3. Agenda
• Introduction & Concept Developing
• Riba & Its Classification
• Shariah & Sources of Shariah
• Contract & Sale
• Murabahah
• Ijarah

4. 4
Introduction To Islamic Banking &
Concept Developing
Mufti Abdul Sattar Laghari
Shariah Adviser
Sattar.laghari@habibmetro.com

5. 5
Islam is a complete Code of Life
Thus Economic System is like a Pillar among the Pillars of Islam
• Quran Majeed says, “Today I have completed for you
your Deen and I have done my blessing over you in full”
• Allah Taa'la says,” I have choose for you Islam as a
Complete Code of Life”.

6. Islamic Banking is Trade
Trade is Allowed in Islam
• Allah Taa’la Says: O you who have believed,
when the call is made to the prayer on Friday, hasten
to the remembrance of Allah and leave off your
trading. This is better for only if you know.
• Then, when the Prayer is over, disperse in the land
and seek Allah’s bounty, and Allah much: maybe you
achieve success.(Surah Al Juma’ah)
6

7. Islamic Banking is Trade
Trade is Allowed in Islam
 Allah Taa'la Says:
 He knows that there will be sick men
among you, and some others who
travel to seek Allah’s bounty…..
(Al Muzammil)
7

8. Shariah Limits
 The U’lama has classified Shariah limits into
major three categories.
 Aqaid (Faith and Belief)
 Shariah
 Akhlaq
8

9. 9
Position of Banking and Finance within Islam

10. PROHIBITIONOF
INTEREST(RIBA)
NOFINANCINGOF
ACTIVITIESPROHIBITED
BYISLAM
RISKSHARING
SANCTITYOF
CONTRACTS
MATERIALITY,
ECONOMICPURPOSE
FAIRNESS/NO
EXPLOITATION

11. What is Islamic Banking
• Islamic Banking refers to a system of banking or banking
activity that is consistent with the principles of Islamic Law
(Shariah) and its practical application through the
development of Islamic Economics.
• Observance of Shariah in banking operations determines
the extent of Shariah Compliance in banking.
11

12. History of Islamic Banking
• Islamic Banking system was established during 1970s. Among the first
institutions was the Naseer Social Bank which started operations in
Cairo, Egypt, in 1972.
• In 1975 Dubai Islamic Bank was established.
• During the last three decades an immense research and efforts have
been made to confine the system for Pakistani environment.
• In the present decade the Islamic banking system has gained a good
position in Pakistan & in the world around.
• HMB Islamic Started its operations in 2002 and now it is with network of
SIX stand alone branches. We are eyeing 25 branches in 2015 Inshallah.
12

13. Basic difference between an Islamic Bank and a
Conventional Bank
13
Islamic Bank Conventional Bank
1-The relation between Islamic
bank & Customer is one of
participation in risks and
rewards.
2- There is no previously fixed
return on the funds invested
with the bank, and same is the
case when banks provide funds.
1-The relationship over here
b/w bank and customer is that
of debtors and creditors.
2-There is pre-agreed fixed
return on the funds either
provided by the bank or
invested by the customer.

14. Basic difference between an Islamic Bank
and a Conventional Bank
14
Islamic Bank Conventional Bank
3-An Islamic bank keeps
capital funds and investors’
funds segregated, in order not
mix up the profit earned on its
own funds (capital & current
up) balances.
4-Islamic banks do not provide
finance by offering cash loans,
but through Musharaka etc.
3- The conventional banks pool
together all the funds.
4- The conventional banks
offer provide finance totally
by offering cash loans.

15. Basic difference between an Islamic Bank and a
Conventional Bank
15
Islamic Bank Conventional Bank
5-Islamic banking is
primarily equity-
based.
6-The Islamic system
is value-oriented.
5- The conventional
system is as a whole
interest-based.
6-This system is
value-neutral.

