Islamic trade and finance

Islam encourages trade because trade is the way to generate revenue. Trade is the lifeline of
the world to go on with its economic affair. Business and trade in Islam are very different
from what we see in the world today.
First of all, there is not interest or usury on money supported by Islam, it is rather
discouraged and a sin.
Second thing is that Islam does not excluded or erases the morals and values even from the
business unlike the todays business where a new concept of CSR has been introduced to
protect consumers and costumers considering them a social responsibility of businesses.
ALLAH (swt) says in Holy Quran: 23: 7
But those whose desires exceed those limits are transgressors

So, it is a must to be fair in trade. ALLAH swt says;
Islam does not allow interest-based debt financing but it allows investment institutions based
on equity and economic justice. Al-Quran condemns the institution of riba in very strong
words (2: 275-279) and prohibits charging interest on the use of money capital in any and all
forms. Our Prophet Muhammad ( ) cursed the person who accepts interest, the one who
pays interest, and the one who records the transaction. From the injunctions of Quran and
Sunnah of the Prophet ( ), it is absolutely clear that any excess earnings on money capital
is riba, which is prohibited regardless of the rate of interest, purpose of the loan, and the
terms and conditions of the transaction. Islam makes no distinction between interest and
usury, nor does it make any distinction between consumption and production loans, insofar as
the prohibition on riba is concerned.

Definition of business in Islam
Any business arrangement based on fairness and legitimacy and on one's labor, skills and
lawful earnings, where the people involved assume fair business risk, is quite lawful in Islam
Business Ethics is the branch of ethics that examines ethical rules and principles within a
commercial context; the various moral or ethical problems that can arise in a business setting;
and any special duties or obligations that apply to persons engaged in commerce. Generally
speaking, business ethics is concerned with the study of what is good and bad, right and
wrong, and just and unjust in business.

Says the Holy Quran:
You are the best nation that has been raised up for mankind; You enjoin right conduct,
forbid evil and believe in Allah. (3:110)

The Prophet (sws) also says:
I have been sent for the purpose of perfecting good morals. (I bn Hambal
[1]
, No: 8595)


Purpose of Business in Islam
To gain profit
To serve Humanity
To cooperate with others
To create a just and fair society for mankind.
Slide 11 data not putting.


Prophet pbuh use to visit market to educate/guide people.


And they say: Why does this Messenger (Muhammad peace be upon him) eat food, and
walk about in the markets (as we). Why is not an angel sent down to him to be a Warner
with him? (Al Furqan, verse 7, Chp 18)




Permission of business during the hajj in Islam
There is no sin on you if you seek the Bounty of your Lord (during pilgrimage by trading).
Then when you leave Arafat, remember Allah (by glorifying His praises, i.e.. prayers and
invocations) at the Mash ar il Haram. And remember Him (by invoking Allah for all good)
as He has guided you, and verily, you were, before, of those who were astray.
(Al Baqarah Chp: 2, V:
198)
Al-Bukhari reported that Ibn `Abbas said, "`Ukaz, Mijannah and Dhul-Majaz were trading
posts during the time of Jahiliyyah. During that era, they did not like the idea of conducting
business transactions during the Hajj season. Later, this Ayah was revealed:

(There is no sin on you if you seek the bounty of your Lord.) During the hajj season ''Abu
Dawud and others recorded that Ibn `Abbas said, "They used to avoid conducting business
transactions during the Hajj season, saying that these are the days of Dhikr. Allah revealed:

'' Ibn Jarir narrated that Abu Salih said to `Umar, "`O Leader of the faithful! Did you conduct
trade transactions during the Hajj'' He said, "Was their livelihood except during Hajj
Sign of a true businessmen
Men whom neither trade nor sale (business) diverts from the remembrance of Allah (with
heart and tongue), nor from performing as salat nor from giving the zakat. They fear a day
when hearts and eyes will be overturned (out of the horror of the torment of the Day of
Resurrection).
(Al Noor Chp: 18, V: 37)
However, the Islamic ethical system substantially differs from the so-called secular ethical
systems as well as from the moral code advocated by other religions and societies. In the
Islamic scheme of things, adherence to moral code and ethical behaviour is a part of I%
man (faith) itself. According to the Islamic teachings, Muslims have to jealously guard their
behaviour, deeds, words, thoughts, feelings and intentions. Islam asks its believers to observe
certain norms and moral codes in their family affairs; in dealings with relatives, with
neighbours and friends; in their business transactions; in their social affairs, nay in all spheres
of private and public life.
What form of gain is the best? [The Prophet] said, A mans work with his hands, and
every legitimate sale. (Ahmad, No: 1576)

From the above it is clear that a Muslim trader must be determined to earn only through
legitimate means. He should not only avoid illegitimate means in earning his provisions and
livelihood but also distance himself from matters dubious and doubtful.


