IMPORTANT POINTS DISCUSSES BY SCHOLARS IN WORKSHOP OF

ISLAMIC FINANCE

I will discuss those facts and ideas in a productive sequence as was discussed in workshop.

It is compulsory in Islam to earn money to fulfil our basic needs but only through legal means but
if anyone want to earn more money other than basic needs, he/she can do that, but it is not
compulsory in Islam. Now the point needs to discuss is that how human financial needs can be
achieved?

Human Financial Needs:

Financial needs of human can be fulfilled by earning money through trade and for starting trade
we need to have money which we can have ourselves or we need to obtain from others. So, there
are two ways through which we can generate capital for starting trade or business which is legal
by Islam.
Aqd' (The Contract):
The Arabic word for a contract is Aqd'.

 Now the point is that anyone will not give his/her money without any benefit so he will
demand some profit or benefit against that. So, then we will do a contract with that
individual, organization or group.
 There are two types of contract according to shariah principles:

AQD’
Non-Compensatory Compensatory
Qard Ijarah
Zaman Musharakah
Hawala Mudarabah
Sadqa Istisna

1. Compensatory contracts

These are compensatory contracts where one person sells

something to someone else for a price or compensation, for example, sale of pen “A” to” B” for
PKR 50/-.
Uqud al Mua'wada: compensatory contracts, e.g. party A sells his car to party B for $1,000.

1. Non- compensatory contracts

These are non-compensatory contracts where one person gives something to someone else without
any compensation for example a contract of loan gift.
Uqud Ghaer Mua'wadha: Non-compensatory contracts, e.g. loan with interest.
The above examples show that for valid contracts, the following conditions must be met:
 Two parties
 Offer and Acceptance (this must relate to the same price and subject matter).
 Material Effect in exchange of subject matter.
It is important to note that the contracting parties to the above contract need to be mature and sane.
With regards to the subject matter or the object, the following conditions need to be satisfied:
Value: The subject matter needs to be consistent with Islamic teachings, i.e. a contract involving
wine, pork and military would not be valid, as these subjects have no value.
Existence: The subject matter needs to be in existence, e.g. a contract involving the sale or
purchase of a house yet to be built would be invalid. There are of course two exceptions to this:
Salam and Istisna.
Ownership: The seller needs to have ownership of the object.
Deliverability: The seller can deliver the goods to the buyer. Of course, this condition does not
apply to certain objects, such as houses.
Specific: In this case, the subject must be clearly defined, e.g. "I will sell you one of my cars..."
would be invalid as the car has not been defined.

1. Profit-and-loss sharing partnership (mudarabah)

Mudarabah is a profit-and-loss sharing partnership agreement where one partner (financier or

rab-ul mal) provides the capital to another partner (labor provider or mudarib) who is
responsible for the management and investment of the capital. The profits are shared between the
parties according to a pre-agreed ratio.

2. Profit-and-loss sharing joint venture (musharakah)

Musharakah is a form of a joint venture where all partners contribute capital and share the profit
and loss on a pro-rata basis. The major types of these joint ventures are:

 Diminishing partnership: This type of venture is commonly used to acquire properties.

The bank and investor jointly purchase a property. Subsequently, the bank gradually
transfers its portion of equity in the property to the investor in exchange for payments.
 Permanent musharakah: This type of joint venture does not have a specific end date and
continues operating as long as the participating parties agree to continue operations.
Generally, it is used to finance long-term projects.
3. Leasing (Ijarah)

In this type of financing arrangement, the lessor (who must own the property) leases the property
to the lessee in exchange for a stream of rental and purchase payments, ending with the transfer
of property ownership to the lessee.

Wakalah:

Literally Wakalah means protection or remedying on behalf of others. Legally Wakalah refers to
a contract where a person authorizes another to do a certain well-defined legal action on his behalf.
It is a contract of agency which means doing any work or providing any service on behalf of any
other. An agent is someone who establishes contractual and commercial relations between a
principal and a third party, usually against a fixed fee. An action performed by an agent on behalf
of the principal will be deemed as action by the principal.

Shariah Risk:

Shariah Risk on the Rise In the end, unlike most of the more common risks, Shariah risk can hit
asset values (with possible loss of investment or loss of reinvestment income), can damage
reputation, and has far greater implications for one's relationship with Allah.

Amanah

Amanah means reliability, trustworthiness, loyalty and honesty. It also refers to deposits in trust,
where a person may hold property in trust for another.

Qard (loan):

Islam gives importance to the Qardh al-hasan. Qardh al-hasan is a form of interest-free loan
(fungible, marketable wealth) that is extended by a lender to a borrower on the basis of
benevolence (ihsan). Al-qardh, from a sharia point of view, is a non-commutative contract, as it
involves a facility granted only for the sake of tabarru’ (donation). Therefore, al-qardh al-hasan is
a gratuitous loan extended to people in need, for a specified period of time. At the end of that
period, the face value of the loan (asl al-qardh) is to be paid off. In other words, sharia prohibits
the stipulation of an excess for the lender, as it amounts to riba, whether the excess is expressed in
terms of quality or quantity, or whether it is a tangible item or a benefit. However, it is permitted
that the repayment of qardh (loan extinguishing) is made with an excess (tangible item, benefit,
service, etc.), provided that such an excess is neither expressly stipulated nor implicitly pre-
arranged (through collusion or tawatu’) in the contract of loan.

Other Important points

 In case all parties share profit and loss then the amount of their share is called “investment”.
 Profit and loss will be share according to the party’s investment “ratio”.
 Purpose of the central bank is to regulate the functions of commercial banks.
 In Islamic banking we say that loan is not for earning purpose
 In conventional banking we say that loan is for earning purpose.