ISLAMIC BANKING:

Oh believers, take not doubled and redoubled interest, and

fear God so that you may prosper. (Al-Qur'an)


INTRODUCTION

Islamic banking refers to a system of banking, which is consistent with Islamic Shariah (Law),
and guided by Islamic economics. Islamic law prohibits the payment and collection of riba
(interest or usury).The main argument against interest is that money is not used as a
commodity with which to make a profit but that it should be earned on goods and services
only, not on control of money itself. Features of Islamic Banking are based on ethical principles.
Islamic Shariah allows all economic activities in the framework of protecting public interest and
safeguarding it. Man may make profit from doing business. However, when this runs against
Islamic ethics and morality, it is outlawed. In addition, for an investment to be legitimate, one
of the most important requirements is that its outcome must fulfil the reality of investment
transactions and that it enables the Islamic Financial Institution (IFI) to state what it expects to
make in profits. However, this cannot be determined as a certainty or can one commit ones
self to it, or bear any loss sustained.
Main conditions governing Islamic investment include: Money does not generate or beget
money in itself, but it becomes productive if it is involving an activity or work; Investment is
subject to the rule of profit and loss sharing; Investment in business activities is lawful, but
prohibitions should be avoided. ;Contracts must be free of gharar (uncertainty, ignorance and
the conditions which lead to disputes).

RIBA (USUARY / INTEREST)
The Islamic Economic System revolves upon the prohibition of Riba (interest).
The two main types of usury to be avoided are as follows:

Riba al-Nasiah
Riba al Nasiyah defined as: any excess compensation over and above the principal which is
without due consideration.
The Prophet (SAW) said:
Every loan that draws interest is Riba
Ali ibn Talib).
Riba al-Nasiah, or deferred usury, is related to extension of the repayment period for additional
payment of money. It is also called Riba Jahiliyyah which was a pre-Islam form of usury and the
worst of its kind.

Riba al-Fadl
Riba al-Fadl means the excess which is taken in exchange of specific homogenous commodities,
such as selling gold with another gold, whereby one has more weight than the other.
Oh believers, take not doubled and redoubled interest, and fear God so that you may
prosper.
Quran
The Prophet banned all interest based transactions as well as cancelling all interest due to and
from the people of Taif condition of the Taif Treaty.

PROHIBITION OF RIBA IN ISLAM

The Islamic Economic System revolves upon the prohibition of Riba.
Riba in the Quran

First Revelation:
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(30:39)
(Surah Al Rum, verse 39)
Riba from Surah Al Baqarah
Those who benefit from interest shall be raised like those who have been driven to madness
by the touch of the devil; this is because they say: trade is like interest while God has
permitted trade and forbidden interest.
Qur'an, 275.
God deprives interest of all blessing but blesses charity
Qur'an, 276.
O believers fear Allah and give up what is still due to you from interest (usury), if you are true
believers.
Qur'an, 278.
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. 279 O Believers, take not doubled and redoubled interest and fear God so that you may
prosper
Surah Al Imran, 130-1.

Riba in the Hadith
The Prophet (SAW) said:
Cursed is the receiver and the payer of interest, the one who records it and the two witnesses to the
transaction. They are all alike in guilt.
Jabirbin Abdalla(Muslim/Tirmidhi)
Prophets Last Pilgrimage
Jabir bin Abdalla(RAW) giving a report on the Prophets (SAW) farewell pilgrimage said:
The Prophet (SAW) addressed the people and said All the Riba of Jahiliyyah is annulled. The first Riba
that I annul is our Riba, that accruing to Abbasibnal Muttalib (Prophets uncle); it is cancelled completely
Muslim Kitabal Hajj, Babb Hajjatial Nabi.
The Prophet's Vision During Miraj
The Prophet (SAW) said:
On the night of Ascension, I came upon people whose stomachs were like houses with snakes visible
from the outside. I asked Gibril who they were. He replied that they were people who had received
interest.
(IbnMajah, MusnadAhmed)

