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ISLAMIC BANKING

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Title: ISLAMIC BANKING


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O, God increase my knowledge
ISLAMIC BANKING TRAINER MANUAL RIBA MODULE
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ISLAMIC BANKING
  • ECONOMIC PHILOSOPHY OF ISLAM
  • no concept of Riba because it encourages
  • concentration of wealth in few hands
  • creation of monopolies
  • greed and selfishness leading to injustice and
    oppression

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ISLAMIC BANKING
  • ISLAMIC MODEL OF DISTRIBUTION OF WEALTH
  • Based on two underlying principles
  • Importance of economic goals
  • Real nature of wealth and property

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ISLAMIC BANKING
  • ISLAMIC MODEL OF DISTRIBUTION OF WEALTH
  • economic activities of man are lawful,
    meritorious and at times obligatory and necessary
  • however economic activity is not the basic
    problem and therefore economic progress is not
    the be-all and end-all of human existence

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ISLAMIC BANKING
  • IMPORTANCE OF ECONOMIC GOALS
  • according to materialistic economics
  • Livelihood is the fundamental problem of man and
    economic development is the ultimate goal of
    human life
  • according to Islamic economics
  • Livelihood may be necessary and indispensable but
    cannot be the true purpose of human life

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ISLAMIC BANKING
  • REAL NATURE OF WEALTH AND PROPERTY
  • wealth in all its possible forms is created by
    Allah
  • therefore wealth is the property of Allah
  • the right of property which accrues to man is
    delegated to him by Allah
  • therefore Allah has the right to demand that
    man subordinate his use of wealth to the
    commandments of Allah

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ISLAMIC BANKING
  • REAL NATURE OF WEALTH AND PROPERTY
  • whatever wealth man possesses has been received
    from Allah
  • it should be used in such a way that it ensures
    success in the world hereafter
  • since wealth has been received from Allah its
    use by Man should also be subject to the
    commandment of Allah

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ISLAMIC BANKING
  • REAL NATURE OF WEALTH AND PROPERTY
  • Allah may command man to give a specified part
    of his wealth to another man.
  • Allah may forbid use of wealth in a particular way

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Hud 87
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OBJECTIVES OF DISTRIBUTION OF WEALTH
  •  
  • Establishment of a practicable Economic system
  • Islam accepts the following thing within a
    certain limits
  • laws of demand and supply
  • motive of personal profit
  • market forces
  • natural relation of employer and employee

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2. Enabling every one to get what is rightfully
due to him- A Elementary level of deserving
wealth Factors of production B Secondary level
of deserving wealth poor In the second verse
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3 Eradicating the Concentration of Wealth
through Prohibition of hoarding, interest,
gambling, speculation, Uqood Fasidah, and
Gharar Holy Quran Says in Al Hashr 7
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  • The Factor of Production in Conventional System
  • Capitalism has four factors of production
  • 1. Capital - the produced means of production"
  • Compensation Interest
  • 2. Land -'natural resources'' (that is to say,
    those things which are being used as means of
    production without having previously undergone
    any process of human production). Compensation
    Rentals
  • 3. Labour -that is to say, any exertion on the
    part of man.
  • Compensation Wages
  • 4. Entrepreneur, or Organization - the fourth
    factor which brings together the other three
    factors, exploits them and bears the risk of
    profit and loss in production.
  • CompensationProfit

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The Factors of Production In Islam
  • 1. Capital That is, those means of production
    which cannot be used in the process of production
    until and unless during this process they are
    either wholly consumed or completely altered in
    form, and which, therefore, cannot be let or
    leased (for example, liquid money or food stuffs
    etc.)
  • Compensation Profit

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  • 2. Land that is, those means of production which
    are so used in the process of production that
    their original and external form remains
    unaltered, and which can hence be let or leased
    (for example, lands, houses, machines etc.).
  • Compensation Rentals
  • 3. Labour -that is, human exertion, whether of
    the bodily organs or of the mind or of the heart.
    This exertion thus includes organization and
    planning too.
  • Compensation Wages

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ISLAMIC BANKING
  • DIFFERENCE BETWEEN CAPITALISM, SOCIALISM AND
    ISLAM
  • CAPATILISM affirms an absolute and unconditional
    right to private property
  • SOCIALISM totally denies the right to private
    property
  • ISLAM admits the right to private property but
    does not consider it to be an absolute and
    unconditional right which can be used to cause
    disorder on earth

