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 January-
June, 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 end-
June, 2009. The physical presence of IBs and Islamic banking is expanding, too. There are six full-
fledged 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 al-
nasi’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 al-
fiddati 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 al-
Buyu, 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 al-
nasi’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) Finance expansions to production capacity.
c) To develop and market new products.
d) To enter new markets.
e) Take-over or acquisition.
f) Moving to new premises.
g) To pay for the day to day running of business.
h) Choosing the Right source of finance.
i) Amount of money required.
j) The amount of risk involved in the reason for the cash.
k) 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 rent-
sharing.

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. 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.
III. 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.
IV. 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.
V. 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. The Islamic banking and finance is the religious based of the banking.
2. The bank is the only for the Islamic people.
3. Interest free banking activities are impossible. It is only of focus not proper action.
4. Islamic based on the investment is the high risk.
5. 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. Al-Quran 2:275
II. Al-Quran 3:130
III. Al-Quran 2:278
IV. Al-Quran 4:161

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 - A suffix attached to the name of the

Holy

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. All citizens are partners in certain types of natural resources.

ii. All citizens are partners in public wealth.
iii. 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.
iv. 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.
v. 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.
vi. 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.
vii. 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.
viii. 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.
ix. 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.
x. Those economic policies are to be encouraged which reduce disparities in distribution.

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 Fiqh-
al-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. Fiqh-
al-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 al-
nasia, 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) Harmony between individual preferences and social interest;

b) Equal distribution of income and wealth;
c) Reflection of the urgency of wants by prices; and
d) 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) Fiqh-al-‘Ibadah
b) Fiqh-al- Mu’amalat
c) Fiqh-al-Jinayat
d) 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) Gharar fil-miqdar
b) Gharar fi-sifah
c) Gharar fil-ajal
d) 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) Guarantee of fulfillment of basic needs for all.

b) Reduction of inequalities in income and wealth.
c) Purification of the donor’s inner self and his wealth.
d) 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.