16. Conventional Banking
Asset Side Products
Conventional Banking
Liability Side Products
16
Bank is
the lender
Client is
the
borrower
Bank is
the
borrower
Client is
the lender

17. Islamic Banking
Assets Side Products
Islamic Banking
Liability Side Products
17
Musawamah
Murabahah
Salam
Istisna’a
Musharakah
Modarabah
Ijarah
Equity/Participato
ry Based
Modarabah
Musharakah
Sale / Trade Base
Participatory Base
Service Base

18. NEXT SESSION
RIBA
18

19. Prohibition of RIBA
19
In Holy Quran there are 4 sets of Ayahs that are revealed
about Riba and its prohibitions:
1st Revelation – Surah-al-Rum, verse 39
2nd Revelation – Surah al-Nisa, verse 161
3rd Revelation – Surah al-Imran, verses 130-132
4th Revelation – Surah al-Baqarah, verses 275-281
Besides, there are also around 40 different Ahadiths on RIBA
and its prohibition from our Holy Prophet.

20. First Revelation about Riba
 “That which you give as interest to increase the peoples' wealth
increases not with God; but that which you give in charity, seeking
the goodwill of God, multiplies manifold.” (Surah Rome, Verse 39)
20

21. 21
4. Hazrat Jabir Ibn-e-Abdullah (‘) has reported the Prophet (]) to have cursed
those who charge interest, those who pay it, those who write documents
pertaining thereto, those who keep the accounts of such matters and
those who sign as witness. He (]) said that they are all equal in this crime.

22. 22
9. Hazrat Abdullah Ibn-e-Masood (‘) has reported that the Prophet (]) said, “The ill affects
of interest are of 73 kinds, the last intense of these is like someone committing adultery
with his mother. This has been reported by Hakim and considered by him authentic
based on the criteria laid down by Imam Bukhari and Imam Muslim.”

23. DEFINITION OF RIBA
● Earning any kind of profit on any debt falls under the category of RIBA
as defined in the Hadith
● Any stipulated profit on any debt is Riba
23
DEFINITION OF RIBA
DEFINITION OF RIBA

24. 24
Classification of Riba
Riba
Riba Al Fadhl
Exchange of
Commodities with
different weights
Riba Al Nasiah
Payment of rabawi
items
Is deffered

25. Riba & its Classification
Riba – un - Nasiyah (Riba Al- Quran)
“that kind of loan where specified repayment
period and an amount in excess of capital is
predetermined”
( Imam Abu Bakr Jassas Razi)
25

26. Riba & its Classification
Riba – un - Nasiyah
 “all loans that draw interest is Riba”
(Hadith quoted by Hazrat Ali ibn Abi Talib)
 “the loan that draws profit is one of the forms of
Riba”
 (definition from Sahabi Fazala Bin Obaid)
26

27. Riba & its Classification
Riba-al-Fadhl (Riba Al Hadith)
 Excess taken in exchange of specific
commodities which are homogeneous.
 Legal definition defers in every fiqh.
27

28. Riba-al-Fadhl (Riba al Hadith)
Hadith prohibiting Riba-al-Fadhl
 sell gold in exchange of equivalent gold
 sell silver in exchange of equivalent silver
 sell dates in exchange of equivalent dates
 sell wheat in exchange of equivalent wheat
 sell salt in exchange of equivalent salt
 sell barley in exchange of equivalent barley
28

29. Riba-al-Fadhl
29
 Sell barley in exchange of equivalent barley but if a
person transacts in excess, it will be Riba.
 However sell gold for silver anyway you please on
the condition it is hand-to-hand (spot sales) and sell
barley for date anyway you please on the condition
it is hand-to-hand(spot sales)

30. FORMS OF RIBA
• Conditional or customary increase in loan (Qarz) or debt
(Dayn)[Payables/Receivables];
• Banking interest is Riba.
• Financial penalty on delay payment of loans and debts.
• Pre agreed discount on early payment of loans and debts.
• Exchange of debt with excess in cash or debt or kind.
• Interest on debts (dues in a credit transaction).
• Rescheduling of debt with increase in rate of return.
• Sale of debt is not allowed in view of majority however some
scholars allow if it is exchanged at par.
• Time based valuation of money is not acceptable.

