Professional Documents
Culture Documents
ISLAMIC ECONOMIC
SYSTEM
Section “A”
Submitted To: Sir Mudassar
Awan
Submitted By:
Economic System
Economic system is a particular set of institutions which deals with
Production
Distribution
Consumption
Of goods and services In a particular society.
Types of Economic System
1. Capitalism
Under this system, the means for producing and distributing goods (land, factories,
technology, transportation system etc) are owned by a small minority of people.
In capitalism the motive for producing goods and services is to sale them for profit
not to satisfy people needs.
In capitalism it is widely assumed that free market economy.
At the present this system is going on almost all over the world.
2. Socialism
Socialism is the collective ownership by all the people of factories, mills,
mines, railroads, land and all other instruments of production.
In socialism the motive for producing for goods and services is to satisfy human
needs, not as under capitalism, for sale and profit.
At present it does not exist in any country of the world in its pure form but recent
past we have seen this system in Russia and China.
3. Mixed economy
In a mix type economy, both the private ownership as well as the state takes
part in a means of production and other types of economic activities.
4. Islamic economic system
Capitalism
Socialism
Mixed economy
Salient Features of Islamic economic system
Man should exploit these resources and things in lawful manner to earn his
subsistence without violating the rights of others.
2. God is real owner of every thing and man is merely a
trustee
The rights given to man are very limited, the real position of man being that
of a trustee and a beneficiary.
3. Every thing created for service and use of man
Many of the things created by God in the earth are of benefit to man directly
or indirectly.
Animals, plants, minerals, metals, water, air, fire, land, river, mountains, sea,
and even sun, moon, stars, day and night, etc. are all for service to man.
4. Concept of Halal and Haram
Islam has introduced concept of Halal (lawful) and Haram (unlawful) in its
economic system.
Certain means of earning livelihood and wealth have been declared unlawful
such as interest, bribery, gambling and games of chance, speculation
Unlawful means of earning are strictly forbidden and a follower of Islam is
permitted to earn through lawful and fair means.
In the field of consumption certain items of food are unlawful such as dead
animals, blood, swine flesh and animals slaughtered in the name other than that
of Allah.
Expenses on certain items such as drinks, narcotics, debauchery,
prostitution, pornography, things that promote obscenity and vulgarity,
lotteries and gambling are strictly inadmissible.
5. System of Sadaqat and Zakat
6. Prohibition of Interest
Charging of interest is a major sin and the usurers have been given the notice
1. Objectives
Achievement of Falah
Circulation of Wealth
Elimination of Exploitation
2. Principles
Principle of Use
Principle of Moderation
Economic Freedom
Principle of Justice
Prohibited Means of Production of Wealth
Interest
Bribery
Embezzlement
Prostitution
Begging
Zakat
Law of Inheritance
Law of Will
Law of Waqf
Charity of Fitr
Monetary Atonements
Charity of Surplus
Prohibitive Measures
Role of Factors of Production (Land, Labour,
Capital)
1. Land
Tenancy or Muzara’a
Irrigation
Dignity of Labour
Rights of Labour
Obligations of Labour
Determination of Wages
Contract of Service
3. Capital
Importance of Capital
Capital Formation
Interest is Prohabited
Duties of Debtors
Duties of Creditors
ISLAMIC MODES OF FINANCING
2) Modarbah
3) Bai Salam
4) Bai Murabaha
5) Bai Muajjal
6) Ijara
In this section we shall discuss the sharii laws governing all the above modes of
financing and their role in the present day with economic perspective.
1. SHARAKAT (Partnership)
Definition of partnership
When two or more persons join to do business with a fixed amount of capital
for the purpose of gaining profit or loss of business according to a fixed ratio.
Justification
“Allah’s (helping) hand is with those partner are not dishonest” (Abu Dawud)
Conditions of Partnership
a) Mutual agreement
b) Maturity of partners
c) Sound mind
Two or more person & enter into a deal in which one party provides capital.
So Bai Salam denotes that mode of transaction or contract of sale in which price
is paid before the delivery of the goods.
The thing soled should be commodity, good or an article, but not currency.
In murabaha no loan advanced but only to sell thing and ownership transfer.
5. BAI MUAJJAL
It is a sale under which the price of the item involved is payable on a deferred
basis either in lump sum or in deferred basis.
The seller has the right to take place profit on the item if that item is at his risk
and not the risk of some one else.
6. IJARA
The literal meaning of the ijara is wages or work denote wages for work.
In interest based economy the bank earns profit by landing out money on low
interest rate.
2) Fixed deposit
3) Saving deposit
b) Advancing loans
1) Short period loans
2) Long period loans
The bank extends loans in three ways:
1) By over draft
2) By cash credit
3) By discounting bills
REASONS
1) Capital
2) Labour
If modarba business earns profit both capital and labour share in profit.
If modarba business results in loss of money, the entire amount of loss shall
be borne by the capitalist.
The success of interest free banking depends on a high level of integrity and honest
dealing because without these the banking system will fail.
DEFINITION OF INTEREST
“Interest is the price which is paid other than the price of loan or capital.”
Holy Quran uses the word RIBA to denote interest. Riba means increase, growth,
addition, raise or excess.
The government of Pakistan established the system of zakat and usher and then
launched the Institution of interest-free Banking. In july 1979 interest-free
banking was introduced in following three institutions:
1) Musharkah
In this mode bank provides finance on the basis of profit and loss sharing.
The profit is shared according to agreed terms and loss is born in the
proportion to the money invested.
The bank can take equity shares in companies and earn profit by purchasing
shares of various companies on the stock exchange.
3) Purchase of participation term certificate and
mudarba certificate
In pakistan PTC have been introduced in place of interest bearing
debenture.
The banks have been permitted to invest in PTC. In addition the
banks are allowed to invest in the shares of modarba companies in
the same way as they purchase the shares of limited companies.
4) Rent sharing
Banks have been authorized to provide finance for purchase of property and
take share in its rent.
ISLAMIC BANKS IN PAKISTAN
Meezan Bank