*

* Wel Come

Islamic Finance & Economics By

Dr. Uzair Albazi

Dean GIFT Business SchoolGIFT University, GujranwalaPakistan======================================Ph: (042) 3756 8430 / Mob: 0300-4426440Email: uzairbazi@hotmail.com / uzair.bazi@gift.edu.pk

*ISLAMIC FINANCE & ECONOMICS COURSE OUTLINETopic 01Introduction & Purpose of the Course

Topic 02Definition of Interest (Riba), History, Verses of Holy Qur'an, Ahadith

Topic 03Economics, Commerce, Business & Trade VS

Topic 04Major Principles of Islamic Economics, Commerce, Buss & Trade

Topic 05Verses of Holy Qur'an, Ahadith, Islamic Jurisprudence, Terms & Conditions

*Islamic Finance & EconomicsTopic 06Definition of Banking, Origin, Different Types & Stages

Topic 07Types of Conventional Banks, Banks' Businesses, Role of Banks in Economy

Topic 09Daily Functions of Conventional Banks, Types of Bank Accounts

Topic 10Functions of a Joint Stock Co., Limited Co., Stock Exchange

Topic 11Views of Scholars, Permissible & Prohibited Functions & Islamic Solutions

*Islamic Finance & EconomicsTopic 12Stock Exchange, Stock Market & Shares

Topic 13Islamic Conditions For Dealing with Stocks, Shares and Cos.

Topic 14Banks Financing, Types, Sources

Topic 15State Bank Of Pakistan Circulars

*Islamic Finance & EconomicsTopic 16Islamic Modes of Financing, Bai, Types, Islamic Conditions

Topic 17Musharakah (Basic Rules, Terms & Conditions)

Topic 18Muzaribah (Basic Rules, Terms & Conditions)

Topic 19Murabahah, Ijarah, ORIGIN (Basic Rules, Terms & Conditions)

Topic 20Sallam, Istisnaa (Rules, Conditions)

*Islamic Finance & EconomicsTopic 21Possible Role of Islamic Banks in Imports & Exports, Views,

Topic 22Changes, Effects of Islamic Banking on Global Economy & Their Solutions

Topic23Insurance, Solution & Global Scenario of Islamic Banking

*Reference Books

Islam Ka Qanoon-e-Tijaratby Dr. Noor Mohammad Ghaffari Qasas-ul-AmbiyaSyed Sulaiman Nadvi rtAl FarooqAllama Shibli Nomani rtAn Introduction to Islamic Financesby Mufti Taqi UsmaniInternational Trade, Investment & Debt ManagementInstitute of Bankers, SBPBab-e-UmarEncyclopedia of IslamBab-e-Moawiyah bin Abu Sufiyan___do___Bab-e-Omar Bin Abdul Aziz___do___

*Reference BooksIslam Ka Muashi Nizamby Dr. Noor Mohammad Ghaffari Imam Abu Hanifa ke Siyasi Zindagiby Syed Manazir Ahsan GillaniAl Iqtisaad fil Islam (Economic Thought)Dr. Allama M. Iqbal rtReconstruction of Religious Thought in Islam ___do___Kuliyaat-e-Iqbal (Political & Islamic Welfare Thought)___do___Sikkay Ke Tareekh (History of Coin)Dairat ul Muarif

*Reference Books

Central Bankingby DeCockCommercial Bankingby Prof. SayersPractice of Bankingby Sheldon / TannanDevelopment of Islamic Bankingby Saleh KamalChallenges Facing Islamic Bankingby Munawar Iqbal, Ausaf

*Reference BooksCirculars of State Bank of PakistanSBPSBP ActSBPBanking Companies OrdinanceSBPBanking Recovery LawsSBPPrinciples of Islamic Financingby Mouzar Kalif & Tariqullah

*Reference Books SuudBy Anjuman Khuddam-ul-Quran Sindh, Karachi

Bahishti ZewerBy Maulana Ashraf Ali Thanvi

Targheeb-ul-MuslimeenBy Maulana Mohammad Musa Albazi

.Gulistaan-e-QanaatBy Maulana Mohammad Musa Albazi

*Reference Books

Halal & Haram (shariat ki rooshni mei)By Hafiz Abdus Salam Bin Mohammad

Masla SuudMufti Shafi rt

Islami Bankari Ki Tashkeel-e-JadeedIshtiaq Ahmed Farooq

*Web Sites

www.statebank.orgwww.islamcity.comwww.islamonline.comwww.lariba.comwww.islamicbanking.com

*Islamic Finance & Economics

Purpose:

To Eliminate Riba (Interest) based Transactions from the current Banking, Economics, Finance and Trade Sectors

*INTERNATIONAL OVERVIEWGlobal Research Estimations:

Number of Islamic Institutions: 350Islamic Deposit Pool US$ 1200 B.Islamic Assets Pool US $ 400 BIslamic Financial Investments US$ 1000 B(Sukkuk, Mutual Funds, TFCs, etc.)Average Annual Growth Rate ranges between 20-25%Number of Countries : 48

*INTERNATIONAL OVERVIEWMAJOR COUNTRIES HAVING ISLAMIC BANKING INSTITUTIONS

MUSLIM COUNTRIES: Bahrain, Kuwait, UAE, Saudi Arabia, Iran, Malaysia, Brunei, Indonesia, Sudan, Egypt, Bangladesh & Pakistan.

