Concept of banking in islam

CONCEPT OF BANKING CONCEPT OF BANKING IN ISLAMIN ISLAM

BYBY

Gulfraz waliGulfraz waliBBA/MBABBA/MBA

International Islamic University International Islamic University ISLAMABAD/H-10ISLAMABAD/H-10

E-MailE-Mail:: [email protected] [email protected]

CONCEPT OF BANKING IN CONCEPT OF BANKING IN ISLAMISLAM

م� ر� و�ح� ال�ب�ي�ع� الل�ه ل� أ�ح� م� و� ر� و�ح� ال�ب�ي�ع� الل�ه ل� أ�ح� و�ب�ا ب�االر� ..الر�

Al Baqarah (2):375Al Baqarah (2):375

`ALLAH (SUBHANAHO WA TA’ALA) HAS `ALLAH (SUBHANAHO WA TA’ALA) HAS PERMITTED TRADING AND PERMITTED TRADING AND FORBIDDEN USURY”.FORBIDDEN USURY”.


و الله اتقوا امنوا الذين ايها و يا الله اتقوا امنوا الذين ايها ياكنتم ان الربا من مابقى كنتم ذروا ان الربا من مابقى ذروا

نوا فاذ تفعلوا لم فان نوا مومنين فاذ تفعلوا لم فان مومنينرسوله و الله من رسوله بحرب و الله من ..بحرب

Al Baqarah (2):278, Al Baqarah (2):278,

O Believers fear Allah Subhanaho Wa Ta’ala and give O Believers fear Allah Subhanaho Wa Ta’ala and give up that interest which is still due to you, if you are true up that interest which is still due to you, if you are true believers, but if you do not do so, then you are warned believers, but if you do not do so, then you are warned

of the declaration of war against you by Allah of the declaration of war against you by Allah Subhanaho Wa Ta’ala and His Messenger”.Subhanaho Wa Ta’ala and His Messenger”.


إ-ال� وم ون� ي�ق ال� ب�ا الر� ك ل ون�ي�أ� إ-ال� ال�ذ-ين� وم ون� ي�ق ال� ب�ا الر� ك ل ون�ي�أ� ال�ذ-ين�

ي�ط�ان الش� ب�ط ه ي�ت�خ� ال�ذ-ي وم ي�ق ا ي�ط�ان ك�م� الش� ب�ط ه ي�ت�خ� ال�ذ-ي وم ي�ق ا ك�م�ا -ن�م� إ ال وا ق� م� ن�ه

ب-أ� ذ�ل-ك� ال�م�س� ا م-ن� -ن�م� إ ال وا ق� م� ن�هب-أ� ذ�ل-ك� ال�م�س� م-ن�

ب�ا الر� ث�ل م- ب�ا ال�ب�ي�ع الر� ث�ل م- ..ال�ب�ي�ع Al Baqarah (2):275Al Baqarah (2):275

Those who take usury shall rise up before Allah Those who take usury shall rise up before Allah Subhanaho Wa Ta’ala like Satan have Subhanaho Wa Ta’ala like Satan have

demented, bewitched and maddened by his demented, bewitched and maddened by his touch. They have been condemned to this touch. They have been condemned to this

condition because they say, "Trade is just like condition because they say, "Trade is just like interest".interest".


مؤكله الربوا اكل الله مؤكله لعن الربوا اكل الله لعنقال و شاهديه و كاتبه قال و و شاهديه و كاتبه و

سواء سواء هم ..همMuslim bin Hajaj Al Qasheery, Sahih, Baab Al Riba.Muslim bin Hajaj Al Qasheery, Sahih, Baab Al Riba.

Allah Subhanaho Wa Ta’ala has imprecated Allah Subhanaho Wa Ta’ala has imprecated Usurer, the one who writes Usury Contract Usurer, the one who writes Usury Contract documents, and its witnesses and said all of documents, and its witnesses and said all of

equal in Allah Subhanaho Wa Ta’ala's equal in Allah Subhanaho Wa Ta’ala's imprecation”.imprecation”.


يوم يبعث الربوا يوم اكل يبعث الربوا اكلمجنونا مجنونا القيامة ..القيامة

Narrated by Ahmed Abu Dawood, Baab Al RibaNarrated by Ahmed Abu Dawood, Baab Al Riba. .

Usurer shall rise maddened before Allah Usurer shall rise maddened before Allah Subhanaho Wa Ta’ala on the Day of Judgment”. Subhanaho Wa Ta’ala on the Day of Judgment”.


