FAQs on Islamic Banking by State Bank of Pakistan

Top 20 FREQUENT WORDS

islamic 216 banking 109 banks 78 profit 71 riba 68 finance 50 shariah 50 financial 48 financing 48 based 47 conventional 40 modes 40 business 39 contract 39 funds 39 sale 37 basis 35 ijarah 35 transaction 35 debt 33

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what is islamic banking answer islamic banking is defined as banking system which is in consonance with the spirit ethos and value system of islam and governed by the principles laid down by islamic shariah

the prohibition of a risk free return and permission of trading as enshrined in the verse of the holy quran makes the financial activities asset backed in an islamic set up with ability to cause a value addition
doctor muhammad imran ashraf usmani meezan bank s guide to islamic banking darul ishaat karachi pakistan p doctor muhammad imran ashraf usmani meezan bank s guide to isalmic banking darul ishaat karachi pakistan p

riba an nasiyah riba al quran in the holy quran allah swt says in sura al baqarah a and if you repent yours is your principal it is reported by harith ibe abi usamah in his musnad that sayyidna ali radi allahu anhu reportedly referred that the holy prophet said alayhi wa sallam said that every loan that derives a benefit to the lender is riba
riba al fadl abu said al khudri radi allahu anhu narrated that holy prophet peace be upon him said doctor muhammad imran ashraf usmani meezanbank s guide to islamic banking darul ishaat karachi pakistan p al syuti al jame al saghir v

gold for gold silver for silver wheat for wheat barley for barley dates for dates and salt for salt like for like payment made hand by hand

fourth revelation in the fourth revelation riba has categorically been prohibited in all its for miss the following set of verses is found in the surah al baqarah verse in the following words
second revelation muslims have been informed about the practice of taking riba by jews in surah an nisaa and because of their charging riba while they were prohibited from it

surely those who believe and do good deeds establish salah and pay zakah have their reward with their lord and there is no fear for them nor shall they grieve
so whoever receives an advice from his lord and stops he is allowed what has passed and his matter is up to allah

from hazrat jabir may allah be pleased with him the prophet cursed the receiver and the payer of interest the one who records it and the two witnesses to the transaction and said they are all alike in guilt
and be fearful of a day when you shall be returned to allah then everybody shall be paid in full what he has earned

from hazrat abu hurayrah may allah be pleased with him the prophet said god would be justified in not allowing four persons to enter paradise or to taste its blessings he who drinks habitually he who takes riba he who usurps an orphans property without right and he who is undutiful to his parents
narrated in mishkat al masabih kitab al buyu bab al riba on the authority of ahmad and daraqutni narrated in ibn majah kitab al tijarat bab al taghlizi fi al riba also in musnad ahmad narrated in ibn majah

are there any injunctions against riba usury in religious texts other than holy quran answer the following references against the prohibition of riba usury are drawn from the old testament of the bible deuteronomy thou shall not lend upon usury to thy brother usury of money usury of victuals usury of anything that is lent upon usury
he that hath not given forth upon usury neither hath taken any increase that hath withdrawn his hand from iniguity hath executed true judgment between man and man hath walked in my statues and hath kept my judgments to deal truly he is just

does the prohibition of riba apply equally to the loans obtained from or extended to muslims as well as non muslims answer with respect to the receipt and payment of interest there is no distinction between muslims and non muslims or between individuals and states because interest is prohibited not only in islamic scriptures but also in other religious scriptures of the world as given in question no
does interest riba is related only to consumption loans or it applies to commercial loans also answer the interest is prohibited whether it is consumption loan loan for meeting day to day human needs or commercial loan loan for business purpose

while disbursing cash finance the execution of agreements for the running finance or working capital exchange of goods services is a must finance no agreement for while disbursing funds under murabaha exchange of goods services is salam istisna contracts
what is the difference between conventional banking and islamic banking answer the following are the main differential points between conventional banking and islamic banking

