Research & Written

YOUSUF IBNUL HASAN Program Consultant Islamic

Banking & Applied Finance
Design by
SAIRA ALI Student MBA Program 2010-2014
IQRA UNIVERSITY

WHAT IS ISLAMIC ECONOMICS?

WHAT ARE THE PRINCIPLES ON WHICH ISLAMIC
ECONOMY, ITS MONETARY AND FINANCIAL
SYSTEMS FUNCTION?
Islamic Economics is a system that defines the available
resources blessed by Almighty Allah to the mankind.
How these resources are utilized and distributed by man
keeping in it, the social justice and seeking best of these
in participation and cooperation by applying, knowledge,
experience, ability and efforts through the power of pen
and book, granted by Almighty Allah, recognizing and in
confirmation the status of men as Unique among all
creations and appointing as Custodian to all the
resources, that Almighty Allah owns it alone and
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absolute.
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20TH CENTURY ECONOMISTS

DEFINE ISLAMIC ECONOMICS
Hasan-uz-Zaman
Islamic economics is the knowledge and application of
injunctions and rules of the Shari'ah that prevent injustice in
the acquisition and disposal of material resources in order to
provide satisfaction to human beings and enable them to
perform their obligations to Allah and the society.
M. Akram Khan

Islamic economics aims at the study of human recovery

achieved by organizing the resources of earth on the basis of
cooperation and participation.
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Dr. Nejatullah Siddiqi

Role of Shariah define belief in justice and

freedom, cooperation and sharing which are
the fundamentals to Islamic economic
philosophy within the total Islamic system.
Key to Islamic economics philosophy lies in
man's relationship with Allah, his universe
and his people. The other human beings are
the nature and purpose of man's life on earth.

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DEFINITION OF ISLAMIC
ECONOMICS
Any activity that has a commercial,

economical and financial purpose with the

priority of social benefit to mankind is
classified as

Islamic Economics

The system that has the foundation on this

classification leads to socio- economic
development and not just the economic
development.

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CONCEPT OF ECONOMICS
Established on the day Adam
Adam was senseless to his needs & desires upon his
creation. He disobeyed Allah Almighty on the
temptation of IBLEES (devil).
Adams act of disobedience created principles of economics
that revolve around
Theory of Need, Want and Desire that lead to
Act, Acquire and Accept
Prophet Adam (May Peace Be Upon Him) was sent to
earth to develop mankind with a system of life that give
birth to Natural Economics.
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BASE OF ISLAMIC ECONOMICS

Resources are unlimited and efforts are limited.
Needs and wants does not effect on the supply or resources.
Availability of resources depend on efforts that increase
affordability which is the force for satisfying needs.
Nations using their efforts in achieving knowledge and
apply it in seeking rights are leaders of economic growth.
Nation merges economics growth with socio development
are the genuine Communities and such states are

For the People, By the People, & Of the People

This Socio Economics Development converts

Peoples into Nations.

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ISLAMIC ECONOMICS IS AN
INDEPENDENT SYSTEM

It

enjoys a separate identity.

It is a self-contained system with its own economic
policy,
It covers interests at Private and Public as well as
Material or Spiritual.
It has given a complete system of lifestyle, Earning,
Expenditure, Businesses, and Relationship with Legal
Framework.
It emphasizes for all bases on Social Justice, Equality,
Unity, love, Cooperation, Sharing, Transparencies in all
affairs and respect.

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Islamic Economics System guards

Rights of minorities and non-Muslims in the Islamic
state.
Rights of Women and Orphans.
Rights of employees.
Rights of Lenders and Borrowers.
Rights of everyone without Race-Religion-Language-Color
or Sect.
Islamic Economics system is based on four principles
All wealth belongs to Almighty Allah
Man is the trustee of the wealth
Hoarding of wealth is prohibited
Wealth must be in circulation at all time
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ISLAMIC ECONOMICS SYSTEM

