Basics of Islamic Banking in Pakistan
Introduction of Participants
- Have you participated in any Islamic banking Course?
The core objective of this course is to equip participants with basics knowledge, concepts and practices of Islamic Banking in connection to HBL Islamic.
The participants are expected to understand and satisfy customer queries regarding Islamic Banking after attending this course.
Introduction of Course (Table of Contents for Islamic Banking in Pakistan)
- Introduction to Islamic Banking
- Shariah basis of Islamic Banking
- Modes of Deposits in Islamic Banking
- Profit Distribution Mechanism
HBL Islamic Banking – HBL Islamic – A Window Model of Islamic Banking in Pakistan
Three options available as per SBP guidelines:
- Full Fledged Islamic Bank
Formation of the Shariah Board is mandatory for any Islamic Bank for effective supervision and guidance according to the Shariah principles.
State Bank of Pakistan requires at least three Shariah Scholars to form the Shariah Board in any Islamic Bank.
The following three Learned Scholars are serving in HBL Islamic’s Shariah Baord
- Dr. Muhammad Zubair Usmani (Chairman Shariah Board)
- Dr. Ejaz Ahmed Samadani (Member Shariah Board)
- Mufti Muhammad Yahya Asim (Resident Shariah Board Member)
Monitoring (Islamic Banking in Pakistan)
In addition to Shariah Board the following monitoring arms are keeping a continuous watch on the Shariah Compliance environment.
- Shariah Compliance Department
- Internal Shariah Audit
- SBP Shariah Inspection
- Shariah Inspection 2.External Shariah Audit
What is Islamic Banking?
Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah.
In other word, Islamic banking refers to Shariah compliant banking which does not contain any element repugnant to Shariah ruling and it is in line with Shariah guidelines.
Importance of Banking
- Banking is a very important sector of the modern day economy.
- Provides an investment opportunity to the household with surplus capital in terms of returns and security.
- Provides an opportunity to Small and Large businesses & Governments to finance their projects/activities through obtaining surplus funds.
Importance of Income Purification
Prophet S.A.W said: A body which has been nourished by unlawful thing shall not enter Paradise (Tibrani)
Prophet S.A.W said, “O Ka’b bin Ujrah! There is no flesh raised that sprouts from the unlawful except that the Fire is more appropriate for it.‘ (Tirmizi)
Importance of Income Purification
The Messenger of Allah (s.a.w) said: “The feet of the son of Adam shall not move from before his Lord on the Day f Judgment, until he is asked about five things: about his life and what he did with it, about his youth and what he wore it out in, about his wealth and how he earned it and spent it upon, and what he did with what he knew.“ (Tirmizi)
Purifying the source of ones’ nourishment is one of the important reasons for the acceptance of supplications by Allah.
Concept of Taharat/Nijasat & Hillat/ Hurmat.
How HBL Islamic works (Islamic Banking in Pakistan)
- Separate Account Types / Tagging in MISYS
- Separate Profit Distribution Machanism
- Demarcated Operations department
- Separate Islamic Treasury
- Demarcated Credit Administration
- Demarcated Risk Management
- Separate Corporate, Commercial & SME departments
However, HBL Islamic doesn’t have a separate Legal standing.
Some Major Shariah issues in Branches
- Account opening forms (Centralised)
- Prize bonds
- Collection Accounts
- Un-approved products
- Guarantee of Profit rates
- Weightage Sheet & Historical Profit rates and ISOBC
- Untrained Staff
Shariah Defined (Islamic Banking in Pakistan)
Lexical Meaning – Plain Way
Technical Meaning – The Divine Law, Islamic Jurisprudence
Shariah is synonym to Islam, which is the entire body of teachings revealed to the Prophet (SAW) in the form of the Holy Quran and the Sunnah or derived from them by the Shari’a scholars.
