 Attiq ur rehman

 Junaid
 Abdul Naveed
 Abu baker
 Shehzad
 In the conventional economic system and its
basis on interest at a fixed rate.

 Under Islamic economic system it is based on

price for a commodity with a difference for
cash and credit sale.
 Islamic Banking is based on Shariah Laws.

 Shariah covers every aspect of our life, it provides

principles how to live at individual level, in the society,
legal and economic system, etc. or simply it is a
complete code of life.
1. The prohibition of interest or riba based transactions

2. Avoidance of speculations (gharar)

3. Avoidance of oppression (zulm)

4. Introduction of Islamic tax (zakat)

5. Financing of Sharia Approved activities and

discouraging the production of goods and services
which are not allowed in Islamic values (haram).
Those who charge usury (riba’/interest) are in the same
position as those controlled by the devil’s influence. This is
because they claim that usury is the same as commerce.
However, God permits commerce and prohibits usury.
Thus, whoever heeds this commandment from his Lord
and refrains from usury, he may keep his past earnings and
his judgment rests with God. As for those who persist in
usury, they will incur Hell, wherein they abide forever.”
(2:274)
 Riba’ literally means “increase” or “excess”. An
increase in a loan transaction or exchange of
commodity accrues to the owner without giving an
equivalent compensation in return. For example
 Exchanging 1kg of grapes with 1.5kg of grapes that are
of the same type, quality and value.

 Exchanging Rs.1000 for Rs.1100.

For the same items any difference in their exchange value

is interest whereas pricing of different items while
exchanging is allowed.
Prohibition of Riba will promote an economic behavior
which is

 economically just (value addition)

 socially fair and ethically correct (equal opportunities).

Inequality is definite in the situation where the lender is

guaranteed a positive return without assuming any share
of the borrower’s risk whereas the borrower takes upon
himself all sorts of risks in addition to his skills and labor.
Riba violates the principle of property rights
Money lent on interest is used either productively that it
creates additional wealth or otherwise. When money used
(together with labor and entrepreneurial skills) to produce
additional wealth, such money lent cannot have any
property rights claim to the incremental wealth because
there was no prior bargain over it. Instead ‘interest’,
demanded a guaranteed return regardless of the enterprise.
Promotion of profit-and-risk-sharing

The sharing of risks and uncertainties of the enterprise is

fundamental to Shariah contracts. Shariah condemns the
act of guaranteeing (even by the entrepreneur) to restore
the invested funds intact.
Lending is a virtuous act
Lending should be a generous act. If money is needed
other than for commercial purposes (thus, risksharing),
such need should not be exploited where the borrower is
put under undue burden.
Allah says in Quran “
Who is he that will lend unto Allah a goodly loan, that He
may double it for him or his may be a rich reward…(57:11)
 Definition of Gharar

An Islamic finance term describing a risky or

hazardous sale, where details concerning the
sale item are unknown or uncertain. Gharar is
generally prohibited under Islam, which
explicitly forbids trades that are considered to
have excessive risk due to uncertainty.
 Most of the Islamic scholars view Gharar as ‘both
ignorance of the material attributes of the subject
matter of a sale and also uncertainty regarding its
availability and existence.
 Majority of derivative contracts are forbidden and
considered invalid because of the uncertainty
involved in the future delivery of the underlying
asset such as forwards, futures and options, short
selling, and speculation.
Gharar is prevented when transactions are
transparent with:

 all details agreed in advance; and

 ownership undisputed.

However, Gharar may be tolerated if there is an

important Maslahah or public benefit.
 Preventable uncertainty is present in any contract
subject to risks in the ordinary course of business –
Istisna or salam contracts.

 Prohibition of Gharar is indirectly a risk management

technique in Islam therefore encouraging the exercise
of due diligence and avoidance of contracts with high
degree of information inconsistency with high
turnover.