Business by Companions of Prophet PBUH:
All Four Caliphs were Businessmen
1. Abu Bakr
2. Omar ibn al-Khatab,
3. Othman ibn Affan,
4. and Ali ibn abi Talib

Ashara-e-Mubashirrah were Businessme
NameofAshraMubashraare


1. Abu Bakr Siddiq,
2. Umar ibn Al Khattab,
3. Uthman bin Affan.
4. Ali bin Abi Talib.
5. Saad bin Abi Waqqas.
6. Abu Ubaydah ibn Al Jarrah.
7. Talha ibn Ubaydullah.
8. Az Zubair ibn Al Awwam.
9. Abdur Rahman ibn Awf.
10. Said ibn Zaid.


First Muslim Lady Khadija rt were a Business woman

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Traveling of Quresh for Business:
Syria in Summer
Yemen in Winter



Because Quraish was made to incline. He made them incline in their journeys of winter
and summer both. They should therefore worship the Lord of this House. Who gave them
food in hunger, and bestowed them security from a big fear.
(Ref: Surah Quresh, Juzz 30, surah 106)



History:

These journeys started by great grandfather of Prophet Pbuh, Hashim. Once during
a sever drought in Makkah. First time, he traveled to Palestine and brought Wheat
and Flour and served his nation.
Then he started traveling on continues basis to Palestine & Syria.
(ref: Tarikh by Ibn Tabri. P. 1089)

Quresh Traveling to other Areas:
Africa
Egypt
Sudan
India
Iran (Persia)
Rome
Quresh means Businessman
Security issues/measures of these Caravans
Custodians of Kaaba
Belongs to Spiritual Land
100-300 Guards
Abu Sufiyan Caravan (100 guards + 2500 camels loaded with merchandise goods
worth of 50,000 gold coins)




Exports of Makkans:
Leather
Animals Skins
Dates
Raisons
Imports of Makkans:
Fragrances (Yemen)
Spices (India & Africa)
Herbal Producs (India & Africa)
Wheat (Syria & Palestine)
Silk (China)
Clothes (Adan)
Labor, Slaves, Army (Africa)
House Decoration Items (Syria & Egypt)
Industrial Products like Silk, Cotton, Thread, Velvet Clothes
(Roome)
Military Equipments, Oil (Syria)
Gold, Gold mixed Sand, Elephant Teeth (Africa





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What is Riba:\

The word riba has been used in the Holy Quran on several occasions. So it is
necessary to know what it means or what it really stands for. Riba has been extracted
from Raba. It means addition, increase. So, riba literally means to increase, to grow to
rise, to add, to swell. It is, however, not every increase or growth which has been
prohibited by Islam. In the Shariah, riba technically refers to the premium that
must be paid by the borrower to the lender along with the principal amount as a
condition for the loan or for an extension in its maturity. In this sense riba has the
same meaning as interest in accordance with the consensus of all jurists without any
exception . So the Holy Quran and the Hadith do not make any such difference
between usury and interest. Interest and usury both are taken as synonymous for the
Arabic word riba.

Riba means any excess compensation over and above the principal which is
without due consideration. Its a premium paid to the lender in return for his
waiting as a condition for the loan.
In the words of Prophet (SAW), by Ali Ibn Abi Talib.
Every loan that draws interest is Riba.

Every Premium paid over and above the Loan is Riba


At least four characteristics define the prohibited interest rate:

At least four characteristics define the prohibited interest rate.
1.It is positive and fixed ex_ante
2.it is tied to the time period
3. Its payment is guaranteed regardless of the outcome or the purposes for which the principal was borrowed,
4. The states apparatus sanctions and enforces its collection.

