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Wel Come
Islamic Finance & Economics
By
Dr. Uzair Albazi
Dean
GIFT Business School

GIFT University, Gujranwala
Pakistan

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Ph: (042) 3756 8430 / Mob: 0300-4426440
Email: uzairbazi@hotmail.com / uzair.bazi@gift.edu.pk

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ISLAMIC FINANCE & ECONOMICS
COURSE OUTLINE
Topic 01
Introduction & Purpose of the Course
Topic 02
Definition of Interest (Riba), History, Verses of Holy Qur'an, Ahadith
Topic 03
Economics, Commerce, Business & Trade

VS

Topic 04
Major Principles of Islamic Economics, Commerce, Buss & Trade
Topic 05
Verses of Holy Qur'an, Ahadith, Islamic Jurisprudence, Terms &
Conditions
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Origin. Role of Banks in Economy Topic 09 Daily Functions of Conventional Banks. Limited Co. Types of Bank Accounts Topic 10 Functions of a Joint Stock Co..Islamic Finance & Economics Topic 06 Definition of Banking. Different Types & Stages Topic 07 Types of Conventional Banks. Permissible & Prohibited Functions & Islamic Solutions 4 . Stock Exchange Topic 11 Views of Scholars.. Banks' Businesses.

Sources Topic 15 State Bank Of Pakistan Circulars 5 . Shares and Cos. Stock Market & Shares Topic 13 Islamic Conditions For Dealing with Stocks. Topic 14 Banks Financing. Types.Islamic Finance & Economics Topic 12 Stock Exchange.

Ijarah. Islamic Conditions • • Topic 17 Musharakah (Basic Rules. Conditions) 6 . Terms & Conditions) • • Topic 18 Muzaribah (Basic Rules. ORIGIN (Basic Rules. Terms & Conditions) • • Topic 19 Murabahah.Islamic Finance & Economics • • Topic 16 Islamic Modes of Financing. Terms & Conditions) • • Topic 20 Sallam. Bai. Istisnaa (Rules. Types.

Views.Islamic Finance & Economics Topic 21 Possible Role of Islamic Banks in Imports & Exports. Solution & Global Scenario of Islamic Banking 7 . Effects of Islamic Banking on Global Economy & Their Solutions Topic23 Insurance. Topic 22 Changes.

Noor Mohammad Ghaffari Qasas-ul-Ambiya Syed Sulaiman Nadvi rt Al Farooq Allama Shibli Nomani rt An Introduction to Islamic Finances by Mufti Taqi Usmani International Trade. SBP Bab-e-Umar Encyclopedia of Islam Bab-e-Moawiyah bin Abu Sufiyan ___do___ Bab-e-Omar Bin Abdul Aziz ___do___ 8 . Investment & Debt Management Institute of Bankers.Reference Books • • • • • • • • • Islam Ka Qanoon-e-Tijarat by Dr.

Noor Mohammad Ghaffari • Imam Abu Hanifa ke Siyasi Zindagi by Syed Manazir Ahsan Gillani • Al Iqtisaad fil Islam (Economic Thought) Dr. Allama M.Reference Books • Islam Ka Muashi Nizam by Dr. Iqbal rt • Reconstruction of Religious Thought in Islam ___do___ • Kuliyaat-e-Iqbal (Political & Islamic Welfare Thought) ___do___ • Sikkay Ke Tareekh (History of Coin) Dairat ul Muarif 9 .

Sayers by Sheldon / Tannan • Development of Islamic Banking by Saleh Kamal • Challenges Facing Islamic Banking by Munawar Iqbal.Reference Books • • • Central Banking Commercial Banking Practice of Banking by De’Cock by Prof. Ausaf 10 .

Reference Books • Circulars of State Bank of Pakistan SBP • • • • SBP Act Banking Companies Ordinance Banking Recovery Laws Principles of Islamic Financing SBP SBP SBP by Mouzar Kalif & Tariqullah 11 .

Karachi • Bahishti Zewer » By Maulana Ashraf Ali Thanvi • Targheeb-ul-Muslimeen By Maulana Mohammad Musa Albazi .Reference Books • Suud » By Anjuman Khuddam-ul-Qur’an Sindh. Gulistaan-e-Qanaa’t » By Maulana Mohammad Musa Albazi 12 .

Reference Books • Halal & Haram (shariat ki rooshni mei) » By Hafiz Abdus Salam Bin Mohammad • Masla’ Suud » Mufti Shafi rt • Islami Bankari Ki Tashkeel-e-Jadeed » Ishtiaq Ahmed Farooq 13 .

org www.islamicbanking.islamcity.com www.islamonline.lariba.com www.com www.Web Sites • • • • • www.com 14 .statebank.

