Lecture-1

Fundamentals of Shariah
Shariah: The root Arabic word of Shariah is the verb sharaa. The literal meaning of sharaa is to open upon a street, like to open a door upon a street. In legal term sharaa means to make or establish laws. From sharaa also comes Shariah which in legal term means laws relating to all aspects of human life established by Allah for his servants. Laws relating to human life are divided into three i.e. those relating to belief, those relating to deeds and those relating to ethics. Thus, in this meaning Shariah is another word for Islam. Why Allah Revealed a Divine Law- Shariah? Some Muslim scholars of jurisprudence said that Allah revealed such a legislative system or Shariah in order to achieve justice. Other jurists said it is for the purpose of achieving happiness. And still some others, especially Al-Ghazali, said it is only for the achievement and the realization of the very benefits of man on earth. All these three approaches complement each other: happiness of mankind cannot be achieved at large without justice, and justice is one of the essential benefits and interest of people on earth. Components of Shariah: The laws governing the human needs are called Fiqh, which is defined as understanding the laws relating to human needs derived from their respective particular evidences. The respective particular evidences are the specific verses of Quran and Hadiths concerning each of human deeds. In modern times Shariah is also applied mean to Fiqh. Fiqh as Shariah which is referred to as Islamic Law is further sub-divided into four as follows: 1. Ibadat (rituals) 2. Munkahat (marriage or family laws) 3. Muamalat (commercial transactions) 4. Jinayat (offences, crimes and punishments)

Objective 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 property. Whatever ensures the safeguard of these five serves public interest and is desirable- Ghazali Objectives of Islamic law are protection of: 1. Faith, religion 2. Life 3. Intellect 4. Posterity and 5. Property These five necessities are derived from Shariah as necessary and basic for human existence. Therefore, every society should preserve and protect these five necessities, otherwise human life would be harsh, brutal, poor and miserable here and in the hereafter. These objectives are of three levels, that is: 1

Lecture-1 1. Da.ru.ruy.yat (life and death, the essentials) 2. Ha.jiy.yat (removing hardships, complementary) and 3. Tah.seen.niy.yat (beautifying, embellishments)

Silent features of Shariah:

It is divine Reward in the world and hereafter It is universal It is permanent It is complete

Sources of Shariah:
Scholars of jurisprudence divide the sources of Shariah into: Main or primary sources and Secondary sources

Primary sources: The primary sources are: 1. Al-Quran 2. Al-Sunnah Secondary sources: The secondary sources are: 1) Qiyas (analogical deductions), and 2) Ijmaa (consensus of opinion) 3) Revealed laws preceding the Shariah of Muhammad 4) The fatwa of a Companion 5) Istihsan (equity in Islamic law) 6) Maslahah mursalah (consideration of public interest) 7) Urf (custom) Why Study Islamic Economics? Definition of Religion: Religion provides norms and standards of behaviour to human beings in all aspects of life, spiritual, personal, social, material and otherwise. Definition of Economics: Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. Irvin B. Tucker The science which studies human behavior as a relationship between ends and scarce means which have alternative uses. L. Robbins

Lecture-1 P. Samuelson adds more details. He defines economics as "the study of human behaviour in relation to using scarce productive resources to produce goods and services and distribute them for consumption. Economics is the social science that studies the allocation of scarce resources to satisfy unlimited wants. All these definitions show that: Economics looks into a part of human behaviour that deals with material matters related to resources, goods and services. Religion and Economics A quick comparison of the definitions of religion and economics allows us to notice that there is a big area of overlap between them. One can easily deduct that the area of economics falls entirely within the domain of religion since economics deals with a subset of human actions included in the larger set of all human behaviours that is covered by the norms and standards set by religion. The Economizing Problem Scarcity Scarcity means that people want more than is available. Scarcity limits people both as individuals and as a society. As individuals, limited income, time and ability, restrict people from doing or having ALL what they like. As a society, limited resources such as manpower, machinery, and natural resources limit the amount of goods and services that can be produced. People must choose which of their desires they will satisfy and which they will leave unsatisfied. When people, either as individuals or as a society, choose more of something, scarcity forces them to take less of something else. Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices. People make choices about what goods and services they wanted. People work harder and do business to earn income or make profits in order to satisfy their unlimited wants. Commodities, money and profits constitute their happiness. Scarcity of Resources (Economic resources are limited relative to wants) Unlimited Wants (Peoples desires to use goods and services that provide satisfaction. Choice (Scarcity of resources requires choices to be made)

