Part of a series on the Islamic Jurisprudence – a discipline of Islamic studies

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Economic Zakat Jizya Nisab Khums Sadaqah Waqf Bayt al-mal Banking Riba Murabaha Takaful Sukuk Inheritance History Political Marital Criminal Etiquette Theological Hygiene Military This box: view • talk • edit

Public finance
This article is part of the series: Finance and Taxation
Taxation
Income tax  ·  Payroll tax CGT ·  Stamp duty  ·  LVT Sales tax  ·  VAT  ·  Flat tax Tax, tariff and trade Tax haven
Tax incidence
Tax rate  ·   Proportional tax Progressive tax  ·   Regressive tax Tax advantage
Taxation by country Australia • British Virgin Islands Canada • China • Colombia France • Germany • Hong Kong India • Indonesia • Ireland Netherlands • New Zealand Peru • Russia • Singapore Tanzania • United Kingdom United States • European Union  v • d • e  Tax rates around the world Tax revenue as % of GDP
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Monetary policy Central bank  ·   Money supply Gold standard
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Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. Fiqh ( Arabic: فقه, fɪqəh is Islamic Jurisprudence. Fiqh is an expansion of the Sharia Islamic law—based directly on the An academic discipline or field of study is a branch of Knowledge which is taught or Researched at the college or university level This is a sub-article to Religious education, Academic discipline, and Islam. This is a sub-article of Fiqh and Law and economics. Islamic economics is Economics in accordance with Islamic law This is a sub-article of Islamic economical jurisprudence. Zakaat ( زكاة zækæːh zakaat or zakāh, has the implied Under Islamic law, jizya or jizyah (جزْية ʤɪzjæh Ottoman Turkish: cizye both derived from Pahlavi and ultimately from Aramaic In Sharia (Islamic Jurisprudence) nisab (نصاب is the amount which savings or capital or product must exceed in order for the Muslim owner to be obliged Khums ( خمس xʊms is the Arabic word for One Fifth (1/5 According to Shia Islamic legal terminology it means "one-fifth of certain items which a person This is a sub-article of Zakat, Infaq and Mustahabb. Sadaqah (plural sadaqat) ( صدقة, sˤɒdæqɒh is an A waqf ( plural, awqāf; vakıf wæqəf is an inalienable religious endowment in Islam, typically devoting a building or plot of land for Muslim Bayt al-Mal, AKA Bayt al-Mal Lil Muslimeen is a Hezbollah -controlled organization that performs financial services for the organization Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law ( Sharia) principles and guided by Islamic economics Riba ( Arabic: ربا rɪbæː means Usury and is forbidden in Islamic economic jurisprudence. Murabaha (accurate transliteration murābaḥa, Arabic مرابحه is defined as a particular kind of sale compliant with Shariah, where the seller expressly mentions Takaful is an Islamic Insurance concept which is grounded in Islamic muamalat (banking transactions observing the rules and regulations of Islamic Sukuk ( Arabic: صكوك plural of صك Sakk "legal instrument deed check" is the Arabic name for a financial Certificate but can be seen This is a sub-article to Islamic economical jurisprudence and Inheritance. This is a sub-article of Islamic economic jurisprudence and Muslim world. See also Modern Islamic philosophy, Islamism, Islamic terrorism Political aspects of Islam are derived from the Quran, the Sunna In Islamic law Marriage ("ʿurs" عرس is a legal bond and Social contract between a man and a woman as prompted by the Shari'a. This is a sub-article of Fiqh and Criminal law. Islamic criminal law (فقه العقوبات is Criminal law in accordance This is a sub-article of Islamic jurisprudence and Etiquette. This is a sub-article to Islamic jurisprudence and Islamic theology. This is a sub-article to Fiqh and Hygiene Hygiene is a prominent topic in Islam. Islamic military jurisprudence consists of the basic laws governing the conduct of the military aspects of Jihad (also known as "lesser Jihad " Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated Payroll tax generally refers to two kinds of taxes: Taxes which Employers are required to withhold from Employees Pay, also known as Withholding A capital gains tax (abbreviated CGT) is a Tax charged on Capital gains the profit realized on the sale of a non-inventory Asset that was purchased Stamp duty is a form of Tax that is levied on documents Historically a physical stamp (a Tax stamp) had to be attached to or impressed upon the document to denote Land value taxation (LVT (or site value taxation) is an Ad valorem tax where only the value of land itself is taxed A sales tax is a Consumption tax charged at the Point of purchase for certain goods and services Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. A flat tax (short for flat rate tax is a Tax system with a constant tax rate The tax tariff and trade laws of a political region State or Trade bloc determine which forms of consumption and production tend to be encouraged A tax haven is a place where certain Taxes are levied at a low rate or not at all In Economics, tax incidence is the analysis of