Islamic Banking (IB)

Money, Banking and Monetary Policy in Islamic View

Money: Most of the economists will define money by its four classical functions:
Means of exchange
Measure of value
Medium of deferred value and
Store of value
We will go over a brief explanation of each of these functions of money and how it relates to Islamic
economics. Specifically, we will discuss some of the deficiencies of money (i.e., fiat money) in light of these
functions. Ultimately, the fundamental question we wish to answer is whether money is a commodity.
Money which is running an economy lubricants are always a hot topic for discussion. Like an engine without
oil, the economy also will not work without the money. However, many of us who only understand the meaning
of money in the context of its form as paper money and coins. In fact, the definition of money is anything that
can be accepted as a means of payment for goods and services in an economic system. In fact, in ancient times
people used stone, animal skins, salt, and shells as money. At the time of the Prophet (SAW), gold coins
(dinars), which come from the Roman and silver coins (dirhams), which comes from the Persian are the two
precious metals are regarded as currency. In the current era, paper money (fiat money) has become a common
means of payment used in all countries in the world.
Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and
therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in
a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more
important than the money used to finance it. Muslim jurists consider money as potential capital rather than
capital, meaning that money becomes capital only when it is invested in business. Accordingly, money
advanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not
entitled to any return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping
money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money represents
purchasing power which is considered to be the only proper use of money. This purchasing power (money)
cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being
used for the purchase of goods and services.
Banking: A banking system that is based on the principles of Islamic law (also known Shariah) and guided by
Islamic economics. Two basic principles behind Islamic banking are
the sharing of profit and loss and
the prohibition of the collection and payment of interest.
Banking is grounded in Islamic principles; all the undertakings of the banks follow Islamic morals. Therefore, it
could be said that financial transactions within Islamic banking are a culturally distinct form of ethical
investing.
For millions of Muslims, banks are institutions to be avoided. Islam is a religion which keeps Believers from the
teller's window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet
Muslims need banking services as much as anyone and for many purposes: to finance new business ventures, to
buy a house, to buy a car, to facilitate capital investment, to undertake trading activities, and to offer a safe place
for savings. For Muslims are not averse to legitimate profit as Islam encourages people to use money in
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Islamically legitimate ventures, not just to keep their funds idle. The rules regarding Islamic Banking are quite
simple and can be summed up as follows:

Islamic Banking -Any predetermined payment over and above the actual amount of principal is
prohibited.
Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender
does not charge any interest or additional amount over the money lent.
Islamic Banking - The lender must share in the profits or losses arising out of the enterprise for which
the money was lent.
As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of
capital and the user of capital should equally share the risk of business ventures, whether those are
industries, farms, service companies or simple trade deals.
The principle which thereby emerges is that Islam encourages investments in order that the community
may benefit.
Islamic Banking -Making money from money is not Islamically acceptable.
Islamic Banking -Gharar (Uncertainty, Risk or Speculation) is also prohibited.
Islamic Banking -Investments should only support practices or products that are not forbidden
It is discouraged- by Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a
real-estate loan could not be made for the construction of a casino; and the bank could not lend money to
other banks at interest.

Monetary Policy: Monetary policy is the management of a nations money supply to achieve economic goals
by a central bank or currency board. Monetary policy objectives can include control of inflation, control of
exchange rates, or even simply economic stability. Monetary policy is contrasted with fiscal policy, which aims
to achieve economic goals through taxation and government expenditure. The Bangladesh Bank handles
monetary policy in the Bangladesh. The Bangladesh Bank controls the money supply through open market
operations, and also sets interest rates between banks and reserve requirements.
There can be no question that monetary policy in an Islamic economy should not only be in conformity with the
ethos of Islam but should also help realize the socio-economic goals that Islam emphasizes. Some of the most
important goals may be briefly stated as:

Economic well-being with full employment and optimum rate of economic growth;
Socio-economic justice and equitable distribution of income and wealth; and
Stability in the value of money to enable the medium of exchange to be a reliable unit of account, a just
standard of deferred payments and a stable store of value.

In an Islamic economy, the demand for money will arise basically from the transactions and precautionary
needs which are determined largely by the level of money income and its distribution. The abolition of interest
and the levy of Zakah at the rate of two-and-a-half per cent will tend to minimize the speculative demand for
money because of a number of reasons including:
1. Interest-bearing assets would just not be available; leaving the holder of liquid funds the option of either
holding them in the form of cash with no return or investing them in profit earning assets to get at least
some return.
2. Short-term as well as long-term investment opportunities with varying degrees of risk will presumably be
available to all investors whether they are high or low risk takers, the extent of foreseeable risk being
offset by the expected rate of return.
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3. It may be safely assumed that no holder of funds would he so irrational as to hoard balances in excess of
transactions and precautionary needs as long as he could use the idle balances to invest in profit-earning
assets to offset at least partly the erosive effect of Zakah, and of inflation, to the extent to which it persists
even in an Islamic economy. Liquidity preference arising from the speculative motive may hence tend to
be insignificant.
The Islamic central bank should estimate the demand for money at full employment within the framework of
stable prices and other socio-economic goals of Islam and try to regulate the supply of money accordingly.
Hence the variable in terms of which monetary policy should be formulated should be the desired stock of
money and not the rate of interest. The objective should be to ensure that monetary expansion is neither
inadequate nor excessive as compared to the capacity of the economy to supply goods and services.
Riba
Riba means Interest. The word Riba is a Quranic term. One of its applications is "interest" or "usury" on loaned
money. The Quranic term is not limited to money but as well includes all loan transactions in which the debtor
returns a sum of goods in excess or above the original loan, be it money, eatable or any other item or goods;
anything in excess of original is considered riba. Riba is any increment on a loan or debt, either preconditioned
or in rescheduling; simply, unjust gains in trade or business, generally through exploitation. Riba is forbidden in
Islamic economic jurisprudence fiqh and considered as a major sin. The Qur'an states:
2:275: Allah has permitted trade and has forbidden interest
Muslim jurists have classified riba in two types:
1. riba al-nasiah, and
2. riba al-fadl.
Riba al- nasiah: 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-fadl: Islam, however, wishes to eliminate not merely the exploitation that is intrinsic in the institution of
interest, but also that which is inherent in all forms of unjust exchange in business transactions. 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.
Riba is considered amongst the Seven heinous sins, namely:

Believing in gods other than Allah.

Magic.
Murder.
Riba/usury.
Unlawfully taking orphans' money.
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Fleeing the battlefield.

Accusing chaste, pious women.

Socio-Economic Effect of Riba

Socio-economic effect is as follows:
If riba becomes norm of the society, it creates lots of social and economic upheaval in the society which
works only for rich against poor. Exampleo I need to travel from home to office on daily basis, and interest based banking system is not at all
functioning in the society, what shall I do now? I will use public transport to go to office,
sometime after few years I gather some money to buy a car (used or new) and travel by using
that car.
o I need to travel from home to office on daily basis, and interest based banking system is
functioning in the society, I take a loan from bank and buy the car and keep paying for another 35 years from my salary..
o Just imagine economic effect of condition b.
o Because most of people can afford to buy a car by using credit facility, cars will be expensive.
o Because, many people buy cars by using credit facility, I am being tempted to buy car even
though I do not need it.
o Because, many people buy cars by using credit facility, companies would make more expensive
and luxurious cars and tempt people to buy expensive cars.
o Expensive cars will be common in the society despite the lower level of income.
o Usage of public transport would reduce and eventually quality of public support also would
decrease.
Gradually society would convert into group of people always tend to exhibits the wealth, compete in
luxury and too low in contentment.
Banks would lure people spend the money which they do not own.
Multinationals would lure the people to buy products which they can't afford.
Everything above works only in favor of rich capitalists against poor.
Eventually the whole society is converted to a greedy, hedonist, exhibitionist society. They would
become more like economic animals instead of realizing their spiritual duty. Every day they would be
thinking only about paying their installments and work hard, try to earn more money, forget about
religious and family obligations.
What I have spoken above can be observed in daily life of people all over world.
Now, Just imagine that interest based banks are not there and recalculate each and every economic and
social factors. You will see that everything would be much better.
Objectives of Islamic Banking
The objective of Islamic Banking is not only to earn profit, but to do well and bring welfare to the people, Islam
upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good
of the society. Islamic Banks operate on Islamic principles of profit and loss sharing and other approved modes
of Investment. It strictly avoids interest which is the root of all exploitation and is responsible for large scale
inflation and unemployment. An Islamic Bank is committed to do away with disparity and establish justice in
the economy, trade, commerce and industry; build socio-economic infrastructure and create employment
opportunities. Philosophy of Islamic banking:
risk-sharing
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owning
handling of physical goods
involvement in the process of trading
leasing and construction contracts using various Islamic modes of finance

Objectives of Islamic Banking:

1. Banking without Riba: The main objective of an Islamic Bank is to Prohibit Muslims from dealing with
interest or usury (Riba) which has been strictly prohibited by Allah and to protect them from one of the
biggest sins.
2. The sharing of Profit and Loss: Islamic investment,
3. Wellbeing of the human being and society: CSR activities.
Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising banking policy and
framework on the basis of Islamic Shariah. This new thought was institutionalized at the end of the third quarter
of the century and emerged as a new system of banking called Islamic banking. The establishment of the
Islamic Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement. Since the
establishment of IDB, a number of Islamic Banking and financial institutions have been established all over the
world irrespective of Muslim and non-Muslim countries. Over the past few decades, the Islamic financial
industry has rapidly expanded worldwide. Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries. The Islamic financial market is estimated to
grow at annual rates averaging 15% in a year. Their rapid growth has gained considerable attention in
international financial circles where various market participants have recognized promising potentials. The
Islamic finance market has become extremely sophisticated as well as increasingly competitive. Today, virtually
all large western financial institutions are involved in Islamic finance whether through Islamic subsidiaries,
Islamic windows, or the marketing of Islamic products. In recent years, a range of new Islamic products have
appeared, such as Islamic bonds (or sukuk) and Islamic derivatives.
Bangladesh is the third largest Muslim country in the world with around 150 million populations of which 90
percent are Muslim. The hope and aspiration of the people to run banking system on the basis of Islamic
principle came into reality after the OIC recommendation at its Foreign Ministers meeting in 1978 at Senegal to
develop a separate banking system of their own. After 5 years of that declaration, in 1983, Bangladesh
established its first Islamic bank. At present, out of 49 banks in Bangladesh, 7 full fledged Islamic Banks and 19
Islamic Banking branches of 9 conventional banks are working in the private sector on the basis of Islamic
Shariah. Islamic banks in Bangladesh since their inception have been gaining popularity in spite of some
problems in their operation.
Deposit in Islamic Banking
Major types of deposits in Islamic Banking are:

