Understanding Islam…. Islam Permissibility & prohibition Islamic view of life & wealth principles of Islamic banking Global perspectives Recommendations & ConclusionSeptember 11, 2011
General Introduction• Islam is not only a religion in the ordinary sense of the word, but indeed a complete system of life.• Islam guides man in his relationship with God and gives him the norms which govern his temporal existence.• Islam is concerned with the spiritual, political, social economic, moral and all other material aspects of the human being. 5
Basic Principles of Permissibility (HALAL) & Prohibition (HARAM) in Islam The first rule established by Islam is that the things which Allah has created and the benefits derived from them are essentially for mans use, and hence are permissible halal . Nothing is haram except what is prohibited by a sound and explicit evidence (either a verse of the Quran or a clear, authentic, and explicit sunnah-practice or saying- of Prophet Muhammad.) If the evidence is not sound, as for example in the case of a weak hadith, or if it is not explicit in stating the prohibition, the original principle of permissibility applies.
Halal & Haram… Allah says: It is He who created all that is in the earth for you.... (2:29) He has subjected to you, from Himself, all that is in the heavens and all that is on the earth.... (45:13) In Islam the sphere of prohibited things is very small, while that of permissible things is extremely vast. There is only a small number of sound and explicit texts concerning prohibitions.
Prohibition is Due to Impurity and Harmfulness It is the right of Allah, the One Who created human beings and bestowed innumerable gifts on them, to legalize or prohibit as He deems proper, and to place obligations and responsibilities upon them as He sees fit. He makes things halal and haram for a reason, with peoples well-being in view. Accordingly, He has neither permitted anything except what is pure nor has He prohibited anything except what is impure.
Economics & Its Problems 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.” The four basic economic problems: 1. Determination of Priorities 2. Allocation of Resources (Land, Labor, Capital, Entrepreneur) 3. Distribution of Income 4. Development We will compare how Capitalism, Socialism and Islamic Economic system addresses to these problems.
Comparison of Capitalism & Socialism Capitalism Socialism • Every individual has • No individual has the1. Determination right to participate in unconditional right to of Priorities participate in any any business business to maximize independently. profits • State will determine the • Concept of Selfish priorities as per the Interest overall planning. • Supply & Demand will • Concept of collective determine the priorities. interest.2. Allocation of • Market forces will • Govt. will decide Resources decide where to where to allocate invest resources resources3. Development • Market forces will decide • Govt. will decide
Comparison of Capitalism & Socialism Capitalism Socialism4. Distribution of • Land - Rent • Land – Rent fixed by Govt. Income • Labor - Wages • Labor – Wages fixed by • Capital- Interest Govt. • Entrepreneur- Profits .
Flaws of Capitalism No bindings/ restrictions while maximizing profits. Blindly follows market forces that creates exploitation of labor & poor people. No moral value limitations. Monopolies & Cartels are created that exploit the society as a whole. Government & Industrialists join hands for unholy alliances
Flaws of Socialism The other extreme of not even giving the natural freedom. Perfect Planning is assumed by Govt. ? Governments are assumed to be angels which can’t commit a deliberate mistake. Cannot work without forceful dictatorship.
What is Islamic Economics? Islam is a complete way of life which gives guidance for Aqidah (Faith & Belief) Ibadah (Worshipping our creator) Akhlaq (Morals, Character & Ethics) Mu’amalat (Dealings with Fellow Man) Economic Activities fall under the purview of Mu’amalat. Informal Dealings Formal, Contractual/Institutional Islamic Finance Banking Insurance Money Market Carpital Market Islam is a DEEN for well being. Spiritual satisfaction.
MEANING AND CONCEPT OF SHARI’AH: Shari’ah= Aqidah+Ibadah+Akhlaq+Muamalat! Islamic laws are also known as Shariah laws, sometimes referred to as Islamic jurisprudence. The original meaning of the word Shariah or shar „is the path or the road leading to the water‟ and the verb shara’a literally means „to chalk out or mark out a clear road to water‟. In a religious sense, it means „the highway of good life‟. In other words, Shariah is the way which directs man‟s life to the right path. The word Shariah also has its correlation with the word “deen” which literally means „submission‟ or „following‟. The two primary sources Shariah are the Al-Qur’an and Al- Sunnah.
Important Concepts in Islamic Economics:Considerations & Prohibitions Islam encourages: Everyone is allowed to trade as they like with the free market exception of: economy Development of the Riba entire community & (Usury/Interest) eradication of concentration of wealth Uncertainty Partners share the risk (Gharar) of reward & loss Gambling (Maisir) Money as a medium of exchange and not as a Unlawful commodity by itself Products/Services Financing must be asset-backed and not Unlawful money on money! Contracts
Islamic Economic System- The prohibitions & considerations1. Divine Prohibitions: Islam has prohibited some economic activities that are not allowed at any time at any place.( Interest, Gambling, Gharar)2. Govt. Restrictions: Islam allows Govt. to intervene where it feels appropriate , but these restrictions are temporary as per the need of the time.3. Moral Considerations & Restrictions Maximum benefit in the life for hereafter.
Factors of Production of Production in Islamic Economic System In Islam there are three factors of production 1.Land 2. Labor 3. Entrepreneur Entrepreneur & Capital is a single factor of production. As interest is Haram hence the risk of profit & loss is with the capital. Anyone investing capital must also take the risk of the investment.