NON MUSLIM COUNTRIES: USA, UK, Canada, Switzerland,Australia, Germany and Sri Lanka

*MAJOR INTERNATIONAL CONVENTIONAL BANKS HAVING ISLAMIC WINDOWS:CitibankANZ GrindlaysABN AmroHSBCSaudi American BankSaudi British BankAmerican ExpressStandard CharteredJP MorganINTERNATIONAL OVERVIEWCont/d

*Developments in SBP:Has already announced a scheme in January 2003 for opening of Islamic Banks, subsidiary or dedicated Islamic Banking Branch.Establishment of an Islamic Banking Department.Formed Sharia Board.Recently announced issuance of Bank Licenses only to Islamic Banks, hence, no new license shall be allowed to Conventional Bank Has prepared Essentials as Standards and Agreements to be used by Islamic Financial Institutions (IFIs).Governor SBP himself approves issuance of Licenses for Islamic Banking Branches.ISLAMIC BANKING IN PAKISTAN

*Overview of the Differences betweenIslamic Banks and Conventional Banks.1)Conventional Banks borrows funds from the depositors paying interest on the liability side of the its balance sheet.

Islamic Banks makes Partnership, Mudarabah or Profit & Loss sharing arrangements between the bank and the depositors.

2)Conventional Banks lends the funds to the borrowers charging higher interest on the asset or the investment side.

Islamic Banks arranges Musharakah or the trade based financing arrangements (Mudharabah) between the bank & its investment clients.

*Overview of the Differences betweenIslamic Banks and Conventional Banks3)There is iron-wall between the conventional banks and their depositors.

Islamic Bank entitles the depositors: -To be informed of what the bank does with their money.-To have a say in where there money will be invested.

4)The interest or the return in predetermined or fixed in advance

In Islamic banking, the profit or the return is based on the actual investment outcome.

5)In Conventional banking, transactions are financial asset based.

In Islamic Banking, transactions are real asset based.

*Sources of Islamic Finance & EconomicsMajor Sources:

Holy Quran

Hadith (Sunnah)

Ijma of Ummat

Fiqh (Islamic Jurisprudence)

*Riba(Interest)O Ye Who Believe, Fear from Allah and leave whatever is from Riba, if you are (true) believers. (Al-Baqarah: 278)

Time of Revelation:

Ahadith of Prophet Peace Be Upon Him:

*RIBA(Interest)

The interest which you give to increase the wealth of people, will have no increase with Allah: But that which you lay out for charity, seeking favor of Allah (He will increase): it is these who will get a recompense multiplied. Ar Rum 39 (First Revelation)

*RIBA(Interest)

Because of their abuse, we forbade the Jews good things which were formally allowed to them: because time after time they debarred others from the path of Allah: Since they practice Riba although they were forbidden and cheat others of their possessions. We have prepared a painful torment for those of them who disbelieve. An Nisa 160-161 (Second Revelation)

*RIBA(Interest)

O believers, devour not Riba, doubling its rate many times. Fear Allah, and you will prosper. Al-e-Imran 130 (Third Revelation)

*RIBA(Interest)

Those who devour Riba shall rise up before Allah like men whom Shaitan has demented by his touch: for they claim that trading is like usury. But Allah has permitted trading and forbidden usury. He that receives an admonition from his Rabb and mends his ways may keep what he has already earned: his faith is in the hand of Allah. But he that pays no heeds shall be among the people of fire and shall remain in it forever. Al-Baqarah 275 (Fourth Revelation)

*RIBA(Interest)

Allah has laid His curse on Riba and blessed charity with increase. He bears no love for the ungrateful sinners Al-Baqarah 276 (Fourth Revelation)

*RIBA(Interest)

O you who believe, Fear Allah and give up what remains of your demand for interest, if you are indeed a believer. If you do not, then you are warned of the declaration of war from Allah and His Messenger, But if you turn back you shall have your principal. Deal not unjustly and you shall not be dealt with unjustly. Al Baqarah 278-279 (Fourth Revelation)

*RIBA(Interest)

Al-Baqarah 278-279If you are indeed believers: Prove your claim with your deeds and actions.