thus in every islamic banking transaction the islamic financial institution and or its deposit holder take s the risk of ownership of the tangible asset real services or capital before earning any profit there from
above it earns profit by taking risk of tangible assets real services or capital and passes on this profit loss to its deposit holders who also take the risk of their capital

in islam shariah refers to the divine guidance and laws given by the holy quran the hadith sayings of the prophet muhammad peace be upon him and supplemented by the juristic interpretations by islamic scholars
for example a normal mcdonalds burger in usa and pakistan may look similar smell similar and taste similar but the former is haram and the later is halal due to its compliance of islamic guidelines of slaughtering animals

in the verse of the holy quran allah the almighty has responded to the apparent similarity between trade and interest by resolutely informing that he has permitted trade and prohibited riba though they may look similar to someone
islamic banks use interest base system kibor as a bench mark while determining profit how islamic banking can be said to be islamic answer islamic banks should ideally have their own benchmark system for determination of profit

one may say that mister b uses an undesirable benchmark in determining the rate of profit but obviously no one can say that the profit charged by him is haram because he has used the rate of profit of the business of liquor only as a benchmark

it is necessary for the validity of mudarabah that the parties agree on a certain formula of sharing the actual profit right at the beginning of the contract
al mudarabah al mutlaqah in case where rab ul maal depositor gives full freedom to the mudarib bank to undertake whatever business he deems fit this is called al mudarabah al mutlaqah unrestricted mudarabah

the deposits of the customers are placed in these pools and profit therefrom is distributed between the bank and the depositors as per weightages assigned at the time of agreement
mudarabah agreement cannot allow a lump sum amount of profit for any party nor can it determine the share of any party at a specific rate tied up with the capital

the excess he receives over his investment will be compensation for his services the following are the basic rules of distribution of loss in case of musharakah all scholars are unanimous on the principle of loss sharing in shariah based on the saying of syedna ali ibn talib that is as follows loss is distributed exactly according to the ratio of investment and the profit is divided according to the agreement of the partners
it is also allowed that if an investor is working his profit share could be higher than his capital contribution irrespective of whether the other partner is working or not

a question may be raised that selling goods on profit under murabaha and charging interest on the loan as per the practice of conventional banks appears to be one of the same things and also produces the same results
the subject matter should be in the ownership either actual or constructive of the seller at the time of sale

possession means a situation where the possessor has not taken physical delivery of the commodity yet it has come into his control and all rights and liabilities of the commodity are passed on to him including the risk of its destruction

in order to secure the payment of price the seller may ask the buyer to furnish a security either in the form of mortgage or in the form of any other item
if the commodity is sold on installments the seller may put a condition on the buyer that if he fails to pay any installment on its due date the remaining installments will become due immediately

as the corpus of the leased asset remains in the ownership of the islamic bank all the liabilities emerging from the ownership shall be borne by the bank
however if no such purpose is specified in the agreement the lessee can use it for whatever legitimate purpose it is used in the normal course

the leased asset shall remain in the risk of the bank throughout the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor
it is permissible that different amounts of rent are fixed for different phases during the lease period provided that the amount of rent for each phase is specifically agreed upon at the time of executing a lease

in order to own and use the entire property the customer purchases the share of bank s property over a period of time and also pays the rent for using the bank s share of the property
what is the difference between conventional mortgage financing and islamic mortgage financing answer there are several key differences between conventional mortgage finance and islamic mortgage finance

similarly if the leased asset looses its usufruct without any misuse or negligence on the part of the lessee the lessor cannot claim the rent while in the case of an interest based financing the financier is entitled to receive interest even if the debtor did not at all benefit from the money borrowed
so far as the parties are agreed with mutual consent upon a well defined benchmark which would serve as a criterion for determining the rent and whatever amount is determined based on such benchmark will be acceptable to both parties therefore there should not be any dispute

