1 WHY DO WE NEED TO STUDY ISLAMIC BANKING ? Objectives 2 1. To refer Qura’nic verses describing “Riba” 2. To refer Qura’nic verses describing “Qard” 3. To refer Hadith defining “Riba” 4. To describe plain understanding regarding “Qard” in the light of referred qura’nic verses & hadiths. 5. To describe “Qard” based conventional banking practices 6. To refer Qura’nic verses describing “Tijarah” 7. To refer Qura’nic verse describing “Dayn”/ debt. 8. To describe difference between “Qard” and “Tijarah” in the light of referred qura’nic verses. 9. To describe how “Dayn” & “Tijarah” concepts used to establish six pillars as basis for practicing Islamic financing transactions. 11. To describe permissibility of Islamic Banking practices by OIC Fiqh Academy. To describe permissibility of Islamic Banking under Pakistani laws of Banking. 12. To describe international standardization for practicing Islamic modes of financing. 3 َ َث ُ َّم َجعَ ْلن علَى ش َِريعَ ٍة ِم َن ْاْل َ ْم ِر فَات َّ ِب ْع َها َو ََل َ اك َ ين ََل يَ ْعلَ ُم َ تَت َّ ِب ْع أ َ ْه َواء الَّ ِذ ون Then We have put you on a certain way of the Matter (i.e. the religion); so follow it, and do not follow the desires of those who do not know. Verse 18 Surah –Al-Jathiyah Why we need to understand Islamic Banking Banking as defined in The Banking Companies Ordinance 1962, means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise; Based on this definition, lending of money is done by a banking company to earn interest. However, there are verses of Holy Quran which do not allow this practice. 4 Qard based verses 5 ۖ عش ََر نَ ِقيبًا َولَقَ ْد أ َ َخذَ ه َ َّللاُ ِميثَاقَ بَ ِني ِإ ْس َرا ِئي َل َوبَعَثْنَا ِم ْن ُه ُم اثْن َْي ص ََلة َ َوآت َ ْيت ُ ُم ه الز َكاة َ َوآ َم ْنت ُ ْم َوقَا َل ه َّللاُ ِإنِي َمعَ ُك ْم ۖ لَئِ ْن أَقَ ْمت ُ ُم ال ه ع ْن ُك ْم ْ ع هز ْرت ُ ُمو ُه ْم َوأ َ ْق َر ً َّللا قَ ْر ُ ِب ُر َ سنًا ََل ُ َك ِف َر هن َ س ِلي َو َ ضا َح َ ضت ُ ُم ه ٍ س ِيئَاتِ ُك ْم َو ََل ُ ْد ِخلَنه ُك ْم َجنها ار ۚ فَ َم ْن َكفَ َر بَ ْع َد ُ ت ت َ ْج ِري ِم ْن ت َ ْحتِ َها ْاَل َ ْن َه َ َٰ ُ َ ْ َ َ ه ْ س ِبي ِل ل ض د ق ف م ك ن م ك ل ذ َ س َوا َء ال ه ِ ِ َ َ ْ Allah has made the Children of Israel take a pledge. We appointed twelve chiefs from among them. Allah said, .I am surely with you. If you establish Salah, and pay Zakah, and believe in My Messengers, and hold them in reverence, and advance to Allah a goodly loan, I shall certainly write off your evil deeds, and I shall certainly admit you into Gardens beneath which rivers flow. So, whoever from you disbelieves after that has lost the straight path.. Verse 12 Surah-Al-Maidah Qard based verses 6 ف ِ ص ِدقَا َ ِص ِدق ً َّللا قَ ْر ُ ت َوأ َ ْق َر ين َو ْال ُم ه ِإ هن ْال ُم ه ُ ع َ ُسنًا ي َ ضا َ ضا َح َ ضوا ه لَ ُه ْم َولَ ُه ْم أ َ ْج ٌر َك ِري ٌم Surely those men who give Sadaqah (alms) and those women who give Sadaqah and have advanced a good loan to Allah, for them it will be multiplied, and for them there is a noble