A Project On

ISLAMIC ECONOMIC SYSTEM

Section “A”Submitted To: Sir Mudassar

Awan

Submitted By:

Economic System

Economic system is a particular set of institutions which deals with

Production Distribution Consumption

Of goods and services In a particular society.

Types of Economic System

1. Capitalism

Under this system, the means for producing and distributing goods (land, factories, technology, transportation system etc) are owned by a small minority of people.

In capitalism the motive for producing goods and services is to sale them for profit not to satisfy people needs.

In capitalism it is widely assumed that free market economy. At the present this system is going on almost all over the world.

2. Socialism Socialism is the collective ownership by all the people of factories, mills,

mines, railroads, land and all other instruments of production.

In socialism the motive for producing for goods and services is to satisfy human needs, not as under capitalism, for sale and profit.

At present it does not exist in any country of the world in its pure form but recent past we have seen this system in Russia and China.

3. Mixed economy

A mixed economy is a mix between Socialism and capitalism.

In a mix type economy, both the private ownership as well as the state takes part in a means of production and other types of economic activities.

4. Islamic economic system

This system is based on four principles

All the wealth belongs to Allah

The community is the trustee of the wealth

Hoarding of wealth is prohibited

Circulation of wealth is a duty

Based on these principles Islam differs fundamentally from man made systems such as

Capitalism

Socialism

Mixed economy

Salient Features of Islamic economic system

1. Allah is the Sustainer

Allah, the Almighty God of universe, is the sustainer and provider.

Allah provides livelihood and subsistence to all of His creatures in the universe.

Every thing has been created by God for service of man.

Man should exploit these resources and things in lawful manner to earn his subsistence without violating the rights of others.

2. God is real owner of every thing and man is merely a trustee

Everything in the universe belongs to Allah.

The rights given to man are very limited, the real position of man being that of a trustee and a beneficiary.

3. Every thing created for service and use of man

Many of the things created by God in the earth are of benefit to man directly or indirectly.

Animals, plants, minerals, metals, water, air, fire, land, river, mountains, sea, and even sun, moon, stars, day and night, etc. are all for service to man.

4. Concept of Halal and Haram

Islam has introduced concept of Halal (lawful) and Haram (unlawful) in its economic system.

Certain means of earning livelihood and wealth have been declared unlawful such as interest, bribery, gambling and games of chance, speculation

Unlawful means of earning are strictly forbidden and a follower of Islam is permitted to earn through lawful and fair means.

In the field of consumption certain items of food are unlawful such as dead animals, blood, swine flesh and animals slaughtered in the name other than that of Allah.

Expenses on certain items such as drinks, narcotics, debauchery, prostitution, pornography, things that promote obscenity and vulgarity, lotteries and gambling are strictly inadmissible.

5. System of Sadaqat and Zakat

Islamic economic order has introduced a comprehensive system of sadaqat which comprises: compulsory contributions like Zakah, sadaqat, Fitr,usher and voluntary contribution such as alms-giving.

The system of sadaqat ensures equitable distribution of wealth in the Muslim community.

Concentration of wealth in few hands is discouraged and the gap between the rich and the poor is bridged.

6. Prohibition of Interest

The foundation of capitalistic system of economy is totally on interest.

Interest has been completely abolished by Islam and even in socialist system.

Charging of interest is a major sin and the usurers have been given the notice

of war from God and His messenger.

7. Ban on hoarding of wealth

Hoarding of wealth has been condemned by Islam in very clear terms.

The hoarding of wealth stop the flow of God-given wealth from the rich to the poor who are in genuine need of it.

Islam discourages hoarding of wealth and instead encourages circulation of wealth among all the sections of society.

8. Equity and not Equality

Islam establishes equity, fairness and justice in the production and distribution of wealth, and in ownership of means of livelihood.

Inequality has been presented by the Qur’an as a part of Divine Economic order.

