Research & Written YOUSUF IBNUL HASAN Program Consultant Islamic Banking & Applied Finance Design by SAIRA

ALI Student MBA Program 2010-2014 IQRA UNIVERSITY

WHAT IS ISLAMIC ECONOMICS? WHAT ARE THE PRINCIPLES ON WHICH ISLAMIC ECONOMY, ITS MONETARY AND FINANCIAL SYSTEMS FUNCTION?

Islamic Economics is a system that identify the available resources blessed by Almighty Allah to the mankind. How these resources are seek, utilized and distributed by man keeping in it, the social justice in participation and cooperation by applying, knowledge, experience, ability and efforts using the power of pen and book, granted by Almighty Allah in confirmation the status of men as Unique among all creations and appointing as Custodian to all the resources, that Almighty Allah owns it alone and absolute. 2
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ECONOMICS IS AS OLD AS ISLAM ITSELF.

Islam is not a religion. It is a complete political, social, financial & economic system for Islamic & non Islamic communities without discrimination with freedom of choice and speak within define limits.

Islam is Deen. It totally differs to the religions because of the definition, depth and details. Deen is interpreted as a Lifestyle. The principles of Deen are comprehensively guided in Holy Quran, explained in Hadiath and practice by Holy Prophet Muhammad May Peace Be upon Him as Shariah

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ALMIGHTY ALLAH IDENTIFIED

Aims, Objectives, Purpose, Way & Means of Islamic Economics
READ

(IQRA) in the name of your Lord, who has created you with the clot of frozen blood and taught you with the power of pen . word READ opens the chapter of an Islamic Economics; in
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The

READ

RATIONAL
EFFORTS APPLICATION DESCRIPTIVENESS
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20TH CENTURY ECONOMISTS DEFINE ISLAMIC ECONOMICS

Hasan-uz-Zaman Islamic economics is the knowledge, application, injunctions and rules of the Shari'ah that prevent injustice in the achievement and disposal of material resources to provide satisfaction to human beings and enable them to perform their responsibility for Allah and the mankind. M. Akram Khan Islamic economics is a study of human recovery achieved by organizing the resources of earth on the basis of cooperation and participation.
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Dr. Nejatullah Siddiqi

Role of Shariah define the belief in social justice, freedom, cooperation and sharing as the fundamentals to Islamic economic philosophy within the Islamic system. Key to Islamic economics philosophy lies in man's relationship with Allah, his universe and his people. The other human beings are the nature and purpose of man's life on earth.

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CONCEPT OF ECONOMICS
Established on the day Adam Adam was senseless to his needs & desires upon his creation. He disobeyed Allah Almighty on the temptation of IBLEES (devil). Adams act of disobedience created principles of economics that revolve around Theory of Need, Want and Desire that lead to Act, Acquire and Accept Prophet Adam (May Peace Be Upon Him) was sent to earth to develop mankind with a system of life that give birth to Natural Economics.
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DEFINITION OF ISLAMIC ECONOMICS

Any activity that has a commercial, economical

and financial purpose with the priority of social benefit to mankind is classified as

Islamic Economics
The system that has the foundation on this classification leads to socio- economic development and not just the economic development.
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BASE OF ISLAMIC ECONOMICS

Resources are unlimited and efforts are limited. Needs and wants does not effect on the supply or resources. Availability of resources depend on efforts that increase affordability which is the force for satisfying needs. Nations using their efforts in achieving knowledge and apply it in seeking rights are leaders of economic growth. Nation merges economics growth with socio development are the genuine Communities and such states are

For the People, By the People, & Of the People

This Socio Economics Development converts

Peoples into Nations.

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ISLAMIC ECONOMIC REGARDS

THREE FACTORS OF PRODUCTIONS.

Man, Money &Commodity

MAN

COMMODITY

MONEY

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RELATIONSHIP OF ALLAH & MAN

Tawheed
Oneness of Almighty Allah
Total commitment to the will of Allah by submission & the mission to mould human life in accordance with Allahs will.

4 Great ways to except Tawheed

1st.. Look back and thank Allah. 2nd. Look forward and trust Allah 3rd Look Around and believe in Allah 4th. Look within yourself and find Allah
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Life on earth Is a test and its purpose is to prove successfully by doing Allahs willed. For man entire universe with all natural resources and powers are opens to exploitation, which Allah owns it alone. Provisions are available to man being the nature of trust. Islam & Faith Almighty Allah is absolute & Prophet Mohammad Peace be upon Him, was an executive judge. Holy Quran is the code of conduct.

Islam organizes Mans life in its aspect of political, social, commercial, legal, ethical, financial, monetary and in economy.
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ISLAMIC ECONOMICS
Application of Deen (Principles of Lifestyle).
Through the Theory The Holy Quran

By the explanation of theory Hadiath & Practice & Implementation The glorious Shariah
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ISLAMIC ECONOMICS IS AN
INDEPENDENT SYSTEM It enjoys a separate identity. It is a self-contained system with its own economic policy, It covers interests at Private and Public as well as Material or Spiritual. It has given a complete system of lifestyle, Earning, Expenditure, Businesses, and Relationship with Legal Framework. It emphasizes for all bases on Social Justice, Equality, Unity, love, Cooperation, Sharing, 15 Transparencies in all affairs and respect. yousuf ibnul hasan

Islamic Economics System guards Rights of minorities and non-Muslims in the Islamic state. Rights of Women and Orphans. Rights of employees. Rights of Lenders and Borrowers. Rights of everyone without Race-Religion-Language-Color or Sect. Islamic Economics system is based on four principles All wealth belongs to Almighty Allah Man is the trustee of the wealth Hoarding of wealth is prohibited Wealth must be in circulation at all time
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Three parameters for day-to-day affairs and problems

IJMA(GATHERING)

QIYAS(DICUSSION)

AMAL(ACT)

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WHAT ISLAMIC ECONOMIC BELIEVE

Islamic Economics is specifically believe distribution as an economic problem. It differ application to capitalist & communist systems for production. It differentiates between Basic

Needs & Luxuries.

