1

Quran Sunnah Ijma’ & Ijtihad

Islamic Economics

Islamic Financial System

Islamic Banking System

Islamic Banks

CHART 1 – Form of Islamic Bank and Islamic Banking and Financial System as determined by Islamic Economics

2

Islamic Economics

1st PillarWorld literally owned by God

Man holds wealth on Trust for

Allah swt and accountable for it in the Hereafter

Islamic BankDeposits are wealth they

hold on Trust for Allah swt.

2nd PillarGod is One and all else are

created

All humans are equal and the best in the eyes of God

is one with the highest Taqwa

Islamic BankThe best Islamic Bank is not the most profitable one but

one which exemplify highest Taqwa

3rd PillarBelief in the Day of

Judgement

Time horizon of Man extends to the Hereafter.

What he does in the world determines by

consequences in Hereafter

Islamic BankLong term planning extends

to the Hereafter

CHART 2 – Implication of Pillars of Economics on Islamic Banks

3

Islamic Economics

Principle of Ownership

Ownership by Man confined to life, on death

wealth distributed as specified by Allah swt.

Principle of Balance

Moderation in all aspects including Consumption. Consumption is not an

end in itself

Principle of Justice

Justice in all aspects of economic activity.

Justice expected to be observed in all aspects of

Islamic Banking

CHART 4 – Implication of Principles of Islamic Economics on Islamic Banks

4

Ownership by Man confined to life, on death wealth distributed as specified by Allah swt

Objective of Far’aid is to deconcentrate wealth

Islamic Banking cannot have activities that leads to concentration of wealth

Example, debt financing with bias towards people/companies with high collateral and equity

5

Moderation precludes profit maximisation as the primary objective.

Moderation in all aspects including Consumption. Consumption is not an end in itself

6

Including: 1) Justice in relationship between Bank and Customer. 2) Justice in the allocation of risks between Bank and Customer. 3) Justice in the clauses of legal agreements between Banks and Customer

Justice expected to be observed in all aspects of Islamic banking

7

Islamic Economics

Prohibition by Law of Riba

No dual system. Islamic Banking operates as a

Sole Single System in a Sole Single Islamic Financial System.

Qirad Driven Economy

No lending in the economy. All will operate on Profit

Sharing.

Islamic Banks take deposits on Mudharabah and extends financing on

Mudharabah

Guarantee of Debt by the State

Guarantee of consumption loans taken by Ummah

Is there debt financing in an Islamic Economy?

Will government guarantee all of debts owned by

Ummah to banks?

CHART 5 – Implications of Three Principal Parameters of Islamic Economics on Islamic Banking

8

Guarantee of minimum standard of living by the State

Islamic Economics

Implemented via Zakah

CHART 6 – Implications of another Parameter of Islamic Economics – Guarantee of Minimum Standard of Living by the State.

9

Responsibility of Islamic Banks in guaranteeing minimum standard of living

Pay ZakahPay ZakahAssist in

guaranteeing minimum standard

of living

Assist in guaranteeing

minimum standard of living

Islamic BankIslamic Bank

10

Therefore, Profit

maximization must be replaced

How? Not compatible with profit

maximisation

With what?Human Welfare

11

Al Ghazali & Al Shatibi

Islam sets Goal for Human Life

Maqasid Syariah

Establishment of Justice

Education of Mankind

Prevention of Evil and Corruption.

Maintenance of Balance in Human Nature. Islah

Achievement of Maslahah.Human Welfare

CHART 7 – What is Human Welfare Formula?

12

Achievement of Maslahah. Human Welfare

Exigencies Essentials

Religion

Life

Property

Intellect

Lineage

Embellishments

13

Property

Protection of Wealth and

Prohibition of destruction of

Wealth

Prohibition of Transgressio

n against property of

others

Equitable Distributio

n of Wealth

Wealth should

benefit owner and society

Good circulation of wealth

Spending on

needy

14

Protection of wealth and Prohibition of destruction of wealth

Required to take extra good care of customer’s property

Prohibition of transgression against property of others

Cannot operate in fiat money system

Equitable distribution of wealth Financing allocated equitably to all big and small enterprises

Good circulation of wealth Abandon debt financing focus on equity financing

Wealth should benefit owner and society

Financing to activities that maximizes benefits to society

Encourage spending on needy Extend microfinance

Implication of Syariah objectives on Property to Islamic Bank