Islamic Economics and Commerce:

The Solution to Monetary Injustice

Rahil Ahmed Khan

In the name of Allah, Most Gracious, Most Merciful.

ISLAMIC ECONOMICS AND COMMERCE:

THE SOLUTION TO MONETARY INJUSTICE
- Rahil Ahmed Khan

For an ebook version of this book,

or for any other information on Islam visit:
http://scanislam.com

No Copyrights Reserved
This book may be published and printed for sale or free distribution without any prior permission
from the author. However, the content of the book should not be edited or deleted in the least
sense.
You have open license to reproduce this book in any other language. However, when translating
for quotations from Quran or Hadiths, please do not try to translate on your own. Refer to a
standard translation.

First Edition : December 2009

Second Edition: December 2010

Acknowledgement
All Praise be to Allah (One True God) who has guided his slave to write this book and
who has provided me with adequate understanding on the topic of Islamic Economics and
Commerce. Everything which has rightly been mentioned by me in this book is only by the
blessings of Allah, and each and every mistake, if there exists, is only due to my ignorance.
Then Ill like to thank Dr. Rehmatullah Ahad for his brief but essential guidance in
understanding the economic concepts. Also there are too many contributors over the years to this
project, and thus it is not possible to mention them individually.
I would like to express my gratitude and sincere thanks to my family and relatives,
especially my brother Kamil Ahmed Khan for his consistent and inevitable supports right from
the inspiration to take up this task to writing its conclusion.
Rahil Ahmed Khan

Preface
Economics and Commerce are usually seen as distant from religion. However
considering Islam claims to be a complete way of life, I was always interested in knowing its
connection with economics and commerce. The first such opportunity came to me when I
attended the Peace Conference in Mumbai in 2009. It was in this Peace Conference that I
listened to brief introductions to Islamic economics. And in this same conference I purchased
first book on Islamic Economics. Soon my interest grew and I started a detailed study on the
same.
Alhamdulillah (All praise be to God), with proper books, lectures, and research I learned
a lot about this subject. The first edition of my book was thus written in early December, 2009.
This edition i.e. second edition (December 2010) was originally written for University of
Mumbai as a final year project of Management Course and with some minor corrections in the
same I am pleased to present to you the book on topic, Islamic Economics and Commerce: The
Solution To Monetary Injustice.
The first section of this book, which I call Islamic Economics starts with basic
principles of Islamic Economics and then goes to explain the problems with the interest based
system. This has been done so as to create awareness about the problems. Also without
presenting the problems, it was impossible to elaborate on Islamic Solutions. The second section
of the book, deals with Islamic Commerce and the discipline it creates within Muslims.
Some parts of this book are being mentioned with respect to India, as I am an Indian
citizen, but may actually be taken in general sense as it is applicable in most of the cases.
Just a few days before the launch of this book, my brother and I successfully
(Alhamdulillah) launched our website http://scanislam.com with the subtitle, Because even
faith must have proof. This website provides the best multimedia and literature on Islam
available on internet for new Muslims and those non-Muslims who have an unprejudiced and
unbiased mind towards understanding Islam or true message of major religions. On the same
lines, this book explores the miraculous nature of Islam in the field of economics and commerce.
Lastly, I welcome your suggestions, feedbacks, queries and comments on this book as
well as for my website (scanislam.com). Please feel free to write on contact@scanislam.com.
May Peace, Mercy and Blessings of Allah (One True God) be upon you.
Rahil Ahmed Khan

INDEX
Section I Islamic Economics
1. Introduction to Islamic Economics
2. Sources of Islamic Economics
2.1 Primary Sources
2.2 Secondary sources
2.3 Limitations of Data Collection

1
3
3
4
4

3. Executive Summary

4. Principles of Islamic Economics

4.1 Prohibition of Ar-Riba
A) Difference Between Ar-Riba and Profit (8)
B) Why Depreciation of Currency is Ar-Riba (9)
4.2 Hoarding is Strictly Prohibited
4.3 It is a Market Economy
4.4 Redistribution is the Essence
4.5 Opposes Monopoly in Necessity
4.6 State Plays an Important Role
4.7 Measurement of Economy
4.8 Taxation is last option for Income
4.9 Neither Communist nor Capitalist
A) Private ownership (14)
B) Public Ownership (14)
C) State Ownership (15)
4.10 Zakat is Compulsory on all Muslims
4.11 Law of God is to be taken as ultimate Law

7
7

9
10
10
11
12
12
12
13

15
15

5. Deception by Capitalism
5.1 Fundamental mistake in definition of Demand
16
5.2 Money that Never Existed
16
5.3 Interest the root cause of improper utilization of resources 17
5.4 Depreciation of a Currency
17
5.5 Where is the Money?
18
A) Universally Acceptable? (18)
B) Store in Value? (18)
C) Unit of Account? (18)
D) Standard of Deferred Payment (19)
5.6 Unknown Taxes
19
A) Inflation Tax (19)
B) Chain taxation due to Inflation (20)

16

6. Ills of interest at international level

21

7. Fraud: Integral Part of System of Interest

7.1 A Mechanism of Exploitation of Labour & Masses

24
25

8. Arguments for Interest are Unsustainable

8.1 Arguments
8.2 Theories

26
27

9. Inflation due to Depreciation of Currency and its Effects

9.1- Relation Between Interest and Inflation
9.2 - Inflation and Exploitation of Have Nots

26

30
30
30

10. Islams Solution#1: Currency fixed on a standard

33
10.1 Comparing Price changes
33
A) Price changes in money based on gold/silver (33)
B)Price changes in floating fiat money (33)
C) Conclusion for Price changes (34)
10.2 Stability of measure of Wealth
34
10.3 Statistics of stability of Gold/Silver as a measure of wealth 35
10.4 Problems faced by nations in adapting Gold standard &their Solutions 39
A) Refuting the argument: Correction of Fiscal Deficit (39)
B) Refuting the argument: Financial Instability (47)
C) Refuting the argument: Hampering of Growth (48)
11. Islams Solution#2: System of Zakat
11.1 The Meaning of Zakat and Its Importance
50
11.2 The Spirit of Zakat
51
11.3 The Benefits of Zakat
52
11.4 Main differences between Zakah in Islam and Charity 53
11.5 Guidelines of basic Taxation System
54
A) Those Required to pay Zakat (55)
B) Types of Possession that require paying Zakat (55)
11.6 Recipients of Zakat
58
11.7 Collection of Zakat
59
11.8 Zakatul Fitr
59

50

12. Islams Solution#3: Investment & Loans without Interest

12.1 Institutional Characteristics of an Islamic Bank
A) Sources of Funds (60)
B) Lending operations of Banks (61)
12.2 Is Islamic Finance Unwanted?
12.3 Islamic Banking & Role of Central Bank

60

13. Complete Prohibition of Ar-Riba

60

63
64
65

14. Conclusion for Islamic Economics

67

Section II
15. Islamic Commerce
15.1 Islamic Rules for Business
68
15.2 Freedom of Enterprise
70
15.3 Islamic Tenants concerning Business Transactions 70
A) Keenness to earn legitimate earnings (70)
B) Trade through mutual consent (71)
C) Truthfulness in Business Transactions (73)
D) Generosity and Leniency in Business Transactions (73)
E) Honoring and fulfilling Business Obligations (74)
F) Fair Treatment of Workers (75)
G) Importance to writing transactions (75)
15.4 Prohibited Matters in Business Transactions
76
A) Sale of Al-Gharar (76)
B) Free market Economy (77)
C) Hoarding is strictly prohibited (77)
D) Exploitation of ones ignorance of market conditions (77)
E) Al-Najsh - Trickery (77)
F) Cheating and Fraud in Business Transactions (78)
G) Swearing (79)
H) Giving short measures (79)
I) Dealing in Stolen Goods (80)

68

16. Conclusion for Islamic Commerce

81
---------------------------------------END OF SECTION II------------------------------------------------17. Case Study (Islamic Economics and Banking: The Crisis proof system)
17.1 Key Statistics About The Crisis
82
17.2 What Caused The Crisis
82
A) History of Banking (82)
B) Sub-Prime and Interest Only Mortgages (83)
C) Interest-only adjustable-rate mortgages (83)
17.3 Consequences for the Government
84
17.4 Islamic Banks Weather Global Crisis
85
17.5 What IMF has to say on Islamic banks
86
A) Crisis Impact (86)
B)Source of Stability (87)

82

18. Conclusion

88

19. Bibliography

89

20. Glossary

91

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1. Introduction to Islamic Economics

All over the world religions are defined as the relationship between God and a person; whereby
God guides humanity to justice, equality, and righteousness. But most of the major religions of the
world tend to look justice, equality and righteousness restricted to social interaction. However
Islam extends this framework to all the possible aspects of life and thus rises to be called A
complete way of life.
You must have heard about capitalistic economy, socialistic economy, mixed economy, etc.
However if I speak about ISLAMIC COMMERCE & ECONOMICS, one would most probably
get surprised and say, Hello!! Islam is a religion and not book of economics. And thats where
people go wrong. If religion is a way of life, then one must expect a religion to provide answers in
all walks of life such as for regulatory (legal) laws, environmental laws, social laws, cultural laws,
international behavior, political environment etc. Because when you live on earth you are bound to
face dozens of conditions.

(Fig 1.1 Dinar - 4.25 grams of Gold)

As a complete way of life, Islam has provided guidelines and rules for every sphere of life and
society. Naturally, a functioning economic system is vital for a healthy society, as the
consumption of goods and services, and the facilitation of this by a common medium of exchange,
play a major role in allowing people to realize their material and other goals in life.
Islam has set some standards, based on justice and practicality, for such economic systems to be
established. These standards aim to prevent the enmity that often occurs between different
socioeconomic sections. Of course, it is true that the gathering of money concerns almost every
human being who participates in transactions with others. Yet, while these standards recognize
money as being among the most important elements in society, they do not lose sight of the fact

Page |2

that its position is secondary to the real purpose of human existence, which is the worship of God,
and hence world-peace.
An Islamic economic system is not necessarily concerned with the precise amount of financial
income and expenditure, imports and exports, GDP, GNP, NNP and other economic
statistics. While such matters are no doubt important, Islam is more concerned with the spirit of
the economic system.
A society that implements Islamic laws and promotes Islamic manners will find that it brings
together all the systems social, economic, and so forth that it deals with. Islam teaches that
God has created provision for every person whom He has given a life. Therefore, the competition
for natural resources that is presumed to exist among the nations of the world is an illusion. While
the earth has sufficient bounty to satisfy the needs of mankind, the challenge for humans lies in
discovering, extracting, processing, and distributing these resources to those who need them.1
In the words of Quran:-

Say: Who hath forbidden the beautiful (gifts) of God, which He has produced for His
servants, and the things, clean and pure, (which He has provided) for sustenance? Say: They
are, in the life of this world, for those who believe, (and) purely for them on the Day of
Judgment. Thus do We explain the signs in detail for those who understand.
[Quran 7:32]
Islam consists of a set of beliefs which organizes the relationship between the individual and his
Creator; between the person and other human beings; between the person and universe; and even
the relationship of the person to himself. In that sense, Islam regulates human behavior, and one
type of human behavior is economic behavior. Economic behavior is dealt by Muslims as a means
of production, distribution, and consumption of goods and services. In Islam, human behavior whether in the economic area or others - is not value free; nor is it value neutral. It is connected
with the ideological foundation of the faith.

For example food is being heavily wasted in America and Bangladeshis are dying with starvation. Also factors like
overpopulation can convincingly be proven wrong. Say you want to maintain todays population, so every mother
must bear 2 children (common sense); however this assumption is based on fact that there are no wars, epidemics,
disasters etc which is a wrong assumption. For more details refer to study of overpopulationisamyth.com

Page |3

2. The Sources of Islamic Economics

2.1 Primary sources
The fundamental sources of Islam - the Quran and the Sunnah of the Prophet2- provide guidelines
for economic behavior and a blueprint of how the economic system of a society should be
organized. Therefore, the values and objectives of all Islamic economic systems must
necessarily conform to, and comply with, the principles derived from these fundamental
sources. The purpose of this report is to outline the most salient characteristics of an economic
system based on the fundamental sources of Islam. The focus here is on the principal features of
the Islamic system.
The Islamic economic system is defined by a network of rules called the Shariah. The rules which
are contained in the Shariah are both constitutive and regulative, meaning that they either lay the
rules for the creation of economic entities and systems, as well the rules which regulate existing
one. As an integral part of the revelation, the Shariah is the guide for human action which
encompasses every aspect of life spiritual, individual, social, political, cultural, and economic. It
provides a scale by which all actions, whether on the part of the individual agents, society, and the
state, are classified in regards to their legality. Thus there are five types of actions recognized,
namely: obligatory; recommended; permissible; discouraged; and forbidden. This classification is
also inclusive of economic behavior.
The basic source of the Shariah in Islam is the Quran and the Sunnah, which include all the
necessary rules of the Shariah as guidance for mankind. The Sunnah further explains these rules
by the practical application of Prophet Muhammad, may the mercy and blessings of God be upon
him. The expansion of the regulative rules of the Shariah and their extensions to new situations in
later times was accomplished with the aid of consensus of the scholars, analogical reasoning which derived rules by discerning an analogy between new problems and those existing in the
primary sources - and finally, through textual reasoning of scholars specialized in the
Shariah. These five sources - the Quran, the Sunnah, consensus of the scholars, analogical
reasoning, and textual reasoning - constitute the components of the Shariah, and these components
are also used as a basis for governing economic affairs.
Thus Primary Sources Directly referred for this report includes1. Al-Quran.
2. Hadith Saheeh Bukhari.
3. Hadith Saheeh Muslim.
4. Hadith Sunan Abu Dawud.
The other primary sources of knowledge such as opinions of scholars are derived from fiqh books.
As far as fiqh (Islamic jurisprudence) books are concerned I have not referred to any book directly.
Such issues of fiqh are taken in this report from secondary sources.
2

The Sunnah is general body of narrations of the speech, deeds, and tacit approvals of the Prophet (PBUH) that has
been recorded and authenticated.

Page |4

2.2 Secondary Sources

The Secondary sources for this report has a vast range right from books, articles, websites,
newspapers, magazines, to even public lectures and speeches.
Extensive research and literature survey was undertaken to find the essence of ongoing and Islamic
economic and commercial fundamentals. The Islamic websites referred were checked for their
authenticity and it was ensured that all data included is true and real. However if any authentic data
such as an authentic Hadith contradicts with this report, the authentic material must be taken over
and above my opinion.
The public lectures include all speeches from weekly Friday Congregation speeches to Islamic
conferences.
Thus the sources of secondary data are so vast and spread across years that listing all of them down
is next to impossible. Thus in Bibliography too I have mentioned only the direct secondary sources
used for this report.

2.3 Limitations of Data Collection

a) There have been very few Islamic Economics Scholars for direct consultation. Though I have
tried level best to comply with scholarly opinions and Sharia laws; there may arise a conflict. In
such a scenario the Sharia law or scholars opinion must be considered first. Any mistake in this
report related to sharia is purely my fault and any correct mentioning of fact or any correct
interpretation is purely due to guidance of One True God.
b) The second limitation faced is the incapability of available non-muslim scholars to understand
Islamic Economics. This was mainly because Islamic Economics is never introduced in any school
or college level syllabus.
c) Third limitation in data collection is the lack of adequate statistics to compare Islamic
Economics. This is due to non-compliance of Muslim countries with sharia laws (The classic
example of that being leaving currency based on standard). However efforts are been made in
countries (like Malaysia) to rectify such mistakes but theres no impact of these efforts until now.

Page |5

3. Executive Summary
World Assets: - Top 1% has 40%
Top 10% has 85%
Bottom half has only 1%
Do you think Slavery still exists? If you think it doesnt then it must be thought of again. It does
exist. It is the economic slavery which exists in the current capitalist system. Let me present to you
a glimpse of the real facts and some solutions for it.
Before we start, we first need to get our economic concepts right. What is Inflation & Deflation?
Suppose a pen costing Rs 10, is being manufactured by latest computer technology and thus its
cost reduces to Rs 8, so are computers causing Deflation? Certainly not. People often have
misconceptions with regards to actual definitions. So if you have such concepts then I advise you
to clear them out3
So inflation in our example will occur only when the Rs10 you hold is not worth buying that pen,
mostly due to depreciation of currency caused by excess issue of currency by the RBI. According
to TOI report, if you had earned Rs100 in December 2008, your money is now just Rs92.82 thus
depreciating currency and thereby causing massive inflation4. Stealing money is a clear crime, so
shouldnt RBI or Government compensate to me for my loss? (I want my Rs7.18 rupees back on
every Rs100 I had earned). Also imagine what would have happened to your Rs100 if you had
earned it right back in 20th Century. This clearly exposes the robbery on the part of Government.

Reasoning the causes of Inflation

(Everything written in abstract requires no proof, because they are generally accepted and recognized by world-wide
economists)

Here we shall discuss one of the general causes of inflation. Due to burden of interest some
entrepreneurs are under compulsion to raise prices of their products5, others want to raise prices of
their products taking advantage of the protection provided by the dominance of interest. When the
average prices are raised, people buy less.
Thus increase in prices caused due to interest, lowers consumption. Industry reduces production
and employment, pretending shortage of demand. To arrest fall in output and employment, the
government raises the money supply. Following which the quantity of commodities that money
buys falls or if they dont people tend to buy all that they want. When more money is available but
there is no increase in supply they end up buying earlier quantities for more money6.
3

Helpful link:- http://www.youtube.com/watch?v=eN7lEMXZRMM&feature=related

As people tend to expend more money as money supply increases and thereby leading to rise in prices on the basis of
demand-supply principle.
5
Because they are not able clear the interest amount with actual growth. This point is proved by comparing growth
rate and interest rates in an economy. Also explained in detail in Fraud: Integral Part of the System of Interest and
some other parts.
6
With everyone trying to buy more, but supply of the goods remaining at the previous level, they end up buying same
quantity at larger amount of money.
4

Page |6

Thus this excess of money supply creates illusion7 of rising prices. Since this increase in price
level does not remove the causes that lead to the price rise, the government goes on increasing
money supply and the prices continue to rise. Thus the continuing depreciation of paper currencies
produce the illusion of consistently increasing prices and it is thus called inflation. Thus inflation
and depreciation of currency are two faces of same fraud.
Fiat money has no real worth and can be depreciated without limit. Consistent and appreciable
increase in the money supply by the government/banks beyond the needs of the economy, results
in consistent fall in the quantity of wealth represented by the currency that creates illusion of
consistent increase in prices, and that is inflation.
When average rate of return of economic activities fall (financial instability), producers8 tend to
maintain it by reducing output and employment. Trying to prevent fall in output and employment,
the government raises money supply (in the pretext of growth and development) that increases rate
of inflation. This reduces real interest rate of capital borrowed in past, and reduces minimum rate
of return for the economic activity to shut-off. Thus increased rate of inflation acts as a relief for
the activities based on capital borrowed (on interest) in past. However this relief is at best,
temporary, because increase in inflation reduces real interest rate and the capitalist creditors then
increases lending rate. In case government tries to reduce lending rate, the capitalist creditors shift
capital to real estate that reduces economic activity and compels the government to allow higher
lending rates. Now, higher rate of inflation is required to maintain previous level of employment
and output 9 . Increase in disparity due to interest and inflation; reduce the aggregate human
capacity as well as the purchasing power of economy. This reduces the rate of return of the
economic activities. Finally, the stage is reached where unemployment rises despite increase in
inflation. This is known as stagflation. This forces the government to stop inflationary trend. Thus
inflation finally results in reduced output and unemployment. Clearly, temporary relief that
inflation provides is small compared to the problems that it creates and this all started due to
inflation caused by issuing more currency without proper backing.