Each of the three constitutions of Each of the three constitutions of Pakistan (1956, 1962, 1973), Pakistan (1956, 1962, 1973), adopted so far, contains a clause adopted so far, contains a clause making the elimination of Riba making the elimination of Riba (Interest), an objective of the (Interest), an objective of the State.State.

State Bank prescribed 12 different State Bank prescribed 12 different non-interest-based modes of non-interest-based modes of financing which the banks could financing which the banks could use for extending finances with use for extending finances with effect from April 1, 1985.effect from April 1, 1985.

On the Liabilities side, all bank On the Liabilities side, all bank deposits, with the exception of deposits, with the exception of foreign currency deposits, were to be foreign currency deposits, were to be on the basis of participation in profit on the basis of participation in profit and loss of the banks effective from and loss of the banks effective from July 1, 1985July 1, 1985

Modes of FinancingModes of Financing MusharakahMusharakah MudharbahMudharbah

Banking practices and procedures must base on Banking practices and procedures must base on principles of profit-loss sharing.principles of profit-loss sharing.

Banking practices and procedures must base on Banking practices and procedures must base on principles of profit-loss sharing in Consonance principles of profit-loss sharing in Consonance with the Islamic Legal Concepts of with the Islamic Legal Concepts of MUDHARABHA and MUSHARAKAH. MUDHARABHA and MUSHARAKAH.

Interest can be replaced by Profit and Loss Interest can be replaced by Profit and Loss Sharing and Qard-e-Hasan.Sharing and Qard-e-Hasan.

Need for Shari‘ah Advisory Board and Shari‘ah Need for Shari‘ah Advisory Board and Shari‘ah Committees.Committees.

Mode of Financing to be used by banks:Mode of Financing to be used by banks: Structure of Banks’ depositsStructure of Banks’ deposits Profit-Sharing arrangements with depositorsProfit-Sharing arrangements with depositors

Need for Islamic Instruments for Banks Secondary Need for Islamic Instruments for Banks Secondary Reserves.Reserves.

Central banks role as “lender of the last resort”.Central banks role as “lender of the last resort”. Inter-Bank flow of Funds.Inter-Bank flow of Funds. Provident fund balances of the Employees.Provident fund balances of the Employees. Problems related to the foreign branches of Pakistani Problems related to the foreign branches of Pakistani

BanksBanks

MODEL OF RIBA-FREE BANKMODEL OF RIBA-FREE BANK

Modes of FinancingModes of FinancingA.A. 1-Financing by Lending (Bank may recover service charges).1-Financing by Lending (Bank may recover service charges).

2- Qard-e-Hasan (Loans on Compassionate Ground).2- Qard-e-Hasan (Loans on Compassionate Ground).B.B. Trade Related ModesTrade Related Modes

3- Purchase of goods by bank and their sale to clients at appropriate 3- Purchase of goods by bank and their sale to clients at appropriate mark-up in price on deferred payment basis.mark-up in price on deferred payment basis.4- Purchase of Trade Bills.4- Purchase of Trade Bills.5- Purchase of movable or immovable property from clients with buy-5- Purchase of movable or immovable property from clients with buy-back agreement or otherwise.back agreement or otherwise.6- Leasing.6- Leasing.7- Hire-purchase.7- Hire-purchase.8- Financing for development of property on the basis of development 8- Financing for development of property on the basis of development charge.charge.

C.C. INVESTMENT TYPE MODESINVESTMENT TYPE MODES9- Musharakah OR Profit and Loss Sharing.9- Musharakah OR Profit and Loss Sharing.10- Equity participation and purchase of shares.10- Equity participation and purchase of shares.11- Purchase of participation Term Certificates and Mudharabah 11- Purchase of participation Term Certificates and Mudharabah certificates.certificates.12- Rent-sharing.12- Rent-sharing.

New Modes of FinancingNew Modes of Financing

New Modes of Financing need to be added to New Modes of Financing need to be added to the list of approved modes of Finance.the list of approved modes of Finance.

1- Ba‘ey Salam (Immediate Payment on 1- Ba‘ey Salam (Immediate Payment on Defferred Delivery of goods).Defferred Delivery of goods).

2- Ba‘ey Muájjal Certificate (instead of Term 2- Ba‘ey Muájjal Certificate (instead of Term Finance Certificate).Finance Certificate).

3- Musharakah Certificate (instead of 3- Musharakah Certificate (instead of Participation Term certificate).Participation Term certificate).

Structure of Banks DepositsStructure of Banks Deposits Structure of bank deposits is important for the just an efficient Structure of bank deposits is important for the just an efficient

functioning of an Islamic profit sharing bank.functioning of an Islamic profit sharing bank. All categories of deposits held by bank are treated as one All categories of deposits held by bank are treated as one

common pool of funds. But income of these is appropriated common pool of funds. But income of these is appropriated under two heads (a) non-interest income (b) interest income.under two heads (a) non-interest income (b) interest income.

