ISLAMIC FINANCE ECONOMICS

BPES3063

ISLAMIC ECONOMIC
MANAGEMENT

Topic 8

ISLAMIC FINANCE ECONOMICS

Objective
 At
the end of the lesson, students are expected to
understand and explain:

 Money Concepts from Islamic Perspective

 Demand and Money Offering
 Islamic financial institutions
 Fiscal Economic Policy
 Islamic financial policy
Money Concepts from Islamic Perspectives

The concept of money from the Islamic economic

perspective is to act as a means of exchange. In
the event of exchange between money and
money, it is allowed provided that it is done in cash
of the same quantity and value. The loan
repayment must be in the same amount. The
excess in the repayment of the loan is not allowed
as it can be categorized as usury.
 Money can serve as a means of exchange.
 The barter system (exchange of goods with goods)
has some disadvantages over money.
 Among the problems of al-fadl 'laptops are the sale
of ribos (such as gold, silver, wheat, tamar and salt)
of the same type without weight / symmetry such as
selling 5 bushels of wheat with 6 bushels or 10 grams
of gold with 11 grams of varying quality .
 There are several other drawbacks to the barter
system (Al-Ghazali, 1980):
 1. Time Needs: Different from one another. This
makes the exchange system impossible. For
example, carpenters needed rice from farmers but
farmers did not need carpentry tools from
carpenters at that time. So simultaneous / non-
existent will does not exist.
 2. Injustice in terms of exchange rate: It is not
possible to determine how much cloth to exchange
for a lot of food. May harm certain parties.
 Two ways to solve the problem (al-Ghazali):
 1. Methods of storage of goods. Need to provide
storage space. Here there is the role of a wholesaler
or merchant called merchant who will benefit from
the business of intermediary between producer and
buyer.
 2. Establish a durable exchangeable tool that is
commonly referred to as a weighted item. Here
comes the need for money usage. The first Islamic
currency was printed in the year 15 Hijrah (636 AD)
 Economists define money according to 4 classic
functions as:
 1. Exchange tools
 2. Value Measurement Tool
 3. Valuation Tool
 4. Pending Payment Tool
 Money is depreciating as well as other assets. The
depreciation is 2.5 percent per year (ie, the 2.5
percent zakat reduction). This depreciation will
make money continue to circulate in the absence
of freezing and plays an important role as an
exchange medium.
 Money is an indefinite measure of value. It allows
individuals to hold it without incurring costs and
creating it through credit creation. Holding money
means delaying some of the exchange
transactions.
 In order to make money a saver then money has to
move towards its main function as a medium of
exchange.
 The function of money as deferred payment relates
to the function of exchange media and value-
storage.
 The ability of money to maintain purchasing power
and its value will guarantee lender profitability.
 However, general inflation (inflation) will result in
losses to lenders.
Demand and Money Offering
 Money demand is the quantity of money that
people ask for (hold).
 Money demand is basically determined by the
purpose of the transaction, the alert and
speculation.
 However, holding money for speculative purposes is
not allowed in the Islamic economy
 Making money in a useless economy is investment
oriented and not loan oriented.
 Holding money involves costs:
1. Cost of release, that is, other benefits, such as
investment profits that are released due to holding
money.
2. The cost of zakat, which is 2.5 percent of the zakat
payable for freezing money
3. Cost of savings, inconvenience and concern of
damage, destruction or theft
4. The cost of sacrifice that forced the holder to give
up part of his current use.
 However, the cost of holding money in the Islamic
economy is minimal due to the following:
1. His request for speculative purposes is prohibited
2. Demand for alert is low due to the existence of
social security and welfare management in the
Muslim community
3. Demand for transactions is also low because
Muslim individuals do not spend too much but rather
simply moderate
 Money laundering is the amount of money allowed
to circulate in the market. It is also known as the
money supply or stock in the market.
 The supply of money in an economy depends on
three parties: the central bank (government), the
commercial bank and the public. All three will
affect the circulation of money in the economy.
 The Central Bank as a government agency can
contract and expand its money supply on a policy
that is in line with economic conditions.
Islamic Financial Institutions
Category
 1. Bank Institutions: Commercial Banks (e.g., Bank Islam,
CIMB Bank, Affin Bank, RHB Bank etc.)
 2. Non-Banking Institutions: Financial Companies,
Investment Companies, Investment Trusts, Cooperatives,
Insurance Companies, Savings Agencies
 3. Welfare Institutions: Retirement Fund, Mortgage Tax
(ar-Rahn), Jariah Charitable Institution
 4. Supervisory Institution: Central Bank, Baitul Mal
 Fiscal Economic Policy