The price increase is with respect to depreciating currency (freely floating fiat money) that is a variable
symbolic measure of value. When supply of money is raised, the quantity of wealth represented by this variable
symbolic money falls. Thus this increase is similar to (i) apparent increase in our weight when unit of measure,
say kg is made smaller and (ii) increase in prices when gold contained in gold coins is reduced. Thus, such
increase in prices is illusion.
8
Entrepreneurs have to pay interest on the capital borrowed for investment. Therefore, they are under compulsion to
ensure that the rate of return does not fall.
9
Many economists have studied this relation between inflation and unemployment. Empirical data confirm our
contention. Relevant data are available in standard Economics textbooks under the heading, Philips Curve.

Page |7

4.Principles of Islamic Economics

4.1 Prohibition Of Ar-Riba

O ye who believe! Fear God, and give up what remains of your demand for Al-Riba, if you
are indeed believers.

If you do it not, Take notice of war from God and His Messenger. But if you turn back, you
shall have your capital sums: Deal not unjustly, and you shall not be dealt with unjustly.
[Quran 2:278-279]
It is a well known fact that Islam condemns Interest; however interest is not a proper synonym to
Arabic word Ar-Riba. In the above verses of Quran it is seen that Ar-Riba is strictly condemned.
So what is Ar-Riba which Islam forbids?
Narrated Ubadah ibn as-Samit: The Apostle of Allah (peace_be_upon_him) said: Gold is to
be paid for with gold, raw and coined, silver with silver, raw and coined (in equal weight),
wheat with wheat in equal measure, barley with barley in equal measure, dates with dates in
equal measure, salt by salt with equal measure; if anyone gives more or asks more, he has
dealt in usury. But there is no harm in selling gold for silver and silver (for gold), in unequal
weight, payment being made on the spot. Do not sell them if they are to be paid for later.
There is no harm in selling wheat for barley and barley (for wheat) in unequal measure,
payment being made on the spot. If the payment is to be made later, then do not sell
them. [Hadith Sunan Abu Dawud 22:3343]
To understand this concept there are basically four main principles to be kept in mind: - Any increase in demand for money without simultaneous production of Goods or Service
constitutes Ar-Riba.10

10

Same thing happens in Bank interest where interest rate is fixed though goods and services may or may not be
produced.

Page |8

If capital by itself is generating more capital then there is Ar-Riba. Thus Capital can
generate more capital only when used with other factors. (Land, Labour and Entrepreneur)

Prophet (PBUH) said, There is no Riba in hand-to-hand (spot) transactions. (Usman ibn
Zaid is the narrator: Bukhari, Muslim and Musnad Ahmed)11-12

Everything should be real in value. No illusions allowed.

4.1.A Difference between Ar-Riba and Profit

By reading the first two principles the point that must have struck you is then what is the
difference between Riba and profit? Even profit does not make simultaneous production. By the
way then you are not the first one to say so, people used to say the same at the time of revelation of
Quran:-

Those who devour Ar-Riba will not stand except as stand one whom the Evil one by his touch
Has driven to madness. That is because they say: "Trade is like Ar-Riba," but God hath
permitted trade and forbidden Ar-Riba. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who
repeat (The offence) are companions of the Fire: They will abide therein (for ever). [Quran
2:275]
However Profit is compensation of Entrepreneurs skill and Riba is unnecessary illusion of wealth
and money though there is no simultaneous production. Profit exists in spot transactions. Profit is
decided at once and Riba is decided over a period of time and thus in Riba value changes with time
factor. Also once you apply the above principles you would clearly get the difference.

11

However there are some exceptions mentioned in Hadiths, such as 1)Money for Money where quantity is not equal,
2)Barter transaction where goods are measurable and of same kind and quantity is not equal 3)Barter transaction where
delivery from one side is deferred.
12
This is because spot transactions take place in accordance with market forces (e.g. demand-supply).

Page |9

4.1.B Why Depreciation of currency is Ar-Riba

Applying the same principles to depreciation of currency i.e. fall in the value of currency due to
excess production of notes or coins you may clearly see that Depreciation of Currency is also ArRiba. The Government reduces the value of currency (when compared with the promised value)
without any simultaneous loss in value of goods, or similarly increases money supply without any
simultaneous increase in goods or services. If supply of money is regulated by actual production of
goods and services then there is no problem, however when an illusion is created, then that is
definitely Ar-Riba. In fact this is not only Ar-Riba but also theft and wrongful taxation and thus
such uninformed depreciation of currency or measure of wealth is completely forbidden in Islam.
This is also seen by one of the Hadith:Narrated Abdullah ibn Mas'ud: The Apostle of Allah (peace_be_upon_him) forbade to
break the coins of the Muslims current among them except for some defect.
[Hadith Sunan Abu Dawud 23:3442]
This shows how important it was 1400 years back to maintain a proper currency. Thus there was
no unnecessary increase or decrease in money supply. On the contrary Islam blocks all those
factors which lead to such illusions (to be discussed later).

4.2 Hoarding is strictly prohibited

Say: "In the bounty of Allah. And in His Mercy therein let them rejoice": that is better than
the (wealth) they hoard.
[Quran 10:58]

On the Day when heat will be produced out of that (wealth) in the fire of Hell, and with it will
be branded their foreheads, their flanks, and their backs.- "This is the (treasure) which ye
buried for yourselves: taste ye, then, the (treasures) ye buried!"
[Quran 9:35]

P a g e | 10

4.3 It is a Market Economy

Narrated Anas ibn Malik: The people said: Apostle of Allah , prices have shot up, so fix
prices for us. Thereupon the Apostle of Allah (peace_be_upon_him) said: Allah is the one
Who fixes prices, Who withholds, gives lavishly and provides, and I hope that when I meet
Allah, none of you will have any claim on me for an injustice regarding blood or property.
[Hadith Sunan Abu Dawud 23:3444]
Thus Islam encourages Demand-Supply mechanism and does not interfere in any business unless it
is unjust and harmful for society.

4.4 Redistribution is the essence (Also failure of Trickle down system)

Conventional Economic systems are based on the Trickle down system. Proponents of these
policies claim that if the top income earners invest more into the business infrastructure and equity
markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and
lower class individuals. Proponents argue economic growth flows down from the top to the
bottom, indirectly benefiting those who do not directly benefit from the policy changes.
However Trickle down system has miserably failed. In fact this system was designed to rob people
of their wealth. There are thousands of arguments to defeat this corrupt ideology however I would
just take one such example to prove the point. In Egypt, Pharaoh used to have a lot of wealth and
property, so should a peasant working 18hrs a day to make a pyramid expect to become even
closely rich to Pharaoh? This ideology is just against the human attitude of GAINING MORE
THAN GIVING. An upper class person could probably live his whole life by earning interest on
Fixed Deposits but a lower or middle class person is actually the one who has to be productive.
The Human nature clearly indicates that, proportionate increase in upper class wealth will be much
more than others.
Reagans trickle down policies in the U.S. can still be felt today:
According to the Tax Policy Center, the top marginal tax rate in the U.S. stood at 70% when
Reagan was elected in 1980, falling steadily to 28% by 1989, before it began to rise modestly. The
top marginal rate now stands at 35% against a peak of 94% in 194513.
These tax cuts were implemented with the support of the Democrats in the House, which explains
why they have been upheld all these years. The result of this was, unsurprisingly, a higher
concentration of wealth in fewer hands:

13

June 30, 2009, Wall Street Journal article By Michael S. Derby

P a g e | 11

Source :-Congressional Budget Office (www.cbo.gov)

Dan Andrews- Harvard University - John F. Kennedy School of Government

Christopher Jencks- Harvard University - John F. Kennedy School of Government and
Andrew Leigh- Australian National University - Economics Program, Research School of Social

Sciences. Analysed statistics of whole 20th century and found no proof to support Trickle down
system.14
Coming back to point, economic system is by default a TRICKLE UP system. Thus Islam
redistributes the income in the best way possible.

4.5 Opposes Monopoly in Necessity

Though no example for the above was found by me in the minimum amount of literature survey
done, to show restriction on Monopoly in the lifetime of Prophet Mohammed (Peace Be Upon
Him); Absence of example at the time of prophet in no ways shows that he accepted monopoly in
every case; rather it shows that such a situation didnt arrive in his lifetime. Also there are
numerous examples where he said that hoarding for prices to rise is a grave sin and thus giving a
framework for monopolized market.
One more noteworthy point is that scholars have an opinion that according to Sharia government
must interfere only if monopoly is in the section of necessity. For example, if someone
monopolizes diamond jewellery market, the ruler must not be concerned with it. However
monopolization of wheat market requires ruler to intervene.

14

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077730

P a g e | 12

4.6 State plays a major role

State in an Islamic Economic system has a major role to play. Its important to note at this point
that a Khalifa (Viceroy) is not the one who makes laws in an Islamic State; he is just an
implementer. Islam is of the belief that laws are made by God alone and that all the decisions if not
directly conveyed should be at least be made in accordance of Gods laws (Sharia). Islam appoints
a direct role on state to channelize the economic growth and welfare of the country15.

4.7 Measurement of Economy

Today, the world measures its economy in terms of GDP, GNP, NNP, NDP etc. Though these
figures are important, Islam will never accept it at the cost of poverty, injustice, inequality,
unemployment etc. An Islamic state is successful only if it implements the teaching of Islam
effectively and the teachings are very clear about this issue16.

4.8 Taxation is the last option available as a source of income for government17
The following Hadith gives us a picture of taxation in Islam. This is originally a long Hadith of
which I have taken a part, reported by 'Abdullah b. Buraida on the authority of his father:... [Prophet Muhammad (PBUH) said] By Him in Whose Hand is my life, she has made such
a repentance that even if a wrongful tax-collector were to repent, he would have been
forgiven. Then giving command regarding her, he prayed over her and she was
buried. [Hadith Muslim 17:4206]
In the above Hadith the Prophet is comparing the sin of a married woman who had illegal sexual
relations to the sin of the wrongful tax-collector. Also he goes on to indicate that the sin of
wrongfully collecting taxes is bigger than the sin which she did18. In the above Hadith, wrongful
tax-collector is originally, in Arabic, spelt Sahabul Maks. This phrase Sahabul Maks refers to
mainly two types of taxes existing in those days, which are SALES TAX and TOLL TAX.

15

Narrated Abdullah bin 'Umar: I heard Allah's Apostle saying, "Every one of you is a guardian, and responsible for
what is in his custody. The ruler is a guardian of his subjects and responsible for them; a husband is a guardian of
his family and is responsible for it; a lady is a guardian of her husband's house and is responsible for it, and a servant is
a guardian of his master's property and is responsible for it." I heard that from Allah's Apostle and I think that the
Prophet also said, "A man is a guardian of his father's property and is responsible for it, so all of you are guardians and
responsible for your wards and things under your care." (41:592) Bukhari

16

A worth mentioning Hadith: - Narrated Abu Huraira: The Prophet said, "If someone leaves some property, it will be
for the inheritors, and if he leaves some weak offspring, it will be for us to support them."(41:583) Bukhari

17

Taxation here does not include Zakah. Zakah is not a tax imposed by government. Rather it is enjoined by God on
humanity and only collected by a righteous ruler. This point only talks about taxation imposed by government.

18

Married person having illegal sexual relations is such a grave sin in Islam that its punishment is directly stone to
death.

P a g e | 13

The obvious inferences which can be drawn from this above Hadith are that, taxes must be just and
must not violate a persons right to use his natural environment. For example, in India Gandhiji
held a march famously known as, Dandi March. His march was absolutely justified because in
that case British government enacted salt tax, thus taxing production of salt, which is naturally and
abundantly available and in its production British government had no share. In the same way a
person earns his livelihood by business; society cannot exist without business. So selling and
buying activities are part of nature and no human can survive without it. Also usually governments
have no role in facilitating private selling and buying. Thus in the same sense government has no
right to charge sales tax19. Similarly, land is available naturally and no one can charge a person
who uses it for travelling. However, if government maintains it and has no option but to recover
money it is a different scenario. In such a case too there has to exist a freeway to reach place B
from A. Something like Sales tax, income tax etc is as illogical as taxing on the number of breathes
one takes, because just as breathing is unavoidable, doing business is also unavoidable. All taxes
imposed must be in accordance with this ideology.
In the opinion of scholars, even the taxes which are justified can be enacted only if all the wealth
from all the available treasuries, if taken together too does not fulfil the requirement.

4.9 Islamic Economy is neither a communist nor a capitalist philosophy

The communist philosophy, to each according to his/her need and from each according to his/her
capacity is in direct conflict with the human nature. People are not willing to work hard and excel
when the fruits of their work is distributed in the society without any respect to their preferences.
In order to enforce the aforesaid utopian principle, Communism denies the people the right to
ownership and inheritance but this unnecessary restriction against human selfness results in loss of
motivation that is essential to cause people to strive to excel. That reduces capital formation as
well as productivity of the resources; resulting fall in production of capital goods halts economic
progress.20
Also under Capitalist Economy there are numerous flaws which are to be discussed from next
chapter onwards.
Thus system of economy must be capable of motivating the people to strive to produce the desired
growth. However the economy propelled by interest is characterized by unemployment, injustice,
exploitation, fraud, corruption and gross disparity of income and wealth and trade cycles
(explained in further chapters).

19
20

Unless, in anyways it causes expenditure on part of the government.

History itself gives the proof of what happened after the collapse of USSR.

P a g e | 14

Keeping the above factor in mind Islam about 1430 years back divided the ownership issue under
three main heads:
4.9.A Private ownership
Islam has made ownership legal right for the individual, and it does not impose limit on wealth one
can own. Accordingly, people may own moveable property, such as livestock, money, cars and
clothes, or immovable property such as land, houses or factories. However Sharia controls the
means of ownership such that people acquire the right to wealth in a just manner, and it also
regulates the way in which it is disposed of.
Means of ownership: - There are variety of ways in which ownership of wealth can be achieved.
Out of them working is the best way. In the words of Prophet:
Narrated Al-Miqdam: The Prophet said, "Nobody has ever eaten a better meal than that
which one has earned by working with one's own hands. The Prophet of Allah, David(PBUH)
used to eat from the earnings of his manual labor.
[Hadith Bukhari 34:286]
Other means of ownership which Islam has permitted include inheritance, grants of states property
to citizens, gifts, blood money and marriage transfers. Islam restricts the means in which wealth
can be earned or invested by forbidding pursuits such as fraud, gambling, theft and bribery or
trading of forbidden items. The worst means of gaining wealth is debt in form of loan21
4.9.B Public Ownership
This is defined as commodities which Islam has made property of citizens as a whole, such that
individuals are allowed to utilize them, but are forbidden from owning them as their own property.
These commodities come under three main categories:- The utilities of the community without which the everyday life of community cannot properly
function. Under the category comes things like water, oil reserves, machinery for drawing water
for public as whole, public water pipes, power stations etc.
- Commodities that by nature cannot be individual property like seas, river, public parks, places of
worship, public highways etc
- Natural uncounted minerals. These include many minerals such as salt or sand which are vast in
quantity. These are property of all citizens and individual or corporate ownership is forbidden.

21

Narrated AbuMusa al-Ash'ari: The Prophet (peace_be_upon_him) said: After the grave sins which Allah has
prohibited the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off,
and meets Him with it.(22:3336) Sunan Abu Dawud

P a g e | 15

Since the public property is property of all citizens it is accordingly right of all to utilise it. In case
of properties like rivers, seas etc there is no problem however in case of mines State must
undertake proper distribution
.
4.9 C State ownership:This includes every property which is connected to the right of public but is not included under
public ownership. It includes properties like unclaimed land, captured land, Government
departments, schools, hospitals etc. This ensures proper distribution of necessary needs.22
Interestingly this three dimensional ownership model was applied formally only in 1950s by
countries like India, Egypt and some others after the Khalifah periods though it was proposed by
Islam in 8th Century.
Though India calls itself as taking a middle way in economics, it has not failed in picking up flaws
of both the systems. Henceforth thus we will be discussing those flaws in detail and see what
solution Islam provides for it.

4.10 Zakat compulsory upon all Muslims

Zakat is compulsory on all Muslims who fit in the eligibility criteria. It is paid and used in
accordance with sharia law. This topic has been explained in detail in Chapter 11.

4.11 Law of God is to be taken as the Ultimate Law

It is not fitting for a Believer, man or woman, when a matter has been decided by God and
His Messenger to have any option about their decision: if any one disobeys God and His
Messenger, he is indeed on a clearly wrong Path.
[Quran 33:36]

22

Under capitalist system people are considered as units of production and theoretically those who cant produce (e.g.
handicapped) must not even exist.

P a g e | 16

5. Deception by capitalism.
5.1 Fundamental mistake in definition of
Demand
When a person wants to buy something to satisfy his/her
necessity or need, it has to be agreed that there is a
demand. For example: a person who wants to buy bread to
satisfy hunger has a valid demand even if the person is not
able to buy it for want of money. However, the economists
define demand as the quantity sold at the prevailing price
that automatically ignores the demand of the poor who
may not be able to afford to buy. Thus the economists have
contributed to the exploitation of the poor by ignoring the
valid claim of the poor over the resources.

5.2 Money that never existed

A major part of net income of most of the developing and under developed countries gets
transferred to the greedy capitalists. The following example nicely explains the severity of this
problem:
Amount lent at 15% yearly compound interest doubles in less than 5 years, it multiplies 10 fold
every 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 fold every 100 years. Net
real rate of growth of world is below 2% 23 . Therefore, even if capital worth 15% of the total
resources of the world could be invested at 15% interest compounded yearly, the over-all growth
of the economy will not be enough even for clearing the interest24. Really, money borrowed on
interest is enough to kill any economy. Yet short sighted, corrupt and incompetent politicians are
seen to be trying to borrow larger and larger amount on interest 25 . These are the real traitors
although some of them may not be aware of this treachery.
Thus, suppose there is 100units of money in economy and bank lends 50units through deposits at
10% annual interest, so next year bank would demand 5 units extra, making total money required
in economy to be 105 units. But as already mentioned average world GDP is about 2%. In short,
demand of money in our case would be 105 units whereas supply would be 102 units after
considering growth, making money shortage of 3 units. So form where will the borrower pay his
debt when money does not exist? By taking more debt/loan? For a short-term you might say others
will lose their money and thus the debtor to bank will pay Rs3, but in that case you would clearly
observe that within a few years all resources will end up in banks pocket. At the Macro level, such
multiplying levels of money cause something like Dubai Debt crisis or forces the government to
23

As per Central Intelligence Agencys World Fact Book.

Hifzur Rab
25
As per RBI combined Debt of central and state governments has reached 76.6% for 2009-10 of GDP due to excess
of interest rate over growth rate.
24

P a g e | 17

depreciate the currency i.e. issue more currency and thereby reduce the value of each unit and at
the micro level either farmers sell their land for illusionary money to pay the debt or they attempt
suicide. This is a new form of colonialism or call it Economic slavery.

