Professional Documents
Culture Documents
Wel Come
Islamic Finance & Economics
By
Dr. Uzair Albazi
Dean
GIFT Business School
======================================
Ph: (042) 3756 8430 / Mob: 0300-4426440
Email: uzairbazi@hotmail.com / uzair.bazi@gift.edu.pk
VS
Topic 04
Major Principles of Islamic Economics, Commerce, Buss & Trade
Topic 05
Verses of Holy Qur'an, Ahadith, Islamic Jurisprudence, Terms &
Conditions
3
Topic 12
Stock Exchange, Stock Market & Shares
Topic 13
Islamic Conditions For Dealing with Stocks, Shares and Cos.
Topic 14
Banks Financing, Types, Sources
Topic 15
State Bank Of Pakistan Circulars
Topic 16
Islamic Modes of Financing, Bai, Types, Islamic Conditions
Topic 17
Musharakah (Basic Rules, Terms & Conditions)
Topic 18
Muzaribah (Basic Rules, Terms & Conditions)
Topic 19
Murabahah, Ijarah, ORIGIN (Basic Rules, Terms & Conditions)
Topic 20
Sallam, Istisnaa (Rules, Conditions)
Reference Books
Islam Ka Qanoon-e-Tijarat
by Dr. Noor Mohammad Ghaffari
Qasas-ul-Ambiya
Syed Sulaiman Nadvi rt
Al Farooq
Allama Shibli Nomani rt
An Introduction to Islamic Finances
by Mufti Taqi Usmani
International Trade, Investment & Debt Management
Institute of Bankers, SBP
Bab-e-Umar
Encyclopedia of Islam
Bab-e-Moawiyah bin Abu Sufiyan
___do___
Bab-e-Omar Bin Abdul Aziz
___do___
Reference Books
Islam Ka Muashi Nizam
by Dr. Noor Mohammad Ghaffari
Reference Books
Central Banking
Commercial Banking
Practice of Banking
by DeCock
by Prof. Sayers
by Sheldon / Tannan
10
Reference Books
SBP Act
Banking Companies Ordinance
Banking Recovery Laws
Principles of Islamic Financing
SBP
SBP
SBP
11
Reference Books
Suud
By Anjuman Khuddam-ul-Quran Sindh, Karachi
Bahishti Zewer
By Maulana Ashraf Ali Thanvi
Targheeb-ul-Muslimeen
By Maulana Mohammad Musa Albazi
Gulistaan-e-Qanaat
By Maulana Mohammad Musa Albazi
12
Reference Books
Masla Suud
Mufti Shafi rt
13
Web Sites
www.statebank.org
www.islamcity.com
www.islamonline.com
www.lariba.com
www.islamicbanking.com
14
Purpose:
To Eliminate Riba (Interest) based Transactions from the current
Banking, Economics, Finance and Trade Sectors
15
INTERNATIONAL OVERVIEW
16
INTERNATIONAL OVERVIEW
17
INTERNATIONAL OVERVIEW
Cont/d
18
ISLAMIC BANKING IN
PAKISTAN
Developments in SBP:
Has already announced a scheme in January 2003 for opening
of Islamic Banks, subsidiary or dedicated Islamic Banking
Branch.
Establishment of an Islamic Banking Department.
Formed Sharia Board.
Recently announced issuance of Bank Licenses only to Islamic
Banks, hence, no new license shall be allowed to Conventional
Bank
Has prepared Essentials as Standards and Agreements to be
used by Islamic Financial Institutions (IFIs).
Governor SBP himself approves issuance of Licenses for
Islamic Banking Branches.
19
1)
Conventional Banks borrows funds from the depositors paying
interest on the liability side of the its balance sheet.
2)
Conventional Banks lends the funds to the borrowers charging
higher interest on the asset or the investment side.
20
3)
There is iron-wall between the conventional banks and their
depositors.
4)
5)
21
Hadith (Sunnah)
Holy Quran
Ijma of Ummat
22
Riba
(Interest)
23
RIBA
(Interest)
The
24
RIBA
(Interest)
Because of their abuse, we forbade the Jews good things which were
formally allowed to them: because time after time they debarred others
from the path of Allah: Since they practice Riba although they were
forbidden and cheat others of their possessions. We have prepared a
painful torment for those of them who disbelieve.
An Nisa 160-161 (Second Revelation)
25
RIBA
(Interest)
26
RIBA
(Interest)
Those who devour Riba shall rise up before Allah like men whom
Shaitan has demented by his touch: for they claim that trading is
like usury. But Allah has permitted trading and forbidden usury. He
that receives an admonition from his Rabb and mends his ways may
keep what he has already earned: his faith is in the hand of Allah.
But he that pays no heeds shall be among the people of fire and
shall remain in it forever.
