Riba Free

Financial System
Chapter 3

Course Instructuor : Yousuf Ibnul Hassan

Two Financial System

for Monitory & Financial Markets

1.Riba Based
2.Riba Free

Course Instructuor : Yousuf Ibnul Hassan

Riba Based

The financial system which is base on RIBA

practice which means bad earning and ,
commonly known as a one category of Riba
which is Interest
(the Price of Money).

Course Instructuor : Yousuf Ibnul Hassan

Riba Free

The system emerged on factual and authentic

principles of Islam on the guidance of Holy
Quran, explained in Hadiath (Prophet May
Peace Be upon Him sayings) and practiced by
Muhammad, May Peace Be upon Him, last and
most Honored and Blessed messenger of
Almighty Allah
Course Instructuor : Yousuf Ibnul Hassan

Historical Background
Financial matters in Post Islam Era were commonly

practiced on the bases on social priorities and Prophet

(PBUH) too were involve in commercial and financial
activities considering the social obligations in financial
matters
Most powerful community development on the basis of
social developments which is authenticated by
archives of Islamic World.

Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
Interest based System, dominating 96% of the

present financial and monetary markets, controlling

the market with its powerful grip and titled as the
Conventional Monetary System,
System derived from Quran, Sunnah and Hadiath
has the better title that signify motive and concept
of the system as Socio-Financial System.

Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
Islamic financing was practice for the most part in

the Muslim world throughout the middle Ages.

It encourage trade and business activities
In Spain and 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.
Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
The term "Islamic financial system" is relatively

new, appearing only in the mid-1960s

Commercial or business activities conforming to
Islamic principles made under the umbrella of
either "interest-free" or "Islamic Banking.
Islamic financial system simply as "interest-free"
does not provide a true picture of the system as a
whole.
Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
Prohibition of receiving & paying interest is the

base of this system.

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 but covers capital formation,
capital markets, and all types of financial
settlement.
Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
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 and 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 appreciate in context of Islamic teachings on
the work ethic, wealth distribution, social and
economic justice, role of the state and responsibilities
and duties of the citizen.
Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
It is establish on absolute prohibition of payment or

receipt of predetermined and guaranteed return

rate.
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 Ashab
(close associates of Prophet May Peace Be upon
Him).
Course Instructuor : Yousuf Ibnul Hassan

Historical BackgroundContd
This ended concept of interest and rule out use of

debt-based 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
Course Instructuor : Yousuf Ibnul Hassan

Basic principles of Islamic financial

system
1 - Prohibition of Riba in Financial
Practice
Any unjustifiable increase of capital whether in loans

or sales is central belief of system.

Any positive, fixed, predetermined rate tied to
maturity and amount of principal (i.e., guaranteed
regardless of performance of the investment
considered Riba

Course Instructuor : Yousuf Ibnul Hassan

2 - Risk sharing
Because interest is prohibited,
suppliers of funds become investors
instead of creditors.
The provider of financial capital and
the entrepreneur share business
risks in return for shares of the
profits.
Course Instructuor : Yousuf Ibnul Hassan

3 - 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, but
only when it acts as capital, not when it is
"potential" capital

Course Instructuor : Yousuf Ibnul Hassan

4 - Prohibition of speculative
behavior
An Islamic financial system
discourages exhibition of wealth
and prohibits transactions
featuring extreme uncertainties,
gambling, and risks

Course Instructuor : Yousuf Ibnul Hassan

5 - Transparency of contracts
Islam upholds contractual
obligations and the disclosure of
information as a sacred duty.
This feature is intended to reduce the
risk of information and moral
hazards.

Course Instructuor : Yousuf Ibnul Hassan

6 - 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
Course Instructuor : Yousuf Ibnul Hassan

Aristotle defines Interest..

Defined Interest as price of money Lender

charge borrower pays. Islam accept that

agreement between financier and user, if agreed
on terms of transaction and fulfill obligations in
rightful manner, there is no harm in lending or
borrowing.
Transaction encounters difference of opinion, it
starts entering into Riba. Thus it affects
relationship and harmony of two parties. In this
condition monetary and financial affairs are
forbidden.
Course Instructuor : Yousuf Ibnul Hassan

How to remove Riba ?

Islam clearly characterizes difference between lawful

and forbidden in economic activity and permit the

Muslims to make all efforts for their right in seeking
their economic benefits.
Further clarify the permissions, Islam prohibits
financial, economical, social and legal actions, which
are morally, financially and socially damage the
community life.

Course Instructuor : Yousuf Ibnul Hassan

How to remove Riba ?................Contd

The Islamic financial system employs concept of

participation in enterprise, utilizing funds at risk on a

profit-and- loss-sharing basis.
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 environment and within the guidelines of the
Shariah.
Course Instructuor : Yousuf Ibnul Hassan

Difference between Conventional &

Islamic Finance Terms
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 and financing cannot be a

loan till return is guaranteed.
Course Instructuor : Yousuf Ibnul Hassan

Thank You

Course Instructuor : Yousuf Ibnul Hassan