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2
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 Roll # Name
 02 Tayyaba Ashraf
 16 Muhammad Azhar
 52 Aaleen Zahra
 64 Sonia Nadeem
 66 Muhammad Waqas
 130 Jawad Munir Bhatti
 134 Badar-Ul-Zaman Badar
 146 Hafiz Muhammad
Sarwar
 164 Ahmad Faraz Khan
 178 Naveed Anjum

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1. Economy.
2. Main Features of Islamic Economy.
3. Comparison Between Islamic and Capitalism
Based Economy.
4. Lending and Borrowing.
5. Mode of Financing.
6. Project Financing.
7. Insurance Policy.
8. Financial Securities.
9. World Economic Crisis
10. Conventional Banking & Islamic Banking
Comparison.
11. Conclusion

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1.1. Islamic Economy
1.2 Conventional Economy

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• All monitory terms and activates prevailing
in the given criteria to meet obligation in
state is called economy.

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Economy based on the Islamic principles
and rules and regulations is called Islamic
economy.

Economy based on the principles of

capitalism is called conventional economy.

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2.1. Freedom Of Work & Enterprise
 Allowed freedom of work and enterprise
 An entrepreneur can produce only
permitted things
 For example, Wine is prohibited in Islam, so
Entrepreneur cannot invest in the wine
producing project
2.2. A Special Concept Of Ownership
 God is the true owner of all things
 His mercy allows human beings to inherit
wealth, own it and use it 9
 This is indeed a trust for proper use
 It is called Trust ownership
2.3. Kinds of Ownership State Ownership
- The basic economic institutions are under the
state control
- Lawful property can be taken over by the state
only for valid social reasons after due
compensation.
For Example:-
Mines, Rivers & Large Track of Land etc. .

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- Communal Ownership
The joint public property
For Example: Water, Graveyard etc..
- Private ownership
Owned by the General Public
For Example: Private Firms etc..

2.4 Prohibition Of Interest

 Prohibits the interest
 As it is a cause of social and economic injustice
2.5 Zakat
 Compulsory on the wealth of rich Muslims
 It facilitate the distressed sections of the society
 Mechanism of distribution wealth between the Rich and the
Poor
 It also influences investment, savings and allocation of
income and resources
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2.6 Distribution of inheritance
 Islam distributes inheritable property among
several groups of people’s
Children
Husband/Wife
Parents
Brothers and sisters
2.7 Shariah compliance
 Central focus is Shariah compliance
 Distinctive feature of Islamic finance is the
establishment of a Shariah advisory or
supervisory board to advice
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2.8 Unlawful Goods or Services
 Prohibits to invest in the Haram Goods & Haram
Services
 For Example:
 Investing of the business of intoxicating drinks,
entertainment and pornography.

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14
Islamic Conventional
Right to Ownership Right to Ownership
Belongs to Allah Private ownership is hallmark of
Some rights vest to Man capitalism

Allow the individual who has Unrestricted economic freedom

liberty to earn wealth Non interference of state in such
•Own it freedom
•& spend it
At his discretion

Monopoly Monopoly
Leads the businessmen towards the
Strictly forbid
monopoly

Interest Based Institutes Interest based Institutes

Have Not Interest Financial Institution Have interest Financial Institution

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4 . LENDING AND BORROWING
4.1 introduction
4.2. Under Islamic Based Economy
4.3 Under Conventional Economy

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 (Continued….)

• Under the both Islamic and Capitalism

based economy the financial institutions
(Banks) are performing the
– Lending
– Borrowing

Then ,
what is difference between them?

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 (Continued….)

• Interest free
• Deposits are accepted through Musharaka
and Mudaraba
• Return is variable
• Risk and reward both are shared with
depositors
• interest free loans (Qarz e Hasna) for any
requirement however they can do business
by providing the required asset to client

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 (Continued….)

 interest-based investment
 normally two participants in such transactions
Investor
○ Provides capital on loan
○ No concern whether the business runs into profit or loss
○ gets an interest in both outcomes @ fixed % on capital
• Manager
• Runs the business
• Must pay the interest on loan whether Earn profit Or, suffer
loss.

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 (Continued….)

5.1 Participatory Modes:

5.2 Trading Modes:

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 (Continued….)