There are some terminologies pertain to this concept such as Share ((شارع, Shariee (شرعی) , Mashro(مشروع)
Sources of Shariah مآخذ شریعہ
Primary Sources بنیادی مآخذ §The Holy Quran §Sunnah
Secondary Sources ثانوی مآخذ §Ijma Qiyas
Basic Shariah Teachings or Teachings of Shariah
- Shariah guides human beings in every walk of life and provides the set of rules which absolutely fulfil their needs.
- For the welfare of human beings, Shariah teaches them what should do and what should not do in all areas of life.
- Shariah teachings contain of two basic categories; Aqayed and A’amal
A perfect combination is required in Islam
Teaching Approach of Shariah
Shariah Rulings for Ibada’at and Muamla’at
According to the rules of Shari’a all methods of Ibaada’at are forbidden except those that are described by Allah and His Prophet
However, all Muamala’at are allowed except those made Haram/forbidden by Allah and His Prophet.
It means that in Muamala’at Islamic teachings almost focus on describing Prohibitions/Don’ts and lets followers do their activities according to their trend till they keep avoiding the Prohibitions therefore, if Haram elements of any financial transaction are removed it becomes permissible and Shariah compliant.
Some Misconceptions in Islamic Banking in Pakistan
Importance of Wahi (Revelation)
Shari’a rulings are based on their process flows not on their end results.
Sharia rulings are based on Illat (Effective Reasons) not on Hikmat (Wisdoms/benefits).
Meanings of Shariah Compliant/Jaiz/Islamic.
Fundamental Prohibitions of Shariah (Mamnua’at/Mahzora’at/Prohibitions/ Don’ts in trade)
There are few prohibitions that Shariah wants to be avoided in trade.
•Riba / سود (Interest)
•Qimar / جوا (Gambling)
•Gharar /غرر (Uncertainty)
Riba / Interest / Usury /سود
In literal terms, Riba means ”increase or excess”.
In Shariah, Riba means an increase that has no corresponding consideration in an exchange of property for property
Riba in Al-Quran
§يَا أَيُّهَا الَّذِينَ آَمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ ۔
اے ایمان والو! کئی گنا بڑھا چڑھا کر سود مت کھائو، اور اللہ سے ڈرو، تاکہ تمہیں فلاح حاصل ہو۔
those who believe do not eat up riba doubled and redoubled. [A’al-e-‘Imran-130]
§يَا أَيُّهَا الَّذِينَ آَمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِنْ كُنْتُمْ مُؤْمِنِينَ (278) فَإِنْ لَمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِنَ اللَّهِ وَرَسُولِهِ وَإِنْ تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ۔ (279)
اے ایمان والو!اللہ سے ڈرو اور اگر تم واقعی مومن ہو تو سود کا جو حصہ بھی )کسی کے ذمے( باقی رہ گیا ہو اسے چھوڑ دے۔ پھر بھی اگر تم ایسا نہ کرو گے تو اللہ اور اس کے رسول کی طرف سے اعلانِ جنگ سن لو۔ اور اگر تم )سود سے( توبہ کرو تو تمہارا اصل سرمایہ تمہارا حق ہے۔نہ تم کسی پر ظلم کرو، نہ تم پر ظلم کیا جائے۔
O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. [Al- Baqarah-278,279]
Riba in Al- Hadeeth
•عَنْ جَابِرٍرضی اللہ عنہ قَالَ: لَعَنَ رَسُولُ اللَّهِ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ آكِلَ الرِّبَا وَمُؤْكِلَهُ وَكَاتِبَهُ وَشَاهِدَيْهِ وَقَالَ هُمْ سَوَاءٌ ۔
حضرت جابر رضی اللہ عنہ سے روایت ہے کہ آپ صلی اللہ علیہ وسلم نے سود کھانے والے، کھلانے والے، اسکے لکھنے والے اور اس پر گواہ بننے والے پر لعنت فرمائی ہے۔ اور آپ صلی اللہ علیہ وسلم نے فرمایا: یہ سب )گناہ میں (برابر ہیں۔
Prophet (s.a.w.s) cursed one who charges riba, gives it, records it, and witnesses it. He said: ‘they are all equal’ [Al-sahih-lil-Muslim, 2995]
•قَالَ رَسُولُ اللَّهِ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ الرِّبَا سَبْعُونَ حُوبًا أَيْسَرُهَا أَنْ يَنْكِحَ الرَّجُلُ أُمَّهُ ۔
آپ صلی اللہ علیہ وسلم کا ارشاد گرامی ہے کہ سود ستر گناہوں کے برابر ہے، ان میں سب سے ہلکا گناہ یہ ہے کہ آدمی اپنی ماں سے نکاح کرلے۔
The Messenger of Allah peace be upon him said: Interest/usury consists of seventy sins, lesser of them is that a man marries his mother. [Al-sunan libn-e-Majah, 2265]
Types of Riba
The application of the meaning of Riba in Shariah is in two contexts:
- Riba Al-Qard
- Riba Al-Bai
Riba Al-Qard is also called Riba Al-Quran, Riba Al-Jahilya, and Riba Al- Nasiah whereas Riba Al-Bai can be referred to as Riba Al-Hadith, and Riba Al-Fadl.