Threat in the strongest words: Not used for any other crime.

Principle amount should be paid back.

Islam emphasis on justice: Deal not unjustly and you shall not be dealt with unjustly.

After the revelation of this verse, Prophet (SAW) in his last sermon at Hajjat-ul-Wada, which is called the charter / blue print of Islam, declared: Interest claim in respect of transactions during the days of ignorance are null and void and would not be claimed. To begin with, we forego the entire interest amount due to my uncle Abbas bin Abdul Muttalib (rt)

*RIBA(Interest)

What is Riba:

Riba means any excess compensation over and above the principal which is without due consideration. Its a premium paid to the lender in return for his waiting as a condition for the loan.

In the words of Prophet (SAW), by Ali Ibn Abi Talib.Every loan that draws interest is Riba.Every Premium paid over and above the Loan is Riba

*RIBA(Interest)

Riba Selected Ahadith

By Hazrat Jabir ibn-e-Abdullah (RT): The Prophet peace be upon him, cursed the receiver and the payer of interest, the one who records it and the witnesses to the transactions and said, They are all alike (in guilt). (Muslim, Tirmidhi and Musnad-e-Ahmad)

-By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him, said, Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother. (Ibn Majah)

*RIBA(Interest)

Riba Selected Ahadith

By Hazrat Amr bin Al Aas (RT): When interest based dealing becomes common among people, they will start facing draught and shortage of food. And when bribery becomes norm among people they will live under constant fear of their enemy.

By Hazrat Abu Hurayrah (RT): The Prophet peace be upon him said, There will certainly come a time for mankind when everyone will take Riba and if he does not do so, its dust/smoke will reach him. (Abu Dawood, Ibn Majah)

*RIBA(Interest)

The prohibition of interest is not limited to Islam, but it is shared by Judaism and Christianity.

Some of the old testaments have rendered Riba as Haram. (See Exodus 22:25, Leviticus 25:35-36, Deutronomy 23:20, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8, 13,17 & 22:12)

Agibi Bank was established circa 700 B.C in Babylonian and functioned exclusively on equity basis.

*RIBA(Interest)

Hadith prohibiting Riab-al-Fadl (By Abu Saeed Khudri (RT)

Sell gold in exchange of equivalent goldSell silver in exchange of equivalent silverSell dates in exchange of equivalent datesSell wheat in exchange if equivalent wheatSell salt in exchange of equivalent saltSell barley in exchange of equivalent barley

(Reported in Muslim)

*RIBA

Definitions:

Imam Abu Bakr Jassaas Razi (rta):

that kind of loan where specified repayment period and an amount in excess of capital is predetermined.

Summary: - All conditional benefits on loan falls in the category of (Riba) interest

*TYPES OF RIBA

Al-Nasa (Al-Nasiah) or Riba-al-JahiliyaAl-Fazal or Riba-al-Bai

Riba Al-Mufrad (Simple Interest):Interest calculated only on the initial investment

Riba Al-Murakkab (Compound Interest):Reinvestment of each interest payment on money invested to earn more interest.

*TYPES OF RIBAInterest (Commercial Interest):Interest paid on loan taken for productive and profitable purpose.

Usury (Sarafi Interest):

Interest paid on loan taken for personal needs and expenses.

*RibaQuran strickly forbids all kinds of RIBA

Examples:

Jews of Madinah

Ansars dealings of interest with Jews for agricultural purposes

Merchants of Makkah

*Riba

Muslim Khilafah

Loans from Bait-ul-Maal

Business dealings of Sahabas among themselves

*RibaLAWS BY ALMIGHTY ALLAH:

Quranic Laws & Principles:( Interest, lottery, gambling, unlawful businesses and products)

Ahadith of Prophet peace be upon him(Sunnah actions, dealings)

Moral Responsibilities for a Muslim(Services to Humanity & focus towards the success in the world hereafter)

*ISLAMIC BANKING & FINANCE

History:

Zubair bin Awam rta

Usman bin Affan rta

Bait-ul-Maal

Caravans of Makkah

Imam Abu Hanifa

*Loan & Trust

Difference between:

Loan (Qarz) & Amanat (Trust)

Conditions of Aqad / Agreement of Qarz

*Bank Accounts

Current Account / Checking Account

PLS Account / Savings Account

Fixed Deposit Account / PLS Fixed Account / CDs

Foreign Currency Account

Lockers

*Islamic Banking

Islamic Point of View about depositing money into those Accounts

*Economics

What is Economics?

To utilize the limited resources in a way that maximum needs and wants are met to ensure the well being of all members ofthe human society.

