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THE ECONOMIC AND FINANCIAL SYSTEM OF ISLAM
Group members: Muhammad Omer (16089) Muhammad Tariq (13166)
THE ECONOMIC AND FINANCIAL SYSTEM OF ISLAM
Course Islamic Jurisprudence
Submitted to Dr.M. Nawaz
Submitted by Muhammad Omer Muhammad Tariq
Date of submission Sunday, May 08, 2011
M Nawaz. Nawaz for guiding us through out the semester and help us understand the concept of islamic jurisprudence. whose countless efforts to teach us the basic fundamentals of Islamic jurisprudence and lead us towards the understanding of Islamic economic and financial system. without all these understanding that we learn in this course we could not be able to complete this report . My deepest thanks to Dr M.3 Acknowledgement This project report could not be completed without the immense support of our lecturer Dr.
Allaah will make a path to Paradise easy for him.4 HOLY PROPHET (SAW) Said: Whoever follows a path in the pursuit of knowledge." (Al-Bukhaari) .
grounded in Sharia's condemnation of interest (Riba). it is equally concerned about their material and physical well-being. and that we are merely His trustees. on a note from the lender] is among the good works that are particularly recommended in the verses of the Quran and the in the Traditions. Islam guides its followers in financial and economic matters. An example of the traditionalist ulama approach to economic issues is Imam Khomeini's work Tawzih al-masa'il where the term `economy` does not appear and where the chapter on selling and buying (Kharid o forush) comes after the one on pilgrimage. and consumption of goods and services. Islam has given detailed regulations for our economic life. and also in moral and personal spheres of human life. The principles of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly. the work "presents economic questions as individual acts open to moral analysis: `To lend [without interest. Islamic economics refers to the body of Islamic studies literature that "identifies and promotes an economic order that conforms to Islamic scripture and traditions." and in the economic world an interest-free Islamic banking system. and material goods are the property of God.5 The Economic and financial System of Islam What is Islamic Economics? Islam is a complete way of life. As Olivier Roy puts it. It is not only concerned with the spiritual upliftment of human beings. in social and political affairs. Traditional approach While many Muslims believe Islamic law is perfect by virtue of its being revealed by God. Islamic law on economic issues was/is not "economics" in the sense of a systematic study of production. which is balanced and fair. and Allah's Guidance extends into all areas of our lives. . Islam is an entire way of life. Islamic economics aims at the study of human recovery achieved by organizing the resources of earth on the basis of cooperation and participation. Muslims are to recognize that wealth. distribution. earnings.
It provides us the security of our money and other property plus give us halal profit as islam prohibited us for consuming iterest and considered it as riba Islamic Economic system is based on four principles All wealth belongs to Almighty Allah Man is the trustee of the wealth Hoarding of wealth is prohibited Wealth must be in circulation at all time The Islamic economic system is based upon the belief that only Allah is the real and actual owner of everything. The chance of such a situation is very real.It not accept the concept of effective scarcity of resources.". Islam also wants to prevent the excessive accumulation of wealth in the hands of a few people so the society may not fall into two classes: one is overstuffing. But God has also implanted the concept of ownership in our nature. we are allowed to "own" the wealth of this world..It differ to application of capitalists & communists system for production. Islamic Economic demands three main principles to be followed by an individual in his day-to-day affairs and problems.so that (the wealth) may not become a monopoly of the rich among you. hungry and homeless people will bear us out. QYAS (Discussion) AMAL (Act)."Whatever is in the heavens and the earth belongs to Allah. Holy Quran identify resources in sufficient.." (2:284) Allah is the owner of the whole universe. It is in this capacity that He has allowed us to own the blessings of this world by saying. unlimited and number of qualities to fulfill basic needs like food. clothing and shelter for over fifty billion human beings at all time. IJMA (Gathering). . while the other is starving."(2:29) However. A look at one of the richest nation in the world.Islam differentiates between basic needs and luxuries. Islam specifically considers distribution as economic problem."He has created for you whatever that is in the earth. and its problem of the poor. the United States of America. The Qur'an says. and thus." (59:7) For any activity and for all purpose.6 Islamic economic and financial system is the most secure system in the world. The Qur'an justifies the concept of tax by saying.
