Naveed ul Haq

Conceptually, Islamic Banking broadly connotes as a banking which is in consonance with the ethos and value system of Islam and is being governed by the principles of Islamic Shariah and under the regulatory regime of the State Bank of Pakistan.

Riba means excess, increase or addition. According to Shariah terminology, it implies any excess compensation without due consideration (consideration does not include time as value of money). Islamic viewpoint is very clear that money does not make money itself and it has no intrinsic value, but it can be used as an effective tool if it involves transfer, activity or sale of permitted commodity. The nature of interest is such that it is calculated on a daily basis and keeps on increasing for the whole period of non-payment.

The transformation of Islamic financial system from a conventional system/interest-based system has a long chequered history of enforcement. However, various circulars issued by the Banking Control Department of the State Bank of Pakistan on the subject of elimination of “RIBA” from the banking system including circular BCD circular No. 13 dated 20.06.1984 and BCD Circular No. 32 dated 26.11.1984. The circular 13 recognized certain permissible modes of financing. In exercise of the powers vested under the Banking Companies Ordinance, 1962, the State Bank of Pakistan is pleased to direct that as from the 1st January 1985, interest, wherever charged by a banking company/development finance institution in any of the items of bank charges, shall be replaced by a non-interest mode considered appropriate by it. Moreover, overdue/penal interest or markup on markup shall not be charged by a banking company/DFI as from as from that date…” Presently the word finance has also been defined in the Financial Institutions (Recovery of Finances) Ordinance, 2001, which inter alia, includes Musharikah, murabaha, mussawana, istisnah, or modaraba certificate and term finance certificate, etc.

Skiekh Mahmud Ahmed in his book ‘Man and Money’ writes that one way of way of winning acceptability of interest was to emphasize the common elements if any between profit and interest, rent and interest or hire and interest. This was done to attract legitimacy to interest by confusing it with other categories. In order to further compound the ratio, the difference in the high and low rates of interest was used as a ruse to substantiate this viewpoint. It is misleading to presume that it is only the high, excessive and exorbitant rate of interest which is harmful financially, socially and religiously, while fair rate of interest was something fully justifiable on economic grounds and the concept of ‘loan sharks’ as mentioned in the Greek literature is not applicable in modern society is absolutely wrong. Skiekh Mahmud Ahmed further held that interest based economy leads to such insurmountable economic problems like unemployment, inflation, fiscal deficit, deficit financing and business fluctuation.

Even the institutionalized credit needs to develop a mechanism and/or framework in line with the principle of Islamic Shariah and cannot adopt any mode of financing other than as permitted by Islam, whether it be consumptional loan or commercial loan. The gestation period of introduction of Islamic mode of financing has to be completed as early as possible. We may broadly categorized Islamic financing as follows:

1. Murabaha

Briefly we can understand that Murabaha is particular brand of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit. Most preferred way of Murabaha is that the financier himself purchases commodity but due to non applicability of the concept they can also hire agent for purchasing commodity on their behalf. It can easily be concluded that Murabaha is not a loan that bears interest but it is practiced as a sale of commodity by adding some agreed profit whose payment can be made in some future date.

2. Ijara

Another form of Islamic mode of financing is Ijara which simply means to give something on rent. Ijara has two different types namely

(a) If a person provides services and wage is given as compensation in this sense employer is called Mustajir and the employee is called Ajir.

(b) The other type is regarding the usufruct of assets and properties. So Ijara means to transfer the usufruct of a particular property to another person in exchange for rent claimed from him. According to the jurisprudence of Islam, it is compulsory for the validity if contract that the physical ownership is a sine qua non condition for the seller. But it has two exceptions based on some defined conditions.

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Conventional Financing                       Murabaha


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1. Qarz based contract                       1.A sale transaction


2.Bank does not assume the ownership         2. The ownership and risk of the asset are


and risk of the assets                       borne by the Bank


3.charges penalty in the case of payment     3.No penalty can be charged in the case of


                                             late payment


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