*EconomicsProblems Faced by Economy:

Determination of PrioritiesAllocation of Resources (land, Labor, Capital, Entrepreneur)Distribution of Wealth / IncomeDevelopment

We will compare how Capitalism, Socialism and Islamic Economic System addresses to these problems.

*Determination of Priorities(Problem 01)CapitalismEvery Individual has an unconditional and absolute right to participate in any business to maximize profits.

Concept of selfish interest.

Supply & Demand will determine the priorities.Socialism

No individual has the right to participate in any business independently.

State will determine the priorities as per the overall planning.

Concept of collective interest.

*Allocation of Resources(Problem 02)

Capitalism

Market force will decide where to invest resources.

Socialism

Govt. will decide where to allocate resources

*Development(Problem 03)Capitalism

Market forces will decideSocialism

Govt. will decide

*Distribution of Income(Problem 04)Capitalism

Land- RentLabor - WagesCapital - InterestEntrepreneur- ProfitSocialism

Land Rent fixed by Govt.Labor Wages fixed by Govt.

*Right to WealthCapitalism

Right to wealth is with the factors of production onlySocialism

Right to wealth with the Govt. which then distributes it among the factors of production

*Flaws of CapitalismNo bindings / restrictions while maximizing profits.

Blindly follows market forces that creates exploitation of labor and poor people.

No moral values limitations

Monopolies are created that exploit the society as a whole.

Govt. & Industrialists join hands for mutual benefits and make laws that exploit common people.

Imbalance in the distribution of Income due to which concentration of wealth takes place.

*Flaws of SocialismThe other extreme of not even giving the natural freedom.

Perfect planning is assumed to be the Cure of all ills.

Govts. are assumed to be the angels which cant commit a deliberate mistake.

Can not work without a forceful dictatorship.

Creates overall inefficiency in the society. There is no incentive to work efficiently as there is no individual profit motive.

*EconomicsCapitalism:

Freedom of businessLaw of supply & Demand helpsResources (land, labor & capital) will be used Competition will force to improve, create and gain maximum.Distribution of wealth among producers of wealth only(law of supply & demand will help to decide their share)

*EconomicsProducer of Wealth:

Landwill getRentLaborwill getWagesCapitalwill getInterestOwnerwill getProfit

*EconomicsSocialism:

No FreedomNo Private OwnershipGovt. will decide about Allocation of ResourcesDetermination of PrioritiesDistribution of IncomeDevelopment

It is also called Planned Economy

*EconomicsPrinciples:

Collective PropertyPlanningCollective InterestEquitable distribution of Income

*EconomicsIslam:

Everything belongs to AllahPrivate ownership is accepted Some restrictions applied to run your economyLaw of supply & demand is accepted

*EconomicsRestrictions:

Halal & Haraam (through Wahi)(Interest, gambling, lottery)

State Restrictions(Smuggling, dealing in any restricted business etc)

Moral Restrictions / Responsibilities

*EconomicsDirect Producer of Wealth:

LandRentLaborWagesCapital(Not Interest) Profit & Risk of Loss Through Musharikah & MudahiribahOwnerProfit or Loss

*EconomicsIf everything belongs to Allah, then He decides to share your wealth with others (their right) through:

Zakaat

Khiraaj

Ushr

Sadaqah

Kaffarah

Sacrifice / Qurbaani

Wirasaat

*Summary of the ComparisonCapitalism:gives unbridled and un conditional right to profit motive and private ownership.

Socialism:goes to other extreme by assuming that perfect planning by the Govt. is the cure of all ills.

Islam: gives a balance view among the two extremes by recognizing the right to private ownership, market forces and profit motive but the restrictions of:

-Halal & Haram -Govt. restrictions -Moral values

Islam ensures equitable distribution of wealth through the concept of primary ownership of Allah and secondary ownership of factors of production.

*TermsDefinitions:

Bai

Mabeea

Saman

Qadar

Price

Ijab

*TermsTarkah

Dain

Madyun

Daiin

Muzarib

Rab-ul-Maal

Rasul Maal

*Islamic ConceptsLegal Person

Shares

Under Writing

Limited Company

Kick Back

Roll Over

Libor / Kibor

*Types of Bai (according to validity)Definitions:

Bai Sahih

Bai Batil

Bai Fasid

Bai Mauqoof

*Islamic Sales ContractBai Sahih (Valid Sale):

A sale is valid if all elements together with their conditions are present

Elements of a valid sale are:

Contract (Aqd)Subject Matter (Mabeea)Price (Saman)Possession or delivery (Qabza)

*Islamic Sale Contract

*Islamic Sales ContractElements of Bai Sahih (Valid Sale):

Contract (Aqd):Offer & Acceptance (Ijab-o-Qabool)Oral (Qauli)Implied (Hukmi)

