Islamic banking provides

services to its customers free

from interest, and the giving and
taking of interest have
prohibited in all transaction.
Islam bans Muslims from taking
or giving interest (the Arabic
term for which is Riba), and this
prohibition makes an Islamic
banking system differ

Islamic Banking
Islamic banking refers to a
system of banking or banking
activity that is consistent with
Islamic law (Sharia) principles
and guided by Islamic
economics.
Islamic law prohibits , the
collection and payment of
interest, also commonly called
Riba in Islamic discourse.

The Importance of Islamic Banking

Modern banking, based on interest and biased in favors of
the capitalists and rich and well-to-do, is rejected as unIslamic because our country try to build a banking systems
with the basic and being foundation by Islam.
Islam as al-Deen is not just a religion but also a set of
beliefs, thoughts and aspects of life that creates a balanced
equilibrium between worldly (material) and spiritual
elements
Without an Islamic foundation the country will no get the
blessing from the god in the world and the hereafter.

Introduction Of Islamic
Banking

Introduction of Islamic Banking

Islamic banking is interest free banking, in
which there is no fixed rate of return. Islamic
banking is the banking system which is run
in accordance with the Islamic laws and the
Shari a` board; that guides the institutions.
This Shari a` board authorizes the products
that whether these are Shari a` compliant or
not. Islamic banking is the banking that is
guided by Islamic law ( Shari a`) principles
and guided by Islamic economics. In
particular, Islamic law prohibits usury, the
collection and payment of interest,
Prepared By: Muneeb Waseem
Ansari

also commonly called Riba in Islamic

discourse. Islamic banking also finds its
roots in Islamic finance and all type of
transactions are interest free and of risk
sharing. The interest is prohibited in
Islamic ways of banking as it is also
obvious from Quran. In Quran, in Sura
Al-Imran, Allah said that; O you who
believe! Do not devour Riba multiplying
it over and keep your duty to Allah that
you may prosper (3:130). Same kind of
prohibition regard fixed interest is also
lead in Sura Al-Rum(39) , Al-Nisa(160161) and Al-Baqarah(275-281) of Quran.
Prepared By: Muneeb Waseem
Ansari

Riba and Gharar are illegal under

Islamic law. Riba refers to fixed
rate of interest. Gharar refers to
speculation. Islamic banking shows
dramatic improvements and
developments in Pakistan. Islamic
banking is taken as national policy
and it is supported but there exist
dual banking structure in the
Muslim countries. Mostly the banks
of conventional system are also
opening their separate Islamic
banking divisions and branches.
Prepared By: Muneeb Waseem
Ansari

The expectation of increase in

growth of networking of Islamic
banking system is increasing. The
Islamic banking has increased in
terms of branches, deposits,
capital funds, sources. The ratio of
income to expenses is high which
indicates increasing profitability of
the sector.
Prepared By: Muneeb Waseem
Ansari

Riba or Interest
Riba literally means increase,
addition, expansion or growth. It is
however not every increase or
growth, which is prohibited by Islam.
In shariah, Riba technically refers to
the premium that must be paid
without any consideration.

Prepared By: Muneeb Waseem

Ansari

Types Of Riba
According to jurists of Islam Riba
have two types.
Riba Al-Naseah
Riba Al-Fadl.

Prepared By: Muneeb Waseem

Ansari

10

The organization of term interest

dates back to 17th century with the
emergence of banking system at
global level. Interest means giving
and/or taking of any excess
amount in exchange of a loan or
on debt. Hence, it carries the same
meaning/ value as that of Riba is
defend in the previous question.
Further, it is narrated that the
loan draws interest is Riba.
Prepared By: Muneeb Waseem
Ansari

11

Riba in Quran
In the Holy Quran, Allah (SWT) says in Sura AlBaqarah (2-279):
. And if you repent, yours is your principal
And what ever Riba you give so that it may increase
in the wealth of the people, it does not increase
with Allah. ( Sura Al-Rum 30:39)
And because of their charging Riba while they were
prohibited from it. ( Sura An-Nisa 4:161)

Prepared By: Muneeb Waseem

Ansari

12

O you who believe! Be mindful of God and

give up what remains ofal-riba if you are
believers. If you do not do so, then receive a
declaration of war from God and his
Messenger. But if you repent,you shall
have your capital sums (ru`us alamwal). You do not deal unjustly and
you are not dealt with unjustly(2:278279)

