ISLAMIC BANKING
WHAT IS ISLAMIC BANKING?
Islamic Banking is a system of banking that complies with Shariah law, the
moral code and religious law of Islam. Unlike conventional banks, Islamic
banks:
• Do not charge or pay interest (Riba)
• Engage in ethical, asset-backed transactions
• Operate under the principles of risk-sharing
• Avoid prohibited (haram) industries
CORE SHARIAH PRINCIPLES OF ISLAMIC FINANCE
1: PROHIBITION OF RIBA (INTEREST)
• Riba is any predetermined, guaranteed interest.
• Islam treats this as unfair, especially for the poor. It creates economic
injustice --- benefiting the lender and mistreating the borrower.
• Islam forbids “money on money” --- wealth should be created through
trade and real economic activity.
• Islamic banks earn profit from actual trading, leasing, or investments.
2: PROHIBITION OF GHARAR (Uncertainty)
• Gharar refers to excessive uncertainty in contracts.
• Islam demands full clarity in terms and outcomes. Transactions must
be clear, well-defined, and free from deception.
Example
Selling something not owned or items not in your possession --- Like,
Derivative contracts (e.g., futures/options without real delivery)
3: PROHIBITION OF MAISIR (Gambling/Speculation)
• Islam prohibits speculative activities with high risk and no productive
outcome. Like, lottery tickets Based purely on chance; no effort or
value.
• Encourages real investments in assets or businesses. Like, offers
home financing, car financing, business loans and etc.
4: RISK SHARING
• Both the bank and customer share the risk and reward of investments.
Encourages joint ventures and partnerships, where both parties
contribute effort and resources.
• Islam discourages "guaranteed return without risk" --- Profits and
losses are shared based on the investment ratio.
Mudarabah: One provides capital, the other manages. Profits are shared,
losses accepted by investor.
Musharakah: Both contribute capital and share profits/losses as per agreed
ratio.
5: ASSET-BACKED TRANSACTIONS
• All financing must involve real, tangible assets in every transaction.
• Promotes real economy and reduces bubbles (not artificial paper
trading).
Example
In Ijara (leasing), the bank owns a car and leases it to you --- it's not just
moving money, it's tied to an actual asset.
6: INVESTMENT IN HALAL INDUSTRIES ONLY
• Islamic banks cannot invest in:
o Alcohol
o Pork
o Gambling
o Conventional banking
ISLAMIC VS. CONVENTIONAL BANKING
FEATURE ISLAMIC BANKING CONVENTIONAL BANKING
Interest (Riba) Prohibited Main source of income
Risk Sharing Encouraged Lender bears no risk
Asset Backing Required Not always required
Halal Business Only Yes No such restriction
Ethical Constraints High (based on Islam) Low to none
REGULATORY FRAMEWORK IN PAKISTAN
Islamic Banking Division – State Bank of Pakistan (SBP)
• Ensures compliance with Shariah law
• Issues Shariah Governance Framework
• Approves products through Shariah Advisory Board
KEY INSTITUTIONS
1. Meezan Bank (Pioneer)
2. Bank Islami
3. Dubai Islamic Bank Pakistan
4. Al Baraka Bank
5. Faysal Islamic Banking
