1. MONOGRAPH
ON
An Overview on Islamic Modes of Financing
(A Case Study of Afghanistan)
‫ط‬ ‫ب‬ ‫کلی‬ ‫ر‬ ‫م‬‫یل‬ ‫ت‬‫اسامی‬ ‫مالی‬
(‫افغانستا‬ ‫ردی‬ ‫م‬ ‫مطالعۀ‬)
BY
Ahmad Frogh “Zhakfar”
09-RC100-81
In partial fulfillment of the requirements for the award of the degree of
BACHELOR OF BUSINESS ADMINISTRATION
BBA IN FINANCE
TO
RANAUNIVERSITY
Baraki Square, Kabul – Afghanistan
‫افغانستا‬ ‫اسامی‬ ‫ری‬ ‫ج‬
‫عالی‬ ‫تحصیات‬ ‫وزارت‬
‫خصوصی‬ ‫موسسات‬ ‫ریاست‬
‫عالی‬ ‫تحصیات‬
‫رنــــا‬ ‫پـــوهـنــتــــــــــــون‬
‫تصدی‬ ‫اقتصاد‬ ‫پوهنحی‬ ‫ریاست‬
‫تجارت‬ ‫ادار‬ ‫ت‬ ‫دیپارت‬ ‫یت‬ ‫آم‬
Islamic Republic of
Afghanistan
Ministry of Higher
Education
Directorate of Private Higher
Education
RANA UNIVERSITY
Directorate of Industrial
Economic Faculty
BBA Department

2. I
MONOGRAPH
ON
An Overview on Islamic Modes of Financing
(A Case Study of Afghanistan)
‫ت‬ ‫ط‬ ‫ب‬ ‫کلی‬ ‫ر‬ ‫م‬‫یل‬ ‫م‬‫اسامی‬ ‫مالی‬
(‫افغانستا‬ ‫ردی‬ ‫م‬ ‫مطالعۀ‬)
In partial fulfillment of the requirements for the award of the degree of
BACHELOR OF BUSINESS ADMINISTRATION
BBA
TO
RANA UNIVERSITY
PREPARED BY:
Name: Ahmad Frogh “Zhakfar”
Father’s Name: Muhammad Hassan
Registration No:09-RC100-81
Period: Jan/2010 to Dec/2013
Serial No.:BBA/FIN/030/2015
Signature:______________________
Date:
SUPERVISED BY:
Name: Sayed Kifayatullah
Designation: Lecturer
Qualification: MSC (Hons) Economics & Finance
ID No.:
Phone No:
Email Add: kifayatkhan70@yahoo.com
Signature:______________________
Date:
‫افغانستا‬ ‫اسامی‬ ‫ری‬ ‫ج‬
‫وزارت‬‫عالی‬ ‫تحصیات‬
‫خصوصی‬ ‫موسسات‬ ‫ریاست‬
‫عالی‬ ‫تحصیات‬
‫رنـــا‬ ‫پــوهـنــتــــــــــون‬
‫تصدی‬ ‫اقتصاد‬ ‫پوهنحی‬ ‫ریاست‬
‫تجارت‬ ‫ادار‬ ‫ت‬ ‫دیپارت‬ ‫یت‬ ‫آم‬
Islamic Republic of
Afghanistan
Ministry of Higher
Education
Directorate of Private Higher
Education
RANA UNIVERSITY
Directorate of Industrial
Economic Faculty
BBA Department

3. II
PROJECT APPROVAL SHEET
The undersigned certify that they have read the following Project Report and are satisfied with the
overall exam performance, and recommend the project to the Department of Business Administration
for acceptance.
Title: An Overview on Islamic Modes of Financing (A Case Study of Islamic Banks in Afghanistan)
Prepared by: Ahmad Frogh “Zhakfar”
09-RC100-81
Recommended by:
Designation in RANA
Signature and Date
Project Coordinator: _________________________________
Head of Department: _________________________________
Vice Chancellor “Academic: _________________________________
VC for Academic Affairs
RIHS Management Verification & Stamp: _________________________________
Date:

4. III
PROJECT EVALUATION SHEET
(Decision of the Monograph Evaluation Committee)
STUDENT PARTICULARS
Name: Ahmad Frogh “Zhakfar”
Registration
No.:
09-RC100-81
Father’s Name: Muhammad Hassan Project Title:
An Overview of Islamic Modes of
Financing (A Case Study of Afghanistan)
Assessment Criteria
Member 1
Problem Definition: Relevant Yes☐No☐Clearly phrased Yes☐ No☐ Testable Yes☐ No☐
Research Design: Theoretical Background Yes☐ No☐ Appropriate Research Method Yes☐ No☐
Research Result: Description ☐ Analysis☐
Analysis, Interpretation and Conclusion: Clear Yes☐ No☐
Further Comments (Allocate Marks out of 25%)
Name of the Committee Member: ______________________________ Sign:___________________
Date:
Member 2
Problem Definition: Relevant Yes☐No☐Clearly phrased Yes☐ No☐ Testable Yes☐ No☐
Research Design: Theoretical Background Yes☐ No☐ Appropriate Research Method Yes☐ No☐
Research Result: Description ☐ Analysis☐
Analysis, Interpretation and Conclusion: Clear Yes☐ No☐
Further Comments (Allocate Marks out of 25%)
Name of the Committee Member: _____________________________ Sign:____________________
Date:

5. IV
Member 3
Problem Definition: Relevant Yes☐No☐Clearly phrased Yes☐ No☐ Testable Yes☐ No☐
Research Design: Theoretical Background Yes☐ No☐ Appropriate Research Method Yes☐ No☐
Research Result: Description ☐ Analysis☐
Analysis, Interpretation and Conclusion: Clear Yes☐ No☐
Further Comments (Allocate Marks out of 25%)
Name of the Committee Member: _______________________________Sign:__________________
Date:
Member 4
Problem Definition: Relevant Yes☐No☐Clearly phrased Yes☐ No☐ Testable Yes☐ No☐
Research Design: Theoretical Background Yes☐ No☐ Appropriate Research Method Yes☐ No☐
Research Result: Description ☐ Analysis☐
Analysis, Interpretation and Conclusion: Clear Yes☐ No☐
Further Comments (Allocate Marks out of 25%)
Name of the Committee Member: _______________________________Sign:__________________
Date:

6. V
ANALYSIS OF MARKS ALLOCATED BY COMMITTEE MEMBERS:
Member 1 Member 2 Member 3 Member 4 Total
Initial Initial Initial Initial VC Stamp

7. VI
Ahmad Frogh “Zhakfar:
09.RC100.81
RANA UNIVERSITY
BARAKI SQUARE, KABUL – AFGHANISTAN
DECLARATION
I hereby, declare that the Monograph [An Overview on Islamic Modes of Financing (A Case Study of
Islamic Banks in Afghanistan)] of the requirements for the Degree of Bachelor of Business
Administration (BBA) to RANA University is my original work and not submitted for any other
degree, diploma, fellowship or similar title or prize.
Ahmad Frogh “Zhakfar”
Signature:__________________
Date:

8. VII
FACULTY CERTIFICATE
Date:
Batch: Jan/2010 up to Dec 2013
Register Number:09-RC100-81
Serial Number: BBA/FIN/030/2015
This is to certify that the Project / Monograph titled
An Overview on Islamic Modes of Financing (A Case Study of Islamic Banks in Afghanistan)
Submitted in partial fulfillment of the requirements for the degree of "bachelor of business
administration to RANA UNIVERSITY, Baraki Square, Kabul – Afghanistan is carried out
By
MR Ahmad Frogh “Zhakfar”
Under my direct supervision and guidance and that no part of this report has been submitted
for the award of any other degree, diploma, fellowship or other similar titles or prize and that
the work has not been published in any scientific or popular journals or magazines.
FACULTY PARTICULARS
Name: Mr. Jehanzeb Khan
Qualification: MS (Management Sciences)
Designation: Lecturer
ID No.:
Signature:______________________
Date:
DEPARTMENT IN-CHARGE
Name: Sayed Kifayatullah
Qualification: MSC (Hons) Economics & Finance
Designation: Head of Department
ID No.:
Signature:______________________
Date:
Department Stamp

9. VIII
ACKNOWLEDGEMENT
All praises and thanks to Almighty Allah, the source of knowledge and wisdom to
mankind, who conferred me with power of mind and capability to take this material
contribution to already existing knowledge. All respect and love to him who is an everlasting
model of guidance for humanity as a whole.
I feel pride in expressing my deepest sense of gratitude to Mr. Kifayatullah who is the
source of origination of this project. His scholastic, consistent advice, encouraging behavior,
valuable suggestion, personal interest and dynamic supervision enabled me to complete the
present Project. This research work was hard to be accomplished without his cooperation.
I am extremely thankful to my colleagues and classmates whose help and good wishes made
this project a success.
Last of all no acknowledgement could never express my obligations to my loving parents,
brothers, and the whole family of mine, because my success is really the fruit of their devoted
prayers. I can never compensate their unlimited love and kindness. My words are extremely
dedicated to my Mother, without her continuous support and encouragement I never would
have been able to achieve my goals. All I am I owe to my mother. I attribute all my success
in life to the moral, intellectual and physical education I received from her.
Sincerely Yours,
Ahmad Frogh “Zhakfar”
09-RC100-81
BBA
Finance