Scarcity Requires Choice Choice

Definition of Islamic Economics Islamic economics is a social science which studies the economic problems of a people imbued with the values of Islam (Mannan 1986, 18) It is the study of social science which enables people to perform their obligation to Allah and to their society. It studies man not only as an isolated individual but of a social individual having; 3

Lecture-1 Faith, Ethics (believing in the six articles, his deeds is accountable to Allah as it is guided by Shariah. He is also required to propagate good doing and prohibit bad doing al-Amr bil Maruf wa alNahy anil Munkar in the society (watch his business ethics). 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.

Islamic economics as a study of how man can achieve al-falah (complete happiness in this world and the hereafter) through his control, ownership and uses of these worldly resources based on the concepts of co-operation and partnership. AKRAM KHAN How Islam views the Economic Problems? Scarcity of Resources Unlimited Wants & Choice Allah (swt) has created resources in abundant. However recourses in the eyes of man are scarce/limited due why? Due to lack of means to reach this resources (which is the results of mans choice such as lack of knowledge, skills, etc.) Islam recognizes that human desires are unlimited. This is explained in the Quran and in the Hadith. Thinking that his wealth would make him last forever! (104:3) If man is given a valley of gold, certainly, he wants the second and third one and he will .. Hadith Hence scarcity of means necessitates choice which can provide higher values but at same time performing ones mission in this life. Choice in Islam should be ranking according to need fulfillment and not to greediness

Resources in Islam

Unlimited Wants

Choice in Islam

As a conclusion Islamic economics can be defined as; A study of human activities to obtain, manage and use the economic resources according to the Shariah principles for the betterment of human life both materially and spiritually in order to achieve the blessing of Allah (al-Falah). The Ultimate Macroeconomics objective in Islam: is to achieve al-Falah. All human activities and decision-making is to achieve al-Falah to achieve the success in this world and in the hereafter. i.e. the guarantee given by Allah for ones happiness in this world as well as in the hereafter.

Lecture-1 The relationship between man and his Creator Allah Through the concept of Tawhid - the unity of thought or the unity and sovereignty of Allah in Islam. Sovereignty in all matters belongs to Allah and to none else a belief in an ultimate sovereignty of God. The belief and understanding that Allah is the creator, the Lord, the Sovereign, the Sustainer and the Giver. To perform the duties and responsibilities as a vicegerent of Allah take good care and use of economic resources. To totally submitting himself to Allah by diligently obeying His rules and regulations. The responsibility of individuals to his society is through Zakat. Not to be selfish profit earning only to a specific sufficient profitability (Responsible Profit earnings). A balance between the requirement of material life and the well-being of the society. Conventional economics objective is to reach maximum output with the use of scarce resources. Islamic economics tend to reach the same objective but is constrained by the Islamic ethical philosophy. High and stable economic growth to maximize output. Full-employment low unemployment and high productivity. Price stability to keep inflation low and stable value of money. Favorable balance of payment.

The relationship between man and his fellow men.

DIFFERENCES BETWEEN: CONVENTIONAL AND ISLAMIC MACROECONOMICS OBJECTIVES.

