Professional Documents
Culture Documents
Assignment No: 2
Program : BSCM
Section : F-19
Submitted to:
Miss Mehwish Malik
Submitted by:
Ayesha Hamid L1F17BSCM0024
PRESENT PRACTICES OF ISLAMIC BANKING
Introduction:
Islamic banking is an Islamic financial system conducting banking and business activities in line
with the provisions and principles of Islamic Shari'a '. It follows the beliefs and principles of
Islamic jurisprudence pertaining to trade and business, so-called fiqhal-muamalat or Islamic rules
on transactions. The Quran, Sunnah and other sources of Islamic law such as Ijma' (opinions
collectively agreed among Shari'a scholars), Qiyas (analogy) and Ijtehad (personal reasoning)
collectively form the basis, from which rules and practices of fiqhal-muamalat (Islamic
jurisprudence) are derived.
Islamic banking avoids all the prohibited activities such as riba (usury-interest), gharar
(uncertainty), financing of haram (forbidden) trades & businesses like alcoholic beverages,
pornography, gambling, etc.
The basic difference between Islamic banking and conventional banking is that Islamic Banking
based on principles of Shari'a while conventional banking is purely man-made. Thus all aspects
of transactions like products' features and business approach are derived from the Shari'a law,
which lead to a significant difference with those of the conventional banks.
Islamic bank does not compromise on the Islamic Shari'a rules, though it is a profit-making
organization. Islamic banking is not based on pricing and exchanging money and earning interest
as conventional interest-based banks do, but it is a system of trade where goods and services are
sold and capital is invested by taking risk to earn Shari'a -compliant profits. It is based on the
Quranic injunction whereby trade has been permitted and riba has been prohibited.
This criticism is not realistic, because it does not take into account the fact that, in proportion to
the conventional banking, the Islamic banks and financial institutions are no more than a small
drop in an ocean, and therefore, they cannot be supposed to revolutionize the economy in a short
period.
Secondly, these institutions are passing through their age of infancy. They have to work under a
large number of constraints, therefore, some of them have not been able to comply with all the
requirements of Shariah in all their transactions, therefore, and each and every transaction carried
out by them cannot be attributed to Shariah.
Thirdly, the Islamic banks and financial institutions are not normally supported by the
governments, legal and taxation system and the central banks of their respective countries. Under
these circumstances, they have been given certain concessions, on the grounds of need or
necessity, which are not based on the original and ideal principles of Shariah.
Islam, being a practical way of life, has two sets of rules; one is based on the ideal objectives of
Shariah which is applicable in normal conditions, and the second is based on some relaxations
given in abnormal situations. The real Islamic order is based on the former set of principles,
while the latter is a concession which can be availed at times of need, but it does not reflect the
true picture of the real Islamic order.
Living under constraints, the Islamic banks are mostly relying on the second set of rules;
therefore, their activities could not bring a visible change even in the limited circle of their
operations. However, if the whole financing system is based on the ideal Islamic principles, it
will certainly bring a discernible impact on the economy.
Objectives:
The main objectives include
Thoroughly study the Islamic banking system according to Sharia law (Islamic law)
Thoroughly study the conventional banking system prevailing in Pakistan
Comparative study of two banking system i.e. Islamic banking system and conventional
system
In Pakistan history of Islamic banking started in 1980 following changes in Banking Companies
Ordinance, 1962. Some of the key developments in the field of Islamic Banking during this
period are mentioned here under:
ICP (Investment Corporation of Pakistan) and NIT (National Investment Trust), being the
Government owned mutual funds, started their investment in Profit and Loss sharing
basis in 1979-1980.
HBFC (House Building Finance Corporation) eliminated interest during their course of
operation effective July 1st, 1979.
PTC (Participation Term Certificate) being instrumental in corporate financing started
issuing interest free instruments for their clients in June, 1980.
