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INTERESTINTERESTFREE BANKINGFREE BANKING

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Interest Free Bankingis a fundamental concept derivedfrom the Islamic form of banking. It operates with the primitiveprofessional and ethical standards that exclude the Muslims frompaying or receiving any kind of interest.

There are a lot of financial tools introduced by the Islamic financialbodies 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 savingsaccount, these interest free banks give a small percentage of return ondeposits on an annual basis.

Introductionntro uct on

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IntroductionIntroduction

Banking and finance as an integral part of anIslamic economic system

Spread all over the world

Over 50-75 countries

About 250 Islamic financial institutions

$200-$800 billion in size

Average annual growth of 15%

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We find a greater indulgence of banks

in our local communities.

Looking at this inevitability, interestfree banking came into existence toserve all the business needs of Muslimsand in turn taking utmost care of therules of Islam.

The interest free banking works onsome simple rules in the Quran andthose who do not follow these rules ordeviates from following them correctlyis termed as non-Islamic.

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Basic PrincipleBasic Principle

The basic principle that helps a person become debt

free at the earliest can be called the most outstandingfeature of these kinds of banks. The interest free bankswork with the rule that the lender must have a share fromthe profits or the losses that occur to the borrower or theborrowing enterprise.

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

The lender and the borrower are more of partners andthat 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 bankingsystem on the other hand collects huge amounts of interestfrom the borrower regardless of the success or the failureissue. It places a huge amount of risk on any entity that isborrowing the money and is proved to be merciless withIslam.

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How Did It AllHow Did It AllStart?Start?

It is a modern banking style

Egypt (1963), Malaysia (1963) and Pakistan (1965)earlyexperimentation.

Malaysia stands out--Pakistan and Egypt left behind

The Middle East as a hub of Islamic Finance.

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Islamic financialIslamic financialtransaction terminologiestransaction terminologies

Bai' a-inah (sale and buy-backagreement)

Bai' bithaman ajil (deferred paymentsale)

Bai muajjal (credit sale)

Mudarabah (profit sharing)

Murabahah (cost plus)

Musawamah

Bai salam

Hibah( gift)

Ijarah (leasing)

Ijarah thumma al bai' (hire purchase)

Ijarah-wal-iqtinaMusharakah (joint

venture)Qard hassan/ Qardul hassan (goodloan/benevolent loan)

Sukuk (Islamic bonds)

Wadiah (safekeeping)

Takaful (Islamic insurance) Wakalah(power of attorney)

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Example!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 AdvisorWhat about the second?

ption 2ption 2My advisor issues securities worth 100,000 on

my houseThe securities are sold to a third party with a

buy-back clause of one yearThe buyer then rents the house to me for one

year on a rental equivalent to 7% of the stocksworth (100,000) Isita

cceptable

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YES

Thisisw

hatwedo

in

securitisat

ion!!!

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hat s Thehat s TheDifference?ifference?Option 1 involves Riba whileOption 2 involves

Tradeptions 1 And 2ptions 1 And 2Comparedompared

Option 1

Pure monetary phenomenon

Return on money RibaStraight forward

Cheap

Option 2

Trade of a physical item is

involvedReturn on investment in property rental

Involves some sort of innovation

Costlyut Are They Reallyut Are They ReallyDifferent?ifferent?

O p t io n 1Return

on money

O p t i on 2Retur

n on

securities

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Future Of IslamicFuture Of IslamicFinanceFinance

Not much different fromconventional finance

Need for re-direction

Need for genuine innovation

Future lies in Islamichomelands and not in theWestern financial centres

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Under the ruling of the Federal Shariah Court, thefinancial experts are endeavoring to switch overfrom the existing interest based system to theRibah free financial system in Pakistan.

Two fully-fledged Islamic banks, one local and oneforeign-based have opened 23 branches recently, whilenine conventional banks including StandardChartered and AG Zurich have 25 branches across

the country.PAKISTAN:

AL-Faisal Investment Bank Ltd., IslamabadAl-Taufeeq Investment Bank Ltd., Lahore

(Dila AL-Barakah Group) Lahore

Faisal Bank LtdNational Bank Trust (NIT)

Shamil Bank, Karachi

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With the rules that help humanity, Interest free

banking is on its way to leave a long lastingimpact on the financial institutions around the

world.

Conclusion

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