Spiritually: socialist Collect zakat (wealth tax) + tax on income, but not or consumption.

It is the responsibility of individuals to help the poor The socioeconomic role of the State is:

Meeting the basic needs of citizens

Maintaining social welfare of the society Undertaking administration/legal measures to avoid concentration of wealth in a few hands.

Economically & financially: Capitalist but with restrictions Islam prohibits and strongly CONDEMNS usury or RIBA Islam promotes partnerships and strongly prohibits limited liability Islam prohibits excessive risk taking Islam prohibits speculation on Islam prohibits earning money through money Zakat compels people to invest money in business ventures

Dimensions of Islamic Economic System

Legal System
Limited Capitalism
(surplus wealth for personal use)

Spiritual System
(human rights on surplus wealth)

Spiritual Socialism

Inter-dependent & Inter-connected (Synthesis)

Restricts luxury & wealth accumulation Immune System (Regulatory) Channels excess wealth to the needy Treatment system (Repair/Maintenance)

Primary focus of Islam is on the spiritual System Legal system provides only safety valve for safeguarding basic human rights Keeping excess wealth and generating income from it is allowed legally but is spiritually detested.

Modern Economic Drivers

Government
1. 2. 3. 4. GDP growth Free market Credit Tax on income/ Consumption 5. Deficit financing

Companies
1. 2. 3. 4. 5. Sales growth Money Credit Consumerism Profit maximization

Individuals
1. 2. 3. 4. 5. Income growth Money Credit Consumption Wealth maximization

Islamic Economic Drivers

1. Economics is a Science of wealth (to teach selfishness). K.K Dewett 1. Earned income 2. Economics 1. Wealth Tax is made to study wealth rather than welfare. 2. Restricts 2. Guarantee basic 3. Whatever economics is concerned with, it does not: consumption human needs Study of relation of real goods (physical science) and wealth (monetary surplus 3. Distribute science) 3. Restricting wealth of material welfare (of individual) and general welfare (of Study of relation wealth accumulation humanity).
Study of relation of short term needs: and long-term needs

Basic types of growth patterns

Growth natural curve (natural resources) linear curve (machines) exponential curve (money) b

Time

Modern tragedy of Contradictory Laws

Integral System

Economic Laws

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford

GREEN ECONOMY: Crackdown on excessive consumption and consumerism through the consolidated efforts of the G20 SUSTAINABLE FINANCE: In the wake of the Global Financial Crisis, Islamic banking and finance will emerge as a force to be reckoned with in shaping the future development of global finance

PARALLEL/DUAL FINANCIAL SYSTEM

Conventional banks Islamic banks

Conventional banks

window

Conventional banks

Islamic Banking Subsidiaries

Insurance Companies

Takaful Operators

Conventional financial system

Islamic financial system

CHARACTERISTICS OF ISLAMIC BANKING

Islamic financial transactions based on Shariah principles: Contract (aqd) No elements of usury (riba) No elements of uncertainty (gharar) or gambling (maisir) Prohibition of unethical activities Multi-faceted roles based on nature of financial transactions engagement:

ISLAMIC FINANCIAL CONTRACTS

Savings and Current Accounts Investment Account Asset Creation

EXAMPLES OF ISLAMIC CONTRACTS

Murabahah Bai bi-thaman ajil Mudharabah Musharakah Bai al-salam Istisna Ijarah

Cost plus or mark-up Deferred payment sale Profit Sharing contract Partnership financing Islamic forward sale
(progressive payment)

(price paid in advance, goods delivered in future)

Commission to manufacture Lease finance

ISLAMIC BANKING OPERATIONS

Sources of funds

Application of funds

Profit

Distribution of profit

Non-mudharabah deposits Mudharabah deposits

General pool
Specific account I
or

Depositors

Bank Partners

SHF

Specific account II

Stylized Balance Sheet of an Islamic Bank

ASSETS Cash & cash equivalents LIABILITIES Current accounts Other liabilities Equity of Profit Sharing Investment Accounts (PSIA) Profit sharing investment accounts Profit equalization reserve Investment risk reserve Owners Equity

Sales receivables
Investment in securities Investment in leased assets Investment in real estate Equity investment in joint ventures Equity investment in capital ventures Inventories Other assets Fixed assets

Takaful Concepts Based on.

TAKAFUL
(e.g. Family, General)

A contract among participants to reciprocally help each other against defined loss

TABARRU (Donation)

Agreement to relinquish certain portion of contribution as donation to fulfil obligation of mutual help and joint guarantee

PROFIT SHARING ON SURPLUS

Commercial profit sharing contract between participants and takaful operator

Takaful Model
2 Models: Mudharabah or Wakalah
Participants Wakalah fees
x% Surplus on Maturity x%

Contributions

Participants Account (PA)

Participants Risk Account (PRA)

Less

Retakaful Reserves Claims Surplus/ (Deficit)

Investment Profit
x%
100%x%

x% 100% -x%

Takaful Operators
Less

Operating Expenses