Fwd: [bangla-vision] Discovering Islaam Lecture 108 : Islamic Banking: An Overview

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Subject: [bangla-vision] Discovering Islaam Lecture 108 : Islamic Banking: An Overview
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AsSalaam O Alaikum (Peace be always with you. AMEEN.)

Islamic Banking: An Overview

                                                              Mohammed Imad Ali.

Outline of the Presentation

§   History of Islamic Banking

§   Principles of Islamic banking

§   Islamic Financial Products

§   Opportunities

§   Conclusion

 History of Islamic banking

§ It was during 1950s that a group of Pakistani economists and finance specialists sought to explore how traditional Islamic financing techniques could be used for modern commercial transactions. In 1958 a small co-operative bank was set up in what was then  West Pakistan, with a group of land lords depositing and obtaining funds on mudarabah profit sharing business.

§ Ahmed El Naggar, an Egyptian, instigated a similar independent experiment in Islamic banking in 1963 in a small delta town of Mit Ghamr. He established savings bank and attracted over 10,000 depositors, with funds made available for for agricultural investments.

§ In the early seventies the first being the agreement by the finance ministers of the Organisation of Islamic conference in December 1973 to establish the Islamic development bank. This started operations in Jeddah in 1975.

§ Since then many banks have been set up and still many are being set up on the Islamic principles

 Sources Of Islamic Banking

§   The Qur'an

§   The Sunnah (traditions or sayings relating to the life of prophet Mohammed(pbuh).

§   Qiyas (Analogy from established law)

§   Ijma (consensus of scholars on an issue to derive and come to a conclusion)

§   Ijtihad (formulation of law by the individual's struggle for proper understanding)

 Principles of Islamic Banking

§   Riba (Interest)

§   Zakat, religious levy or almsgiving

§   Haram Prohibited Transactions

§   Gharar (Uncertainty) maysir( Gambling)

§   The provision of takaful (Islamic insurance)

Riba (Interest) in Qur'an

Interest deprives wealth of God's blessings

And That which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people's property, has no increase with Allah; but that which you give in Zakat seeking Allah's countenance, then those they shall have manifold increase. (30:39)

Wrongful appropriation of property belonging to others

And their taking of Riba though they were forbidden from taking it and their devouring of men's substance wrongfully (bribery). And We have prepared for the disbelievers among them a painful torment. (4:161)

Stay clear of interest for the sake of their (Muslims) own welfare.

O you who believe! Eat not Riba doubled and multiplied, but fear Allah that you may be successful!

And fear the Fire, which is prepared for the disbelievers.

And Obey Allah and the Messenger that you may obtain mercy. (3:130-132)

Clear distinction between interest and trade, urging Muslims, first to take only the principal sum and second, to forgo even this sum if the borrower is unable to pay.

Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: "Trading is only like Riba," whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba shall not be punished for the past; his case is for Allah (to judge); but whosoever returns (to Riba), such are the dwellers of the Fire – they will abide therein.

 

Allah will destroy Riba and will give increase for saqadat (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners.

 

O you who believe! Be afraid of Allah and give up what remains (due to you) from Riba (from now onwards, if you are really believers).

 

And if you do not do it, then take a notice of war from Allah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).

 

And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay, but if you remit it by way of charity, that is better for you if you did but know.And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.

(2:275-281)

Riba in Hadith

From Jabir: The Prophet (pbuh) 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, vol.3,p.1219:106)

From Abu Hurairah: The Prophet (pbuh) said: "Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother." (Ibn Maja, vol.2,p. 763:2273)

From Abu Hurairah: The Prophet (pbuh) said:  "There will certainly come a time for mankind when everyone will take riba and if he does not do so; its dust will reach him." (Ibn Maja, vol.2,p.765:2278, Sunan al-Bayhaqi,vol.5,p.276 and Mustadrak al-Hakim, vol.2,p.11)

From Abu Hurairah: The Prophet (pbuh) said:  "God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba, he who eats an orphan's property withtout right, and he who is undutiful to his parents." (Mustadrak al-Hakim, vol 2,p 37)

Narrated Samura bin Jundub: Allah's Apostle very often used to ask his companions, "Did anyone of you see a dream?" So dreams would be narrated to him by those whom Allah wished to tell.

One morning the Prophet said, "Last night two persons came to me (in a dream) and woke me up and said to me, 'Proceed!'"

 I set out with them and we came across a man lying down, and behold, another man was standing over his head, holding a big rock. Behold, he was throwing the rock at the man's head, injuring it. The rock rolled away and the thrower followed it and took it back. By the time he reached the man, his head returned to the normal state. The thrower then did the same as he had done before.

