PREFACE

The topic of our
research is about Islamic Banking being completely Islamic or unislamic. We
extended our work to know about the perceptions of students and workers working
in Islamic Banks and people having investments in those.

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Our research is a
basic research as to extend the boundaries of our knowledge. We have not tried
to come up with a concrete statement that may provide solution for people who
want to invest islamically rather we made efforts to share our evidences and
references in light of Islamic history, Holy Quran and Ahhadiths on the basis
of which this report may appear to be a guide for the muslim investors.

The research is
limited being our first experience and time constraint importantly. We have
tried our best to bring the purest of it so that any reader can make most of it
and take a rational decision on the basis of information we have gathered.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acknowledgement:

We acknowledge the help of our course instructor
Mr. Mumtaz Ahmed in performing this research work and for providing us a solid
platform for excelling in our studies. We extend our gratitude to Mr. Tanveer
Hussain (Bank Alfalah,Islamic) who welcomed our queries and entertained our
questions and also filled up the questionnaire for us we are also obliged to

 Mr. Shahid
Ahmed (Faysal Bank )who greatly and whole heartedly helped us in performing
this research, without them it would have been impossible for us to execute
this work.

May Allah forbid any mis statement made in this
regard (Aameen)

Wardah Nasir

Hira Aziz

 

 

 

Introduction:

Islamic baning has
always been an issue in Muslim Countries. Investors, common public and even
students are always confused if they should choose a bank as an investment
option or as a career. The reason behind the controversies is only one that is
if it is Riba free or not because of the ‘Interest Factor’ being stipulated
with it. There are many big names like Maulana Taqi Usmani and Dr. Zair Naik
who have been working and explaining their perspectives in their own special
and comprehensive ways. Such big names cannot be pointlessly claimed to be
wrong but we, as student are personally still not satisfied with the answers
neither we have ever got a chance to ask our queries one to one. The lectures
we have listened to and the broachers and books we have gone through do not
give us a crystal clear answer whether as to the Islamic Banking is completely
Islamic or not, if it complies with the Shariaah, Al Quran and the Hadiths and
if we are fair enough in choosing a career in Banking and other institutions
when it comes to Halaal Investments.

Research Objective:

The aim to conduct
this research is to help our fellows and we in finding out as accurate answer
as possible to clarify th confusions and to answer the unasked questions
regarding the Islamic Banking. Researches have already been made on Islamic
Banking but yet the topic we have catered is unique in its domain. People have
talked about Islamic Banking on the basis of interest; they have tried to
explain what transactions can be regarded as riba free and so consequently
Halal or Haraam. There also have been studies and researches guiding people
towards Islamic Banking and helping them being ‘More Islamic’ but not
completely. No one came up with defining with what Interest actually is, that
we intend to try to explain fully in light of Al Quran and Hadiths.

Research Plan:

In order to
understand how Islamic Bank works and what are the key differences in Islamic
and conventional Banking that make the two Islamic and Unislamic and to study
the issues raised from it, we need to study both, the practices of Islamic
Banks as well as those of Conventional Banks.

We intend to make
use of the following:

Books and A/V Aids

•       
Al Quran

•       
The Hadiths

•       
Introduction
to Islamic Finance by Maulana Taqi Usmani

•       
Lectures of
Dr. Zakir Naik, Chair Person at Islamic Research Foundation

•       
Product
guides of Islamic Banks.

Personal Interviewing:

•       
Head
Credit, Marketing Unit, Bank Al falah Islamic, Regional Office South, Mr. Syed
Tanveer Hussain

•       
Non
Executive Independent Director, member of bank’s risk management committee,
Faysal Bank, Mr. Shahid Ahmed

Research Question:

Conventional
Banking provides loans and investments alternatives where a person invests or
borrow and earn or pay interest, whereas Islamic Bank emphasizes on purchasing
the particular product for your need, handing it over to you for your use and
ensuring to receive its profit after the said period of time that it charges
above the cost of that commodity.

How come this
profit is different from interest being charged by the conventional Banks is
the matter of concern. What policies do they have and on what basis Islamic
Banks provide loans to its customers? What is the difference between the
Mudarbah and fixed deposit, Leasing and Ijarah and other products that are yet
to be explored? People call it holding the nose either way. Is that really
true? Or it is only the lack of knowledge and understanding.

