1. PROPOSED TOPIC OF THESIS 1 How Islamic Finance can reduce Inflation? Presented By: Erum Altaf PBA02123014 Lahore Business School University of Lahore

2. WHAT IS ISLAMIC FINANCE? Islam stands for equity and justice. Prophet (P.B.U.H.) working under divine guidance purified all affairs of men including economic once. All that was apparently good was further purified by purging off all elements of injustice, exploitation and fraud. This, purified good was made lawful. Similarly, what was bad was prohibited. 3. Islamic finance is finance under Islamic Law, or Shariah Principles. The basic source of Shariaah are the Quran and the Sunnah, which are followed by the consensus of the Jurists and the interpreters of Islamic Law. The central feature of Islamic finance system is the Prohibition in the Quran of the payment or receipt of RIBA (Interest). 4. The basis of Islamic Finance denounces usury, termed as riba (which is the lending of money at exorbitant rates) but it doesnt stop just there. The concept is more accurately that money has no intrinsic value it is only a measure of value, and since money has no value itself, there should be no charge for its use. Therefore, Islamic Finance is said to be asset based as opposed to currency based whereby an investment is structured on exchange or ownership of assets, and money is simply the payment mechanism to effect the transaction. The basic framework of an Islamic Financial System is based on elements of Shariah, which governs Islamic societies. Shariah, the law of Islam, originates from two principal sources: the Quran, the Holy Book of the Muslims and its practices; and the Sunnah, the way of life prescribed as normative in Islam, based on the teachings and practices of Prophet Muhammad (pbuh). 5. ISLAM AND SHARIAH IslamAqidah (Faith & Belief)Shariah (Practices & Activities)Akhlaq (Morality & Ethics)IBADAT (Man to God Worship)Muamalat (Man to Man Activities)Political ActivitiesEconomic ActivitiesBanking & Financial ActivitiesSocial Activities 6. WHAT IS RIBA First, in the Holy Qur`an we read: O you who believe! Be mindful of God and give up what remains of alriba if you are believers. If you do not do so, then receive a declaration of war from God and his Messenger. But if you repent, you shall have your capital sums (ru`us al-amwal). You do not deal unjustly and you are not dealt with unjustly (2:278-279) 7. Riba is an Arabic word meaning interest, addition or growth. Riba was forbidden in the Medinan society of Muhammad, just as in the medieval Christian world. Historically, the consensus of Muslim jurists held that any loan that involved an increase in repayments was forbidden, and as such, the Islamic state prohibited it. This prohibition was reconsidered with the advent of European influence during the Age of Enlightenment. The word is a Quranic term. One of its applications is "interest" or "usury" on loaned money. The Quranic term is not limited to money but as well includes all loan transactions in which the debtor returns a sum of goods in excess or above the original loan, be it money, eatable or any other item or goods; anything in excess of original is considered riba if items exchanged are of the same kind (such as gold for gold). Riba is any increment on a loan or debt, either preconditioned or in rescheduling. 8. RIBA IN QURAN 9. PRODUCT TREEIslamic Finance ModelsPartnership Based ModesTrade Based ModesMurabaha Musharaka (Joint Venture Profit Sharing )Mudaraba ( Trustee Profit Sharing)(Cost Plus Profit Sale)Musawama (Bargain sale )Salam (Commodity Sale)Istisna (Sale on Order)Rental Based ModesIjarah ( Leasing )Diminishing Musharaka ( Transfer of Ownership) 10. WHAT ARE THE MAIN PRINCIPLES OF ISLAMIC FINANCE? The main principles of Islamic Finance include: The prohibition or taking or receiving interest at exorbitant rates (Riba), but this does not preclude a rate of return on investment which is agreed up front by both parties contracting. In most cases, the references to interest rates by Islamic financial institutions are to help benchmark the return on investment to offer transparency. This does not imply interest is being used in the transaction. Risk in any transaction must be shared between at least two parties so that the provider of capital and the entrepreneur share the business risk in return for a share in profit. The prohibition of speculative behaviour (Gharar), meaning that gambling (Maysir) and extreme uncertainty or risk is prohibited and thus contractual obligations and disclosure of information are a sacred duty.Investments that violate the rules of Shariah, advised against by Shariah boards, and are generally non-ethical meaning that investment in businesses related to alcohol, pork related products, conventional financial services, entertainment (gambling and casinos, pornography, weapons and defense. 