Al-Baqarah 275 (Fourth Revelation)
27
RIBA
(Interest)
Allah has laid His curse on Riba and blessed charity with
increase. He bears no love for the ungrateful sinners
Al-Baqarah 276 (Fourth Revelation)
28
RIBA
(Interest)
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 (Fourth Revelation)
29
RIBA
(Interest)
Al-Baqarah 278-279
If you are indeed believers: Prove your claim with your deeds and
actions.
Threat in the strongest words: Not used for any other crime.
Islam emphasis on justice: Deal not unjustly and you shall not be dealt
with unjustly.
After the revelation of this verse, Prophet (SAW) in his last sermon at
Hajjat-ul-Wada, which is called the charter / blue print of Islam,
declared: Interest claim in respect of transactions during the days of
ignorance are null and void and would not be claimed. To begin with,
we forego the entire interest amount due to my uncle Abbas bin Abdul
Muttalib (rt)
30
RIBA
(Interest)
What is 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.
31
RIBA
(Interest)
32
RIBA
(Interest)
Riba Selected Ahadith
By Hazrat Amr bin Al Aas (RT): When interest based dealing
becomes common among people, they will start facing draught
and shortage of food. And when bribery becomes norm among
people they will live under constant fear of their enemy.
By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him
said,
There will certainly come a time for mankind when everyone will
take Riba and if he does not do so, its dust/smoke will reach him.
(Abu Dawood, Ibn Majah)
33
RIBA
(Interest)
34
RIBA
(Interest)
35
RIBA
Definitions:
Summary:
- All conditional benefits on loan falls in the category of (Riba)
interest
36
TYPES OF RIBA
37
TYPES OF RIBA
38
Riba
Quran strickly forbids all kinds of RIBA
Examples:
Jews of Madinah
Merchants of Makkah
39
Riba
Muslim Khilafah
40
Riba
41
History:
Bait-ul-Maal
Caravans of Makkah
42
Difference between:
Loan (Qarz)
&
Amanat (Trust)
43
Bank Accounts
Lockers
44
Islamic Banking
45
Economics
What is Economics?
To utilize the limited resources in a way that maximum needs
and wants are met to ensure the well being of all members of
the human society.
46
Economics
Determination of Priorities
Allocation of Resources (land, Labor, Capital, Entrepreneur)
Distribution of Wealth / Income
Development
47
Determination of Priorities
(Problem 01)
Capitalism
Socialism
48
Allocation of Resources
(Problem 02)
Socialism
Capitalism
49
Development
(Problem 03)
Capitalism
Socialism
50
Distribution of Income
(Problem 04)
Capitalism
Land
Labor
Capital
Entrepreneur -
Rent
Wages
Interest
Profit
Socialism
51
Right to Wealth
Capitalism
Socialism
52
Flaws of Capitalism
Govt. & Industrialists join hands for mutual benefits and make laws
that exploit common people.
Flaws of Socialism
.
54
Economics
Capitalism:
Freedom of business
Law of supply & Demand helps
Resources (land, labor & capital) will be used
Competition will force to improve, create and gain maximum.
Distribution of wealth among producers of wealth only
(law of supply & demand will help to decide their share)
55
Economics
Producer of Wealth:
Land
Labor
Capital
Owner
will get
will get
will get
will get
Rent
Wages
Interest
Profit
56
Economics
Socialism:
No Freedom
No Private Ownership
Govt. will decide about
Allocation of Resources
Determination of Priorities
Distribution of Income
Development
It is also called Planned Economy
57
Economics
Principles:
Collective Property
Planning
Collective Interest
Equitable distribution of Income
58
Economics
Islam:
59
Economics
Restrictions:
Halal & Haraam (through Wahi)
(Interest, gambling, lottery)
State Restrictions
(Smuggling, dealing in any restricted business etc)
Moral Restrictions / Responsibilities
60
Economics
Land
Labor
Capital
Owner
Rent
Wages
(Not Interest) Profit & Risk of Loss Through
Musharikah & Mudahiribah
Profit or Loss
61
Economics
Zakaat
Khiraaj
Ushr
Sadaqah
Kaffarah
Sacrifice / Qurbaani
Wirasaat
62
Islam:
-Govt. restrictions
-Moral values
Terms
Definitions:
Bai
Mabeea
Saman
Qadar
Price
Ijab
64
Terms
Tarkah
Dain
Madyun
Daiin
Muzarib
Rab-ul-Maal
Rasul Maal
65
Islamic Concepts
Legal Person
Shares
Under Writing
Limited Company
Kick Back
Roll Over
Libor / Kibor
66
Types of Bai
(according to validity)
Definitions:
Bai Sahih
Bai Batil
Bai Fasid
Bai Mauqoof
67
Contract (Aqd)
Subject Matter (Mabeea)
Price (Saman)
Possession or delivery (Qabza)
68
Aqd
(Contract)
Possession
(Qabza)
Bai Sahih
(Valid Sale)
Subject
Matter
(Mabeea)
Price
(Saman)
69
Existing
Valuable
Usable
Capable of ownership / title
Capable of delivery / possession
Specific & Quantified
Seller must have title & risk
71
72
73
No ownership
Note:
Exceptions are:
(1) Bai Salam
(2) Bai Istisna
74
Sale Agreement
75
76
77
Modes of Financing
Musharakah
Mudharibah
Murabahah
Bai Salam
Bai Istisna
78
Modes of Financing
Musharakah:
It is the same financing contract as Modarabah except that client also
provides a part of capital in addition to management participation. On
the other hand, Islamic bank may also contribute in the management
in addition to its capital. In that case, management fees and
distributable profit form the enterprise are shared by the client and
Islamic Bank in accordance with ratios fixed under the Musharakah
contract.
