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Mufti Ehsan Waquar Ahmad

Member Shariah Committee/ Manager Shariah Compliance


Emirates Global Islamic Bank Limited
Muharram 18, 1429
January 28, 2008
What has

Religion ﴾‫﴿دین‬
got to do with

Economics, Banking and


Finance?
‫‪ Islam is a way to lead a life in society not like other‬‬
‫‪religions which segregates religion with other issues‬‬
‫‪of life.‬‬
‫أفلح هن ىدي إلى االسالم ‪ ً ،‬كان عٍشو كفافا ً قنع بو‬
‫الراوي‪ :‬فضالة بن عبيد األنصاري ‪ -‬خالصة الدرجة‪ :‬صحيح ‪ -‬المحدث‪ :‬األلباني ‪ -‬المصدر‪ :‬صحيح الجامع ‪ -‬الصفحة أو الرقم‪1138 :‬‬

‫هن شاب شٍبة فً االسالم ؛ كانت لو نٌرا ٌٌم القٍاهة ‪ً ،‬هن رهى بسين فً سبٍل اهلل ‪ ،‬فبلغ‬
‫بو العدً أً لن ٌبلغ ؛ كان لو كعتق رقبة ‪ً ،‬هن أعتق رقبة هؤهنة ؛ كانت فداءه هن النار‬
‫عضٌا بعضٌ ‪.‬‬
‫الراوي‪ :‬عمرو بن عبسة السلمي ‪ -‬خالصة الدرجة‪ :‬صحيح لغيره ‪ -‬المحدث‪ :‬األلباني ‪ -‬المصدر‪ :‬صحيح الترغيب ‪ -‬الصفحة أو الرقم‪1286 :‬‬

‫‪ Islam is a religion which address all the basic areas of‬‬
‫‪human life; belief, ritual, communal, behavioral‬‬
‫‪(etiquettes) and contractual issues.‬‬
 Analyze the time spent during a day

 We conclude that majority of the time spent is


interaction with people around

 Now analyze the time spent in performing rituals.

 What is the reason Muslims segregate the areas of


practical life?
Importance of Banking
 Banking is the most important sector of the modern
day economy.

 It provides an opportunity to the household with


surplus capital to select the best mix of investments in
terms of return and tenors & security.

 It provides an opportunity to businesses and


Governments to finance their activities through
obtaining surplus funds
 What is economics?
“Utilization of limited resources in such a way that
needs and wants are satisfied optimally to ensure
the well being of all members of the human society.”
The four basic economic problems:
 Determination of Priorities
 Allocation of Resources (Land, Labor, Capital,
Entrepreneur)
 Distribution of Income
 Development
We will glance some defects of Capitalism, Socialism
and compare it with Islamic Economic system.
Shortcoming of Capitalism
 Maximization of profits without limitations
 Total reliance of market forces
 No moral value limitations
As a result
 Formation of Monopolies & Cartels
 Exploitation of common people
 Imbalance distribution of income
 Concentration of wealth takes place
Shortcoming of Socialism
 Impede natural freedom
 Ignore Individuals and entrepreneurs
 Exaggerated Government Interference
 No moral value limitations
As a result
 Creates inefficiency
 Exploitation of common people
 Imbalance distribution of income
 Inactive without forceful Dictatorship
Economic Philosophy of Islam
 Discourages concentration of wealth in few hands

 Creation of monopolies

 Greed and selfishness leading to injustice and


oppression
Islamic Economic System
The prohibitions & considerations
1. Divine Prohibitions:
Islam has prohibited some economic activities that are
not allowed at any time at any place.( Interest,
Gambling, Hoarding etc.)
2. Govt. Restrictions:
Islam allows Govt. to intervene where it feels
appropriate , but these restrictions are temporary as per
the need of the time.
3. Moral Considerations & Restrictions (ROIA)
Life in this world is temporary and there is an eternal
life after words. One has to make this worldly life a way
to get the maximum benefit in the life hereafter.
Al Baqarah 275

“Those who devour Riba shall rise up before Allah like men
whom Satan has demented by his touch; for they claim that
trading is like usury. But Allah has permitted trading and
forbidden usury. He that receives an admonition from his
Rabb and mends his ways may keep what he has already
earned; his faith is in the hand of Allah. But he that pays no
heed shall be among the people of fire and shall remain in
it forever.”
Al Baqarah 278 - 279

“O you who believe, Fear Allah and give up what


remains of your demand for Interest, if you are indeed
a believer. If you do not, then you are warned of the
declaration of war from Allah and His Messenger; But if
you turn back you shall have your principal: Deal not
unjustly and you shall not be dealt with unjustly.”
Selected Ahadith

From Hazrat Jabir Ibn-e-Abdullah (‫)رضی اہلل عنہ‬:


The Prophet, peace be on him, cursed :
 The receiver and the payer of interest
 The one who records it and
 The witnesses to the transaction
And said: "They are all alike [in guilt]."
(Muslim, Tirmidhi and Musnad Ahmad)
Selected Ahadith

From Hazrat Abu Hurayrah (‫)رضی اہلل عنہ‬:


The Prophet, peace be on him, said: "Riba has seventy
segments, the least serious being equivalent to, a man
committing adultery with his own mother.“
(Ibn Majah)
Does ONLY ISLAM prohibits Interest?
 Prohibition of interest is not limited to Islam it is
prohibited in Judaism and Christianity
 Exodus 22:25, Leviticus 25:35-36, Deuteronomy
23:20,Psalms 15:5, Proverbs 28:8, Nehemiah 5:7
and Ezakhiel 18:8,13,17 & 22:12
 "Thou shalt not lend upon usury to thy brother;
usury of money, usury of victuals, usury of any
thing that is lent upon usury." [Deuteronomy 23:19]
Islamic Financial System
 For centuries Muslims have conducted business in
ways consistent with Islamic law.
 The classical system of Islamic finance has remained
intact
 Now the entire system of Islamic finance and
business is undergoing a revival; the potential of this
sector is real and deserving of serious attention.
 But unfortunately, today for many interest is more than
a way of life, it is fact of life.
Features of Islamic Economics and
Banking
 Transactions are asset-based