the effect of a particular Tax on the distribution of economic welfare. In a Tax system and in Economics, the tax rate describes the burden Ratio (usually expressed as a Percentage) at which a business or person is A proportional tax is a Tax imposed so that the Tax rate is fixed as the amount subject to taxation increases A progressive tax is a Tax imposed so that the Tax rate increases as the amount subject to taxation increases A regressive tax is a Tax imposed in such a manner that the Tax rate decreases as the amount subject to taxation increases Tax advantage refers to the economic bonus which applies to certain accounts or Investments that are by Statute, tax-reduced tax-deferred or tax-free Personal income taxes See also Income tax in Australia Only the federal government imposes income taxes on individuals and this is the most significant source of Taxation in the British Virgin Islands is relatively simple by comparative standards photocopies of all of the tax laws of the British Virgin Islands would together amount to about 200 The level of Taxation in Canada is average among Organisation for Economic Co-operation and Development (OECD countries Taxes provide the most important revenue source for the Government of the People's Republic of China. See Government of Colombia for a wider perspective of Colombian government See Government of France for a wider perspective of French government Taxes in Germany —being a Federal Republic —are levied by the federation ( Bund) the States ( Länder) as well as the HK Inland Revenue Ordinance Cap112 is one of Hong Kong's Ordinances Taxes in India are levied by the Central Government and the State Governments This article ls with Taxation in Indonesia or pajak. Definitions "Pajak" in Indonesian for Tax and taxes whereas " Perpajakan The system of Taxation in Ireland is broadly similar to the system of Taxation in the United Kingdom. The Netherlands has a rich history dealing with taxation predating the Romanic period. Taxation in New Zealand is collected at a national level by the Inland Revenue Department (IRD on behalf of the Government of New Zealand. The Income tax in Peru is collected by the Superintendencia Nacional de Administración Tributaria, best known as SUNAT. The Russian Tax Code is the primary tax law for the Russian Federation. Individual income tax in Singapore forms part of two main sources of Income tax, the other being Corporate taxes on companies In Tanzania the Income Tax Act 2004 came into effect in July 2004 Taxation in the United Kingdom may involve payments to a minimum of two different levels of government The central government ( Her Majesty's Revenue and Customs) Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many methods of taxation Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. Comparison of Tax Rates around the world is a difficult and somewhat subjective enterprise This table lists countries by total 2005 Tax revenues (federal state and local as a percentage of GDP (Gross Domestic Product Economic policy refers to the actions that Governments take in the economic field. Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold Fiscal policy, taking the scope of Budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes Government spending or government expenditure is classified by economists into three main types A budget deficit occurs when an Entity (often a Government) spends more Money than it takes in Government debt (also known as public debt or national debt) is Money (or credit) owed by any level of government either Central government Trade is the willing exchange of goods, services, or both Trade is also called Commerce. For other uses of this word see Tariff (disambiguation. A tariff is a tax imposed on goods when they are moved across a political boundary A trade pact is a wide ranging Tax tariff and trade pact that often includes Investment guarantees The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Fractional-reserve banking is the banking practice in which Banks keep only a fraction of the value of their Bank notes and demand deposits in reserve Full-reserve banking is the Banking practice in which the full amount of each depositor's funds are available in reserve at the bank when each depositor Free banking is a theory of Banking in which commercial banks and market forces control the provision of banking services Sharia ( Arabic: ar شريعة) is the body of Islamic Religious law. This is a sub-article of Fiqh and Law and economics. Islamic economics is Economics in accordance with Islamic law In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. Usury (ˈjuːʒəri comes from the Medieval Latin usuria, "interest" or "excessive interest" from the Latin usura "interest" Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets Riba ( Arabic: ربا rɪbæː means Usury and is forbidden in Islamic economic jurisprudence. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). Haraam (حرام is an Arabic term meaning "forbidden" In the late 20th century, a number of Islamic banks were created, to cater to this particular banking market. The twentieth century of the Common Era began on

