PFS2253 ISLAMIC FINANCE

CHAPTER 1
NATURE OF ISLAMIC ECNOMIC SYSTEM
CHAPTER OUTLINED
• Overview of Conventional and Islamic Economic
• Early development of Islamic Economics
• World Economic and Islamic Economic System
• Introduction to Islamic Finance
• Basic principles and objectives of Islamic Banking
• Conventional vs Islamic Banking
• Fundamental of Islamic Economic and Finance
Law
OVERVIEW ON ECONOMIC AND ISLAM

• The turning point on contribution of Muslim world to the current economic

condition based upon a renewed application of Islamic Law or Shariah.
• The conceptual framework in conventional economic imply different view in
the nature of economic setup.
• While in Islamic Economic system imply several concept highlighted in Quran
for example verses dealing with zakat (tax on surplus wealth) and riba
(usury/interest).
• In general, economy or yconomye defined as management of the household.
• The word economy was first used in the year 1440 and that may have
originated from a word; in the mid-French era that is economie; from the
Latin, they called as oeconomia; and from the Greek, oikonomia. In Kamus
Ekonomi (1993) defined economics as a field of social science that studies the
behaviour of humans in the provision of limited resources to meet unlimited
needs and demands, where one competes with the other
EARLY STAGE OF ISLAMIC ECONOMIC

• The existence of Islamic Economics is proven through Surah al-Maidah :

• …This day I have perfected your religion for you, completed my favors
upon you, and have chosen for you Islam as your religion… (Q5 : 3)
• Above verse clear that Islam encompasses all aspects of the human life.
• One of the examples economic transactions in the earlier stage, when
The Prophet Muhammad p.b.u.h in his youth practiced economy through
trade based On Mudharabah with his wife Siti Khadijah.
• One of the early concepts can be found in the method of distributing
wealth obtained from battles won.
• Islamic economic activities continued to be developed after the time of
Prophet p.b.u.h continued by Eras of Caliphs.
ECONOMIC IN ISLAM

• Islam, is not only as religious but according to Surah Al Maidah, Islam

means Ad Din. It is a way of life.
• How someone should react, behave, manage everything being teach in
Islam through Al Quran.
• Economic in Islam is not as mentioned by the conventional definition.
Where in conventional economic is a process managing the asset,
resources to meet with supply and demand.
• In Islam, economic is more on the managing resources to meet the
responsibility and obligation to Allah.
• Resources here refer to the tangible and intangible resources.
WORLD ECONOMIC AND ISLAMIC ECONOMIC SYSTEM

• Based on the definitions of economy and economics, it can

be conclude that economics is a branch of knowledge
about the ways people use existing resources to create
products and services for their use.
• Muslims are people who work to obtain rezeki or
sustenance by using the resources made available by Allah
SWT for their use while living in this world (refer to several
verse)
• Unfortunately, Islamic economic knowledge was not
developed and passed down among generation to
generation. Been stolen.
• The fundamental substance of economics claimed to have been
developed by intellectuals from the West was in fact stolen from
the works of great thinkers of Islamic Economics.
WORLD ECONOMIC AND ISLAMIC
ECONOMIC SYSTEM (CONT.)

• There are a lot of similarities between

the views presented by Westerns and the
views of Islamic thinkers.
• These are some such views:
• The optima pareto theory originated from the works of Iman
Ali r.a. Titled Nahjul Balagh
• Priest Bar Hebraeus from the Syariac Jacobite church copied
several chapters from the book Ihya Ulumuddin written by
Imam Ghazali
• St. Thomas Aquinas plagiarized many chapters from the
works of al-Farabi
INTRODUCTION TO ISLAMIC FINANCE

What is Islamic finance : -

• Islamic finance is a financial management
process using by bank for the products or
services provided that conform to the Syariah
(Islamic law).
What is Islamic banking :-
• Financial institution that operates with the
objective to implement the economic and
financial principles of Islam in banking system.
• Islamic Banking Act 1983 stated that, “Islamic banking business means
banking business whose aims and operations do not involve any
element which is not approved by the religion of Islam…”
 BASIC PRINCIPLE IN ISLAMIC FINANCE

The prohibition
of Riba’
1

The sharing of
profit and loss
between a bank
and its customer
2
OBJECTIVES OF ISLAMIC FINANCE
Facilitate Stability
in Money Value Economic
Development

Offer Financial
Services
Optimum
Resources
Allocation

Optimist
Approach
Equitable
Distribution of
Resources
 CONVENTIONAL VS ISLAMIC BANKING

 Islamic Banking  Conventional Banking

– Functions and operating modes based on – Function and operating modes based on
Syariah principles fully man principles
– Promote risk-sharing between the provider – Investor assured of a pre-determined rate
of capital (investor) and the user of funds of interest
(entrepreneur)
– Aim at maximizing profit but subject to – Aim at maximizing profit without any
Syariah restriction restriction
– Functional to be a Zakat Collection Centre – Do not deal with Zakat
and they also pay Zakat
– Partners, investors and trader, buyer and – Business relationship known as lender and
seller borrower.
ADVANTAGES OF ISLAMIC FINANCE AND BANKING

• Justice and fairness

– Main Islamic banking model is based on profit sharing principle, whereby the risk shared by the
bank and customer
• Liquidity
– Follow the profit and loss-sharing principle to mobilize resources and are less likely to face any
sudden run on deposits. As such, they have a minimum need for maintaining high liquidity.
• Transparency
– Transparent to the account holders on the investments made in different areas and the profits
realized from these investments. The profit is then shared in the pre-agreed ratio.

• Ethical and Moral Dimension

– Their strong ethical and moral dimensions of doing business and selecting business
activities to be financed, play an important role in promoting socially desirable
investments and better individual/corporate behavior.
 
• Banking for all
– Although based on Syariah principles to meet the financial needs of Muslims, it is
not restricted to Muslims only and is available to non-Muslims as well