Islamic Financial System

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Islamic Financial System

  1. 1. ISLAMIC FINANCIAL SYSTEM Md. Nurul Islam Deputy Managing Director Islami Bank Bangladesh Limited
  2. 2. ISLAMIC FINANCIAL SYSTEM <ul><li>TOPICS FOR DISCUSSION: </li></ul><ul><li>01. FUNDAMENTAL PRINCIPLES OF ISLAM: </li></ul><ul><li>02. MAQASID AL-SHARIAH: </li></ul><ul><li>03. THE STRATEGY: </li></ul><ul><li>04. THE ISLAMIC WORLD VIEW: </li></ul><ul><li>05. ISLAMIC FINANCIAL SYSTEM(IFS): </li></ul><ul><li>06. DIFFERENCES BETWEEN CFS & IFS </li></ul><ul><li>07. PRINCIPLES OF AN ISLAMIC FINANCIAL SYSTEM </li></ul><ul><li>08. THE OBJECTIVES ISLAMIC ECONOMICS AND BANKING </li></ul><ul><li>09. PRINCIPLES OF ISLAMIC ECONOMICS SYSTEMS: </li></ul><ul><li>10. DEPOSIT PRODUCTS OF ISLAMI BANK: </li></ul>
  3. 3. Topics for discussion <ul><li>01. FUNDAMENTAL PRINCIPLES OF ISLAM: </li></ul><ul><li> TAWHID (ONENESS AND UNITY OF ALLAH </li></ul><ul><li> ALLAH IS ONE, UNIQUE AND SUPREME </li></ul><ul><li> KHILAFAH (VICEGERENCY) </li></ul><ul><li>THE CONCEPT OF KHILAFAH HAS A NUMBER OF </li></ul><ul><li>IMPLICATIONS OR COROLLARIES. THESE ARE: </li></ul><ul><ul><li>UNIVERSAL BROTHERHOOD </li></ul></ul><ul><ul><li>RESOURCES ARE A TRUST </li></ul></ul><ul><ul><li>HUMBLE LIFE STYLE </li></ul></ul><ul><ul><li>HUMAN FREEDOM </li></ul></ul><ul><li> ADALAH (JUSTICE) </li></ul><ul><ul><li>NEED FULFILLMENT </li></ul></ul><ul><ul><li>RESPECTABLE SOURCE OF EARNING </li></ul></ul><ul><ul><li>EQUITABLE DISTRIBUTION OF INCOME & WEALTH </li></ul></ul><ul><ul><li>GROWTH & STABILITY </li></ul></ul>
  4. 4. ISLAMIC FINANCIAL SYSTEM <ul><li>02. MAQASID AL-SHARIAH: </li></ul><ul><li>MAQASID AL-SHARIAH IS TO PROMOTE THE WELFARE OF THE PEOPLE BY SAFEGUARDING THEIR- </li></ul><ul><li>  FAITH </li></ul><ul><li>  PROSPERITY (DESCENDANT) </li></ul><ul><li> LIFE & INTELLECT </li></ul><ul><li>  WEALTH </li></ul><ul><li>MAQASID (OBJECTIVES OF) AL-SHARIAH </li></ul><ul><li>There have been efforts by jurists to add to the list of these five requisites and also to change their sequence, but it seems that these attempts have, in general, not satisfied most jurists. </li></ul><ul><li>Imam abu ishaq-al-shatibi (d. 790/1388), writing a little less than three centuries after al-ghazali, put his stamp of approval on his list as well as the sequence, thereby indicating that both of these are the most preferable in terms of their harmony with the essence of the shariah. </li></ul><ul><li>All the other requisites may be considered as corollaries of these five as will be indicated in this chapter. </li></ul>
  5. 5. ISLAMIC FINANCIAL SYSTEM <ul><li>03. THE STRATEGY: </li></ul><ul><li>  </li></ul><ul><li> A SOCIALLY AGREED FILTER MECHANISM </li></ul><ul><li>  </li></ul><ul><li> A STRONG MOTIVATING SYSTEM TO INDUCE THE </li></ul><ul><li> INDIVIDUAL TO RENDER HIS BEST IN HIS OWN </li></ul><ul><li> INTEREST AS WELL AS THE INTEREST OF THE SOCIETY </li></ul><ul><li>  </li></ul><ul><li> RESTRUCTURING OF THE WHOLE ECONOMY WITH THE </li></ul><ul><li> OBJECTIVE OF REALIZING THE MAQASID IN SPITE OF </li></ul><ul><li> SCARCE RESOURCES. </li></ul><ul><li>  </li></ul><ul><li> A POSITIVE AND STRONG GOAL-ORIENTED ROLE FOR </li></ul><ul><li> THE GOVERNMENT </li></ul>
