as major modes of finance, we shall not be able to change
prevailing economic system into Riba free Islamic economic system in its
true senses.
Musharaka
According to Hadith Qudasi (revelation reported by Prophet Muhammad PBUH) Indeed, Allah the
Exalted says: I am the third of the two partners so long as the one does not cheat the other, and when
he cheats, I withdraw myself (Khan, 1989). Literal meaning of Musharaka is sharing. Its root in
Arabic language Shirka means being a partner. Musharaka means a joint enterprise formed
conducting some business in which all partners share the profit according to pre agreed ratio while
loss is shared according to the ratio of contribution (Meezan bank guide 2002). For a valid Musharaka
fulfillment of certain conditions required. First is there must be an agreement written (verbal) among
the partners stating clearly the terms and conditions including management, capital contributions,
profit and loss sharing among the partners. Second capital can be contributed in cash as well as in
assets. However, once an asset is contributed as capital that belongs to firm and contributing partner
is relieved from the bar of risks and returns attached with ownership. Third profit is distributed
according to agreement of partnership however sleeping partner cannot claim share in profit more than
his proportionate share in equity. None of the partner can guarantee the capital or profit share to any
other partner (Sharia standard 12). Under Musharaka IFIs are receiving deposits and finances business
requirements for profit and loss sharing.

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Diminishing Musharaka
Diminishing Musharaka is a form of declining partnership between IFI and client generally used to
finance real estates. When a customer requests to IFI for financing to purchase an asset IFI participates
in the ownership of asset by contributing required finance. Certain portion (e.g.20%) must be
contributed by customer. Total equity of bank is divided into units of smaller amounts which are
purchased by client in installments. Under this mode of financing one of the partners (client) promises
to buy the equity share of the other partner (IFI) gradually until the title to the equity is completely
transferred to him. Buying and selling of equity units must be independent of partnership contract and
must not be stipulated in partnership contract. Generally, IFI rent out his share to client and earns
rentals. Any profit accruing on property is distributed among the co-owners according to agreed ratio
however losses must be shared in proportion of equity (Sharia standard 12). Diminishing Musharaka
is used for house financing by IFIs and has replaced successfully conventional mortgages.
Bai Salam
Bai e Salam is a form of sale contract where by IFIs purchase goods for spot payment with deferred
delivery. Practically it is used in financing of agricultural needs of farmers. Farmers sell their crops
prior to harvesting to IFIs to get money to purchase seeds and fertilizers. Generally spot price agreed
is lesser than future the actual date of delivery, hence IFIs are making profit. As a matter of practice
IFIs are entering into a parallel Salam contract with third party to sell the proceeds once taken over
however execution of second contract is not conditional to the fulfillment of first (Sharia standard
10).
Bai Muajjal
Literal meaning is deferred / credit sales. Islamic financial Institutions (IFIs) are using this mode to
finance the customers needs by supply of desired commodities. The difference between Murabaha
and Bai Muajjal lies in disclosure of cost. Under Bai Muajjal cost may or may not be disclosed. All
other features are same as discussed in Murabaha.