Wadia
Qardh
Mudaraba

Wadia: Wadiah is a contract ( akad ) between the owner of goods and custodian of the goods. It protects the
goods from being stolen, destroyed etc and ensures the safe custody of the goods
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Modes of Operations:
Operates under the contract of Wadiah Yad Dhamanah (guaranteed custody).
The bank accepts deposits from its customers looking for safe custody and convenience.
The bank requests permission to make use of the customers funds for investment purposes.
The customers may withdraw their balances at any time.
Profit generated from the use of the customers funds belongs to the bank.
However, the bank may at its absolute discretion rewards the customers by declaring profits to them.
Under the contract of Wadiah, the custodian i.e. the Bank is not allowed to mention or to promise any
reward on the deposit received.
The owner/depositors too cannot demand any rewards or return from their Bank on their savings.
Wadiah is purely a contract on safe custody of goods without any promise on rewards or returns.
Qardh: Qardh literally means a debt or loan without interest. There should be no promise of return or reward
either by the borrower or the lender. The Bank may use an appropriate portion of its fund to provide benevolent
loans to certain selected customers. This is an act of social responsibility to help a person who is in need.
Modes of Operations:
The borrower is obliged to pay only the principal amount of the loan.
The Bank cannot demand the borrower to pay anything above the principal loan amount.
Mudaraba: Mudharabah is a contract between two parties, i.e. the owner of the capital and the entrepreneur.
The depositor, who is the owner of the capital places a specified sum of money with the Bank, (who acts as the
entrepreneur) for the purpose of participating in the profits made from the utilization of the fund.

Modes of Operations:
Operates under the contract of Mudharabah (Trustee Profit Sharing).
The Bank accepts deposits from its customers looking for investments opportunities.
The customer is the Capital Provider, while the Bank acts as the entrepreneur.
Both parties agree with the profit distribution/sharing ratio.
The customer does not participate in the management of the funds.
In the event of a loss, the customer bears all the losses.
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Profits generated from the use of the customers funds will be distributed according to the predetermined
ratio.

Types of Mudharabah-In term of the powers/authority given to the entrepreneur, Mudharabah may be
categorized into
1. Unrestricted Mudharabah
2. Restricted Mudharabah
Why Mudaraba and Musharaka are best Islamic investment
There are different modes of investment under the Islamic Shariah which can be classified into three
categories:
1.
2.
3.

Trading or Bai mode (Bai-Muazzal, Bai-Murabaha, Bai-Salam, Istisnaa)

Partnership or Share mode (Mudaraba, Musharaka)
Leasing/Izara mode (Hire purchase, Izara-Bil-Baia, Leasing)

Among the above the mudarabah and musharakah are the two forms of profit/loss sharing investment mode of
Islamic banking. In mudarabah, one party provides the capital while the business is managed by the other party.
Profit is shared in pre-agreed ratios and loss, if any, unless caused by the negligence or violation of the terms of
the agreement, is borne by the provider of capital. In musharakah, partners pool their capital to undertake
business. All providers of capital are entitled to participate in management but are not necessarily required to
do so. Profit is distributed among the partners in pre-agreed ratios while loss is borne by each partner strictly in
proportion to the respective capital contribution. The jurists of the early Islamic period closely examined the
features of mudarabah and musharakah as found in the pre-Islamic period and built a corpus of juridical
opinion in regard to the attributes that must be possessed by these two types of financial arrangements to make
them fully compatible with the ethos of the value system of Islam. The wealth of fiqh literature on the subject
has been of invaluable help in devising models of Islamic banking capable of functioning on truly Islamic lines
in the modern age.
So, these two types investment modes are on base of profit/loss sharing principle which maintains the value of
Islam thats why Mudaraba and Musharaka are called the best modes of Islamic investment.
Banks steps to minimize loss with Mudaraba and Musharaka

Examine partners historical data deeply

If bank provide capital bank should carefully examine the business project.
If bank receive capital bank should operate business with utmost care
Periodically visit the project
Close communication with other party
Support by advise/guideline/assistance etc.

Liquidity Surplus & Management

Liquidity is the cash or cash equivalent reserve of a bank to meet its current cash requirement. This liquidity is
nothing but a different between supplies of liquidity and demand of liquidity. Lists of supplies of liquidity and
demand of liquidity are as follows:
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When total supply of liquidity of bank is being greater than total demand of Liquidity then surplus of liquidity
exists which is called liquidity surplus. Moreover, mismatch of deposit maturity is also a factor for liquidity
surplus. Some other reasons for liquidity surplus in Islamic bank are as follow:

No lender of Last resort

Different shariah interpretation
No Islamic Money Market
Absence of Islamic secondary market
Slow development in Islamic financial instruments
Small no. of participants

Yeah, I think the main factor for liquidity surplus of Islamic bank is the lack of demand for investment from
good borrower.
Creating Good Borrower
Islamic bank can create good borrower to adjust liquidity surplus by the following ways:
Offer competitive rate for investment
Marketing about clear conception of Islamic modes of investment
Financing in SMEs with easy profit ratio
Financing to lady entrepreneur at almost free of cost
Circulate usefulness of Islamic investment modes
Motivate business entity take loan with Islamic financing system principles
Provide advise/support to prospective entrepreneur regarding new business etc.
Problems and Challenges of Islamic Banking in Bangladesh (Rural Area)
The Islamic banks in Bangladesh have been facing a number of challenges to carry its banking services to the
doorsteps of rural people. The challenges are:
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Controlling and Supervision by the Central bank on the Basis of Islamic banking
Problems Related to Micro Operation of the Islamic Banks
Lack of rural branch
Shortage of Skilled and Trained Manpower in Islamic Shariah banking
Unwillingness to posted in rural area by bank officers
Lack proper marketing about Islamic banking services to rural area
Liquidity and Capital
Financial Stability
Insufficient Legal protection
Lack of Unified Shariah Rulings
Shortage of Supportive and Link Institutions
Lack of Familiarity of Islamic Products and procedures in rural area.
Economic slowdown and Political Situation of the Country
Fraud-Forgery or corruption in Islamic Banks.
Minimum Budget for Research and Development.
Working Environment.

Solutions: to solve the above problems and the followings:

Opening branch in rural area

Need for Re-organization of the Whole financial System
New banking philosophy for the Islamic Banks
Future Policy and Strategy
Stepping for Distributional Efficiency.
Promotion of allocative Efficiency
Modern banking Policies and practices
Government and Central bank Responsibilities
Inter-Islamic Bank Co-operation and Perspective Plan

Types of Mudaraba
Mudarabah is a partnership between the "Capital Provider" and the "Entrepreneur," whereby the former receives
a share of the profit against his capital and the latter receives a share of the profit against his labor and
management. Jurisprudence defines Mudarabah as "A contract for sharing profits by providing capital from one
side and labor from the other".
Terms and elements of Mudaraba:
Contracting Parties: There are two contracting parties in Mudaraba The provider of the capital i.e. Shahib al-maal and
The Mudarib.
Capital: Capital is the amount of money given by the provider of funds i.e. Shahib al-maal to the
Mudarib with the purpose of investing it in the Mudaraba business.
Profit & Loss: Profit should be for both Shahib al-maal and Mudarib as per agreed ratio. Loss should be
borne by the Shahib al-maal.
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The main features of Mudaraba:

There should be two parties: Shahib al-maal (financer/Investor) and businessman is Mudarib (Who
provides skill and labour).
There should be written agreement/contract between the Bank and the businessman which includes
nature of business, period/time, sharing of profit etc.
Bank will finance and the businessman will run the business by providing his labour & skill.
The Bank will not interfere in the business.
The businessman will appoint employee(s) and he will run the business independently.
The Shahib al-maal /Financier/Investor reserves the right to check/verify the accounts of the business at
any time.
Sectors benefiting of Mudarabah:
The Commercial Sector: through providing finance for tenders and customers with expertise. The bank
fully finances the subject transaction and the client sells the goods;
The Real Estate Sector: through providing finance for buildings construction and the customer assumes
the construction works and the sale of units;
The Industrial Sector: through providing finance for purchasing production lines and the customer
following-up the operation thereof;
Mudaraba Contracts are generally divided as under:

Unrestricted Mudaraba and

Restricted Mudaraba

Unrestricted Mudarabah: Unrestricted Mudaraba may be defined as a contract in which the Shahib al-maal
permits the Mudarib to administer the Mudaraba fund without any restriction. In this type, the Entrepreneur has
the freedom of action without consultation with Capital Provider until the completion of Mudarabah Contract.
This type of Mudarabah is applied to investment deposits and accounts in Islamic banking.
Restricted Mudarabah: Restricted Mudaraba may be defined as a contract in which the Shahib al-maal restricts
the actions of the Mudarib to a specified period or to a particular location or to a particular type of business. In
this type, the Capital Provider imposes certain conditions on the Entrepreneur to secure his capital. This type is
applied to provide financing to customers. Al-Abbas, the uncle of The Prophet Mohammad (Peace be upon
Him) practiced this type when he paid capital to an entrepreneur by way of Mudarabah conditioned to the
Entrepreneur not travelling by sea, trade in cattle or land up in a valley, and The Prophet (Peace be upon Him),
endorsed this practice.
Islamic Banks Foreign exchange
Yeah, foreign exchange operation of Islamic bank is different from foreign exchange operation of conventional
bank. They are:

Conventional bank can foreign exchange by future, forward, option etc. modes whereas Islamic bank
can do foreign exchange [Exchange of currency (Bai` Sarf)] only spot basis.
Conventional bank provides importers import finance and exporter assistance facility whereas Islamic
provides murahaba import L/C, Murabaha Import Bills and murabaha port import (MPI) facilities.
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Conventional Bank: Foreign exchange (FX) is an important activity in modern economy. A foreign exchange
transaction is essentially an agreement to exchange one currency for another at an agreed exchange rate on an
agreed date, it provides protection against unfavorable currency exchange rates and helps businesses associated
with activities in a foreign currency to set a form of currency risk exposure. And when using techniques such as
foreign exchange hedging capabilities, businesses can protect against adverse currency movements at a future
date. FX transactions cover foreign currency payment transactions and fund transfers involving different
currencies and countries and transactions such as travelers cheques, foreign currency cash, foreign currency
drafts, foreign currency fund transfers/remittances, investments and trade services.
Islamic Bank: Islamic banks exchange currencies on the spot in transactions such as a bank transfer or
remittance expressed in a foreign currency, payment for goods imported from another country, payment for
services billed in a foreign currency, in the case of a sell or a purchase of a foreign currency in cash or travelers
cheque or bank draft against another currency, or when a client deposits a cheque or bank draft made out in a
foreign currency and requires payment in local currency. In addition to spot transactions, an FX transaction may
be undertaken by banks on the basis of forward contracts, futures contracts, option contracts, swap contracts and
currency arbitrage. Even though, some of these transactions are controversial as Islamic financial instruments,
because it is arguable that the element of speculation and interest is built into these contracts. Also, while there
are normally no up-front costs involved with FX transactions, Islamic banks still derive a financial benefit by
incorporating a margin into the transaction or the contract rate. This means that the banks rate may be different
from the market rate prevailing at that time, whereby the bank makes a profit on a transaction.
Murabaha Post Import (MPI)
The importers apply for investment facility against imported goods after shipment for payment of the invoice
values of the goods to the seller/supplier including custom duty, VAT and other expenses. In such a case, Islamic
banks allow a Bai-Murabaha investment facility under single deal concept. It is so called as the Letter of Credit
which is called Mudaraba Post Import (MPI). Bills and the handling of Post-shipment are settled under one
agreement while opening the letter of credit for importing the goods. Procedures

Verify the sanction limit

Office note
Document Endorse favoring the Importer

Accounting procedure for purchase price, profit and sale price

Price payable to the supplier

Other expenses related with purchase
o Conveyance- TA/DA
o Commission payable to the agents.
o The expenditures in connection with suppliers payment.
o Transportation cost up to the Banks godown.
o Transit Insurance and other expenses.
o Godown rent and salary of officials etc. incurred before sale of goods.

Additional expenses

Duty
VAT
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License fee
Commission for C&F agent etc.

Shariah Council of Islamic Bank

Role of Shariah Council: With demand for Shariah-compliant financial services growing at a faster rate than
conventional banking, Shariah council play a vital role in helping to develop new procedures and products to
position the Islamic bank to adapt to industry trends, and customers expectations. In fact, Islamic financial
products must be structured to conform to strict legal and Shariah requirements. Shariah council play an
important role in that sense as they help ensuring that the issued financial products strictly adhere to the
principles of Shariah and offer constructive and creative recommendations to maintain Islamic banking system
in line with the continued challenges of working in a sophisticated and ever-changing financial environment. In
addition, by showing flexibility based on their Ijtihad, Boards scholars help to respond to changes and diversity
in day to day life by taking into consideration concepts of custom, general good, utility or necessity while
remaining within the Islamic law boundaries. So, in we can simplify the role of Shariah Council byA Shariah council certifies the Islamic financial products as being Sharia-compliant. It thereby
reviews the related contracts and provides an opinion about whether those agreements would be
permissible under Islamic law.
Power and Functions of Shariah Council:

To advise the Board on Shariah matters in its business operation

To endorse Shariah Compliance Manuals
To endorse and validate relevant documentations
To assist related parties on Shariah matters for advice upon request
To provide written Shariah opinion
To investigate functions whether or not this they include non-permissible transactions such as Riba
To determine the Shariah compliance of products and the investments
To carry their own independent audit regarding Shariah compliance
To create alternative framework of banking services which conform to the principles of Islam

To issue a Fatwa(s) with the rules and principles of Shariah.

To devote time and effort to devising more Sharia-compliant transactional procedures, templates and
banking products
Analysing contracts and agreements concerning the Banks transactions, as submitted by the Chairman
of the Board of Directors or any department/branch within the bank or requested by the Board itself so
that Sharia compliance can be evaluated and maintained
Analysing administrative decisions, issues and matters that require the Boards approval.
Supervising Sharia training programmes for the Banks staff.
Preparing an annual report on the Banks balance sheet with respect to its Sharia compliance.

Relation between Board of Directors of a bank and Shariah Council:

In Shariah council members of board of directors with appropriate quality should be included
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Meeting of Shariah Council with board of directors must be arranged within a specific time frame
Board of directors must present new issued on shariah council for examine for shariah compliance
Audit report of Shariah council should be presented among board of directors
Shariah council should provide guidelines regarding up to date situation etc.

Liquidity Management in Islamic Bank

Liquidity management is a crucial part of asset-liability & risk management framework of the Banking industry,
failure to address the issue may lead to dire consequences, including instability of the Bank. It is a process of
making properly & timely bridge of Banks sources & uses of funds at reasonable cost at all times. For Islamic
financial institutions, liquidity management is a big challenge due to limited development of the Islamic money
market to raise and deployment of funds to/from the inter-Bank money market (Wholesale market) and Global
Market. Whereas the money market is an important component of the liquidity management framework as it is
the first avenue to manage liquidity of the Bank. Accessing the liquidity Position of the Bank:

Maintenance of CRR
Maintenance of SLR
Cash Flow cum Balance sheet

Islamic bank manage its liquidity by supply and demand of deposits (Previous Chart of supply and demand of
deposit)
Why SLR of Islamic Bank 10.50% i.e. lower than conventional bank
The central bank of Bangladesh has increased the statutory liquidity ratio (SLR) by half a percentage point to
10.5 percent for Islamic banks to curb inflationary pressures on the economy. The new SLR rules for the
Islamic banks came into effect from 16, May,2010, a senior official of the Bangladesh Bank, the countrys
central bank, told AHN Media in Dhaka on 17 ,May ,2010.
Islamic banks maintain only 10.5 percent SLR lower than conventional scheduled banks as they cannot
purchase treasury bills and bonds that involve receipt of interest. Shariah rules ban payment or receipt of
interest by any individual or institution.
Characteristics Islamic Bank

An Islamic bank is a full service intermediary financial institution that abides by the Islamic law. The
commitment of Islamic finance to abide by the Islamic law determines its main characteristics.
The underlying principle of Islamic banks is the principle of justice which is an essential requirement for
all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary
share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The
principle of fairness and justice requires that the actual output of such a project should be fairly
distributed among the two parties. If a financier is expecting a claim on profits of a project, he should
also carry a proportional share of the loss of that project.
In contrast with conventional finance methods, Islamic financing is not centered only on credit
worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project
are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented
under profitability.
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One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral
values with its banking operation. The ethical and moral consideration of Islamic banks cannot be
detached and their behavior should be consistent with the moral and ethical standards laid down by the
Islamic Shariah.
Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services
and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as
casinos and pornography, irrespective of whether or not such goods and services are legal or not in a
given country.
In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and
interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of
financing. This adds another merit for Islamic banks since there is a beneficial impact on the
productivity in the economy as it reduces the social and economic cost of such harmful products and
activities.
Another important characteristic which forms the basis for the development of Islamic banks is the
relationship with depositors. They deal with their customers on investment grounds rather than a predetermined fixed interest rate. They invest the money of their depositors on high profitable projects after
going through a strategic analysis in order to give a substantial return to their depositors.
Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and
bring them closer to the real market. The nature of the financial intermediation of Islamic banks
significantly defers from conventional banks and it is in harmony with real market and developmental
changes in it.

Role of Islamic Banks in Bangladesh

Yeah, Islamic bank in Bangladesh playing an important role in the banking areas of Bangladesh such as

Islamic Banking brings economic empowerment to peoples of Bangladesh in the areas of operation
It helps businesspersons, through financial aid, to remain competitive
It also leads towards the creation of job opportunities for Muslims as well as Non-Muslims
It is a basis for expansion into the Islamic Economic System since the establishment of each Islamic
Bank is also the creation of another bank to co-operate with others
It provides investors with flexibility in the types of accounts within which they could channel their
investment
It thus links capital to labor and reduces expenditure, to levels, related with the type of investment, the
value thereof and its period.
Islamic Banks enable the saving of monetary resources for the future as shown by the Yusuf (A.S.) and
in a methodology approved by Allah.
This thus leads to the protection of wealth
Sponsoring Islamic activity & the mobilization of resources for International Islamic Support not only
investment, but moral as well (CSR activities)
Islamic Banks facilitate international and local trade, provide foreign exchange services and profitably
invest

Principles of Islamic Economic System

1. Honesty and compassion in monetary matters, clean living and honest trade
2. Kindness and compassion in monetary dealings
3. Wealth
14

4.
5.
6.
7.
8.

Spending
Charity
Investment
The Baitul-Maal (Zakat)
Interest
a. Cancellation of Riba
b. The person who takes or gives interest
9. Debts
a. Repayment of debts
b. Debts of the deceased and the severity of debt (debt payment before death)
c. Discharging a debt in a better way than the original debt obligation (debt pay is better than zakat)
d. Procrastination in payment (late payment)
10. Gharar (prohibited i.e. sell of guilty item)
Objectives of Islamic Economics

Economic well-being and the moral norms of Islam;

Universal brotherhood and justice;
market mechanism and good governance
Equitable distribution of income; and
Freedom of the individual within the context of social welfare.

This list of goals is by no means complete but should provide a sufficient framework for discussing and
elaborating the Islamic economic system and highlighting those characteristics which distinguish the Islamic
system from the two prevalent systems capitalism and socialism.
Principle of Islamic Financial System
The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as
shariah, governing economic, social, political, and cultural aspects of Islamic societies. Shariah originates from
the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah)
by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic jurisprudence
within the framework of the Quran and Sunnah. The basic principles of an Islamic financial system can be
summarized as follows:

Prohibition of interest: Prohibition of riba, a term literally meaning an excess and interpreted as any
unjustifiable increase of capital whether in loans or sales is the central tenet of the system. More
precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of is considered
riba and is prohibited.
Risk sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors.
The provider of financial capital and the entrepreneur share business risks in return for shares of the
profits.
Money as potential capital: Money is treated as potential capital - that is, it becomes actual capital
only when it joins hands with other resources to undertake a productive activity. Islam recognizes the
time value of money, but only when it acts as capital, not when it is potential capital.
Prohibition of speculative behavior: An Islamic financial system discourages hoarding and prohibits
transactions featuring extreme uncertainties, gambling, and risks.
15

Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information as a
sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard.
Shariah approved activities: Only those business activities that do not violate the rules of shariah
qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and
casinos would be prohibited

Objectives of Islamic Financial System

To establish interest free or Islamic banking

To advocate risk sharing, individuals rights and duties, property rights, and the sanctity of contracts.
To provide Islamic guideline in capital formation, capital markets, and all types of financial
intermediation.
To establish economic activities on the basis of ethical, moral, social, and religious dimensions
To enhance equality and fairness for the good of society as a whole.
To develop absolute prohibition of the payment or receipt of any predetermined, guaranteed rate of
return.
To close the door to the concept of interest and precludes the use of debt-based instruments.

