Introduction to Islamic Banking

Lecture 01

بسم الله الرحمن الرحيم

Starting in the Name of Allah, The Most Beneficent, The Most Merciful

• Islam has given an immense importance to trade

• The nobility of this profession is obvious from the fact that it was the chosen profession of prophet Muhammad (PBUH).

Importance of Trade in Islam

WHY ISLMIC BANKING

Before explaining the concept “what is Islamic Banking” the elaboration of concept “why Islamic Banking” is very important.

Islam is a complete code of life that provides guidance regarding each aspect of life.

WHY ISLAMIC BANKING…ContdThe primary objectives of Islamic Economic System are as under.1. Achievement of Falah (Well being of mankind) 2. Fair and Equitable Distribution (With Zakat & Sadaqat) 3. Provision of Basic Human Needs (Social Security – Tax) 4. Establishment of Social Justice (Tax & Legal

Activities) 5. Promotion of Brotherhood and Unity6. Achievement of Moral and Material Development (With

Tax & Fiscal Mgt – Zakat) 7. Circulation of Wealth (With no hoarding policy) 8. Elimination of Exploitation

These objectives can never be achieved in Interest / Riba based economic systems.

Belief in Divine Guidance: The foremost belief around which all the Islamic concepts

revolve is that the whole universe is created and controlled by One. The only One God.

He has created man and appointed him as His vicegerent on the earth to fulfill certain objectives through obeying His commands.

These commands are not restricted to some modes of worship or so-called religious rituals.

They, on the contrary, cover a substantial area of almost every aspect of our life.

Common interface between Islamic and contemporary banks Same purpose: Financial intermediation

Same Objective: Profit

Successful Operation of Islamic banks has shown that financial intermediation is possible even without interest.

DIRECT FINANCING

HouseholdsBusinesses

Flow of Real goods

Financial Flow

Indirect Financing

Business

Financial Institutions

Households

Financial ResourcesFinancial Resources

Return on Investment

Return on Investment

Goods

Goods

Goods

STRUCTURE OF FINANCIAL MARKETS

Supervisory Bodies

Direct Finance Indirect Finance

Bonds Equities

PrimaryMarkets

SecondaryMarkets

InvestmentBanks

Dealers andBrokers

StockExchanges

Over-the-CounterExchange

DepositoryInstitutions

ContractualSavings

Institutions

InvestmentIntermediaries

CommercialBanks

Saving & LoanAssociations

InsuranceCompanies

Mutual Funds

PensionFunds

Venture Capitals

ALL BUSINESSES

Islamic Banks and Other businesses

Financial Institutions

All BanksIslami

Banks

Social and Moral Norms

Should not indulge in Riba Should not indulge in fraudulent behavior Should not pursue people by force. Should assure fairness to all parties.

No financing of socially undesirable goods such as alcohol, drugs, pornography.

Should not be in practices such as cheating, bribing, fraudulent practices.

Current Account

PLS Accounts

Investment Account

Uses of Funds

Murabaha

Musharakah

Mudarabah

Ijarah

Qard z Hasana

Sources of Funds

“An Economic System is a systematic way of

performing economic activities in order to address

and solve economic problems”

The Major Economic Systems:

1. Capitalism (Free system)

2. Communism/Socialism (Controlled system)

3. Mixed Economies.

4. The Islamic Economic System (The guided system)

Capitalism: Capitalism which is prevailed in the most part of the globe as an

economic system has the following basic principles

1. Personal Profit Motive

2. Private Property

The market forces (the forces of demand and supply) are used as mechanism for the solution of economic problem in capitalism.

Socialism: Communism/Socialism which is emerged in contrast to the

capitalism and prevailed as an economic system in communist countries has the following basic principles.

• Collective Property • Collective Interest • Equitable Distribution of Income

Planning (Economic planning) is used as mechanism for the solution of basic economic problems in communism/ socialism.

THE ISLAMIC ECONOMIC SYSTEM

1. A Guided System2. Sources of Guidance

i. The Holy Quranii. Hadiths

3. Islamic Fiqah

Islam - A Complete Way of Life

- Covers all aspects of life Including:

1. Personal

2. Social

3. Legal

4. Political

5. Economics

Regarding Economics, Islam Explains

- Halal (permissible) Economic Activities

- Haram (non- permissible) Economic Activities

- Considered Halal Economic Activities as worship

- Considered Haram Economic Activities as Sin

THE BASIC PRINCIPLES OF ISLAMIC ECONOMIC SYSTEM

ALLAH – The absolute owner of all Economic resources.

Human Beings – The trustees of Allah for the management and use of economic resources.

The Economic Resources will be used as per the instruction of Allah Almighty.

The Economic Resources entrusted to mankind by Allah Almighty will be available for society’s welfare and betterment.

PROHIBITED ECONOMIC ACTIVITIES

Monopoly in all forms. Hoarding. Gambling and Betting in all forms. Cheating in quality, quantity, weight or any other

specifications of the goods and services. Speculation. All types of fraudulent sale. All trade malpractices. Interest in all forms and levels. Bribes Activities. Etc.

THANKS