GUIDANCE

Guides in maintaining of wealth in a proper form of

distribution and define incentives for work and efforts.
Shows opposition & defends against misuse of exploitation
in getting hold of wealth through unfair means.
Denies clearly "free" Market of Capitalism, which has led
to the situation of survival of a part of the society.
Emphasizes public revenue from natural resources should
be use to secure needs of community and not to fill pockets
of casino owners.
Outlaw hoarding of wealth and eliminate copyright or
patent laws that open an avenues for developing potential
monopoly.
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ISLAMIC ECONOMIC SYSTEM

Protects the society and secures the needs of the

people.
Mandates vital and natural resources as public
property while allowing for unlimited access to luxury
items.
Protects society by defining certain needs as a
prohibited needs.
Disregards corrupt man-made systems and protects
honor, rights of woman, minor and orphans.
Bans all forms of prostitution, pornography or any
activities that exploit charms and physical
attractiveness of women.
Prohibits alcohol, gambling, spiral of corruption, social
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turmoil and moral devastation

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BASIC PRINCIPLES OF ISLAMIC ECONOMICS

Principle of adaptable ownership

Principle of economic freedom within a defined limit
Principle of social justice.

FIRST PRINCIPLE
Three types of ownerships are permitted ;
The individual ownership.
The state ownership.
The public ownership.
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SECOND PRINCIPLE
Economic Freedom within a Defined Limit
Islamic law prohibits all such social and economic
activities that differ to the teachings of Islam and its
principles and values.
It guides State to protect and safeguard public interest
through the control on individual freedom in the illegal
and non-permitted actions they involve due to which the
economic activity of the community and society suffer.

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THIRD PRINCIPLE:
Social Justice in Islamic Economics
To give-and-take responsibility
To keep social balance
Prohibits growth in differences

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IT GIVE SOCIAL BALANCE

i.e. few live in extra luxury and rest were deprived of basic
necessities of life and forced to live a life of misery, hunger,
without shelter, illness and as neglected class of the society.
DIFFERENCE

Tawhid (monotheism)
Definite acceptance of Almighty Allahs relationship with
man and mans believes in supremacy of Almighty Allah
with clear vision on Day of Judgment.
The accomplishment of man depends on the belief and
obeying the teachings of Islam and bringing healthy and
peaceful community by synchronizing between morality
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and the material characteristic of life.
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ETHICS

The contribution of Zakat and elimination of Riba

develop stability, peace, harmony and social
economics development.
It gives the real value of Money as money to be
respected instead to be loved.
It defines the state responsibilities for income
distribution and take this responsibility as the basic
principles towards the social justice

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MAN & MONEY IN ISLAMIC

ECONOMICS

Money matters in human life play a vital role

Matters pertaining to money must be fair, transparent &
useful for developing socio-economic life of community.
It does not impose limits on amount of wealth that an
individual can acquire.

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WHAT ISLAMIC ECONOMIC BELIEVE

Islamic Economics is specifically believe distribution as an
economic problem.
It differ application to capitalist & communist systems for
production.
It differentiates between Basic Needs & Luxuries.

It does not accept concept of effective scarcity of resources.

It does not accept concept of inflation

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MAN, MONEY & COMMODITY

Three factors of production give birth to the exchange system

and practice in the fulfillment of needs.

The two exchange system are classified as

Lending and Borrowing

Financing and Participation

Lending is base on principle amount in transaction by

pricing it with the time value without the concept of
utilization of money and its impact on economic activity.
Financing is made available on the basis of Mans ability to
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use the money and to multiply, divide, subtract and add
the amount realize through the exercise of money.
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DIFFERENCE OF FINANCING & LENDING

Financing is Equity and not Liability
Lending is liability and not participation.
Loan is secure financing is support.
Financing is an investment and loan is facility.
Loan cannot be financing until it is agreed on Profit and
loss sharing
Financing cannot be a loan till return is guaranteed.
Loan is given at a price of money on application of Rate
Financing outcome to be profit, shared in an agreed Ratio.
Loan has to be secured by external factor of collateral
Financing cannot be made until the user is able to use it
Lending is given against the confirmation of guarantee.