  6. 6. ISLAMIC FINANCIAL SYSTEM <ul><li>04. THE ISLAMIC WORLD VIEW: </li></ul><ul><li> INABILITY OF THE CAPITALIST & SOCIALIST COUNTRIES AS WELL AS THE DEVELOPING ECONOMIES TO REALIZE SIMULTANEOUSLY THE GOALS OF BOTH EFFICIENCY & EQUITY </li></ul><ul><li>  </li></ul><ul><li> SOCIAL DARWINISM, SURVIVAL OF THE FITTEST, CLASS STRUGGLE, MAXIMUM WANT SATISFACTION, MATERIAL CONDITION OF LIFE PROVED UNSUCCESSFUL. </li></ul>
  7. 7. MAQASID AL-SHARIAH <ul><li>HUMAN WELL-BEING TO BE REALIZED BY ENSURING THE ENRICHMENT OF THE FOLLOWING FIVE INGREDIENTS FOR EVERY INDIVIDUAL. </li></ul>‘ Aql Intellect Din Faith Nasl Posterity Nafs Self Mal Wealth
  8. 8. ISLAMIC FINANCIAL SYSTEM <ul><li>05. ISLAMIC FINANCIAL SYSTEM(IFS) : </li></ul><ul><li>A financial system that is based on Islamic principles and values, which eliminates Riba and ensure a profit sharing mechanism in the financial system, may be called IFS. </li></ul><ul><li>It may be characterized by the absence' of interest based financial institution & transactions, doubtful transactions or Gharar, Stocks of companies dealing in unlawful activities, unethical or immoral transactions such as market manipulation, insider trading short-selling etc.­ </li></ul><ul><li>06. DIFFERENCES BETWEEN CFS & IFS </li></ul><ul><li>The conventional financial system is of two types. </li></ul><ul><li>1) Socialistic financial system and </li></ul><ul><li>2) Capitalistic financial system </li></ul><ul><li>- both systems have been proved inefficient to establish economic balance in the society. </li></ul>
  9. 9. ISLAMIC FINANCIAL SYSTEM Basis of Difference CFS IFS 1. Religious Belief Secular & separates Religion from other Parts human life Belief in unity of God & relates this belief to economic Life of a man 2. Freedom of Economic Activity In socialism govt. enjoys economic freedom but in capitalism Individuals enjoys freedom. Restrictive freedom is allowed in the light of Shariah both by the govt. &/or individuals 3. Ownership of means Socialism-state ownership, Capitalism-individual ownership Allah is the exclusive owner. Man is the caretaker of the property 4. Goals of financial System Socialism-profit of the society Capitalism-Individual’s profit Welfare of both here and hereafter. 5. Competition Socialism-No competition Capitalism- Logical & unethical competition Logical Competition and financial co-operation 6. Wealth distribution Socialism-Equal Capitalism – Unequal Equitable
  10. 10. ISLAMIC FINANCIAL SYSTEM Basis of Difference CFS IFS 7. Basis of Economic System Riba or Interest Interest Free; PLS, Zakat & Compensation based 8. Sources of the System Intellects brain storming of the economic problems of men’s life Devine book “Al-Quran” & Prophets(SM) speeches 9. Result Capitalism concentration of income & economic power in few hands. Inefficiency Maximum & equitable Distribution of economic opportunities and higher production in the society 10. Social & environmental welfare Do not consider the social & environmental welfare Ensure social & environmental welfare 11. Owners exception in respect of respect of investment Dividend or part of profit in case of equity financing Part of Profit or Loss 12. Lender or Bank’s expectation in terms of dept financing Interest Profit or Loss Sharing 13. Modes of Investment Loan, Overdraft & Cash Credit Mudarabah, Musharaka, Murabaha etc.
