Introduction:
The fundamental objective of this report is to carefully analyze the system through which Islamic economic system results in the development and prosperity of the society by bring solutions to all kinds of economic problems. The differences and policies of both, the conventional and the Islamic economic system will be examined to comment by drawing up a valid conclusion. Islamic economics is a financial system which functions under Islamic law (Shariah) principles. The basic sources of Shariah are the Holy Quran and the Sunna of the Prophet (P.B.U.H), which are followed by the consensus of the Ulmas/Muftis and interpreters of Islamic law. The central feature of the Islamic financial system is the prohibition of the payment and receipt of interest (Riba) as clearly ordered in the Holy Quran. The foremost belief around which all the Islamic concepts revolve is that the whole universe is created and controlled by Almighty Allah only. He has created man and appointed him as His vicegerent on the earth to fulfill certain objectives through obeying His commands. These commands are not restricted to some modes of worship or religious rituals. They, on the contrary, cover a every aspect of our life. Islam is not only a religion but a complete system for mankind through which they can earn success in this life and thereafter. The Islamic economic system lies on the fundamental Islamic policy of the socio-economic development of the society. Islam uniquely considers distribution as the economic problem, and Muslims do not share the obsession of capitalists and communists with production. Because Islam differentiates between the basic needs and luxuries, there exists no concept of scarcity of resources in Islam. The resources available on earth are sufficient to secure the basic needs (food, clothing, and shelter) of more sixty billion human beings at a time. Under the Islamic system, Nigeria alone could support the whole of Africa, as occurred in the past when, under the system of Islam, Africa sent food to relieve the famine in Madina during the rule of Omar bin al-Khattab.
others and excessive emphasis on the serving of self-interest does not have the potential of motivating people to make the needed sacrifice.
4. Justice
Without justice, it would be difficult to realize even development. Muslim scholars have emphasized this throughout history. Development Economics has also started emphasizing its importance, more so in the last few decades. Rendering justice to those wronged and eradicating injustice, raises tax revenue, accelerates development of the country, and brings blessings in addition to reward in this world and the life after death. Justice and the well-being of all may be difficult to realize without a sacrifice on the part of the well-to-do. The conventional economics doesnt bind any obligation to promote justice and equality; rather it results in the survival of the fittest. It not recognize any solution if it requires a sacrifice on the part of a few (rich) for raising the well-being of the many (poor). Such a position is in clear conflict with moral values & ethical standards of Islam and the free market economy. Hence, this concept did not arise in Islamic economics. In fact, Islam makes it a religious obligation of Muslims to make a sacrifice for the poor and the needy, by paying Zakat at the rate of 2.5 percent of their net worth. This is in addition to the taxes that they pay to the governments as in other countries.
contracts and other obligations through proper upbringing, incentives and deterrents, appropriate regulations, and an effective and impartial judiciary. The Quran can only provide norms. It cannot by itself enforce them. The state has to ensure this. Prophet Muhammad (P.B.U.H) was the practical example of how a person should comply with the regulations of Sharia which results in the prosperity in his life. According to the father of Modern Islamic economics, Ibn Khaldun, the state should not feel that, because it has authority, it can do anything it likes. It should be welfare-oriented, moderate in its spending, respect the property rights of the people, and avoid onerous taxation. This implies that what Ibn Khaldun visualized as the role of government is what has now been generally referred to as good governance.