Contents 1 History of Islamic banking 1.1 Classical Islamic banking 1.2 Modern Islamic banking 2 Principles 3 Shariah Advisory Council/Consultant 4 Investments through principles 4.1 Bai' al-Inah (Sale and Buy Back Agreement) 4.2 Bai' Bithaman Ajil (Deferred Payment Sale) 4.3 Bai muajjal (Credit Sale) 4.4 Bai salam 4.4.1 Basic Features And Conditions Of Salam 4.5 Hibah (Gift) 4.6 Ijarah 4.7 Advantages of Ijarah 4.8 Ijarah Thumma Al Bai' (Hire Purchase) 4.9 Ijarah-Wal-Iqtina 4.10 Mudarabah (Profit Sharing) 4.11 Murabahah (Cost Plus) 4.12 Musawamah 4.13 Joint Venture 4.14 Qard Hassan (Good Loan) 4.15 Sukuk (Islamic Bonds) 4.16 Takaful (Islamic Insurance) 4.17 Wadiah (Safekeeping) 4.18 Wakalah (Agency) 5 Islamic Equity Funds 6 Islamic laws on trading 7 Microfinance 8 Controversy 9 See also 10 Notes 11 References 12 External links 13 Islamic Financial Institutions

History of Islamic banking

Classical Islamic banking

Main article: Islamic economics in the world

Further information: Early reforms under Islam

During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate,^[1] where an early market economy and early form of merchant capitalism was developed between the 8th-12th centuries, which some refer to as "Islamic capitalism". This is a sub-article of Islamic economic jurisprudence and Muslim world. Many Reforms took place under Islam between 610 and 661, including the period of Muhammad 's mission and the rule of Capitalism is the Economic system in which the Means of production are owned by private Persons and operated for Profit and where A free market is a Market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers A caliphate (from the Arabic خلافة or khilāfa) is the political leadership of the Muslim community in classical and medieval Islamic history A market economy is a realized Social system based on the Division of labour in which the prices of Goods and Services are determined in a Mercantilism is the idea that a colony should export more goods than it imports and that a colony should sell at higher prices and buy at lower prices ^[2] A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. The monetary economy is that part of a society's Economic system where products and services are traded in exchange for money Wikipedia talkFeatured lists for an explanation of this and other inclusion tags below -->This list of circulating currencies contains the 182 current A currency is a unit of exchange, facilitating the transfer of Goods and/or services It is one form of Money, where money is The Dinar is the name of the official currency in several countries Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money,