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Similarities and Difference Islamic Banking V/S Conventional Banking
Islamic Financial Institutions (IFIs) are operating in the same society where conventional banks are
operating and perform all those functions which are expected from a financial institution. IFIs are
assisting business world by providing all the services required to run the economy smoothly, however,
the philosophy and operations are different. In this section I will analyze the operations and products
of IFIs in comparison with traditional conventional banks. Any financial system is expected to assist
in running the economy by providing the following services grouped in two headings. First; Savings
mobilization from savers to entrepreneurs and Second; Provision of general utility services including
transfer of funds, facilitation in international trades, consultancy services, safekeeping of valuables,
and any other service for a fee. There is no restriction on provision of such services by IFIs as for the
service is not against the Sharia. However there exists difference in mechanism of funds mobilization
from savers to entrepreneurs as described following. Savings mobilization consists of two phases i.e.
accepting deposits and extending financing and investments.
Deposits
Deposits are collected from savers under both type of institutions for reward irrespective a bank is
operating under conventional system or Islamic system. The difference lies in agreement of reward.
Under conventional system reward is fixed and predetermined while under Islamic deposits are
accepted through Musharaka and Mudaraba (appendix B) where reward is variable. Under
conventional banking return is higher on long-term deposits and lower for short-term deposits. Same
is the practice in Islamic banking to share profit with depositors. Higher weight for profit sharing is
assigned to long-term deposits being available to bank for investing in longer term projects yielding
superior returns and lower weight for short-term deposits which cannot be invested in long term
projects. The only difference in conventional and Islamic system lies in sharing of risk and reward.
Under conventional system total risk is born by the bank and total reward belongs to it after servicing
the depositors at fixed rate while under Islamic system risk and reward both are shared with depositors.
Reward of depositors is linked with outcomes of investments made by IFIs. Under Islamic financial
system only those IFIs will be able to collect deposits who can establish trust in the eyes of masses
hence leading to optimal performance by financial industry. So for IFIs working in Pakistan have
succeeded in establishing their credibility in the eyes of savers as depicted in table 2 (appendix A) an
increasing trend of deposits collection (SBP,2010).
Financing and Investments
The second phase in savings mobilization process is extension of credit facility to business and
industry for return. Both types of institutions (Islamic and Conventional) are providing financing to
productive channels for reward. The difference lies in financing agreement. Conventional banks are
offering loan for a fixed reward while IFIs cannot do that because they cannot charge interest. IFIs can
charge profit on investments but not interest on loans. In conventional banking three types of loans
are issued to clients including short term loans, overdrafts and long-term loans. Islamic banks cannot
issue loans except interest free loans (Qarz e Hasna) for any requirement however they can do business
by providing the required asset to client. In following paragraphs, I present the comparative working
of different products (financing scheme) of both systems.
Overdrafts/Credit Cards
Conventional banks offer the facility of overdrawing from account of the customer on interest. One of
its form is use of credit card whereby limit of overdrawing for customer is set by the bank. Credit card
provides dual facility to customer including financing as well as facility of plastic money whereby
customer can meet his requirement without carrying cash. As for facility of financing is concerned
that is not offered by Islamic banks except in the form of Murabaha (which means IFI shall deliver the
desired commodity and not the cash) however facility to shop/meet requirement is provided through
debit card whereby a customer can use his card if his account carries credit balance. Under
conventional banking a customer is charged with interest once the facility availed however under
Murabaha only profit is due when the commodity is delivered to the customer.
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Furthermore, in case of default customer is charged with further interest for the extra period under
conventional system however extra charging is not allowed under Murabaha.
Short term loans
Short term and medium term loans are provided to customer to meet working capital requirements of
firm by conventional banks. Working capital is required by firms to invest in inventories and accounts
receivables and meet the expenses. As for inventory investment is concerned that is provided by
Islamic banks through Murabaha. As for meeting of day to day expenses of business is concerned
financing is provided through participation term certificates where by profit of a certain period (e.g.
quarter, six month, one year) is shared by IFIs on prorata basis. However, financing through
participation term certificates is not as easy as a short-term loan from conventional bank due to risk
involved for IFIs in the transaction. Firm seeking short-term facility from IFIs has to prove the viability
of the project/business to the satisfaction of investor. For meeting the working capital requirements of
nonprofit organizations to date there is no arrangement under Islamic financial system. Personal
consumption loans are also not issued by IFIs however any individual of sound financial position can
acquire anything for his personal use under Murabaha financing whereby a certain percentage of profit
is added on cost by IFIs. Murabaha financing is very useful for short to medium term financial
requirements of business/nonprofit organizations and individuals. Murabaha financing is asset based
financing and anyone can request to an IFI for provision of an asset generally used for Halal (lawful)
purposes. By default, under Islamic financial system IFIs cannot lend cash for interest (only exception
is Qarz e HasnaCharity loan). One of the features of Murabaha is in case of delay in payment by
customer IFI cannot ask for extra amount as time value of money like conventional banks. However,
penalty is imposed on defaulter if stipulated in original contract of Murabaha duly signed by the
customer but same cannot be included in the income of IFI. This penalty must be spent for charitable
purposes. Under Murabaha scheme of financing facility is linked with assets which leads to economic
stability and creates linkage between real and financial sector. It is not zero sum game because utility
is created through services and products and not by mere building the blocks of wealth through dealing
in paper money. Although Murabaha is being used by IFIs successfully and have succeeded in meeting
short to medium term requirements of firms by providing a successful replacement of conventional
loans yet certain differences exist in both type of financing. First is one cannot get cash under
Murabaha. Second asset is purchased by IFI initially then transferred to customer hence IFI participate
in risk. Third refinancing facility is not available under Murabaha. Fourth in case of default price of
the commodity cannot be enhanced however penalty may be imposed if stipulated in original contract
of Murabaha however same cannot be included in income of IFI. Fifth only those assets can be
supplied by IFIs under Murabaha whose general and/or intended use is not against the injunctions of
Sharia (e.g. supply of a machine to produce liquor).
Medium to long term loans
Medium to long-term loans are provided for purchase or building of fixed assets by firms to expand
or replace the existing assets. Under Islamic financial system requirement of firms and individuals are
fulfilled through Murabaha, Bai Muajjal and Istasna (discussed in appendix B). Another financing
option for long-term financing is profit sharing under Musharaka and Mudaraba (discussed in
appendix B). Although financing under Murabaha, Bai Muajjal and Istasna is very much look like
conventional loans with the only difference of provision of asset and not cash to client however
differences exist in the contracts which alter the nature of risks and returns. Financing under
Musharaka and Mudaraba is challenging for IFIs and firms as well. Under Sharia based financing
schemes firms must prove the viability/profitability of the project/business to the satisfaction of IFIs
to get the finance because risk of losing the amount is involved.

