Assignment I

THE INSTITUTE OF ISLAMIC BANKING & FINANCE

ASSIGNMENTS OF MODULE I & II ID. NO

:

PGDIBF/542/09

NAME

:

MOHAMED RIYAS.J

SUBMITTED TO: THE INSTITUTE OF ISLAMIC BANKING & FINANCE SUBMITTED BY, (MOHAMED RIYAS.J)

MODULE – I PART – I SECTION – 1

Q 1. Attach at least five downloads from any websites on Islamic Banking & Finance with your comments on the schemes/developments/events in the Islamic Finance world. New Islamic account launched:

MANAMA: Citibank Bahrain and the Citi Islamic Investment Bank 15-09-09 launched its Sharia-compliant corporate current account. The new account is targeted at corporate clients providing them with all the convenience and flexibility of a current account supported with a world-class service experience. "Islamic banking is the fastest growing segment within commercial banking today, and the newly launched Sharia-compliant current account for companies is part of our strategy to serve the small and medium enterprises (SMEs) segment," said Citibank chief executive Mayank Malik. "This is in line with our efforts to meet the needs of SMEs who form the backbone of any economy and are significant contributors to business activities in Bahrain." Source: www.gulf-daily-news.com Kuwait to set up new Islamic bank with free shares: The Kuwaiti cabinet has decided to establish a new Islamic bank with three quarters of its shares offered free to citizens, the official KUNA news agency reported on 15-09-09. The Warba Bank, the fourth Islamic bank in the oil-rich emirate, will have a capital of 100 million dinars (350 million dollars) in which the state-run Kuwait Investment Authority, the sovereign wealth fund, will own 24 percent. The remaining 76-percent stake worth 265 million dollars will be distributed equally to the 1.1 million Kuwaitis with the government footing the bill. The decision, taken by the cabinet late on Monday, comes on the eve of the Muslim feast of Eid al-Fitr next week, for which the government has allocated a full one-week public holiday.

Kuwait already has three Islamic banks, including Kuwait Finance House, one of the world's largest Islamic banks. It has also given approval to a conventional bank to become Islamic. In addition, the emirate has seven conventional local banks and branches for six international and Gulf banks. The foreign banks include world banking giants BNP Paribas, Citibank and HSBC, besides Abu Dhabi National Bank of the United Arab Emirates and Qatar National Bank. Qatar's Doha Bank and Saudi Arabia's largest bank Al-Rajhi have been granted licences to operate in the emirate, which opened its doors to foreign banks in January 2004. Source: www.saigon-gpdaily.com.vn First Islamic Bank to Open in Kazakhstan: United Arab Emirates- Islamic banking system keeps growing amidst the uncertainty of global economic situation.…………………………………………………………………

This is seen from the programme of Abu Dhabi-based Al-Hilal Bank that ‘plans to open Kazakhstan’s first Islamic bank in December.’………………………………………………..

The United Arab Emirates’s state-run bank also plans to start two new branches and to expand its wings to other states of Soviet Union.……………………………………. Mohamed Berro, Al-Hilal Bank’s CEO, told that ‘the lender is on track to break even by end 2009 and will be profitable in 2010.’………………………………………………………. With initial of about Dh100millions, or about $27million, the bank will headquarter the new bank called Al-Hilal Islamic Banks in Almaty and Asthana.…………………… The initiatives came out as the Kazakhstan has just recently passed a new Islamic banking law, which is hopefully to underpin the Islamic economics in general as well. Said to TradeArabia.com, Mohamed Berro said, “It will be a stepping stone to enter former Soviet Union states.” Sources: http://islamine.blogspot.com

Conventional Banks’ Profits Decline, but Islamic Banking Expands: 14 September 2009 ISLAMABAD: The profits of conventional banks have declined 31 percent during JanuaryJune, 2009 compared to the like period of 2008. But, there is a good news, too. In contrast to the conventional banks, the Islamic banking is doing quite well, and very upbeat, a State Bank of Pakistan, or SBP, report unveiled this week indicates. Twenty-four commercial banks saw their combined profit after tax, or PAT, during this half year period, decline 31 per cent to Rs26.8 billion down from Rs38.7 billion in the January-June, 2008, according to banking sector and financial analysts. Net interest income or NII indicated a growth of 11 per cent only. But the cost-to-income ratio declined by 20 basis points to 50.1 per cent by June, showing that the banks are operating more effectively than previously. The slow to poor growth in the various sectors of the economy, analysts said, was the key cause of the decline in profitability. This sharply contrasts with several years of a boom period until 2006. That was the time when foreign investors were buying Pakistani banks, or investing in bank shares. Bank mergers and acquisitions (M&A) was a significant phenomenon when foreign investors, particularly from the UAE, the Gulf and the Middle East saw this sector lucrative enough to invest in this country. However, the recent two years have seen the banks grappling with bad and non performing loans, or NPLs. They had to make the record high provisioning on to offset growing NPLs. The increasing NPLs are a sign of borrowers failure to stick to their repayment schedules due to their reduced sales, shrinking earnings and profits. The provisioning in the first half of calendar year 2009 rose as high as Rs35 billion up from Rs20.2 billion in the like six months of 2008. The growth of NPLs by 74 per cent a sign of the economy doing badly. The GDP was down to 2.2 per cent in 2009, from a high of more than 6.5 per cent in 2006. The growth is projected at 3.3 per cent even for the current fiscal 2010. The industrial output in fiscal 2009, ended June 30, was minus 9.0 percent, as demand hit by low purchasing power, high inflation and reduced bank advances for consumer durables hit the economy. Food inflation reaching 31 last summer, and core inflation at 21.0 per cent, reduced the purchasing power that led to lower demand for food and consumer goods. High lending rates of banks and reduced advances for leasing of consumer durables ranging from autos to refrigerators, as well as loaning for property and real estate mortgages vastly eroded the market. Leasing for consumer durables were further reduced as the banks saw their NPLs rising and the bankers turned more risk averse. Consumer financing dropped from Rs359 billion in the last fiscal ended June 30, 2008 to Rs. 294 billion in the year ended June 30, 2009, despite their high yield in interest income. Advances to the private sector were merely Rs28 billion in Jan-June, 2009, out of Rs 319 billion deposits. The balance was borrowed by the government to meet budget deficit. The banks reported that their administrative expenses rose 20 per cent to Rs74.4 billion during January-June, 2009, due to soaring inflation. It forced the cost-to-income ratio to 45 per cent, from 42 per cent in like period of 2008. Despite the fact that there were not many borrows for advances during this half year period, the Net Interest Income, or NII recorded a significant growth of 19 per cent reaching Rs122.7 billion. The spread helped them to earner a larger amount of NII.