reward. Verse 18 Surah-Al-Hadid Qard based verses 7 ً َّللا قَ ْر ُ ِإ ْن ت ُ ْق ِر ضا ِع ْفهُ لَ ُك ْم َويَ ْغ ِف ْر لَ ُك ْم ۚ َو ه َ ُسنًا ي َ ضا َح َُّللا َ ضوا ه ور َح ِلي ٌم َ ٌ ش ُك If you advance a good loan to Allah, He will multiply it for you, and will forgive you. And Allah is Appreciative, Forbearing, Verse 17 Surah-Al-Taghabn 8 Qard based verses صفَهُ َوثُلُثَهُ ِإ هن َرب َهك يَ ْعلَ ُم أَنه َك تَقُو ُم أ َ ْدن ََٰى ِم ْن ثُلُثَي ِ الله ْي ِل َونِ ْ َو َ ع ِل َم أ َ ْن لَ ْن طا ِئفَةٌ ِم َن اله ِذ َ ين َمعَ َك ۚ َو ه ار ۚ َ َّللاُ يُقَ ِد ُر الله ْي َل َوالنه َه َ ع ِل َم أ َ ْن علَ ْي ُك ْم ۖ فَا ْق َر ُءوا َما ت َيَ ه ت ُ ْح ُ آن ۚ َ اب َ صوهُ فَت َ َ س َر ِم َن ْالقُ ْر ِ سيَ ُك ُ ون ون يَ ْ ض يَ ْبتَغُ َ ض ِربُ َ ض َٰى ۙ َوآخ َُر َ ون فِي ْاَل َ ْر ِ ون ِم ْن ُك ْم َم ْر َ َ س ِبي ِل ه ِ ض ِل ه ِ س َر ِم ْن فَ ْ ون يُقَا ِتلُ َ َّللا ۙ َوآخ َُر َ َّللا ۖ فَا ْق َر ُءوا َما تَيَ ه ون ِفي َ ص ََلة َ َوآتُوا ه سنًا ۚ َّللا قَ ْر ً الز َكاة َ َوأ َ ْق ِر ُ ضوا َه ِم ْنهُ ۚ َوأَقِي ُموا ال ه ضا َح َ َّللا ُه َو َخي ًْرا َوأ َ ْع َ َو َما تُقَ ِد ُموا َِل َ ْنفُ ِس ُك ْم ِم ْن َخي ٍْر ت َ ِجدُوهُ ِع ْن َد ه ِ ظ َم َّللا َ ور َر ِحي ٌم َّللاَ ۖ ِإ هن َه أ َ ْج ًرا ۚ َوا ْست َ ْغ ِف ُروا ه غفُ ٌ Verse 20 Surah-Al-Muzammil : Qard based verses 9 Your Lord knows that you stand (in prayer) for nearly two thirds of the night, and (at times) for half of it, and (at times) for one third of it, and (so do) a group of those who are with you. And Allah measures the night and the day. He knows that you (O Muslims,) cannot do it in regular way; therefore He turned to you in mercy. Now, recite as much of the Qur‘an as is easy (for you). He knows that some of you may be sick, and others traveling in the land, seeking the grace of Allah, and yet others fighting in Allah‘s way. Therefore, recite as much of it as is easy. And establish Salah, and pay Zakah, and advance to Allah a goodly loan. And whatever good you will send ahead for your own-selves, you will find it with Allah much better in condition, and much greater in reward. And seek forgiveness from Allah. Indeed Allah is Most-Forgiving, VeryMerciful. Verse 20 Surah-Al-Muzammil : Verse on “Riba” َوأ َ َح هل َّللاُ ْالبَ ْي َع َو َح هر َم ا ِلربَا Allah has permitted sale, and prohibited riba Part of verse 275 Surah Al-Baqara 10 Riba based verses 11 َّللا َو َما آت َ ْيتُم ِمن ِ َّ اس فَ ََل يَ ْربُوا ِعن َد ِ ََّو َما آت َ ْيتُم ِمن ِربًا ِليَ ْربُ َواْ فِي أ َ ْم َوا ِل الن ْ َّللا فَأ ُ ْولَ ِئ َك ُه ُم ا ْل ُم َ ُُض ِع َ َز َكا ٍة ت ُ ِريد O ون ِ َّ َُون َو ْجه Whatever Riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah; and whatever Zakah you give, seeking Allah‘s pleasure with it, (it is multiplied by Allah, and) it is such people who multiply (their wealth in real terms). Verse 39 Surah-Ar-Rum Riba based verses ص ِ ِّد ِه ٍْم عَن َ ٍَو ِب ٍ ِ أ َ ْم َوا ٍَل النَّا س 12 ُ فَ ِب ٍعلٍَْي ِه ٍْم َط ِيِّبَاتٍ أ ُ ِحلَّتٍْ لَ ُه ْم ٍَ ن الَّ ِذ ٍَ ظ ْلمٍ ِ ِّم َ ين َهادُوٍاْ َح َّر ْمنَا