PRINCIPLES OF ISLAMIC BANKING
Islamic Banking is based on the principles of trade, partnership, sharing of gains and losses, and
prohibition of reckless risk.
Prohibition of Interest or Usury
Ethical Standards
Moral and Social Values
Liability and Business Risk

1- Prohibition of Interest or Usury

The principles of Islamic finance are established in the Qur'an, which Muslims believe are the exact
Words of God as revealed to the Prophet Mohammed. These Islamic principles of finance can be
narrowed down to four individual concepts.
The first and most important concept is that both the charging and the receiving of interest is strictly
forbidden. This is commonly known as Riba1 or Usury. Money, on its own, may not generate profits.
When Riba infects an entire economy, it jeopardises the well-being of everyone living in that society.
When investors are more concerned with rates of interest and guaranteed returns than they are with
the uses to which money is put, the results can only be negative.
Adherents of Islam believe that the Qur'an is the final book of God's word following both the Torah and
the Bible. As a result, there are a number of similarities between the Islamic, Christian and Jewish faiths.
Quoting Shaikh Saleh Abdullah Kamel, Chairman and Founder of Albaraka Banking Group; Usury is
forbidden in all the three religions, Judaism, Christianity and Islam, but it is the people who forget the
rules of Allah. All societies, nowadays - Muslims, Christians and Jews - deal with Usury.
2- Ethical Standards
The second guiding principle concerns the ethical standards. When Muslims invest their money in
something, it is their religious duty to ensure that what they invest in is good and wholesome. It is for
this reason that Islamic investing includes serious consideration of the business to be invested in, its
policies, the products it produces, the services it provides, and the impact that these have on society
and the environment. In other words, Muslims must take a close look at the business they are about to
become involved in.

In all facets of the financial system, Islam has certain rules, certain regulations as to how Muslims should
go about participating in these activities. For example, in share trading or the securities market, Islam
looks at the activities of the companies, to establish whether or not the companies are involved in
activities which are in line with Sharia'a.

3- Moral and Social Value
The third guiding principle concerns moral and social
values. The Qur'an calls on all its adherents to care for and support the poor and destitute. Islamic
financial institutions are expected to provide special services to those in need. This is not confined to
mere charitable donations but has also been institutionalised in the industry in the form of profit-free
loans or Al Quard Al Hasan.
An Islamic bank's business includes certain social projects, as well as charitable donations. Islamic banks
provide profit-free loans. For example, if an individual needs to go to hospital or wants to go to
university, we give what is called Quard Al Hasan. This Quard Hasan is normally given for a short period
of one year and the Islamic bank does not charge anything for that.
4- Liability and Business Risk
The final principle concerns the overarching concept of fairness, the idea that all parties concerned
should both share in the risk and profit of any endeavor. To be entitled to a return, a provider of finance
must either accept business risk or provide some service such as supplying an asset, otherwise the
financier is, from a Sharia'a point of view, not only an economic parasite but also a sinner. This principle
is derived from a saying of the Prophet Mohammed (May Peace be upon Him) "Profit comes with
liability". What this means is that one becomes entitled to profit only when one bears the liability, or risk
of loss. By linking profit with the possibility of loss, Islamic law distinguishes lawful profit from all other
forms of gain.
In order to insure that these principles are followed, each Islamic institution must establish and provide
itself with an advisory council known as a Sharia'a Board. The members of Sharia'a Boards can include
bankers, lawyers or religious scholars as long as they are trained in the Islamic law, or Sharia'a.

In 2001, the Industry witnessed a remarkable development in this regard by the initiative of the
Accounting and Auditing Organization for the Islamic Financial Institutions or AAOIFI. At that time,
AAOIFI's standards were enhanced to include elements that aim at broadening the role of the external
auditor. Now according to these new developments the external auditor is also required to look for
compliance with Sharia'a rules as defined by the Sharia'a supervisory board of each bank and in
accordance with the Sharia'a standards AAOIFI has begun to issue.
islamic banking prohibits:
Interest-based banking
Gharar unclear contracts
Maysirspeculation
Financing of haram transactions - alcohol, gambling, pork, etc.
Lending in Islamic Banking
Islamic Financing involves a buy-sale deal or a rent to sale deal. There is always an underlying asset
behind the deal. Allah reminds us: We have permitted trade and forbidden riba. In Islamic banking,
the lender must share the risk with the borrower.
Types of Lending contracts
Murabaha sale contract
Mudaraba Part financing
Musharika Partnership
Ijara rental/lease
Tawarruq overdraft facilities.
Istisnaa
Salam

