02. isalmic financial system

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ISLAMIC FINANCIAL SYSTEM

01. FUNDAMENTAL PRINCIPLES OF ISLAM:

TAWHID (ONENESS AND UNITY OF ALLAHALLAH IS ONE, UNIQUE AND SUPREME

KHILAFAH (VICEGERENCY)

THE CONCEPT OF KHILAFAH HAS A NUMBER OF

IMPLICATIONS OR COROLLARIES THESE ARE:

1. UNIVERSAL BROTHERHOOD2. RESOURCES ARE A TRUST

3. HUMBLE LIFE STYLE

4. HUMAN FREEDOM

ADALAH (JUSTICE)

1. NEED FULFILLMENT

2. RESPECTABLE SOURCE OF EARNING

3. EQUITABLE DISTRIBUTION OF INCOME & WEALTH

4. GROWTH & STABILITY

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Md. Shafiqur RahmanExecutive Vice President & In charge,

Islami Bank Bangladesh Ltd.Local Office,

Foreign Exchange Department.


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02. MAQASID AL-SHARIAH:

MAQASID AL-SHARIAH IS TO PROMOTE THE WELFARE OF THE

PEOPLE BY SAFEGUARDING THEIR-

FAITH

WEALTH

PROSPERITY (DESCENDANT)

LIFE & INTELLECT

HUMAN WELL-BEING TO BE REALIZED BY ENSURING THE ENRICHMENT OF

THE FOLLOWING FIVE INGREDIENTS FOR EVERY INDIVIDUAL.

Figure I

MAQASID (OBJECTIVES OF) AL-SHARIAH

THERE HAVE BEEN EFFORTS BY JURISTS TO ADD TO THE LIST OF THESE FIVEREQUISITES AND ALSO TO CHANGE THEIR SEQUENCE, BUT IT SEEMS THAT THESE

ATTEMPTS HAVE, IN GENERAL, NOT SATISFIED MOST JURISTS. IMAM ABU ISHAQ-AL-

SHATIBI (D. 790/1388), WRITING A LITTLE LESS THAN THREE CENTURIES AFTER AL-

GHAZALI, PUT HIS STAMP OF APPROVAL ON HIS LIST AS WELL AS THE SEQUENCE,

THEREBY INDICATING THAT BOTH OF THESE ARE THE MOST PREFERABLE IN TERMS

OF THEIR HARMONY WITH THE ESSENCE OF THE SHARIAH. ALL THE OTHER

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Aql

Intellect

Din

Faith

Nasl

Posterity

Nafs

Self

Mal

Wealth


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REQUISITES MAY BE CONSIDERED AS COROLLARIES OF THESE FIVE AS WILL BE

INDICATED IN THIS CHAPTER.


03. THE STRATEGY:

A SOCIALLY AGREED FILTER MECHANISM

A STRONG MOTIVATING SYSTEM TO INDUCE THE

INDIVIDUAL TO RENDER HIS BEST IN HIS OWN

INTEREST AS WELL AS THE INTEREST OF THE SOCIETY

RESTRUCTURING OF THE WHOLE ECONOMY WITH THE

OBJECTIVE OF REALIZING THE MAQASID IN SPITE OF

SCARCE RESOURCES.

A POSITIVE AND STRONG GOAL-ORIENTED ROLE FOR

THE GOVERNMENT

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04. THE ISLAMIC WORLD VIEW:

INABILITY OF THE CAPITALIST & SOCIALIST COUNTRIES AS

WELL THE DEVELOPING ECONOMIES TO REALIZE

SIMULTANEOUSLY THE GOALS OF BOTH EFFICIENCY &

EQUITY

SOCIAL DARWINISM, SURVIVAL OF THE FITTEST, CLASS

STRUGGLE, MAXIMUM WANT SATISFACTION, MATERIAL

CONDITION OF LIFE PROVED UNSUCCESSFUL.

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05 . ISLAMIC FINANCIAL SYSTEM(IFS) :

A financial system that is based on Islamic principles and values,

which eliminates Riba and ensure a profit sharing mechanism in

the financial system, may be called IFS. It may be characterized by

the absence' of interest based financial institution & transactions,doubtful transactions or Gharar, Stocks of companies dealing in

unlawful activities, unethical or immoral transactions such as market

manipulation, insider trading short-selling etc.

06. DIFFERENCES BETWEEN CFS & IFS

The conventional financial system is of two types.

1) Socialistic financial system and

2) Capitalistic financial system

- both systems have been proved inefficient to establish economic

balance in the society.

Basis of Difference CFS IFS1. Religious Belief Secular & separates

Religion from other

Parts human life

Belief in unity of God

& relates this belief to

economic Life of a man

2. Freedom of Economic

Activity

In socialism govt.

enjoys economic

freedom but in

capitalism Individuals

enjoys freedom.

Restrictive freedom is

allowed in the light of

Shariah both by the govt.

&/or individuals

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3. Ownership of means Socialism-state

ownership, Capitalism-

individual ownership

Allah is the exclusive

owner. Man is the

caretaker of the property

4. Goals of financial

System

Socialism-profit of the

society

Capitalism-Individuals

profit

Welfare of both here and

hereafter.

