Islamic Studies

ISLAMIC
ECONOMIC
SYSTEM
DEFINITION OF ECONOMICS

Economics is the social

science that studies
the allocation of
scarce (Limited)
resources to satisfy
unlimited wants. 2
 DEFINITION OF ISLAMIC
ECONOMICS
 Islamic Economics is the
studies of economic problems
of people imbued with the
values of Islam.
 It is the study of social science
which enables people to
perform their obligation to
Allah and to their society
 CONT. DEFINITION OF ISLAMIC
ECONOMICS

It studies man not only as an

isolated individual but of a
social individual having;
Faith, Ethics believing in the six
articles, his deeds is accountable to
Allah as it is guided by Shari’ah.
he is also required to propagate good
doing and prohibit bad doing al-Amr bil
Maruf wa al-Nahy anil Munkar in the
society (which are his business ethics)
4
 CONT. DEFINITION OF ISLAMIC
ECONOMICS
Akhirah: the hereafter for
accountability, and for getting the
outcome of all deeds including
economic activities, in an eternal life.
Economic and Non-Economic well-
being for leading a good life and
discharging socio-Islamic obligations
in this world and for achieving the
home of hereafter.

5
 HOW ISLAM VIEWS THE
ECONOMIC PROBLEMS?

 Scarcity of Resources
 Unlimited Wants &
 Choice
RESOURCES IN ISLAM

Allah (swt) Has created many resources.

However recourses in the eyes of mans is
scarce/limited due to
 lack of means to reach these
resources (which is the results
of man’s choice such as lack of
knowledge, skills, etc.)
 UNLIMITED WANTS

Islam recognizes that human

desires are unlimited. This is
explained in the Quran and in
the Hadith.

‫َل‬ ‫َأ‬ ‫َل‬ ‫َأ‬

‫َيْح َس ُب َّن َم ا ُه ْخ َدُه‬
Thinking that his wealth would
make him last for ever!(104:3)
8
 ‫‪MAN IS GREEDY‬‬

‫‪:‬قال رسول الله (صلى الله عليه وسلم)‬

‫لو أن ابن آدم أعطي واديا من ذهب أحب إليه ثانيا ‪« ،‬‬
‫ولو أعطي ثانيا أحب إليه ثالثا ‪ ،‬وال يمأل جوف ابن‬
‫» آدم إال التراب ‪ ،‬ويتوب الله على من تاب‬

‫‪“If man is given a valley of gold,‬‬

‫‪certainly, he wants the second‬‬
‫”‪and third one and he will …..‬‬
‫‪Hadith‬‬

‫‪9‬‬
ACQUIRING WEALTH IN
ISLAM
IS IT PROHIBITED ?

Yes/No
‫‪Cont. Acquiring Wealth in Islam‬‬

‫عن ابي الدرداء قال قال رسول الله‬

‫صلى الله عليه وسلم لن يزول قدما‬
‫أربع‬
‫‪WHEN‬‬ ‫يسأل عن‬
‫‪A MAN‬‬ ‫حتى‬
‫‪DIES HE‬‬ ‫القيامة‪WILL‬‬ ‫يوم‬
‫‪BE ASKED‬‬ ‫عبد‪ON‬‬
‫‪FOUR:‬‬
‫عن شبابه فيما اباله وعن عمره فيما‬
‫افناه وعن ماله من اين اكتسبه وفيما‬
‫?‪1- HIS YOUTH HOW HE SPEND IT‬‬
‫أنفقه‬
‫?‪2- HIS AGE HOW HE SPEND IT‬‬
‫‪3- HIS WEALTH HOW HE ACQUIRES‬‬
‫& ?‪IT‬‬
‫?‪4- HOW HE SPENDS IT‬‬
 SECULAR WORLDVIEW
(Man’s Way of Life)

SEPARATION BETWEEN RELIGION AND OTHER

ASPECTS OF LIFE,

- MATERIALISTIC,
- INDIVIDUALISTIC,
- LESS SOCIO ECONOMIC JUSTICE
- LESS PUBLIC RELATIONS,
- LESS CONCERN WITH THE HEREAFTER LIFE
 Islamic WORLDVIEW
(Man’s Way of Life)

BELIEF IN A DUAL WORLDVIEWS: THIS

WORLD & THE HEREAFTER

- RELIGION IS PART OF HIS/HER DAILY LIFE

- MASLAHAH OF THE UMMAH (PUBLIC
BENEFIT),
- ACCOUNTABILITY,
- TRUSTWORTHINESS,
- TRANSPARENCY ETC.
 ISLAMIC WORLDVIEW

To understand the Islamic worldview

let us first define the followings:

1. Islam, Iman, A’mal, Ihsan.

2.Relationship between Allah,
man, nature, religion.
3.The nature and characteristics
of man; man’s role as ‘abd and
khalifah
 Islamic
Prohibitio
n of Riba’
 Meaning of Riba’

• Literally: excess, increase, expansion or

growth

Definitions of Riba’
Ibn al-Arabi: every excess in return of
which no reward is paid
Mawdudi: predetermined excess or
surplus over and above the loan received
by the creditor conditionally on relation to
a specified period
 PROHIBITION OF RIBA’

In the Qur’an - 4 Stages:

1. Surah al-Rum: 39
• compare riba’ with Zakat and charity
• praising Zakat but not riba’
2. Surah al-Nisa’: 160-161
• attaching the practice of riba’ with the
Jews
• Consider the practice as an inequity
3. Surah ali-Imran: 130
• Prohibiting the practice of charging
double and multiple riba’
 PROHIBITION OF RIBA’

4. Surah al-Baqarah: 275-281

• Conclusively prohibiting all forms of riba’
• Any excess over the capital is disallowed
“…they say: trade is like riba’, but Allah has
permitted trading and forbidden (haram)
riba’ (usury)”

