Islamic Economics and Finance

Philosophical Foundation & Shari’ah compliant Business & Shariah compliant Insurance Contemporary Subjects &
Islamic Financial Market
Basic Rules Financial Contracts (Takaful) Shariah Compliance

Islamic Economic
Murabahah Islamic Equity Market (Overview)
System

Foundation & Basic

Concepts of Finance in Salam & Istisna’a
Money Market – Islamic Perspective
Islam

Sources of Shari'ah Ijarah Capital Market – Islamic Perspective

Key Prohibitions Mudarabah Shariah Compliant Stocks

Islamic Law of Contracts

Musharakah Screening of Shariah Compliant stocks
and Sale
An Overview of Islamic Economic
System
CHAPTER 1
 What is Economics?

 To utilize the limited resources in a way that maximum needs and wants are met to ensure the well-
being of all members of the human society.

 Economics is the discipline that deals with the production, distribution and consumption of goods or
services and wealth in general.

Adam Smith* believed in the free market concept, competitive forces and prices determined by the
demand–supply mechanism. A significant economic theory defined by him was the concept of economic
scarcity. (Classical Theory - 1776)

 The modern economic system is described as a network of relationships between households,

businesses and governments involved in the economic activities of production, distribution and
consumption of goods and services in a manner that protects the rights of future generations and of
the environment.
 Determination of
Priorities

Factors of Economic System

Allocation of
Development
Resources

Which of the
unlimited wants
should be addressed
first?
Distribution of
Income

How to develop the Where & how to

economic outcome in allocate factors of
both qualitative and production?
quantitative terms?

Who will decide the

distribution of
generated income
and on what basis?
 Major Economic Systems

A. Market Economy: These economies are self-regulating, with no government intervention. Demand and
supply determine prices. The disadvantages are that this system can cause polarization of wealth and
can be detrimental to society – for example, the USA. (Capitalism)

B. Mixed Market Economy: In these economies markets operate under the demand and supply
mechanism but governments ensure that market rules beneficial to the country are not broken.
Important economic sectors like public services, defense, infrastructure, etc. may be under
governmental control – for example, Sweden, the UK, France.

C. Command or Planned Economy: These economies are the opposite of the market economy.
Government decides about production, distribution and consumption. Communist countries usually have
this kind of economy – for example, Cuba, North Korea and the former Soviet Union. (Socialism)

D. Mixed Socialist Economy: In some market economies, to deal with income inequality, poverty and
other social issues, some vital sectors are under governmental control, like banking, healthcare,
education, energy, transportation, etc. – for example, China.
 Basic Rules of Capitalism

The basic principle of this system is ‘unrestricted economy’ i.e. the removal of all
restrictions whether political, economical or religious from business, industry, and
every other means of livelihood.

Three basic rules of capitalism are:

a) Absolute Right to Private Property

b) Profit Maximization Motive

c) No Intervention (Laissez Faire)*

 Salient Features of Capitalism

 Economy freely works on the market principle of ‘demand and supply’.

 Every Individual is free to perform trade and business i.e. dealings between
individuals are not subject to government control or religious edicts.

 Every individual has a right to maximize his or her profit.

 Private holdings are free of restrictions.

 Shortcomings of Capitalism

a) No bindings/restrictions on profit maximization.

b) Survival of the fittest*.
c) Trade and industry, and wealth evolve around interest, gambling, speculation and
commission. Resultantly, the resources of production and wealth concentrate in a few
hands of the moneylenders and capitalists.
d) Blindly follows market forces which creates exploitation of labor & poor people.
e) No consideration of moral values, the goal is only profit making i.e. drugs, immoral or
unethical entertainment industry, and gambling etc.
f) Government and industrialists joint to gather for their own interests rather than public
interest.
g) Monopolies and cartels emerge.
h) Imbalance in the distribution of wealth (rich become richer and the poor poorer i.e. a
 Basic Rules of Socialism

The basic principle of Socialism is ‘collectivism’ i.e. the government alone is the owner of all
resources, and only it can frame policies of trade and industry and execute them. It is also
called planned economy.