79
Modes of Financing
Modharibah:
Modaribah is a contract between an Islamic Bank and the client
whereby the Islamic bank provides specific amount of funds to the
clients for an enterprise for defined purposes in exchange for a
reasonable and highly predictable profit. The client receives a share in
the profit as compensation or fee for his management.
80
Modes of Financing
Murabahah:
Under this deal, Islamic Bank purchases goods, raw material,
equipment, machinery or any other items of economic significance
from a third party at the request of a client and sells such goods to the
client on spot or deferred payment basis at it s own sale price. The
difference between the purchase cost of the Islamic bank and the sale
price to the clients forms the profit called Mark Up.
81
Modes of Financing
82
Modes of Financing
Bai Salam:
Seller undertakes to supply specific goods to the buyer / bank at a
future date in exchange of an advanced price fully paid at the spot of
agreement.
Purpose:
-To meet the need of small farmers who need money to grow their
crops and to feed their family up to the time of harvest.
-To meet the need of traders for import and export of goods.
83
Modes of Financing
Bai Istisna;
The Bank enters into an agreement with the client for purchase of any
goods before it comes into existence.
It is an order to producer to manufacture a specific commodity for the
purchaser.
84
No false statement
85
86
According to Imam Malik rt, Imam Shafi rt, it should be according the
investment ratio.
According to Imam Abu Hanifa rt, it could vary except the sleeping
partner.
87
88
Dissolving Musharakah
89
MUZARIBAH
Features of Muzaribah:
90
MUZARIBAH
MUZARIBAH AL MUQAYYIDAH:
MUZARIBAH AL MUTALLAKAH:
91
MUZARIBAH
NOTE:
All four Imams agree that no salary will be given to Muzarib on his/her
services.
92
Murabihah
Features:
Just using the name of Mark Up or profit instead of interest does not
make it permissible until all the terms and conditions set by Islamic
Jurisprudence are fulfilled.
93
Murabihah
94
Murabihah
If the actual cost can not be identified, then Murabihah deal is not
possible. In that case, we must use Bai Musawamah.
95
Murabihah
(Agreement)
Liability of Client
96
Murabihah
(Agreement)
Bank
&
Client
Client
&
Bank
Wakeel
&
Bank
Bank
&
Wakeel
Wakeel
&
Seller
97
Ijarah
Features:
Lessor stays as owner and the lessee has the right to use the
item/good.
98
Ijarah
99
Salam
Conditions:
The date of delivery, time, and the place must be mentioned clearly.
100
Istisna
Features:
101
Istisna
Canceling Istisna:
one party can cancel the Istisna deal by giving notice to the other
before starting production/purchasing etc
102
Difference between
Istisna & Salam
Istisna
Salam
In Salam, it is necessary to
make full payment in advance.
103
Project Financing
Proposed Methods:
Musharikah
Mudharibah
Basic Principles:
Financing through Musharikah and Mudharibah does not mean the
advancing of money. It means participation in the business in the
case of Musharikah, sharing in the assets of the business to the
extent of the ratio of financing.
An Investor must share the loss incurred by the business to the
extent of his financing.
The partners can determine with mutual consent any ratio of profit
which may differ from the ratio of investment. However the partner
who has excluded himself from the responsibility of work for the
business cannot claim more than the ratio of his investment.
104
Project Financing
Project Financing:
If the financier wants to finance the whole project, the form of
Mudharibah can come into operation.
If investment comes from both sides, the form of Musharikah can
be adopted. In this case:
If the management is the sole responsibility of one party, while
the investment comes from both, a combination of musharikah
and Mudharibah can be brought into play according to the
rules.
Since it would be a new project, no problem with regard to the
valuation of capital should arise.
105
Project Financing
If the financier wants to withdraw from the Musharikah, while the other
party wants to continue the business, the later can purchase the
shares of the former at an agreed price. In this case, the financier may
get back the amount he has invested along with a profit, if the
business has earned a profit.
