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Other Education Resources

This section brings together other educational resources and materials for students, teachers and professionals.

Lessons

Shariah Supervisory Board

Shariah Supervisory Board (SSB) is one of the key components of an Islamic bank. Shariah boards have fiduciary responsibilities towards the institution’s stakeholders.

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Zakat al-Mal

The word Zakat means “purity, development, blessings and praise” but in practice it refers to alms

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Zakat on Gold

Zakat on gold is mandatory similar to Zakat al-mal for all Muslims which is to be charged over the total amount of gold owned by a person if it exceeds a certain quantity.

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Bai Bithaman Ajil

Bai Bithaman Ajil is a “deferred payment sale”, which works like a murabaha contract, but with payment generally made on a deferred basis.

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Wadiah

The literal meaning of wadiah corresponds to safekeeping, custody, deposit and trust.

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East Cameron Partners’ Sukuk

East Cameron Partners issued sukuk of US$165.67 million in July 2006 with maturity period of 13 years.

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AAOIFI Standards

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is an independent industry body dedicated to the development of international standards applicable for Islamic financial institutions. The Bahrain-based organisation started producing standards as early as 1993.

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Islamic Derivatives: Paradox or Panacea?

With Islamic finance continuing to establish itself in the West - home of complex financial instruments - commentators believe that this will lead to a rise in Islamic alternatives for derivatives. With this in mind and given the recent problems caused by such instruments, we ask - what makes derivatives Islamic and are they part of the solution?

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Islamic risk management: types, trends & issues

From a bird's eye view, one could differentiate between three basic types of Islamic risk management products and mechanisms: First, those that are formally being standardized, such as the ISDA/IIFM Ta'Hawwut (Hedging) Master Agreement; second, risk management methods directly based on the well-recognized Islamic financing modes and rules; and third, the possibility to use formally Shariah-compliant mechanisms to replicate conventional risk management products and risk profiles.

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Koç Foundation

The Koç Foundation of Turkey constitutes the best example for this type. Since the companies in question are incorporated, they can enjoy longevity for reasons explained above. It would be reasonable to assume that this longevity would be reflected on the waqf as well.

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Islamic Banking Services in Malaysia

As the Islamic banking system developed, services offered by Islamic banks and banking institutions under Islamic Banking Scheme have become diversified (Table 1). Islamic banking services are very similar to those in conventional banks; however, some distinct differences can be observed. For example, current accounts and savings accounts are under Wadiah Yad Dhamanah (deposits with guarantee), Mudharabah (profit-sharing), and Qard (interest-free loan); depositors are guaranteed repayment of the whole amount of deposits and have no right to receive any return from Islamic banks. Islamic banks, however, may provide depositors with returns as gratitude because of the other concept of Mudharabah. In the case of investment accounts, money in a general investment account under Mudharabah (profit-sharing) and Qard (interest-free loan) is for an Islamic bank to invest in projects without instruction from depositors, whereas depositors with special or specific investment accounts under Mudharabah (profit-sharing) are able to instruct the bank as to which project to invest in.

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Tawarruq

Tawarruq means “to buy on credit and sell at spot value.” This transaction is now a days being used by many Islamic banks for liquidity management and as a mode of financing especially for personal financing and credit cards.

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Integrating Money in Capital Theory

“The money market, which plays such a major role in the capitalist system, is the result of speculation with money. It is only logical, then, that the abolition of interest would lead to the total disappearance of this market.

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Qard-ul-Hassan

From the legal point of view, the main ingredient of a Qard-ul Hassan contract is a loan that is not contaminated in any way by Riba. There is a lender and a borrower, with no reference to a market, which might give one the impression that there should be a ‘price’ for it. The relationship between lender and borrower is one of creditor and debtor, and the principal of the money loaned out remains the responsibility of the borrower.

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Mosa’qaat Contract in Islamic Finance

This is a contract between the owner of a ‘tree and the like’ and an Amel, against a clear-cut share of the yield, which includes fruit, flower petals, and so on. Again, the constituent parts of Mosa’qaat can be separated into tree, labor, yield, and time period.