Murabaha
The term Murabaha comes from the Arabic word rabh which means profit (Short term
trade financing). Client identifies goods which we wishes to buy for KShs. x and requests a bank to
finance the transaction. The Bank buys the said goods and resells them to the client for KShs. x+ margin
(e.g. 10% agree profit).The Client then repays within agreed timeframe.
Musharika
This is a joint enterprise formed for business where all the partners (Bank and customer) contribute
capital and share the profit according to a specific ratio while any possible loss is in turn shared
according to the capital contribution by the two parties. Both the bank and the client contribute capital,
client brings know how. Profits/losses are thus shared on agreed ratios.

Musharika vs Interest Banking
The characteristics of Interest Based banking are:
Fixed Rate of Return percentage
Bank does not take any share of loss/risk
Banks not invoved in owning and selling of goods.
Mudaraba
This is a partnership where the bank contributes 100% of the capital and the client contributes know
how. Profit is in turn shared on an agreed ratio. If there are any losses, the bank absorbs it fully. This is
the equivalent to 100% financing by the bank.

Uses of Musharika/Mudhariba
Short/medium/long term financing
Project financing
SME set up
Import financing
LCs
Export (Pre-shipment Financing
Working Capital Financing.
Diminishing Musharika
This is where a client wants the bank to finance and remain a partner. The Diminishing
Musharika/Murabaha is where the client buys out the shares of the bank over time. The classic
examples is for example, the purchase of houses, equipment etc.
Ijara
Ijara is the same as leasing. The bank purchases the asset/house. There is Joint ownership between the
bank and the client. The client rents it from the bank. Client enters into an agreement to buy the shares
from the bank over an agreed timeframe. He then buys out small amounts of shares from the bank time
to time ending up with a hundred per cent (100%) ownership. Repayment is in the form of rental costs
which changes as the percentage owned by the client increases. The value of the asset can also increase
thus the bank has the right to charge a higher price for the sale of its shares.
Istisnaa
Istisnaa is a sales transaction where a commodity is sold before it comes into existence. For example
this mode of financing may be used for home financing where the client owns land and seeks financing
for the construction of a house, the financier can provide him with a constructed house on a specified
piece of land. The price must be fixed with the consent of all parties involved. All other necessary
specifications of the commodity must also be fully settled. The payment of an Istisnaa may be made in
advance or instalments or in a lump sum at the end of the period.
Salam
Salam is a sales transaction where a commodity, usually horticultural or agricultural goods, is sold before
it comes into existence. The price of the commodity must be paid in advance to make the transaction
valid.
What is the history of Islamic Banking in
Pakistan?

Ans. Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan
was among the three countries in the world that had been trying to implement interest free banking at
comprehensive/national level. But as it was a mammoth task, the switchover plan was implemented in
phases. The Islamization measures included the elimination of interest from the operations of
specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial
banks during January 1981 to June 1985. The legal framework of Pakistan's financial and corporate
system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of
corporate financing named Participation Term Certificate (PTC). An Ordinance was promulgated to allow
the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based
capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and
related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire
purchase.

Separate Interest-free counters started operating in all the nationalized commercial banks, and one
foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis.
Regarding investment of these funds, bankers were instructed to provide financial accommodation for
Government commodity operations on the basis of sale on deferred payment with a mark-up on
purchase price. Export bills were to be accommodated on exchange rate differential basis. In March,
1981 financing of import and inland bills and that of the then Rice Export Corporation of Pakistan,
Cotton Export Corporation and the Trading Corporation of Pakistan were shifted to mark-up basis.
Simultaneously, necessary amendments were made in the related laws permitting the State Bank to
provide finance against Participation Term Certificates and also extend advances against promissory
notes supported by PTCs and Mudaraba Certificates. From July 1, 1982 banks were allowed to provide
finance for meeting the working capital needs of trade and industry on a selective basis under the
technique of Musharaka.