Buyer and Seller must be:SaneAdult / MutureWise

Conditions of Contract:Sale must be non contingentSale must be immediate

*Islamic Sales ContractElements of Bai Sahih (Valid Sale):

Subject Matter (Mabeea)

Existing ValuableUsableCapable of ownership / titleCapable of delivery / possessionSpecific & QuantifiedSeller must have title & risk

*Islamic Sales ContractElements of Bai Sahih (Valid Sale):

Price (Saman)

Quantified (Maloom)

Specified & Certain (Mutaiyan)

*Islamic Sales ContractElements of Bai Sahih (Valid Sale):

Qabza (Delivery / Possession)

Physical (Haqiqi)Constructive (Hukmi)

*Basic Rules of Bai (buying / selling)Nobody can sell such Product / Commodity which:

Does not exist

No ownership

Not in the possession

Note: Exceptions are: (1) Bai Salam(2) Bai Istisna

*Sale Agreement

-Difference between Actual Sale & Promise of Sale

*More Rules of BaiBai must be on unconditional basis & implemented right away. If the sale of any product is attached with a condition of any future incident or date, it will not be valid.

Bai must be done of such product which has a value/price in the market

Bai of a product is not permissible, which has no use other than Haram

*More Rules of Bai

Product must be identified, clear with all demanding qualities

Selling product must be given in the possession of buyer. It should not be based on any incident, struggle etc.

Price of the product must be clearly mentioned and identified

There should be no unusual condition in Bai otherwise it will not be valid

*Modes of FinancingMusharakah

Mudharibah

Murabahah

Ijarah (Lease or Hire)

Ijarah Wa Iqtinah (Hire-Purchase)

Bai Salam

Bai Istisna

*Modes of Financing

Musharakah:

It is the same financing contract as Modarabah except that client also provides a part of capital in addition to management participation. On the other hand, Islamic bank may also contribute in the management in addition to its capital. In that case, management fees and distributable profit form the enterprise are shared by the client and Islamic Bank in accordance with ratios fixed under the Musharakah contract.

*Modes of Financing

Modharibah:

Modaribah is a contract between an Islamic Bank and the client whereby the Islamic bank provides specific amount of funds to the clients for an enterprise for defined purposes in exchange for a reasonable and highly predictable profit. The client receives a share in the profit as compensation or fee for his management.

*Modes of FinancingMurabahah:

Under this deal, Islamic Bank purchases goods, raw material, equipment, machinery or any other items of economic significance from a third party at the request of a client and sells such goods to the client on spot or deferred payment basis at it s own sale price. The difference between the purchase cost of the Islamic bank and the sale price to the clients forms the profit called Mark Up.

*Modes of FinancingIjarah (Lease or Hire):

The bank acquires machinery /equipment, building etc for his client and charges a certain rental for their use.

Ijarah Wa Iqtinaa (Hire-Purchase):

The bank finances the purchase of equipment and the client uses them under a contract. The contract provides that the client will pay the cost of the instrument and a share in the net rental value of the equipment which is proportional to the outstanding shares in the total investment.

*Modes of Financing

Bai Salam:

Seller undertakes to supply specific goods to the buyer / bank at a future date in exchange of an advanced price fully paid at the spot of agreement.

Purpose:

-To meet the need of small farmers who need money to grow their crops and to feed their family up to the time of harvest.-To meet the need of traders for import and export of goods.

*Modes of FinancingBai Istisna;

The Bank enters into an agreement with the client for purchase of any goods before it comes into existence.

It is an order to producer to manufacture a specific commodity for the purchaser.

*Condition for a Valid DealConditions for Islamically Valid Dealing:

All/both parties must have the ability of dealing

Deal must be done with free will

No intention of cheating / fraud

No false statement

*Conditions for Musharakah Dealing. All given 4 conditions must be applied, Also

Profit ratio for each party must be decided in the beginning of agreement

Profit sharing ratio must be based on the percentage of actual outcome of the business, not on the basis of actual investments percentage

*Profit Sharing Ratio of MusharikaQ: Is it necessary to have the profit sharing ratio according to the actual investment ratio?

Ans: Three Opinions:

According to Imam Malik rt, Imam Shafi rt, it should be according the investment ratio.

According to Imam Ahmed rt, it could vary, if it is decided with a free will of all parties.

According to Imam Abu Hanifa rt, it could vary except the sleeping partner.

*Loss Sharing Ratioof Musharikah

According to all Imams, loss sharing ratio of each partner must be equal according to the percentage of their investment.

*Dissolving Musharakah

Any party can dissolve the Musharakah agreement by give notice to the other party.

Upon the death of any partner.

If a partner is not in sane anymore (for long time)

*MUZARIBAHFeatures of Muzaribah:

Investment from (one party) Rab-ul-Maal only.