Islamic Finance & Economics • Purpose: To Eliminate Riba (Interest) based Transactions from the current Banking. Economics. Finance and Trade Sectors 15 .

etc.INTERNATIONAL OVERVIEW • Global Research Estimations: – – – – • • Number of Islamic Institutions: 350 Islamic Deposit Pool US$ 1200 B.) Average Annual Growth Rate ranges between 20-25% Number of Countries : 48 16 . TFCs. Mutual Funds. Islamic Assets Pool US $ 400 B Islamic Financial Investments US$ 1000 B (Sukkuk.

Indonesia. Malaysia. Switzerland.INTERNATIONAL OVERVIEW • MAJOR COUNTRIES HAVING ISLAMIC BANKING INSTITUTIONS – MUSLIM COUNTRIES: Bahrain. – NON MUSLIM COUNTRIES: USA.Australia. Egypt. Saudi Arabia. Brunei. Iran. Canada. Sudan. Bangladesh & Pakistan. Germany and Sri Lanka 17 . UK. Kuwait. UAE.

INTERNATIONAL OVERVIEW Cont/d… • MAJOR INTERNATIONAL CONVENTIONAL BANKS HAVING ISLAMIC WINDOWS: – Citibank – ANZ Grindlays – ABN Amro – HSBC – Saudi American Bank – Saudi British Bank – American Express – Standard Chartered – JP Morgan 18 .

– Governor SBP himself approves issuance of Licenses for Islamic Banking Branches. subsidiary or dedicated Islamic Banking Branch. – Formed Sharia Board. – Establishment of an Islamic Banking Department.ISLAMIC BANKING IN PAKISTAN • Developments in SBP: – Has already announced a scheme in January 2003 for opening of Islamic Banks. hence. no new license shall be allowed to Conventional Bank – Has prepared Essentials as Standards and Agreements to be used by Islamic Financial Institutions (IFIs). – Recently announced issuance of Bank Licenses only to Islamic Banks. 19 .

• Islamic Banks makes Partnership. • Islamic Banks arranges Musharakah or the trade based financing arrangements (Mudharabah) between the bank & its investment clients.Overview of the Differences between Islamic Banks and Conventional Banks . • 2) Conventional Banks lends the funds to the borrowers charging higher interest on the asset or the investment side. Mudarabah or Profit & Loss sharing arrangements between the bank and the depositors. 20 . 1) Conventional Banks borrows funds from the depositors paying interest on the liability side of the its balance sheet.

• 4) • In Islamic banking. The interest or the return in predetermined or fixed in advance In Conventional banking. transactions are real asset based. -To have a say in where there money will be invested. transactions are financial asset based. • Islamic Bank entitles the depositors: -To be informed of what the bank does with their money. 21 . the profit or the return is based on the actual investment outcome.Overview of the Differences between Islamic Banks and Conventional Banks • 3) There is iron-wall between the conventional banks and their depositors. • 5) • In Islamic Banking.

Sources of Islamic Finance & Economics • Major Sources: • • Hadith (Sunnah) • • Holy Qur’an Ijma of Ummat Fiqh (Islamic Jurisprudence) 22 .

(Al-Baqarah: 278) Time of Revelation: Ahadith of Prophet Peace Be Upon Him: 23 . Fear from Allah and leave whatever is from Riba.Riba (Interest) O’ Ye Who Believe. if you are (true) believers.

RIBA (Interest) “The interest which you give to increase the wealth of people. will have no increase with Allah: But that which you lay out for charity. seeking favor of Allah (He will increase): it is these who will get a recompense multiplied.” Ar Rum 39 (First Revelation) 24 .

RIBA (Interest) • “Because of their abuse. We have prepared a painful torment for those of them who disbelieve.” An Nisa 160-161 (Second Revelation) 25 . we forbade the Jews good things which were formally allowed to them: because time after time they debarred others from the path of Allah: Since they practice Riba although they were forbidden and cheat others of their possessions.

doubling its rate many times.RIBA (Interest) “O’ believers. and you will prosper. devour not Riba.” Al-e-Imran 130 (Third Revelation) 26 . Fear Allah.

” Al-Baqarah 275 (Fourth Revelation) 27 . But he that pays no heeds shall be among the people of fire and shall remain in it forever. But Allah has permitted trading and forbidden usury.RIBA (Interest) Those who devour Riba shall rise up before Allah like men whom Shaitan has demented by his touch: for they claim that trading is like usury. He that receives an admonition from his Rabb and mends his ways may keep what he has already earned: his faith is in the hand of Allah.

He bears no love for the ungrateful sinners” Al-Baqarah 276 (Fourth Revelation) 28 .RIBA (Interest) “Allah has laid His curse on Riba and blessed charity with increase.

if you are indeed a believer. then you are warned of the declaration of war from Allah and His Messenger. But if you turn back you shall have your principal. Fear Allah and give up what remains of your demand for interest.RIBA (Interest) “O you who believe.” Al Baqarah 278-279 (Fourth Revelation) 29 . Deal not unjustly and you shall not be dealt with unjustly. If you do not.

declared: Interest claim in respect of transactions during the days of ignorance are null and void and would not be claimed.RIBA (Interest) • Al-Baqarah 278-279 • If you are indeed believers: Prove your claim with your deeds and actions. To begin with. we forego the entire interest amount due to my uncle Abbas bin Abdul Muttalib (rt) 30 . which is called the charter / blue print of Islam. • Islam emphasis on justice: Deal not unjustly and you shall not be dealt with unjustly. Prophet (SAW) in his last sermon at Hajjat-ul-Wada. • After the revelation of this verse.” • Principle amount should be paid back.” • Threat in the strongest words: Not used for any other crime.

