By 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. 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.
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 categorize Islamic financing as follows:
- 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.
- Ijara
Another form of Islamic mode of financing is Ijara which simply means to give something on rent. Ijara has two different types namely: If a person provides services and wage is given as compensation in this sense employer is called Mustajir and the employee is called Ajir; 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.
- Salam
The terminology of Salam has been defined as a “sale where by the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price.”
The Holy Prophet (PBUH) allowed salam on the following circumstances that full payment should be made from the end of buyer because salam is allowed with keeping in mind the unavailability of finance of the seller like farmer. So salaam is beneficial for both the parties, seller enjoys advance payment unlike buyer take the benefit of price lower than the spot rate.
- Istisna (Pre-production sale)
Similarly Istisna is kind of a sale where a commodity is transacted before it comes into existence. The important point in the case of Istisna is that the manufacturer uses its own material for production otherwise the contract will be of Ijara rather than Istisna.
The distinguishing features are that in Istisna manufacturing of the commodity is necessary. In Salam full price is paid in advance but in Istisna there is no such condition and last but not least the delivery time is an important factor in Salam and not of Istisna.
Source Business Recorder