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INTEREST
FREE BANKING

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GROUP
MEMBERS
WALEED MUDASSAR
HAMZA JAVED

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 Introduction
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“Interest Free Banking” is a fundamental concept derived
from the Islamic form of banking. It operates with the primitive
professional and ethical standards that exclude the “Muslims” from
paying or receiving any kind of interest.

There are a lot of financial tools introduced by the Islamic financial

bodies to fulfill these business or profit making requirements.

For a clear understanding, they deal with equity financing rather then
reflecting on debt financing.

In addition, as a replacement of fixed interest rates on the savings

account, these interest free banks give a small percentage of return on
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deposits on an annual basis.
 Introduction…
Banking and finance as an integral part of an
Islamic economic system

Spread all over the world

Over 50-75 countries

About 250 Islamic financial institutions

$200-$800 billion in size

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Average annual growth of 15%
 We find a greater indulgence of banks
in our local communities.

Looking at this inevitability, interest

free banking came into existence to
serve all the business needs of Muslims
and in turn taking utmost care of the
rules of Islam.

The interest free banking works on

some simple rules in the Quran and
those who do not follow these rules or
deviates from following them correctly
is termed as “non-Islamic”.

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 Basic Principle
The basic principle that helps a person become debt
free at the earliest can be called the most outstanding
feature of these kinds of banks. The interest free banks
work with the rule that the lender must have a share from
the profits or the losses that occur to the borrower or the
borrowing enterprise.

Thus it is mandatory to share the profits as well as the

losses.

The lender and the borrower are more of partners and

that plays a major role in characterizing the social order.
In turn it helps remove the discrimination between the
modern day “rich” and the “poor”. The traditional banking
system on the other hand collects huge amounts of interest
from the borrower regardless of the success or the failure
issue. It places a huge amount of risk on any entity that is
borrowing the money and is proved to be merciless with
Islam.
 How Did It All
Start?
It is a modern banking style

Egypt (1963), Malaysia (1963) and Pakistan (1965)early

experimentation.

Malaysia stands out--Pakistan and Egypt left behind

The Middle East as a hub of Islamic Finance.

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 Islamic financial
transaction terminologies
Bai' a-inah (sale and buy-back Hibah( gift)
agreement)
Ijarah (leasing)
Bai' bithaman ajil (deferred payment •Ijarah thumma al bai' (hire purchase)
sale) •Ijarah-wal-iqtinaMusharakah (joint
venture)
Bai muajjal (credit sale) Qard hassan/ Qardul hassan (good
loan/benevolent loan)

Mudarabah (profit sharing) Sukuk (Islamic bonds)

Wadiah (safekeeping)
Murabahah (cost plus)
Takaful (Islamic insurance) Wakalah
(power of attorney)
Musawamah

.Bai salam
 An
Example!
I need £100,000 for a business venture for a period of one year.
I have got two options
1. Borrowing at a rate of interest of 7%
2. Going Islamic way
First is not acceptable to my Shariah Advisor
What about the second?

Option 2
My advisor issues securities worth £100,000 on
my house
The securities are sold to a third party with a
buy-back clause of one year
p t able?
The buyer then rents the house to me for one it a cce
year on a rental equivalent to 7% of the stocks’ Is in
worth (£100,000) S … e d o
YE h a t w
h is is w ion!!!
T
ur it i sa t
sec

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 What ’ s The
Difference?
Option 1 involves Riba while
Option 2 involves Trade
Options 1 And 2
Compared
Option 1 Option 2
Pure monetary phenomenon Trade of a physical item is
Return on money – Riba involved
Straight forward Return on investment in property
– rental
Cheap
Involves some sort of innovation
Costly
But Are They Really
Different?

n 2
1
O p t i o n oney Optio
on m on
Return Return rities
secu

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 Future Of Islamic
Finance
Not much different from
conventional finance

Need for re-direction

Need for genuine innovation

Future lies in Islamic

homelands and not in the
Western financial centres
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 Advantages &
Disadvantages
ADVANTAGES D IS A D V A N T A G E S

Islamic finance does not N o t m u ch d iffe re n t

allow creating new risks to fro m co n ve n tio n a l
profit thereby. fin a n ce
It is not a closed system.
It has no regional, ethnic
or class affiliations.
It tries to make the
transactions as risk free as
possible.

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 Under the ruling of the Federal Shariah Court, the
financial experts are endeavoring to switch over
from the existing interest based system to the
Ribah free financial system in Pakistan.

Two fully-fledged Islamic banks, one local and one

foreign-based have opened 23 branches recently, while
nine conventional banks including Standard
Chartered and AG Zurich have 25 branches across
the country.
PAKISTAN:

AL-Faisal Investment Bank Ltd., Islamabad

Al-Taufeeq Investment Bank Ltd., Lahore
(Dila AL-Barakah Group) Lahore

Faisal Bank Ltd

National Bank Trust (NIT)
Shamil Bank, Karachi

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 Conclusion

With the rules that help humanity, Interest free

banking is on its way to leave a long lasting
impact on the financial institutions around the
world.
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