TYPES OF RIBA
Althought the Quran did not specify any particular kind of riba, it is generally held that the
word al-riba in the Quran is that kind of dealing which had been in vogue during the pre-
Islamic days . Muslim jurists have classified riba in two types: 1. riba al-nasiah, and 2. riba
al-fadl.
RIBA AL-NASIA
The term nasiah means to postpone or to wait and it refers to the time period that is allowed
for the borrower to repay the loan in return for the addition of the premium. Hence it refers to
the interest on loans. The prohibition of riba al nasiah essentially implies that the fixing in
advance of a positive return on a loan as a reward for waiting is not permitted by the Shariah
RIBA AL FADAL
Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an
addition by the debtor to the creditor in exchange of commodities of the same kind. The
following tradition of the Prophet Muhammad (saw) is cited as evidence. It is related that
Abu Said al-Khurdi said: the Prophet Muhammad (saw) has said that gold in return for gold,
silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, can be
traded if and only if they are in the same quantity and that is should be hand to hand. If
someone gives more or takes, then he is engaged in riba and accordingly has committed a
sin.



To sum up, riba al-nasiah and riba al-fadl are both covered by the verse, Allah has
allowed trade and prohibited riba (2:275), while riba-al nasiah relates to loans and
riba al-fadl relates to trade. Although trade is allowed in principle it does not mean that
everything in trade is allowed.

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.

Interest (Commercial I nterest):

Interest paid on loan taken for productive and profitable purpose.
Usury (Sarafi I nterest):
Interest paid on loan taken for personal needs and expenses.






Riba prohibition verses:



Allah has laid His curse on Riba and blessed charity with increase. He bears no love
for the ungrateful sinners Al-Baqarah 276



O you who believe, Fear Allah and give up what remains of your demand for interest,
if you are indeed a believer. If you do not, then you are warned of the declaration of war
from Allah and His Messenger, but if you turn back you shall have your principal. Deal
not unjustly and you shall not be dealt with unjustly
Al Baqarah 278-
279
(Time: Dispute between Banu Amr b, Umeyr of Banu Thaqif [who embraced Islam in
9AH] and Banu Mughirah over vast outstanding claims of interest earned prior to prohibition.





O believers, devour not Riba, doubling its rate many times. Fear Allah and you will
prosper.
Al-e-I mran
130
(Time: According to Ibn Hajar -revealed in 2AH as preceding and succeeding verses are
about the Battle of Uhud
Prevented Muslims from usurious loans to equip their armies in response to the action of the
pagans
Explicit prohibition of compound interest
Qualification is not exclusive but rather suggestive of prevalent practice)



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
(Time: Revealed in Makkah
Not prohibitive in nature
According to the majority of exegetes, refers to the gift that is extended to another with the
intention that the latter will return it with a better gift)



That they took riba, though they were forbidden

(Time: Enumeration of the iniquity and wickedness of the Jews
Exact time of revelation is uncertain
Context indicates before 4
th
year AH as most Jews had by the departed Madinah
According to al-Tabari refers to predetermined excess taken upon the lending of a
specified amount for a specified period
Not explicitly prohibitive for Muslims
Prohibition for Muslims is inferred, otherwise Jews would not be blameworthy)





Prohibition of Riba in Ahadith








The Fuqaha have given two interpretations of the word, Riba: Riba-al-Nasia (
) and Riba al Fadl ( ).

Riba al-Nasia is defined as,



This is translated as:
"Any lending arrangement that obligates the borrower to pay a certain extra amount
over and above the payment of the principal amount against the specified deferment"

Similarly, Imam Baihaqi reports the interpretation of Riba by Hazrat Fuzalah Ibni Ubaid
(R.A):



"Any lending arrangement which results in some benefits to the lender is one of the
kinds of Riba". It is important to note that the Ayahs of Holy Qur'an prohibiting interest
relate to Riba al-Nasia
At the time of revelation of the above Ayahs, the prevalent form of Riba was Riba al-Nasia.
Therefore, the companions of the Holy Prophet (S.A.W) understood the meaning of these
Ayahs in terms of Riba al-Nasia. Thus Riba al-Nasia was categorically regarded Haram in
matters of Qarz. (Loan transactions QARD)
Riba al-Fadl occurs in those commodity exchange contracts where a contract provides
payment of any extra quantity of the commodity.

For instance, one kilogram of wheat is exchanged for more than one kilogram of wheat,
regardless of quality consideration. What matters is that a given quantity is to be exchanged
for the same quantity. In this case, the Hadith of the Prophet (S.A.W),






Sell gold by gold, silver by silver, dates by dates, wheat by wheat, salt by salt, and barley
by barley like for like and equal for equal so he who made an addition or who accepted
an addition committed the sin of taking interest. But sell gold for silver as you like but
hand to hand and sell barley for dates as you like but hand to hand.