” “Every Premium paid over and above the Loan is Riba” 31 .RIBA (Interest) • What is Riba: – Riba means any excess compensation over and above the principal which is without due consideration. “Every loan that draws interest is Riba. by Ali Ibn Abi Talib. It’s a premium paid to the lender in return for his waiting as a condition for the loan. – In the words of Prophet (SAW).

RIBA
(Interest)

Riba – Selected Ahadith
– By Hazrat Jabir ibn-e-Abdullah (RT): The Prophet peace be upon
him, cursed the receiver and the payer of interest, the one who
records it and the witnesses to the transactions and said, “They
are all alike (in guilt).”
(Muslim, Tirmidhi and Musnad-e-Ahmad)
- By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him,
said, Riba has seventy segments, the least serious being
equivalent to a man committing adultery with his own mother.”
(Ibn Majah)

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RIBA
(Interest)
• Riba – Selected Ahadith
– By Hazrat Amr bin Al Aas (RT): “When interest based dealing
becomes common among people, they will start facing draught
and shortage of food. And when bribery becomes norm among
people they will live under constant fear of their enemy.”
– By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him
said,
– “There will certainly come a time for mankind when everyone will
take Riba and if he does not do so, its dust/smoke will reach him.”
(Abu Dawood, Ibn Majah)

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RIBA
(Interest)

The prohibition of interest is not limited to Islam,
but it is shared by Judaism and Christianity.

Some of the old testaments have rendered Riba as Haram. (See
Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5,
Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8, 13,17 & 22:12)

Agibi Bank was established circa 700 B.C in Babylonian and
functioned exclusively on equity basis.

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RIBA (Interest) • Hadith prohibiting Riab-al-Fadl – – – – – – (By Abu Saeed Khudri (RT) Sell gold in exchange of equivalent gold Sell silver in exchange of equivalent silver Sell dates in exchange of equivalent dates Sell wheat in exchange if equivalent wheat Sell salt in exchange of equivalent salt Sell barley in exchange of equivalent barley (Reported in Muslim) 35 .

” • Summary: .RIBA • Definitions: • Imam Abu Bakr Jassaas Razi (rta): – “that kind of loan where specified repayment period and an amount in excess of capital is predetermined.“All conditional benefits on loan falls in the category of (Riba) interest” 36 .

” 37 .TYPES OF RIBA • • Al-Nasa (Al-Nasi’ah) or Riba-al-Jahiliya Al-Fazal or Riba-al-Bai • Riba Al-Mufrad (Simple Interest): “Interest calculated only on the initial investment” • Riba Al-Murakkab (Compound Interest): “Reinvestment of each interest payment on money invested to earn more interest.

” 38 .TYPES OF RIBA • Interest (Commercial Interest): “Interest paid on loan taken for productive and profitable purpose.” • Usury (Sarafi Interest): “ Interest paid on loan taken for personal needs and expenses.

Riba Qur’an strickly forbids all kinds of RIBA • Examples: • Jews of Madinah • Ansar’s dealings of interest with Jews for agricultural purposes • Merchants of Makkah 39 .

Riba • Muslim Khilafah • Loans from Bait-ul-Maal • Business dealings of Sahabas among themselves 40 .

lottery.Riba • LAWS BY ALMIGHTY ALLAH: • Qur’anic Laws & Principles: ( Interest. unlawful businesses and products) • Ahadith of Prophet peace be upon him (Sunnah actions. gambling. dealings) • Moral Responsibilities for a Muslim (Services to Humanity & focus towards the success in the world hereafter) 41 .

ISLAMIC BANKING & FINANCE History: • Zubair bin Awam rta • Usman bin Affan rta • Bait-ul-Maal • Caravans of Makkah • Imam Abu Hanifa 42 .

Loan & Trust • Difference between: Loan (Qarz) & Amanat (Trust) • Conditions of Aqad / Agreement of Qarz 43 .

Bank Accounts • Current Account / Checking Account • PLS Account / Savings Account • Fixed Deposit Account / PLS Fixed Account / CDs • Foreign Currency Account • Lockers 44 .

Islamic Banking • Islamic Point of View about depositing money into those Accounts 45 .

” 46 .Economics • What is Economics? – “To utilize the limited resources in a way that maximum needs and wants are met to ensure the well being of all members of the human society.

Economics

Problems Faced by Economy:



Determination of Priorities
Allocation of Resources (land, Labor, Capital, Entrepreneur)
Distribution of Wealth / Income
Development

We will compare how Capitalism, Socialism and Islamic Economic
System addresses to these problems.