As from April 1, 1985 all finances to all entities including individuals began to be made in one of the
specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made
interest-free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits
and all existing deposits in a bank were treated to be on the basis of profit and loss sharing. Deposits in
current accounts continued to be accepted but no interest or share in profit or loss was allowed to these
accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as
before. The State Bank of Pakistan had specified 12 modes of non-interest financing classified in three
broad categories. However, in any particular case, the mode of financing to be adopted was left to the
mutual option of the banks and their clients.

The procedure adopted by banks in Pakistan since July 1 1985, based largely on mark-up technique
with or without buy-back arrangement, was, however, declared un-Islamic by the Federal Shariat Court
(FSC) in November 1991. However, appeals were made in the Shariat Appellate Bench (SAB) of the
Supreme Court of Pakistan. The SAB delivered its judgment on December 23, 1999 rejecting the appeals
and directing that laws involving interest would cease to have effect finally by June 30, 2001. In the
judgment, the Court concluded that the present financial system had to be subjected to radical changes
to bring it into conformity with the Shariah. It also directed the Government to set up, within specified
time frame, a Commission for Transformation of the financial system and two Task Forces to plan and
implement the process of the transformation.

The Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the
State Bank of Pakistan under the Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of
Pakistan. A Task Force was set up in the Ministry of Finance to suggest the ways to eliminate interest
from Government financial transactions. Another Task Force was set up in the Ministry of Law to suggest
amendments in legal framework to implement the Courts Judgment. The CTFS constituted a Committee
for Development of Financial Instruments and Standardized Documents in the State Bank to prepare
model agreements and financial instruments for new system.

The CTFS in its Report identified a number of prior actions, which were needed to be taken to prepare
the ground for transformation of the financial system. It also identified major Shariah compliant modes
of financing, their essentials, draft seminal law captioned Islamization of Financial Transactions
Ordinance, 2001, model agreements for major modes of financing, and guidelines for conversion of
products and services of banks and financial institutions. The Commission also dealt with major products
of banks and financial institutions, both for assets and liabilities side, like letters of credit or guarantee,
bills of exchange, term finance certificates (TFCs), State Bank's Refinance Schemes, Credit Cards,
Interbank transactions, underwriting, foreign currency forward cover and various kinds of bank
accounts. The Commission observed that all deposits, except current accounts, would be accepted on
Mudaraba principle. Current accounts would not carry any return and the banks would be at liberty to
levy service charge as fee for their handling. The Commission also approved the concept of Daily Product
and Weightage System for distribution of profit among various kinds of liabilities/deposits. The Report
also contained recommendation for forestalling willful default and safeguarding interest of the banks,
depositors and the clients.
According to the Commission, prior/preparatory works for introduction of Shariah compliant financial
system briefly included creating legal infrastructure conducive for working of Islamic financial system,
launching a massive education and training program for bankers and their clients and an effective
campaign through media for the general public to create awareness about the Islamic financial system.
The Finance Minister of Pakistan in his budget speech for the FY02 declared the following:
Government is committed to eliminate Riba and promote Islamic banking in the country. For this
purpose a number of steps are under way which are:
1. A legal framework is designed to encourage practice of Islamic banking by banks and financial
institutions as subsidiary operations of their main operations;
2. Consultations and exchanges are undertaken with brother Islamic countries and renowned
institutions of Islamic learning such as middle eastern countries and Al-Azhar University of Egypt, to
learn more about their experiences and practices;
3. Amendments in HBFC Act are being made in line with the directive of the Supreme Court. With these
changes, HBFC would be fully Shariah compliant institution, which will play an effective role both in
promotion of Islamic financing method but also in the development of the important housing sector;

4. Shariah compliant modes of financing like Musharaka and Mudaraba will be encouraged so that
familiarity and use of such products is enhanced and their adoption at a wider scale made possible.
It is governments intention to promote Islamic banking in the country while keeping in view its linkages
with the global economy and existing commitments to local and foreign investors.