The differences between conventional and Islamic economic system

In Islam there is no conflict between matter and soul, as there is no separation between economy and religion.
Although Islamic economics is young in comparison with conventional economics, its characteristics, value and
essence are appreciated by Muslims and the non-Muslims. The differences between conventional and Islamic
economics are as listed below.

The Role of Moral Values: While conventional economics generally considers the behavior, tastes and
preferences of individuals as given, Islamic economics does not do so. It places great emphasis on
individual and social reforms through moral uplift.
The Importance of the Hereafter: The Hereafter is a concept which is completely ignored by
conventional economics, but it is one which is greatly emphasized by Islam and other major religions.
Rational Economic Man: Conventional economics equates rationality with the serving of self-interest
through wealth maximization where in Islamic economics rationality is defined in terms of the overall
individual as well as social wellbeing.
Positivism: Positivism in the conventional economics sense of being entirely neutral between ends
whereas in Islamic economics all resources at the disposal of human beings are a trust from God, and
human beings are accountable before Him.
Pareto Optimum: The concept of Pareto optimum does not, therefore, fit into the paradigm of Islamic
economics. This is because Pareto optimality does not recognize any solution as optimum which is fit to
conventional economics.
Social Obligation: Islam makes it a religious obligation for Muslims to sacrifice for the poor and the
needy- by paying zakat. This is in addition to the taxes that they pay to the government which is not
exist in conventional economic system.

Money is not a commodity

In the current financial system right now, money is regarded as a tradable commodity. This is in contrast with
Islamic views who do not accept the functions of money as a commodity. That's because money does not
qualify as a commodity. There are 4 factors that distinguish the money to commodities.
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Firstly, money has no intrinsic utility. In contrast to commodities, money cannot be eaten, worn, or used
directly. Money can be exchanged only with a commodity, and commodities that will be eaten, worn or
used. In economic terms, money only has value in exchange as commodities having value in exchange
and value in use at once.
Second, money does not need the quality to determine its value; in terms of paper currency Taka 100 an
old issue of paper money in 2007 with a new Taka 100 published in 2009 has the same purchasing
power. Another case with commodities, for example, output of the Honda Jazz 2007 to January 2009 the
output has a different price. This indicates a difference in quality between the two cars on top of which
reflected the value and the price difference.
Third, the money does not require specification of the validity of transactions, while commodities have
specific properties when the validity of transactions. For example, if we want to buy the goods we will
choose the things we want to taste us, like color, other complementary accessories. That is, if the seller
offers the same goods but they were not in accordance with our tastes may be we will refuse. But it is
different with the money that is not specific. Any combination of currency note for total amount is
acceptable.
There is one additional difference between commodity money, especially with fiat money we use today.
Paper money (fiat money) to current has no intrinsic value (intrinsic value). Paper money became legal
tender by law issued by a country that declared the validity of the money. This shows that the acceptance
of paper money as a means of payment is only due to the government trust factor that ensures the
validity of these bills. That is, if the trust is lost or reduced the value of the money will be weakened due
to more people off, by selling money, than to have it. Because obviously, have no intrinsic value.

So, money is a medium of exchange.

Zakat and Wealth Distribution
According to the Islamic Law of Succession and Inheritance, distribution of an Estate will only commence after
funeral expenses, debts and bequests (if any) made to non-heirs - which will not exceed one-third (1/3) of the
Estate after debts and funeral expenses - have been settled. Thereafter, all assets form part of the Net Estate and
will have to be distributed according to the Islamic Law of Succession and Inheritance.
The net estate will be divided into one hundred and forty-four (144) equal shares and distributed as follows:

Wife receives 18 shares

Each son receives 34 shares
each daughter receives 17 shares and
mother receives 24 shares
50% of the business in partnership will form part of the estate and all the heirs of the deceased brothers
will be partners in the business according to their share from the estate. The youngest brother may
mutually agree with
the eldest brother to purchase their shares from the business

Zakah system provides a permanent mechanism from within the economy, to continuously transfer income from
the rich to the poor and that once correctly assessed, promptly collected and properly disbursed, it plays the role
of solving dangerous problems such as poverty, unemployment, catastrophes, indebtedness, and inequitable
income distribution in a Muslim society. The paper recommends that Muslims rich should be encouraged to
discharge their obligations
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Zakat
Zakat is the Islamic concept of tithing and alms. It is an obligation on Muslims to pay 2.5% of their wealth to
specified categories in society when their annual wealth exceeds a minimum level (nisab). Zakat is one of the
Five Pillars of Islam.
Principal of Zakat:
1, Economy well being within frame work of model of Islam.
2, Universal brotherhood and Justice.
3, Equitable distribution of wealth.
4, Individual freedom within context of social welfare.
Effect of Zakat/Zakat for poverty alleviation:

Pure transfer from rich to poor.

Direct incentive on the poor people.
No interest and no payback.
Hardcore poorer peoples are addressed by Zakat.
Those who are not addressed by any other source, Zakat addressed to them.
Zakat does not increase poverty.
Helps poor to raise fund to do any income generating activities
Reduce unemployment problem
Making down flow of money.
Bridge between rich and poor.
Zakat reduces social crime.

There are eight categories of people (asnaf) who qualify to receive zakat funds, according to the Qu'ran:

Those living in absolute poverty (Al-Fuqar')

Those who cannot meet their basic needs (Al-Maskn)
The zakat collectors themselves (Al-milna 'Alaih)
Non-Muslims who are sympathetic to Islam or wish to convert to Islam.(Al-Mu'allafatu Qulbuhum)
People whom one is attempting to free from slavery or bondage. Also includes paying ransom or blood
money (Diyah). (Fir-Riqb)
Those who have incurred overwhelming debts while attempting to satisfy their basic needs (AlGhrimn)
Those working for an Islamic cause (F Sablillh)
Travelers in need (Ibnus-Sabl)

Mudaraba profit distribution

Bank:Customer = 65:35
Conventional provide interest as per predetermined ration whereas Islamic bank provide profit as per income
generating from.
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(General Banking Training Materials)

Meaning and Scope of Islamic Economics
The Islamic economic system is defined by a network of rules called the Shariah. The rules which are
contained in the Shariah are both constitutive and regulative, meaning that they either lay the rules for the
creation of economic entities and systems, as well the rules which regulate existing one. As an integral part of
the revelation, the Shariah is the guide for human action which encompasses every aspect of life spiritual,
individual, social, political, cultural, and economic. It provides a scale by which all actions, whether on the part
of the individual agents, society, and the state, are classified in regards to their legality.
Thus there are five types of actions recognized, namely:

obligatory
recommended
permissible
discouraged and
forbidden

The Islamic economic system is derived from the only source that is capable of satisfying the needs and desires
of everyone, without resulting in chaos. The source of these rules is our Creator. Islam, coming from the
Creator, does not deny the needs of humans, but instead, it sets guidelines on how these needs and desires are to
be fulfilled. As human beings, we have the freedom to use our minds to prove that a Creator does exist, and that
Islam is the Creator's mercy to us to guide our lives and live it with purpose. Once we accept Islam freely, we
then follow the rules of Islam. This shows how Islam defines the freedom in our lives. Freedom is living by the
best system possible, not creating a system that destroys the lives of human beings.
The Sources of Islamic Economics
The Islamic economic system is defined by a network of rules called the Shariah. The basic source of the
Shariah in Islam is the Quran and the Sunnah, which include all the necessary rules of the Shariah as guidance
for mankind. The Sunnah further explains these rules by the practical application of Prophet Muhammad, may
the mercy and blessings of God be upon him. The expansion of the regulative rules of the Shariah and their
extensions to new situations in later times was accomplished with the aid of consensus of the scholars,
analogical reasoning - which derived rules by discerning an analogy between new problems and those existing
in the primary sources - and finally, through textual reasoning of scholars specialized in the Shariah. These five
sources constitute the components of the Shariah and Shariah is the rules of Islamic economic system

the Quran,
the Sunnah,
consensus of the scholars,
analogical reasoning, and
textual reasoning

And these components are also used as a basis for governing economic affairs. In summary, we can say that the
Islamic Economic system is based upon the notion of justice. It is through justice that the existence of the rules
governing the economic behavior of the individual and economic institutions in Islam can be understood.
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Justice in Islam is a multifaceted concept, and there several words exist to define it. The most common word in
usage which refers to the overall concept of justice is the Arabic word adl. This word and its many synonyms
imply the concepts of right, as equivalent to fairness, putting things in their proper place, equality,
equalizing, balance, temperance and moderation.
Difference between Interest and Profit

Interest is an increment in a loan or a debt, profit is a difference in the cost price and sale price of a good
or service.
Interest is the "price of money" as usually described but it is better to call it the price of debt. This is
what is prohibited in our religion; Profit is earnings by doing business with commodities instead of
money
Any presumption on the cost is mingled with interest, profit is not predetermined
Any contractual (pre-conditioned) increment in a loan is interest, such a statement covers all what is
mentioned above and any excuse for inflation, cost, etc. does not change the fact; there will be a point
where supply meets the demand and the price will settle under certain conditions where a minimum
profit is allowed to funds providers that make them continue their business
Interest taker is not a partner of business; profit taker is a partner of business

Islamic Banking
An Islamic bank is a banking institution whose scope of activities includes all currently known banking
activities in accordance with the principles of the Shariah.
Functions: An Islamic bank is a deposit-taking banking institution whose scope of activities includes all
currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities
side, it mobilizes funds on the basis of a Mudarabah or Wakalah (agent) contract. It can also accept demand
deposits which are treated as interest-free loans from the clients to the bank. and which are guaranteed. On the
assets side, it advances funds on a profit-andloss sharing or a debt-creating basis, in accordance with the
principles of the Shariah. It plays the role of an investment manager for the owners of time deposits, usually
called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an
integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way
that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the
formula used for sharing the net earnings with the bank.
Banker Customer Relationship in Islamic Bank Vs Conventional Bank