 Literature Review:

Starting from the
literal meanings of Riba that came out of the word Raba of Arabic language,
which means to increase, to swell, to grow, to add or to rise, in the
particular context it refers to the increase in value or amount of anything
borrowed, may it be goods in exchange of goods or money in exchange of money.

In light of
Al-Quran there is only one verse that some how gives an idea that what riba may
be, however no where in the Al Quran we find the concrete definition of what
riba actually is. That Aayah is as follow:

“That which ye lay
out for increase through the property of (other) people, will have no increase
with Allah: But that which ye lay out for charity, seeking the countenance of
Allah (will increase): it is these who will get a recompense multiplied”.
(Surah Al room 30:39)

As a general outcome of the Ayah we can say that riba is
increasing one’s own wealth/property through the wealth/property of others. We
can also construct that opposite of Riba is charity.

The aayah also supports the literary meaning of riba as in
Arabic language. In order to authenticate our definition we have to move on to
Ahadiths that follow the hidden and narrow aayahs.

Narrated ‘Umar bin Al-Khattab: Allah’s Apostle said,
“The bartering of gold for silver is Riba, (usury), except if it is from
hand to hand and equal in amount, and wheat grain for wheat grain is usury
except if it is from hand to hand and equal in amount, and dates for dates is
usury except if it is from hand to hand and equal in amount, and barley for
barley is usury except if it is from hand to hand and equal in amount.”

Sahih Bukhari, Volume 3, Book 034, Number 344

 

Narrated Abu: We used to be given mixed dates (from the
booty) and used to sell (barter) two Sas of those dates) for one Sa (of good
dates). The Prophet said (to us), “No (bartering of) two Sas for one Sa
nor two Dirhams for one Dirham is permissible”, (as that is a kind of
usury).

Sahih Bukhari, Volume 3, Book 034, Number 294

With the above two ahadiths we can conclude that riba refers
to anything that involves exchange of unequal values.

The point to clarify is that dates in exchange of dates and
other commodities mentioned above is prohibited if not hand to hand only
because the values and the price of the commodities may change over the period
of time and hence will give raise to exchange of unequal values.

We can say that barter system is not allowed in Islam unless
the goods exchanged are of equal value and amount.

Let us also
consider the definition being quoted by famous Islamic Scholars:

The profit earned
through dealing in money (of the same currency) or the papers representing them
is interest, hence prohibited

Riba means anything
over and above. It includes usury that is exorbitant interest but it even
includes interest because by definition interest is money earned by money lent
and usury is exorbitant interest

 

 

 

 

 

 

 

 

 

Theoretical Frame
work:

We can examine the
following two products of Islamic Banking in order to compare it with
conventional Bank. The following table of variables can identify a transaction
being interest free:

*NK= Not Known

*NA= Not Applicable

 *1 Loss: Loss as defined by the oxford
dictionary is process of losing something and that by financial dictionaries
refer to gaining less amount than the one invests.

Since the investors
in both the banking systems get more than their investment we cannot say that
they share the losses as well. However we can say that they share whatever the
amount of profit is being earned, regardless of being much or less.

Conventional Product

Islamic Bank Product

Pre-determined return

Loss sharing*1

Unequal Value Exchange

Time Scale

Penalty on defaulting payment

Return of Capital on demand

 

 

Conv.    
Islamic

C        
I

C           
I

C       I

C         
I

C          
I

Fixed Deposits

Mudarbah

Yes        
No

No     
No

Yes        
NK*

Yes   Yes

NA      
NA

Yes      
Yes

Asset Financing

Ijarah/murabaha

Yes        
Yes

Yes    
No

Yes       
Yes

Yes   Yes

Yes     
Yes

NA *      
NA

 

The table can help
analyze the nature of the transactions. As we observed through ahadiths that
transactions should be hand to hand, it points that the profit should not be
pre determined and should be determined at the time of the transaction. As per
the norm of the business, the commodity once bought (as an inventory) is sold
for a higher price but that is hand to hand which actually differentiates
commerce from interest. Whereas the assets sold by the Islamic Banks does not
involve a hand to hand value exchange even if they are equal in the value.
Moreover if they would have been exchanged hand to hand (at the time of
termination of Ijarah)their value at the same point of time would not have been
equal in the two different markets.

