1 DIFFERENCE BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING

There are two major differences between Islamic Banking and Conventional Banking: 1. Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction. 2. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer.

CONVENTIONAL BANKS 1. The functions and operating modes of conventional banks are based on fully man made principles.

ISLAMIC BANKS 1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

2. It promotes risk sharing 2. The investor is assured of a between provider of capital predetermined rate of (investor) and the user of funds interest. (entrepreneur). 3. It also aims at maximizing 3. It aims at maximizing profit profit but subject to Shariah without any restriction. restrictions.

4. It has become one of the service-oriented functions of the 4. It does not deal with Zakat. Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat. 5. It can charge additional 5. The Islamic banks have no money (penalty and provision to charge any extra compounded interest) in case money from the defaulters. of defaulters. 6. They are purely dealers of 6. They are financial agents and funds. fund managers. 7. They consider cash, gold 7. They consider such items as and other precious metals as medium of exchange. assets. 8. They deal only in money 8. They deal and documents. commodities. in assets and

9. The status of a 9. The status of Islamic bank in conventional bank, in relation relation to its clients is that of to its clients, is that of creditor partners, investors and trader, and debtors. buyer and seller. 10. They have equation of Money = Money = Money (M = M = M) 10. They have equation of Money = Commodity = Money (M = C = M)

2 ISLAMIC ECONOMY MODEL VERSUS MATERIALISTIC ECONOMY SYSTEM

THE MATERIALS ECONOMY The Materials Economyit has been the driving force behind U.S. economics since the Second World War. The name refers to the raw materials from which its products are made. The marketing and sale of these products is what keeps the Materials Economy in motion, all the while exhausting natural resources and generating incalculable amounts of waste. Consumer products manufactured and sold in the Materials Economy follow linear life cyclescycles, which like natural resources themselvesare finite. Throwaway products are a key component to the success of the Materials Economy, as they provide an unending cycle of supply and demand. Planned obsolescence is the other key component, which ensures that yesterdays hot buy quickly becomes tomorrows flop, aggressively prompting consumers to keep up with all the latest fashions and trends. Just like the carrot leading the donkey, the manufacturer is always one step ahead, and the consumer can never get enough. Since its inception some sixty-plus years ago, the Materials Economy has proven to be both unsustainable and unacceptable. Excess and intemperance run deep in the Materials Economy, where more is better, and the idea of happiness and peace of mind are sold in the promise of tomorrow's purchase. To better understand the impact of the Materials Economy on societies, cultures, and the environment, it can be helpful to examine the life cycle of any one of its products. The linear evolution of a product reveals the flaws of the Materials Economy itself, for the product is merely a microcosm of the system as a whole. Product Life Cycles Products in the Materials Economy follow a life cycle, just as living things in the natural world fulfill a life cycle by which they are
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born, grow older, and eventually die. The life cycle of any given product observes the following pattern:

Take, for example, the cell phone industry. In 2005, it was estimated that there were almost 2.5 billion subscribers worldwide.1 That figure has undoubtedly risen dramatically since then, as cell phone usage continues to permeate everyday lives of cultures all over the world. A throwaway product? The Environmental Protection Agency estimated that in 2005 alone, 125 million cell phone were discarded, leaving behind more than 65,000 tons of waste. 2 What about planned obsolescence? Todays most popular models now include state-of-the-art features like high resolution digital cameras, mp3 players with high definition speakers, internet capability, and GPS systems. One leading manufacturer is promoting one of its newest products as Thinner. Lighter. Better than ever. ISLAMIC ECONOMIC SYSTEM Islamic economic system consists of institutions, organizations. And the social values by which natural, human and manmade. Resources are used to produce, exchange, distribute and consume Wealth/goods and services under the guiding principles of Islam TO ACHIEVE FALAH IN THIS WORLD AND ALSO AFTER IT From the definition it is clear that Muslims are required to follow the principles of Islam in all aspects of an economy. For example production of wealth should take place strictly within the limits described by Islam to find that ultimate consumption pattern of the people is evolved in line with the injunctions of Islam.
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The silent features or the main characteristics of the economic system of Islam are as follows. Islam gives a unique concept of ownership or right to private property. According to this concept everything belongs to Allah and the people are trustees of what is being given to them by Allah. Thus, they are allowed to own and use property earned by them in accordance with the guidelines of Islam. This shows that Islam recognizes the individuals right to private property and it permits ownership of all type of property. Basic principles laid down in Islam for the consumption and investment of private property are as follows: 1) One has to distinguish between HALAL and HARAM in the pursuit of his/her earning or in the production and consumption of wealth. 2) Parading of ones wealth or ostentation is not allowed. 3) A property cannot be used against public interest. 4) Extravagance or spending lavishly on consumer goods and also miserliness on the contrary, is forbidden. 5) Real/money capital cannot be used for gambling. 6) People are not allowed to lend their money capital to earn interest. 7) Payment of Zakat and Ushar is compulsory and obligatory and therefore evasion in this regard would be illegal. In an Islamic society people are not allowed to satisfy their wants by the way they choose, as it is there in other economic systems. According to Islamic principles, people are allowed to consume necessaries and comforts in life and luxuries are not allowed to be used in any way because this is against the concept of TAQWA. Hence Islam shows HALAL and HARAM. Only HALALS are required to be consumed and not the HARAM ones.

Elements Economic Approach Primary Users

Material Economy Model Micro Investors Creditors

Islamic Economy Model Macro

and State, Management, People

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Accounting Policy Asset Valuation Income Determination Time Value Money Time Period Primary Focus Theoretical Concept Going Concern Postulate Fixed Interest Legalistic Orientation Accounting Rules Accounting Ethics Stock Exchange Market Bonds Accounting Approach

Goal Oriented Historical Cost Price Revenue-Expense Approach Yes Yes Income Statement Entity Theory Based on Income Yes Common Law Technical Professional Ethics Yes Yes Value Approach

Value Oriented Current Exit Price Asset-Liability Approach No Yes Balance Sheet Proprietary Theory Based Law No Religious Law Ethical Religious Ethics Yes Yes with condition No request on Islamic

Event Approach

Dichotomy of Business and Yes Private Morality

3 ISLAMIC WEALTH VERSUS MATERIALISTIC WEALTH

Wealth usually refers to money and property. It is the abundance of objects of value and also the state of having accumulated these objects. The use of the word itself assumes some sociallyaccepted means of identifying objects, land, or money as "belonging to" someone, i.e. a broadly accepted notion of property and a means of protection of that property that can be invoked with minimal (or, ideally, no) effort and expense on the part of the owner. Concepts of wealth vary among societies. Wealth plays an important role in human life. It is the subject matter of trade and other business transactions such as sales. Wealth can be in many forms. It can be in the form of money to some people and to other it can be in the form of property like houses, cars and lands. In order for men to obtain this wealth he has to work hard1 because it does not come like that, even though some times it can be inherited. In Islam wealth is known as mal. In Islam something can be recognized as mal or wealth only when it satisfies the following conditions that are only when you possessed, secured it or stored it. For example, the birds in the sky, the minerals underground and the fish in the river are not recognized as wealth in the Islamic perspective. Only when you have possessed, secured and stored these things can they be recognized as wealth. It is different from the conventional point if view which wealth is recognized even if it has not been possessed secured and stored. In conventional perspective wealth is totally owned by man. Man can use the wealth in any way he feels like using it. They utilize their wealth only for this world purposes without concerning about the Hereafter. This way of thinking is totally contrast with what Islam thought. It is stated in the Holy Quran that wealth in all its forms is a thing created by Almighty Allah as a trust for man. Thus, man only have right to uses the wealth only according to the shariah. Allah s.w.t said in the Holy Quran:
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Give to them from the property of Allah which he has bestowed upon you (24:33) WEALTH IN CAPITALISTIC "The annual produce of the land and labour of the society". This "produce" is, at its simplest, that which satisfies human needs and wants of utility. An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group. Wealth can be categorized into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets, including real estate, stocks, and bonds. Wealth provides a type of safety net of protection against an unforeseen decline in ones living standard in the event of job loss or other emergency and can be transformed into home ownership, business ownership, or even a college education. WEALTH IN SOCIALISM Socialists stand for the establishment of a system of society fundamentally different from that which exists now. In a socialist society the means of producing and distributing wealthfactories, farms, mines, docks, offices, transportwill belong to the whole community. Common ownership will do away with the need for exchange, so that money will have no use. Production in socialism will be determined by people on the basis of social need, not profit. At the moment people may need wealth but, unless they can afford to buy it, they must go without. Production is geared to sale with a view to profit. Socialism means production solely for use: bread to eat, houses to live in, clothes to wear.
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What will be the incentive to work in a socialist society? There will be no wages, for in a classless society no person will have the right to buy another person's ability to work for a price. Work in socialist society will depend on cooperation and the voluntary decisions of men and women to contribute to society in order to keep it going. Just as an individual could not survive if he or she did not eat, drink or take basic health care, so a socialist society would not survive unless the people in it acted cooperatively in a spirit of mutuality.

