islamic microfinance by qazi abdul samad

International Conference onIslamic Microfinance

CENTER OF ISLAMIC BANKING & ECNOMICS

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What is Islamic Finance

 Abdul Samad

Shariah Advisor The Bank of Khyber

Islam and ShariahIslam

Aqidah(Faith & Belief)

Shariah(Practices & Activities)

Akhlaq(Morality & Ethics)

IBADAT(Man to God Worship)

Muamalat(Man to Man Activities)

Political Activities Economic Activities Social Activities

Banking & Financial Activities

Human Financial Needs

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

Why Islamic Finance? The body which is promoted by Hiram sources is

bound to hellfire. On the Day of Judgment, a person will not be moved from the place where he stand until he is asked about the sources of his income and they

way he spent it. Purifying of the needs of life (food, drink, clothes

house etc) is one of the most important reason for the acceptance of prayers by Allah.

Why Islamic Finance?

The main objective of an Islamic Financial System is to clean the income of Muslims from

Muhurramat.

Most Important Islamic Teaching Related To Business

1. Elimination of Interest (Raba) 2. The prohibition of uncertainty (Gharar)3. The prohibition of Gambling (Qimar)4. The precipitation of games of chance (Maser)5. Honesty and Fair Trade (Ghishsh and Khilabah)6. Spending in the Good Cause7. Buy Back 8. Two Mutually Conditional Contract9. Entitlement to profit depends on liability for risk

Interest Interest, Usury, or Riba is forbidden in almost all

major religions of the world e.g.

Judaism

Christianity

Islam

Riba in Quran God has permitted trade and forbidden interest….”

(The Cow – Sura Al-Baqara 2:275)

O believers, fear Allah, and give up what is still due

to your from the interest (usury), IF [indeed] you are true believers[!!!]. If you do not do so, then take Notice of War from Allah and his Messenger.

But, if you repent, you can have your principal. Neither should you commit injustice, nor should you be subjected to it.”

(The Cow – Sura Al-Baqara 2:278-9)

Riba in Quran (Related in context to 2:278)The only reward of those Who make War upon Allah & his Messenger, and strive

after corruption in the land, will be that they will be

1. Killed

2. Or, Crucified,

3. Or, have their Hands and Feet on alternate sides Cutoff,

4. Or, will be Expelled out of the land.

Such will be their degradation in the world, and

in the hereafter, theirs will be an terrible doom.”

(Quran: The Table Spread - Al-Maida Chapter 5: Verse 33)

Riba in HadithThe Prophet 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).”

(Sources: Jabir Ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed

Riba in Hadith

The Prophet said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own

mother.”

(Sources: Aby Hurayrah, Ibn Majah)

The prohibition of uncertainty (Gharar)

There are strict rules in Islamic finance against transactions that are highly uncertain or may cause

any injustice or dishonesty against any of the parties. 

The concept of Gharar has been broadly defined by the scholars in two ways.

First, Gharar implies uncertainty. Second, it implies dishonesty.

Classical Examples of Gharar Selling goods that the seller is unable to deliver Selling known or unknown goods against an unknown

price, such as selling the contents of a sealed box   Selling goods without proper description, such as shop

owner selling clothes with unspecified sizes   Selling goods without specifying the price, such as selling

at the 'going price'     Selling goods on the basis of false description Selling goods without allowing the buyer the properly

examine the goods The Prophet (pbuh) prohibited the pebble sale and the

Gharar sale.

Qimar Qimar includes every form of gain or money, the achievement of which depends purely on luck and

chance. O ye who believe! Intoxicants and gambling,

sacrificing to stones, and (divination by) arrows, are an abomination, of Satan’s handiwork…..: (5:90-91) He who played Qimar has disobeyed Allah and His

Messenger.” (Ibn Majah )

Honesty and Fair Trade (Ghishsh and Khilabah)

Thus Manipulations and Mismanagement like Hoardings Black marketing

Cheating Short weighting

Hiding the defective quality of the goods are prohibited in Islamic Financial System.

The prophet (PBUH) said: the truthful honest merchants are with the prophets in the Day of Judgment.

Spending in the Good Cause The Islamic economic approach is one, which

is directed towards the achievement and actualization of justice in human relations.

The result of this effort is falah or success and salvation, and hayah tayyibah or good life in

this world and the hereafter. So IMFI don’t permute to establish any

relation with commodities, services and individuals whose moral practices are doubtful

Some people spend Allah’s wealth (i.e. Muslim’s Wealth) in an unjust manner, such people will be put in the (Hell)

fire on the day of resurrection” (Bukhari and Ahmad)

Buy Back

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is

immediately repurchased by the financier for cash at a discount.

Two Mutually Conditional Contract

Two mutually contingent contract have been prohibited by the holy prohibited by the holy

Prophet (pbuh). The sale of two item in such a way that one who

intends to purchase good is obliged to purchase the other also at any given price.

One sale transaction with tow prices. Combining sale and lending in one contract.

