Introduction to Islamic Banking and Finance
From the historical point of view, Islamic banking can be divided into three eras
First era (Early era)
The early year of Islam until the period of Caliph arRashidin
Second era (Middle era)
Stretches from the era of the caliphates until the fall of the
Uthmaniyah Empire.
Third era (Modern era)
The era of modern Islamic banking
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 (PBUH).
CLASSIFICATION OF KNOWLEDGE
Divine Knowledge (Revealed Knowledge)
Human Knowledge (Acquired Knowledge)
WHY ISLMIC BANKING
Islam is a complete code of life that provides guidance regarding each aspect of life.
SOURCES AND APPLICATION OF SHARIAH LAWS
primary
Al-QURAN (The Holy Book)
Al-SUNNAH
Secondary
IJMA ULAMA (The Consensus of opinion of Islamic scholars)
QIAS (Analogical deduction provided detailed understanding derived
from Al-Quran and Al-Sunnah)
SHARIAH BASIS
Three basic elements
Aqidah (Faith & Belief),
Akhlaq (Moralities & Ethics) and
Shariah (Practices & Activities).
Shariah-
Ibadat (Man-to-Allah worship) and
Muamalat (Man-to-Man activities).
Shariah is an Islamic Law, governing the way of life for human beings.
MUAMALAT is a Shariah Law covering on man-to-man activities, is confined to Muslim
and open to be practiced by non-Muslim.
IBADAH governs man to Allah relationship i.e. worship to Allah (only confined to
Muslims)
History of Islamic Banking
The establishment of Islamic bank is in 1960’s.
However, banking activities exist long before the 1960’s in the Islamic history.
Before the era of Prophet Muhammad p.b.u.h, there were trade activities conducted in
Mecca.
These activities continued even after Islam became rooted in Mecca and Medina
Introduction to Islamic Banking
Islamic Banking for 7 defines
Islamic banking refers to a banking activity or a system of banking that is in
consonance with the basic principles of Islamic Shraiah.
Islamic banking is also known as interest free banking system as the Shariah
disallows the acceptance of “Riba” or interest rate for the accepting and lending of
money.
“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’h”
Islamic banking is a banking system that was developed based on the sharia (law) of
Islam.
That Islamic Banking is: "Financial institutions are businesses primarily providing
financing and other services, the traffic and circulation of cash payments adjusted
with the implementation of Islamic law".
Riba
This definition of Riba is derived from the Quran and is unanimously accepted by all the
Islamic scholars.
Literally means ‘increase in’ or ‘addition to’ anything.
Types Of Riba
Riba Al-Naseah
Riba Al-Fadl.
'Riba An-Nasiyah' is defined as excess, which results from predetermined interest which a
lender receives over and above the principle (Ras ul Maal).
'Riba Al Fadl' is defined as the excess compensation without any consideration resulting from
a sale of goods.
Gharar: Element of uncertainty in a contract.
Maisir: The word ‘maisir’ literally means ‘getting something too easily’ or ‘getting a profit
without working for it’
Principles of Islamic banking
Speculation
Another feature condemned by Islamic is economic transactions involving elements of
speculation.
Buying goods or shares at low and selling them for higher price in the future is
considered to be illicit. Similarly an immediate sale in order to a void a loss in the
future is condemned.
The reason is that speculators generate their private gains at the expense of society at
large.
Islamic Versus Western Economics
The Biblical statement that “money is the root of all evil” might be closer to Islam then
the western idea as discussed by Shaw that “Lack of money is the root of all evil”
Mufti Shafee Usmani very eloquently explains: “There is no doubt that Islam is
opposed to monasticism and considers economic activities to be permissible,
desirable, and even necessary and required at times.
LEVELS OF SHARIAH LAWS
Wajib
Mandoob (Sunna)
Mubah
Makruh
Haram
Clarification on Nomenclature
Islamic Banking is known by several names:
Interest free banking (Iran)
PLS Banking (Pakistan)
Islamic Banking (Gulf)
Special Finance Houses (Turkey)
What are the elements not approved under the Islam
Riba (Interest/Usually)
Gharar (Executive uncertainty)
Maysar (Gains for game or chance)
Ihtikar (Hoarding to bid up prices)
Producing and Trading in Haram
Ghish
The avoidance of Riba
Division of Riba
Riba Al duyun (Riba in Loan contract)
Riba Al buyu (Riba in Exchange contract) Like to Like, Hand to Hand any
increase is riba.
Summary of rules under the HADITH
Money1 + Money1: Requires two conditions:
Equality in quantity.
Hand-to-hand exchange.
Food1 + Food1: Requires two conditions:
Equality in quantity.
Hand-to-hand exchange.
Money1 + Money2: Requires one condition:
Hand-to-hand exchange.
Food1 + Food2: Requires one condition:
Hand-to-hand exchange.
Money + Food: No condition free trading
Other Items + Other Items: No condition free trading
Gharar it refers to the prohibition of transactions involving the sale of items whose existence
or key characteristics are not clearly defined or certain.
Types of Gharar:
Gharar Fahish (Major Uncertainty)
Gharar Yasir (Minor Uncertainty)
Maysir (Gambiling)
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
Islamic Banking
The functions and operating modes of Islamic banks are based on the principles of Islamic
Shariah.
It also aims at maximizing profit but subject to Shariah restrictions.
Zakat Collection
Encourage asset-based financing and based on commodity trading.
Conventional Banking
The functions and operating modes of conventional banks are based on fully
manmade principles (largely capitalism theory).
Aim at maximizing profit without any restrictions
It does not deal with Zakat.
Based on money trading.
Islam is a complete code of life that provides guidance regarding each aspect of life.
The primary objectives of Islamic Economic System are as under.
Equal Distribution of wealth
Social justice