10. IX
TABLE OF CONTENTS
PROJECT APPROVAL SHEET .........................................................................................................................II
PROJECT EVALUATION SHEET ...................................................................................................................III
DECLARATION ..................................................................................................................................................VI
FACULTY CERTIFICATE ...............................................................................................................................VII
ACKNOWLEDGEMENT .................................................................................................................................VIII
ABSTRACT ..........................................................................................................................................................XI
CHAPTER 1:INTRODUCTION
1.1 INTRODUCTION ................................................................................................................................1
1.2 DEFINITION OF ISLAMIC BANKING .............................................................................................3
1.3 HISTORY OF ISLAMIC BANKING .............................................................................................................4
1.4 ORIGIN OF ISLAMIC BANKING.................................................................................................4
1.5 MAJOR SIMILARITIES & DIFFERENCES BETWEEN ISLAMIC & CONVENTIONAL FINANCIAL SYSTEMS…....6
1.6 IMPACT OF ISLAMIC BANKING ON ECONOMIC GROWTH......................................................................12
1.6.1 DEFINITION AND IMPACT OF MURABAHA.............................................................................................13
1.6.2 DEFINITION AND IMPACT OF MUSHARAKAH........................................................................................13
1.6.3 DEFINITION AND IMPACT OF MUDARABAH.........................................................................................14
1.6.4 DEFINITION AND IMPACT OF IJARAH (LEASING)...................................................................................14
1.6.5 DEFINITION AND IMPACT OF ISTISNA...................................................................................................15
1.6.6 DEFINITION AND IMPACT OF SALAM....................................................................................................15
1.7 RESEARCH QUESTIONS...........................................................................................................................17
1.8 RESEARCH OBJECTIVES..........................................................................................................................17
1.9 SIGNIFICANCE TO STUDY.......................................................................................................................17
1.9 SCHEME OF THE STUDy.............................................................................................................18
CHAPTER 2:LITERATURE REVIEW……………………………………………………………………………………………………….…….19
2.1 BACKGROUND……..……….………………………………...………………………………….….19
2.2 PREVIOUS LITERATURES….………………………………………………………..………………………………………19
CHAPTER 3:RESEARCH METHODOLOGY ...............................................................................................26
3.1 TYPE OF RESEARCH ..................................................................................................................26
3.2 RESEARCH APPROACH .............................................................................................................26
3.3 RESEARCH METHODOLOGY...................................................................................................26
3.4 SOURCE OF DATA ..........................................................................................................................26
3.5 POPULATION....................................................................................................................................26
3.6 SAMPLE.............................................................................................................................................26
3.7 SAMPLING METHOD ......................................................................................................................26
3.8 SAMPLING TECHNIQUE.................................................................................................................26
3.9 LIMITATIONS.........................................................................................................................26
CHAPTER 4:DATA ANALYSIS AND INTERPRETATION ........................................................................27
4.1 BACKGROUND........................................................................................................................................27
4.2 TABLE 1: MURABAHA IN ISLAMIC BANKS OF AFGHANISTAN .......................................................28
4.3TABLE 2: IJARAH IN ISLAMIC BANKS OF AFGHANISTAN..................................................................28
4.4TABLE 3: MUSHARAKAH IN ISLAMIC BANKS OF AFGHANISTAN....................................................30

11. X
4.5TABLE 4&5: MUDAREBAH IN ISLAMIC BANKS OF AFGHANISTAN ...............................................31
4.6TABLE 6: ALWADEAA IN ISLAMIC BANKS OF AFGHANISTAN..........................................................33
4.7TABLE 7: FINANCE + INVESTMENTOF ISLAMIC BANKS OF AFGHANISTAN..................................34
4.8TABLE 8: PROFITOF ISLAMIC BANKS OF AFGHANISTAN .................................................................35
4.9TABLE 9: ASSESTSOF ISLAMIC BANKS OF AFGHANISTAN ...............................................................36
CHAPTER 5:CONCLUSION AND RECOMMENDATIONS .......................................................................37
5.1 CONCLUSION...................................................................................................................................37
5.2 RECOMMENDATIONS FOR FUTURE GROWTH..............................................................39
5.3 BIBLIOGRAPHY................................................................................................................................ 39
END PAGE SIGN AND STAMP ....................................................................................................................... 40

12. XI
Abstract
The purpose of this study is to conduct an overview on Islamic modes of financing” while sub-
objectives are to know the main Islamic modes of financing currently applicable in Afghanistan, to
know the current statistics about Islamic modes of financing of Islamic banks in Afghanistan, How to
compare and investigate the efficiency of Islamic banking with conventional banks? It indicates that
Islamic banking system has in the terms of assets; deposit, financing and other activities have grown
gradually in our country. The study shows the measurement, technical and cost efficient that are using
by Islamic banking system. The study indicates that efficiency of Islamic banking system has been
increased, however the conventional banks are still stable, and however the efficiency of Islamic
banks is still lower than conventional bank. In Afghanistan, All banks operate as per compliance of
rule and regulation of DA Afghanistan Bank, they are allowed to offer both Islamic and conventional
scheme. This study will help the readers to find Islamicaly acceptable financial products which can
help them to be more financially sustainable, the study covers the definition of all the products
through which Islamic banks are operating, and the impact of each on the economic growth as well.
Further it discovers the previous study or literatures of deferent scholars and researchers. and after the
data analysis done in chapter four it is concluded that the modes of financing which are currently in
practice by Islamic windows of Afghanistan are: Murabaha, Ijarah, Musharakah, Mudarebah, and
Alwabeaa, further data analysis from year 2012 until 2014 shows that there is an increase of 67% in
Murabaha , a decrease of 2.50% in Ijarah, a decrease of 19.54% in Musharakah, a decrease of 1.12%
in Mudarebah, an increase of 21.35% in Alwadeaa and a decrease of 10.2% in Finance + Investments
of the Islamic Banks in Afghanistan compared to the year 2012. Further it is concluded that overall
banks have been in profit constantly during the years of 2012, 2013, 2014 and according to analysis
there has been an increase of 64.61% in profit of year 2014 compared to 2012, and that none of the
banks in Afghanistan are full pledge of Islamic Banking but Islamic Windows. Finally, it can be
concluded that Islamic finance has great potential to become a key instrument in project financing and
to play a major role in the banking industry. Furthermore It is recommended to permit the licensing of
Islamic banks rather than Islamic windows, to permit the licensing of specialized Islamic financial
institutions such as Mudaraba banks, Murabaha banks and Musharaka banks, to introduce the Islamic
insurance in Afghanistan to reduce the risk of Islamic financing, And Finally, it is recommended
that use of Islamic finance principles for public sector financing needs more attention, and ensure that
proper procedures for good corporate governance, transparency and ensuring Shariah compliance are
in place, it could be helpful in ensuring fiscal discipline and thus giving a just basis for monetary
management.

13. 1
CHAPTER ONE
INTRODUCTION TO THE STUDY
1.1 Introduction:
Can we imagine a world without banks? In the past, banks focused on loans, deposits, debits,
and credits. Now, due to dramatic changes in the world economy, banking is a far more
complex business. On a daily basis, the industry must deal with margin pressures,
consolidation, and technological and marketing challenges, not to mention unforeseen
financial and political crises. However, with cash and capital, banks are positioning
themselves to succeed in the future, while coping with regulatory compliance, global
competition, and financial and operational risk. This provides an overview of the Islamic
banking industry. This section will be a brief introduction to the Islamic banking industry's
value chain, business model, and trends. Second, examines the business and regulatory issues
and challenges facing of the Islamic banking industry. Third this research will address the
issues that will play a significant role in the Islamic banking and how may increase their
ability to participate in economic growth of Afghanistan, Finally this will look at some of the
successful strategies that leading banking companies are applying. Target Audience
=Consulting houses, corporations, and small-to-medium-sized enterprises that sell products
or services to other sectors and industries; companies looking for knowledge and key
business information about Islamic banking industry.
Banking and finance are part of economics or the economic system. As indicated that all
economic and financial contracts in the frame work Islamic finance have to conform to the
Shariah rules with the objective of helping to achieve the wellbeing of people in the worldly
life as well as in the hereafter. Hence studying economics is important for the dual purpose
of having better sustenance and the religious imperatives. The sources of rules dealing with
economic aspects of human beings are the Holy Quran and Sunnah of his last messenger