It does not accept concept of effective scarcity of resources.

It does not accept concept of inflation

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The Holy Quran identifies resources Sufficient, Unlimited & in Qualities Fulfilling the basic needs like Food, Clothing & Shelter For over Fifty Billion Human Beings at all time.

Conventional economics
misguides this reality with starvation, poverty, & economic backwardness because of misdistribution originated from man-made laws and systems.
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MAN & MONEY IN ISLAMIC ECONOMICS

Money matters in human life play a vital role Money matters identify principles of it affairs including earnings, income, distribution of wealth & its utilization. Matters pertaining to money must be fair, transparent & useful for developing socio-economic life of community. Islamic Economics eliminate monopoly of an individual, group or an organization who keeps a control on world monetary policies and gets most out of these resources by blocking wealth, crossing their jurisdictions It does not impose limits on amount of wealth that an individual can acquire.

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ISLAMIC ECONOMICS SYSTEM GUIDANCE

Guides in maintaining of wealth in a proper form of distribution and define incentives for work and efforts. Shows opposition & defends against misuse of exploitation in getting hold of wealth through unfair means. Denies clearly "free" Market of Capitalism, which has led to the situation of survival of a part of the society. Emphasizes public revenue from natural resources should be use to secure needs of community and not to fill pockets of casino owners. Encourages state to provide public, essentials, utilities and resources to cover needs of citizens in justified way. Outlaw hoarding of wealth and eliminate copyright or patent laws that open an avenues for developing potential monopoly.
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ISLAMIC ECONOMIC SYSTEM

Protects ownership of businesses & companies by restricting it only to those who contributes both capital or effort Effectively puts a stop on concepts "corporate takeover" from becoming a reality. Classifies wealth in a systematic way to protect rights of individuals to access wealth. Protects the society and secures the needs of the people. Mandates vital and natural resources as public property while allowing for unlimited access to luxury items. Protects society by defining certain needs as a prohibited needs. Disregards corrupt man-made systems and protects honor, rights of woman, minor and orphans. Bans all forms of prostitution, pornography or any activities that exploit charms and physical attractiveness of women. Prohibits alcohol, gambling, spiral of corruption, social turmoil 22 and moral devastation yousuf ibnul hasan

BASIC PRINCIPLES OF ISLAMIC ECONOMICS

Principle of adaptable ownership Principle of economic freedom within a defined limit Principle of social justice.

FIRST PRINCIPLE Three types of ownerships are permitted ; The individual ownership. The state ownership. The public ownership.
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SECOND PRINCIPLE
Economic Freedom within a Defined Limit Islamic law prohibits all such social and economic activities that differ to the teachings of Islam and its principles and values. Such social, economical and commercial activities fall under the category of Riba It defines the principles on which ruler sworn for supervision of general activities intervenes in any anti Islamic economic activities. It guides State to protect and safeguard public interest through the control on individual freedom in the illegal and non-permitted actions they involve due to which the economic activity of the community and society suffer.
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ECONOMICS FREEDOM IN DEFINE LIMITS

Men have no right to possess unlimited wealth and desire to obtain wealth by any means and way he may choose. Right is given to every member of the society by appointing each one as a guardian of the public trust and the ownership is limited for the public welfare and for the betterment of mankind.

THIRD PRINCIPLE: Social Justice in Islamic Economics To give-and-take responsibility To keep social balance Prohibits growth in differences

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IT GIVE SOCIAL BALANCE

i.e. few live in extra luxury and rest were deprived of basic necessities of life and forced to live a life of misery, hunger, without shelter, illness and as neglected class of the society.
DIFFERENCE

Tawhid (monotheism) Definite acceptance of Almighty Allahs relationship with man and mans believes in supremacy of Almighty Allah with clear vision on Day of Judgment. The accomplishment of man depends on the belief and obeying the teachings of Islam and bringing healthy and peaceful community by synchronizing between morality and 26 the material characteristic of life.
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IJTEHAD
Emphasize on independent legal judgment, effort and ability to figure out rules from sources that carry out social justice in accordance with Islamic Economics. Economical and social problems can be solved only through Ijtehad, particularly issues in regard to which, no definite injunction is available in the Quran, or Sunnah.

ETHICS
It is third element for the enforcement of social justice. Islamic economics considers ethics in relation to human lifestyle or religion. Islamic Shariah defines social justice in Islamic Economic as the pillar of the concept that functions with a valid reason. 27

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ETHICS
The concept of Zakat and prohibition of practicing of Riba in the daily life of an Islamic society. The contribution of Zakat and elimination of Riba develop stability, peace, harmony and social economics development. It gives the real value of Money as money to be respected instead to be loved. It defines the state responsibilities for income distribution and take this responsibility as the basic principles towards the social justice

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MAN, MONEY & COMMODITY

Three factors of production give birth to the exchange system and practice in the fulfillment of needs. The two exchange system are classified as

Lending and Borrowing Financing and Participation

Lending is base on principle amount in transaction by pricing it with the time value without the concept of utilization of money and its impact on economic activity. Financing is made available on the basis of Mans ability to use the money and to multiply, divide, subtract and add the29 amount realize through the exercise of money.
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DIFFERENCE OF FINANCING & LENDING

Financing is Equity and not Liability Lending is liability and not participation. Financing is made and Loan is given Loan is secure financing is support. Financing is an investment and loan is facility. Loan cannot be financing until it is agreed on Profit and loss sharing Financing cannot be a loan till return is guaranteed. Loan is given at a price of money on application of Rate Financing outcome to be profit, shared in an agreed Ratio. Loan has to be secure by external factor of collateral Financing is collateralize within its own system Financing cannot be made until the user is able to use it 30 Lending is given against the confirmation of guarantee.