5.1 Participatory Modes

i) Mudaraba
ii) Musharaka
iii) Diminishing Musharaka
5.2 Trading Modes
i) Murabaha
ii) Ijarah
iii) Salam
iv) Istisna
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 (Continued….)

i) Mudaraba
ii) Musharaka
iii) Diminishing Musharaka

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 (Continued….)

An arrangement where one or more persons participate

with their investment and other(s) with their efforts/skills to
participate in profit in a predetermined ratio.

The Manager (Mudarib) can be a natural person, a group of

persons or legal entity.

Conduct of business within a framework;

- Sharing of profit in agreed proportion;
- Financial loss on capital only;
- Liability of investor limited to his investment

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 (Continued….)

• Subject of sale must exist and it should be in

ownership of the seller at the time of sale.
• Bank makes purchases through agent;
• Payment to supplier and issuance of invoice by
him;
• Price once agreed cannot change;
• Penalty in case of delay. To go to charity;
• Buyer may be asked to furnish security;
• No rollover is possible;
• Buyback arrangement is prohibited
• All conditions of sale must be met;

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 Relationship established under a contract
through mutual consent of the parties for
sharing of profits, losses from a joint
enterprise, venture. Investment comes
from all partners.
GENERAL:
- All assets joint property of all partners;
- Capital contribution in terms of money
or species at an agreed valuation.

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 DM is a form of co-ownership in which two or more persons
share the ownership of a tangible asset in an agreed
proportion
 Under diminishing Musharaka house is purchased jointly by
IFI and customer.
 IFI rents out its share in property to customer for an agreed
amount of rent.
 Share of financier is divided in units of small denominations.
 Customer pays the installments to IFI consist of rentals plus
purchase price of a unit.
 Stake of customer in property is increasing while of IFI is
decreasing with payment of every installment.
 Finally with the payment of last installment stake of IFI
reaches to zero and property is transferred in the name of
customer.

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i) Murabaha (Assets based financing)
ii) Ijarah (Leasing)
iii) Salam
iv) Istisna

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 A margin of profit based sale where the
seller expressly mentions the cost of
commodity and adds agreed margin of
profit. Price must be fixed in an
unambiguous manner. If deferred, due date
should be known and specific.

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 (Continued….)

Subject of sale must exist and it should be in

ownership of the seller at the time of sale.
Bank makes purchases through agent;
Payment to supplier and issuance of invoice
by him;
Price once agreed cannot change;
Penalty in case of delay. To go to charity;
Buyer may be asked to furnish security;
No rollover is possible;
Buyback arrangement is prohibited
All conditions of sale must be met;

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 (Continued….)

Asset based Financing Under

Conventional Finance

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 (Continued….)
 Asset-based lending is any kind of borrowing
secured by an asset of the company
 The lending company allows you to finance a
percentage of the assets.
 For example, most accounts receivable are funded
at 80%.
 Inventory and machinery, on the other hand, are
funded at lower levels.
 The financing margin for these assets is often 50% -
75% of liquidation value.
 In case of delay in payment by customer
conventional banks can ask for extra amount as
time value of money.
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ii) Conventional Leasing
Contracts and Ijarah

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• Ijarah is an alternative to financing in which a financer buys
and rent a productive asset to a person short of funds and is
in need of such asset.
• The aim of such arrangement is to obtain the rentals and
proceeds by receiving the benefits of the assets through
time.

- Lessor's ownership;

· - Delivery of assets to lessee essential to claim rentals;

· - Lessor’s ownership during the entire term of lease;
· - Rental in absolute terms. Predetermined lease period
· - Penalty for delay;
· - Damage to the Asset, With or Without Lessee’s fault;
· - Lessee bear the operating expenses;;
· - Unilateral promises
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 (Continued….)

• Contract between a Lesser and a Lessee for the

hire of a specific asset
• Lesser retains the ownership of the asset
• Right to use the asset is given to the lessee for
an agreed period of time
• In return for a series of payments paid by the
lessee to the lesser

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 (Continued….)

