Agenda

• Introduction & Concept Developing

• Riba & Its Classification

• Shariah & Sources of Shariah

• Contract & Sale

• Murabahah

• Ijarah

4

Introduction To Islamic Banking &

Concept DevelopingMufti Abdul Sattar Laghari

Shariah Adviser

Sattar.laghari@habibmetro.com

5

Islam is a complete Code of LifeThus Economic System is like a Pillar among the Pillars of Islam

• Quran Majeed says, “Today I have completed for

you your Deen and I have done my blessing over

you in full”

• Allah Taa'la says,” I have choose for you Islam as

a Complete Code of Life”.

Islamic Banking is Trade Trade is Allowed in Islam

• Allah Taa’la Says: O you who have believed,

when the call is made to the prayer on Friday,

hasten to the remembrance of Allah and leave

off your trading. This is better for only if you

know.

• Then, when the Prayer is over, disperse in the

land and seek Allah’s bounty, and Allah much:

maybe you achieve success.(Surah Al

Juma’ah) 6

Islamic Banking is Trade

Trade is Allowed in Islam

Allah Taa'la Says: He knows that there will be sick

men among you, and some others who travel to seek Allah’s bounty…..

(Al

Muzammil)

7

Shariah Limits

The U’lama has classified Shariah limits

into major three categories.

Aqaid (Faith and Belief)

Shariah

Akhlaq8

9

Position of Banking and Finance within Islam

PR

OH

IBIT

ION

OF

INTER

ES

T (R

IBA

)

NO

FINA

NC

ING

OF

AC

TIV

ITIE

S P

RO

HIB

ITED

BY

ISLA

M

RIS

K S

HA

RIN

G

SA

NC

TIT

Y O

F C

ON

TR

AC

TS

MATER

IALIT

Y,

EC

ON

OM

IC P

UR

PO

SE

FAIR

NESS / N

O

EX

PLO

ITATIO

NISLAMIC FINANCIAL SYSTEM

What is Islamic Banking

• Islamic Banking refers to a system of banking or

banking activity that is consistent with the

principles of Islamic Law (Shariah) and its practical

application through the development of Islamic

Economics.

• Observance of Shariah in banking operations

determines the extent of Shariah Compliance in

banking.

11

History of Islamic Banking

• Islamic Banking system was established during 1970s. Among the

first institutions was the Naseer Social Bank which started

operations in Cairo, Egypt, in 1972.

• In 1975 Dubai Islamic Bank was established.

• During the last three decades an immense research and efforts

have been made to confine the system for Pakistani environment.

• In the present decade the Islamic banking system has gained a

good position in Pakistan & in the world around.

• HMB Islamic Started its operations in 2002 and now it is with

network of SIX stand alone branches. We are eyeing 25 branches

in 2015 Inshallah.

12

Basic difference between an Islamic Bank and a Conventional Bank

13

Islamic Bank Conventional Bank1-The relation between Islamic bank & Customer is one of participation in risks and rewards.

2- There is no previously fixed return on the funds invested with the bank, and same is the case when banks provide funds.

1-The relationship over here b/w bank and customer is that of debtors and creditors.

2-There is pre-agreed fixed return on the funds either provided by the bank or invested by the customer.

Basic difference between an Islamic Bank and a Conventional Bank

14

Islamic Bank Conventional Bank3-An Islamic bank keeps capital funds and investors’ funds segregated, in order not mix up the profit earned on its own funds (capital & current up) balances.

4-Islamic banks do not provide finance by offering cash loans, but through Musharaka etc.

3- The conventional banks pool together all the funds.

4- The conventional banks offer provide finance totally by offering cash loans.

Basic difference between an Islamic Bank and a Conventional Bank

15

Islamic Bank Conventional Bank

5-Islamic banking is primarily equity-based.

6-The Islamic system is value-oriented.

5- The conventional system is as a whole interest-based.

6-This system is value-neutral.