Though the above Hadith mentions the incidence of Riba in six things but the Fuqahah have
extended the application of this Hadith to all commodity transactions characterized by the
same underlying reason. Whenever the same commodity is exchanged for more (Quantity),
the Riba al-Fadlwill arises.
In the light of above explanation, it is clear that the word 'Interest' as commonly understood
in context of banking/financial pertains to the Riba al-Nasia. Therefore, any extra payment
specified in Qard relating contract over and above the principal amount, falls under the
definition of Riba, al-Nasia, irrespective of the rate/amount of the extra payment. Hence, both
the Simple and the compound interest are prohibited as being Riba al-Nasia.
Some people, perhaps have misunderstood the meaning of the verse, "O ye who believe,
devour not usury doubled and multiplied but fear Allah that ye may (really) prosper" (3: 130)

And have tried to argue the permissibility of the simple interest. This is totally wrong
conclusion.
As a matter of fact, the Holy Qur'an wants to root out an interest mentality as appears from
verse (2:279). Ibn-e-Jareer has reported the interpretation of Hazrat Qatada (RA) in his tafsir.





"That the Holy Qur'an permits the lender to receive the principal amount only and does not
allow any addition (however small it may be) ".




Bank accounts
PLS Account / Savings Account
Savings accounts are often the first official bank account held by consumers. Children may
open an account with a parent to begin a pattern of saving. Teenagers open accounts to stash
cash earned from a first job or household chores. The majority of Americans use a savings
account to park emergency cash. Opening a savings account also serves as a way to establish
a working relationship with a financial institution.
Good For: First bank account, kids, adults looking for a place to park savings or extra cash.
Drawbacks: Savings accounts typically yield a low interest rate in comparison to money
market accounts and CDs. Typically, they do not come with a debit card for purchases, and
the number of withdrawals per month is limited.
Current Account / Checking Account
Checking accounts provide the consumer with a basic account to deposit checks, make
withdrawals, and pay bills. Paper checks, though slowly losing popularity, are issued from
checking accounts. More recently, the debit card (or check card) has taken over as a primary
form of payment from checking accounts. Most banks now offer online bill pay services
through checking accounts, helping to streamline payments.
Good For: Anyone who needs a place to deposit a paycheck or cash and maintains a balance
under $5,000, people who enjoy convenience of a check card.
Drawbacks: Checking accounts are subject to a variety of fees, which can become expensive
quickly. Many checking accounts charge a maintenance fee or require a minimum balance.
Options vary widely from bank to bank.
Fixed Deposit Account / PLS Fixed Account / CDs
A money market account earns more interest than either a savings or checking account, but
combines features of both. For those who tend to carry higher balances in checking accounts,
these can be a great option to park cash. The higher rates mean the cash is working for you
and earning interest.
Good For: People who hold average balances in their account of $5,000 or more and want to
earn higher interest rates.
Drawbacks: Most money market accounts have significant minimum balance requirements
ranging from $5,000 to $10,000. Interest rates may be low, and fees can still be charged on
money market accounts. Withdrawals are often limited to a certain number per month.
Foreign Currency Account
Foreign Currency Account (FCA) is a transactional account denominated in a currency other
than the home currency and can be maintained by a bank in the home country (onshore) or a
bank in another country (offshore).
Foreign currency accounts are generally not covered by national deposit insurance schemes.
Lockers
Safe deposit lockers facility is one of the ancillary services extended by bank. The
relationship between the banker and the customer of a locker is that of lessor and lessee. The
locker units leased out to customers who have been properly introduced to the bank.