No participation in business or management

All loss must be suffered by Rab-ul-Maal only.

Rab-ul-Maal must carry all liabilities of Business

All assets will be the property of Rab-ul-Maal

*MUZARIBAH

MUZARIBAH AL MUQAYYIDAH:-Investment for a specified business only

MUZARIBAH AL MUTALLAKAH:-Free option to do any business

*MUZARIBAHNOTE:

All four Imams agree that no salary will be given to Muzarib on his/her services.

According to Imam Ahmed rt, compensation for daily food allowance can be given.

According to Ahnaf, compensation for daily food can be given only,if the Muzarib travels out of town.

*MurabihahFeatures:

Basically, its not a mode of financing but a source to avoid interest dealing. It should be used only where Musharaikah and Muzaribah not workable.

Just using the name of Mark Up or profit instead of interest does not make it permissible until all the terms and conditions set by Islamic Jurisprudence are fulfilled.

*Murabihah

Its not a type of loan but a deal (Bia/Agreement).

Murabihah can be used as a source of financing only when the client needs funds to purchase any product/machinery/equipments etc.

The product which is given on Murabihah basis must be in the possession of owner.

*Murabihah

Sharing of risk of loss differentiate Murabihah from the interest category.

It is important for a Murabahah dealing that the product must be bought from a third party. On buy back basis, Murabihah deal will not be valid.

Roll Over is not valid in Murabihah.

If the actual cost can not be identified, then Murabihah deal is not possible. In that case, we must use Bai Musawamah.

*Murabihah(Agreement)

*Murabihah(Agreement)

*IjarahFeatures:

Lessor stays as owner and the lessee has the right to use the item/good.

Leasing is not permissible for consumable goods.

Lessor will be responsible for all liabilities related to that property/good etc like taxes. Lessee will be responsible for those liabilities only, which can be used/benefited while using that good/item etc. like Bills, etc.

*Ijarah

Risk of loss of that property/good will stay with lessor. If Lessee is responsible for any Loss/damage, he/she has to afford it.

Leasing Time, Duration, Rent etc must be decided in the beginning of the contract.

Lessor cant increase the percentage/share of rent by himself.

*Salam

Conditions:

It is necessary to pay the lump sum amount in the beginning of Bai Salam contract.

Salam is permissible only on those items which can be quantified or measured.

Salam is not valid for a specific farm/land/garden etc.

The product must be identified, quantified clearly with all qualities.

The date of delivery, time, and the place must be mentioned clearly.

*Istisna

Features:

Not necessary to pay the amount in Advance like Bai Salam

Price must be decided in the beginning of the contract

Qualities, features of that product must be clearly identified

*Istisna

Canceling Istisna:

one party can cancel the Istisna deal by giving notice to the other before starting production/purchasing etc

if the production/work has already started, then it cant be cancelled from one side.

*Difference between Istisna & Salam Istisna

Istisna is permissible for any item / commodity which need to be produced / manufactured. In Istisna, advance payment is not necessary.

In Istisna, it could be cancelled, if the production is not started yet.

Date, Time of delivery does not have to be fixed.

Salam

But in Salam, it could or could not be. Or Subject can be anything.

In Salam, it is necessary to make full payment in advance.

In Bai Salam, it can not be cancelled one sided.

In Salam, it is the basic part of the deal.

*Project FinancingProposed Methods:

MusharikahMudharibahBasic Principles:Financing through Musharikah and Mudharibah does not mean the advancing of money. It means participation in the business in the case of Musharikah, sharing in the assets of the business to the extent of the ratio of financing. An Investor must share the loss incurred by the business to the extent of his financing.

The partners can determine with mutual consent any ratio of profit which may differ from the ratio of investment. However the partner who has excluded himself from the responsibility of work for the business cannot claim more than the ratio of his investment.

*Project FinancingProject Financing:

If the financier wants to finance the whole project, the form of Mudharibah can come into operation.

If investment comes from both sides, the form of Musharikah can be adopted. In this case:

If the management is the sole responsibility of one party, while the investment comes from both, a combination of musharikah and Mudharibah can be brought into play according to the rules.

Since it would be a new project, no problem with regard to the valuation of capital should arise.

*Project Financing

The distribution of profits according to the normal accounting standards is not difficult.

If the financier wants to withdraw from the Musharikah, while the other party wants to continue the business, the later can purchase the shares of the former at an agreed price. In this case, the financier may get back the amount he has invested along with a profit, if the business has earned a profit.

The price of his share would be determined through valuation of the assets called as constructive liquidation with mutual consent of the parties.

In the case of loss, however any decrease in the total value of the assets would be divided between them in the ratio of their investment.

