Islamic Studies 1

Syeda Gull Zainab Gardezi

Home Assignment

Syeda Gull Zainab Gardezi

Topic: Economic Integration

Section: A

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Q1: Islamic Banking?

Bank:

Bank is an institution which deals in credit. It receives deposits of public saving and
extents loans to needy people for productive or unproductive ventures. In interest-
based economies bank earns profit by lending out money on low interest-rate.

Functions of Bank in Interest-based Economies:

In interest-based economy a commercial bank performs the following functions:

1. Accepting deposits
2. Advancing Loans
3. Providing Agency Services
4. Money Transfer
5. Safe-Deposit Lockers
6. Investments
7. Credit Creation

Islamic Economy and interest free banking:

 Islam gives importance to justice, benevolence and cooperation in mutual

relations.
 It forbids from taking advantage of helpless circumstances or another person.
 Islam promotes equal distribution of wealth and unity in an economy.

Need for Interest-free Banking:

1. Utility of bank is acknowledged. So it is necessary to reform the banking

system according to the principles of Islam.
2. Modern banking system gives rise to injustice, oppressesion, waste resources
among nations. Interest-free banking is an essential need of civilized human
community:
 In order to invest their capital, the banks extend loans to businessmen
on a fixed rate of interest. The liability for profit or loss rests with the
businessman. In either case of loss or in case of profit one party suffers
injustice. Interest-free banking offers the only remedy to this injustice.

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 In an interest-based economy the bank wants to recover its capitakl

along with interest. The bank gathers information about the use of the
capital. But it is basically interested in credibility of the entrepreneur
and the satisfactory guarantee provided by him. Under these
circumstances efficient distribution of capital is not generally kept in
view and capital is provided for many ventures which, though they
satisfy the banks conditions of eligibility for loan, are not most
productive for the community. In this way several ventures which are
for the welfare an d betterment of society are starved for funds. Thus
interest becomes a huddle in way of several productive ventures.
 Recovery of interest on consumption loans is absolutely unjust. The
consumer does not produce any wealth with the loans, yet the bank
demands interest on loan which is unreasonable and improper on
economic as well as moral grounds.
 Exploitation of interest in international loan

Islamic Banking:

 Islamic Banking refers to a system of banking or banking activity which is

consistent with Islamic law (sharia) principles and guided by Islamic
economics.
 In particular, Islamic law prohibits usury, the collection and payment of
interest, also commonly called riba in Islamic discourse.
 Generally, Islamic law also prohibits trading in financial risk (which is seen as
form of gambling).
 In addition, Islamic law prohibits investing in business that are considered
haram (such as business that sell alcohol pr pork, or business that produce
un-Islamic media).

Principles in Islamic banking:

 Islamic banking has the same purpose as conventional banking except that it
claims to operate in accordance with rules of Shariah, known as Fiqh al-
Muamalat (Islamic rules on transactions).
 The basic principle of Islamic banking is sharing of profit and loss and
prohibition of riba (interest).

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 Among the common Islamic concept used in Islamic banking are profit sharing
(Muidharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus
(Murabahah) and leasing (Ijarah).

Concepts in Islamic Banking:

1. Wadiah (safekeeping)
 In Wadiah, a bank is deemed as a keeper and trustee of funds.
 A person deposits funds in the bank and bank guarantees refund
of entire amount of the deposit, or any part of the outstanding
amount, when the depositor demands it.
 The depositor, at the bank’s discretion, may be rewarded with a
“hibah”(gift) as a form of appreciation for the use of funds by the
bank.
 In this case, the bank compensates depositors for the time-value
of their money (i.e. pays interest) but refers to it as a “gift”
because it doesn’t not officially guarantee payment of the gift.
2. Muidharabah (Profit Loss Sharing)
 It is an arrangement or agreement between a capital provider
and an entrepreneur, whereby the entrepreneur can mobiles
funds for its business activity.
 Any profits made will be shared between the capital provider and
the entrepreneur according to an agreed ratio, where both
parities share in profits and only capital provider bears all losses
if occurred.
 The profit-sharing continues until the loan is repaid.
 The bank is compensated for the time value of its money in the
form of a floating interest rate that is pegged to debtor’s profits.
3. Musharakah (Joint Venture)
 This concept is normally applied for business partnerships or
joint ventures.
 The profits made are shared on an agreed ratio, while losses
incurred will be divided based in the equity participation ratio.
 This concept is distinct from fixed-income investing (i.e.
issuance of loans).

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4. Murabahah (cost plus)

 This concept refers to the sale of goods at a price, which
includes a profit margin agreed to by both parties. The purchase
and selling price, other costs and the profit margin must be
clearly stated at the time of the sale agreement.
 The bank is compensated for the time value of its money in the
form of profit margin.
 This is a fixed –income loan for the purchase of a real asset
(such as real estate or a vehicle), with a fixed rate of interest
determined by the profit margin.
 The bank is not compensated for the time value of money
outside of the contracted term (i.e. the bank cannot charge
additional interest on late payments) however the asset remains
in the ownership of bank until the loan is paid in full.
5. Bai Bithaman Ajil (Deferred Pavement Sale):
 This concept refers to the sale of goods on a deferred payment
basis at a price, which includes a profit margin agreed to by both
parties.
 This is similar to Murabahah, except that the debtor makes only
a single installment, on the maturity date of the loan. By the
application of discount rate, an Islamic bank can collect the
market rate of interest.