crisis' by taking into account a number of variables like corruption, bad government policies, and weak administration. All of these together played a role in worsening the impact of the famine, which could otherwise have been handled effectively without a significant adverse impact on the population. The Christianity, Judaism, Hinduism and Islam, prohibit collecting interest on money loaned. Interest is the excess amount of money paid on the loaned principal. This is considered exploitation or RIBA. The main source of profit for the banks is from the interest they charge and from other ancillary services. The bank relies on their client to pay back the borrowed money with interest. As a precautionary measure the bank obtains collateral against the loan. The primary interest of the bank is to make a profit from the interest and not from reclaiming collateral. The borrower believes that by leveraging the commodity/collateral he will make more money than interest paid to the bank. For example: If you buy a Rs100,000 land with a 20% down payment, and sell the house after 2 years for Rs110,000, your profit is 50%. That is, on your initial down payment of $20,000. The interest you paid on the borrowed money was the rent you would have paid if you had lived elsewhere. The transaction occurs on mutual confidence. The bank being confident of his clients ability to make interest and principal payments on regular basis. The client being confident of making more money on his product against which he has borrowed money. Note, the payment of interest from one party to another is unrelated to the value of the house. You may put down 10% (instead of 20%) in order to make more profit and the bank will be willing to lend you more in the hope of receiving more interest. These types of transactions ultimately create fear, greed and corruption. In Islamic financing, the purchaser of the house and the lender both become partners in the equity of the house in proportions to their contributions say, 20% and 80% as in the above example. Here the Islamic banker either rents him the house till the price is paid off or sells him the house outright with an agreed-upon long term payment contract. We can see the clear difference in both systems. In the present banking system one party gains at the expense of the other without due regard to the price paid for the home. In Islamic finance, the arrangement is based on equity participation, called Murabaha. The focus in this type of financing is the individual, the product and the society. Islam has no objection in creating wealth, but must be based on partnership and fairness. The Islamic Bank providing the equity to finance the house will share in the loss as well as in the profit as earlier agreed upon when the product is sold. The whole society ultimately benefits from such transactions. By elimination of interest, monopoly, money trading and imposing Zakat as compulsory tax to be paid on wealth, the Islamic system develops a mutual relation and zeal towards socieeconomic development of the society. It only strives towards Riba free market mechanisms but also provide better and profitable alternatives for the attainment of higher yet halal profits which is regarded as the reward against the capital invested or the talent/ability utilized.
India, the Kyrgyz Republic, and Syria have recently granted, or are considering granting, licenses for Islamic banking activities. In fact, there are currently more than 600 Islamic financial institutions spread over 51 countries, plus well over 250 mutual funds that comply with Islamic principles. Over the last decade, this industry has experienced growth rates of 10-15 percent per annum, a trend that is expected to continue. The Islamic financial system can prevent all financial crises as it is biased on the laws of nature which are truly error free. It offers four main kinds of products that are the perfect replacement of several interests based financial products. Modarbaha Ability and Talent Financing Morabaha Commodity Financing Musharka Partnership Financing Ijara (leasing) Asset Financing
1. 2. 3. 4.
Conclusion:
After thoroughly understanding the key differences of the conventional and the Islamic economic system, I come to the conclusion that even thou interest is essential part of the banking industry but the objectives of banks is merely higher profits with safe investments and Islamic financial system aims to do the same through the Sharia compliance way. The policies of which we see innovate Islamic Financial and banking products being introduced in this free market are based upon the Holy Quran and the Sunnah. Making it precise, they rely on the principles of Allah which are surely error free and a promise & guaranty of success within itself. The conventional system regards the economic system as the natural system where as Islam regards this system as socio-economic system designed for mankinds own benefit. Many investor have realized the glimpse of higher and safer investment portfolios in the Islamic financial system. The reason, today even many western countries are not using the term Islamic Finance but closely follow the Sharia principles in order to save their nations from economic crises similar to 2008 2009 where so called effective or ration economic system collapsed and resulted in the extreme failure of interest based mechanism. Even thou all the policies of Islamic Financial system are evident but more clearer and comprehensive explanations are needed in order for deep understanding of several aspects of this system. Now, as the students of Islamic Finance we should try to contribute as much possible so that the development in this sector can be increased with pace. As this system prevails, it would eliminate all in flaws and loopholes but this would require certain amount of time and efforts from all the stakeholders of the society and the financial system.
References:
IMF Working Paper; Monetary and Capital Markets Department. Introducing Islamic Banks into Conventional Banking Systems. http://www.islamic-world.net/ http://www.bos.frb.org/commdev/c&b/2006/summer/islamicfinancef http://www.islamicfinanceboard.com/files/islamicbanking10 Islam and the Economic Challenge by M. UMER CHAPRA http://www.islamic-banking.com/resources http://www.globalfinance.org/portal/data/conferences/Islamic-Financial-Products http://alaiwah.wordpress.com/2009/04/06/islam-the-present-economic-crisis/ http://elgamal.blogspot.com/2008/10/islamic-economics-and-financial-crisis.html The resource book of Mr. Yousuf Ibnul Hassan.