The House Building Finance Corporation had shifted its rent sharing operations to interest based system
in 1989. The Task Force of the M/O Law proposed amendments in the HBFC Act to make it Shariah
Compliant. Having vetted by the CTFS, the amended law has been promulgated by the Government.
Accordingly, the HBFC launched in 2001 Asaan Ghar Scheme in the light of amended Ordinance based on
the Diminishing Musharakah concept. A Committee was constituted in the Institute of Chartered
Accountants, Pakistan (ICAP), wherein the SBP was also represented, for development of accounting and
auditing standards for Islamic modes of financing. The Committee is reviewing the standards prepared
by the Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
with a view to adapt them to our circumstances and if considered necessary, to propose new accounting
standards.
It was decided in September 2001 that the shift to interest free economy would be made in a gradual
and phased manner and without causing any disruptions. It was also agreed that State Bank of Pakistan
would consider for:
1. Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant
transactions;
2. Specifying branches by the commercial banks exclusively dealing in Islamic products, and
3. Setting up new full-fledged commercial banks to carry out exclusively banking business based on
proposed Islamic products.

Accordingly, the State Bank issued detailed criteria in December 2001 for establishment of full-fledged
Islamic commercial banks in the private sector. Al Meezan Investment Bank received the first Islamic
commercial banking license from SBP in January 2002 and the Meezan Bank Limited (MBL) commenced
full-fledged commercial banking operation from March 20, 2002. Further, all formalities relating to the
acquisition of Societe Generale, Pakistan by the MBL were completed, and by June, 2002 it had a
network of 5 branches all over the country, three in Karachi, one in Islamabad and one in Lahore. The
MBL now maintains a long term rating of A+ and short term rating of A1+, assessed by JCR VIS Credit
Rating Co Ltd, signifying a consistent satisfactory performance.

The Government as also the State Bank are mainly concerned with stability and efficiency of the banking
system and safeguarding the interests, particularly, of small depositors. With this concern in mind it has
been decided to operate Islamic banking side by side with traditional banking. The approach is to
institute best practice legal, regulatory and accounting frameworks to support Islamic banks and
investors alike. The year 2002-2003 witnessed strengthening measures taken in the areas of banking,
non-bank financial companies and the capital markets.
Islamic Banking Global Scenario
. Over the last three decades Islamic banking and finance has developed into a full-fledged system and
discipline reportedly growing at the rate of 15percent per annum. Today, Islamic financial institutions, in
one form or the other, are working in about 75 countries of the world. Besides individual financial
institutions operating in many countries, efforts have been underway to implement Islamic banking on a
country wide and comprehensive basis in a number of countries. The instruments used by them, both
on assets and liabilities sides, have developed significantly and therefore, they are also participating in
the money and capital market transactions. In Malaysia, Bahrain and a few other countries of the Gulf,
Islamic banks and financial institutions are working parallel with the conventional system.

Bahrain with the largest concentration of Islamic financial institutions in the Middle East region, is
hosting 26 Islamic financial institutions dealing in diversified activities including commercial banking,
investment banking, offshore banking and funds management. It pursues a dual banking system, where
Islamic banks operate in the environment in which Bahrain Monetary Agency (BMA) affords equal
opportunities and treatment for Islamic banks as for conventional banks. Bahrain also hosts the newly
created Liquidity Management Centre (LMC) and the International Islamic Financial Market (IIFM) to
coordinate the operations of Islamic banks in the world. To provide appropriate regulatory set up, the
BMA has introduced a comprehensive prudential and reporting framework that is industry-specific to
the concept of Islamic banking and finance. Further, the BMA has pioneered a range of innovations
designed to broaden the depth of Islamic financial markets and to provide Islamic institutions with wider
opportunities to manage their liquidity.

Another country that has a visible existence of Islamic banking at comprehensive level is Malaysia where
both conventional and Islamic banking systems are working in a competitive environment. The share of
Islamic banking operations in Malaysia has grown from a nil in 1983 to above 8 percent of total financial
system in 2003. They have a plan to enhance this share to 20 percent by the year 2010. However, there
are some conceptual differences in interpretation and Shariah position of various contracts like sale and
purchase of debt instruments and grant of gifts on savings and financial papers.