originated by man-made laws and systems. In Islamic Economics public revenue from natural resources used to secure needs of community and not to fill pockets of casino owners. poverty. It guides maintaining of wealth in proper form of distribution & incentive on work and efforts. which has led to the situation of survival of the large part of the society. income. It resulted from misdistribution. Basic Components of Islamic Economic The Islamic economy is composed of three basic components The principle of adaptable ownership . Matters pertaining to money must be fare and transparent and useful for developing socio-economic life of the community. & economic backwardness. It clearly denies "free" market of Capitalism. Who gets most out of these resources? Blocks wealth to cross their jurisdictions Remain in between privileged society. and distribution of wealth & utilization of these same. Islamic Economic eliminate monopoly of a group or individual who Keep a control on world monetary polices. This is classified as Capitalist form of Economy that protects the class of influence and privileged. The financial matters in the human life play a vital role It identifies principles of finance including earnings. It show opposition & defend against misuse of exploitation in getting hold of wealth through unfair means.7 Conventional economics misguide this reality with starvation. It does not impose any limits on amount of wealth that an individual can acquire.
In many situations. specific taxes and tax systems are prescribed. degrading. Thus. or contradicting these prescriptions could prove catastrophic to the developmental policies and policy-making institutions in Muslim societies. their underlying philosophy. disregarding. familiarity with and understanding of the Islamic taxes. monopoly. like holdings. The public ownership. Men have no right to possess unlimited wealth and desire to obtain wealth by any means and way he may choose of his like. Such social and economical activities fall under the categories of Riba. Under Islamic jurisprudence. The state ownership. Taxation in Islam Taxes and tax systems are among the most potent policy tools at any policy makers’ disposal. Principle of Economic Freedom within a Defined Limit Islamic law is the source that that prohibits all such social and economic activities that differ to the teaching of Islam and the principles and values that are approved by Islam. and the overall tax system are imperative for both decision makers in the Muslim world. The state must protect and safeguard the public interest through the control on individual freedom in the illegal and non-permitted actions they involve due to which the economic activity of the community and society suffer. Islamic law permits three types of ownership. The individual ownership. gambling and speculation It clearly defines principal on which ruler of an estate sworn in for the supervision of general activities and intervenes in anti Islamic economic activities. as well as all outsiders .8 The principle of economic freedom within a defined limit The principle of social justice. tax policies can foster or hinder the plan in its entirety. Right is given to every member of the society by appointing each one is a guardian of the public trust and the ownership is limited for the public welfare and in the betterment of mankind. Accordingly. their impacts.
and the production. and those who witness such a contract. those who write a contract based on it. Accordingly.9 who deal with these communities. "And let those who covetously withhold of the gifts which Allah has given them of His Grace. those who receive it. "Those who devour usury will not stand.Allah has permitted trade and forbidden usury.. It is reported that the Prophet Muhammad (peace be upon him) cursed those who pay interest. "To orphans restore their property (when they reach their age). and distribution of alcohol. Do not substitute your worthless things for their good ones. but will give increase for deeds of charity. That will be best for you. theft. Allah will deprive usury of all blessing. prior to devising or implementing any plan or policy. that you may prosper" (Qur'an 5:90). what are the Islamic taxes? What philosophy they subscribe to? What aims and policies do they pursue? What outcome do they seek? What are their impacts? What are their institutional requirements? Can they be integrated into modern tax policy and systems? Are they subject to changes and revisions? And so forth.. The second installment on this work will discuss the methodology and philosophy of Islamic taxation and will engage in their critical analysis and assessment. But fear ALLAH ALMIGHTY that you may really prosper" (Qur'an 3:130) this prohibition is for all interest-based transactions. or other falsehoods. ". if you have faith" (Qur'an 7:85).. And do not do mischief on the earth after it has been set in order. deceit. The current study is an attempt to address some of these and similar questions. It is particularly hateful for a guardian to take from an orphan's property. doubled and multiplied. lotteries." (Qur'an 2:275-6). it lays the foundations and presents the origin. sacrificing to stones. and do not withhold from people the things that are their due.. is a descriptive explanation of Islamic taxes. Forbidden are earnings from gambling.. The task will be carried out in two installments. Everyone should take what they need and no more. For instance. Eschew such abomination. think .. the structure. and do not devour their property by mixing it up with your own.Give just measure and weight. the present paper. sale. many questions must be answered.. and the basis of Islamic taxes.. For this is indeed a great sin" (Qur'an 4:2). "O you who believe! Intoxicants and gambling.. and divination by arrows are an abomination of Satan's handiwork. Part one. It is forbidden to gain property or wealth by fraud. To enhance the possibility of success. It is unlawful to hoard food and other basic necessities. Muslims are not to deal in interest. "O you who believe! Devour not usury.. whether dealing with Muslims or non-Muslims. whether giving or receiving.
