Islamic Economics-Final Topic1 (Pak-Studies-I)

ECONOMIC
SYSTEM OF ISLAM
Prepared By: Ms. Nargis Shamim
Topics to be discussed..
• Islamic Economics
• The Islamic Law
• Sources of Islamic Law
• Islamic Economics System
• The Sharia'h framework
• Islamic Finance
• Islamic Banking Operations
• Advantages of Islamic Banking
• Conclusion
• Recommended Articles
What is the backbone of economic
system of Islam?
• In context of the economy, being a significant
component of Islam, Zakat forms the backbone of
the Islamic economy-its role being both diverse
and endless. It covers all the aspects of an
economy- from social to political.
The Islamic Law
• The Islamic law, also called Sharia, is a code of conduct
derived from the religious precepts of Islam, which guides
Muslims in social, economic, and political matters.
• The purposes of Sharia (Maqāṣid) are the preservation
of five essentials of human well-being:
religion, life, intellect, offspring, and property.
• It includes invariant elements that are the canonical rules
immutable in time and space and variant elements that
Muslim jurists are able to enact, according to the analysis
of particular and evolutionary situations.
•
Sources of Islamic Law
Basically there are two main Sources :
• The Primary Source
• The Secondary Source
The two main Primary sources of Sharia are:
• The Qur'an: The holy book of Islam records the message of God as revealed to the Prophet
Muhammad (SAWS), it is considered to be the most sacred source in terms of law. Any element drawn
from other legal sources must absolutely be in full conformity with the word of God in the Qur'an.
• Sunnah: This term encompasses all the teachings transmitted by the Prophet Muhammad (SAWS)
through his words, expressions, deeds, and tacit approval.
These two sources represent foundations for determining the conformity of any
action with the rules and purpose of Sharia. However, Sharia remains open to
possible interpretations and development.
Thus, two other sources which are the Secondary are also used as of Sharia:
• Ijma (Consensus): In its technical dimension, Ijma means agreement of the whole

Muslim community, the Muslim Ummah, therefore it has very much importance
as the third source of Islamic law. This can help to create unity among the Muslim
ummah, if agreement reaches on critical issues.
• Qiyas (Analogical reasoning): this technique consists of assigning, on the basis of a

common underlying characteristic, the legal ruling of an existing case found in the
texts of the Qur'an, Sunnah and / or Ijmaa, to a new case whose legal ruling could not
be addressed in the scripture. This while remaining true to the spirit of traditional
sources of Islamic law.
The Sharia'h framework
• The Shari'ah represents the legal framework of Islamic
religious law within which the public and private aspects
of life are regulated.
• It is based on principles revealed from Islamic sources
that deal with many aspects of day-to-day life,
including politics, economics, business, family, and
social issues.
The key objective of the Shari’ah is to promote human
welfare, which consists in the preservation, the promotion
and the enrichment of Muslim faith, the preservation of
human life and human mind and the protection of
posterity and wealth.
Continue..
• For that purpose, the Shari'ah offers prominent alternative dimensions for economic
activity where justice is the Supreme purpose.
• It aims at establishing an ideal society based on justice, equity and virtue, where
social security and peace are promoted, and where individuals and organizations are
encouraged to cooperate in all activities in accordance with moral values in matters
of goodness and prohibition from evil deeds and in solidarity with needy and
deprived people.
• These objectives constitute the material and spiritual welfare of the people in this world as
well as the Hereafter. This welfare lies in complete justice, mercy and wisdom. It doesn’t
only include the economic development and growth, but also human brotherhood, socio-
economic justice, mental peace, happiness, family, as well as social harmony.
Islamic Finance
• Islamic finance refers to the means by which

individuals and corporations, including banks and
other lending institutions, raise capital in accordance
with Shariah.
• This centuries-old practice is gaining recognition
throughout the world and is seen as a unique form of
socially responsible investment. Islamic Finance covers a
wide range of financial products and services that are
deemed permissible under the Islamic law, and whose
ethical nature is even drawing the interest of non-
Muslims.
Common principles that govern Islamic Finance
The most common principles that govern Islamic Finance are:
1. The Investment must not be in businesses related to alcohol, pork products,
gambling, pornography, and weapons
2. Investment cannot involve the payment of interest
3. Investment cannot include speculation, or deals with extreme uncertainty
4. Risk must be shared between at least two parties
Continue..
The approach to risk in Islamic Finance is quite different to the conventional
system. So while an Islamic Finance product may have the similar objective to a
conventional finance product, it is likely to have a very different risk/reward
profile. At times, this unconventional risk/reward profile is attractive to potential
investors, even when they are not motivated by religious reasons.

While the basic principles of Islamic Finance are well-understood and generally
accepted, there can be some variation in viewpoint between Islamic scholars on how
these principles apply in certain situations. So it is possible that certain deals may be
regarded as acceptable in some places (jurisdictions/ Shariah boards), but not
acceptable in others.
Islamic Banking Operations
• Islamic banking is a banking system in accordance with the

Shariat. In Islam, money has no intrinsic value – money,
therefore, cannot be sold at a profit and is permitted to be
used as per shariat only. The Islamic Law or Shariat prohibits
paying any fee for renting of money (called Riba) for specific
periods of time.
• Islamic banking refers to a system of banking that complies with
Islamic law also known as Shariah law. The underlying principles
that govern Islamic banking are mutual risk and profit sharing
between parties, the assurance of fairness for all and that
transactions are based on an underlying business activity or asset.
Continue..
There are basically two folds of Islamic financing.
• They are: Profit-and-loss-sharing (PLS), also called participatory
modes, i.e.,
Musharakah and Mudarabah; and. Purchase and hire of goods or
assets and services on a fixed-return basis, with the principles of
Shari’ah.
Advantages of Islamic Banking
“Justiceand Fairness. The foundation of the Islamic Banking model
is based on a profit-sharing principle, whereby the risk is shared by
the bank and the customer.
• Banking for All. ...
• Transparency. ...
• Ethical and Moral Dimensions. ...
• Discouraging Speculation.
Conclusions
• Islam is founded upon the notion of Tawhid, a total commitment to the will of God.
Total compliance with God’s vision of how man should regulate his relation to
Himself, other men, and nature guides the Islamic man in every aspect of life,
including the economic life. His vision is focused on both the material world and
the hereafter. This double perspective obliges him to develop very different outlook
on life compared to his secular counterpart.
• The distinguishing element of an Islamic economy is that entrepreneurs act under
the guidance of norms drawn from the traditional sources of Islam. They promote
the avoidance of waste, extravagance and ostentation. They discourage activities
that create harmful externalities.
• They stimulate generosity and work hard, charge fair prices, and pay others their
dues.
Recommended Article
• http://www.financialislam.com/islamic-economics.html
• https://saraycon.com/islamic-economic-system/
• https://slideplayer.com/slide/13665038/
• Economic System of Islam and Its Effect on Growth and
Development of Entrepreneurship
THANK YOU!!

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ECONOMIC

• Ijma (Consensus): In its technical dimension, Ijma means agreement of the whole

• Qiyas (Analogical reasoning): this technique consists of assigning, on the basis of a

• Islamic finance refers to the means by which

• Islamic banking is a banking system in accordance with the

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