Abolition of Interest from transaction: Interest is considered a main deficiency factor in the
relationships of a banker and a customer, under conventional banking system. The debtor-creditor
relationship of a banker and a customer is frequently threatened by this factor whereas banker-customer
relationships in Islam are established on a profit/loss income sharing arrangement instead of interest.
The Islamic Shariah prescribes how a society is to be organized, what will be the relationships of its
members, and how the affairs of the members are to be conducted.
Assurance of Distributive Justice: The Conventional banking system does not ensure distributive
justice of investment financing. Distributive justice means distribution of risk and returns between the
financier whereas in Islamic bank any return on capital in the form of interest is completely prohibited in
Islam, there is no objection in getting a return on capital if the provider of capital enters into a
partnership with a worker or entrepreneur and is prepared to share in the risks as well as the gains
between them.
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Supply of Venture Capital: The relation between a conventional banker and a potential entrepreneurial
customer is not properly established due to the fact that lending by conventional banks is collateraloriented as a result, venture capital cannot be provided to the innovative entrepreneur, who has a new
idea for creating products or services but in Islamic bank brought a golden opportunity to the potential
entrepreneurial customer to establish a relationship with the banker without security under Mudaraba,
Musharaka and other lending principles of the Islami Bank within the framework of the Shariah can
easily contribute to the GDP.
Elimination of Banking Fraud: Bank frauds are on the increase. The customers deposited money has
fraudulently been drawn from the bank. It is the bankers contractual obligation to pay depositors
money from his own sources. This resulted in deterioration of relationships in conventional bank
between a banker and a customer but in Islamic banking system Religion plays a dominant role in
building up the character of men. Religious values among the customers by imparting training to them
so that they possess a mind free of fraud. It recognizes that a religious man always keeps himself away
from fraud.
Application of Zakat: There is no zakat pool in conventional bank among banker customer relationship
but Islamic bank has Zakat pool out of its own resources calculated on capital and reserves. Customers
also can deposit their Zakat funds to the Islamic bank Zakat pool. This arrangement of Zakat ties the
religious relationship of a banker and a customer.
Rendering Improved Customer Service: Better customer services can ensure better relationship
between a banker and a customer. Logically, customers can claim some services as debtors, creditors,
buyers and some as fellow in conventional bank whereas in Islamic bank customers are still some more
as fellow men in general. Islam is well known as a complete code of life, based essentially on the many
verses of the holy Quran and many sayings of the Prophet (peace be upon him). So it is the duty of an
Islamic Bank to satisfy the needs of the above parties.
Charity Functions: The resources of a conventional bank are used for the purposes and activities having
high social priority but for commercially viable projects only. These banks have no operations designed
for charity-based projects. So, the conventional bankers have limited relationships with their customers
but in Islamic there are many charity functions which explore banker customer relationship upon a level.

SHORT NOTE
Diminishing Musharaka
Musharaka in Arabic means "partnership", so a diminishing musharaka is a diminishing partnership, in the sense
that a home buyer and his/her bank are partners in the purchase of the home. The diminishing musharaka
contract generally provides for the home buyer to contribute a deposit, while the bank pays the rest, and the two
become co-owners of the home. The home buyer lives in the house, paying rent to the bank as well as regular
scheduled purchases of "units" of the bank's share of the house. As the bank's ownership decreases/diminishes,
the rent decreases accordingly, until the home buyer has bought out the bank and owns the house outright.
In Arabic it is called Shirkat-ul-Mutanaqisa. Diminishing Musharaka is just a Musharaka with an additional
feature of decreasing ownership of one party. This differs from normal Musharaka, Where ownership ratio does
not change. The closest term in conventional finance is redeemable capital.
Capitalism, Communism and Islam
Capitalism & Islam:

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Capitalism is based on the concept that economics is that which examines man's needs, which are
unlimited and how to satisfy these unlimited needs. The system depends upon the separation of church
and state or in other words, the separation of the Creator from life's affairs. The concept of freedom
plays a major role in the Capitalist ideology. Freedom is guaranteed by the state, therefore, man is totally
free to satisfy his needs in any manner possible as long as he does not legally infringe on the freedom of
others BUT The Islamic economic system is derived from the only source that is capable of satisfying
the needs and desires of everyone, without resulting in chaos. The source of these rules is our Creator.
Islam, coming from the Creator, does not deny the needs of humans, but instead, it sets guidelines on
how these needs and desires are to be fulfilled. As human beings, we have the freedom to use our minds
to prove that a Creator does exist, and that Islam is the Creator's mercy to us to guide our lives and live it
with purpose.

Capitalism is also based on the theory of relative scarcity. This means that there always has to be a real
or as in the majority of cases, a forces insufficiency of commodities to meet the needs of the people.
Some people are left without the fulfillment of their basic needs of food, shelter, and clothing while
others seem to have too much of one or more. This theory divides the society such that a small
percentage of people hoard almost all the wealth while the rest of society struggles to have a home and
food BUT Islam does not share this idea of relative scarcity. Islam does not allow this to happen. The
basic needs are guaranteed to every Muslim and non-Muslim living under the rule of Islam. The Islamic
economic system is not based on price as the method of distribution of goods, but rather, how to
distribute funds and benefits to all citizens. With the basic needs satisfied, everyone can live a happier
life because people are allowed to search for the livelihood that suits them best and makes them the
happiest.

Communism & Islam:

It is next to impossible for men to exert themselves towards the realization of their economic ends in the
way communism suggests and then be able to pay any attention to the moral values or betterment of
their own spiritual life, because the exaggerated importance given to the economic aspect in communism
favors but a one-sided development only. It may be likened to an outgrowth of human heart or liver the
invariable result being that such an outgrown organ of human body hampers the proper development or
functioning of other parts. Islam, therefore, gives foremost importance to spiritual power, for it does not
want to deprive man of the great and miraculous benefits it can bring to him although it does not at the
same time sit idle nor does it refuse material means to realize its end. Islam does believe in miracles but
favors not the idle waiting for the spiritual miracles to happen. Its constant guiding principle rather is:
God restrains with Authority that which is not restrained by the Qur'an".
Islam holds that the real duty of a woman is the propagation of the human race. It, therefore, does not
encourage her to leave her queendom and work in factories and fields, except, of course, in cases of
genuine need, that is to say, in case she has no male bread earner, be he her father, brother, husband or a
near one. But communism makes it obligatory for woman to go out and work in factories or fields for as
many hours as the men do. Even if we overlook for the time being the underlying communist philosophy
which refuses to recognize any difference between the functions as well as the psychological make-up of
the sexes.
The communist economy rests on a full-fledged dictatorship of the proletariat, which means that the
state alone decides as to the functions performed by different citizens without any regard whatsoever to
their respective aptitudes or likings. The state alone controls all thought, acts, associations as well as the
ends to be realized by them. At this point we must also differentiate between the dictatorship of a single
ruler and the dictatorship of the state (proletariat). For, in the case of a ruler it is just possible that he be
of a congenial, modest character with the welfare of his country very dear to his heart and May even at
22

times condescend to consult the representatives of the people-real or false-before deciding a matter or
enacting a law. But all these possibilities are simply out of question in the case of a dictatorship of the
proletariat or state, concerned as it primarily will be with the economics alone and the realization of such
ends, as suit it, with an iron hand. That is what is signified by the very name-dictatorship of the
proletariat.
Zakat, Ushr and Tax
Zakat: Zakat is one of the Five Pillars of Islam, is the giving of a fixed portion of one's wealth to charity,
generally to the poor and needy. Zakat is considered to be a religious duty, and is expected to be paid by all
practicing Muslims who have the financial means (nisab). In addition to their zakat obligations, Muslims are
encouraged to make voluntary contributions (sadaqat). The zakat is not collected from non-Muslims, although
they are sometimes required to pay the jizyah tax. There are eight categories of people (asnaf) who qualify to
receive zakat funds, according to the Qu'ran:
Those living in absolute poverty (Al-Fuqar')
Those who cannot meet their basic needs (Al-Maskn)
The zakat collectors themselves (Al-milna 'Alaih)
Non-Muslims who are sympathetic to Islam or wish to convert to Islam.(Al-Mu'allafatu Qulbuhum)
People whom one is attempting to free from slavery or bondage. Also includes paying ransom or blood
money (Diyah). (Fir-Riqb)
Those who have incurred overwhelming debts while attempting to satisfy their basic needs (AlGhrimn)
Those working for an Islamic cause (F Sablillh)
Travelers in need (Ibnus-Sabl)
Ushr: To use "Ushri" land for agriculture thereby getting benefit there from will make Zakaat compulsory on
the produce. This Zakaat on agricultural produce is called "Ushr" (tithe) i.e. one-tenth of the produce is due in
most of cases and in some cases half of it (one-twentieth) is charged. Ushr is due on every kind of cereals like
wheat, barley, millet, paddy etc. dry fruits like walnut, almond etc. and vegetables like melon, water-melon,
cucumber, brinjal irrespective of less or more cultivation. Ushr or half Ushr, as the case may be, will be due on
total produce of agricultural commodities on which Ushr or half Ushr is due without deducting the expenses of
cultivation like peasants' labour, ploughing charges and price of seeds etc. Completion of full one year is no
condition for Ushr's being due. If cultivation is done on the land more than once in a year Ushr will be due on
each cultivation. Ushr is due on agricultural produce (not on person). If one dies before paying Ushr and his
crop is still there, Ushr will be charged on the produce. If crop is sold before it is ready for harvest then the
buyer should pay Ushr and if it is ripe at the time of sale then the seller should pay Ushr. In case, both the land
and crop are sold or only land is sold and there is also enough time to cultivate the land once more before the
completion of one year then Ushr is due on the buyer otherwise on the seller.
Tax: A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the
government a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an
enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by
government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid,
supply, or other name.
Types of Tax

Income tax
Capital gains tax
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Corporate tax
Social security contributions Tax are
Taxes on payroll or workforce
Taxes on property
Expatriation tax

Taxes on goods and services are

Value added tax (Goods and Services Tax)

