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INTEREST FREE BANKING .

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GROUP MEMBERS

WALEED MUDASSAR HAMZA JAVED

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Introduction … “Interest Free Banking” is a fundamental concept derived from the Islamic form of banking. It operates with the primitive professional and ethical standards that exclude the “Muslims” from paying or receiving any kind of interest. There are a lot of financial tools introduced by the Islamic financial bodies to fulfill these business or profit making requirements. For a clear understanding, they deal with equity financing rather then reflecting on debt financing.

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In addition, as a replacement of fixed interest rates on the savings account, these interest free banks give a small percentage of return on deposits on an annual basis.

Introduction… Banking and finance as an integral part of an Islamic economic system

Spread all over the world

Over 50-75 countries

About 250 Islamic financial institutions

$200-$800 billion in size .

Average annual growth of 15%

We find a greater indulgence of banks in our local communities. Looking at this inevitability, interest free banking came into existence to serve all the business needs of Muslims and in turn taking utmost care of the rules of Islam. The interest free banking works on some simple rules in the Quran and those who do not follow these rules or deviates from following them correctly is termed as “non-Islamic”.

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Basic Principle The basic principle that helps a person become debt free at the earliest can be called the most outstanding feature of these kinds of banks. The interest free banks work with the rule that the lender must have a share from the profits or the losses that occur to the borrower or the borrowing enterprise. Thus it is mandatory to share the profits as well as the losses. The lender and the borrower are more of partners and that plays a major role in characterizing the social order. In turn it helps remove the discrimination between the modern day “rich” and the “poor”. The traditional banking system on the other hand collects huge amounts of interest from the borrower regardless of the success or the failure issue. It places a huge amount of risk on any entity that is borrowing the money and is proved to be merciless with Islam.

How Did It All Start? It is a modern banking style Egypt (1963), Malaysia (1963) and Pakistan (1965)early experimentation. Malaysia stands out--Pakistan and Egypt left behind The Middle East as a hub of Islamic Finance.

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Islamic financial transaction terminologies Bai' a-inah (sale and buy-back agreement)

Hibah( gift) Ijarah (leasing)

Bai' bithaman ajil (deferred payment sale) Bai muajjal (credit sale) Mudarabah (profit sharing) Murabahah (cost plus) Musawamah .Bai salam

•Ijarah thumma al bai' (hire purchase) •Ijarah-wal-iqtinaMusharakah (joint

venture) Qard hassan/ Qardul hassan (good loan/benevolent loan) Sukuk (Islamic bonds) Wadiah (safekeeping)

Takaful (Islamic insurance) Wakalah (power of attorney)

An Example! I need £100,000 for a business venture for a period of one year. I have got two options 1. Borrowing at a rate of interest of 7% 2. Going Islamic way First is not acceptable to my Shariah Advisor What about the second?

Option 2 My advisor issues securities worth £100,000 on my house The securities are sold to a third party with a buy-back clause of one year ble? a t p The buyer then rents the house to me for one cce a t i year on a rental equivalent to 7% of the stocks’ Is in o … d worth (£100,000) S e w YE t a h is w ion!!! s i h T i sa t t i r u sec .

What ’ s The Difference? Option 1 involves Riba while Option 2 involves Trade

Options 1 And 2 Compared Option 1 Pure monetary phenomenon Return on money – Riba Straight forward Cheap But Are They Really Different?

1 O p t i o n oney on m Return

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Option 2 Trade of a physical item is involved Return on investment in property – rental Involves some sort of innovation Costly

n 2 Optio on Return rities secu

Future Of Islamic Finance Not much different from conventional finance Need for re-direction Need for genuine innovation Future lies in Islamic homelands and not in the Western financial centres .

Advantages & Disadvantages ADVANTAGES Islamic finance does not allow creating new risks to profit thereby. It is not a closed system. It has no regional, ethnic or class affiliations. It tries to make the transactions as risk free as possible. .

D IS A D V A N T A G E S N o t m u ch d iffe re n t fro m co n ve n tio n a l fin a n ce

Under the ruling of the Federal Shariah Court, the financial experts are endeavoring to switch over from the existing interest based system to the Ribah free financial system in Pakistan. Two fully-fledged Islamic banks, one local and one foreign-based have opened 23 branches recently, while nine conventional banks including Standard Chartered and AG Zurich have 25 branches across the country. PAKISTAN:

AL-Faisal Investment Bank Ltd., Islamabad Al-Taufeeq Investment Bank Ltd., Lahore (Dila AL-Barakah Group) Lahore Faisal Bank Ltd National Bank Trust (NIT) Shamil Bank, Karachi

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Conclusion

With the rules that help humanity, Interest free banking is on its way to leave a long lasting impact on the financial institutions around the world. .