Riba Free Financial System

Course Instructuor : Yousuf Ibnul Hassan

Riba Free Financial System

Chapter 3


Two Financial Systemfor Monitory & Financial Markets

1.Riba Based

2.Riba Free


Riba Based

The financial system which is base on RIBA practice which means bad earning and , commonly known as a one category of Riba which is Interest

(the Price of Money).


Riba Free

The system emerged on factual and authentic principles of Islam on the guidance of Holy Quran, explained in Hadiath (Prophet May

Peace Be upon Him sayings) and practiced by Muhammad, May Peace Be upon Him, last and

most Honored and Blessed messenger of Almighty Allah


Historical Background

Financial matters in Post Islam Era were commonly practiced on the bases on social priorities and Prophet (PBUH) too were involve in commercial and financial activities considering the social obligations in financial matters

Most powerful community development on the basis of social developments which is authenticated by archives of Islamic World.


Interest based System, dominating 96% of the present financial and monetary markets, controlling the market with its powerful grip and titled as the Conventional Monetary System,

System derived from Quran, Sunnah and Hadiath has the better title that signify motive and concept

of the system as Socio-Financial System.

Historical Background…………………Contd


Islamic financing was practice for the most part in the Muslim world throughout the middle Ages.

It encourage trade and business activities In Spain and the Mediterranean and Baltic states,

Islamic merchants became vital intermediaries for trading activities.

European financiers and businesspersons later adopted many concepts, techniques, and instruments of Islamic finance.



The term "Islamic financial system" is relatively new, appearing only in the mid-1960s

Commercial or business activities conforming to Islamic principles made under the umbrella of either "interest-free" or "Islamic Banking.

Islamic financial system simply as "interest-free" does not provide a true picture of the system as a whole.



Prohibition of receiving & paying interest is the base of this system.

It works on Islamic set guidelines consisting of Risk Sharing, Individual Rights & Duties, Property Rights, Purity of Contracts, Commitments, Transparencies, Fair Deals and Employment Growth.

Not limited to banking but covers capital formation, capital markets, and all types of financial settlement.



The philosophical roots of an Islamic financial system originate from the relations of factors of production and economic activities.

Conventional financial system deals primarily with the economic and lending and borrowing aspects of transactions. Financial system equally emphasizes on the ethical, moral, social & religious proportions for enhancing equality and fairness for an ideal society.

It fully appreciate in context of Islamic teachings on the work ethic, wealth distribution, social and economic justice, role of the state and responsibilities and duties of the citizen.



It is establish on absolute prohibition of payment or receipt of predetermined and guaranteed return rate.

Pre-agreed/ estimated share of profit or growth had been noticed in the archives, way back to post Islamic era and was practiced by Muhammad (May Peace Be Upon Him), the Caliphs and the Ashab (close associates of Prophet May Peace Be upon Him).



This ended concept of interest and rule out use of debt-based instruments.

The system encourages risk sharing, promotes entrepreneurship, discourages speculative behavior, and emphasizes the sanctity of contracts

Basic framework for Islamic financial system is enforcement of the rules for handling of economic, social, political, and cultural characteristic of Islamic societies



Basic principles of Islamic financial system

1 - Prohibition of Riba in Financial Practice

Any unjustifiable increase of capital whether in loans or sales is central belief of system.

Any positive, fixed, predetermined rate tied to maturity and amount of principal (i.e., guaranteed regardless of performance of the investment considered Riba


2 - Risk sharing

Because interest is prohibited, suppliers of funds become

investors instead of creditors. The provider of financial capital

and the entrepreneur share business risks in return for

shares of the profits.


3 - Money as "potential" capital

Money is treated as "potential" capital It becomes actual capital only when it

joins hands with other resources to undertake a productive activity.

Islam recognizes the time value of money, but only when it acts as capital, not when it is "potential" capital


4 - Prohibition of speculative behavior

An Islamic financial system discourages exhibition of

wealth and prohibits transactions featuring extreme uncertainties, gambling, and

risks


5 - Transparency of contracts

Islam upholds contractual obligations and the disclosure

of information as a sacred duty.

This feature is intended to reduce the risk of information

and moral hazards.


6 - Shariah-approvedactivities

Only those business activities that do not violate the rules of Shariah

qualify for investment.

For example, any investment in businesses dealing with alcohol, gambling, and casinos would be

prohibited


Aristotle defines Interest…..

Defined Interest as price of money Lender charge borrower pays. Islam accept that agreement between financier and user, if agreed on terms of transaction and fulfill obligations in rightful manner, there is no harm in lending or borrowing.

Transaction encounters difference of opinion, it starts entering into Riba. Thus it affects relationship and harmony of two parties. In this condition monetary and financial affairs are forbidden.


How to remove Riba ?

Islam clearly characterizes difference between lawful and forbidden in economic activity and permit the Muslims to make all efforts for their right in seeking their economic benefits.

Further clarify the permissions, Islam prohibits financial, economical, social and legal actions, which are morally, financially and socially damage the community life.


The Islamic financial system employs concept of participation in enterprise, utilizing funds at risk on a profit-and- loss-sharing basis.

Careful investment policy, diversification of risk and careful management by Islamic financial institutions.

Potential profit in proportion to the risk assumed and to satisfy conflicting demands of participants in the current environment and within the guidelines of the Shariah.

How to remove Riba ?................Contd


Difference between Conventional & Islamic Finance Terms

Financing is Equity and not Liability Lending is liability and not participation. Financing is made and Loan is given Loan is secure financing is support. Financing is an investment and loan is facility. Loan cannot be financing until it is agreed on

Profit and loss sharing and financing cannot be a loan till return is guaranteed.


Thank You

Riba Free Financial System

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