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LENDING AND FINANCING DIFFERENCE

Lending leads to inflation and liquidation

Financing ends at ownership
Financing increase the capital base as well as net-worth
Lending increase liability, cost and decrease the net worth
LENDING money given for unstated purpose against the
security without going through pros & cones of activity for
which money is spent on and return is fixed either in cash
or in term liquidation of mortgaged movable or non movable
property/properties.
FINANCING is joining in the profitable operation, like
equity participation, venture finance, acquiring business
operation with proper appraisal of purpose, verification,
validation of data submitted by the two partners in which
financier becomes direct or indirect partner in that venture
with un-guaranteed profit and loss in returns.
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DEFINITION OF FINANCING
Finance is the intermediary source in shape of money
having a value to act in production, trading and exchange
of commodities, services and assets.
Financing is the source that makes the money service for
specific purpose within specific period, in between person
to person, person to institution or institution with group
or institution on an understanding to share the result in
profit and loss.
Financing is the source that develops ownership, support
entrepreneurship and line-up procurement, production,
distribution, utilization through participation and
cooperation between skill and capital on the basis of
profit and loss acceptability upon the maturity.
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(CONT)

Financing is the use of money by one who owns it

and the other who has the ability to use it for a
common purpose to make profit by participation
and cooperation.
Financing is the act of money without the concept
of liability, collateral or the guarantee. Its origin
is investment and its end is ownership.
Financing is an act of money which is classified
as the opposite to lending.
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HISTORICAL BACKGROUND
Financial matters in Post Islamic era were commonly
practiced on the basis of social priorities & Prophet (PBUH)
too was involved in commercial & financial activities
considering social obligations in financial matters
It is authenticated by archives of the Islamic world that
with the introduction of financing and discarding lending
the most powerful community development on the basis of
social development in first Islamic state under the
guidance of Prophet Muhammad ( May Peace Be Upon
Him) in the rule of four Caliph.
Interest based system was dominating 98% monetary
markets, controlling the market with its powerful grip and
titled as Conventional Monetary System

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(CONT)
Now reduce to almost 75% and it is gaining the
momentum on daily basis.
Financial system derived from Quran, Sunnah and
Hadiath has a well defined title that signifies motive and
concept of the system as
Socio-Financial System.
Islamic Finance was practice for the most part in the
Muslim world throughout the middle ages.
In Spain, the Mediterranean and Baltic states, Islamic
merchants became vital intermediaries for trading
activities.
European financiers and businesspersons later adopted
many concepts, techniques, and instruments of Islamic
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finance.

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(CONT)

Term "Islamic finance is relatively new for commercial

money market in a sense as it appearing only in the early
1960s through a movement that started from Egypt when
the fist Social Bank was establish to bring the change in
the money activities and unite money with ability with
propose and period.
Commercial or business activities confirming to Islamic
principles are made under the umbrella of either
"interest-free"
interest-free or "Islamic Banking which Islamic financial
system simply as "interest-free" does not provide a true
picture of the system as a whole. Prohibition of receiving
and paying interest may be the base of this system, not
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all.
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(CONT)

It works on Islamic set guidelines consisting of Risk

Sharing, Individual Rights & Duties, Property Rights,
Purity of Contracts, Commitments, Transparencies, Fair
Deals and Employment Growth.
Not limited to banking only but covers capital formation,
capital markets, and all types of financial settlement.
Conventional financial system deals primarily with the
economic lending and borrowing aspects of transactions.
It is established on absolute prohibition of payment or
receipt of predetermined and guaranteed return rate.
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(CONT)

The system encourages risk sharing, promotes

entrepreneurship, discourages speculative behavior, and
emphasizes the sanctity of contracts
Basic framework for Islamic financial system is
enforcement of the rules for handling of economic, social,
political, and cultural characteristic of Islamic societies

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BASIC PRINCIPLES OF ISLAMIC FINANCE

Prohibition of Riba
Any unjustifiable increase of capital through the use of
the capital whether in financing, lending or sales is
central belief of the system.
Any positive, fixed, predetermined rate tied to maturity
and amount of principal etc. i.e. guaranteed regardless of
performance of the investment is prohibited
Risk sharing
Interest is prohibited and owner of funds become
investors instead of creditors. The provider of capital and
entrepreneur shares business risks and shares profits
and loss according to the ratio of investment and
participation by way of their Capital or Skill.
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(CONT)

Money as "potential" capital

Money is treated as "potential" capital
It becomes actual capital only when it joins hands with
other resources to undertake a productive activity.
Islam recognizes the time value of money, only when it
acts as capital, not when it is "potential" capital
Money cannot be treated as Capital if it is not in
circulation.