Right to Wealth in Islam In both Capitalism & Socialism the right to wealth is with those factors of production only that have taken part directly in the process of production. Islam believes that the original ownership of everything is with Allah and without Allah’s “Taufeeq” no factor of production can produce anything. ALLAH Factors of Production Zakat, Ushr Wirasat, Sadqaat Qurbani,Khiraj Secondary owners of wealth
What is “Islamic Banking” ?• Islamic banking is defined as “banking system which is inconsonance with the spirit, ethos and value system of Islam andgoverned by the principles laid down by Islamic Shariah”.• Interest-free banking is a narrow concept denoting a numberof banking instruments or operations which avoid interest.•Islamic banking, the more general term, is based not only toavoid interest-based transactions prohibited in Islamic Shariahbut also to avoid unethical and un-social practices.•In practical sense, Islamic Banking is the transformation ofconventional money lending into transactions based on tangibleassets and real services. 21
Why Islamic Banking? • In response to the needs of Muslim community • Acts as a catalyst to fill the gap to mobilise funds for productive purposes, in particular for Muslim communities • Significant untapped business potential • Proven to be a viable financial intermediation channel in supporting economic growth • Fulfils the demands of not only Muslims but non-Muslim population as wellSeptember 11, 2011
Distinctive features of Islamic finance The most distinctive features of Islamic finance are; the prohibition of interest, whether nominal or excessive, simple or compound, fixed or floating. the prohibition of gambling; dealing only in lawful (halal) things and; the elimination of uncertainty and ambiguity (gharar) in business contracts.
Global Trends in Islamic Banking Modern Islamic Banking is growing rapidly across the world Distinct Phases of Development in Islamic Banking: Initiation (1960 through 1975): Oil Boom in this period was the biggest contributor leading to increased wealth and liquidity in the Gulf States and also in North Africa Progress (1976 to the Early 1980s) Spread from the Gulf States to Malaysia and Europe Growing Maturity (1983 to the Present) Size of the Industry Over 300 Islamic Banks & Financial Institutions worldwide Estimated Assets of up to $750 billion Projected to grow to $1.6 trillion by 2012 Almost 25% of Islamic Financial Institutions operate in Non-Muslim dominated/Western countries Dow Jones/FTSE Islamic IndexSeptember 11, 2011
ROLEROLE OF BANK NEGARA MALAYSIA OF CENTRAL BANK (MALAYSIA example) Islamic Banking Act 1983 Islamic financial system Takaful ActIslamic banksTakaful operators Money market Capital marketNon-bankinginstitutions Supervisory objective • Financial stability • Consumer BNM protection - Separate Malaysia Deposit clearing and Insurance settlement Corporation Customer system Dispute resolution - Liquidity management Judicial system Specific monetary KL Regional policy Arbitration instruments CentreConventional banksInsurance Financialcompanies Money market Capital market MediationNon-banking Bureauinstitutions BAFIA 1989 Conventional financial system Insurance Act 1996
MALAYSIA AT A GLANCE MALAYSIA AT A GLANCE •Population – 26.1 m • Muslim – 15.4 m (59%) • Religion Malaysia is a multi- religious society and Christianity, Buddhism, T aoism, Hinduism and Sikhism are openly & freely practiced.
Categories of Shariah principles– Profit and loss sharing principles • Mudarabah • Musharakah– Fees or charges based principles • Murabahah • Bai mu’azzal • Ijara • Ijara wa-iktina– Free service principles • Qard hassan– Ancillary principles. • Wadiah • Rahn
STAGES OF DEVELOPMENT RECOMMENDED: Gradual and pragmatic approach Milestones Full-fledged Islamic banks, e.g. JAIZ Conventional banks offering Islamic Banking window Islamic subsidiary Islamic money markets Takaful Operators Takaful Operators.. significant milestones in building comprehensive and integrated Islamic financialsystem with diversity of players….
DEVELOPMENTAL FOCUSRECOMMENDED: DEVELOPMENTAL FOCUS Institutional & Regulatory development Enhancement of Product and market knowledge and development expertise Legal and Shariah framework
ENABLING INFRASTRUCTURERECOMMENDED: ENABLING INFRASTRUCTURELegal Ensure legislation exists for Islamic banking institutions to exist side-by-side with the conventional banks. Establish Legal Redress FrameworkShariah Shariah governing committees • National Shariah Advisory Council at Central Bank • Shariah committee at Islamic financial institutionRegulatory Adopt international standards IFSB (Islamic Financial Services Board) AAOIFI (Accounting & Auditing Organisation for Islamic Financial Institutions)
Recommended: Human Capital Development inHuman Capital Development in Islamic Finance Islamic Finance Level of knowledge: Level of knowledge: Focus: Elementary Intermediate & Leadership programs advanced Focus: Short training courses Focus: to meet industry‟s International needs professional certification and post- graduate programs Institution Other s of higher training learning providers Meeting the education needs of all levels of Islamic finance practitioners
CONCLUSION:• Islamic banking is founded on Shariah principles which express an explicit intention to meet the financial needs of participants with integrity and in a manner that is just, fair, trustworthy and honest, while ensuring a more equitable wealth distribution.• Islamic banking upholds the principles of integrity, transparency, fairness and good corporate governance in financial dealings.• "The ethical principle of which Islamic finance is based may bring bankers close to their clients in the true spirit which should mark every financial service..[Osservatore Romano, Vatican Official Newspaper, March 4, 2009. ]• This presentation has been made with utmost sincerity, evensuccess. Good Communication between all stakeholders is key for if limited knowledge, and with the greatest respect to the varying religious sentiments of the audience. The author therefore craves God’s forgiveness & the indulgence of the audience in the event of any unintended error.