A Muslim should be responsible in spending money. appearing only in the mid-1980s. No. and the sanctity of . offering Him sincere devotion. on the Day of Judgment. Extravagance and waste are strongly discouraged. many concepts. and Allah is wellacquainted with all that you do" (Qur'an 3:180). "[The Servants of Allah are] those who. for Allah loves not the wasters" (Qur'an 7:31). Whereas ALLAH ALMIGHTY. but waste not by excess. but hold a just balance between those extremes" (Qur'an 25:67). prohibiting the receipt and payment of interest is the nucleus of the system. Eat and drink. but it is supported by other principles of Islamic doctrine advocating risk sharing. techniques. and to make sure that everyone's needs are met. "And they have been commanded no more than this: to worship ALLAH ALMIGHTY. Every Muslim who owns wealth. property rights. individuals’ rights and duties. To establish regular prayer. the term “Islamic financialsystem” is relatively new." What is Islamic finance? Islamic finance was practiced predominantly in the Muslim world throughout the middle Ages. with Him is the highest reward. In fact.10 that it is good for them. being true in faith. In fact. Soon it will tied to their necks like a twisted collar. and spend in charity for the benefit of your own souls. fostering trade and business activities with the development of credit. The Prophet Muhammad once said that "nobody's assets are reduced by charity. must pay a fixed rate of Zakat to those in need. and instruments of Islamic finance were later adopted by European financiers and businessmen. Muslims are encouraged to give constantly in charity. Muslims must pay Zakat (alms). Zakat is a means of narrowing the gap between the rich and the poor. are not extravagant and not stingy. they are the ones that achieve prosperity" (Qur'an 64:15-16). and to give zakat. And those saved from the selfishness of their own souls. when they spend. describing the Islamic financial system simply as “interest-free” does not provide a true picture of the system as a whole. Islamic merchants became indispensable middlemen for trading activities. all the earlier references to commercial or mercantile activities conforming to Islamic principles weremade under the umbrella of either “interestfree” or “Islamic” banking. it will be the worse for them. So fear Allah as much as you can. However. more than a certain amount to meet his or her needs. To Allah belongs the heritage of the heavens and the earth. "O Children of Adam! Wear your beautiful apparel at every time and place of prayer. In Spain and the Mediterranean and Baltic states. And that is the religion right and straight" (Qur'an 98:5). "Your riches and your children may be but a trial.In contrast. Undoubtedly. listen and obey.