Basic rules of socialism include:

a) Equal distribution of wealth

b) Collective property

c) Government planning and control

d) Collective interest
 Salient Features of Socialism

 Socialism is the reaction to the individualism that had gone to the extremes during
capitalism.

 Socialism does not recognize the individuals.

 No free market system.

 Attention is given to un-privileged segments of society.

 It does not recognize the individual’s right to property.

 Government makes decision about resource allocation.

 Shortcomings of Socialism

a) The government assumes that it possesses perfect planning capabilities, believing it can
address all societal issues. As a result it dictates all aspects of production, distribution and
consumption of goods and services, as well as overall wealth allocation.
b) In a socialist economy, market mechanisms are absent, resulting in the lack of demand
and supply dynamics.
c) Dictatorship by the government which creates government monopolization of all resources
and essential services.
d) Government determines wages and profits, resulting in fixed rates, which leads to
inefficiency due to the absence of a profit motive. This lack of incentive diminishes the
drive for efficient work and competitiveness.
e) Potential for corruption and abuse of power.*
f) Consumer choice restrictions.
g) Limited innovation and entrepreneurship.
 Comparison of Capitalism & Socialism

Features Capitalism Socialism

• Right to participate in any business • No right to participate in any business

Determination of Priorities
• Concept of self interest • Concept of collective interest
• Supply and demand determine the priorities • State determines priorities

Allocation of Resources • Market forces decide where to invest resources • Government decides

• Market forces decide where to focus on

Development development • Government decides

• Land: Rent (determined by market) • Land: Rent fixed by the government

• Labor: Wages (determined by market) • Labor: Wages fixed by the government
Distribution of Income
• Capital: Interest (determined by market economy)• Capital: controlled by the government
• Entrepreneur: Profit (demand & Supply factor) • Entrepreneur: No individual rights
• Right to wealth is with the government
Right to wealth • Right to wealth is with the factors of production (to distribute it among the factor of
Production)
 Economic Teachings of Islam

‫َأ‬
‫ُه ْم َيْق ِس ُم وَن َر ْح َم َت َر ِّبَك ۚ َنْح ُن َق َس ْم َنا َبْيَنُه م َّم ِعيَش َتُه ْم ِف ى ٱْلَحَيٰو ِة ٱلُّدْنَيا ۚ َوَر َف ْع َنا َبْعَض ُه ْم‬
‫َف ْو َق َبْع ٍۢض َدَر َج ٰـ ٍۢت ِّلَيَّتِخ َذ َبْعُض ُه م َبْع ًۭضا ُس ْخ ِر ًّۭيا ۗ َوَر ْح َم ُت َر ِّبَك َخ ْي ٌۭر ِّمَّم ا َيْج َم ُعوَن‬

“Is it they who distribute your Lord’s mercy? We ˹alone˺ have distributed their ˹very ˺ livelihood
among them in this worldly life and raised some of them in rank above others so that some may
employ others in service. ˹But˺ your Lord’s mercy is far better than whatever ˹wealth ˺ they
amass.” (Al Quran 43:32)*
 Two fundamental rulings of economy in Islam are:
1. Health of the economy is based upon ‘spending’ rather than ‘saving’.
2. Riba (interest) is a big hurdle towards the prosperity and growth of economy.
 Economic Teachings of Islam (Cont’d)

Islamic economics involves studying rules provided in the Islamic holy book, the Quran, and
the Sunnah (teachings of the Prophet Muhammad PBUH) pertaining to the economic concepts,
comparing and contrasting these with contemporary economics, identifying the gaps, and
finding ways to bridge these gaps.

 The teachings of Islam cover all aspects of human life i.e. social, political, economic etc.

 The values of Islamic economic system are derived from Islamic principles.

