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ISLAMIC BANKING :ISLAMIC BANKING :Basic Basic Concepts Concepts and Philosophyand Philosophy

ByBy

Muhammad AyubMuhammad Ayub National Institute of banking and Finance, National Institute of banking and Finance,

State Bank of Pakistan, KarachiState Bank of Pakistan, Karachi

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Pre-requisite for Isl. Pre-requisite for Isl. BankingBanking

Convincing clarity of the conceptsConvincing clarity of the concepts All stakeholdersAll stakeholders Bankers, in particularBankers, in particular

Shariah scholarsShariah scholars RegulatorsRegulators Product developersProduct developers ImplementersImplementers Those sitting at the front officeThose sitting at the front office

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MythsMyths

Any Return on deposits is Riba;Any Return on deposits is Riba; Any prefixed return – RibaAny prefixed return – Riba Islamic banking: cost-less money Islamic banking: cost-less money

available – Approach of Businesses available – Approach of Businesses Repayment of loans not a serious issue Repayment of loans not a serious issue

–be waived of–be waived of Trade profit similar to interest on loans / Trade profit similar to interest on loans /

debtsdebts

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Myths (Cont’d)Myths (Cont’d)

Credit and cash market prices of a Credit and cash market prices of a commodity must be samecommodity must be same

Profit margin on credit sale by banks Profit margin on credit sale by banks resembles Riba.resembles Riba.

Sharing vs. Non Sharing instruments:Sharing vs. Non Sharing instruments: Permissibility & Priority two Permissibility & Priority two

different aspectsdifferent aspects Money can be rented like other assetsMoney can be rented like other assets

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Loans in Islamic FinanceLoans in Islamic Finance

Qard (Loan) : Qard (Loan) : to give anything in ownership of to give anything in ownership of other by way of virtue - same or similar amount of other by way of virtue - same or similar amount of that thing would be paid back on demand or at the that thing would be paid back on demand or at the settled time.settled time.

Dayn (Debt) : Dayn (Debt) : Incurred by way of rent or trade-Incurred by way of rent or trade-ought to be returned at the settled time without any ought to be returned at the settled time without any profit.profit.

Āriyya: Āriyya: To give any commodity to other for use To give any commodity to other for use without taking any return for its use-Ghazwa without taking any return for its use-Ghazwa Hunain; Camels and iron chest plates .Hunain; Camels and iron chest plates .

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Welfare Economy FrameworkWelfare Economy Framework Socio-economic & Distributive JusticeSocio-economic & Distributive Justice Ethics and value systemEthics and value system Functioning of the Market & Role of the State:Functioning of the Market & Role of the State:

Right of ownership, freedom of enterprise,Right of ownership, freedom of enterprise, Competitive price mechanism Competitive price mechanism

Transparency and disclosures Transparency and disclosures Over seeing role of the State;Over seeing role of the State; Creating additional value and sharing gainsCreating additional value and sharing gains

Closer linkage between real economy & Closer linkage between real economy & financefinance

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Riba ProhibitionRiba Prohibition

Unanimity on Riba Prohibition;Unanimity on Riba Prohibition; Problem then?Problem then? InterpretationInterpretation Consensus (Consensus (Holy Quran gives principle Holy Quran gives principle

ddefining Riba in Verse II-279)efining Riba in Verse II-279)..

“O you who believe. Fear Allah, and give up the Riba that remains outstanding if you are (in truth) believer”. (11:278).

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RibaRiba - - Unanimity Unanimity ( (Contd)Contd)

““If you do not do so, then be sure of If you do not do so, then be sure of being at war with Allah and his being at war with Allah and his Messenger. But, if you repent, then Messenger. But, if you repent, then you have your principal”. (11:279)you have your principal”. (11:279)

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And if you repent, And if you repent, then you have your then you have your principal.principal. Wrong not, and you shall not be Wrong not, and you shall not be wronged ”. {without inflicting or receiving wronged ”. {without inflicting or receiving injustice}injustice}

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FoundationFoundation

Those who protested and argued that lending on interest was like an act of trade, were admonished through revelation that while ‘trade’ was permitted, ‘Riba’ was forbidden and in loan transactions they were entitled to their principal sums only.