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Determination of Priorities
(Problem 01)
• Capitalism

Every Individual has an
unconditional and absolute
right to participate in any
business to maximize profits.

Concept of selfish interest.

Supply & Demand will
determine the priorities.

• Socialism

No individual has the right to
participate in any business
independently.

State will determine the
priorities as per the overall
planning.

Concept of collective interest.

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Allocation of Resources
(Problem 02)


• Socialism

Capitalism

Market force will decide where
to invest resources.

Govt. will decide where to
allocate resources

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Development (Problem 03) • • Capitalism Market forces will decide • • Socialism Govt. will decide 50 .

Distribution of Income (Problem 04) • • • • • • Capitalism Land Labor Capital Entrepreneur - Rent Wages Interest Profit • • Socialism Land – Rent fixed by Govt. Labor – Wages fixed by Govt. 51 .

which then distributes it among the factors of production 52 .Right to Wealth • • • Capitalism Right to wealth is with the factors of production only • Socialism Right to wealth with the Govt.

Flaws of Capitalism

No bindings / restrictions while maximizing profits.

Blindly follows market forces that creates exploitation of labor and
poor people.

No moral values limitations

Monopolies are created that exploit the society as a whole.

Govt. & Industrialists join hands for mutual benefits and make laws
that exploit common people.

Imbalance in the distribution of Income due to which concentration of
wealth takes place.
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Flaws of Socialism

The other extreme of not even giving the natural freedom.

Perfect planning is assumed to be the “Cure of all ills”.

Govts. are assumed to be the angels which can’t commit a
deliberate mistake.

Can not work without a forceful dictatorship.

Creates overall inefficiency in the society. There is no incentive
to work efficiently as there is no individual profit motive

.
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Economics

Capitalism:




Freedom of business
Law of supply & Demand helps
Resources (land, labor & capital) will be used
Competition will force to improve, create and gain maximum.
Distribution of wealth among producers of wealth only
(law of supply & demand will help to decide their share)

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Economics • Producer of Wealth: – – – – Land Labor Capital Owner will get will get will get will get Rent Wages Interest Profit 56 .

will decide about » Allocation of Resources » Determination of Priorities » Distribution of Income » Development • “It is also called Planned Economy” 57 .Economics • Socialism: – No Freedom – No Private Ownership – Govt.

Economics • Principles: – – – – Collective Property Planning Collective Interest Equitable distribution of Income 58 .

Economics • Islam: – – – – Everything belongs to Allah Private ownership is accepted Some restrictions applied to run your economy Law of supply & demand is accepted 59 .

lottery) State Restrictions (Smuggling. gambling. dealing in any restricted business etc) Moral Restrictions / Responsibilities 60 .Economics • Restrictions: Halal & Haraam (through Wahi) (Interest.

Economics • Direct Producer of Wealth: – Land – Labor – Capital – Owner Rent Wages (Not Interest) Profit & Risk of Loss Through Musharikah & Mudahiribah Profit or Loss 61 .

then He decides to share your wealth with others (their right) through: • Zakaat • Khiraaj • Ushr • Sadaqah • Kaffarah • Sacrifice / Qurbaani • Wirasaat 62 .Economics • If everything belongs to Allah.

Summary of the Comparison • Capitalism: gives unbridled and un conditional right to profit motive and private ownership. is the cure of all ills. • Islam: gives a balance view among the two extremes by recognizing the right to private ownership. restrictions -Moral values Islam ensures equitable distribution of wealth through the concept of primary ownership of Allah and secondary ownership of factors of production. 63 . • Socialism: goes to other extreme by assuming that perfect planning by the Govt. market forces and profit motive but the restrictions of: -Halal & Haram • -Govt.

Terms • Definitions: • Bai • Mabee’a • Saman • Qadar • Price • Ijab 64 .

Terms • Tarkah • Dain • Madyun • Dai’in • Muzarib • Rab-ul-Maal • Ra’sul Maal 65 .

Islamic Concepts • Legal Person • Shares • Under Writing • Limited Company • Kick Back • Roll Over • Libor / Kibor 66 .

Types of Bai (according to validity) • Definitions: • Bai Sahih • Bai Batil • Bai Fasid • Bai Mauqoof 67 .

Islamic Sales Contract • Bai Sahih (Valid Sale): – A sale is valid if all elements together with their conditions are present – Elements of a valid sale are: • • • • Contract (Aqd) Subject Matter (Mabee’a) Price (Saman) Possession or delivery (Qabza) 68 .

Islamic Sale Contract Aqd (Contract) Possession (Qabza) Bai Sahih (Valid Sale) Subject Matter (Mabee’a) Price (Saman) 69 .

Islamic Sales Contract • Elements of Bai Sahih (Valid Sale): – Contract (Aqd): • Offer & Acceptance (Ijab-o-Qabool) – Oral (Qauli) – Implied (Hukmi) • Buyer and Seller must be: – Sane – Adult / Muture – Wise • Conditions of Contract: – Sale must be non contingent – Sale must be immediate 70 .