 It is socially-responsible banking

 Ethical Banking

 It pulls evil out of the society

 Healthier Society as ethics and moral values play a


major role in investment decisions
Islamic Banking Pakistan 7 years
Scenario

 In 2001, the industry comprised of just two players


Currently there are 6 full fledged Islamic Banks,
while
13 Banks have set up Islamic Banking Divisions
(IBDs)
There around 183 IBBs
Islamic products and services offered by 250+
Financial Institutions around the world
Germany: 3 UAE: 9
- Bank Sepah - Dubai Islamic Bank
- Commerz Bank Bahrain: -26 Abu Dhabi Islamic Bank 5
Kuwait:
United States: 20 - Deutsche Bank - HSBC -Amanah
- Bahrain Islamic Bank Kuwait Finance House
- Al Manzil Financial Services Switzerland: 6 - Al Baraka
- American Finance House
UK: 26 (primarily Qatar: 4
branches of Gulf and global - ABC Islamic Bank
- Failaka Investments - CitiIslamic Investment Bank - Qatar Islamic Bank
banks) - Qatar International Islam
- HSBC
- HSBC Amanah Finance
- Ameen Housing Cooperative
- Al Baraka International Ltd Iran: 8 19
Pakistan:
- Takafol UK Ltd India: 3
- The Halal Mutual
Investment Company Turkey: 7 Bangladesh: 3
- J Aron & Co Ltd (GoldmanEgypt: 7 - Faisal Finance
Sachs) - Alwatany Bank of Egypt Institution Malaysia: 49
- Egyptian Saudi Finance - Ihlas Finance House
2 - Pure Islamic Banks (Ban
Sudan: 9Saudi Arabia: 10 Islam, Bank Muamalat)
- Al Rajhi
Rest - conventional banks
- SAMBA
- Saudi Hollandi
- Riyadh Bank
Indonesia: 4
Yemen: 5

Note: Figure indicates number of Islamic FIs in the country. Only some of the key FIs are shown for each country
International Overview

 The size of Islamic Financial Industry is growing


aggressively @ 15% annually

 60 countries have Islamic Banking Institutions

 27 Muslim countries including Bahrain, UAE, Saudi


Arabia, Malaysia, Brunei and Pakistan

 Many non-Muslim countries including USA, UK,


Canada, Switzerland, Belgium, Kenya, South Africa
and Australia
International Overview

Leading foreign Banks have opened Islamic Banking


windows or subsidiaries such as:
 Standard Chartered Bank

 Citibank

 HSBC

 ABN AMRO

 UBS
“Some people claim that there is No concept of
banking in Islam”

The use of the word banking does not make any


institution halal or haram, rather it is the underlying scope
& nature of activities that are being conducted which
makes it halal or haram.
 Concept of banking based on pooling of excess funds of
depositors and channeling them towards those who
require it for investing activities is not only approved but
encouraged by Islam.
 But the concept to lending and borrowing on the basis
of interest in not allowed in Islam.
“Islamic banking looks the same as conventional
banking”

 The validity of a transaction does not only depend on


the end result but rather the steps followed in reaching
the end
 A KFC’s burger in USA and Pakistan looks the same
and has the same taste and smell but the former is haram
and the latter is halal due to its compliance of Islamic
guidelines of slaughtering animals
 Same is also true for Islamic and Conventional banking.
Former is halal being based on Islamic principles while
latter being based on interest is haram.
“A fixed rate of return is not permitted under
Islamic Shariah”

Fixed return does not make a transaction halal or


haram
For example:
 Profit on trading
 Rent on property
“Can Interest rate be used as a Bench Mark?”

 Using Interest Rate benchmark for determining the


profit in halal transactions does not render the
transaction as invalid or haram.

Selling a soft drink over a soft drink bar counter and


serving it in terms of goblets/pack will not make it
haram

 The nature of transactions determines the validity of


the transaction.
Products based on Islamic Modes

Mode Application
1 Murabaha Sale of Raw material or commodities on cost plus

2 Ijarah Leasing of Cars & Fixed Assets (medium to long term financing)
3 Musharakah Participatory certificates and deposits, Joint ventures, Export Refinance

4 Diminishing House Financing (Build, Buy, Renovate & Replace)


Musharakah Plant & Machinery, Commercial Premises
5 Mudarabah Usage of Mudarabah on asset and liablities sides
6 Salam Foreign Currency Salam - Alternative for Sight Bill Discounting
7 Istisna Order to Manufacture - Islamic Export Refinance Scheme (IERS)
8 Wakaltul-Istismar Investment Agency contract for fund management
9 Musawamah Sale without mentioning the cost, finance against usance LC
The Way Forward
 Islamic banking is a viable alternative – however it is still
in the development stage and has to go a long way
 It needs to be supported in its mission to eliminate the
curse of riba from our societies.
 Positive criticism is always welcome but we also need to
gain knowledge about the concept before commenting
 Should be viewed with an open mind and we need to be
cautious in passing judgments without sufficient
knowledge
 We also need to understand the fact that disagreement
between about any operational item or any difference of
view in two schools of thought does not make the whole
process of IB invalid or in any way similar to Riba.

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