While the commercial banks were facing a less then cheery environment, the Islamic Banks, or IBs are doing quite well, despite the domestic slowdown, and fall out effects of the global financial crisis. SBP reported this. IBs posted a 12.4 per cent growth during the quarter ended June 30, 2009. It said the total assets of IBs rose to Rs313 billion during the quarter up from Rs278 billion in the previous quarter that ended March 31, 2009. SBP report said, the asset financing activities of IBs have revived, alongside substantially higher assets and deposits growth.” The profits are up significantly. The financing and investment portfolio of IBs rose to Rs195.0 billion at end-June, 2009. It was Rs185 billion as of March 31, 2009. IBs, the report says, are growing in all areas of operations. Their market share in terms of total assets rose to 5.1 percent, financing and investment was up at 4.2 percent, and deposits rose to 5.2 percent at endJune, 2009. The physical presence of IBs and Islamic banking is expanding, too. There are six fullfledged IBs, and 12 conventional commercial banks with dedicated Islamic banking branches. Put together their number rose to 528 branches during the quarter under review. “The current growth rate of the Islamic banking industry aims at achieving a share of 12 percent by 2012, according to the Islamic banking strategy plan.” More depositors feel attracted by Islamic banking as their confidence grows in the system. As a result, the deposits increased 15.5 per cent during the quarter. SBP recorded the deposit based of IBs at Rs. 238 billion at the end of the quarter up from Rs. 206 billion at end-March 31, 2009. There is a 13.3 per cent increase in total liabilities of IBs reaching Rs. 274 billion compared to Rs. 242 billion at the end of the previous quarter. The net assets were up 7.0 per cent, and equity, similarly, rose 7.0 per cent. The IBs reserves rose 6.0 per cent to Rs. 1.0 billion. Their appropriated profits rose 79 per cent to Rs900 million. The SBP says, the key element of the IBs performance during the quarter was “most of the indicators of Islamic Banking in Pakistan showed their reversion towards the usual high growth trend.” This is in contrast to the fact the IBs had also been through a slowdown as a result of the global situation and the domestic slowdown of the economy in general. IBs financing portfolio expanded 3.0 during the quarter, compared to the previous quarter. This is a very positive feature because the IBs financing had declined by Rs. 10.0 billion. The central bank points out, “the resurgence in financing was accompanied by a Quarter-on-quarter 9.3 percent increase in the investment. Larger investment shows “the improved economic outlook of Pakistan.” The investment also increased following the government of Pakistan issuing the third series of ‘Ijara sukuk.’ ‘Musharika’ financing saw a Rs. 2.4 billion expansion. But the ‘Mudaraba’ financing was down nearly 50 per cent compared to the previous quarter. As the overall Islamic banking stayed upbeat, the net markup income, or MI of IBs nearly doubled from Rs7.8 billion in the quarter that ended March 31, and the one that ended June 30 when it was Rs 15.4 billion. The IBs non-markup income or NMI rose by a huge 213.2 percent from Rs 0.5 billion in the quarter ended March 31, to Rs1.6 billion in the quarter ended June 30, SBP analysis said. Sources: www.khaleejtimes.com

United Arab Bank Plans to Offer Islamic Banking Solutions: 11/09/2009 Sharjah: United Arab Bank has plans to offer Islamic banking solutions either through a dedicated Islamic banking window or an Islamic banking subsidiary, the bank's top officials told Gulf News. "Our board is actively considering the option of offering Islamic banking solutions. Our partner, Commercial Bank of Qatar (CBQ) has the expertise in Sharia compliant products and services. Although we have not decided on the timing of the launch, it is very much on our plan," said Shaikh Faisal Bin Sultan Bin Salem Al Qasimi, Chairman of United Arab Bank. CBQ has a 40 per cent equity stake in the lender which it acquired in 2007. The UAB management said that there is a growing demand for Islamic products from its existing customer base. "The board and the management are keen to provide appropriate products that have demand in the local and regional environment. Keeping in mind we are primarily an Arab bank and operating in a region where there is a strong demand for Sharia compliant products. We are taking early steps to offer limited number of Islamic product to our customers," said paul Trowpidge, chief executive officer. Sources: http://www.muslims.net/

Q 2. Write down at least 10 points of your inference drawn from “what the press says” a) Islam forbids payment or receipt of interest on financial transactions. b) Now-a-days the Muslims have been trying to restructure their lives on the basis of Islamic Principles. c) In India most of the companies under against of Islamic Principle. It includes interest based transaction of business and also alcohol, tobacco, pornography, etc. d) One of the few investment products in India Market that is closest to meeting the shariah standards is a ‘select equity’ mutual fund scheme offered by a private fund house. e) A lot of money is being allocated for India from the Middle East. The fund will invest in energy, road and highway projects. It will also focus on large urban infrastructure projects. f) Last two decades increased the Islamic financial institution in India. g) Islamic Banking and finance are growing at the rate of 15 percent every year. h) At present, more than 300 Islamic Banks and financial institutions operate in 75 countries, 40 of them in the Arab Gulf Co-operation Council (AGCC) countries.

i) The Islamic way of equity financing includes the Al Musharaka and Al Mudarabah. j) High return and high risk in the Islamic Investment. k) Most of the companies accept the Islamic principles of equity finance.

Q 3. Define the impact of brain storming session on your introductory understanding of the subject in five points. a) Islamic finance over the last several years has expanded throughout the world, not just in Middle East, but in Asia, Europe and the United States. The global Islamic finance industry has growth significantly over the last 10 years and today assets are in the range of $1 trillion $2 trillion. b) The treatment of profit and losses will have consequences for the balance sheet structure and will require particular adjustments to meet minimal prudential requirements. For example, in Mudaraba transactions, the bank bears full financial responsibility for any losses but shares relative profits with the client. Any losses stemming from uncollateralized equity financing may require higher loan loss provisioning and additional capital. c) The Malaysian Islamic financial market is a very important component of the global growth for the industry. Malaysia, a majority – Muslim nation with ambitions become a global hub for Islamic finance, has been particularly aggressive in promoting itself as a banking base for the Muslim world. To help banks-local and foreign win religious approval for their products, the government has set up a Standards board with international Islamic experts. It is also pushing local companies to arrange their financing through Islamic instruments. Most of the corporate debt issued in Malaysia. d) Members of a committee constituted by the Reserve Bank of India (RBI) to examine the issue has viewed that Islamic banking cannot be offered by banks in India as well as the overseas branches of local banks under the present legal framework. Except a basic offering like current account, almost no other banking product in India can be modified to meet the conditions of Islamic Banking. e) Usury or Interest is prohibited. The battle between finance and faith is not limited to Islam; the restriction on interest has roots in many religions, including Christianity and Judaism, to ensure that the wealthy don’t take unfair advantage of the poor. Only Islam still adheres to this strict interpretation.

Q 4. What does the Holy Quran say about Riba? Quote from the Four Surahs. Rewrite the order of these Surahs in order of Compilation. The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money).

Riba in the Quran “Those who devour usury will not stand except as stands one whom the Evil one by this touch hath driven to madness. That is because they say,” Trade is like usury”, but God hath permitted Trade and forbidden usury”. (Quar-an 2:275) “God deprives interest of all blessing but blesses charity; He loves not the ungrateful sinner (Quar-an 2:276) “These who believe, perform good deeds, establish prayer and pay the zakat, their reward is with their Lord; neither should they have any fear, nor shall they grieve”. (Quar-an 2:277) “O believers, fear God, and give up the interest that remains outstanding if you are believers. (Quar-an 2:278)

Q 5. What did Abu Hurayrah narrate about the prophet (PBUH) on Riba? Answer in Five Points. 

“On the night of Ascension I came upon People whose stomachs were like houses with snakes visible from the outside. I asked Gabriel who they were. He replied that they were people who had received interest”.

 “Riba has seventy segments, the least serious being equivalent to a men committing adultery with his own mother”.  “There will certainly come a time for mankind when everyone will take riba and it he does not do so, its dust will reach him”.  “God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba he who usurps and orphan’s property without right, and he who is undutiful to his parents.”  The Riba is highly prohibited other than sinner of activities.

SECTION – 2 Q 1. How is Riba defined in Fiqh terminology? Riba is one of those unsound (fasid) transactions which have been severely prohibited (nahyan mughallazan). It literally means increase…….

However, in fiqh terminology, riba means an increase in one of two homogeneous equivalents being accompanied by a return. It is classified into two categories. First, riba alnasi’ah where the specified increase is in return for postponement of, or waiting for the payment; for example, buying an irdab (a specific measure) of wheat in winter against and irdab and a half of wheat to be paid in summer. As the half irdab which has been added to the price was not accomplished by an equivalent value in the commodity sold and was merely in return for the waiting, it is called riba al-nasi’ah. The second category is riba al-fadi which means that the increase mentioned is irrespective of the postponement and is not offset by something in return. This happens when an irdab of wheat is exchanged hand to hand for an irdab and a kilah (another measure) of its own counterpart, the buyer and the seller both taking reciprocal possession; or when ten carats of gold produce are exchanged for twelve carats of similar gold produce.

Q 2. Does Riba enter into every commodity or is it confined gold, silver, wheat, barley, dates and salt? Justify with your reasoning.  Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt].  Every business is mutual of buyer and seller based on shariah.

