ISLAMIC FINANCIAL SYSTEM

Md. Shafiqur Rahman

Executive Vice President & In charge,
Islami Bank Bangladesh Ltd.
Local Office,
Foreign Exchange Department.

01. FUNDAMENTAL PRINCIPLES OF ISLAM:

 TAWHID (ONENESS AND UNITY OF ALLAH

ALLAH IS ONE, UNIQUE AND SUPREME

 KHILAFAH (VICEGERENCY)
THE CONCEPT OF KHILAFAH HAS A NUMBER OF
IMPLICATIONS OR COROLLARIES THESE ARE:
1. UNIVERSAL BROTHERHOOD
2. RESOURCES ARE A TRUST
3. HUMBLE LIFE STYLE
4. HUMAN FREEDOM

 ADALAH (JUSTICE)
1. NEED FULFILLMENT
2. RESPECTABLE SOURCE OF EARNING
3. EQUITABLE DISTRIBUTION OF INCOME & WEALTH
4. GROWTH & STABILITY

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 ISLAMIC FINANCIAL SYSTEM
02. MAQASID AL-SHARIAH:
MAQASID AL-SHARIAH IS TO PROMOTE THE WELFARE OF THE
PEOPLE BY SAFEGUARDING THEIR-
 FAITH
 WEALTH
 PROSPERITY (DESCENDANT)
 LIFE & INTELLECT

HUMAN WELL-BEING TO BE REALIZED BY ENSURING THE ENRICHMENT OF

THE FOLLOWING FIVE INGREDIENTS FOR EVERY INDIVIDUAL.

Din
Faith

Nafs ‘Aql Nasl

Self Intellect Posterity

Mal
Wealth

Figure I
MAQASID (OBJECTIVES OF) AL-SHARIAH
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. 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. ALL THE OTHER

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REQUISITES MAY BE CONSIDERED AS COROLLARIES OF THESE FIVE AS WILL BE
INDICATED IN THIS CHAPTER.

ISLAMIC FINANCIAL SYSTEM

03. THE STRATEGY:

 A SOCIALLY AGREED FILTER MECHANISM

 A STRONG MOTIVATING SYSTEM TO INDUCE THE

INDIVIDUAL TO RENDER HIS BEST IN HIS OWN
INTEREST AS WELL AS THE INTEREST OF THE SOCIETY

 RESTRUCTURING OF THE WHOLE ECONOMY WITH THE

OBJECTIVE OF REALIZING THE MAQASID IN SPITE OF
SCARCE RESOURCES.

 A POSITIVE AND STRONG GOAL-ORIENTED ROLE FOR

THE GOVERNMENT

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 ISLAMIC FINANCIAL SYSTEM

04. THE ISLAMIC WORLD VIEW:

 INABILITY OF THE CAPITALIST & SOCIALIST COUNTRIES AS

WELL THE DEVELOPING ECONOMIES TO REALIZE
SIMULTANEOUSLY THE GOALS OF BOTH EFFICIENCY &
EQUITY

 SOCIAL DARWINISM, SURVIVAL OF THE FITTEST, CLASS

STRUGGLE, MAXIMUM WANT SATISFACTION, MATERIAL
CONDITION OF LIFE PROVED UNSUCCESSFUL.

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 ISLAMIC FINANCIAL SYSTEM

0 5 . ISLAMIC FINANCIAL SYSTEM(IFS):

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. 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.

06. DIFFERENCES BETWEEN CFS & IFS

The conventional financial system is of two types.

1) Socialistic financial system and

2) Capitalistic financial system
- both systems have been proved inefficient to establish economic
balance in the society.

Basis of Difference CFS IFS

1. Religious Belief Secular & separates Belief in unity of God
Religion from other & relates this belief to
Parts human life economic Life of a man
2. Freedom of Economic In socialism govt. Restrictive freedom is
enjoys economic allowed in the light of
Activity
freedom but in Shariah both by the govt.
capitalism Individuals &/or individuals
enjoys freedom.

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3. Ownership of means Socialism-state Allah is the exclusive
ownership, Capitalism- owner. Man is the
individual ownership caretaker of the property
4. Goals of financial Socialism-profit of the Welfare of both here and
System
society hereafter.
Capitalism-Individual’s
profit
5. Competition Socialism-No Logical Competition and
competition financial co-operation
Capitalism- Logical &
unethical competition
6. Wealth distribution Socialism-Equal Equitable
Capitalism – Unequal
7. Basis of Economic Riba or Interest Interest Free; PLS, Zakat
System & Compensation based
8. Sources of the Intellects brain storming Devine book “Al-Quran”
System of the economic & Prophets(SM)
problems of men’s life speeches
9. Result Capitalism Maximum & equitable
concentration of income Distribution of economic
& economic power in opportunities and higher
few hands. Inefficiency production in the
society
10. Social & Do not consider the Ensure social &
environmental welfare social & environmental environmental welfare
welfare
11. Owners exception in Dividend or part of profit Part of Profit or Loss
respect of respect of in case of equity
investment financing
12. Lender or Bank’s Interest Profit or Loss Sharing
expectation in terms of
dept financing
13. Modes of Investment Loan, Overdraft & Cash Mudarabah, Musharaka,
Credit Murabaha etc.
ISLAMIC FINANCIAL SYSTEM

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07. PRINCIPLES OF AN ISLAMIC FINANCIAL SYSTEM

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:

Prohibition of interest : Prohibition of Riba, a term literally meaning "an

excess" and interpreted as "any unjustifiable increase of capital
whether in loans or sales" 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 "interest" as widely practiced.