5. Competition Socialism-No

competition

Capitalism- Logical &

unethical competition

Logical Competition and

financial co-operation

6. Wealth distribution Socialism-Equal

Capitalism Unequal

Equitable

7. Basis of EconomicSystem

Riba or Interest Interest Free; PLS, Zakat

& Compensation based

8. Sources of the

System

Intellects brain storming

of the economic

problems of mens life

Devine book Al-Quran

& Prophets(SM)

speeches

9. Result Capitalism

concentration of income

& economic power in

few hands. Inefficiency

Maximum & equitable

Distribution of economic

opportunities and higher

production in the

society

10. Social &

environmental welfare

Do not consider the

social & environmental

welfare

Ensure social &

environmental welfare

11. Owners exception in

respect of respect ofinvestment

Dividend or part of profit

in case of equityfinancing

Part of Profit or Loss

12. Lender or Banks

expectation in terms of

dept financing

Interest Profit or Loss Sharing

13. Modes of Investment Loan, Overdraft & Cash

Credit

Mudarabah, Musharaka,

Murabaha etc.


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07.PRINCIPLES OF AN ISLAMIC FINANCIAL SYSTE M

The basic framework for an Islamic financial system is a set of rules and

laws, collectively referred to as Shariah, governing economic, social,

political and cultural aspects of Islamic societies. Shariah originates from

the rules dictated by the Quran and its practices, and explanations

rendered (more commonly known as Sunnah) by the Prophet Muhammad.

Further elaboration of the rules is provided by scholars in Islamic

jurisprudence within the framework of the Quran and Sunnah. The basic

principles of an Islamic financial system can be summarized as follows:

Prohibition of interest :Prohibition of Riba, a term literally meaning "anexcess" and interpreted as "any unjustifiable increase of capital

whether in loans or sales" is the central tenet of the system. More

precisely, any positive, fixed, predetermined rate tied to the maturity

and the amount of principal (i.e.) guaranteed regardless of the

performance of the investment) is considered Riba and is prohibited. The

general consensus among Islamic scholars is that Riba covers not only

usury but also the charging of "interest" as widely practiced.

This prohibition is based on arguments of social justice, equality, andproperty rights. Islam encourages the earning of profits but forbids thecharging of interest because profits, determined ex post, symbolizesuccessful entrepreneurship and creation of additional wealth whereasinterest, determined ex ante, is a cost that is accrued irrespective off theoutcome of business operations and may not create wealth if there arebusiness losses. Social justice demands that borrowers and lendersshare rewards s well as losses in an equitable fashion and that the processof wealth accumulation and distribution in the economy be fair andrepresentative of true productivity.

Risk shar ing: Because interest is prohibited, suppliers of funds becomeinvestors instead of creditors. The provider of financial capital and theentrepreneur share business risks in return for shares of the profits.

Money as " Potential" Capital: Money is treated as "Potential" capital-that is, it becomes actual capital only when it joins hands with otherresources to undertake a productive activity. Islam recognizes the time value

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of money, but only when it acts as capital, not when it is "Potential" capital.

Pr ohibit ion of speculative behavior: An Islamic financial systemdiscourages hoarding and prohibits transactions featuring extremeuncertainties, gambling, and risks.

Sanctity of contracts : Islam upholds contractual obligations andthe disclosure of information as a sacred duty. This feature is intended toreduce the risk of asymmetric information and moral hazard.

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.

The Objectives Islamic Economics and Ba nking

The Objectives of Shariah

The very objective of the Shariah is to promote the welfare of the peoplewhich lies in safeguarding their faith, their life, their intellect, their

posterity, and their wealth. Whatever ensures the safeguarding of thesefive serves public interest and is desirable. (AI-Ghazali)

The-basis of the Shariah is wisdom and welfare of the people in thisworld as well as the Hereafter. This welfare lies in complete justice,mercy, well being and wisdom. Anything that departs from justice tooppression, from mercy to harshness, from welfare to misery and fromwisdom to folly, has nothing to do with the Shariah (Ibn AI-Quayyum).

Definition of EconomicsProf. L. Bobbins -Economics is a science which studies humanbehavior asa relationship between ends end scarce means which havealternative uses.

Definition of Islamic Economics

1. Islamic Economics is that branch of knowledge which helps realizehuman well-being through an allocation and distribution of scarce

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resource that is in conformity with Islamic teachings without undulycurbing individual freedom or creating continued macro-economic andecological imbalances- Oman Chapra.

2. Islamic Economics aims at the study of human falah achieved byorganizing the resources of the earth on the basis of co-operation andparticipants (Muhammad Akram Khan).

3. Islamic Economics is the Muslim thinker's response to the economicchallenges of their times. In this Endeavour they are aided by theQuran and the Sunnah as well as by reason and experience- MNegatullah Siddiq.

4. Islamic Economics is the science of how man uses resources and

means of production to study his worldly needs according to apredetermined code given by Allah (SWT) in order to achieve thegreatest equity- Princes Muhammad Al-Faisal Scud.

