What is Islamic
Microfinance ?
Abdul Samad
 Shariah Advisor
The Bank of Khyber
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2
Why Islamic Banking?
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The body which is promoted by Hiram sources is
bound to hellfire.
On the Day of Judgment, a person will not be moved
from the place where he stand until he is asked
about the sources of his income and they way he
spent it.
Purifying of the needs of life (food, drink, clothes
house etc) is one of the most important reason for
the acceptance of prayers by Allah.
3
Rulings In Islam
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These 5 primary objectives follow by Shariah
can be observed though the Al Ahkam
(rulings)
upon
which
Fiqh
(Islamic
Jurisprudence) rotate around. The rulings are
categorized as follows:
a. Wajib (obligatory)
e. Haram (unlawful)
b. Mustahab (recommended) (Sunnat)
c. Mubah (permissible)
d. Makruh (disliked)
4
Rulings
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Wajib- An obligatory action or something that shall be
performed. Anyone who leave it is liable to gain the
punishment of Allah s.w.t. in the Here after as well as
a legal punishment in this world.
Haram- An unlawful action or the one that shall not be
performed and is strictly prohibited. Anyone who
engages in it is liable to gain the punishment of Allah
s.w.t. in the Here after as well as a legal punishment
in this world.
Mustahab- A recommended action or something that
should be performed.
Mubah- A permissible action or something that is
neither encouraged nor discouraged.
Makruh- A disliked action or something which is
abominable and should be avoided but not in strictly
prohibitory terms.
5
Islam and Shariah
Islam
Aqidah
(Faith & Belief)
Shariah
(Practices & Activities)
IBADAT
(Man to God Worship)
Political Activities
Akhlaq
(Morality & Ethics)
Muamalat
(Man to Man Activities)
Economic Activities
Social Activities
Banking & Financial Activities
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Human Financial Needs
Fulfillment of Financial Needs
Own Capital
Others’ Capital
Equity Financing
Debt Financing
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External (Equity & Debt) Financing
Equity Financing
Debt Financing
Al-Musharakah (Joint
Venture Profit Sharing)
Uqud al-Muawadhat
(Deferred Contracts of Exchange)
Al-Mudarabah
(Trustee Profit Sharing)
Al-Bai’ Bithaman (Mu)Ajil (Deferred
Installment Sale)
Others
Bai’ al-Murabaha
(Cost Plus Profit Sale)
Al-Ijarah (Leasing)
8
Most Important Islamic Teaching
Related To Business
1.
2.
3.
4.
5.
6.
7.
8.
9.
Elimination of Interest (Raba)
The prohibition of uncertainty (Gharar)
The prohibition of Gambling (Qimar)
The precipitation of games of chance (Maser)
Honesty and Fair Trade (Ghishsh and Khilabah)
Spending in the Good Cause
Buy Back
Two Mutually
Conditional Contract
Entitlement to profit depends on liability
for risk
9
Interest

Interest, Usury, or Riba is forbidden in
almost all major religions of the world
e.g.

Judaism

Christianity

Islam
10
Riba in Quran

God has permitted trade and forbidden interest….”
(The Cow – Sura Al-Baqara 2:275)
 O believers, fear Allah, and give up what is still
due to your from the interest (usury), IF
[indeed] you are true believers[!!!]. If
you do not do so, then take
Notice of War from Allah and his Messenger.

But, if you repent, you can have your principal.
Neither should you commit injustice,
nor should you be subjected to it.”
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(The Cow – Sura Al-Baqara 2:278-9)
Riba in Quran (Related in context to
2:278)
The only reward of those Who make War upon Allah & his Messenger, and
strive
after corruption in the land, will be that they will be
1.
Killed
2.
Or, Crucified,
3.
Or, have their Hands and Feet on alternate sides Cutoff,
4.
Or, will be Expelled out of the land.
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Such will be their degradation in the world, and
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in the hereafter, theirs will be an terrible doom.”
(Quran: The Table Spread - Al-Maida Chapter 5: Verse 33)
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Riba in Hadith
The Prophet cursed
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the receiver and