*Project Financing

Since financial institutions do not normally want to remain partner of a specific project for good, they can sell their share to other partners of the project.

If the sale of the share on one time basis is not feasible for the lack of liquidity in the project, the share of the financier can be divided into smaller units and each unit can be sold after a suitable interval.

Whenever a unit is sold, the share of the financier in the project is reduced to that extent, and when all the units are sold, the financier totally comes out of the project.

*Import FinancingImport Financing:

Conventional Banks charge two types of fee for the service of letter of credit which the bank provided to the importer. They are:

Service Charges for the opening an LCInterest charged on the LCs not opened on full margin.

*Import Financing

Collecting service charges for this purpose is allowed, but as interest cannot be charged in any case, scholars have proposed two methods for financing LCs.

These methods are:

MusharikahMorabihah

*Import FinancingMusharikah: The appropriate substitute for LC is Musharikah. Bank and importer can make an agreement of Mudharbah or Musharikah while opening LC. If LC is being opened at zero margin then an agreement of Mudharbah can be made, in which bank will become Rabb-ul-maal and importer will be regarded as Mudarib. Bank will own the goods that are being imported and profit will be distributed according to the agreement. If LC is being opened at some margin then Musharikah agreement can be made. Bank will pay the remaining amount and the goods that are being imported will be owned by both of them according to their share of investment. Bank and importer, with their mutual consent can also include a condition in the agreement, whereby, Musharikah or Mudharibah will end after a certain time period even if the goods are not sold. In this case, importer will purchase the banks share at the market price.

*Import FinancingMurabihah:

At present Islamic banks are using Murabihah to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabihah agreement. Murabihah financing requires bank and importer to sign two agreements separately. One for the purchase of goods and other for appointing the importer as the agent of the bank (that is agency agreement). Once these two agreements are signed, importer can negotiate and finalize all the terms and conditions with the exporter on behalf of the bank.

*Murabihah(Agreement)

*Export FinancingTwo important roles of bank in Exports:

They act as a negotiating bank and charge a fee for this purpose which is allowed in Shariah.

They provide export financing facility to the exporters and charge interest on this service.

These services are of two types:

Pre Shipment FinancingPost Shipment Financing

*Export FinancingPre Shipment Financing:Pre Shipment Financing can be fulfilled by two methods:MusharikahMurabihah

Musharikah:Bank & Exporter can make an agreement of Musharikah or Mudharibah, if exporter is not investing, otherwise Musharikah agreement can be made. Agreement in this case will be easy, as cost and expected profit is known. Exporter will manufacture or purchase goods and profit that will be obtained by exporting, will be distribute between them according to the pre determined ratio.

*Export FinancingProblem:

If the exporter is not able to deliver the goods according to the terms and the conditions of the importer then importer can refuse to accept the goods and in this case exporters bank will ultimately suffer.

Solution: it can be rectified by including a condition in Mudharibah or Musharikah agreement that if exporter violates the terms and conditions of import agreement then the bank will not be responsible for any loss which arises due to this negligence.

This condition is allowed in Shariah as the Rabbul Maalis not responsible for any loss that arises due to the negligence of Mudharib.

*Export FinancingMurabihah:Murabihah is being used in many Islamic Banks for export financing. Banks purchase goods that are to be exported at discounted (less) price than the agreed price between the exporter and the importer. Bank exports goods at the original price and thus can earn profit.

Murabihah Financing requires bank and exporter to sign at least two agreements separately.

One for the purchase of goodsSecond one for appointing the exporter as the agent of the bank

Once these two agreements are signed, the exporter cannegotiate and finalize all the terms and conditions with theimporter on behalf of the bank.

*Export FinancingPost Shipment Financing:

It is similar to the discounting of Bill of Exchange. Its alternate Shariah compliant procedure is as follows.

Exporter with Bill of Exchange can appoint bank as his agent to collect receivable on his behalf. Bank charges a fee for this service. Bank can provide interest free loan to the exporter equal to the amount of bill and exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of loan.

*Export FinancingHere two procedures and two different agreements will be made.

One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a fee.

Second will be for providing interest free loan to the exporter and authorizing bank for keeping the amount received through bill as a payment for loan.

This method is valid in Shariah because:collecting fee for service and giving interest free loan is permissible in Islam.

*Islamic Ways of InsuranceConventional Insurance Principles

Pooling of RiskPayment of fortuitous lossRisk TransferIndemnificationProfit for the share holders from underwriting results and investments

*Islamic Ways of InsuranceWhy NO to conventional Insurance?

Is something wrong with the concept?Risk AversionAssuring othersRisk sharing

Q: What is wrong with the practice?Ans: The contract between the insurer and the insured is technically wrong from the Shariah perspective because of:Gharar & Riba

*Islamic Ways of InsuranceGharar:

Lexically it means uncertainty and technically it means the uncertainty of the counteract or the subject matter or the periodin a commutative contract.