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Direct Investment and Islamic Syndication

This is another of the activities of Islamic banks subject to joint-venture regulations. The establishment and start-up of new production and development units through this type of investment is permitted where equity participation is either impossible or where the private sector is reluctant to become involved.

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Mudharabah Transactions

Mudarabah, the most-widely known Islamic contract, is a profit sharing contract in which one party (the Rab al Maal) provides funds and the other (the managing trustee, the Mudarib or Ameel) management expertise. This contract is believed to come from the Arabic word darb, which means walking and traveling on the earth. (The Mudhrabah is sometimes known as Qirad).

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Properties of Money in Islamic and Conventional Settings and the Effect on Society

…if benevolence were to lead each person to regard her fellow’s concerns as her own, there would be no free riders or parasites to be restrained by the visible hand of 9 cooperation. All would seek naturally to coordinate their actions for the common good, without putting forward opposed claims to the fruits of their endeavours, which justice must resolve. (Brosio and Hochman 1999, Volume 1: 114).

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Interest (Riba) in Islam

In examining the scope of interest on money, we adhere to the valuable Judgment on Interest produced by the Pakistan Federal Shari’ah Court in 1995. Unless otherwise specified, all the following assertions are adopted directly from this valuable work.

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The Problem with Interest

“The most powerful force in the universe is compound interest.” — Albert Einstein “Zero nominal interest rates are necessary for efficient resource allocation.” — Friedman Rule

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Classification of Islamic Modes of Contract

Islamic contracts can be classified into two broad categories: (1) those with variable returns (such as Musharakah and Mudarabah contracts) and (2) those with fixed returns (Installment Sales, Hire Purchase, Jo’aalah, and the like). The second category may be defined as auxiliary contracts, which can be used in conjunction with the first category or after such has been utilized.

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Capitalist vs Islamic Economic System

Negatives of the Capitalist Economic System:

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Islamic Banking Can Save Capitalism (Part 1)

“It was once believed that the capitalist economy would be self-regulating and self correcting, but the intensity and frequency of economic fluctuations have made even the most ardent of economists withdraw from such claims. The greed and selfish consumption that underlies the system has disturbed the ecological balance in a way that poses a massive threat to all mankind, a threat whose magnitude could have never been imagined by the great architects of the Scientific Revolution.

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Islamic Banking Can Save Capitalism (Part 2)

We must gain the courage to implement the Divine Rules in the form of logical models that can be presented coherently to the world’s scientific community. Though these rules have remained, unchanged, for centuries, serious analytical research on Islamic banking goes back 50 years at most. The world expects us to do more. We should expect more of ourselves

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The Role of the Central Bank in Islamic Banking

In economics, we are basically dealing with two interrelated concepts – one legal (or conventional), the other real. All contractual agreements such as marriage, ownership, organizational hierarchy, money, interest and the like fall into the first category; while human-beings, commodities, buildings, amenity and the like are included in the second.

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Sukuk and Tawarruq Contracts in Islamic Finance

The Institute of Islamic Banking and Insurance (IIBI) defines Sukuk contracts as having ‘similar characteristics to that of a conventional bond with the key difference being that they are asset backed; Sukuk represents proportionate beneficial ownership in the underlying asset.

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Hammoudi puts the problem this way:

The central issue is that although these products allow banking to take place without offending Shari’ah compliance – haram conventional banking products sanitized to become halal …

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Mudharabah

Mudarabah, the most-widely known Islamic contract, is a profit sharing contract in which one party (the Rab al Maal) provides funds and the other (the managing trustee, the Mudarib or Ameel) management expertise. This contract is believed to come from the Arabic word darb, which means walking and traveling on the earth.

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Direct Investment and Islamic Syndication

This is another of the activities of Islamic banks subject to joint-venture regulations. The establishment and start-up of new production and development units through this type of investment is permitted where equity participation is either impossible or where the private sector is reluctant to become involved.

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Salam Contract in Islamic Finance

This contract (also known as ‘advance payment sale’) is an advance payment for deferred delivery. In this case, the bank pays the agreed amount of the financing to the client in advance, and the goods are delivered to the bank at a specified future date and place.

