Research & Written

YOUSUF IBNUL HASAN

Program Consultant Islamic Banking & Applied Finance

IQRA University Pakistan

Design by

SAIRA ALI Student MBA Program 2010-2014

IQRA UNIVERSITY

MAN, MONEY & COMMODITY

Three factors of production give birth to the exchange

system and practice in the fulfillment of needs.

The two exchange system are classified as

Lending and Borrowing

Financing and Participation

Lending is base on principle amount in transaction by

pricing it with the time value without the concept of

utilization of money and its impact on economic activity.

Financing is made available on the basis of Man’s ability to

use the money and to multiply, divide, subtract and add

the amount realize through the exercise of money.

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DIFFERENCE OF FINANCING & LENDING

Financing is Equity and not Liability

Lending is liability and not participation.

Financing is made and Loan is given

Loan is secure financing is support.

Financing is an investment and loan is facility.

Loan cannot be financing until it is agreed on Profit and loss sharing

Financing cannot be a loan till return is guaranteed.

Loan is given at a price of money on application of Rate

Financing outcome to be profit, shared in an agreed Ratio.

Loan has to be secure by external factor of collateral

Financing is collateralize within its own system

Financing cannot be made until the user is able to use it

Lending is given against the confirmation of guarantee.3

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LENDING AND FINANCING DIFFERENCE

Lending leads to inflation and liquidation

Financing ends at ownership

Financing increase the capital base as well net-worth

Lending increase liability, cost and decrease the net worth

LENDING money given for unstated purpose against the security without going through pros & cones of activity for which money is spent on and return is fixed either in cash or in term liquidation of mortgaged movable or non movable property/properties.

FINANCING is joining in the profitable operation, like equity participation, venture finance, acquiring business operation with proper appraisal of purpose, verification, validation of data submitted by the two partners in which financier becomes direct or indirect partner in that venture with un-guaranteed profit and loss in returns.

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DEFINITION OF FINANCING

Finance is the intermediary source in shape of money

having a value to act in production, trading and exchange

of commodities, services and assets.

Financing is the source that makes the money service for

specific purpose within specific period, in between person

to person, person to institution or institution with group

or institution on an understanding to share the result in

profit and loss.

Financing is the source that develops ownership, support

entrepreneurship and line-up procurement, production,

distribution, utilization through participation and

cooperation between skill and capital on the basis of

profit and loss acceptability upon the maturity.5

yousuf ibnul hasan

(CONT…)

Financing is the use of money by one who owns it

and the other who has the ability to use it for a

common purpose to make profit by participation

and cooperation.

Financing is the act of money without the concept

of liability, collateral or the guarantee. Its origin

is investment and its end is ownership.

Financing is an act of money which is classified

as the opposite to lending.6

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THE WORLD OF MONEY

First is the Monitory Market where money is bought

and sold. In this system money is treated as the

commodity and not the medium of exchange. This

system which is based on Interest and according to

Islamic financial system it is commonly known as a one

category of Riba.

Second is the Financial Market that emerged on

factual and authentic principles of Islam & on the

guidance of Holy Quran, explained in Hadiath. In this

market the money is been served on the basis of capital

or by skill with clear understanding of participation in

responsibilities, duties, obligations, earning, income,

risk and profit sharing. 7

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HISTORICAL BACKGROUND

Financial matters in Post Islamic era were commonly

practiced on the basis of social priorities & Prophet (PBUH)

too was involved in commercial & financial activities

considering social obligations in financial matters

It is authenticated by archives of the Islamic world that

with the introduction of financing and discarding lending

the most powerful community development on the basis of

social development in first Islamic state under the

guidance of Prophet Muhammad ( May Peace Be Upon

Him) in the rule of four Caliph.

Interest based system was dominating 98% monetary

markets, controlling the market with its powerful grip and

titled as Conventional Monetary System

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(CONT…)

Now reduce to almost 75% and it is gaining the momentum on daily basis.

Financial system derived from Quran, Sunnah and Hadiath has a well defined title that signifies motive and concept of the system as

Socio-Financial System.

Islamic Finance was practice for the most part in the Muslim world throughout the middle ages.

In Spain, the Mediterranean and Baltic states, Islamic merchants became vital intermediaries for trading activities.

European financiers and businesspersons later adopted many concepts, techniques, and instruments of Islamic finance. 9

yousuf ibnul hasan

(CONT…)

Term "Islamic finance” is relatively new for commercial

money market in a sense as it appearing only in the

early 1960’s through a movement that started from Egypt

when the fist Social Bank was establish to bring the

change in the money activities and unite money with

ability with propose and period.