COMMON PRACTICES OF ISLAMIC BANKS
IN THE SOURCES OF FUNDS
The common practices of Islamic banks in the sources of funds may be described
as follows:
2.1 Current Accounts
All Islamic banks operate current accounts on behalf of their clients: individuals
and business firms. These accounts are operated for the safe custody of deposits and for
the convenience of customers. There is little difference between conventional banks and
Islamic banks as far as the operation of current accounts is concerned. However, the
main characteristics of these accounts, as operated by Islamic banks, are listed below:
19
i)Current accounts govern what is commonly known as call deposits or demand
deposits. These accounts can be opened either by individuals or
companies, in domestic currency or in foreign currency, if the bank is
allowed to operate in the foreign exchange market and the holding of
current balances in foreign currency is legal under the law of the land.
ii)The bank guarantees the full return of these deposits on demand and the
depositor is not paid any share of the profit or a return in any other form.
iii)Depositors authorize the bank to utilize funds at the bank's own risk. Hence,
if there is any profit resulting from the employment of these funds, it
accrues to the bank and if there is any loss, it is also borne by the bank.
iv)There are no conditions with regard to deposits and withdrawals.
v)Usually, account holders have a right to draw checks on their accounts.
There are two dominant views about current accounts. One is to treat demand
deposits as am_nah (trust). This view is adopted by the Jordan Islamic Bank which
operates a "Trust Account" instead of a current account. A trust deposit is defined by the
Jordan Islamic Bank as "cash deposits received by the bank where the bank is authorized
to use the deposits at its own risk and responsibility in respect to profit or loss and which
are not subject to any conditions for withdrawals or depositing".10
Thus, these deposits are handed over to the bank by depositors as a Trust and the
bank does not have the authority to use them without first obtaining the specific
permission of the owner of the funds.
The other view is to treat demand deposits as qard hasan (interest-free loan).
This view has been adopted by Iranian Islamic banks which call the current account
"qard hasan current account".11 According to this view, money deposited in these
accounts is a benevolent (or interest free) loan (qard hasan) from the depositor to the
bank. The bank is free to utilize these funds at its own risk without any return to the
depositor and without needing any authorization because in the case of qard hasan, the
debtor does not need the specific permission of the creditor to use the borrowed funds.
The debtor owes the creditor only the principal amount borrowed. This condition is
fulfilled as the amount deposited in these accounts is fully underwritten by the bank.
2.2 Savings Deposits
Although all Islamic banks operate saving accounts, there are some differences
in the operation of these accounts. A typical example is that of the Bank Islam Malaysia,
which defines savings deposits in the following way:
"The Bank accepts deposits from its customers looking for safe custody of their funds
and a degree of convenience in their use together with the possibility of some
profits in the form of Saving Accounts on the principle of Al Wad_a. The bank
requests permission to use these funds so long as these funds remain with the
bank. The depositors can withdraw the balance at any time they so desire and
the Bank guarantees the refund of all such balances. All the profits generated by
the Bank from the use of such funds belong to the portion of the Bank.
However, in contrast with the current account, the Bank may, at its absolute
discretion, reward the customers by returning a portion of the profits generated
from the use of their funds from time to time".12
It must be pointed out that any return on capital is Islamically justified only if the
capital is employed in such a way that it is exposed to a business risk. If savings
depositors are guaranteed that their amounts will be refunded in full, if and when they
want them, as is the case with traditional banks, then, they are not participating in a
business risk. Under these circumstances, it has to be made clear that savings depositors
are not Islamically entitled to any return. If an Islamic bank refunds some portion of the
profits generated from the use of saving deposits to the depositors, it is absolutely at the
discretion of the bank concerned and it must be treated as a gift. It is quite clear from the
above quotation that this is exactly the course of action adopted by the Bank Islam
Malaysia.
In contrast to this, the Bahrain Islamic Bank calls these accounts "Savings
Accounts with Authorization to Invest". Depositors provide the bank with an
authorization to invest their money. Depositors have the right of withdrawal, but profits
are calculated on the basis of the minimum balance maintained for a month.13
Similarly, savings accounts at the Dubai Islamic Bank operate as follows:
i)Savings accounts are opened with the condition that depositors provide the
bank with an authorization to invest.
ii)Depositors have the right to deposit and withdraw funds.
iii)The profits in savings accounts are calculated on the minimum balance
maintained during the month. Depositors participate in the profits of
19
savings accounts with effect from the beginning of the month following
the month in which the deposits are made. Profits are not calculated with
effect from the beginning of the month in which a withdrawal is made
from the account.
iv)A minimum balance has to be maintained in order to qualify for a share in
profits.
The Iranian Islamic banks include saving accounts in "Qard Hasan
Accounts" and call them "Qard Hasan" deposits. The operation of these accounts is
similar to that of savings accounts in the conventional system as far as the deposit and
withdrawal of money by means of a savings account passbook is concerned. Although
no dividends are due in the case of qard hasan depositors, Iranian banks use different
promotional methods in order to attract and mobilize deposits. These include giving the
following incentives to depositors:
i)Non-fixed bonus either in cash or in kind.
ii)Exempting depositors from or granting discount thereto, in the payment of
commissions and/or fees.
iii)According priority to customers in the use of banking facilities.15
The Jordan Islamic Bank has adopted yet another way to operate savings
accounts. It includes the savings deposits into an investment pool called joint investment
accounts.
The foregoing discussion makes it clear that Islamic banks adopt one of the
following practices in operating savings accounts:
a)Accepting savings deposits on the principle of Al Wad_a (trust) requesting
depositors to give permission to the bank to use these funds at its own
risk, but guaranteeing full return of deposits and sharing any profits
voluntarily.
b)Accepting savings deposits with an authorization to invest and share profits in
an agreed manner for the period in which a required balance is
maintained.
c)Treating savings deposits as qard hasan from depositors to the bank and
granting pecuniary or non pecuniary benefits to depositors.
d)Accepting savings deposits as part of an investment pool and treating them as
investment deposits.