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They used to say that it is all equal whether They used to say that it is all equal whether we increase the price in the beginning of the we increase the price in the beginning of the sale, or we increase it at the time of maturity. sale, or we increase it at the time of maturity. It is this objection which has been referred to It is this objection which has been referred to in the verse by saying “They say that the in the verse by saying “They say that the sale is very similar to Riba.” (Ibn-Abi-Hatim)sale is very similar to Riba.” (Ibn-Abi-Hatim)

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Types of RibaTypes of Riba

Riba Al-Fadl - sale transactions, Riba Al-Fadl - sale transactions, Quality premium in exchange of low quality Quality premium in exchange of low quality

with better quality goods of same kind; with better quality goods of same kind; prohibited e.g. dates for dates, wheat for prohibited e.g. dates for dates, wheat for wheat etc.wheat etc.

Riba Al-Nasia - loan transactions. Riba Al-Nasia - loan transactions. Riba Al-Nasia (Riba Al-Ouran) involved in Riba Al-Nasia (Riba Al-Ouran) involved in

credit/delay; modern banking transactions credit/delay; modern banking transactions falls under Riba Al-Nasia, falls under Riba Al-Nasia,

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Overall ConsensusOverall Consensus

Council of Islamic Ideology (CII): Preliminary WorkCouncil of Islamic Ideology (CII): Preliminary Work CII Report on Elimination of Interest from the CII Report on Elimination of Interest from the

Economy (June, 1980) – Economy (June, 1980) – Unanimously EndorsedUnanimously Endorsed Representation of all Muslim sects in PakistanRepresentation of all Muslim sects in Pakistan

Justice Dr. Tanzil-ur-Rahman (J Afzal Cheema)Justice Dr. Tanzil-ur-Rahman (J Afzal Cheema) Mawlana Zafar Ahmad AnsariMawlana Zafar Ahmad Ansari Mufti Sayyahuddin KakakhelMufti Sayyahuddin Kakakhel Khawaja Qamruddin SiyalviKhawaja Qamruddin Siyalvi Mawlana Muhammad Taqi UsmaniMawlana Muhammad Taqi Usmani Mawlana Muhammad Hanif NadviMawlana Muhammad Hanif Nadvi Allama Syed Muhammad RaziAllama Syed Muhammad Razi Mr. Khalid M IshaqMr. Khalid M Ishaq

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ProhibitionsProhibitions Earning returns from a loan or debt contract Earning returns from a loan or debt contract

(Riba/Interest)(Riba/Interest)

Compensation-based restructuring of debts Compensation-based restructuring of debts

Excessive uncertainty in contracts in respect of Excessive uncertainty in contracts in respect of

the subject matter or the price. (Gharar)the subject matter or the price. (Gharar)

Gambling and chance-based games (Qimar)Gambling and chance-based games (Qimar)

Selling debt contracts at discountSelling debt contracts at discount

Delayed exchange of foreign exchangeDelayed exchange of foreign exchange

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EncouragementsEncouragements

BenevolenceBenevolence

Transparency and disclosuresTransparency and disclosures

Purification of incomePurification of income

Comprehensive and universal ethical Comprehensive and universal ethical

approachapproach

DocumentationDocumentation

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Business Vs. Business Vs. BenevolenceBenevolence

Banking or Benevolence ?Banking or Benevolence ? Sharing of profit and loss on post facto Sharing of profit and loss on post facto

basis arising from:basis arising from:

i.i. (Deferred) Trading– profit margin for (Deferred) Trading– profit margin for the sellerthe seller

ii.ii. Rentals on leased assetsRentals on leased assets

iii.iii. PLS PLS

iv.iv. Combination of contractsCombination of contracts Return free (loans)Return free (loans)