 Fiscal economic policy involves government spending,

taxation and government debt to achieve the country's
economic goals.
 According to the Islamic economic perspective, Baitul
Mal is a region and center of fiscal economy.
 Baitul Mal serves as the treasurer of the national
treasury, in terms of spending, revenue and national
debt.
 The Basis of Islamic Fiscal
Economy
 Zakat and BaitulMal are the two main institutions in the
formation of the Islamic fiscal system
 The Quran mentions several instances of the word zakat
in conjunction with prayer.
 The effectiveness of zakat in terms of ensuring the
welfare of a country has proven its superiority as the
most important tool of fiscal economy mentioned in the
Quran.
 Objective of Fiscal Policy

 1. Economic stability
 2. Growth and Development
 3. Distributive equality
 4. Allocation of resources
 5. Preaching
 Components of Islamic
Fiscal Economy
 1. Source of government revenue
 2. Zakat
 3. Kharaj (land tax)
 4. Jizyah (self-tax)
 5. Ghanimah (the property of the infidels acquired
by the Muslims by victory)
 6. Al-fai '(property acquired by Muslims in peace)
 7. Usyur (import tax)
 8. Property is not inherited or has no owner
 9. Waqaf and wills
 10. Nazr property and infidelity
 11. Other sources (alms, gifts, donations,
government investment benefits, other halal
resources)
 Islamic Finance Policy
 Monetary policy is one of the policies implemented by the
Central Bank aimed at regulating money supply (money
supply) in the economy.
 The main components of the money supply are the central
bank's offer of money and current deposits as well as the
creation of credit by the Commercial Bank.
 The Central Bank is able to influence and control the supply
of money directly through its control over money
laundering but it is unable to control the current deposits of
the Bank.
 Therefore, the Central Bank needs to use effective methods
to control the components of the Commercial Bank to
affect the money supply in the economy.
 The objectives of monetary policy are to improve economic growth,
fairness of income distribution, price stability and balance of
payments.
 In Islam, the fundamental objective of Shari'a is to improve the
welfare of everyone and to avoid misery.
 It deals with the matter of meeting basic needs, eradicating
everything that is harmful and repairing the quality of life from
material and spiritual aspects.
 Socioeconomic justice and the balance of income distribution in
Islam are based on the concept of brotherhood between Muslims.
 Islam promotes savings mobilization to achieve balanced economic
development. Islam promotes the use of energy savings (investment)
 Fundamentals of Islamic
Finance Policy
 1. Elimination of interest rates
 The Islamic financial system changes from the concept of
interest rates to the concept of profit sharing (bank rates /
discounts are converted to profit rates). It is the rate of profit
sharing between banks and depositors. If the Central Bank lowers
the profit rate, the investment will increase. This will increase the
money supply.
 2. Elimination of the bond market
 It means the government cannot produce bonds. The
government can only borrow from the Central Bank. In the Islamic
financial system the market is still the money and equity markets.
Two financial controls that can be used are open market
operations for the equity market and the reserve requirement
rate for demand deposits. When the demand for reserves is
lowered, money supply will increase. This will increase the supply
of capital that can be invested.
 3. Equity-based economy
 This means that the debt-based economy
is turning to the equity-based economy,
from debt financing to equity financing. All
economic activities now use equity focused
on the concept of profit-sharing. Open
market activity can run but switch from
bond market to equity / stock market.
Money laundering and equity selling are
two options that Central banks can take to
meet government loan demand
 Financial Policy Tools and
Mechanisms
 1. Financing ratio
 2. Profit sharing ratio
 3. Sale of business shares
 4. Reserves ratio
 5. Central Savings Certificate
 6. Money supply and circulation
 7. Public provision (government reserves)
 8. Definition of credit roof level
 9. Selected provisions
 10. Moral persuasion
 11. The merger of government demand at the
Commercial Bank
 12. Cooperation between commercial banks
 13. Rent lending