ع ْن ٍهُ َوأ َ ْك ِل ِه ٍْم ٍِّ س ِبي ٍِل َ ْالربَا َوقَ ٍْد نُ ُهوٍا َ ِّ ِ َوأ َ ْخ ِذ ِه ٍُمO يرا ً ِللاِ َكث O ما ٍَ اط ٍِل َوأ َ ْعت َ ْدنَا ِل ْلكَا ِف ِر َ ين ِم ْن ُه ٍْم ِ َِبا ْلب ً عذَابًا أ َ ِلي So, because of the transgression of those who became Jews, We prohibited for them good things which were made lawful for them earlier and for their preventing (people), very often, from the way of Allah, and for their charging Riba (usury or interest) while they were forbidden from it, and for their devouring of the properties of the people by false means. We have prepared, for the disbelievers among them, a painful punishment. Verse 160-161 Surah-e-AlNisa Riba based verses 13 ْ َ الربَا أ َ ضعَافًا ُّم َ يَا أَيُّ َها الَّ ِذ َّللا لَعَلَّ ُك ْم َ ضا ِ ْين آ َمنُواْ َلَ تَأ ْ ُكلُوا َ ْعَُةً َواتَّقُوا َ ت ُ ُْ ِل ُح O ون O you who believe, do not eat up the amounts acquired through Riba (interest), doubled and multiplied. Fear Allah, so that you may be successful. Verse 130 Al-e-Imran Riba based verses 14 ُ َّون ِإَلَّ َك َما يَقُو ُم الَّ ِذي يَت َ َخب َ الربَا َلَ يَقُو ُم َ ُين يَأ ْ ُكل َ الَّ ِذ ُ ش ْي َط ان ِم َن َّ طهُ ال ِ ون الربَا ِ الربَا َوأ َ َح َّل َّللاُ ا ْلبَ ْي َع َو َح َّر َم ِ ا ْل َم ِس َذ ِل َك ِبأَنَّ ُه ْم قَالُواْ ِإنَّ َما ا ْلبَ ْي ُع ِمثْ ُل َّللا َو َم ْن ِ ف َوأ َ ْم ُرهُ ِإلَى َ فَ َمن َجا َءهُ َم ْو ِع َظةٌ ِمن َّر ِب ِه فَانت َ َهى فَلَهُ َما َ َ سل َ اب النَّ ِار ُه ْم ِفي َها َخا ِلد O ُون ْ َ عَا َد فَأ ُ ْولَـ ِئ َك أ ُ ص َح 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: .Sale is but like riba.‘‘, while Allah has permitted sale, and prohibited riba. So, whoever receives an advice from his Lord and desists (from indulging in riba), then what has passed is allowed for him, and his matter is up to Allah. As for the ones who revert back, those are the people of Fire. There they will remain forever. Verse 275 Al-Baqarah Riba based verses 15 O ب ُك َّل َكَُّ ٍار أ َثِ ٍيم ِ ص َدقَا َّ ق َّللاُ ا ْل ِربَا َويُ ْر ِبي ال ُ يَ ْم َح ُّ ت َوَّللاُ َلَ يُ ِح Allah destroys riba and nourishes charities, and Allah does not like any sinful disbeliever. Verse 276 Al-Baqara َ ِالربَا ِإن كُنتُم ُّم ْمْؤ ِمن َ يَا أَيُّ َها الَّ ِذ O ين ِ ي ِم َن َ َّللا َو َذ ُرواْ َما بَ ِق َ ْين آ َمنُواْ اتَّقُوا O you who believe, fear Allah and give up what still remains of riba, if you are believers. Verse 278 Al-Baqara Riba based verses 16 وس ِ ب ِم َن ُ َّللا َو َر ٍ فَ ِإن لَّ ْم ت َ ُْعَلُواْ فَأ ْ َذنُواْ ِب َح ْر ُ سو ِل ِه َو ِإن ت ُ ْبت ُ ْم فَلَ ُك ْم ُر ُمْؤ َ ون َوَلَ ت ُ ْظلَ ُم َ أ َ ْم َوا ِل ُك ْم َلَ ت َ ْظ ِل ُم O ون But if you do not (give it up), then listen to the declaration of war from Allah and His Messenger. However, If you repent, yours is your principal. Neither wrong, nor be wronged. Verse 279 Al-Baqara َ َو ِإن َك ص َّدقُواْ َخ ْي ٌر لَّ ُك ْم ِإن كُنت ُ ْم ُ ان ذُو َ َ س َر ٍة َوأَن ت ْ ع َ س َر ٍة فَنَ ِظ َرةٌ ِإلَى َم ْي َ ت َ ْعلَ ُم O ون If there is one in misery, then (the creditor