What is Microfinance? Microfinance is usually defined as the provision of

financial services and products to those whose low economic standing excludes them from conventional financial institutions.

MFI ENGAGE IN THE FOLLOWINNNG ACTIVITIES

Micro-finance offer of financial services such as loans, savings, insurance, and training to

people living in poverty. And to those typically unable to gain such

services in the normal finance markets

What Islamic MF

To provide all these services under the umbrella of Shariah. Shariah compliant MFI, to enable Muslims to do

their transaction – a Halal way. Achieving the goals and objectives of an Islamic

economy.

Message of Islam regarding poverty Islamic jurists have unanimously held the view

that it is the collective obligation (fard kifayah) of a Muslim society to take care of the basic needs of the poor.

Economic Empowerment

Islam strongly encourages charity from the giver’s point of view, it seeks to minimize dependence on charity from the beneficiary’s point of view.

Economic Empowerment

A man of the Ansar community came to the Prophet (peace be upon him) and begged from him.

He (the Prophet) asked: Have you nothing in your house? He (the man) replied: Yes, a piece of cloth, which we wear, or which we spread (on the ground), and a wooden bowl from which we drink water.

Economic Empowerment He (the Prophet) said: Bring them to me. He (the man)

then brought these articles to him and he (the Prophet) took them in his hands and asked to the assembly of people: Who will buy these? A man said: I shall buy them for one dirham. He (the Prophet) asked twice or thrice: Who will offer more than one dirham? Another man said: I shall buy them for two dirhams.

He (the Prophet) gave these to him and took the two dirhams and, giving them to the man of the Ansar, he said: Buy food with one of them and hand it to your family, and buy an axe and bring it to me.

Economic Empowerment He then brought it to him. The Prophet (peace be upon him)

fixed a handle on it with his own hands (#5) and said: Go, gather firewood and sell it, and do not let me see you for a fortnight.

The man went away and gathered firewood and sold it. When he had earned ten dirhams, he came to him and bought a garment with some of them and food with the others.

The Prophet (peace be upon him) then said: This is better for you than that begging should come as a spot on your face on the Day of Judgment.

Source of Fund Collection of IMFI

The Shariah option for deposit mobilization can be worked out by respecting two principles:

The aim of the exchange at hand must be recognizes in Shariah.

The modalities to achieve the said must be Shariah Compliant.

Source of Fund Collection of IMFI

Zakat

1. Zakah is the third among five pillars of Islam and payment of zakah is an obligation on the wealth of every Muslim based on clear-cut criteria.

2. These funds are meant mostly for the extremely poor and function as a safety net for meeting their immediate and basic needs

Source of Fund Collection of IMFI Suddqa

1. Charity occupies a central position in the Islamic scheme of poverty alleviation.

2. Suddqa kind of Charity which is not obligatory.

Waqf (trust)

The term waqf literally means detention. The legal meaning of Waqf according to Imam Abu Hanifa is the detention of specific thing in the ownership of waqif and the devoting of its profit or products "in charity of poors or other good objects".

Source of Fund Collection of IMFI Islamic banks generally use Musharakah and Mudarabah

based product for obtaining investment account. These deposits are based on the Shariah principles of

profit and loss sharing, and the banks use them, along with its own funds in businesses which are Shariah

compliant. Wakala model can also be used for Investment Account.

WHAT IS MUSHARAKAH? The literal meaning of Musharakah is sharing. The

root of the word "Musharakah" in Arabic is Shirkah, which means being a partner.

Under Islamic jurisprudence, Musharakah means where two or more than two persons agree to

contribute funds for conducting some business in which all partners share the profit according to a

specific ratio while the loss is shared according to the ratio of the contribution.

Management of Musharakah Each partner has right to take part in Musharakah

management. The partner may appoint a managing partner by mutual

consent. One are more of the partners may decide not to work for

the Musharakah and work as a sleeping partner If one or more partners choose to become no-working or

steeping partners. The ratio of their profit cannot exceed from the ratio of their capital investment.

Capital of Musharakah

All partners must contribute their capital in terms of money or species at an agreed valuation.

Share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the

letter case the market value of the commodities shall determine the share of the partner in the

capital.

Distribution of Profit The ratio of profit distribution must be agreed at the time

of execution of the contract. The ratio must be determined as a proportion on the

actual profit earned by the enterprise.

1. Not as percentage of partner’s investment.

2. Not in lump sum amount

A sleeping partner cannot share the profit more than the percentage of his capital.

Rule for loss

In the case of loss all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of

investment

WHAT IS MUDARABAH? This is a kind of partnership where one partner

gives money to another for investing in a commercial enterprise.

The investment comes from the first partner who is called “Rab-ul-Maal”(Investor)

The management and work is an exclusive responsibility of the other, who is called

“Mudarib” (Working Partner). All other terms and conditions of Mudarabah are

mostly same to Musharakah.

Islamic Microfinance Contracts  

Qariz Musharakah Mubarabah Murabaha Ijarah Salam Istisna

Thank You

CENTER OF ISLAMIC BANKING & ECNOMICS

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