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ISLAMIC BANKING
  • RIBA
  • Riba means excess, increase or addition
  • Riba in banking implies any excess compensation
    without due consideration

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First Revelation about Riba
  • 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. (Surah Rome, Verse
    39)

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Second Revelation
  • And for their taking interest even though it was
    forbidden for them, and their wrongful
    appropriation of other peoples' property. We have
    prepared for those among them who reject faith a
    grievous punishment (Surah al-Nisa', verse 161)

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Third Revelation
  • Believers! Do not swallow riba, doubled and
    redoubled, and be mindful of Allah so that you
    may attain true success ( Al Imran, Ayat 130)

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Fourth Revelation
Surah Al Baqarah Verses 274-281
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Those who spend their wealth night and day,
secretly and openly, they have their reward with
their Lord, and there is no fear for them, nor
shall they grieve.Those who take riba (usury or
interest) will not stand but as stands the one
whom the demon has driven crazy by his touch.
That is because they have said Trading is but
like riba. So, whoever receives an advice from
his Lord and stops, he is allowed what has
passed, and his matter is upto Allah. And the
ones who revert back, those are the people of
Fire. There they remain forever.Allah destroys
riba and nourishes charities. And Allah does not
like any sinful disbeliever. Surely, those who
believe and do good deeds, establish Salah and
Zakah have their reward with their Lord, and
there is no fear for them,nor shall they
grieve.O those who believe, fear Allah and give
up what still remains of the riba if you are
believers. But if you don not, then listen to the
declaration of war from Allah and His Messenger.
And if you repent, yours is your principal.
Neither you wrong, nor be wronged.And if there
be one in misery, then deferment till ease. And
that you leave it as alms is far better for you,
if you really know. And be fearful of a day when
you shall be returned to Allah, then everybody
shall be paid, in full, what he has earned. And
they shall not be wronged. (Verses of Surah Al
Baqarah 274-281)
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Prohibition of Riba in Hadith
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The prohibition of Interest is not limited to
Islam, but it is shared by Judaism and
Christianity. Some of the old testaments have
rendered riba as haram (See Exodus 2225,
Leviticus 2535-36, Deutronomy 2320, Psalms
155, Proverbs 288, Nehemiah 57 and Ezakhiel
188,13,17 2212). Agibi Bank was established
circa 700 B.C. in Babylonian and functioned
exclusively on equity basis.
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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Riba-un-Nasiyah or Riba-al-Jahiliya
  • Riba-al-Fadl or Riba-al-Bai

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Riba-un-Nasiyah or Riba-al-Jahiliya
  • that kind of loan where specified repayment
    period and an amount in excess of capital is
    predetermined( Imam Abu Bakr Hassas Razi)

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Riba-un-Nasiyah or Riba-al-Jahiliya
  • all loans that draw interest is riba(Hadith
    quoted by Ali ibn Talib)
  • the loan that draws profit is one of the forms
    of riba(definition from Sahabi Fazala Bin Obaid)

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Riba-un-Nasiyah or Riba-al-Jahiliya
  • real and primary form of riba
  • premium paid to the lender in return for his
    waiting
  • giving or taking of every excess amount in
    exchange of a loan at an agreed rate
    irrespective of whether it is low or high

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Riba-al-Fadl
  • excess taken in exchange of specific commodities
    which are homogeneous
  • legal definition defers in every fiqh

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Hadith prohibiting Riba-al-Fadl
  • sell gold in exchange of equivalent gold
  • sell silver in exchange of equivalent silver
  • sell dates in exchange of equivalent dates
  • sell wheat in exchange of equivalent wheat
  • sell salt in exchange of equivalent salt
  • sell barley in exchange of equivalent barley

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Hadith prohibiting Riba-al-Fadl
  • sell barley in exchange of equivalent barley but
    if a person transacts in excess, it will be riba.
  • However sell gold for silver anyway you please on
    the condition it is hand-to-hand(spot sales) and
    sell barley for date anyway you please on the
    condition it is hand-to-hand(spot sales)

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Imam Abu Hanifa on Riba-al-Fadl
  • commodities must have two common characteristics
  • Weight
  • Volume
  • includes all commodities having weight or volume
    and are being exchanged

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Imam Shafi on Riba-al-Fadl
  • commodities must have two common characteristics
  • be a medium of exchange
  • be edible
  • includes all commodities that are edible or can
    be used as a medium of exchange(currency)

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Imam Maalik on Riba-al-Fadl
  • commodities must have two common characteristics
  • can be preserved
  • be edible
  • includes all commodities that are edible and can
    be preserved