the agreement of ijarah should not have the clause regarding the lessor s promise to gift or sell the leased property to the lessee at the end of the ijarah period
it should not be a bilateral promise binding on both parties because in this case it will be a full contract becoming effective on a future date which is not allowed in the case of sale or gift

the legality of istisna is accepted by the shariah scholars because it does not contain any prohibition as far as the financing mode it has been legalized on the basis of the principles of istihsan public interest
istisna is an agreement culminating in a sale at an agreed price whereby the purchaser places an order to manufacture assemble or construct or cause so to do anything to be delivered at a future date

what is the difference between istisna and ijarah answer under istisna the manufacturer either uses his own material or he arranges for the material himself whereas under ijara the material is provided by the customer and the manufacturer uses only his labour and skill meaning that his services will be hired for a specified fee paid to him

in view of the severity of the problem islamic fiqh academy of the oic and shariat appellate bench of the supreme court of pakistan have approved the provision of penalty clause in the contractual agreements
if clients do not honour their commitments in respect of timely payment of a debt created in installment sale murabaha leasing or do not pay banks share of profit in participatory modes or do not deliver goods at stipulated time in salam and istisna it could cause irreparable loss to the system

the conventional banks can avail the economies of scale due to their wide network and huge volume of business which the islamic banking in its nascent stage cannot avail given the present volume of their business
why is it so answer islamic banking is in its early stage and is in the process of strengthening its base in the economies having conventional banking rooted deeply in the current interest dominated system

if the islamic banks do not lend money on interest then what modes of financing can be used for the following a trade and industrial finance b financing the budget deficit c acquiring foreign loans answer as a matter of principle all the financial transactions between the parties are lawful in the eyes of islamic shariah as long as they do not violate islamic principles
a modes for financing trade and industry murabaha musawama ijarah and salam are particularly suitable for trade while istisna is especially suitable for manufacturing or construction industry

sometimes the budget deficits are seen as a result of either extravagant and or unproductive expenditure or insufficient and or inefficient effort to generate tax revenue due to political economical reasons or otherwise
an alternative to foreign loans seeking islamic solution to foreign borrowing arrangements could be made to attract foreign as well as domestic funds through the following two ways i

if banking were to be based on interest free transactions how would it work in practice answer islamic bank like other banks is an institution whose main business is to mobilize funds from savers and use these funds to finance the economic activities of businessmen entrepreneurs
as far as the nature of investment deposits are concerned these could be either general investment deposits or specific investment accounts in which deposits are made for investment in particular projects

do we need bank in order to assess the need of the bank we need to look at the functions it perfor miss in any society be it a secular or islamic one the main function of the bank is to mobilize funds from the surplus units and allocate these to the shortfall units or to the units having budget constraints
financial intermediation enhances the efficiency of the saving investment process by eliminating the mismatches inherent in the requirements and availability of financial resources of savers and entrepreneurs in an economy

however the concepts of islamic banking and finance are still in their early stages of development and islamic banking is an evolving reality for continuously testing and refining those concepts

theoretical arguments and models developed by islamic economists and the successful practice of hundreds of institutions in heterogeneous conditions both testify to the viability of islamic banking as islamic banking model provides a complete banking solution to all the business needs of the customers while remaining with the boundaries of shariah
this is considered remarkable in view of the fact that the markets in which these islamic banks were established have had highly developed and well established commercial banks as their competitors

although the results of operations of an enterprise in which such loans are to be invested are by no means certain yet guaranteeing in advance a fixed return on a loan without taking into consideration the actual results of the operations of the borrowing enterprise puts all business risks on the entrepreneur borrower

the transformation of an interest based system into profit sharing system helps in the achievement of economic growth which results in increasing the supply of venture or risk capital and consequently encourages new project owners to enter the realm of production as a result of more participation in the risk taking
how can islamic banking institutions avoid money laundering and such kind of other illegal illegitimate activities answer in the post a global scenario anti money laundering measures by regulatory authorities of banking and finance have gained extraordinary importance