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LENDING AND FINANCING DIFFERENCE

Lending leads to inflation and liquidation Financing ends at ownership Financing increase the capital base as well net-worth Lending increase liability, cost and decrease the net worth LENDING money given for unstated purpose against the security without going through pros & cones of activity for which money is spent on and return is fixed either in cash or in term liquidation of mortgaged movable or non movable property/properties. FINANCING is joining in the profitable operation, like equity participation, venture finance, acquiring business operation with proper appraisal of purpose, verification, validation of data submitted by the two partners in which financier becomes direct or indirect partner in that venture with un-guaranteed profit and loss in returns. 31

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DEFINITION OF FINANCING
Finance is the intermediary source in shape of money having a value to act in production, trading and exchange of commodities, services and assets. Financing is the source that makes the money service for specific purpose within specific period, in between person to person, person to institution or institution with group or institution on an understanding to share the result in profit and loss. Financing is the source that develops ownership, support entrepreneurship and line-up procurement, production, distribution, utilization through participation and cooperation between skill and capital on the basis of profit and loss acceptability upon the maturity.

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(CONT)

Financing is the use of money by one who owns it and the other who has the ability to use it for a common purpose to make profit by participation and cooperation.

Financing is the act of money without the concept of liability, collateral or the guarantee. Its origin is investment and its end is ownership.
Financing is an act of money which is classified as the opposite to lending.
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THE WORLD OF MONEY

First is the Monitory Market where money is bought and sold. In this system money is treated as the commodity and not the medium of exchange. This system which is based on Interest and according to Islamic financial system it is commonly known as a one category of Riba. Second is the Financial Market that emerged on factual and authentic principles of Islam & on the guidance of Holy Quran, explained in Hadiath. In this market the money is been served on the basis of capital or by skill with clear understanding of participation in responsibilities, duties, obligations, earning, income, risk and profit sharing.

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HISTORICAL BACKGROUND
Financial matters in Post Islamic era were commonly practiced on the basis of social priorities & Prophet (PBUH) too was involved in commercial & financial activities considering social obligations in financial matters It is authenticated by archives of the Islamic world that with the introduction of financing and discarding lending the most powerful community development on the basis of social development in first Islamic state under the guidance of Prophet Muhammad ( May Peace Be Upon Him) in the rule of four Caliph. Interest based system was dominating 98% monetary markets, controlling the market with its powerful grip and titled as Conventional Monetary System

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(CONT)
Now reduce to almost 75% and it is gaining the momentum on daily basis. Financial system derived from Quran, Sunnah and Hadiath has a well defined title that signifies motive and concept of the system as Socio-Financial System. Islamic Finance was practice for the most part in the Muslim world throughout the middle ages. In Spain, the Mediterranean and Baltic states, Islamic merchants became vital intermediaries for trading activities. European financiers and businesspersons later adopted many concepts, techniques, and instruments of Islamic finance.

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(CONT)

Term "Islamic finance is relatively new for commercial money market in a sense as it appearing only in the early 1960s through a movement that started from Egypt when the fist Social Bank was establish to bring the change in the money activities and unite money with ability with propose and period. Commercial or business activities confirming to Islamic principles are made under the umbrella of either "interestfree" or "Islamic Banking which Islamic financial system simply as "interest-free" does not provide a true picture of the system as a whole. Prohibition of receiving and paying interest may be the base of this system, not all.
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(CONT)

It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies, Fair Deals and Employment Growth. Not limited to banking only but covers capital formation, capital markets, and all types of financial settlement. The philosophical roots of an Islamic financial system originate from the relations of factors of production and economic activities. Conventional financial system deals primarily with the economic lending and borrowing aspects of transactions. Financial system equally emphasizes on the ethical, moral, social & religious proportions for enhancing equality and fairness for an ideal society. It fully appreciates context of Islamic teachings on the work ethic, wealth distribution, social and economic justice as well as role of the state and responsibilities and duties of the citizen. . It is established on absolute prohibition of payment or receipt of predetermined and guaranteed return rate.
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(CONT)
Pre-agreed/ estimated share of profit or growth had been noticed in the archives, way back to post Islamic era and was practiced by Muhammad (May Peace Be Upon Him), the Caliphs and the Asahaba (close associates of Prophet May Peace Be upon Him). This ended the concept of interest and ruled out use of debtbased instruments. The system encourages risk sharing, promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts Basic framework for Islamic financial system is enforcement of the rules for handling of economic, social, political, and cultural characteristic of Islamic societies

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BASIC PRINCIPLES OF ISLAMIC FINANCE

Prohibition of Riba Any unjustifiable increase of capital through the use of the capital whether in financing, lending or sales is central belief of the system. Any positive, fixed, predetermined rate tied to maturity and amount of principal etc. i.e. guaranteed regardless of performance of the investment is prohibited Risk sharing Interest is prohibited and owner of funds become investors instead of creditors. The provider of capital and entrepreneur shares business risks and shares profits and loss according to the ratio of investment and participation by way of their Capital or Skill. 40
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(CONT)
Money as "potential" capital Money is treated as "potential" capital It becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, only when it acts as capital, not when it is "potential" capital Money cannot be treated as Capital if it is not in circulation.
Prohibition of speculative An Islamic financial system discourages exhibition of wealth and prohibits transactions featuring extreme uncertainties, gambling, and risks
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(CONT)
Transparency of contracts Islam upholds contractual obligations and disclosure of information as a sacred duty. This feature is intended to reduce risk of information and moral hazards. Shariah Approved Activities Only those business activities that do not violate the rules of Shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited

Concept of Finance defines Interest as price of money where lender charges borrower pays. Islam accepts that agreement between financier and user to be pre agreed on terms of transaction and fulfills obligations in rightful manner.
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(CONT)

Salient features of this order Islam clearly characterizes difference between lawful and forbidden economic activities and permits the Muslims to make all efforts for their right in seeking their economic benefits. Islam prohibits financial, economical, social and legal actions, which are morally, financially and socially damaging to the community life. The Islamic financial system employs concept of participation in enterprise, utilizing funds at risk on a profit-and- losssharing basis. It implies Careful investment policy, diversification of risk and careful management by Islamic financial institutions. Potential profit in proportion to the risk assumed and to satisfy conflicting demands of participants in the current 43 environment and within the guidelines of the Shariah.
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HOW FINANCE IS APPRAISE

Financing appraisal is base on straight line method, applying 12-P Formula 12-P Formula in pre-financing activities Person who is financing to whom? Purpose for which financing is work out? Project for which financing is required? Period for which finances to stay as financing? Product that develop through financing? Process to be use for financing? Price is the volume of finance require? Place locations where finance shall be utilize?