The element of Gharar in the commercial insurance contractThe insurer does not know how much he would owe to an individual.

Some times an insured does not know either how much he would pay ultimately to the insurer

In case of no claim from the insured in general insurance, then Qimar emerges.

*Islamic Ways of InsuranceRiba in Commercial Insurance:

Direct Riba Excess on one side in case of exchange between the amount of premium and the sum insured

Indirect RibaThe interest earned on interest based investments

*Islamic Ways of InsuranceThe concept of Takaful:

Features:Taburro (contributions) from the participants (Policy Holders) to create a fund which will provide financial help at the occurrence of certain lossesPartnership among the participantsNeed of an operatorThe management contract between the participants and the operatorInvestments in Shariah compliant modes

*Islamic Ways of InsuranceDifferent Models:

Pure Mudharabah Model:The participants and the operator enter into an Mudahrabah contract from the beginning of the relation, for indemnification and share of the underwriting results

Wakalah Model (hybrid of wakalah & Mudarabah):An agency agreement is made between an individual willing to participate in the fund and the operator working as the manager of the fund. The operator earns an upfront deductible fee and shares the profit of investments, it does not share the results of underwriting.

Wakalah based on Waqf:The share holders create a waqf fund to extend the help to those who want to cover against financial loss. The participants contribute to the fund and the operator manages the fund. All under writing results belong to the fund which itself has a legal entity.

*Business Ethics In IslamDefinition of Business In Islam:

Verses of Holy Quran

Ahadith of Prophet Peace be Upon Him

*EvidencesPermission of Business In Islam:

Through Holy Quran

Through Ahadith of Prophet pbuh

Companions of Holy Prophet

Four Caliph of Muslims

Ashara Mubasharrah

Muhajreen of Makkah

*Halal & HaramEating Halal:

Verses of Holy Quran:

*Halal & HaramAhadith of Prophet pbuh:

Examples:

Zabiha and Non ZabihahMuslim And Non Muslim

*Duties of MuslimsDuties of Muslims in Business WorldVerses of Holy Quran

Ahadith of Prophet pbuh

e-g:OilGoldMan PowerLand

*Forbidden EarningsDefinition of Haram Earning

Verses of Holy Quran

*Forbidden EarningsAhadith of Holy Prophet pbuh:

*Forbidden EarningsDetails of Forbidden Earnings:

StealingRobbery

SwearingOffense

LiesCheating

UnjustlyHaram Business

Deal Without Permission & Authority

*Attributes of Business & Businessmen

Verses of Holy Quran

*Attributes of Business & BusinessmenAhadith of Holy Prophet pbuh

*Major Principles of Business in Islam

Everything belongs to Almighty Allah

Trust in Allah

Understanding of Business Issues Avoiding Israaf

Well behaved

Trust Worthy

Hard Working & Sincerity

No greediness

*Major Principles of Business in Islam

Keep Purity

Charity & Zakaat

Clarifying defective products

Fulfilling Promises & Agreements

Accepting returned goods

*Forbidden Action in Business:No loss of Islamic Practices

No Swearing

No Cheating

No Fake Praises

No Buying / selling of stolen goods

No Buying / selling of Haram goods

No mixing (for cheating), (B into A quality)

*Forbidden Action in Business

No storing for higher profit

No selling of goods without having possession (except Bai Salam)

No selling of goods without owners permission

*Forbidden BusinessWinePig

Dead Animals & Birds

Interest Based Business

Lottery

Stolen Products

Business in Masjid

*Forbidden BusinessDeal Upon Deal

Idols/Pictures of Living Beings

Unavailable Products

Selling Products without permission

*Summary

Business Ethics in Islam

Verse of Holy Quran

(Surah Al Qisas, verse 77)

*SummaryFour Major peaces of Advice:

Achieving Success in the world hereafter

Take your share from this world

Do Ehsaan (Favors)

No Offense (Fasad)

*Working Plan for Islamic BankingWorking Plan for Islamic Banking:

Structure of Bank FundsStructure of Public DepositsModes of lending Modes of Financing & Products of InvestmentSpecialized Financial OperationsIndustrial BankingAgricultural BankingTrade/Commercial BankingCo-operative Banking

*Working Plan for Islamic Banking Cont:Monetary Policy & Central Banking

Inter & Intra Govt. & Banks Transactions

Policy of National Savings Schemes

Insurance Policy

Policy regarding existing internal interest based debts

Policy regarding external interest based debts

Changes in the taxation system

*Islamic Economics Course

The End

Jazakumullahu Khairan

Thank You

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