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.

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.

M on e y a s " Potential" Capital: Money is treated as "Potential" 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

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of money, but only when it acts as capital, not when it is "Potential" capital.

P r o h i b i t i o n o f speculative behavior: An Islamic financial system

discourages hoarding and prohibits transactions featuring extreme
uncertainties, gambling, and risks.

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.

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.

The Objectives Islamic Economics and Banking

The Objectives of Shariah

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)

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).

Definition of Economics
Prof. L. Bobbins -“Economics is a science which studies human
behavior as a relationship between ends end scarce means which have
alternative uses.

Definition of Islamic Economics

1. Islamic Economics is that branch of knowledge which helps realize

human well-being through an allocation and distribution of scarce

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 resource that is in conformity with Islamic teachings without unduly
curbing individual freedom or creating continued macro-economic and
ecological imbalances- Oman Chapra.

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).

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.

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 Scud.
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.

Objectives of Islamic Economics

1. To establish justice in the Economy (5:58) (16:90), Nahal, Nisa)

- Surely Allah enjoins justice and the doing good (to others) (16:90 Al-Nahal)
- Whenever you judge between people, you judge with justice 5:58 (An-Nisa)

2. To protect the interest of the deprived and the oppressed. (28:5) (Kisas)
- 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)

3. To establish good practices and institutions in the economy and to

eliminate bad practice and bad institutions from Economy (22:41)

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 - [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)

4. To make life easy and bearable (7:157)

5. To ensure full utilization of resources.

6. Proper of distribution of wealth and Resources.

7. Maximum production of useful production.

8. Bring stability in the value of money and exchange rates

9. Ensure economic efficiency and accelerated rate of growth

10. Ensure broad based economic well being, balanced monetary expansion and
full employment.

Principles of Islamic Economics Systems:

1. Sole purpose is to obey and please Allah.
2. The wealth and asset in all their forms given under trust by Allah.
3. Moral values and guiding factors for all Economic activities.
4. Maximum equitable utilization of human and material resources given by Allah
5. Human dignity and respect of Labour.
6. 'Maximum freedom for economic activity within a just framework.
7. Equitable distribution of wealth and income and disciplined private ownership.
8. Simplicity economy and austerity in expenditure.
9. Adal and Ihsan (Justice and kindness).
10. Strict prohibition of Riba, Interest and Usury in all forms.

Definition of Islamic Bank

"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" - OIC

Dr. Ziauddin Ahmed'- "Islamic Bank is essentially a normative concept and could be
defined as conduct of "banking in consonance with the ethics of the value system
of Islam."

Objectives of Islamic Bank

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a. All it's activities are conducted on interest-free system according to Islamic
Shariah.

b. Investment is made through different modes permitted under Islarnic Shariah.

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.

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.

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.

f. It plays a vital role in human resource development and employment

generation particularly for the unemployed youths.

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.
Deposit Products of Islami Bank:

1. Al-wadeeah Current Deposits

2. Mudaraba Savings Deposits
3. Mudaraba Special Notice Deposits
4. Mudaraba Term Deposits
5 Mudaraba Hajj Savings A/c
6. Mudaraba Savings Bond
7. Mudaraba Special Savings Scheme
8. Mudaraba Monthly Prft Dep Schemes(MMPDS)
9. MUDARABA MUHOR SAVINGS A/C
10. Mudaraba Waqf Deposit A/C
11. Mudaraba Savings Deposits(RDS)

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 ECONOMICS: CAPITALISM VS. ISLAMIC

UNDER CAPITALISM UNDER ISLAM

1. Economic Laws are like physical 1. Economic laws are like natural
laws laws
2. Positivism: Economics is a 2. Economics is value oriented.
positive science as like as Permissible & prohibition have to
biology, physics which have no be observed
value, value neutral
3. Motive for More: Pecuniary 3. Man does not work for only
interest. Man is rational personal interest. He has to
economic being. Survival of the secure the interest of this world
fittest, destruction of the poor & the world hereafter.
4. Market Oriented: Market can 4. Market can solve major problem
solve all the problems. Poors’ but not all. At least 20%
need is not reflected in the economic problems to be solved
market. Demand is backed by by the government. Communism
purchasing power. Result is the prescribes 100% solution by
mismatch in resource allocation. government. Capitalists leaves it
100% to market.
5. Little concern for poor humanity 5. Major concern for poor. Poverty
alliviation by Zakat, Sadaqa &
gives emphasis on economic
progress
6. Nearly 100 corporate of ¾ 6. No conentration of wealth in few
countries control the world hand. Wide dispersal of wealth &
economy in the name of property
globalization.
7. BBC reports 35 million people in 7. None can live below poverty line
USA live below poverty line (not if Islamic economic system is

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getting two meals a day) established

The End

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