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(CONT)
Participation, relationship and responsibilities of financier and user? Pact terms and condition of financing between parties of financing? Professionalism ability, experience, knowledge and expertise in purpose? Perfect ness in Performances? Profitability by the application of twelve P formulas which is the RISK base perimeters

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RIBA- PROFIT & INTEREST Introduction & Differences

Almighty Allah clearly defines principles & means for Goods & services, weight & measurement, time & period, increase & decrease, profit & loss, buying & selling, giving & taking, efforts & lethargy, success & failure, defeat & winner, richness & poverty, knowledge & ignorant, civilized & orthodox, traditions & customs, morals & ethics, transparencies & malice, honesty & fraud, crime & punishment, reward & penalty.
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 Performance

in mans daily life is define only and only in the will of Almighty Allah for which holy books are blessed to mankind and messengers were send to explain evil & sins, losses & distraction health, wealth and happiness for mankind. For betterment of humanity Allah define limits of everything that the men have in this daily life. Men have given unlimited power through achieving knowledge that can be stored in human mind & act according to an organize system that is clearly explain in Holy Quran, Hadiath 47 and Sharia'h

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Prime Importance for mankind

Almighty Allah prohibited any object or any act that is harmful to humankind that creates instability, bring injustice, become injurious to human life and considered as unconstructive to Socio Economic System.
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RIBA.
Riba is an Arabic word drive from word RIBH which means Profit.
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Ribh means excess, increase or addition in accordance to the Islamic guidance for commercial & business practices & correctly interpreted according to Sharia'h terminology as Double Profit.

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 Any

earning, income, profit or benefits being earned, taken or received through wrong means, bad intentions, shady practices or wicked participation. Such earning, income, profit or benefits are classified as RIBA.
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Such

earning, income, profit or benefits are not only treated as immoral, unjust and filthy but furthermore threat to socio economic life of society.

Such

earning, income, profit or benefits leads to crimes of various nature, cruelty, 50 exploitation & self-importance.

Riba is as a combination of evil and sins. Riba is bad practice to earn & gain. Riba bring instability in the community life. Riba is the source for the increase of inflation. Riba create classes in the society. Riba create injustice in seeking the rights. Riba is non transparent economic activity. Riba is the most hated practice in Islam Riba is the social crime

Riba is immoral, unethical, unjustified commercial, economical, political, social, cultural and traditional practices and activities to gain benefit at individual, 51 collective or institutional level ,

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HOLY QURAN
AL-BAQARAH 2:275-6
People who indulge in Riba shall be raised like those who have been Driven to madness by the touch of Devil. That is because they say that Riba-based transaction is just like trading, while Allah has permitted trade and prohibited Riba. Hence those who have received the warning from Allah and have stop accordingly, may have what has already passed, their case being entrust to Allah but those who revert to Riba-based dealings, shall be the inhabitants of the hell-fire and abide therein for ever. (You must know that) Allah deprives Riba from all blessings and blesses charity; He loves not any ungrateful sinners.

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AL-BAQARAH 2:278-79
O you believers! Fear Allah and give up Riba that remains outstanding if you are true believers. Watch out! If you do not obey this directive, then Allah declares war against you from Himself and from His Prophet. But, if you give up your outstanding Riba, then you can claim your principals. Neither should you cause harm with Riba to others, nor should others harm you.

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HADIATH REINFORCE CONCEPT OF QURANIC RIBA

Prophet Muhammad (May Peace Be Upon Him) Said At the last Pilgrimage, All Riba of Jahilliya is null and void. In this respect, the first Riba I (May Peace Be Upon Him) withdraw that the borrowers owe to my uncle Abbas; it is cancelled completely. (Muslim) The Prophet (May Peace Be Upon Him) cursed all those who take Riba, who give Riba, who write a Riba contract and the two witnesses to a Riba contract. He (May Peace Be Upon Him) further said: "They are all alike (in fault). (Muslim 2995)

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RIBA IN FINANCIAL AFFAIRS

Riba must be eliminated from the financial transactions. No thing is more horrific as compared to Riba that Islam has prohibited. Nothing is more dreadful than Riba, is remains in widespread threatening socio economic activities in both theory and practice. Riba convert financing system into lending system that make the money as a commodity and owner of the wealth, a seller and user of the same as buyer. Riba does not justify money to be a medium of exchange and brings the love of money instead of respect for the money.

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INTEREST
When money become a commodity and bought and sold with guaranteed results of profitability or increase in volume of money being used for the transaction, such increase is the price of the money and this price of the money is classified as Interest which is the part of Riba
There is confusion in understanding for the terms Interest & Riba (Usury).
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THE QUESTION ARISE INTEREST IS RIBA OR RIBA IS INTEREST?

To make a distinction of terms with rational reasoning, Islam through definitions and interpretations, provides in Holy Quran and Hadiath, Riba is clearly explained where Interest is define by the scholars.

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ABUL ALA MAUDUDI,

Interest is an earning through lending on money by lender from borrower on condition that lender shall charge a fixed amount of money in addition to the principal. Interest is prohibited in Islam and people are not allowed to make money by lending their capital on interest. Capital is to be invested in productive manner that increases the profits.

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KEYNES

A western economist defines "Interest has nothing to do with influencing volume of savings. Practically it is rate of return on investment that determines rate of saving

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GREEK SCHOLAR ARISTOTLE

He define Interest in his book Money & politics.

