The Iranian Association of Islamic Finance held an international webinar on “Islamic Finance: A Driving Force in the Economic System” on the 11th of June, 2024 at 2:00PM Iran Standard Time.

Speaker: Sheikh Shabbir Hassan Maisami, Shariah Advisor to State Bank of Pakistan and Founder of AL-Sadiq Institute, Pakistan

The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance (“Takaful”). In many majority Muslim countries, Islamic banking assets have been growing faster than conventional banking assets. There has also been a surge of interest in Islamic finance from non-Muslim countries such as the UK, Luxembourg, South Africa, and Hong Kong. Over the past decade Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system – and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity. Islamic finance is equity-based, asset-backed, ethical, sustainable, environmentally- and socially-responsible finance. It promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.

The following key principles guide Islamic Finance:
1)Prohibition of interest on transactions (riba);
2)Financing must be linked to real assets (materiality);
3)Engagement in immoral or ethically problematic businesses not allowed (e.g., arms manufacturing or alcohol production);
Returns must be linked to risks.

ABOUT ISLAMIC BANKING:
Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. Interest free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads towards the achievement of a system which helps achieve economic Prosperity.
PHILOSOPHY OF ISLAMIC BANKING:
The philosophy of Islamic banking takes the lead from Islamic Shariah. According to Islamic Shariah, Islamic banking cannot deal in transactions involving interest/riba (an increase stipulated or sought over the principal of a loan or debt). Further, they cannot deal in the transactions having the element of Gharar or Maiser. Moreover, they cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of Islam). Islamic banks focus on generating returns through investment tools which are Shariah compliant as well. Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.
ABOUT ISLAMIC CAPITAL MARKET:

The Islamic Capital Market (ICM) functions as a parallel market to the conventional capital market in Malaysia. In the ICM, market transactions are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam.

Investing in Shariah-compliant securities is not limited to only Muslims as Shariah-compliant securities are part of the securities listed on Bursa Malaysia. In general, all ICM instruments and institutions must comply with Shariah principles, namely:

•Prohibition of riba (interest)
•Application of al bai’ (trade and commerce)
•Avoidance of gharar (ambiguity) in contractual agreement
•Prohibition of maisir (gambling)
•Disengagement from production of prohibited commodities,
•such as liquor, pork, tobacco, etc.
There are at least six basic principles which are taken into consideration while executing any Islamic banking transaction. These principles differentiate a financial transaction from a Riba/interest based transaction to an Islamic banking transaction.
BASIC PRINCIPLES OF ISLAMIC BANKING:

1. Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to satisfy whether the transaction is halal (valid) in the eyes of Islamic Shariah. This means that Islamic bank’s transaction must not be invalid or voidable. An invalid contract is a contract, which by virtue of its nature is invalid according to Shariah rulings.

2. Risk sharing: In every Islamic banking transaction, the Islamic financial institution and/or its deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning any profit there from.

3. No Riba/interest: Islamic banks cannot involve in riba/interest related transactions. They cannot lend money to earn additional amount on it. However as stated in point No. 2 above, it earns profit by taking risk of tangible assets, real services or capital and passes on this profit/loss to its deposit holders who also take the risk of their capital.

4. Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity. Further, Islamic banking transactions are backed by tangible asset or real service.

5. Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement.

6. No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matter or activities may be allowed by the law of the land but if the same are not allowed by Shariah, these can not be financed by an Islamic bank.

ISLAMIC MODES OF FINANCE:

The following are the modes of finance which are or three categories:
1. Participatory modes of Finance
a) Mudarabah
b) Musharakah

2. Non Participatory modes of Finance
a) Murabaha
b) Musawamah
c) Salam
d) Istisna
e) Ijarah
f) Ijarah wa Iqtina (Ijarah Muntahiyyah Bittamleek)

3. Sub contracts
a) Wakalah
b) Kafalah
c) Rahn