The importance of banks cannot be denied in the development of the economy of any country«.. The involvement of Interest in the current conventional system of banking has closed several doors of opportunities for not only Muslims, but also for the world development of economic sustainability «. In such times, the need of an Islamic Ideal Body is obvious«. Let us try to know the reasons and basics upon which islamic banking is considered as Halal« and different from Interest/conventional banking«.

Islamic Banking

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as:

Fiqh al-Muamalat al(Islamic rules on transactions).

Basics of Islamic Banking
The basic principle of Islamic banking is:

‡ The sharing of Profit and Loss ‡ The prohibition of

Riba (usury)

´Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by Islamic Sharia·hµ

What are We Focusing Upon?

We will be focusing on the Concept of Islamic Banking and upon which bases, it has been considered as

Halal and Permissible on the basis of Shariah

‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Interest-free banking seems to be of very recent origin. The earliest references to the reorganization of banking on the basis of Anwar Qureshi (1946), Naiem Siddiqi (1948) Mahmud Ahmad (1952) Mawdudi (1950) Muhammad Hamidullah (1962) They have all recognized the need for commercial banks and their perceived "necessary evil" have proposed a banking system based on the concept of Mudarabha - profit and loss sharing

Philosophy of Islamic Banking & Finance
risk-sharing owning handling of physical goods involvement in the process of trading leasing and construction contracts using various Islamic modes of finance

Need of a New System
Why Islamic Banking needed? Before explaining the concept

´what is Islamic Bankingµ
the elaboration of concept

´why Islamic Bankingµ
is very important.

Principles Governing

Aqidah (Faith and Belief)

Shariah (Practices and Activities)

Akhlaq (Moralities and Ethics)

Objectives of Islamic Banking
‡ Main Objectives of Islamic Banking:

(Banking Without Riba)
´The main objective of an Islamic Bank is to Prohibit Muslims from dealing with interest or usury (Riba) which has been strictly prohibited by Allah and to protect them from one of the biggest sinsµ.

What is Riba or interest? Before moving to an easier definition of riba, for a definition of interest we can refer to the work of J M Keynes:

´Interest in economics denotes the price paid on money in exchange for the use of a sum of money, the premium, obtained on current cash over deferred cashµ
(Keynes, 1937)

No Interest than???
What to do then? ‡ There is nothing wrong in the business of banking. A modern society can not do without it. ‡ All we have to do is to change the business as to make it acceptable in Islamic framework. ‡ Islam not only stresses on acceptability of what we do how we do (

(The Ends),
it also emphasizes on

The Means)
certain things.

From Haram to Halal
How to change it? 1st we simply remove those aspects of banking that contradict Islamic standards. 2nd we can keep those elements of banking that don't violate Islamic norms. 3rd while making these changes, we refer to a set of Islamic norms, collectively known as Shariah, which is based on the: Quran and The Sunnah (the Prophet·s tradition.

Importance of Trade in Islam
Islam has given an immense importance to trade. ‡ The nobility of this profession is obvious from the fact that it was the chosen profession of prophet Muhammad (S)

Most important Islamic Teachings Related to Business
‡ The Prophet (PBUH) said: ´The

truthful honest merchant is with the Prophets, the truthful and martyrs (in the day of judgment)µ
Narrated by Al-Tirmidhi)

Forms of Businesses Allowed by Islam
1. 2. 3. Joint ventures based on sharing of risks & profits Provision of services through trading, both cash and credit, Leasing activities.

Uniqueness of Islamic Banking
Commingling between Finance and Religion and ethics

Sharia Supervisory Boards (SSB) 
Studies Articles of associations and by laws  Approval of all contracts  Audit the actual implementations  Issuance of Fatwas (Responses)  Conferences ² Research - Training
Islamic Banking




Structure of Hierarchy
Shari¶ah Supervisory Board

Shariah Advisory Council/Consultant

Basis of Shariah Approval

‡ Bai' al 'inah ‡ Bai' bithaman ajil ‡ Bai' muajjal ‡ Musharakah ‡ Mudarabah ‡ Murabahah ‡ Musawamah ‡ Bai salam ‡ Hibah ‡ Ijarah ‡ Musharakah ‡ Qard hassan/ Qardul hassan ‡ Sukuk ‡ Takaful ‡ Wadiah ‡ Wakalah

Major Contracts Used in Islamic Banking
‡ ‡ ‡ ‡ ‡ ‡ Mudaraba: Investment management Musharaka: Partnership Ijarah: Leasing Ijarah: Wakalah: Wakalah: Agency Istisna·: Contract of works Wadiah : safekeeping

Basic Difference between Islamic and Conventional Modes of Finance

Conventional Bank
Money Bank Client

Money + Money (interest)

Islamic Bank
Islamic Bank Goods And Services Client


Islamic Banking
1) Functions and operations are based on Sharia·h principles 2) Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs) 3) Aim at maximizing profit but subject to Sharia'h restrictions 4) Partners, investor and traders, buyer or seller relationship 5) Encourage asset-based financing and based on commodity trading 6) No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss.

