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 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).
Adam’s 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 Orphan’s.

 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 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 Allah’s relationship with man and
man’s 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 and the material characteristic
of life. 15

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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 Man’s ability to use the
money and to multiply, divide, subtract and add the amount realize
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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 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 1960’s 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 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

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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 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
Almighty Allah prohibited any
object or any act that is

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harmful to humankind that
creates instability, bring
injustice, become injurious to
human life and considered as
unconstructive to
Socio Economic System. 36
 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
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

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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
O you believers!
Fear Allah and give up Riba that remains outstanding if you are
true believers.

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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

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

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Riba I (May Peace Be Upon Him) withdraw that the borrowers owe
to my uncle Abbas; it is cancelled completely. (Muslim)

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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 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.

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 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

Riba is immoral, unethical, unjustified

commercial, economical, political, social,
cultural and traditional practices and
activities to gain benefit at individual,
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collective or institutional level ,
 INTEREST
When money becomes a commodity and
bought and sold with guaranteed results
of profitability or increase in volume of

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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

Any amount, earning or income that is taken over and above

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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,

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

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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

A western economist defines

"Interest has nothing to do with

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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”.

“Interest is an artificial profit, which does not

enter in legal trading. Using money as a

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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 46
qualities ”.
 Prophet Moses (May PEACE BE UPON HIM)

Torah 22nd versus of the “Exodus”

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.”
Deuteronomy verse 23rd

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“You shall not lend upon Riba to your brother, Riba on
money, Riba on virtual, Riba on anything that is lent for
Riba.”
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
he can continue to live among you. 47
 JUDAISM
In several Biblical passages in which the taking of interest
is either forbidden, discouraged or disliked.

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The religion of peace and love define Interest as the key to
cruelty and hatred and give birth to cirme.

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 Roman Catholic Church
In fourth century AD prohibited taking
of interest by Church Scholars.

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In the eighth century under
Charlemagne it was declared usury to
be a general criminal offence.

"The love of money is the root of

all evil." (Timothy 6:10)
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 Ancient Hindu Religion

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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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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 Islam for Money Matter
Riba does not justify money to be a medium of
exchange
and develops the love of money in several ways that

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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?
Income on financing is determined not on
financing amount, but takes principal
amount, cost of transaction and

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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
If Interest is eliminated from monetary
system, would it be possible that system &
transactions would become transparent

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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. Exploitation by taking advantage of
status and position,
2. Irregular weight & measures for

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profitability,
3. Wrong declaration for higher return,
4. Misconduct (misbehavior),
5. Crime & Law breaking,
6. Mistrust,
7. Commit a breach
8. False commitment, 54
9. Manipulation of affairs for benefits at a
cost and efforts of other,
10. Gambling in all form,
11. Promising to secure the benefit by
covering honorable, nearest, dearest

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12. Falsehood and Lies
13. Betting and gambling
14. Speculation
15. Trading in commodities prohibited by
Islam and law of the land,
16. Income from the practices or activities
that are prohibited by Islam,
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17. Breaking and abuse of state law for self benefit or for any
purpose that is declared as punishable act.
18. Disobedience to the state law by declaration and
submission of wrong information for self-benefits.
19. Disturbing peace of community by using force.
20. Committing and involving in the illegal acts.

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21. 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,
22. 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. Keeping deposit with person or institution having involved
in Riba practices,

24. Using deposits as investments and declaring non-

transparent results that lead to discrimination of sharing in
accordance with investment percentage,

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25. Holding and storing of currency that affects economic
activities negatively.
26. Holding commodities that lead towards scarcity in the
supplies against market demand.

27. Monopoly and monopolization of activity, transaction and

business to taking sole benefit, stopping the growth of
employment and earnings 57
28. Grabbing 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

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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,

35. Misuse of power and status,

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36. Theft,
37. Burglary,
38. Smuggling,
39. Adultery,
40. Human trading,
41. Pressurizing and influencing of earning situation and

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taking benefits,
42. Misuse of public representation and obtaining benefit
through status as Public Representative,
43. 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 al Nassieah practiced before Islam as man
paying his money to another for a pre agreed

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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 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.

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 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 one’s 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

yousuf ibnul hasan

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

yousuf ibnul hasan

 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