to enhance equality and fairness for the good of society as a whole. Interpreting the system as “interest free” tends to create confusion. The philosophical foundation of an Islamic financial system goes beyond the interaction of factors of production and economic behavior. This instrument is partly backed by durable assets and its income is not predictable. and the role of the state. Types of Islamic Financial Instruments Demand for monetary instruments is influenced by the variation and level in the market rate what is meant as the market rate of return. Type "A" is a financial claim of monetary value with recourse to underlying durable assets and related cash flows. social. not only to avoid loss but also to obtain gains in the capital value of financial assets under the expectation that the market rate of return may move in a certain direction. the Islamic system places equal emphasis on the ethical. Banks need these instruments for: 1. the instrument passes title to the goods and not to the debt. and. Whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions. and all types of financial intermediation. is marketable and can be discounted since with the changing of hands. transaction purposes. It is basically lease-based. but evaluated through an asset valuation process at the end of an agreed and declared duration. moral. 2. only a "financial claim" changes hands in the form of a promissory note or a title to any future flow of income adjusted for any capital appreciation. and religious dimensions. precautionary purposes. The system can be fully appreciated only in the context of Islam’s teachings on the work ethic. capital markets. Basically there are the following four types of Islamic financial instruments: A. B.11 contracts. social and economic justice. Some of the instruments also represent ownership of the underlying assets together with a claim to underlying cash flows. What differentiates a traditional financial market from others markets is that no tangible good or service is exchanged for any monetary consideration. 3. Not all Islamic instruments are purely financial claims. Similarly. The demand for household monetary instruments is mainly for the purpose of circulation of income. The underlying . in that some unexpected payments have to be made while some expected inflows may not be forthcoming on their due date. wealth distribution. the Islamic financial system is not limited to banking but covers capital formation. This type has a predictable future income stream.
fixed. musharaka etc. May Peace Be upon Him. silver. or commodities quoted on exchanges. . guaranteed regardless of performance of the investment considered Riba Risk Sharing Because interest is prohibited. Basic principles of Islamic financial system Prohibition of Riba in Financial Practice Any unjustifiable increase of capital whether in loans or sales is central belief of system. Any positive. This Type may be traded in the secondary market at its fair market price acceptable to the parties involved but not discounted. Money as "potential" capital The provider of financial capital and the entrepreneur share business risks in return for shares of the profits. explained in Hadiath (Prophet May Peace Be upon Him sayings) and practiced by Muhammad. C. The instrument entitles the holder to take delivery of the underlying asset but does not carry any attached revenue stream except that its price is pegged to the price of the underlying precious metal or commodity quoted at recognised international exchange rates.e. The Type may be traded at its face value declared at the end of each accounting period but cannot be discounted.. Two Financial Systems for Monitory & Financial Markets First system which base on RIBA means bad earning. The Type "D" is purely a financial claim of monetary value but with recourse to certain precious metals such as gold. platinum. D. Income is evaluated through an asset-valuation process at the end of an agreed and declared period.. It can be traded but not discounted. suppliers of funds become investors instead of creditors. istasna etc. contracts. Type "C" is purely a monetary claim to an expected income stream forthcoming from underlying commercial transactions. A transaction of this type may comprise morabaha. commonly known as Interest (Price of Money and a part of Riba). Second system emerged on factual and authentic principles of Islam on the guidance of Holy Quran.. contracts which are debt claims against third parties in respect to actual commercial transactions.. modaraba. predetermined rate tied to maturity and amount of principal (i. last and most Honored and Blessed messenger of Almighty ALLAH. etc.12 transactions can be a mix of ijara.
and risks Transparency of contract Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of information and moral hazards.13 Money is treated as "potential" capital It becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money. For example. any investment in businesses dealing with alcohol. but only when it acts as capital. Capital to invest in productive manner that increases the profits. Interest is prohibited in Islam and people are not allowed to make money by leading their capital on interest. gambling. Western economist Keynes defined "Interest has nothing to do with influencing volume of savings. gambling. Practically it is rate of return on investment that determines rate of saving” Holy Quran and Riba Holy Quran clearly inform that . and casinos would be prohibited The concept of riba in Islam Riba is an earning on lending of money by lender from Brower on condition that lender shall charge a fixed amount of money in addition to the principal. not when it is "potential" capital Prohibition of speculative behavior An Islamic financial system discourages exhibition of wealth and prohibits transactions featuring extreme uncertainties. Shariah-approved activities Only those business activities that do not violate the rules of Shariah qualify for investment.