Harris bin Abi Usama (Rahimahu Allah) quotes a Hadith narrated by Sayyaduna Ali (Radi Allahu anhu)
An increase in any loan is Riba.
The word ‘increase’ in the said Hadith implies any increase or gain which can be either conditional (Mashroot) or understood (Ma’roof) and in whatever form financial or non-financial.
Note that the word ‘Ma’roof’ is also used in various Shariah rulings to imply the meaning of ‘Mashroot’ i.e. understood as conditional.
The term Riba Al-Bai refers to any increase or gain for either party in a transaction of homogenous commodities.
The Hadith defining Riba Al-Bai are Ahadith al-Mashoorh, including the Hadith about the “six-commodities” which is narrated by ‘Ubada bin al-Samit (Radi Allahu anhu) that The Holy Prophet (Salla Allahu Alaihe wasallam) said:
‘’Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.’’ (Tirmidi)
Common Question about Riba
Qimar / Maysir / جوا
The terms ‘Qimar’ and ‘Maysir’ are similar in meaning
and used interchangeably. Qimar, in Urdu language, is
commonly referred to as “جوا /Juwa”.
Allama Hattabi (Rahimahul Allah) defines Al-Qimar in the
following words: ”Qimar is any kind of financial agreement between two people in which either person has the chance to win it all or lose it all.“
Qimar & the Holy Qura’an:
§يَا أَيُّهَا الَّذِينَ آَمَنُوا إِنَّمَا الْخَمْرُ وَالْمَيْسِرُ وَالْأَنْصَابُ وَالْأَزْلَامُ رِجْسٌ مِنْ عَمَلِ الشَّيْطَانِ فَاجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُون ۔
اے ایمان والو!شراب، جوا، بتوں کے تھان، اور جوے کے تیر، یہ سب ناپاک شیطانی کام ہیں، لہذا ان سے بچو، تاکہ تمہیں فلاح حاصل ہو۔
O you who believe! Wine, gambling, altars and divining arrows are filth, made by Satan. Therefor, refrain from it, so that you may be successful. [Al-Maidah, 90]
Qimar & Ahadithes:
§عن عبداللہ بن عمر رضی اللہ عنھما قال: قال رسول اللہ صلی اللہ علیہ وسلم: ان اللہ حرم علی امتی الخمر و المیسر۔ [ مسند احمد6511 ]
حضرت عبد اللہ ابن عمر رضی اللہ عنہما فرماتے ہیں کہ آپ صلی اللہ علیہ وسلم کا ارشاد ہے کہ : بلاشبہ اللہ تعالی نے میری امت پر شراب اور جوے کو حرام قرار دیا ہے۔
Narrated by Hazrat Abdullah ibn Omar RA: The Prophet SAW said, Verily Allah has prohibited wine and gambling for my Ummah
§ان النبی صلی اللہ علیہ وسلم نھی عن الخمر و المیسر و الکوبۃ۔ [سنن ابی داود، 2/351، باب ماجاء فی السکر]
تحقیق کہ آپ صلی اللہ علیہ وسلم نے شراب، جوا اور کوبہ )موسیقی کا آلہ( سے منع فرمایا ہے۔
Verily, Prophet SAW prohibited wine, gambling and al-koobah
Respected Maulana Mufti Muhammad Taqi Usmani (Damat Barakatuhum) writes about the ingredients of Al-Qimar
After contemplating upon the teachings and ruling derived from the Holy Quran, Hadiths, and Islamic Fiqh it is ascertained that Qimar is a product of four ingredients:
- It is a contract of compensation i.e. Aqd Mua’awada;
2. Every person involved in such a kind of contract puts his entire stake at risk of complete loss;
3. The chance of acquiring profit through this gamble is contingent upon an event which may or may not take place;
4. The status of the money at stake is uncertain and at risk: either it will be completely lost or it will pull money towards it;
(Buhos Fi al-Qadaya al-Faqiha al-Muasarah)
Gharar / Uncertainty / Ambiguity / غرر :
In Literal terms, Gharar means to cheat /deceive to lure/entice’ and also risk, danger, hazard.