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The Jo’aalah Contract in Islamic Finance

This is a contract under which one party, the Jaa’el or bank, undertakes to pay a specified amount of money, the Jo’ol, to the other party, the Amel or contractor, for rendering a service specified in the terms of the contract.

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Divine Rules

“The only reliable and absolute sources on all matters – past, present and future – are Allah’s (SWT) sayings in the Qu’ran, which stands first, and then the Sunnah, as a natural complement. History has taught us that no matter how well-designed and sophisticated man-made experiments are, they have defects.

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Hire-Purchase (Leasing) in Islamic Finance

A hire-purchase agreement provides the hirer with the option to become the owner of the item at the end of the tenure of the hire provided that the hirer has fulfilled all the conditions in the agreement. Under its terms, a business entity or individual may request the bank to purchase capital goods such as equipment, tools or machinery and rent them to him or her.

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Civil Partnership in Islamic Finance

This contract involves mixing the capital of one or more partners with the capital of the Islamic bank on a joint-venture basis for the performance of a specific job in the fields of production, trade, and services for a limited period. This is an optional partnership in that, unless a specific duration is stated at the signing of the contract, any one of the partners may withdraw from it at anytime.

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Example of the Harmful Effect of an Interest-Based Economy (United States)

In order to better understand the harms done to an economy from having an interest based system, a few observations are worthwhile here. A U.S. economist and then coordinator of the Center for Economic and Policy Research, Dean Baker, in 2001, had this to say:

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Mozara’ah Contract in Islamic Finance

In Islamic jurisprudence, Mozara’ah is an agreement between the owner of land and the farmer, according to which the farmer (Amel) cultivates the land and the produce is divided between the parties in an agreed fixed-ratio. A more elaborate definition describes it as a contract in accordance with which one of the parties gives a plot of land for a fixed period to the other party to cultivate and divide the yield.’ (Shirazi 1988: 229).

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Musharakah

This contract in its general form is the pillar of Islamic finance in that it is primarily based on profit-and-loss sharing (PLS). It has the flexibility that enables it to be used for a wide variety of economic activities, from industry (as equity participation), to construction (as civil partnerships and installment sales), to farming (as Mozara’ah), to plantation (as Mosa’qaat), and finally to trade (as Mudarabah).

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Going Back to the Basics with Islamic Finance

“In conventional economics, the place of man in society is ambiguous in that it (society) works as an instrument whose ultimate goal is consumption. Islamic economics is designed to give man the dignity and status he deserves. He is given the potential to enhance his spiritual life in parallel with his physical life. Islam provides rules and regulations giving him the option to choose between vice and virtue. Without this option, there is no way for spiritual elevation. Unlike in the capitalist system, comfort and happiness come from both material and spiritual elevation.

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Istisna’a Contract in Islamic Finance

At the request of the client, the bank places an order for the manufacture of some equipment or the construction of some major item as road or water pipeline… When the item is ready, the bank buys it from the manufacturer and sells it to the client at whose behest the order was placed, at a profit, on a deferred payment basis. (Khan 2000: 26-7)

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The Money Value of Time

“It has been argued by some Muslims that the rate at which installment sales are based is the same as the rate of interest. This has become another source of confusion in some Islamic countries. In order to make this clear, it has to be emphasized that the rate of interest is the ‘time value of money,’ which is forbidden. The mark-up used in installment sales is the ‘money value of time,’ which is permitted.

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Society and Cooperation in Islam: Incentives and Consequences

Society, then, as is conceived has its own identity albeit this identity is derived from each individual member of the society; such that no one individual member of the society loses his/her identity. The mutual interaction between individual and society best exemplifies the paradigm: unity in diversity and diversity in unity.

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Collateral in Islamic Finance

The Place of Interest in Capitalist Economics “Western economists treat interest as if it were a necessary and unavoidable aspect of every economic system, as a common string to tie all economic activities together and without which the system collapses.

