MONEY AND BANKING

GROUP MEMBERS
• HALIMA ARSHAD
• TALMEEZ FATIMA
• KHANSA AHMED
• TUBAH NOOR
• AIMA ZULFIQAR

SUBMITTED TO
• MAM LALA RUKH

Basic Features Of Islamic Banking

Islamic banking

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the
Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles
which emphasize moral and ethical values in all dealings have wide universal appeal.

Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to
Muslims.

Basic features of Islamic banking

⮚ Prohibition of Interest (Riba’)

⮚ Asset-Backed Financing
⮚ Prohibition of Uncertainty (Gharar)
⮚ Prohibition of Speculative Behavior
⮚ Shari’ah Approved Activities
⮚ Risk Sharing
⮚ Social justice
⮚ Sanctity of contracts

Prohibition of Interest (Riba’)

● Any amount, big or small, over the principal, in a contract of loan or debt is “Riba” prohibited by the Holy
Qur’an, regardless of whether the loan is taken for the purpose of consumption or for some production
activity.

● Riba is a concept in Islamic banking that refers to charged interest. It has also been referred to as usury, or
the charging of unreasonably high-interest rates. There is also another form of riba, according to most
Islamic jurists, which refers to the simultaneous exchange of goods of unequal quantities or qualities.

Asset-Backed Financing

● Under the concept of money as a potential capital, money has on intrinsic utility. Therefore, unlike
conventional financial institutions, financing in Islam is always based on illiquid an asset which creates real
assets and inventories.
● Islamic financing is backed by real goods or assets. Transactions that have no such real or physical assets
are considered by shari'a null and void ab initio (originally and essentially batil)
● Islamic banking effectively helps ensure stability in the value of money and also helps prevent speculation
and manipulation. The fund flows through Islamic financial modes of financing are linked directly to the
flow of goods and services in the economy.

PROHIBITION OF UNCERTAINTY (GHARAR)

• Literal meanings: Indeterminacy, Speculation, Risk or Hazard.

• Technical meanings: Gharar takes place where the consequences (of a transaction) are concealed.
• Usually, the riskiness deals with the variation of outcome (i.e. possibilities of profit & loss). Islamic
commercial law does not disapprove risk & uncertainty when it refers to business outcomes as they
constitute a law of nature. But Islamic commercial law requires absolute certainty about the terms and
conditions of contractual obligations.
• Examples of Gharar:
• Sale of a car which has been stolen by someone.
• Sale of goods yet to be acquired by seller.
• Sale of fish in water & birds in the air.

SHARI’AH APPROVED ACTIVITIES

• All moral and ethical value systems would naturally promote higher ideals such as fairness and justice for
all mankind. However, it is fascinating to note that the primary source for Shari’ah rules and principles,
namely Qur’an and Sunnah of Prophet Muhammad S.A.W, more than 1400 years ago, have explicitly
ordained in a comprehensive and concise manner certain code of ethics that can be universally applied
even in the modern day, undeterred by time, space or race.
• Only those business activities that do not violate the rules of Shari’ah qualify for investment. For example,
any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited. Project
 finance, which puts emphasis on equity participation in transactions involving real assets, is natural fit for
Islamic finance.

Risk sharing

• Risk refers to inherited or natural and not speculative.

• Risk sharing is encouraged rather than risk transferring. So suppliers of funds become investors
rather than creditors.

•
• Islamic banking requires Risk-sharing than Risk transferring, Moreover A person is entitled to profit
only when he bears risk of loss

Example:

A businessman is entitled to Profits & Gains in his business because he is ready to bear Loss.

Social justice
Islamic finance promotes entrepreneurship and risk sharing, and its expansion to the poor could be an
effective development tool, particularly for economic development of marginalised communities as well
as poverty alleviation. The social benefits are obvious, since the poor currently are often exploited by
lenders charging usurious rates.

• Achievement of Falah
• Fair and equitable distribution
• Provision of basic human needs
• Zakat and sadqat
• Promotion of brotherhood and unity
• Circulation of wealth
• Economic freedom

Prohibition of Speculative Behavior

Islamic finance prohibits transactions featuring speculation including extreme uncertainties, gambling, and risks.
Therefore, transactions in Islamic finance should be backed by real assets.

Sanctity of contracts

Islam teachings uphold contractual obligations and the disclosure of information as a sacred duty. This feature is
intended to reduce the risk of symmetric information and moral hazard.