4 LENDING MONEY IN ISLAM

One person lends out capital in the form of a debt, and a second person puts in his labor; if there is a loss it has to be borne by labor, but, profit or loss, interest does accrue to Capital in any case. Islam has interdicted this form of investment.

O, believers, fear Allah, and give up what is still due to you from the interest (usury), if you are true believers. (2:278)
The Holy Quran also says: If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it. (2:279) In these two verses, the phrases ''what is still due to you from the interest" and "you shall have the principal" makes it quite explicit that Allah does not condone the least quantity of interest, that "giving up the interest" implies that the creditor should get back only the principal. Thus, one can clearly see that Islam considers every rate of interest (except zero%) to be totally inadmissible. In the pre-Islamic period, certain Arab tribes used to carry on their trade with the help of money borrowed on the basis of interest
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from other tribes. Islam puts an end to such transactions altogether. Ibn Juraij says: "In the pre-Islamic period, the tribe of Banu Amr bin Auf used to take interest from the tribe of Banu-al-Mughira, and the Banu-alMughira used to pay this interest. When Islam came, the later owed a considerable amount of money to the former". And further on: The Banu-al-Mughira used to pay interest to the Banu Thaqif" Let it be understood that the position of every Arab tribe was like that of a joint company, carrying on trade with the joint Capital of its individual members. So, when a tribe would borrow collectively from another tribe, it would usually be for the purposes of trade. The Holy Quran prohibited even this practice. Thus, under the Islamic system of economy, if a man wants to lend his money to a businessman for being invested in business, he will have first to decide clearly whether he wishes to lend this money in order to have a share in the profit, or simply to help the businessman with his money. If he means to earn the right to a share in the profit by lending his money, he will have to adopt the mode of "partnership" or that of Co-operation'' (Mudarabah). That is to say, he too will have to bear the responsibility of profit or loss - if there is eventually a profit in the enterprise, he shall have a share in the profit; but if there is a loss, he shall have to share the loss too. On the other hand, if he is lending this money to another person by way of help, then he must necessarily regard this help as no more than help, and must forgo all demand for a "profit. He will be entitled to get back only as much money as he has lent out. Islam considers it not only unjust but also meaningless that he should fix a rate of "interest" and thus place all the burden of a possible loss on the debtor. This discussion makes it clear that Islam places the responsibility of ''taking the risk of loss'' on Capital. The man who invests
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capital in a risk-bearing business enterprise shall have to take this risk.