Long-term and Short- term PLS should get different treatment.Long-term and Short- term PLS should get different treatment. Most efficient service must be provided.Most efficient service must be provided. There must be convenience of transaction (ATM, Merchant There must be convenience of transaction (ATM, Merchant

Account). Account). Surplus fund in banks must be invested in the most efficient Surplus fund in banks must be invested in the most efficient

manner. manner.

Profit Sharing Arrangements With Profit Sharing Arrangements With DepositorsDepositors

Income derived from the investment of PLS deposits Income derived from the investment of PLS deposits should only be distributed among PLS depositors.should only be distributed among PLS depositors.

Income earned from foreign branches, current Income earned from foreign branches, current account deposits and non-fund based income earned account deposits and non-fund based income earned from services rendered by banks should go to share from services rendered by banks should go to share holders only.holders only.

Banks should receive a specified portion of income Banks should receive a specified portion of income earned from PLS deposits for meeting their expense earned from PLS deposits for meeting their expense and saving should be their profit for managing PLS and saving should be their profit for managing PLS deposits.deposits.

Income of the PLS account must be published.Income of the PLS account must be published.

Islamic Instruments for Secondary ReservesIslamic Instruments for Secondary Reserves

Simple solution is that entire liquidity reserve be Simple solution is that entire liquidity reserve be maintained in cash which will not involve any maintained in cash which will not involve any interest.interest.

Banks must be allowed to keep this reserve in the Banks must be allowed to keep this reserve in the form of profit and loss sharing investment like the form of profit and loss sharing investment like the shares of the Joint Stock Companies.shares of the Joint Stock Companies.

Reserve requirement may only apply to current Reserve requirement may only apply to current deposits.deposits.

Secondary or liquidity reserves should be kept in Secondary or liquidity reserves should be kept in interest free securities which should be easily interest free securities which should be easily encashable with no risk of capital loss.encashable with no risk of capital loss.

Central Banks Role As “Lender Of The Last Resort”Central Banks Role As “Lender Of The Last Resort”

This can be performed in more than one way i.e.;This can be performed in more than one way i.e.; Qard-e-HasanQard-e-Hasan Funds provided by Central Bank be treated as PLS deposits Funds provided by Central Bank be treated as PLS deposits

of comparable duration held by the said bank.of comparable duration held by the said bank. Entire Income be passed to the central bank after deducting Entire Income be passed to the central bank after deducting

the actual out-of- pocket expense.the actual out-of- pocket expense. Funs from central bank be treated as a special Musharakah Funs from central bank be treated as a special Musharakah

arrangement and the profit may be shared according to the arrangement and the profit may be shared according to the agreement.agreement.

Inter-Bank flow of Funds.Inter-Bank flow of Funds. Inter-bank flow of funds may be treated in the Inter-bank flow of funds may be treated in the

same way as the funds received from the same way as the funds received from the central bank are treated.central bank are treated.

These should be handled on share holders These should be handled on share holders account and should be separate from the account and should be separate from the Income account of the PLS depositors.Income account of the PLS depositors.

Provident Fund Balances Of The Employees.Provident Fund Balances Of The Employees.

The provident fund and the pension fund balances of The provident fund and the pension fund balances of all the employees should by law be required to be all the employees should by law be required to be deposited with a government agency to be created for deposited with a government agency to be created for this purpose.this purpose.

Government may give retirement grant of the retiring Government may give retirement grant of the retiring employee according to the length of his service and employee according to the length of his service and the salary bracket.the salary bracket.

Part of the provident and pension fund balances may Part of the provident and pension fund balances may be invested by the concerned agency in profitable be invested by the concerned agency in profitable ventures.ventures.

Problems Related To The Foreign Branches Problems Related To The Foreign Branches Of Pakistani BanksOf Pakistani Banks

Banks work according to the law of the land Banks work according to the law of the land where they are located.where they are located.

Portion of the interest earned by foreign Portion of the interest earned by foreign branches of Pakistani banks be surrendered for branches of Pakistani banks be surrendered for the charitable purpose so that it is not included the charitable purpose so that it is not included in the dividend income distributed to the in the dividend income distributed to the shareholders of Pakistani banks.shareholders of Pakistani banks.

THANK UTHANK U

Q & AQ & A

May Allah Almighty Bless May Allah Almighty Bless You All.You All.

AameenAameen

Economy & Finance

Concept of banking in islam