Riba Free

Financial System
Introduction
&
Background
 Two Financial System
for Monitory & Financial
Markets
 First
The financial system which is base
on RIBA practice which means
bad earning and , commonly
known as a one category of Riba
which is Interest
(the Price of Money).
 Second
The system emerged on factual and
authentic principles of Islam on the
guidance of Holy Quran, explained in
Hadiath (Prophet May Peace Be upon Him
sayings) and practiced by Muhammad,
May Peace Be upon Him, last and most
Honored and Blessed messenger of
Almighty Allah
 Historical Background
 Financial matters in Post Islam Era were
commonly practiced on the bases on social
priorities and Prophet (PBUH) too were involve
in commercial and financial activities
considering the social obligations in financial
matters
 Most powerful community development on the
basis of social developments which is
authenticated by archives of Islamic World.
 Interest based System, dominating 96% of
the present financial and monetary
markets, controlling the market with its
powerful grip and titled as the
Conventional Monetary System,
 System derived from Quran, Sunnah and
Hadiath has the better title that signify
motive and concept of the system as
Socio-Financial System.
 Islamic financing was practice for the
most part in the Muslim world throughout
the middle Ages.
 It encourage trade and business activities
 In Spain and the Mediterranean and Baltic
states, Islamic merchants became vital
intermediaries for trading activities.
 European financiers and businesspersons
later adopted many concepts, techniques,
and instruments of Islamic finance.
 The term "Islamic financial system" is
relatively new, appearing only in the
mid-1960s
 Commercial or business activities
conforming to Islamic principles
made under the umbrella of either
"interest-free" or "Islamic Banking.
 Islamic financial system simply as
"interest-free" does not provide a true
picture of the system as a whole.
 Prohibition of receiving & paying interest
is the base of this system.
 It works on Islamic set guidelines
consisting of Risk Sharing, Individual
Rights & Duties, Property Rights, Purity of
Contracts, Commitments, Transparencies,
Fair Deals and Employment Growth.
 Not limited to banking but covers capital
formation, capital markets, and all types
of financial settlement.
 The philosophical roots of an Islamic
financial system originate from the
relations of factors of production and
economic activities.
 Conventional financial system deals
primarily with the economic and
lending and borrowing aspects of
transactions.
 Financial system equally emphasizes on
the ethical, moral, social & religious
proportions for enhancing equality and
fairness for an ideal society.
 It fully appreciate in context of Islamic
teachings on the work ethic, wealth
distribution, social and economic justice,
role of the state and responsibilities and
duties of the citizen. .
 It is establish on absolute prohibition of
payment or receipt of predetermined and
guaranteed return rate.
 Pre-agreed/ estimated share of profit or
growth had been noticed in the archives,
way back to post Islamic era and was
practiced by Muhammad (May Peace Be
Upon Him), the Caliphs and the Ashab
(close associates of Prophet May Peace Be
upon Him).
 This ended concept of interest and rule
out use of debt-based instruments.
 The system encourages risk sharing,
promotes entrepreneurship, discourages
speculative behavior, and emphasizes the
sanctity of contracts
 Basic framework for Islamic financial
system is enforcement of the rules for
handling of economic, social, political, and
cultural characteristic of Islamic societies
 Basic principles of
Islamic financial system
Prohibition of Riba in Financial
Practice
 Any unjustifiable increase of capital whether in
loans or sales is central belief of system.
 Any positive, fixed, predetermined rate tied to
maturity and amount of principal (i.e.,
guaranteed regardless of performance of the
investment considered Riba
 Risk sharing
Because interest is prohibited,
suppliers of funds become
investors instead of creditors.
The provider of financial capital
and the entrepreneur share
business risks in return for shares
of the profits.
 Money as "potential" capital
 Money is treated as "potential" capital
 It becomes actual capital only when it
joins hands with other resources to
undertake a productive activity.
 Islam recognizes the time value of money,
but only when it acts as capital, not when
it is "potential" capital
Prohibition of speculative
behavior
An Islamic financial system
discourages exhibition of wealth
and prohibits transactions
featuring extreme uncertainties,
gambling, and risks
Transparency of contracts
Islam upholds contractual
obligations and the disclosure of
information as a sacred duty.
This feature is intended to reduce
the risk of information and moral
hazards.
Shariah-approved activities

Only those business activities that

do not violate the rules of Shariah
qualify for investment.
For example, any investment in
businesses dealing with alcohol,
gambling, and casinos would be
prohibited
 Aristotle
 Defined Interest as price of money
Lender charge borrower pays. Islam
accept that agreement between financier
and user, if agreed on terms of transaction
and fulfill obligations in rightful manner,
there is no harm in lending or borrowing.
 Transaction encounters difference of
opinion, it starts entering into Riba. Thus
it affects relationship and harmony of two
parties. In this condition monetary and
financial affairs are forbidden.
 Salient features of this order
 Islam clearly characterizes difference between
lawful and forbidden in economic activity and
permit the Muslims to make all efforts for their
right in seeking their economic benefits.
 Further clarify the permissions, Islam prohibits
financial, economical, social and legal actions,
which are morally, financially and socially
damage the community life.
 The Islamic financial system employs concept
of participation in enterprise, utilizing funds at
risk on a profit-and- loss-sharing basis.
 Careful investment policy, diversification of risk
and careful management by Islamic financial
institutions.
 Potential profit in proportion to the risk
assumed and to satisfy conflicting demands of
participants in the current environment and
within the guidelines of the Shariah.
 Difference
 Financing is Equity and not Liability
 Landing is liability and not participation.
 Financing is made and Loan is given
 Loan is secure financing is support.
 Financing is an investment and loan is
facility.
 Loan cannot be financing until it is
agreed on Profit and loss sharing and
financing cannot be a loan till return is
guaranteed.