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Speculation, Uncertainty, Interest, and Unemployment

ASSERTION: Speculation, in any market, produces a rate of interest in terms of itself. Keynes proved the opposite; therefore, interest is both a necessary and sufficient condition for speculation to take place. ASSERTION: Store-of-value makes of itself a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money – none of which can be studied independently from the rate of interest. ASSERTION: Speculative activities with any durable commodity produce the rate of interest in terms of themselves. This is done on the basis of the M-C-M relationship. This is nothing but indirect demand for money; that is, an Islamic interest-free economic system is not only futile and misleading but it is also the result of confusion and misunderstanding.

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Conventional Bank as Loan House vs Islamic Bank as Finance House

Conventional Bank as Loan House: It is a loan house; It has deposits as its inputs and loans made to customers as outputs; It has bank depositors and customers on the basis of loans given to or received from the bank; 64 Accumulation of deposits makes it a powerful ‘monetary’ institution with monies available for lending, leaving the legal aspect of loans intact;

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Islamic Bank as Finance House

What we expect from Islamic banking is not only to remove ‘the evil’ of interest, but also to provide an environment where there are stable prices, full employment, equitable distribution of income and wealth, sustained growth and no business cycle – something the capitalist system has not been able to achieve in the last two centuries.

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Islamic Money and Banking: Integrating Money in Capital Theory

Repeated cycles, with prolonged damaging impacts, have been occurring in the financial sphere of capitalist economies. This fact has imposed an inevitable question to the effect that there must be an alternative to the current financial system, the one which carries the least, if not any, significant harmful impacts. This momentous question that seeks an alternative was taken and posited by Islamic financial system, or what that has come to be meant by designation ‘the Islamic banking.’ This alternative banking system has emerged especially after the frequent and short intervals in economic imbalances witnessed in capitalist economic systems. Thus it is the dissatisfaction with the state of the existing literature on the subject that prompted the author to embark on writing this book.

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IRR (Internal Rate of Return) and Investment Project Appraisal

The use of proper investment criteria is essential to industry and agriculture both. Yet given various subsidy provisions aimed at reducing the risks, upon which farmers have little or no control, the agriculture image becomes rather vague and hence it does not concern us here. Furthermore, although appraisal can be used both in public and private sectors of the economy, public sector has its own additional special problems to be taken into account; like social costs and benefits. Therefore, this paper is mainly concerned with the private sector and the problems involved in evaluating different industrial investment projects.

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How Islamic banking narrows the gap between the rich and poor

Islamic banking narrows the gap between the rich and poor in three ways: First: Stable Prices, Second: Full Employment, and Third: Enjoyment of bank depositors from (higher than interest) profit income through PLS. This in turn provides equitable distribution of income; the cornerstone of sustained growth and development.

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A Legal Perspective Towards Islamic Finance

Students of economics are traditionally and quite properly exposed to different subjects related to economics, such as accounting, business law, management and organization, etc. However, they seldom get a chance to appreciate their direct relevance to a better understanding of economics, for the main concerns of economic textbooks, generally speaking, are the technicalities of economic theory. I venture to say that not a single microeconomics textbook ever treats the theory of the firm in its legal environment.

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Money and Capital Reconsidered

Money, capital, interest and profit are pivotal concepts in the science of economics. For a clear understanding of how they interrelate we need to ask the simple question: What is a ‘firm’? Laws and regulations are primarily intended to keep order in society; a corollary function is the production of legal entities, with specified rights and responsibilities, which supply numerous kinds of goods and services that a community wants.

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Speculation and on Demand for Money in an Islamic Economy

Terms like “loans with equity features” (Khan and Mirakhor), have appeared in the Islamic economics literature. It should be clear that ‘loan’ and ‘equity’ are not only of two different legal natures but also very different in economic consequences. The fact that such confusion passes unnoticed and unchallenged in the most frequently cited papers is worrying. There is an urgent need, given the growth in the literature on as well as the practice of Islamic banking both in Muslim and non-Muslim countries to re-examine these two most important economic concepts, namely money and capital, whose different legal aspects and economic consequences place them under two different contracts.