2.3 Investment Deposits
Investment deposits are Islamic banks' counterparts of term deposits or time
deposits in the conventional system. They are also called Profit and Loss-Sharing (PLS)
Accounts or Participatory Accounts. However, they can be distinguished from
traditional fixed term deposits in the following manner:
i)Fixed term deposits in the conventional system operate on the basis of interest,
while investment accounts in Islamic banks operate on the basis of profit
sharing. Instead of promising depositors a predetermined fixed rate of
return on their investment, the bank tells them only the ratio in which it
will share the profits with them. How much profit each depositor earns
depends on the final outcome of the bank's own investment.
ii)While fixed term deposits are usually distinguished from each other on the
basis of their maturities; investment deposits can be distinguished on the
basis of maturity as well as on the basis of purposes, as it is possible to
give special instructions to the bank to invest a particular deposit in a
specified project or trade.
The main characteristics of investment deposits can be described as follows:
i)Investment accounts can be opened by individuals or companies either in
domestic or foreign currency provided that the bank is allowed to operate
in foreign exchange.
ii)Deposit holders do not receive any interest. Instead, they
participate in the share of the profits or losses.
iii)Usually these accounts are opened for a specific period, e.g. three months, six
months, one year or more.
iv)The return on investment is determined according to actual profits from
investment operations of the bank and shared in an agreed proportion by
depositors according to the amount of their deposits and the period for
which they are held by the bank. As an accounting practice, the amount
held in the account is multiplied by the period for which it has been
employed and profits are distributed on a pro rata basis.
v)Generally speaking, depositors do not have the right to withdraw from these
accounts as is customary in time deposits in conventional banks.

However, withdrawals may be made under special circumstances with
the depositor forfeiting his share of the profit for the withdrawn amount.
vi)Usually, banks insist on a specified minimum amount to open and maintain
the investment account.
vii)Most banks issue an investment certificate to depositors stating the terms and
conditions of the deposit.
Islamic banks have been experimenting with different kinds of investment
deposit schemes in order to satisfy the needs and requirements of different kinds of
investors. some of these are described in this paper, but it is necessary to mention that
most of these innovations are bank-specific. Hence, all of the different kinds of
investment deposit may not be found in any given bank.
Joint/General Investment Account
The most prevalent practice among Islamic banks is to establish some kind of
investment pool in lieu of fixed term deposits. The investment pool takes the form of a
general investment account in which investment deposits of different maturities are put
together. These are not tied to any specific investment project but are utilized in
different financing operations of the bank. Profits are calculated and distributed at the
end of the accounting period, which is either three months, six months or one year.
Another variation of the investment pool is the establishment of a "Joint
Investment Account" which is defined by the Jordan Islamic Bank as "cash deposits
received by the bank from persons desiring to participate with the bank in multilateral
and continuous investment and financing operations, whereby such deposits will receive
a certain percentage of annual profits realized in accordance with the conditions of the
account under which they are entered".17
Furthermore, Section 13(A) of the Law governing the Jordan Islamic Bank states
that "cash deposits in investment accounts opened by the bank shall constitute part of the
total cash resources of the bank to be used in financing operations" and shall be
designated as "Joint Investment Account.18 Joint investment accounts of the Jordan
Islamic Bank are further classified into savings accounts, notice accounts and fixed term
accounts.19 It is also necessary to mention that profits and losses relating to financing
from joint investment accounts are kept separate as an accounting practice from other
income and expenditure resulting from other activities and services offered by the
bank.