14. 2
Mohammad (Pbuh), in addition to the Quran and Sunnah, Ijma Qiyas and Ijitihad provide a
hierarchical framework of sources of rules governing Islamic economics and finance.
Many people may think that Islamic banking is for the Muslim only and that Islamic banking
is a gateway to the significant wealth amassed by the oil-producing countries in the Gulf. Mr.
Yahi Abdul Rahman mentioned in his book that is not true that‘s why he wrote his book by
the name Art of Islamic banking and Finance. The Islamic financial system has a centuries-
old history. As noted by Chapra and Khan (2000), from the very early stage in Islamic
history, Muslims were able to establish a financial system without interest for activating
resources to finance productive activities and consumer needs. The system worked quite
effectively during the heyday of Islamic civilization and for centuries thereafter.‘ However,
as the centre of economic gravity shifted over the centuries to the Western world, Western
financial institutions (including banks) became principal and the Islamic tradition remained
undeveloped. As being a Muslim, my personnel experience, dealing with different banks in
Afghanistan that I have studied make me interested to explore my experience, therefore
always questions raised on my mind, whether Islamic Banking is Shariah based or Shariah-
compliant? What are the major difference between conventional banking and Islamic
banking and what will be the impacts of Islamic banking on the economy of Afghanistan?
Islamic banking is all about Riba/ribit free banking or a new brand of banking and finance
services.
The purpose of this study shows that how Islamic banking works? How to compare and
investigate the efficiency of Islamic banking with conventional banks? It indicates that
Islamic banking system has in the terms of assets; deposit, financing and other activities have
grown gradually in our country. The study shows the measurement, technical and cost
efficient that are using by Islamic banking system. The study indicates that efficiency of
Islamic banking system has been increased, however the conventional banks are still stable,
and however the efficiency of Islamic banks is still lower than conventional bank. In
Afghanistan, All banks operate as per compliance of rule and regulation of DA Afghanistan
Bank, they are allowed to offer both Islamic and conventional scheme.
Now we can see that Islamic banking system has been accepted in universes. We noticed that
economists have been debate the impact of religion on economic performance for many
years. Should we mix mixed economics with religion? And it is a significant question these
days, more specifically; can Islam be helpful in economic growth? Or it is a drag on

15. 3
economic growth? Focusing on finance is the most strategic part of any economic system.
Most of scholars have blamed the relative poverty of Muslims today on their religious
beliefs, but Marcus Noland, a well-known economist maintains that this long-standing idea is
wrong. This is not in their inherent that Muslims have to perform poorly in the societies.
Islam promotes growth and deals with the creation of wealth. The Islamic economic system
is different from the other systems only to the extent of ownership and distribution of
resources among the factors of production and various groups of society. This is a well-
defined role of the government to ensure that injustice is not done to any of the individuals ,
parties or groups in fact Islamic financing can promote a balance between the social and
economic aspect of human society .the income distribution and poverty aid issues can be
effectively address while capitalism has not been able to address. The principles laid down in
the Holy Qur‘an and the Sunnah of the prophet Mohammad (PBUH), significantly played a
strategic role in the development of Human society from the second half of the seventh to the
tenth century AD.
For the smooth and proper functioning of the banking and finance sectors, governments and
regulators should be obliged to perform an effective overseeing role to ensure that market
forces and different stakeholder do not exploit one another. For justice, fairness and the
longer term health of the system, they have to ensure that monetary growth is adequate and
not excessive or deficient.
1.2 Definition of Islamic Banking:
Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh
muamalat (Islamic rules on transactions). The rules and practices of fiqh muamalat came
from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions
collectively agreed among Shariah scholars (ijma‘), equivalence (qiyas) and personal
reasoning (ijtihad).
Islamic banks obey to the concepts of Islamic law. This form of banking turns around several
well-established principles based on Islamic standards. Islamic finance is ruled by the
Shariah, which prohibits interest and instructs that income must be derived as profits from
shared business risk rather than guaranteed return. These banks, which neither charged nor
paid interest, invested mostly by engaging in trade and industry, directly or in partnership

16. 4
with others, and shared the profits with their depositors. Therefore, they functioned
essentially as saving investment institutions rather than as commercial banks.
1.3 History of Islamic Banking:
During the Islamic Golden Age, early forms of capitalism markets were present in the early
Islamic kilafath, where an early market economy and an early form of mercantilism were
developed between the 9th-12th centuries. The Islamic Financial sectors, which are includes,
Islamic banks, Islamic Windows, Islamic non-banking financial institutions , Islamic
insurance , Islamic capital markets, Fund management institutions and Islamic Mortgage
companies.
The first Islamic institution in Malaysia was the Muslims Pilgrims Savings Corporation set
up in 1963.The first modern experimentation with Islamic banking was undertaken by
Ahmad El Najjar, in the Egyptian civic of Mit Ghamr in 1963. The Nasir Social Bank,
incorporated in Egypt in 197l, was acknowledged an interest-free commercial bank. The
Islamic Development Bank (IDB) was established in 1974 by the Organization of Islamic
Countries (OIC), but it operations are free of interest and are openly based on Shariah
principles. The evolution of the interest free banking concept to the 1970s when economics
of Arab countries had started experiencing huge financial benefits from price hike in the
petroleum products. In the seventies, a number of Islamic banks, came into reality in the
Gulf, e.g., the Dubai Islamic Bank (1975) the first modern commercial Islamic Bank, the
Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977), the Bahrain
Islamic Bank (1979), and the Philippine Amanah Bank (PAB) was established in 1973,
operates two windows for deposit transactions in commercial and Islamic.
1.4 Origin of Islamic Banking (Shariah Compliant Vs Shariah Based products):
Shariah is defined as Islamic law or Law of Allah. It shows one of many ways that humanity
strives to harmonize and maintain internal and external belief systems in an holistic approach
to life. Hence Shariah covers not only religious rituals, but also many aspects of day-to-day
life, politics, economics, banking, business or contract law, and social issues.

17. 5
The authority of Shariah is drawn from two primary sources. The first major source is the
specific guidance in the Holy Quran, and the second source is the Sunnah, literally the
―Way,‖ as in the way that Prophet Muhammad (pbuh) lived his life. Shariah law can be
broadly divided into two main sections; the acts of worship or known as al-ibadat and the
human interaction or known as al-mu‘amalat which includes financial transactions,
endowments, laws of inheritance, foods and drinks, judicial matters and others.
Shariah based products and services are the products and services that straightly derived from
the primary sources of Islamic laws such as the Qard‘al-hassan (benevolent loan).
Shariah based products and services are said to be originated during Prophet‘s period. These
products and services have undergone the process of cleansing where any prohibited
elements were removed by Prophet Muhammad (pbuh) such as al-bay‘ (trade), mudarabah
(profit sharing), musyarakah (joint venture, profit and loss sharing),murabahah (cost
plus), and Ijarah (leasing).
On the other hand, Shariah compliance products and services are the products and services
that comply or obey to the requirements to the Shariah itself. The good example would be
the Sukuk (Islamic bond) that is invented from the application of rules from Shariah based
products. Therefore, it is permissible and complies to the requirements of Shariah. Shariah
compliance products and services are also can be said as the modern day products and
services after Islamisation of it.
Shariah based also refers to the desired objectives of the Shariah (known as the maqasid
shariah) when determining a hukm (rules) aimed at the protecting human maslahah (public
interest). Thus, Shariah based products and services like mudarabah are aimed to encourage
the entrepreneurship among public and to maintain risk-reward relationships in a just
manner. The mudarabah principle also implies to recognize same and equal ability to
undertake responsibility and to have full authority to act on behalf of the other and are jointly
and severally liable for the liabilities of the partnership business.
However, the Shariah compliance products and services focusing on what it is needed to
make the products and services provided in line with the permissibility in Islam.

18. 6
Therefore, the products and services must not have any elements of riba (usury), maisir
(gambling), gharar (excessive uncertainties), excessive speculations, haram (impermissible
elements like pork) and others.
Shariah based products and services are also the products from the full-fledged Islamic
financial institutions or banks. However, for the Islamic products and services provided by
the conventional banks through Islamic windows are known as the Shariah compliance
products and services.
1.5 Major Similarities & Differences between Islamic & Conventional Financial Systems
Islamic Financial Institutions (IFIs) are operating in the same society where conventional
banks are operating and perform all those functions which are expected from a financial
institution. IFIs are assisting business world by providing all the services required to run the
economy smoothly, however, the philosophy and operations are different. In this section I
will analyze the operations and products of IFIs in comparison with traditional conventional
banks. Any financial system is expected to assist in running the economy by providing the
following services grouped in two headings. First; Savings mobilization from savers to
entrepreneurs and Second; Provision of general utility services including transfer of funds,
facilitation in international trades, consultancy services, safekeeping of valuables, and any
other service for a fee.
There is no restriction on provision of such services by IFIs as for the service is not against
the Sharia. However there exists difference in mechanism of funds mobilization from savers
to entrepreneurs as described following. Savings mobilization consists of two phases i.e.
accepting deposits and extending financing and investments.
1.5.1 Deposits: Deposits are collected from savers under both type of institutions for reward
irrespective a bank is operating under conventional system or Islamic system. The difference
lies in agreement of reward.
Under conventional system reward is fixed and predetermined while under Islamic deposits
are accepted through Musharaka and Mudaraba where reward is variable. Under