Q 3. The characteristic features of Riba Al Fadl are……. Narrate five examples. From ‘Umar ibn al-Khattab: The last verse to be revealed was on riba and the prophet, peace be on him, was taken without explaining it to us; so give up not only riba but also ribah [Whatever raises doubts in the mind about its rightfulness]. (Ibn- Majah, op.cit) From Abu S’id al-Khudri: The Prophet, peace be on him, said : “Do not sell gold for gold expect when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away from among these] for what is ready”. (Bukhari, Kitab al-Buyu, Bab bay’I alfiddati bi al-fiddah; also Muslim, Tirmidhi, Nasa’I and Musnad Ahmad). From ‘Ubada ibn-al-samit: The Prophet, peace be on him, said : “ Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt – like for like, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you, wish, provided that the exchange is hand-to-hand”. (Muslim, Kitab al- Musaqat, Babal-sarfi wa bay’I al-dhahabi bi al-waraqi naqdan; also in Tirmidhi). From Abu Saj’id al-khudri: The Prophet, peace be on him, said : “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt – like for like, and hand-to-hand. Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt]”. (Muslim, ibid, and Musnad Ahmad). From Abu Umamah: The Prophet, peace be on him, said : “Whoever makes a recommendation for his brother and accepts a gift offered by him has entered riba through one of its large gates” (Bulugh al-riba, reported on the authority of Ahmad and Abu Dawud).

Q 4. Define Riba Al Nasiah, Narrate five characteristics with sources and examples. From Usamah ibn Zayd: The Prophet, peace be on him, said : “There is no riba except in nasi’ah [waiting]” (Buhari, Kitab al- Buyu, Bab Bay al-dinari bi al-dinar nasa’an ; also Muslim and Musnad Ahmad). “There is no riba in hand-to-hand [spot] transactions” (Muslim, Kitab al-Musaqat, Bab Bay’I al-ta’ami mithlan bi mithin; also in Nasa’i). From Ibn Mas’ud : The Prophet, peace be on him, said : “Even when interest is much, it is bound to end up into paltriness” (Ibn Majah Kitab Al Tijarat, Babal” taghlizi fi alriba, also in Musnad Ahmad) From Anas ibn Malik: The Prophet, peace be on him, said : “ When one of you grants a loan and the borrower offers him a dish, he should not ride, unless the two of them have been previously accustomed to exchanging such favours mutually”. (Sunan al-Bayhaqi, Kitab alBuyu, Bab kulli qardin jarra manfa’atan fa huwa riban). From Anas ibn Malik. The Prophet, peace be on him, said. “If a man extends a loan to someone he should not accept a gift”, (Mishkat, op.Cit., on the authority of Buhari’s Tarikh and ibn Taymiyyah’s al- Muntaqa). From Abu Burdah ibn Abi Musa: I came to Madinah and met “ Abdallah ibn Salam who said, “ you live in a country where riba is rampant; hence if anyone owes you something and presents you with a load of hay, or a load of barley, or a rope of straw, do not accept it for it is riba” (Mishkat, op.cit., reported on the authority of Bukhari)

Q 5. Name the Compendium and Contents of Abd al – rahman al Jaziris work and what is it known for? ‘Abd al-Rahman al-Jaziri’s al-Fiqh’ala al-Mad-hahib al-arba’ah, is a compendium on the juristic opinions of the four predominant schools of Muslim jurisprudence. It is held in high esteem and considered to be an authority on the subject. Given below are some relevant excerpts from this book on the subject of riba. Definition and classification Riba is one of those unsound (fasid) transactions which have been severely prohibited (nahyan mughallazan). It literally means increase……. However, in fiqh terminology, riba means an increase in one of two homogeneous equivalents being accompanied by a return. It is classified into two categories. First, riba alnasi’ah where the specified increase is in return for postponement of, or waiting for the payment; for example, buying an irdab (a specific measure) of wheat in winter against and irdab and a half of wheat to be paid in summer. As the half irdab which has been added to the price was not accomplished by an equivalent value in the commodity sold and was merely in return for the waiting, it is called riba al-nasi’ah. The second category is riba al-fadi which means that the increase mentioned is irrespective of the postponement and is not offset by something in return. This happens when an irdab of wheat is exchanged hand to hand for an irdab and a kilah (another measure) of its own counterpart, the buyer and the seller both

taking reciprocal possession; or when ten carats of gold produce are exchanged for twelve carats of similar gold produce.

SECTION -3 Q 1. How does Profit Sharing principle differ from Profit and Loss Sharing Principle? Narrate in five points. a) Profit Sharing Principle is based on the Mudarabah principle i.e., profits will be shared between the owner and the entrepreneur on the basis of a contractual agreement whereas losses under normal circumstances would be written on capital. b) The first indication of this principle in the literature under review was given by Quraishi in his notion of partnership. But his concept is ambiguous as he suggests that capital will be shared by the two parties. c) The profit and loss sharing principle is related to the Musharaka principle. d) Profits are distribution according to contractually agreed shares, but the liability of loss is proportionate to the capital contribution. e) According to Ahmad, Islamic financing may take one of two forms: share may be floated by joint stock companies in accordance with the Mudarabah principle, or banking institutions may mobilize resources on the basis of the Mudarabah principle. Q 2. Justify in 10 points the need for financing. a) Start a business.

b) c) d) e) f) g) h) i) j) k)

Finance expansions to production capacity. To develop and market new products. To enter new markets. Take-over or acquisition. Moving to new premises. To pay for the day to day running of business. Choosing the Right source of finance. Amount of money required. The amount of risk involved in the reason for the cash. The length of time of the requirement for finance.

Q 3. What was the name of enterprise the Prophet (PBUH) used to have with Khadijah for trading? Discuss. The Mudarabah enterprise the Prophet (pbuh) had with Khadijah which started more than fifteen years before the beginning of the revelation. They also mention the common practice of Mudarabah in the Makkan society. It should be noted that Mudarabah implies that the net profit of trade is shared between the owner (rab al mal) and the worker (mudarib) after it is actually realized at the end of the transaction.

Additionally, the agricultural society of Al Madinah used to practice crop sharing which was called ‘muzara’ah and Musaqah with the former applying to open fields used for crops and the latter to orchards of trees especially palm. Land in muzara’ah and land and trees together in Musaqah are fixed assets put at the disposal of the working partner. These arrangements ensure the use of assets without actually paying for them which is tantamount to financing. Both muzara’ah and Musaqah require sharing the gross output and allow for limited flexibility in the contractual distribution of operational expenses. Q 4. Can debt repayment be postponed? If yes, under what conditions and how? The Qur’an tells about rescheduling the payment of debts : If the debtor is in a difficulty, grant him time till it is easy for him to repay… (II:280) As may be observed from the preceding and following verses, the context of this verse is mainly the issue of business lending and the elimination of riba. In his commentary al Qurtubi contends that the above verse was revealed in connection with the debts owed to the Thaqif tribe by the tribe of Bani Al Mughirah. These debts were interest- bearing and the preceding verses (II: 278-279) prohibited any increase above the principal of debts. As a result, the Thaqif asked for their principal to be paid back and the Bani Al Mughirah complained to the Prophet (pbuh) that they lacked liquidity. Then, the verse ordering postponing of the repayment of these debts was revealed. Al Qurtubi, however, contends that despite the specific circumstances of the revelation of this verse, its meaning is general and it applies to all debts regardless of their source or origin adding that: The best thing said about the application of this verse is the statement of ‘Ata’, Al Dahhak and Al Rabi’ Ibn Khaitham that: it is for any debtor who is in difficulty, he must be granted time (free o charge) whether the debt was originally based on riba or not (ibid p. 372, our translation from Arabic). The postponement of debts, as prescribed by the verse above, is done without any financial compensation. This applies regardless of the causes of default-involuntary or deliberate. Q 5. Please name any four eminent commentators on Quran about Riba and any ones views about Riba. Muhammad ibn ‘Abdallah ibn al-‘Arabi (Qur’an commentator and maliki jurist). Riba literally means increase, and in the Qur’anic verse (2:275) it stands for every increase not justified by the return… (Ahkam al-Quran, Cairo: Isaal-Babi al-halabi, 1957, p.242). It may be clarified here that the ‘waiting’ involved in a loan is not considered by the jurists to be a return justifying the increase (interest) on the principal amount.