Interest is the price of money whereas money is just an intermediary between exchanges of transaction. This compulsory return. which eradicates human satisfaction and frustrates its civilized and neutral developments. “No Islam exists in a place where there is Riba based system” Riba based system is a misery on humanity as faith. morals or imagination of life. Nothing is more horrific as compare to Riba that Islam has prohibited. 1. It is the most hateful system. demanded for assistance and need of money from the user by the lender”. Interest is one of the categories among them. that remains in widespread threatening to socio economic activities in both theory and practice. Classifications of Riba Some of the categories are mention and clearly defined in Islamic Economics. 2. cultural. Islam has complete ethical system supported by realistic system as interlink. upon principal amount. is an Interest. 3. moral. Ethnics & reality cannot separate in Islam & cannot be practice alone. . whereas Interest categorized as one of elements of Riba. Nothing more dreadful than Riba. economical. Riba is as a combination of evil & sins. Islam strictly prohibits these as well as society disregard them due to their dreadful effect on social. There are many categories of Riba. earning on a fixed term & fixed percentage. : Fundamental Facts on Riba The bases of Islamic thoughts have a conflict directly with the Riba based system. Islam has clearly stated benefits of followings of ethics & reality and followers follow in daily life. financial and legal life styles of the society. but also in every core of economic and practical life. Riba is bad practice to earn & gain while Interest is price of Wealth. income.14 It is clearly indicated that Riba must be eliminating from the financial transactions.
15 Successful Islamic economics does not rise without Ethics which cannot be separate to reality of life and its rational approach. Riba provides an individual a feeling that he is free to enjoy his wealth without abiding . In return. Such transaction has the involvement of exploitation and injustice on any one’s part of the two.Riba establishes a feeling of liberty among humans for ways and means of obtaining wealth. rupee for a rupee. Types of riba Riba al nasseieah Riba al Nassieah practice before Islam because as the man had to pay his money to another for a pre agreed period. he took from him a certain amount every month without taking the principal amount. selfishness. Practical life of people cannot prosper without proper ethics. Riba Al fadi A man sells an article in exchange of another article having same quality and nature with an increase or decrease as like gold sold for gold. Today investing the capital on minimum risk based over guaranteed return is commonly practice for the funds received as deposit. culture and the relationship by spreading the spirit of greed. he asked him for his capital and if he was unable to repay he increased in his fund and the term of repayment. sneakiness and gambling in general. Money lent on higher Interest (Riba) does not grow useful projects but seeks the most lucrative opportunity even if profit comes from the lowest nature and the meanest tendency. corn for corn and barley for barley. It also corrupts the human life. interest (Riba) is repaid at lower to the depositor’s investment and higher to investment managers or vis-à-vis. Thus. When date of payment came. encouraging them to adopt more unfair means t multiply it. and investing on risk and return. Riba practices corrupt the individual’s ethics. behavior. and feelings towards community and the society. This kind is considered as Riba as commodities are similar to each with different values not ascertain.
The worker is called Modarib. the financier loses the money used to finance and the worker loses his time. efforts and talent. The history of Modaraba reveals that the business under the concept of Modaraba was in practice before the rise of Islam.16 the contract of faith and trust in Almighty Allah or obeying any condition as holder of wealth. profit is divided according to the agreement. In Islamic jurisprudence. the financier is called Rab-Al-Maal. Upon the maturity. In case of loss the Financier looses the Capital Investment and Skill lose its Time. IBNE GHAZI says Modaraba is permissible as an exception to Gharar (fraud) and unknown remuneration . Modaraba is a contract between persons. Profit sharing is agreed upon beforehand at a predetermined ratio. In case of loss. through which finances are given for trading or manufacturing purpose. and between institutions. The owner of money. Qiyas is only allowed in accordance with the teachings of the Holy Quran. emerging from Italian city of Rome. According to Fuqaha Modaraba It is a partnership contract between two parties. which was the center for trade and culture in the Christian world. which will either be equal or one third. Fuqaha had invalidated Modaraba on the basis of Qayas (wages). for which he is not bound to keep the interest of others Riba Free Mode of Financing Modarba Three names with an ancient background of transactions used for economic activities classified as business activities under a contract of “Money and Ability”. Sunnah and the Ijma IBNE TAYMIYA Modaraba is valid on the basis of Qayas. the other shares his time and skill for a specified project or transaction. in proportion. between persons and institutions. Al KASSANI says Modaraba becomes invalid if it is on the basis of Qiyas as it involves an unknown salary for an unknown amount of work. Efforts and Reputation. persons or organizations in which one brings the capital.
