Objections On Interest Free Banking System Finance Essay

Interest Free Banking System: A banking system formed harmonizing to Islamic rules and under Sharia Laws is called involvement free banking system. The chief rules of involvement free banking system are riddance of involvement and the construct of net income and loss sharing.

Interest free banking systems does non utilize fixed involvement rates but distributes net income on the sedimentations.

This system chiefly focuses on equity funding in topographic point of debt funding.

Interest free banking system runing regulation is that loaner has to be a spouse in net income every bit good as the losingss happening to the borrower. Therefore bearing hazard is the chief rule in Islamic banking.

The loaner and borrower are spouses in Islamic banking and the sharing of both net incomes and losingss does non set a immense load on the borrower.

( Riphah Center of Islamic Business, Islamabad. )

Expostulations on Interest Free Banking System:

Harmonizing to Islamic principlesthere is no involvement involved in loaning, and investings can merely be done on the footing of mudarabah ( net income and loss sharing system ) . Therefore the first expostulation on involvement free banking is that it has to do two separate systems, one for loaners and one for investors.

Interest free banking system is based on net income and loss sharing system but now a yearss Islamic Bankss do non put wholly in net income and loss sharing undertakings. ( Beng Soon Chong, Ming-Hua Liu )

Principle-agent jobs are besides associated with involvement free banking system ( Dar and Presley, 2000 ) . The bank acts as an agent for the loaners and direction has the right to put on their behalf, hence hapless direction can do the loss of investings. ( Dar, H.A. , Presley, J.R. , 2000 )

Another expostulation on involvement free banking system is that it uses involvement rate as a criterion for finding its net incomes which makes these minutess non dependable from sharia point of position.

( Omer and Faizan )

Reservations on Interest Free Banking System: The chief reserve on involvement free banking system/Islamic banking is that its users think that this is non truly an Islamic banking system but its name is merely changed from the conventional system.

Harmonizing to Omar Mustafa Ansari, The most common statement against Islamic banking is that Islamic banking and conventional banking is the same, and it is merely a alteration of paperss and names.

Another reserve on Islamic banking is that this system has merely changed the name from involvement to gain, but in fact they pay the same as market involvement rates.

Evaluation of Expostulations and Reservations: All the expostulations and reserves are right up to some extent but as we are runing in an involvement based economic system hence Muslim Bankss faces jobs in smooth Islamic operations as usage of KIBOR as a criterion for finding net income. It will take clip in development of a complete Islamic banking system as Islamic banking is traveling through its evolutionary phases now a yearss.

Muslim Banking: A banking system which is based on Islamic jurisprudence i.e. Shariah and is in conformity with the instructions of Holy Quran and Hadith is called an Islamic banking system.

Doctrine of Islamic Banking: The chief doctrine of Islamic banking is that it can non do such dealing which involves riba/interest.

Hazard sharing is besides a cardinal rule of Islamic banking, in Islamic banking the loaner is a spouse and he portions both net incomes and losingss.

Muslim Bankss can non cover in such minutess which includes component of Gharar or Maiser.

These Bankss besides can non put in such a concern which is termed as Haram by Islam.

Development of Islamic Banking: From its origin Islamic banking is developing twenty-four hours by bay. Islamic banking was started with the birth of Islam itself when the Holy Prophet ( S.A.W.W. ) himself acted as an agent for his married woman ‘s trading operations.

The first Islamic bank was formed in a spiritual country of Egypt called Mit Ghamr in 1963.

In his book & A ; acirc ; ˆ?Islamic Banking in Pakistan: A Review of Conventional and Islamic Banking & A ; acirc ; ˆA? Prof. Dr. Khawaja Amjad Saeed explains the development of Islamic banking as under,

Many statute laws including Companies Ordinance 1984, Negotiable Instruments Act 1882, State Bath Act and Recovery of Loans Laws were reviewed to convey these in line with the renters of Islam.

Participation Term Certificates was introduced in 1980s which was recently replaced by Term Finance Certificate.

In Pakistan Musharaka was introduced on 1st July 1982.

In conventional banking system net income and loss sharing system was introduced on 1st April 1985.

On 23rd December 1991 it was announced that all banking minutess including involvement will discontinue to hold consequence by 30th June 2001.

Areas of Operation of Islamic Banks: The runing country of Islamic Bankss is different from those of conventional Bankss because all fiscal minutess in Islamic Bankss are based on net income and loss sharing system and involvement is purely prohibited in it.

Following are some of the fiscal minutess through which an Islamic bank operates,

Mudarabah: In this sort of dealing one individual provides capital for the concern and the other individual provides his managerial accomplishments in order to run the concern. The individual supplying capital is called Sahib-ul-maal and the individual runing the concern is called Mudarib

Musharakah: It is a partnership understanding where two or more than two individuals provide capital to run a concern and they portion net incomes and losingss in an in agreement ratio.

Ijarah: It is a rental or rental contract where the lease giver ( proprietor ) passes goods to a leaseholder but the ownership remains with the proprietor. Lessee pays rent in return for utilizing the goods.

Al Wadiah: Peoples deposit their money with Islamic Bankss in current history, savings history or fixed sedimentation history. Bank act as the agent of depositor and has unconditioned right to put the sedimentations and net incomes are so distributed among the depositors at an in agreement ratio.

Ujrah: Under the contract of Ujrah Islamic Bankss provides certain services to its clients and in return they pay a fee for these services.

Investing Activities:

Conventional Bankss invest in such securities which have fixed sum of return guaranteed i.e. involvement on bonds while Muslim Bankss as its name is self-explanatory can non put in such securities therefore Muslim Bankss in different sorts of Islamic funding instruments.

State Bank of Pakistan & A ; acirc ; ˆ™s Shariah board has approved some indispensable Islamic manners of funding which are,

Murabaha Facility Agreement

Musawamah Facility Agreement

Lease Agreement

Salam Agreement

Musharaka Investment Agreement

Istisna Agreement

Agreement for involvement free loan

Mudaraba Financing Agreement

Syndication Mudaraba Agreement

Social Activities:

Maslahah: Muslim Bankss should work for the public good.

Zakah: Zakah is the part of plus that is made compulsory to be spent in the ways specified by Allah Ta & A ; acirc ; ˆ™ala.

Muslim Bankss help hapless and destitute by administering zakah in them. The chief construct on the dorsum of zakah is that to convey equality in the society.

Qard-e-Hasna: In Islam merely gratuitous pecuniary loans are allowable which means no involvement has to be charged on loan provided.

Financing under Net income and Loss Sharing System: In Islamic Banking the chief construct is sharing of net incomes and losingss. Mudarabah and Musharakah are the best illustrations of net income and loss sharing contracts.


Interest free banking is emerging twenty-four hours by twenty-four hours, although there are many expostulations on it but it is playing a critical function in the economic system. Due to refined authorities statute laws Islamic banking has improved greatly and in future there are more bright chances nowadays.