In Shariah Context, Gharar is “the outcome of which is uncertain or ambiguous.”
For example: 1.Sale of fish in water, birds in the air (whose acquisition is in doubt) 2.A fetus in the womb 3.Fruits of trees at the beginning of season when their quality cannot be established
Gharar & the Holy Qura’an
§ يَا أَيُّهَا الَّذِينَ آَمَنُوا لَا تَأْكُلُوا أَمْوَالَكُمْ بَيْنَكُمْ بِالْبَاطِلِ ۔
اے ایمان والو! آپس میں ایک دوسرے کے مال ناحق طریقے سے نہ کھاؤ.
O you believe, do not devour each other’s property by false means. [Al-Nisa, 29]
Gharar & Ahadithes (Islamic Banking in Pakistan)
§عَنْ أَبِي هُرَيْرَةَ قَالَ: نَهَى رَسُولُ اللَّهِ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ عَنْ بَيْعِ الْحَصَاةِ وَعَنْ بَيْعِ الْغَرَرِ ۔
حضرت ابو ہریرہ رضی اللہ عنہ سے منقول ہے کہ آپ صلی اللہ علیہ وسلم نے کنکر اور غررکی بیع سے منع فرمایا ہے۔
Hdrat Abu Hurraira (Radi Allahu anhu) narrated that the Prophet Muhammad (Salla Allahu Alaihe Wasallam) has forbidden two kinds of sale (Bai): Bai Hassaat (in which outcome is determined by the throwing of stones) & Bai Gharrar.” [Al-Sahih lil Muslim]
Where Gharrar is effective?
The prohibited gharar (uncertainty) is excessive (gharar fahish). Unlike Riba whereby its prohibition is absolute, some degree of gharar is acceptable.
Occurs in contracts of exchange (‘Aqd Mua’awadah) which is bilateral.
Found in the essence & base of the contract
Should not be in necessary type contract (Aqd Zaroori) which causes unease to the masses
Gharar is tolerated in the gratuitous contract (tabarru’) e.g. donation which is unilateral in nature.
Examples of Gharar (Islamic Banking in Pakistan)
- In the existence of subject matter e.g. selling neighbor’s belongings without consent or fish in water
2. In delivery of subject matter e.g. selling birds in the air
3. In the core of the contract e.g. leaving the sale place without taking any clear decision on the subject matter or price.
4. When subject matter is unknown
5. When price is unknown When payment or delivery time is unknown.
Basics of Islamic Law of Contract
CONTRACT or AQD
Lexical : Conjunction, to tie.
“It is connection between the offer and the acceptance in a manner that results the proper affects”.
“A contract is a legally binding exchange of promises or agreement between parties that the law will enforce.”
PROMISE Against Islamic Banking in Pakistan
It means promise. It basically refers to a unilateral undertaking or promise extended by one person to another in which he offers to sell or buy something in future. Since it is unilateral no question of future arises which is not allowed in Islam. It must have a time after which the offer expires.
