BANK ALFALAH RULES

INTRODUCTION OF ISLAMIC BANKING
The thrust for Islamic Banking is founded on the desire to submit to the Divine Instructions on all transactions, particularly those involving exchange of money for money. RIBA TAREEF: It has been argued in vain for long in some circles that the prohibition in Islam is that of excessive interest only. Or that it is the interest on consumptive loans that has been forbidden and as such loans extended for commercial purposes are entitled to an excess over the principal amount lent. Such tendentious arguing fails to give due understanding to verses 278 and 279 of Surah Al-Baqarah (quoted below). “O ye who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onwards) if you are (really) believers! 2:278 And if you do not do it, take notice of war from Allah and His Messenger! But if you repent, you shall have your capital sums 2:279 RULES: In Islam, profit is the recognised reward for capital. When capital employed in permissible business yields profit that “excess over capital” becomes the rightful and just claim of the owner of the capital. As a corollary, the risk of loss also rests exclusively with the capital and no other factor of production is expected to incur it. Another important element of Islamic finance is that profit or reward can only be claimed in the instance where either risk of loss has been assumed or effort has been expended. Profit is therefore received by the provider of capital and wages/remuneration by labour/manager. A depositor in an Islamic bank can therefore make earnings on his or her deposit in several ways. Through return on his capital when that capital is employed in a business venture; through sharing of profit when his capital is part of the capital that is employed in a partnership, and finally through rental earnings on an asset that has been partially financed by his capital. Islamic financing: Unlike conventional banks which deal primarily in money and financial securities, Islamic financing is related to an asset that is a feature of the transaction, and quite often the principal feature itself. From this springs an important distinguishing feature of Islam wherein Islamic financing is always based on illiquid assets that have intrinsic value. Profit to Islamic financing is generated through bonafide sale of these assets. Conventional banking, on the other hand, is free of such limitations. It lends money and makes its earnings through this act of lending. Its earnings are unconcerned with the economic fate of its lending. A Perspective: The history of Islamic banking from its recorded inception is less than 40 years old. From a humble beginning in a small village in Egypt in the late 60’s, it has spread to the four corners of the world. By normal standards in a time span that is less than half a century it could have hardly been expected to establish foothold in Muslim world, let alone make its presence felt in Muslim-minority countries. Yet such has been its phenomenal rate of growth that not only is it taking firm roots in its homestead, but is also attracting genuine interest among the standard bearers of conventional banking and in swathes of land where Muslims are a small minority Still there is much ground left to cover. In Pakistan, Islamic Banking is less than 3% of the Banking sector. Even in the Gulf states, where it has a larger footprint, in no single country is the volume of Islamic banking more than a third of the entire sector. Many blame Islamic Banking’s small share against conventional banking to a smaller portfolio of products. A standard complaint against Islamic banks is that they do not have the same variety of financial instruments as found in conventional banking. Though valid to an extent, this popular jeremiad needs to be seen in the perspective of Islamic Banking’s brief history against more than two centuries of conventional banking adopted in full force across the globe, its competition against an entrenched system of banking and the constraints within which it must operate. Notwithstanding, Islamic banking is still growing at more than twice the growth rate of conventional banking worldwide, and while it may not have the latter’s plethora of financial products, its repertoire of Islamic financial products is steadily increasing. In the following space, principal Islamic instruments are briefly described to acquaint the reader with their fundamental aspects. Following that, Islamic Products in BAL-IBD’s portfolio are illustrated in terms of their features.