Islamic Sales Contract • Elements of Bai Sahih (Valid Sale): – Subject Matter (Mabee’a) • • • • • • • Existing Valuable Usable Capable of ownership / title Capable of delivery / possession Specific & Quantified Seller must have title & risk 71 .

Islamic Sales Contract • Elements of Bai Sahih (Valid Sale): – Price (Saman) • Quantified (Maloom) • Specified & Certain (Muta’iyan) 72 .

Islamic Sales Contract • Elements of Bai Sahih (Valid Sale): – Qabza (Delivery / Possession) • Physical (Haqiqi) • Constructive (Hukmi) 73 .

Basic Rules of Bai (buying / selling) • Nobody can sell such Product / Commodity which: • Does not exist • No ownership • Not in the possession • • Note: Exceptions are: (1) Bai Salam (2) Bai Istisna 74 .

Sale Agreement - Difference between Actual Sale & Promise of Sale 75 .

• Bai must be done of such product which has a value/price in the market • Bai of a product is not permissible. which has no use other than Haram 76 . If the sale of any product is attached with a condition of any future incident or date.More Rules of Bai • Bai must be on unconditional basis & implemented right away. it will not be valid.

It should not be based on any incident. • Price of the product must be clearly mentioned and identified • There should be no unusual condition in Bai otherwise it will not be valid 77 . struggle etc. clear with all demanding qualities • Selling product must be given in the possession of buyer.More Rules of Bai • Product must be identified.

Modes of Financing • Musharakah • Mudharibah • Murabahah • Ijarah (Lease or Hire) • Ijarah Wa Iqtinah (Hire-Purchase) • Bai Salam • Bai Istisna 78 .

79 . On the other hand.Modes of Financing • Musharakah: It is the same financing contract as Modarabah except that client also provides a part of capital in addition to management participation. In that case. management fees and distributable profit form the enterprise are shared by the client and Islamic Bank in accordance with ratios fixed under the Musharakah contract. Islamic bank may also contribute in the management in addition to its capital.

Modes of Financing • Modharibah: Modaribah is a contract between an Islamic Bank and the client whereby the Islamic bank provides specific amount of funds to the clients for an enterprise for defined purposes in exchange for a reasonable and highly predictable profit. The client receives a share in the profit as compensation or fee for his management. 80 .

raw material.Modes of Financing • Murabahah: Under this deal. machinery or any other items of economic significance from a third party at the request of a client and sells such goods to the client on spot or deferred payment basis at it s own sale price. The difference between the purchase cost of the Islamic bank and the sale price to the clients forms the profit called “Mark Up”. Islamic Bank purchases goods. 81 . equipment.

• Ijarah Wa Iqtinaa (Hire-Purchase): The bank finances the purchase of equipment and the client uses them under a contract. The contract provides that the client will pay the cost of the instrument and a share in the net rental value of the equipment which is proportional to the outstanding shares in the total investment. 82 .Modes of Financing • Ijarah (Lease or Hire): The bank acquires machinery /equipment. building etc for his client and charges a certain rental for their use.

• Purpose: -To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest. -To meet the need of traders for import and export of goods.Modes of Financing • Bai Salam: Seller undertakes to supply specific goods to the buyer / bank at a future date in exchange of an advanced price fully paid at the spot of agreement. 83 .

84 . The Bank enters into an agreement with the client for purchase of any goods before it comes into existence.Modes of Financing • Bai Istisna. It is an order to producer to manufacture a specific commodity for the purchaser.

Condition for a Valid Deal • Conditions for Islamically Valid Dealing: • All/both parties must have the ability of dealing • Deal must be done with free will • No intention of cheating / fraud • No false statement 85 .

Conditions for Musharakah Dealing . All given 4 conditions must be applied. not on the basis of actual investment’s percentage 86 . Also • Profit ratio for each party must be decided in the beginning of agreement • Profit sharing ratio must be based on the percentage of actual outcome of the business.

it should be according the investment ratio. it could vary except the sleeping partner. Imam Shafi rt.Profit Sharing Ratio of Musharika Q: Is it necessary to have the profit sharing ratio according to the actual investment ratio? Ans: Three Opinions: • According to Imam Malik rt. • According to Imam Ahmed rt. if it is decided with a free will of all parties. • According to Imam Abu Hanifa rt. it could vary. 87 .

loss sharing ratio of each partner must be equal according to the percentage of their investment.Loss Sharing Ratio of Musharikah • According to all Imams. 88 .

• If a partner is not in sane anymore (for long time) 89 . • Upon the death of any partner.Dissolving Musharakah • Any party can dissolve the Musharakah agreement by give notice to the other party.

MUZARIBAH Features of Muzaribah: • Investment from (one party) Rab-ul-Maal only. • Rab-ul-Maal must carry all liabilities of Business • All assets will be the property of Rab-ul-Maal 90 . • No participation in business or management • All loss must be suffered by Rab-ul-Maal only.

