Islamic banking is system of conducting trade and bankingactivities in line with the principles of Islamic Shariah while avoiding allthe prohibited activities such as interest or Riba, Gharar, financing of haramtrades & businesses etc.
It isnot banking which is based on pricing money and earning interest asconventional interest based banks do but it is a system of trade where goodsand services are sold and capital is invested by taking risk to earn halalprofits. In practical sense, Islamic Banking is the transformation ofconventional money lending into transactions based on tangible assets and realservices. The model of Islamic Banking system leads towards the achievement ofa system which helps achieve economic prosperity. Henceit is not just a change of name as misunderstood by many but it is based on theQuranic injunction of ‘ Allah has permitted trade and forbiddenriba.’ (Surahal-Baqarah, Verses 275)• IslamicBanking refers to a system of Banking or Banking activity that is based on theprinciples of the Sharia’h (Islamic rulings). According to the principles ofSharia’h the bank is not allowed to enter into or any act that involves (giveand take of) interest. The prohibition on paying or receiving fixed interest isbased on the Islamic tenet that money is only a medium of exchange; it has novalue in itself, and therefore should not be allowed to give rise to moremoney, via fixed interest payments, simply by being put in a bank or by lendingto someone else. • Hence,a frequently asked question is – how do Islamic banks make money if they cannotcharge interests? The principal means of Islamic finance are based on trading,hence, banks can profit from the buying and selling of Shari’ah Compliant goodsand services.
Islamic financial institutions trade in Shari’ah-compliantinvestments with the money deposited by customers, sharing the risks and theprofits between them.• Tradeplays significant role in acquisition of wealth. It is certainly superior toagriculture, service and even industry. History is witness to the fact howindividuals and communities have gained prosperity through trade and hownations acquired territories and built up colonial empires through trade.
Islamrecognizes role of trade in acquiring fortune and greatness. There are manyverses of the Qur’an about trade and sale. The Prophet of Islam alsohighlighted importance of trade. Let us have a glance through the relevantverses of the Qur’an and traditions of Holy Prophet.• Oye who believe! Squander not your wealth among yourselves in vanity, except itbe a trade by mutual consent, and kill not yourselves. Lo! Allah is everMerciful unto you• (4:29)• Hadiths-e-Qudsi• “AllahSubhan-o-Tallah has declared that He will become a partner in a businessbetween two Mushariks until they indulge in cheating or breach of trust(Khayanah)”• Ahadithof Muhammad (PBUH)• AbuSayeed reported that the Messenger of Allah said: The truthful trustworthymerchant will be with the prophets, truthful and martyrs. (Tirmizi , Ibn Majah)• ImamAl-Ghazali pointed this out 900 years ago in the following words:• “Riba(interest), is prohibited because it prevents people from undertaking realeconomic activities.
This is because when a person having money is allowed toearn more money on the basis of interest, either in spot or in deferredtransactions, it becomes easy for him to earn without bothering himself to takepains in real economic activities. This leads to hampering the real interestsof the humanity, because the interests of the humanity cannot be safeguardedwithout real trade skills, industry and construction. • Importanceof Purifying the Source of Income in Islam• ØThe body which is nourished by non-pure sources is bound to hellfire.• ØOn the day of Judgement, a person will not be moved from the place which hestands until he is asked about the sources of his income, and the• wayshe spent it.• ØPurifying the source of ones’ nourishment is one of the important reasons forthe acceptance of supplications by Allah.• Non-Remunerativecurrent account of an Islamic Bank is based on Qard (loan) • Remunerative deposits are based on Musharakahand Mudarabah• Thebank will allocate the funds received from the customer to one or more pools(like PKRFCY deposit pool) based on the type of currency, investment strategy,distinct risk and rewards features and tenure.• Thesefunds from the pool will be utilized to provide financing to customer underIslamic modes Murabaha, Ijarah , Istisna , Salam, Sukuk ,Tijarah etc.• The bank will calculate the profit of thedeposit pool every month• GrossIncome (Return) of each deposit poolwill be calculated by taking all the assets booked by utilizing the funds fromthe pool.
• The Net Income will be shared between the bankand depositors in a predetermined ratio (%) of the actual profit earned.• Thedistributable profit of the pool will be announced on monthly basis. Theprofit will be calculated by 7thworking day of each subsequent month, for the previous month.• This ratio of profit for bank and deposit pool(for depositors) will be announced at least three working days before thebeginning of the month.• The profit will be distributed among theaccount holders on the basis of predetermined weightages, announced at leastthree working days before the beginning of the month, based on their respectivecategory iers.
ISLAMIC BANKS (IB) CONVENTIONAL BANKS (CB) Islamic banks are money lending institutes but they are working as trade/investment house. Conventional Interest based banks are in the business of lending and borrowing money based on interest. IB work under the socio-religious guidelines that prohibit charging and paying interest and avoid all impermissible transactions like gambling, speculation, short selling & Sale of debt and receivable. In Conventional banks interest is the bank-bone of the system and short selling, sale of debts and speculative transactions are common. Governing Framework IB business model is based on trade, thus IB actively participates in trade and production process and activities. Generally CB do not involve themselves in trade and business as they act only as money lenders.
IB have a strong Shariah governing framework in terms of Shariah Advisor and Shariah Supervisory Board, which approves the transactions and product in the light of the Shariah rulings. In CB, no such framework is present and actually it is a key litmus test to judge the claim of those who fail to see differences between Islamic and Conventional bank. • The validity of a transaction does not onlydepend on the end result but rather the steps followed in reaching the end.• AMcDonald’s burger in USA and Pakistan looks the same and has the same taste andsmell but the former is haram and the latter is halal due to its compliance ofIslamic guidelines of slaughtering animals.• Same isalso true for Islamic and Conventional banking. Former is halal being based onIslamic principles while latter being based on interest is haram.• Equitable Distribution & Circulation of Wealth in the society• Avoid allImpermissible transactions • Through Islamic banking, financial inclusion canbe promoted and a larger pool of saving s can be brought into the economy.
• Shariah principles forbid any investment thatwould support industries or activities that are considered harmful to the peopleand the society in general. This includes usury, speculation and gambling,irrespective of whether these are legal or not in a given territory.• It promotes the principle of financial justice • Fulfilling Halal Customer Needs• EnsuringSharia’h Compliance in all transactions