SECTION-4

Q 1. In Conventional economics the factors of production are….. How do they differ in Islamic Economics? In conventional economics, profit, rent, wage and interest are considered to be factors of production. In one way or another, all are fixed in relation to time expect profit. Profit is an uncertain amount whereas wage, rent, and interest are fixed and known. Islamic economic literature dismisses interest as it is prohibited by the holy Quran. Rent and wage are treated as one and the same as the term Ujrah is used for the price of both human resources per unit of time (wage) as well as the usufruct rights of fixed assets (rent). Therefore, the question can be asked: what is profit and how is it different from Ujrah (rent/wage) and interest? In the Holy Qur’an, the term profit is used only one: These are they who have purchased error in exchange for guidance Their trade has brought them no profit (II:16) In Islamic jurisprudence literature, profit is defined as the increase in the value of assets (fixed or mobile) actually realized in exchange. Profit may be the result of a natural process of growth without any effort or cost on the part of the owner, e.g., pastures growing on privately owned land or the increase in water of a privately owned well. Profit in Islamic economic thinking is inherently associated with the responsibility of decision making. In a market economy this responsibility exposes the decision maker to an uncertain outcome. Hence, when the capital owner becomes also the decision maker of the firm, his earning is called profit i.e., the residual after paying a known and fixed return Ujrah (wage) to labor. A working partner, without any share in capital, can also be the decision maker of the firm and can share in profit once payment of a fixed a known return Ujrah (rent) is made to physical capital and possibly to other workers who have made a human input. Since money has what the fuqaha’ call the potentiality of growth only through the process of exchange, it is needed in the production process for making payments to physical capital, labor and intermediate inputs. As money does not posses a flow of services of its own, it can only enter the production process on the basis of sharing the outcome of exchange. In other words, it can enter production only on the basis of sharing the uncertainty and risk inherent in a market economy.

Q 2. Mention at least 5 characteristics of Mark up principle.  The mark-up principle of finance results from incorporating deferred payment in Murabahah.  In the mark-up principle, the financier benefits from the difference between the immediate and deferred prices of the goods.

 The mark-up principle is justified on the basis of a generally accepted axiom that time may be valued provided it is incorporated in a sale transaction.  The financier’s claim for return derives its fiqhi legitimacy from the fact that the financier has owned the object of sale for at least some period of time. Such ownership implies carrying risk and uncertainty.  The mark-up creates a fixed, predetermined and secure indebtness. This has made the mark-up principle attractive for Islamic Banks as an alternative to interest based transactions. Q 3 Basic features of Renting principle are……. Discuss. By separating an assets’s ownership rights from its use rights, the rent principle Ijarah makes the use of an asset independent from its financing. The owner of the asset bears all the risks associated with ownership and the user of the asset pays a fixed price (rent) for the benefits of the asset. One can, thus, use an asset without owing it. Therefore, Ijarah plays an important financial role. Two variants of the Ijarah principle have been used in some countries: hire purchase and rentsharing. In a hire-purchase form of finance, the client (the purchaser of an asset) knows the price of the asset, the bank’s profits in the underlying sale transaction and the amount of rent to be paid. After paying the principle plus the profit and rents for the relevant period, the client assumes the ownership refraining from the use of the hire-purchase principle unless appropriate care is taken with regard to the provision of the extension of the lease period, the termination of the lease contract, the return of the asset to its owner, the purchase of the asset at the end of the lease contract, etc. In a rent sharing contract, in addition to the principle, the client pays a known share of the market rent of the building until such time as he completes all payments. It is understood that the bank’s profits in the operation are incorporated into the agreed rent. Q 4. What is a sale based principle? Mention a few prominent commentaries. Although sale-based liability creating finance has been widely used by Islamic banks, the general principle has only recently been dealt with in the literature. By studying the differences between the terms riba, bai’ and dayn (debt) as they appear in the Holy Qur’an , Ismail (1989) attempts to show that sale-based liability-creating financing is the Islamic alternative to interest. Ismail concludes that the fuqaha’ usually mention the following five forms of permissible deferred sales which create deferred obligations: i) Salam sale (the price is paid at the time of contract but the object of sale becomes due as debt in kind). ii) Mua’jjal sale (the object of sale is delivered at the contract and the object of sale is manufactured and delivered later)

iii) Istisna’ sale (the price is paid at the time of contract and the object of sale is manufactured and delivered later) iv) Ijarah (the sale of the use rights of assets where assets are delivered to the user who in turn pays periodic rentals) and v) Murabahah li al;amer bi al shira’ (sale with a known profit which may or may not create debt). Q 5. What is Dayn and what are its sources. Debt is something owed. Anyone having borrowed money or goods from another owes a debt and is under obligation to return the goods or repay the money, usually with interest. For governments, the need to borrow in order to finance a deficit budget has led to the development of various forms of national debt. Debt (dayn), has two primary sources: a nonmarket source (i.e., loan) and a market source (i.e., sale). The question of a return on nonmarket debt does not arise because the cause of the debt is a humanitarian consideration and the question of a return on debt created by sale does not arise because the return has already been incorporated into the price of the assets traded. Thus, once the debt is created, irrespective of its origin, the extension of its repayment period can only be non-economic in nature. A debt default does not improve the quality or quantity of the debt. Therefore, claiming a return for extending the repayment period is unnatural and illogical. MODULE I PART II SECTION – 1 1. How do you specify principles of Islamic banking? The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (interest). Amongst the common Islamic concept used in islamic banking are profit sharing (mudharabah), safe keeping (wadiah), joint venture (Musharakah), cost plus (Murabahah) and Leasing (Ijarah). 2. Name atleast two shariah compliant funds which have started operations in India. i) Parsoli Corporation Limited ii) Srei Infrastructure Finance iii) 2i Capital Group 3. Name five reasons and problems hindering Islamic Banking & Finance in India. I.

Al Wadiah (for saving bank account): Section 21 of the Banking Regulation Act requires payment of interest on such deposits; thus, interest free deposit and a simple charging of premium or Hiba is not permissible.

II.

III. IV. V.

Mudarabah (for term deposit or investment): Here again, section 21 of the BR Act disallows such products where the bank can invest the money in equity fund (in India, equity exposure is determined by a separate set of rules), and the client has complete freedom in the management. Mudarabah, Musharakah (for project finance and SME credit): section 5, 6 of the BR Act indicate the forms of business a banking company can undertake, and does not allow any kind of profit-sharing and partnership contract-the basis of Islamic banking. Ijarah (for home finance): As against Islamic banking where the banks owns the asset and hold the title, section 9 of the BR Act prevents the bank from any sort of immovable property other than private use. Istisna (leasing, buyback): Besides the usual curbs on acquiring immovable property, offering Islamic banking products may not be bankable due to stamp duty, central sales tax and state tax laws that will apply depending on the nature of the transfer.

4. Name five common misconceptions about Islamic Banking and Finance. 1. 2. 3. 4. 5.

The Islamic banking and finance is the religious based of the banking. The bank is the only for the Islamic people. Interest free banking activities are impossible. It is only of focus not proper action. Islamic based on the investment is the high risk. Islamic principle is not suitable for all religions peoples.

5. What are the Two indirect reasons that lure gulf investors to India? i) India is a developing country lot of companies developing in here. ii) India has the largest customer market and cheap rate of labor force 6. What comes in the way of starting Islamic Banking in India? How was this problem overcome in U.K. In India will create the new Banking Regulation Act based on the Islamic Principle at the time come in the way of starting Islamic Banking in India. In market like the UK, there is separate law that makes it possible to launch Islamic Banking products. 7. The Four Surahs of the holy Quran which mention about riba are… I. II.