Interest is an artificial profit, which does not enter in legal trading. Using money as a commodity is selling, just a forged artificial transaction. Money has to be used as a means of sale and purchase and a measurement of a commodity to be sold or purchased. Money is just a means to ascertain value of commodity and it cannot be sold or purchased within similar quantities and 60 qualities .

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HOW TO DEFINE INTEREST

Any amount, earning or income that is taken over and above to principal amount, without any risk, efforts, activity, without loss sharing and the return is guaranteed within a specific time is called interest. The compulsory return, income, earning on a fixed term & fixed percentage, upon principal amount, is an Interest. Interest is the price of money whereas money is just an intermediary between exchanges of transaction. There are many categories of Riba. Interest is one of the categories of Riba.

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Prophet Moses

(May PEACE BE UPON HIM)

Torah 22nd versus of the Exodus

If you lend money to any of my people with you who are poor, you shall not be to him as an exact Riba from him. Deuteronomy verse 23rd You shall not lend upon Riba to your brother, Riba on money, Riba on virtual, Riba on anything that is lent for Riba.

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Leviticus 25:35
'If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so 62 he can continue to live among you.

JUDAISM
In several Biblical passages in which the taking of interest is either forbidden, discouraged or disliked.
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The religion of peace and love define Interest as the key to cruelty and hatred and give birth to cirme.

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Roman Catholic Church

In fourth century AD prohibited taking of interest by Church Scholars.

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In the eighth century under Charlemagne it was declared usury to be a general criminal offence.

"The love of money is the root of all evil." (Timothy 6:10)

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Ancient Hindu Religion

Vasishtha, a well known Hindu law-maker made a special law which forbade higher castes of Brahmans (priests) and Kshatriyas (warriors) from being usurers or lending at interest. Vedic texts of Ancient India (2000-1400BC) In the Jatakas, (600-400 BC) Usury is referred to in a humiliating manner: Two-Faced Elites accused of practicing Usury.

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Islam for Money Matter

Riba does not justify money to be a medium of exchange and develop the love of money in several ways that disrupt the entire system of mankind. Islam stresses a respect of money by disregard lending and borrowing and guide to financing on participation by uniting money and skill as equal in effort and utilization and value. Islam guides the point of origin and limit of destination of monetary transaction. Islam defines duties and responsibilities between money owner and money user. The combination and participation of money and effort brings the result which is share according to the preagreed terms of understanding is the creation of Profit

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Profit how it is Describe?

Income on financing is determined not on financing amount, but takes principal amount, cost of transaction and applicable fee & charges as a part. Profit is the aim of financing and loss is acceptance. Appraisal, Precaution, Trust, Confidence, Experience, Knowledge, Purpose, Will and Sprit are business ethics that result in realizing profit on the transaction.
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Profit is an amount appreciates over and above to principle amount of investment on the basis of profit and lost sharing between two participants of the transaction upon the maturity as gross return. This gross return over to the principal amount of investment then be deducted with applicable and agreed fee, expenses and charges which is classified as the cost of the transaction brings out Net Income on the transaction. The Net Income which is to be shared in an agreed ratio instead of confirms and guaranteed rate is the Profit. Profit is sharing in ratio of investment and not realize through rates applied on principle amount.

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Now the question arises

If Interest is eliminated from monetary system, would it be possible that system & transactions would become transparent and clear? Answer is simple and straight: Filth remains in its hard and powerful grip irrespective of other factors. Interest alone cannot be eliminated without eliminating categories that fall under term called Riba.

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Categories of Riba

Some of the categories of Riba are mentioned and clearly defined in Islamic Economics System . Islam strictly prohibits these acts as well as society disregards them as Social Crimes due to their dreadful effect on social, moral, cultural, economical, financial, commercial and lawful life styles of the society.

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The main classes of RIBA

Exploitation

by taking advantage of status and position, Irregular weight & measures for profitability, Wrong declaration for higher return, Misconduct (misbehavior), Crime & Law breaking, Mistrust, Commit a breach False commitment,

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 Manipulation

of affairs for benefits at a cost and efforts of other, Gambling in all form, Promising to secure the benefit by covering honorable, nearest, dearest Falsehood and Lies Betting and gambling Speculation, Conjecture, unfounded information, Trading in commodities prohibited by Islam and law of the land, Income from the practices or activities that are prohibited by Islam,

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Breaking and abuse of state law for self benefit or for any purpose that is declared as punishable act. Disobedience to the state law by declaration and submission of wrong information for self-benefits. Disturbing peace of community by using force. Committing and involving in the illegal acts. Paying and receiving Interest that is declare as price of money using act of cruelty, exploitation, wrong means, false declaration, and advantage based on weak or wrong calculation, Taking and giving return on loans or fixing amount without appraising the use of funds that are given to user.

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 Keeping

deposit with person or institution having involved in Riba practices, Using deposits as investments and declaring non-transparent results that lead to discrimination of sharing in accordance with investment percentage, Holding and storing of currency that affects economic activities negatively. Holding commodities that lead towards scarcity in the supplies against market demand. Monopoly and monopolization of activity, transaction and business to taking sole 74 benefit, stopping the growth of employment and earnings

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 Grabbing

the wealth, Illegal encroachment on the property that is not owned by encroacher. Like construction of pray area on the property not lawfully purchase, legally gifted or transferred to occupant Using public money for luxuries & self-usage, Misuse of rights belonging to minors, orphans, widows and women, Misappropriations among share division on inherited wealth Miscalculation of share for inherited wealth under law of inheritance, Income by power and cruelty, 75 Misuse of power and status,

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Theft, Burglary, Smuggling, Adultery, Human trading, Pressurizing and influencing of earning situation and taking benefits, Misuse of public representation and obtaining benefit through status as Public Representative, Trade and Sale of commodity by charging over and above to the prevailing price and avoiding payment to state toward revenue, hiding such earning and income on transactions. (Premium on commodity for extra benefit), 76 Abuse of labor, specially child and women. Above classes differentiate Interest vis--vis Riba

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FUNDAMENTAL FACTS ON RIBA

BASIS OF ISLAMIC THOUGHTS CONFLICT DIRECTLY WITH THE RIBA BASED SYSTEM. AS NO ISLAM EXISTS IN A PLACE WHERE THERE IS RIBA BASED SYSTEM.