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5 FACTORS OF PRODUCTION
THE CAPITALIST VIEW In order to understand the Islamic point of view fully, it would be better to have a look at the system of the distribution of wealth that is obtained under the capitalist economy. This theory can be briefly stated like this: wealth should be distributed only over those who have taken a part in producing it, and who are described in the terminology of economics as the factors of production. According to the Capitalistic economics, these factors are four:1. Capital: which has been defined as "the produced meafns of production" - that is to say, a commodity which has already undergone one process of human production, and is again being used as a means of another process of production. 2. Labour: that is to say, any exertion on the part of man. 3. Land: Which has been defined as ''natural resources'' (that is to say, those things which are being used as means of production without having previously undergone any process of human production). 4. Entrepreneur, or Organization: The fourth factor that brings together the other three factors, exploits them and bears the risk of profit and loss in production. Under the Capitalist economy, the wealth produced by the cooperation of these four factors is distributed over these very four factors as follows: one share is given to Capital in the shape of interest, the second share to Labor in the shape of wages, the third share to Land in the shape of rent (or revenue), and the
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fourth share (or the residue) is reserved for the Entrepreneur in the shape of profit. THE SOCIALIST VIEW On the other hand under the Socialist economy, capital and land instead of being private property are considered to be national or collective property. So, the question of interest or rent (or revenue) does not arise at all under the philosophy of this system. Under the Socialist system, the entrepreneur too is not an individual but the state itself. So profit as well is out of the questionf here - at least in theory. Now, there remains only one factor namely labor. And labor alone is considered to have a right to wealth under the Socialist system, which it gets in the shape of "Wages". Market socialism refers to various economic systems where the means of production are publicly owned, managed, and administered and the market is utilized to distribute resources and economic output. THE ISLAMIC VIEW The Islamic system of the distribution wealth is different from both. From the Islamic point of view, there are two kinds of people who have a right to wealth: 1) Those who have a primary right that is to say, those who have a right to wealth directly in consequence of participation in the process of production. In other words, it is those very "factors of production" which have taken a part in the process of producing some kind of wealth. 2) Those who have a secondary right, that is to say, those who have not taken a direct part in the process of production, but it has been enjoined upon the producers to make them co-sharers in their wealth. Let it be made clear that we are here concerned with the basic philosophy or theory of socialism, and not with its present practice, for the actual practice in socialist countries is quite different from this theory.
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ISLAMIC THEORY

Those who have a primary right to wealth

As indicated above, the primary right to wealth is enjoyed by "the factors of production." But "the factors of production'' are not specified or technically defined, nor is their share in wealth determined in exactly the same way as is done under the Capitalist system of economy. In fact, the two ways are quite distinct. From the Islamic point of view, the actual factors of production are three instead of being four: 1) Capital That is, those means of production which cannot be used in the process of production until and unless during this process they are either wholly consumed or completely altered in form, and which, therefore, cannot be let or leased (for example, liquid money or food stuff etc.) 2) Land That is, those means of production, which are so, used in the process of production that their original and external form remains unaltered, and which can hence be let or leased (for example, lands, houses, machines etc.). 3) Labor That is, human exertion, whether of the bodily organs or of the mind or of the heart. This exertion thus includes organization and planning too. Whatever "wealth" is produced by the combined action of these three factors would be primarily distributed over these three in this manner: one share of it would go to Capital in the form of profit (and not in the form of interest); the second share would go to Land in the form of rent, and the third share would be given to Labor in the form of wages.

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6&7 CONCENTRATION VERSUS DISTRIBUTION OF WEALTH IN ISLAM

1) Achievement of Falah:

The first and the foremost aim and objective of Islam is falah or well-being of the mankind in this world and in the next world. That is why al-Quran, the revealed book of Islam, admires those who pray to God : Our Lord ! Give unto us in the world that which is good and in the Hereafter that which is good, and guard us from the doom of fire (2 : 201) 2) Fair and Equitable Distribution: The second most important objective of the economic system of Islam is to make distribution of economic resources, wealth and income fair and equitable. Islam discourages concentration of wealth in few hands and ensures its circulation among all the sections of society. Al-Quran, the revealed book of Islam, says: That which Allah giveth as spoil unto His messenger from the people of the townships, it is for Allah and His messenger and for the near of kin and the orphans and the needy and the wayfarer, that it become not a commodity between the rich among you. (Al-Hashr 59:7) 3) Provision of Basic Human Needs: It is also an important purpose and objective of the Islamic economic system that basic necessities of life like food, clothing and shelter should be provided to all the citizens of the Islamic state. The Prophet of Islam has beautifully defined the barest necessities of life in his famous Hadith which says: The son of Adam has no better right than that he would have a house wherein he may live, and a piece of cloth whereby he may hide his nakedness, and a piece of bread and some water. (Tirmizi). Thus, in this Hadith the basic needs of an individual have been
15

