5th economic system

7/26/2019 5th Economic System

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Essentials of Islamic Finance IU Gulshan Campus, Slide # 1

Conventional Economic andConventional Economic andFinancial SystemFinancial System

Essentials of Islamic Finance

IQRA University Gulshan Campus MBA Spring, 21!

Muhammad [email protected]


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EconomicsEconomics


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Essentials of Islamic Finance IU Gulshan Campus, Slide # "

In fact like other sciences there is no one universallyacce!ted ans"er to the question #$hat is economics%#

Indiana &niversity ' (urdue &niversity de)nes its as*

#Economics is a social science that studies humanbehavior. Economics has a unique method for analy+ing and!redicting individual behavior as "ell as the e,ects ofinstitutions such as )rms and governments or clubs andreligions.

-he Economists /ictionary of Economics de)neseconomics as*

#-he study of the !roduction distribution and consum!tionof "ealth in human society.#

What is EconomicsWhat is Economics


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-hat is economics is the study of the trade'o,sinvolved "hen choosing bet"een alternate sets of

decisions.#

What is EconomicsWhat is Economics


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So the core ob0ective of any economic system is managementof the available resources1

-he human history !roves that humans develo!ed manysystems and every one of these systems !resented variousideas and theories for achievement of this basic ob0ective1

2arious human civili+ations have e3!erimented di,erentsystems to achieve this ob0ective in !erfect manners1

&nless "e have a clear basis for the critical evaluation of thee3isting economic systems "e "ill not be able to concludeanything !recisely1

-"o !oints are of im!ortance before "e start analysis ofe3isting economic systems*

Objectives of the EconomicsObjectives of the Economics


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Firstly many critics of e3isting economic systems haveunfair criticism on both systems as they associate everysingle !roblem of both the systems "ith non'com!lianceof Shariah "hile the fact is not so. -herefore "e shallfocus on reality rather than the !erce!tions1

Secondly the e3tensive criticism on both the e3istingsystems i.e. ca!italism and socialism created a!erce!tion about both the systems that both arecom!letely unacce!table to Islam1

-his !erce!tion is not a reality as not every single feature or

value of both the systems are incorrect.

MisconceptionsMisconceptions


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Determination of Priorities;4$hat to !roduce%4 2arious !olicies 4 monitory trade labor and ta3ation etc.14 Micro and macroeconomics1

Allocation of Resources (Land Labor !apital

Entrepreneur";4 $here and ho" to allocate%4 $hat are the resources of "ealth generation%

Distribution of #ncome;4 5o" to distribute the income bet"een members of the

society%

Development;4 Future !lanning of creation of "ealth1

Objectives of the EconomicsObjectives of the Economics


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In our analysis "e are taking t"o !oints in consideration*' 6on'com!liance to religious guidelines 4 a theoretical

analysis1' (ractical defect of systems 4 an em!irical analysis1

-he basic issue in both the system "as*' 7oth the systems have emerged in atheist societiesand designed by

disbelievers. -herefore no attention "as !aid to anyreligious thought ie.conce!t of 5alal and 5aram etc.1

' -he basis for acce!tance and re0ection of an idea "aslogical a!!roach and reasoning only and nothing.-herefore "e )nd huge di,erences bet"een ideologyof Islam and the theory both the systems !resented1

!onventional Economics $ %la&s!onventional Economics $ %la&s


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Islamic la" !resents theory of !ermanent 8al'tha"abit9

and changeable 8almutaghayyirat9 as!ects of Islamicla"s1

:s for !ermanent !art of la"s no alternation is!ermissible though its retirement e3tension and

rea;rmation is encouraged 8e3am!le* !rohibition of


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$ellbeing of all members of society is an ob0ective ofIslamic economic

system1

$ellbeing from Islamic !ers!ective are of t"o ty!es*

> Material "ell'being 4 satisfaction of the needs of all1> S!iritual "ell'being 4 nearness to =od moral u!lift* theseare necessary for !eace ofmind inner ha!!iness familyand social solidarity absence of crime etc.