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Businesses Modes Businesses Modes

Trading, Muzara’ah, Musaqat (Gardening Trading, Muzara’ah, Musaqat (Gardening with Shirkah), Services (Ujrah and Ijarah) with Shirkah), Services (Ujrah and Ijarah) – The Main businesses;– The Main businesses;

Barter and the Money based transactions;Barter and the Money based transactions; Individual Businesses, with self capital or Individual Businesses, with self capital or

arranged on Riba;arranged on Riba; Loans, Debts (Credit /Forward contracts – Loans, Debts (Credit /Forward contracts –

Salam/SalfSalam/Salf PartnershipPartnership

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Impact of contractsImpact of contracts

Bay: Definite transfer of ownership of goods against Bay: Definite transfer of ownership of goods against payment of price-spot, delayed and forward; payment of price-spot, delayed and forward;

Hibah: Permanent transfer of ownership of assets Hibah: Permanent transfer of ownership of assets free of any payment;free of any payment;

Riba (al Nasia): Temporary transfer of ownership of Riba (al Nasia): Temporary transfer of ownership of goods/assets against payment;goods/assets against payment;

Qard Hassan / Tabarrue: Temporary transfer of Qard Hassan / Tabarrue: Temporary transfer of ownership of goods/assets free of any payment;ownership of goods/assets free of any payment;

Ariyah: Temporary transfer of usufruct of goods Ariyah: Temporary transfer of usufruct of goods along with or without assets free of any paymentsalong with or without assets free of any payments

Ijarah: Transfer of usufruct of goods against payment Ijarah: Transfer of usufruct of goods against payment of rent.of rent.

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Principles of Islamic FinancePrinciples of Islamic Finance Lending a virtuous act – Not a business. Lending a virtuous act – Not a business.

Prohibition of Riba and Gharar; permission of Prohibition of Riba and Gharar; permission of trading. trading.

All gains to principal not prohibited.All gains to principal not prohibited. Deciding Factor: nature of transaction.Deciding Factor: nature of transaction. Entitlement of profit: liability of risk of loss with the Entitlement of profit: liability of risk of loss with the

capital itself; (Al Kharaj bil Daman)capital itself; (Al Kharaj bil Daman) Profit to be earned by sharing risk and reward of Profit to be earned by sharing risk and reward of

ownership through pricing of ownership through pricing of goods, services or goods, services or benefits.benefits.

Time has value that can be discounted only Time has value that can be discounted only through price; not in the form of interest, through price; not in the form of interest, sometimes negative value as well.sometimes negative value as well.

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Profit linked with LiabilityProfit linked with Liability

Ownership cannot be separated from the risk of its Ownership cannot be separated from the risk of its lossloss

Al Kharaju Bil damanAl Kharaju Bil daman The above implies that entitlement to return from The above implies that entitlement to return from

an asset is intrinsically linked to the liability of loss an asset is intrinsically linked to the liability of loss of that assetof that asset What that implies for the attitude towards risk?What that implies for the attitude towards risk? What that implies for time value of money?What that implies for time value of money?

in loansin loans in deferred salesin deferred sales

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Principles of Islamic Finance Principles of Islamic Finance (Contd)(Contd)

Ability to cause ‘value addition’.Ability to cause ‘value addition’. Differentiating: Trading, loaning and leasingDifferentiating: Trading, loaning and leasing

Ownership TransferOwnership Transfer in: Sale of assets, Loans and in: Sale of assets, Loans and Leasing;Leasing;

Any thing which cannot be used without Any thing which cannot be used without consuming its corpus, or whose corpus changes consuming its corpus, or whose corpus changes its form in the process of its use, cannot be leased its form in the process of its use, cannot be leased out like money, edibles, fuel, etc.out like money, edibles, fuel, etc.

Taking rent on leasing of asset permissible while Taking rent on leasing of asset permissible while rent on loan is prohibited.rent on loan is prohibited.