Prepared By: Muneeb Waseem

Ansari

13

Riba in Hadith

"Every loan that derives a benefit (to the creditor)

is riba."
This Hadith is reported by Hazrat Ali Radi-AllahuAnhu

Prepared By: Muneeb Waseem

Ansari

14

Abu Said al Khudri Radi-AllahuAnhu

narrated that Holy Prophet( peace be upon
him) said:
Gold for gold, silver for silver, wheat for
wheat, barley for barley, dates for dates, and
salt for salt, like for like, payment made
hand by hand. If anyone gives more or asks
for more, he has dealt in Riba. The receiver
and giver are equally guilty.

Prepared By: Muneeb Waseem

Ansari

15

If the creditor received a goat as mortgage

from the debtor, the creditor may use its
milk to the extent he has spent in providing
fodder to the goat. However, if the milk is
more than the price of the fodder, the
excess isriba." Usmani, para 99)
Prepared By: Muneeb Waseem
Ansari

16

 From Usamah ibn Zayd: The Prophet,

peace be on him, said: "There is no riba
except in nasi'ah [waiting]." [Bukhari,
Kitab al-Buyu, Bab Bay al-dinari bi aldinar nasa'an, #386; also Muslim and
Musnad Ahmad]
"There is no riba in hand-to-hand [spot]
transactions." [Muslim, Kitab alMusaqat, Bab bay'i al-ta'ami mithlan bi
mithlin; also in Nasa'i].

Prepared By: Muneeb Waseem

Ansari

17

Difference between conventional

banking and Islamic banking

Prepared By: Muneeb Waseem

Ansari

18

money
Bank

Client
money + money (interest)

Conventional
Banking System

Prepared By: Muneeb Waseem

Ansari

19

Bank

Goods &
Services

Client

money

Islamic Banking
System

Prepared By: Muneeb Waseem

Ansari

20

Conventional Banks

Islamic Banks

Money is a commodity besides medium of

exchange and store of value

Money is not a commodity thought it

is used as a medium of exchange and
store of value

Time value is the basis for charging

interest on capital

Profit on trade of goods for charging

on providing service is the basis for
earning profit

Interest is charged even in case the

organization suffers losses by using
banks fund

Islamic bank operates on the basis of

profit and loss sharing

While disbursing cash finance, running

The execution of agreements for the
finance or working capital, no agreement
exchange of goods & services is a
for exchange of goods & services is made. must while disbursing funds under
Murabaha, salam & Istisna contracts
Conventional banks use money as a
commodity which leads to inflation

Islamic banking tends to create link

with the real sector of the economic
system by using trade related
activities.

Prepared By: Muneeb Waseem

Ansari

21

Conventional banks

Islamic Banks

The investor is assured of a pre

determined rate of interest

In contract it promotes risk sharing

between provider of capital (investor)
and the user of funds (entrepreneur)

Lending money and getting it back

with compounding interest is the
fundamental functions of the
conventional banks

Compounding calculation is strictly

prohibited under Islamic banking system

It can charge additional money incase

of defaulters

The Islamic banks have no provision to

charge any extra money from the
defaulters.

Conventional banks invest their

deposit in interest based modes

Islamic banking only deals in Halal

products and services, all transactions
must be in SHARIAH COMPLIANCE

The status of a conventional bank, in

relations to its clients, is that of
creditors and debtors.

The status of Islamic bank in relation to

its clients is that of Partners, Investors,
and Trader, Buyer and Seller.

A conventional bank has to guarantee

of all its deposits.

Islamic banks cannot guarantee of all its

deposits.

Prepared By: Muneeb Waseem

Ansari

22

Basic Principles of Islamic Banking

Prepared By: Muneeb Waseem

Ansari

23

Sanctity of contracts.
Risk sharing.
No Riba / Interest.
Economic purpose / activity.
Fairness.
No valid subject matter.