Prohibition of speculative
An Islamic financial system discourages exhibition of
wealth and prohibits transactions featuring extreme
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uncertainties, gambling, and risks
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(CONT)

Transparency of contracts
Islam upholds contractual obligations and disclosure of
information as a sacred duty. This feature is intended to
reduce risk of information and moral hazards.
Shariah Approved Activities
Only those business activities that do not violate the rules
of Shariah qualify for investment. For example, any
investment in businesses dealing with alcohol, gambling,
and casinos would be prohibited

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(CONT)

Salient features of this order

Islam clearly characterizes difference between lawful and
forbidden economic activities and permits the Muslims to
make all efforts for their right in seeking their economic
benefits.
Islam prohibits financial, economical, social and legal
actions, which are morally, financially and socially
damaging to the community life.

It implies Careful investment policy, diversification of risk

and careful management by Islamic financial institutions.

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HOW FINANCE IS APPRAISE

Financing appraisal is base on straight line method,
applying 12-P Formula
12-P Formula in pre-financing activities
Person who is financing to whom?
Purpose for which financing is work out?
Project for which financing is required?
Period for which finances to stay as financing?
Product that develop through financing?
Process to be use for financing?
Price is the volume of finance require?
Place locations where finance shall be utilize?

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(CONT)

Participation, relationship and responsibilities of

financier and user?
Pact terms and condition of financing between parties of
financing?
Professionalism ability, experience, knowledge and
expertise in purpose?
Perfect ness in Performances?
Profitability by the application of twelve P formulas
which is the RISK base perimeters

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RIBA- PROFIT &

INTEREST
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Introduction & Differences

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Prime Importance for

mankind
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Almighty Allah prohibited any

object or any act that is
harmful to humankind that
creates instability, bring
injustice, become injurious to
human life and considered as
unconstructive to
Socio Economic System.

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RIBA.
Riba is an Arabic word drive from word RIBH
which means Profit.
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Any earning, income, profit or benefits being

earned, taken or received through wrong means,
bad intentions, shady practices or wicked
participation. Such earning, income, profit or
benefits are classified as RIBA.

Such earning, income, profit or benefits are not

only treated as immoral, unjust and filthy but
furthermore threat to socio economic life of37
society.

HOLY QURAN

AL-BAQARAH 2:275-6

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People who indulge in Riba shall be raised like those who

have been Driven to madness by the touch of Devil.
That is because they say that Riba-based transaction is
just like trading, while Allah has permitted trade and
prohibited Riba. Hence those who have received the
warning from Allah and have stop accordingly, may
have what has already passed, their case being entrust
to Allah but those who revert to Riba-based dealings,
shall be the inhabitants of the hell-fire and abide
therein for ever. (You must know that) Allah deprives
Riba from all blessings and blesses charity; He loves
not any ungrateful sinners.

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AL-BAQARAH 2:278-79

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O you believers!
Fear Allah and give up Riba that remains outstanding if
you are true believers.
Watch out! If you do not obey this directive, then Allah
declares war against you from Himself and from His
Prophet.
But, if you give up your outstanding Riba, then you can
claim your principals. Neither should you cause harm
with Riba to others, nor should others harm you.

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HADIATH REINFORCE
CONCEPT OF QURANIC RIBA

The Prophet (May Peace Be Upon Him) cursed all those who
take Riba, who give Riba, who write a Riba
contract and the two witnesses to a Riba contract.
He (May Peace Be Upon Him) further said: "They are all alike
(in fault). (Muslim 2995)

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Prophet Muhammad (May Peace Be Upon Him)

Said At the last Pilgrimage,
All Riba of Jahilliya is null and void. In this respect,
the first Riba I (May Peace Be Upon Him) withdraw that the
borrowers owe to my uncle Abbas; it is cancelled
completely. (Muslim)

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Riba is as a combination of evil and sins.