Sales taxes
Excises
Tariff

Modes of Islamic Investment

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Halal and Haram in Islamic Banking
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Hawala
Hawala is an informal value transfer system based on the performance and honor of a huge network of money
brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and South Asia. It is
basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional
banking or financial channels. In the most basic variant of the hawala system, money is transferred via a
network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a
successful definition of the hawala system that is used is money transfer without money movement. Hawla is
like hundi where sender send money with a password which used by receiver to receive money.
Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far
lower commission than that charged by banks. Its advantages are most pronounced when the receiving country
applies unprofitable exchange rate regulations or when the banking system in the receiving country is less
complex. Moreover, the transfers are usually informal and not effectively regulated by governments, which are
a major advantage to customers with tax, currency control, immigration, or other concerns.
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic
international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics
and Sharia'a standards for Islamic financial institutions and the industry. It was founded in 1991 and has so far
issued a total of 42 standards covering the areas of accounting, auditing, ethics, and governance for Islamic
financial institutions. The AAOIFI has approximately 200 members from 45 countries, including central banks
and Islamic financial institutions. The AAOIFI's standards are not binding on its members. However, several
countries have adopted their standards and others have issued guidelines based on these standards. The AAOIFI
triggered controversy in 2008 when it claimed that more than 80% of sukuk issued did not comply with Sharia
principles and tightened the standards that sukuk must meet to comply with Sharia. However, despite this
announcement sukuk are still being issued that may not comply with their strict standards.
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Bangladesh Bank guideline Terms used in Islamic Banking Operations

The following terms as used in this guideline, if not repugnant to the subject or affairs, shall have the following
meaning:

"Islamic bank" means such a banking company or an Islamic banking branch(es) of a banking company
licensed by Bangladesh Bank, which follows the Islamic Shariah in all its principles and modes of
operations and avoids receiving and paying of interest at all levels.
"Islamic Banking Business" means such banking business, the goals, objectives and activities of which
is to conduct banking business/activities according to the principles of Islamic Shariah and no part of the
business either in form and substance has any elements not approved by Islamic Shariah.
"Depositor" means someone who holds with any Islamic Banking Company any account namely
Current account based on Al-Wadiah principles, Savings or long and short term deposit accounts under
Mudaraba principles.
f. "Investment" means any such modes of financing which Islamic Bank Company does in accordance
with principles of Shariah or as per the Shariah approved modes like Mudaraba, Musharaka, BaiMurabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under Shirkatul Melk, etc.
g. "Client" means such a person or institution who/which has any business relationship with Islamic
Banking Company.

The following will be the broad criteria for consideration of setting up of the scheduled Islamic Commercial
Bank:

The proposed bank company will be a public limited company and a minimum of 50% share shall be
offered to the public.
All the financial transactions of the banking company shall be conducted based on the principles of
Islamic Shariah.
The ways and means of resource mobilization, expansion and nature of business transactions have to be
stated in the application form.
The applicant(s) shall indicate expertise and other facilities available with them for ensuring operation of
their Islamic Banking business as per Islamic Shariah.
The banking company, to commence business, shall raise a minimum paid-up capital of Tk.2.00 billion
and shall at all times maintain the required capital adequacy ratio, as prescribed by the Bangladesh
Bank.
The minimum shareholding stake of each sponsor shall be Tk.2.5 million and the maximum shall be
10% of the proposed bank's total share capital. This ceiling of 10% applies to an individual, company or
family member, either severally and jointly or both.

Investment sukuk
Investment sukuk are certificates of equal value representing, after closing subscription, receipt of the value of
the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs
and services, or equity of a given project or equity of a special investment activity. One of the differences
between these certificates and shares is that shares are issued only by stock companies which have been granted
by law an independent juristic personality. This is not necessary in the case of investment sukuk. Therefore,
these certificates are defined in this Standard as investment sukuk to distinguish them from shares and loan
bonds.
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Characteristics of investment sukuk Investment sukuk are documents issued, in equal value, either in the name of the owner or of the bearer
to establish the right of the certificate owner or rights and obligations such certificate is representing.
Investment sukuk represent a common share of ownership of assets available for investments, whether
they are non-monetary assets, usufructs, a mixture of tangible assets and usufructs and monetary assets,
such as receivables and cash. These sukuk do not represent a debt owed to the issuer by the certificate
holder.
Investment sukuk are issued on the basis of a Sharia-compliant contract in which case the issue of
trading of these sukuk are governed by the rules of respective contract.
The trading of investment sukuk is subject to the terms that govern trading of the rights they represent.
The owners of these certificates share the return as stated in the subscription prospectus and bear the
losses, each according to his respective share of ownership.
Types of investment sukuk Certificates of ownership in leased assets
Certificates of ownership of usufructs
Salam certificates
Istisnaa certificates
Murabaha certificates
Participation certificates
Muzaraa (sharecropping) certificates
Musaqa (irrigation) certificates
Mugarasa (agricultural) certificates
Concession certificates
Risk management in Islamic bank
General Risks Credit risk
Market risk
Liquidity risk
Operational risk
Islamic Banks Risks Shariah non-compliance risk
Rate of return risk
Displaced Commercial risk
Equity Investment risk
Risk management is the process by which various risk exposures are. The process identified,
measured/assessed,
mitigated and controlled,
reported and monitored
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Sources of Islamic Law

Islamic law is based upon four main sources:

The Quran: Muslims believe the Quran to be the direct words of Allah, as revealed to and transmitted
by the Prophet Muhammad.
The Sunnah: Sunnah is the traditions or known practices of the Prophet Muhammad, many of which
have been recorded in the volumes of Hadith literature.
Ijma (consensus): In situations when Muslims have not been able to find a specific legal ruling in the
Quran or Sunnah, the consensus of the community is sought. The Prophet Muhammad once said that his
community would never agree on an error.
Qiyas (analogy): In cases when something needs a legal ruling, but has not been clearly addressed in the
other sources, judges may use analogy, reasoning, and legal precedent to decide new case law. This is
often the case when a general principle can be applied to new situations.

Syndicated Loan/Investment
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by
one or several commercial banks or investment banks known as arrangers. At the most basic level, arrangers
serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the
arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result,
the most profitable loans are those to leveraged borrowers-issuers whose credit ratings are speculative grade and
who are paying spreads sufficient to attract the interest of non-bank term loan investors. Though, this threshold
moves up and down depending on market conditions.
Factors of Production in Islamic Economics
The primary right to wealth is enjoyed by "the factors of production." From the Islamic point of view, the actual
factors of production are three instead of being four:

Capital: That is, those means of production which cannot be used in the process of production until and
unless during this process they are either wholly consumed or completely altered in form, and which,
therefore, cannot be let or leased (for example, liquid money or food stuff etc.)
Land: That is, those means of production, which are so, used in the process of production that their
original and external form remains unaltered, and which can hence be let or leased (for example, lands,
houses, machines etc.).
Labor: That is, human exertion, whether of the bodily organs or of the mind or of the heart. This exertion
thus includes organization and planning too. Whatever "wealth" is produced by the combined action of
these three factors would be primarily distributed over these three in this manner: one share of it would
go to Capital in the form of profit (and not in the form of interest); the second share would go to Land in
the form of rent, and the third share would be given to Labor in the form of wages.

Istisna
Istisna is a Sharia mode of financing widely used by Islamic banks and financial institutions to finance the
construction of buildings, residential towers, villas and related products, and manufacturing of aircrafts, ships,
machines and equipment, etc.

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The Arabic word "Istisna" means "asking someone to manufacture". It may be further defined and elaborated as
a sale contract between the seller and the buyer for the sale of an asset described in the sale contract and
transacted before it comes into existence. To fulfill its obligation, the seller can either manufacture/construct it
by itself or can get it manufactured/constructed by someone else to deliver it to the buyer on the date described
in the sale contract. The buyer can pay the sale price in lump sum at the time of signing the contract or later in
different stages as the manufacturing/construction process proceeds.

Bangladesh Government Islamic Investment Bond/Mudaraba Perpetual Bond

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Bangladesh Government has introduced a Mudaraba Bond named Bangladesh Government Islamic Investment
Bond (Islamic Bond) in October, 2004 with a view to mitigating the long-felt need for a Shariah-based
monetary instrument which can be used as an approved security for the purpose of maintaining the SLR as well
as providing an outlet for investment or procurement of funds by the Islamic banks. This bond is also open for
investment by the private individuals, companies or corporations. The major features of Government Islamic
Investment Bond are summed up below:
This Government Islamic Investment Bond will be governed by the glorious Islamic Shariah
Bond will be governed on the principles of Mudaraba.
Profit Sharing Ratios (PSR) relating to the Bond may be determined separately for each deal.
Bangladesh Bank will act as Mudarib.
Under the Rules, any individual, private or public companies, Islamic banks and financial institutions
may purchase the bond. Any non-resident Bangladeshi may also invest in the bond through his/her
NFCD account maintained with any bank in Bangladesh.
CRR and SLR of Islamic Bank
The SLR requirement for Islamic banks is 10% and they are to keep 4% of this reserve as CRR and the rest 6%
in approved securities. One might ask for the rationale behind offering Islamic banks concession in maintenance
of SLR ratio. The advantage the Islamic banks enjoy in the form of concession in meeting the SLR (Statutory
Liquidity Reserve) ratio helps them record higher profitability compared with those of the conventional banks.
The fact is that Islamic banks are allowed 10 per cent whereas conventional banks are needed 18 per cent to
maintain SLR, which has been increases by 0.5 percentage points both for conventional and Islamic banks
This means, against deposit of Tk.100, a conventional bank is in a position to lend or invest only Tk.82 and an
Islamic bank can make higher investment of Tk.90 and as such Islamic bank can add earning on investment of
extra Tk.8.0. In other words, with the same amount of deposit, an Islamic Bank is privileged to invest more and
hence enabled to earn more, in spite of the same rate of earning on their investment/loan amount. Higher the
investment is the higher the earning will be. So, obviously earning on Tk.90 must be more than that of Tk.82.
But to draw the above inference, the practical scenario is not so simplified because of many factors. SLR is
composed of two elements. First, CRR (Cash Reserve Ratio), which needs to be kept in current A/c with
Bangladesh Bank earning no interest thereon. The other element is 'SLR minus CRR'. Let us give it a name -Supplementary Reserve Requirement or SRR -- for the sake of easy understanding. The latter is invested in the
Treasury Bill/Bond of Bangladesh Bank earning fixed interest at lower rate than that of commercial lending.
Composition of 18 per cent SLR for a conventional bank is 5 per cent CRR and 13 per cent SRR. As such a
conventional bank earns zero interest on 5 per cent and a fixed interest on the rest 13 per cent.
An Islamic bank is to maintain 10 per cent SLR, either the whole as CRR, earning nothing on that 10 per cent;
or 5 per cent as CRR and rest 5 per cent SRR in the form of Islamic/Mudarabah Investment Bond, earning non
fixed insignificant amount on the latter. Moreover, as the Mudaraba contract stipulates, Islamic bank must incur
the entire loss, if any, resulting from such investment.
Cash Waqf Certificate
Cash Waqf provides a unique opportunity for making investment in different religious, educational and social
services. Savings made from earning by the well off and the rich people of the society can be utilized in our
organized manner. Income earned from these funds will be spent for different purposes like the purposes of the
waqf properties itself. This scheme has been well received by the public in general due to its unique feature. The
guidelines for operation of this scheme are stated below:
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Cash waqf is an endowment in conformity with shariah, bank manages the waqf on behalf of the waquif.
Waqfs are done in perpetuity and the A/c is opened in the title given by the waquif.
Waquif have the liberty to choose the purpose(s) to be served either from the list of 32 purposes
identified by the bank, covering (a) family empowerment credits (b) Human resource development (c)
Health and sanitation and social utility services or any other purpose(s) permitted by shariah.
Cash waqf amount earns profit at the highest rate offered by the Bank from time to time.
Cash waqf amounts remain intact and only the profit amount is spent for the purpose(s) specified by the
waquif. Unspent profit amounts automatically added to waqf amount and earn profit to grow over the
time.
Waquif can also instruct the Bank to spend the entire profit amount for the purpose specified by him/her.
Waqif have the opportunity to create cash waqf at a time. Otherwise he/she may declare the amount
he/she intends to build up and may start with a minimum deposit of Tk. 100/-(one hundred) only. The
subsequent deposits may also be made in thousand or in multiple of thousand.
Waquif have the right to give standing instruction to the bank for regular realization of cash waqf at a
rate specified by him/her from any other A/c maintained with SIBL.
The amount in Cash Waqf Account is a perpetual deposit.