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Supply of Money Unidentified

It will be instructive at this point to go back in economic history and reflect briefly on the validity and effectiveness of monetary policies essentially based on ‘the supply of money’. Let us start from the capitalist premise that the important variable for determining the level of employment and the rate of change of the price level is the state of aggregate demand.

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Extended Model

The previous discussion attempts to extend the conventional theory of the firm, in which the legal dimension of the firm is left out. It is not possible, it seems to me, to theorize a purely technical relation between output and capital while omitting the legality dimension. In this section, we put back in the legal and another aspect of the firm in order to make the model more realistic. In so doing we go back to some basic accounting terms.

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Introduction to Islamic Economic System

One of the forms of capitalism, which has been flourishing in non-Islamic societies, is the interest-based investment. There are normally two participants in such transactions. One is the Investor who provides capital on loan and the other Manager who runs the business.

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The importance of the economic goals

No doubt, Islam is opposed to monasticism, and views the economic activities of man quite lawful, meritorious, and sometimes even obligatory and necessary. It approves of the economic progress of man, and considers lawful or righteous livelihood an obligation of the secondary order.

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The real nature of wealth and property

The other fundamental principle, which can help to solve the problem of the distribution of wealth, is the concept of “wealth” in Islam. According to the illustration of the Holy Quran “wealth” in all its possible forms is a thing created by Allah, and is, in principle His "property". Allah delegates the right of property over a thing, which accrues to man, to Him.

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Difference between Islam, Capitalism and Socialism

Now we are in a position to draw clear boundary lines that separate Islam, Capitalism and Socialism from one another:

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Factors of Productions in Islam: Capitalist View

In order to understand the Islamic point of view fully, it would be better to have a look at the system of the distribution of wealth that is obtained under the capitalist economy.

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Factors of Production: The Socialist View

Under the Socialist economy, capital and land instead of being private property, are considered to be national or collective property.

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Factors of Production: The Islamic View

The Islamic system of the distribution wealth is different from both. From the Islamic point of view, there are two kinds of people who have a right to wealth:

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Islamic Economic Theory

The primary right to wealth is enjoyed by "the factors of production." But "the factors of production'' are not specified or technically defined, nor is their share in wealth determined in exactly the same way as is done under the Capitalist system of economy.

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Socialism and Islam

As we said, the Islamic system of the distribution of wealth is different from Socialism and Capitalism both. The distinction between the Islamic economy and the Socialist economy is quite clear. Since Socialism does not admit the idea of private property, wealth under the Socialist system is distributed only in the form of wages.

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Islam and Capitalism

It is equally essential to understand fully the difference that exists between the Islamic view of the distribution of wealth and the Capitalist point of view. This distinction being rather subtle and complicated, we will have to discuss it in greater detail.

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Distribution of Wealth in Islam

The first object of the distribution of wealth is that it would be the means of establishing in the world a system of economy which is natural and practicable, and which, without using any compulsion or force, allows every individual to function in a normal way according to his ability, his aptitude, his own choice and liking, so that his activities may be more fruitful, healthy and useful.

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Riba in the Qur’an

“That which you give as interest to increase the people’s' wealth increases not with God; but that which you give in charity, seeking the goodwill of God, multiplies manifold.” (30: 39)

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Riba in Hadith

From Jabir : The Prophet, , may cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." (Muslim, Kitab al-Musaqat, Bab la'ni akili al-riba wa mu'kilihi; also in Tirmidhi and Musnad Ahmad)

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Types of Riba

The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money) Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.

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Riba An Nasiyah - Explained

This is the real and primary form of Riba. Since the verses of Quran has directly rendered this type of Riba as haram, it is called Riba Al Quran. Similarly since only this type was considered Riba in the dark ages, it has earned the name of Riba Al Jahiliya.

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Riba Al Fadl - Explained

The second classification of Riba is Riba Al Fadl. Since the prohibition of this Riba has been established on Sunnah, it is also called Riba Al Hadees.

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Commercial Interest and Usury

In the 17th century, two new technical terms of interest emerged after the establishment of banking system, namely: Tijarti Sood (Commercial Interest): Interest paid on loan taken for productive & profitable purposes.Sarfi Sood (Usury): Interest paid on loan taken for personal need and expenses.

