Group members:

Mariam Zehra
Hina Fatemah
Amna Qasim
Taqi Azad
Ali Yaqooti
 Money is only a medium of exchange, a way
of defining the value of a thing; it has no
value in itself
 The concept of profit-and-loss sharing in an

enterprise, as a basis of financial transactions

is a progressive one as it distinguishes good
performance from the bad and the mediocre
 Interest can leads to injustice and

exploitation in society
Conventional Banking System
money
Bank Client

money + money (interest)

 Islamic Banking System

BANK Goods & CLIENT

Services

Money
 “Islamic Banking is interest free Asset
Backed banking governed by the
principles of Islamic Shariah”

 Islamic Banking distinguishes from

Conventional Banking in three basic
principles:
1. Interest Free Transactions.
2. Risk Sharing
3. Asset & Service Backing
• Interest free banking? 

• Profit and loss 

sharing?


• Ethical banking?
 The literal meaning of interest or Al-RIBA as it is
used in the Arabic language means to excess or
increase. In the Islamic terminology interest means
effortless profit or that profit which comes free
from compensation or that extra earning obtained
that is free of exchange.
 The Prophet said: Gold in exchange for gold, silver
in exchange for silver, wheat in exchange for
wheat, barley in exchange for barley, dates in
exchange for dates, salt in exchange for salt is in
the same category and (should be exchanged) hand
to hand, so who ever adds or demands increase he
has practised usury. The giver and taker are the
same.
 Unfortunately, the basis of many of the
transactions (especially in banking and insurance),
personal or business involve interest. Thus it is
becoming increasingly difficult for the majority of
the Muslims, especially those who are comercially
orientated to abstain from dealings involving
interest. Many of us purchase items on ‘Buy now,
Pay later' schemes thinking that this sort of scheme
is of great benefit to us. Sadly, what we fail to
recognize at the time of purchasing this ‘supposed
bargain' is the fact that if we fail to pay the
required amount at the due time, we will be liable
to pay interest.
 A New Interest free Economic Standard can be
adopted, the "Comprehensive Indexation" will be
based on inflation, actual devaluation and
depression of value or purchasing power money.

 The indexation based equalizer system is a non-

interest based scheme. There will be no concept of
Compounding, "quarterly rest" and penal equalizer
or "equalizer upon equalizer" like interest.
Furthermore interest rate is "pre-determined" while
equalizer rate will be "post determined".
 The benefits of non interest banking and/or
interest free system.

 Over the last three decades Islamic banking and

finance has developed into a full-fledged system
and discipline reportedly growing at the rate of 15
per cent per annum. Today, Islamic financial
institutions, in one form or the other, are working
in about 75 countries of the world.
Mudaraba Defnition:
"Mudarabah" is a special kind of partnership where one partner
gives money to another for investing it in a commercial enterprise.
The investment comes from the first partner who is called "rabb-ul-
mal", while the management and work is an exclusive responsibility
of the other, who is called "mudarib“

Types of Mudaraba

1. Mudaraba Mutlaqa (unrestricted)

2. Mudaraba Muqayyada (Restricted)

 Capital must be in monetary form.
 Profit is shared according to ratio agreed upon. A fixed
amount is not allowed.
 The loss is borne by the provider of the capital.
 The capital provider cannot intervene day-to-day business
operation.
 Sub-mudaraba is not allowed without the permission of the
first capital provider.
 Mudarib cannot claim any periodical salary or a fee.

 Exceptions: (1) for daily food expenses

(2) for overseas travel (Hanafis)
 The Mudarib & Rab-ul-Maal cannot allocate a lump sum
amount of profit for any party nor can they determine the
share of any party at a specific rate tied up with the capital.

 If the business has incurred loss in some transactions and

has gained profit in some others, the profit shall be used to
offset the loss at the first instance, then the remainder, if any,
shall be distributed between the parties according to the
agreed ratio.
The Mudarabah becomes void (Fasid) if the profit is fixed in
any way. In this case, the entire amount (Profit + Capital) will
be the Rab-ul-Maal’s.
 Transferring of usufruct not ownership to another
person for an agreed price, at an agreed
consideration.

 Subject of lease
Valuable, Identified and Quantified
 Consumable things cannot be leased out
Anything which cannot be used without consuming cannot be leased
out; e.g., money, wheat etc.
If no specific purpose is identified in the agreement, then it can be used
for any purpose for which it is used in normal course

16
 Lessee as Ameen
The lessee is liable to compensate the lessor for every harm to the
leased asset caused by any misuse or negligence. The leased asset shall
remain in the risk of the lessor throughout the lease period.

 Lease of jointly owned property

Is permitted and rentals shall be distributed between all the joint
owners according to the proportion of their respective shares in the
property.

17
 Leasing should not be interest-based loan or replacing interest with rent,
rather it should comply with all of the following conditions of Islamic
Leasing:

1. The commencement of lease

2. Rent should be charged after the delivery of the leased asset to the lessee
3. Different relations of the parties
4. Difference between Murabahah and leasing
5. Expenses consequent to ownership to the lessor
6. Lessee as Ameen
7. Variable Rentals in Long Term Leases
8. Penalty for late payment of Rent
9. Termination of Lease

18
 Musharakah literally means “Sharing”.
 Musharakah means a joint pool of funds formed
for conducting some business in which all
partners share the profit according to an agreed
ratio while the loss is shared as per the ratio of
investment
MUSHARAKAH MODEL
 This rule is based on a saying of Hazrat Ali (R.A):

 “Profit is based on agreement of the parties, but

loss is always subject to the ratio of investment”
 Depositors Bank

Profits

Deposits Equity
Weightage System
Profits

Pool of Funds

Financing
Profits

Businesses/Corporate
 It means a sale on mutually agreed profit.

 Technically, it is a contract of sale in which

the seller declares his cost and profit.

 As a financing technique, it involves a

request by the client to the bank to
purchase certain goods for him.
 Literal meaning is “ Gift “.

 This is a token given voluntarily by a debtor

to a creditor in return for a loan.

 Hibah usually arises in practice when Islamic

banks pay their customers a 'gift' on savings
account balances, representing a portion of
the profit made by using those savings
account balances in other activities.
 A type of Islamic insurance, where members
contribute money into a pooling system in
order to guarantee each other against loss or
damage.
 Takaful is based on Sharia, Islamic religious

law, and explains how it is the responsibility

of individuals to cooperate and protect each
other.
 It is against the concept of riba (interest) &

uncertainity.
 Framework

 Excess Liquidity

 Unresolved Figh Issues/Mutual Agreement

Islamic banking in
Pakistan
 Annual Growth of 20%.

 InternationalInstitutions are setting

up their local wings in the category.
◦ Standard Chartered Islamic Unit in Middle
East
◦ HSBC (AMANAH)
◦ Citi-Islamic (CITIBANK)
 More than 300 Institutions spread
over 51 countries.

 250 Mutual Funds that comply with

Islamic Principles.

 Asset possession rose by 28.6%

 YEAR NET ASSET
2008 $ 639 billion
2009 $ 822 billion

The Banker’s “Top 500 Islamic Financial Institutions” Survey