5.3 Interest, the root cause of improper utilization of resources

Interest is the root cause of shortage of supply, unemployment, inflation and exploitation and
growing disparity of income and wealth. The following example clearly demonstrates it:
Suppose that our cement factories are producing at 70% of their capacity. Now if their production
is raised to 85% of capacity, then the cement price will fall (Demand-Supply Theory). Suppose that
price per bag prior to and after increase in production are rupees 110 and 100 respectively. Let cost
of production per bag excluding interest paid on capital borrowed prior to and after the increase in
production be Rs 100 and Rs 95 respectively and the interest paid per bag is Rs8 and Rs7
respectively (Interest rate will fall slowly as capital is needed for expansion, most of the times
interest payable per bag actually increases). Note that prior to increase in production the cement
factories were having a net profit of rupees 2 per bag but when the production is raised there is net
loss of rupees 2 per bag. This loss is due to interest, as in the absence of interest the factories
would have been making a profit of rupees 5 per bag even after increasing production. Clearly, it is
due to interest that the companies (who have taken loans on interest) will not increase production.
Thus, it is due to interest, that most of our industries produce far below their capacity and employ
lesser labour. Due to interest, entrepreneurs cant get capital for investment unless they are willing
to pay the prevailing rate of interest. Therefore, there is no investment in a business that is not
expected to produce profits much higher than the prevailing interest rate. If the interest rate is
abolished, industries will be set upon profit sharing basis and then the completion from the
entrepreneurs who will be willing to produce for lower profit margins it would increase the rate
increase in employment, labor wage and increased production will reduce prices.

5.4 Depreciation of a currency

Depreciation of a currency produces an illusion of increasing prices and it is what constitutes
inflation. Depreciation of the currency is the same as reduction in the quantity of wealth
represented by measure of wealth. Currency is a measure of value, therefore measure and its
depreciation constitutes worst fraud against humanity. It is used as a unit of account. That results
in part of capital being accounted as profit or interest.
A large number of industries in the organized sector are based on the capital entrepreneurs who
have borrowed on interest. Entrepreneurs are said to be the owners. Rate of return can fall below
expected value due to large number of causes and new causes may develop. After the loan is
contracted they are under compulsion to keep the cost of produce high. This is because they agreed
to pay prior to setting up the industry, when they could not have taken into considerations the fall
in rate of return due to factors that might not have existed then.
Shortage of supply causes the price to rise and abundance causes price to fall. This is very natural
and it leads to price increase and fall in prices respectively; but it has nothing to do with inflation
that is a consequence of fraudulent reduction in quantity of wealth that (fiat) money is

P a g e | 18

(Depreciation of Currency). This causes severe losses to the have-nots. Planned inflationary
economy constitutes an institutionalized exploitation of the masses and the labor (To study
exploitation caused due to depreciation of currency, read the topic Mechanism of Exploitation of
Labour & Masses and Inflation).

5.5 Where is the Money?

Money is any object that is generally accepted as payment for goods and services and repayment
of debts in a given country or socio-economic context. The main functions of money are
distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a
standard of deferred payment. Thus we could list down few properties of money as defined by
Reserve banks across the Globe: A. Universally acceptable.
B. Store of value.
C. Unit of Account.
D. Standard of deferred payment.
Now we would compare todays money with the definition given:5.5.A Universally Acceptable
It is worth mentioning here that paper is not universally accepted! It is the gold backed currency
which people accepted. Once you remove gold backing from currencies it no longer remains
universally accepted. No one exchanges a piece of paper for something. A piece of paper is as
cheap as a stone lying on road. Rather what now remains is just FORCED ACCEPTANCE. If
given a choice people will still conduct trade in gold backed currencies because universal
acceptance arises due to intrinsic value of element and not by force.
5.5.B Store of value
No sane person in this world would agree that todays so called, Money has store of value. Value
of money continuously goes on depreciating due to over issue of currency by government
(constituting Ar-Riba in Islam). C.Rangarajan 26 in his book India: Monetary Policy Financial
Stability and other Essays mentions that India is issuing 20% more currency annually from past 3
years and if you lessen Growth rate from it, you get 11-12% extra money. So every next year your
money reduces by about 11%. So does anyone still think that our current money has store in value?
5.5.C Unit of account
Money in general has always been unit of account. However the current fiat money system was
never really given this status. Lets take an example, suppose a business in terms of current units of
money (n India Rupees) earns 10% Profit; and in the same year government depreciated currency
by net 12%. So the business actually will be in an illusion of earning profits however in reality it is
in 2% loss. Indeed Prophet Mohammed (PBUH) rightly prophesied: 26

Former Governor of RBI (1992-1997), Former Governor of Andhra Pradesh (1997-2003), Head of Twelfth Finance
Commission (2003-04) and currently Rajya Sabha member.

P a g e | 19

Ab Bakr ibn Abi Maryam reported that he heard the Messenger of Allah (PBUH) say: "A
time is certainly coming over mankind in which there will be nothing (left) that will be of use
(or benefit) save a Dinr (i.e., a gold coin) and a Dirham (i.e., a silver coin)[Both have
intrinsic values].
[Hadith Musnad Ahmad]
5.5.D Standard of deferred payment
There is really no way in which one could call something like Euro, Rupees or Dollars anywhere
close to a standard for deferred payment. Suppose I took 100 rupees from someone in 1950s and I
have to return it now to him. In no ways will I be doing justice if I return todays 100 rupees back.
This is because of continuous excess issue of currency (Ar-Riba) undertaken by governments. In
fact, organized businesses have actually nowadays developed systems to cope this problem of time
value of money. Indeed the Hadith stands true:Narrated Abu Hurayrah: The Prophet (peace_be_upon_him) said: A time is certainly
coming to mankind when only the receiver of usury will remain, and if he does not receive it,
some of its vapour will reach him. Ibn Isa said: Some of its dust will reach him.
[Hadith Sunan Abu Dawud 22:3325]
So the question arises, where is the real money? This important question has been discussed in
detail in Quran and the Sunnah (tradition of Prophet s.a.w) and mentioned later in chapter 10.
(Constancy/Stability of Gold).

5.6 The Unknown Taxes

5.6.A Inflation tax
When central banks print notes and issue credit, they increase the amount of money available in
the economy. This is sometimes done as a reaction to worsening economic conditions. It is
generally held that in the long run, an increase in the money supply causes inflation. In effect,
increasing the money supply and causing the holders of money to pay an inflation tax is a form of
taxation
If the annual inflation rate in the United States is 5%, one dollar will buy $1 worth of goods and
services this year, but it would require $1.05 to buy the same goods or services the next year; this
has the same effect as a 5% annual tax on cash holdings, provided there is 0% economic growth, or
other price-reducing factors, such as efficiency-enhancing technology. With price reducing factors
at play, a 5% inflation rate indicates a tax rate of higher than 5%.
Governments are almost always net debtors (that is, most of the time a government owes more
money than others owe to it). Inflation reduces the relative value of previous borrowing, and at the
same time it increases the amount of revenue from taxes. Thus it follows that a government can
improve the debt-to-revenue ratio by employing inflationary measures.

P a g e | 20

An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in
one denomination of currency due to the effects of Expansionary monetary policy, which acts as a
hidden tax that subtracts value from those assets. Many economists hold that the inflation tax
affects the lower and middle classes more than the rich, as they hold a larger fraction of their
income in cash, they are much less likely to receive the newly created monies before the market
has adjusted with inflated prices, and more often have fixed incomes, wages or pensions
5.6.B Chain taxation due to inflation
Things do not end at Inflation tax. If due to inflation, value of capital assets such as real estate,
metals etc increase then surely you will again be taxed in the banner of Capital Gains tax. The
chain still does not end, again due to inflation if your returns increase e.g. your salary increases as
compensation to inflation then you will be subjected to income tax. It depends on countries
taxation policies of how much a chain stretches. This is just a big scam to which people are
unaware.

P a g e | 21

6. Ills of Interest at International level

International trade between inflationary economies leads to fraudulent transfer of wealth of the less
developed economy towards the more developed ones.
For e.g.: Currencies of the developed world have higher stability and they command worldwide
acceptance and recognition. Everyone likes to have dollars but no one, not even Indians prefer to
have Indian rupees. This causes massive loss to the less developed economies. Majority of havenots live in less developed countries and it results in the exploitation of the have-nots. Thus the so
called champions of the human rights (developed countries) are the worst exploiters of the havenots. It exposes their hypocrisy.
On an international level, the
situation is much more devastating
and dangerous. There is no
question that when looked at from
an
international
perspective,
interest kills people. The debt
servicing of lesser developed
countries today is so great that
they must sacrifice essential health
and nutritional needs. It is
dumbfounding to think that untold
numbers of children are dying
daily in lesser-developed countries
due to the tool of modern
capitalism: interest. Some African
governments are forced to spend
more on debt servicing than they
spend on health or education.
In this context, the United Nations
Development Programme, UNDP
(1998) predicted that if the external debt of the 20 poorest countries of the world was written off, it
could save the lives of 20 million people before the year 2000. In other words, it means that
uncancelled debt was responsible for the deaths of 130,000 children per week up until the year
2000.
Ken Livingston, Former Mayor of London, claimed that global capitalism kills more people each
year then the number of people killed by Adolf Hitler. He blamed the IMF and World Bank for
deaths of millions due to their refusal to ease the debt burden. Susan George stated that every year
since 1981 between 15 and 20 million people died unnecessarily due to debt burden because
Third World governments have had to cut back on clean water and health programs to meet their
repayments.
Debt, with its increasing amount of interest compounded upon it, is dangerous for any nation
because it means loss of sovereignty and control. This aspect, incidentally, is no accident. Lesser

P a g e | 22

developed countriesespecially their elites and corrupt rulersare not free of guilt when it comes
to the issue of the debt that they have accumulated. At the same time, if they did not borrow and
get in debt, pressure would definitely be put on them to do so. Caufield noted:
Thus it has been with the World Bank; refunding operations have become more and more of the
total of its lending. The result has been an accumulation of debt by the Banks borrowersand a
gradual loss of sovereignty as well. No creditor is willing to keep refunding forever without
asserting some control over the way the debtor conducts business. In earlier times, the great
powers did not hesitate to use military force to bend recalcitrant debtors to their will.
In his classic essay, Public Debts, published in 1887, the American economist Henry Carter
Adams wrote that the granting of foreign credits is the first step toward the establishment of an
aggressive foreign policy, and under certain conditions, leads inevitably to conquest and
occupation.
The Banks approach to its debtors is not so crude. Instead of sending in the Marines, it offers
advice on how countries should manage their finances, make their laws, provide services to their
people, and conduct themselves in the international market. Its powers of persuasion are great, due
to the universal conviction that, should it decide to ostracize a borrower, all other major national
and international powers will follow its lead. Thus, by the excessive lendingborn of an
underlying inconsistency in its missionthe Bank has added to its own power and depleted that of
its borrowers.
John Perkins now famous Confessions of an Economic Hit Man details contemporary economic
intrigues. While describing his job of evaluating projects, he wrote:
The unspoken aspect of every one of these projects was that they were intended to create large
profits for the contractors, and to make a handful of wealthy and influential families in the
receiving countries very happy, while assuring the long-term financial dependence and therefore
the political loyalty of governments around the world. The larger the loan, the better. The fact
that the debt burden placed on a country would deprive its poorest citizens of health, education,
and other social services for decades to come was not taken into consideration.
Perkins work has now been followed up by A Game as Old as Empire: The Secret World of
Economic Hit Men and Web of Global Corruption edited by Steven Hiatt. Hiatt writes,
Debt keeps Third World countries under control. Dependent on aid, loan reschedulings, and debt
rollovers to survivenever mind actually develop they have been forced to restructure their
economies and rewrite their laws to meet conditions laid down in IMF structural adjustment
programs and World Bank conditionalities.
The current debt situation, with the major role that interest is playing in it, is potentially very
devastating for the world as a whole. In Global Trends 2015, the Central Intelligence Agency
(CIA) recognized:
The rising tide of the global economy will create many economic winners, but it will not lift all
boats. [It will] spawn conflicts at home and abroad ensuring an ever-wider gap between regional
winners and losers than exists today. [Globalizations] evolution will be rocky, marked by chronic
financial volatility and a widening economic divide. Regions, countries and groups feeling left

P a g e | 23

behind will face deepening economic stagnation, political instability and cultural alienation. They
will foster political, ethnic, ideological and religious extremism, along with the violence that often
accompanies it.
Noreena Hertz has an excellent chapter in her work, The Debt Threat: How debt is destroying the
developing world and threatening us all, delineating many of the dangers that the massive
debtand, again, which would not be as massive without the ever-growing aspect of interest
poses for the world today. She details the dangers of extremism, terrorism, depletion of the
worlds natural resources, and more. To cite just one aspect, she writes:
Debts ugly progenypoverty, inequality, and injusticeare also called upon to justify, and even
legitimize, acts of the greatest violence. Only a few weeks after the World Trade Center was
attacked, leading African commentator Michael Fortin wrote: We have to recognize that this
deplorable act of aggression may have been, at least in part, an act of revenge on the part of
desperate and humiliated people, crushed by the weight of the economic oppression practiced by
the peoples of the West. Fortins languagecrushed, oppression, desperate,
humiliatedis deliberately evocative. And it is manifestly clear that there is an audience with
whom such words powerfully resonate.
In reality, there are yet other ills related to interest that could be discussed but the above should
suffice for the purposes here.

P a g e | 24

7. Fraud: Integral Part of the System of Interest

As already said, amount lent at 15% yearly compound interest doubles in less than 5 years, it
multiplies 10 fold every 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 fold
every 100 years. Net real rate of growth of world is below 2%. Therefore, even if capital worth
15% of the total resources of the world could be invested at 15% interest compounded yearly, the
over-all growth of the economy will not be enough even for clearing the interest. Leary, money
borrowed on interest is enough to kill any economy. Yet short sighted, corrupt and incompetent
politicians are seen to be trying to borrow larger and larger amount on interest. These are the real
traitors although some of them may not be aware of this treachery. At the Macro level such
multiplying levels of money cause something like Dubai Debt crisis or forces the government to
depreciate the currency i.e issue more currency and thereby reduce the value of each unit and at the
micro level either farmers sell their land to pay the debt or they attempt suicide.
The amount that is returned by previous borrowers is again lent on interest to new borrowers and
therefore this process of doubling of dues continues despite the fact that many borrowers are able
to repay the loan within a few years. Interest is a mechanism to enslave the people and any law that
enforces its payment is unjust and inhuman.
Further, since it is not possible for any economy to continue to grow like this, it will have to go on
reducing its yardstick of measurement of wealth i.e., currency. Considering that wealth is most
widely sought after, it is clear that manipulation of its unit represents a massive fraud. Moreover
currency is normally used as unit of accounts; its manipulation corrupts the accounting process and
thus, incorporates elements of
fraud in all our dealings. It
confounds truth with falsehood
and masses fail to distinguish
between right & wrong.
Considering that the system of
interest cannot survive unless
currency
is
consistently
depreciated (i.e., quantity of
wealth expressed by currency is
reduced) it is clear that fraud is
an integral part of the system of
interest.
(Depreciating
currency is like saying that
from now on 500gms will
represent 1kg. I mean this is
clearly a crime not known to
us). Thus interest saves
inflation and inflation saves
interest.

P a g e | 25

7.1 A mechanism of exploitation of the labour and the masses

In the capitalist system, the entrepreneurs are considered as the owners and this result in gross
understatement of the rate of return of the economic activities. For example, if the actual rate of
return of the activity set up on capital borrowed on 12% interest is 13%, then due to adoption of
this fraudulent definition of ownership, the rate of return will be shown as just 1%. By showing the
rate of profit to be much less than what it really is, the entrepreneurs are able to compel the
laborers to accept lower wages and similarly the suppliers of raw materials are also persuaded and
compelled to accept lower prices. Further the entrepreneurs raise the price of their product on the
ground of very poor profit margin.
Now suppose that the farmers also start summing up the cost of supply of land, in that case the cost
of production of the food grains will come to be much higher than prevailing prices of the food
grains. As there is no substitute for food grains, we will have to buy these at whatever prices they
sell. This will cause the cost of food grains to multiply. Since people need food to sustain them,
they will be compelled to cut most other requirements so as to satisfy hunger. In such a case,
agricultural sector alone will flourish while all other sectors will tremble. In such a scenario, the
farmers will earn much higher wages than specialists and farm laborers will earn much higher
wages than what engineers earn. This demonstrates how deductions of interest in the form of cost
of supply of capital help, the owners derive undue benefits.
Interest based investment compels the entrepreneurs to raise the rate of return of the economic
activities under their control up to the rate of interest of the capital borrowed. Further, normally it
allows them to raise the rate of return to twice the prevailing interest rate, as no investment can be
made in activities having lesser rate of return for their owners than twice the prevailing interest
rate. Entrepreneurs can do this by increasing the price of their products or by reducing the labour
wages, or by causing the raw materials prices to fall or a combination of the above methods. All
this results in exploitation of the masses and this is due to the prevalence of interest.
In this perspective, the cost-push argument of the proponents of the capitalist system is irrelevant
because it is interest that causes the cost of production to rise. The proponents of interest justify it
on the ground that the entrepreneurs and creditors agree to it on their free will and then allow
massive injustice and exploitation on the ground that it is essential to sustain the economy. It is
also noted that by adopting these fraudulent procedures, the masses and the laborers are made to
pay a major part of the interest that is agreed between the creditors and entrepreneurs. Clearly, use
of interest as a basis of sharing of profits between the creditors and the entrepreneurs is unjust,
exploitative and oppressive.

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8. Arguments for Interest are unsustainable

The advocates of interest do not have any substantial argument to support their contention. They
ought to correct themselves and the following reasons may be enough to convince those who seek
justice.