MUZARIBAH • MUZARIBAH AL MUQAYYIDAH: • -Investment for a specified business only • MUZARIBAH AL MUTALLAKAH: • -Free option to do any business 91 .

MUZARIBAH • NOTE: • All four Imams agree that no salary will be given to Muzarib on his/her services. if the Muzarib travels out of town. compensation for daily food allowance can be given. • According to Imam Ahmed rt. compensation for daily food can be given only. 92 . • According to Ahnaf.

• Just using the name of “Mark Up” or profit instead of interest does not make it permissible until all the terms and conditions set by Islamic Jurisprudence are fulfilled.Murabihah • Features: • Basically. it’s not a mode of financing but a source to avoid interest dealing. 93 . It should be used only where Musharaikah and Muzaribah not workable.

• Murabihah can be used as a source of financing only when the client needs funds to purchase any product/machinery/equipments etc. 94 . • The product which is given on Murabihah basis must be in the possession of owner.Murabihah • It’s not a type of loan but a deal (Bia/Agreement).

On buy back basis. • If the actual cost can not be identified. • It is important for a Murabahah dealing that the product must be bought from a third party. In that case.Murabihah • Sharing of risk of loss differentiate Murabihah from the interest category. then Murabihah deal is not possible. we must use Bai Musawamah. 95 . • Roll Over is not valid in Murabihah. Murabihah deal will not be valid.

Murabihah (Agreement) Client & Bank (Agreement) Bank & Wakeel (Agreement) Product Pocession By Bank Wakeel & Seller (Deal) Bank & Client (Deal) Liability of Client 96 .

Murabihah (Agreement) Bank & Client Client & Bank Wakeel & Bank Bank & Wakeel Wakeel & Seller 97 .

etc.Ijarah • Features: • Lessor stays as owner and the lessee has the right to use the item/good. like Bills. • Lessor will be responsible for all liabilities related to that property/good etc like taxes. • Leasing is not permissible for consumable goods. 98 . which can be used/benefited while using that good/item etc. Lessee will be responsible for those liabilities only.

99 . Rent etc must be decided in the beginning of the contract. If Lessee is responsible for any Loss/damage.Ijarah • Risk of loss of that property/good will stay with lessor. • Leasing Time. he/she has to afford it. Duration. • Lessor can’t increase the percentage/share of rent by himself.

100 . • The product must be identified.Salam • Conditions: • It is necessary to pay the lump sum amount in the beginning of Bai Salam contract. time. and the place must be mentioned clearly. quantified clearly with all qualities. • The date of delivery. • Salam is not valid for a specific farm/land/garden etc. • Salam is permissible only on those items which can be quantified or measured.

features of that product must be clearly identified 101 .Istisna • Features: • Not necessary to pay the amount in Advance like Bai Salam • Price must be decided in the beginning of the contract • Qualities.

102 .Istisna • Canceling Istisna: • one party can cancel the Istisna deal by giving notice to the other before starting production/purchasing etc • if the production/work has already started. then it can’t be cancelled from one side.

advance payment is not necessary. it is the basic part of the deal. it can not be cancelled one sided. it could be cancelled. Or Subject can be anything. 103 . • In Istisna. if the production is not started yet. • In Istisna.Difference between Istisna & Salam Istisna Salam • Istisna is permissible for any item / commodity which need to be produced / manufactured. • In Bai Salam. • In Salam. • Date. • But in Salam. it could or could not be. Time of delivery does not have to be fixed. it is necessary to make full payment in advance. • In Salam.

sharing in the assets of the business to the extent of the ratio of financing. 104 . An Investor must share the loss incurred by the business to the extent of his financing. The partners can determine with mutual consent any ratio of profit which may differ from the ratio of investment. However the partner who has excluded himself from the responsibility of work for the business cannot claim more than the ratio of his investment.Project Financing • Proposed Methods: – Musharikah – Mudharibah Basic Principles: Financing through Musharikah and Mudharibah does not mean the advancing of money. It means participation in the business in the case of Musharikah.

In this case: • If the management is the sole responsibility of one party.Project Financing • Project Financing: – If the financier wants to finance the whole project. no problem with regard to the valuation of capital should arise. – If investment comes from both sides. the form of Mudharibah can come into operation. while the investment comes from both. the form of Musharikah can be adopted. 105 . a combination of musharikah and Mudharibah can be brought into play according to the rules. – Since it would be a new project.

the financier may get back the amount he has invested along with a profit. if the business has earned a profit. In this case. • If the financier wants to withdraw from the Musharikah. while the other party wants to continue the business. • In the case of loss.Project Financing • The distribution of profits according to the normal accounting standards is not difficult. 106 . • The price of his share would be determined through valuation of the assets called as constructive liquidation with mutual consent of the parties. however any decrease in the total value of the assets would be divided between them in the ratio of their investment. the later can purchase the shares of the former at an agreed price.

they can sell their share to other partners of the project. the financier totally comes out of the project.Project Financing • Since financial institutions do not normally want to remain partner of a specific project for good. 107 . the share of the financier in the project is reduced to that extent. • If the sale of the share on one time basis is not feasible for the lack of liquidity in the project. and when all the units are sold. • Whenever a unit is sold. the share of the financier can be divided into smaller units and each unit can be sold after a suitable interval.

