Islamic Studies

ISLAMIC
ECONOMIC
SYSTEM
DEFINITION OF ECONOMICS

Economics is the social

science that studies the
allocation of scarce
(Limited) resources to
satisfy unlimited wants.
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 DEFINITION OF ISLAMIC ECONOMICS

➢ Islamic Economics is the studies of

economic problems of people
imbued with the values of Islam.
➢ It is the study of social science
which enables people to perform
their obligation to Allah and to their
society
 CONT. DEFINITION OF ISLAMIC
ECONOMICS

It studies man not only as an

isolated individual but of a social
individual having;
➢Faith, Ethics believing in the six articles, his
deeds is accountable to Allah as it is guided
by Shari’ah.
➢he is also required to propagate good doing
and prohibit bad doing al-Amr bil Maruf wa al-
Nahy anil Munkar in the society (which are his
business ethics)
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 CONT. DEFINITION OF ISLAMIC
ECONOMICS

➢Akhirah: the hereafter for accountability,

and for getting the outcome of all deeds
including economic activities, in an eternal
life.
➢Economic and Non-Economic well-being
for leading a good life and discharging
socio-Islamic obligations in this world and
for achieving the home of hereafter.

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 HOW ISLAM VIEWS THE
ECONOMIC PROBLEMS?

➢ Scarcity of Resources
➢ Unlimited Wants &
➢ Choice
 RESOURCES IN ISLAM

➢Allah (swt) Has created many resources.

➢However recourses in the eyes of mans is
scarce/limited due to
➢lack of means to reach these
resources (which is the results of
man’s choice such as lack of
knowledge, skills, etc.)
 UNLIMITED WANTS

Islam recognizes that human desires

are unlimited. This is explained in the
Quran and in the Hadith.

ُ َ َ ْ َ ُ َ َ َّ َ ُ َ ْ َ
‫يحسب أن ماله أخلده‬
Thinking that his wealth would make
him last for ever!(104:3)

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 ‫‪MAN IS GREEDY‬‬

‫قال رسول هللا (صىل هللا عليه وسلم)‪:‬‬

‫أعط ثانيا أحب‬
‫ي‬ ‫أعط واديا من ذهب أحب إليه ثانيا ‪ ،‬ولو‬
‫ي‬ ‫« لو أن ابن آدم‬
‫التاب ‪ ،‬ويتوب هللا عىل من تاب »‬ ‫إليه ثالثا ‪ ،‬وال يمأل جوف ابن آدم إال ر‬

‫‪“If man is given a valley of gold,‬‬

‫‪certainly, he wants the second and‬‬
‫‪third one and he will …..” Hadith‬‬

‫‪9‬‬
ACQUIRING WEALTH IN
ISLAM
IS IT PROHIBITED ?

Yes/No
 ‫‪Cont. Acquiring Wealth in Islam‬‬

‫اب الدرداء قال قال رسول هللا صىل هللا عليه وسلم لن‬
‫عن ي‬
‫حت يسأل عن أرب ع عن شبابه‬‫يزول قدما عبد يوم القيامة ر‬
‫فيما اباله وعن عمره فيما افناه وعن ماله من اين اكتسبه‬
‫‪WHEN A MAN DIES HE WILL BE ASKED ON FOUR:‬‬
‫وفيما أنفقه‬
‫?‪1- HIS YOUTH HOW HE SPEND IT‬‬
‫?‪2- HIS AGE HOW HE SPEND IT‬‬
‫?‪3- HIS WEALTH HOW HE ACQUIRES IT‬‬
‫&‬
‫?‪4- HOW HE SPENDS IT‬‬
 SECULAR WORLDVIEW
(Man’s Way of Life)

SEPARATION BETWEEN RELIGION AND OTHER

ASPECTS OF LIFE,

- MATERIALISTIC,
- INDIVIDUALISTIC,
- LESS SOCIO ECONOMIC JUSTICE
- LESS PUBLIC RELATIONS,
- LESS CONCERN WITH THE HEREAFTER LIFE
 Islamic WORLDVIEW
(Man’s Way of Life)

BELIEF IN A DUAL WORLDVIEWS: THIS

WORLD & THE HEREAFTER

- RELIGION IS PART OF HIS/HER DAILY LIFE

- MASLAHAH OF THE UMMAH (PUBLIC BENEFIT),
- ACCOUNTABILITY,
- TRUSTWORTHINESS,
- TRANSPARENCY ETC.
 ISLAMIC WORLDVIEW

To understand the Islamic worldview let us

first define the followings:

1. Islam, Iman, A’mal, Ihsan.

2.Relationship between Allah, man,
nature, religion.
3.The nature and characteristics of
man; man’s role as ‘abd and khalifah
 Islamic
Prohibition
of Riba’
 Meaning of Riba’

• Literally: excess, increase, expansion or

growth

Definitions of Riba’
Ibn al-Arabi: every excess in return of which
no reward is paid
Mawdudi: predetermined excess or surplus
over and above the loan received by the
creditor conditionally on relation to a
specified period
 PROHIBITION OF RIBA’

In the Qur’an - 4 Stages:

1. Surah al-Rum: 39
• compare riba’ with Zakat and charity
• praising Zakat but not riba’
2. Surah al-Nisa’: 160-161
• attaching the practice of riba’ with the
Jews
• Consider the practice as an inequity
3. Surah ali-Imran: 130
• Prohibiting the practice of charging
double and multiple riba’
 PROHIBITION OF RIBA’

4. Surah al-Baqarah: 275-281

• Conclusively prohibiting all forms of riba’
• Any excess over the capital is disallowed
“…they say: trade is like riba’, but Allah has
permitted trading and forbidden (haram)
riba’ (usury)”

