Islamic Economics & Banking

Islamic Banking

Is this about Islam?

Or
about Banking?

What has Religion got to do with Economics & Banking?

 Economics & Its Problems
 What is economics?
“To utilize the limited resources in a way that maximum needs and
wants are met to ensure the well being of all members of the
human society.”

 The four basic economic problems:

1. Determination of Priorities
2. Allocation of Resources (Land, Labor, Capital, Entrepreneur)
3. Distribution of Income
4. Development

We will compare how Capitalism, Socialism and Islamic Economic

system addresses to these problems.
 Comparison of Capitalism & Socialism

Capitalism Socialism
• Every individual has • No individual has the
1. Determination right to participate in
unconditional &
of Priorities absolute right to any business
participate in any independently.
business to maximize • State will determine the
profits priorities as per the
• Concept of Selfish overall planning.
Interest • Concept of collective
• Supply & Demand will interest.
determine the priorities.

2. Allocation of • Market forces will • Govt. will decide

decide where to where to allocate
Resources invest resources resources
• Market forces will • Govt. will decide
3. Development decide
 Comparison of Capitalism & Socialism

Capitalism Socialism
4. Distribution of • Land - Rent • Land – Rent fixed by
Govt.
Income • Labor - Wages
• Labor – Wages fixed by
• Capital- Interest
Govt.
• Entrepreneur- Profits

Right to Right to wealth is Right to wealth is

Wealth with the factors of with the Govt.
production only. which then
distributes it
among the factors
of production.
 Flaws of Capitalism

 No bindings/ restrictions while maximizing profits.

 Blindly follows market forces that creates exploitation of labor & poor people.

 No moral value limitations.

 Monopolies & Cartels are created that exploit the society as a whole.

 Government & Industrialists join hands for mutual benefit and make laws

that exploit common people.

 Imbalance in the distribution of income due to which concentration of wealth

takes place.
 Flaws of Socialism

 The other extreme of not even giving the natural freedom.

 Perfect Planning is assumed to be the “Cure of all ills”.

 Governments are assumed to be angels which can’t commit a deliberate

mistake.

 Cannot work without forceful dictatorship.

 Creates overall inefficiency in the society. There is no incentive to work

efficiently as there is no individual profit motive.

 What is Islamic Economics

 Islam is a Deen which gives guidance for Aqaid, Ibadat, Mu’ashrat, Akhlaq &
Mu’amalat.
 Hidaya- famous nook of Fiqh has 70 % portion dedicated to Mu’amalat.
 The humanitarian goal of achieving the well being of all members of the human family
cannot be attained by concentrating primarily on the material constituents of well-
being and making maximization of wealth as the main objective of Economics.
 It is also necessary to raise the spiritual content of well being and reduce all the
symptoms of anomie, like family disintegration, heavy interest based debt payments,
conflict and tensions, crime, alcoholism, drug addiction, and mental illness, all indicating
lack of inner happiness and contentment in the life of individuals.
 Capitalism as well as Socialism have both failed to lead mankind
to such an overall well-being. It is therefore, necessary to lay down the contours of a new
system which could help optimize human well-being as per the divine guidelines of Allah.
 Islamic Economic System

 Islam accepts the market forces of supply and demand- Reference of Holy
Quran.

 In fact Islam gave the concept of Market Forces 1300 years before Keynes
presented the modern model of Economics in 1927.

 Islam accepts the right to private property and accepts the right to maximize
profits. But these rights are not unbridled and un conditional rather there are
some prohibitions.
 Islamic Economic System- The
prohibitions & considerations

1. Divine Prohibitions:
Islam has prohibited some economic activities that are not allowed at any
time at any place.( Interest, Gambling, Hoarding etc.)

2. Govt. Restrictions:
Islam allows Govt. to intervene where it feels appropriate , but these
restrictions are temporary as per the need of the time.

3. Moral Considerations & Restrictions (ROIA)

Life in this world is temporary and there is an eternal life after words. One
has to make this worldly life a way to get the maximum benefit in the life
hereafter.
 Factors of Production of Production in
Islamic Economic System

 In Islam there are three factors of production

1.Land 2. Labor 3. Entrepreneur

 Entrepreneur & Capital is a single factor of production.

 As interest is Haram hence the risk of profit & loss is with the capital.

 Anyone investing capital must also take the risk of the investment.
 Right to Wealth in Islam

 In both Capitalism & Socialism the right to wealth is with those factors of
production only that have taken part directly in the process of production.

 Islam believes that the original ownership of everything is with Allah and
without Allah’s “Taufeeq” no factor of production can produce anything.

ALLAH
Factors of Production Zakat, Ushr
Wirasat, Sadqaat
Qurbani,Khiraj

Secondary owners of wealth

 Summary of The Comparison

 Capitalism gives unbridled and un-conditional right to profit motive and

private ownership, while socialism goes to other extreme by assuming that
perfect planning by the govt. is the cure of all ills.
 Islam gives a balance view among the two extremes by recognizing the right
to private ownership, market forces and profit motive but under the
restrictions of:
1. Divine restrictions 2. Govt. restrictions 3. Moral considerations

 Islam ensures equitable distribution of wealth through the concept of

primary and secondary ownership.
 All these factors combined have a cumulative effect of achieving the well
being of all members of the human society.
 the management of  "Finance" is a broad term that
describes two related activities:
large amounts of the study of how money is
money, especially by managed and the actual
governments or large process of acquiring needed
companies. funds. Because individuals,
businesses and government
entities all need funding to
operate, the field is often
separated into three sub-
categories: personal finance,
corporate finance and public
finance.
Investopedia on Facebook
 Finance is a field that deals with the study of
investments. It includes the dynamics of assets and
liabilities over time under conditions of different degrees
of uncertainty and risk. Finance can also be defined as
the science of money management.
What is Banking?