Import Financing • Import Financing: – Conventional Banks charge two types of fee for the service of letter of credit which the bank provided to the importer. They are: • Service Charges for the opening an LC • Interest charged on the LCs not opened on full margin. 108 .

Import Financing • Collecting service charges for this purpose is allowed. scholars have proposed two methods for financing LCs. • These methods are: – Musharikah – Morabihah 109 . but as interest cannot be charged in any case.

Import Financing • Musharikah: The appropriate substitute for LC is Musharikah. If LC is being opened at some margin then Musharikah agreement can be made. importer will purchase the bank’s share at the market price. Bank will own the goods that are being imported and profit will be distributed according to the agreement. Bank and importer can make an agreement of Mudharbah or Musharikah while opening LC. Musharikah or Mudharibah will end after a certain time period even if the goods are not sold. whereby. If LC is being opened at zero margin then an agreement of Mudharbah can be made. with their mutual consent can also include a condition in the agreement. Bank will pay the remaining amount and the goods that are being imported will be owned by both of them according to their share of investment. Bank and importer. In this case. 110 . in which bank will become Rabb-ul-maal and importer will be regarded as Mudarib.

Import Financing • Murabihah: – At present Islamic banks are using Murabihah to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabihah agreement. One for the purchase of goods and other for appointing the importer as the agent of the bank (that is agency agreement). Murabihah financing requires bank and importer to sign two agreements separately. 111 . Once these two agreements are signed. importer can negotiate and finalize all the terms and conditions with the exporter on behalf of the bank.

Murabihah (Agreement) Bank & Client Client & Bank Wakeel & Bank Bank & Wakeel Wakeel & Seller 112 .

Export Financing • Two important roles of bank in Exports: – They act as a negotiating bank and charge a fee for this purpose which is allowed in Shariah. These services are of two types: Pre Shipment Financing Post Shipment Financing 113 . – They provide export financing facility to the exporters and charge interest on this service.

will be distribute between them according to the pre determined ratio. Agreement in this case will be easy. if exporter is not investing. Exporter will manufacture or purchase goods and profit that will be obtained by exporting. 114 .Export Financing • Pre Shipment Financing: – Pre Shipment Financing can be fulfilled by two methods: • Musharikah • Murabihah Musharikah: Bank & Exporter can make an agreement of Musharikah or Mudharibah. otherwise Musharikah agreement can be made. as cost and expected profit is known.

Export Financing • Problem: – If the exporter is not able to deliver the goods according to the terms and the conditions of the importer then importer can refuse to accept the goods and in this case exporter’s bank will ultimately suffer. “This condition is allowed in Shariah as the Rabbul Maal is not responsible for any loss that arises due to the negligence of Mudharib”. 115 . Solution: it can be rectified by including a condition in Mudharibah or Musharikah agreement that if exporter violates the terms and conditions of import agreement then the bank will not be responsible for any loss which arises due to this negligence.

• One for the purchase of goods • Second one for appointing the exporter as the agent of the bank Once these two agreements are signed. Bank exports goods at the original price and thus can earn profit.Export Financing • Murabihah: – Murabihah is being used in many Islamic Banks for export financing. 116 . the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank. – Murabihah Financing requires bank and exporter to sign at least two agreements separately. Banks purchase goods that are to be exported at discounted (less) price than the agreed price between the exporter and the importer.

Export Financing • Post Shipment Financing: – It is similar to the discounting of Bill of Exchange. • Bank can provide interest free loan to the exporter equal to the amount of bill and exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of loan. • Exporter with Bill of Exchange can appoint bank as his agent to collect receivable on his behalf. Its alternate Shariah compliant procedure is as follows. Bank charges a fee for this service. 117 .

Export Financing • • Here two procedures and two different agreements will be made. 118 . This method is valid in Shariah because: collecting fee for service and giving interest free loan is permissible in Islam. for which he will charge a fee. – Second will be for providing interest free loan to the exporter and authorizing bank for keeping the amount received through bill as a payment for loan. – One will authorize the bank to collect the loan on his behalf as an agent.

Islamic Ways of Insurance • Conventional Insurance Principles – – – – – Pooling of Risk Payment of fortuitous loss Risk Transfer Indemnification Profit for the share holders from underwriting results and investments 119 .

Islamic Ways of Insurance • Why “NO” to conventional Insurance? – Is something wrong with the concept? • Risk Aversion • Assuring others • Risk sharing Q: Ans: What is wrong with the practice? The contract between the insurer and the insured is technically wrong from the Shariah perspective because of: Gharar & Riba 120 .