Objectives and Principles

1. Objectives Achievement of Falah

Fair and Equitable Distribution

Provision of Basic Human Needs

Establishment of Social Justice

Promotion of Brotherhood and Unity

Achievement of Moral and Material Development

Circulation of Wealth

Elimination of Exploitation

2. Principles

Allah determines Right and Wrong

Principle of Use

Principle of Moderation

Economic Freedom

Principle of Justice

Prohibited Means of Production of Wealth

Interest

Bribery

Usurpation of Orphan’s Property

Trade in Wine and Narcotics

Gambling and Games of Chance

Theft and Robbery

Hoarding of Essential Goods

Embezzlement

Wrong Measuring and Weighing

Prostitution

Begging

Miscellaneous Unfair Means

Means of Equitable Distribution

Zakat

Law of Inheritance

Law of Will

Law of Waqf

Charity of Fitr

Monetary Atonements

Charity and Alms

Feeding the Poor

Goodly Loan to Allah

Charity of Surplus

Hoarding of Wealth Forbidden

Prohibitive Measures

Role of Factors of Production (Land, Labour, Capital)

1. Land

Tenancy or Muzara’a

Irrigation

State or Public Ownership of Land

Feudalism or Jaqirdari System

2. Labour

Dignity of Labour

Lawful and Unlawful Wages

Rights of Labour

Obligations of Labour

Determination of Wages

Contract of Service

3. Capital

Importance of Capital

Capital Formation

Reward for Capital

Interest

Interest is Prohabited

The Qur’an on Interest

Interest and Trade

Interest and Zakat

Interest and Rent

Loan

General Rules in the Light of the Qur'an and the Sunnah

Duties of Debtors

Duties of Creditors

ISLAMIC MODES OF FINANCING

Islamic economics provides several modes to secure such financial resource of which the following are particularly not worthy.

1) Sharakat (Partnership)

2) Modarbah

3) Bai Salam

4) Bai Murabaha

5) Bai Muajjal

6) Ijara

In this section we shall discuss the sharii laws governing all the above modes of financing and their role in the present day with economic perspective.

1. SHARAKAT (Partnership)

Definition of partnership

When two or more persons join to do business with a fixed amount of capital for the purpose of gaining profit or loss of business according to a fixed ratio.

Justification

The following ahadith clearly provide justification for partnership. The apsolte of Allah (S.A.W) says

Conduct business on the basis of equal share.

“This brings ample returns” (Abu Dawud) The holy prophet (S.A.W) said

“Allah’s (helping) hand is with those partner are not dishonest” (Abu Dawud)

Conditions of Partnership

a) Mutual agreement

b) Maturity of partners

c) Sound mind

d) The business must be lawful

e) Fixing the rate of profit

2. MODARABAH

Two or more person & enter into a deal in which one party provides capital.

Other party conduct business with this capital.

Under an agreement of receiving a fixed share in profit.

Financer known as (Rab-al-Mal) provides capital.

The person adding his labour to it increase it called modarabah.

The profit or increase share among two according to the agreed ratio.

3. BAI SALAM

It mean spot payment of the price before delivery of the goods.

So Bai Salam denotes that mode of transaction or contract of sale in which price is paid before the delivery of the goods.

Condition of contract or transaction.

Condition of consideration or price.

Khayar-i-shart is a legal term which means the right of the party’s cancel the contract.

Ras-al-mal denotes the advance payment.

4. BAI MURABAHA

Murabaha is to purchase a thing at a price and add to it a sum at a settled or determined rate and sell it.

The thing soled should be commodity, good or an article, but not currency.

The thing sold must be the property of the seller.

The previous price must be disclosed to the seller.

Basic difference between Murabaha and Riba a loan’s advanced on which fixed sum is charged after a fixed period and the capital remains the property of the creditor.

In murabaha no loan advanced but only to sell thing and ownership transfer.

5. BAI MUAJJAL

It is a sale under which the price of the item involved is payable on a deferred basis either in lump sum or in deferred basis.

The price of the item must be fixed.

The date of the payment must also be fixed.

The item on sale must be owned and in physical or constructive possession of the seller.

The seller is authorized to hold some property of the purchase in mortgage.

The seller has the right to take place profit on the item if that item is at his risk and not the risk of some one else.

6. IJARA

The literal meaning of the ijara is wages or work denote wages for work.

The purpose of ijara is to gain profit from a thing.

