ISLAMIC BANKING

A COMPREHENSIVE OVERVIEW
Topics Discussed:
Basics

Principles

Products

and Services

RIBA IN THE QUR'AN

1. First Revelation (Surah al-Rum, verse 39)

That which you give as interest to increase the peoples' wealth increases not
with God; but that which you give in charity, seeking the goodwill of God,
multiplies manifold. (30: 39)

2. Second Revelation (Surah al-Nisa', verse 161)

And for their taking interest even though it was forbidden for them, and
their wrongful appropriation of other peoples' property. We have prepared for
those among them who reject faith a grievous punishment (4: 161)

3. Third Revelation (Surah Al 'Imran, verses 130-2)

O believers, take not doubled and redoubled interest, and fear God so that
you may prosper. Fear the fire which has been prepared for those who reject
faith, and obey God and the Prophet so that you may receive mercy.

RIBA IN HADITH

1. From Jabir R.A: The Prophet S.A.W may 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]." (Muslim, Kitab al-Musaqat, Bab la'ni akili al-riba wa
mu'kilihi; also in Tirmidhi and Musnad Ahmad)

2. Jabir ibn 'Abdallah R.A, giving a report on the Prophet's

Farewell Pilgrimage, said: The Prophet S.A.W addressed the
people and said "All of the riba of Jahiliyyah is annulled. The
first riba that I annul is our riba, that accruing to 'Abbas ibn 'Abd
al-Muttalib R.A[the Prophet's uncle]; it is being cancelled
completely." (Muslim, Kitab al-Hajj, Bab Hajjati al-Nabi, ; may
also in Musnad Ahmad)

BASICS OF ISLAMIC BANKING

Islamic

Banking is based on Shariah Laws.

Shariah

covers every aspect of our life, it provides

principles how to live at individual level, in the

society, legal and economic system, etc. or simply
it is a complete code of life.

GOVERNING PRINCIPLES
1. The prohibition of interest or riba based transactions
2. Avoidance of speculations (gharar)
3. Avoidance of oppression (zulm)
4. Introduction of Islamic tax (zakat)
5. Financing of Sharia Approved activities and discouraging the
production of goods and services which are not allowed in Islamic
values (haram).

SOME FACTS
Top

10 richest individuals of the world have

wealth equal to 48 poorest countries.

The

interest based system widens the gap

between rich and poor.

Islamic

system is based on:

Equal distribution of wealth.
Social justice

PRODUCTS AND SERVICES

Mudarabah

Musharakah

Murabahah

Salam

Ististna

Ijara

Sukuk

(Bonds)

Takaful

MUDARABAH

Mudarabah is partnership between persons in which one

partner gives money to another for investing in profitable
avenues.
The investor (fund provider/supplier) is called Rabb-ulMaal while the person who utilizes this fund (the fund
manager) is called Mudarib;
Mudarib is exclusively responsible for management of the
business.
Rabbul Maal (fund supplier) does not have any right to
interfere in business affairs.

MUDARABAH
There are two types of Mudarabah:
Restricted Mudarabah (Mudarabah Muqayyadah):
It is a kind of Mudarabah in which the capital provider
restricts the Mudarib to perform business with certain
restrictions. These restrictions may be for place
(geographical restriction), particular type of investment
(sector wise restriction) or any other restriction provided
these restrictions do not unduly constrain the Mudarib from
business operations.
Unrestricted Mudarabah (Mudarabah Mutlaqah):
It is a kind of Mudarabah in which the capital provider
(Rabbul Maal) does not put any restriction the Mudarib.

MUSHARAKAH
A joint enterprise or partnership structure with profit/loss
sharing implications that is used in Islamic finance instead of
interest-bearing loans
There are some basic features of Musharakah:
Mixing of Capital (joint ownership);
Asset or property or anything that can accept
partnership;
Rights and Responsibilities;
Sharing of profit and loss

MUSHARAKAH
Permanent

Musharaka:

Permanent Musharaka is a partnership of permanent nature i.e. a

going concern;
Temporary

(Redeemable) Musharaka;

Musharakah can be for a limited time period, after that it will be

redeemed;
Diminishing/declining

Musharaka

A Musharakah in which a partner buys the share of the other partner

gradually until the ownership of the asset or property is completely
transferred to second partner;
According to this concept, a financer (bank) and its client participate
in a joint commercial enterprises or property or asset and the client
gradually buys banks share.

MURABAHAH
Murabahah is a particular kind of sale where the seller
expressly mentions the cost of the sold commodity he has
incurred, and sells it to another person by adding some profit
thereon. Thus, Murabahah is not a loan given on interest; it is
a sale of a commodity for cash/deferred price.
(1) Islamic bank purchase the goods for murabaha sale from the
vendor and pays for it.
(2) Islamic bank enters into a murabaha contract with customer
and delivers the good.
(3) The customers pays the bank in installments/cash over the
contract period.

SALAM
In Salam, the seller undertakes to supply specific goods to the
buyer at a future date in exchange of an advanced price fully paid
at spot. The price is in cash but the supply of purchased goods is
deferred.
Parallel Salam
In an arrangement of parallel Salam there must be two different
and independent contracts; one where the bank is a buyer and the
other in which it is a seller.

ISTISNA

Istisna is a sale transaction where a commodity is

transacted before it comes into existence. It is an order to a
manufacturer to manufacture a specific commodity for the
purchaser. The manufacturer uses his own material to
manufacture the required goods.

TAKAFUL

Takaful is commonly referred to as Islamic insurance; this

is due to the apparent similarity between the contract of
kafalah (guarantee) and that of insurance.

In takaful, the policyholders are joint investors with the

insurance vendor (the takaful operator), who acts as a
mudarib a manager or an entrepreneurial agent for the
policyholders. The policyholders share in the investment
pool's profits as well as its losses. A positive return on
policies is not legally guaranteed, as any fixed profit
guarantee would be akin to receiving interest and offend
the prohibition against riba.

IJARAH

Basic Rules

Transferring of usufruct not ownership

Subject of lessee

Should be identified and quantified.

All consumable things cannot be leased out

All liabilities of ownership is borne by lessor

Period of lease

Lease for specific purpose

Lessee as Ameen

THANK YOU FOR YOUR TIME