19. 7
conventional banking return is higher on long-term deposits and lower for short-term
deposits. Same is the practice in Islamic banking to share profit with depositors.
Higher weight for profit sharing is assigned to long-term deposits being available to bank for
investing in longer term projects making superior returns and lower weight for short-term
deposits which cannot be invested in long term projects. The only difference in conventional
and Islamic system lies in sharing of risk and reward. Under conventional system total risk is
born by the bank and total reward belongs to it after servicing the depositors at fixed rate
while under Islamic system risk and reward both are shared with depositors. Reward of
depositors is linked with outcomes of investments made by IFIs. Under Islamic financial
system only those IFIs will be able to collect deposits who can establish trust in the eyes of
masses hence leading to optimal performance by financial industry
1.5.2 Financing and Investments: The second phase in savings mobilization process is extension
of credit facility to business and industry for return. Both types of institutions (Islamic and
Conventional) are providing financing to productive channels for reward. The difference lies
in financing agreement. Conventional banks are offering loan for a fixed reward while IFIs
cannot do that because they cannot charge interest. IFIs can charge profit on investments but
not interest on loans. In conventional banking three types of loans are issued to clients
including short term loans, overdrafts and long-term loans. Islamic banks cannot issue loans
except interest free loans (Qarz e Hasna) for any requirement however they can do business
by providing the required asset to client. In following paragraphs I present the comparative
working of different products (financing scheme) of both systems.
 Overdrafts/Credit Cards etc.: Conventional banks offer the facility of
overdrawing from account of the customer on interest. One of its form is use of credit
card whereby limit of overdrawing for customer is set by the bank. Credit card provides
dual facility to customer including financing as well as facility of plastic money whereby
customer can meet his requirement without carrying cash. As for facility of financing is
concerned that is not offered by Islamic banks except in the form of Murabaha (which
means IFI shall deliver the desired commodity and not the cash) however facility to
shop/meet requirement is provided through debit card whereby a customer can use his
card if his account carries credit balance. Under conventional banking a customer is
charged with interest once the facility availed however under Murabaha only profit is due

20. 8
when the commodity is delivered to the customer. Furthermore in case of default
customer is charged with further interest for the extra period under conventional system
however extra charging is not allowed under Murabaha. International Journal of Business
and Social Science Vol. 2 No. 2; February 2011 170 Third under conventional system
customer can avail the opportunity of rescheduling by entering into a new agreement to
pay interest for extended period which is not the case under Murabaha. IFIs can claim
only the original receivable amount agreed in initial contract. Another practical issue
under Murabaha is how to deal with intentional defaulters. Different options are lying
with IFIs including to blacklist the defaulter for any further financing facility, to stipulate
in the contract that in case of default all installments will be due at once, to stipulate in
the contract a penalty shall be imposed but the same shall not form income of IFIs rather
it will go in charity (Usmani, 2002).
 Short term loans: Short term and medium term loans are provided to customer to
meet working capital requirements of firm by conventional banks. Working capital is
required by firms to invest in inventories and accounts receivables and meet the expenses.
As for inventory investment is concerned that is provided by Islamic banks through
Murabaha. As for meeting of day to day expenses of business is concerned financing is
provided through participation term certificates where by profit of a certain period (e.g.
quarter, six month, one year) is shared by IFIs on prorate basis. However financing
through participation term certificates is not as easy as a short term loan from
conventional bank due to risk involved for IFIs in the transaction. Firm seeking short-
term facility from IFIs has to prove the survival of the project/business to the satisfaction
of investor. For meeting the working capital requirements of nonprofit organizations to
date there is no arrangement under Islamic financial system. Personal consumption loans
are also not issued by IFIs however any individual of sound financial position can acquire
anything for his personal use under Murabaha financing whereby a certain percentage of
profit is added on cost by IFIs. Murabaha financing is very useful for short to medium
term financial requirements of business/nonprofit organizations and individuals.
Murabaha financing is asset based financing and anyone can request to an IFI for
provision of an asset generally used for Halal (lawful) purposes. By default under Islamic
financial system IFIs cannot lend cash for interest (only exception is Qarz e Hasna—
Charity loan). One of the features of Murabaha is in case of delay in payment by

21. 9
customer IFI cannot ask for extra amount as time value of money like conventional
banks. However penalty is imposed on defaulter if stipulated in original contract of
Murabaha duly signed by the customer but same cannot be included in the income of IFI.
This penalty must be spent for charitable purposes. Under Murabaha scheme of financing
facility is linked with assets which leads to economic stability and creates linkage
between real and financial sector. It is not zero sum game because utility is created
through services and products and not by mere building the blocks of wealth through
dealing in paper money. Although Murabaha is being used by IFIs successfully and have
succeeded in meeting short to medium term requirements of firms by providing a
successful replacement of conventional loans yet certain differences exist in both type of
financing. First is one cannot get cash under Murabaha. Second asset is purchased by IFI
initially then transferred to customer hence IFI participate in risk. Third refinancing
facility is not available under Murabaha. Fourth in case of default price of the commodity
cannot be enhanced however penalty may be imposed if stipulated in original contract of
Murabaha however same cannot be included in income of IFI. Fifth only those assets can
be supplied by IFIs under Murabaha whose general and/or intended use is not against the
injunctions of Sharia (e.g. supply of a machine to produce liquor)
 Medium to long term loans: Medium to long-term loans are provided for
purchase or building of fixed assets by firms to expand or replace the existing assets.
Under Islamic financial system requirement of firms and individuals are fulfilled through
Murabaha, Bai Muajjal and Istasna (discussed Further). Another financing option for
long-term financing is profit sharing under Musharaka and Mudaraba. Although
financing under Murabaha, Bai Muajjal and Istasna is very much look like conventional
loans with the only difference of provision of asset and not cash to client however
differences exist in the contracts which alter the nature of risks and returns. Financing
under Musharaka and Mudaraba is challenging for IFIs and firms as well. Under Sharia
based financing schemes firms have to prove the viability/profitability of the
project/business to the satisfaction of IFIs to get the finance because risk of losing the
amount is involved.
 Leasing: Leasing is relatively recent source of financing whereby usufruct of an
asset is transferred to lessee for agreed amounts of rentals. Under leasing ownership may

22. 10
or may not be transferred. © Centre for Promoting Ideas, USA www.ijbssnet.com 171
Same facility is provided by IFIs under agreement of Ijara. Under Ijara asset is provided
to customer for use with out transfer of ownership for a specific period of time in
exchange for agreed rentals. Ownership of asset can be transferred to customer through
mutual agreement at the completion of lease term. All ownership risks are born by IFIs
during Ijara tenure. Certain differences exist in the transaction under both systems. First
is rental under Ijara are not due until asset is delivered to the lessee for use. Second
additional rent cannot be demanded in case of default except a penalty (if stipulated in
original contract of lease) which is not the income of IFI. Third during period of major
repair rent cannot be demanded by IFI. Fourth if asset is lost or destroyed IFI cannot
claim further installments hence all risks of ownership are born by IFI.
 Agricultural Loans: Agricultural loans include both types of loans short-term as
well as long-term. Short-term loans are required by farmers for seeds and fertilizers and
long-term loans are required to develop additional lands and purchase of equipments.
Normally farmers return these loans after selling the finished crops. Conventional banks
are providing credit facility by charging interest. Same facility is provided by IFIs to the
farmers under Bai Slam, Bai Murabaha Musharaka and Mudaraba. Under Bai Salam cash
is provided to farmers for purchase of seeds and fertilizers however this is not loan rather
purchase of finished crops to be delivered by farmers. For purchase of equipments
Murabaha facility is used and for development of additional land Musharaka and
Mudaraba is used by IFIs. To get finance for land development farmers have to convince
the IFIs about profitability of the venture due to risk involved in the transaction.
 House financing: Housing finance/Mortgages is the more secured form of
financing for both conventional banks and IFIs. Under conventional system loan is
provided for interest while under Islamic financial system facility is provided through
diminishing Musharaka. Under diminishing Musharaka house is purchased jointly by IFI
and customer. IFI rents out its share in property to customer for an agreed amount of rent.
Share of financier is divided in units of small denomination. Customer pays the
installments to IFI consist of rentals plus purchase price of a unit. Stake of customer in
property is increasing while of IFI is decreasing with payment of every installment.
Finally with the payment of last installment stake of IFI reaches to zero and property is

23. 11
transferred in the name of customer. Diminishing Musharaka model can help out in
avoiding the real estate crisis because when market value of property decreases both IFI
and customer suffers according to their share in property and whole burden is not shifted
on customer alone
 Investments: In order to maintain liquidity conventional banks have many
avenues including government securities, shorter term loans and money at call and short
notices, leasing companies‘ bonds, investment in shares etc. Interestingly mandatory
reserve maintenance by conventional banks with central banks is also rewarded in the
form of interest. Conventional banks can also create liquidity by issuing the bonds against
their receivables. Commercial banks are also protected by central bank by providing
liquidity in rainy days for interest. Interbank deposits are also rewarded in the form of
interest by commercial banks. For IFIs avenues are very limited to create required
liquidity at the same time to earn some revenue by investing in short term and liquid
securities. IFIs cannot invest in government securities, short term loans, bonds and
money at call and short notices because of interest based transactions. Mandatory reserve
with central bank is maintained by IFIs but they are not rewarded like conventional
banks. Looking towards central bank in rainy days to maintain liquidity is also not as
straightforward due to interest demand of central bank. IFIs cannot demand interest on
interbank deposits. As for investment in market able securities are concerned again IFIs
are not free to invest in any equity security due to two reasons. First Halal business of the
underlying firm is required. Second financial operations of underlying firm should be
interest free. Keeping in view the dominance of conventional banking and existing
business practices one can conclude safely that a very negligible number of firms meet
both conditions. IFIs can invest only in those securities which are declared Sharia
compliant securities through filtering of Sharia compliance criteria. International Journal
of Business and Social Science Vol. 2 No. 2; February 2011 172 Listing here the major
conditions to qualify a security as Sharia compliant is worth mentioning as follow.
Meeting of following tests is required to declare a security as Sharia compliant. First the
core business of the company should be Halal (not prohibited by Islamic Law such as
liquor, pork and pornography etc). Second illiquid assets should be equal to 20% of total
assets of the company. Shares of a company merely dealing in liquid assets are not Sharia
compliant hence IFIs cannot invest. Third ratio of all interest based debts including