Al-Quran 2:275 Al-Quran 3:130 Al-Quran 2:278 Al-Quran 4:161

III. IV.

8. Dubai International Financial Centre offers three basic services. They are… a. Retail b. Corporate Banking

c. Investment d. Project financing 9. How is Life Insurance Corporation of India active in Saudi Arabia? LIC’s new international joint venture company- Indo-Saudi Insurance Company. So LIC in Saudi Arabia. 10. How is Bank Muscat involved in Investments in India? Oman’s largest bank, Bank Muscat, which recently picked up 43% stake in the domestic brokerage house Mangal Keshav Group, is raising a $250 million Shari’ah compliant India specific fund and another $500 million private equity fund for investment in the booming domestic market. SECTION -2 MATCH THE FOLLOWING Islamic Philanthropy

-

Sadaka or Zakah

Principle of Sharing the net outcome

-

Mudaraba

Fiqh

-

Islamic jurisprudence

Riba

-

Usury – Interest

PBUH Holy

-

A suffix attached to the name of the Prophet

Muajjal and salam

-

Principle of financing through sale

Fuqaha

-

Multiple of Faquih

Istisnaa sale

-

Price is paid at the time of contract

Shariah Compliance

-

Strict adherence to norms laid down by Islamic law & jurisprudence

Hadith

-

Also Pronounced as Hadees

SECTION – 3

FILL UP THE BLANKS 1. The two variants of Ijarah principle are hire-purchase and rent-sharing. 2. In conventional economics the factors of production are profit, rent, wage, interest. 3. Two main types of Riba are Riba Al-Nasi’ah and Riba Al-Fadl 4. The trading enterprise between the Holy Prophet PBUH and Khadijah was named as Mudarabah. 5. To understand the principle of financing in islam the distinction between HALAL and HARAM is of crucial important.\ 6. In Fiqh terminology Riba is defined as Usury – Interest 7. Agricultural practice prevalent in Madinah were named as muzara’ah and Musaqah. 8. In Islamic terminology wage is known as Ujrah. 9. Profit sharing principle is based on Mudarabah and Profit and loss sharing principle is

based on Musharaka. 10. Riba is an unsound transaction known as usury.

MODULE II PART I SECTION – 1 Q 1. On what paradigm is Islamic economics based? Islamic economics is based on a paradigm which has socio-economic justice as its primary objective (Qur’an, 57:25), This objective takes its roots in the belief that human beings are the viceregents of the One God, who is the creator of the Universe and everything in it. They are brothers unto each other and all resources at their disposal are a trust from Him to be used in a just manner for the well-being of all (repeat all). They are accountable to Him in the Hereafter and will be rewarded or punished for how they acquire and use these resources. In spite of its emphasis on morals, Islam does not recognize any watertight distinction between the material and the spiritual. All human effort, irrespective of whether it is for ‘material’, ‘social’, ‘educational’, or ‘scientific’ goals, is spiritual in character as long as it conforms to the value system of Islam. It is presumed within this paradigm that morally-oriented individual behavior in an appropriate socio-economic justice and overall human well-being, just as it is presumed

within the market system’s paradigm that self-interested behavior in a competitive market would ensure social interest. Q 2. Define Islamic Economics and name the important institutions that have played a crucial role in its development. Islamic economics may be defined as that branch of knowledge which helps realize human well-being through an allocation and distribution of scarce resources that is in conformity with Islamic teachings without unduly curbing individual freedom or creating continued macroeconomic and ecological imbalances. A number of institutions have played a crucial role. The most important of these are: • •

• • • • • • •

The Association of Muslim social scientists, U.S.A (established in 1972) The Islamic foundation, Leicester, U.K. (1973) Islamic Economics Research Bureau, Dhaka, Bangladesh (1976) The Centre for Research in Islamic Economics at the king Abdulaziz university, Jiddah (1977) The International Institute of Islamic Thought, Herndon, Virginia, U.S.A. (1981) The Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB), (1983) The International Institute of Islamic Economics, Islamabad (1983) The College (Kulliyyah) of Economics at the International Islamic University, Kula Lumpur (1983) and The International Association of Islamic Economics (1984).

Out of these the Centre for Research in Islamic Economics at the king Abdul Aziz University and the Islamic Research and Training Institute at the IDB deserve a special credit for their outstanding contributions. The centre’s contribution has been already recognized by the IDB award in Islamic Economics in 1993. Q 3. What are the elements of Islamic Economic System? Mention at least 3 characteristics of each. Due to the universality of islam over time and space, its economic system should be flexible. It should allow for the differences in the social-political factors of the various Muslim countries. The main sources which determine the basic elements of the Islamic system are the Qur’an and Sunnah. The thoughts of Muslim scholars and the experience during the past 14 centuries would give an important guidance. These latter sources, however, should be taken with care and greater flexibility. This is due to the drastic changes which took place in the organization of societies during the past 14 centuries, and the fact that economic organization to a large extent falls in the category of transactions (Mu-amal-at). a) Ownership

b) Motivation c) Decision Making Process Q 4. Name the three basic concepts of Conventional economics with their characteristics. The secularist worldwide gave rise to a number of concepts which constitute the paradigm of conventional economics. One of these was that of rational ‘economic man’. Given the materialist and social Darwinist outlook of this worldview, rational behavior did not get identified with what was necessary to serve the social interest or to realize the normative goals. It rather became equated with unhindered freedom of the individual to pursue his self-interest in turn became identified with the maximization of wealth and want satisfaction, independent of its impact on the well-being of others. Such an emphasis on the pursuit of self-interest had a social stigma attached to it because of its apparent conflict with the prevalent social vision. Adam smith helped remove this stigma by arguing that if everyone pursued his self-interest, the ‘invisible hand’ of market forces would, through the restraint imposed by competition, promote the interest of the whole society. The second concept was that of ‘positivism’. ‘Positveness’ did not, however, become defined in terms of the impact on normative goals. It rather became defined in terms of unrestrained individual freedom. The third concept, which was essentially a derivative of the assumed harmony between individual and social interests, was that of the efficacy of market forces. It was asserted that the economy will run efficiently in left to itself. Any effort on the part of the government to intervene in the self-adjusting market on the basis of society’s normative goals could not but lead to distortions and inefficiency. The government should hence abstain from intervening. Market forces would themselves create ‘order’ and ‘harmony’, and lead to ‘efficiency’ and ‘equity’. Q 5. Define the main factors that affect the economic system in any country. Keynesian Approaches 1 Savings and Investment There are some economic facts of life that underpin all macroeconomic explanations of growth. Perhaps the most important is that in order for capital goods to be accumulated to produce greater quantities of consumer goods in the future, consumer goods have to be given up in the present. For example, if workers are building a textile factory they cannot simultaneously be making textiles. These will only appear in the future as a result of the sacrifices of the present. Increases in the amount of capital goods are called investment. For growth to occur the level of investment has to be greater than the amount of depreciation, i.e. the amount by which machines wear out or become obsolete during the year. The higher the level of investment above depreciation the greater the potential output of the economy in the future.

Unfortunately, the resources to enable investment have to come from somewhere. The only way that workers can be freed from making cars to build car factories is by an increase in savings by households. i.e. by the postponement of any decision to buy goods today in favor of future consumption. Look now at the investment figures for your six case study countries and think about the differences between them, particularly those between Asian and Latin American countries. Notice also the very marked regional differences in investment and savings rates. The analysis above gives the traditional PPF model of economic growth. In the diagram below, a country starting with high levels of current consumption will have few resources available for investment. Its PPF will increase only slowly, if at all. A country succeeding in restricting consumption today will have an expanded PPF in the future, and can move to a point of higher consumption.