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Simple and Compound Interest

Riba an Nasiyah can be classified into two types: Simple Interest ( Sood-e-Mufrid)Compound Interest (Sood-e-Murakkab)

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Islamic Contracts

In Islamic jurisprudence what is the ruling of putting a condition on a contract or agreement? There are four basic rules for judging the validity of conditions in a contract:

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Sale (Bai)

Sale (Bai) is commonly defined in shari’ah as “the exchange of a thing of value by another thing of value with mutual consent”. More specifically it means “the sale of a commodity in exchange of cash”.

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Valid Sale in Islamic Finance

A valid sale has 4 key elements:

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Five Khiyars

The term khiyar refers to the option or right of the buyer & seller to rescind a contract of sale.

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Definition and classification of Musharakah

The literal meaning of Musharakah is sharing. The root of the word “Musharakah” in Arabic is Shirkah, which means being a partner. It is used in the same context as the term “shirk” meaning partner to Allah. Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners share the profit according to a specific ratio while the loss is shared according to the ratio of the contribution.

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Rules & Conditions of Shirkat-ul-Aqd

Common conditions are three which are as follows: a) The existence of Muta’aqideen (Partners):b) Capability of Partners: Must be sane & mature and be able of entering into a contract. The contract must take place with free consent of the parties without any fraud or misrepresentation. c) The presence of the commodity: This means the price and commodity itself.

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The basic rules of Musharakah

Musharakah or Shirkat-ul-amwal is a relationship established by the parties through a mutual contract. Therefore, it goes without saying that all the necessary ingredients of a valid contract must be present here also.

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Issues Relating to Musharakah

Musharakah is a mode of financing in Islam. Following are some issues relating to the tenure of Musharakah, redemption in Musharakah and the mixing of capital in conducting musharakah. These were discussed previously, they are explained in detail here.

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Uses of Musharakah and Mudarabah

These modes can be used in the following areas (or can replace them according to Shariah rules)

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Types of Mudarabah

This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ulMaal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio.

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Basic mistakes in Murabahah Financing

Some basic mistakes that can be made in practical implications of the concept are as follows:

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Istijrar

Istijrar means purchasing goods time to time in different quantities. In Islamic jurisprudence Istijrar is an agreement where a buyer purchases something from time to time; each time there is no offer or acceptance or bargain. There is one master agreement where all terms and conditions are finalized.

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Ijarah wa-iqtina

In Islamic Shariah, it is allowed that instead of sale, the lessor signs a separate promise to gift the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent.

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Features of a Conventional Bank

The conventional banking, which is interest based, performs the following major activities:

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The Role of Islamic Banks

A bank under Islamic Shariah can act as an agent (on AlWakalah basis) of the customer and can carry out the transaction on his behalf. Moreover it can charge agency fee for the services.

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Musharakah in Bank Deposits

An important value of an Islamic society is mutual dealing. It also refers to deposits in banks.

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Import Financing

Musharakah can be used for Import Financing as well.

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Export Financing

A bank plays two very important roles in Exports. It acts as a negotiating bank and charge a fee for this purpose, which is allowed in Shariah. Secondly it provides export-financing facility to the exporters and charge interest on this service.

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The Principle of Limited Liability

The concept of 'limited liability' has now become an inseparable ingredient of the large-scale enterprises of trade and industry throughout the modern world, including the Muslim countries. The present topic aims to explain this concept and evaluate it from the Shariah point of view in order to know whether or not this principle is acceptable in a pure Islamic economy.

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Islamic REITs

Islamic REITs. The first Islamic REIT in the world was Malaysia-based Al-Aqar KPJ REIT, launched on June 2006. Al-Aqar KPJ REIT initial investment were six hospitals valued at USD 138 million. The second Islamic REIT was also Malaysia-based, Al-Hadaharah Boustead REIT, with initial investment in palm oil plantation estates valued at USD 136 million and was launched on February 2007. The third Islamic REIT and world’s first Islamic industrial/office REIT was the Malaysia-based AXIS REIT.

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