24. 12
preferred stock should be less than 40% of total assets of the company. Fourth ratio of
non-Sharia compliant investments to total assets of the company should be less than 33%.
Fifth revenue from non-compliant investments should be less than 5% of total revenue of
the company and even then IFIs are required to purify their earnings by spending this
non-compliant revenue as charity. Finally market price per share should be greater than
the net liquid assets per share. Recently IFIs have created an avenue to meet their
liquidity requirement in the form of Skuks (Islamic Bonds) whereby servicing is fixed
like conventional bonds however such types of Skuks can be issued against Ijara
receivables. Under Ijara Skuks initially asset is given on rent to the customer for an
agreed period and rentals while ownership remains with IFI. To meet liquidity
requirements IFI issues Skuks (bonds) to the investors equal to the value of asset, hence
ownership of the asset is transferred to Skukholders. While it is known the rentals of the
asset so the return on investment is predetermined and known with certainty to the
investors. Skuks of Murabaha cannot be sold except at par being sale of loans. Other
types of Skuks (Musharaka etc) are not carrying fixed return although tradable in
secondary security market. Underlying principle in issue of Skuks is that illiquid assets
should dominate in the portfolio against which Skuks are issued. Under Islamic financial
system Skuks are ownership certificates and not mere debt securities hence all risks and
rewards are shared by Skukholders.
1.6 Impact of Islamic Banking on Economic Growth:
Islam encourages the earning of profit as profit represents successful business dealing and
creation of new wealth. Interest on the other hand is a cost that is in place regardless of the
outcome of business operations. If business losses are experienced, there may not be real wealth
creation. Social justice requires that lenders and borrowers share both profit and loss in an
equitable manner and that the method of collecting and distributing wealth in the economy is
fair and represents true productivity. To achieve these goals, there are several modes of finance
used in Islamic banking which are very helpful and will have a good impact on the economic
growth of any country specially Afghanistan where people are more likely to have interest free
banking. And they are discussed below:

25. 13
ISLAMIC MODES OF FINANCING
1.6.1 Definition and Impact of Murabaha
A kind of ―cost-plus‖ transaction in which the bank buys the asset then immediately sells it to the
customer at a pre-agreed higher price payable by installments. This facility is often used in the
way that conventional banking customers might seek a loan when buying property.
The most preferred method of financing for many Islamic banks due to the simplicity of the
model. Or An Islamic financing structure, where an intermediary buys a property with free and
clear title to it. The intermediary and prospective buyer then agree upon a sale price (including
an agreed upon profit for the intermediary) that can be made through a series of installments, or
as a lump sum payment. Murabaha has no direct effect upon poverty reduction, but indirectly it
provides a good tool for an efficient deferred sale, providing business men the asset of its choice
and providing banks profit for the effort and risk that it tool. Murabaha has little effect on the
reduction of unemployment; there is no clear study on the effect of Murabaha on inflation.
1.6.2 Definition and Impact of Musharakah
This is a partnership, normally of limited duration, formed to carry out a specific project.
Participation in a Musharakah can either be in a new project, or by providing additional funds for
an existing one. Profits are divided on a pre-determined basis, and any losses shared in
proportion to the capital contribution. In this case, the bank enters into a partnership with a
client, in which both share the equity capital- and maybe even the management -of a project or
deal, and both share in the profits or losses according to their equity shareholding.
Musharakah encourages partnerships, also created jobs for many people in society, promotes
enterprise and partnership ventures, creating jobs in the country, and promotes business
enterprise culture in society and growth of skilled people. Musharakah has a strong effect on
controlling inflation and extent of baseless credit, promoting joint ventures without potent
investigations and research ensures business successes, not speculations. And it also decreases
available credit, which also reduces spending.

26. 14
1.6.3 Definition and Impact of Mudarabah
"Mudarabah" is a special kind of partnership where one partner gives money to another for
investing it in a commercial enterprise. The investment comes from the first partner who is called
"rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is
called "mudarib. The rabb-ul-mal may specify a particular business for the mudarib, in which
case he shall invest the money in that particular business only. This is called al-mudarabah al-
muqayyadah (restricted mudarabah). But if he has left it open for the mudarib to undertake
whatever business he wishes, the mudarib shall be authorized to invest the money in any
business he deems fit. This type of mudarabah is called 'almudarabah al-mutlaqah" (unrestricted
mudarabah). Mudarabah is a very potent tool for removing interest from the society by providing
an interest free tool for skill utilization and it can especially help in mobilizing resources of the
society by employing them as a manager, while banks will provide the finance and also bear the
chances of profit and loss, which is absent in interest based financing for venture capital.
Mudarabah has a significant effect on reducing the unemployment in both the short and long run,
as it encourages business management by skilled people and promotes commercial activity
which helps to reduce poverty. Mudarabah also helps control inflation by promoting interest free
business activities. Interest and credit creation of banks through lending are the major source of
inflation in society. Mudarabah involves bank or other capitalists bearing in both profit and loss,
and not just making earnings through a predetermined interest rate exploiting the needs of
individuals or firms.
1.6.4 Definition and Impact of Ijarah (Leasing)
A form of Shariah law-compliant leasing involving the rights over the use of an asset under
which the bank buys the asset then leases it to the customer over a fixed period in return for a
pre-agreed monthly price. Provisions can be made for the customer to buy the asset at the end of
the agreed period. Thought needs to be given to issues such as the provision of insurance, as the
asset is effectively owned by the bank during the lease period.
Or
Ijarah is an operating lease whereby the bank will buy and lease out equipment required by the
customer for an agreed rental fee. The agreement does not include a promise that the leased asset
at the end of the lease term will be transferred to the lessee.
Ijarah is defined in Fiqh as a possession of a usufruct or benefits for consideration in the Islamic
Fiqh. This term is used to denote two things:

27. 15
 To employ the services of a person on wages given to him as consideration for his hired
services.
 It relates to the rights of assets and properties. Here it means To transfer the rights of a
particular property to another person and exchange for a rent claim from him
Ijarah has no direct effect upon poverty reduction and has a little effect on reducing
unemployment. However, it has great potential for protecting against inflationary harms
to middle class people and entrepreneurs, by allowing the use of assets without sudden
cash outflows. It enables them to modify or replace, even after some months or years,
their equipment or machinery without much cash flow swings. But Ijarah, like ordinary
lease, can sometimes leads to inflation itself if the economy is working at the full
employment level, then boosting demand of goods which will further increase prices in
the market.
1.6.5 Definition and Impact of Istisna
Istisna, another form of forward sales contract, is a contract whereby a party undertakes to
produce a specific thing which is possible to be made according to certain agreed-upon
specifications at a determined price and for a fixed date of delivery. This undertaking of
production includes any process of manufacturing, construction, assembling or packaging.
Sellers can then either create the asset themselves or subcontract, with buyers also having the
option of paying the entire sum due either in advance or as installments during the manufacturing
process. Istisna is especially useful in the housing sector, boosting the construction demand,
creating employment and wealth to society without harmful effects of interest. It has also good
effects on the reduction of unemployment by boosting construction and house building activities
in society. Istisna has a little effect on inflation control.
1.6.6 Definition and Impact of Salam
A kind of forward sales contract whereby the seller undertakes to supply some specific goods to
the buyer at a future date in exchange of an advanced price fully paid at spot. The contract of
Salam creates a moral obligation on the Salam seller to deliver the goods,. The Salam contract
cannot be cancelled once signed. Salam is very useful in reducing agricultural sector poverty

28. 16
easily, by enabling the banks and farmers to contract with each other of the crops and to get
finance at an appropriate time, instead of usurious loans, which ultimately fails through the
compounding of interest. Salam also has great potential in reducing rural sector unemployment
and reduces trend towards development, by enabling farmers and agriculturists to work. Salam
engages them at villages and towns, thus decreasing the unemployment problem. This generates
agricultural and rural sector development and eventually more income for these poor people.
Salam has a great effect on reducing inflation, where food stuff has reached its peak prices, the
main way it cuts inflation is through ensuring increased aggregate supply and reduce food
product fall by use of pesticide and fertilizers at appropriate times, boosting the yield of land and
farms to much extent.
The effect of a bank‘s activity on economic growth will therefore depend on which
modes of finance and investment the bank undertakes most, and how much each one of
these modes contributes to economic growth. At present, fixed return modes of financing
are dominating usage by most Islamic banks – modes such as Murabaha and leasing.
Even though these are clearly distinguishable from interest-based modes, as transactions
are always done through real commodities, they do not yield the full benefits in terms of
promoting growth with equity which is expected of an Islamic financial system.

