PMS 2017 Solved Islamiat Past Papers | The Shariah’s Status of Islamic Banking System
The following question of PMS Islamiat 2017 is solved by Miss Ayesha Irfan, the highest scorer in CSS Islamiat. Moreover, the question is attempted using the same pattern taught by Sir Syed Kazim Ali to his students, who have scored the highest marks in compulsory subjects for years. This solved past paper question is uploaded to help aspirants understand how to crack a topic or question, write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.
Question Breakdown
The examiner asked about the Islamic banking system’s Shariah status and its practical need. The first part is an outline, breaking the question into different parts. Moving further, an introduction is given, followed by the Islamic banking system’s Shariah status and its practical need, as well as a critical analysis and conclusion.
Outline
1-Introduction
2- A brief overview of the Islamic banking system
3- What is the Islamic banking system’s Shariah status
A-Fundamental principles of the Islamic banking system
- ✓ Prohibition of Riba (interest)
- ✓ Prohibition of transactions of Gharar or Maiser
- ✓ Prohibition of Investment in Prohibited Industries
B-Sharia’s status in the history of Islamic banking
C- Islamic Banking Practices Working in the Current Era
4- The practical need for the Islamic banking system
- ✓ Supporting financial inclusion
- ✓ Promoting ethical investments by avoiding interest and other unethical means
- ✓ Generating wealth from legitimate trade
5-Critical analysis
6-Conclusion
Answer to the Question
Introduction
Islamic banking is characterized as a banking system that adheres to Islam’s values, ethos, and spirit and is regulated by the rules established by Islamic Shariah. The more generic phrase, Islamic banking, is founded on avoiding immoral and unsocial behaviours and interest-based transactions that Islamic Shariah forbids. Practically speaking, Islamic banking is the conversion of traditional money lending into exchanges centred on actual goods and services. Establishing a system that contributes to economic prosperity is the result of the Islamic banking paradigm.
A brief overview of the Islamic banking system
Islamic Shariah serves as the foundation for the Islamic banking philosophy. Islamic Shariah prohibits Islamic banking from handling transactions, including interest or riba, which is a specified or requested increase over the principal of a loan or obligation. Additionally, they cannot engage in transactions that include Maiser or Gharar. Furthermore, they cannot engage in transactions whose subject matter is void (haram in Islamic terms). Islamic banks concentrate on making money via Shariah-compliant investment instruments. Islamic Shariah relates a capital’s performance to its gain. The foundation of Islamic banking’s operations, which fall under the purview of Shariah, is the pooling of risk that may result from trading and investing activities through contracts of various Islamic modes of finance.
What is the Shariah status of the Islamic banking system?
Islamic banking is based on the principles of Islam as they apply to business dealings. The Quran, the primary religious text of Islam, is the source of the fundamentals of Islamic finance. Shariah, the Islamic legal code (derived from the teachings of the Quran), must be followed in all transactions in Islamic banking. Fiqh al-muamalat is the term used to describe the regulations that control business dealings in Islamic banking.
A-Fundamental principles of the Islamic banking system
Islam’s principles and objectives satisfy every social and economic need for human existence. Islamic Sharia, which translates to “clear path,” is the name given to Islamic law. Therefore. The foundation of the current banking system is made up of forbidden financial components that go against Islamic banking principles.
- Sharing profit and loss
One of the fundamental tenets of Islamic finance is that partners split profits and losses based on their contributions to the company. The rate of returns that the Muslims will act as partners rather than creditors is not guaranteed. Additionally, Islamic banking encourages risk-sharing in business dealings. Musharakah Contracts, for instance, are Islamic banking and finance instruments that are used for business between partners (maybe a bank and an individual) on a shared-risk basis. Nonetheless, Riba (interest) is prohibited by Sharia in the Islamic banking system. This implies that the wealth will generate a return without any risk or labour. Therefore, regardless of the economy’s state, the borrower must return the money and Riba to the lender. According to the Quran, “Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. After receiving a warning from their Lord, whoever refrains may keep their previous gains, and their case is left to Allah. As for those who persist, they will be the residents of the Fire. They will be there forever.” (2-275). This ayah signifies the prohibition of Riba in the Islamic banking system.
- Prohibition of transactions of Gharar or Maiser
Going down the ladder, Muslims are prohibited from taking part in transactions that are unclear or ambiguous in accordance with the rules of Islamic finance (Gharar). Shariah, or the origins of Muslim law, states that both parties must have appropriate control over the company. For the profit and loss to be distributed equitably, both parties also need access to all relevant information. Furthermore, it is forbidden in Islam to get wealth through dishonest methods or to engage in Maysir or gambling. Since traditional insurance is a form of gambling, it will shield Muslims against it. However, Islamic banking is involved in Takaful Insurance, which entails shared risks and obligations.
- Prohibition of Investment in Prohibited Industries
Islamic banking is based on the tenets of Islamic finance, which state that businesses that pose a danger to social obligations or are detrimental to society are forbidden by Islam. These sectors consist of pornographic images, prostitution, Alcohol, Pork products and medication. Therefore, Investment in such industries is prohibited, as is participation in mutual funds that support the sector’s growth.