In the case of loss, however any decrease in the total value of the
assets would be divided between them in the ratio of their investment.
106
Project Financing
If the sale of the share on one time basis is not feasible for the lack of
liquidity in the project, the share of the financier can be divided into
smaller units and each unit can be sold after a suitable interval.
107
Import Financing
Import Financing:
Conventional Banks charge two types of fee for the service of
letter of credit which the bank provided to the importer. They are:
Service Charges for the opening an LC
Interest charged on the LCs not opened on full margin.
108
Import Financing
109
Import Financing
Musharikah:
The appropriate substitute for LC is Musharikah. Bank and importer
can make an agreement of Mudharbah or Musharikah while opening
LC. If LC is being opened at zero margin then an agreement of
Mudharbah can be made, in which bank will become Rabb-ul-maal and
importer will be regarded as Mudarib. Bank will own the goods that are
being imported and profit will be distributed according to the
agreement.
If LC is being opened at some margin then Musharikah agreement can
be made. Bank will pay the remaining amount and the goods that are
being imported will be owned by both of them according to their share
of investment. Bank and importer, with their mutual consent can also
include a condition in the agreement, whereby, Musharikah or
Mudharibah will end after a certain time period even if the goods are
not sold. In this case, importer will purchase the banks share at the
market price.
110
Import Financing
Murabihah:
111
Murabihah
(Agreement)
Bank
&
Client
Client
&
Bank
Wakeel
&
Bank
Bank
&
Wakeel
Wakeel
&
Seller
112
Export Financing
113
Export Financing
Pre Shipment Financing:
Pre Shipment Financing can be fulfilled by two methods:
Musharikah
Murabihah
Musharikah:
Bank & Exporter can make an agreement of Musharikah
or Mudharibah, if exporter is not investing, otherwise
Musharikah agreement can be made. Agreement in this
case will be easy, as cost and expected profit is known.
Exporter will manufacture or purchase goods and profit
that will be obtained by exporting, will be distribute
between them according to the pre determined ratio.
114
Export Financing
Problem:
If the exporter is not able to deliver the goods according to the
terms and the conditions of the importer then importer can refuse
to accept the goods and in this case exporters bank will ultimately
suffer.
Solution:
it can be rectified by including a condition in Mudharibah or
Musharikah agreement that if exporter violates the terms and
conditions of import agreement then the bank will not be
responsible for any loss which arises due to this negligence.
This condition is allowed in Shariah as the Rabbul Maal
is not responsible for any loss that arises due to the negligence
of Mudharib.
115
Export Financing
Murabihah:
Murabihah is being used in many Islamic Banks for export
financing. Banks purchase goods that are to be exported at
discounted (less) price than the agreed price between the exporter
and the importer. Bank exports goods at the original price and thus
can earn profit.
Murabihah Financing requires bank and exporter to sign at least
two agreements separately.
One for the purchase of goods
Second one for appointing the exporter as the agent of the bank
Once these two agreements are signed, the exporter can
negotiate and finalize all the terms and conditions with the
importer on behalf of the bank.
116
Export Financing
117
Export Financing
118
Pooling of Risk
Payment of fortuitous loss
Risk Transfer
Indemnification
Profit for the share holders from underwriting results and
investments
119
120
Gharar:
Lexically it means uncertainty and technically it means the
uncertainty of the counteract or the subject matter or the period
in a commutative contract.
The element of Gharar in the commercial insurance contract
The insurer does not know how much he would owe to an
individual.
Some times an insured does not know either how much he
would pay ultimately to the insurer
In case of no claim from the insured in general insurance, then
Qimar emerges.
121
122
123
Different Models:
Pure Mudharabah Model:
The participants and the operator enter into an Mudahrabah contract
from the beginning of the relation, for indemnification and share of the
underwriting results
125
Evidences
Ashara Mubasharrah
Muhajreen of Makkah
126
Eating Halal:
127
Examples:
Duties of Muslims
e-g:
Oil
Gold
Man Power
Land
129
Forbidden Earnings
130
Forbidden Earnings
131
Forbidden Earnings
Stealing
Robbery
Swearing
Offense
Lies
Cheating
Unjustly
Haram Business
132
133
134
Trust in Allah
Well behaved
Trust Worthy
No greediness
135
Keep Purity
136
No Swearing
No Cheating
No Fake Praises
137
138
Forbidden Business
Wine
Pig
Lottery
Stolen Products
Business in Masjid
139
Forbidden Business
Unavailable Products
140
Summary
141
Summary
Do Ehsaan (Favors)
No Offense (Fasad)
142
143
Insurance Policy
The End
Jazakumullahu Khairan
Thank You
145
146
147
148
149