Islamic

Banking
&Finance
ASSIGNMENT # 1

Sumitted to:

Mohammad Sohaib Asharf

Sumitted by:

Ateeq-ur-Rehman

Program

BBA-26,Section-A ,7th Semester

Reg:#

3582-FMS/BBA/F12

Summary of Lecture 1:

Bank is a financial institution who receive deposits and lend money to customers and charges interest on them.
The word bank derives from banca or banque. Money lenders did job of storing precious items before in
temples and palaces. Romans build first separate building of bank. British banking system was established when
Adam smith gave his theory of invisible hand. Banks have various types which include Central bank,
Development bank, Investment bank, Cooperative credit bank, Regional rural bank, Non-Banking financial
companies who are performing their functions based on interest. There are public and private commercial
banks. Public banks are owned by central bank or government and private banks are owned by public. The
major functions of commercial banks are accepting deposits (current accounts, fixed deposits and saving
deposits), giving loans (cash credit, demand loans and short-term loans), overdraft, discounting of bills of
exchange, and investment of funds, agency function and miscellaneous functions (collect cheques, lockers).
Commercial banks are also called conventional banks. They take interest as profit. On the other hand, Islamic
banks only receive money and work on Islamic modes of finance mudarabah, musharakah, murabah, salam,
istisana, ijarah and diminishing musharakah and give profit in return. They do not give loans. They work on
teachings of shariah thats why they differ from other banks.
Summary of Lecture 2:
There are three types of economic system: Capitalism, Socialism and Islam. To learn about Islamic economic
system we must first learn about capitalism and socialism. Capitalism give more right to private property, this
right is absolute. There are four factors of production land, capital, labor and entrepreneur. As compensation
there is rent against land, interest against capital, wages for labor and profit for entrepreneur. In capitalism, rich
become more and rich more rich and poor become poorer. In concept of socialism, there is no right given to
private property all property is owned by government. There are only wages for labor and other belongs to
government. In concept of Islam, there is a right given to private property but it is not unconditional and
absolute. There are three factors of production land, capital and labor. As compensation there is Ujarat on Ijarah
of land, profit for labor, and Ujarat (wages) for labor (entrepreneur receive profit). In Islam, there are three
objectives of distribution of wealth. The first one is that make an economic system which is practicable and
profitable but there are some restrictions on it based on Shariah because do not want to create disorder in earth.
The second one is about the right of wealth which is due on people, first right is of those people who perform in
production ad second is of those who have need for it because everything belongs to ALLAH alone. Thats why
there is Sadqa, Zaqat, Ushr, and Hadia. Third and last one is the circulation of wealth from rich to poor so that
the wealth does not remain only in some hands.
Summary of Lecture 3:
Riba is an Arabic word which means getting additional money from other party after a specific period of time
in return. In loan, one person give money to other without any business transaction but in case of debt there is a
business transaction between them and they agree on later payment. If there is equal amount or person give
additional amount because of his happiness then there is no Riba involved in it. Riba has two types Riba-alQuran and Riba-al-Sunnah. Riba-al-Quran (Riba-al-Jali/Riba-al-Jahilya) is given by borrower to lender as
interest because of his wait for time. For example, Commercial banks. This is strictly prohibited by Allah in
Quran. Riba-al-Sunnah (Riba-al-Khafi/Riba-al-Nasiah) is explained by Hadith and is hidden. It is further
divided in two types Riba-al-Fadl and Riba-al-Nasiah. These two deals in commodity. In Riba-al-Fadl, there is
an exchange of products or commodities who have same nature and person pay it back after sometime if he pay
additional amount in return then it is Riba-al-Fadl which is not allowed in Islam. Additional amount is allowed
if it is given with pleasure. In Riba-al-Nasiah, the exchange of commodities is of different nature. The person
gives an additional amount to another person but it must be at the spot (hand-to-hand). If it involves sometime