There will be no return for Modarib if a profit does not result in the transaction. different scholars have interpreted them differently. As the Modaraba mode penetrated in the economic activities and Shariah accepted the mode. Musharka is a technique of financing used as a partnership. All partners have a right to participate in managing the project. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. silver and precious metals are not permitted for the capital of Modaraba Musharka Musharka or Shirkah can be defined as a form of partnership where two or more persons combine either their capital or labor together to share the profits & enjoying similar rights and liabilities. SAMARKANDI has given his views that capital should consist of consummate value. Any one can waive the right of participation in favor of partner or partners. Two or more parties provide finance for a project. The Arab society at the time of the rise of Islam had very simple financing methods and forms of business peculiar to that society Birth of Islam saw Musharka practice in Arabia in commercial activities. In case of loss Rab-al-Maal has the right to investigate the cause of loss.In case of loss it is shared exactly in the proportion of capital. Even gold. It differs because money is the main objective in Modaraba and work in the second. financier can claim the financing. in case of any negligence or misappropriation or a purposeful mistake by the Modarib. Rab-al-Maal (the financier) does not have to take an active part in the daily operations as in the case of employment. Two main form of musharka Permanent Musharka .17 Modaraba falls in the partnership type of contract. which has a vague similarity to Mufawadah. Here is the reason: Modaraba transaction with paper currency is permissible. whereas. Though rules and conditions of Modaraba are in accordance with the teachings of the Holy Quran and Sunna. scholars laid down Modaraba conditions & rules.A contract between two or more persons who launch a business or financial enterprise to make profit.
Partners gets dividend on their equity and if any of the partner sell or buy other partner some of its equity. it could be informal and oral. Diminishing Musharka It allows equity participation on a pro-rata basis system by which equity of parties keeps on reducing ultimately the ownership of the asset on any one or more participants is transfers. however.This technique suits for long terms projects as funds and development are committed and protracted. be shared in proportion to the capital contribution.The period of contract is not specified. It is Shirkah al-Milk Ikhtiyariyyah (voluntary). It is a proper partnership as the parties concerned willingly entered into a contractual agreement for joint investment and the sharing of profits and risks Shirkah al-Uqood (contractual partnership) The agreement need not necessarily be formal and written. Just as in Modaraba. it is allowed to do so. Type of musharka Shirkah -Al-Milk (non-contractual) It involves co-ownership and form when two or more persons get joint-ownership of some asset without a formal partnership agreement. Losses must. the profits can be shared in any equitably agreed proportion. It can continue so long as the will of the parties. If it is indivisible and they are forced to stay together it is characterized as Jabriyyah (involuntary). In Fiqh Shirkah al-Uqood divided into four kinds: .18 In this form the parties of Musharka participates in the equity of a project or transaction and receives a share of profit on a pro rata basis. Example Two persons receiving an inheritance or a gift of property which mayor may not be divisible? Partners have to share property or its income in accordance with their share until they decide to divide. If the property is divisible and partners still decide to stick together.