 I said to my two companions, 'Subhan Allah! Who are these two persons?' They said, 'Proceed!'

And so we proceeded and came across a river." I think he said, ".... red like blood." The Prophet added, "And behold, in the river there was a man swimming, and on the bank there was a man who had collected many stones. Behold! While the other man was swimming, he went near him. The former opened his mouth and the latter (on the bank) threw a stone into his mouth whereupon he went swimming again. He returned and every time the performance was repeated.

 I asked my two companions, 'Who are these (two) persons?' They replied, 'Proceed! Proceed!'

I said to them, 'I have seen many wonders tonight. What does all that mean which I have seen?' They replied, "We will inform you"-

As for the first man you came upon whose head was being injured with the rock, he is the symbol of the one who studies the Qur'an and then neither recites it nor acts on its orders, and sleeps, neglecting the enjoined prayers.

And the man whom you saw swimming in the river and given a stone to swallow, is the eater of usury (Riba) (Excerpt from a long hadith – Bukhari, Vol. 9, Hadith no. 172)

Narrated Abu Said al-Khudri: Once Bilal brought Barni (i.e. a kind of dates) to the Prophet and the Prophet asked him, "From where have you brought these?"

Bilal replied, "I had some inferior type of dates and exchanged two Sas of it for one Sa of Barni dates in order to give it to the Prophet (PBUH) to eat."

Thereupon the Prophet said, "Beware! Beware! This is definitely Riba (usury)! This is definitely Riba (Usury)! Don't do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money." (Bukhari, Volume 3, Hadith 506)

Muslim narrated on the authority of 'Abu Said Al-Khudriy; The Messenger of Allah (pbuh) said:"Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for  dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is  Riba."

Hazrat Jabir (raa) has reported that the Messenger of Allah (saws) cursed the devourer of usury, its payer, its scribe and its two witnesses. He also said that they were equal (in sin). (Mishkat-ul-Masabih)

Hazrat Abu Hurairah radiyallahu anhu reported that the Messenger of Allah (saws) said: I came across some people in the night in which I was taken to the heavens. Their stomachs were like houses wherein there were serpents, which could be seen from the front of the stomachs. I asked: O Gabriel! Who are these people? He replied these are those who devoured usury. [Ahmed,Ibn Majah]

Narrated Abu Huraira: The Prophet said, "Avoid the seven great destructive sins." The people enquire, "O Allah's Apostle! What are they? "He said,

1.      To join others in worship along with Allah

2.      To practice sorcery

3.      To kill the life which Allah has forbidden except for a just cause, (according to Islamic law)

4.      To eat up Riba (usury)

5.      To eat up an orphan's wealth

6.      To give back to the enemy and fleeing from the battlefield at the time of fighting

7.   And to accuse, chaste women, who never even think of anything touching chastity and are good believers. (Bukhari, Volume 4, Hadith 28)

 

 

 

Riba (Interest)

§ Riba literally means increase, addition, expansion or growth.

 

§ In sharia, riba technically refers to the "premium" that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. The term riba is however used in the shari'ah in two senses:

a.    Riba al-nasia and

b.    Riba al-fadl.

 

Riba Al-Nasia (Riba of delay)

§ Hence riba al-nasi'a refers to interest on loans. The point in question is the pre-determined positiveness of the return.

 

§ The nature of prohibition is strict, absolute and unambiguous. There is no room for arguing that riba refers to usury and not interest, because Prophet Mohammed prohibited the taking of even a small gift, service or favor as a condition for loan, in addition to the principal. 

 

 

Riba al-Fadl (Riba of excess)

§ Riba al-fadl which is the second sense in which riba has been used and which is encountered in hand-to-hand purchase and sale of commodities.

 

§ It covers all spot transactions involving cash payment on the hand and immediate delivery of the commodity on the other.

 

Riba al-Fadl

§ What is essentially being required is justice and fair play in spot transactions;

 

§  The price and the counter value should be just in all transactions where cash payment (irrespective of what constitutes money) is made by one party and the commodity or service is delivered reciprocally by the other. 

 

Why Riba is forbidden

§ In interest transaction earning profit is uncertain; the payment of interest is predetermined and certain. The profit may or may not be realized. Hence there can be no doubt that the payment of something definite in return for something uncertain inflicts harm.

§  Riba (interest) is essentially in conflict with the clear and unequivocal Islamic emphasis on socio- economic justice. 

 

 

 

 

 

Acquisition of property rights

Property can be acquired in the following three ways

§ New rights can be created:

o   Labour + Natural resources

       Old rights can be transferred.