should allow) deferment till (his) ease, and that you forgo it as alms is much better for you, if you really know. Verse 280 Al-Baqara Riba based verses 17 َسبَتْ َو ُه ْم َل َ َُواتَّقُواْ يَ ْو ًما ت ُ ْر َجع ِ ون فِي ِه ِإلَى َ َّللا ث ُ َّم ت ُ َوفَّى ُك ُّل نَ ُْ ٍس َّما َك َ يُ ْظلَ ُم O ون Be fearful of a day when you shall be returned to Allah, then every person shall be paid, in full, what he has earned, and they shall not be wronged. Verse 281 Al-Baqara Hadith to define Riba “Every loan that draws any premium is Riba”. [Hadith is reported by Hazrat Harith Ibn Abi Usamah in his Musnad (See Supreme Court Judgment December 23, 1999)] 18 Evidence of Saving from Quran 19 ِ هت ه ُ بَ ِقي يظ َ َِّللا َخي ٌْر لَ ُك ْم ِإ ْن ُك ْنت ُ ْم ُمؤْ ِمن ٍ ين ۚ َو َما أَنَا َعلَ ْي ُك ْم ِب َح ِف What remains with Allah is better for you if you are believers, and I am not a keeper over you. Verse 86 Surah-Hud Verse on “Tijarah” َوأ َ َح هل َّللاُ ْالبَ ْي َع َو َح هر َم ا ِلربَا Allah has permitted sale, and prohibited riba Part of verse 275 Surah Al-Baqara 20 Verse on “Tijarah” 21 َ اط ِل ِإَلَّ أَن تَك َ يَا أَيُّ َها الَّ ِذ ُون ِ َين آ َمنُواْ َلَ تَأ ْ ُكلُواْ أ َ ْم َوالَ ُك ْم بَ ْينَ ُك ْم ِبا ْلب َ ُ َ َّللا َك َّ ُ ان ِب ُك ْم ن إ م ك س ُ ن اض ِمن ُك ْم َوَلَ ت َ ْقتُلُواْ أ َ ٍ ارةً عَن ت َ َر َ تِ َج ْ ِ َ َر ِحي ًما O you who believe, do not devour each other‘s property by false means, unless it is trade conducted with your mutual consent. Do not kill one another. Indeed, Allah has been Very-Merciful to you. Part of verse 29 Surah Al-Nisa’ Verse on “Dayn” 22 س ًّمى فَا ْكتُبُوهُ َو ْليَ ْكتُب به ْينَ ُك ْم َ يَاأَيُّ َها الهذِينَ آ َمنُواْ ِإذَا ت َ َدايَنتُم ِب َدي ٍْن ِإلَى أ َ َج ٍل ُّم ب ِب ْالعَ ْد ِل ٌ َكا ِت O you who believe, when you transact a debt payable at a specified time, put it in writing, and let a scribe write it between you with fairness. Part of verse 282 Surah Al-Baqara Difference between Qard and Dayn 23 س ًّمى فَا ْكتُبُوهُ َو ْليَ ْكتُب به ْينَ ُك ْم َ يَاأَيُّ َها اله ِذ َ ين آ َمنُواْ ِإ َذا ت َ َدايَنتُم ِب َدي ٍْن ِإلَى أ َ َج ٍل ُّم ب ِب ْالعَ ْد ِل ٌ َِكات O you who believe, when you transact a debt payable at a specified time, put it in writing, and let a scribe write it between you with fairness. Part of Verse 282 Surah-AlBaqarah Difference between Qard and Dayn 24 َ اط ِل ِإَلَّ أ َن تَك َ يَا أَيُّ َها الَّ ِذ ُون ِ َين آ َمنُواْ َلَ تَأ ْ ُكلُواْ أ َ ْم َوالَ ُك ْم بَ ْينَ ُك ْم ِبا ْلب َ س ُك ْم ِإ َّن َّللاَ َك ان ِب ُك ْم َر ِحي ًما َ ُُاض ِمن ُك ْم َوَلَ ت َ ْقتُلُواْ أَن ٍ ارةً عَن ت َ َر َ ِت َج O you who believe, do not devour each other‘s property by false means, unless it is trade conducted with your mutual consent. Do not kill one another. Indeed, Allah has been VeryMerciful to you. Part of verse 29 Surah Al-Nisa’ Permissibility of Islamic Banking 25 by International Islamic Fiqh Academy How Islamic Fiqh Academy established? Resolution No.8/3-C, (I.S.) adopted by the Third Islamic Summit