Principle of Islamic Money: Money is considered as servant, medium of exchange, should not Functions Of an Islamic Bank: 1.
lamic Bank: 1. Management of Investment implies Islamic banks act as
be used for speculative purpose, is not considered as commodity and hence cannot be traded,
Value of money should be kept stable, blessing as it helps avoiding ’Riba AL Fadl’, Supply of
money is controlled and conditional, Credit Money is discouraged, hoarding of money is
prohibited
Principle of Islamic banking: Establishing a Banker –Customer relationship, Investment on
Profit and loss sharing, Prohibition of Interest, mobilizing resources to use for development not
only for profit, acting as a multipurpose bank , Earning reasonable profit through Halal
transaction, upholding socio-economic requirement of the country, creating more employment
opportunities by increasing economic activities, ensuring equitable distribution of resources,
establishing Baiya (Trade, Com. & Industry), establish good and eliminate evils
Islamic vs. Conventional View of Money: I: Money is considered as servant, Money is
considered as the medium of exchange, Money should not be stored or used for speculative
purpose, Money is not considered as commodity and hence cannot be traded, Value of money
should be kept stable, Money is considered as blessing as it help avoiding ’Riba AL Fadl’, Supply
of money is controlled and conditional, Credit Money is discouraged C: Money is considered as
Master, Money is considered as both commodity and medium of exchange, Money should be
stored and used for speculative purpose, Money is considered as commodity and hence can be
traded, Value of money could be ordered, Money is used to earn Riba or interest, Supply of money
is uncontrolled and unconditional, Credit Money is encouraged
Why according to Islam money is not a commodity: a. Money has no intrinsic utility. It cannot
be utilized in direct fulfillment of human needs. It can only be used for acquiring some goods or
services. A commodity, on the other hand, has intrinsic utility and can be utilized directly without
exchanging it for some other thing. For example, rice, cloth, chair, pen etc. are commodity
because they are used directly to satisfy human need. If a person is hungry, he cannot eat money
directly rather he has to use money to buy food for eating. A thirsty person has to buy a glass of
water against money to drink. One cannot write by money rather he has to buy a pen to write
anything. (b) Money Has no variety of Quality: The commodities can be of different qualities
while money has no quality except that it is a measure of value or a medium of exchange.
Therefore, all the units of money of the same denomination are hundred percent equal to each
other. An old and dirty note of Rs.1000 has the same value as a brand-new note of Rs.1000. On
the other hand, goods like clothe, food, furniture, household appliances have got variety of
qualities and categories. Each quality of goods and services had different value or price.
Islamic Bank: Islamic Bank is a financial institution whose statutes, rules and procedures
expressly state its commitment to the principles of Islamic Shariah and to the banning of the
receipt and payment of interest on any of its operations.
Goals of IB: To eliminate riba from all sectors of economy, establish Baiya (Trade, Com. &
Industry), mobilize savings for productive purposes, earn reasonable profit through Halal
transaction, create more employment opportunities by increasing economic activities, ensure
equitable distribution of resources, safeguard the money of customers, contribute towards
economic development, establish balanced trade and welfare, prevent allowing of concentration
of wealth, establish justice and humanity, serve all classes of people in general and specially
to favor the weaker classes, establish good and eliminate evils
◼ To establish justice and humanity.
◼ To serve all classes of people in general and specially to favor the weaker classes.
◼ To establish good and eliminate evils.
Lending/investment of Islamic & Conventional bank compared: 1. Character of the loan
applicant : very important, important 2. Purpose of the loan: important, less important, 3.
Financial strength of the client : less important, important 4. project Profitability: very much
important, less important 5. Diversification of investment: important, not important 6.
National interest: primary, secondary 7. Close supervision: routine work, not routine 8.
Observance of Shariah : strictly followed, not followed
Riba: The word used by the holy Quran concerning ‘interest’ is riba. The literal meanings of
riba are money increase, increase of anything or increment of anything from its original
amount. Islam prohibits only those increases that are charged on loan with a prefixed rate.