defined to include a house to live in, clothing to hide ones body and food for survival and maintenance of health. 4) Establishment of Social Justice: One of the major objectives of the Islamic economic system is to establish socio-economic justice among all the members of the nation. Al-Quran says: He (Allah) placed therein firm hills rising above it, and blessed it and measured therein its sustenance in four days, alike for (all) who ask (41 : 10). Allah has placed in the earth sustenance and provisions for all to cater their needs. However, on account of various reasons, the distribution of these provisions does not remain fair among all the human beings, thus making some lucky ones very rich who possess wealth more than their needs and making many others very poor who possess nothing or too little to meet their very basic necessities of life. Islam meets this challenge of disproportionate division of wealth by making it obligatory on the rich to surrender a part of their wealth for helping the poor and unfortunate members of the community. Al-Quran says: Establish worship, pay Zakat and bow your heads with those who bow (in worship)- (2 : 43). The Holy Book again says Ye will not attain unto piety until ye spend of that which ye love. And whatsoever ye spend, Allah is aware thereof.(3:92). It further pronounces: And in whose wealth there is a right acknowledged, for the beggar and the destitute (70 : 24-25). 5) Promotion of Brotherhood and Unity: Another objective of the Islamic economic system is to establish brotherhood and unity among the Muslims. The Holy Quran says: It is not righteousness that ye turn your faces to the East and the West; but righteous is he who believeth in Allah and the Last Day and the Angels and the Scripture and the Prophets; and giveth his wealth, for love of Him, to kinsfolk and to orphans and the needy and the wayfarer and to those who ask, and to set slaves free; and observeth proper worship and payeth Zakat (2 : 177). Again the Holy Book enjoins upon its followers: They ask thee, (O Muhammad), what they shall spend. Say : That which ye spend for good (must go) to parents and near kindred and orphans
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and the needy and the wayfarer. And whatsoever good ye do, Lo! Allah is aware of it (2:215). Thus by enjoining upon the rich and wealthy to pay Zakat and spend for their poor parents, relatives, orphans and needy, Islam lays the foundations of fellow-feeling, brotherhood, friendship and love among all the members of Muslim Ummah. By helping the poor, the rich persons not only discharge their religious obligations but also earn their gratitude, love and affection. So the Zakat and alms pave the way for national solidarity and social cohesion by cementing the bonds of fraternity among the rich and the poor.
6)

Achievement of Moral and Material Development: The economic system of Islam aims at material as well as moral development of the Muslim community. It achieves this objective through its system of taxation and fiscal management particularly through Zakat. Zakat discourages hoarding of wealth and encourages its circulation. Those persons who possess hoarded wealth know that if they keep it like that, it would be consumed by Zakat. So they would not keep it lying idle, rather they would per force bring it into circulation by investing or spending it. Thus the consumption and investment would have multiplier effect on the growth of the national income. Moreover, taxes like Zakat are collected from the rich and returned to the poor and thus the purchasing power of the poor is strengthened. The poor people now having purchasing power in their hands will demand more goods. The industrialists would produce more in order to meet the increasing demand. Thus the increase in demand and supply will encourage industrialization and thereby expand the scope of employment in the country. In this way, the human and material resources of the country would be fully exploited and national income would grow rapidly. The Quran perhaps refers to this situation when it compares usury and Zakat and pronounces: That which ye give in usury in order that it may increase on (other) peoples property hath no increase with Allah; but that which ye give in charity, seeking Allahs countenance, hath increase manifold (30 : 39)

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7) Circulation of Wealth: Another important objective of economic system of Islam is to discourage hoarding and ensure the constant circulation of wealth. About hoarding of wealth the Quran says: They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings of a painful doom. On the day when it will (all) be heated in the fire of hell and their foreheads and their flanks and their backs will be branded therewith (and it will be said unto them). Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard: (At-Taubah-9 : 34-35). So the Quran not only discourages hoarding of wealth but also threatens persons responsible for this heinous crime with the dire consequences.