B-Sharia’s status in the history of Islamic banking
The foundation of Islamic banking is Islamic Shariah, which forbids the use of interest, or riba, in financial dealings. Shariah also forbids investments in things that are prohibited in the Quran, such as alcohol and pork, as well as speculation and gambling. Consequently, Islamic banking is based on the principles of Islam as they apply to business dealings. The Quran, the primary religious text of Islam, is the source of the fundamentals of Islamic finance. Shariah, the Islamic legal code derived from the Quran, must be followed in all transactions in Islamic banking. Fiqh al-muamalat is the term used to describe the regulations that control business dealings in Islamic banking. For instance, According to Jabir ibn ‘Abdallah’s account of the Prophet’s Farewell Pilgrimage, the Prophet spoke to the populace and declared, “All of the riba of Jahiliyyah is annulled.” The first riba I annul is ours, which is due to ‘Abbas ibn ‘Abd al-Muttalib [the uncle of the Prophet] and is being cancelled entirely.” (Muslim) Thus, Sharia law states that Islamic banks use equity participation plans, which are similar to profit-sharing, to make money instead of collecting interest as is conventional.
C- Practices of Islamic Banking in the Modern Era
In an effort to progressively transition to riba-free banking, certain Muslim nations have implemented a dual banking system. Full-fledged Islamic banks, conventional banks’ Islamic subsidiaries, and traditional banks’ Islamic banking offices can all be established using the Pakistani model. Careful handling of this procedure is necessary to safeguard the interests of persons choosing Islamic investments for their money from both Islamic banks’ poor management and their mingling with conventional banks’ interest-based business practices. Worldwide, more than 1,900 mutual funds and more than 560 institutions adhere to Islamic law. According to 2022 research by the Islamic Corporation for the Development of Private Sector (ICD) and Refinitiv, Islamic financial assets increased from $2.17 trillion to around $4 trillion between 2015 and 2021 and are expected to reach approximately $5.9 trillion by 2026. Moreover, according to Standard and Poor’s Global Ratings, the Islamic finance sector expanded worldwide in 2021 and 2022 due to rising bond issuance and the financial markets’ ongoing economic recovery. Islamic assets increased by more than 10% in 2020 despite the pandemic.
- The practical need for the Islamic banking system
Because of the Islamic financial system’s comprehensiveness, both conventional and Islamic investors can manage their portfolios to satisfy their financial needs. Companies function as economic actors that mobilize long-term savings for long-term investments and economic expansion. The more comprehensive phrase “Islamic banking” refers to methods that are not only based on avoiding interest-based transactions that Islamic Shariah forbids but also on avoiding immoral and antisocial behaviour.
- Supporting financial inclusion
Avoiding interest that promotes financial inclusion is one of the many pragmatic requirements of Islamic banking, a financial system that complies with Shariah, or Islamic law. Access to financial services, such as microfinance, and the promotion of sustainable and ethical finance, which are at the forefront of social welfare, are all included in financial inclusion. Additionally, funds are allocated to ethical and sustainable projects that support long-term economic growth without sacrificing environmental integrity. Moreover, Musharakah and Murabaha contracts help small and medium-sized businesses (SMEs). For example, Malaysia leads the world in Islamic finance. The nation’s Islamic banking industry has improved financial inclusion with products suited for different societal segments, including micro-entrepreneurs and rural populations. Thus, these types of financial inclusions support society’s economy.
- Promoting ethical investments by avoiding interest and other unethical means
Although Islamic banking adheres closely to Shariah law, which forbids interest (riba) and other immoral activities, it encourages moral investing. By avoiding industries that are considered haram (forbidden), like gambling or alcohol, this strategy promotes ventures that are both profitable and advantageous to society. Islamic banks promote a financial environment where moral behaviour and economic expansion are valued by doing this matter. For instance, by effectively lending money to small farmers and traders and by avoiding interest, Islamic microfinance organizations in Sudan have increased local trade and agricultural output. These programs have increased economic stability and quality of life in rural areas. Consequently, the Islamic banking system avoids interest and other unethical methods to encourage ethical investments.
- Generating wealth from legitimate trade
The guiding principles of Islamic banking place a strong emphasis on making money through asset-based investments and lawful commerce. It steers clear of interest (usury) and speculative activity, in contrast to traditional banking, and encourages transactions involving real assets and services. By establishing a link with the actual economy, this framework makes sure that financial operations are based on profitable business ventures. For instance, Indonesia, home to the world’s biggest Muslim population, has used Islamic banking to connect with the unbanked. Access to financial services in remote locations has greatly expanded because mobile banking systems emphasize making money through legal commerce and agent networks. Therefore, by virtue of the practical necessity of the Islamic banking system, Islam means promoting ethical investments by avoiding interest and other unethical ways, supporting financial inclusion, and creating wealth through lawful trade.
Critical Analysis
The Islamic banking system is currently needed as a viable alternative for Muslim populations looking for financial services that comply with their religious beliefs by forbidding interest (“riba”) and offering moral investment options, especially in areas with sizable Muslim populations. However, it faces obstacles due to the complexity of its products, the economic downturn in Islamic nations, the absence of standardized regulations, and the requirement for more knowledgeable staff to realize its full potential.
Conclusion
According to Islamic banking principles, Muslims should invest in industries that will help achieve the financial and social objectives set forth by Islam. Their goal is to guarantee an economy’s prosperity. It is, therefore, a way to keep their money from going to the wrong endeavour and perhaps gain additional knowledge about Islamic banking. Consequently, the Islamic banking system is currently required because it may offer financial services that comply with Shariah laws, which forbid interest (riba) and encourage moral investing. With more than 200 Islamic financial institutions handling more than $250 billion in investments worldwide, there is an increasing need for alternative banking options that are consistent with Islamic principles. Thus, this system is becoming more and more significant in a variety of industries.
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