The promise is enforceable by law until and unless the Promissory is not in a position to fulfil it. In this case, if it is not due to any of his negligence then he has to make good the loss to the Promise.
AGREEMENT/MUAHIDA for Islamic Banking in Pakistan
§It means bilateral undertaking (promise) or agreement. According to majority of the Sharia Scholars, Muahida is not allowed in situations where Aqd is not allowed (e.g. forward contracts), and thus is not enforceable by law.
According to certain scholars of the Sub-continent, Muahida is enforceable by law, however, Muahida of transaction like short-selling of currencies or shares is not allowed.
The rational behind it is that in some cases Muahida is genuinely required, for example, importer need to hedge foreign exchange but since future contract is not allowed in Islam they can do through bilateral promise. The difference between future contract and bilateral promise is that unlike Aqd, the ownership in Muahida is not transferred at the time of signing the agreement.
Essentials FOR Valid CONTRACT
A contract Should ideally be in writing, as guided by the Holy Quran.
CONTRACT and CONDITION
A condition, which is not against the contract, is a valid condition.
A condition, which seems to be against the contract, but it is in the market practice, is not void, if its avoidance is not proved with the clear injunctions of the Holy Quran and Sun nah.
A condition that is against the contract and not in market practice but is in favour of one of the contractors or subject matter, the condition is void.
A condition, which is against the contract, not in the market practice and not in favour of any contractor, that is not a void condition.
VOID CONDITIONS AND VOID CONTRACTS
The contracts of compensation like sale, purchase, lease agreements become void by putting void condition.
Non-compensatory (voluntary) agreements like contract of loan (Qard-e-Hasana), do not become void because of void condition. The void condition, however, becomes itself ineffective.
Islamic Depository Products
COMPARISON OF ISLAMIC AND CONVENTIONAL BANKING
EARNING DEPOSITS – AAOIFI STANDARD
According to AAOIFI’s Standards, the depositor is termed as “Investment Account Holder” and the investment account holder authorizes the Islamic Bank to invest the account holders’ funds on the basis of Modaraba contract.
Under this arrangement the Islamic Bank can commingle the investment account holder’s funds with its own funds (owner’s equity) or with other funds the Islamic bank has the right to use.
IMPORTANCE OF DEPOSIT
Deposits from savers are an important source of financial strength for the Islamic banks. They use it to increase their capacity for financing operations and thereby increase profit for the shareholders.
WHAT IS SAVINGS ACCOUNTS ?
Those having small amounts of savings, particularly with variable amounts generally prefer savings accounts.
Bank provide facilities to such deposit accounts to encourage the savings among the general public. The depositors are usually allowed to withdraw money from the account.
The bank utilises this fund safely through various means of investments and pay profit to the account holders on the running balance during the period.
What is FIXED DEPOSIT ACCOUNTS ?
The depositors who intend to keep their money for a fixed period of time, usually open fixed deposit account.
The period is fixed at the time of opening a Bank account. Within this period the account holders are not entitled to withdraw money from the accounts.
Usually, a high rate of profit is allowed in case of fixed deposit account.
The account holder can withdraw money with special permission of the Bank. In case of earlier withdrawals full amounts of profit are not paid, and instead profit is paid at a lower rate.
What is CURRENT ACCOUNTS ?
It is a popular form of bank account. Majority of the customers particularly business class, government departments, public bodies keep their money in current accounts.
Under this account the customers are allowed to withdraw money as many times during the working hours of the bank as they like.
No profit is allowed to such deposit accounts.
What is DEPOSITORS IN ISLAMIC BANKING ?
Depositors in Islamic Banking can be compared with investors/shareholders in companies, who earn dividends when the investment makes a profit or lose part of their capital if the investment makes a loss.
The contractual agreement between depositors and Islamic banks does not pre-determine any rates of return, it only sets the ratio according to which profits and losses are distributed between the parties to the deposit contract.