A number of innovative concepts and techniques were introduced in early Islamic banking, including contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal),^[3] circulating capital, capital expenditure, revenue, cheques, promissory notes,^[4] trusts (see Waqf), startup companies,^[5] savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,^[6] and lawsuits. A contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law A negotiable instrument is a specialized type of " Contract " for the payment of money that is unconditional and capable of transfer by negotiation International trade is exchange of Capital, Goods, and Services across International borders or Territories. For partnership in cricket terminology see List of cricket terms A partnership is a type of Business entity in which partners A limited partnership is a form of Partnership similar to a General partnership, except that in addition to one or more general partners (GPs there are Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately thereby generating Debt is that which is owed usually referencing Assets owed but the term can cover other obligations loss may refer to A negative difference between retail Price and Cost of production An event in which the team or individual in question In Economics, capital or capital Goods or real capital refers to items of extensive value Most generally the accumulation of capital refers simply to the gathering or amassment of objects of value the increase in wealth or the creation of wealth Circulating capital is a term used by classical economists such as Adam Smith, David Ricardo and Karl Marx. Capital expenditures (CAPEX or capex are expenditures creating future benefits In business revenue or revenues is Income that a company receives from its normal business activities usually from the sale of goods and services A cheque (spelled check in American English) is a Negotiable instrument instructing a Financial institution to pay a specific amount of A promissory note, also referred to as a note payable in Accounting, is a Contract where one party (the maker or issuer) makes an In Common law legal systems a trust is an arrangement whereby Property (including real tangible and intangible is managed by one person (or persons or organizations A waqf ( plural, awqāf; vakıf wæqəf is an inalienable religious endowment in Islam, typically devoting a building or plot of land for Muslim A startup company or start-up is a Company with a limited operating history Savings accounts are accounts maintained by retail Financial institutions that pay Interest but can not be used directly as Money (by for example A transactional account ( North America: checking account or chequing account, United Kingdom and some other countries current account A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent In Finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money A bureau de change is an organisation or facility which allows customers to exchange one Currency for another A ledger or lieger (from the English dialect forms liggen or leggen, to lie or lay in sense adapted from the Dutch substantive An assignment (Latin cessio) is a term used with similar meanings in the Law of Contracts and in the law of Real estate. In Accountancy, the double-entry In law a lawsuit is a civil action brought before a Court in which the party commencing the action the Plaintiff, seeks a legal or equitable remedy ^[7] Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. An organization (or organisation &mdash see spelling differences) is a social arrangement which pursues collective goals which controls its own performance and A corporation is a separate legal entity usually used to conduct business A state is a political association with effective Sovereignty over a geographic Area and representing a Population. Agency is an area of Commercial law dealing with a Contractual or Quasi-contractual Tripartite set of relationships when an Agent ^[8][9] Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards. ^[3]

The common view of riba (usury) among classical jurists of Islamic law and economics during the Islamic Golden Age was that it is only riba and therefore unlawful to apply interest to money exnatura sua—exclusively gold and silver currencies—but that it is not riba and is therefore acceptable to apply interest to fiat money—currencies made up of other materials such as paper or base metals—to an extent. Riba ( Arabic: ربا rɪbæː means Usury and is forbidden in Islamic economic jurisprudence. Usury (ˈjuːʒəri comes from the Medieval Latin usuria, "interest" or "excessive interest" from the Latin usura "interest" Ulema ( ar علماء,, singular ar عالِم,, "scholar" refers to the educated class of Muslim legal scholars engaged in the several Sharia ( Arabic: ar شريعة) is the body of Islamic Religious law. This is a sub-article of Fiqh and Law and economics. Islamic economics is Economics in accordance with Islamic law Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets Gold (ˈɡoʊld is a Chemical element with the symbol Au (from its Latin name aurum) and Atomic number 79 Silver (ˈsɪlvɚ is a Chemical element with the symbol " Ag " (argentum from the Ancient Greek: ἀργήντος - argēntos gen A currency is a unit of exchange, facilitating the transfer of Goods and/or services It is one form of Money, where money is The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be Materials are physical Substances used as inputs to production or Manufacturing. Paper is thin material mainly used for writing upon printing upon or packaging In Chemistry, the term base metal is used informally to refer to a Metal that oxidizes or corrodes relatively easily and reacts variably with ^[10] The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart. Fiqh ( Arabic: فقه, fɪqəh is Islamic Jurisprudence. Fiqh is an expansion of the Sharia Islamic law—based directly on the Surplus value is a concept created by Karl Marx in his critique of Political economy, where its ultimate source is unpaid Surplus labor " When "currencies of base metal were first introduced in the Islamic world, no jurist ever thought that paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. The distinction between real versus nominal value occurs in many fields The economic value of a good or service has puzzled economists since the beginning of the discipline For example, it was acceptable for a loan of 1000 gold dinars to be be paid back as 1050 dinars of equal aggregate weight (i. The Dinar is the name of the official currency in several countries e. , the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight). The rationale behind riba according to classical Islamic jurists was "to ensure equivalency in real value" and that the "numerical value was immaterial (or it was not of any concern at that time). Immaterialism is the theory propounded by Bishop Berkeley in the 18th century which holds that there are no material objects only minds and ideas in those minds "