 Islam believes in the market forces of supply and demand.*

 Economic Teachings of Islam (Cont’d)

 Islam allows the system driven by market supply and demand. However, Islam also
allows government intervention so that market forces could not exploit any
segment of the society.*

 Islam allows the right to property and profit maximization, but there are some
prohibitions that make it different from capitalism, such as:

a) Divine prohibitions

b) Government restrictions (public/collective interest)

c) Ethical and Moral considerations

 Economic Teachings of Islam (Cont’d)

 The ownership rights of property in Islam are addressed according to the following principles:

1. Allah is the absolute owner of all property, and He has entrusted people with its possession and
use. Thus, it should be used for the benefit of society, supporting future generations, and to
avoid causing harm to the environment.

2. All human beings should have access to the natural resources bestowed by Allah.

3. People can acquire property through their own productive efforts or through various types of
legal transfers, such as exchanges, contracts, gifts, donations, or inheritance.

4. Islam limits the accumulation of wealth (spending is encouraged).

5. Islam recommends taking care of our property and discourages waste or destruction.
 Factors of Production in Islam

Islam recognizes three factors of production:

a) Land

b) Labor Capital???

c) Entrepreneur
 Basic Principles of Islamic Economics

1. Sanctity of private ownership (earnings through halal means create sanctity of ownership and
no one has right to interfere)
2. Collective ownership (in case of non-existence of private ownership)
3. Moral issue (anything that creates moral corruption should be avoided)
4. Written documentation and evidence (in particular future contracts to avoid conflicts)
5. Incapacity to manage the property (if proven that anyone is incapable then his/her property
can be controlled by the government)
6. Compulsory donation (Zakat, Fidyah*, Nazoor etc.) provides social security system at the local
level
7. Avoidance of concentration of wealth (to create social and economic justice)
8. General benefit (to help those who lack behind in the struggle of earnings)
 Features of Islamic Economics

1. Religion and economics are interrelated in Islam.

2. Economic and social fairness & justice is not forced on individuals, but they are encouraged to implement it.
3. Property and wealth is ultimately owned by the Creator, whereas, man has been given control over it as a
trustee.
4. People are expected to be moderate in their expenses and avoid extravagance and wastage.*
5. Productive activities are encouraged, and all can pursue personal economic gains as long as they are
Shariah-compliant and do not harm society or the environment.
6. All Halal trade and business, legitimate and permissible in Islam, are encouraged while all Haram trade and
business, unlawful and prohibited in Islam, is to be avoided.
7. All human beings have the right to equal opportunities, and those who own wealth are responsible for
sharing it with the community. To achieve this, Islamic economics dictates compulsory charity i.e. Zakat,
which is a religious tax, designed to reduce the gap between the rich and the poor, as well as encouraging
additional non-compulsory charity (Sadaqah).
 General Principles of Market in Islam

1. The market in the Islamic Economy operates on the free will of buyers and sellers. All production and
consumption decisions are made by individuals and institutions on the basis of their respective
judgements.
2. The prices are determined by the free flows of supply and demand except where a seller may be able to
fix prices on the basis of market imperfection (monopoly).
3. The prophet (pbuh) forbade certain market practices such as:*
a) withholding of food items at times of scarcity (ihtikār),

b) collusion to bid up prices (tanājush),

c) counter bidding/outbidding (tasāwum)

d) sale by town-dwellers on behalf of farmers, purchasing from farmers at lower prices keeping them ignorant
about the market prices,

e) sale or purchase of an uncertain commodity (bay’ al gharar),

f) sale of something which one does not possess/own.

 General Principles of Market in Islam

4. In a barter trade, if the same commodity is being exchanged, then the quantity should be equal and
the exchange should be simultaneous.
5. Transaction must involve physical transfer of the commodity or its ownership to the buyer. The seller
must own a commodity or property before he can resell it.
6. Both the commodity and the price cannot be deferred to effect a legally enforceable sale.
7. Any sales transaction in which the seller makes materially false statements which the buyer
believes and acts on, gives the buyer the option to revoke the contract.*
8. Profiteering caused by the need of the buyer is not allowed.
9. There should be no ambiguity about the price, object of sale, time and place of delivery.
10. Money is not a commodity but a medium of exchange and a store of value.** The Riba transactions
presume money as a commodity. The person who receives riba charges it as a price of this
commodity (money).
Thank You

Any Question?