In the diagram two countries starting with the same PPF, achieve two very different growth paths. The first country, by consuming less and therefore saving more, has a high degree of investment and moves from A to B. The second country consumes more initially, at C, but this allows a much smaller expansion of the PPF, resulting in less of both consumption and investment in the future at D. This analysis suggests that a high rate of savings is a necessary condition for a high rate of growth in GDP. Government policy may have to make savings compulsory, or provide effective incentives for people to postpone consumption e.g. increased taxes. Governments may also feel the need to do the investment themselves, having enforced savings through taxation. An alternative is to borrow the necessary funds from other governments or from official aid agencies, paying back the interest from future growth. Another important variable implicit in the diagram is the effectiveness of capital goods in producing consumer goods. Clearly, some new car factories are more productive than others. A lot depends on the technology employed and the human capital of the workers.

The analysis therefore suggests that a growth orientated government should also target research and development and the education and skills of its workers. The analysis above is an informal representation of the Harrod-Domar model. This model has been extremely influential in development economics. Evaluation of the model: An increased level of savings is not a sufficient condition for growth. For a start, the savings funds have to find their way to people who are willing to take the risk of investing. Provided they get the funds at reasonable rates of interest they then have to be able to make informed choices about the kind of investment needed e.g. what consumer tastes in the future are likely to be. There are also problems coordinating investment projects. Often firms will only invest if other firms are also investing, e.g. providing intermediate goods, infrastructure support or external economies of scale. Indeed, the two-good PPF model illustrated in the diagram may be rather misleading because it leaves out of the picture the extent to which the various sectors of the economy are in tune with each other. The extent to which the savings rate can be influenced by government policy may be very limited. The trouble is that the savings rate cannot really be taken as independent of the level of GDP. To some extent people’s willingness to save depends on their income. With people generally less inclined to save when their incomes are low. For example, in developed countries it is usual for people to borrow money when starting employment and only to start saving when their salaries are higher later on in their careers. The situation is much more acute for people below the poverty line in developing countries. The prospect of future growth in GDP may act as a disincentive to do the savings necessary for that growth. What makes sense for the economy as a whole may not appear to be at all sensible for the individuals making the decisions. A further major problem with the arguments of the Harrod-Domar model is its assumption that increases in capital automatically expands the PPF. Unfortunately, extra capital for a given quantity of labour can only bring a certain amount of growth. At some point the economy will run into diminishing returns, i.e. a shortage of labour. This suggests that the level of savings is much less important than the rate of technological change. Some countries have compulsory savings laws e.g. Singapore. But perhaps this works only if the economy is already growing fast enough to provide the economic and political basis on which to sustain compulsory savings. There is also a need for potential savers to trust the financial system. e.g. that there will be a low inflationary environment and that institutions are safe places to deposit money.

2 Government-Financed Investments

It may be the case that governments are not well enough informed to make investment decisions which reflects market circumstances. However, some kinds of investment are subject to market failure and government provision may therefore be necessary. For example, the provision of infrastructure is difficult to achieve in a free market . it has too much of a public good aspect to be provided effectively by private companies. There are also obvious positive externalities associated with an efficient, well maintained, and reliable infrastructure. Market-Based Approaches 3 Macroeconomic Stability General macroeconomic conditions are very important in terms of the general climate under which investment decisions are made. So economic growth will depend to some extent upon the stability of the economy e.g. fiscal balance, and reasonably predictable levels of inflation. Macroeconomic stability reduces the risks of investment and might therefore be seen as a necessary condition for growth. Fiscal balance ensures that there is less risk of inflation, because there will be less risk of governments printing money. This may also stabilize the exchange rate and allow interest rates to be set at a reasonably low level - so further encouraging investment. Stability is also an important factor in the amount of foreign direct investment a country may be able to attract. For developing countries this may be the only realistic source of investment funds. 4 Trade Liberalisation, Capital Mobility and Exchange Rate Policy The abolition of trade restrictions (tariffs and quotas) is often seen as a necessary condition for growth. The idea is to widen markets and thus allow economies of scale in exporting industries. It is often argued that exchange rates need to be adjusted downwards at the same time, to ensure that potential exporters can compete on world markets. To encourage direct foreign investment restrictions on international capital flows may need to be reduced. These policies have often been introduced to satisfy the conditions of IMF loans .This is discussed in more detail under structural adjustment policies. However, such policies are extremely controversial. Free trade did not seem to be a necessary condition for European growth. Certainly, exposure to foreign competition may increase the productivity of companies that survive but the side-effects for what are likely to be some of the poorest people in developing countries are likely to be severe.

SECTION – 2

Q 1. Write short notes on Inheritance, Zakah, Zakah al Fitr and Al Waqf. The inheritance system leads to the redistribution of the total wealth of the deceased. The impact of inheritance on distribution differs according to the system of inheritance itself. For example : “ Under primogeniture the eldest son inherits almost everything which leads to concentration of wealth”. Zakah is the third pillar of Islam, and is a long term measure with widespread effects, zakah is in fact a collection of redistributive measures and not a single measure, as its beneficiaries have different economic characteristics. Zakah al Fitr is obligatory, according to majority of the jurists, on each muslim, male or female, minor or major, slave or free. Each individual pays it for himself and for all his dependents as long as he has more than one day’s food for himself and his dependents on the night of ‘id al Fitr. Zakah al fitr then is obligatory on those who may themselves be legally reckoned as poor but they pay to those who are poorer. Thus, Zakah al Fitr is directed towards the poorest of the poor. The waqf or Charitable trust is a way of transferring income from one generation to another for welfare purposes. Of course, a waqf can created while person is alive. Anyone can give some of his wealth as waqf and the income generated by this, in the final analysis has to be a charitable waqf, the ultimate beneficiary must be deserving people. So, waqf usually will be something durable e.g. real estate. Q 2. Discuss in detail the elements of Islamic scheme for distribution and redistribution. Islam uses many tools and schemes for redistribution. These are briefly surveyed below and the analysis also focuses on how Islam deals with the incentive effect of redistribution. Prohibition of interest and promotion of profit sharing These may be considered as measures operating through the market process, thus they can be classified as distributive schemes. How does prohibition of interest promote better distribution of income? Let us examine the case of a loan. A commercial bank has two applications for financing – one form a poor man and the other form a rich person. Let us assume that the two projects present their prospects of profit and loss as similar. If the bank is financing on the basis of interest-based system, it is mainly concerned about getting back its principle plus interest (Riba) as stipulated in the contract. Compare this with financing based on profit sharing. In profit sharing the financier is not sure that the principal and his share of profit will materialize unless the project is successful. He cannot go and take the property of the receiver if the project fails. So his not, his attention is devoted to scrutinizing the project itself. If it succeeds, he gains, if it does not,

he looses. So the banker in the Islamic system has no personal interest to seek the rich particularly and give them money. He will week the best project. Prohibition of Monopoly Monopolies have many forms; some are natural, some contrived and some are administratively created by society. Islam clearly prohibits monopoly except in those cases where monopoly has to be tolerated because of peculiarities in the processes of production. Shari’ah and Fuqaha ‘ have clearly stated that if monopoly for some reason is inevitable or unavoidable (by giving the examples and monopolies existing in their own times) the government must intervene and control the price of the product. The elimination of monopoly helps considerably in eliminating a reason for the creation of disparities of income and wealth. Q 3. What are the important axioms of distribution in Islam? i. ii. iii.

iv.

v.

vi.

vii.

All citizens are partners in certain types of natural resources. All citizens are partners in public wealth. It is recommended (and at time obligatory) to give away freely “surplus real wealth”. Each person who possesses productive assets, natural or produced is obliged to give away freely the surplus usufruct without compensation. Surplus is that whose additional (marginal) utility and cost for the owner is negligible. If the utility for the beneficiary of this excess is very large it is permitted to oblige the owner to bear some minor costs involved in the process of granting the surplus. He who produces “surplus” as his basic profession is exempted from giving it away freely. Man i ha (particular kinds of gifts) is recommended in all kinds of productive assets. This gradually changes to an obligation as the need of the beneficiary increases and that of the donor decreases. The Imam is authorized to make it mandatory and organize it on a wide scale if the distribution is much distorted. Maniha must be temporary, and the ownership rights of the donors must be guarded. The assets should be returned to the owners when the beneficiaries become well off, or when the public treasury can provide for them. Resources which become available to the Muslim community without a special effort from anyone, and are not generated from a privately owned asset, are governed by the rule of ‘Fay’ and are appropriated to the public treasury so that all Muslims share their benefits. Priority of benefitting from ‘Fay’ is granted to the poor and to those who perform public duties. Society may deduct from each category of private earnings a portion which is to be spent as ‘Fay’. Such portion decreases as the labour, risk and cost of earnings increase. Awqaf (charitable trusts) are to be encourages so that their immense benefit to the people is restored. They are to be organized so that their social role in the provision of public services is revived.