Limited Period Investment Deposits
These deposits are operated by the Bahrain Islamic Bank and the Kuwait Finance
House. Investment deposits under this scheme are accepted for a specified period which
is mutually determined by the depositor and the bank. The contract terminates at the end
of the specified period but profits are calculated and distributed at the end of the financial
year.
Unlimited Period Investment Deposits
These investment deposits differ from limited period deposits in that the period is
not specified. Deposits are automatically renewable unless a notice of three months is
given to terminate the contract. No withdrawals or further deposits are permitted in this
kind of contract, but customers are allowed to open more than one account. The profits
are calculated and distributed at the end of the financial year.22
Specified Investment Deposits
Some Islamic banks have developed an investment deposit scheme with specific
authorization to invest in a particular project or trade. In this case, only the profits of this
particular project are distributed between the bank and its customers according to
mutually agreed terms and conditions.
In the case of specified investment accounts, Islamic banks function as an agent
on behalf of depositors. This is evident in the provisions of the Jordan Islamic Bank
which declares that the bank will accept cash deposits into specific investment accounts
"from persons desiring to appoint the bank as agent for investment of these deposits in a
specific project or in a specific manner on the basis that the bank will receive a part of
the net profits realized but without liability for any losses which are not attributable to
any violation or default by the bank".
Investment Deposits in Iran*
*The information reported here was collected in 1988 and describes the situation as it prevailed between 1984 and
1988. However, there is no evidence available to the author, which might suggest that these practices have either been
abandoned or modified.

Under the system of usury-free banking introduced in 1984, Iranian banks are
authorized to accept both short - and long-term investment deposits.
The duration of short-term investment deposits is three months and long-term
deposits have a duration of one year or more. According to prevailing practices, shortterm
deposits are left with the banks for an initial period of three months which can
subsequently be extended by one month. The duration of long-term investment deposits
is extendable by a multiple of three months. A minimum balance of Iranian Riyal 2,000
and 50,000 is required for short- and long-term investment deposits respectively.24
Investment deposits are used by Iranian banks in any one of the following ways:
i)Banks can combine their own resources, i.e. their capital, with investment
deposits to finance an investment project. In this case, the resulting
profits are shared between the depositors and the banks. In calculating
the return to depositors, the required reserves are subtracted from the
base amount. The banks announce their profit rates every six months.
The share of profits to depositors is also distributed accordingly. No
profits are earned by depositors if the amount is either withdrawn before
the required time or falls below the required minimum.25
ii)Iranian banks are only allowed to invest their depositors' funds, i.e. without
mixing these funds with their own resources. In this case, the bank acts
only as an agent on behalf of the depositors and the profits earned as a
result of the bank's investment of such funds are distributed among the
depositors after the deduction of the bank's fees for acting as an agent.
Furthermore, the return of the principal of these deposits is guaranteed by
the bank.26
It is also worth noting here that according to Article 4 of the Law for Usury Free
Banking of 1983, "banks ..... may undertake and/or insure the principal of the term
investment deposits".
Deposit Management in Pakistan
Commercial banks in Pakistan began accepting deposits from the public on the
basis of Profit and Loss Sharing (PLS) in 1981 when the Islamization of banking was
made compulsory for nationalized commercial banks.28 However, in the initial stages,
Pakistani banks continued to accept interest bearing deposits in addition to PLS deposits.
From July 1985, banks in Pakistan were asked not to accept any interest bearing deposit.
19
From that date, all deposits (other than foreign currency deposits held in Pakistan)
accepted by Pakistani banks were to be on the basis of participation in profit and loss.29
The main features of deposit management under the Islamic banking system in
Pakistan may be described as follows:*
i)Deposits in current accounts continue to be accepted as before. No interest or
profit is allowed on such deposits.
ii)Deposits, other than current accounts, are classified into three categories:
special notice deposits, savings deposits and fixed term deposits. Under
the Islamic banking system adopted in the country since 1985, all
deposits are accepted only on the PLS basis.
iii)Special notice deposits are further classified into two types: those requiring a
notice of 7 to 29 days and those requiring a notice of 30 days or more.
Savings deposits also are of two types: with checking facilities and
without. There are seven types of fixed or term deposits classified on the
basis of their duration ranging from three months to five years or more.
Thus, 11 different types of PLS deposits are offered by nationalized
banks in Pakistan.
iv)In March, 1986, PLS deposits constituted 65 percent of the total banking
deposits in Pakistan.
v)All banks and development finance institutions accepting PLS deposits are
required to declare rates of profit on a half-yearly basis on various
categories of deposits after obtaining the necessary clearance from the
State Bank of Pakistan which is the central bank of the country.
vi)Only non-interest income earned by the banks is distributed to PLS deposit
holders.
vii)Banks are required to maintain separate accounts for interest and non-interest
operations. Establishment expenses, provisions for bad and doubtful
debts, etc. are divided between interest and non-interest incomes in the
ratio that the two incomes bear to each other.
viii)The non-interest income of the bank, after making the above and other
appropriate deductions, is first distributed among various types of
deposits accounts and then to individual depositors using a specific
formula developed by the State Bank of Pakistan, which assigns different
weights to different deposit categories.