Conventional Banking
1) Functions and operations are based on fully man made principles 2) Investor is assured of pre-determined rate of interest 3) Aim at maximizing profit without any restrictions 4) Creditor-Debtor relationship 5) Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam. 6) It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.

Deposit Products

Current Account
² It is organized as wadiah or safe-keeping. ² The deposits are held in trust and utilized by the bank at its own risk. ² There is no big difference here between conventional and Islamic banks, as normally no interest is paid on such account.

Savings Account
‡ This account is based on Mudharaba principle. ‡ Depositors are owners of funds and the bank is owner of labor. ‡ Profits are shared by both parties as per pre-agreed ratio fixed through negotiation. ‡ If loss occurs, it is borne by depositor only as owners of fund. The bank loses its effort.

Investment Account
Core deposits of an Islamic bank. Based on the concept of Mudharaba Islamic counterpart of the Islamic counterpart of the conventional fixed deposit products. 1. General Investment Deposits: Open to any project as selected by the bank. 2. Special Investment Deposit: Tied to any specific project agreed upon by both parties.

Islamic Banking Global Scenario

Focus Areas

Worldwide Statistics

Market Performance

Interest Vs. Rent
Profit and Fees ‡ Not every known income is interest.  Rent is a known payment to use a leased item.  Fees are a known payment to buy services.  Interest is a known payment to use money. ‡ Profit is the difference between revenue and costs. It is, however, not known in advance. It is therefore not fixed, but variable. ‡ Interest forms part of production costs. Profits are the difference between revenues and costs.

So ³Loan´ can¶t be a business tool!
‡ Islam does not allow anyone to give and take anything extra on a loan. ‡ But, today banks make money from the loan business. ‡ Depositors receive interest on their loan to banks. Banks receive interest on their loans to Entrepreneurs (Financeseekers). ‡ Islamic banks can·t make use of such loans.

Jamia Darul 'Ulum Karachi remains firm upon its previous fatwa. It is permissible to perform financial transactions with banks which are not based on interest that are working under the supervision of authentic scholars while keeping with the principles of the Shari'a. The profit earned from such transactions is halal (lawful) and it is not interest or haram (unlawful). Mufti Taqi Usmani Mufti Afzal Ali Rabbani Mufti Abdurrauf Sakkharwi Mufti Mahmud Ashraf Usmani Mufti Muhammad Abdul Mannan

Dr. Zakir Naik
‡ In Islam there is no different entity such as capital and organization, on land you pay rent, to labour, you pay wage, capital has profit and loss sharing and same is for organization while modern banking defines interest for capital. This is the basic difference of modern banking and Islamic banking

Guidance from Rules of Islamic Jurisprudence- Rule of Positive Approach:

´Everything in this world is Halal except that which is declared as Haramµ

And then we looked at the Pakistani scenario now«.

The Islamic Banking Customer
Definition: ´People who don·t want to compromise on their principles, But they want Top Quality, High Standard Shariah Compliant Products/Services from Institutions that care for the community as a wholeµ

Professor Saleem says
"There is a good future for Islamic banks, provided they improve services and focus on real economy, infrastructures and do not invest in credit cards and derivatives," "Conventional banks encourage people to spend more. Islamic banks can put a break on this negative trend,"

‡ Many Muslim scholars are not happy with the present Islamic banking system due to the absence of a comprehensive law. "Islamic banks should prove that they are totally different from conventional ones to attract faithful Muslims," ‡ Muhammad Yousuf Saleem told Arab News that ´At present there is no law defining what is Islamic banking and finance. We need a complete set of rules and regulations. In the absence of such a law, discrepancies will continue,´ ‡ The deficiency of educated and qualified scholars in the field of banking, one of the expert said: ´"These bankers think the mothers are going to give born graduated sharia scholars, obviously we need to develop them´ them´

‡ On the basis of the above it can be said that supply and demand of capital would continue in an interest free scenario with additional benefit of greater supply of risk-based capital along with more efficient ‡ Allocation of resources and active role of banks and financial institutions as required in asset based Islamic theory of finance.

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