Repayment of loan- Must.Repayment of loan- Must. Husan al qada: Repaying a loan in excess of the Husan al qada: Repaying a loan in excess of the

principal.principal. Debt contracts cannot be sold at discount.Debt contracts cannot be sold at discount.

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PrepaymentsPrepayments

Jews of Jews of Bani al NadhirBani al Nadhir expelled from expelled from Madina, ‘Da’awoo wa Madina, ‘Da’awoo wa Ta’ajjaloo’Ta’ajjaloo’

Another Hadith: Another Hadith: Miqdad bin AswadMiqdad bin Aswad, 90 for 100 Drahim of , 90 for 100 Drahim of Loan; Holy Prophet termed it as Riba; Holy Prophet asked Loan; Holy Prophet termed it as Riba; Holy Prophet asked Ka’ab bin MalikKa’ab bin Malik to waive half of the debt payable by to waive half of the debt payable by Abdullah bin Abi Hadrad;Abdullah bin Abi Hadrad;

Jurists : remitted amount in case of Jurists : remitted amount in case of Bani al NadhirBani al Nadhir related related to amount of Riba accrued to Jewsto amount of Riba accrued to Jews

Imam Malik: no difference of opinion about illegality of Imam Malik: no difference of opinion about illegality of remitting a part of Dayn;remitting a part of Dayn;

Duyoon HaalahDuyoon Haalah and and Dyun Mu’ajjalah; Remission in due Dyun Mu’ajjalah; Remission in due loans allowedloans allowed as delay is not right of the debtor: Shah as delay is not right of the debtor: Shah Waliullah also of this view.Waliullah also of this view.

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Exchange RulesExchange Rules Different for different contracts and types of wealth:Different for different contracts and types of wealth:

Goods, Durable assets, Shares representing pool Goods, Durable assets, Shares representing pool of assets - Market based pricingof assets - Market based pricing

Gold silver or any monetary units (Athman) – Gold silver or any monetary units (Athman) – Rules of Bai al SarfRules of Bai al Sarf

Usufruct and services (Leasing/ Services)Usufruct and services (Leasing/ Services)

Loans/Debts – Repayment or Assignment of the Loans/Debts – Repayment or Assignment of the same amount.same amount.

Well-Known Injunction on exchange of six Well-Known Injunction on exchange of six commodities: Gold, Silver, Wheat, Barley, Dates and commodities: Gold, Silver, Wheat, Barley, Dates and Salt.Salt.

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Exchange Rules (Nawawi)Exchange Rules (Nawawi) Illah Illah (Effective Cause of prohibition): Unit of value (Effective Cause of prohibition): Unit of value

and Edibilityand Edibility

When underlying When underlying illah illah is different, short fall/excess is different, short fall/excess and delay both are permissible, e.g. sale of gold for and delay both are permissible, e.g. sale of gold for wheat.wheat.

When commodities of exchange are similar, excess When commodities of exchange are similar, excess and delay both are prohibited, e.g. gold for gold or and delay both are prohibited, e.g. gold for gold or wheat for wheat, Rupee for Rupee, etc.wheat for wheat, Rupee for Rupee, etc.

When commodities of exchange are heterogeneous When commodities of exchange are heterogeneous but the but the illahillah is same, as in the case of gold for silver is same, as in the case of gold for silver (medium of exchange) or wheat for rice (edibility), (medium of exchange) or wheat for rice (edibility), then excess/deficiency is allowed, but delay in then excess/deficiency is allowed, but delay in exchange is not allowed.exchange is not allowed.

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Exchange of Currencies Exchange of Currencies Contd)Contd)

Special rules for exchange of monetary Special rules for exchange of monetary values.values.

Forward Currency Contracts : Some scholars Forward Currency Contracts : Some scholars forbid them while others distinguish between forbid them while others distinguish between the two cases:the two cases:

First, where First, where one currency is delivered on spot and one currency is delivered on spot and the other is delayedthe other is delayed - - forbiddenforbidden. .