Different forms of mutual social support (social insurance) should be encouraged and organized for the aid of individuals who have been harmed by misfortunes and accidents. It is obligatory for the ruler to determine, in the light of the principle of Shari’ah and the economic conditions of the community, the minimum level of real income to be guaranteed by the public treasury for those who are unable to attain it and do not have any prosperous relatives, in case the sources of Zakah are insufficient. The courts should be permitted to entertain suits against the treasury for the enforcement of this guarantee. Those economic policies are to be encouraged which reduce disparities in distribution.

viii.

ix.

x.

Q 4. What are Fiqh and Ijtehad? Discuss. Islamic laws are related to human understanding of the Shari’ah. This understanding could either be correct or incorrect. This is the nature of Fiqh. On the other hand, Shari’ah can never be wrong as it is the revelation by Allah through His Prophet (pbuh). Shari’ah is thus permanent. It cannot be challenged at it is just the Qur’an itself. Allah says “God commands justice. The doing of good and liberality to kith and kin and He forbids all shameful deeds, and injustice and rebellion” (16:90). This is the revelation. The responsibility of the Prophets is to convey it, not to invent it according to their own likes and dislike. “The Apostle’s duty is but to proclaim (the message) but God knoweth all that ye reveal and ye conceal” (5:102). Thus, the role of the Prophet (pbuh) is to convey the will of Allah and the role of the jurists and the scholars (‘Ulama’) is to understand and interpret it. Every scholar or jurist is not qualified to interpret the will of Allah, since the Prophet (pbuh) has made it clear that if one is qualified to understand and interpret Shari’ah, then he will be serving Allah, even if his interpretation is not correct. Islam places much emphasis on Ijtihad. It is the only religion which asks its followers to make Ijtihad; to carry out research, even if the findings, the results, the views reached at, are wrong. The efforts so directed are also met with reward. The reward is double if the conclusions are right, but on the condition that it is carried out by qualified persons. If it is not done by the qualified persons, it is prohibited. At the same time, they should be sincere, and they should not follow their own desires, likes and dislikes. Q 5. What are the major goals of distributive justice in Islam? Discuss. (i) Guarantee of fulfillment of basic needs for all: The guarantee of fulfillment of basic needs of all people in society is a fundamental Islamic objective of distribution and redistribution. It is supported by over whelming rules explicitly stated in the texts in Qur’an and Hadith, and there is no doubt as to its importance and primacy in the Islamic concept of distributive justice. (ii) Reduction of inequalities in income and wealth:

The second goal is the reduction of inequality in income and wealth. This goal is also stated explicit in the Qur’an. Many of the Islamic rules of distribution and redistribution clearly aim to achieve the objective of reducing the inequalities in income and wealth. (iii)

Purification of the donor’s inner self and his wealth: The third rule for redistribution is the purification of the donor’s inner self and the purification of his wealth. This is also explicitly stated in the Qur’an and in Hadith.

(iv) Generation of goodwill among people The final goal is the generation of goodwill among people, which is also explicitly stated in the texts as one of the goals of redistribution in Islam.

SECTION – 3 Q1. How would you conclude your view on Riba (bank interest) by relying on the argument of Islamic jurists (Fuqaha)? In concluding, it is clear that al riba is prohibited in Islamic law. This is evidenced by the clear texts of the Qur’an, Sunnah, and juristic opinions. It is also clear that the prohibited riba includes the interest imposed on bank loans and given on deposits by the banks. “In view of the above discussion, we are of the firm view that the interest charged on loans and given on deposits by the banks falls within the definition of Riba and that it makes no difference whether the loan is taken for consumption purpose or for productive purpose, i.e., for trade, commerce and industry.” Thus, in determining whether the Islamic bank conforms to the precepts of Islamic Law, the most important element to be eliminated is the element of riba. With the, elimination of riba, all forms of exploitation will be eliminated, especially in the form of the financier being assured of a positive return without doing any work or sharing any risk, while the entrepreneur, in spite of his management and hard work, is not assured of such a positive return. Based on the above discussion, it is difficult to see how anyone could justify interest in an Islamic social system. The difficulty to understand the prohibition comes from lack of appreciation of Islamic values, particularly its uncompromising emphasis on socio-economic justice and equitable distribution of income and wealth. Q2. What is Gharar? Name a few main types of Gharar. Gharar is the uncertainty, hazard, chance or risk. Technically, sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. It is an exchange in which one or more parties stand

to be deceived through ignorance of an essential element of the exchange. Thus it refers to an element of absolute or excessive uncertainty in any business or contract. Gambling (qimar) is a form of gharar because the gambler is ignorant of the result of the gamble. ( gharar one of the three fundamental prohibitions in Islamic finance, the other two being riba and maysir). The Hanafi school of Islamic jurisprudence defined gharar as "that whose consequences are hidden." The Shafi'i school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazn of the Zahini school wrote " Gharar is where the buyer does not know what he bought, or the seller does not know what he sold.' The root Gharar denotes deception; an exchange in which one or both parties stand to be deceived through ignorance of an essential element of exchange. It also refers to ambiguity present in a contractual relationship as to the consideration and the terms of the contract that can lead to a dispute. Gharar is divided into three types, namely Gharar Fahish (excessive to which Gharar normally refers), which vitiates the transaction, Gharar Yasir (minor) which is tolerated and Gharar Mutawassit (moderate) which falls between the other two categories. Any transaction can be classified as forbidden activity because of excessive gharar. In general, this prohibits the selling of goods or services that the seller is not in a position to deliver or the making of a contract which is conditional on an unknown event. Due to the uncertainty and risk involved, it makes a transaction similar to gambling. The prohibition on Gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculative trading and derivatives. "Deception through ignorance by one or more parties to a contract. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. Gharar can occur in several ways, all of which are haram. The following are some examples: * Selling goods that the seller is unable to deliver * Selling known or unknown goods against an unknown price, such as selling the contents of a sealed box * Selling goods without proper description, such as shop owner selling clothes with unspecified sizes * Selling goods without specifying the price, such as selling at the 'going price' * Making a contract conditional on an unknown event, such as when my friend arrives if the time is not specified * Selling goods on the basis of false description * Selling goods without allowing the buyer the properly examine the goods" Uncertainty in a contract of exchange as to the existence of the subject matter of the contract and deliverability, quantity or quality of the subject matter. It also involves contractual ambiguity as to the consideration and the terms of the contract. Such ambiguity will render most contracts invalid. The root Gharar denotes deception; an exchange in which

there is an element of deception either through ignorance of the goods, the price, or through faulty description of the goods. Thus, one or both parties stand to be deceived through ignorance of an essential element of exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. Speculative risk-taking in commerce, which involves the investment of assets, skills and labor, is not considered similar to gambling. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives." Types of Gharar: Gharar-fil-Sifah:

Uncertainty with respect to characteristics of the goods.

Gharar-fi-al-Ajal:

Uncertainty with respect to time of the delivery.

Gharar-fi-al-Miqdar:

Uncertainty with respect to quantity of goods.

Gharar-fi-al-Taslim:

Uncertainty with respect to delivery of the goods.

Gharar Yasir:

A small amount of gharar that may be unavoidable.