  11. 11. ISLAMIC FINANCIAL SYSTEM <ul><li>07. PRINCIPLES OF AN ISLAMIC FINANCIAL SYSTEM </li></ul><ul><li>The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as Shariah, governing economic, social, political and cultural aspects of Islamic societies. Shariah originates from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad. Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the framework of the Quran and Sunnah. The basic principles of an Islamic financial system can be summarized as follows: </li></ul><ul><li>  </li></ul><ul><li>Prohibition of interest : Prohibition of Riba, a term literally meaning &quot;an excess&quot; and interpreted as &quot;any unjustifiable increase of capital whether in loans or sales&quot; is the central tenet of the system. More precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of principal (i.e.) guaranteed regardless of the performance of the investment) is considered Riba and is prohibited. The general consensus among Islamic scholars is that Riba covers not only usury but also the charging of &quot;interest&quot; as widely practiced. </li></ul>
  12. 12. ISLAMIC FINANCIAL SYSTEM <ul><li>This prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined ex post, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a cost that is accrued irrespective off the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards s well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity. </li></ul><ul><li>  </li></ul><ul><li>Risk sharing : Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits. </li></ul>
  13. 13. ISLAMIC FINANCIAL SYSTEM <ul><li>Money as &quot;Potential&quot; Capital : Money is treated as &quot;Potential&quot; capital -that is, it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is &quot;Potential&quot; capital. </li></ul><ul><li>Prohibition of speculative behavior : An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks. </li></ul><ul><li>Sanctity of contracts : Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard. </li></ul><ul><li>Shariah approved activities : Only those business activities that do not violate the rules of Shariah qualify for investment. For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited. </li></ul>
  14. 14. ISLAMIC FINANCIAL SYSTEM <ul><li>The Objectives Islamic Economics and Banking </li></ul><ul><li>The Objectives of Shariah </li></ul><ul><li>The very objective of the Shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity, and their wealth. Whatever ensures the safeguarding of these five serves public interest and is desirable. (AI-Ghazali) </li></ul><ul><li>The-basis of the Shariah is wisdom and welfare of the people in this world as well as the Hereafter. This welfare lies in complete justice, mercy, well being and wisdom. Anything that departs from justice to oppression, from mercy to harshness, from welfare to misery and from wisdom to folly, has nothing to do with the Shariah (Ibn AI-Quayyum). </li></ul><ul><li>Definition of Economics </li></ul><ul><li>Prof. L. Bobbins -“Economics is a science which studies human behavior as a relationship between ends end scarce means which have alternative uses. </li></ul>
  15. 15. ISLAMIC FINANCIAL SYSTEM <ul><li>Definition of Islamic Economics   </li></ul><ul><li>1. Islamic Economics is that branch of knowledge which helps realize human well-being through an allocation and distribution of scarce resource that is in conformity with Islamic teachings without unduly curbing individual freedom or creating continued macro-economic and ecological imbalances- Oman Chapra. </li></ul><ul><li>2. Islamic Economics aims at the study of human falah achieved by organizing the resources of the earth on the basis of co-operation and participants (Muhammad Akram Khan). </li></ul><ul><li>3. Islamic Economics is the Muslim thinker's response to the economic challenges of their times. In this Endeavour they are aided by the Quran and the Sunnah as well as by reason and experience- M Negatullah Siddiq. </li></ul><ul><li>4. Islamic Economics is the science of how man uses resources and means of production to study his worldly needs according to a predetermined code given by Allah (SWT) in order to achieve the greatest equity- Princes Muhammad Al-Faisal Soud. </li></ul><ul><li>5. Islamic Economics is a social science which studies the economic problem of the people imbued with the values of Islam. It is a composite social science which studies the problem of production, distribution and consumption through integrative system of exchange and transfer overtime and their social through integrative system of exchange and transfer overtime and their social and moral consequences in the light of Islamic rationalism. It assumes the presence of Islamic man. M.A. Mannan. </li></ul>
  16. 16. ISLAMIC FINANCIAL SYSTEM <ul><li>Objectives of Islamic Economics </li></ul><ul><li>  </li></ul><ul><li>1. To establish justice in the Economy (5:58) (16:90), Nahal, Nisa) </li></ul><ul><li>  </li></ul><ul><li>- Surely Allah enjoins justice and the doing good (to others) (16:90 Al-Nahal) </li></ul><ul><li>- Whenever you judge between people, you judge with justice 5:58 (An-Nisa) </li></ul><ul><li>  </li></ul><ul><li>2. To protect the interest of the deprived and the oppressed. (28:5) (Kisas) </li></ul><ul><li>- And we desired to bestow a favour upon those who were deemed weak in the land, and to make them the leaders, and to make them the Heirs 28:5 (Al-Qasas) </li></ul><ul><li>  </li></ul><ul><li>3. To establish good practices and institutions in the economy and to eliminate bad practice and bad institutions from Economy (22:41) </li></ul><ul><li>- [Well aware of] those who, if we firmly establish them in the land (on earth) will keep up prayer (remain constant prayer) and give in charity and enjoin good and forbid bad 22:41 (Al-Hajj) </li></ul>
