ISLAMIC FINANCE

Presented By

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 Introduction

Islamic finance is a system of finance that is bound

by religious laws that prevent the taking of interest
payments

A system that prohibits trading in financial risk and

investing in businesses considered haram, such as
those selling alcohol or pork and gambling
Contemporary Islamic finance is a burgeoning
subsector of international finance markets
Islamic banking is the fundamental element of
Islamic finance
The true implementation of Islamic finance can
lead to new era of banking and economic system
 Evolution of Islamic Finance
Islam promotes sustainable economic
development and growth

Two main sources of information in Islam have

prescribed tools to achieve socio economic
objectives

Prohibition of Riba is the cornerstone of

Islamic financial transactions
The Bait ul Maal is the foundation of the islamic
banking

Efforts to Islamize the economy of Pakistan

started in the mid 60s and implemented in 80s

The Banking Companies Ordinance 1962 was

amended to accommodate non-interest based
transactions
Some products and processes being used in
Islamic Banking were challenged in Federal
Shariah Court in 90s
Later on State Bank proceeded ahead for
promoting Islamic banking parallel to commercial
banking
 Concept of Interest in Islam
Islam has provided a complete economic
model for a establishing a healthy society

Allah Almighty says in Quran

“O, believers, fear Allah, and give up what is still due to you
from interest (Riba), if you are true believers. If you do not
do so, then take notice of war from Allah and His
Messenger. But, if you repent, you can have your principal.
Neither should you commit injustice nor should you be
subjected to it.” (Surah Al Baqra: 278-279)
The Holy Prophet (PBUH) has also declared Ribah
or interest as un-Islamic value and practice

 "The Prophet (PBUH)forbade the acceptance of the price of

a dog or blood, and also forbade the profession of tattooing,
or getting tattooed and receiving or giving Riba (usury), and
cursed the picture-makers." (Sahih Al-Bukhari, Vol.3, Hadith
No.299)
The debt or loan has its roots in Islamic histories

 Narrated 'Aishah Radiyallahu Anha: The Prophet (PBUH) bought

some foodstuff on credit for a limited period and mortgaged his
armour for it. (Sahih Al-Bukhari, Vol.3, Hadith No.686)

 Narrated Abu Hurairah Radiyallahu Anh: Allah's Messenger

(PBUH) said; "A man used to give loans to the people, and used to
say to his servant, 'If the debtor is poor, forgive him, so
that Allah may forgive us.' So when he met Allah (after his
death), Allah forgave him." (Sahih Al-Bukhari, Vol.4, Hadith
No.687)
 Classification of Riba
Riba An Nasiyah

 Real and Primary form of Riba

 Specified in Quranic verses so termed as Riba Al Quran
 Earned name as Riba Al Jahiliya

“That kind of loan where specified repayment period

and an amount in excess of capital is
predetermined.” (Imam Abu Bakr Hassas Razi)
Riba Al Fadl

 Second form of Riba

 Specified in Hadith so termed as Riba Al Hadis

The Prophet (P.B.U.H) said

"Sell gold in exchange of equivalent gold, sell silver in exchange of

equivalent silver, sell dates in exchange of equivalent dates, sell
wheat in exchange of equivalent wheat, sell salt in exchange of
equivalent salt, sell barley in exchange of equivalent barley, but if
a person transacts in excess, it will be usury (Riba).
This Hadith enumerates 6 different commodities
namely “Amwal-e-Ribawiya”

I. Gold
II. Silver
III. Dates
IV. Wheat
V. Salt
VI. Barley
 Modes of Islamic Finance
Murabaha
 A sale on mutually agreed profit
 Seller declares his cost and profit in contract of sale
 Mode of financing in Islamic Banks in which customer
requests to the bank for particular commodity

Ijarah
 It is termed as leasing
 Contract of a known and proposed usufruct against
a specified and lawful return
Ijarah-Wal-Iqtina
 Rental contract between bank and client
 Bank provides goods and services in return for profit
 Rental and purchase prices are fixed in contract

Musharkah
 Literal meaning “Relationship”
 A contract by mutual consent for sharing profit and loss
 Islamic Bank provides funds
 Profit and loss is shared according to set ratio
Musawamah
 Price of the commodity to be traded is bargained
between seller and the buyer
 Negotiation on price between buyer and seller

Istisna’a
 Contractual agreement for manufacturing goods and
commodities
 Provides the facility of financing for construction and
manufacturing
Bai Muajjal
 Literally it means a credit sale
 Financing technique that takes the form of Murabaha
Muajjal
 Bank earns profit on purchasing price from buyer in near
future

Mudarbah
 A form of partnership in which one party provides the
fund and other provides expertise
Bai Salam
 A contract of receiving advance payments for goods to be
delivered in near future
 No ambiguity defining quality, quantity and
workmanship
 Comparison between Interest Based and
Islamic Finance
Islamic Finance
Ribah (Interest) is prohibited
To make money from money is
discouraged
It is concerned with “bearing the risk”
involved in transactions
It is haram to get benefit without any
liability
It is based on sharing of profit and loss
Conventional Finance
Interest is charged
Encourage generating wealth from
wealth
It is concerned with “elimination of
risk”
It gets benefit from consumer without
bearing any liability
It is based only sharing of profit by the
bank
 Advantages of Islamic Finance
Provides opportunity of doing business in
accordance with Islamic standards
Facilities of shariah-complaint solutions by the
Islamic Financial Institutions
Islamic Finance not only confined to the Muslims
Appraisal for discouraging trade in arms, drugs,
alcohol and gambling

Removes ambiguity between buyers and sellers

Encourages both the sharing of profits and losses

The liability of consumer and financial institutions

is identifiable
 Issues in Islamic Finance
Human Resource for Shariah Compliance
Unresolved Fiqh Issues
Legal Framework
Excess liquidity
Globalization
 Conclusion
1. Islamic banking is unique, but by no means
anomalous
2. It promotes the business according to religious
standards
3. It provides relatively better business
opportunities to the Muslims as well as non
Muslims
4. It encourages wealth sharing and economic
development
5. It provides solutions to the low income people in
the society
 Recommendations
 Islamic Financial Institutions should market their
products in rural areas to promote agriculture finance
 Regulatory bodies should take steps to promote Islamic
modes of financing along with conventional banking
 To take strict actions against non compliance of
Islamic Sharia provisions.
 To expand it to the western countries as well
 To solve issues through the panel of Ulmah Karam