 

§ In exchange of counter value of the same worth

 

§ As a voluntary gift/inheritance

 

 Interest is not a legal form of property as it is not acquired in one of three legal ways.

 

 

No pain no gain

§ Receiving a monetary advantage without giving a counter value is forbidden in Islam.

§ According to Islam money is sterile, as long as it is not combined with (spiritual) labour.

§ Mere postponement of consumption (saving) is no justification for compensation (interest).

§ Interest is not a legal form of property, because it is not acquired in one

 

Zakat

§  A mechanism for the redistribution of income and wealth

 

§  So that every Muslim is guaranteed a fair standard of living, nisab

 

§ Zakat is the most important instrument for the redistribution of wealth.

 

§ This arms giving is a compulsory levy, and is one of the basic tenets of Islam.

 

§ The amount of zakat is a one fortieth (2.5 per cent) assessment on assets held for a full year (after small initial exclusion, nisab)

 

§ The purpose of zakat is to transfer income from the wealthy to the needy

 

Haram

Investments should be based on Islamic ethics. Money should not be invested in the industries whose main area of business is involved in the following.

§ Alcoholic beverages

§ Pork related products

§ Conventional Financial Services (banks, Insurance etc)

§ Entertainment (casinos/gambling, cinema, pornography, music, etc.)

 

 

 

Gharar

§ Literally meaning fraud (al-khida), gharar in transactions has often been used in the sense of risk, uncertainty and hazard.

 

§ In a contract of sale gharar often refers to uncertainty and ignorance of one or both of the parties over the substance or attributes of the object of sale, or of doubt over its existence at the time of the contract.

 

Four conditions of Gharar

1.      It must be excessive.

2.      It occurs in the context of commutative contracts.

3.      It affects the subject matter directly.

4.      If there is public need then even if gharar  is excessive it will be accepted.

            Eg. Salam (advance purchase),

                  Istisna (manufacturing contract) 

 

 

Islamic Financial Products

1.      Mudaraba.

2.      Musharaka.

3.      Murabaha.

4.      Bai Bi-thamin Ajil ( BBA)

5.      Bay' Muajjal.

6.      Bay' salam.

7.      Istisna

8.      Ijara

9.      Housing Property finance

10.   Qard Hasan

12. Islamic Securities

 

Mudaraba

Profits are shared in a pre-determined ratio between:

 

INVESTOR (Sahib al-mal)                              ENTREPRENEUR (mudarib)  

-Entrusts capital                                               Contributes      -Knowledge

-Not involved in actual management                                        -Entrepreneurial skills

 

 

 

 

 

 

 

 

Musharaka (Equity participation)

 

PLS (Profit loss sharing)

§  Profits and losses are shared according to prefixed proportions,

§  But for profits these proportions need not coincide with the ratio of financing input. 

 

Murabaha

 

§ Cost-plus profit financing

§ Sale of property by a vendor by adding the profit to the cost price and this is agreed by both.

§ The payments would be made in installments over a period of time.

 

Example

§  Consumer selects house and applies to financier.

§  Financier approves consumer and house.

§  Financier pays seller and obtains title.

§  Financier sells on deferred basis to consumer:

a.      Financier transfers title

b.      Consumer makes monthly payments      and

c.      Grants mortgage and signs note          

 

Murabaha Agency

 

§  Consumer selects house and applies to financier.

§  Financier approves consumers and house.

§  Financier pays consumer to act as financier's agent

§  Consumer pays seller and obtains title.

 

Bai Bi-thamin Ajil (BBA)

§ BBA is a deferred payment by installments while murabaha is also deferred payment but in a lump sum.

§ With murabaha the purchaser should be aware of the cost price, which is in contrast to BBA.

§ Some Islamic economic authors make no reference to BBA as it is incorporated into murabaha, for example in Pakistan but that is not the case in Malaysia.

 

 

Bay Muajjal (Deferred Payment)

 

§ Islamic banks have been resorting to purchase and resale of assets, products and properties on a deferred payment basis, which is termed as bai'muajjal.

 

§ Both BBA and murabaha fall under this category of sale, because this transaction allows the sale of an item on the basis of deferred payment in installments or in lump-sum payment.

 

Bai' Salam (Prepaid Purchase)

 

§ In bai salam the price is paid at the time of the contract but the delivery takes place at a future     date. Here the bank pays the money first and receives the commodity later. It is a method which is normally used to finance agricultural products.

 

§ The bank pays the value of the crops in advance, at a predetermined price and receives the product later at the harvest time. This facility is extended to manufacturers as well.

  

Istisna (Manufacturing)

 

§ This is a contract to acquire goods on behalf of a third party where the price is paid to the manufacturer in advance and the goods produced and delivered at a later date.