Example in the Sunnah:

“From Jabir (RA) the Prophet (S.A.W) cursed
the receiver and the payer of riba’, the one
who records it and the two witnesses to the
transaction: they are alike in guilt”
 TYPES OF RIBA’

1. Riba’ al-Buyu’ (exchange transaction)

• Riba al-Fadl (due to excess)
Example:
(a) Trading commodities of the same commodities
(gold – gold; dates – dates)
• Both commodities must be equivalent
• Prompt delivery
(b) Trading commodities of the same group but
different kinds (gold - silver; wheat – barley)
• Equality not a condition
• Prompt delivery
(c) Trading commodities of different groups and kinds
(gold – wheat; silver – barley)
• No conditions imposed i.e. free trading
 TYPES OF RIBA’

2. Riba’ al-Duyun (loan/debt transaction)

• Riba’ al-Nasi’ah (due to delay)

Characteristics of Riba’ al-Nasiah

3 Elements:
1. Excess or surplus over and above the loan
capital;
2. Determination of surplus in relation to
time; and,
3. Stipulation of surplus in the loan
agreement.
 RIBA’ VS TRADE
Wisdom behind prohibition of riba’
• Elimination of injustice and encourage cooperation
• Spirit of brotherhood

Riba’ is not trading:

• Money loaned for self-generating or self-expanding
value is not sale
• Growth or increase in money is inequitable
• One party receives an increase without equivalent
return to the other party
• In sale, there is productive exchange such as
goods for goods and money for goods
 Islamic
Prohibition of
Gharar
 MEANING OF GHARAR

Literally: In Arabic means negative

elements e.g. deceit, fraud, uncertainty,
danger, risk, hazard etc. that might lead
to destruction and loss

Technically: uncertainty and ignorance of

one or both parties of a contract over
the substance or attributes of the object
of sale or doubt over its existence and
availability at the time of contract
 GHARAR IN THE QUR’AN

• The Gharar appeared 27 times in the Qur’an

• Refer to the need of believers to be aware of
the deceptive character of the worldly
pleasures, and not to be deceived by such
temptations
• Example in Surah al-Nisa’ (4:29):
“O you believe! Eat not your property among
yourselves unjustly (bil batil i.e. by falsehood
and deception) except in a trade amongst
you by mutual consent”
• Most jurists agreed that al-Batil refers in the
above verse includes illegal and deceptive
elements in commercial contracts
 GHARAR IN THE SUNNAH

• In commercial transactions, the Prophet

s.a.w in many of his sayings prohibited
the sale involving gharar
• Examples: The prohibition of sale of fish
in the sea, bird in the air, unborn
animals, etc.
• Gharar is prohibited by consensus of the
jurists (ijma’) since the time of the
companions, their followers (tabi’in) and
subsequently until now.
 REASONS FOR PROHIBITION OF
GHARAR
• To ensure full consent and satisfaction of
all parties in a contract
• Without full consent and satisfaction the
contract is null and void
• Full consent can only be achieved
through certainty, full knowledge, full
disclosure and transparency, and zero
deceit or fraud
• Gharar also results in the risk being built
into the contract at its inception which
may result in a profit for one party and
corresponding loss to other party (zero-
sum game or gambling)
 FACTORS FOR GHARAR IN CONTRACTS

• None or incomplete ownership (“do not

sell if you do not have” or cannot legally
guarantee delivery
• Non-possession or cannot guarantee
physical delivery to avoid manipulation
by the seller and protect the interest of
buyer
• Uncertainty in the contract or
conditional sales
 EXCEPTIONS OF GHARAR

• The uncertainty is too trivial or too slight

and tolerable by both or all parties
• Charitable contracts (tabarru’at i.e.
Waqf etc.)
• The real public need for the transaction
or contracts even gharar is excessive
e.g. bay al-Salam (advance purchase),
al-Istisna’ (manufacturing contract )
• To satisfy people’s immediate need and
removal of hardship makes Gharar an
exception and need takes priority
 EXCEPTIONS OF GHARAR

Gharar is averted if:

• Both the price and the subject matter
are proved to be in existence at the
time the transaction concluded
• The qualities are known and the
quantities are determined
• The contractual parties have control
over them so as to ensure the exchange
can take place
• Term of time can be precisely
determined
 RIBA IN BANKING

• On the both sides of the conventional banks Riba

exists:
• On the Liabilities Side, through borrowing from
depositors on fixed and guaranteed return
• On the Assets side, through lending on Interest basis.
BASIC DIFFERENCE BETWEEN ISLAMIC AND
CONVENTIONAL MODES OF FINANCE

Conventional

money
Bank Client

money + money (interest)

BASIC DIFFERENCE BETWEEN ISLAMIC AND
CONVENTIONAL MODES OF FINANCE

Islamic

Bank Goods & Client

Services

money
THEORETICAL COMPARISON

CONVENTIONAL ISLAMIC
BANKING BANKING
--------------------------- ---------------------------
➢Is based on interest.
◼ Is based on profit

➢Deals in money or papers. ◼ Deals in assets.

➢Is based on fixed return on ◼ Is based on profit sharing on

both Sides of the balance deposits side, and on Islamic
sheet. modes on assets side.
◼ Actively participates in
➢Does not involve itself in trade, production and valid
trade and business
services through valid
contracts.
 SOME FALSE THOUGHTS ABOUT AL-RIBA

▪ Riba could exist in loan transaction only

▪ Riba (interest) is an excessive rate (usury) of premium
imposed on the borrower in loan transaction. The prohibition of
riba is restricted only to doubled and multiplied riba

▪ Riba is prohibited in consumption loan (dharurah) and

allowed in productive loan

▪Riba al-duyun is the only type of riba prohibited in Islam

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