8) Elimination of Exploitation: The last, but the most important, objective of Islamic economic system is elimination of exploitation of one human by another. To achieve this end Islam has taken many effective measures. First such measure is the abolition of interest or usury which is and has been perhaps the worst instrument of human exploitation. The Quran calls it riba and declares it a heinous crime which amounts to war against God and Gods messenger. The Quran says : O ye who believe ! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent then ye have your principal (without interest). Wrong not and ye shall not be wronged. -(2 : 278-279)

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8 RIBA
DEFINITION OF RIBA OR INTEREST The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). Types of riba 'Riba An Nasiyah' It is defined as excess, which results from predetermined interest (sood) which a lender receives over and above the principle (Ras ul Maal) 'Riba Al Fadl' It is defined as excess compensation without any consideration resulting from a sale of goods. RIBA IN LIGHT OF QURAN The Qur'an states the following on Riba: That they took riba, though they were forbidden and that they devoured mens substance wrongfully We have prepared for those among men who reject faith a grievous punishment (Qur'an 4:161) Those who charge riba are in the same position as those controlled by the devil's influence. This is because they claim that riba is the same as commerce. However, God permits commerce, and prohibits riba. Thus, whoever heeds this commandment from his Lord, and refrains from riba, he may keep his past earnings, and his judgement rests with God. As for those who persist in riba, they incur Hell, wherein they abide forever (Qur'an 2:275) God condemns riba, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their
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Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of riba, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Qur'an 2:276-280) O you who believe, you shall not take riba, compounded over and over. Observe God, that you may succeed. (Qur'an 3:130) And for practising riba, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Qur'an 4:161) The riba that is practised to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Qur'an 30:39) RIBA IN LIGHT OF HADITH Riba is mentioned in a number of Hadith: Jabir said that Muhammad cursed the accepter of usury and its payer, and one who records it, and the two witnesses, and he said: They are all equal.[23] Narrated Abu: We used to be given mixed dates (from the booty) and used to sell (barter) two Sas of those dates) for one Sa (of good dates). The Prophet said (to us), "No (bartering of) two Sas for one Sa nor two Dirhams for one Dirham is permissible", (as that is a kind of usury). (See Hadith No. 405) Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is form hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount Narrated Ibn 'Umar: Muhammad said, "The selling of wheat for wheat is Riba (usury) except if it is handed from hand to hand and equal in amount. Similarly the selling of barley for barley, is Riba
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except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount Narrated AbuHurayrah: Muhammad said: If anyone makes two transactions combined in one bargain, he should have the lesser of the two or it will involve usury

9 TYPES OF BUSINESS IN ISLAM

MUSHARAKA A bank may join another entity to set up a joint venture, both parties participating in the various aspects of the project in varying degrees. Profit and loss are shared in a pre-arranged fashion. This is not very different from the joint venture concept. The venture is an independent legal entity and the bank may withdraw gradually after an initial period. MUDARABHA Where the bank contributes the finance and the client provides the expertise, management and labour. Profits are shared by both the partners in a pre-arranged proportion, but when a loss occurs the total loss is borne by the bank. ISTISNAA It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. BAI- MUJJAL Literally it means a credit sale. It is a contract in which the bank earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in instalments. It has to express that mention cost of the commodity and the margin of profit is mutually agreed.
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BAI- SALAM Salam means a contract in which advance payment is made for goods to be delivered after on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies. MURABAHA Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and profit. Islamic banks have adopted this as a mode of financing. As a financing technique, it involves a request by the client to the bank to purchase certain goods for him. The bank does that for a definite profit over the cost, which is stipulated in advance. IJARAH The bank provides assets on lease basis to the customer. The assets may include cars buildings, machinery, computer, and equipment. A contract is made to pay fixed amount at regular intervals for certain numbers of years. IJARAH-WA- IQTINA The bank makes an agreement for leasing assets like cars, machinery, computers, and buildings. The customer can pay agreed amount in instalment at regular intervals. Additional amount is also paid to become the owner of assets at the end of lease contract. BAI' AL-INAH A client sells one of his properties to the bank for an agreed price payable now on condition that he will buy the property back after certain time for an agreed price. LOANS WITH A SERVICE CHARGE
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Where the bank lends money without interest but they cover their expenses by levying a service charge. This charge may be subject to a maximum set by the authorities. QARD HASANA The bank is expected to set aside a part of their funds to grant qard hasana to needy persons such as small farmers, entrepreneurs, producers, etc. and to needy consumers. There is no interest or surcharges on such amounts. The customer pays principal amount when he is able to pay.