29. 17
Specialists in Islamic financial theory had counted on Islamic banks to provide a
significant amount of profit-sharing finance, which would have had economic effects
similar to direct investment and would have produced a strong economic development
impact. However, due to practical difficulties, profit-sharing finance has remained
negligible in the operations of Islamic banks (Al Hallaq, 2006)
1.7 Research Questions:
The research questions for this study are formulated as following:
 What are the main Islamic modes of financing in Islamic banks?
 What are the current statistics about Islamic modes of financing of Islamic banks in
Afghanistan?
1.8 Research Objectives:
The main objective of this study is ―To conduct an overview on Islamic modes of
financing‖ while sub-objectives are formulated as following.
 To know the main Islamic modes of financing currently applicable in Afghanistan.
 To know the current statistics about Islamic modes of financing of Islamic banks in
Afghanistan.
1.9 Significance to Study:
This study will help the readers to find Islamicaly acceptable financial products which
can help them to be more financially sustainable. And as nowadays Islamic banking is
one of the fastest growing sectors of the financial market place, largely driven by the new
wealth of Middle East and by the need for Muslims.
The readers can develop their information about the positive impacts of Islamic banking
on the countries which has launched this sector during past 20 years and what benefits
these countries has driven from this sector, so through that the readers can realize that
Islamic banking is not only for Muslims, everyone can be part of this sector and everyone
can be familiar with the financial rules of Islam and Islamic banking.
This study is also effective for my own personal experience dealing with different banks
in Afghanistan, this research will help me to improve my ability and skills and make
personal career as a good banker.

30. 18
This study indicates that Islamic banking efficiency has grown globally over the years, as
good and big projects which might be turned down by conventional banks due to lack of
guarantee and security would be financed by Islamic banks on profit sharing basses and
this study indicates that Islamic banking can play a effective role in stimulating
economic growth.
1.10 SCHEME OF STUDY
This study addresses to Islamic Banking, Origin of Islamic Banking, Shariah Compliant
vs Sharia Based Products, the main differences between Conventional Banking and
Islamic banking, different products of Islamic Windows, the Modes of Financing of
Islamic Banks in Afghanistan (Research Question and Research Objectives), the previous
literatures review, and the data analysis of Islamic Banks‘ modes of financing all over
Afghanistan, data of which are collected from central bank of Afghanistan (Da
Afghanistan Bank).

31. 19
Chapter Two
Literature Review
2.1 Background
The aim of this chapter is to present a vital review of the literature which adds to the Islamic
banking theory.
2.2 Previous literatures
Abdouli, A. (1991). Access to finance and collaterals: Islamic Versus Western
Banking. Journal of KAU: Islamic Economies. vol.3, pp. 55-62
Abdouli has explained that maximizing of profitability is not the only concern for Islamic
banking institutes and the principles that Islamic banks are based on are deeply integrated with
ethical and moral values. They also state that Islamic Banks do not depend on tangible collaterals
and lead to a better distribution of income, allowing access to finance for those in poorer classes
of society, and resulting in greater benefits for social justice and long term growth. In contrast
with conventional methods, Islamic financing is not centred only around creditworthiness but
rather on the worthiness and profitability of a project, and therefore recovering the principle
becomes a result of profitability and worthiness of the actual project. The nature of Islamic
banking operations are directly affected by the success or failure of client enterprises as a result
of the profit-loss-sharing process
2.2 Hassan. K, Zaher. T, (2001), A comparative Literature survey of Islamic Finance and
Banking, Institutions and Instruments 10(4): 155-199.
Hassan. Ka, Zaher explained: Shari‘a supervision by a qualified Shari‘a advisory board is an
essential component of the Islamic financial structure. The board consists of prominent scholars
who are well versed in Islamic law that relates to transactions and business dealings. The board
is supposed to be independent and screens investment strategies, implementation, monitoring and
reporting.
The second main pillar known as screening, involves the activities of including or excluding
publicly traded securities from investment portfolios or mutual funds based on the religious and

32. 20
ethical conditions of the Islamic law. Some businesses are not in keeping with Islamic laws and
the stocks from such companies are therefore excluded.
Community based investment programs provide capital to those who are unable to access it via
conventional channels. These community-based investments allow people to improve standards
of living and assist them to develop small businesses and create jobs.
The practices and activities of Islamic banks reflect the environment in which they are based.
There are strong retail operations in Iran and Saudi Arabia. In the secular societies of northern
Africa, Islamic banks compete on the quality of products rather than on religious grounds. In
Kuwait, financing has focused on the petroleum sector and real estate investment and in the
United Arab Emirates, the emphasis is on trade and finance.
2.3 Dimitri.V and Yoon.C, Credit policies: Lessons from Japan and Korea”, World Bank
Research Observer, vol. 2, no.2, pp. 277 – 298.
According to the World Bank Research Observer (1996), commercial banks prefer to lend to
low-risk activities and are reluctant to finance high risk projects, even if such projects present
better investment opportunities. They are also less willing to finance small firms that don‘t have
satisfactory security.
In contrast, fostering serious economic development is a key objective of Islamic banks as they
seek to maximize social benefit. Islamic banks therefore work hard to overcome shortages and
difficulties to help the economy to progress to a higher stage of self-sustained development,
resulting in a favorable effect on socio economic harmony due to equal income distribution.
It has been widely claimed by development economists that policy and resource allocation is
strongly focused on large firms and that existing banking institutions prefer to grant credit
facilities to clients who are able to offer sufficient collateral security.
2.4 Chapra, M. (1992). The Role of Islamic Banks in Non-Muslim Countries. The Journal of
Muslim Minority Affairs. vol.13, no.2, pp.1-49.
Chapra, M. Explained: Profit sharing is more stable than the interest based system resulting in
prevention of fluctuations in rates of return. It has been pointed out that interest based debt
financing is a major factor in causing economic instability in capitalist economies.
The large number of economic ills, including poverty, social and economic injustice, inequalities
of income and wealth, economic instability and inflation of monetary assets are all in conflict

33. 21
with the value system of Islam. It is the responsibility of the money and banking system to
contribute to the achievement of socio-economic development and hence eliminate such
economic ills. The principle goals and functions of the Islamic banking system include economic
well-being with full employment and maximum rate of economic growth, equal distributions of
income and wealth and as a result socio-economic justice, and the generation of sufficient
savings and their productive mobilization and stability in the value of money. Profit sharing is
more stable than the interest based system resulting in prevention of fluctuations in rates of
return. It has been pointed out that interest based debt financing is a major factor in causing
economic instability in capitalist economies.
2.5 Nedal El-Ghattis, (2009). Islamic Banking's Role in Economic Development: Future
Outlook. Pp. 2-7, and 16-21. Senior Lecturer Centre of Islamic Finance, Bahrain Institute
of Banking and Finance, Bahrain
Nedal El-Ghattis‘s research addressed the issues that will play a significant role in the future
outlook of Islamic banking and how may increase their ability to participate in economic
development, and how does the application of the profit-loss sharing scheme in Islamic banking
contribute to economic development.
According to El-Ghattis, the Islamic profit sharing concept helps to foster economic
development by encouraging equal income distribution and which results in greater benefits for
social justice and long term growth. And profit-loss sharing scheme improves capital allocation
efficiency as a return on capital depends on productivity and the allocation of funds is based on
the success of the project.
This profit-loss sharing scheme improves capital allocation efficiency as a return on capital
depends on productivity and the allocation of funds is based on the success of the project. And
believes that Islamic financial system is more stable than the conventional banking system due to
the elimination of debt financing. It also reduces inflation in the economy as the supply of
money is not permitted to go above the supply of goods. Islamic banks are less risky than
conventional banks as both investors and entrepreneurs share any risks that are involved in the
business.

34. 22
2.6 Katherine Johnson, (2013). The Role of Islamic Banking in Economic Growth, Claremont
Colleges Scholarship, CMC Senior Theses. pp. 5-35
Katherine Johnson‘s researched to add to the literature by realistically analyzing the economic
growth determinative power of Islamic banks. Confirming pas research, Muslim popularity in a
population is found to be the most significant factor of the circulation of Islamic banks.
According to Katherine Johnson, Certain components of Islamic banking such as risk-sharing,
stability, and innovation are proven energizers of growth while others, including limited
liquidity, may be harmful to the economy. Therefore, elements of Islamic banking likely impact
economic growth; he has attempted to add to the literature on Islamic banks by realistically
investigating the factors of the circulation of Islamic banking, the effect of that circulation on
economic growth, and its impact on financial deepening. Furthermore, the effect of the
circulation of Islamic banking on the explanatory power of legal origin as a factor of growth and
financial deepening was tested. His finding is supported by previous evidence that Islamic
banking appears to be a complement to, rather than a substitute for, conventional banks
The research unveils two topics for further investigation and analysis. First, Islamic banking may
operate as a channel for the convergence process. Second, the degree to which Islamic banks
purify institutional environment, defined by legal origin, inconsequential is questionable in
aggregate data. This finding suggests the necessity for better measures of when Shariah laws are
strictly enforced and actually establish an alternate legal system. The results also show that the
effect of Islamic banking on financial deepening is dependent on the legal origin of the countries
in which it operates. Islamic banks are negatively correlated with financial system development
in countries of British legal origin and positively correlated in countries with French legal origin.
This outcome indicates that Islamic banks may be more beneficial to development of the
financial sector in French legal origin countries.
2.7 Dr. G. Shahul Hameed and Fayaz Ahmad (2010). Development of Islamic banking with
reference to UAE, pp.1-17
Dr. G.Shahul Hameed and Fayaz Ahmad‘s study analyzed the Islamic banking operations
currently practiced in Global banking system. This paper explains the important legal principles
of Islamic Banking, which includes a brief review of the current state of Islamic banking
development and provides the analysis of Islamic Banks with their acquired results. The paper