8.1 Arguments
A. Economist often justifies interest as fixed charge on capital. Comparing with fixed labour wage,
they justify it on the ground that both are factors of production. Proponents of this anti-human
concept ought to realize that labour, being members of human race, have a right to sustenance.
Most efficient way of fulfilling this right is to guarantee payment of just wages irrespective of
whether their employers make profit or loss. However, capital has no such rights and therefore,
there is no reason to allow a predetermined charge for capital. Also in most case wages are too
subjected to fines, cuts etc depending on performance.
B. Capitalist creditor has nothing to do with the conduct of business as his or her interest lies only
in interest of and the ability of the entrepreneurs to provide collateral alone that matters. Thus
incompetent entrepreneurs who can provide collateral get the loans, while the entrepreneurs who
fail to provide collateral due to their poverty do not get loan despite their competence. Thus,
interest based mechanism result in selection of rich entrepreneurs who may be incompetent instead
of competent entrepreneurs who are poor.
C. It is well known that in a market based economy, rate of return of economic activities
constituting economy is widely distributed. Rate of return on investment varies widely. No profit
can be earned without some form of investment. Productivity of capital is only due to its
investment and therefore, it cant be independent on the rate of return on its investment. When the
rate of return of investment falls, the amount payable to the creditor must also fall. Rate of return
on investment is subject to natural laws of distribution and therefore, it is not possible to assign a
fixed rate of return on capital. Frequently there is sudden fall in the rate of return for some
enterprises due to reasons that are beyond the control of the entrepreneurs; there is no reason why
they should bear the loss. Therefore the creditor must provide the capital either free of cost or must
also share the losses. Creditors are owners of capital and thus have better capacity to bear the loss.
Thus, interest based mechanism creates inefficiency by assigning losses to entrepreneurs who have
lower capacity to bear the losses.
D. The interest based mechanism tends to ensure that the rich will ever remain rich because most
of gains arising out of economic activity pass to them in form of interest. Thus they continue to
grow richer, while the poor do not have an opportunity even to get higher education and training
that is essential to compete for well- paid jobs. Thus interest allows greedy capitalists to control
economic resources even if they are not fit to ensure proper economic growth. Clearly the interest
of humanity lies in its ability to provide opportunities to its efficient members to rise to the top,
and interest acts as an artificial barrier against the natural process of rewarding the efficient.(You
deposit more in accounts you get more interest and thus more control on economy)

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E. Interest cant be justified as time value of money. When future value of money is defined at its
present value plus profit expected to be made by its investment in the intervening period, it will be
more than the value of equal amount of future money. If this difference is defined as time value of
money it is not correct to hold that time value of money does not exist. However, in the case, time
value of money will depend upon its investment and thus it is uncertain. Therefore, it cannot
justify a fixed charge (just imagine food prices if farmers start adding time value of land!!).
F. It is well known that interest has to be paid by everyone, as it is included as a cost in the price of
the products. It is well known. It forms 40 to 50 percent of the cost in most of the countries.
Entrepreneur-creditor combine has no right to force everyone to pay interest that they mutually
agree. Therefore it ought to be strictly banned.
G. Some incompetent economists try and compare interest to rent paid for using capital. However
they must be made aware that one can take hammer on rent but not nails. Rent is given when the
object is used and given back in its original form. E.g.:- While taking house on rent, you return
same house back and not a new one. Similarly, capital is used up to generate more and thus it loses
its original form. Its just the case where you cannot take rice on rent.
H. Interest grows exponentially and all other things are subject to law of growth and decay. Thus
its conflict with nature is obvious and therefore systems driven with interest can never be efficient.
As discussed above fraud is an integral part of interest and therefore it can only lead to growing
fraud and corruption, injustice and exploitation. Thus it can never lead o human welfare.
I. Cost of Capital argument does not have any substance in it because the currency consists of
printed piece of paper only and cost of its production is negligible compared to interest that is
charged year after year.
J. Prevailing interest acts as a ceiling and the resources that cannot be so employed as to ensure
rate of return higher than prevailing interest rate, remain unemployed. This produces
unemployment of material resources that produces corresponding unemployment of labour. Thus
the system ails to properly utilize its productive capacity.

8.2 Theories
The mere plethora of opinions attempting to explain the existence of interest and justify its
paymentaccompanied by the credible critiques of all of these views by noted and respected
economists should be a sign to everyone that something is not quite right. In the history of
economic thought, one can find the following theories justifying interest (among others):
A. The Colorless Theories (as Boehm-Bawerk calls them): These were advanced by Adam
Smith, Ricardo and other early economists. This theory has many flaws, including confusing
interest with gross profit on capital. Ricardo further traced all value of capital back to laborbut
somehow he failed to note that it was never labor that was receiving the payment for said value.
B. The Abstinence Theories: These kinds of theories have popped up every now and
then. Economists discovered that abstinence may not be a good word to use and would often

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change it to other terms, such as waiting (a la Marshall). Interest is, in essence, the wage one
receives for waiting or abstaining from immediate consumption. This theory failed because it
seems to think that savings are solely a function of interest, which has been found not to be true.
C. Productivity Theories: The proponents of this theory see productivity as being inherent in
capital and therefore interest is simply the payment for that productivity. The theory, as put
forward by Say, assumes that capital produces surplus value but, again, there is no proof to support
that claim. The most that one can claim is that some value has been created, which is a payment to
capital, but one cannot prove that excess or surplus value has been created, which is the essence of
their claim that interest is justified. Of course, these theories also complete ignore the monetary
factors when analyzing interest.
D. Use Theories: Boehm rejected the validity of the assumption that there was beside each capital
good a use thereof which was an independent economic good possessing independent value. He
further emphasized that in the first place, there simply is no such thing as an independent use of
capital, and, consequently, it can not have independent value, nor by its participation give rise
to the phenomenon of excess value. To assume such a use is to create an unwarrantable fiction
that contravenes all fact.
E. Remuneration Theories: This group of economists sees interest as the remuneration of labor
performed by the capitalist. Although supported by English, French and German economists,
perhaps this view needs no comment.
F. The Eclectic (combination of earlier theories, such as Productivity and Abstinence) Theories:
Afzal-ur-Rahman writes:
This line of thought seems to reveal a symptom of dissatisfaction with the doctrine of interest as
presented and discussed by the economists of the past and the present. And, as no single theory on
the subject is in itself considered satisfactory, people have tried to find a combination of elements
from several theories in order to find a satisfactory solution of the problem.
G. Modern Fructification Theory: Henry George was the developer of this theory but it never
carried enough weight to have many, if any, followers.
H. Modified Abstinence Theory: Yet another unique theory, proposed by Schellwien; it never had
much impact.
I. The Austrian Theory (The Agio or Time-Preference Theory): This is the view that BoehmBawerk himself endorses. According to this theory, interest arises from a difference in value
between present and future goods. Cassel has critiqued this theory in detail. It boils down to
being a fancy waiting theory.
J. Monetary Theories (the Loanable Funds Theory, the Liquidity Preference Theory, the Stocks
and Flows Theory, the Assets-Preference Approach): More recently, economists have tried to
introduce and emphasize the influence of monetary factors into the issue of interest. In reality,
though, the emphasis here begins to be switched from why interest is paid to what determines the
prevailing rate of interest. According to Robertson, interest in liquidity preference theory is

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reduced to nothing more than a risk-premium against fluctuations about which we are not
certain. It leaves interest suspended, so to speak in a void, there being interest because there is
interest. Similar critiques have been made of the other views in this family of theories.
K. Exploitation theory: Incidentally, socialist economists have always considered interest as
nothing but exploitation. It should be recalled that the founding fathers of capitalist theory,
Adam Smith and Ricardo, believed that the source of all value is nothing but labor. If that is true,
then all payments should be made to labor and interest is nothing but exploitation.

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9. Inflation due to depreciation of Currency and its Effects

Consider the following example. Suppose that the
number of grams that constitute a kg is reduced to 500.
Then, with respect to the new kg, our weights will be
found to have doubled. This doubling of our weight is an
illusion. Similarly, with respect to the new kg the
prices will fall to half their previous level. Clearly this
fall in prices is no more than an illusion. Similarly, if a
unit of currency represents 10mg of gold and later it is
made to represent 5mg of gold, compared to previous
value, the price of goods will double with respect to later
coins. Clearly, this price increase is illusory as the
doubling of weights and the fall of prices.
Economists define inflation to include increase in
the prices due to natural causes. However, in order to
differentiate increase in prices due to natural causes from the increase in prices due to artificial
reduction in the quantity of goods represented by currency, we ought to define inflation as the
increase in prices due to artificial reduction in the quantity of goods represented by currency.
Accordingly, if the currency was real or linked to a basket of real goods, it will always represent
definite quantity or quantities of goods. Thus, inflation will not exist.

9.1 Relation between interest and inflation

Increased rate of inflation acts as a relief for the activities based on capital borrowed in the past. If
the prevailing interest rate is near the balanced rate of interest, it will require lower relief and
minor increase in the rate of inflation will be enough. Similarly, if the prevailing rate of interest is
sufficiently higher than the balanced rate of interest, it will require higher increase in money
supply (to prevent fall in output and employment) that will create more inflation.

9.2 Inflation & exploitation of have-nots

Inflation is the worst tool of injustice, exploitation and oppression that humanity ever invented.
There are many ways in which it harms the poor and the oppressed. In its absence the interest
based capitalist system would have collapsed and therefore, it is responsible for the massive
exploitation and oppression produced by interest. Some of the mechanisms by which inflation
harms the poor are given below:A. Prior to 1920-30 the prices as well as labour were more or less fixed and the masses actively
participated in the market mechanism of price determination. Any effort by industry/
commerce to increase the price of the products of the organized sector or to lower the labour
wages or the prices of raw materials was strongly resisted. The massive response it used to
generate prevented the owners of the organized sector from indulging in injustice and
exploitation.

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Inflation eliminates the active participation of the masses in the mechanism of price
determination by the market. This allows the owners of the activities in the organized sector to
manipulate the prices to their advantage that results in the massive transfer of the earnings and
the wealth to the rich.
B. It allows the developed and powerful economies to exploit the under-developed and
developing economies. Currencies of developed economies have higher stability than the
currencies of the under-developed and the developing economies and command worldwide
acceptance and recognition. For example, everyone likes to have USAs dollars but no one
prefers to have Indian currency. This causes massive loss to the developing and the underdeveloped economies. For example, let us assume that the USAs dollars held by the Indian
government and by the Indians amount to 10 billion. Clearly, India and Indians can get these
dollars only by selling off some goods or services or as a loan. In the first case, Indians are
deprived of the resources and in the second case; they have to pay interest on it.
Further in the absence of inflation, the producers will not be able to exploit the masses and
labour and therefore, average rate of return of the economic activities will be lower than the
average rate of return in the inflationary situation. Lower rate of return of the economic activity
implies lower interest rates as well as lower cost of technology transfer. The under developed
and the developing economies buy capital as well as technology from the developed economies
and therefore, this increases the rate of transfer of earnings and wealth of the masses of the
under-developed and the developing countries to the developed countries. Majority of the
masses live in developing and under developing countries and exploitation of their economies
amount to their exploitation.
C. It eats away small savings of the poor. Major part of the earnings of the poor is consumed
by their immediate requirements and therefore, to meet their heavier experiences they are
required to save over a long period of time. For example, they save over 15-20 years for
owning a house, for 5 to 10 years of marriage, 10-15 years for marriage of their children.
Meanwhile, inflation goes on eating away their marriage.
Those who deal in interest may partially reduce the losses for example, either by buying the
house by supplementing the savings with borrowings on interest that are freely available or by
partially reducing the effect of depreciation by keeping the savings in the time deposit scheme.
D. It reduces the availability of interest free loans to almost nil. This results in severe loss to
the masses as they pay higher interest when they borrow but receive little or no interest when
they lend. If someone tries to avoid interest bearing loans, he/she is required to save over long
period of time and meanwhile inflation eats away most of their savings. Inflation has killed the
spirit of mutual help and that aggravates the exploitative potential of the capitalist creditors.
E. It assists the greedy capitalists and their agents in divesting the masses of their control over
the resources. Due to the gross disparity, the masses have lost the capacity to derive proper
benefits from the resources owned by them. The rate of return of the resources owned by the
masses stands further reduced due to price differential created by inflation. Additionally the
masses are not fully aware of the extent of depreciation and know that currency to be worth
more than what it is. Accordingly, they consider the worth of the resources owned by them to
be worth less than what they are. The rich are aware of the real worth of these resources. Thus

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when the poor are offered the right prices they wrongly feel it more and therefore, get allured
into selling off the resources that are under their control. Value free advertising products a
highly alluring picture of the industrial products and services that tempt the masses to buy
them. The temptation of higher prices and strong desire to own the products made alluring due
to the value free advertising, prompt the masses to sell off the resources under their control to
buy those products.
F. Inflation is fraud and the worst tool of injustice, exploitation and oppression and it creates
massive fraud and corruption and makes it impossible to do injustice. The transfer of earning
and wealth of the poor to the rich produced by inflation, results in increasing poverty and
growing disparity. For the period 1952-1965, inflation rate averaged about 1% per year this
low-inflation product strong inflation-adjusted family income growth. In the mid-1960s
inflation rates began a dramatic rise, for the next 2 decades. Once the inflation rates exceeded
about 3%, real family incomes and savings rates ceases to grow. Thus, increase in the rate of
inflation is invariably accompanied by increase in poverty as well as disparity.
G. The failure of the economy to solve the problem of unemployment is due to increase in its
severity due to mutually reinforcing effect of interest and inflation. Increasing disparity goes
on reducing the proportion of people who own enough resources to employ themselves. As the
people get poorer they are not able to employ themselves and hence they are not able to
provide collateral required for availing interest based finance. In the economy based on
interest, any economic activity that is not able to produce surplus at a rate higher than rate of
interest cannot be run as it results in loss to its owner.
Thus, increase in the rate of inflation is invariably accompanied by increase in poverty as well as
disparity and even rate of unemployment increases in the long run. Thus, even under capitalism,
inflation is extremely harmful to the poor and does not help them to the least.

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10. Islams Solution#1: Currency fixed on a standard

10.1 Comparing price changes
10.1. A Price Changes in case of money Based on Gold/Silver
Let us assume that money supply is doubled, but there is no increase in the supply of goods in the
market. People have more money and therefore they will try to buy more goods but they cannot
buy more goods because there is no increase in Supply of goods. Will the competition between the
people trying to buy more goods double the price level?
Clearly the answer is in the negative for the reason that existing price level is based on relative
preference of the people for goods with respect to the specified quantity of gold or silver. Clearly
this involves a selection between two luxuries having more goods or more money. People have
strong preference for gold and silver. Unless there is shortage of supply they will not like to
exchange it for lesser amount of goods than for what they used to exchange. Hence they will prefer
to have more money that is equivalent to gold or silver than to buy the same amount of goods for
larger amount of money.
Thus the tendency to buy more goods will be almost nullified by the tendency not to exchange
gold/silver for lower quantity of goods than what it is used to buy. Price increase if any will be
marginal. The empirical evidence that is
discussed latter confirms it. Islamic
scholars in the past made similar
observations e.g., Al-Maqrizi has
observed that, price of goods under gold
and silver increase slightly but under
Fulus (depreciating fiat money) price of
goods increase rapidly.
10.1.B Price Changes in case of floating
Fiat Money
Again, assume that money is doubled but
there is no increase in the supply of goods
in the market. People have more money
and therefore they will try to buy more
goods but they cannot buy more goods
because there is no increase in supply of
goods. Will competition between the
people trying to buy more goods double
the price level?
Basic reason i.e. intrinsic value that led to a firm no in the first case does not apply in this case.
Due to depreciation, the depreciating currency performs very poorly as a value in store. People do

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keep some cash but it is mainly to meet emergency requirements or in anticipation of some good
bargain coming up. No informed person keeps money as value in stores. Therefore, with everyone
trying to buy more goods but with the supply of goods remaining unchanged, people end up
buying same amount of goods for double the amount of money.
(The above cases are mainly observed in case of raw materials and extreme luxury)
10.1.C Conclusion for Price change
Governments might have not been aware that abolition of gold standard without creating any
reliable measure of wealth amounted to fraud against humanity and that it stands to demolish all
the stands for justice and righteousness. If we consider the underlying reality we see that what is
said to be currency is only a symbol. In case of freely floating fiat money, it is a symbol for
varying/changing quantity of goods and services.
The quantity is varied but the symbol is not changed. Thus, what the symbol represents, vary with
time. The underlying reality is that total supply of money represents the number of shares in that
national out-put that is divided. Currency is equal to one share. To double the supply of money is
to double the number of shares and therefore each share i.e., currency becomes halved.

10.2 Stability of measures of Wealth

Considering the causes that lead to fluctuation in the relative prices of the goods, an absolute
measure of wealth cant be found. This is because there does not exist any commodity, the price
whereof could be held to be invariant. Price of some goods is highly volatile and price of some
goods is almost stable.
The characteristics that lead to stability are discussed below:A. Widely distributed and heavily traded: It is essential because widespread distribution and
trading imparts price stability as the masses become well aware of prices of other commodities
with respect to such commodities. Further it also ensures that the manipulators are not able to
significantly alter its supply and demand.
B. Preferably near zero cost of preservation: If there commodity needs to be preserved and that
incurs some cost then it would raise the amount of currency it represents over the period of time;
and vice-versa if not preserved.
C. Constant utility: Utility is one of the primary factors that determine prices of goods and
therefore the utility of standard measure of wealth ought to be constant overtime.
D. Non-Essential: In case of essential goods, shortfall of production causes the prices to shoot up.
For example fall in production cause the prices of food grains to soar up. Therefore an essential
good cannot be good measure of wealth.
E. Naturally controlled Supply and demand: The goods supply and demand whereof is artificially
controlled, cannot be good standards because the prices of such goods can be manipulated.
Artificially created changes in the price of standard will affect various accounts.

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F. Use as medium of exchange: If some commodity has reasonable price stability, people may use
it as medium of exchange. Its use as medium of exchange raises its demand and almost everyone
tries to keep some quantity of it, to meet transactions demand. Its acts like a buffer stock.
Mark that Gold and Silver are the best to match above criteria. However a measure of wealth may
be a mixture of many such stable materials and thus currency may be issued on its backing. Point
to be noted is that the demand for money now wont increase in a multiplying manner as we
already got rid of interest and the increase in the demand for money would be close to the real
growth of Economy.