In Sudan, a system of Islamic banking and finance is in operation at national level. Like other Islamic
banks around the world the banks in Sudan have been relying in the past on Murabaha financing.
However, the share of Musharaka and Mudaraba operations is on increase and presently constitutes
about 40 percent of total bank financing. Although the Islamic financial system has taken a good start in
Sudan, significant problems still remain to be addressed.

Like Sudan, Iran also switched over to Usury Free Banking at national level in March 1984. However,
there are some conceptual differences between Islamic banking in Iran and the mainstream movement
of Islamic banking and finance.

Owing to the growing amount of capital availability with Islamic banks, the refining of Islamic financing
techniques and the huge requirement of infrastructure development in Muslim countries there has been
a large number of project finance deals particularly in the Middle East region. Islamic banks now
participate in a wide financing domain stretching from simple Shariah-compliant retail products to highly
complex structured finance and large-scale project lending. These projects, inter alia, include power
stations, water plants, roads, bridges and other infrastructure projects. Bahrain is the leading centre for
Islamic finance in the Middle East region. The establishment of the Prudential Information and
Regulatory Framework for Islamic Banks (PIRI) by the BMA in conjunction with AAOIFI has gone a long
way towards establishing a legal and regulatory framework to meet the specific risks inherent in Islamic
financing structures.

The BMA has quite recently signed MoU with the London Metal Exchange (LME) to pool assets to
develop and promote Shariah compliant tradable instruments for Islamic banking industry. The
arrangement is seen as a major boost for industrys integration in the global financial system and should
set the pace for commodity-trading environment in Bahrain. BMA has also finalized draft guidelines for
issuance of Islamic bonds and securities from Bahrain. In May 03, the Liquidity Management Centre
(LMC) launched its debut US$ 250 million Sukuk on behalf of the Government of Bahrain.

National Commercial Bank (NCB) of Saudi Arabia has introduced an Advance Card that has all the
benefits of a regular credit card. The card does not have a credit line and instead has a prepaid line. As
such, it does not incur any interest. Added benefits are purchase protection, travel accident insurance,
etc and no interest, no extra fees with no conditions, the card is fully Shariah compliant. It is more
secure than cash, easy to load up and has worldwide acceptance. This prepaid card facility is especially
attractive to women, youth, self employed and small establishment employees who sometimes do not
meet the strict requirements of a regular credit card facility. Saudi Government has also endorsed an
Islamic-based law to regulate the kingdom's lucrative Takaful sector and opened it for foreign investors.

Islamic banks have also built a strong presence in Malaysia, where Standard & Poor's assigned a BBB+
rating to the $600 million Sharia-compliant trust certificates (called sukuk) issued by Malaysia Global
Sukuk Inc. Bank Negara Malaysia (BNM) has announced to issue new Islamic Bank licences to foreign
players. The Financial Sector Master plan maps out the liberalisation of Malaysia's banking and
insurance industry in three phases during the next decade. It lists incentives to develop the Islamic
financial sector and enlarge its market share to 20 percent, from under 10 percent now. A dedicated
high court has been set up to handle Islamic banking and finance cases.

In United Kingdom, the Financial Services Authority is in final stages of issuing its first ever Islamic
banking license to the proposed Islamic Bank of Britain, which has been sponsored by Gulf and UK
investors. The United States of America has appointed Dr. Mahmoud El Gamal, an eminent
economist/expert on Islamic banking to advise the US Treasury and Government departments on Islamic
finance in June 2004.

Deposits in Islamic Banking
Clients deposits fall under the category of qard(Loan) to the bank and the bank is obliged to pay back.
These loans fall under the category of Musharika. The bank is obliged to share in the profits of the bank
with its depositors. Bank must protect these assets on behalf of its clients as well as get them the
highest halal returns. Since banks do not pay interest, clients must therefore become a partners or
Mushariks to share in the profits. The only way to become a partner is to open an investment account
(Time or Saving Deposit) which allows the bank to invest ones money. Profit sharing is then calculated
and distributed. Profits will be very close to prevailing deposit rates.