the payer of interest,

the one who records it and
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the witnesses to the transaction
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and said: “They are all alike (in guilt).”
(Sources: Jabir Ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed
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RIBA
RIBA
Riba-Al-Fadl
Riba-Al-Nasiyah
Sarfi Sood
Tijarti Sood
Simple Sood
Simple Sood
Compound Sood
Compound Sood
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The prohibition of uncertainty
(Gharar)
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There are strict rules in Islamic finance
against transactions that are highly uncertain
or may cause any injustice or dishonesty
against any of the parties.
The concept of Gharar has been broadly
defined by the scholars in two ways.
First, Gharar implies uncertainty.
Second, it implies dishonesty.
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Classical Examples of Gharar
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Selling goods that the seller is unable to deliver
Selling known or unknown goods against an
unknown price, such as selling the contents of a
sealed box
Selling goods without proper description, such as
shop owner selling clothes with unspecified sizes
Selling goods without specifying the price, such as
selling at the 'going price'
Making a contract conditional on an unknown event,
such as when my friend arrives if the time is not
specified
Selling goods on the basis of false description
Selling goods without allowing the buyer the
properly examine the goods
The Prophet (pbuh) prohibited the pebble sale and the Gharar sale.
16
Qimar
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Qimar includes every form of gain or money, the
achievement of which depends purely on luck
and chance.
All Lotteries and Prize schemes based purely on
luck come under this prohibition.
O ye who believe! Intoxicants and gambling,
sacrificing to stones, and (divination by) arrows,
are an abomination, of Satan’s handiwork…..:
(5:90-91)
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He who played Qimar has disobeyed Allah and
His Messenger.” (Ibn Majah )
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Honesty and Fair Trade (Ghishsh
and Khilabah)
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Thus Manipulations and Mismanagement like
Hoardings
Black marketing
Cheating
Profiteering
Short weighting
Hiding the defective quality of the goods are
prohibited in Islamic Financial System.
 The prophet (PBUH) said: the truthful
honest merchants are with the prophets
In the Day of Judgment.
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Spending in the Good Cause
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The Islamic economic approach is one, which is
directed
towards
the
achievement
and
actualization of justice in human relations.
The result of this effort is falah or success and
salvation, and hayah tayyibah or good life in
this world and the hereafter.
So Islamic banks don’t permute to establish
any relation with commodities, services and
individuals whose moral practices are doubtful
Some people spend Allah’s wealth (i.e. Muslim’s
Wealth) in an unjust manner, such people will be put
in the (Hell) fire on the day of resurrection” (Bukhari
and Ahmad)
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Buy Back