Conventional Macroeconomics Objectives are to achieve:

Fundamental Objectives of Islamic Economics Social Justice One will not abuse the power and wealth given to him for the justice of the society; since we are only the khalifah of Allah granted and being trusted to the use of ownership of the bounties given by Allah. Surah Taaha; 20:6, Hes the one who own the bounties whatever on this earth and in the outer space (sky) or in between or down beneath the wet earth, For the welfare and justice of the society and to perform his duties to pay the Zakat as a voluntary duty for social justice. Make use of the education and knowledge for the betterment of human life. Higher education and skills to support productive human capital. Every Muslims were to be given the same chance to acquire education.

Universal education

Lecture-1 High rate of economic growth Make use all capitals and resources which are scarce for the growth of the economy, keeping in consideration the development of spiritual aspects of a mans life. The qualitative aspects of the economic growth differentiate a Muslims countrys growth path with others - to include all the moral, spiritual and material aspects of human well being. To reach the best efficiency in the production to create high employment opportunities. Social justice, is to produce goods at the maximizing revenue with high numbers of job opportunities.

Maximization of job opportunities.

Islam as a Deen is a complete constitution that organizes all aspects of life and relationships based on the principle of Tauhid and believe that Allah is the only one. The fundamentals of Islamic Finance Islamic Finance is based on principles that are derived from the Quran and Sunna of the Prophet peace be upon him. The basic principle in Islamic Law is permissibility. Under this principle all commercial and financial transactions are permissible except those that contain prohibited elements. What is Islamic Banking? Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called qh muamalat (Islamic rules on transactions). The rules and practices of qh muamalat came from the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions collectively agreed among Shariah scholars (ijma), analogy (qiyas) and personal reasoning (ijtihad). Muamalat: Muamalat is plural and singular is Muamalah. Muamalah is from the verb aamala literally meaning to interact. Muamalat means interactions or transactions. Commercial transactions are concluded through contracts which are permitted by the Shariah as evidenced by the Quran, the Sunnah and other sources of Islamic law.

Fiqh al-muamalat Fiqha-muamalat are laws regarding relationships between human beings which include economic transactions. Many of these were established centuries ago. During Islams golden age approximately the period from the time of the Prophet Mohammed until the fall of Al-Andalus in 1492 the Islamic world developed the most sophisticated system of trade and currencies the world had yet seen. The processes created during this period provide a broad basis from which to construct and extrapolate rules that can be applied to modern day nancial transactions. The main principles of Islamic nance include the following: Strict prohibition on paying or receiving interest; Riba in every shape is prohibited. Risks in any transaction must be shared between the parties, so that the provider of capital and the entrepreneur share the business risk in return for a share in the prots;

Lecture-1 Speculative behaviour is prohibited. This means that extreme or excessive uncertainty (Gharar)or risk is prohibited, and thus contractual obligations and disclosure of information are necessary; Money is seen as potential capital and can only take the form of actual capital when it is used in a productive capacity, or combined with labour; and Every economic activity is permissible unless explicitly prohibited by Shariah, which includes injunctions contained in, or derived from, the Quran and the Sunnah (sayings and practices of the Prophet Mohammed).

Prohibition in Muamalat: Trade and commerce in Islam must comply with requirements of Shariah, which broadly refers to: Abstinence from prohibitions (haram matters) and Observing that every contract possesses all its essential elements and that every essential element meets the necessary conditions. Prohibition of Riba (interest) Introduction of religious levy, zakat Avoidance of Gharar (excessive uncertainty in contracts) Application of Al Bay (trade/commerce) in all transactions Prohibition of Maisir (speculative, high-risk, gambling) Prohibition of involvement into the financing of alcohol, pork

Objectives of Islamic Finance The underlying aims of Islamic Finance are the same as those of conventional finance, namely:

To utilize the funds of surplus economic units to facilitate investment and asset allocation To facilitate trade To provide financial services To create investment opportunities