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Imam Ahmad Bin Hanbal on Riba-al-Fadl
  • first citation conforms to the opinion of Imam
    Abu Hanifa
  • second citation conforms to the opinion of Imam
    Shafi
  • third citation includes three characteristics at
    the same time i.e. edible, weight and volume

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ISLAMIC BANKING
  • CLASSIFICATION OF RIBA
  • Present day Islamic scholars on Riba-al-Fadl
  • if two characteristics i.e. weight and use as
    medium of exchange is present then the following
    transactions are not allowed
  • a deferred sale of goods having weight and
    homogeneous nature
  • a sale of unequal goods having weight and
    homogeneous nature

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • First law
  • Exchange of any of the six commodities with
    itself but differing in quality, is allowed only
    under certain conditions

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • First Law
  • CONDITIONS OF EXCHANGE
  • Any difference in value/quality should be ignored
  • The commodities should be exchanged in equal
    amounts (equal weight and volume).
  • No of direct exchange of commodities of the same
    kind
  • A person should sell his commodity against cash
    at the market value and buy someone elses
    commodity in exchange of cash proceeds at the
    market value.

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • Second law
  • Exchange of a product with its raw material is
    allowed under certain conditions

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • Second law
  • Exchange of a product with its raw material is
    allowed under certain conditions

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • Second Law
  • CONDITIONS OF EXCHANGE
  • If the characteristics of the product has been
    totally changed by the industry, then different
    amounts can be exchanged.
  • If little difference has been made
  • either the exchange should be in equal weights
  • or one of the commodities should be sold in the
    market and the cash proceeds used to buy the then
    one.

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ISLAMIC BANKING
  • THE LAWS OF RIBA AL FADL
  • Third Law
  • Exchange of any of the six commodities with one
    another is allowed in unequal amounts but the
    payment should not be deferred
  • Provided that the general conditions of a sale
    contract are fulfilled

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ISLAMIC BANKING
  • TYPES OF RIBA
  • Riba al Nasiah is classified in two types
  • Sood-e-Mufrad( Simple Interest)
  • interest calculated only on the initial
    investment
  • Sood-e-Murakkab(Compound Interest)
  • reinvestment of each interest payment on money
    invested to earn more interest

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ISLAMIC BANKING
  • TYPES OF RIBA
  • Quranic verses on absolute prohibition of Riba
  • O believers fear God and give up the interest
    that remains outstanding (i.e. whether it is
    simple interest or multiplied interest) if you
    are believers (Surah Al-Baqrah, verse 278)

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ISLAMIC BANKING
  • TYPES OF RIBA
  • Quranic verses on absolute prohibition of Riba
  • If you do not do so then be sure of being at war
    with God and His Messenger. But if you repent,
    you can have your principal( only not any kind of
    interest or premium). Neither should you commit
    injustice nor should you be subjected to it
    (Surah Al-Baqrah, verse 278)

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ISLAMIC BANKING
  • TYPES OF RIBA
  • Tijarti Sood(Commercial interest)
  • interest paid on loan taken for productive and
    profitable purpose
  • Sarfi Sood (Usury)
  • interest paid on loan taken for personal need and
    expenses

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Arguments given to Justify Commercial
Interest a Commercial Interest is charged from
wealthy persons whereas usury is charged from the
poor. It does not exploit the poor while
consumption interest or usury exploit the
poor. Ans. Validity of a transaction is not based
on the financial status of a party, like sale,
leasing etc. Law does not differentiate between
poor and wealthy in crimes like bribery, theft
etc. Further, Commercial Interest also exploit
the poor.
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b It was not in the prevalent modern shape in
those days. Ans. When some thing is prohibited,
it is not directed to a particular form of it but
it covers every form which comes in its general
sense, e.g. gambling and pork, liquor and
adultery are as Haram now as they were in
Jahiliyyah
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c The Commercial interest was not in vogue in
Arab Ans. History shows that it was in vogue. d
Doctrine of necessity and wisdom requires to
allow it Ans. (i) It does not, it is not at all a
necessity in Shariah. Even from economic point of
view, the modern interest has brought more harm
to the humanity than the premature forms of
usury. (ii) The Principles of Shariah are
binding, even though their wisdom is not visible
in a particular transaction. They are based on
Illat.
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ISLAMIC BANKING
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An Nur 33
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Yaseen 71
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Az Zukhruf 32
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Al Maarij 24-25
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Al Anaam 141
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Al Hashr 7
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