Second, Second, permitted,permitted, involves the involves the future exchange of future exchange of both currencies at the previously agreed rate.both currencies at the previously agreed rate.

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Alternative Financing Alternative Financing PrinciplesPrinciples

Participation and sharing principleParticipation and sharing principle

Deferred trading principleDeferred trading principle

Interest free loans Interest free loans

Combination of contractsCombination of contracts

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Main Financial ContractsMain Financial ContractsA. Debt creating Modes (Low Risk Category)A. Debt creating Modes (Low Risk Category)

1.1. Qard Al-Hasan (interest-free loan)Qard Al-Hasan (interest-free loan)2.2. Bai Muajjal (Price deferred sale)Bai Muajjal (Price deferred sale)3. 3. Murabaha and Musawama Murabaha and Musawama 4. 4. Salam (Commodity sale)Salam (Commodity sale)5.5. Istisna´a (Istisna´a ((Order to Manufacture)(Order to Manufacture)

B. Semi-debt ModesB. Semi-debt Modes1. 1. IjaraIjara

C. Sharing or Non-debt Modes (Full Risk C. Sharing or Non-debt Modes (Full Risk Category)Category) 1. 1. Musharaka (Close to Venture Capital)Musharaka (Close to Venture Capital)2. 2. Specific Purpose Mudaraba Specific Purpose Mudaraba 3. 3. General Purpose MudarabaGeneral Purpose Mudaraba

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Shirkah RulesShirkah Rules

Commingling by two or more persons, their Commingling by two or more persons, their money or work or obligations to earn a money or work or obligations to earn a profit or a yield or appreciation in value and profit or a yield or appreciation in value and to share the loss if any according to their to share the loss if any according to their proportionate ownership. proportionate ownership.

In Shirkah, pre-stipulated ratio of profit distribution In Shirkah, pre-stipulated ratio of profit distribution may differ from ratio of investment but the loss may differ from ratio of investment but the loss must be shared exactly in accordance with the must be shared exactly in accordance with the ratio of capital (as also in Mudaraba).ratio of capital (as also in Mudaraba).

Not allowed to fix a lump sum amount for any of Not allowed to fix a lump sum amount for any of the partners, or any rate of profit tied up with the partners, or any rate of profit tied up with investment.investment.

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ShirkahShirkah

The profit ratio must relate to the The profit ratio must relate to the actual profit accrued to the business; actual profit accrued to the business; e.g. between two parties: fifty: fifty, e.g. between two parties: fifty: fifty, sixty: forty or thirty: seventy; or sixty: forty or thirty: seventy; or partners A, B and C, can get 30%, 40, partners A, B and C, can get 30%, 40, and 30% of the profit.and 30% of the profit.

Shariah scholars accept the concept Shariah scholars accept the concept of ‘Projected profit’ subject to final of ‘Projected profit’ subject to final settlement.settlement.

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MusharakaMusharaka

Where all the partners invest some capital into Where all the partners invest some capital into a commercial enterprises or they jointly a commercial enterprises or they jointly undertake to render some services to their undertake to render some services to their customers and share the fee charged by them customers and share the fee charged by them according to agreed ratio.according to agreed ratio.

Or they Or they avail credit from market using their avail credit from market using their credibility and sell the commodity to credibility and sell the commodity to share the profit so earned at an agreed share the profit so earned at an agreed ratio.ratio.

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MudarabaMudaraba

Mudaraba/Muqarada; one party provides capital Mudaraba/Muqarada; one party provides capital and the other provides entrepreneurship. and the other provides entrepreneurship.

The basis for relationship between banks, The basis for relationship between banks, depositors and entrepreneurs.depositors and entrepreneurs.

The amount of investment: be precisely The amount of investment: be precisely determined.determined.

Entrepreneur can be a natural person, a group of Entrepreneur can be a natural person, a group of persons, or a legal entity and a corporate body.persons, or a legal entity and a corporate body.