Operating Lease (pure rental agreement)

Financial lease

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 Operating Lease (Continued….)
○ Distinctive features:
○ The cost of the asset is not fully amortized over the lease
period,
○ the lessor provides maintenance of the asset and
○ The asset is usually returned to the lesser.
 Financial Lease
○ Distinctive features:
○ Title to the asset must not automatically pass to the lessee as
one of the conditions of the lease term.
○ The lease term must be for less than 75% of the economic life
of that asset
○ The present value of rental, or lease, payments excluding
executor costs (Insurance, maintenance, taxes, etc) must be less
than 90% (not equal to) of the fair market value of the asset.
○ The rationale underlying these features is to determine the
intent of the parties to a lease transaction
○ A lease that doesn’t transfer all the benefits and liabilities
associated with ownership is said to be an operating lease.
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 A mode of sale, being an exception to the norm,
whereby an order is placed by the buyer, with the
seller, to assemble, construct or manufacture, or cause
so to do, anything to be delivered at a future date, at
an agreed price.
• Known and specified commodity;
- Fixation of price in absolute / unambiguous manner.

- Flexibility in manner of payment.

• Obtaining of material cannot be the buyer’s
responsibility;
• Penalty for delay.

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• A sale where the seller agrees to supply specific goods
by a future date in consideration of a price fully paid in
advance, at the time of contract.
• Suitable for Agri. finance.

Full payment of price at the time of contract

a must
- Firm agreement on quality, quantity, specifications
- Date and place of delivery must be specified
- Commodities which can be offered in Salam
- Availability of commodity;
- Salam cannot be tied
- No buy back with the Seller
- Security can be asked for 38
6.1 introduction
6.2 under Islamic finance
6.3 under conventional system

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 long-term financing of infrastructure and
industrial projects
 based upon the projected cash flows of
the project
 Rather than the balance sheets of its sponsors
 Type of financing is for
large, complex and expensive installations
For Example, Power plants, Chemical processing
plants, Mines, Transportation Infrastructure,
Environment, and Telecommunications infrastructure

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Basic principles of Musharakah and Mudarabah are applied
 Financing in participatory modes of financing does not mean
advancing of loan
 Capital investments must qualify the requirements of Musharakah
and Mudarabah
 Profits sharing ratio determined with mutual agreement
 A sleeping partner can’t claim a share of profit more than the
proportionate share in the total capital
 Losses will be shared according to the investment

• If the financier wants to withdraw

– May get back the invested amount along with a profit
– Can be replaced with a third party by selling his/her part of
investment
– Remaining partner can purchase the share of financer

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• Project financing is usually chosen by project developers in
order to inter alia:
• Eliminate or reduce the lender’s recourse to the sponsors
• Permit an off-balance sheet treatment of the debt financing
• Maximize the leverage of a project
• Circumvent any restrictions or covenants binding the sponsors
under their respective financial obligations
• Avoid any negative impact of a project on the credit standing
of the sponsors
• Obtain better financial conditions when the credit risk of the
project is better than the credit standing of the sponsors
• Allow the lenders to appraise the project on a segregated
and stand-alone basis
• Obtain a better tax treatment for the benefit of the project,
the sponsors or both
• Reduce political risks affecting a project
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7.1 Introduction
7.2 Takaful (Under Islamic Finance)
7.3 Under Conventional System

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• Financial protection against loss or harm
• Contract between two parties
• One party called insurer
• Other party called insured' or 'assured'”

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An Arabic word meaning “guaranteeing each other”
• principles of Takaful insurance
– Policyholders cooperate among themselves for
their common good.
– Every policyholder pays his subscription to
help those that need assistance.
– Losses are divided and liabilities spread
according to the community pooling system.
– Uncertainty is eliminated in respect of
subscription and compensation.

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• One party agrees to undertake the risk of another in
exchange for consideration known as premium and,
• Promises to pay a fixed sum of money to the other party
on
• Happening of an uncertain event
• Or, after the expiry of a certain period in case of life
insurance
• Party bearing the risk is known as the 'insurer' or 'assurer
• The party whose risk is covered is known as the 'insured' or
'assured'”

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8.1 Under Conventional System
8.2 Under Islamic Finance

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 Dealt in the Capital market (Both primary
& secondary markets)
 On bonds, normally fixed return is given
(Sometime return may be floating )
 These may be
 Treasury bond
 Corporate bonds
 Municipal bonds
 Euro bonds

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 Sukuk securities are structured to comply with the Islamic Law & its
investment principles, which prohibits the charging, or paying of interest.
 Return is variable
 In its simplest form sukuk represents ownership of an asset or its usufruct
 Claim embodied in sukuk is not simply a claim to cash flow but an
ownership claim
 Sukuk are basically investment certificates consisting of ownership
claims in a pool of assets

• Developed to provide complete Riba/ interest free investment/

saving options to Adamjee Life customers keeping in mind the recent
increase in demand of Shariah compliant investment vehicles
• The fund is managed through an active management strategy with
dynamic allocation towards different asset classes.

