Basic Principles of Islamic Banking An Overview Prof Abdullah Saeed by jadakiss


									Basic Principles of Islamic Banking:
           An Overview
              Prof Abdullah Saeed
            University of Melbourne

           The presentation will cover

•   Historical overview
•   Basic framework and key concepts
•   Permissible and prohibited contracts
•   Application of key concepts to banking

            Historical Overview
• Dealing with money, investment on profit and loss sharing
• Attitude to interest: Sharia on the whole did not accept the
  legitimacy of interest
• Western banks in Muslim countries: interest
• Literature on banking without interest: 20th century
• Practical steps: village banks in Egypt
• Islamic Development Bank in Jeddah
• Islamic commercial banks
• Today: network of Islamic banks with a range of products
  competing with interest-based banks

             Basic Framework-1:
            Wealth and Ownership
• Wealth as trust
   – Right of the needy; circulation; spending;
• Ownership
   – Trust; individual/community rights;
   – Ways and means:
       • labour; gift; inheritance
       • all ways and means to acquisition must be halal
       • Object of ownership: must be halal

                Basic Framework
         Concept of Halal and Haram - 1
• Basic principle:
  – Generally all ways and means are halal (except
    those that are clearly prohibited).
  – Prohibition is always an exception

               Basic Framework:
         Concept of Halal and Haram - 2
• Some of the haram ways and means of acquiring
  –   through riba (interpreted as ‘interest’)
  –   cheating and fraud: quality, measure, weight
  –   games of chance (lotteries, betting)
  –   creating artificial scarcities
  –   manipulation of prices
  –   sale and dealing in haram products
  –   engaging in haram professions (eg prostitution)
  –   exploitation of the poor, the needy and disadvantaged

               Basic Framework:
                  Concept of Money
• Money as a form of wealth
• Money:
    – primary function: medium of exchange
    – No price should be charged for money
    – Basic rule in lending: return an equal amount

               Basic Framework:
                  Prohibition of Riba
•   Riba as interest (differences among Muslims)
•   Interest in all forms prohibited
•   All interest-based transactions should be avoided
•   Interest-based transactions are seen as ‘unjust’:
    risk on the borrower

      Contracts in Islamic Finance
     Permissible and Prohibited Contracts
• Contracts:
   – in transactions should be permissible (re
   – should be based on mutual agreement
   – should not be based on: riba, haram, fraud etc
• Terms that both parties agree to (and are not
  based on haram) are acceptable


• Important institutions but should not be based on
• Banks should be in line with the requirements of
  Islamic law
• Alternative ways of operating banks and financial
  institutions should be found

Interest-based system, risk and profit

• Problems with the system:
    – risk on the borrower
•   Profit related to risk
•   Risk should be shared: both parties
•   Profit should be shared on an agreed upon ratio
•   Loss should be shared strictly according to capital

      Banks: Profit and Loss Sharing (PLS)

• Banking business should be based on PLS:
    – the deposits & investments
    – PLS contracts of mudaraba and musharaka will form
      the backbone of Islamic banking
• PLS contracts of mudaraba and musharaka will
  form the backbone of Islamic banking
• Both contracts are developed in Islamic law
  Important to refer to Islamic legal texts to
  understand the nature of these contracts

                 PLS and Deposits

•   Bank will mobilise deposits on the basis of PLS
•   PLS contract of mudaraba is used
•   Features of mudaraba contract (bank:depositors)
•   Relationship of the Bank with the Depositors

            PLS and Investments

• PLS contracts of mudaraba and musharaka should
  be used
• Other forms of non-PLS contracts are also used
• Fee-based services can be provided
• Relationship of the Bank with its investment
  clients (mudaraba, musharaka, murabaha)

   Objectives of Islamic Banks: An
• To help Muslims, execute their financial dealings in strict
  respect of the ethical, individual and social values of the
  Shariah, without contravening the prohibition of dealing
  in riba (interest or usury).
• To Serve all Muslim communities in mobilising and
  utilising the financial resources needed for their economic
  development and prosperity.
• To serve the Islamic communities and other nations by
  strengthening the economic and financial cooperation for
  economic development


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