The difference, however, between Islamic Finance and conventional finance is in the manner in which they proceed to meet their objectives. The basis of Islamic Finance is equity (through profit and loss sharing schemes) and rental income whereas the pillar of conventional finance is debt (through interest). The Islamic financier/investor deals in physical assets, whereas the conventional financier deals mainly in paper assets. Therefore an Islamic financier will assume the risk of the purpose of the funds he is investing and share in pre-agreed ratios in the profit or loss resultant there from, while the conventional financier will only assume the risk of default of the entity or person to whom he is advancing funds, and the only upside that he will receive is the interest payable on the loan. History, Growth and Potential of Islamic Finance in Pakistan In Pakistan Islamic banking emerged as a response to both religious and economic needs. Efforts for economy wide elimination of Riba started during 1970s and most of the significant and practical 7

Lecture-1 steps were taken in 1980s. The mid-80s attempt was a significant step in the evolution of Islamic banking system in the country. In a technical sense it was the most advanced model compared to any other model being practiced anywhere in the world at that time. However that system fell apart as it did not adequately address issues such as putting in place an effective Shariah compliance mechanism, giving emphasis to expertise, and opting for a flexible and evolutionary approach. In any case this effort provided a valuable experience that has been taken into account while formulation of SBPs current strategy to re-launch Islamic Banking in Pakistan. The initiative to re-introduce Islamic Banking in Pakistan was launched back in 2001 when the government decided to promote Islamic banking in a gradual manner and as a parallel and compatible system that is in line with best international practices. Following the decision of the government to shift to interest free economy in a phased manner without causing any disruptions the effort was envisaged to be based on a market driven and flexible approach. Furthermore it aims at building a broad based financial system in the country to enable all segments of the population to access financial services. In this context SBP worked on a three divided strategy for promotion of Islamic Banking Allow new full fledged Islamic banks in the private sector, Allow the conventional banks to set up Islamic banking subsidiaries Allow the existing conventional banks to open Stand-alone Islamic banking branches. This time there has been a shift in the approach from the legal & regulatory perspective to that of dealing with the whole affair of introducing Islamic banking in Pakistan as a change management issue. As compared to our past experience our new approach provides flexibility to the IBIs (Islamic Banking Institutions) as regard to products, instruments and Shariah compliance methodology. This new initiative has witnessed a very encouraging response. Growth of Islamic Banking in Pakistan (Source Tribune March 02, 2014) In Pakistan, the largest Islamic bank is Meezan Bank, which is fast assuming mainstream prominence. Growth of Islamic banking in the country has been over 30% in the last few years, which is certainly above the average global growth rate of Islamic banking and finance. If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs.926 billion. New strategy The newly unveiled Islamic banking strategy by the State Bank of Pakistan attempts to double the number of Islamic banking branches from 1,200 in the next four years, and to increase its market share from 10% to 15%. Given the huge potential the country has in terms of Islamic banking, increasing the share to 15% is a modest aim. Indeed, if Islamic banking fails to achieve 20% share in the market by 2018, by all indicators, it has failed to reach its potential.

Lecture-1 Given that a number of banks are showing renewed interest in Islamic banking, the industry should target an increase of 2% in market share every year through Brownfield growth, i.e. cannibalization of conventional banking and through conversion of conventional into Islamic banks. Once Summit Bank is converted into a full-fledged Islamic bank, it will become the second largest Islamic bank in the country, taking the number two position from BankIslami (assuming that BankIslami does not grow further). Only this will give 8% additional market share to Islamic banking over the next four years. If Islamic banks exhibit Greenfield growth, more than the growth in conventional banking, it should be able to double its market share. Greenfield growth is not only possible but is in fact needed in Pakistan where there is widespread financial exclusion. If Islamic banking is used as a tool for promoting financial inclusion, there is no reason that Islamic banking should not be able to achieve the important milestone of 20% market share. If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20% and 30% of the market share. Pakistan, however, will become the most important player in Islamic banking and finance, if it attains 20% market share. This is so because the country is the second largest Islamic market (population-wise) after Indonesia.