Research & WrittenYOUSUF IBNUL HASAN Program Consultant Islamic Banking & Applied FinanceDesign by SAIRA ALI Student MBA Program 2010-2014IQRA UNIVERSITY

yousuf ibnul hasan

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.

WHAT IS ISLAMIC ECONOMICS?WHAT ARE THE PRINCIPLES ON WHICH ISLAMIC ECONOMY, ITS MONETARY AND FINANCIAL SYSTEMS FUNCTION?

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20TH CENTURY ECONOMISTS DEFINE ISLAMIC ECONOMICSHasan-uz-ZamanIslamic economics is the knowledge and application ofinjunctions and rules of the Shari'ah that prevent injustice inthe 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 KhanIslamic 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 SiddiqiRole 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 ECONOMICSAny 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 ECONOMICSEstablished on the day AdamAdam was senseless to his needs & desires upon his creation. He disobeyed Allah Almighty on the temptation of IBLEES (devil).Adams act of disobedience created principles of economics that revolve aroundTheory of Need, Want and Desire that lead toAct, Acquire and AcceptProphet 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 ECONOMICSResources 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 PeopleThis Socio Economics Development converts Peoples into Nations.

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ISLAMIC ECONOMICS IS AN INDEPENDENT SYSTEMIt 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 guardsRights of minorities and non-Muslims in the Islamic state.Rights of Women and Orphans. 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 AllahMan is the trustee of the wealthHoarding of wealth is prohibitedWealth 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.*yousuf ibnul hasan

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ISLAMIC ECONOMIC SYSTEMProtects 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 ownershipPrinciple of economic freedom within a defined limitPrinciple of social justice.

FIRST PRINCIPLEThree types of ownerships are permitted ;The individual ownership.The state ownership.The public ownership.

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SECOND PRINCIPLEEconomic 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.*yousuf ibnul hasan

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THIRD PRINCIPLE:Social Justice in Islamic Economics To give-and-take responsibilityTo keep social balanceProhibits 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 Allahs relationship with man and mans 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.

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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 BELIEVEIslamic 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 & COMMODITYThree 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 ParticipationLending 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 Mans ability to use the money and to multiply, divide, subtract and add the amount realize through the exercise of money.

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DIFFERENCE OF FINANCING & LENDINGFinancing is Equity and not LiabilityLending 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 RateFinancing outcome to be profit, shared in an agreed Ratio.Loan has to be secured by external factor of collateralFinancing cannot be made until the user is able to use it Lending is given against the confirmation of guarantee.*yousuf ibnul hasan

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LENDING AND FINANCING DIFFERENCELending leads to inflation and liquidationFinancing ends at ownershipFinancing 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.*yousuf ibnul hasan

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DEFINITION OF FINANCINGFinance 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.*yousuf ibnul hasan

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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 BACKGROUNDFinancial 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 mattersIt 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 *yousuf ibnul hasan

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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 1960s 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" 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 predetermined and guaranteed return rate.*yousuf ibnul hasan

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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 RibaAny 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 sharingInterest 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" capitalMoney is treated as "potential" capitalIt 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" capitalMoney 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 contractsIslam 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 ActivitiesOnly 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 orderIslam 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.*yousuf ibnul hasan

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HOW FINANCE IS APPRAISE Financing appraisal is base on straight line method, applying 12-P Formula12-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 & INTERESTIntroduction & Differences*yousuf ibnul hasan

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Prime Importance for mankindAlmighty Allah prohibited any object or any act that is harmful to humankind that creates instability, bring injustice, become injurious to human life and considered as unconstructive to Socio Economic System.

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Riba is an Arabic word drive from word RIBH which means Profit.

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 of society.

*yousuf ibnul hasanRIBA.

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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 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.*yousuf ibnul hasan

HOLY QURAN AL-BAQARAH 2:275-6

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AL-BAQARAH 2:278-79O you believers! Fear Allah and give up Riba that remains outstanding if you are true believers. 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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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 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)*yousuf ibnul hasan

HADIATH REINFORCE CONCEPT OF QURANIC RIBA

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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.Riba create injustice in seeking the rights.Riba is non transparent economic activity.Riba is the most hated practice in IslamRiba is the social crime Riba is immoral, unethical, unjustified commercial, economical, political, social, cultural and traditional practices and activities to gain benefit at individual, collective or institutional level , *yousuf ibnul hasan

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INTERESTWhen money becomes a commodity and bought and sold with guaranteed results of profitability or increase in volume of 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 to principal amount, without any risk, efforts, activity, without loss sharing and the return is guaranteed within a specific time is called interest. *yousuf ibnul hasan

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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 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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KEYNESA western economist defines "Interest has nothing to do with influencing volume of savings. Practically it is rate of return on investment that determines rate of saving

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GREEK SCHOLAR ARISTOTLEHe define Interest in his book Money & politics.

Interest is an artificial profit, which does not enter in legal trading. Using money as a 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 qualities .*yousuf ibnul hasan

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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 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.*yousuf ibnul hasan

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JUDAISMIn several Biblical passages in which the taking of interest is either forbidden, discouraged or disliked.

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

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

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)*yousuf ibnul hasan

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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)

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 MatterRiba does not justify money to be a medium of exchange and develops the love of money in several ways that 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.*yousuf ibnul hasan

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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 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.*yousuf ibnul hasan

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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 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.*yousuf ibnul hasan

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The main classes of RIBAExploitation by taking advantage of status and position,Irregular weight & measures for profitability,Wrong declaration for higher return,Misconduct (misbehavior),Crime & Law breaking,Mistrust,Commit a breach False commitment,*yousuf ibnul hasan

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Manipulation of affairs for benefits at a cost and efforts of other,Gambling in all form,Promising to secure the benefit by covering honorable, nearest, dearest Falsehood and LiesBetting and gamblingSpeculationTrading in commodities prohibited by Islam and law of the land,Income from the practices or activities that are prohibited by Islam,

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Breaking and abuse of state law for self benefit or for any purpose that is declared as punishable act.Disobedience to the state law by declaration and submission of wrong information for self-benefits.Disturbing peace of community by using force.Committing and involving in the illegal acts.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,Taking and giving return on loans or fixing amount without appraising the use of funds that are given to user.*yousuf ibnul hasan

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

Using deposits as investments and declaring non-transparent results that lead to discrimination of sharing in accordance with investment percentage,

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

Monopoly and monopolization of activity, transaction and business to taking sole benefit, stopping the growth of employment and earnings

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Grabbing the wealth,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 occupantUsing public money for luxuries & self-usage,Misuse of rights belonging to minors, orphans, widows and women,Misappropriations among share division on inherited wealthMiscalculation of share for inherited wealth under law of inheritance,Income by power and cruelty,Misuse of power and status,

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Theft,Burglary,Smuggling,Adultery,Human trading,Pressurizing and influencing of earning situation and taking benefits,Misuse of public representation and obtaining benefit through status as Public Representative,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),*yousuf ibnul hasan

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RIBA AL NASSIEAH Riba al Nassieah practiced before Islam as man paying his money to another for a pre agreed 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. 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 ones part of the two. *yousuf ibnul hasan

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GHARARGharar 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 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: *yousuf ibnul hasan

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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 Selling goods on the basis of false descriptionSelling goods without allowing buyer to properly examine the goodsGambling is a form of Gharar because the gambler is ignorant of the result of his gamble*yousuf ibnul hasan

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ANY QUESTIONS??

THANK YOU

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