 

§ It is a contract for production of specified items where a person or a company may ask the bank for production of such items, with inputs provided by the maker, at an agreed price. Such contracts are used for the financing of aircraft manufacture, equipment installation of factories, construction etc.

 

Example

§ Consumer selects site and contractors, then apply to financier

§ Financier approves credit, contractors, plans and permits.

§ Financier buys site and engages contractors, then funds construction draws.

§ At completion financier either leases houses to consumer for monthly rent or sells outright (could apply murabaha)

 

Ijara (Leasing)

 

§ Leasing or ijara is also frequently practiced by Islamic banks. Ijara literally means 'to something on rent', and technically it relates to transferring the usufruct of a particular property to another person on the basis of a rent claimed from him.

§ An ijara wa iqtina is more like a financing lease. It can have a purchase option or a purchase obligation at the end of its term. 

 

Ijara Thumma Al-iqtina/ Al-bai

 

§ In this when the bank rents the asset to the customer who promises to purchase the asset        within a specified period.

§ The rental payment could be a fixed amount or a percentage directly tied to the cash flow of the    project (important for project finance) and consists of the bank's share in the net profit plus the rental charges. When the total rental charge equals the cost of the asset, ownership of the asset transfers to the customer.

 

Housing Property Finance

 

A combination of a diminishing musharaka and ijara forms the basis of home finance provided by Islamic Banks in a number of countries. This concept requires the financer and the client to participate in the joint ownership of a property. The share of the financer is further divided into number of units. The client is then able to purchase those units one by one periodically so that the equity held by the bank reduces progressively over time. Eventually, the bank will have zero equity and will cease to be a partner.

 

Qard Hasan (Beneficence loans)

 

§ This is the zero return type of loan that the Holy Quran urges muslims to make available to those who need them.

 

§  The borrower is obliged to repay only the principal amount of the loan, but is permitted to add a margin at his own discretion.

 

Islamic Securities

 

Islamic financial institutions often maintain an international Islamic equity portfolio where the underlying assets comprise ordinary shares in well-run businesses the productive activities of which exclude those on the prohibited list (alcohol, pork, armaments) and financial services based on interest income.

§ Islamic Mutual Funds

§ Unit trusts

§ Islamic Bonds 

 

Takaful (Islamic Insurance)

 

Takaful is a noun stemming from the Arabic verb 'kafal' meaning to take care of one's needs.

It is descriptive of a practice whereby participants in a group agree jointly to guarantee themselves against loss or damage. Essentially the concept of Takaful is based on:

§ Solidarity

§ Responsibility

§ Brotherhood

 

From the viewpoint of Islamic law there are three main problems with the conventional insurance.

§ Gharar (Uncertainty)

§ Mayisr (Gambling)

§ Riba (Interest)

 

Three types of Takaful products are on offer:

1.      General Takafuls (Islamic General Insurance)

2.      Family Takaful (Islamic life insurance)

3.      Retakaful coverage (Islamic reinsurance)

 

 

General takafuls are short-term contracts for the protection of potential material losses from specified catastrophes. Members' premiums are called tabaru (contribution, donation).These are invested on a mudaraba basis by the takaful company, with profits allocated between the tabaru fund and the management. Any surplus, after indemnity, reserves and operational costs are deducted, is then shared between either all participants or those who did not make a claim, depending on the company concerned.

 

§ In short, the similarity with conventional insurance comes from the entire contribution of members being invested, like premiums, in a tabaru fund.

 

§  The difference come from the mudaraba investment asis and the entitlement of participants to any surplus in the tabaru fund.

 

Opportunities

 

GCC High Net Worth Individual Wealth Abroad

 

                                         Amount                           Individuals

 

Saudi Arabia                US$ 700 billion                        85,000

 

UAE                            US $ 266 billion                       60,000

 

Kuwait                         US $ 163 billion                       40,000

 

Rest of the GCC          US $ 65 billion                         15,000

 

Growth of Islamic Banking

                                               

§ Islamic Financial Institutions:   300

 

§ Worth                                    :   200 U.S $

 

§ Growth rate                           :   15 %

 

 

Conclusion

 

§ For Islamic Banking to grow, Muslims have to decide that they would not deal in interest.

§ Interest should be hated and avoided by all Muslims.

§ Muslims should strive to make an interest free world.

 

 

Jazak Allah U Khairan

 

For Any Further Queries Please email  imadali@yahoo.com or abd@ibaad.com

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Irshad Mahmood - Global Auliyaa (PRESIDENT), Siraat - al - Mustaqeem Dawah Centre
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