10.3 Statistics of stability (store value) of Gold /Silver as a unit of measure

At the time of Prophet Mohammed (PBUH) 21.25gms of Gold would buy you a camel, or you may
say 4.25gms of Gold would buy you a goat and even now they cost the same. Right now, when Im
writing this (evening of 29th July, 2010) the gold rate is 17,445 rupees per 10 grams. So if you take
rate of 4.25grams it comes to Rs7,414, that is approximately what it costs for a healthy goat in
Mumbai at this date27. Thus you may observe the purchasing power of gold has remained same.
Prof. Roy Jastram examined the purchasing power of Gold against basket of commodities for
500years and found it to be constant. You may refer to his publication, Golden Constant.
Between 1900 and 1995 purchasing power of Gold increased by just 15% while Sterling one of the
most stable currencies fell to less than one fortieth part of the purchasing power. Thus if anyone
thought he has made 80% profit in this period then in reality he has made only 2% profit because
of Sterling fall. Growth of global gold stock in 1915-1997 amounted to 2.17% per year. That is
close to net real growth rate of the economy. This explains near constancy of Gold prices and
shows that Gold prices shall continue to remain similarly stable in future. In 1971 an ounce of
Gold was worth $35, now it is worth is around $400. Considering that in the same period, US
dollar has depreciated to just 8% of its value, it is clear that purchasing power of Gold has
remained reasonably constant. Lets see gold prices more in terms of US Dollars because this is the
way international market sees gold. Taking a really small example for representation purpose,
observe the graph below starting from March 2003 to March 2008 (Just before recession):-

27

However in since 2009, there has been an intentional appreciation of gold for many reasons. For further information
please refer to the reports of Gold Anti-Trust Action Committee of USA. (gata.org)

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Now this clearly shows that as US Dollar has felt; Gold price have increased. However just to add to
evidences one may look at Prof. Roy Jastrams graph when he wrote an article for School of Business

Administration, University of California, Berkeley, to the Security Analysts Society of San

Francisco December 2, 1981 o directly refer to his book Golden constant
From 1833-1930 (period when gold currency was attached to gold) the maximum and minimum of
Gold value in US Dollars had a difference of just 75 cents. That is, for 97 years gold remained
between the ranges of 75 cents.
Throughout history, an ounce of gold would always buy a reasonable, but not luxurious, outfit of
clothes. This was true in the fourteenth century, when an ounce of gold was 1.25 to 1.33; it was
true in the late 18th century when an ounce of gold was around 4.25 or $19; it remained true in
the current decade when an ounce of gold has so far (2000 to 2008) averaged 269 or $472. In
contrast, neither 1.33 nor 4.25 nor $19 would go very far in a normal shopping mall today.
Nevertheless, anecdotal evidence is one thing; proper statistical analysis another. Thus in
conclusion I would just like to say that for 1400 years before this date gold has shown constancy
and stability.
Critics claim that once the gold standard was abolished gold didnt maintain its constancy. The
conclusions about the behavior of the purchasing power of gold differ somewhat between the
periods before 1971, when the gold price was controlled, and after, when it was free. Nevertheless,
one conclusion remains unchanged - that gold maintains its purchasing power over long periods of
time even though, over shorter periods, it has fluctuated significantly. Gold is frequently thought of
as an inflation hedge, or as a hedge against the fear of inflation, and experience since its price was
freed in 1971 broadly supports this. The gold price rose far more rapidly; far more than the rate of
inflation so that its purchasing power leaped in the 1970s. This was a decade not just of high
inflation but it also included the two oil price shocks and what appeared at the time to be an end
to the post-war miracle growth of the 1950s and 1960s. Politically, events in first Vietnam, and
later Iran and Afghanistan, seemed to weaken US political hegemony. In contrast, during the time
of the great moderation in the 1980s and 1990s a period of disinflation, generally improving

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economic circumstances, mostly strong stock markets and marked politically by the fall of
communism the purchasing power of gold fell. In the current decade, which saw renewed fears
of inflation, growing concern over global imbalances and rising debt, and increasing political
tensions, all culminating in the current economic and financial crisis, the purchasing power of gold
has risen again. Jastram noticed that while the price of gold had remained constant for extended
periods (1701 - 1792 and 1822 1914 in England), commodity prices had fluctuated around it. He
also noted that the exchange rate between gold and commodities that ruled in 1930 (which he
took as the base year for his indices) had already been achieved around 1650 and was achieved
again on several occasions in the 18th and 19th centuries. During the 20th century, when the price
of both gold and commodities started on an irreversible upward trend, they moved around each
other with golds purchasing power returning to the 1930 level on more than one occasion. Hence
his main conclusion that the purchasing power of gold is maintained over long periods of time.
Jill Leyland (World Gold Council) updated Professor Roy Jastrams report until 2009 and
presented following graphs: -

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P a g e | 39

These graphs clearly show that in long term purchasing power of gold remains constant though in
short term it may fluctuate. This behavior is unlike the behavior of fiat money (rising vegetable
and consumer goods prices is sufficient evidence for it).
Thus it is gold which is:- Store Value
- Unit of Account
- Universally accepted
- Standard for deferred payments

10.4 Problems faced by Nations in adopting Gold standard and their solutions
Such problems could be classified into three major parts: A. If Gold standard is adopted there will be no scope to correct Fiscal Deficits of government.
B. If Gold standard is adopted it may lead to financial instability
C. If Gold standard is adopted it may hamper growth.
10.4.A Refuting the argument: - If Gold standard is adopted there will be no scope to correct
Fiscal Deficits of government.
At a time when economic recovery needs more stimuli by the Government of India (GoI), there is
also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell
to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total
expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing
which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were
9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures
by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30%
due to high debt serving ratio to total revenue expenditure.

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In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the
increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing);
increased subsidies on food, fuel and fertilizer; and rural development through schemes like
NREGS, farmers loan waiving scheme and Sarva Shiksha Abhiyan are the three most important
factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the
economy, it is expected that the plan expenditures may further increase whereas due to recession,
the revenue receipts may decline. This decrease in revenue receipts and increase in plan
expenditure may increase the fiscal deficit to an unwanted high level. Working upon different
options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even
if revenue receipts decline and plan expenditures increase.
Islamic financial products have a great role to play in reducing the fiscal deficit in emerging
economies by replacing the debt based investments for infrastructure with funds mobilized through
equity based Government Securities for infrastructure projects. Lets see how Islamic finance may
help us reduce our present fiscal deficit.

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Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03%
revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total
revenue expenditures. For a developing economy like India, in the proposed plan we project
increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue
expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high
debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24%

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of total revenue expenditures. So, with capital expenditure being as low as just 11% of total
expenditure and debt serving being as high as 59% of total expenditure, how can we go about
planning to foster inclusive growth?
Debt Finances crossed the Planned Estimates:
The debt based finances for investments under 11th five year plan document was proposed to be
48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt
receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize
targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over
borrowed debt receipts.

According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579
crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores.
So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our
inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better
that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on
infrastructure investments to stimulate the economy at a time when GDP growth rates and
employment growth rates are falling.
Actual Debt Receipts are 210% of the planned Estimates:
Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated
requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan
documents, the GoI should seriously think about this increased debt receipts. The funds utilized for
debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs.
3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts
at a time when Indian industries are looking for more affordable credits from banks to meet the
challenges after the global meltdown?

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In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as
interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to
GoI because had there been equity based receipts against debt receipts, GoI would have saved this
amount.
Financing Fiscal Deficit through subsidized bank loans is not good
In the 11th five year plan document it was projected that by year 2008-09, to meet the proposed
investment needs around 50% debt receipts worth Rs. 63,207 crores would be mobilized as
domestic banks credit. However, the figures of revised budget estimates for 2008-09 states that
market loans (amounting Rs. 261,972 Crores) are over 80% of total debt receipt by the GoI. The
increased flow of subsidized bank loans to GoI for financing fiscal deficit is in fact creating
problems for economic growth of the economy because it is creating hurdles for banks to increase
the supply of cheaper credit to the private sector at a time when they need it to minimize their
output cost and combat recession. It is observed that besides a fall in international demands, the
availability of equity finance or cheaper credit sources have affected business confidence. The
equity financial sources are drying up after reversal of capital flows from stock markets due to the
global meltdown. External Commercial Borrowings (ECBs) and Export Credits have also
declined. This has all affected the growth rate for industries.

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Besides evaluating the fall in annual growth rate of Gross Domestic Product (GDP) from 9.0% in
2007-08 to 6.7% in 2008-09, it would also be important to analyze the growth trend for different
industries during last year. The Manufacturing industry employing a majority of non agriculturalworkers observed the deepest fall where annual growth rate fell to 2.4% in 2008-09 compared to
8.2% in 2007-08. Similarly the annual growth rate of agriculture, forestry and fishing fell to 1.6%
in 2008-09 against 4.9% an year ago.
However, the increase in annual growth rate for Community, Social and personal services has
remarkably increased to 13.1% in 2008-09 as compared to 6.8% in 2007-08 reflecting the impact
of increased expenditures by the Government through financing schemes like NREGS. But it is
important to note that such expenses have not only increased the fiscal deficit beyond the estimated
budget for 2009-10, but only 9% of the Indian workforce engaged in Community, Social, and
Personal services is expected to be benefited through it.
Thus the excess flow of subsidized bank credits to GoI for financing the budget deficit is
ultimately restraining the economic growth.
Fearing an even higher fiscal deficit?
To reduce the fiscal deficit, it is simple to either cut the expenses or increase the revenues. But
under present conditions, it is not possible either to increase the revenue receipts or to cut the
expenditures because any increase in taxation will be disastrous at a time when recession has hit
the business community and is already demanding for more stimuli to recover. When there is
mounting pressure to increase the stimuli, the expenditure is suppose to increase further. Moreover
the political promises (to provide subsidized foods and increase flagship programme expenses) by
the new Parliamentarians before the election would also increase the plan expenditures. It all
increases the possibility of any further increase in the current fiscal deficit.
What the Government should do now?
Considering the constraints to increase the revenue receipts and cut the plan expenditures to
control fiscal deficit, the GoI needs to innovate new products for public finance. As almost 60% of
total expenditures are made for debt servicing, GoI needs to substitute the debt receipts with equity
funds. Since SEBI failed to protect the stock markets and NBFCs dealing in MFs and VCs are not
in a position to mobilize huge long term investment funds, GoI needs to innovate Sovereign
equities to mobilize adequate amount of non debt receipts for consolidation of public finance.
Considering the available options of capital sources in the international market, there are chances
to get Islamic funds instead of mere equity funds from the Muslim countries. The equity funds are
somehow different from Islamic Funds in the manner that when equity funds are mixed with debt
funds, it doesnt remain Islamic Funds.
Islamic Bond (Sukuk) for public finance in India:
Islamic economist Dr. Shariq Nisar in his paper Islamic Bonds (Sukuk): Its Introduction and
Application writes that the recent innovations in Islamic finance have changed the dynamics of
the Islamic finance industry. Especially in the area of bonds and securities, the use of Sukuk or
Islamic securities have become increasingly popular in the last few years, both as a means of
raising government finance through sovereign issues, and as a way for companies to obtain

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funding through the offer of corporate Sukuk. Beginning modestly in 2000 with a total of 3 Sukuk
worth $336 million the total number of Sukuk by the end of 2007 has reached 244 with over US$
75 billion funds under management. Dr. Shariq summarizes the growth of Sukuk in following
table.

Recent studies about Sukuk at http://online.wsj.com/ indicate that the Sukuk market has managed
to come back modestly, but only for higher corporate issuers. IFIS (Islamic Finance Information
Service) data show that so far this year, more than $7.6 billion of Sukuk has been issued. Almost
all this years fund-raisers have been governments or government-related, the overwhelming
majority from Southeast Asian countries such as Indonesia. The Middle Eastern market that drove
the pre-2007 boom has also sprung into life this month with a $500 million issue for the
government of Bahrain, which was boosted to $750 million because of strong demand. Thus there
is no harm if GoI study the feasibility of innovating Islamic products to consolidate public finance
in India.
Scope of Islamic Bond in India:
Unfortunately, so far India has yet to launch any real Islamic bond or Mutual fund because
somehow all the so called ethical mutual funds have been mixing equity funds with debts.
Moreover unofficial sources indicate that considering the higher growth rate of India, some larger
Islamic banks and financial institutions like Islamic Development Bank, Dubai Islamic Bank and
others want to invest in Indian infrastructure but do not find suitable opportunities. So, we study
the prospects of Islamic Bond (Sukuk) issues from GoI to finance infrastructures.

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Fiscal deficits can be reduced by the Sukuk funds:

Since returns to Sukuk holders come from the actual returns from the project there is no chance of
any interest burden on the economy. In case there is any loss in the specified project that will also
be duly shared by the Sukuk holders. Thus Sukuk finance negates any possibility of interest burden
on the economy and removes the chance of fiscal deficit due to interest payments on borrowed
debts to finance infrastructural needs of the economy.
We have higher revenue expenditures due to higher debt servicing ratio to total expenditure. The
problem is also that capital expenditure is much behind the target and growth rate cant be fostered
if we lack infrastructure. Thus while we need to stimulate the economy, it is better to introduce
Sukuk by the Indian Government as it would not only help build infrastructure, increase capital
expenses and stimulate the economy, but also reduce the revenue deficits, debt servicing ratio and
revenue deficits. Sukuk may even be issued on a pre-condition that government will be able to buy
them back at market value after a fixed period (if at all government does not want to give away
their ownership).
Financing the deficit through more subsidized bank loans is creating problems for the banks to
reduce lending rates for the private sector; as a result the private sector is getting lower amounts of
credit at higher costs. Besides the recent global recession, this hardening credit supply is adversely
affecting the growth rate of agriculture and the manufacturing industry, as reflected by negative
growth rates. Thus the finance deficit is not helping the majority of the Indian workforce as
agriculture and manufacturing collectively provide livelihood for around 63% of the workers. So,
to foster growth and ensure it is inclusive growth by way of providing sufficient and affordable
credits to the private sector, the increased flow of subsidized bank loans to GoI should be reduced;

P a g e | 47

otherwise the private sector will continue to suffer and we may not be able to attain a desirable
growth rate even by increasing the fiscal deficits to stimulate the economy.
Since Sukuk is bounded with religious faith, the economic rationality is a secondary aspect in the
decision making by the investors. The top priorities for Sukuk holders are to ensure that
1. The returns are Halal (legal according to Islamic ethics) and investments will be used for
building potential infrastructures for national development. Thus the investments and returns may
draw tax incentives as well, which may stand as compensation against lower rate of returns.
2.

The investments are meant for legal share (proportionate ownership) in the infrastructure.

3. There would not be any fraud or cheating by the fund managers and the investments would not
be spent for promoting unethical and unlawful activities (as prohibited by Islamic ethics).
4.

The investments will be in safe hands to carefully develop the assets and not manipulate them.

5. Even if the rate of returns are low as compared to market returns on other investments, the
advantage of earning Halal income and the tax incentives on investments in infrastructure, would
be some compensatory advantages to the Sukuk holders.
Since all sorts of returns on Sukuk are free from interest and does not exceed the actual asset value,
whatever is paid as returns to Sukuk holders paid from the actual earnings from the asset created
by that particular investment. There is no need to borrow any debt to pay Sukuk returns or repay
the whole Sukuk funds because all the Sukuk holders collectively own the asset. They will thus
proportionately gain or lose according to appreciation or decline in the value of that particular
asset.
Anyways this point of expanding fiscal deficits and money supply in proportion with actual growth
was also stressed by committee under Prof. Sukhamoy Chakravarty.
10.4.B Refuting the argument: - If Gold standard is adopted it may lead to financial
instability.
As already mentioned in previous chapters, interest/usury (Ar-Riba) is the main cause of financial
instability28. Let us have another example, amount payable in lieu of interest based finance doubles
and redoubles and this redoubling continues.
Suppose rate of interest is 10.41%, then amount payable doubles and redoubles every 7 years. In
50 years it becomes 28,26,581 times respectively. The amount that is returned by previous
borrowers is again lent on interest to new borrowers and therefore this process of doubling of dues
continues despite the fact that many borrowers are able to repay the loan within a few years.
28

Former Governor of RBI (1992-1997), Former Governor of Andhra Pradesh (1997-2003), Head of Twelfth Finance
Commission (2003-04) and currently Rajya Sabha member in his book India Monetary Policy Financial Stability and
Other Essays at page 43, 47.

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Naturally, things grow but then decay and there is nothing real that can continue to grow in this
exponential pattern. Clearly debts cleared by interest-based finance can never be cleared. Number
of people below poverty line has been increasing and many poor countries have already been
trapped by the debt created by interest-based finance. It follows that interest is a mechanism to
enslave the people and any law that enforces its payment is unjust and inhuman.
Thus it is interest which causes financial instability and thus depreciation of currency. Once
interest based finance is eradicated and Islamic Finance is used, these arguments are futile.
10.4.C Refuting the argument: - If Gold standard is adopted it may hamper growth
Gold standard will definitely hamper growth, but not of economy, rather of illusionary wealth. It is
said that expanding monetary policies lead to more investments and stimulates demand and thus
moves the economy. However it must be realized that such expansion of money only creates an
illusion. In short term you may find positive results but however in long term when people realize
the actual situation it only nullifies its effects. However countries tend to avoid this nullifying
effect by further expanding money supply. As already mentioned such expansionary policies only
result it exploitation poor and gives opportunity to rich to become richer.
Islamic Economic system with its unique system avoids such unjust policies. In Islam productive
investment is exempt from the charge of zakah (explained later) but non-productive investments
including merchandise are chargeable to zakah. Thus investments like that in gold and silver are
chargeable to 2.5% when above nisab (85grams of gold or 595grams of silver) level but on the
same hand productive investments such as that in machinery are exempted. Similarly, stocks kept
in warehouses for more than a period of 1 year and more than nisab level are chargeable to zakah
because they are unproductive and blocks funds. Thus taxing unproductive use of resources, in an
Islamic economy, creates massive productive investments.
Also it is worth mentioning that Islamic principles always brings about a rotation in money and
avoids hoarding or blockage of funds, or say, it keeps economy moving. This is explained very
clearly in following Hadith: Narrated Abu Huraira: Allah's Apostle said, "If I had gold equal to the mountain of Uhud
(hill-lock near Madina), it would not please me that it should remain with me for more than
three days, except an amount which I would keep for repaying debts."
[Hadith Bukhari 41:574]
Similarly there are laws that relate specifically with unproductive uses:Jabir b. Abdullah (Allah be pleased with them) reported Allah's Messenger (may peace be
upon him) as saying: He who has land should cultivate it himself, but if he does not cultivate
it himself, then he should let his brother (brother means all righteous people as per
definitions in Hadiths) cultivate it.
[Hadith Muslim 10:3716]

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There are also facts narrated that under Khalifa rule, if any one had claimed any unclaimed land
and failed to bring it into production for 3 years then his claim was considered null and void. Such
an Economic system was so successful that it is narrated; that at the time when Umar II was the
Khalif, people used to carry charity but there was no one to collect it.

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11. Islams Solution#2: System of Zakat

(Taxing excess wealth and unproductive uses of money)
Firstly, it is highly important to clear out that Zakat is a compulsion imposed by God Almighty and
its distribution too is done in accordance with the instructions provided in Quran and the Sunnah.
The government is only responsible for
channelizing it properly and taking actions
against non-payments. As mentioned
while stating principles of Islamic
Economics, government as per Islam
could only impose taxes as a last option
and that too when it provides some service
against it or has some role to play in the
taxed element. As an example we took
Sales Tax and Toll Tax. In private sales
government has no role to play, also
selling is an unavoidable human behavior,
thus taxing sales is unjust. However an
Islamic government has full right to tax
people for the services provided by them.
These above principles do not apply to
zakat. Again because zakat is not imposed by state. It is a compulsion from God.

11.1. THE MEANING OF ZAKAT AND ITS IMPORTANCE

Zakat is the Fourth Pillar of Islam. It is an obligation (Fard), prescribed by God on those Muslim
men and women who possess enough means, to distribute a certain percentage of their annual
savings or capital in goods or money among the poor and the needy. Zakat is assessed once a year
on both capital and savings from income.
The literal meaning of the word zakat is 'purity'. The Prophet (peace be on him) has said: "God has
made zakatobligatory simply to purify your remaining property ." There is no equivalent practice
in other religions. Hence, while terms such as 'charity " poor-tax', 'alms-tax' and 'poor-due' have
been coined by various translators, none of these terms actually conveys the true sense of the
word zakat. Zakat is not a tax levied by a government, nor is it a voluntary contribution. It is first
and foremost a duty enjoined by God and hence a form of worship. In Qur'an the payment
of zakat is frequently mentioned in the same sentence or verse as the establishment of
salat (prayers):"Lo! Those who believe and do good deeds and establish salat and pay zakat, their reward is
with their Sustainer; and no fear shall come upon them, nor shall they grieve."
[Quran 2:277]

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"These are verses of the Book full of wisdom, a guide and mercy to the doers of good -those
who establish salat and pay zakat and have the assurance of the Hereafter. These are on
guidance from their Sustainer, and these are the ones who will prosper .
[Quran 31 :1-5]
Thus, while salat is an act of worship through words and bodily action, zakat is a devotional act
through one's wealth. Without the spirit of submission to God and love of Him, both acts are
without spiritual and moral significance.
From a practical point of view, it is the duty of an Islamic state to collect zakat from every Muslim
who meets the requirements for paying it. The first Caliph, Abu Bakr Siddiq, declared war on
those tribes which refused to payzakat while still professing Islam and observing daily prayers.. He
reasoned that the Divine law (Shari'ah) cannot be divided and that one cannot follow part of the
Holy Book and cast aside other parts.
However, in a non-Islamic state it is up to the individual Muslim to be. conscientious enough to
voluntarily fulfil this duty to God and to his community, and it is up to his brother Muslims to
remind him of this duty.