Modern Islamic banking

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. This article is about the country of Egypt For a topic outline on this subject see List of basic Egypt topics. The pioneering effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country. [1]

Principles

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). Sharia ( Arabic: ar شريعة) is the body of Islamic Religious law. The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Riba ( Arabic: ربا rɪbæː means Usury and is forbidden in Islamic economic jurisprudence. Usury (ˈjuːʒəri comes from the Medieval Latin usuria, "interest" or "excessive interest" from the Latin usura "interest" Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). Profit sharing, when used as a special term refers to various Incentive plans introduced by Businesses that provide direct or indirect payments to Employees A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together Murabaha (accurate transliteration murābaḥa, Arabic مرابحه is defined as a particular kind of sale compliant with Shariah, where the seller expressly mentions Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual periodic tax deductable payments

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. A mortgage loan is a Loan secured by Real property through the use of a Mortgage (a legal instrument However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real-estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).

There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy. In Economics, capital or capital Goods or real capital refers to items of extensive value

And finally, Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. Socially responsible investing, also known as sustainable investing or ethical investing describes an Investment Strategy which seeks to maximize both Financial Ethical consumerism is buying products and services that are made ethically. Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. Full-reserve banking is the Banking practice in which the full amount of each depositor's funds are available in reserve at the bank when each depositor The reserve requirement (or required reserve ratio) is a Bank regulation that sets the minimum reserves each Bank must hold to customer [2] However, in practice, this is not always the case. [3]

Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. Microfinance refers to the provision of financial services to poor or low-income clients including consumers and the self-employed A Muslim (مسلم pronounced Muslim, not Muzlim) is an adherent of the Religion The Grameen Bank (গ্রামীণ ব্যাংক is a Microfinance organization and Community development bank started in Bangladesh that ( Bengali: বাংলাদেশ inc-Latn Bangladesh) officially However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral or excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba). Muhammad Yunus (মুহাম্মদ ইউনুস pronounced bn-Latn ''Muhammôd Iunus'' (born 28 June 1940 is a Bangladeshi Banker and Economist In lending agreements collateral is a borrower's asset that is Forfeited to the lender if the borrower is insolvent—that is unable to pay back the principal and interest on Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets Usury (ˈjuːʒəri comes from the Medieval Latin usuria, "interest" or "excessive interest" from the Latin usura "interest" Riba ( Arabic: ربا rɪbæː means Usury and is forbidden in Islamic economic jurisprudence. ^[11][12]

Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish Shariah advisory committees/consultants to advise them and to ensure that the operations and activities of the bank comply with Shariah principles.

In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia)

Investments through principles

Bai' al-Inah (Sale and Buy Back Agreement)

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. earliest form of Islamic banking in Malaysia may be traced back to September 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH was set up The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency.

Bai' Bithaman Ajil (Deferred Payment Sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest. For the interest rate charged to Banks for borrowing short-term funds directly from the Federal Reserve, see Discount window.

Bai muajjal (Credit Sale)

Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Bai salam

Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Basic Features And Conditions Of Salam

1. First of all, it is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effecting the sale. It is necessary because in the absence of full payment by the buyer, it will be tantamount to sale of a debt against a debt, which is prohibited, as the basic wisdom behind the permissibility of salam is to fulfill the instant needs of the seller. If the price is not paid to him in full, the basic purpose of the transaction will be defeated. Therefore, all the Muslim jurists are unanimous on the point that full payment of the price is necessary in Salam. However, Imam Malik is of the view that the seller may give a concession of two or three days to the buyers, but this concession should not form part of the agreement.
2. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
3. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
4. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
5. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
6. The exact date and place of delivery must be specified in the contract.
7. Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari‘ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.

