Banking from Islamic point of view

Presented By:

• Abbas Ali Shah

• Aiman Iqbal
• Bilal Ahmed
• Talha Abbasi
• Yasir Murtaza
 Introduction
• Purpose-The purpose of this report is to analyze the present role of Islamic Banking in the economy of
Pakistan and to find out how this system can benefit our economy better than the conventional banking
system

• Background-In Muslim communities, limited banking activity, such as acceptance of deposits, goes back to
the time when the Prophet Mohammad was still alive. At that time, people deposited money with the
Prophet Mohammad (P.B.U.H) or with Abu Bakr Siddique, the first Caliph of Islam. The Islamic Banking
system prohibits ‘Riba’ (or interest) and advocates a system that is fair as well as profitable. This has also
been emphasized greatly by the Holy Quran. Steps for Islamization of the banking system of Pakistan
were started in 1977-78. Pakistan was among the three countries of the world that had been trying to
implement Islamic Banking at a national level and a number of prominent banks are currently offering
interest-free banking in the financial circles.

• Scope-The report covers the contribution and effects of Islamic Banking with regard to Pakistan’s economy
only. The conventional banking mechanism and its role will also be limited merely to the financial system
of Pakistan.

• Methodology-The information for analysis has been collected from a variety of sources. The major part of
the research material was gathered from assorted articles and newsletters published on the same topic.
We also interviewed Mr. Shehzad Alam, an employee of Bank Alfalah for a more in-depth understanding
of the intricacies of the banking systems. The internet also provided a wealth of information and resources
to use for the study

• Limitations-Because this report is very closely related to finance and we had to deliver it to a non-finance
audience, we could not use financial jargon and complicated figures in the report. We made it as simple as
possible and this may have limited our research affectivity to some extent.
 Islamic Banking
• Definition-Islamic banking has been defined as banking in
accordance with the philosophy and value system of Islam and is
governed by the principles laid down by the Islamic Shariah. The
essential feature of Islamic banking is that it is interest-free. Islam
prohibits Muslims from taking or giving interest (riba) regardless of
the purpose for which such loans are made and regardless of the
rates at which interest is charged.
• Riba in the Light of Quran

• Surah Al-Room, verse no.39 Allah mentions

• "That which you give in usury for increase through the property of
people will have no increase with Allah: but that which you give for
charity seeking the countenance of Allah, it is these who will get a
recompense multiplied."
 Promises Of Islamic Banking
• Price Reduction of Consumer Goods
• Decrease in Construction Costs and House Rents
• Increase in Savings and Bank Deposits
• Banks will Obtain Capacity of Infinite Advancement
of Loans
• Rise in Employment Opportunities
• Development of the Industrial Sector
• Decrease in the Budget Deficit And Increase in the
Domestic Debt-Retirement Capability
• Rise in the Potential of Foreign Debt-Retirement
 Founding Factors and Mechanism
• Modes Of Financing • Basic Accounts
o Mudaraba-A form of partnership where one party provides the funds o Current Accounts-The current account, also known
while the other provides expertise and management. The provider of as alwadiah, as in the case of conventional banks, gives
the funds is called “Rabbul Maal”, while the one who provides the no return to the depositors. It is essentially a safekeeping
expertise is referred to as the Mudarib. Any profits accrued are (alwadiah) arrangement between the depositors and the
shared between the two parties on a pre-agreed basis, while loss is bank, which allows the depositors to withdraw their money
borne only by the provider of the capital. at any time and permits the bank to use the depositors'
money. As in the case of conventional banks, cheques
o Musharaka-Another legitimate mode of financing recognized in books are issued to the current account deposit holders and
Islam is one based on equity participation (musharaka); in which the the Islamic banks provide the broad range of payment
partners use their capital jointly to generate a surplus. Profits or facilities clearing mechanisms, bank drafts, bills of
losses will be shared between the partners according to some exchange, travelers cheques, etc. (but not yet, it seems,
agreed formula depending on the equity ratio credit cards or bank cards). More often than not, no service
charges are made by the banks in this regard.
o Murabaha-The most commonly used mode of financing seems to
be the 'mark-up' device which is termed murabaha. In a murabaha
transaction, the bank finances the purchase of a good or asset by o Savings Account-The savings account is also operated
buying it on behalf of its client and adding a mark-up before reselling on an al-wadiah basis, but the bank may at its absolute
it to the client on a 'cost-plus' basis. It may appear at first glance that discretion pay the depositors a positive return periodically,
the mark-up is just another term for interest as charged by depending on its own profitability. Such payment is
conventional banks, interest thus being admitted through the back considered lawful in Islam since it is not a condition for
door. What makes the murabaha transaction Islamically legitimate is lending by the depositors to the bank, nor is it
that the bank first acquires the asset and in the process it assumes predetermined. The savings account holders are issued
certain risks between purchase and resale. The bank takes with savings books and are allowed to withdraw their
responsibility for the good before it is safely delivered to the client. money as and when they please.
o Ijara-Ijara is a form of leasing. It involves a contract where the bank
buys and then leases an item – perhaps a consumer durable, for o Investment Account -The investment account is
example – to a customer for a specified rental over a specific period. based on the mudaraba principle, and the deposits are
The duration of the lease, as well as the basis for rental, are set and term deposits which cannot be withdrawn before maturity.
agreed in advance. The profit-sharing ratio varies from bank to bank and from
time to time depending on supply and demand conditions.
o Ijara wa Iktana-Ijara-wa-iktana is similar to Ijara, except that In theory, the rate of return could be positive or negative,
included in the contract is a promise from the customer to buy the but in practice the returns have always been positive and
equipment at the end of the lease period, at a pre-agreed price. quite comparable to rates conventional banks offer on their
Rentals paid during the period of the lease constitute part of the term deposits.
purchase price. Often, as a result, the final sale will be for a token
sum
 Conclusions
Islamic banking is interest free banking in consonance with the islamic shariah; it bears
some resemblance to the conventional banking system but clearly forbids trading in 'riba'
(interest). It works on the basis of some permissible financing methods which have been
derived from the teachings of the Hole Quran and the Prophet Mohammad (PBUH).
The conventional banking system works utterly on interest, it earns through holding
deposits, lending loans, providing remittance services etc. This system has exploited the
general public to the extent being cruel, which is evident from the ever increasing
banking 'spread'.
The banks which are presently operating in Pakistan have some issues of their own.
From the framing of legislation to the manipulation of the prescribed models, they have
not yet been up to the mark. Although, banks like Meezan and Al-baraka have shown
encouraging prospects but they have still along way to go.
The Islamic Banking system if applied properly holds a lot of promise and potential for
our economy and the general public, being of interest free nature it would reduce costs
for all businesses and would bring down the menace of inflation. It would also provide
job opportunities and could single handedly free our nation of foreign as well as domestic
debt and these are just the direct benefits indirectly it could rid our nation of other evils
which persist out of economic adversity.