Rationale of the Prohibition of Riba

To begin with we need to look at what might possibly be wrong with the institution of interest. In the Holy
Quran, Allah (SWT) did not mention any specific reason for the prohibition of interest. Islam being a complete
code of life offers its own economic system to guide human behavior in the economic sphere. Muslims believe
that the absence of the practice of interest is an essential feature of an Islamic economic system. The reasons
can be best understood only in terminology and precepts which can be comprehended easily by the people of a
particular period of time. In some case reason has been mentioned by the Holy Quran, it is in very broad terms,
as
This is better for you if you know or understand,
This is better for you if you practice, or
This is better for you because it is closer to piety and fear of Allah.
Islam gives in detail the punishment for those involved in interest and narrates the condemnation of interest in
different manners in different places. However, in connection with the condemnation of interest in one place it
comes very close to giving a rationale. The Quran says: Allah has permitted trade and prohibited interest .
The implication of this is that the principle of interest is quite opposite to that of business. This shows Islam
does not consider lending on interest as a business in the real sense.
In the pre-Islamic Arabian society, interest or riba was considered similar to trade. But the Quran has
enunciated that trade and interest are not the same . In trade, there are two parties involved one is the
purchaser and the other is the vendor. The vendor makes a particular product or commodity by exerting his
labor, money and time or he purchases it from someone else. In both cases, the vendor along with his capital
employs labor, time, intellect and experience and presents it before that buyer and by selling he makes some
profit on top of it. In exchanging the product, sometimes he may incur a loss instead of making a profit. So he
(the vendor) has to take the risk of looses while going for trade.
At least four characteristics define the prohibited interest rate:
1. It is positive and fixed ex-ante,
30

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.

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DIFFERENCES
Compensation Charge in Islamic Band Vs Penalty in Conventional Bank
Compensation Charge in IB: Compensation for late payment is a charge to compensate Islamic banks for the
expenses incurred in maintaining accounts that are past due and delinquent. The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) requires that these charges are channeled to charity or
to whatever other means as approved by the Islamic banks Shariah councils. However, in reality, to avoid
customers from taking advantage it is allowed to Islamic banks do charge compensation charges (akin to
penalty fee) on late payment but whatever compensation charges collected by the bank, are normally given to
charitable organizations. In this respect, compensation charges should not be a source of income to the Islamic
bank but as a deterrent mechanism to avoid customers taking advantage on the Islamic banking system by
delaying their installment payment to the bank.
Penal interest: It is the interest rate charged by the bank or lending institution from the borrower if he misses a
repayment. It is also called the late payment penalty. If the installments are not received as per the repayment
terms, by the end of the month, the borrower will be charged interest on the installments delayed which is called
as penal interest.
CRR Vs SLR
CRR: The cash reserves that banks keep with the central bank is called the Cash Reserve Ratio (CRR). A CRR
requires only a cash reserve so a portion of the cash deposits that banks receive are kept with the central bank as
a reserve. A decrease in the CRR would mean a higher amount of money that banks can lend generating more
income for them. It controls the liquidity in the economy. Now it is required to Islamic banks to keep CRR 4.5%
among SRR 10.5% in Bangladesh Bank.
SRR: The Statutory Liquidity Ratio (SLR), on the other hand, is cash, precious metals, or certificates that a
bank keeps with them as a reserve. It limits the influence that banks have on putting more money into the
economy. An SLR guarantees the stability of banks and is used to limit the increase in bank credit. It controls
the credit growth in the economy by curbing inflation and encouraging growth. It is also used to make banks
invest more in government securities. Now it is required to Islamic banks to keep SRR 10.5% of its total capital
in Bangladesh Bank.
Markup Vs Interest
Markup: The Islamic banks use Murabaha sale as a debt-financing instrument because it
is less risky and easier to maintain as compare to Mudharaba. The definition of Murabaha
sale is selling the commodity for the purchase price plus a certain profit margin agreed
upon. This margin can be a percentage of the purchase price or a lump sum. Murabaha is
also called mark up cost and the most popular Murabaha product is deferred installment
payment or Bai Bithaman Ajil. Murabaha sale could be divided into two types, which are
the ordinary Murabaha sale without promise to purchase and Murabaha Sale with
promise to purchase and could be legally enforced after owning and possessing the
commodity. The banks normally use the latter. In Murabaha sale, the buyer of asset will
determine his or her needs to the bank. The bank will purchase the asset from the owner
of the asset and after taking ownership and possession then the bank could sell the
asset to the purchaser. In this case the bank must assume the risk and liability in the
defect before delivery and the risk of commodity returned.
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Interest: Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the
assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount
owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time is called the
interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds.
Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase,
major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated
upon the value of the assets in the same manner as upon money.
Laease Finance Vs Higher Purchase
Lease Finance:
The fundamental characteristic of a lease is that ownership never passes to the business customer.
Instead, the leasing company claims the capital allowances and passes some of the benefit on to the
business customer, by way of reduced rental charges.
The business customer can generally deduct the full cost of lease rentals from taxable income, as a
trading expense.
With a finance lease the equipment is still shown as an asset and liability in the balance sheet however
there are several fundamental differences. Firstly the VAT is spread over the term of the agreement and
paid with the monthly rentals. Therefore from a cash flow point of view finance lease can work better
for some customers. Instead of claiming capital allowances the monthly rental is offset against the profit
and loss account therefore the full benefit from a tax point of view is claimed over the exact period of
the lease. This can be advantageous if the equipment being funded is high tech and will need to be
replaced at the end of the agreement. However at the end of the agreement the finance lease will go into
secondary rentals which are equivalent to one months rental being paid on an annual basis.
Alternatively the kit can be sold and the customer retains typically 95% of the sale proceeds. The
remaining 5% is paid to the finance company along with the VAT.
Hire Purchase:
With a hire purchase agreement, after all the payments have been made, the business customer becomes
the owner of the equipment. This ownership transfer either automatically or on payment of an option to
purchase fee.
For tax purposes, from the beginning of the agreement the business customer is treated as the owner of
the equipment and so can claim capital allowances. Capital allowances can be a significant tax incentive
for businesses to invest in new plant and machinery or to upgrade information systems.
Under a hire purchase agreement, the business customer is normally responsible for maintenance of the
equipment.
With a hire purchase facility all the VAT must be paid up front with a deposit of usually 10% of the net
amount. At the end of the agreement and with payment of the final payment an option to purchase fee is
paid and legal title passes to the customer. The equipment is shown as an asset in the companys balance
sheet from the onset of the hire purchase agreement with a corresponding liability for the finance
agreement. Capital allowances are claimed on a reducing balance basis.
Shariah Borad Vs Central Shariah Borad
Shariah Board: Every Islamic bank contains a standard Shariah Council or Shariah Board which is entrusted
with advising, giving directives as to whether all functions of the bank including investment procedures are
33