Conventional economic systems does not recogni+es!iritual "ell'being for success in the day of 0udgment.Consequently they segregate bet"een material ands!iritual "ell'being and consider the religion a !ersonalmatter)

*tatus of Economic Activities in #sl*tatus of Economic Activities in #sl



?ee!ing in vie" the discussion "e can easily summari+ethat the Islamic model "ill be mi3ed version of varioustheories that may have been !resented by many schoolsof thoughts including but not limited Ca!italism andSocialism1

-he di,erence "ill be in main theory and its a!!lication.

Modern Economics and #slamic PerspeModern Economics and #slamic Perspe



%inancial%inancial#ntermediation#ntermediation


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%inancial #ntermediation;%inancial #ntermediation;

Financial intermediation is an act of institution )rm orindividual "ho mediates bet"een t"o or more !arties in a)nancial conte3t1

Financial conte3t means facilitating the channelling of fundsbet"een lenders and borro"ers indirectly1

-he savers 8lenders9 give funds 8de!osit9 to an institution8such as a bank9 and that institution gives those funds tos!enders 8borro"ers91

-y!ically the )rst !arty is a !rovider of a !roduct or serviceand the second !arty is a consumer or customer1

-his may be in the form of loans or mortgages1


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%inancial #ntermediation%inancial #ntermediation

Individuals

C*mpanies

+rusts

1Business2Industry"IndividualsG*vernments$C*mpanies!Internati*nal trade%et- et-

.ire-tly t* these a-tivities

1Ban/s2Insuran-e -*mpanies)"Credit uni*ns)0unds)

Supply * unds thr*ugh0inan-ial intermediaries

0undssupply

rivate Businesses

3rgani4ati*ns


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Essentials of Islamic Finance IU Gulshan Campus, Slide # 1$

%inancial #ntermediar%inancial #ntermediar

: )nancial intermediary is an institution )rm or individual"ho mediates bet"een t"o or more !arties in a )nancialconte3t "hich means channeling of funds bet"een lendersand borro"ers indirectly1

Follo"ing are its ty!es*

Financial intermediaries

.ep*sit*ry instituti*n 5*n6dep*sit*ry instituti*n

1Ban/s)2Saving ass*-iati*ns)"7*an ass*-iati*ns)Credit uni*ns)$Credit s*-ieties)

1.evel*pment 8an/s)2State 8an/s)"Insuran-e -*mpanies)Investment 8an/s)


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Essentials of Islamic Finance IU Gulshan Campus, Slide # 1&

!onventional +an,in' *stem!onventional +an,in' *stem

BA59.:3SI+3RS CUS+3M:RS

STRUCTURE OF CONVENTION! "N#


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Essentials of Islamic Finance IU Gulshan Campus, Slide # 1(

#nterest +ased +an,in'#nterest +ased +an,in'

BA59.:3SI+3RS

7:5.

CUS+3M:RS

I5+:R:S+

7:5.

I5+:R:S+

Financial acti$ities of a con$entional %an&

Receive deposit on interest;

And give money on interest;


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Possibilit of #slami-ation of +an,in'Possibilit of #slami-ation of +an,in'*stem*stem

7anks receive money from one side and give to other side1 :ny !ossibility for this in Islam%

See nest slide*


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Possibilit of #slami-ation of +an,in'Possibilit of #slami-ation of +an,in'*stem*stem..

IS7AMIC BA59.:3SI+3RS

arti-ipate in8usiness

Mudara8ah)

Mushara/ahCUS+3M:RS

1r*it in trade2Rent in rental)"Share in pr*it inparti-ipati*n)

STRUCTURE OF IS!'IC "N#

1+rade)2Rental)"arti-ipati*n)

Investment Agen-y

Share in pr*it


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Problems and issues in e.istin' /nancialProblems and issues in e.istin' /nancialsstem;sstem; Interest1

=ambling1

E3cessive uncertainty1

6on'Islamic business1

6o obedience to Islamic rules of business1


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Essentials of Islamic Finance IU Gulshan Campus, Slide # 2"

uestions%uestions%

5th economic system

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