The financier sells an asset to the customer
on a deferred-payment basis, and then the
asset is immediately repurchased by the
financier for cash at a discount.
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Two Mutually Conditional Contract
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Two mutually contingent contract have been
prohibited by the holy prohibited by the holy
Prophet (pbuh).
The sale of two item in such a way that one
who intends to purchase good is obliged to
purchase the other also at any given price.
One sale transaction with tow prices.
Combining sale and lending in one contract.
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WHAT IS ISLAMIC BANKING?
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WHAT IS BANK?
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The name bank derives from the Italian
word banco "desk/bench.
In practice, the word “Bank” means an
institution which borrows money from
people and lends money to people for
interest or profit and provided
other financial services.
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BANKS ENGAGE IN THE
FOLLOWINNNG ACTIVITIES.
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Accepting money
Processing of payments by way of telegraphic
transfer, internet banking, or other means;
Issuing bank drafts and bank cheques
Lending money
Providing documentary and standby letter of
credit,
guarantees,
performance
bonds,
securities underwriting commitments and other
forms of off balance sheet exposures
Safekeeping of documents and other items in
safe deposit boxes
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WHAT IS ISLAMIC BANKING?
Islamic banking has been defined as
banking in consonance with the ethos
and value system of Islam and
governed, in addition to the conventional
good governance and rick management
rules by the principle laid down by
Islamic Shariah.
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Comparison of the Islamic and Conventional
systems
Conventional Banking
 Conventional Banks take deposit on interest
basis and lend on the basis on interest. A part of
interest is paid to the depositors and the
remaining interest is left for the bank as its
income. If this residual is more than its
expenses, it will have Net Income otherwise it
will have Net loss.
Islamic Banking
 Islamic Banking accepts deposits on PLS basis
and invest in Shariah based modes. Whatever is
the profit, it is shared with depositors. If there is
a loss it will also be shared.
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OBJECTIVES OF ISLAMIC BANKING
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Shariah compliant banking, to enable
Muslims to do their banking transaction – a
Halal way.
Achieving the goals and objectives of an
Islamic economy.
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Types of contract
CONTRACT
Compensatory / Financial Contract
Non Compensatory / Social Contract
Trade
Gift
Leasing
Nikah
Employment
Money lending
Partnership
Guarantee (Damanat)
Paid agency
Non-paid agency
Services against fee
Rights transfer
(Hawalah)
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COMPONENTS OF VALID
SALE
SALE
CONTRACT
•Offer/Acceptance
•Buyer/Seller
SUBJECT
MATTER
•Existence
•Ownership
•Possession
PRICE
POSSESSION
•Physical
•Constructive
•Certain
•Valuable
•Halal Purpose
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Instant and absolute
Unconditional
DERIVATION OF MURABAHA
The word “Murabaha” has been
derived from the Arabic word
“Ribah”, which has literary
meaning of profit.
The Murabaha can be denoted as
“Sale With Profit”.
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DEFINITION OF MURABAHA
Murabaha is a particular kind of sale
where Seller expressly mentions the cost
it has incurred on purchase of the
Asset(s) to be sold and sells it to another
person by adding some profit, which is
known to Buyer.
31
Musawamah
Musawamah is a general kind of sale in
which price of the commodity to be traded
is stipulated between seller and the buyer
without any reference to the price paid or
cost incurred by the former. Thus it is
different from Murabaha in respect of
pricing formula.
Unlike Murabaha, seller in Musawamah
is not obliged to reveal his cost.
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VARIOUS
MODELS OF
MURABAHA
FINANCE
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MODEL - I
TWO PARTY REALTIONSHIP
 Bank – Customer
MODEL - II
THREE PARTY RELATIONSHIP
 (Bank-Vendor) and Customer
MODEL - III
THREE PARTY RELATIONSHIP
 Bank and (Vendor-Customer)
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MODEL - I
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The simplest possible Model emerges
when the transaction involves two
parties only, i.e Bank and the
Customer.
The Bank is also vendor and sells the
Asset(s) to its Customers on deferred
payment basis.
From Shari’ah perspective it is an ideal
Model and its profits are fully justified
because Bank assumes all risks as
Vendor/Trader.
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MODEL I – GRAPHICAL PRESENTATION
2
Customer
1
3
36
Bank/Vendor
MODEL I - PHASES
Phase 1:
The customer approaches Bank (Vendor) and
identifies Asset(s) and collects relevant
information including cost and profit.
Phase 2:
Bank sells Asset(s) to the Customer, transfer
risk and ownership to the Customer at certain
Murabaha Price.
Phase 3:
Customer pays Murabaha Price in lump sum
or in installments on agreed dates.
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MODEL - II
 In
most cases Murabaha Transaction
involves a third party (i.e. Vendor)
because Bank is not expected to engage
in sale of variety of products required
for variety of Customers.
 The Bank directly deals with the Vendor
and purchases the Asset(s).
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MODEL II
 The
Bank sells the purchased
Asset(s) to the customer on cost
plus basis.
 There
are two distinct sale contracts
at different point of times. First
between Bank and Vendor and
second between Bank and the
Customer.
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MODEL II – GRAPHICAL PRESENTATION
1
Customer
Vendor
5
2
6
40
3
4
Bank
MODEL II - PHASES
Phase 1:
Customer identifies and approaches the
Vendor or Supplier of the Asset(s) and
collects all relevant information.
Phase 2:
Customer approaches the Bank for
Murabaha Financing and promises to buy
the Asset(s).
Phase 3:
The Bank makes payment to vendor
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directly.
MODEL II – PHASES
Phase 4:
Vendor delivers the Asset(s) & transfers the
ownership of Asset(s) to the Bank.
Phase 5:
Bank sells the Asset(s) to Customer on cost
plus basis and transfers ownership.
Phase 6:
Customer pays Murabaha Price in lump
sum or in installments on agreed dates.
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MODEL III – BANKING
MURABAHA
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43
This Murabaha Model is mostly
practiced model in Banking now a days
and therefore we will look at it in more
detail.
We will also look at the documentation
required at different stages of the
transaction.
It is also a three-party structure but it is
bit complicated than previous ones.
MODEL III – BANKING MURABAHA
 The
product of Murabaha that is being
used in Islamic Banking as a mode of
finance is something different from the
Murabaha used in normal trade .
 It
is called Murabaha to the Purchase
Orderer .
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MODEL III – BANKING MURABAHA