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 The portfolio of the fund primarily invests in the
following allocation.
 Sukuks and Islamic Term Deposits - 70%
 Listed Equities (KMI) and Islamic Mutual Funds - 25%
 Islamic Savings Bank Account - 5%
 KSE Meezan Index (KMI)
 Comprises those companies which qualify by the KMI
Shariah screening criteria. The index was introduced on
the Karachi Stock Exchange in September 2008
 Islamic Term Deposit
 Cash deposit only in Shariah compliant banks (Money only
withdraw on maturity)
 Islamic Mutual Funds
 Those mutual funds which are as per Shariah complaint.
 Islamic Savings Bank Account
 Money can withdrawal any time.
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9.1. Introduction
9.2 Credit Crunch & Housing Bubble
9.3. Next Phase Financial Crisis

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• The worst Economic in the world
• The capital markets and financial
institutions were collapsed
• Its effects are seen still today

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 Credit Crunch
 GFC begun on July 2007 with a Credit Crunch
The investor lose confidence in the value of sub-prime
mortgage due caused liquidity crisis
Housing Bubble
The borrower fails to pay their mortgage
payment & banks face the serious financial
crisis

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 The collapse of Lehman Brothers enters the crisis in
the new phase on 14-Sep-2008
 The Govt. , around the world, struggled to save the
Giant financial institutions and their capital markets
 First of all, Australian Govt. its stimulate lane to
trigger the slowing economy
 The U.S Govt. proposed a $700 Billion Rescue plan
But, U.S Congress didn’t allow this,
They said, the tax payer’s massive money should not use to
rescue the Walt street investment Bank (as they thought,
this bank is the cause of Economic Crisis)
By Sep and Oct 2008
• The investor starts investing heavily in the GOLD &
the other commodities like US Dollar & Bonds etc.

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57
WHAT IS INTEREST BASED BANKING
 The subject matter of Interest based banking is money
 Bank treats money as commodity and earns profit from pricing it
 Therefore most transactions are interest based contract

WHAT IS INTEREST ISLAMIC BANKING

• The subject matter of Islamic banking is the economy
• Bank earns profit from participating in the economy, by sharing
risks and rewards through pricing of goods, services and benefits
• Consequently there are no interest based contracts

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• Economy
• Works under both financial system
• Main differences
• Islamic system prohibits the GHRRAR & INTEREST
• While conventional system allow these
• Lending & Borrowing
• Financial Institution provide the facility under both system
• Mode of Financing
 Practitionery Mode
• Mudaraba Consignment
• Musharaka Partnership
• Diminishing Musharaka House financing

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• Trading Modes
• Salam Agri Loan
• Istisna Special contract
• Murabaha Assets Based Financing
• Ijarah Leasing
• Project Financing
• Facility is available under both financial system
Insurance policy
• Available under both Islamic and conventional system
Under Islamic Under Conventional
Takaful State Life Insurance

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• Financial securities
• Under Islamic Under Conventional
• KMI Corporate Bonds
• Amanat Fund Munis
• Islamic Savings Bank Account T-Bills
• Islamic Mutual Funds Preference stock
• Islamic Term Deposit Conventional Term Deposit

• Insurance
• Available under both financial systems
• Under Islamic system the return is normally not fixed
• Under the conventional system the return is predetermined

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• Islamic Banking VS Conventional Banking
• Islamic banking is interest free and Ghrrar
• Conventio
• World Economic Crisis 2007/08
• Globally investment markets collapse due to following
the principles of CONVENTIONAL financial system
• But, by following the ISLAMIC Financial Principles we
can save our investment
• nal banking promotes the interest and Ghrrar

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