Example in the Sunnah:

“From Jabir (RA) the Prophet (S.A.W) cursed
the receiver and the payer of riba’, the one
who records it and the two witnesses to the
transaction: they are alike in guilt”
 TYPES OF RIBA’
1. Riba’ al-Buyu’ (exchange transaction)
• Riba al-Fadl (due to excess)
Example:
(a) Trading commodities of the same commodities
(gold – gold; dates – dates)
• Both commodities must be equivalent
• Prompt delivery
(b) Trading commodities of the same group but
different kinds (gold - silver; wheat – barley)
• Equality not a condition
• Prompt delivery
(c) Trading commodities of different groups and kinds
(gold – wheat; silver – barley)
• No conditions imposed i.e. free trading
 TYPES OF RIBA’

2. Riba’ al-Duyun (loan/debt transaction)

• Riba’ al-Nasi’ah (due to delay)

Characteristics of Riba’ al-Nasiah

3 Elements:
1. Excess or surplus over and above the
loan capital;
2. Determination of surplus in relation to
time; and,
3. Stipulation of surplus in the loan
agreement.
 RIBA’ VS TRADE
Wisdom behind prohibition of riba’
• Elimination of injustice and encourage
cooperation
• Spirit of brotherhood

Riba’ is not trading:

• Money loaned for self-generating or self-
expanding value is not sale
• Growth or increase in money is inequitable
• One party receives an increase without
equivalent return to the other party
• In sale, there is productive exchange such as
goods for goods and money for goods
 Islamic
Prohibition
of Gharar
 MEANING OF GHARAR

Literally: In Arabic means negative

elements e.g. deceit, fraud,
uncertainty, danger, risk, hazard etc.
that might lead to destruction and loss

Technically: uncertainty and ignorance

of one or both parties of a contract
over the substance or attributes of the
object of sale or doubt over its
existence and availability at the time
of contract
 GHARAR IN THE QUR’AN

• The Gharar appeared 27 times in the Qur’an

• Refer to the need of believers to be aware of
the deceptive character of the worldly
pleasures, and not to be deceived by such
temptations
• Example in Surah al-Nisa’ (4:29):
“O you believe! Eat not your property among
yourselves unjustly (bil batil i.e. by falsehood
and deception) except in a trade amongst you
by mutual consent”
• Most jurists agreed that al-Batil refers in the
above verse includes illegal and deceptive
elements in commercial contracts
 GHARAR IN THE SUNNAH

• In commercial transactions, the

Prophet s.a.w in many of his sayings
prohibited the sale involving gharar
• Examples: The prohibition of sale of
fish in the sea, bird in the air, unborn
animals, etc.
• Gharar is prohibited by consensus of
the jurists (ijma’) since the time of the
companions, their followers (tabi’in)
and subsequently until now.
REASONS FOR PROHIBITION OF GHARAR

• To ensure full consent and satisfaction

of all parties in a contract
• Without full consent and satisfaction
the contract is null and void
• Full consent can only be achieved
through certainty, full knowledge, full
disclosure and transparency, and zero
deceit or fraud
• Gharar also results in the risk being
built into the contract at its inception
which may result in a profit for one
party and corresponding loss to other
party (zero-sum game or gambling)
 FACTORS FOR GHARAR IN CONTRACTS

• None or incomplete ownership (“do

not sell if you do not have” or cannot
legally guarantee delivery
• Non-possession or cannot guarantee
physical delivery to avoid manipulation
by the seller and protect the interest of
buyer
• Uncertainty in the contract or
conditional sales
 EXCEPTIONS OF GHARAR

• The uncertainty is too trivial or too

slight and tolerable by both or all
parties
• Charitable contracts (tabarru’at i.e.
Waqf etc.)
• The real public need for the
transaction or contracts even gharar is
excessive e.g. bay al-Salam (advance
purchase), al-Istisna’ (manufacturing
contract )
• To satisfy people’s immediate need
and removal of hardship makes Gharar
an exception and need takes priority
 EXCEPTIONS OF GHARAR

Gharar is averted if:

• Both the price and the subject matter
are proved to be in existence at the
time the transaction concluded
• The qualities are known and the
quantities are determined
• The contractual parties have control
over them so as to ensure the exchange
can take place
• Term of time can be precisely
determined
 RIBA IN BANKING

• On the both sides of the conventional banks Riba

exists:
• On the Liabilities Side, through borrowing from
depositors on fixed and guaranteed return
• On the Assets side, through lending on Interest
basis.
 BASIC DIFFERENCE BETWEEN ISLAMIC
AND CONVENTIONAL MODES OF FINANCE

Conventional

money
Bank Client

money + money (interest)

 BASIC DIFFERENCE BETWEEN ISLAMIC
AND CONVENTIONAL MODES OF FINANCE

Islamic

Bank Goods & Client

Services

money
THEORETICAL COMPARISON

CONVENTIONAL ISLAMIC
BANKING BANKING
--------------------------- ---------------------------
Is based on interest.
 Is based on profit

Deals  Deals in assets.

in money or
papers.
Is based on fixed return  Is based on profit sharing on
on both Sides of the deposits side, and on Islamic
balance sheet. modes on assets side.
 Actively participates in
Does not involve itself in
trade, production and valid
trade and business
services through valid
contracts.
 SOME FALSE THOUGHTS ABOUT AL-RIBA

 Riba could exist in loan transaction only

 Riba (interest) is an excessive rate (usury) of premium
imposed on the borrower in loan transaction. The prohibition of
riba is restricted only to doubled and multiplied riba

 Riba is prohibited in consumption loan (dharurah) and allowed

in productive loan

Riba al-duyun is the only type of riba prohibited in Islam

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