Conference, held in Makkah Al-Mukarramah and Taif called for the establishment of an Islamic Fiqh Academy (Jurisprudence) Academy. Permissibility of Islamic Banking 26 by International Islamic Fiqh Academy Objectives of Islamic Fiqh Academy: 1. To achieve the theoretical and practical unity of the Islamic Ummah by striving to have Man conform his conduct to the principles of the Islamic Sharia at the individual, social as well as international levels. 2. To strengthen the link of the Muslim community with the Islamic faith. 3. To draw inspiration from the Islamic Sharia, to study contemporary problems from the Sharia point of view and to try to find the solutions in conformity with the Sharia through an authentic interpretation of its content. 27 Resolution No. 10 (10/2) concerning transactions with banks dealing with interest and dire need for financial transactions with Islamic financial institutions based on Shari’ah rulings Bismillah-hiRahman NirRaheem Praise be to Allah, the Lord of the Universe, and Prayers and Blessings be upon Sayyidina Muhammad, the last of the Prophets, and upon his Family and his Companions Passed by the Council of the Islamic Fiqh Academy, during its second session from 10 to 16 Rabiul Thani 1406 H (22-28 December 1985); Having reviewed numerous studies on modern financial 28 transactions; and thoroughly discussing all aspects thereof, because of its deviation from directives of the Holy Book, which clearly prohibits Riba (usury), be it total or partial, and commands us to repent from it, and permits us to recover only the principal of loans, no more and no less, whether it is a big amount or a small one, and warns us of a war waged by Allah and His Prophet against usurers; RESOLVES First: Any increase or interest on a debt which has matured, in return for an extension of the maturity date, in case the borrower is unable to pay and the increase (or interest) on the loan at the inception of its agreement, are both forms of usury which is prohibited under Shari'ah. Second: The alternative which guarantees the cash flow and financial support for the commercial activity in a form acceptable to Islam, is to trade with each other in conformity with Shari'a principles. 29 to Third: The Academy invites Governments of Islamic countries encourage the financial institutions which operate in accordance with the principles of Islamic Shari'ah, and to enable them to operate in every Muslim country, so that they may respond to the needs of Muslims and a Muslim does not have to live in contradiction between the demands of his faith and the realities of life. Pillars of Islamic Banking practices 30 1st • No financing allowed of activities that are prohibited by Shari’ah. Thus pork & wine can not be financed. 2nd • Prohibition of Interest (Riba). Thus Islamic Banking institutions will never execute any financing transactions, based on lending & borrowing “money”. 3rd • Risk taking/sharing by the financier, being the owner of assets/commodities based on Hadith Mubarakah. 