ISLAMIC ECONOMIC SYSTEM

FARMAN ALI
 the interest-based investment
• There are normally two participants in such
transactions. One is the Investor who provides
capital on loan and the other Manager who
runs the business. The investor has no
concern whether the business runs into profit
or loss, he automatically gets an interest
(Riba) in both outcomes at a fixed rate on his
capital.
THE REASONS OF THE PROHABITATION
OF RIBA
• The economic philosophy of Islam has no concept of
Riba because according to Islam, Riba is that curse in
society, which accumulates money around handful of
people, and it results inevitably in creating monopolies,
opening doors for selfishness, greed, injustice and
oppression. Deceit and fraud prospers in the world of
trade and business. Islam, on the other hand, primarily
encourages highest moral ethics such as universal
brotherhood, collective welfare and prosperity, social
fairness and justice. Due to this reason, Islam renders
Riba as absolutely haram and strictly prohibits all types
of interest based transactions
 2. The distribution of wealth
• The distribution of wealth is one of the most important
and most controversial subjects concerning the
economic life of man, which has given birth to global
revolutions in today’s world, and has affected every
sphere of human activity from international politics
down to the private life of the individuals. For many a
century now, the question has been the center not only
of fervent debates, oral and written both, but also of
armed conflicts. The fact, however, is that whatever
has been said on the subject without seeking guidance
from Divine Revelation and relying merely on human
reason, has had the sole and inevitable result of
making the confusion worse confounded.
 Difference between Islam, Capitalism
and Socialism
• Capitalism affirms an absolute and
unconditional right to private property.
Socialism totally denies the right to private
property.
• But the truth lies between these two extremes
- that is Islam admits the right to private
property but does not consider it to be an
absolute and unconditional right that is bound
to cause "disorder on the earth”.
 FACTORS OF PRODUCTION IN ISLAM
• Capital: which has been defined as "the produced means of
production" - that is to say, a commodity which has already
undergone one process of human production, and is again
being used as a means of another process of production.
• Labour: that is to say, any exertion on the part of man.
• Land: which has been defined as ''natural resources'' (that
is to say, those things which are being used as means of
production without having previously undergone any
process of human production)
• Entrepreneur, or Organization: The fourth factor that brings
together the other three factors, exploits them and bears
the risk of profit and loss in production.
 THE SOCIALIST VIEW
• On the other hand under the Socialist economy, capital
and land instead of being private property, are
considered to be national or collective property. So, the
question of interest or rent (or revenue) does not arise
at all under the philosophy of this system. Under the
Socialist system, the entrepreneur too is not an
individual but the state itself. So profit as well is out of
the question here - at least in theory. Now, there
remains only one factor namely labor. And labor alone
is considered to have a right to wealth under the
Socialist system, which it gets in the shape of "Wages"
 THE ISLAMIC VIEW
• The entrepreneur, as a regular factor, has been excluded from the list of
the factors of production, and only three factors have been recognized,
instead of four.
• Islam does not distribute wealth merely in the form of wages, as does
Socialism, but in the form of profit and rent as well
• Socialism deprives human labor of its natural right to individual choice and
control, compulsion and force becomes indispensable in order to make
use of this labor, which has a detrimental effect on its efficiency as well as
on its mental health.
• It is not "interest" but "profit" that has been considered as the "reward"
for Capital.
• Capitalism defines' 'Capital'' as "the produced means of production.
“Capital" only those things which cannot be utilized without their being
wholly consumed, or, in other words, which cannot be let or leased - for
example, money. Machinery is to be excluded from "Capital", according to
this definition
 ISLAMIC CONTRACT
• A condition, which is not against the contract, is a valid condition
• A condition, which seems to be against the contract, but it is in the
market practice, that type of condition is not void, if its voidness is
not proven with the clear injunctions of the Holy Quran and
Sunnah. For example ‘A’ buys an air conditioner on a condition that
the seller will provide him five-year guarantee and one year free
service. This type of condition does not invalidate the contract.
• A condition that is against the contract and not in the practice of
market but it is in favor of one of the contractors or subject matter,
this type of condition is void. For example if ‘A’ says he sells a car
with a condition that he will use it on a fixed date every month, this
contract will NOT VALID.
• A condition, which is against the contract, not in the market
practices and not in favor of any contractor, is not a void condition.
 Sale
• (Bai) is commonly defined in shari’ah as “the exchange of a thing of
value by another thing of value with mutual consent”. More
specifically it means “the sale of a commodity in exchange of cash”
• Valid Sale (Bai Sahih): • Contract (Aqd) • Subject Matter (Mabe’e) •
Price (Thaman) • Possession or delivery (Qabza)
• Types of Sales
• Bai Musawamah: It refers to normal sale in which cost price is not
known.
• 2. Bai Murabaha: It refers to a sale in which cost and sale price is
known to the buyer.
• 3. Bai Salam: It is a kind of sale in which payment is spot while the
delivery of the good is deferred.
• 4. Bai Istisna: It refers to such sale in which commodity is transacted
before it comes into existence. It is basically an order to
manufacture.
option or right of the buyer & seller to
rescind a contract of sale
• Khiyar-e-Shart At the time of sale Buyer or
Seller can put a condition that he has an
option to rescind the sale within the specific 4
days
• Khiyar-e-Roiyyat (Option of inspecting goods)
• Khiyar-e-Aib (Option of defect)
• Khiyar-e-Wasf (Option of quality)
• Khiyar-e-Ghaban (Option of price)
 ISLAMIC MODES OF FINANCING
• MUSHARAKAH: Partnership in capital,
Partnership in services, Partnership in
goodwill, Partnership Capital & labour at par,
equality in capital, management or liability.
 MUDARABAH
• This is a kind of partnership where one
partner gives money to another for investing
in a commercial enterprise.
– restricted Mudarabah
– unrestricted Mudarabah
 DIMINISHING MUSHARAKAH
• According to this concept, a financier and his
client participate either in the joint ownership of
a property or an equipment, or in a joint
commercial enterprise. The share of the financier
is further divided into a number of units and it is
understood that the client will purchase the units
of the share of the financier one by one
periodically, thus increasing his own share until
all the units of the financier are purchased by him
so as to make him the sole owner of the property,
or the commercial enterprise, as the case may be.
 MURABAHA
• Murabahah is a particular kind of sale where
the seller expressly mentions the cost of the
sold commodity he has incurred, and sells it to
another person by adding some profit
thereon. Thus, Murabahah is not a loan given
on interest; it is a sale of a commodity for
cash/deferred price
 SALAM
• This mode of financing can be used by the
modern banks and financial institutions
especially to finance the agricultural sector. In
Salam, the seller undertakes to supply specific
goods to the buyer at a future date in
exchange of an advanced price fully paid at
spot. The price is in cash but the supply of
purchased goods is deferred
• ‫آڈھت بزنس‬
 Istisna’
• Istisna’ is a sale transaction where a
commodity is transacted before it comes into
existence. It is an order to a manufacturer to
manufacture a specific commodity for the
purchaser. The manufacturer uses his own
material to manufacture the required goods.
In Istisna’, price must be fixed with consent of
all parties involved. All other necessary
specifications of the commodity must also be
fully settled.
 ISTIJRAR
• In Islamic jurisprudence Istijrar is an
agreement where a buyer purchases
something from time to time; each time there
is no offer or acceptance or bargain. There is
one master agreement where all terms and
conditions are finalized.
 IJARAH (LEASING)
• In leasing an owner transfers its usufruct to
another person for an agreed period, at an
agreed consideration.