Islam And Economics.Pps


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Islam And Economics.Pps

  1. 1. Economic System Islam and Economics
  2. 2. Grand Charter of Economy <ul><li>059.007 </li></ul><ul><li>What Allah has bestowed on His Messenger (and taken away) from the people of the townships,- belongs to Allah,- to His Messenger and to kindred and orphans, the needy and the wayfarer; In order that it may not (merely) make a circuit between the wealthy among you. </li></ul>
  3. 3. Key Indicators of Economy <ul><li>There are five key indicators of the health of an economy: </li></ul><ul><li>Disparity between rich and poor </li></ul><ul><li>Poverty </li></ul><ul><li>Inflation </li></ul><ul><li>Unemployment, and last but not the least </li></ul><ul><li>Corruption </li></ul>
  4. 4. Pakistan’s Economic Situation <ul><li>If we analyze the economic situation of Pakistan, we will realize that the gap between the rich and the poor is ever widening; approximately 60% of our population lives below the poverty level; the unofficial inflation rate (in the year 2007) is 17%; and actual employment rate in this country is a staggering 30%. </li></ul>
  5. 5. Cause of Economic Problems <ul><li>So what is the root cause of all these problems? </li></ul><ul><li>The answer to this question lies in a single phrase: “Interest based economic system”. </li></ul><ul><li>In an economic system based on interest, the dual objectives of attaining 100 per cent employment and curbing inflation cannot be achieved simultaneously. </li></ul>
  6. 6. Confliction Economic Goals <ul><li>Economic goals conflict. For example, controlling inflation and stabilizing the international payments situation usually require the State Bank to slow down the economy through restricted money supply growth and higher interest rates. However, this policy threatens to generate more unemployment and subdue economic growth. Evidence that economic goals may conflict was provided by British economist A. W. Phillips (1958) and U.S. economists Paul Samuelson and Robert Solow (1960) about four decades ago. These economists uncovered an inverse relationship between price-level increases (inflation) and unemployment. For example, Samuelson and Solow, using data collected from the 1950’s, found that stable prices could be achieved only if unemployment remained as high as 5 to 6 percent of the civilian labor force. </li></ul>
  7. 7. Inflation <ul><li>You must have observed that the goods were cheaper in the past (to what they cost now); this also implies that the same goods will become more expensive in the future. This phenomenon is known as inflation. It is defined as ‘persistent increase in price of goods and services’. </li></ul>
  8. 8. Reduction in purchasing power <ul><li>There is a flip side to the same coin: </li></ul><ul><li>You must have observed that you were able to buy more goods with a particular amount of money (say 100 rupees) in the past to what you are able to buy now. This also implies that you will be able to buy less goods in the future (with the same 100 rupee). This phenomenon is known as reduction in purchasing power. </li></ul>
  9. 9. Inflation & Reduction in Purchasing Power <ul><li>Thus these phenomena act as a double edged sword. On one end it affects the people due to inflation, while at the same time it also makes them suffer by reducing their purchasing power. It is estimated that every fourth year the price of a product doubles. </li></ul>
  10. 10. Inflation & Reduction in Purchasing Power <ul><li>You must be wondering by now that why do prices keep on increasing or/and why does purchasing power keep on diminishing! </li></ul>
  11. 11. Prohibition of Compound Interest <ul><li>003.130 O ye who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that ye may be successful. </li></ul>
  12. 12. Economy Based on Compound Interest <ul><li>The root cause of these evils in also ‘interest based economy’. To be precise, inflation or/and reduction in purchasing power are only possible in an economy which runs on interest. The following graphs will give pictorial depictions of these phenomena: </li></ul>
  13. 13. Economy Based on Compound Interest
  14. 14. Economy Based on Compound Interest
  15. 15. Economy Based on Compound Interest <ul><li>The above two graphs show the negative impacts of Interest in the economy. This is why Allah first declared Compound Interest as ‘Haraam’ and then He eventually also declared ‘Simple Interest as ‘Haraam’. </li></ul>
  16. 16. Usury and Charity <ul><li>030.039 That which ye give in usury in order that it may increase on (other) people's property hath no increase with Allah; but that which ye give in charity, seeking Allah's Countenance, hath increase manifold. </li></ul>
  17. 17. Inflation & Value of Money <ul><li>This ayah may seem contradictory to a common person, but it is 100 per cent true. The phenomenon of ‘reduction in purchasing power’ reduces the value of money of the depositor, while inflation (simultaneously) increases the value of money for the financial institution. The following graph illustrate this phenomenon: </li></ul>