Riba based system is a misery not only on humanity, faith, morals or imagination of life, but also in every core of economic and practical life. It is the most hateful system, which eradicates human satisfaction and frustrates its civilized and neutral developments. Islam has complete ethical system supported by realistic system as interlink. Ethics & reality cannot be separated in Islam & cannot be practiced alone.

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FUNDEMENTAL FACTS OF RIBA

Islam has clearly stated benefits of following of ethics and reality that followers follow in daily life. Successful Islamic economics does not rise without Ethics which cannot be separated to reality of life and its rational approach. Practical life of people cannot prosper without proper ethics. Riba practices corrupt the individuals ethics, behavior, and feelings towards community and the society. It also corrupts the human life, culture and the relationship by spreading the spirit of greed, selfishness, sneakiness and gambling in general. 78

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FUNDAMENTAL FACTS OF RIBA

Today investing capital on minimum risk basis over guaranteed return is commonly practiced including funds as deposit, invested on no risk with guaranteed return. Interest is paid at lower to the depositors investment and higher to investment managers and shareholders. Money lent to somebody on higher return or interest does not grow useful projects but seeks the most lucrative opportunity even if profit comes from the lowest nature and the meanest tendency.

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Islam is a connected system; it prohibits the dealing with Riba. It also defines all its systems based on providing the need to it. It organizes the aspects of social life on giving out means of dealing without touching growth of human, social & economic development. A true Muslim should have a firm belief that whatever Almighty Allah has prohibited, can develop human life in better and fair way. It must be kept as a firm belief to restrain from false and evil acts for the betterment of life with its development and growth in harmony.

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Almighty Allah is the Creator of this life and makes man, custodian to all the blessings for humanity. Mans determination towards the Almighty Allah overcomes all and guides the man to the right path. It is also impossible for the Muslims to raise the community in prosperity or the perception that wickedness can show the way to advancement, going against the prohibitions of Almighty Allah.

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RIBA AL NASSIEAH

Riba al Nassieah practiced before Islam as man paying his money to another for a pre agreed period. In return, he took from him a certain amount every month without taking the principal amount. When date of payment came, he asked him for his capital and if he was unable to repay would increase in his fund and the term of repayment.

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RIBA AL FADI
A man sells an article in exchange of another article having same quality and nature with an increase or decrease like gold sold for gold, rupee for a rupee, corn for corn and barley for barley. This kind is considered as Riba, as commodities are similar to each with different values not ascertain. Such transaction has the involvement of exploitation and injustice on any ones part of the two. Riba system emerges initially on a rule that there is no relationship between the determination of Allah and the life of man. 83

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Riba creates the false feeling in the mind of men that wealth ownership would bring the power to become the master of this earth. It instructs the men to not to get bound by a pledge himself from Allah and to ignore the importance of following the commandments of Allah. Riba establishes a feeling of liberty among humans for ways and means of obtaining wealth, encouraging to adopt more unfair means to multiply it. Riba provides an individual a feeling that he is free to enjoy his wealth without abiding the contract of faith and trust in Almighty Allah or obeying any condition as holder of wealth, for which he is not bound to keep the interest of others.

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GHARAR

Gharar is uncertainty, hazard, chance or risk and technically it is sale of a thing which is not present at hand or the sale of a thing whose consequence or outcome is not known or a sale involving risk or hazard in which one does not know whether it will come to be or not. Such as fish in water or a bird in the air which are dishonesty through ignorance by one or more parties to a contract. There are several types of Gharar, all of which are Haram. The following are some examples:

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Selling goods that the seller is unable to deliver Selling known or unknown goods against an unknown price Selling goods without proper description Selling goods without specifying the price Making a contract conditional on an unknown event Selling goods on the basis of false description Selling goods without allowing buyer to properly examine the goods Gambling is a form of Gharar because the gambler is ignorant of the result of his gamble

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Saving Investment Participation

Chapter : 4
Cour se Instr ucto r: Yous uf Ibnul Hasa

SAVING & SAVING CONDUCT

Goal in the Islamic financial System in spreading the saving awareness and developing it.
Cour se Instr ucto r: Yous uf Ibnul Hasa

INDIVIDUAL DECISION
Saving

deposit is a decision that is taken by an individual. Saving is a part of income that is kept aside for spending to a later time. Islamic Finance give particular importance and care to saving deposits. . Cour
se Instr ucto r: Yous uf Ibnul Hasa

 Reasons

that encourage to take decision for avoiding un-necessary spending of income and use saving for better purpose.
distinguish a commitment that define individual of realizing his own Cour se interest and the betterment of economic Instr ucto activities. r:
Yous uf Ibnul Hasa

Saving

ISLAMIC FINANCIAL SYSTEM DEFINE A WAY TO SAVING FUNDS.

Saving are employed according to the requirements and means of incentives that give individual to practice saving application. It do not neglect individual and guided to lead his saving motives as a caution to ensure safety for himself for future. It raise to the individual standard of living. They caution towards wastage and guide to make profit.