Conventional Banking

Asset Side Products

Conventional Banking

Liability Side Products

16

Bank is the

lender

Client is the

borrower

Bank is the

borrower

Client is the

lender

Islamic Banking

Assets Side Products

Islamic Banking

Liability Side Products

17

Musawamah

Murabahah

Salam

Istisna’a

Musharakah

Modarabah

Ijarah

Equity/Participatory Based

Modarabah

Musharakah

Sale / Trade Base

Participatory Base

Service Base

NEXT SESSION

RIBA18

Prohibition of RIBA

19

In Holy Quran there are 4 sets of Ayahs that are

revealed about Riba and its prohibitions:

1st Revelation – Surah-al-Rum, verse 39

2nd Revelation – Surah al-Nisa, verse 161

3rd Revelation – Surah al-Imran, verses 130-132

4th Revelation – Surah al-Baqarah, verses 275-281

Besides, there are also around 40 different Ahadiths on

RIBA and its prohibition from our Holy Prophet.

First Revelation about Riba

“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.” (Surah Rome, Verse 39)

20

21

4. Hazrat Jabir Ibn-e-Abdullah (‘) has reported the Prophet (]) to have cursed

those who charge interest, those who pay it, those who write documents

pertaining thereto, those who keep the accounts of such matters and those

who sign as witness. He (]) said that they are all equal in this crime.

22

9. Hazrat Abdullah Ibn-e-Masood (‘) has reported that the Prophet (]) said, “The ill affects

of interest are of 73 kinds, the last intense of these is like someone committing adultery

with his mother. This has been reported by Hakim and considered by him authentic

based on the criteria laid down by Imam Bukhari and Imam Muslim.”

DEFINITION OF RIBA

● Earning any kind of profit on any debt falls under the category of RIBA as defined in the Hadith

● Any stipulated profit on any debt is Riba

23

DEFINITION OF RIBA

DEFINITION OF RIBA

24

Classification of Riba

Riba

Riba Al FadhlExchange of

Commodities with different weights

Riba Al NasiahPayment of rabawi

itemsIs deffered

Riba & its Classification

Riba – un - Nasiyah (Riba Al- Quran)

“that kind of loan where specified

repayment period and an amount in

excess of capital is predetermined”

( Imam Abu Bakr Jassas Razi)

25

Riba & its Classification

Riba – un - Nasiyah

“all loans that draw interest is Riba”

(Hadith quoted by Hazrat Ali ibn

Abi Talib)

“the loan that draws profit is one of the

forms of Riba”

(definition from Sahabi Fazala Bin

Obaid) 26

Riba & its Classification

Riba-al-Fadhl (Riba Al Hadith)

Excess taken in exchange of specific

commodities which are homogeneous.

Legal definition defers in every fiqh.

27

Riba-al-Fadhl (Riba al Hadith)

Hadith prohibiting Riba-al-Fadhl

sell gold in exchange of equivalent gold

sell silver in exchange of equivalent silver

sell dates in exchange of equivalent dates

sell wheat in exchange of equivalent wheat

sell salt in exchange of equivalent salt

sell barley in exchange of equivalent barley

28

Riba-al-Fadhl

29

Sell barley in exchange of equivalent barley

but if a person transacts in excess, it will be

Riba.

However sell gold for silver anyway you

please on the condition it is hand-to-hand

(spot sales) and sell barley for date anyway

you please on the condition it is hand-to-

hand(spot sales)

FORMS OF RIBA• Conditional or customary increase in loan (Qarz) or

debt (Dayn)[Payables/Receivables];• Banking interest is Riba.• Financial penalty on delay payment of loans and

debts.• Pre agreed discount on early payment of loans and

debts.• Exchange of debt with excess in cash or debt or

kind.• Interest on debts (dues in a credit transaction).• Rescheduling of debt with increase in rate of return.• Sale of debt is not allowed in view of majority however some

scholars allow if it is exchanged at par.• Time based valuation of money is not acceptable.

Permissible Forms

• Following is permissible:• Charging of actual cost of recovery of

delayed debts.• Charging actual cost of

documentation or issuing expenses of loans.