Profit to be divided in strict proportion agreed at Profit to be divided in strict proportion agreed at the time of contract.the time of contract.

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Principles of Credit SalePrinciples of Credit Sale Installments Sale permissible, even if the deferred Installments Sale permissible, even if the deferred

price exceeds the spot price.price exceeds the spot price.

Deferred prices can vary so long as price not Deferred prices can vary so long as price not finalised. finalised.

Sale cannot take place until the parties agree to a Sale cannot take place until the parties agree to a particular price & mode of payment. particular price & mode of payment.

Not permissible to fix the spot price on cash basis, Not permissible to fix the spot price on cash basis, then to charge interest expressly tied with different then to charge interest expressly tied with different periods. periods.

Commercial papers are lawful types of Commercial papers are lawful types of authentication of a debt by putting it down in writing; authentication of a debt by putting it down in writing; - Treated by Shariah near to mandatory.- Treated by Shariah near to mandatory.

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Two main prohibited SalesTwo main prohibited Sales

Bai al inahBai al inahCreditor purchasing assets from debtor on Creditor purchasing assets from debtor on

cash and selling back to him on creditcash and selling back to him on credit

• Bai al DaynBai al Dayn

• Trading of debt securitiesTrading of debt securities

• On face value- Hawalah - PermissibleOn face value- Hawalah - Permissible

• On premium or discount – Not permissibleOn premium or discount – Not permissible

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MurabahaMurabaha Basic concept: Sale on mutually agreed profit margin Basic concept: Sale on mutually agreed profit margin

on the known cost of goods; payment of sale price is on the known cost of goods; payment of sale price is deferred. deferred.

Real, tangible goods to be traded and not papers of Real, tangible goods to be traded and not papers of debt or credit documents.debt or credit documents.

Murabaha cannot be used as mode in case no Murabaha cannot be used as mode in case no commodity is purchased by the client.commodity is purchased by the client.

Buy-back arrangement: not allowed.Buy-back arrangement: not allowed.

MUAJJAL; Credit price may include margin of mark-up, MUAJJAL; Credit price may include margin of mark-up, taking into consideration the deferred payment. As a taking into consideration the deferred payment. As a debt, no return can be charged on the amount of debt, no return can be charged on the amount of Note/Bill.Note/Bill.

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MURABAHA ContdMURABAHA Contd Seller having a good title Seller having a good title physical / constructive possession.physical / constructive possession. Defaulter: different punishments, penalty for Defaulter: different punishments, penalty for

charity.charity. Solatium through court (out of penalty).Solatium through court (out of penalty). Client as Agent to the BankClient as Agent to the Bank; ; Better to have a third party as agent; Better to have a third party as agent; Roll-over.Roll-over. Asset price Risk or commodity risk ( client Asset price Risk or commodity risk ( client

might not take delivery);might not take delivery); Market risk, Market risk, Credit risk, Credit risk, Reputational RiskReputational Risk

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Rules in MusawamahRules in Musawamah

AA general kind of sale: Price bargained without any general kind of sale: Price bargained without any reference to the price paid or cost incurred.reference to the price paid or cost incurred.

Seller not obliged to reveal his cost. Seller not obliged to reveal his cost.

Different from Different from MurabahaMurabaha in pricing formula only. in pricing formula only.

MusawamahMusawamah can be used for big single deals. can be used for big single deals.

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Salam Salam (Forward Sale) (Forward Sale)

Prepayment of price in full for goods to be delivered in Prepayment of price in full for goods to be delivered in future.future.

Allowed by Holy Prophet (SAW) himself to meet Allowed by Holy Prophet (SAW) himself to meet farmers’ money need.farmers’ money need.

Banks will receive contracted commodities, not money.Banks will receive contracted commodities, not money.

Parallel Parallel Salam:Salam: a bank can sell a commodity purchased a bank can sell a commodity purchased through through SalamSalam for even the same date of delivery or the for even the same date of delivery or the quantity;quantity; As long as the two contracts are not made As long as the two contracts are not made

conditional on each other.conditional on each other.