Agricultural Loans
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Agricultural loans include both types of loans short-term as well as long-term. Short-term loans are
required by farmers for seeds and fertilizers and long-term loans are required to develop additional
lands and purchase of equipments. Normally farmers return these loans after selling the finished
crops. Conventional banks are providing credit facility by charging interest. Same facility is provided
by IFIs to the farmers under Bai Slam, Bai Murabaha Musharaka and Mudaraba (discussed in appendix
B). Under Bai Salam cash is provided to farmers for purchase of seeds and fertilizers however this is
not loan rather purchase of finished crops to be delivered by farmers. For purchase of equipments
Murabaha facility is used and for development of additional land Musharaka and Mudaraba is used by
IFIs. To get finance for land development farmers must convince the IFIs about profitability of the
venture due to risk involved in the transaction.
House financing
Housing finance/Mortgages is the more secured form of financing for both conventional banks and
IFIs. Under conventional system loan is provided for interest while under Islamic financial system
facility is provided through diminishing Musharaka. Under diminishing Musharaka house is purchased
jointly by IFI and customer. IFI rents out its share in property to customer for an agreed amount of
rent. Share of financier is divided in units of small denomination. Customer pays the installments to
IFI consist of rentals plus purchase price of a unit. Stake of customer in property is increasing while
of IFI is decreasing with payment of every installment. Finally, with the payment of last installment
stake of IFI reaches to zero and property is transferred in the name of customer. Diminishing
Musharaka model can help in avoiding the real estate crisis (like of 2008) because when market value
of property decreases both IFI and customer suffers according to their share in property and whole
burden is not shifted on customer alone. Hijazi, & Hanif (2010) have raised certain questions about
the existing practice of IFIs working in Pakistan and needs to be addressed by policymakers, Sharia
boards and management of IFIs.
Investments
To maintain liquidity conventional banks, have many avenues including government securities,
shorter term loans and money at call and short notices, leasing companies bonds, investment in shares
etc. Interestingly mandatory reserve maintenance by conventional banks with central banks is also
rewarded in the form of interest. Conventional banks can also create liquidity by issuing the bonds
against their receivables. Commercial banks are also protected by central bank by providing liquidity
in rainy days for interest. Interbank deposits are also rewarded in the form of interest by commercial
banks. For IFIs avenues are very limited to create required liquidity at the same time to earn some
revenue by investing in short term and liquid securities. IFIs cannot invest in government securities,
short term loans, bonds and money at call and short notices because of interest based transactions.
Mandatory reserve with central bank is maintained by IFIs but they are not rewarded like conventional
banks. Looking towards central bank in rainy days to maintain liquidity is also not as straightforward
due to interest demand of central bank. IFIs cannot demand interest on interbank deposits. As for
investment in market able securities are concerned again IFIs are not free to invest in any equity
security due to two reasons. First Halal business of the underlying firm is required. Second financial
operations of underlying firm should be interest free. Keeping in view the dominance of conventional
banking and existing business practices one can conclude safely that a very negligible number of firms
meet both conditions.