Let us consider an
example. A bank sells out a car through Ijarah. Thae Bank itself bought it for
let say Rs.800, 000 and sells it out for Rs. 900,000 to be paid on installments
for the next 5 years. The ownership is not being transferred however the usage
related risks lie with the customer and the ownership related with the banker.

 Considering the two important factors that are
the conditions for an interest free transaction that are hand to hand
transaction and equal value exchange, we see that the rent that is
predetermined is not on the basis of the future market value of the car but on
the prevailing interest rates of the market equivalent to the conventional
banking system in most of the cases. These prevailing interest rates may or may
not result in the future fair value of the asset in the market.

The Islamic banking
policies however tried to meet this criteria by not transferring the possession
of the car at the time of beginning of the Ijarah contract but it leads to
unequal value exchange that makes it interest based.

Secondarily, the
assets leased by the conventional banks under the lease contract are also their
property till the time all the installments are being paid by the customer.
They also do not transfer the ownership in the same manner as Islamic Banks do
not. They charge the rent not based on the equal value exchange but on the
basis of interest rates. However we see a minute difference that Conventional
Banks repossess the leased assets in case of default and Islamic Banks set the
consumer liable to a penalty that they take in form of zakat to be paid in the
same bank with which it formed an Ijarah contract. This small difference is not
enough to declare a transaction Riba free.

Another question
arises out of this particular situation that on what basis the Islamic Banks
are charging zakat. How can a person already under a burden of loan be
chargeable to zakat? If he is able to pay zakat would not he have paid the
installment first?

The other part of
our research is to study the perception of students, employees and general
public about working/investing in an Islamic Bank. For that we considered the
following conceptual frame work.

 

 

 

 

 

CONCEPTUAL FRAMEWORK

Islamic banking is
suppose to follow sharia principle but it is largely perceive that Islamic
banks does not follow fully Islamic principles .To know that whether Islamic
banks are working on Islamic laws or not we have developed a conceptual
framework as follows:

 

 

 

HYPOTHESIS

H # 1    Islamic banking is largely
perceived to be unislamic.

H # 2    Islamic banking is largely followed by people in
order to run their business not on 
religious basis

H#3     
Islamic Banks offer fixed return

H # 4    It is Islamic

H # 5    It is more efficient than
conventional banking

H # 6    It helps the economically weaker class

According to
Islamic laws an Islamic bank should be shariaah compliant, efficient and able
to help in poverty reduction and economic development. However, variables work
under unislamic central bank. They are using interest  as benchmark, and taking fixed return,
therefore these are taken to test whether they are sharia compliant or not .
Unislamic central bank does not use Islamic laws. It is based on interest, it
is a measure for a bank to be sharia compliant. Using interest rates as a
benchmark means that Islamic banks follow interest rates to set their profit
margins which show that Islamic banks are same as conventional banks. Taking
fixed returns is strictly prohibited in Islam i.e. interest, if Islamic banks
take some sort of fixed return it means they are not following sharia.

The large number of
economic ills, including poverty, social and economic injustice, inequalities
of income and wealth, economic instability and inflation of monetary assets are
all in conflict with the value system of Islam. It is the responsibility of the
money and banking system to contribute to the achievement of socio-economic
development and hence eliminate such ills. Therefore, variables of Islamic
banks are able to control unemployment. Control inflation and encourages equal
distribution of wealth are taken into account.

Islamic banks are
perceived to be more efficient and focused financial institutions than
conventional banks; by excluding interest principle from its mechanism, Islamic
banks excludes all speculative activities related to interest rate
expectations, and hence, change in money flow will directly reflect on real
sphere by a change in demand and supply of goods and services. Therefore,
stability, operating efficiency and risk management are the variables taken
into account for checking the efficiency of Islamic banks. To test our
hypothesis we have developed the following questionnaire:PREFACE

The topic of our
research is about Islamic Banking being completely Islamic or unislamic. We
extended our work to know about the perceptions of students and workers working
in Islamic Banks and people having investments in those.

Our research is a
basic research as to extend the boundaries of our knowledge. We have not tried
to come up with a concrete statement that may provide solution for people who
want to invest islamically rather we made efforts to share our evidences and
references in light of Islamic history, Holy Quran and Ahhadiths on the basis
of which this report may appear to be a guide for the muslim investors.

The research is
limited being our first experience and time constraint importantly. We have
tried our best to bring the purest of it so that any reader can make most of it
and take a rational decision on the basis of information we