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Salam ConditionsSalam Conditions

not where delivery has to be not where delivery has to be simultaneous, e.g. Gold, silver or simultaneous, e.g. Gold, silver or currencies.currencies.

Date and place of delivery must be Date and place of delivery must be specified in the contract.specified in the contract.

In case of a number of commodities, the In case of a number of commodities, the amount and delivery period should be amount and delivery period should be separately fixed.separately fixed.

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Istisna’a (Order to Manufacture)Istisna’a (Order to Manufacture)

Istisna’a,Istisna’a, an agreement for order to manufacture, an agreement for order to manufacture, culminating into a sale at an agreed price; culminating into a sale at an agreed price;

The things to be manufactured must be known and The things to be manufactured must be known and specified to the extent of removing any ignorance specified to the extent of removing any ignorance or lack of knowledge of its kind, type, quality, and or lack of knowledge of its kind, type, quality, and quantity.quantity.

Price be known in advance that can be readjusted Price be known in advance that can be readjusted only by mutual consent of the parties.only by mutual consent of the parties.

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Istisna’a (ContdIstisna’a (Contd))

Prepayment not necessary in Prepayment not necessary in Istisna’aIstisna’a Not necessary for seller to Not necessary for seller to

manufacture the commodity himselfmanufacture the commodity himself

Parallel Parallel Istisna’aIstisna’a contract; without any contract; without any condition attached to the original condition attached to the original

Istisna’aIstisna’a contract. contract.

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Reference RatesReference Rates Reference rates needed for executing and pricing the Reference rates needed for executing and pricing the

contracts.contracts.

Different scales for different kinds of financial Different scales for different kinds of financial contracts.contracts.

For Conventional finance: Only one reference rate For Conventional finance: Only one reference rate (interest rate), (interest rate),

Islamic finance: Two : debt/semi-debt contracts and Islamic finance: Two : debt/semi-debt contracts and non-debt (equity) contracts, non-debt (equity) contracts,

Therefore, two reference scales are needed: Therefore, two reference scales are needed: • Price mark up/rent reference scale Price mark up/rent reference scale • Share ratio reference scale, through the Central Share ratio reference scale, through the Central

Bank Mudaraba ratio or Interbank Mudaraba ratio.Bank Mudaraba ratio or Interbank Mudaraba ratio.

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Myths RemovedMyths Removed Fixed return by way of pricing of goods and Fixed return by way of pricing of goods and

their usufruct is permissible. their usufruct is permissible.

Islamic banking is also a business, It does not Islamic banking is also a business, It does not mean availability of cost free money. mean availability of cost free money.

Repayment of loans and debt is must.Repayment of loans and debt is must.

Time value of money is accepted to the extent Time value of money is accepted to the extent of pricing of goods but not in the form of of pricing of goods but not in the form of conventional opportunity cost concept.conventional opportunity cost concept.

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Myths Removed (Cont’d)Myths Removed (Cont’d)

Profit margin that banks charge in their Profit margin that banks charge in their trade operations is permissible if trading trade operations is permissible if trading principles given by Islam are properly principles given by Islam are properly taken care of. taken care of.

PLS modes have preference but Debt PLS modes have preference but Debt creating modes also permissible; Banks creating modes also permissible; Banks can use any modes keeping in view the can use any modes keeping in view the Risk Profile of the investorsRisk Profile of the investors

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Key Areas in Future DirectionKey Areas in Future Direction

Justifiable profit distribution mechanismJustifiable profit distribution mechanism Focusing on asset managementFocusing on asset management Potential scope of Shari’ah complaint Potential scope of Shari’ah complaint

financial engineeringfinancial engineering Financial stabilityFinancial stability Shari’ah complaint risk management Shari’ah complaint risk management

toolstools Corporate governance, transparency and Corporate governance, transparency and

disclosures requirementsdisclosures requirements

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ThanksThanks