MUSHARAKA
Definition and classification of Musharakah The literal meaning of Musharakah is sharing. The root of the word "Musharakah" in Arabic is Shirkah, which means being a partner. It is used in the same context as the term "shirk" meaning partner to Allah. Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to the ratio of the contribution. It is an ideal alternative for the interest based financing with far reaching effects on both production and distribution. The connotation of this term is little limited than the term "Shirkah" more commonly used in the Islamic jurisprudence. For the purpose of clarity in the basic concepts, it will be pertinent at the outset to explain the meaning of each term, as distinguished from the other. "Shirkah" means "Sharing" and in the terminology of Islamic Fiqh, it has been divided into two kinds: (Shirkat-ul-milk (Partnership by joint ownership): It means joint ownership of two or more persons in a particular property. This kind of "Shirkah" may come into existence in two different ways:
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(2) Shirkat-ul-Aqd (Partnership by contract): This is the second type of Shirkah, which means, "a partnership effected by a mutual contract". For the purpose of brevity it may also be translated as "joint commercial enterprise." Shirkat-ul-Aqd is further divided into three kinds: (i) Shirkat-ul-Amwal (Partnership in capital) Where all the partners invest some capital into a commercial enterprise. (ii) Shirkat-ul-Aamal (Partnership in services) where all the partners jointly undertake to render some services for their customers, and the fee charged from them is distributed among them according to an agreed ratio. For example, if two people agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done, this partnership will be a shirkat-ulaamal which is also called Shirkat-ut-taqabbul or Shirkat-ussanai or Shirkat-ul-abdan. (iii)Shirkat-ul-wujooh (Partnership in goodwill). The word has its root in the Arabic word Wajahat meaning goodwill. Here the partners have no investment at all. They purchase commodities on deferred price, by getting capital on loan because of their goodwill and sell them at spot. The profit so earned is distributed between them at an agreed ratio.

10(A) TIJARTI SOOD VERSUS SARFI SOOD

1. TIJARTI SOOD (Commercial Interest): Interest paid on loafn taken for productive & profitable purposes. 2. SARFI SOOD (Usury): Interest paid on loan taken for personal need and expenses.

10(B)
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SIMPLE INTEREST VERSUS COMPOUNDED INTEREST

DEFINITION OF SIMPLE INTEREST: Interest calculated only on the initial investment. DEFINITION OF COMPOUND INTEREST: INTEREST Reinvestment of each interest payment on money invested, to earn more interest.

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REFERENCES
http://www.accountancy.com.pk/articles.asp?id=100 http://www.trcb.com/religion/islam/islamic-economic-system5951.htm http://www.newgreeneconomy.com/sustainableliving/item/12-transforming-the-materials-economy http://www.wordiq.com/definition/Wealth http://www.takaful.coop/doc_store/takaful/Wealth %20Mgt.doc http://en.wikipedia.org/wiki/Wealth http://www.worldsocialism.org/articles/socialism_will_work.ph p http://www.meezanbank.com/section1_2.aspx http://www.muslimtents.com/shaufi/b16/b16_2.htm#2.%20Pr inciple%20of%20Use:

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