in the name of allah(j.j) chapter # 5 interest free banking by kokab manzoor
TRANSCRIPT
In the name of Allah(j.j)Chapter # 5
Interest Free Banking
By Kokab Manzoor
LOGO
Contents Definition of interest
Economic importance of prohibition of interest
Islamic banking Definition and need of Islamic banking Supremacy of Islamic banking Bill of exchange & Interest free loans Comparison of conventional & Islamic banking
Insurance Definition, Evolution, importance and Islamic
Concept of insurance
LOGODefinition of Interest
Interest is the price of capital. The Holy Quran uses the word Riba to denote interest which means increase, growth, addition, raise, excess.
Allah deprives interest of all blessing and develops charity [Al-Baqara; 276]
LOGOWhy did Islam forbids
Interest..???
CAPITALIST ECONOMY
Factors Compensation
LAND RENT
LABOR WAGES
CAPITAL INTEREST
ENT PROFIT
ISLAMIC ECO SYSTEM
Factors Compensation
LAND RENT
LABOR WAGES
RISK CAPITAL PROFIT
In Capitalist Economy there are four factors of Production while Islamic Economic system recognizes only three Factors of Production.
LOGOEconomic Importance of Prohibition on Interest
Investment MEC Interest-Rate
100 mn 24 % 18%
200 mn 22 % 18%
300 mn 20 % 18%
400 mn 18 % 18%
1 Interest and investment• Capital investment depends on the one hand on
the rate of interest and on other hand on MEC.• The process of investment in a country will
continue as long as MEC is higher or equivalent to rate of interest, and vice versa…
LOGOCont`d…..
2 Interest and Price
3 Interest and Distribution of Wealth
4 Interest and Trade Cycle
5 Interest and Allocation of Resources
6 Interest and business
7 Interest and Efficiency
8 Interest and Economic Stability
9 Interest and International Loans
LOGOBANK
Bank is an institution which deals in creditFunctions of banks
Accepting deposits Advancing loans Providing agency services Money transfer Safe deposit lockers Investment Credit creation
LOGONeed for Interest Free Banking
Modern banking system gives rise to injustice, oppression, waste of resources and inequitable distribution of resources among nations.
And as modern banking system is based on Riba (interest) and Islam forbids interest. Meanwhile the utility of Banks is acknowledged, so it is necessary to reform the banking system according to the principles of Islam.
LOGOWhat is Islamic Banking ??
Since interest is forbidden by Islam, Shirakah (partnership) and Modarbah will be the only alternative basis of banking in Islamic economy. A bank will be established by two or more individual making investments according to a fixed ratio
Islamic banking has been defined as banking governed by the principles laid down by Islamic Sharia’h
LOGOMECHANISM OF ISLAMIC BANKING
Under Islamic scheme of banking there may two types of depositors.
1 The one who deposit surplus amount and can withdraw at anytime, bank will charge Zakat or service charges for safeguarding.
2 They can not withdraw their money without notice as their amount will be invested in short term projects. The depositors will share in profit and loss.
LOGO
Business of the Bank
The business of the Bank may assume three forms,
1 Services on which a charge is made
2 Investment on the basis of Shirakah (partnership) or Modarbah basis
3 Free services
LOGO1 Services on which a charge is made
Like modern banks, the Islamic banks will also receive fee, commission or fixed charges on various services like;
a) Facility of lockers
b) Transfer of Money
c) Receiving and Forwarding of trade Goods
d) Services as financial and legal consultants to business corporations
LOGO2 Investment on the basis of Shirakah or Modarbah basis
The interest free banks will enter into Shirakah or Modarbah transaction with businessmen.
Shirakah A contract between partners on both capital and profit.
Modarbah
A contract between partners in which one provides capital and other provides services.
Note these two will be discussed in detail in next chapter
LOGOIssue of Loans in interest free
Banking system
1. The bank will issue loans without any charge to businessmen for short period.
2. Such loans will be issued by the bank out of “Loan Account”
3. The debtor will provide guarantee
4. Bank have right to invest the available sum in “Loan Account” in profitable venture.
5. Banks shall also be entitled to take charge free loans from Central Bank.
LOGOBill of exchange & interest-free
Loans
Discounting Bills of Exchange would not be permissible; however following procedures may be adopted Instead of bill of Exchange the businessmen
should take loans from Banks on Modaraba basis,
Bank will advance charge free loans The bank will make no deductions, and will
recover the full amount on the date of the maturity of the bill of exchange.