Hibah (Gift)

This is a token given voluntarily by a creditor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks involuntarily pay their customers interest on savings account balances.

Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Advantages of Ijarah

The following are the advantage of Ijarah to lessee:

Ijarah conserves capital as it may provide 100% financing.

Ijarah enables the Lessee to have the use of the equipment on payment of the first rental. This is important since it is the use (and not ownership) of the equipment that generates income.

Ijarah arrangements are flexible because the terms and rental provision may be tailored to suit the needs of the Lessee. Therefore, it aids corporate planning and budgeting

Ijarah is not borrowing and is therefore not required to be disclosed as a liability in the Balance Sheet of the Lessee. Being an "off-balance-sheet" financing, it is not included in the computation of gearing ratios imposed by bankers. Off balance sheet (OBS usually means an Asset or Debt or financing activity not on the company's Balance sheet. The borrowing capacity of the Lessee is therefore not impaired when leasing is resorted to as a mean of financing.

All payments of rentals are treated as payment of operating expenses and are therefore, fully tax-deductible. Leasing therefore offers tax-advantages to profit making concerns.

There are many types of equipment, which becomes obsolete before the end of its actual economic life. This is particularly true in high technology equipment like computers. Thus the risk is passed onto the Lessor who will undoubtedly charge a premium into the lease rate to compensate for the risk. A Lessee may be willing to pay the said premium as an insurance against obsolescence.

If the equipment use is for a relatively short period of time, it may be more profitable to lease than to buy.

If the equipment is for short duration and the equipment has a very poor second hand value (resale value), leasing would be the best method for acquisition.

Ijarah Thumma Al Bai' (Hire Purchase)

These are variations on a theme of purchase and lease back transactions. There are two contracts involved in this concept. The first contract, an Ijarah contract (leasing/renting), and the second contract, a Bai contract (purchase) are undertaken one after the other. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed rental over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed price.

In effect, the bank sells the product to the debtor, at an above market-price profit margin, in return for agreeing to receive the payment over a period of time; the profit margin on the lease is equivalent to interest earned at a fixed rate of return.

This type of transaction is particularly reminiscent of contractum trinius, a complicated legal trick used by European bankers and merchants during the Middle Ages, which involved combining three individually legal contracts in order to produce a transaction of an interest bearing loan (something that the Church made illegal). A contractum trinius was a set of contracts devised by European bankers and merchants in the Middle Ages as a method of circumventing canon law edicts prohibiting The combiniation of different contracts is also prohibited according to Shariah.

Ijarah-Wal-Iqtina

A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.

Mudarabah (Profit Sharing)

Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. ^[13] The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits.

Murabahah (Cost Plus)

Main article: Murabaha

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. Murabaha (accurate transliteration murābaḥa, Arabic مرابحه is defined as a particular kind of sale compliant with Shariah, where the seller expressly mentions The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i. e. , the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the Murabaha is paid in full.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.

Musawamah

Musawamah is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, however, the seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell. musawah.

Joint Venture

Musharakah is a relationship between two parties, both of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. ^[13] All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i. e. issuance of loans).

Qard Hassan (Good Loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money [4].

Sukuk (Islamic Bonds)

Main article: Sukuk

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. Sukuk ( Arabic: صكوك plural of صك Sakk "legal instrument deed check" is the Arabic name for a financial Certificate but can be seen Sukuk ( Arabic: صكوك plural of صك Sakk "legal instrument deed check" is the Arabic name for a financial Certificate but can be seen However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Conservative estimates suggest that over US$500 billion of assets are managed according to Islamic investment principles. The United States dollar ( sign: $; code: USD) is the unit of Currency of the United States; it has also been Such principles form part of Shariah, which is often understood to be Islamic law, but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam.

Takaful (Islamic Insurance)

Main article: Takaful

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is an Islamic Insurance concept which is grounded in Islamic muamalat (banking transactions observing the rules and regulations of Islamic Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. The law of large numbers (LLN is a theorem in Probability that describes the long-term stability of the mean of a Random variable.