being carried out in accordance with Shariah. So, we can say A Sharia Board certifies the Islamic financial
products as being Sharia-compliant. It thereby reviews the related contracts and provides an opinion about
whether those agreements would be permissible under Islamic law.
Central Shariah Board: For exchanged views on some important issues relating to Islamic Banking of
Bangladesh Central Shariah Board was established name of which is Central Shariah Board for Islamic Banks
of Bangladesh (CSBIB) comprising of Prof. Maulana Salah Uddin, Khatib, Baitul Mukarram National Masjid
and Mr. Md. Mukhlesur Rahman, Secretary General of CSBIB.
Mudarib Vs Sahib al Maal
Mudarib: Mudarib is the party in a Mudaraba contract who invests the capital provided by Rabb ul Mal using
his/her expertise for an agreed profit sharing ratio.
Saahib al-Maal: In Islamic law, a person who possesses sufficient wealth to be required to pay zakah, which
are the charitable donations Muslims are required to pay. In a Mudaraba contract who provide capital for an
agreed profit sharing ratio is called Saahib al-Maal.
Bai salam and Istisna
Bai salam and istisna are forms of Islamic financing that are not as popular as others, but still prominently
present.
Bai Salam: Bai salam is a contract that demands a payment of a good or service that will be delivered
eventually. The money owed should be submitted to the supplier. The supplier will receive the full price for his
commodity. It is necessary that the details of the transfer of the commodity are specified to prevent
disagreement with a partner later. These commodities have to exclude gold, silver, and currencies based on
these specific metals.
Istisna: Istisna is translated as commission to manufacture. The due is paid in installments as investment
progresses. The prepaid installments will be lower in price in relation to the purchasing of the final product.
Istisna is a Sharia mode of financing widely used by Islamic banks and financial institutions to finance the
construction of buildings, residential towers, villas and related products, and manufacturing of aircrafts, ships,
machines and equipment, etc. The Arabic word "Istisna" means "asking someone to manufacture".
Juala Vs Wakalah
Juala:
Wakalah: Literally Wakalah means protection or remedying on behalf of others. Legally Wakalah refers to a
contract where a person authorizes another to do a certain well-defined legal action on his behalf. It is a contract
of agency which means doing any work or providing any service on behalf of any other. An agent is someone
who establishes contractual and commercial relations between a principal and a third party, usually against a
fixed fee. An action performed by an agent on behalf of the principal will be deemed as action by the principal.
Agency is necessitated by the fact that an agent has to perform certain tasks which the principal has neither the
time, knowledge nor the expertise to perform himself. The need for agency arises where a person has no ability
or expertise to perform a certain action due, for example, to distance or size. The main features of agency are
service, representation and the authority to act for the principal. An agent may obtain a certain wage for services
rendered within the incentive structure of the principal.
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Riba Vs Profit
Riba: A concept in Islamic banking that refers to charged interest. It is forbidden under Sharia, Islamic religious
law, because it is thought to be exploitive. Depending on the interpretation, riba may only refer to excessive
interest; however to others, the whole concept of interest is riba, and thus is unlawful. Even though there is a
wide spectrum of interpretation on the point at which interest becomes exploitive, many modern scholars
believe that interest should be allowed up to the value of inflation, to compensate lenders for the time value of
their money, without creating excessive profit.
Profit: Profit is a very important concept for any business particularly a start-up. Profit is the financial return
or reward that entrepreneurs aim to achieve to reflect the risk that they take. Given that most entrepreneurs
invest in order to make a return, the profit earned by a business can be used to measure the success of that
investment. Profit is also an important signal to other providers of finance to a business. Banks, suppliers and
other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit and that
it can pay debts as they fall due. Profit is also an important source of finance for a business. Profits earned
which are kept in the business are known as retained profits.
Ijara Vs HPSM
Ijara: Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available
in return for a payment, but where ownership of the asset itself is not transferred. The ijara contract is
essentially of the same design as an installment leasing agreement. Where fixed assets are the subject of the
lease, such can return to the lessor at the end of the lease period, in which case the lease takes on the features of
an operating lease and thus only a part amortization of the leased asset's value results. In an alternative
approach, the lessee can agree at the outset to buy the asset at the end of the lease period in which case the lease
takes on the nature of a hire purchase known as ijara wa iqtina. Some jurists do not permit this latter
arrangement on the basis that it represents more or less a guaranteed financial return at the outset to the lessor,
in much the same way as a modern interest-based finance lease. The terms of ijara are flexible enough to be
applied to the hiring of an employee by an employer in return for a rent that is actually a fixed wage.
HPSM: Hire Purchase under Shirkatul Meelk is a special type of contract, used by Islamic Banks, which has
been developed through practice. It is a combination of three contracts like Shirkat-al-Meelk, Ijarah and Sale.
Hire Purchase is a system of buying someting by making regular payments for it over several months or years.
Shirkat-al-Meelk means share in ownership. HPSM or IMB is one of the forms of Ijarah used in combination
with Shirkat and Sale by the Islamic Banks as a mode of financing. This is actually a form of leasing contract
which includes a promise by the Lessor to transfer the ownership in the leased property to the Lessee, either at
the end of the term of the contract period or gradually step by step during the term of the contract on payment.
Islamic Banks practices three aspect of HPSM contract Purchase of a specified asset under joint ownership of the Bank and the Client.
Lease out the asset by the Bank to the Client
Transfer the ownership of the Bank share of the asset gradually to the client through sale
contract.
Muzara'a Vs Mushakat
Both are the types of Investment Sukuk

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Muzaraa (sharecropping): These are documents of equal value issued for the sake of using the mobilized
funds in financing a Muzaraa contract. The certificate holders become entitled to a share in the crop as per
agreement.
Musaqa (irrigation): These are documents of equal value issued on the basis of a Musaqa contract for the sake
of using the mobilized funds for irrigating trees that produce fruits and meeting other expenses relating to
maintenance of the trees. The certificate holders become entitled to a share in the crop as per agreement.
Service Charge Vs Riba
Service Charge: Service Charge is a type of fee charged to cover services related to the primary product or
service being purchased. For example, a concert venue may charge a service fee in addition to the initial price of
a ticket in order to cover the cost of security or for allowing electronic purchases. Another example would be a
fee for using the ATM of a competing bank. Services fees go by a number of different names depending on the
industry, including booking fees (hotels), security fees (travel), maintenance fees (banking) and customer
service fees. These fees are often levied when human interaction between a consumer and the company is
involved, with services beyond the physical good itself considered extra.
Riba: Riba is a concept in Islamic banking that refers to charged interest. It is forbidden under Sharia, Islamic
religious law, because it is thought to be exploitive. Depending on the interpretation, riba may only refer to
excessive interest; however to others, the whole concept of interest is riba, and thus is unlawful. Even though
there is a wide spectrum of interpretation on the point at which interest becomes exploitive, many modern
scholars believe that interest should be allowed up to the value of inflation, to compensate lenders for the time
value of their money, without creating excessive profit.
Bai' muajjal Vs Hypothication
Bai' muajjal: Bai' muajjal is a type of Islamic finance credit sale that is compliant with the shariah. Bai' muajjal
literally means credit sale. In a Bai' muajjal the financial institution will earn a profit margin on the price of a
purchased asset or assets and will let the buyer pay off the price and they can do so all at once or in installments.
Both parties in this Islamic finance transaction must agree upon the cost of the asset, as well as the profit
margin. Bai' muajjal is an Islamic finance activity and there are many Islamic financial institutions that will
have this kind of credit sale for those that follow the Muslim faith. The financial institution that deals with the
Bai' muajjal will transfer the ownership of the asset to the party before the sale price receipt. This is a way to
follow shariah law properly.
Hypothecation: Hypothecation is the practice where a borrower pledges collateral to secure a debt. The
borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has
the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a
mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off. If a
consumer takes out an additional loan secured against the value of his mortgage the consumer is then
hypothecating the mortgage itself the creditor can still seize the house but in this case the creditor then
becomes responsible for the outstanding mortgage debt. Sometimes consumer goods and business equipment
can be bought on credit agreements involving hypothecation the goods are legally owned by the borrower, but
once again the creditor can seize them if required.
Ijma Vs Qiyas
Ijma: Ijma is an Arabic term referring to the consensus of the Muslim community. Various schools of thought
within Islamic jurisprudence may define this consensus as that of the first generation of Muslims only; the
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consensus of the first three generations of Muslims; the consensus of the jurists and scholars of the Muslim
world, or scholarly consensus; or the consensus of the entire Muslim world, both scholars and laymen. Sunni
Muslims regard ijm' as the third fundamental source of Sharia law, after the divine revelation of the Qur'an, the
prophetic practice or Sunnah.
Qiyas: In Islamic jurisprudence, qiyas is the process of deductive analogy in which the teachings of the Hadith
are compared and contrasted with those of the Qur'an, in order to apply a known injunction to a new
circumstance and create a new injunction. Here the ruling of the Sunnah and the Qur'an may be used as a means
to solve or provide a response to a new problem that may arise. This, however, is only the case providing that
the set precedent or paradigm and the new problem that has come about will share operative causes (illah). The
illah is the specific set of circumstances that trigger a certain law into action.
Mudaraba Bond Vs Treasury Bond (Bills)
Mudaraba Perpetual Bond: Bangladesh Government has introduced a Mudaraba Bond named Bangladesh
Government Islamic Investment Bond (Islamic Bond) in October, 2004 with a view to mitigating the long-felt
need for a Shariah-based monetary instrument which can be used as an approved security for the purpose of
maintaining the SLR as well as providing an outlet for investment or procurement of funds by the Islamic
banks. It is called Mudaraba Perpetual Bond. This bond is also open for investment by the private individuals,
companies or corporations.
Treasury Bond (Bills): Treasury bill or T-bill is a short-term debt issued by a national government with a
maximum maturity of one year. Treasury bills are sold at discount, such that the difference between purchase
price and the value at maturity is the amount of interest. Although the maturity of T-bill shouldn't be more than
one year, in Bangladesh, 2-year and 5-year securities are also regarded as T-bills. Treasury bills are fully
guaranteed by the government and hence are free from default risk. The biggest reason that T-Bills are so
popular is because they are one of the few money market instruments that are affordable to the individual
investors. Basically, investors invest in T-bills due to:
to maintain the Statutory Liquidity Reserve (SLR),
to maintain adequate liquidity
to earn yields,
to utilize properly huge idle cash in banks, and
to averse highly risky investments.
Capital Markets Vs Money Market

Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.e., for
one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e.,
for more than one year).
Credit Instruments: The main credit instruments of the money market are call money, collateral loans,
acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are
stocks, shares, debentures, bonds, securities of the government.
Institutions: Important institutions operating in the' money market are central banks, commercial banks,
acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital
market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies,
mortgage banks, building societies, etc.

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Purpose of Loan: The money market meets the short-term credit needs of business; it provides working
capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of
the industrialists and provides fixed capital to buy land, machinery, etc.
Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The
maturity of one year or less gives little time for a default to occur, so the risk is minimized. Risk varies
both in degree and nature throughout the capital market.
Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital
market is that of putting capital to work, preferably to long-term, secure and productive employment.
Relation with Central Bank: The money market is closely and directly linked with central bank of the
country. The capital market feels central bank's influence, but mainly indirectly and through the money
market.
Market Regulation: In the money market, commercial banks are closely regulated. In the capital market,
the institutions are not much regulated.

Al Wadia Vs Mudaraba Account

Mudaraba Account: Mudaraba represents islamic partnership between investor and entrepreneur. In Islamic
financing, a type of partnership in which one partner provides the capital while the other provides expertise and
management. Each gets a prearranged percentage of the profits, but the partner providing the capital bears any
losses. Mudaraba savings account is opened under the Mudaraba principal of Islami Shariah. Under the above
principal the clients is the Shaheb-Al Mal and the Bank is Mudarib. Mudaraba Savings accounts are mainly
meant for Non-Trading customers who have some potential saving with small no. of transactions taking place.
More than one person can open and operate a Mudaraba savings account.
Al- Wadia Current Account: It is defined as "Any belonging that is left by its owner or his representative with
somebody to take care of it". It is likable for the person who is confident that he could take care of the alWadi'ah to accept it. If he does, he should then handle it with care and should not dispose of it. Al-Wadiah
Current Account follows the Principle of Islami Shariah wherein the bank is deemed as a keeper and trustee of
funds as Al-Amana (on Trust). This deposit that operates by taking permission from depositors would be taken
to use their fund according to Shariah Principle and depositors would not receive any kind of profit. As such the
bank is under obligation to return the entire money on demand by the customer. The account is not time barred
i.e. Account Holder can withdraw money as many numbers of times as he wishes in a working day.

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