introduction islamic banking & finance

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  • By Farrukh QUreshi

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  • Sources of the ShariahFramework of Islamic FinanceShariah, Fiqh & MuamalatNecessary Requirements of Islamic FinanceRiba, Gharar, Maysir & OthersEssential Contracts in Islamic FinanceProducts and Instruments

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  • Before explaining the concept what is Islamic Banking & Finance the elaboration of concept why Islamic Banking is very important.

    Islam is a complete code of life that provides guidance regarding each as pect of life.

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  • The primary objectives of Islamic Economic System are as under.

    Equal Distribution of wealthSocial justiceThese objectives can never be achieved in Interest/Riba based economic systems.*

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  • Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed by the principles laid down by Islamic Shariah, in addition to the conventional good governance and risk management rules,

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  • Primary Sources

    The Holy Quran

    Sunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH)

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  • QURAN

    Primary source for discerning the laws of God.

    Example : God has permitted trade and prohibited RibaReference : Surat Al Baqara verse 275*

  • SUNNAH

    Literally means : Well-known pathWords or Acts of the Prophet- Sayings of the Prophet (SAW) used to lay down and give moral guidanceActs of the Prophet (SAW) which have a legal content (ex: method of praying)- Tacit approval (silence) of the Prophet (SAW) on the action of one of his companions in his presence or in his knowledge*

  • Secondary SourcesIJMA (Consensus)

    QIYAS (Analogy)

    IJTIHAD (reasoning of a group of qualified scholars, which is aimed at adapting Islamic rules to the contemporary world)

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  • IJMA (Consensus)

    Literally means agreement on a matter- In its technical sense, it means the consensus of the independant jurists from the Ummah of the Prophet Muhammad (SAW) after his death- Example : Jurists have reached a consensus (Ijma) that the selling of goods by an party who doesnt own the goods and without the approval of the goods owner is void.*

  • QIYAS

    Literally means measuring or estimating one thing in terms of anotherTechnically, it is the assignement of the legal rule of an existing case found in the texts of the QURAN, the SUNNAH, or IJMA to a new case whose legal rule is not found in these sources.- Example : Jurist looked into details of the prohibition of alcohol. After analysis, it was decided that the underlying reason is intoxication. Once this has been defined, the scholars would look at other liquids that intoxicate and extend the legal rule *

  • IJTIHAD

    Number of meaning of Ijtihad

    Islamic scholars take into account the customs of a place that adress a problem but are not offensive to Sharia- In some cases, Islamic Scholars develop their own preference from a solution to an apparently unique problem- Fundamentaly, it is a personal exercise until other scholars are able to agree with the solution proposed by the innovator.*

  • In general, the framework of Islamic finance is the same framework used by the conventional finance practices.

    These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.

    Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.

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  • However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance. Any violation of this framework will definitely effect the validity of Islamic finance itself. Shariah Compliance Framework

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  • Three main interrelated terminologies: Shariah, Fiqh & MuamalatShariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba, etc.As such, it is revealed in nature

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  • Shariah, in this sense, is wide and encompassing various branches of IslamNormally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)It is the duty of the judge (qadi), mufti and jurisconsult (ulama) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios. The result of human reasoning and understanding to the shariah is known as fiqhFixed v. Flexible Agreements v. Differences

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  • However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).Islamic commercial law is one of the components of Islamic law Other components of Islamic law include:Islamic law of purification and worshipIslamic family lawIslamic criminal lawIslamic law of evidence and procedureIslamic law of inheritance, etc The main subjects of Islamic commercial law are commercial contracts and the rules governing them

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  • Conclusion of contract by mutual consentThe avoidance of ribaThe avoidance of ghararThe avoidance of transactions involving maysir (gambling)The avoidance of transactions involving prohibited commodities

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  • WHAT TO BE AVOIDEDRiba prohibited in many Quranic verses and sayings of the Prophet s.a.w.Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba

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  • Literally: excess, expand, increase, growthAny unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities)

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  • PROHIBITION OF RIBA IN THE QURANFirst Stage (30:39) Second Stage(4:160-161) Third Stage(3:130) Fourth Stage(2:275-281) Compare riba with zakat & charityPraising zakat & charity, not riba

    Attaching the practice of riba with the JewsConsider the practice as an iniquity (zulm)

    Prohibiting the practice of charging double and multiple riba

    Conclusively prohibiting all forms of ribaAny excess over the capital is disallowed

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  • and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other peoples property, has no increase with Allah

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  • and their taking of Riba though they were forbidden from taking it and their devouring of mens substance wrongfully. and we have prepared... a painful torment.

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  • O you who believe, Eat not Riba doubled or multiplied, but fear Allah that you may be successful.

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  • those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba, whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire they will abide therein forever.

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  • Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms)..O you who believe, be afraid of Allah and give up what remains (due to you) from Riba (from now onward), if you are really believers

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  • And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).

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  • And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know.And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.

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  • CONTDThere are also a number of narrations from the Sunnah on the prohibition of ribaSome of the narrations give general prohibitions of riba, e.g.:

    The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt).*

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  • Under Islamic law, riba can occur in two main situations, i.e.: riba al duyun (loan): the riba or excess which occurs in debt and loan transactions because of extension/delay in repaymentriba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of riba-bearing commodities without observing the required rules

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  • PROHIBITION OF RIBA (LOAN)

    Interpretative EffortsWhat amounts to

    Trade

    Usury

    CriteriaOppressive / unfair distribution of risk & returnUnjustified enrichment at expense of others

    CriteriaFair exchange of goods or valueFair distribution of risk & return

    Surah al-Baqarah, ayat 275 But Allah hath permitted trade and forbidden usury*

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  • PROHIBITION OF RIBA (EXCHANGE)

    Interpretative EffortsApplication

    Staple Food

    RulesSame TypeAt ParSpotDifferent TypeSpot

    RulesSame denominationAt ParSpotDifferent denominationSpot

    CurrencySunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the c

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