Business of an Islamic bank:

1. Services on which a charge is made

2. Facility of Lockers
3. Transfer of Money
4. Receiving and Forwarding Trade Goods
5. Services as Financial and legal Consultant to Business Corporations

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Q2: Economic Integration among Muslims and a need for an Islamic union?

Ans: Aggressive globalization emerging from global village, increasing

homogenization of tastes and attitudes, deregulation and eliminating of physical,
fiscal/financial and technical barriers, rapidly scientific and technological innovations,
and predictive uncertainty, are some factors that underlay the importance of
emerging the new economic integration approach and relationships among bloc of
countries. The main reason is that most countries and organizations cannot always
have the resources or known-how to cope with increasingly complex global
environments from internal resources alone.

Economic Integration: Economic integration is combining different aspects of

economies into an integral whole. A basic theory in support of economic integration
was presented in 1960’s by Hungarian Economist Bella Balassa. As economic
integration or economic unity of economies increase, the barriers of trade between
markets diminish. The most integrated economy today, between independent
nations, is the European Union and Euro zone.

Economic Cooperation Organization (ECO):

ECO is an intergovernmental international organization involving ten Asian or

Eurasian nations. It provides a platform to discuss ways to improve development and
promote trade and investments opportunities. It was formed to achieve the conceived
objectives of economic integration.

A regional collaborative relationship (RCR) for global competitiveness:

Globalization and economic integration among countries, involving the formation of

free trade areas, customs, unions, common markets or full economic unions, has
become a fact for most of developed or western countries. European Union (EU) as
well as other positive forms of economic integration have gone successfully and
taken place in Latin America, the Pacific area via trade agreement (PTA), and in the
NAFTA. This globalization and economic integration is still a desirable object in
developing countries. The challenge is all the greater in the Arab world. As regards
the Arab/Islamic World there have been several attempts for economic integration.

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Yet these attempts have not given any positive results. Unless a serious movements
towards regional economic integration, Arab countries are under threats from the
global market economy. This global economy now sets the rules for the economic
policies which should be adopted by the region’s countries. This economic
integration is prerequisite for facing or achieving some level of globalization.

Co-operation, competition and integration:

Co-operation is seen as the basic value in Islam’s economic philosophy.
Besides being required by human brotherhood and equality, unity of purpose
and common ultimate interests, and also besides being explicitly enjoined by
Quran and Sunnah it is the attitude that suits the practical interests of mankind
today. With a positive attitude to economically and patterning life on earth in
accordance with Islamic economic philosophy. Economic relations, especially
those in development, production and exchange of wealth, should be co-
operation in nature. “Rivalry and cutthroat competition make no sense in this
context”. The Islamic view of co-operation does not rule out free and fair
competition in the market (local, regional or global), provided all economic
agents adhere to Islamic morality. This makes it still more n\necessary to
visual how the co-operation spirit will translate itself into action where many
different countries and millions of individual units are involved, knowledge is
imperfect and communicative involve costs.
Some projects under this co-operation deal:
Reviewing all attempts of co-operation, alliances or integration among Arab or
Islamic countries in the last four decades we find big projects at the beginning
and very little or nothing left at the end. Some of these projects are:
1. The emergence of new centers of development and investment finance
2. Arab found for economic and social development
3. Kuwait Fund for Arab Economic Development
4. Abu Dhabe fund for Arab economic Development
5. Council of Arab Economic Unity
6. Gulf Cooperation Council (GCC)
7. Arab Bank for Economic Development in Africa
8. Arab Maghreb Union: Algeria, Libyan, Mauritania, Morocco, Tunisia
(AMU)

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9. Arab Monetary Fund (AMF), 1976

10. Arab Trade Financial Program (ATFP)
11. Arab Common Market, 1964
12. Arab Free Trade Zone

Failure of Economic Integration in Muslim countries:

1. To consolidate cultural affinities and spiritual and fraternal ties that bind the people
of the member states through social and cultural channels of thought and action.
2. To contribute to the growth of world trade and to strive for removing iniquitous
trading policies resulting in adverse terms of trade for the developing countries, by
evolving a common approach in international forums.
3. It is clear that ECO's main aim was to establish a preferential trade system, rather
than a free trade area. Furthermore, ECO is not conceived as a closed system,
but rather an open one, which aspires to obtain a greater share of world trade.
4. However, it must be mentioned that none of the ECO countries are each other's
major trading partners. Most of them rely on trade extensively with the Western
countries, which keeps their industrial sectors from fully blooming and perpetuates
their dependency. ECO is certainly a step in the right direction if the member
states want to benefit from the fruits of economic collaboration. However, ECO is
far from achieving that full benefit.
5. LANGUAGE AND ECO:
 There should be a common language used in the muslim countries in order to
communicate, as NAFTA has English.
 None of the member states have a common language.
 Farsi was once the universal language of the region, which was replaced by
the colonial powers with other national languages like the modern Turkish in
Turkey and Urdu in Pakistan. And it is still Farsi that has the potential to unite
the region linguistically.
 Such strategic communication is absent in the case of ECO.
6. THE PROBLEM OF AFGHANISTAN:
 There is a need to develop overland routes through Afghanistan, which is a
territory full of landmines.
 There had been some political tensions in the past in Afghanistan due to which
no progress was made.

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7. To have access to the Arabian sea and Indian Ocean, these states again need to
ship overland to the coast of Gwadhar in Pakistan. Pakistan is willing to invest in
rail and road links but neither Afghanistan nor Pakistan has the financial capacity
to remove the landmines that infest large tracts of its territory. This is also a factor
that makes it undesirable for other ECO to promote integration.
8. If compared to EU or NAFTA, it is easy to say that ECO as a region is still a
backward region in the case of development.

Benefits for Muslim Union:

1. Contemporary world politics make it necessary for nations to integrate into

international unions in the interest of their own national security and economy.
2. A similar organization will provide considerable benefits to Muslim nations. For
those that are desperate for technological as well as economic development,
the foremost step toward stability is the creation of a central organization or, in
other words, a unified Islamic world under the auspices of the Islamic Union.
3. Economic Development and Increasing Prosperity:

 Economic cooperation is necessary on two counts: stability and development.

Muslim nations must bring stability and solidity to their economies.

 Society must be motivated to become more productive, and the resulting

economic cooperation will play a major role in eradicating poverty, illiteracy, the
unjust distribution of wealth, and other socioeconomic problems rampant in
Muslim countries. This partnership can be formed only by the creation of free
trade zones, customs unions, and common economic areas.

4. In the Islamic world, 86% of the population's living standards fall below
$2,000, 76% under $1,000, and 67% under $500 per year. When the Islamic
world's total resources are considered, this is quite a paradox: Roughly half of
the petrol consumed in the West is exported from the Islamic world, as is 40%
of the world's agricultural production. Many economists and strategists freely
admit that the world economy depends upon the Islamic world's oil and gas
exports.

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5. The Islamic world is not using its resources effectively, for many of its
members lack the infrastructure and technology to increase the production
and use their natural resources to develop themselves.
6. Explorations undertaken by foreign companies reveal that other Muslim
nations have oil and gas reserves, but they cannot benefit from their
resources.
7. However, solving this problem can begin the process of solving many other
problems.

For example, one country will produce oil and another one will process it, and
agriculturally dependent countries will be able to import the food they need from
agriculturally developed countries. A manpower-poor country will be able to help
out a manpower-rich country that does not have enough jobs for its people. Rich
countries can invest in poor countries to the benefit of both. Sharing know-how
and experience will increase prosperity, and all Muslims will benefit from
technological developments.

8. The living standards and wealth of Muslim nations will increase, and their
existing inequalities will disappear

“The men and women of the believers are friends of one another. They command
what is right and forbid what is wrong, perform prayer and give the alms, and
obey God and His Messenger. They are the people on whom God will have
mercy. God is Almighty, All-Wise.” (Qur’an, 9:71)

9. All of these can be realized only under a central authority's leadership and
coordination. Achieving this will be possible if Muslim nations adopt the
Qur'an's values and the Prophet's (may God bless him and grant him peace)
Sunnah, or, in other words, if they adopt Islamic culture. The Islamic Union
must lead the way to this cultural awakening, as well as the resulting political
and economic cooperation.
10. Mutual cooperation among Muslims, part of the Islamic code, must be
adhered to by all Muslims, for God commands people to refrain from avarice
and to guard the needy and support one another. In fact, destitute people
have a due share of the believers' wealth (Qur'an, 51:19). As the Qur'an
proclaims:

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“Those of you possessing affluence and ample wealth should not make oaths that
they will not give to their relatives, the very poor, and those who have migrated in
the way of God. Rather, they should pardon and overlook. Would you not love
God to forgive you? God is Ever-Forgiving, Most Merciful.” (Qur'an, 24:22)

11. It also expresses the importance of cooperation and solidarity between

Muslim nations. The cooperation that will arise from this fraternal awareness
between Muslim nations will bring prosperity and wealth to Muslims and
eradicate poverty, an important problem of the Islamic world. Societies that
follow the Qur'an's values will not experience famine, destitution, and poverty.
Muslims will develop their nations by following rational and long-term policies,
establishing good relations with other nations and people, valuing trade and
development, and learning from other cultures' experiences.

As the Quran says:“Those who do not believe are the friends and protectors of
one another. If you do not act in this way (protect each other), there will be turmoil
in the land and great corruption. ”

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