35. 23
suggests a Global organization that would allow Islamic banks to develop in compliance with its
Islamic laws [shariah] principles.
According to Dr. G.Shahul Hameed and Faraz Ahmad, A key element of Islamic Finance is
division of reasonable rewards to the various factors of production. Islamic financial system
seeks system of fairness and flow of money into economy is guaranteed. Islamic Banking is a
system of business transactions that not only provides allowable (Halal) modes of transactions by
avoiding that which is revolting and objectionable, but also fosters moral, fair-haired and just
practices. They have focused on concept of Islamic banking, identifying need of Islamic banking,
basic principles of Islamic banking, importance and development likelihood of Islamic banking
in key markets, and surveying the growing literature on Islamic banking.
And they believe that Islamic banking has proved vital potential as a competitive and better
substitute against conventional banking system in many countries of the world.
While elimination of "Riba" or interest in all its forms is an important feature of the Islamic
financial system, Islamic banking is much more. Currently, two different approaches are
experienced towards the development of Islamic banking. First way experienced is to implement
Islamic banking on a country wide and on a broad basis. Second, way is to setup individual
Islamic banks in equivalent to the conventional interest based banks. It required support and
continue efforts to eliminate the interest (Riba) from the economy. Islamic Banking may be
viewed as a form of moral investing, or moral lending, except that no loans are achievable unless
they are interest-free. Its practitioners and clients need not be Muslims, but they must accept the
ethical precincts underscored by Islamic values.
2.8 Johansen (2011). Flow of Islamic Finance and Economic Growth-- an Empirical Evidence
of United Arab Emirates (UAE), JEL classification: O16, C32, pp. 1-12
Johnsen has analyzed empirically the relationship between the development of Islamic finance
system and growth of the economy in the United Arab Emirates (UAE). To document the
relationship between development of Islamic finance and economic growth, time series data
from 1990 to 2010 were used. He used Islamic banks‘ financing credited to private sector
through modes of financing as a proxy for the development of Islamic finance system and Gross
Domestic Product (GDP), Gross Fixed Capital Formation (GFCF), as indirect means for real

36. 24
economic growth. The observed results show that there is a strong positive link between Islamic
banks‘ financing and economic growth in the UAE, which strengthens the idea that a well-
functioning banking system promotes economic growth. In this case, the development in the
Islamic financial sector acts as supply, leading to transfer of resources from the traditional, low-
growth sectors to the modern high-growth sectors, and to promote and motivate an innovative
response in these modern sectors. Furthermore, the results show that Islamic Banks‘ financing
has contributed to the increase of investment in UAE in the long term and in a positive way.
According to Johansen, The financial sector plays a growth promoting role, if it is able to direct
financial resources towards the sectors that demand those the most. When the financial sector is
more developed, more financial resources can be assigned into productive use, and more
physical capital gets formed, which will lead to economic growth. He believes that Islamic
finance theory promotes economic development through its direct link to the real economy and
physical transactions, its prohibitions against harmful products and activities, and its promotion
of economic growth and social justice. That means Islamic banks‘ financing and economic
growth move together in the long-run. It is proved that the UAE has benefited from strong
banking system.
He also found that the causality relation exist in the Islamic banks‘ financing to economic growth
in a unique direction from the development of financial system to economic growth, but not in
the opposite direction. The results also indicate that improvement of the Islamic financial
institutions in the UAE will benefit economic development, and it is critical in the long run for
the economic welfare, and also for poverty reduction. The results of study are quite significant as
it is one of the innovative studies of Islamic finance.
2.9 Hafas Furqani and Ratna Mulyany (2009). Islamic Banking and Economic Growth:
Empirical Evidence from Malaysia, pp. 1-16
Hafas Furqani and Ratna Mulyany have explained that Islamic financial system in Malaysia has
evolved as a sustainable and competitive component on the overall financial system as a driver
of economic growth and development. Central Bank of Malaysia (BNM) launched the financial
sector master plan which incorporated the 10 years master plan for Islamic banking that is aimed
at creating an efficient, progressive and comprehensive Islamic financial center for Islamic
banking and finance. And in term of economic growth, Malaysia has a remarkable record of
consistently high growth in the past three decades. The growth of GDP in real terms accelerated

37. 25
to 5.3 percent in 2005. As a country slightly shifted toward industrial country, industrial sectors
and services contributed 80 percent to total of GDP of Malaysia. With total population 26.7
million, Malaysia maintains it‘s per capita above USD 3,000 since 1995. A well-developed
Islamic financial system and a marvelous economic growth at the same time pull our attention to
examine whether or not the Islamic banking system that currently applied in Malaysia really
contribute in the long-run to economic growth of Malaysia. To do this, we will look at the lively
connections between finance and growth by applying models where the financial system effects
economic growth and economic growth transforms the operation of the financial system. The
results generally show that in the long-run, Islamic bank financing is positively and significantly
correlated with economic growth and capital increase of Malaysia. In this regard, Islamic
banking has effectively played its main role as financial intermediaries that facilitate the
transmission of savings from surplus households to deficit households. Therefore, we can say
that the current policies by Bank Negara Malaysia to develop a complete Islamic financial
system in Malaysia is considered as effective since financial development and economic growth
are strongly linked. Furthermore, this finding also shows the reliability and contribution of
Islamic banking to the real economic sectors of Malaysia especially economic growth and
investment. This result also indicates that improvement of the Islamic financial infrastructure in
Malaysia may benefit economic development and it is important in the long run for economic
welfare.

38. 26
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Type of Research:
This research is Descriptive in nature because I have described the Islamic modes of financing
in detail.
3.2 Research Approach:
The research approaches for this study is Qualitative and quantitative because this research is
based both on numerical and non-numerical data.
3.3 Research Method:
The research method for this study is Case Study research method.
3.4 Source of Data:
The data for this research is collected from Secondary sources that are already published data.
3.5 Population:
The population for this study is Banking Sector.
3.6 Sample:
As a sample only Islamic Banks are selected.
3.7 Sampling Method:
Non probability sampling method has been used to collect the data.
3.8 Sampling Technique:
Personal Judgment technique has been used to acquire relevant data from sample.
3.9 Limitations:
The limitations I have faced during doing this study were Time Constraints, Political Uncertainty
in Afghanistan, Data Availability as there was no data published of the Islamic windows of
Afghanistan publically, and the data wasn‘t enough disclose able to public.Correct Responses of
Respondents was also a challenge to face.

39. 27
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 Background:
In this chapter I have used resources and standard data to represent the characteristic spread of
values of variables. I have shown the accuracy of our analysis (which define the probable range
of the true value in the Islamic Banks of Afghanistan from which we drew our data). The values
shown vertically in charts represent the amount of each Islamic product of Islamic Banks, and
the values shown horizontally in charts represent the year and the exact values of amount
particularly under each year mentioned.
This chapter also addresses that are Islamic banks stable and efficient to the economic of
Afghanistan, by utilizing overall data of all Islamic Windows in Afghanistan, data of which is
collected from DAB‘s (Da Afghanistan Bank) Islamic Banking Supervision Department.
4.2 Table 1: Murabaha in Islamic Banks of Afghanistan (AFS)
The table shows the extent of overall Murabaha products of Islamic windows in Afghanistan for
the year 2012 up to Sep-2014, which is further, described in Graph 1 and has been interpreted
below.
Source: Da Afghanistan Bank‘s Islamic Banking Supervision Department
Year Amount (AFS)
2012 805,019,000
2013 687,635,000
Sep-2014 1,350,738,000

40. 28
Graph 1: Amount Based on AFS (000)
Interpretation: As it is noticeable in the above graph there has been a good increment in the
Murabaha services of the Islamic windows of Afghanistan in the year 2014, there were a very
small fall in the year 2013 but the customers has putted more attention to this product in 2014
which is considered beneficial as Murabaha indirectly provides a good tool for an efficient
deferred sale, providing business men the asset of its choice and providing banks profit for the
effort and risk that it tool. Murabaha has little effect on the reduction of unemployment; there is
no clear study on the effect of Murabaha on inflation.
4.3 Table 2: Ijarah (Leasing) in Islamic Banks of Afghanistan (AFS)
The table shows the extent of overall Ijarah products of Islamic windows in Afghanistan for the
year 2012 up to Sep-2014, which is further, described in Graph 2 and has been interpreted below.
Source: Da Afghanistan Bank‘s Islamic Banking Supervision Department
Year Amount (AFS)
2012 731,498,000
2013 697,634,000
Sep-2014 713,272,000

41. 29
Graph 2: Amount Based on AFS (000)
Interpretation: As shown in the above graph at the starting stage Afghanistan was in a very
good phase in terms of Ijarah investments, but after a year passed due to doubts in security
satuations and departure probability of U.S. Forces from Afghanistan people and specially the
banks were afaired of investing in this service, that is why the amount invested in this particuler
service got decreased in 2013, afterward in 2014 the security didn‘t got that much worst as
expected, and people were more hopefull to the future investments, which is really effective
since Ijarah has great potential for protecting against inflationary harms to middle class people
and entrepreneurs, by allowing the use of assets without sudden cash outflows. It enables them to
modify or replace, even after some months or years, their equipment or machinery without much
cash flow swings. But Ijarah, like ordinary lease, can sometimes leads to inflation itself if the
economy is working at the full employment level, then boosting demand of goods which will
further increase prices in the market.