It is a bunch of contracts completed in steps
and ultimately suffices the financial needs of
the client.
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THE SEQUENCE OF THEIR EXECUTION
IS EXTREMELY IMPORTANT TO MAKE
THE TRANSACTION SHARIA’H
COMPLIANT.
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MODEL III – GRAPHICAL
PRESENTAION
3
Vendor
4
5
5
2
Bank
Customer
6
Offer
Acceptance
1
46
7
PHASE I – PROMISE TO PURCHASE AND SELL
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The Customer approaches the Bank for
Murabaha Finance and promises to
purchase the Asset(s) from the Bank
which, the Customer will purchase as an
Agent of the Bank.
Master Murabaha Finance Agreement
(MMFA) shall be signed by the Bank and
the Customer at this stage. This is
basically a Memorandum of
Understanding between two parties.
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PHASE II – APPOINTMENT OF
AGENT
In the absence of expertise required to
purchase particular kind of Asset(s), the Bank
appoints Customer as its Agent to buy Asset(s)
on its behalf
Types of Agency Agreement
ON ASSET BASIS
ON TIME BASIS
•Global Agency
•Specific Agency
•Limited Period
•Open Ended
PHASE III & IV –
PURCHAHSE OF ASSETS BY AGENT
The Customer identifies the Vendor,
selects the Asset(s) on behalf of the Bank
and advice its particulars, including the
Vendor’s name and purchase price to the
Bank.
 If the supplier is nominated by the
Customer itself, guarantee for good
performance can be demanded from
the Customer.

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PHASE III & IV –
PURCHAHSE OF ASSETS BY AGENT

The Customer takes possession of the
Asset(s) as an Agent of the Bank.

It is the obligation of the Customer(Agent) to
ensure, at this stage, that Asset(s) supplied is
in accordance with the given specifications.

To ensure that a fresh Asset(s) are purchased
by the Agent, Bank’s staff should verify
actual purchase of Asset(s).
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PHASE III & IV–DOCUMENTATION
DECLARATION FROM CUSTOMER (AGENT)
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51
The Customer (Agent) will inform the Bank,
through this document, that it has taken the
possession of Asset(s) on behalf of the Bank.
This Transactional Document shall be an
integral part of Master Murabaha Financing
Agreement (MMFA).
This declaration must contain the statement that
Customer has inspected the Asset(s) to ensure
that its appropriateness and suitability to the
customer.
Steps Of Banking Murabaha
MOU

Order Form

Agency Agreement

Purchase

Payment of Purchase Price

Possession

Offer and Acceptance
(Declaration)

Payment of Murabaha Price
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Short/ Medium Term
Financing (Murabaha)
Supplier
3. Customer buys
the goods as
Bank’s agent.
Cost: $100
4. Disbursement
of the Facility.
Facility Amount:
$100
Customer
1. Execution of
Murabaha
Agreement.
Sale
2. Bank appoints
the Customer as
its agent to buy
the goods.
Bank
5. Under the Murabaha Agreement the Bank will immediately sell
the goods at $110 (cost plus a profit margin) payable on a deferred
Features:
• Fixed rate financing only
Uses:
• Inventory Financing
•Financing commodity
purchase
Tenor:
•12-18 months
Risks:
•Credit Risk
payment terms.
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SALAM
54
INTRODUCTION
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There are three basic conditions for validity of a
sale in Shariah :
 The purchased commodity must be existing;
 The seller should have acquired the ownership
of that commodity; and
 The commodity must be in the physical or
constructive possession of the seller.
There are only two exceptions to this principle in
Shariah:
 Salam (which is also called as Salaf); and
 Istisna.
DEFINITION


The seller undertakes to supply
specific goods to the buyer at a future
date in exchange of an advanced price
fully paid at spot.
The price is paid immediately in cash
but the supply of purchased goods is
deferred to a fixed date.
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FROM WHERE SALAM STARTED
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Before prohibition of interest farmers used to get
interest based loans for growing crops and
harvesting. After prohibition of interest, they were
allowed to do Salam transactions. This helped
them to get money in advance for their needs.
During the days of our prophet (SAAWS), the
merchants going with caravans used to get
interest based loans for purchasing the
commodities. After prohibition of interest, they
were allowed to do Salam.
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BENEFIT TO THE SELLER


The seller gets in advance the money
he wants in exchange of his obligation
to deliver the commodity later.
He benefits from the Salam sale by
covering his financial needs whether
these are personal expenses or
expenses for productive or trading
activity.
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BENEFIT TO THE BUYER


The purchaser or the Bank gets the
commodity it is planning to trade on the
time it decides.
The Bank will also benefit from the cheap
prices because usually the Salam sale is
cheaper than the cash sale. This way the
Bank will also be secured against the
fluctuations of price.
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PARALLEL SALAM