Shariah compliant business structures for Mudarabas were introduced through
promulgation of the Mudarabah Companies and Modarabas Ordinance, 1980 along with
Mudarabah Companies and Mudarabah Rules, 1981.
For recovery of loan made on interest free method of financing, changes were made in
1984 in Banking and Financial Services Ordinance, 1984 and Banking Tribunal
Ordinance, 1984.
Nationalized commercial banks started interest free counters for their customers effective
January 1st, 1981.
BCD Circular No. 13 of 1984 issued by State Bank of Pakistan advising that all financing
to Federal and Provincial Governments, Public Sector Corporations and public or private
joint stock companies would be made through interest free mode. This action was
implemented through issuance of circular from January 1, 1985.
Similarly, from July 1, 1985 banking in Pak Rupees was made interest free as such banks
introduced Profit and Loss sharing schemes for their large net of depositors.
All these measures although were fair enough to promote Islamic Banking in Pakistan, but it
was later realized that preparation and home work from financial institution was not done
adequately. Federal Sharia Court challenged some of the Islamic products and processes and
termed them un-Islamic. The Shariat Appellate Bench of Supreme Court upheld the decision
of the Federal Sharia Court and order to address the issues in a defined timeline for further
implementation. Review petition filed by the United Bank Limited thereafter, and this
decision was later set aside. Proper strategy was made to re-launch of Islamic Banking in
Pakistan in 1990 and onwards, owing to the fact that lot of experience was gained during the
first phase of launch of Islamic Banking in Pakistan. Some of the key lessons learned are
enumerated below:
There are now two conditions for exchanging money for money: hand-to-hand, and in equal
quantity. However, any violation of this rule will result in one of two forms of forbidden riba: (a)
riba al-fadl: where money is exchanged for money hand-to-hand, but in different quantities, or
(b) riba al-nasiah: where money is exchanged for money with deferment.
In Quran ALLAH says, “That which you give as interest to increase the peoples’ wealth
increases not with God; but that which you give in charity, seeking the goodwill of God,
multiplies manifold.” (30: 39)
Prohibitation of Gharar:
The Arabic word gharar means risk, uncertainty, and hazard. Unlike riba, gharar is not precisely
defined. The concept of gharar has been broadly defined by the Islamic scholars in two ways.
First, gharar implies uncertainty. Second it implies deceit. The Quran has clearly forbidden all
business transactions, which cause injustice in any form to any of the parties.
Prohibitation of Maysir:
Gambling games of chance or speculation are forbidden. Gambling is a zero sum game which
creates no additional value to the society.
The Arabic word gharar means risk, uncertainty, and hazard. Unlike riba, gharar is not
precisely defined. The
concept of gharar has been broadly defined by the Islamic scholars in two ways.
First, gharar implies uncertainty.
Second, it implies deceit. The
Quran has clearly forbidden all business transactions, which cause injustice in any form to
any of the parties.
The Arabic word gharar means risk, uncertainty, and hazard. Unlike riba, gharar is not
precisely defined. The
concept of gharar has been broadly defined by the Islamic scholars in two ways.
First, gharar implies uncertainty.
Second, it implies deceit. The
Quran has clearly forbidden all business transactions, which cause injustice in any form to
any of the parties.
The Arabic word gharar means risk, uncertainty, and hazard. Unlike riba, gharar is not
precisely defined. The
Conclusion:
In conclusion, there are many of the motives that led to the development of Islamic finance and
growth. The factors that behind the development of the Islamic finance, desire of Muslims to live
all aspects of their lives in accordance with the teachings of Islam and growing demand by
investors for Shariah compliant financial instruments, and the desire of corporations to raise
funds in a cost effective, Shariah compliant, manner which does not dilute shareholder equity.
The development of Islamic finance was regarded as an infant industry striving to prove its
viability and competitiveness. In these past five years Islamic finance has recorded dramatic
growth and has a presence in more than 75 countries in both Muslim and non-Muslim dominated
communities.