Cour se Instr ucto r: Yous uf Ibnul Hasa

THE CROSS ROAD

Saving

is one of the qualities of the member of healthy and welfare community. Saver do not spend wastefully in regards to what he receive funds in his hand. Saving Conduct is the saving for future of community for common goals.
Cour se Instr ucto r: Yous uf Ibnul Hasa

TO APPLY THE DIRECTIVES ISLAM CALLED FOR IN HOLY QURAN WHAT MEANS
IX, 34 CHAPTER THE REGRET

And as for those who store up gold and silver and do not spend those in Allahs cause announce to them a painful destiny

Cour se Instr ucto r: Yous uf Ibnul Hasa

 Islamic

Financial System do not neglect saving motives of saving. It does not stick on to Islam and nature of human beings and their character. It make clear to individual step by step as when he makes his saving interest . It exercises a practical devotion of worshipping. Cour
se Instr ucto r: Yous uf Ibnul Hasa

 Do

not differ with conventional that system focus all efforts on class of savings. It does not care about size of savings that is conventional system practice of discourage savings which are below a minimum limit. It stress on the continuous and timely investment savings that are collected in any Cour size of amount. se
Instr ucto r: Yous uf Ibnul Hasa

SAVINGS OPERATIONS IN ISLAMIC FINANCE

 Islamic

System emphasis on benefit for the community and does not remain to make profit at all ways through funds colleted. It care saving conduct and not the individual interest by guiding the ways and benefits of saving. Saving and Spending is the social conduct and un-necessary saving is discourage and moderate spending is encourage.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Saving is a part of broad Islamic Financial System and provide individual to take part in shaping its individual character to adapts himself for welfare of Community as a whole. More saving activity becomes a habit, it expands large number of community balance to community requirements and increases community in becoming strong and number of needy persons decreases.

Cour se Instr ucto r: Yous uf Ibnul Hasa

IS CONVENTIONAL SYSTEM BETTER THEN ISLAMIC SYSTEM FOR SAVINGS

In

their ability to attract savings by offering interest on savings rather Islamic system does not offer any interest Risk free investment Easy to investment in any form and in any product and services.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Verity of saving products that give a choice Inter-lending support in investment of savings Multi currency conversion of saving funds Compounding of return that increase the volume of saving returns. Need no obligation on declaration of details of saving results.

BUT ..

Cour se Instr ucto r: Yous uf Ibnul Hasa

Islamic Financial System

Restrict

saving to be invested in illegal

form. Compounding of saving return are prohibited. Savings are invested on Profit & Loss Basis. Restricted saving products available .
Cour se Instr ucto r: Yous uf Ibnul Hasa

 Limited

number of financial institutions. Saving cannot be invested in prohibited products and practices. Savings results are transparent, short tenure and with clear understanding of Profit & Loss. Human ego avoid pain whenever it finds the way to that.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Conventionally it is found that savers have higher participation in investment and lesser in receiving in return. Savers are less important in in saving operation whereas the savings are the real players that generate the interest. Conventional system restrict higher ratio of saver on the saving return and allow higher return to the saving fund operators.

Cour se Instr ucto r: Yous uf Ibnul Hasa

Besides social and educational effects for spreading saving conduct, are there are economic reasons in which Islamic Financial play great notice to spread the saving conduct. Voluntary individual savings as a part of individual income for which he temporarily postpones his spending. The saving he made help in financing the economic activities for socio economic development .

Cour se Instr ucto r: Yous uf Ibnul Hasa

INVESTMENT
There are common apprehension & economic principles which can be taken as guiding rules of the Islamic Financial System for investment

SAVING LEADS TO INVESTMENT

Rule of Profit & Loss sharing is Participation. Loan leads to seeking price of money that increase in capital. Financing is made on principle of safety for capital and obtaining profit. Expenditure is deducted from profit and not from capital. Profit which can be distributed is net profit and not gross profit.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Islamic Financial System allow participation in Joint Stock Companies or Limited Liability Companies from its accounts or can participate in a part of the capital of existing companies Financing working capital in projects at short term financing with participation which is not lent at interest.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Legitimate participation is a way of seeking profit through money from the money owner and work close of participator at a common purpose among each participant for earning profit. Riba Free Financial House can may be the money owner and saver the participator or vice versa.

Cour se Instr ucto r: Yous uf Ibnul Hasa

The Riba Free Financial Houses are permitted to be a participator from employer to re-participate with the previous participated funds on a Profit & Loss basis. The Riba Free Financial Houses can be the second participator if it receives participation from the first participator.
Cour se Instr ucto r: Yous uf Ibnul Hasa

The Riba Free Bank may be the second participator if it receives participation from the first participator. The Riba Free Finance House as money owner bears loss alone as long as the participator does not exceed his role. If the Riba Free Finance House works as a participator it does not bear loss as is sufficient that the Riba Free Finance Houses effort and work are of no return.

Cour se Instr ucto r: Yous uf Ibnul Hasa

It is allowed that the profit between money owner and participator is pre agreed. But if it is determined sum of principal amount of money with the condition of no loss then participation becomes null and void. Riba Free Finance House can trade its funding precious stone and in foreign currencies on its conditions written down in the exchange contract. Investment in financial securities is only valid in shares and not in debentures.

Cour se Instr ucto r: Yous uf Ibnul Hasa

IN CONVENTIONAL SYSTEM
TRADITIONS DO NOT APPROVE THE FINANCE HOUSES OR THE LENDERS TO PERFORM INVESTMENTS BY ITSELF WHEREAS RIBA FREE FINANCE HOUSE BREAK THE TRADITION IN THREE STAGES.
Cour se Instr ucto r: Yous uf Ibnul Hasa

FIRSTLY
Rule

known to us that every person is taken by his words. Allahs word revealed in written form and by traditions of Prophet (May Peace be upon him) as considering Riba Free Finance Houses and their systems are the blessings and in purity which cannot be break, provided these are followed in according to its pure soul. Cour
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SECONDLY

With no doubt Finance Houses with their present forms and existing functions rose up in response to different environments and non Islamic philosophies in their present form and they serve these environments which are not necessarily convenient for serving Islamic communities in achieving the Rules approved by Almighty Allah

Cour se Instr ucto r: Yous uf Ibnul Hasa

THIRDLY
Riba Free Financial System guide to perform direct investments or financing by participation and stop all practices of other nature that deviate to its system. In case if continues its operations in style of usurious banks and follow the lending of saving funds by covering its administrative expenses from these funds, this damage the investment and create a difference between the two system.