31. Permissible Forms
• Following is permissible:
• Charging of actual cost of recovery of
delayed debts.
• Charging actual cost of documentation or
issuing expenses of loans.
• Voluntary increase by debtor (without
demand by creditor or society norms)

32. General view of the conventional economists
• Interest plays an important role in
promoting savings, investments, and
economic development.
• Totally against Quran:
32

33. Important Shariah Maxim:
All gains to the principal are not prohibited. But
• “Al Kharaj bil Daman”
• “Al Ghunm bil Ghurm”
• “laa ribh maa laa yadhman”
are the criterion of legality of any return on capital
meaning thereby that assumption of business risk
is a pre-condition for acquisition of any profit over
the principal.
33

34. QIMAR
Pure Games of Chance
 Qimar means gambling. Technically, it is an
arrangement in which possession of a property is
contingent upon the happening of an uncertain
event. By implication it applies to a situation in which
there is a loss for one party and a gain for the other
without specifying which party will lose and which
will gain.
 Gambling and wagering contracts fall in ambit of
Qimar 34

35. GHARAR ‫غرر‬
Gharar is an Arabic word which means 'risk',
'uncertainty', and hazard.
• Technical meaning of Gharar is: “any bargain in which
the result of it is hidden”.
This includes uncertainty, cheating, ambiguity and non
transparency.
• Gharar is 'excessive uncertainty' about subject matter
or its quantity / quality or price or maturity of the
contracts.
• 'Excessive uncertainty' means uncertainty that
generally leads to disputes between parties.

37. Shariah
The Word Shariah Means a path a way.
In legal terms the verb “Shara’a” means to make or establish
laws. Thus the word Shariah means “laws relating to all
aspects of human life established by Allah s.w.t. for His
servants” OR simply you can say “the Divine Law”
The laws relating to human life are divided into three;
Laws relating to Belief
Laws relating to Ethics
Laws relating to Deeds
Shariah is an other word for Islam.

38. 38
Objectives of Shariah
Protection of
Property
Protection of
Posterity
Protection of
Intellect
Protection of
Life
Protection of
Faith
Objectives
of Shariah

39. Fiqh
• The word fiqh is an Arabic term meaning "deep
understanding" or "full comprehension".
• Technically it refers to the science of Islamic law extracted
from detailed Islamic sources (which are studied in the
principles of Islamic jurisprudence).
• The process of gaining knowledge of Islam through
jurisprudence, and the body of legal advisements so derived,
is known as fiqh.
39

40. Sources Of Shariah
 All the Shariah Rulings regarding Islamic
finance & every aspect in human life, are
derived and understood from the four
sources.
40

42. 1) The Holy Quran
• The book of Allah (SWT): Revealed on the last prophet,
written in the form of book and is being conveyed with
out any break.
• Gives main beliefs, principles and wide-ranging
directives of Allah, Allah (SWT) says:
"Verily, this Qur'an guides to that which is best, and gives
glad tidings to the believers who do good that theirs will
be a great reward." (17: 9)
42

43. 2) Sunnah
Definition:
A word spoken or an act done or ratified by the Holy
Prophet (peace be upon him), by Sahabah and a
word spoken or act done by Taabae’een.
It is a source of Shariah because the Holy Quran
itself has made it obligatory for every believer that
he must obey and follow the Holy Prophet:
43

44. 3) Ijma’a
Ijma’a means Scholarly consensus
Scholarly consensus is defined as being the agreement of all
Muslim scholars on a specific issue. Given the condition that all
such scholars have to agree to the ruling, its scope is limited to
matters that are clear according to the Qur'an and Prophetic
example, upon which such consensus must necessarily be based.
The Holy Prophet (SAW) has said:
My Ummah shall never be combined on an error.
44

45. 4) Qiyas (Analogy)
• Qiyas is reasoning by analogy.
• To apply a recognized rule of Shariah expressly mentioned in the
Holy Quran and Sunnah to a similar thing or situation by way of
analogy.
• Legal analogy is a powerful tool to derive rulings for new matters.
For example, drugs have been deemed impermissible, through
legal analogy from the prohibition of alcohol that is established in
the Qur'an. Such a ruling is based on the common underlying
effective cause of intoxication.
45

