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.
The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars. Learn about more key terms by downloading Islamic Banking Glossary.
The origination of term interest dates back to 17th century with the emergence of banking system at global level. Interest means giving and/or taking of any excess amount in exchange of a loan or on debt. Hence, it carries the same meaning/value as that of Riba as defined in the previous question. Further, it is narrated that “the loan that draws interest is Riba”. There is consensus among the Muslim scholars of all the fiqhs that interest is Riba in all its forms and manifestations.
There are four sets of revelations about Riba which were revealed on different occasions:
- First Revelation: In Surah-Ar-Rum, verse 39 , dealing in riba has been discouraged in the following words:
“And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah.” [Surah Ar-Rum 30:39] - Second Revelation: Muslims have been informed about the practice of taking riba by Jews in Surah An-Nisaa: “And because of their charging riba while they were prohibited from it.” [Surah An-Nisaa 4-161]
- Third Revelation: Riba/Interest has been abolished in the third verse of Surah Ali-’Imran. The prohibition of riba is laid down in the following words: “O those who believe do not eat up riba doubled and redoubled.” [Surah Al-e-Imran3- 130]
- Fourth Revelation: In the fourth revelation, Riba has categorically been prohibited in all its forms. The following set of verses is found in the Surah Al-Baqarah, verse 275-281 in the following words: “Those who take interest will not stand but as stands whom the demon has driven crazy by his touch.’ That is because they have said: ‘Trading is but like riba’. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah. And the ones who revert back, those are the people of Fire. There they remain for ever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve. O those who believe, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged.”
According to Islamic jurists and scholars, there are around 40 different Ahadith on the subject of riba and its prohibition from Holy Prophet (peace be upon him).
Few of these are as follows:
- From Hazrat Jabir (May Allah be pleased with him): The Prophet, cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: “They are all alike [in guilt].”
- Jabir ibn Abdallah (May Allah be pleased with him), giving a report on the Prophets Farewell Pilgrimage, said: The Prophet addressed the people and said “All of the riba of Jahiliyyah is annulled. The first riba that I annul is our riba, that accruing to 3. Abbas ibn Abd al-Muttalib (the Prophet’s uncle); it is being cancelled completely.”
- From Hazrat Abdallah ibn Hanzalah (May Allah be pleased with him): The Prophet, said: “A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times”
- Bayhaqi has also reported the above hadith in Shuab al-iman with the addition that “Hell befits him whose flesh has been nourished by the unlawful.”
The following are the main differential points between Conventional Banking and Islamic banking:
| Sr. | Conventional Banking | Islamic Banking |
|---|---|---|
| 1 | Money is a commodity besides medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out. | Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out. |
| 2 | Time value is the basis for charging interest on capital. | Profit on trade of goods or charging on providing service is the basis for earning profit. |
| 3 | Interest is charged even in case the organization suffers losses by using bank’s funds. Therefore, it is not based on profit and loss sharing. | Islamic bank operates on the basis of Profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah). |
| 4 | While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. | The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts. |
| 5 | Conventional banks use money as a commodity which leads to Inflation. | Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. Since, the money is linked with the real assets therefore therefore it contributes directly in the economic development. |
The Islamic bank uses its funds in various trades, investment and service related Shariah compliant activities and earns profit thereupon. The profit earned from such activities is passed on to the depositors according to the agreed terms.
No, Islamic banks accept the deposits either on profit and loss sharing basis or on Qard basis. These deposits are deployed in financing, trading or investment activities by using the Shariah compliant modes of finance. The profit so earned by the bank is passed on to the depositors according to the pre-agreed ratio which, therefore, cannot be termed as interest.
There will be no minimum balance requirement or Even if you have zero balance no charges will be applied. Please note that in case zero balance is maintained for a period of one year the account would be closed..
Yes, you will be able to use the entire ABL network to perform your day to day online banking transactions.
transfer through internet etc.?
Yes, you can continue using ADC services without any hindrance.
We will offer you a range of Shariah-compliant term certificates at competitive rate of Profitand the profit on these Term Certificates is Riba-free and therefore, absolutely Halal. Allied Islamic Term Certificates will be available for periods ranging from Allied Islamic Term Certificates will be available for periods ranging from one month to 5 years. Profit Payment options will be either Monthly, Quarterly, Half yearly and at Maturity. Premature encashment options for Allied Islamic Term Certificates are also available.
Currently there is no Shariah-compliant solution for Islamic Credit Cards approved by the Sharia Advisor of the Bank.
The operation of All PKR & FCY current accounts is based on the Islamic principle of Qard. The structure of Remunerative Saving & Term Deposits Accounts is based on the principle of Mudarabah and is strictly in conformity with the rules of Islamic Shariah and is approved by the Shariah advisor of ABL Islamic Banking.
Yes, you can contact us on the following phone number within Banking hours:
Zubair Tariq Khan
Head Shariah Compliance
Islamic Banking Group
Allied Bank Limited
2nd Floor, 3-4 Tipu Block
New Garden Town, Lahore
Tel # 042 3588 0043 Ext: 31419