Commercial or business activities confirming to Islamic

principles are made under the umbrella of either

"interest-free" or "Islamic Banking which Islamic financial

system simply as "interest-free" does not provide a true

picture of the system as a whole. Prohibition of receiving

and paying interest may be the base of this system, not

all. 10

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(CONT…) It works on Islamic set guidelines consisting of Risk Sharing,

Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies, Fair Deals and Employment Growth.

Not limited to banking only but covers capital formation, capital markets, and all types of financial settlement.

The philosophical roots of an Islamic financial system originate from the relations of factors of production and economic activities.

Conventional financial system deals primarily with the economic lending and borrowing aspects of transactions.

Financial system equally emphasizes on the ethical, moral, social & religious proportions for enhancing equality and fairness for an ideal society.

It fully appreciates context of Islamic teachings on the work ethic, wealth distribution, social and economic justice as well as role of the state and responsibilities and duties of the citizen. .

It is established on absolute prohibition of payment or receipt of predetermined and guaranteed return rate. 11

yousuf ibnul hasan

(CONT…)

Pre-agreed/ estimated share of profit or growth had been

noticed in the archives, way back to post Islamic era and

was practiced by Muhammad (May Peace Be Upon Him),

the Caliphs and the Asahaba (close associates of Prophet

May Peace Be upon Him).

This ended the concept of interest and ruled out use of

debt-based instruments.

The system encourages risk sharing, promotes

entrepreneurship, discourages speculative behavior, and

emphasizes the sanctity of contracts

Basic framework for Islamic financial system is

enforcement of the rules for handling of economic, social,

political, and cultural characteristic of Islamic societies12

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BASIC PRINCIPLES OF ISLAMIC FINANCE

Prohibition of Riba

Any unjustifiable increase of capital through the use of

the capital whether in financing, lending or sales is

central belief of the system.

Any positive, fixed, predetermined rate tied to maturity

and amount of principal etc. i.e. guaranteed regardless of

performance of the investment is prohibited

Risk sharing

Interest is prohibited and owner of funds become

investors instead of creditors. The provider of capital and

entrepreneur shares business risks and shares profits

and loss according to the ratio of investment and

participation by way of their Capital or Skill.13

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(CONT…)

Money as "potential" capital

Money is treated as "potential" capital

It becomes actual capital only when it joins hands with

other resources to undertake a productive activity.

Islam recognizes the time value of money, only when it

acts as capital, not when it is "potential" capital

Money cannot be treated as Capital if it is not in

circulation.

Prohibition of speculative

An Islamic financial system discourages exhibition of

wealth and prohibits transactions featuring extreme

uncertainties, gambling, and risks 14

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(CONT…)

Transparency of contracts

Islam upholds contractual obligations and disclosure of information as a sacred duty. This feature is intended to reduce risk of information and moral hazards.

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

Concept of Finance defines “Interest” as price of money where lender charges borrower pays. Islam accepts that agreement between financier and user to be pre agreed on terms of transaction and fulfills obligations in rightful manner. 15

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(CONT…)

Salient features of this order

Islam clearly characterizes difference between lawful and forbidden economic activities and permits the Muslims to make all efforts for their right in seeking their economic benefits.

Islam prohibits financial, economical, social and legal actions, which are morally, financially and socially damaging to the community life.

The Islamic financial system employs concept of participation in enterprise, utilizing funds at risk on a profit-and- loss-sharing basis.

It implies Careful investment policy, diversification of risk and careful management by Islamic financial institutions.

Potential profit in proportion to the risk assumed and to satisfy conflicting demands of participants in the current environment and within the guidelines of the Shariah.

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HOW FINANCE IS APPRAISE

Financing appraisal is base on straight line method,

applying 12-P Formula

12-P Formula in pre-financing activities

Person who is financing to whom?

Purpose for which financing is work out?

Project for which financing is required?

Period for which finances to stay as financing?

Product that develop through financing?

Process to be use for financing?

Price is the volume of finance require?

Place locations where finance shall be utilize?

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(CONT…)

Participation, relationship and responsibilities of

financier and user?

Pact terms and condition of financing between parties of

financing?

Professionalism ability, experience, knowledge and

expertise in purpose?

Perfect ness in Performances?

Profitability by the application of twelve “P” formulas

which is the RISK base perimeters

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