46. School of Thoughts
Our four school of thoughts
Hanafi (Imam Abu Hanifa an-Nu’man bin Thabit 699 A.D – 767 A.D)
Shafai (Imam Muhammad bin Idris al-Shafai 767 A.D – 819 A.D)
Malki (Imam Malik bin Anas 713 A.D – 800 A.D)
Hanbali (Imam Ahmed bin Muhammad bin Hanbal 780A.D – 855A.D)
All these are based on these sources of Shariah and are true.
46

48. Types Of Commitment
 Wa’adah
(Unilateral Promise/undertaking)
 Muwa’adah
(Bilateral Promise/undertaking)
 Aqd (Contract)
48

49. Wa’adah
 It means promise.
 It basically refers to a unilateral undertaking or promise extended by
one person to another in which he offers to do something in future.
 The consensus of present Shariah Scholar is that Wa'adah is enforceable
by law
Example:
A promises to sell his car to B within the next 3 months for Rs. 2.5
lacks, it is a unilateral undertaking or Wa’ada.
49

50. Muwa’adah (Bilateral Promise)
 It means bilateral undertaking (promise) or agreement.
 According to majority of the Shariah Scholars, Muwa'adah is not
allowed in situations where Aqd is not allowed (e.g. forward contracts),
and thus is not enforceable by law.
 According to the some Scholars of the Sub-continent, Muwa'adah is
enforceable by law.
 They argue that some times Muwa'adah is genuinely required, for
example, importer/exporter need to hedge foreign exchange.
50

51. Concept of a Contract
A contract in Shariah is called Aqd, and it is a type of Islamic
Muamlat.
 The literal meaning of aqd is “join” or “tie”.
 The English word for aqd is contract
 The Shariah term for aqd as given by the author of al Inayah
is:
A legal relationship created by the conjunction of two
declarations, from which flow legal consequences with regard
to the subject matter
51

52. AQD - TYPES OF AQD
 AL MUAWADHA (with consideration)
E.g. contract of sale & purchase, Ijarah, Musharakah
Modarabah etc.
 TABARRU (without consideration)
E.g. Contract of loan, Aariyah, Wadiah
 DHIMINIAH (Supplemental/supporting contracts)
52

53. 53
Shariah Contracts applied in Islamic Finance
CONTRACTS ACCORDING
TO
THEIR APPLICATIONS
PARTICIPATING TRADING SUPPORTING
Musharakah
Mudarabah
Muzaraah
Bai’ Sarf
Bai’ Murabaha
Tawuliyah
Salam
Istisna
Ijarah
Ai’ nah
Rahan
Kafalah
Wakalah
Wadiah
Qardh
Hiba/Tabarru’
Muqasah
Ibra’
Commitment

54. Bai’
DEFINITION OF SALE (BAI)
Exchange of a thing of value with another thing of
value with mutual consent
OR
The sale of a commodity in exchange of cash
54

55. Types of Bai’
TYPES OF SALE (Bai)
 Valid sale ( Bai Sahih)
 Void/Non existing Sale ( Bai Baatil )
 Existing sale but void due to defect( Bai Fasid)
 Valid but disliked sale ( Bai Makrooh )
55

56. Types of sale
 VALID SALE ( Bai Sahih)
 a sale is valid if all elements together with their
conditions are present
 elements of valid sales are
 Contract ( Aqd )
 Subject matter ( Mabe’e)
 Price ( Thaman )
 Possession or delivery ( Qabza )
56

57. Types of Valid sale
There are about 40 types of valid sale, some
famous are;
 Murabahah
 Musawamah
 Wadiah
 Salam
 Istisna'a etc
57

58. VOID / NON EXISTING SALE (BAI BAATIL)
 The buyer does not have the title to subject
matter.
 the seller does not have title to price.
 Both subject matter and price cannot be
used lawfully.
 the produce of both will be unlawful.
58

59. Bai Fasid
 sale will exist but will be invalid due to non
compliance to:
 Conditions of Sold goods are missing
 Conditions of Price are not met
 Conditions about Possession not met
59

60. VALID BUT DISLIKED SALE ( BAI MAKROOH )
Sale is valid but disliked due to certain
conditions like:
 sale after Juma Azan
 sale after hoarding
 sale by intervention of a third party while
two are negotiating
60