LOGOProcess of Credit Creation in
Islamic banking
Bank will keep 10% as reserve of Loan Account for meeting daily needs
Loan advanced, will be again deposited in bankBank will hold large amount of deposits and rest
will be invested in Modarbah That amount will be deposited in various other
banks, hence bank receives back a large part of the money it lent out or invested.
Hence the process of credit creation is similar to conventional banking but the technique is different
LOGOCOMPARISON
Conventional banking Borrows funds from the
depositors paying interest on the liability side of its balance sheet.
Lends the funds to the borrowers, charging interest on the asset side.
Islamic Banking Partnership (Mudarabah)
or profit and loss sharing arrangement between the bank and the depositors
Profit and loss sharing (Musharaka) or trade and leasing based financing arrangement between the bank and its clients users of funds)
LOGO
Conventional banking Between the depositors
and the bank, there is an iron wall.
The interest or the return is predetermined or fixed in advance
Islamic Banking Islamic bank entitles the
depositors--to be informed of what the bank does with their money
--where their money would be invested
The profit or the return is based on the actual investment outcome.
COMPARISON
LOGOCOMPARISON
Conventional banking
Money earning money without real sector business: Transactions are financial asset based
Islamic Banking
Transactions are real asset based as per defined principles of trading or leasing
LOGOSUPERIORITY OF ISLAMIC CONCEPTION OF BANKING
Conventional banking Loan on interest-- chance of unhealthy
investment—leads to depression and ultimately unemployment– also acts criminally if borrower fails to repay.
Islamic banking Interest free loans– banks interested in
investment rather than loan--so healthy investment takes place– reduces unemployment rate--less chance of depression-even if, can easily be countered.
LOGOSummary & Conclusion
1. Riba, usury, Interest are prohibited.
2. Saving is the function of investment not the interest.
3. Islamic banking is based on principles of partnership.
4. Short term and long term financing can be made through system of guarantee.
5. Strong relationship of banks with depositors and entrepreneurs.
6. Islamic banks can contribute better to economic development by performing extra banking activities.
LOGO
Islam and Insurance
LOGODefinition of Insurance
Definition “a contract whereby one person, called the
“insurer” undertakes, in return for the agreed consideration, called the “premium”, to pay to another person, called the “assured” a sum of money, on the happening of a specified event.
This specified event must have some element of uncertainty about it.
LOGOImportance of insurance
Risk and uncertainty are part of daily life of human being
Risk is of two types
1 (Risk of loss) In any economic activity a person may gain profit or suffer loss
2 Breakage of crockery, glassware etc, or accidents, injuries, Hazards, sinking of ships etc…
LOGO
Importance of insurance
In business the second kind of risk is the greatest target of insurance.
It gives sense of security to businessmen
Improves efficiency
Raise morale to face risk
LOGOEvolution of Insurance
Started to meet risk of traders whose ships were often wrecked by storms
Muslims maritime traders during the Islamic rule in Spain were the pioneers.
Arab traders launched a system of insurance on a Shirakah basis.
LOGOTakaful Islamic concept of insurance
Takaful is an Arabic word that means "guaranteeing each other".
It is a system of Islamic insurance based on the principle that “the risk will be shared collectively by the group Voluntarily”.
This is a pact among a participants who agree to guarantee among themselves against loss or damage to any of them.
LOGO
Basic Principle behind Takaful
1.The principle of “fortunate many helping the unfortunate few" is a concept recognized by Islam.
2.The Quran states in Surah Al-Maidah verse # 2:"Help ye one another in righteousness and piety, but
help ye not one another in sin and rancor".
LOGOOperation of Takaful Fund
The contribution collected by company will be further invested on the principle of Al –Modarbah, through which the element of interest (riba) will be replaced.
All premium holders will participate in pofit and loss.
Profit will be shared on agreed ratio.