  17. 17. ISLAMIC FINANCIAL SYSTEM <ul><li>4. To make life easy and bearable (7:157) </li></ul><ul><li>  </li></ul><ul><li>5. To ensure full utilization of resources. </li></ul><ul><li>6. Proper of distribution of wealth and Resources. </li></ul><ul><li>  </li></ul><ul><li>7. Maximum production of useful production. </li></ul><ul><li>  </li></ul><ul><li>8. Bring stability in the value of money and exchange rates </li></ul><ul><li>  </li></ul><ul><li>9. Ensure economic efficiency and accelerated rate of growth </li></ul><ul><li>  </li></ul><ul><li>10. Ensure broad based economic well being, balanced monetary expansion </li></ul><ul><li>and full employment. </li></ul><ul><li>  </li></ul>
  18. 18. ISLAMIC FINANCIAL SYSTEM <ul><li>Principles of Islamic Economics Systems: </li></ul><ul><li>1. Sole purpose is to obey and please Allah. </li></ul><ul><li>2. The wealth and asset in all their forms given under trust by Allah. </li></ul><ul><li>3. Moral values and guiding factors for all Economic activities. </li></ul><ul><li>4. Maximum equitable utilization of human and material resources given by Allah </li></ul><ul><li>5. Human dignity and respect of Labour. </li></ul><ul><li>6. 'Maximum freedom for economic activity within a just framework. </li></ul><ul><li>7. Equitable distribution of wealth and income and disciplined private ownership. </li></ul><ul><li>8. Simplicity economy and austerity in expenditure. </li></ul><ul><li>9. Adal and Ihsan (Justice and kindness). </li></ul><ul><li>10. Strict prohibition of Riba, Interest and Usury in all forms. </li></ul>
  19. 19. ISLAMIC FINANCIAL SYSTEM <ul><li>Definition of Islamic Bank </li></ul><ul><li>&quot;An Islamic Bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations&quot; - OIC </li></ul><ul><li>Dr. Ziauddin Ahmed'- &quot;Islamic Bank is essentially a normative concept and could be defined as conduct of &quot;banking in consonance with the ethics of the value system of Islam.“ </li></ul><ul><li>Objectives of Islamic Bank </li></ul><ul><li>a. All it's activities are conducted on interest-free system according to Islamic Shariah. </li></ul><ul><li>b. Investment is made through different modes permitted under Islarnic Shariah. </li></ul><ul><li>c. Investment-income of the Bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonably fair rate of return on their deposits. </li></ul><ul><li>d. Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities. </li></ul><ul><li>e. It extends Socio-economic and financial services to the poor, helpless and low-income group of the people for their ecanomic upliftment particularly in the rural areas. </li></ul><ul><li>f. It plays a vital role in human resource development and employment generation particularly for the unemployed youths. </li></ul><ul><li>g. Its aim is to achieve: balanced growth & equitable development of the country through diversified investment operations particularly in the priority sectors and in the less developed areas. </li></ul>
  20. 20. ISLAMIC FINANCIAL SYSTEM <ul><li>Deposit Products of Islami Bank: </li></ul><ul><li>1.Al-wadeeah Current Deposits </li></ul><ul><li>2. Mudaraba Savings Deposits </li></ul><ul><li>3.Mudaraba Special Notice Deposits </li></ul><ul><li>4.Mudaraba Term Deposits </li></ul><ul><li>5.Mudaraba Hajj Savings A/c </li></ul><ul><li>6.Mudaraba Savings Bond </li></ul><ul><li>7.Mudaraba Special Savings Scheme </li></ul><ul><li>8.Mudaraba Monthly Profit Dep. Schemes(MMPDS) </li></ul><ul><li>9.MUDARABA MUHOR SAVINGS A/C </li></ul><ul><li>10.Mudaraba Waqf Cash Deposit A/C </li></ul><ul><li>11.Mudaraba Savings Deposits(RDS) </li></ul>
  21. 21. ISLAMIC FINANCIAL SYSTEM UNDER CAPITALISM UNDER ISLAM 1. Economic Laws are like physical laws 1. Economic laws are like natural laws 2. Positivism: Economics is a positive science as like as biology, physics which have no value, value neutral 2. Economics is value oriented. Permissible & prohibition have to be observed 3. Motive for More: Pecuniary interest. Man is rational economic being. Survival of the fittest, destruction of the poor 3. Man does not work for only personal interest. He has to secure the interest of this world & the world hereafter. 4. Market Oriented: Market can solve all the problems. Poors’ need is not reflected in the market. Demand is backed by purchasing power. Result is the mismatch in resource allocation. 4. Market can solve major problem but not all. At least 20% economic problems to be solved by the government. Communism prescribes 100% solution by government. Capitalists leaves it 100% to market. 5. Little concern for poor humanity 5. Major concern for poor. Poverty alleviation by Zakat, Sadaqa & gives emphasis on economic progress 6. Nearly 100 corporate of ¾ countries control the world economy in the name of globalization. 6. No concentration of wealth in few hand. Wide dispersal of wealth & property 7. 18-20% people in B angladesh live below poverty line (not getting two meals a day) 7. None can live below poverty line if Islamic economic system is established

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