• Voluntary increase by debtor (without demand by creditor or society norms)

General view of the conventional economists

• Interest plays an important role in promoting savings, investments, and economic development.

• Totally against Quran:

32

Important Shariah Maxim:

All gains to the principal are not prohibited. But

• “Al Kharaj bil Daman” • “Al Ghunm bil Ghurm” • “laa ribh maa laa yadhman” are the criterion of legality of any return on

capital meaning thereby that assumption of business risk is a pre-condition for acquisition of any profit over the principal.

33

QIMARPure Games of Chance

Qimar means gambling. Technically, it is an

arrangement in which possession of a

property is contingent upon the happening

of an uncertain event. By implication it

applies to a situation in which there is a

loss for one party and a gain for the other

without specifying which party will lose and

which will gain. Gambling and wagering contracts fall in ambit of

Qimar

34

GHARAR غرر Gharar is an Arabic word which means 'risk',

'uncertainty', and hazard.• Technical meaning of Gharar is: “any bargain in which

the result of it is hidden”.

This includes uncertainty, cheating, ambiguity and non transparency.

• Gharar is 'excessive uncertainty' about subject matter or its quantity / quality or price or maturity of the contracts.

• 'Excessive uncertainty' means uncertainty that generally leads to disputes between parties.

Shariah & its Sources

ShariahThe Word Shariah Means a path a way.

In legal terms the verb “Shara’a” means to make or establish laws. Thus the word Shariah means “laws relating to all aspects of human life established by Allah s.w.t. for His servants” OR simply you can say “the Divine Law”

The laws relating to human life are divided into three; Laws relating to Belief Laws relating to Ethics Laws relating to Deeds

Shariah is an other word for Islam.

38

Objectives of Shariah

Protection of Property

Protection of Posterity

Protection of Intellect

Protection of Life

Protection of Faith

Objectives of Shariah

Fiqh

• The word fiqh is an Arabic term meaning "deep

understanding" or "full comprehension".

• Technically it refers to the science of Islamic law

extracted from detailed Islamic sources (which are

studied in the principles of Islamic jurisprudence).

• The process of gaining knowledge of Islam through

jurisprudence, and the body of legal advisements so

derived, is known as fiqh.

39

Sources Of Shariah

All the Shariah Rulings regarding

Islamic finance & every aspect in

human life, are derived and

understood from the four sources.

40

QURAN MAJEED

SUNNAH

IJMA,A

QIYAS

SOURCES OF SHARIAH

Primary

Secondary

1) The Holy Quran

• The book of Allah (SWT): Revealed on the last prophet, written in the form of book and is being conveyed with out any break.

• Gives main beliefs, principles and wide-ranging directives of Allah, Allah (SWT) says:

"Verily, this Qur'an guides to that which is best, and gives glad tidings to the believers who do good that theirs will be a great reward." (17: 9)

42

2) Sunnah

Definition:

A word spoken or an act done or ratified by

the Holy Prophet (peace be upon him), by

Sahabah and a word spoken or act done by

Taabae’een.

It is a source of Shariah because the Holy

Quran itself has made it obligatory for every

believer that he must obey and follow the

Holy Prophet:43

3) Ijma’a Ijma’a means Scholarly consensus

Scholarly consensus is defined as being the agreement of all

Muslim scholars on a specific issue. Given the condition that all

such scholars have to agree to the ruling, its scope is limited to

matters that are clear according to the Qur'an and Prophetic

example, upon which such consensus must necessarily be

based.

The Holy Prophet (SAW) has said:

My Ummah shall never be combined on an error.

44

4) Qiyas (Analogy)

• Qiyas is reasoning by analogy.

• To apply a recognized rule of Shariah expressly mentioned

in the Holy Quran and Sunnah to a similar thing or

situation by way of analogy.

• Legal analogy is a powerful tool to derive rulings for new

matters. For example, drugs have been deemed

impermissible, through legal analogy from the prohibition

of alcohol that is established in the Qur'an. Such a ruling

is based on the common underlying effective cause of

intoxication.