4th • Sanctity of contracts, permissible under shari’ah rulings. Thus only “Tijarah” based contracts will be extended by Islamic Banking Institutions to earn “halal” profits. 5th • Materiality/economic purpose. Thus Islamic Banking Institutions will have to make sure that their transactions do serve “Economic purpose”. 6th • Fairness/no exploitation. Thus parties to the contracts will not enter any transaction which has any element of “Gharar-e-Kaseer / Huge uncertainty”. 31 Permissibility of Islamic Banking under Banking Companies Ordinance 1962 In 1984, sub section of section 7(I) to Banking Companies Ordinance, 1962, was inserted in the following manner to allow financial transactions based on Shari’ah rulings under banking laws of Pakistan. Purchase or acquisition in the normal course of its banking business of any property, including commodities, patents, designs, trademarks and copyrights with or without buy-back arrangements by the seller, or for sale in the form of hire-purchase or on deferred payment basis with mark-up or for leasing or licensing or for rent sharing or for any other mode of financing; Over the globe standardisation of Islamic Banking practices 32 The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic international autonomous not-forprofit corporate body that prepares Shari'ah standards accounting, auditing, governance and ethics for Islamic financial institutions and the industry. AAOIFI was established in accordance with the Agreement of Association which was signed by Islamic financial institutions on 1 Safar, 1410H corresponding to 26 February, 1990 in Algiers. Then, it was registered on 11 Ramadan 1411 corresponding to 27 March, 1991 in the State of Bahrain. Over the globe standardisation of Islamic Banking practices 33 As an independent international organization, AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide. AAOIFI has gained assuring support for the implementation of its standards, which are now adopted in the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s shari’ah standards. Establishment of Islamic Banking Department at State Bank of Pakistan 34 Alhamdulillah, Islamic Banking Department was established on 15th September, 2003 and has been entrusted with the task of promoting & developing the Shari’ah Compliant Islamic Banking as a parallel and compatible banking system in the country. Islamic Banking is a high priority area for State Bank of Pakistan. Steps are being taken to make Islamic banking industry in Pakistan robust enough to offer a viable alternative to conventional banking, should the market decide that Pakistan should have an exclusively Islamic banking system in the country. State Bank of Pakistan wants to develop a progressive and sound Islamic banking system that is in line and compatible with the global financial sector, providing innovative Shari’ah compliant products and services so as to achieve equitable economic growth.