Riba is bad practice to earn & gain.
Riba bring instability in the community life.
Riba is the source for the increase of inflation.
Riba create classes in the society.
Riba create injustice in seeking the rights.
Riba is non transparent economic activity.
Riba is the most hated practice in Islam
Riba is the social crime

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Riba is immoral, unethical, unjustified

commercial, economical, political, social,
cultural and traditional practices and
activities to gain benefit at individual, 41
collective or institutional level ,

INTEREST
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When money becomes a commodity and

bought and sold with guaranteed results
of profitability or increase in volume of
money being used for the transaction,
such increase is the price of the money
and this price of the money is classified as
Interest which is the part of Riba

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HOW TO DEFINE INTEREST

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Any amount, earning or income that is taken over

and above to principal amount, without any risk,
efforts, activity, without loss sharing and the
return is guaranteed within a specific time is
called interest.

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ABUL ALA MAUDUDI,

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Interest is an earning through lending on

money by lender from borrower on
condition that lender shall charge a
fixed amount of money in addition to the
principal. Interest is prohibited in Islam
and people are not allowed to make
money by lending their capital on
interest. Capital is to be invested in
productive manner that increases the
profits.

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KEYNES

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A western economist defines

"Interest has nothing to do with
influencing volume of savings.
Practically it is rate of return on
investment that determines rate of
saving

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GREEK SCHOLAR
ARISTOTLE
He define Interest in his book Money & politics.

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Interest is an artificial profit, which does not

enter in legal trading. Using money as a
commodity is selling, just a forged artificial
transaction.
Money has to be used as a means of sale and
purchase and a measurement of a commodity
to be sold or purchased.
Money is just a means to ascertain value of
commodity and it cannot be sold or purchased
within similar quantities and qualities . 46

Prophet Moses

(May PEACE BE UPON HIM)

Torah 22nd versus of the Exodus

Deuteronomy verse 23rd

You shall not lend upon Riba to your brother,
Riba on money, Riba on virtual, Riba on
anything that is lent for Riba.

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If you lend money to any of my people with you

who are poor, you shall not be to him as an exact
Riba from him.

Leviticus 25:35

'If one of your countrymen becomes poor and is

unable to support himself among you, help him
as you would an alien or a temporary resident, so 47
he can continue to live among you.

JUDAISM

The religion of peace and love define Interest as

the key to cruelty and hatred and give birth to
cirme.

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In several Biblical passages in which the taking

of interest is either forbidden, discouraged or
disliked.

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Roman Catholic Church

In fourth century AD prohibited taking

of interest by Church Scholars.

"The love of money is the root of

all evil." (Timothy 6:10)

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In the eighth century under

Charlemagne it was declared usury to
be a general criminal offence.

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Ancient Hindu Religion

In the Jatakas, (600-400 BC) Usury is referred to in

a humiliating manner:
Two-Faced elite accused of practicing Usury.

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Vasishtha, a well known Hindu law-maker made a

special law which forbade higher castes of
Brahmans (priests) and Kshatriyas (warriors)
from being usurers or lending at interest. Vedic
texts of Ancient India (2000-1400BC)

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Islam for Money Matter

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Riba does not justify money to be a medium of

exchange
and develops the love of money in several ways that
disrupt the entire system of mankind. Islam stresses a
respect of money by disregard lending and borrowing
and guide to financing on participation by uniting money
and skill as equal in effort and utilization and value.
Islam guides the point of origin and limit of destination
of monetary transaction. Islam defines duties and
responsibilities between money owner and money user.

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Profit how it is Describe?

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Income on financing is determined not on

financing amount, but takes principal
amount, cost of transaction and
applicable fee & charges as a part.
Profit is the aim of financing and loss is
acceptance.
Appraisal, Precaution, Trust, Confidence,
Experience, Knowledge, Purpose, Will
and Sprit are business ethics that result in
realizing profit on the transaction.

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Now the question arises

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If Interest is eliminated from monetary

system, would it be possible that system &
transactions would become transparent
and clear?
Answer is simple and straight:
Filth remains in its hard and powerful
grip irrespective of other factors.
Interest alone cannot be eliminated without
eliminating categories that fall under term
called Riba.