42. 30
4.4 Table 3: Musharakah in Islamic Banks of Afghanistan (AFS)
The table shows the extent of overall Musharakah products of Islamic windows in Afghanistan
for the year 2012 up to Sep-2014, which is further, described in Graph 2 and has been interpreted
below.
Source: Da Afghanistan Bank‘s Islamic Banking Supervision Department
Graph 3 Amount Based on AFS (000)
Interpretation: The graph shows that although in 2013 there were security dificiency rumors in
the capital and provinces, the Musharakah Investment in Afghanistan was in the peak stage,
since most of the investors wanted to decrease the probability of their losses into half by
involvement of Islamic Banks into their businesses and banks never wanted to lose their
customers and also there is another reason that more people got to know about this product than
the previouse year and they tried to share their profit and loss with islamic windows since it was
a good source of financing for them . But in the year 2014 the number of the projects got
Year Amount (AFS)
2012 1,391,695,000
2013 1,718,627,000
Sep-2014 1,119,669,000

43. 31
decreased by departure of foreign troops from Afghanistan and made some sort of impacts on the
investments as well. Muharakah can be one of the key elements in the field of Islamic Banking
in Afghanistan as Musharakah encourages partnerships, also created jobs for many people in
society, promotes enterprise and partnership ventures, creating jobs in the country, and promotes
business enterprise culture in society and growth of skilled people.
4.5 Table 4 & 5: Mudarebah (Saving and Time Deposit) in Islamic Banks of
Afghanistan (AFS)
The table 4 and the table 5 shows the extent of overall Mudarabah products of Islamic windows
in Afghanistan for the year 2012 up to Sep-2014, which is further described in Graph 4 and 5,
and has been interpreted below. Table 4 represents (Savings) and Table 5 represents (Time
Deposits).
Table 4 Savings (Mudarebah)
Table 5 Time Deposit (Mudarebah)
Year Amount (AFS)
2012 2,628,471,000
2013 3,037,845,000
Sep-2014 3,009,439,000
Year Amount (AFS)
2012 2,474,327,000
2013 2,348,391,000
Sep-2014 2,035,840,000

44. 32
Graph 4: Amount Based on AFS (000)
Graph 5: Amount Based on AFS (000)

45. 33
Interpretation: As discribed in the graph 4 & 5, though there is an small fall in the year 2014 it
is easy to see that people of Afghanistan are increasingly getting attracted in interest free banking
since they are getting aware of the service, but still they need to be educated about the products
of islamic banking for making this service more as Murabaha encourages business management
by skilled people and promotes commercial activity which helps to reduce poverty. Mudarabah
also helps control inflation by promoting interest free business activities. Interest and credit
creation of banks through lending are the major source of inflation in society. Mudarabah
involves bank or other capitalists bearing in both profit and loss, and not just making earnings
through a predetermined interest rate exploiting the needs of individuals or firms.
4.6 Table 6: Alwadeaa (Current) in Islamic Banks of Afghanistan (AFS)
The table shows the extent of overall Alwabeaa products of Islamic windows in Afghanistan for
the year 2012 up to Sep-2014, which is further, described in Graph 6 and has been interpreted
below.
Graph 6: Amount Based on AFS (000)
Year Amount (AFS)
2012 2,073,524,000
2013 2,906,455,000
Sep-2014 2,516,233,000

46. 34
Interpretation: The above graph discribes that islamic windows in Afghanistan were successful
in atracting businesses as well, specially in the year 2013 however there is no major difference
in the current account services of Conventional and Islamic Banks except that none islamic
accounts are directly or indirectly involved in (Ribha or Interest) which is prohabited in Islam.
This service helps the business and as well as the bank being more liquid in their daily
operations.
4.7 Table 7: Finance + Investment in Islamic Banks of Afghanistan (AFS)
The table shows the extent of overall Finance and an Investments of Islamic window in
Afghanistan for the year 2012 up to Sep-2014, which is further, described in Graph 7 and has
been interpreted below.
Graph 7: Amount Based on AFS (000)
Interpretation: As shown in the above graph at the beginning stage Islamic Banks in
Afghanistan were in a very good phase in terms of financing and investments, but after a year
Year Amount (AFS)
2012 3,597,570,000
2013 3,224,842,500
Sep-2014 3,214,660,000

47. 35
passed due to doubt in security satuations and departure probability of U.S. Forces from
Afghanistan the banks were afaired of investings and financing, that is why the amount of
investments got decreased in 2013 and 2014 but the variance is not so much huge.
4.8 Table 8: Profit of Islamic Banks in Afghanistan (AFS)
The table shows the extent of overall Profit of Islamic windows in Afghanistan for the year 2012
up to Sep-2014, which is further, described in Graph 8 and has been interpreted below.
Graph 8: Amount Based on AFS (000)
Interpretation: As shwon in the graph this is clear that islamic windows have a positive run
since they are stablished, as they have never experienced losses in the past three years of their
operation. Although there has been some ups and downs in the amount of the profit on yearly
bases.
Year Amount (AFS)
2012 70,067,000
2013 190,606,000
Sep-2014 115,336,000

48. 36
4.9 Table 9: Asset of Islamic Banks in Afghanistan (AFS)
The table shows the extent of overall Asset of Islamic windows in Afghanistan for the year 2012
up to Sep-2014, which is further described in Graph 9 and has been interpreted below.
Graph 9: Amount Based on AFS (000)
Interpretation: As it is shown in the graph islamic windows in afghanistan has increased their
maturity and trust by increasing there assets in the year 2013, and the small decrease in the year
2014 discribes that most of the assets are fixed and long term. And we are hopfull of their long
run to make a better society which is interest free and less treat of inlation is there, as the
businesses will be involed in both profit an loss, and not just making earnings through a
predetermined interest rate abusing the needs of individuals or firms.
Year Amount (AFS)
2012 8,213,141,000
2013 9,570,837,000
Sep-2014 9,209,355,000

49. 37
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion:
This study addresses to Islamic Banking, Origin of Islamic Banking, Shariah Compliant
vs Sharia Based Products, the main differences between Conventional Banking and
Islamic banking, different products of Islamic Windows, the Modes of Financing of
Islamic Banks in Afghanistan (Research Question and Research Objectives) and the data
analysis of Islamic Banks‘ modes of financing all over Afghanistan, data of which are
collected from central bank of Afghanistan (Da Afghanistan Bank).
After the data analysis done in chapter four it is concluded that the modes of financing
which are currently in practice by Islamic windows of Afghanistan are: Murabaha, Ijarah,
Musharakah, Mudarebah, and Alwabeaa, further data analysis from year 2012 until 2014
shows that there is an increase of 67% in Murabaha , a decrease of 2.50% in Ijarah, a
decrease of 19.54% in Musharakah, a decrease of 1.12% in Mudarebah, an increase of
21.35% in Alwadeaa and a decrease of 10.2% in Finance + Investments of the Islamic
Banks in Afghanistan compared to the year 2012. Further it is concluded that overall
banks have been in profit constantly during the years of 2012, 2013, 2014 and according
to analysis there has been an increase of 64.61% in profit of year 2014 compared to 2012,
and that none of the banks in Afghanistan are full pledge of Islamic Banking but Islamic
Windows.
Finally, it can be concluded that Islamic finance has great potential to become a key
instrument in project financing and to play a major role in the banking industry.

50. 38
5.2 Recommendations for Future Growth:
The prospects for Islamic banking and finance are bright but the task ahead is
challenging, its practice is not only maintainable but also profitable in taking form of a
genuine business .It would be useful to bring a few recommendations to the attention of
the public:
Recommendations necessary for the success of Islamic banking are as follows:
 Islamic banks can expand its operation by implementing Shariah law, this would not be
achieved without hiring professionals with the skill and experience in financial consultancy
and preparation of possibility studies for projects.
 Public faith can be constructed by communicating the Shariah law by indicating the
allocation of the bank‘s current investments, the plans for future investments and
information about the management of such investments.
 Technology is vital tool to assist communications, transactions and interactions and to
survive in the highly competitive environment of the banking industry in world.
 Islamic banks must be clearly defined about their practices, strategies, objectives, missions
and visions, and convey them to the public.
 Improving Accounting and Auditing Standards based on Shariah principles and to maintain
Islamic law
 None existence of Islamic Insurance in Afghanistan has been the one of the largest
challenges for Islamic Baking in Afghanistan. Investment side of Islamic Banking needs
them very crucially. Every investment projects of Islamic Banking needs insurance and the
conventional insurance cannot be the right option.
 Another key would be to permit the licensing of Islamic banks rather than Islamic windows
to strict compliance with the Shariah rules.
 It is possibly not too rough scheme to promote that there is a need for specialized Islamic
financial institutions such as Mudaraba banks, Murabaha banks and Musharaka banks which
would compete with one another to provide the best possible services.

51. 39
Finally, it is recommended that use of Islamic finance principles for public sector financing
needs more attention, and ensure that proper procedures for good corporate governance,
transparency and ensuring Shariah compliance are in place it could be helpful in ensuring fiscal
discipline and thus giving a just basis for monetary management.

52. 40
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