can a muslim country transform its economy according to the principles islamic finance in a successful manner what are the prerequisites for success answer the conventional banking still holds sway over the overwhelming part of the banking operations internationally
keeping this in view pakistan has adopted a strategy by adopting uniform international standards to ensure fair play by all kinds of banks and financial institutions including islamic banks

adopting the operating method of islamic banking the economic consequences of eliminating interest at the national level could be anticipated on the basis of considering the nature of the business operations of islamic banks
in cases all interest based transactions are abolished from the economy what would be the economic implications on national and international levels answer in case all interest based transactions are abolished from the economy the implications at the national and international level may be visualized as follows a

this implies that under islamic finance the vital factor of obtaining the financing facilities is the ultimate results of the enterprise whose operations are being financed whereas the credit worthiness is the secondary factor
there is no room for a large volume of transactions in debt instruments bonds as appears in conventional economies where the volume of such transactions reaches multiples of gdp

at such time higher rates of business failures and bankruptcy could bring the average rate of return on banks investments below the average rate of interest they have to pay on time deposits
in a conventional economy debt financing comes in a pyramid shaped chain where foreign banks lend local banks which in turn lend individuals and local enterprises

alternatives to borrowing each of these three dimensions is discussed as follows a dealing with current debts to begin with it should be noted that the shift to the islamic economic system does not mean the outstanding debt under conventional system would not be settled
a large number of muslim countries depend heavily on foreign loans from other countries as well as from international financial institutions like the world bank and the imf

should a country find it difficult to secure the liquidity required to settle all its outstanding debts it could resort to one of the following courses of action the outstanding debts of developing countries facing economic difficulties are usually offered in markets at prices less than their nominal value
in addition debt can be swapped for equity in public enterprises within the desired limits of keeping the majority holding of key enterprises in the hands of nationals

what compounded their problem was the fact that heavily leveraged economies inevitably face two proble miss the first is that business borrowers face disproportionately high risks in relation to the size of equity during periods of slow economic activities as debts have to be repaid regardless of business conditions
c alternatives to foreign borrowing what could an islamic country do to benefit from foreign financial resources the key to answering this question lies in the innovative utilization of financial markets to attract foreign capital

f an ijarah fund f a trade financing fund f an agricultural investment fund f an industrial investment fund f a housing investment financing fund and f a fund for financing a specific project d when is it permissible to borrow it must first be noted that borrowing as such is not prohibited by the shariah

the quranic text providing for the doctrine itself lays down two basic conditions the user must accept the sanctity of the original law implying a return to it as soon as possible and in the meanwhile use the exception to the minimum possible extent
can islamic banks play any role in economic development of the country answer while functioning within the shariah framework islamic banks can perform a crucial task of resource mobilization and efficient allocation using either profit sharing musharaka and mudaraba or trading ijarah based categories of islamic modes of financing

on the basis of the above it can be said that supply and demand of capital would continue in an interest free scenario with additional benefit of greater supply of riskbased capital alongwith more efficient allocation of resources and active role of banks and financial institutions as required in asset based islamic theory of finance
they can manage investors schemes to mobilize resources on mudarabah basis and to some extent on agency basis and use the funds so collected on murabaha ijarah or equity participation basis

instead of sharing in the bank s profit the investors would share the profits of the enterprise in which funds are placed with the bank taking a management fee for its work
under equity based funds banks can offer a type of equity exposure through specified investment accounts where they may identify possible investment opportunities from existing or new business clients and invite account holder to subscribe

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic banking

KeyWords

contract price sale asset financing lease client purchase ijarah payment profit musharakah lessee amount commodity housing agreement contracts ownership project

DOCUMENT REFERENCES

Number of Pages

55

Published Date

2008-10-21 18:46:17

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FAQs on Islamic Banking by State Bank of Pakistan

Contents

Top 20 FREQUENT WORDS

DOCUMENT KEY POINTS

DOCUMENT WORD ANALYSIS

Main Category

KeyWords

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