 the business conducted  In general terms, the

or services offered by a business activity of
bank. accepting and
safeguarding money
owned by other individuals
and entities, and then
lending out this money in
order to earn a profit.
Read more:
http://www.investorwords.c
om/5413/banking.html#ixzz
4JSbk37bO
 A bank is a financial institution that accepts
deposits from the public and creates credit.
Lending activities can be performed either
directly or indirectly through capital markets.
Due to their importance in the financial system
and influence on national economies, banks are
highly regulated in most countries.
 Islamic Banking-the concept
 What is Islamic Banking?
“Islamic Banking is interest free Asset Backed banking governed by
the principles of Islamic Shariah”

 Islamic Banking distinguishes from Conventional Banking

in four basic principles:

1. Interest Free Transactions.

2. Risk Sharing
3. Asset & Service Backing
4. Contractual Certainty( Gharar free contracts)
 Six Key Principles of Islamic Banks

 Six key principle drive the activities of Islamic banks

are :
 1) Prohibition of predetermined loan repayments as
interest (riba)
 2) Profit and loss sharing is at the heart of the islamic
system
 3) Making money out of money is unacceptable. All
financial transactions must be asset-backed
 4) Prohibition of speculative behavior
 5) Only Shariah approved contracts are acceptable
 6) The sanctity of contracts

 sanctityof contract refers to the principle that the

parties to a contract, having duly entered into. it,
must honor their obligations under it. The sanctity of
contract means giving recognition to the contractual
framework with appropriate. legislation.
Define Shari’ah

 Shari’ah is an Islamic religious law that governs not only

religious rituals, but aspects of day-to-day life in Islam.
Shari’ah, literally translated, means "the way." There is
extreme variation in how Shari’ah is interpreted and
implemented among and within Muslim societies today.
 Islamic products and services offered by 250+
Financial Institutions around the world

Germany: 3 UAE: 9
- Bank Sepah - Dubai Islamic Bank
- Commerz Bank Bahrain: 26 - Abu Dhabi Islamic Bank 5
Kuwait:
United States: 20 - Deutsche Bank - Bahrain Islamic -Bank
HSBC Amanah - Kuwait Finance House
- Al Manzil Financial Services Switzerland: 6
UK: 26 (primarily - Al Baraka
- American Finance House - ABC Islamic Bank Qatar: 4
branches of Gulf and global - Qatar Islamic Bank
- Failaka Investments - CitiIslamic Investment Bank
banks) - Qatar International Islamic
- HSBC
- HSBC Amanah Finance
- Ameen Housing Cooperative
- Al Baraka International Ltd Iran: 8 Pakistan: 5
- Takafol UK Ltd India: 3
- The Halal Mutual
Investment Company Turkey: 7 Bangladesh: 3
- J Aron & Co Ltd (Goldman
Egypt: 7 - Faisal Finance
Sachs) - Alwatany Bank of Egypt Institution Malaysia: 49
- Egyptian Saudi Finance - Ihlas Finance House
2 - Pure Islamic Banks (Bank
Sudan: 9 Saudi Arabia: 10 Islam, Bank Muamalat)
- Al Rajhi
Rest - conventional banks
- SAMBA
- Saudi Hollandi
- Riyadh Bank
Indonesia: 4
Yemen: 5

Note: Figure indicates number of Islamic FIs in the country. Only some of the key FIs are shown for each country
The current Islamic Banking movement
is a Grass Root Level Demand Driven
Phenomenon.

Its about time for the whole industry to

pursue for the Islamic Banking Industry
to reach the “Tipping Point”
 The Tipping
Point…..
•“Tipping Point” is that magic moment when ideas,
trends and social behaviors cross a threshold, tip and
spread like wildfire.
•We are, as humans, heavily socialized to make a kind
of rough approximation between cause and effect.
•Consider for example the paper folding example-
geometric progression.
•As human beings we have a hard time with this kind of
progression, because the end result-the effect-seems
far out of proportion of the cause.
•We need to prepare ourselves for the possibility that
sometimes big changes follow from small events, and
that sometimes these changes can happen very
quickly.
 To reach the Tipping Point for
Islamic Finance

We need to understand :
•What Motivates a customer towards
Islamic Banking? (This includes both new &
existing users of banking services)
•What is modern day Marketing?
•Who is Islamic Banking’s Customer?
•How to market Islamic Banking to make it
reach to the tipping point .
What Motivates an
individual?
 Universal Motivating Factors:

1.Fear
2.Reward (in Cash or Kind))
 Motivating Factor- Reward

“The interest which you give to increase the wealth of people, will have no
increase with Allah: But that which you lay out for charity, seeking favor
of Allah (He will increase): it is these who will get a recompense
multiplied.”

Ar Rum 39 (First Revelation)

 Motivating Factor- Fear

“O you who believe, Fear Allah and give up what remains of your demand for
Interest, if you are indeed a believer. If you do not, then you are warned of the
declaration of war from Allah and His Messenger; But if you turn back you shall
have your principal: Deal not unjustly and you shall not be dealt with unjustly.”

Al Baqarah 278 - 279 (Fourth Revelation)

 Motivating Factor- Fear

From Hazrat Abu Hurayrah (RA):

The Prophet, peace be on him, said:
"Riba has seventy segments, the least
serious being equivalent to a man
committing adultery with his own
mother." (Ibn Majah)
Thank You!