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INTRODUCTION
Islam by its real meaning denotes the phenomenon of completely following the command of somebody in general understanding it is the state in which somebody follows the instruction of ALLAH Almighty. Islam by its very nature is not a religion like any other religion. It is a Deen which denotes a complete way of living and provides us with the complete set of instructions to be followed in the whole life of a Muslim. These include the Ibadaat and Muamlaat i.e the modes of worship in different styles and the matters of dealings with others. We know that being a Muslim demands the state of adherence to the complete set of instructions made available to us through the Holy Quran and Sunnah, irrespective of such instructions being included in the Ibadaat or Muamlaat. The set of instructions received, which we generally call our Deen, in addition to our matters, provide us full guidance in the matters relating to business. In this study, we will try to understand and apply such principles in the affairs of managing the finances of a business in Pakistan, within the framework provided by ALLAH Almighty through its Messenger (SAAWS). Since, the most crucial issue for doing business is this era is the matter of avoiding interestbearing and similar transactions, a major area of this study is devoted on interest-free financing alternates and interest-free financial management. In this study, we have considered most of the options available for the interest-free system. In this respect, it is worthwhile to note that certain schools of thought have objections of certain tools of Islamic finance on various grounds. Similarly, it has also been established by almost all schools of
"Seek the abode of the Hereafter in that, which Allah has given you, and
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Mission Statement
To promote and develop Islamic Banking industry in line with best international practices, ensuring Shariah Compliance and transparency. Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijara). Islamic banking activities must be practiced consistent with the Shariah and its practical
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1. Musharakah
Musharakah (joint venture) is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to the invested capital. In case of loss, each partner loses capital in the same ratio. If the Bank provides capital, the same conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. Each partner may or may not participate in carrying out the business. A working partner gets a greater profit share compared to a sleeping (non-working) partner. The difference between Musharaka and Mudharaba is that, in Musharaka, each partner contributes some capital, whereas in Mudharaba, one partner, e.g. A financial institution provides all the capital and the other
2. Mudarabah
"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib". The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the money has to take losses.
3. Murabahah
This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are common in North American stores.
4. Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full
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5. Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.
6. Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.
5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks. 6. It can charge additional money (penalty and compounded interest) in case of defaulters.
7. Very often it results in the banks own interest becoming prominent. It makes no effort to ensure growth with equity.
8. For interest-based commercial banks, borrowing from the money market is relatively easier. 9. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. 10. The conventional banks give greater emphasis on credit-worthiness of the clients. 11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. 12. A conventional bank has to guarantee all its deposits.
8. For the Islamic banks, it must be based on a Shariah approved underlying transaction. 9. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations. 10. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects. 11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller. 12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based
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Shariah Compliance:
Obviously, the sole purpose of the Islamic bank is to conduct banking strictly in accordance with the Shariah principles, as outlined in Holy Quran and Sunnah. The bank is required to ensure the Shariah compliance on all the agreements, and products and services offered and handled by the IBD and / or IBB. The responsible authority for the
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Departmental Objectives:
1. Drive and Implement the Strategic Plan for Islamic banking industry 2. Strengthen the existing regulatory framework for Islamic Banking Industry 3. Strengthen and broaden the scope and functioning of SBP Shariah Board through inclusion of more members and engaging of consultants of international repute 4. Arrangement of IFSB events, particularly Council and Technical Committee meetings, along with the side events in Pakistan in November, 08 5. Leverage from/support the efforts of IFSB, IDB/IRTI, AAOIFI, IIFM and other international institutions for promotion of Islamic banking in Pakistan 6. Coordination with BPRD regarding licensing of full fledged Islamic Banks (IBs) and their branches and Islamic Banking Branches of conventional banks (IBBs) and formation of Islamic banking subsidiaries 7. Coordination with BID for Shariah compliance inspection of IBIs and proper compliance of the observations/recommendations of inspection report (regarding Shariah Compliance) 8. Utilizing SBP-SECP Joint Forum for the promotion of Islamic financial industry 9. Support industry players in development of Shariah-compliant liquidity management instruments 10. Utilizing the Shariah Advisor Forum for conflict resolution and for discussion on AAOIFI Shariah Standards for their adoption in Pakistan 11. Conduct awareness programme within and outside SBP to eliminate the misconceptions and to develop the confidence of the public about Islamic banking 12. Publication of Islamic Banking Bulletin (IBB) and Islamic Banking System review (IBSR) and facilitate different departments in preparing various SBP publications 13. Human resource capacity building in the Islamic banking industry through coordination with educational institutes
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