Leasing
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leasing is relatively recent source of financing whereby usufruct of an asset is transferred to lessee for
agreed amounts of rentals. Under leasing ownership may or may not be transferred. Same facility is
provided by IFIs under agreement of Ijara. Under Ijara asset is provided to customer for use with out
transfer of ownership for a specific period of time in exchange for agreed rentals. Ownership of asset
can be transferred to customer through agreement at the completion of lease term. All ownership risks
are born by IFIs during Ijara tenure. Certain differences exist in the transaction under both systems.
First is rental under Ijara are not due until asset is delivered to the lessee for use. Second additional
rent cannot be demanded in case of default except a penalty (if stipulated in original contract of lease)
which is not the income of IFI. Third during period of major repair rent cannot be demanded by IFI.
Fourth if asset is lost or destroyed IFI cannot claim further installments hence all risks of ownership
are born by IFI.

Conclusion

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Islamic financing is working within the Sharia frame work following certain restrictions including
following. First IFIs cannot provide finance for an activity which is prohibited by Sharia (Islamic law)
irrespective of its profitability and economic viability e.g. business of liquor, pork and pornography.
Second IFIs cannot lend any amount in cash for interest however need is fulfilled either through supply
of required asset or through profit and loss sharing. Consequently, certain financial needs of some
sections of the society are ignored in financing including personal loans and working capital
requirements of not for profit organizations. Third under Islamic financial system when financing is
provided under profit and loss sharing although profit can be shared as per agreement between the
parties involved however loss must be shared according to capital contribution/ownership. Islamic
banking is not as foreign to business world as it is perceived by certain quarters. It is a business very
much like conventional banking within certain restrictions imposed by Islamic law. All business needs
are being fulfilled by IFIs in efficient ways through Murabaha, Ijara, Bai Muajjal, Bai Salam, Istasna,
Musharaka and Mudaraba. Two features of Islamic financial system are worth mentioning. First is
linkage between financial and real sector as IFIs cannot extend credit facility without having support
from real sector. Financing is either made through sharing risk and reward or must be asset backed.
Second a unique feature of Islamic financial system is in the form of Mudaraba which can play role of
catalyst for transforming society into prosperity by extending capital facility to skilful persons lacking
capital. Under Mudaraba mode of financing partnership between capital and skill is formed hence it
can be used to provide self employment to jobless skilful citizens. Islamic banking is not a mere copy
of conventional banks as perceived by certain Muslims. It has its own way of doing business and all
operations are duly certified by Sharia experts ranging from Sharia advisor to Sharia boards and finally
Islamic Fiqh Academy (IFA). Portfolios of IFIs are dominated by Sharia compliant modes of financing
and negligible investments are being made under Musharaka and Mudaraba. Sharia based modes of
financing which can create a real difference in the society are not getting momentum in the operations
of IFIs. Hanif, & Iqbal, (2010) have identified the hindrances (e.g. profit manipulation, riskiness of
financing under sharing, lack of awareness, widespread conventional banking, lack of skilled human
resources etc.) in the way of popularity of Sharia based financing and concluded that existing
accounting and business frame work is not conducive for application of Musharaka and
Mudaraba.Islamic banks are doing business in a nonconductive environment which makes operations
challenging. IFIs cannot claim interest on their balances with other banks, on mandatory cash reserve
maintained with central bank, cannot invest in government securities, interest based bonds, cannot
claim time value of money from defaulters, bear risks in sale and lease transactions, can only invest in
Sharia compliant securities and not in all available equities and finally must compete with
conventional banks in deposit servicing as well as in financing.
In spite of these difficulties growth of Islamic financial system world over in general and marvelous
growth of 76% (average annual) in Pakistan in last six and half years suggests a bright and promising
future of this financing system. Two issues at hand demands attention of policy makers immediately
including a separate law of Islamic banking to regulate the industry and implementation of accounting
standards issued by Auditing & Accounting Organization of Islamic Financial Institutions (AAOIFI)
for preparation of annual reports of IFIs.

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