influenced by the business practices. The details are. Ijara . credit-worthiness and Mufawadah) In Mufawadah partners are adults. however. their ability to undertake responsibility and their share of profits and losses. however. Partnership rules framed by the government. Its commercial activities are influenced by the practices prevailing in the business community. Business practices prevailing in the business community. provided that such liabilities have been incurred in the ordinary course of business. considerably different due to change of Urf and other factors including modem commercial techniques. 2. They have full authority to act on behalf of the others jointly and severally responsible for the liabilities of their partnership business.19 Al-Mufawadah (full authority & obligation) Al-Inan (restricted authority & obligation) Al-Abdan (labor. economic conditions and legal requirements. which are those of Shirkah al-Inan. Cooprative society This Musharka is also governed by statutory rules. The modern Musharka principally resembles Shirkah al-Inan. Limited company This type of Musharka is strictly controlled by the statutory rules framed by the government its commercial activities are. Other types of Musharka mentioned by jurists are nearly obsolete nowadays. Let us discuss briefly the conditions of Musharka. Each partner can act as an agent (Wakil) for the partnership business and stand as surety or guarantor (Kafil) for the other partners Modern Musharka and its Conditions The modern business concerns being run on the basis of Musharka Partnership: It is regulated by Partnership: It is regulated by1. equal in their capital contribution. skill and management) Al-Wujuh (goodwill.
then it can be used for any purpose for which it is used in normal course Lessee as Ameen The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence. wheat etc. at an agreed consideration Subject of lease Valuable.20 “Ijara (leasing) is the contract in which asset is transfers to user for an agreed period on an agreed consideration” Basic rules Transferring of usufruct not ownership To another person for an agreed price. Lease of jointly owned property . Identifies and Quantified Consumable things cannot be leased out Anything which cannot be used without consuming cannot be leased out. All Liabilities of ownership are borne by lessor Corpus of leased property remains in the ownership of the seller. e.g. The leased asset shall remain in the risk of the lessor throughout the lease period. Period of lease Must be determined in clear terms at the time of contract Lease for specific purpose only If no specific purpose is identified in the agreement. money..
If the supplier has delayed the delivery after receiving the full price. Hence.It is permissible that different amounts of rent are fixed for different phases during the lease period. the lessee should not be liable for the rent of the period of delay. Sale and lease back When the client sells the asset to the bank the entire risk and rewards are transferred to the bank who is then is responsible for the ownership related expenses. The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor. Different relations of the parties There are two separate relations between the institution and the client: one of an agent and the other of a lessee. The commencement of lease Unlike the contract of sale. In this case the bank is allowed to lease the asset to the client but there are conditions which have to be followed to make the entire transaction Sharia compliant. There should be at least one year lease period . 4.21 Is permitted and rentals shall be distributed between all the joint owners according to the proportion of their respective shares in the property. Ijara as a mode of financing 1. as normally done in financial leases. Rent should be charged after the delivery of the leased asset to the lessee And not from the day the price has been paid. provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease. the agreement of Ijarah can be effected for a future date. it is different from Murabaha. 3. 2. Determination of Rental The rental must be determined at the time of contract for the whole period of lease. is not against the rules of Shariah.
. How clean this system is. It shows how efficient this system is working.no one is ready to invest their money because of uncertainity in situation. its not only teaches us how to live the basic life. Islam the best and save religion of the world and Islamic system is also considered to be the best and secure system.22 There should be separate contracts for sale and lease The agreement to sell at the end of the lease must be separate The intention of the client is to avoid interest related transactions Islamic way of living a life is the ultimate way. the islamic finanical system is working ate their best. In the western countries they are shocked to see the growth in Islamic financial system when whole world is facing crises. big business has been shutoff . but it also teaches us the concept of business through Islamic economic and financial system. In Islamic economic system the line between the halal and haraam is clearly explained and defined. This is the best economic and financial system in the world and it will remain the best system because it’s a concept of Islam. No concept of riba is providing the strenght that is reuired to run the financial system effectively. big multinational firms are in a state of stress because of financial crises. Today we see when whole world is suffereing from cash deficit.
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