In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance which spreads the risk among many people. The concept of insurance where resources are pooled to help the needy does not contradict Shariah. However, conventional insurance involves the elements of uncertainty (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies that contravene the rules of Shariah. It is generally accepted by Muslim jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

Wadiah (Safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank. In this case, the bank compensates depositors for the time-value of their money (i. e. pays interest) but refers to it as a gift because it does not officially guarantee payment of the gift.

Wakalah (Agency)

This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney. A power of attorney (POA or letter of attorney in Common law systems or Mandate in civil law systems is an authorization to

Islamic Equity Funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.

Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater for their local markets, e. g. , Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.

Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index and the FTSE Global Islamic Index Series. The Web site failaka. com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.

Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money). The Qur’an ( القرآن, literally "the recitation" also sometimes transliterated as Qur’ān, Koran, Alcoran The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk"). Hadith ( ar الحديث, pl aḥadīth; lit. "narrative" are oral Traditions relating to the words and deeds of the Islamic Arabic (ar الْعَرَبيّة (informally ar عَرَبيْ) in terms of the number of speakers is the largest living member of the Semitic language

The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden. The Hanafi ( Arabic حنفي school is the oldest of the four schools of thought ( Madhhabs Madhhab or Mazhab ( Arabic مذهب mæðhæb pl مذاهب mæðæːhıb) is an Islamic school of thought, or " The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely. The Shāfi‘ī Madhab ( ar شافعي) is one of the four schools of Fiqh, or religious law within " The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not. Hanbali ( حنبلى) is one of the four schools ( Madhhabs of Fiqh or religious law within Sunni Islam (the other three being " Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold. Ibn Hazm ( 7 November 994 &ndash 15 August 1064 was an Andalusian - Arab philosopher, litterateur Zāhirī (ظاهري is a school of thought in Islamic jurisprudence ” The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling. " There are a number of hadith who forbid trading in gharar, often giving specific examples of gharhar transactions (e. Hadith ( ar الحديث, pl aḥadīth; lit. "narrative" are oral Traditions relating to the words and deeds of the Islamic g. , selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother’s womb etc. ). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram. Halal (حلال ḥalāl, halaal) is an Arabic term meaning permissible. Haraam (حرام is an Arabic term meaning "forbidden" [5]

What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading and perhaps even for derivatives trading. A stock broker or stockbroker is a qualified and regulated professional who buys and sells shares and other securities through Market makers or

Microfinance

Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor. ^[14]

Controversy

Islamabad, Pakistan, June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:

Taking part in the budget debate, M. |name = Islamabad|native_name = |nickname = |settlement_type = Capital City |total_type Pakistan () officially the Islamic Republic of Pakistan, is a country located in South Asia, Southwest Asia, Middle East and Events 1487 - Battle of Stoke Field, the last dying breath of the Wars of the Roses. "MMIV" redirects here For the Modest Mouse album see " Baron von Bullshit Rides Again " Islamism ( Islam + ism; Arabic: al-'islāmiyya) a set of ideologies holding that Islam is not only Muttahida Majlis-e-Amal ( MMA) (متحدہ مجلس عمل ( United Council of Action) is a coalition between religious-political parties in Pakistan. The National Assembly is the Lower house of the bicameral Parliament of Pakistan. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets P. Bhindara, a minority MNA [Member of the National Assembly]. . . referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. Al-Azhar University (pronounced "az-HAR" الأزهر الشريف, "the Noble Azhar" in Egypt, founded in 975 is the chief centre of For other meanings including people named 'Islam' see Islam (disambiguation. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members. Muttahida Majlis-e-Amal ( MMA) (متحدہ مجلس عمل ( United Council of Action) is a coalition between religious-political parties in Pakistan. . . rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout. . . . Later, the opposition members were persuaded by a team of ministers. . . to return to the house. . . the government team accepted the right of the MMA to respond to the minority member's remarks. . . . Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue[6].