Cour se Instr ucto r: Yous uf Ibnul Hasa

Financing by participation means sharing Investor (banks) capital of productive project becomes a partner in the ownership project, partner in management, running and supervision and partner in all what it yields from profit or loss according to proportions agreed upon. The Investor (bank) can sell its share to a limit restore only the price agreed upon in the selling contract either it is less or more than its capital.

Cour se Instr ucto r: Yous uf Ibnul Hasa

 Justice

must be secured and there should not be exploitation as in the case of loan at interest where the lender obtains all its capital completely with an increase in its capital equal to the mount of interest either the project which borrowed makes a loss or profit. Participation should exist on joint liability between the financier and the financing in case of loss and in case of profit.
Cour se Instr ucto r: Yous uf Ibnul Hasa

Financier or Islamic Bank is a partner in the financing on the condition to accept loss or profit as the condition of participation. From here comes the glorious reference and great wisdom, thus this participation in the two cases (loss and profit) obliges the two partners (every of them) to make the project prosper, and to do every effort to supervise it to participate in its success and therefore the efforts of the two partners should be faithfully directed to its development

Cour se Instr ucto r: Yous uf Ibnul Hasa

PARTICIPATION
Participation operations lead at the end to an ownership that is applied in projects or transactions. Islamic Financial System through its Banking System contribute in solving the problems.

Cour se Instr ucto r: Yous uf Ibnul Hasa

 Diminishing

participation or participation leading at the end to ownership. In participation were the financer or bank gives the partner the right to replace it by ownership. It is either at once or in parts according to preagreed conditions on a basis of organized arrangement by keeping a part of income as an installment to repay financing.
Cour se Instr ucto r: Yous uf Ibnul Hasa

METHOD OF DIMINISHING
PARTICIPATION
Entrepreneur presents the project to Financier. Financier sees its viability of the project. Financier financer as the partner of the project. Entrepreneur pay through earning of profit in parts. If entrepreneur owner keeps it ownership to him, the profit is distributed between financier and entrepreneur according to the proportions agreed upon. .

Cour se Instr ucto r: Yous uf Ibnul Hasa

In case entrepreneur pay the financing either at once or in installments financier has no right to obtain any privilege because of the increase in prices. The financier or bank invest in project with the capital and therefore it is treated as a partner in the transaction either equally or in part and any change in the value of the transaction the working partner has always the choice either to sell and earn profit or buy himself according to market price.

Cour se Instr ucto r: Yous uf Ibnul Hasa

In hire selling method the financer has to participate in construction on the land then rents the housing units. The land owner pay the ownership and rent and finally become an ownership to its hirer after a period of time. Rent installment includes a calculated part of costing.

Cour se Instr ucto r: Yous uf Ibnul Hasa

RULES OF PARTICIPATION
TRANSACTIONS WHICH FINANCIER FOLLOW WITH PARTNER.

Each participation transaction is under a contract and conditions that specify investment and profit in proportion of each partner and instruct two matters:

The The

First: The participator should keep accounts for the Second: The accounts of the participation transaction
Cour se Instr ucto r: Yous uf Ibnul Hasa

business operation. should be checked by the expert accountant to approve their results.

Islamic Finance has a social target. Participation through financing for the purpose to enlarge economic base and opening doors for every one desiring in work and in production. For small worker who needs a small financing forcing him to keep accounting books is asking him impossible act which could makes him reject financing. Keeping accounting books and auditing exceed the value of the financing. The expense of this checks are treated as the cost of the transaction.

Cour se Instr ucto r: Yous uf Ibnul Hasa

HOW FINANCIER DETERMINE

PROFITS ON INVESTMENT
The First stage: Every participation determine the share according to the rules of participation contract. The Second Stage: By preparing Profit & Loss account of investment operations and determining the portion resulting from participation transactions and from the results of investment projects which the financier operates alone.

Cour se Instr ucto r: Yous uf Ibnul Hasa

 The

Third Stage: The distribution of net profit and loss of investments among the group of investors and the financier or bank and everyone according to his share in investment, as the shares with a sum of its funds in transactions. After that it is distributed among every one of investors.
Cour se Instr ucto r: Yous uf Ibnul Hasa

PROFIT PORTION OF EVERY

INVESTOR FROM THE PROFIT DETERMINED
Every investor obtains his portion of profit according to agreed terms as regards to investing operations. By mixing of total fund participated or deposited by the investor in the bank to the time: For the period in which the fund has being invested. Mixing leads to a fair distribution as regards the share of investors from profits distributor.

Cour se Instr ucto r: Yous uf Ibnul Hasa

IS IT POSSIBLE THAT THE RESULT OF

INVESTMENT IS A LOSS
Chance may be there that the Islamic Bank for the sake of eliminating the possibility of loss from investment operations. Keeping such possibility there are ways to keep investors secure and in banking provisions are made for the purpose of safeguarding such possibilities by way of .

Cour se Instr ucto r: Yous uf Ibnul Hasa

Technical pre- study of the investment projects before their execution. The qualitative and geographical distribution of investments. The refusal of conditional investment in a certain project that have whole operations of is a distribution of risk. Formation of appropriate provisions and reserves
Cour se Instr ucto r: Yous uf Ibnul Hasa

FORMING APPROPRIATED PROVISIONS & RESERVES.

Provision or reserve is a part of profit that is put aside to encounter probable loss or to strengthen the financial standing. The reserve is of the right of the profit owner from which the reserve is deducted. Reserve or provision made to encounter losses and are deducted from investment profits before distribution. Reserve are the right of investors and the bank (participators) together.

Cour se Instr ucto r: Yous uf Ibnul Hasa

Investor is not a permanent and may finish his participation is a natural matter. Casual problem is seen on withdrawal In order to investment operations without disputes, the bank make a reserve or an investment provision from the proportion the bank charges in return for its efforts and for managing investments. Therefore this reserve is employed to encounter any emergency and the balance is still be owned by the bank.

Cour se Instr ucto r: Yous uf Ibnul Hasa