Types of Accounts in an Islamic Financial Institution (IFI)
In Islamic banking each customer is a partner with the Islamic Financial Institution (IFI). This relationship
is classified as a Mudarib Partnership. Profits resulting from the account are divided between the
parties. An IFI receives a certain percentage of the net profits, as a return for the amounts deposited in
different investment accounts as its share, being a Mudarib, as agreed between the customer, who is
the investment account holder, and the IFI.

Current Accounts
Current accounts are an interest-free loan by the account holder to the Islamic bank, which maintains
these funds and pays them to the customer on demand. These accounts are similar to a loan in
guarantee and the payment of the same amount. An IFI has the right to invest the funds it is holding in
current accounts without the customer bearing any loss. For this reason, the customer does not get any
profit on this type of account, but he also does not bear any loss.

Investment Savings Accounts
Many Islamic banks offer savings accounts to their customers. This account allows the account holder to
place funds in a safe environment till such time when they may wish to withdraw them. Profits and
losses under investment savings accounts accrue on the minimum monthly balance. Profits are paid, or
losses are deducted, after the expiry of the financial year and the net profits are determined.
The balances under investment savings accounts are invested on the basis of unrestricted Mudharaba.
An Islamic bank has the right to do everything necessary to realize common interest.
An account holder authorizes the Islamic bank to invest the profits made from the moment they are
registered in his own account with the Islamic bank.
DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL
BANKING
There are a number of key differences between the products and services offered by a conventional
bank in comparison to an Islamic Financial Institution (IFI). Islamic transactions are created in view of the
juristic rules of Islamic Shariah and the differences can be highlighted as follows:
Quranic rule: if the debtor is in a difficulty, grant him time till it is easy for him to repay. However, if
he is procrastinating, the bank applies Shariah compliant rules to guarantee its right, but without
resorting to interest.
Funds must be invested in lawful areas that achieve social and economic development. Areas outlawed
by Shariah must be avoided. The capital is invested on a partnership basis between the bank or
entrepreneur and the capital provider.

SHARAH ADVISORY BOARDS/COMMITTEES

All Islamic Financial Institutions are required to have a Shari'ah Supervisory Board/Committee. This
Board should consist of trustworthy scholars who are highly qualified to issue fatawa (religious rulings)
on financial transactions. In addition, Shari'ah board members ought to have considerable experience in
modern business/financial dealings and transactions.

The world renown Shari'ah expert, Sheikh Nizam Yaquby points out:

"The Articles of Association, prospectuses, or statutes (depending on the type of activity) should provide
for the existence of a Shariah advisory board, whose fatawa and resolutions should be binding upon the
financial institution's board of directors and management. The advisory board is required to be
independent and free to give opinions on proposed contracts and transactions. The role of the Shariah
supervisory board should be concurrent with that of the financial institution itself in the sense that it
should be formed from the moment the financial institution is incorporated, and that it should provide
continued supervision and permanent checking of contracts, transactions, and procedures. This should
be expressly provided for in the Articles of Association or the prospectus."
conclusion
Thus, the Islamic banking system is built on a completely different ideological principles, rather than
European or Asian. Despite this, it stands in the way of integration into the global financial system.
Major Western banks, given the high attractiveness of the Arab market and a significant number of
people in the world, Muslim, and make counter-moves, creating in their own specialized units, which
respect the principles of the religious feelings of Muslims.
We could conclude by saying that "Islamic Banking within Muslim Minorities" is an expression, in
practical and applicational terms, of part of our Religious conduct that is all encompassing. As such, its
absence from an Islamic Community in the Developed World is a reflection of an imperfect execution of
our duty unto Allah, who had prescribed a Deen for us that is economically related as well.
The importance of Islamic Banking within Muslim Minorities is equally relevant in Islamic States where
the Banking System is "Kufr" based.
Finally, the success of Islamic Banks lay in the amalgamation of all necessary Financial, Economical,
Managerial and other skills in a manner that conforms to Shariah principles in order to attempt to
preserve man's perpetual happiness in the Hereafter.