*The information reported here relates to year 1986.


REFERENCE(CONTEMPORARY PRACTICES OF ISLAMIC FINANCING TECHNIQUES AUSAF
AHMAD*)

Loan & Trust

Definition of loan
A thing that is borrowed especially a sum of money that is expected to be paid back with
interest. In finance, a loan is a debt evidenced by a note which specifies, among other things,
the principal amount, interest rate, and date of repayment. A loan entails the reallocation of
the subject asset(s) for a period of time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender
at a later time. Typically, the money is paid back in regular installments, or partial
repayments; in an annuity, each installment is the same amount.
Definition of trust
Allah says in His Glorious Book: "Those who faithfully observe their trusts and their
covenants," (23:08), and: "Surely Allah commands you to make over trusts to their owners
and that when you judge between people you judge with justice; surely Allah admonishes you
with what is excellent; surely Allah is Seeing, Hearing," (04:58), and: "O you who believe!
Be not unfaithful to Allah and the Messenger, nor be unfaithful to your trusts while you
know." (08:27).





Difference between loan and trust
Loan Trust
Something lent for temporary use.
A sum of money lent at interest.
An act of lending; a grant for temporary
use.
A temporary transfer to a duty or place
away from a regular job:


Aqad
Definition of aqad
Literally aqad refers to the Arabic word, mean an agreement and aqad might also refers to
the rope which is connecting some people which are involved in a certain agreement.
Syariah also defines aqad as the inter-connection among the peoples and covenant.
Types of aqad

I. aqad munjiz/direct aqad means; the contract that directly being actualizes a soon
after the Aqad is taken.
II. Qaad mualaq/pre-determined aqad means; the contract that requires same pre-
determined requirements such as on-line shopping that generally requires the pay-pal
orfull payment before the stuffs delivery.
III. Aqad mughaf/determined aqad means; the contract that being determined its
actualization period, it means that this kind of contract has no laws barrier uo-to the
determined period of contracts actualization.
Condition of Aqad
Here is some general condition of Aqad
The one who take any; aqad should be compatible in their action. They couldnt be
unconscious aqad
The syariah allowance on the objects of Aqad
The syariah allowance on the Aqid to take some Aqad
The Aqad on the forbidden sales
The Aqad should be caused into some advantages.
A complete ijab and qabul.


Difference between trade and interest

THE DIFFERENCE BETWEEN TRADE AND USURY
There remains a crucial difference between trade and usury. To assert that they are at times
synonymous has been rebuked by the Quran in no uncertain terms.
002.275
"Those who consume usury will not stand except as stand one whom the Satan has
confounded by his touch. That is because they say: "Trade is like usury," but God has
permitted trade and forbidden usury. Those who after receiving direction from their Lord,
desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat
(the offence) are companions of the Fire: They will abide therein.
To cite an example of trade, if one bought a commodity for x and then sold it for x+10
(profit), then that would amount to trade. On the other hand, if one 'lends' 10 bags of sugar
and two months , expects 15 bags of sugar in return, the excess of 5 bags of sugar would
amount to 'Riba'.
Similarly, if a loan is granted today attracts a specific rate of interest (beyond currency
inflation), that is Riba. It is to be noted, that on the strength of verse 2:279, a creditor is
entitled to their capital back. Therefore, if money is the commodity that is lent, one could
arguably expect to recoup a fair 'inflationary' element, so as not to be in a state of loss on the
principle. In today's economy, currency seldom holds the same value over a period of time.
It can therefore be argued, that any lending which has a predetermined return, or a 'rate of
interest', regardless of the circumstances of the borrower, would amount to 'Riba'. However,
if both the lender and borrower share in any prospective gains and losses, the nature of the
contractual agreement is considerably altered.

The latter point underscores the difference between a contractual trade agreement and that of
usury. In trade, both parties are involved in the assessment of the transaction and agree
suitable profit and loss terms. In the case of usury, the debtor is at the mercy of the creditor
who will not only charge a fixed return but also usually impose a financial penalty if a
payment is not met.

Major Principles of Trade (Bai