Prepared By: Muneeb Waseem

Ansari

24

Shariah / Islamic Law

Prepared By: Muneeb Waseem

Ansari

25

Shariah lexically means a way or

path. In Islam Shariah refers to the
divine guidance and laws given by
the Holy Quran, the Hadith
(sayings) of the Prophet
Muhammad (peace be upon him)
and supplemented by the juristic
interpretations by Islamic Scholars.
Shariah embodies all aspects of
the Islamic faith, including beliefs
and practices.
Prepared By: Muneeb Waseem
Ansari

26

Sources of Islamic Law

The Holy Quran
The Sunnah of the Holy Prophet (peace be
upon him)
Ijma ( consensus of the Ummah)
Qiyas (Analogy)
Prepared By: Muneeb Waseem
Ansari

27

Islamic Mode of Financing

Prepared By: Muneeb Waseem

Ansari

28

Contracts
Mudarabah
Murabaha
Musawamah
Salam
Istisna
Ijarah
Ijarah wa Iqtina ( Ijarah Muntahiyyah Bitamleek)

Sub Contracts
Wakalah
Kafalah
Rahn

Prepared By: Muneeb Waseem

Ansari

29

Islamic Banking Fare vis--vis

Conventional Banking
The approach of Islamic banking to
satisfy the business needs of the
customers is entirely different from that
of the approach adopted by
conventional banking. Basically Islamic
banking satisfies the business needs of
the entrepreneurs by the following two
methods.
Profit and loss sharing modes
By: Muneeb Waseem
Debt creatingPrepared
modes
Ansari (financing the

30

Role of Islamic banking in

Economic Development of
the Country

Prepared By: Muneeb Waseem

Ansari

31

Principles Governing

Prepared By: Muneeb Waseem

Ansari

32

While functioning within the Shariah

framework, Islamic banks an perform a
crucial task of resource mobilization and
efficient allocation using either profit
sharing (Musharakah and Mudarabah) or
trading & Ijarah based categories of
Islamic mode of financing. Profit sharing
modes can be used for short, medium
and long-term project, financing, import
financing, pre-shipment export financing
and working capital financing
transactions. In order to ensure
maximum role of Islamic finance in the
development of economy it would be
necessary to create an environment
Prepared By: Muneeb Waseem
Ansari

33

Small and medium enterprises (SME)

sector has a great potential for
expanding production capacity and
self-employment opportunities.
Enhancing the role of financial sector
in development of SME sub-sector
could mitigate the serious problems of
unemployment and low level of
exports.
it can safely be said that Islamic
banking has a great potential of
playing an effective role in the
Prepared By: Muneeb Waseem
Ansari

34

Is Islamic Banking Viable

Prepared By: Muneeb Waseem

Ansari

35

Islamic banking is still in the stage of

evolution. No one can disputes that there is a
definite desire amongst Muslims savers to
invest their savings in the venues which are
permitted by the Shariah. Nevertheless, they
must be provides with Halal returns on their
investments. Islamic scholars and practical
bankers took up this challenge and have
made commendable progress in the last few
decades in providing a number of such
instruments. However, the concepts of
Islamic banking and finance are still in their
early stages of development and Islamic
banking is an evolving reality for continuously
testing and refining those concepts.
Prepared By: Muneeb Waseem
Ansari

36

Nature of Deposits in Islamic

Banks

Prepared By: Muneeb Waseem

Ansari

37

Following are the nature of

deposits in Islamic banks.
Deposit

Nature

Current

Qarz

Saving

Mudarabah

Prepared By: Muneeb Waseem

Ansari

38

Qarz can be use for own need and

amanah can not be used for any
purpose, thats why Islamic banks
current accounts are based on Qarz
and not in amanah.
Islamic banks offered three types of
saving accounts.
Mudarabah Saving Account
Musharakah Saving Account
Wakalah Saving Accounts
Prepared By: Muneeb Waseem
Ansari

39

ISLAMIC BANKING AS AN
ALTERNATIVE APPROACH

Prepared By: Muneeb Waseem

Ansari

40

One might wonder whether Islamic banking and

finance is an alternative approach to modern
banking. In fact, the banking business is no more
than a possible means to satisfy the needs of
society according to the prevailing conditions and
circumstances. Those needs should always govern
the means, not be its subject. The most important
development in modern banking is the art of
mobilizing funds for investment. It happened to be
that the method of both collecting and using of
funds was based in the West on interest paid and
charged. In contrast, Islamic banking
is a system that provides financing and attracts
savings on the basis of profit/loss sharing. One may
have to think positively of such a scheme. By
waiving the interest factor, we find an alternative
vehicle to provide financing on a different basis
which should be judged
on its own merit.
Prepared By: Muneeb Waseem
Ansari

41

For Muslims, this system of profit/loss

sharing coincides with their belief in the
prohibition of interest, and helps in mobilizing
unused funds for investment and creating
new job opportunities.
As for non-Muslims, the Islamic banking
system does not contradict their faith, while
it provides the society with alternative ideas
for venture capital and other tools of
investment.