11.2 THE SPIRIT OF ZAKAT

In the Holy Qur'an, wealth is referred to as God's bounty (fadl). God, as the Creator and Sustainer
of the universe, is also the Owner of all things, including all the things which man possesses and
uses.
"Who has created the heavens and the earth and sends down rain for you from the sky?
With it We caused to grow orchards full of loveliness; it is not in your power to make trees
grow in them."
[Quran 27:60]
Since God is the true Owner of all things and we are merely His trustees, wealth is to be produced,
distributed, acquired and spent in a way which is pleasing to Him. The acquisition of wealth is not
an end in itself, nor is wealth to be squandered for meaningless or wasteful purposes, and above all
it is not to be used in order to gain power over other people through exploitation or control of the
means of livelihood. Qur'an and Hadith make it very clear that any form of gain which results in
some injustice or harm to others is an act of disobedience to God. On the other hand, Qur'an tells
us that next to purity of faith, the most pleasing thing in the sight of God is kindness and charity,
forbearance and forgiveness, and doing good to others.
"Those who spend in charity. whether in prosperity or adversity. , who restrain anger and
pardon people; for God loves those who do , good to others."
[Quran 3: 134]
Thus, God enjoins on us humility before the Creator and His creatures, moderation in the
satisfaction of our legitimate needs and desires, control of our appetites, and a spirit of generosity
and charity, while He asks us to shun pride in ourselves and contempt for others, self-indulgence
and pleasure seeking, and greed for material things and worldly power. We find, therefore, that

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prayers (salat) are made obligatory to purify our hearts from every kind of pride,
fasting (seeyam) controls our appetites, and zakat to overcome our greed. The spirit behind all
these acts of worship ought to be the spirit of submission to God, gratitude for all His bounties, and
hope for His forgiveness and mercy.
In particular, it is with utmost gratitude and joy that a Muslim who possesses enough means
that zakat is obligatory for him should fulfil his obligation gratitude for the bounties which God
has showered upon him and joy in being able to help others. Because the payment of zakat is a
duty to God, no one should ever think of it as a favour done to the person who receives it. In fact, it
is his right to receive it and the obligation of the giver to give it. Like any other act of worship in
Islam, in giving zakat it is necessary that the intention of the giver and receiver be pure and honest.

11.3 THE BENEFITS OF ZAKAT

The moral and material benefits of zakat are obvious Giving zakat purifies the heart of the giver
from selfishness and greed for wealth and develops in him sympathy for the poor and needy. And
receiving zakat purifies the heart of the recipients from envy and hatred of the rich and prosperous,
and fosters in him a sense of good will towards his brother Muslims who although they are better
off, have shared their wealth with him for the sake of God.
God says in Qur'an :
"To Him belong the keys of the heavens and the earth; He enlarges or restricts the
sustenance to whom He wills, for He knows full well all things."
[Quran 42:12]
"He has raised some of you in ranks above others that He may try you in the gifts He has
given you."
[Quran 6: 165]
Thus, a Muslim, whether prosperous or needy, considers his condition in this world as a test from
God. Those who have wealth have the obligation to be generous and charitable and to share the
bounties of God with their brothers, while those who are poor have the obligation to be patient, to
work to improve their situation, and to be free of envy .Qur'an tells us that it is not a man's wealth
or position but his God-consciousness, the quality of his character, and the manner in which he
uses whatever is given to him by God which determines his ultimate destiny in the Hereafter. The
economic objective of Islam is just and humane. distribution of wealth, as stated in Qur'an: "...so
that this (wealth) may not circulate solely among the rich from among you." [Quran 59:7]
Thus, Islam neither approves of hoarding and unlimited building up of capital, nor of compulsory
equal distribution of wealth, as both are unjust. Its teaching encourages the earning of a livelihood
and acquisition of wealth by lawful, honest and productive means, and enjoins the just sharing of
the acquired wealth among the workers, the investors and the community at large. The
community's share in the produced wealth is zakat and sadaqah (charity), the first an obligatory
and the second a voluntary contribution from individuals. Zakat , when honestly practiced, results
in freeing the society from class distinctions, rivalries, suspicion and corruption. It produces a
community of people who love and respect each other, and who have sympathy and concern for
each other's welfare. Giving zakat is not a matter of pride. It is a devotional act, like salat, on the

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completion of which the contributor should be thankful to God for the fulfilment of his obligation
and pray for the forgiveness of his sins.
The current Taxation system seems to be highly discouraging for production and developmental
works. The problems which it creates are definitely more than the solutions. If we are to provide a
framework of taxation, it would be such that which would encourage production and discourage all
unproductive uses of wealth. That means more of Wealth Tax kind of things and less of VAT types
(It is clearly unfair for the person who is making a productive use of nations money). Thus the
current taxation system makes it much easier to hoard money in banks and earn interests rather
than utilizing the money for productive use. So the current Wealth Tax system needs some serious
improvements. Rather than extracting more money from hoarded wealth, Government of India on
9th July 2009 increased the exemption limit from 15lacks to 30 lacks. Such hoarded wealth is
suppressing countrys productivity every year and thus creating mountains of problems for poor
through inflations and recessions.
Also, after completely getting through with INTEREST and DEPRECIATION (which were
the causes of de-stability and discouragement of optimum utilization of resources), there must be
something to encourage investment.

11.4 The main differences between Zakah in Islam and Charity

A. Zakah in Islam is not a mere charity left to the righteousness of individuals, as part of their good
deeds. It is rather an essential pillar of this religion, one of its major rituals and the second of its
main four forms of worship. Not paying it is like going astray. He who denies its obligation is
considered disbeliever, It is an obligation supported by the ethical values of Islam as well as by the
power of law in the Islamic state.
B. Zakah is a right to the poor in the wealth of the rich, a right decided by the true Owner of
wealth, God and imposed on those who have been given control of that wealth by Him. Zakah thus
does not humble or humiliate the receiver nor does it make the rich get a higher rank, ethically or
socially.
C. Zakah is a recognized and defined due, determined by Shari'ah so that Muslims may know with
clarity the ratios, conditions, and exemptions of this due.
D. The Islamic state is charged with the responsibility of collecting zakah and distributing it.
Zakah is in this respect like a tax that must be collected and not like a contribution that is granted.
The Qur'an states, "Take out of their wealth sadaqah" and the Sunnah says, "to be taken from the
rich".
E. The state has the right to penalize that who refuses to pay zakah. This penalty may include a
fine of as much as half the assets as mentioned in the saying, "we shall take it along with half the
wealth of the rejecter".

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F. Any group of people that thinks of using force in resisting the payment of zakah would be
fought by the Islamic government. War is declared on them until they accept to pay the due on
their wealth, imposed by God, to the poor.
G. The individual Muslim is called upon to establish this essential obligation of Islam even if the
state does not collect it, since the payment of zakah is in itself a worship that a Muslim offers to his
Lord. If the government does not require its collection, it is required by the faith and by the Qur'an.
Each Muslim should know of all the rulings of zakah so he or she may pay it according to the
conditions stipulated in Shari'ah.
H. The proceeds of zakah are not left to government or to religious leaders or priests to determine
their distribution. The distribution of zakah and the deserving categories are determined in this
religion in the verse "sadaqat are only for the poor, the needy,..." Sunnah brought the details of
distribution. It is known from human experience that righteousness is not achieved by merely
collecting the right dues. The dispersement of the proceeds is even more important, so the
messenger of God (pbuh) announced that neither he nor any member of his family and descendents
were allowed to take any part of the proceeds of zakah. Zakah is taken from the rich in every area
and rendered to the poor in that same area.
I. Zakah is not merely temporary relief to the immediate needs of the poor and to attenuate his
misery, leaving him in the long run to his poverty. Zakah aims at eliminating poverty and making
the poor at least self sufficient, helping them with sufficient financial means to enable them to
work and produce for their own sustenance, zakah is a periodical due repeated each year, aimed at
raising the level of living of the poor.
J. Zakah in its dispersement aims at achieving several spiritual, moral, social, and political
purposes. For that reason, it may be spent for the reconciliation of hearts, for the liberation of
slaves, for those who are in debt, and for the sake of God in the widest meaning of the word.
With these characteristics of zakah that are so distinct from alms in other religions, we realize that
zakah is an institution unique in its characteristics and features. It is different from taxes and other
dues in as much as it is different from alms known in other religions/cultures.

11.5 Guidelines of basic taxation system

Zakat is a certain fixed portion of the wealth and property that a Muslim is obliged to pay yearly
for the benefit of the poor in the Muslim community. The payment of Zakat is obligatory, as it is
one of the five pillars of Islam. Zakat is the major economic means for establishing social justice
and leading the Muslim society towards prosperity and security. Every Muslim who owns a fixed,
minimum amount of wealth (called Nisab), and who satisfies certain other conditions, must pay
Zakat. The Qur'an mentions Zakat in many places. For example, Allah (S.W.T) says:

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Take Sadaqah (obligatory charity) from their wealth in order to purify them and sanctify
them with it, and invoke Allah for them. Verily, your invocations are a source of security for
them, and Allah is All-Hearer, All-Knower.
[Quran 9:103]
Zakat has also been mentioned by Prophet Muhammad (Peace be upon Him) in many
Ahadith (recorded statements and deeds of Prophet Muhammad (Peace be upon Him).
The Prophet (Peace be upon Him) said:
Narrated Abu Huraira: Allah's Apostle said, "Whoever is made wealthy by Allah and does
not pay the Zakat of his wealth, then on the Day of Resurrection his wealth will be made like
a bald-headed poisonous male snake with two black spots over the eyes. The snake will
encircle his neck and bite his cheeks and say, 'I am your wealth, I am your treasure.' " Then
the Prophet recited the holy verses:-- 'Let not those who withhold . . .' (to the end of the
verse). (3.180).
[Hadith Bukhari][Book of Zakat]
11.5.A Those required to pay Zakat
Those who satisfy the following conditions are required to pay the Zakat:

Muslims who own a minimum amount of extra wealth (referred to as Nisab) beyond the
necessities of life, such as food, clothing, places of residence, means of transportation and the tools
necessary for work.

A full year has passed (hawl) since one had possession of the minimum amount of wealth liable
for payment of the Zakat. However, there are exceptions to it.

The Nisab (wealth above which payment of zakat is compulsory) is free from debts and
thus is not owed to debtors.
11.5.B Types of Possessions That Require Paying the Zakat
Gold, Silver and savings in form of money (wages,salaries)
This is based on Allah's [Gods] Statement in the Noble Qur'an:

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O ye who believe! There are indeed many among the priests and anchorites, who in
Falsehood devour the substance of men and hinder (them) from the way of Allah. And there
are those who bury gold and silver and spend it not in the way of Allah. Announce unto them
a most grievous penalty.
[Quran9:34]
Also, the Prophet (Peace be upon Him), said:
"There is no charity on what is less than five Uqiyyah (of silver)," (Al-Bukhari and Muslim)
[Note 5 Uqiyyah = 200 Dirhams = 595gms Silver = 85gms of Gold at the time of Prophet
(PBUH)]29
Rikaz (Buried precious metals or minerals)
These are any precious metals, stones or minerals that are buried in the earth (such as buried
treasures or mines) When they are found, 1/5th (20%) Zakat is due upon the find. The Prophet
(Peace be upon Him) said:
"There is no compensation for one killed or wounded by an animal, or by falling in a well, or
due to working in mines: and one-fifth (Zakat) is compulsory on Rikaz,"
[Hadith Bukhari and Muslim]
Food Grains and Fruit
Certain crops and grains that could be kept or stored require Zakat to be paid on them. The grains
that require Zakat are barley and wheat. The fruits that require Zakat to be paid are dates (fresh
and dried) and raisins, However, this does not include the fruit and grains that one intends to feed
oneself and one's family with, This ruling applies to a person like a farmer who harvests and sells
fruit and grains that he does not intend to use for his own needs and the needs of his family. Allah's
Messenger (Peace be upon Him) said:
"On a land irrigated by rain water or by natural water channels or land that is wet due to a
nearby water channel. One-tenth (10%) is compulsory (as Zakat); on the land irrigated by a
well. half of a tenth (5%) is compulsory (as Zakat on the yield of the land).
[Hadith Bukhari and Muslim]
29

Fiqh Al Zakah Dr Yusuf Al Qadri (King Abdul Aziz University)

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He (Peace be upon Him) also said:

"There is no Zakat due on what is less than five Wasqs (of grains or vegetation)." (AlBukhari and Muslim) (Note: Five Wasqs are approximately 900 kg; One Wasq = 60 Sa` of
measured grain.)
Items Used for Business Transactions and Commercial Purposes (Business Inventories)
This requires a fourth of a tenth (2.5%) Zakat to be paid on them, when they remain a full year
without decreasing below the Nisab amount. The minimum amount of the value of business
merchandise that requires Zakat to be paid is the same as gold and silver, and the merchant could
use either standard to estimate how much Zakat he should pay.
Treasures
When the Muslim finds any treasures hidden in his land, he is required to give a fifth (20%) of that
treasure in charity as Zakat.
Returns on Investments
If the investment is merchandizing transactions or animal products, then the Zakat for these
returns on investment should be paid in addition to, and at the same time when the Zakat is paid
on the principal, even if these profits did not remain for a full year. For instance, if the animal
gives birth when the Zakat on the animals is due, then the owner should add all of these animals
together and pay the Zakat due on all of them, and such is the case with monetary investments.
When one earns money from inheritance or gifts, the Zakat becomes due if such inheritance
reaches the minimum amount that requires Zakat and remains for a full year in one's possession
without decreasing below the Nisab amount.
Livestock
Grazing camels, grazing cows and grazing sheep and goats are eligible for Zakat payment.
Allah's Messenger (Peace be upon Him) said:
"Whoever had camels or cows or sheep, and did not pay their Zakat those animals will be
brought on the Day of Resurrection far bigger and fatter than before, They will trample him
with their hooves and butt him with their horns, When the last has its turn, the first will start
again, and this punishment will go on until Allah has finished the judgements amongst the
people,"
[Hadith Bukhari and Muslim]
Each category of the above mentioned livestock animals has a set Nisab amount based upon the
number of animals owned. These figures can be researched from the appropriate books of Islamic
Jurisprudence.30

30

One of my advices - Fiqh Al Zakah Dr Yusuf Al Qadri (King Abdul Aziz University)

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Fruits and Grains

As per sharia
VERY IMPORANT NOTE: -

THIS IS NOT THE REPORT IN WHICH I COULD GO INTO DETAILS ABOUT

ZAKAT LAWS THUS WE MOVE ON IN A BRIEF MANNER AND JUST
TOUCHING ON THE TOPICS OF ZAKAT. THERE ARE GOODS ON WHICH
ZAKAT DOES NOT APPLY SUCH AS ANY PROPERTY THAT IS NOT USED
FOR BUSINESS PURPOSES, HORSES, DONKEYS, PRODUCTS NOT OF
PRODUCTIVE NATURE, DEPOSITS AND PLEDGES ETC. ONE MAY REFER
TO APPROPRIATE BOOK ON ISLAMIC JURISPRUDENCE TO KNOW
ABOUT THEM.
11.6 Recipients of Zakat
Those who are eligible to receive zakat are mentioned in the Holy Qur'an.
"The alms are only for the poor, the needy, those who collect them, those whose hearts are to
be reconciled, to free the captives and the debtors, for the cause of God, and for the
travellers; a duty imposed by God. God is All-Knowing, AII-Wise." (9:60)
A. The poor: Those who does not have anything to support themselves .
B. The needy: Those people who have some income or earnings but it is not enough to provide
them with basic needs.
C. Zakat collectors: The salaries of these workers may be paid from this fund.
D. Converts/Likely Converts: Those people who have embraced Islam or are inclined for
it. Attempts should be made to settle them in a normal life.
E. People who are not free: This category would include payment of ransom for freeing
Muslim salves from slavery from their owners.
F. Debtors: People who are unable to pay debts incurred due to pressing lawful needs.
G. Wayfarers and travellers: Those people who are rendered helpless out side their city.
H. In the Cause of Allah

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11.7 Collection of Zakat

In an Islamic state, the Muslim leader (Khalifah, Ameer, etc.) is responsible for the collection of
Zakat. His duty is to make sure that those Muslims who possess the minimum amount of wealth
(Nisab) pay their Zakat in a timely manner. The ruler will deputize certain trustworthy men to go
about amongst the Muslims and collect the Zakat from those upon whom it is due. He is also
responsible for making sure that the Zakat is distributed amongst those who are worthy of
receiving it.31

11.8 Zakatul-Fitr
There is a Zakat payment due at the end of the month of fasting, called Ramadhan. The day that it
is due is called 'Eidul-Fitr, which is a day of celebrating the end of the fast.
One of the Prophet (PBUH)s Companions named Ibn 'Umar, may Allah be pleased with
them him, said:
"Allah's Messenger (Peace be upon Him) enjoined the payment of one Sa' of dates or one Sa'
of barley as Zakatul-Fitr on every Muslim, slave or free, male or female, young or old, and
he ordered that it be paid before the people went out to offer the 'Eid prayer."
[Hadith Bukhari and Muslim]
The rich should not be allowed to withhold capital unless they compensate for the loss the havenots suffering because of it. Refusal of such a tax is equivalent to refusing right to live of poor
with dignity. Considering the fact that the right to life is definitely the most fundamental right of
man, no civilized person can deny it.
Thus, the right of the poor to receive livelihood through such a tax is their fundamental right. In
practice, these provisions cause owners of capital to prefer to invest their resources in really
productive activities as in that case the resources are exempted from charge of Tax. This
preferential investment in the productive economic activities maximizes the economic growth, thus
giving economy resistance from Inflation and recession and also creating job opportunities for the
lower section of the society.

31

It is historically proven that first three Khalifs supported such a collection.

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12. Islams Solution#3: Investment & Loans without Interest

Islamic Financing could be divided into two types: Loan: - In Islamic terms, there is only one main principle of loan; you give loan to help needy and
thus no interest rate applies. (And if you are thinking about people who cant even pay back the
principal amount, then please refer to my upcoming article on Islamic Commerce). If the person
taking loan is not a needy, then it will be considered as an investment, and not a loan.
Investment: - For Investment I would say; there are two terms for money in Islamic Economics,
one Capital and the other Potential Capital. You earn returns only on Capital. A Potential
Capital becomes Capital only when it is used along with other factors. For eg; labour and/or land.
(Or else it would be interest according to Islamic definition of Ar-Riba)

12.1 Institutional Characteristics of an Islamic Banking System

The explicit injunction against the payment of interest implies that banks in an Islamic economy
are denied conventional sources of funds, such as interest-bearing deposits, and cannot undertake
lending operations on the basis of predetermined rates of return. In the Islamic system savings are
mobilized through direct participation of savers in entrepreneurial activities, including banking,
and surplus funds are loaned out in various forms of (religiously) approved transactions. This
section describes the methods that have evolved to enable banks to continue to serve as
intermediaries between savers and investors, while at the same time remaining consistent with the
guidelines of Islam.
We start by considering the liability side of the balance sheet of banks, and then turn to the asset
side where we discuss in somewhat more detail the approved modes of lending and financing.
12.1.A Sources or funds
Besides their own capital and equity, the main sources of funds for Islamic banks would be two
forms of deposits - transaction deposits and investment deposits.
Transaction deposits
As the name suggests, such deposits are directly related to transactions and payments, and can be
regarded as corresponding to demand deposits in conventional banking systems. Although a bank
would guarantee the nominal value of the deposit, it would pay no interest on this type of liability.
Banks would be expected to provide a variety of services to the holders of transaction deposits, the
most important of which are checking facilities32. Generally speaking, funds mobilized through
this source cannot be used for profitable investment by banks. As such, banks would presumably
have to levy a service charge on deposit holders to cover the costs of administering this type of
account.
32

Other services would presumably include the transfer of funds, foreign exchange facilities, the issue of bank drafts
and letters of credit, and share brokerage.