then it is Riba-al-Nasiah. Islamic banks work according to the teachings of Shariah known as Islamic modes of
finance while commercial banks work on the basis of interest.
Summary of Lecture 4:
Contract means Aqd to conjunct or to tie. There are two parties in contract who agree on its terms. One party
makes an offer to other who is called Ejab and other accept an offer who is called acceptance (Qabool). There
are three types of contract Valid, Invalid and Void. In the Islamic perspective, there item sold must be in a
possession, existence, legal, specification, Halal and legal. If these all things are involved in contract then the
contract is considered as valid and if anyone of them is not present in it then contract is void. There may be a
chance that the contract is valid when it is made but after sometime it becomes void because of subject matters
this is invalid contract. Khiyar means an option to accept or reject an offer, it is given to both or one party. It has
five types. Khiyaar Al-Taaeen (selection option) is an option in which buyer have different products from
which he select. Khiyaar Al-Majlis (session option) is an option in which buyer select product in a same session.
If buyer change the topic or leave session then the session is over and they have to start it again otherwise it is
not valid. Khiyar Al-Ruyah (inspection option) is an option in which buyer buy product in advance and see it
later for inspection that it is according to specification and then select or reject it. Khiyar Al-Ayb (defect option)
is an option which gave right to buyer to return the good if it is defective even before or after transaction. Kiyar
Al-Syart (condition option) is an option in which one or both parties have right to accept or reject the offer in a
specific period of time.
Summary of Lecture 5:
Islamic banking operates business according to six modes of finance; Partnership finance include Musharakah
finance and Mudarabah finance, Trade based finance include Murabaha finance and Salam Finance, Rental
financing include Ijarah and Diminishing Musharakah Finance. They gain profit from these six modes of
finance. Musharakah is a partnership agreement in which two or more parties combine their capital, properties
and liabilities and share profit according to their mutual consent but they can share loss only according to their
investment. There are five pillars of Musharakah; Sharuka (shareholder), Rasul Mal (capital), Mashru
(Project), Ribh (Profit allocation), Sighah (offer and acceptance). Musharakah is divided into two types
Musharakah Al-Milk and Musharakah Al-Aqad. Musharakah Al-Milk means two or more people share
ownership of property. It is further divided into two types Shirkat Al-Ikhtiyar (optional ownership) and Shirkat
Al-Jabbar (compulsory ownership). Shirkat Al-Aqad means Ejab and Qabool are two parties who agree for
partnership with mutual consent. It is further divided into four types; Shirkat Al-Amwal (share capital), Shirkat
Al-Aamal (share Labor), Shirkat Al-Wujuh (partnership in goodwill/credit) and Shirkat Al-Mudarabah (Profit
Sharing). Shirkat Al-Amwal is further divided into two types Shirkat Al-Mufawadah (equal share) and Shirkat
Al-Inan (General). Partnership dissolve by mutual consent, after completion, due to bankruptcy, by request and
death of partner.
Summary of Lecture 6:
In Mudarabah mode of finance, there are two parties one give capital or finance and other one provide
management skills, experience and expertise for running a business. The word Mudarabah is derived from the
word Zarb which means to beat. This concept was given by Hazrat Muhammad (S.A.W.W) 1400 years
before. There are two parties in Mudarabah one is called Rab-ul-Mal who invest in business and the other one is
called Mudarib who provide his skills and work as agent. Profit on this partnership is divided according to
agreed ratio and loss is beard by Rab-ul-Mal only, but in case of negligence of Mudarib loss is shared by both

according to the ratio of their profit. There are two types of Mudarabah; Al Mudarabah Al Muqayyadah in
which Rab-ul-Mal tell Mudarib to do not invest in some industry because of risk and the other one is Al
Mudarabah Al Mutlaqah in which there is no restriction by Rab-ul-Mal on Mudarib. There are five roles of
Mudarib which he has to perform; Ameen (trustee), Wakeel (agent), Shareek (partner), Zamin (liable) and Ajeer
(employee). Rab-ul-Mal provide money but does not ask about money to Mudarib. Mudarib is not allowed to
invest in business, he makes on behalf of Rab-ul-Mal and work separately according to his management skills
and experience. In Pakistan, there are MCMR 1981 and MCMO 1980 through which Mudarabah finance is
regulated. Mudarabah is terminated after completion or by giving notice.
Summary of Lecture 7:
Murabaha is derived from the word Ribah which means profit. In mrabaha mode of finance, this is kinds of
sale in which seller sell product to customer by adding some profit in it. Transaction or sale have four types;
musawama, murabaha, tolia and wadia. There is only fresh asset purchase and no buy back transaction in
Murabaha. The product must be halal and legal. Murabaha have three models in first model there are only two
parties customer and buyer, in second model there is customer and (bank-vendor) and in third there is bank and
(customer-vendor). In salam, seller sell goods to customer on future date and receive full money from buyer in
advance. Salam product must be in possession, ownership and in existence. It gives benefit to short farmers due
to their need for money as working capital. There is a deferred purchase of goods. In diminishing Musharakah
mode of finance, two parties agree to buy product in shirkat and one partner purchase that product from other
with the passage of time. Car ijarah is its example in which bank and other party buy car in Musharakah
agreement and then other party use the car and pay ujrat or ijarah as installment on monthly basis under ijarah
agreement and in last there is a sale agreement in which person make payment to bank and transfer ownership
from bank to his own name, this sale agreement is called Bai Taam.
Summary of Lecture 8:
Ijarah is a mode of finance, in which there is a contract between owner and other person on asset which is not
consumable that owner will transfer ownership to another person after a specific period of time and he receive
money against it on monthly or yearly basis. Ijarah is approved by Shariah and is Islamic alternative of leasing.
Ijarah has three types; operating Ijarah, Ijarah Muntahia Bittamleek and Ijarah tul Musha. In operating Ijarah,
there is no promise in lease agreement that lessor passes ownership to lessee. Ijarah Muntahia Bittamleek means
there is a lease agreement in which ownership is transferred after Ijarah as a gift or token. In joint ownership
Ijarah or Ijarah tul Musha, customer and bank buy leased asset and customer buy shares from bank on lease
after that ownership is transferred to customer. There are four components of Ijarah; Ajeer means labor, Mujir
means Lessor, Mustajir means Lessee and Ujrah means Rental income. There is an example of car Ijarah, in
which customer contact to bank for lease agreement both buy car in Musharakah agreement or bank buy it from
vendor in both cases bank has ownership after the accomplishment of lease agreement bank give car to
customer on lease and receive money from customer on periodic basis. If there is a delay in payment, bank take
additional money from customer and add it to charitable fund. All loss is suffered by bank or lessor before
transfer of ownership to customer. At the end, there is a sale agreement between customer and bank for the
purchase of asset.
Reference:
1. Teacher lecture
2. Distribution of Wealth by Mufti Muhammad Shafi
3. My lecture notes

4. Slides given by Teacher