ISLAMIC BANKING

Islamic banking is based not only to avoid interest-based transactions prohibited in Islamic Shariah
but also to avoid unethical and un-social practices.
Islamic Banking is the transformation of conventional money lending into transactions based on
tangible assets and real services
Gharar: Excessive level of uncertainty or ambiguity created due to the lack of information or
control in a contract
aiser: Game of !hance
Islamic banks focus on generating returns through investment tools "hich are Shariah compliant as
"ell. Islamic Shariah links the gain on capital "ith its performance.
#perations of Islamic banking are based on sharing the risk "hich may arise through trading and
investment activities using contracts of various Islamic modes of finance
The prohibition of a risk free return and permission of trading makes the
fnancial activities asset-backed in an Islamic set-up with ability to cause value
addition.

RIBA:

The word "Riba" means ecess! increase or addition. Riba implies any ecess
compensation without due consideration "consideration does not include time
value of money#.
$he origination of term interest dates back to %&th century "ith the emergence of banking system at
global level.
Interest means giving and'or taking of any excess amount in exchange of a loan or on debt.
OR
$he loan that dra"s interest is (iba).
KINDS OF RIBA:
There are two kinds of Riba$
%. Riba-&n-'asiyah(Riba-&l-)uran
*. Riba-&l-+adl
%. Riba-&n-'asiyah(Riba-&l-)uran
Defnition: "Every loan that derives a beneft (to the lender) is Riba
Example of (iba-al-*asiyah'Interest: If r. + lends (s.%,, to r. B -a borro"er. "ith a condition
that r. B shall return him (s.%%, after one month. In this case/ the extra amount of (s. %, is (iba
or Interest.
*. Riba-&l- +adl.
0Gold for gold/ silver for silver/ "heat for "heat/ barley for barley/ dates for dates and salt for salt/
like for like/ payment made hand by hand. If anyone gives more or asks for more/ he has dealt in
riba. $he receiver and giver are e1ually guilty0
#f the six commodities specified in the hadith/ t"o -gold and silver. unmistakably represent
commodity money used at that time. #ne of the basic characteristics of gold and silver is that they
are monetary commodities. +s a matter of fact/ each of the six commodities mentioned in the hadith
has been used as a medium of exchange at some time or the other.
Revelation / Verses in Holy Quran Regarding
Prohibition of nterest!
$here are four sets of revelations about (iba "hich "ere revealed on different occasions.
%. 2irst (evelation: In Surah-+r-(um/ verse 34
5. Second (evelation: uslims have been informed about the practice of taking (iba by 6e"s in
Surah +n-*isaa:
The word usury is used in the sense of any amount claimed by the creditor
over and above the principal advanced by him to the debtor.
The word Riba used in the ,oly )uran carries the same meaning because the
verse of -urah &n-'isaa ".-%/%# eplicitly mentions that riba was prohibited for
the 0ews also.
3. $hird (evelation: (iba'Interest has been abolished in the third verse of Surah +li-7 Imran.
8. 2ourth (evelation: In the fourth revelation/ (iba has categorically been prohibited in all its forms
- Surah +l-Ba1arah/ verse 5&9-5:%.
Di"eren#e $et%een &onventional $an'ing and sla(i#
$an'ing!
12'34'TI2'&5 6&'7I'8 vs. I-5&9I1 6&'7I'8
%. 9oney is a commodity besides medium of echange and store of value.
Therefore! it can be sold at a price higher than its face value and it can also be
rented out. "1onventional 6anking#
oney is not a commodity though it is used as a medium of exchange and store of value.
$herefore/ it cannot be sold at a price higher than its face value or rented out. -Islamic Banking.
5 $ime value is the basis for charging interest on capital. -!onventional Banking.
;rofit on trade of goods or charging on providing service is the basis for earning profit. -I.B.
3. Interest is charged even in case the organi<ation suffers losses by using bank=s funds. $herefore/
it is not based on profit and loss sharing. -!onventional Banking.
Islamic bank operates on the basis of profit and loss sharing. In case/ the businessman has suffered
losses/ the bank "ill share these losses based on the mode of finance used -udarabah/
usharaka.. -Islamic Banking.
8. >hile disbursing cash finance/ running finance or "orking capital finance/ no agreement for
Exchange of goods ? services is made. -!onventional Banking.
$he execution of agreements for the exchange of goods ? services is a must/ "hile disbursing
funds under urabaha/ Salam ? Istisna contracts. -Islamic Banking.
9. !onventional banks use money as a commodity "hich leads to inflation. -!onventional Bank.
Islamic banking tends to create link "ith the real sectors of the economic system by using trade
related activities. Since/ the money is linked "ith the real assets therefore it contributes directly in
the economic development. -Islamic Banking.