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It has been argued that transaction deposits should have a 100 percent reserve requirement placed
on them, with the backing being in the form of currency, foreign exchange, or suitable government
securities33. Obviously with a 100 percent reserve requirement the nominal value of these deposits
would be automatically guaranteed. Aside from satisfying the desires of risk-averse individuals for
a complete safe financial asset, this reserve requirement would also prevent the possibility of a
banking crisis from interfering with the payments mechanism34.
Investment deposits
The principal source of funds for banks would be deposits that more closely resemble shares in a
firm, rather than time and savings deposits of the customary sort. The bank offering investment
deposits would provide no guarantee on their nominal value, and they would not pay a fixed rate of
return. The depositor instead would be treated as if he were a shareholder in the bank and therefore
entitled to a share of the profits made by the bank. If the bank's operations resulted in an overall
loss, such losses would also be shared by the depositor (and the bank) and the nominal value of the
deposit would be written down. Unlike in conventional banking systems where the depositor is
guaranteed the nominal value of his deposit, either by the bank or by the government through
explicit or implicit deposit insurance35, the only contractual agreement between the depositor and
the bank is the proportion in which profits and losses are to be distributed. This profit sharing ratio
has to be agreed in advance of the transaction between the bank and the depositor, and cannot be
altered during the life of the contract, except by mutual consent.
As shown in a paper by Khan (1986), this system of investment deposits is quite closely related to
proposals aimed at transforming the traditional banking system into an equity basis made
frequently in a number of countries, including the United States. Since the nominal value of
investment deposits is not guaranteed and will fluctuate according to the performance of the bank,
any shocks to asset positions are absorbed by changes in the value of shares (deposits) held by the
public. Therefore, an equity-based system of this type can respond more easily and rapidly in the
face of a banking crisis. In the traditional banking system the bank is expected to guarantee the
nominal value of the deposit, and a shock can cause a divergence between the real value of assets
and liabilities. If the bank cannot absorb losses through its reserves and borrowings from the
central bank, this divergence may well result in instability and possible collapse of the payments
mechanism. With the value of deposits directly linked to the earnings, and therefore assets, of
banks, such a possibility is excluded from the Islamic banking system
12.1.B Lending operations of banks
Mudarabah financing (Similar to partnership).
In general terms, in this transaction surplus funds are made available by the owner to the
entrepreneur to be invested in a productive economic activity in return for a predetermined
percentage of the profits earned. During the lifetime of the project the lender is the sole owner of
33

See Khan (1986).

Any losses incurred by a bank would not affect its transaction deposit liabilities as these would be fully covered.
35
Even in cases where there is no official deposit insurance scheme, the government is likely to step in to compensate
depositors when a bank faces a crisis and potential bankruptcy.
34

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the project and the borrower is the manager. Profits are to be shared between the lender and the
borrower however financial losses have to be borne exclusively by the lender. The borrower, as
such, loses only the time and effort invested in the venture36.
Musharakah financing (Similar to Equity market)
A complementary method to Mudarabah financing is a Musharakah transaction in which there is
more than a single contributor of funds. All parties invest in varying proportions and the profits
and losses are shared strictly in relation to their respective capital contributions.The essential
difference between the two forms of financing is the number of parties involved in the transaction,
and indeed Musharakah financing corresponds closely to an equity market in which shares can be
acquired by the public, banks, and even the central bank and the government.
Other modes of financing
The recommended methods of financing through Mudarabah or Musharakah contracts would tend
to be most feasible in the case of large borrowers where the investment projects could be clearly
identified and evaluated by the lender. There would be practical difficulties, however, in applying
the strict profit and loss sharing approach to small-scale borrowers or for consumption loans. As
such, a number of alternative instruments for investment and financing that are not expressly
forbidden by Islamic law are available to banks. In the remainder of this subsection we discuss
some of these.
i. Deferred payment sale, or "mark up": This method allows for the sale of a product on the basis
of deferred payments either in installments or in a lump sum. The price of the product is agreed to
between the buyer and seller at the time of the sale and cannot include any charges for deferring
payments. Insofar as banking transactions are concerned, this method, known in Arabic
terminology as Bai Muajjal or Murabaha, implies that the bank would purchase the product and
resell it to the ultimate buyer, including in its price a profit margin or mark up. This mark up has to
be negotiated with the buyer (borrower) and cannot be set
unilaterally by the bank.
Because of its inherent simplicity the mark up method has become the most frequently used mode
of financing in Islamic countries 37 . However, it is considered to be a second-best method in
comparison to profit sharing. For the mark up system to be consistent with Islamic law the
transaction must satisfy two conditions. First, the financier has to take physical possession of the
goods being financed for the borrower. This ensures that the lender is exposed to some measure of
risk. Second, the rate of mark up should not be tied to the length of the period over which the
financing is to be provided. This second condition means that there is an incentive to keep the
maturity of the transaction fairly short.

36

This arrangement, therefore, effectively places human capital on par with financial capital.
The mark up method is also employed in financing foreign trade by the Islamic Development Bank in Jeddah. In
Pakistan this technique has been used for bank financing of commodity operations of the government and public sector
agencies.

37

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ii. Purchase with deferred delivery: In this transaction, known as Bai' Salam, the buyer pays the
seller the full negotiated price of a product which the seller agrees to deliver at a specified future
date. Obviously the transaction would be limited to goods whose quality and quantity is known at
the time of the contract. Because of this characteristic, this future delivery method is particularly
suited to agricultural financing. Essentially the bank enters into an agreement with the farmer for
the future purchase of agricultural products and makes the payment when the contract is
determined. The assets of the farmer could be used as collateral for the loan as a guarantee against
fraud or negligence, but any financial losses incurred in the operation would have to be fully borne
by the lending bank.
This method goes hand-in-hand with following Hadith:Narrated Ibn 'Abbas: The Prophet came to Medina and the people used to pay in advance
the price of dates to be delivered within two or three years. He said (to them), "Whoever
pays in advance the price of a thing to be delivered later should pay it for a specified measure
at specified weight for a specified period.
[Hadith Bukhari 35:443]
iii. Leasing: A bank can purchase the product and lease it to the borrower for a specific sum and a
specific period of time. The borrower can also negotiate for lease-purchase of the product, where
the payments include a portion which can be applied towards the final purchase and transfer of
ownership of the product. The bank, as in a normal leasing arrangement, can expect to receive
payment for the cost of the product, as well as a share in the net rental value of the item, the risk
also has to be shared between both parties in the event of any damage to the leased item38. The
leasing method can be particularly helpful to enterprises in the acquisition of capital equipment, as
well as for loans to households for purchases of consumer durables.

12.2 Is Islamic Financing unwanted?

In short all those methods of financing which does not violate the principles of Islam are lawful. It
is argued that for borrower such financing is highly motivating because he wont have to pay a
fixed interest amount if he has lesser rate of returns. Similarly the general opinion which people
might hold to such financing is that, given an option lenders will opt for interest based financing.
However this theory is been convincingly proven to be wrong by WAQAR MASOOD KHAN,
Chief Economist and Vice President, Bankers Equity Limited, Karachi, Pakistan, in his report
Towards an Interest-Free Islamic Economic System39 where he say:Using rigorous mathematical techniques to compare the Islamic financial system based on
variable return scheme (VRS) with the traditional one based on fixed return scheme (FRS). It is
shown, under certain assumptions which include risk aversion on the part of investors, that the
Pareto optimal contract is the VRS. Also VRS spreads risks more evenly than FRS allowing more
risk taking in the economy. The domination of the real world by FRS, i.e. debts contracts, is shown
to be caused mainly by informational asymmetry and higher monitoring Costs in case of VRS. But
these costs are not prohibitive. The more effective the methods of monitoring and the higher the
level of honesty on the part of economic agents, the more superior the Islamic financial system
would prove to be in practice.
38
39

Assuming, of course, that the item has not been insured by a third party.
http://scanislam.com/books_files/PerceptionReality/TowardsanInterestFreeIslamicEconomicSystem.pdf

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12.3 Islamic banking, and the role of the central bank

. Under the Islamic system, banking operations will undoubtedly be more varied and complex, as
compared to the traditional banking system. In terms of profit sharing activities, the criterion of
credit-worthiness of the borrower that underlies conventional banking systems will have to be
changed to place more emphasis on the viability and profitability of the specific project being
proposed. In addition to a term structure of rates of return, there will be a structure of returns for
different economic activities that banks have to consider. Project evaluation and appraisal,
determination of profit sharing ratios, and the establishment of a procedural framework for the
processing, monitoring, supervision, and auditing of various projects will create new demands on
commercial banks. On the liability side, banks would have to attract depositors on the basis of
profits and dividends, rather than through interest rates. In short, commercial banks in an Islamic
system would have to be transformed into institutions that would closely resemble investment
banks in Western financial systems. For detailed report refer to The Financial System and
Monetary Policy in an Islamic Economy by MOHSIN S. KHAN and ABBAS MIRAKHOR,
Assistant Director, and Economist Research Department, International Monetary Fund,
Washington, D. C.40

40

http://scanislam.com/books_files/General/FinancialSystemAndMonetaryPolicyInIslamicEconomy.pdf

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13. Complete Prohibition of Ar-Riba

Just reminding the definition of Ar-Riba mentioned earlier:i) Any increase in demand for money without simultaneous production of Goods or Service
constitutes Ar-Riba
ii) If capital by itself is generating more capital then there is Ar-Riba. Thus Capital can generate
more capital only when used with other factors.(Land, Labour and Entrepreneur)
iii) Prophet said, There is no Riba in hand-to-hand(spot) transactions. (Usman ibn Zaid is
the narrator: Bukhari, Muslim and Musnad Ahmed)
iv) Everything should be real in value. No illusions allowed.
There are some Hadiths which I feel are required to be mentioned here to show the graveness of
Riba (interest/usury) in Islam:Narrated Abdullah ibn Mas'ud: The Apostle of Allah (peace_be_upon_him) cursed the one
who accepted usury, the one who paid it, the witness to it, and the one who recorded it.
[Hadith Sunan Abu Dawud 22:3327]
Narrated Ubadah ibn as-Samit: The Apostle of Allah (peace_be_upon_him) said: Gold is to
be paid for with gold, raw and coined, silver with silver, raw and coined (in equal weight),
wheat with wheat in equal measure, barley with barley in equal measure, dates with dates in
equal measure, salt by salt with equal measure; if anyone gives more or asks more, he has
dealt in usury. But there is no harm in selling gold for silver and silver (for gold), in unequal
weight, payment being made on the spot. Do not sell them if they are to be paid for later.
There is no harm in selling wheat for barley and barley (for wheat) in unequal measure,
payment being made on the spot. If the payment is to be made later, then do not sell them.
[Hadith Sunan Abu Dawud 22:3343]
However if time, amount and measure are specified the transaction ends at spot. Thus no detail
must be left for future which may cause variations and thus Ar-Riba. Similarly the above Hadith
stresses on avoiding fluctuations due to exchange rates. This fact is also explained in following
Hadith:Narrated Ibn 'Abbas: The Prophet came to Medina and the people used to pay in advance
the price of dates to be delivered within two or three years. He said (to them), "Whoever
pays in advance the price of a thing to be delivered later should pay it for a specified measure
at specified weight for a specified period.
[Hadith Bukhari 35:443]
It is also my duty to mention that it is not just monetary policies by which Ar-Riba is caused and
controlled. It is the responsibility of every Muslim to avoid it in every circumstance. Islam takes
every measure to make people aware about Riba and ways to abstain from it (over and above
monetary policies). Some Hadiths could be listed as follows:-

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Narrated Abu Al-Minhal: I used to practice money exchange, and I asked Zaid bin 'Arqam
about it, and he narrated what the Prophet said in the following: Abu Al-Minhal said, "I
asked Al-Bara' bin 'Azib and Zaid bin Arqam about practicing money exchange. They
replied, 'We were traders in the time of Allah's Apostle and I asked Allah's Apostle about
money exchange. He replied, 'If it is from hand to hand, there is no harm in it; otherwise it is
not permissible."
[Hadith Bukhari 34:276]
Narrated AbuHurayrah: The Prophet (peace_be_upon_him) said: If anyone makes two
transactions combined in one bargain, he should have the lesser of the two or it will involve
usury.
[Hadith Sunan Abu Dawud 23:3454]
Narrated Tawus: Ibn 'Abbas said, "Allah's Apostle forbade the selling of foodstuff before its
measuring and transferring into one's possession." I asked Ibn 'Abbas, "How is that?" Ibn
'Abbas replied, "It will be just like selling money for money, as the foodstuff has not been
handed over to the first purchaser who is the present seller."
[Hadith Bukhari 34:342]
Abu Huraira (Allah be please with him) is reported to have said to Marwan: Have you made
lawful the transactions involving interest? Thereupon Marwan said: I have not done that.
Thereupon Abu Huraira (may peace be upon him) said: You have made lawful the
transactions with the help of documents only, whereas Allah's Messenger (may peace be
upon him) forbade the transaction of foodgrains until full possession is taken of them.
Marwan then addressed the people and forbade them to enter into such transactions (as are
done with the help of documents). Sulaiman said: I saw the sentinels snatching (these
documents) from the people.
[Hadith Muslim 10:3652]
Narrated AbuSa'id al-Khudri: The Prophet (peace_be_upon_him) said: If anyone pays in
advance he must not transfer it to someone else before he receives it.
[Hadith Sunan Abu Dawud 23:3461]

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14. Conclusion for Islamic Economics

For the most part, modern civilization has decided to turn its back on Divine Guidance (mostly
due to the experience in the West with Christianity) and have attempted to construct their own
economic systems, political systems, international laws and so on. When doing so though, they
have to admit that they are attempting something that is beyond their means. The social sciences
are very different from the physical sciences. There are no labs in which humans can be used to
determine what may be the best results under different scenarios (and even that would have to
assume that humans will always react the same under the same circumstances).
In the realm of economics, the first thing that may come to mind is the collapse of the theories of
socialism and communism. One should also take a closer look at capitalism and how far its reality
is from what it is supposed to be. The early capitalist theorists envisioned a theory that would lead
to the best of all possible worlds. However, their theories were based on assumptions that never
were and will never be fulfilled. They assumed perfect competition, perfect knowledge, free trade
and so forth. Once these assumptions are violated, which they inevitably are, they do not lead to
the best of all possible worlds. Instead, they easily lead to a world of exploitation, wherein the
rich get richer and the poor get poorer. One of the driving forces behind this system is the
institutionalization of interest.
God has blessed humans with the guidance of the Qurana book that has been minutely preserved
since its revelation. This book contains the guidance that humankind needs to lead a successful
life in both this world and the Hereafter. It is therefore no surprise that this book absolutely
prohibits interest in the strongest fashion, condemns unfair trade methods, and provides an
economic system which will lead to uplifted of the poorer section and bring universal brotherhood
by breaking the barriers of wealth.

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15. Islamic Commerce

O ye who believe! Eat not up your property among yourselves in vanities: But let there be
amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for
verily God hath been to you Most Merciful!
[Quran 4:29]

15.1 Islamic rules of business

Islamic laws about permissible transactions for trade, transfer of property and the ethical conduct
of business are quite detailed and form one of the strengths of Islamic economics. Explicit orders
to fulfill contractual obligations, recommendations to write down contracts, and exhortations to
witnesses to testify faithfully provide the basis on which the Islamic rules are built.
A key difference between Islamic and Western business ethics, which lies at the heart of the
matter, may be summarized as follows. In some European conceptions, morality is viewed as
instrumental to the procurement of freedom for individuals; freedom is also represented by
wealth (which gives the individual freedom to pursue his or her desires). More crudely, good
ethics is good business. In contrast, moral behavior or the pursuit of virtue is the goal of an
Islamic society, and the conduct of business is also subordinated to this goal. In Islam, the value of
any action is judged by its intention. The dramatic contrast between the Islamic view and a western
secular view may be illustrated by the following Hadith narrated on the authority of Sulaiman b.
Yasar:
.............................Then will be brought a man whom Allah had made abundantly rich and
had granted every kind of wealth. He will be brought and Allah will make him recount His
blessings and he will recount them and (admit having enjoyed them in his lifetime). Allah will
(then) ask: What have you done (to requite these blessings)? He will say: I spent money in
every cause in which Thou wished that it should be spent. Allah will say: You are lying. You
did (so) that it might be said about (You):" He is a generous fellow" and so it was said. Then
will Allah pass orders and he will be dragged with his face downward and thrown into Hell.
[Hadith Muslim 20: 4688]

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Adopting integrity, supporting charitable causes and engaging in social welfare as a means of
enhancing company reputation and hence favorably impacting on that businesss bottom line is
explicitly condemned in Islamic teachings. Virtue must not be subordinated to making a profit.
This is also logical, since if morality is seen as a means of making money, then immoral behavior
will be preferred if it leads to more money. This tendency can be illustrated by the actual ethical
practices of some Western businesses. For example, after learning that design defects in the Ford
Pinto would lead to deaths by burning in rear-end collisions; the Ford company calculated that the
costs of a safety recall would be more than the projected monetary value of death and
dismemberment. Also, Ford decided it would be cheaper to pay off possible lawsuits for resulting
deaths.
Islam places the highest emphasis on ethical values in all aspects of human life. In Islam, ethics
governs all aspects of life. Ethical norms and moral codes discernable from the verses of the Holy
Quran and the teachings of the Prophet (sws) are numerous, far reaching and comprehensive.
Islamic teachings strongly stress the observance of ethical and moral code in human behaviour.
Moral principles and codes of ethics are repeatedly stressed throughout the Holy Quran. Besides,
there are numerous teachings of the Prophet (sws) which cover the area of moral and ethical values
and principles. Says the Holy Quran:
You are the best nation that has been raised up for mankind; You enjoin right conduct,
forbid evil and believe in Allah....
[Quran 3:110]
Narrated Masruq: (Continued) Abdullah bin 'Amr added, Allah's Apostle said, 'The best
among you are those who have the best manners and Character.'
[Hadith Bukhari 73:56]
This goes without saying that there is a general consensus among human beings about certain
fundamental ethical values. However, the Islamic ethical system substantially differs from the socalled secular ethical systems as well as from the moral code advocated by other religions and
societies. In the Islamic scheme of things, adherence to moral code and ethical behaviour is a part
of faith itself. According to the Islamic teachings, Muslims have to jealously guard their behaviour,
deeds, words, thoughts, feelings and intentions. Islam asks its believers to observe certain norms
and moral codes in their family affairs; in dealings with relatives, with neighbours and friends; in
their business transactions; in their social affairs, nay in all spheres of private and public life.
Islam has its own distinctive value-based ethical system for business dealings. It prescribes certain
specific guidelines for governing business ethics. It (i) enumerates the general ethical rules of
business conduct, (ii) identifies ethically desirable forms of business, and, (iii) specifies the
undesirable modes of transactions.
Given the nature of Islamic ethical and moral codes, it would be beyond the capacity of one paper
to fully comprehend the subject. In the following pages, our effort will be to confine ourselves to
the discussion of some specific principles of business ethics in Islam.