Q3. Name of the categories of Fiqh with their characteristics. Muslim jurists, in their writings, have classified Islamic Fiqh (or Islamic law) into various categories. The foremost among them is Fiqh –al-‘Ibadah (The jurisprudence of worship). It encompasses the relations between the man and his creator, Allah. It includes rules pertaining to prayers (salah), fasting (sawm), charity (zakah), Pilgrimage (Hajj) and the likes. Almost one fourth of the Fiqh or Islamic law consists of Fiqh –al-‘ibadah. The second category is Fiqh-al-Mu’amalat (the jurisprudence of transactions on social dealings). It contains the doctrines, norms, laws, rules and regulations governing the dealings, transactions, contracts, and agreement between man and man concerning assets and property. In Arabic language, Mu’amalah means dealings, to deal with, to buy, to sell, to hire etc. Hence, in Fiqh – al- Mu’amalat, we come across such terms as ‘Aqd-al-Bay’ (contract to sell), Ijarah (Hiring), Mudarabah (commenda), and Musharakah (partnership) etc. There is another category of Fiqh namely Fiqh-al-Jinayat which deals with the criminal law. The Fiqhal-Hukm, yet another category, deals with administrative and constitutional matters. Since we are primarily concerned with the Fiqh-al-Mu’amalat, let us define it. Fiqhal-mu’amalat is the norms, the rules and regulations, governing Mu’amalat i.e. the contracts, agreements, dealings, and transactions between individuals. Q4. What are the two conditions to be kept in mind while studying Fiqh al Muamalat? First, one should be aware of the Islamic rules and regulations governing these transactions, contracts, agreements. This is the basic requirement to evaluate the Islamic

norms and the Islamic principle governing the transactions, the Mu’amalat. Most of the time economists find themselves in a situation where they cannot even use a contract not to speak of combination of contracts. But it is not very difficult. It requires thinking and research just to utilize and put to it together and to bring something new out of two, three, four five of the Islamic contracts. Although jurists are bound to make research and reach any amicable solution of the questions put to them but two conditions should be there to guide them. The first condition is that the solution should not involve Riba (interest). The second is that it should not involve Gharar (uncertainty). It is thus rightly said by some jurists like ibn Rushd that all agreements between Muslim. i.e. the contracts, transactions etc.

Q5. What are the basic characteristics of Riba in relation to its definition? The literal translation of the Arabic word riba is increase, addition or growth, though it is usually translated as 'usury'. As the following discussion shows, usury is not to be regarded solely as the practice of taking interest on a loan. Several methodologies exist for describing riba. Here, two defining elements of riba are identified (riba al-fadl and riba al-nasia), and two kinds of transaction into which these elements may be incorporated are described (riba al-qarud and riba al-buyu). Riba al-fadl involves an exchange of unequal qualities or quantities of the same commodity simultaneously, and could therefore be described as the usury of surplus. Riba alnasia, the usury of waiting, involves the non-simultaneous exchange of equal qualities and quantities of the same commodity and does not therefore involve a surplus but only a difference in the timing of exchange. Some writers employ the term riba al-nasa to define such an exchange. Hence, an exchange in which I part with 100 grammes of gold now in return for 100 grammes of gold to be received from you tomorrow can be described as riba al-nasia. An exchange in which I part with 100 grammes of gold now in return for 110 grammes of gold to be received from you now can be described as riba al-fadl. It is occasionally argued that usurious loans, riba al-qarud, combine both riba al-nasia and riba al-fadl since there is both a delay and a surplus involved in such transactions. This is the modern interest bearing loan, wherein a charge is levied by one party on a debtor in respect of an amount owed. It is one of the major forms in which riba may be practised. The original debt may arise from a loan of money or from the purchase of an item on credit. In either case, the debtor enters into a contract to repay the lender a pre-agreed amount of wealth in addition to the original debt in return for a delay in the timing of repayment. Somewhat confusingly, the term riba al-nasia is occasionally used synonymously with riba al-qarud, but in this text the terms are used as defined above.

Some scholars have in the past asserted that the prohibition on riba al-qarud relates only to high interest charges and not to all forms of interest. Others such as Dr. Tantawi, while Sheikh of al-Azhar in Cairo, have argued that bank interest is a sharing of the bank's profit and may therefore be permissible. In recent times it seems that the Sheikh has either changed his opinion on this matter, or corrected an earlier misunderstanding of his opinion by others. In any case, the view in question has now been widely rejected. Rejected too have been those arguments that proposed fixed interest rates to be haram and variable interest rates halal. It is occasionally argued that if the rate of interest is allowed to vary then this is permissible since the rate of return is not fixed in advance. This of course is a complete misunderstanding of the mechanics of interest. It is simply the manner of calculating interest that varies here, not the fact of its payment. Under variable rates of interest, interest is indeed charged but the rate at which it is charged is determined at the beginning of each sub-period into which the loan is divided. Riba al-buyu, the usury of trade, is a second major form in which the elements of riba al-fadl and riba al-nasia may appear. In order to avoid riba al-buyu, both the quality and quantity of the exchanged items must match and the exchange must be simultaneous. Hence, if dates are to be exchanged for dates, the quality and quantity of the dates must be the same and the exchange must be made on the spot. (Quite why anyone would enter into such an exchange is another matter, but Mahmoud El-Gamal at Rice University in Houston has pointed out that the requirement may simply exist in order to encourage the sale of goods for cash in order to achieve fair market values for buyers and sellers, "marking-to-market" as he describes it). MODULE II PART-II SECTION -1 Please write point answers in words or points and not narrations. 1. The most indispensable conditions for market equilibrium to be in harmony are; a) b) c) d)

Harmony between individual preferences and social interest; Equal distribution of income and wealth; Reflection of the urgency of wants by prices; and Perfect Competition.

2. Name the important measures for distribution of natural resources. a) Partnership of all citizen in certain kinds of wealth. b) Prohibition of Private Preserves (enclosures) c) Obligation of granting surplus water and renewable natural resources.

3. The FOUR categories of Fiqh are… a) b) c) d)

Fiqh-al-‘Ibadah Fiqh-al- Mu’amalat Fiqh-al-Jinayat Fiqh-al-Hukm

4. The 3 main elements of Islamic economic system are… a) Ownership b) Motivation c) Decision Making Process 5. The Three basic concepts of Conventional economics are… a) Secularist b) Positivism c) Harmony 6. Gharar is manifested in FOUR ways. They are… a) b) c) d)

Gharar fil-miqdar Gharar fi-sifah Gharar fil-ajal Gharar fil attasl i m

7. Name three eminent Islamic economists. a) Abu Yusuf b) Al-Mas’udi c) Al-Mawardi 8. Major goals of distributive justice in Islam are... a) b) c) d)

Guarantee of fulfillment of basic needs for all. Reduction of inequalities in income and wealth. Purification of the donor’s inner self and his wealth. Generation of goodwill among people.

9. Important elements of distribution are (only name them) a) Prohibition of interest and promotion of profit sharing b) Prohibition of monopoly.

10. What are elements to be studied to understand Riba? a) Riba is forbid in Islam. b) This is very big sins category c) Compulsory we are save our society. SECTION - 2 MATCH THE FOLLOWING Sufficient limit

Hadd e kifayah

Maqasid e shariah

The goals

Inheritance

Wasiyah

Maniha

Resource obtained without much effort

Fay

Gift

Auqaf

Charitable Purpose

Ijtehad

Research

Gharar

Uncertainty

Kharaj

Gain

Daman

Risk

SECTION - 3 FILL IN THE BLANKS 1. The amount of Zatah al Fitr obligatory on each individual, by weight is one Sa’ (2.75 liters) of the staple food of the country. This is equivalent, for example, to 2.175 kg. of wheat. 2. Alfred Marshall’s great treatise on conventional economics of 1890 is named as PRINCIPLES OF ECONOMICS. 3. The sufficiency limit Hadd al-Kifayah should be assured for every individual. 4. Islamic economics is based on the paradigm of Socio – economic justice. 5. Islam is characterized by two important features as a religion sent by Allah. They are QURAN AND HADITH.