Prepared By: Muneeb Waseem

Ansari

42

Mudarabah as a contract of participation between

the provider of capital and the managing
entrepreneur responds to normal human needs. An
enterprising engineer living in the West, as an
example, would welcome any possibility that
enables him to be provided by venture capital to
establish a new factory. This could be the case with
many individuals of the same spirit. The ultimate
test of such alternative is whether it is successful or
not. It can be safely said that the idea of Islamic
banking has been successful. It is, therefore, not
surprising to find several international banking
institutions started the establishment of Islamic
units or windows for some of their customers.
Islamic banking was partially practiced by some of
the Western banks and financial institutions in
Switzerland, U.K. and the United States.
Prepared By: Muneeb Waseem
Ansari

43

The establishment of City Islamic Investment

Bank in Bahrain is the latest example for the
possible adoption of the Islamic banking system
by traditional bankers. Economists have proven
that the wider is the freedom of
choice the higher is the level of social welfare. In
addition, wider choice implies greater respect of
human rights. When an alternative concept such
as Islamic banking is introduced, a new choice is
open to the market, with obvious economic and
social benefits. Introducing Islamic banking as a
new choice has also further benefits related to
the advantages it provides to many fund users.
Commodity and service producers would certainly
appreciate equal opportunities for obtaining
capital based on the merits of their businesses
Prepared By: Muneeb Waseem
Ansari

44

rather than on their personal creditworthiness

alone. Those entrepreneurs who prefer to be self
employed need ways to obtain financing other
than borrowing. Islamic banking gives those
pioneers such an opportunity on the basis of
profit/loss sharing. In general, Islamic finance
places more weight on the merit
of the business to be financed, rather than the
wealth of the fund user. As a result under this
new banking alternative, a better distribution of
credit may be achieved. Therefore, I would like to
recommend strongly to the Western World that
all obstacles remaining in the way of establishing
Islamic banks in their countries be removed.
Prepared By: Muneeb Waseem
Ansari

45

Prepared By: Muneeb Waseem

Ansari

46

CHALLENGES AND PROSPECTS

Prepared By: Muneeb Waseem

Ansari

47

Last but not least, I would like to conclude with a

word about the challenges facing Islamic banks
and what prospects they may have. The biggest
challenge Islamic banks have faced from their very
beginning is how to narrow the gap between the
Islamic banking model and its application; in other
words, between theory and practice. Difficulties
arise in this respect come from being relatively
small in a traditional banking environment, having
to rely on bankers trained in traditional banking,
and attempting to balance the unquenchable
enthusiasm on the side of depositors, with a
limited supply of investment opportunities.

Prepared By: Muneeb Waseem

Ansari

48

Islamic banks have been trying hard to meet those

challenges through several means. The first is to
work for a better understanding of the concepts
upon which their operations are based. This has
been a success to the extent that now traditional
bankers are mostly cooperative and accommodating.
Central bankers have also come forward with new
ideas of better methods for supervision and control,
to suit the operations of Islamic banks. Another
means is to train their staff in this new form of
banking and to press for more banking and financial
innovations which are necessary for the new modes
of finance. Fortunately, financial engineering has
come in handy with bold and new ideas in finance
which made the Islamic model so much more
applicable. Innovations in this regard did not come
exclusively from
Prepared By: Muneeb Waseem
Ansari

49

Islamic banks. Surprisingly, financial markets

produced
some
useful
innovations,
perhaps
indicating that Islamic banking is an idea whose
time has come. Nonetheless, many challenges still
remain, not the least to the predominance of
Murabaha (sale mode) in the operations of some
Islamic banks, as well as the relative scarcity of
short-term Islamic financial instruments. The
prospects of Islamic banking and finance will depend
extensively on the ability of Islamic banks to
continue facing challenges with resourcefulness and
creativity, in addition to being worthy of trust and
understanding. I believe that competition, if allowed
and maintained, not only within Islamic banks, but
also between all banks whether Islamic or traditional,
would insure a promising future for the banking
industry as a whole.
Prepared By: Muneeb Waseem
Ansari

50