2. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1 Essentials of Islamic Banking and Finance IQRA University Gulshan Campus. MBA, Fall, 2011 IRSHAD AHMAD AIJAZ/ TALHA SALEEM KAPADIA irshad786@gmail.com / talhasaleemkapadia@gmail.comirshad786@gmail.comtalhasaleemkapadia@gmail.com Introduction to Shari'ah and Islamic Banking and Finance

3. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2 Contents of the lecture Introduction to Shari'ah: – Scope of Shari'ah rulings; – Sources of Shari'ah; – Role of Fiqh and Fuqahaa; Principles of Islamic Economics; – Basic Concepts and philosophy of Islamic economics; Four basic prohibitions in financial system of Islam: – General prohibitions; – Riba (interest); – Gharar (uncertainty); – Violation of Islamic Law of contract;

4. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3 Introduction to Shari'ah

5. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4 Introduction What do we mean when we say ISLAMIC? ISLMIAC means according to ISLAM; When we say according to Islam we mean in conformity with Shari'ah ( ﺷﺮﻳﻌﺖ (; Again the same comes to us, what is Shari'ah ( ﺷﺮﻳﻌﺖ( ? Is Shari’ah ( ﺷﺮﻳﻌﺖ ( a set of rules and laws set out by religion? Let us see what is it!

6. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5 Introduction Shari’ah is not only a religious 'Law' as it supersedes Law in its inclusion substance and form both; It deals with social and economic problem both; It give concept of another world that comes after this world – the day of judgment; So Shari’ah is “a system consisting of laws and rules for religious, political, social, domestic and private aspects of life of individuals and groups”; Every individual is responsible for balancing between all these aspects in manners required and guided by Shari’ah; The rules and guidelines of Shari'ah are: – Commandments of Allah (SWT) revealed by Him upon His messenger Holy Prophet (Sallallahu Alayhi Wa Sallam) as:  Recited Wahee – the nobel Qura'n; or  Un-recited Wahee – the Sunnah;

7. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6 Islamic rules and guidlines A perfect combination is required by Islam

8. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7 Islamic rules and guidlines Our scope

9. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 8 Islamic rules and guidlines The regulations of the Shari'ah are of two types: – Regulations on worships and ritual duties;  This type is known as 'Ibaadat' or 'Huqooqullah' (rights of Allah);  This type of rules and guidelines deal with 'Man-to-God' relations;  It explain the ways and methods of 'I'badaat' (worships) and beliefs;  This type is, up to some extent, a personal matter between God and a person; – Regulations on juridical, social and political nature;  This type is known as 'Muaamlaat' or 'Hoqooqul Ibaad' (human dealings);  This type deals with 'Man-to-Man' relations;  Under this type many relationships are covered namely social, political and economic;  This type defines rules for each type of relationship;  This type of rules are of common nature and not specific to each and every person;

10. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9 Sources of Shari'ah As we discussed the rules and guidelines of Shari'ah are Commandments of Allah (SWT) revealed by Him upon His messenger Holy Prophet (Sallallahu Alayhi Wa Sallam) as Recited Wahee – the nobel Qura'n or Un-recited Wahee – the Sunnah; Therefore, the sources of Shari'ah are simply very clear and easy to understand; Source of law means 'a definite means for extracting principles and guidelines'; There are two types of sources of Shari'ah: – Primary Sources; – Secondary / derived Sources;

11. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10 Sources of Shari'ah Primary source means a source of laws and rules that is used for extraction of laws as the first source; There are two sources falls in under this type: – Qur’an - The book of Allah:  Qura'n gives main beliefs, principles and wide-ranging directives of Allah. Allah (SWT) said: "Verily, this Qur'an guides to that which is best, and gives glad tidings to the believers who do good that theirs will be a great reward." (17: 9);  Rulings derived explicitly from Qur’an are Frad (obligatory) and its refutation is 'Kufr';

12. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11 Sources of Shari'ah Sunnah or Hadees:  Sunnah includes Sayings, Practices, No-objection (Silent Approvals) of the holy Prophet (SAWS) and practices of four caliphs and other companions of holy Prophet (SAWS); Both these sources are primary and main sources of rulings and guidelines of Shari'ah;

13. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12 Sources of Shari'ah Derived /secondary Sources: – Ijmaa' – consensus of Fuqahaa;  Scholarly consensus means the agreement of a group of Muslim scholars on a specific issue;  The condition is that all such scholars or majority of them have to agree to the ruling;  Ijmaa’ prefers a meaning or explanation of primary sources on other possible meanings; ► Example of Ijmaa' is consensus of Ulema on prohibition of banking interest;

14. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 13 Sources of Shari'ah Derived /secondary Sources: – Qiyaas – The analogy;  Qiyas is 'finding a reason of a ruling by method of analogy';  Application of Qiyas means 'searching a solution for a new issue that is not discussed in Quran and Sunnah';  The reason or cause of an existing Islamic rule becomes basis for a ruling for new issue; ► For example, drugs have been deemed impermissible through an analogy from the prohibition of alcohol in the Qur'an. This ruling is based on underlying cause of “intoxication”;

15. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 14 Sources of Shari'ah Every Islamic rule is derived from these sources; Whenever a rule is declared 'Islamic' it will be either derived from Qura'n, Sunnah, Ijmaa' or Qiyass; Every rule need not be extracted from Qura'an or Hadees; This is one of the very common mistakes nowadays; Islamic banking and its all details are not extracted from Qura'n or Sunnah only. This system is based use of all sources of Shari'ah;

16. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 15 Role of Fiqh and Fuqahaa Sometimes it is misunderstood what is Fiqh and role of Fuqahaa'; This is important to understand the contribution of Fuqahaa'; The primary sources of Shari'ah, Quar'an and Sunnah, did not consist of legal rulings only, there are rules and guidelines, stories of previous nations, mention of circumstances of the day of judgment and many more; Also rulings about one thing are mentioned dispersedly and revealed over a period of time; Therefore it was difficult for a common man to go through the whole book or collection of rulings to conclude a decision about a particular situation; The contribution of Fuqahaa' is compilation and grading of ruling on a particular issue thereby making it easy for a common man to follow Islamic teachings;

17. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 16 Role of Fiqh and Fuqahaa For example rulings about prayers are mentioned over a period of time and dispersedly in many places; Fuqahaa' have compiled all the rulings belong to prayers and categorized them in Fard, Wajib, Sunnat and Mustahab; This help general people to do what they need easily and as required by Shari'ah;

18. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 17 Principles of Islamic Economics

19. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 18 Principles of Islamic Economics ISLAMIC ECONOMIC MODEL – ISLAMIC ECONOMIC MODEL is based on two underlying principles:  IMPORTANCE OF ECONOMIC GOALS: ► Economic activities of man are lawful and sometimes they become obligatory and necessary; ► However economic activity is not the basic problem of human being; ► Therefore economic progress is not the be-all and end-all of human existence;  REAL NATURE OF WEALTH AND PROPERTY: ► Islam has a different viewpoint about the four Basic Economic Problems: ► Determination of Priorities:  Adherence to commandment of ALLAH should be the top priority; ► Allocation of Resources (Land, Labor, Capital, Entrepreneur):  No remuneration to Capital as it is rewarded under entrepreneur;

20. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 19 Principles of Islamic Economics ► Distribution of Income:  Both wealth creators and non creators have right in wealth. (Zakat, Sadaqaat, etc. etc. are for non creators); ► Development:  Only through Halal (permissible) ways and for Halal purposes; – Wealth creation and distribution:  Islam suggest a good mechanism of Distribution of Wealth;  The purpose is to establish a practicable Economic system under which everyone benefits;  Islam accepts the following economic laws thing within a certain limits: ► Laws of demand and supply; ► Motive of personal profit; ► Market forces; ► Natural relation of employer and employee; ► Profit and loss distribution; ► Asset based system rather than speculation and document based system;

21. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 20 Principles of Islamic Economics – Wealth creation and distribution:  Distribution of wealth: ► Enabling every one to get what is rightfully due to him; ► Elementary level of deserving wealth are factors of production; ► Secondary level of deserving wealth are poor and deserving people who did not contribute in creation of wealth;  Eradicating the Concentration of Wealth ► Prohibition of:  Hoarding,  Interest;  Gambling;  Invalid speculation;  Uqood-e-Fasidah (invalid contracts), and  Gharar (excessive uncertainty); ► Encouragement of Sadaqah, Laws of Inheritance, Mehar etc.

22. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 21 Basic prohibitions in financial system of Islam

23. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 22 Basic prohibitions Islam prohibits some economic activities and allow all other activities that beyond these prohibited activities; We can categorize these activities in four basic types: – General prohibitions; – Riba (interest); – Gharar (uncertainty); – Violation of Islamic Law of contract;

24. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 23 General prohibitions This type include all economic activities that involve in any things which is declared disallowed in Islam; For example business of alcohol, pork and film industry is not allowed in Islam; Therefore any involvement in such businesses fall under general prohibitions; This type is easily understandable for all;

25. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 24 Interest – Riba Riba means: – Any excess compensation over and above the principal which is without due consideration. It is in fact a premium paid to the lender in return for his waiting as a condition for the loan; It is an impermissible activity in Islam; In the words of Prophet (SAW): – '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)]

26. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 25 Types of Interest Explicit Interest: – Main type of interest which is clear and easy to understand for everyone; – Lending and borrowing on interest is simple example of it; – Banking interest is also an example of it. Implicit Interest – A type of interest that has both possibilities of being interest or not; – It is not always surely interest but becomes if it is pre-agreed and common in practice. – Examples:  Premium charged against delaying or rescheduling;  Rebate on early payment;  Discount offered on payables in case of early settlement.

27. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 26 Gharar – excessive uncertainty Gharar is a comprehensive Arabic word which has a comprehensive meaning; A near translation of Gharar may be 'uncertainty' or 'ambiguity'; Selling a commodity/goods/thing without clear specification is sale with element of Gharar; It has been narrated from Abu Hurayrah (RA), that He (SAW) said: – 'The Messenger of God (S) forbade the ‘sale of the pebble’ [sale of an object chosen or determined by the throwing of a pebble], and the sale of al-Gharar'. [Sahih Muslim];

28. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 27 Violation of Islamic law of contract Islam has clearly explained certain rules and laws for each type of economic and financial contract; The contracts made in violation of these laws of contract are called Uqood-e-Fasidah (invalid contracts); A detail discussion on the topic will come in coming lectures;

29. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 28 Summary Islamic financial system revolves around these basic prohibitions; All financial policies, monetary systems and other practices should follow these rules; A system that follows these guidelines is Islamic or 'Shari'ah compliant' system;

30. Essentials of Islamic Finance – IU Gulshan Campus, Slide # 29 Questions?