Riba vs Profit: Riba= Riba is a predetermined return arising out of the loan operation , Time is
the determining factor of Riba , Loan is the base of Riba. No loan no interest, Risk of loss is
not applicable to Riba, The rate of Riba, and period etc. are prefixed, A lender may receive
Riba for many times out of one single contract of loan, Calculation of Riba p(1+r)t , where,
p=pricipal, t = time, r = rate of interest, Riba as buit-in increases the price level and welcome
inflation Profit: Profit is the net positive outcome of a business operation, Favorable business
transaction, cost effectiveness and market, Trade or investment is the base of profit, Risk of
loss is associated to Profit, No rate is prefixed in connection with Profit, An investor or a seller
can earn profit for once out of one single contract or transaction, Calculation of Profit = Sales
rev– Tot. Cost (variable cost + Fixed cost) , Profit as system does not increases the price level
Riba Al-Nasia: The term nasi’ah comes from the root nasa’a which means to postpone, to
defer, or wait, and refers to the time that is allowed for the borrower to repay the loan in return
for the ‘addition’. Therefore, riba al-nasi’ah means interest on loans. Example of Riba Al-
Nasia: X give Tk. 1000 as loan to Y for one year @ 10% interest. After one year X gets tk
1000+100 as principal and interest respectively.
Riba Al-Fadl Riba al-fadl is the excess charged against spot transaction. Example of Fadl:
X exchange one kg of superior quality rice to two kgs of inferior quality rice with Y.
Fadl vs Nasia: Riba Al-Fadl relates to excess charged to sale transactions, Riba-Fadl is
forbidden by the Hadith of the Holy Prophet, Riba-Fadl is prohibited by the prophet as a
precautionary and preventive measure, Riba Al-Nasia relates to the excess charged in loan
transactions, Riba Al-Nasia is forbidden by the clear text of the Quran, Nasia is forbidden by
Islam because of its evil and cruel nature.
Social Impact of Riba : Interest makes a man selfish and miser; It creates hostile relation
between the rich and the poor; Moral decay spreads out in the society; Idleness and
tendency of effortless Income
Impact of Interest on Distribution: Interest increases unemployment: As interest reduces
the amount of investment so the number of unemployed people also increases. Interest
increases exploitation of labor: As unemployment increases the demand for labor decreases
but supply of laborers increases. Hence the laborers got least bargaining power. So they are to
be exploited by selling their lobor at a price less than normal.
principles of Al-Wadiah: Safekeeping: Al-Wadiah involves the safekeeping of the depositor's
funds by the bank. The bank becomes a trustee of the customer's deposits and is responsible
for their protection. No Profit-Sharing: Unlike other Islamic contracts like Mudarabah or
Musharakah, the Al-Wadiah contract does not involve profit-sharing between the bank and the
customer. The bank is not obligated to share any profits it earns from utilizing the deposited
funds. Guaranteed Return of Principal: The bank guarantees the full return of the deposited
funds to the customer upon demand. This means that if the customer requests to withdraw
their money, the bank is obligated to return the entire amount without any reduction.
a manager of fund to be invested by the original investor (depositor). It does not recognize
the relationship of a debtor and creditor between the Islamic bank and the customer, By acting
as a Mudarib: In that case the bank will get the attorney from the original investor and take
decisions regarding investments. The bank will share profit with the owner of the capital in
an agreed ratio but loss will be borne fully by the owner of the capital. By acting as an agent
of the investor (depositor): Under this arrangement the bank will act on behalf of the owner
of the capital not on the basis of profit sharing but on the basis of fixed commission or
remuneration. 2. Investment: Investment free of Interest, Investment based on bui mode,
Profit-loss sharing basis, rent/lease basis, Quard-e- Hasana 3. Agency Functions: Transfer of
money , Acting as paying banker, collecting banker, trustee, executor 4. Utility & Social
Functions: Issue of solvency certificate, Providing Locker service, Utility Bill Payments,
Publication of journals and periodicals, sponsoring games and cultural activities, Patronizing
education
The principles of investment under Islamic banking: To ensure mutual benefit both of the
bank and the investment-client: 1. By professional appraisal of investment proposal, 2. By
judicious sanction of investment, 3. By close and constant supervision and monitoring, To
make investment keeping the socio-economic requirement of the country in view, To
increase the number of potential investor by making participatory and productive investment,
To finance various development schemes for poverty alleviation, income and employment
generation with a view to accelerating sustainable socio-economic growth and
development of the society, To investment in the form of goods and commodities rather than
give out cash money to the investment clients, To encourage social enlistment enterprise, To
shun event highly profitable investments in field forbidden under Islamic Sharia and are
harmful for the society.