5. Islamic Economics is a social science which studies the economicproblem of the people imbued with the values of Islam. It is acomposite social science which studies the problem of production,distribution and consumption through integrative system of exchangeand transfer overtime and their social through integrative system ofexchange and transfer overtime and their social and moralconsequences in the light of Islamic rationalism. It assumes thepresence of Islamic man. M.A. Mannan.

Objectives of Islamic Economics

1. To establish justice in the Economy (5:58) (16:90), Nahal, Nisa)

- Surely Allah enjoins justice and the doing good (to others) (16:90 Al-Nahal)- Whenever you judge between people, you judge with justice 5:58 (An-Nisa)

2. To protect the interest of the deprived and the oppressed. (28:5) (Kisas)- And we desired to bestow a favour upon those who were deemed weak in the

land, and to make them the leaders, and to make them the Heirs 28:5 (Al-Qasas)

3. To establish good practices and institutions in the economy and toeliminate bad practice and bad institutions from Economy (22:41)

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- [Well aware of] those who, if we firmly establish them in the land (on earth)will keep up prayer (remain constant prayer) and give in charity and enjoin goodand forbid bad 22:41 (Al-Hajj)

4. To make life easy and bearable (7:157)

5. To ensure full utilization of resources.

6. Proper of distribution of wealth and Resources.

7. Maximum production of useful production.

8. Bring stability in the value of money and exchange rates

9. Ensure economic efficiency and accelerated rate of growth

10. Ensure broad based economic well being, balanced monetary expansion andfull employment.

Principles of Islamic Economics Systems:

1. Sole purpose is to obey and please Allah.2. The wealth and asset in all their forms given under trust by Allah.3. Moral values and guiding factors for all Economic activities.

4. Maximum equitable utilization of human and material resources given by Allah5. Human dignity and respect of Labour.6. 'Maximum freedom for economic activity within a just framework.7. Equitable distribution of wealth and income and disciplined private ownership.8. Simplicity economy and austerity in expenditure.9. Adal and Ihsan (Justice and kindness).10. Strict prohibition of Riba, Interest and Usury in all forms.

Definition of Islamic Bank

"An Islamic Bank is a financial institution whose statutes, rules and proceduresexpressly state its commitment to the principles of Islamic Shariah and to thebanning of the receipt and payment of interest on any of its operations" - OIC

Dr. Ziauddin Ahmed'- "Islamic Bank is essentially a normative concept and could bedefined as conduct of "banking in consonance with the ethics of the value systemof Islam."

Objectives of Islamic Bank

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a. All it's activities are conducted on interest-free system according to IslamicShariah.

b. Investment is made through different modes permitted under Islarnic Shariah.

c. Investment-income of the Bank is shared with the Mudaraba depositorsaccording to a ratio to ensure a reasonably fair rate of return on their deposits.

d. Its aims are to introduce a welfare-oriented banking system and also toestablish equity and justice in the field of all economic activities.

e. It extends Socio-economic and financial services to the poor, helpless andlow-income group of the people for their ecanomic upliftment particularly inthe rural areas.

f. It plays a vital role in human resource development and employmentgeneration particularly for the unemployed youths.

g. Its aim is to achieve: balanced growth & equitable development of the countrythrough diversified investment operations particularly in the priority sectorsand in the less developed areas.

Deposit Products of Islami Bank:

1. Al-wadeeah Current Deposits2. Mudaraba Savings Deposits

3. Mudaraba Special Notice Deposits4. Mudaraba Term Deposits5 Mudaraba Hajj Savings A/c6. Mudaraba Savings Bond7. Mudaraba Special Savings Scheme8. Mudaraba Monthly Prft Dep Schemes(MMPDS)9. MUDARABA MUHOR SAVINGS A/C

10. Mudaraba Waqf Deposit A/C11. Mudaraba Savings Deposits(RDS)

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ECONOMICS: CAPITALISM VS. ISLAMIC

UNDER CAPITALISM UNDER ISLAM

1. Economic Laws are like physicallaws

1. Economic laws are like naturallaws

2. Positivism: Economics is apositive science as like asbiology, physics which have no

value, value neutral

2. Economics is value oriented.Permissible & prohibition have tobe observed

3. Motive for More: Pecuniaryinterest. Man is rationaleconomic being. Survival of thefittest, destruction of the poor

3. Man does not work for onlypersonal interest. He has tosecure the interest of this world& the world hereafter.

4. Market Oriented: Market cansolve all the problems. Poorsneed is not reflected in themarket. Demand is backed bypurchasing power. Result is themismatch in resource allocation.

4. Market can solve major problembut not all. At least 20%economic problems to be solvedby the government. Communismprescribes 100% solution bygovernment. Capitalists leaves it

100% to market.5. Little concern for poor humanity 5. Major concern for poor. Poverty

alliviation by Zakat, Sadaqa &gives emphasis on economicprogress

6. Nearly 100 corporate of countries control the worldeconomy in the name ofglobalization.

6. No conentration of wealth in fewhand. Wide dispersal of wealth &property

7. BBC reports 35 million people inUSA live below poverty line (not

7. None can live below poverty lineif Islamic economic system is

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getting two meals a day) established

The End

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02. isalmic financial system

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