Group members

Asad Mehmood

Hamza Bhatti
Sulaiman Akram Hisan Asif

 Banking according to Islamic values Interest free banking Prohibit unethical practices Basic features of Islamic finance that effect the products

The Philosophy of Islamic Finance

Based on prohibitions and encouragements
Asset backed transaction Structure revolves around riba and profit

Exchange transaction allowed

I.Fungible II.Non fungible Investment consider when it is part of real activity Deposits, Government bonds and other financial document

consider un Islamic

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Excessive risk taking not allowed Transparency issues Above discussion three rules stem from it:

Avoiding Interest ii. Avoiding Gharar iii. Avoiding Gambling

i.

Avoiding Interest

Two verses serves as fundamental building block of Islamic theory Charge premium on loan or look for compensation Pricing the goods Once debt created you wont demand for more

Avoiding Gharar
Means uncertainty Three ways it could be used Current practices of institutions is un Islamic; Futures and

options Prohibits speculative trading IFIs should disclose information Trading derivatives grey area

Avoid Gambling
Prize bond and lotteries comes under it Chance and disproportionate prizes

Certain schemes are prohibited

Futures and options are prohibited

Alternative Financing Principles

In absences of interest following tools are there to do business: i. Mudharbah ii. Musharka iii. Murabaha iv. Salam v. Ijarah vi. Istisnaa

Security/Collateral
Bank can ask for collateral Bank can ask for security

Bank not entitled to it

Islamic banks products are non liquid

Valid Gains on Investment

Profit is reward Association with tangible real asset

Money is not capital

All pre-fixed returns are not Riba

Not necessary income is variable
Look nature of transaction Good could be sold at higher prices

Various transaction are discussed below:

i. Bai ii. Hibah

iii. Ribah
iv. Ijarah

Variables Rates on Investment

Shirkah provides variable return Investor could get quasi fixed return

More risky
Liberty to determine profit and loss

Benchmarks
Essential for the regulation of contract
Makes effective and transparent i. Ujrat ul mithl

ii. Riba al mithl

iii.Qirad al mithl iv.Musaqat mithl

Mithl means compensation

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Only one reference for conventional bank
Two reference used in IFIs Both system use same benchmark

Introduction
Al Kharaj bi-al-Daman the criteria of legality of any

return on capital
one has to bear loss, if any, if he/she wants to attain

profit over any investment.

Investment is not merely the financial one, rather

financial investment will be considered only if it is part of a real activity.

Important points
Reward should depend on the productive behavior of

the investment.

E.g in loans, there is not entitlement to any profit as

the creditor goes back to the original amount irrespective of the amount which the debtor incurred as loss in the business.

Important points
Islamic banks deal with documents with particular

attention to Shariah compliance, they use documents to facilitate sales and lease transactions.
Transfer of ownership: For the transfer of an assets

ownership, there must exist separate sale and gift agreement.

Important points
Islamic banks cannot accept fees against lending

operations but they can/may offer services against service charges or management fees.

Important points
Islamic banks have to ensure transparency in

documentation in the process of conducting its transactions. The Islamic bank disclosure system is rigorous as their role is not limited to that of a passive financier but they also finance for physical assets like machinery, etc. Asset risks involved in Modarba and Ijara

Important points
Internal controls and Risk Mitigation needs to be

upgraded, etc. Mitigation of Risk would require sound Islamic Financial expertise and Shariah board compliance. Debt has to remain a part of Islamic financial institutions while providing financial facility through trading activities, create a debt that is genuinely shown in their balance sheets.

Important points
The only point that should be kept in mind is that in

debt there should not be any interest incurring. (Islamic perspective example) EXCHANGE RULES: the famous Hadith of the Holy Prophet (PBUH) has laid the foundation of these rules. (for the exchange of six commodities) (explanation with Islamic terms, continued).

TIME VALUE OF MONEY IN ISLAMIC FINANCE

There is concept of time value of money in Islam, but within some limitations. Credit price of commodity can be greater than the cash price, but price should be settled before separation. (clearly define in Sharah)
The only prohibition is any addition to the price once agreed because of any delay in its payment.

 The difference between cash and credit price of commodity should be considered on the genuine market practice. Both time and place have impact on the price of commodity, but it is acceptable in Sharah if done by genuine market forces. Sharah also prohibits mutual exchanges of gold, silver or monetary values except when it is done

simultaneously.

 There is also forward contract known as Salam.

In Salam commodity is bought for immediate

payment but delivery is done in future.

Time valuation can only be done in business and

trade Goods not in the exchange of monetary values and loans or debts. Islamic

MONEY, MONETARY POLICY AND ISLAMIC FINANCE

The status, value, role, function of money is different in Islamic finance as comparing to conventional finance.
In conventional finance money is considered as commodity, while in Islam it is taken money as a medium of exchange.

 Status of Paper Money

Money only for exchange and payments and not for itself, as it has no intrinsic value.
Notes of any particular currency can be exchanged equal for equal Linking money to productive purposes brings into action labor and other resources bestowed by Allah (SWT) to initiate a process from which goods and services are produced and benefits passed on to society.

 Trading in Currencies

Its is conformed that paper money cannot be sold or bought like goods. The Sharah treated money in two scores
i.

money (of the same denomination) is not held to be the subject matter of trade, like other commodities. If for exceptional reasons, money has to be exchanged for money or it is borrowed, the payment on both sides must be equal

ii.

Fluctuation
Currency rate

effect of currency appreciation & depreciation

Settlement of debts

Islamic point of view

Summary
Islamic Finance ???
Conditions that contract should not contain. Riba Gharar Qimar

Summary
Islamic Shariah does not prohibit all the gains on capital.
The prohibition of risk free return and permission to trade. The Islamic banking system is based on risk sharing.

Summary
Once the bank have stable stream of halal income.

Depositor will also receive stable and halal income.

Demand deposit vs. Investment deposit

Demand : no participation in PL. Investment: mobilize on the bases of PLS

Summary
Permission w.r.t cash

Prohibition w.r.t loaning

Permission w.r.t leasing

Silent Features Of Islamic Finance

All gains on principal are not prohibited.
Lending is a virtuous act. Entitlement to profit is linked with the liability of risk of

loss Differentiating
Trading Loaning Leasing

MAJOR FINDINGS
A fixed return in the pricing of goods
Islamic banking is also a business. The cash and credit prices of commodities are different, its

normal in trade. Trade profit is permissible. Preferable modes of financing.