11. WHAT IS INFLATION? The term "inflation" originally referred to increases in the amount of money in circulation. However, most economists today use the term "inflation" to refer to a rise in the price level. Inflation simply refers to "an increase in the price you pay for goods." In other words, a decline in the purchasing power of your money". 12. CAUSES OF INFLATION 1.2. 3. 4. 5.Over-expansion of money supply i.e. excess liquidity in the economy leads to inflation because too many money would be chasing too few goods. Expansion of Bank Credit Rapid expansion of bank credit is also responsible for the inflationary trend in a country. Deficit Financing: The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of the inflationary spiral in a country. A high population growth leads to increase in demand and money income and cause a high price rise. Excessive increase in the price of fuel or food products due to political, economic or natural reasons will lead to inflation for short- as well as long-term. 13. EFFECTS OF INFLATION ON ECONOMY Inflation is the increase in the price of general goods and service. Thus, food, commodities and other services become expensive for consumption. Inflation can cause both short-term and long-term damages to the economy; most importantly it causes slow down in the economy. 1. 2. 3. 4.5.People start consuming or buying less of these goods and services as their income is limited.. Banks will increase interest rates as inflation increases otherwise real interest rate will be negative. Rising inflation can prompt trade unions to demand higher wages, to keep up with consumer prices. Rising wages in turn can help fuel inflation. Inflation affects the productivity of companies. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Higher interest rates leads to shutdown in the economy 14. HOW ISLAMIC FINANCE CAN REDUCE INFLATION Followings are some solutions that how islamic finance can reduce inflation. All these are proposed solutions and we will work on it In sha ALLAH in near future. 15. ONE : HARD CURRENCY IS TIED TO GOLD OR SILVER STANDARD The Islamic system requires currency / medium of exchange to be based on the gold and silver standard which have an intrinsic value. Notes can be used to represent the precious metals instead of carrying gold and silver around, but they must be backed up by them. Due to the intrinsic value in the precious metals stability is achieved and devaluation and inflation controlled.In Islam, currency is treated as a medium of exchange/store of value and should not be treated similar to commodity (i.e., that can be traded at anyones whims). 16. TWO : NO ARTIFICIAL MONEY The Islamic system does not only forbid riba, but also does not allow us to loan what we do not own or have. Banks cannot produce money at any time, as and when they like. 17. THREE : NO HOARDING TO MANIPULATE SUPPLY AND DEMAND The Islamic system abhors hoarding and the artificial manipulation of supply and demand. 18. FOUR : OWNERSHIP OF NATURAL RESOURCES Islams solution is based on its view of ownership and permissibility of generating profits from natural resources. Islam is the only system that defines 3 types of ownership; individual, public and state property. The Prophet SAW in his Hadith has included natural resources that combust (oil field, gas field, coal mine, etc) as public property as well as other natural resources. Public property can not be transferred to the state or private sector, but remains the property of the public (Muslim Ummah) and is run by the Islamic state for their benefit on a no profit, no tax basis. Any profit generated by selling surplus oil to friendly non-muslim countries must be spent on the Ummah. 19. FIFTH : REVIVAL OF DEAD LAND The Prophet SAW informed us that a Muslim who revives a dead Khiraji land, which was never cultivated since Muslims opened it, would own the neck as well as its produce. The Prophet SAW also informed us any Muslim or Zimmi (non-Muslim citizen of the Islamic state) who revives a dead Khiraji land on which Khiraj was applied in the past would own the produce, whilst the neck would remain with the State.The concept being whoever revives a dead land can benefit from it. This presents a great incentive for poor farm workers and others to take advantage of this Islamic rule and revive dead land and the whole state would benefit. Poverty would be reduced, employment would increase and so would production. Increased production leads to increased supply and therefore cheaper prices and lower inflation.