Islamic banks do compensate and charge for the time value of money, thus paying and receiving what is known in economics as interest. The time value of money is based on the premise that an Investor prefers to receive a payment of a fixed amount of money today rather than an equal amount in the future Such people compare Islamic banking to contractum trinius—a legal trick devised by European bankers and merchants during the Middle Ages, designed to facilitate the borrowing of money at a fixed rate of interest (something that the Church fiercely opposed) through combining three different contractual agreements that in and of themselves were not prohibited by the Church. A contractum trinius was a set of contracts devised by European bankers and merchants in the Middle Ages as a method of circumventing canon law edicts prohibiting While Islamic law prohibits the collection of interest, it does allow a seller to resell an item at a higher price than it was bought for, as long as there are clearly two transactions.

Islamic Banks (such as Islami Bank) in Bangladesh have added their own variation to Islamic Banking. They charge a fixed fee, what they termed as a 'markup'. This markup is a constant amount decided by the bank which is added to the loan but is not dependent on the success of the business. It serves as an acceptable loophole to collecting interest. Also these banks will take part in profit-sharing but will not take part in any losses. Their success have been in convincing people of their religious mandate but at the same time have exploited every nuance of the mandate.

These arguments and criticism are exactly the same as those used at the time of Muhammad. The Qur'an addresses this issue in simple terms, saying that usury (Riba)is forbidden by Allah, while trade has been permitted by him:

"Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever). " (Surah Baqarah 2:275) - http://www.usc.edu/dept/MSA/quran/002.qmt.html

See also

• Muhammad Taqi Usmani
• Contractum trinius
• e-dinar
• e-Dirham
• Full-reserve banking
• Fractional-reserve banking
• Gold dinar
• Islamic economical jurisprudence
• Islamic Banking in Indonesia
• Islamic banking in Malaysia
• Reserve requirement
• Green economics
• Micro venture capital
• Economy of the OIC
• Mont de Piété
• List of Islamic terms in Arabic
• JAK members bank A Swedish interest-free bank
• International Association of Islamic Banks

Notes

References

• Sait, Siraj; Lim, Hilary (2006). Land, Law and Islam. New York: UN-HABITAT.  

External links

• Amwal Investors - Discussion Board on Islamic Finance, Banking and Investment
• Accounting and Auditing Organization for Islamic Financial Institutions
• Mufti Taqi Usmani's book on Islamic Finance
• Historic Judgment on Interest Given by the Supreme Court of Pakistan
• Islamic Banking Law
• Article on Islamic Banking, Finance & Economics by Maryam Ayaz
• Global Islamic Finance & Commerce
• Training in Islamic Finance
• Riba, Time Value of Money (TVM) and Bai Al-Dain (Dayn) - A must read for Islamic Banking & Finance People
• islamic-finance.startpagina.nl
• Islamic Banking, is it really kosher? - American Magazine March 2007
• Definitive judgement on the issue of Islamic banking
• Reviewing Islamic Banking
• Islamic Banks and Financial Institutions Information
• Islamic Financial Services Board
• Muslim Investor: A community site on Islamic investment, banking, finance and insurance
• Value matter of Money - Unfair to Islamic Banking & Finance
• Elements of Islamic Finance
• Riba and Islamic Banking.
• Islam and Economics, a blog by Mahmoud El-Gamal
• Toward Defining and Understanding Riba by Dr. Mohammad Omar Farooq
• Islamic Banking references
• Islamic Banking references (GDRC)
• Islamic Banking Compendium of Muslim Texts University of Southern California
• Institute of Islamic Banking
• Leading Islamic Finance publication
• Ishtirak: Seeing the Future of Islamic Banking
• Khalid Chraibi: Mixed message on "riba" leaves Muslims trapped between usurers and lenders
• Islamic Banking Portal
• Islamic Banking in Indonesia
• RIBH - Sharia Compliant Finance Watch
• The Islamic Finance Blog

Islamic Financial Institutions

• University Islamic Financial Corp. - First US Islamic Banking Subsidiary
• The Islamic Bank of Asia
• iB (ai-Bi), Indonesian Islamic Banking

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