  18. 18. Prohibition on Simple Interest <ul><li>002.278 -279 O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. But if you do (it) not, then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital; neither shall you make (the debtor) suffer loss, nor shall you be made to suffer loss. </li></ul><ul><li>004.160-161 </li></ul><ul><li>Because of the wrongdoing of the Jews We forbade them good things which were (before) made lawful unto them, and because of their much hindering from Allah's way, And their taking usury though indeed they were forbidden it and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement. </li></ul>
  19. 19. Economy Based on Simple Interest
  20. 20. Economy Based on Simple Interest <ul><li>If you observe the above graph, you will notice that although the depositor perceives his deposit to be growing, it is in fact diminishing with the passage of time. This reduction in the value of money is brought about by interest mechanism. </li></ul>
  21. 21. Crux <ul><li>In a transaction based on interest, one person can gain only when the other person loses. In other words, it creates a win lose situation. Whereas Allah encourages a win-win situation. How can He tolerate the exploitation of His one creature at the hand of the other! </li></ul><ul><li>This is why Rasool Allah (saw) also cursed interest in the following ahadees. </li></ul>
  22. 22. Prohibition of Interest <ul><li>Sunan of Abu-Dawood Hadith 3327 Narrated byAbdullah ibn Mas'ud The Apostle of Allah (peace be upon him) cursed the one who accepted usury, the one who paid it, the witness to it, and the one who recorded it. </li></ul><ul><li>Al-Tirmidhi Hadith 2826 Narrated byAbuHurayrah Allah's Messenger (peace be upon him) said, &quot;Usury has seventy parts, the least important being that a man should marry his mother.&quot; Ibn Majah and Bayhaqi, transmitted it in Shu'ab al-Iman. </li></ul><ul><li>Sahih Al-Bukhari Hadith 8.840 Narrated byAbu Huraira The Prophet said, &quot;Avoid the seven great destructive sins.&quot; They (the people) asked, &quot;O Allah's Apostle! What are they?&quot; He said, &quot;To join partners in worship with Allah; to practice sorcery; to kill the life which Allah has forbidden except for a just cause (according to Islamic law); to eat up usury (Riba), to eat up the property of an orphan; to give one's back to the enemy and fleeing from the battlefield at the time of fighting and to accuse chaste women who never even think of anything touching chastity and are good believers.&quot; </li></ul>
  23. 23. Charity <ul><li>The other portion of the ayah deals with charity, which again may seem to be contradictory (to a common person). However, it is not. On the contrary it is also 100 per cent true. </li></ul>
  24. 24. Multiplier Effect <ul><li>There is a concept in economics known as ‘Multiplier effect’. According to this model, the more the money circulates in an economy, the more that economy flourishes. The mechanism of ‘Zakat’ strengthens an economy by increasing the circulation of money in it. </li></ul>
  25. 25. Multiplier Effect <ul><li>Multiplier = 1/(1 – 39/40) </li></ul><ul><li>= 40 </li></ul><ul><li>In this case, a spending of rupees 2.5 generates rupees 40 of increased demand for goods and services . </li></ul><ul><li>This same principle has a negative aspect also. That is why when The State Bank increases its reserve requirement by 5%, it generates a negative multiplier effect by the same magnitude. </li></ul>
  26. 26. Conclusions <ul><li>The Islamic Economic system is better than ‘Interest Based Economic System’ in many ways: </li></ul><ul><li>The true Islamic Economic system is ‘Interest Free’. As such, there is no inflation. On the contrary the influx of Zakat creates deflation (instead of inflation), and even a common man is able to fulfill his basic needs. </li></ul>
  27. 27. Interest Free Economy Without Zakat
  28. 28. Interest Free Economy With Zakat
  29. 29. Hundred Per Cent Employment <ul><li>In a Islamic Economic System the objective of attaining 100% employment is possible. (Which in not possible in ‘Interest Based Economic System). </li></ul>
  30. 30. Hundred Per Cent Employment <ul><li>Rasool Allah (saw) created an example in this context when he created brotherhood between a Muhajir and an Ansar. By doing so, he amicably solved the problem of unemployment which could have otherwise burdened the economy of Madinah. </li></ul>
  31. 31. Merits of Islamic Economics <ul><li>The Islamic Economic System is also superior in the following manners: </li></ul><ul><li>It reduces the gap between the rich and poor. </li></ul><ul><li>It reduces poverty. </li></ul><ul><li>It creates deflation instead of inflation. </li></ul><ul><li>It creates 100 per cent employment. </li></ul>
  32. 32. Final Conclusion <ul><li>Only Islam provides practical solutions to the above four economic problems that have been troubling the world since centuries. No economist can come up with such brilliant solutions to these major economic problems. This clearly demonstrates that these solutions have been provided by the Almighty whose knowledge is far superior to that of any human. If we follow His Economic Model, we can rid the world of these taxing problems. And if we don’t follow this system, we won’t cause any loss to Allah. Instead, we will cause harm to ourselves only. </li></ul>