The Bank being the purchaser of Salam commodity
can further sell on Parallel Salam in a similar manner
as it has previously purchased on first Salam without
making one contract dependent on the other.
However, in such case, the date of delivery shall not
be earlier than the date of receipt of such
commodity.
The Bank also has the option of waiting to receive
the commodity and then sell it for cash or deferred
payment.
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FLOW OF SALAM TRANSACTION
SALAM
PURCHASER
SALAM SELLER
1
Salam Sale
2
3
Delivery of
Commodity
Salam on
Credit
ISLAMIC BANK
Purchaser
Seller
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SALAM BASED FINANCIAL
PRODUCTS
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Agriculture financing
Working Capital Financing
Commercial and industrial financing
Export financing
Operations and capital cost financing
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DIFFERENCE BETWEEN SALAM
AND MURABAHA
Salam
Murabaha
In Salam, delivery of purchased In Murabaha, purchased goods
goods is deferred, price is paid are delivered at spot, price may
on spot.
be either on spot or deferred.
In Salam price has to be paid in In Murabaha price may be paid on
full in advance.
spot or deferred.
Salam is not executed in the Murabaha
is
executed
particular
commodity
but particular commodity.
commodity
is
specified
by
specifications.
in
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BASIC RULES
64
SPECIFICATION OF
COMMODITY


The commodity (Al-Muslam fihi) should
be known. It must be monitored by
specifications to the maximum possible
degree, only negligible variation is
tolerated.
It must also be ensured that the
commodity is possible to be delivered
when it is due.
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SPECIFICATION OF
COMMODITY


Only those goods can be sold through
Salam contract in which the quality and
quantity can be exactly specified. In other
words it can be done only in such items
which can be weighed, measured or
counted.
Salam can only be carried out in the items
in which variations in numbers make no
difference.
66
DELIVERY CONDITIONS


Due date of delivery must be agreed at the
commencement of the contract.
The place of delivery should also be known.
If it is not known, the place where the
contract took place shall be considered to
be the place of delivery, unless it is
impracticable. In such a case, the place of
delivery shall be decided according to
customary practices.
67
DELIVERY CONDITIONS




Before delivery, goods will remain at the
risk of seller.
After delivery, risk will be transferred to
the purchaser.
Possession of goods can be physical or
constructive.
Transferring of risk and authority of use
and utilization / consumption are the basic
ingredients of constructive possession.
68
SALE BEFORE POSSESSION


Commodity purchased under Salam
can not be sold earlier than taking
possession thereof. However, a very
small school of though is of the view
that this restriction should apply to the
food commodities only.
These commodities can, however, be
sold under parallel Salam or may be
promised to be sold at a future date.
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PARALLEL SALAM


There must be two separate and
independent contracts, one where the
Bank acts as buyer and other in which it
is a seller.
The two contracts cannot be tied up and
performance of one should not be
contingent on other.
70
BUY BACK


Salam arrangement cannot be used as a
buy back facility where the seller in the
first contract is also the purchaser in the
second.
Even if the purchaser in the second
contract is a separate legal entity but
owned by the seller in the first contract,
it would not tantamount to a valid
Parallel Salam agreement.
71
Ijarah- Concepts


An Ijara is a lease purchase contract in which a financial institution purchases
capital equipment or property and leases it to an enterprise. The financial
institution may either rent the equipment or receive a share of the profits
earned through its use.
Ijara wa-Iqtina is the same as Ijara except that the lessees can acquire
ownership of the asset by making installment payments. The responsibilities of
the various parties to an Ijara wa-Iqtina contract are given below:
 The bank buys the assets from the vendor
 The bank then leases the asset to the customer
 The bank collects periodic rentals
 The title of the asset remains with the bank under an operating Ijara.
 Title passes to the customer under an Ijara muntahia bittamleek, either
gradually over the period of the contract or at the end.
Assets leased to the
customer- title does (not)
pass at the end of the lease
term
Transfer of title
to the bank
Vendor
Islamic Bank
Payment of purchase
price
Customer (lessee)
Ijarah
installments
72
Procedure of Banking Ijarah
Undertaking to Ijarah

