Islamic Economic System

ISLAMIC BANKING
The emergence of a Riba-Free Solution
Najmul Hassan

"Those who devour Riba shall rise up before Allah like men societies. Shariah originates from the teachings of the Quran
whom Shaitan has demented by his touch; for they claim that and its explanations rendered by the Prophet Muhammad
trading is like usury. But Allah has permitted trading and (SAW), more commonly known as Sunnah.
forbidden usury. He that receives an admonition from his
Rabb and mends his ways may keep what he has already The Shariah prohibits interest or usury, gambling and gharar
earned; his faith is in the hand of Allah. But he that pays no (undue risk taking), involvement in trading in such goods and
heed shall be among the people of fire and shall remain in it
services that are unlawful in themselves. It also encourages
forever." (Surah Al Baqarah 275)
risk- and profit-sharing in the sphere of financial activities as
With the expanding focus and scope of Islamic finance 'the essential principle of interest-free banking is profit/loss
worldwide, there is a rapid proliferation of feasible solutions sharing'.
that cater to almost all financial requirements. From equity
based investment financing and complex corporate As such, Islamic banking products are fundamentally and
structured finance, to the broad based product and service conceptually different from conventional banking products,
scope of consumer (retail) banking, Shariah compliant although in order to facilitate customer ease and clarity of
financing is proving sound in both theory and practice. understanding, such products often emulate the packaging
and presentation of conventional banking products. This
With the Shariah being a divinely-inspired eternal guidance, does not mean that these products are the same as those
it is inconceivable to assume that it cannot or would not offered by conventional banks. Islamic Bank serve the same
cater to the ever-evolving needs of mankind. Any concerns
purpose to customers and the functions of Islamic banks are
as to its modern applicability are allayed by realizing that it
and will remain essentially that of financial intermediaries.
does not need to have specifically envisioned modern equity
trading or stock markets at the time of its revelation, for However, all banking transactions and services remain in
example. It is in guidelines concerning Riba and trade that it strict conformity with the Shariah principles.
lays down, wherein lies its practical applicability, as well as
our progress and salvation. While Islamic banking may not be a totally new concept, the
widespread expansion of this form of banking is certainly a
Another beneficial realization is that while we may feel that fairly recent phenomena. There are more than 150 Islamic
our world is growing apparently more complex, the truth is banking institutions and these institutions not only operate in
that this growing complexity is often just one of sheer
Muslim countries, but have also gained footing in non-
volume and not in essence any structure itself. Even today a
straight forward approach is the best solution. Muslim countries.

Over the past few decades the Muslims across the globe are In Pakistan, the Islamic Banking movement has had a
seeking means to ensure that their financial and economic checkered history, with an initial noble intention but an
dealings are in accordance with the principles of Shariah. ineffective execution, resulting in the dilution of the
Today, we are witnessing the rapid growth in Islamic Banking credibility of this model and the misunderstanding of its
worldwide. Islamic Banks are now operating in over 75
essence in the minds of the public. In 1999 ruling by the
countries across the world.
Shariah Appellate Bench of the Supreme Court, directed all
The guiding principles for an Islamic bank and the Islamic the existing interest banking laws to cease. This paved the
financial system in general is a set of rules and laws, way for the State Bank of Pakistan, the government and
collectively referred to as Shariah. This governs the prominent banking experts to make required initiatives to
economic, social, political and cultural aspects of Islamic commence Islamic Banking in the country.

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In 2001, the SBP outlined the criteria by customers. For buying machinery declining, its functional importance is
for establishment of Islamic and heavy equipment, the principles of on the rise in several modern
commercial banks in private sector and Ijarah and diminishing musharaka are economies.
subsidiaries and stand-alone branches employed.
by existing commercial banks to Product development is an important
conduct Islamic banking in Pakistan. Advisory services are also provided at area in which Islamic banks will need
Finally, in the year 2002 the State Bank Islamic banks in many countries. These to focus its resources. The industry
of Pakistan issued the first Islamic services include project planning, started mainly with basic murabaha
banking license to Meezan Bank property management, preparation of transactions and since then has
Limited as the dedicated Islamic Bank feasibility studies, project evaluation, acquired some experience, investor as
in Pakistan. Since then the Islamic trustee services and training and well as customer confidence and
Banking industry is rapidly growing education in Islamic finance and trained human resources. The way that
with the entrance of new-dedicated economics. Unlike conventional banks lies ahead is to lead the industry
Islamic Banks and existing banks some Islamic banks are also actively towards a concentrated approach to
opening Islamic Banking branches. involved in social activities. The developing new and unique products
services that are considered as social and improve the existing ones in terms
The central objective of Islamic banks service include benevolent loans, of reduced costs and efficiency in
is to provide banking facilities and collection and distribution of Zakat delivery. This will, in turn, ensure
services in accordance with Islamic funds, donation and activities that will penetration and consolidation in new
principles, rules and practices. This enhance Islamic values and ways of and existing markets respectively, and
means Islamic banks provide saving life. enhanced profitability.
facilities to depositors and extend
financing to meet fund deficits. Normal In addition, the Insurance Ordinance Islamic Banks are truly leading the way
deposit facilities such as savings of 2000 had for the first time in the forward in establishing a real, stable,
accounts, current (checking) accounts, history of Pakistan made provision for and dynamic Islamic Banking system.
fixed or investment deposits are the business of Takaful or Islamic This has become possible due to the
available to customers. Islamic banks cooperative insurance, based on the guidance of its highly qualified and
are also involved in facilitating concept of mutual assistance. However globally renowned scholars, who as a
international trade for their customers under the Insurance Ordinance, the whole bring together a rich knowledge
(Islamic Export Refinance Schemes). Takaful business may only be base of Islamic Fiqh accumulated over
Services such as letters of credit, bills conducted in accordance with rules the past 1400 years. Furthermore, with
for collection, letters of guarantee, prescribed in this regard by the the able support of the SBP's Islamic
buying and selling of foreign Securities & Exchange Commission Banking Department, all the products
currencies, and remittance services are (SECP). Despite vigorous lobbying by offered by the bank are very
also available. insurance companies as well as thoroughly scrutinized by these
concerned institutions, the SECP has Shariah specialists in Islamic finance,
Islamic banks are also actively not as yet notified the rules for Takaful hence approval of these products is not
involved in financing the needs of their business. Islamic banks are in dire based on unqualified individual
customers. This means providing short, need of the availability of the Takaful opinion or views, but on very sound
medium- and long-term funding alternative, as it would thus enable assessment and jurisprudence.
facilities. Since the Islamic banks are them to address this area as well.
prohibited from making loans with
interest to their customers, all All financial institutions in general and About the Author:
financing operations are either based banks in particular have undergone
on profit-loss sharing or based on fixed profound changes in their business Mr. Najmul Hassan, MBA qualified
charges. The principles of mudaraba functions. As they are facing increasing from IBA. He is working as General
and musharaka based on profit-loss challenges from other capital markets, Manager, Head of Corporate and
sharing concepts are used by Islamic financial intermediaries are still Business Development at Meezan
banks in financing working capital growing through the avenue of
Bank.
needs and long term financing. continuous financial innovation. As a
Principles of murabaha are used by result, in the global financial market, Readers are welcome to contact him
banks to finance the purchase of raw although the role of financial at: [email protected]
materials and occasionally fixed assets intermediation as an institution is

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