Two types of ijara according to deal.

a) To gain profit from the thing.

b) To gain profit from the service or action of an individual.

From first case profit gained is called Ain majur and the person who gain the profit is called Ain mujaster.

It has three forms.

a) Renting out property, immovable land and houses.b) Renting out goods such as garments, pots, pans.c) Hiring out animals.

ISLAMIC BANKING

Bank is an institution which deals in credit. This institution receives deposits of public savings and extends loans to needy people.

In interest based economy the bank earns profit by landing out money on low interest rate.

Functions of the bank in interest based economy

a) Accepting deposit

1) Demand deposit/Current deposit

2) Fixed deposit

3) Saving deposit

b) Advancing loans1) Short period loans2) Long period loans

The bank extends loans in three ways:1) By over draft2) By cash credit3) By discounting bills

c) Providing agency servicesd) Money transfere) Safe deposit lockersf) Investmentg) Credit creation

ISLAMIC ECONOMY AND INTEREST-FREE BANKING

Basically islam gives key importance to justice benevolence and cooperation in mutual relations.

It absolutely forbids to take advantage of the helpless circumstances of another person

Islam prescribes important and practical steps to prevent concentration and promote circulation

It orders its followers to extend interest-free loans to needy persons.

NEED FOR INTEREST-FREE BANKING

A modern developed economy is unthinkable without today’s banking system. It is necessary to replace it with a new system.

REASONS

A clear and direct answer is modern banking system is based on Riba(interest) and islam forbids interest.

Modern banking system gives rise to injustice oppression, waste of resources and inequitable distribution of wealth.

BASIS OF ISLAMIC BANKING

1) Profit and loss shirakah (partnership)

In profit and loss partnership the rate of profit fluctuates and depends on efficiency.

This shirakah(partnership) may be of many kinds.

Partnership between two persons or investment companies, banks and other institutions may carry on their business on profit and loss shirakah basis.

MODARBA

In modarba there are two parties,

1) Capital

2) Labour

If modarba business earns profit both capital and labour share in profit.

If modarba business results in loss of money, the entire amount of loss shall be borne by the capitalist.

The success of interest free banking depends on a high level of integrity and honest dealing because without these the banking system will fail.

DEFINITION OF INTEREST

“Interest is the price which is paid other than the price of loan or capital.”

Holy Quran uses the word RIBA to denote interest. Riba means increase, growth, addition, raise or excess.

Allah says in Holy Quran:

“Allah deprives interest of all blessings and develops charity.”

ISLAMIC BANKING IN PAKISTAN

The government of Pakistan established the system of zakat and usher and then launched the Institution of interest-free Banking. In july 1979 interest-free banking was introduced in following three institutions:

a) Investment Corporation of Pakistan (ICP)

b) National Investment Trust (NIT)

c) House Building Finance Corporation (HBFC)

They are registered as modarba companies and are authorized to do business.

CURRENT MODES OF INTEREST-FREE BANKING

1) Modes relating to loans:

Interest free loans with services charges Hasna loans (loans without services charges)

2) Modes of procuring business finance

Differed payments with services charges Purchase of bills of exchange Buy-back agreement Leasing Hire-purchase agreement Development charges

MODES OF PROVIDING FINIANCE FOR INVETMENT

1) Musharkah

In this mode bank provides finance on the basis of profit and loss sharing.

The profit is shared according to agreed terms and loss is born in the proportion to the money invested.

2) Equity participation and purchase of shares

The bank can take equity shares in companies and earn profit by purchasing shares of various companies on the stock exchange.

3) Purchase of participation term certificate and mudarba certificate

In pakistan PTC have been introduced in place of interest bearing debenture.

The banks have been permitted to invest in PTC. In addition the banks are allowed to invest in the shares of modarba companies in the same way as they purchase the shares of limited companies.

4) Rent sharing

Banks have been authorized to provide finance for purchase of property and

take share in its rent.

ISLAMIC BANKS IN PAKISTAN

Meezan Bank

Emirates Global Islamic Bank

Albaraka Islamic Bank

Dubai Islamic Bank Pakistan LTD

Bank Alfalah Limited