Agency Agreement

Purchase

Payment of Purchase Price

Lease Agreement
73
Finance Lease (Ijarah)
Features:
• Floating rate financing
Manufacturer /
Supplier
1. Customer buys
the property as
Bank’s agent.
Cost: $100
possible
3. Disbursement
of the Facility.
Facility Amount:
$100
Lease
Uses:
• Financing Capital
Expenditure
Customer
2. Execution of Ijara
Agreement
•Can be used for refinancing
4. Bank appoints
the Customer as
its agent to buy
the property.
Bank
5. Under the Ijara Agreement the Bank will lease the property
immediately.
•Financing Big Ticket items
like Aircraft, VLCCs, LNG
Carriers, etc.
Tenor:
•5-7 years
Risks:
•Credit Risk
•Performance Risk
•Cost Overruns
•Ownership Risk
74
Ijarah…illustrative deal
Ijara is used to raise finance against an asset
 XYZ Real Estate Deal : Sale/leaseback of existing properties to fund
construction of new buildings
 Client sells its existing asset to the Bank. The sale can be a beneficial
transfer of ownership or actual legal title transfer
 Bank leases the asset back to the client for the period of financing, against
periodic lease rentals.
 The rentals will comprise of only profit (during grace period) and both
profit and principal payments (during amortisation period). The profit can
be linked to a floating rate index, such as Libor.
 At the end of the term, Bank transfers the asset back to the client either
as a gift or at a nominal sum or at the termination price (if bullet
repayment).
 During the lease period, Bank is liable for insurance and major
maintenance as owner of the property. However, Bank can appoint the
client as its agent to perform these tasks
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MUZARA'A

Muzara’a is partnership in crops in which one
party presents land to another for cultivation and
maintenance in consideration for a common
defined share in the crop.
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MUZARA'A

1.
2.
It can take several forms.
For instance, contract based arrangement can
specify that land and other physical factors of
production for the enterprise could come from
one party while labor could be provided by the
other party.
Incidence of a three-party in which the first
party provides land, the second provides a
combination of required physical inputs, and the
third provides labor.
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MUZARA'A



The location and characteristics of the land to be
cultivated under Muzara'a must be clearly
identified and submitted to the party that is to
implement the operation.
The production goal of the enterprise must be
defined in terms of end products i.e. crops or live
stock to be grown.
The period in which the Muzara'a contract is to
be effective must be defined.
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MUGHARASA

Mugharasa (agricultural) partnership is a
partnership in which one party presents a
treeless piece of land to another to plant trees
on it on the condition that they share the trees
and fruits in accordance with a defined
percentage.
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MUGHARASA





The functions and obligations of each individual
or party in the contract must be clearly and
unambiguously defined.
The location and characteristics of the land to be
cultivated under Mugharasa must be clearly
identified.
The production goal of the arrangement must be
defined in terms of end products.
The period in which the Mugharasa contract is to
be effective must be defined.
Method of distribution of output must be stated
80
clearly in the contract.
Summary of the Presentation





Islamic Banking is a system where deposits collected
on profit & loss sharing basis are invested in
profitable Projects using any Shariah based mode
and their net income/loss is shared between the
depositor and the bank.
It has three parts.
Collection of deposits on pls basis.
Investing deposits in profitable ventures using
shariah based modes.
Distributing profit and loss among depositors and the
bank.
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(From Economists Point Of View)


It is the pooling of cash resources (means) of the
economy and diverting it to projects which have
the greatest positive impact on the GNP and
distributing the benefits of increased GNP among
the segments of the economy.
It has three parts.




Pooling of cash resources.
Diverting it to projects which have positive impact on
GNP
Distributing GNP benefits to resource providers
Benefiting the Different segments of the economy
through increased GNP
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Funds supply – summary of possible ways in
Islam
83
ISLAMIC BANKING MODEL
Bank
Equity
PLS
Deposito
rs
Current
Dep
osit
Operational Expenses
POOL OF
FUND
S
Investmen
t
Income/L
oss
from
Invest
ment
SBP
Current
Depo
sit
Idle fund
Distributabl
e
Income
from
non
fund
busines
s
Reserves
Income
Depositors
PLS
Equity
84
Comparison of the Islamic and Conventional
systems
Conventional Banking
Equation of Banks Failure
Admn Exp + Interest Exp > Total Income + Reserves
 Equation of Banking System Failure
Admn Exp + Interest Exp > Total Income + Reserves + Equity

Islamic Banking
Equation of Banks Failure
Operational Losses > Reserves + PLS Deposits
 Equation of Banking System Failure
Operational Losses > Reserves + PLS Deposits + Equity
 Operational Losses
Operational Losses = Income (Losses) from Invest ± Admn Exp

85
Thank You
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