 Treating Gharar as risk has its penalties i.e. trading of

risks therefore is prohibited where the traded risks
may have been transferable in derivative format.
 Zulm refers to all form of inequity, injustice, exploitation,
oppression and wrong doing.
 A person either deprives others of their rights or does not
fulfill his obligations towards them.
 Zulm also refers to trading in matters which are prohibited
(haram) under Shariah such as:-
a. alcoholic drinks/beverages; and
b. non halal poultry/meat, pork.
 An extension of the social justice and fair economics.
ISLAMIC BANKS CONVENTIONAL BANKS

The functions and operating The functions and operating

modes of Islamic banks are modes of conventional
based on the principles of banks are based on fully
Islamic Shariah. manmade principles
(capitalism theory).
ISLAMIC BANKS CONVENTIONAL BANKS

It promotes risk sharing The investor/lender is

between provider of capital guaranteed of a
(investor) and the user of predetermined rate of
funds (entrepreneur). interest or returns.
ISLAMIC BANKS CONVENTIONAL BANKS

Unrestricted profit
It also aims at maximizing
maximization illustrated by
profit but subject to Shariah
derivatives trading, deposit
restrictions.
multiplication, etc.
ISLAMIC BANKS
In the modern Islamic
banking system, it has
become one of the service-
oriented functions of the
Islamic banks to be a Zakat
collection centre and they
also pay out their Zakat.
CONVENTIONAL BANKS
Conventional banks do offer
the service of Zakat
deduction but the
depositors are reluctant to
pay Zakat from their
accounts in conventional
banks.
ISLAMIC BANKS CONVENTIONAL BANKS

Participation in partnership Lending money and getting

business is the fundamental it back with compounding

function of the Islamic interest is the fundamental

banks. function of the conventional

banks. Money is a
commodity and the
motivation.
ISLAMIC BANKS CONVENTIONAL BANKS

Islamic banks have no It can charge additional

provision to charge any money (penalty and
extra money from the compounded interest) in
defaulters except for case of defaults.
compensation and is used
for charitable purposes.
ISLAMIC BANKS CONVENTIONAL BANKS

Importance is given to the Banks interest is the main

public interest or maslahah. objective. It makes no effort
Its ultimate aim is to ensure to ensure growth with
growth with fairness. equity.
ISLAMIC BANKS CONVENTIONAL BANKS

For the Islamic banks, it Interest-based commercial

must be based on a Shariah banks don’t care about the
approved underlying activities being performed
transaction. with their financing.
ISLAMIC BANKS
Since it shares profit and
loss, the Islamic banks pay
greater attention to
developing project appraisal
and evaluations.
CONVENTIONAL BANKS
Since income from the
advances/loans is fixed, it
gives little importance to
developing expertise in
project appraisal and
evaluations. Risks are
transferable at a price
(insurance).
ISLAMIC BANKS CONVENTIONAL BANKS

Greater emphasis on the The conventional banks

viability of the projects. give greater emphasis on
creditworthiness of the
clients.
ISLAMIC BANKS CONVENTIONAL BANKS

Islamic bank can only

A conventional bank has to
guarantee deposits for
deposit account, which is guarantee all its deposits.
based on the principle of al-
wadiah, thus the depositors
are guaranteed repayment
of their funds, however if
the account is based on the
Mudarabah concept, client
have to share in a loss
position.
 Islamic banks perform as their obligatory duty to take
care of the whole system of Zakat as its principal
religious liability, and they pay Zakat themselves as
well.

 Naturally Islamic banks will be trusted more than the

conventional banks to perform this job.
 Islamic banks will make sure that funds are
used only in Sharia approved economic
activities, e.g. businesses of alcoholic goods,
narcotics, haram meat, pork, casinos, and
prostitutions, etc.
Participatory Modes
1. Mudarabah
2. Musharakah
Sale Modes
1. Murabaha
2. Salam and parallel salam
3. Istisna and parallel Istisna

Rent based Modes

1. Ijarah
2. Ijarah wa Iqtina