IB vs CB: IB= The functions and operating modes of Islamic banks are based on Islamic
Shariah, IB promotes risk sharing between provider of capital and the entrepreneur,
Maximizing profit should not be objective of an IB, Islamic banks collect and distribute Zakat,
Participation in partnership business is the fundamental function of the Islamic banks, It gives
importance to the public interest. Its ultimate aim is to ensure growth with equity, Since it
shares profit and loss, the Islamic banks pay greater attention to developing project appraisal
and evaluations, Islamic banks give greater emphasis on the viability of the projects, The
status of Islamic bank in relation to its clients is that of partners, investors and trader, Strictly
speaking there is no guarantee for deposit money, An Islamic bank can never be a bankrupt,
Promotes mass banking CB= The functions and operating modes of conventional banks are
based on manmade principles, The investor is assured of a predetermined rate of interest,
maximizing profit without any restriction, does not deal with Zakat, Lending money and
getting it back with interest is the fundamental function of the CB, Bank’s own interest
becomes prominent. It makes no effort to ensure growth with equity, since return from loan
is fixed, it gives little importance to project appraisal and evaluations, CB give greater
emphasis on credit-worthiness of the clients, The status of a CB, in relation to its clients, is
that of creditor and debtors, A CB has to guarantee all its deposits, A CB has every possibility
to be a bankrupt, Promotes class banking
No Fixed Maturity: Al-Wadiah deposits typically do not have a fixed maturity date. The
customer can demand the return of the funds at any time without any penalty. Ownership
Retained: Despite the bank's role as a custodian, the ownership of the deposited funds remains
with the customer. The bank is merely responsible for safekeeping and returning the funds,
and it does not gain ownership or control over the money.
Mudaraba Principle: In Mudaraba principle the depositor is termed as Rab-al-Mal / Saheb-
al- Mal and the Bank as Mudarib; The depositor keeps the Mudaraba fund in a bank and
authorises the Bank is to invest the same at the risk of depositor;Profit emerged from
deployment of the respective deposit is distributed between the Bank and the depositor as per
pre- agreed ratio; Loss incurred, if any, is borne by the depositor; Capital Contribution: The
investor provides the capital required for the business, while the entrepreneur contributes
expertise, labor, and management skills. The entrepreneur's contribution is considered in-kind
and is not a monetary contribution, Profit-Sharing: Mudarabah is based on the principle of
sharing profits between the investor and the entrepreneur. The distribution of profits is agreed
upon at the outset of the partnership. The profit-sharing ratio based on a percentage of the
actual profit generated. Loss-Bearing: The investor (Rabb-ul-Maal) bears all the losses
incurred in the business venture. The entrepreneur's liability is limited to the effort and skill
invested in the project. Active and Silent Partners: The investor is typically a silent partner
who provides the capital but does not participate in the day-to-day management of the
business. The entrepreneur is the active partner responsible for running the business
operations. Shariah Compliance: The business venture must adhere to the principles of
Shariah law, which prohibits certain activities such as dealing with prohibited goods (e.g.,
alcohol, pork) and engaging in unethical or harmful businesses.
MSD: Bank operates savings accounts under the Mudaraba principle of Islamic Shariah. This
principle offers depositors an agreed portion of business profit and assigns risk for any
genuine loss. Islami Bank distributes a minimum 65% of its investment income among all
Mudaraba accounts as per weight. Mudaraba Savings accounts are mainly meant for Non-
Trading customers who have some potential saving with small no. of transactions. MSND:
Mudaraba Special Notice Deposit (MSND) Account is a profit bearing deposit where advance
notice of 7 to 30 days is required for amount withdrawal. This A/C is usually opened by Firms,
Corporate Financial Institution. MTD: (MTD) is a profit bearing account which offers returns
by depositing money for fixed period of time based on Mudaraba concept. These deposits are
repayable subject to a period of notice and hence known as time deposits or time liabilities
meaning thereby that these are withdraw able subject to a period of notice and not on demand.
Tk.1000/- and multiple of Tk.100/- for the period of 3 months, 6 months, 12 months, 24
months and 36 months can be deposited.
Bai-Murabaha: Bai-Murabaha may be defined as a contract between a buyer and a seller
under which the seller sells certain specific goods (permissible under Islamic Shariah and the
Law of the land), to the buyer at a cost-plus agreed profit payable in cash on any fixed future
date in lump-sum or by installments. The profit marked-up may be fixed in lump-sum or in
percentage of the cost price of the goods.
Features of Bai Murabaha: Client can offer an order to purchase particular goods by
specification and committing himself to buy the same cost plus agreed upon profit, The seller
bears the risk of goods until those are sold and delivered to Client, The seller should disclose
the cost price and the profit mark-up separately to the Client, Delivery Mechanism and Date
of Delivery should be Known to both buyer and seller, Price once fixed cannot be further
increased