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The main classes of RIBA

1.

3.
4.
5.
6.
7.
8.

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2.

Exploitation by taking advantage of

status and position,
Irregular weight & measures for
profitability,
Wrong declaration for higher return,
Misconduct (misbehavior),
Crime & Law breaking,
Mistrust,
Commit a breach
False commitment,

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9.

10.
11.

13.
14.
15.

16.

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12.

Manipulation of affairs for benefits at a

cost and efforts of other,
Gambling in all form,
Promising to secure the benefit by
covering honorable, nearest, dearest
Falsehood and Lies
Betting and gambling
Speculation
Trading in commodities prohibited by
Islam and law of the land,
Income from the practices or activities
that are prohibited by Islam,

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17.

18.

20.
21.

22.

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19.

Breaking and abuse of state law for self benefit

or for any purpose that is declared as
punishable act.
Disobedience to the state law by declaration and
submission of wrong information for selfbenefits.
Disturbing peace of community by using force.
Committing and involving in the illegal acts.
Paying and receiving Interest that is declare as
price of money using act of cruelty, exploitation,
wrong means, false declaration, and advantage
based on weak or wrong calculation,
Taking and giving return on loans or fixing
amount without appraising the use of funds that
are given to user.

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23.

24.

26.

27.

Using deposits as investments and declaring nontransparent results that lead to discrimination of
sharing in accordance with investment
percentage,
Holding and storing of currency that affects
economic activities negatively.
Holding commodities that lead towards scarcity
in the supplies against market demand.

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25.

Keeping deposit with person or institution

having involved in Riba practices,

Monopoly and monopolization of activity,

transaction and business to taking sole benefit, 57
stopping the growth of employment and earnings

28.Grabbing

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the wealth,
29.Illegal encroachment on the property that is not
owned by encroacher. Like construction of pray
area on the property not lawfully purchase, legally
gifted or transferred to occupant
30.Using public money for luxuries & self-usage,
31.Misuse of rights belonging to minors, orphans,
widows and women,
32.Misappropriations among share division on
inherited wealth
33.Miscalculation of share for inherited wealth under
law of inheritance,
34.Income by power and cruelty,
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35.Misuse of power and status,

36.
37.
38.
39.
40.

42.
43.

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41.

Theft,
Burglary,
Smuggling,
Adultery,
Human trading,
Pressurizing and influencing of earning
situation and taking benefits,
Misuse of public representation and obtaining
benefit through status as Public Representative,
Trade and Sale of commodity by charging over
and above to the prevailing price and avoiding
payment to state toward revenue, hiding such
earning and income on transactions. (Premium
on commodity for extra benefit),

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RIBA AL NASSIEAH
Riba

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al Nassieah practiced before Islam

as man paying his money to another for a
pre agreed period.
In return, he took from him a certain
amount every month without taking the
principal amount.
When date of payment came, he asked
him for his capital and if he was unable to
repay would increase in his fund and the
term of repayment.

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RIBA AL FADL
A

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man sells an article in exchange of another

article having same quality and nature with
an increase or decrease like gold sold for gold,
rupee for a rupee, corn for corn and barley
for barley.
This kind is considered as Riba, as
commodities are similar to each with
different values not ascertain.
Such transaction has the involvement of
exploitation and injustice on any ones part of
the two.

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GHARAR
Gharar is uncertainty, hazard, chance or risk and
technically it is sale of a thing which is not present at
hand or the sale of a thing whose consequence or
outcome is not known or a sale involving risk or hazard
in which one does not know whether it will come to be
or not.
Such as fish in water or a bird in the air which are
dishonesty through ignorance by one or more parties to
a contract.
There are several types of Gharar, all of which are
Haram. The following are some examples:

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Selling goods that the seller is unable to deliver

Selling known or unknown goods against an unknown
price
Selling goods without proper description
Selling goods without specifying the price
Making a contract conditional on an unknown event
Selling goods on the basis of false description
Selling goods without allowing buyer to properly
examine the goods
Gambling is a form of Gharar because the gambler is
ignorant of the result of his gamble

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ANY QUESTIONS??
THANK YOU