45

School of Thoughts

Our four school of thoughts

Hanafi (Imam Abu Hanifa an-Nu’man bin Thabit 699 A.D – 767 A.D)

Shafai (Imam Muhammad bin Idris al-Shafai 767 A.D – 819 A.D)

Malki (Imam Malik bin Anas 713 A.D – 800 A.D)

Hanbali (Imam Ahmed bin Muhammad bin Hanbal 780A.D – 855A.D)

All these are based on these sources of Shariah and are true.

46

CONTRACT & SALE

Types Of Commitment

Wa’adah

(Unilateral Promise/undertaking)

Muwa’adah

(Bilateral Promise/undertaking)

Aqd (Contract)

48

Wa’adah It means promise.

It basically refers to a unilateral undertaking or promise

extended by one person to another in which he offers to do

something in future.

The consensus of present Shariah Scholar is that

Wa'adah is enforceable by law

Example:

A promises to sell his car to B within the next 3 months for

Rs. 2.5 lacks, it is a unilateral undertaking or Wa’ada.49

Muwa’adah (Bilateral Promise)

It means bilateral undertaking (promise) or agreement.

According to majority of the Shariah Scholars, Muwa'adah is

not allowed in situations where Aqd is not allowed (e.g.

forward contracts), and thus is not enforceable by law.

According to the some Scholars of the Sub-continent,

Muwa'adah is enforceable by law.

They argue that some times Muwa'adah is genuinely required,

for example, importer/exporter need to hedge foreign

exchange.

50

Concept of a Contract

A contract in Shariah is called Aqd, and it is a type of

Islamic Muamlat. The literal meaning of aqd is “join” or “tie”. The English word for aqd is contract

The Shariah term for aqd as given by the author of al

Inayah is:

A legal relationship created by the conjunction of two

declarations, from which flow legal consequences with

regard to the subject matter

51

AQD - TYPES OF AQD AL MUAWADHA (with consideration)

E.g. contract of sale & purchase, Ijarah, Musharakah

Modarabah etc.

TABARRU (without consideration)

E.g. Contract of loan, Aariyah, Wadiah

DHIMINIAH (Supplemental/supporting contracts)

52

53

Shariah Contracts applied in Islamic FinanceCONTRACTS ACCORDING

TO THEIR APPLICATIONS

PARTICIPATING TRADING SUPPORTING

Musharakah

Mudarabah

Muzaraah

Bai’ Sarf

Bai’ Murabaha

Tawuliyah

Salam

Istisna

Ijarah

Ai’ nah

Rahan

Kafalah

Wakalah

Wadiah

Qardh

Hiba/Tabarru’

Muqasah

Ibra’

Commitment

Bai’

DEFINITION OF SALE (BAI)

Exchange of a thing of value with another

thing of value with mutual consent

OR

The sale of a commodity in exchange of cash

54

Types of Bai’

TYPES OF SALE (Bai)

Valid sale ( Bai Sahih)

Void/Non existing Sale ( Bai Baatil )

Existing sale but void due to defect( Bai

Fasid)

Valid but disliked sale ( Bai Makrooh )

55

Types of sale

VALID SALE ( Bai Sahih)

a sale is valid if all elements together with

their conditions are present

elements of valid sales are

Contract ( Aqd )

Subject matter ( Mabe’e)

Price ( Thaman )

Possession or delivery ( Qabza )

56

Types of Valid saleThere are about 40 types of valid sale, some

famous are;

Murabahah

Musawamah

Wadiah

Salam

Istisna'a etc57

VOID / NON EXISTING SALE (BAI BAATIL)

The buyer does not have the title to

subject matter.

the seller does not have title to price.

Both subject matter and price cannot

be used lawfully.

the produce of both will be unlawful.

58

Bai Fasid

sale will exist but will be invalid due to

non compliance to:

Conditions of Sold goods are missing

Conditions of Price are not met

Conditions about Possession not met

59

VALID BUT DISLIKED SALE ( BAI MAKROOH )

Sale is valid but disliked due to certain

conditions like:

sale after Juma Azan

sale after hoarding

sale by intervention of a third party

while two are negotiating

60