Islamic Ways of Insurance • Gharar: – Lexically it means uncertainty and technically it means the uncertainty of the counteract or the subject matter or the period in a commutative contract. then Qimar emerges. – The element of Gharar in the commercial insurance contract • The insurer does not know how much he would owe to an individual. 121 . • Some times an insured does not know either how much he would pay ultimately to the insurer • In case of no claim from the insured in general insurance.

Islamic Ways of Insurance • Riba in Commercial Insurance: – Direct Riba • Excess on one side in case of exchange between the amount of premium and the sum insured – Indirect Riba • The interest earned on interest based investments 122 .

Islamic Ways of Insurance • The concept of Takaful: – Features: • Taburro (contributions) from the participants (Policy Holders) to create a fund which will provide financial help at the occurrence of certain losses • Partnership among the participants • Need of an operator • The management contract between the participants and the operator • Investments in Shariah compliant modes 123 .

The operator earns an upfront deductible fee and shares the profit of investments. All under writing results belong to the fund which itself has a legal entity.Islamic Ways of Insurance • Different Models: – Pure Mudharabah Model: • The participants and the operator enter into an Mudahrabah contract from the beginning of the relation. 124 . The participants contribute to the fund and the operator manages the fund. – Wakalah based on Waqf: • The share holders create a waqf fund to extend the help to those who want to cover against financial loss. for indemnification and share of the underwriting results – Wakalah Model (hybrid of wakalah & Mudarabah): • An agency agreement is made between an individual willing to participate in the fund and the operator working as the manager of the fund. it does not share the results of underwriting.

Business Ethics In Islam • Definition of Business In Islam: • Verses of Holy Qur’an • Ahadith of Prophet Peace be Upon Him 125 .

Evidences • Permission of Business In Islam: • Through Holy Qur’an • Through Ahadith of Prophet pbuh • Companions of Holy Prophet • Four Caliph of Muslims • Ashara Mubasharrah • Muhajreen of Makkah 126 .

Halal & Haram • Eating Halal: • Verses of Holy Qur’an: 127 .

Halal & Haram • Ahadith of Prophet pbuh: • Examples: • • Zabiha and Non Zabihah Muslim And Non Muslim 128 .

Duties of Muslims • Duties of Muslims in Business World • Verses of Holy Qur’an • Ahadith of Prophet pbuh • • • • • e-g: Oil Gold Man Power Land 129 .

Forbidden Earnings • Definition of Haram Earning • Verses of Holy Qur’an 130 .

Forbidden Earnings • Ahadith of Holy Prophet pbuh: 131 .

Forbidden Earnings • Details of Forbidden Earnings: • Stealing Robbery • Swearing Offense • Lies Cheating • Unjustly Haram Business • Deal Without Permission & Authority 132 .

Attributes of Business & Businessmen • Verses of Holy Qur’an 133 .

Attributes of Business & Businessmen • Ahadith of Holy Prophet pbuh 134 .

Major Principles of Business in Islam • Everything belongs to Almighty Allah • Trust in Allah • Understanding of Business Issues Avoiding Israaf • Well behaved • Trust Worthy • Hard Working & Sincerity • No greediness 135 .

Major Principles of Business in Islam • Keep Purity • Charity & Zakaat • Clarifying defective products • Fulfilling Promises & Agreements • Accepting returned goods 136 .

Forbidden Action in Business: • No loss of Islamic Practices • No Swearing • No Cheating • No Fake Praises • No Buying / selling of stolen goods • No Buying / selling of Haram goods • No mixing (for cheating). (B into A quality) 137 .

Forbidden Action in Business • No storing for higher profit • No selling of goods without having possession (except Bai Salam) • No selling of goods without owner’s permission 138 .

Forbidden Business • Wine • Pig • Dead Animals & Birds • Interest Based Business • Lottery • Stolen Products • Business in Masjid 139 .

Forbidden Business • Deal Upon Deal • Idols/Pictures of Living Beings • Unavailable Products • Selling Products without permission 140 .

Summary • Business Ethics in Islam • Verse of Holy Qur’an (Surah Al Qisas. verse 77) 141 .

Summary • Four Major peaces of Advice: • Achieving Success in the world hereafter • Take your share from this world • Do Ehsaan (Favors) • No Offense (Fasad) 142 .

Working Plan for Islamic Banking • Working Plan for Islamic Banking: • • • • • • • • • Structure of Bank Funds Structure of Public Deposits Modes of lending Modes of Financing & Products of Investment Specialized Financial Operations Industrial Banking Agricultural Banking Trade/Commercial Banking Co-operative Banking 143 .

Working Plan for Islamic Banking – Cont: • Monetary Policy & Central Banking • Inter & Intra Govt. & Banks Transactions • Policy of National Savings Schemes • Insurance Policy • Policy regarding existing internal interest based debts • Policy regarding external interest based debts • Changes in the taxation system 144 .

Islamic Economics Course The End Jazakumullahu Khairan Thank You 145 .

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