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15.2 Freedom of Enterprise

Islam gives complete freedom to economic enterprise. Each individual in an Islamic society enjoys
complete freedom in the earning of his livelihood. He can start, manage and organize any kind of
business enterprise within the limits set by the Islamic Shariah. However, freedom does not and
must not operate without a sense of responsibility. An individual is free to pursue his economic
activities provided he respects the code of conduct prescribed for the profession, which broadly
means choosing things lawful and shunning matters unlawful. The dictates of the Holy Quran and
the teachings of the Prophet (sws) serve to set a scale in everybodys mind to distinguish between
the lawful and the unlawful means of earning, and to prohibit or disapprove of all things that are
either morally wrong or socially unacceptable.
Islam, as a matter of principle, prohibits all activities which may cause harm either to the traders or
the consumers in the market. For example:Narrated 'Abdullah bin 'Umar: Allah's Apostle said, "Do not urge somebody to return what
he has already bought (i.e. in optional sale) from another seller so as to sell him your own
goods.
[Hadith Bukhari 34:349]
It encourages the prevalence of free market where everyone earns his sustenance without
government intervention. However, it puts certain restraints in order to eliminate the incidence of
injustice and check malpractices and unlawful operations. In all other respects market in Islam is free
from any state intervention. However, if the people fail to take guidance from the Holy Quran in
matters relating to business transactions, an Islamic state will strive to organize the market
transactions on sound Islamic principles. Freedom of enterprise in an Islamic market will, therefore,
be regulated by the (i) dictates of the Holy Quran and the teachings of the Prophet Muhammad
(sws) and (ii) the directives of the temporal authority.

15.3 Islamic Tenets Concerning Business Transactions

Islam demands a certain type of behaviour from the economic agents the consumers and the
producers. The behaviour prescribed for the economic units of the society are so devised as to lead
to a happy state of affairs, which is the ultimate goal of Islam. An Islamic market is characterized
by certain norms that take care of the interests of both the buyer and the seller. There are a number
of rules of ethical discipline in Islamic commercial transactions without which business contract
would be regarded as lacking perfection in the light of the code of good manners, decency and
ethical excellence. Some of these tenets are as follows:
15.3.A. Keenness to Earn Legitimate (Halal) Earnings
Islam places great emphasis on the code of lawful and unlawful in business transactions. Many
Quranic verses disapprove the wrongful taking of the property.
Says the Holy Quran:

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Do not devour one anothers property wrongfully, nor throw it before the judges in order to
devour a portion of others property sinfully and knowingly.
[Quran 2:188]

O ye who believe! stand out firmly for God, as witnesses to fair dealing, and let not the
hatred of others to you make you swerve to wrong and depart from justice. Be just: that is
next to piety: and fear God. For God is well-acquainted with al l that ye do.
[Quran 5:8]
The Prophet Mohammed (PBUH) added to it by:Narrated Al-Miqdam: The Prophet said, "Nobody has ever eaten a better meal than that
which one has earned by working with one's own hands. The Prophet of Allah, David used to
eat from the earnings of his manual labor.
[Hadith Bukhari 34:286]
15.3.B Trade through Mutual Consent
Mutual consent between the parties is a necessary condition for the validity of a business
transaction. It, therefore, follows that a sale under coercion is not acceptable in Islam. A sale
transaction is to be regarded as legal only if it is made through the mutual consent of the parties
concerned. Taking advantage of someones plight and charging high price is also a form of
pecuniary exploitation and as such forbidden in Islam. The Holy Quran says:

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O you who believe! eat not up your property among yourselves in vanities: but let there be
amongst you traffic and trade by mutual goodwill: nor kill [or destroy] yourselves: for verily
Allah has been to you Most Merciful.
[Quran 4:29]
Thus two key elements of general theory of contract are endorsed emphatically in these verses:
mutual consent and gainful exchange. One can also find importance of mutual consent for legality
of a business deal. The Prophet (sws) is reported to have said:
A sale is a sale only if it is made through mutual consent.
[Hadith Ibn Majah, No: 2176]
Narrated Abu Salama: That there was a dispute between him and some people (about a
piece of land). When he told 'Aisha about it, she said, "O Abu Salama! Avoid taking the land
unjustly, for the Prophet said, 'Whoever usurps even one span of the land of somebody, his
neck will be encircled with it down the seven earths."
[Hadith Bukhari 43:633]
Narrated Hakim bin Hizam: Allah's Apostle said, "The seller and the buyer have the right to
keep or return goods as long as they have not parted or till they part; and if both the parties
spoke the truth and described the defects and qualities (of the goods), then they would be
blessed in their transaction, and if they told lies or hid something, then the blessings of their
transaction would be lost.
[Hadith Bukhari 34:293]
Narrated Ali ibn AbuTalib: A time is certainly coming to mankind when people will bite
each other and a rich man will hold fast, what he has in his possession (i.e. his property),
though he was not commanded for that. Allah, Most High, said: "And do not forget liberality
between yourselves." The men who are forced will contract sale while the Prophet
(peace_be_upon_him) forbade forced contract, one which involves some uncertainty, and the
sale of fruit before it is ripe.
[Hadith Sunan Abu Dawud 22:3376]

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15.3.C Truthfulness in Business Transactions

Islam encourages truthfulness in business transactions and raises the status of a truthful merchant
so much so that he will be at par with the holy warriors and martyrs, in the Hereafter. The Prophet
(sws) is reported to have said:
Narrated 'Abdullah bin Abu Aufa: A man displayed some goods in the market and swore by
Allah that he had been offered so much for that, that which was not offered, and he said so,
so as to cheat a Muslim. On that occasion the following Verse was revealed: "Verily! Those
who purchase a small gain at the cost of Allah's covenant and their oaths (They shall have no
portion in the Hereafter ..etc.)' (3.77)
[Hadith Bukhari 34:301]
Narrated Abu Said: Allah's Apostle forbade the selling by Munabadha, i.e. to sell one's
garment by casting it to the buyer not allowing him to examine or see it. Similarly he forbade
the selling by Mulamasa. Mulamasa is to buy a garment, for example, by merely touching it,
not looking at it.
[Hadith Bukhari 34:354]
The seller and the buyer have the right to keep or return the goods as long as they have not
parted or till they part; and if both the parties spoke the truth and described the defects and
qualities [of the goods], then they would be blessed in their transaction, and if they told lies
or hid something, then the blessings of their transaction would be lost.
[Hadith Bukhari, No: 1937]
The tradition implies that Allah blesses business dealings if both the buyer and the seller are true to
each other. Telling lies and hiding facts will result in the loss of divine blessing.
15.3.D Generosity and Leniency in Business Transactions
One should be lenient and generous in bargaining. Therefore, whoever demands his debt back
from the debtor should do so in a decent manner. The Prophet (sws) said:Narrated Jabir bin 'Abdullah: Allah's Apostle said, "May Allah's mercy be on him who is
lenient in his buying, selling, and in demanding back his money."
[Hadith Bukhari 34:290]
Narrated Abu Huraira: The Prophet said, "There was a merchant who used to lend the
people, and whenever his debtor was in straitened circumstances, he would say to his
employees, 'Forgive him so that Allah may forgive us.' So, Allah forgave him.
[Hadith Bukhari 34:292]

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Quran says:-

If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit
it by way of charity, that is best for you if ye only knew.
[Quran 2:280]
The Prophets exhortation to Muslims means that a creditor should be easy and generous in
demanding back his money. The debtor, in turn, should also give back the debt to the creditor on
time with due thanks and politeness. The Prophet (sws) was the best of all people in repaying the
debts.
Narrated Abu Huraira: The Prophet owed somebody a camel of a certain age. When he
came to demand it back, the Prophet said (to some people), "Give him (his due)." When the
people searched for a camel of that age, they found none, but found a camel one year older.
The Prophet said, "Give (it to) him." On that, the man remarked, "You have given me my
right in full. May Allah give you in full." The Prophet said, "The best amongst you is the one
who pays the rights of others generously.
[Hadith Bukhari 38:501]
Narrated AbuMusa al-Ash'ari: The Prophet (peace_be_upon_him) said: After the grave sins
which Allah has prohibited the greatest sin is that a man dies while he has debt due from him
and does not leave anything to pay it off, and meets Him with it.
[Hadith Sunan Abu Dawud 22:3336]
15.3.E Honoring and fulfilling Business Obligations
Islam attaches great importance to the fulfilment of contract and promises. Islamic teachings
require a Muslim trader to keep up his trusts, promises and contracts. The basic principles of truth,
honesty, integrity and trust are involved in all business dealings. The Holy Quran emphasizes the
moral obligation to fulfil ones contracts and undertakings. A verse states thus:
O you who believe! Fulfil [your] obligations.
[Quran 5:1]
Narrated AbuHurayrah: The Prophet (peace_be_upon_him) said: Pay the deposit to him
who deposited it with you, and do not betray him who betrayed you.
[Hadith Sunan Abu Dawud 23:3528]
In order to safeguard the interest of both the buyer and the seller it is desirable, according to the
Islamic teachings, to clearly define all the necessary details concerning the business deal. Each
business contract should clearly specify the quality, the quantity and the price of the commodity in
question. Thus, in a business contract the offer and acceptance should be made between the parties

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concerned on a commodity which is with the buyer and, which he is able to deliver. Any
commodity which is non-existent or not deliverable is not allowed to be transacted. A contract
must be explicit with regard to the rights and obligations of the parties concerned so that it does
not lead to disputes and disagreements between them.
15.3.F Fair Treatment of Workers
Islam puts certain conditions and restrictions to obviate the chances of bitterness between the
employer and employees. Islam encourages and promotes the spirit of love and brotherhood
between them. According to the Islamic teachings it is the religious and moral responsibility of the
employer to take care of the overall welfare and betterment of his employees. Fair wages, good
working conditions, suitable work and excellent brotherly treatment should be provided to the
workers. The last Prophet of Allah (sws) has explained this principle in the following words:
Narrated Al-Ma'rur bin Suwaid: I saw Abu Dhar Al-Ghifari wearing a cloak, and his slave,
too, was wearing a cloak. We asked him about that (i.e. how both were wearing similar
cloaks). He replied, "Once I abused a man and he complained of me to the Prophet . The
Prophet asked me, 'Did you abuse him by slighting his mother?' He added, 'Your slaves are
your brethren upon whom Allah has given you authority. So, if one has one's brethren under
one's control, one should feed them with the like of what one eats and clothe them with the
like of what one wears. You should not overburden them with what they cannot bear, and if
you do so, help them (in their hard job)."
[Hadith Bukhari 46:721]
Narrated Abu Huraira: The Prophet said, "Allah says, 'I will be against three persons on the
Day of Resurrection: 1. One who makes a covenant in My Name, but he proves treacherous.
2. One who sells a free person (as a slave) and eats the price, 3. And one who employs a
laborer and gets the full work done by him but does not pay him his wages.
[Hadith Bukhari 34:430]
15.4.G Importance to writing transactions
Most of the times unethical and unlawful activities take place due to things not been written down.
Islam strictly enforces writing all future based transactions whether small or large. As mentioned
in Quran:O ye who believe! When ye deal with each other, in transactions involving future obligations
in a fixed period of time, reduce them to writing Let a scribe write down faithfully as
between the parties: let not the scribe refuse to write: as God Has taught him, so let
him write. Let him who incurs the liability dictate, but let him fear His Lord Allah, and not
diminish aught of what he owes. If they party liable is mentally deficient, or weak, or unable
Himself to dictate, Let his guardian dictate faithfully, and get two witnesses, out of your own
men, and if there are not two men, then a man and two women, such as ye choose, for
witnesses, so that if one of them errs, the other can remind her. The witnesses should not
refuse when they are called on (For evidence). Disdain not to reduce to writing (your
contract) for a future period, whether it be small or big: it is juster in the sight of Allah,

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More suitable as evidence, and more convenient to prevent doubts among yourselves but if it
be a transaction which ye carry out on the spot among yourselves, there is no blame on you if
ye reduce it not to writing. But take witness whenever ye make a commercial contract; and
let neither scribe nor witness suffer harm. If ye do (such harm), it would be wickedness in
you. So fear God; For it is Good that teaches you. And God is well acquainted with all things.
If ye are on a journey, and cannot find a scribe, a pledge with possession (may serve the
purpose). And if one of you deposits a thing on trust with another, let the trustee (faithfully)
discharge his trust, and let him Fear his Lord conceal not evidence; for whoever conceals it, his heart is tainted with sin. And God knoweth all that ye do.
[Quran 2:282]

15.4 Prohibited Matters in Business Transactions

So far we have focused on one aspect of the business ethics guidelines prescribed by Islam for
conducting business transactions. Another aspect of business ethics is the various forms of
unethical business practices a Muslim businessman must avoid in his business dealings. Some of
these prohibited and undesirable business practices are as follows:
15.4.A Sale of Al-Gharar (Uncertainty, Risks, Speculation)
In Islamic terminology, this refers to the sale of a commodity or good which is not present at hand;
or the sale of an article or good, the consequences or outcome of which is not yet known; or a sale
involving risks or hazards where one does not know whether at all the commodity will later come
into existence. Such a sale is strictly prohibited in Islam because the quality, whether good or bad,
is not known to the buyer at the time of the deal and there is every possibility that the contract may
give rise to disputes and disagreements between the concerned parties. The Prophet (sws),
therefore, prohibited the sale of what is still in the loins of the male; or sale of whatever is in the
womb of a shecamel; or sale of birds in the air; or the sale of fish in the water, and any
transaction which involves Gharar. (i.e. anything that involves deception). He also forbade the sale
of fruits before they look healthy and also the sale of crops until the grain hardens. Nevertheless,
such advance sales would be acceptable if the element of Gharar does not exist and the quality and
the quantity of the goods are pretty well known and predictable. Some Hadiths concerning AlGharar:Abu Huraira (Allah be pleased with him) reported that Allah's Messenger (may peace be
upon him) forbade a transaction determined by throwing stones, and the type which involves
some uncertainty.
[Hadith Muslim 10:3614]
Narrated Abdullah ibn Umar: Allah's Apostle said, "He who buys foodstuff should not sell it
till he is satisfied with the measure with which he has bought it.
[Hadith Bukhari 34:336]
Narrated 'Abdullah bin 'Umar: Allah's Apostle forbade the sale of fruits till their benefit is
evident. He forbade both the seller and the buyer (such sale).
[Hadith Bukhari 34:399]

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Ibn Abbas (Allah be pleased with them) reported Allah's Messenger (may peace be upon
him) as saying: He who buys food-grain should not sell it until he has taken possession of it.
Ibn Abbas (Allah be pleased with them) said: I regard everything like food (so far as this
principle is concerned).
[Hadith Muslim 10:3642]
15.4.B Islam encourages free market economy (Explained previously)
15.4.C Hoarding is strictly prohibited (Explained previously)
15.4.D Exploitation of ones Ignorance of Market Conditions
One of the most common unethical practices in modern business is to exploit ones ignorance of
market conditions. Sometimes it may happen that a buyer arrives in a town with objects of prime
and general necessity for selling them in the market. A local trader may persuade the new-comer to
transfer all of the goods to him so that he will sell them on his behalf in the market. He obtains the
commodities on a price that is lower than market price and then sells them at a high or exorbitant
price. Islam condemns this act of intermediary intervention which involves exploitation of ones
ignorance of market conditions. The practice was prevalent in pre-Islamic society. The Prophet
(sws) has prohibited this practice through a number of instructions.
Narrated 'Abdullah bin Umar: Allah's Apostle forbade the selling of the goods of a desert
dweller by a town person.
[Hadith Bukhari 34:368]
Narrated Tawus: I asked Ibn 'Abbas, "What is the meaning of, 'No town dweller should sell
(or buy) for a desert dweller'?" Ibn 'Abbas said, "It means he should not become his broker.
[Hadith Bukhari 34:372]
(The above practice stops broker from taking advantage of rural vendors ignorance)
Narrated Nafi: Ibn 'Umar told us that the people used to buy food from the caravans in the
lifetime of the Prophet. The Prophet used to forbid them to sell it at the very place where
they had purchased it (but they were to wait) till they carried it to the market where
foodstuff was sold. Ibn 'Umar said, 'The Prophet also forbade the reselling of foodstuff by
somebody who had bought it unless he had received it with exact full measure.
[Hadith Bukhari 34:334]
(The above Hadith also stops selling of items at the very place they are buyed; so that consumers
are not in deception of market price).
15.4.E Al-Najsh (Trickery)
The term Al-Najsh means an action in which a person offers a high price for something, without
intending to buy it, but just to cheat or defraud another person who really means to buy it. The
person practising it may collaborate with the seller to offer high prices in front of the buyers

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merely as a means to cheat them. This type of fraudulent transaction is totally prohibited in Islam.
The Prophet (sws) is reported to have said:
Ibn 'Umar (Allah be pleased with them) reported Allah's Messenger (may peace be upon
him) as having said this: One amongst you should not enter into a transaction when another
is bargaining.
[Hadith Muslim 10:3617]
(Protecting right to bargain)
Abu Huraira (Allah be pleased with him) reported Allah's Messenger (may peace be upon
him) as having said this: Do not Outbid in a sale in order to ensnare. No man should enter
into a transaction in which his brother has already entered, and no dweller of the town
should sell on behalf of the villager. And no man should make a proposal of marriage which
his brother has already made and no woman should ask for the divorce of another (co-wife)
in order to deprive her of what belongs to her.
[Hadith Muslim 8:3290]
As is clear from the above, Islam also forbids the practice of sale over sale and purchase over
purchase. This means that it forbids someone to offer a higher price for a commodity after the deal
has been accomplished between the parties. Obviously he is offering a higher price in order to
spoil the agreement reached between the parties. As a result of this offer the buyer may feel
tempted to cancel his contract to sell it at a higher price. It may give rise to disputes and
disagreements between brothers. Hence it is strictly prohibited in Islam.
15.4.F Cheating and Fraud in Business Transactions
The traders and businessmen generally have a tendency to motivate the customers by adopting
fraudulent business practices. Islam strongly condemns all such practices in business transactions
(Al-Ghashsh). The Messenger of Allah has commanded the believers not to indulge in cheating
and fraudulent practices in business transactions. Sale of dead animal, dubious and vague
transactions, manipulating the prices, selling the items belonging to a desert dweller by a
townsman Al-Najsh (trickery), false eulogy and concealment of defects are all examples of
cheating and fraud i.e. Al-Gashsh. The Prophet (sws) has strongly condemned all such practices in
a number of traditions and the believer to abstain from them. In the words of Quran:-

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God doth command you to render back your Trusts to those to whom they are due; And
when ye judge between man and man, that ye judge with justice: Verily how excellent is the
teaching which He giveth you! For God is He Who heareth and seeth all things.
[Quran 4:58]
15.4.G Swearing
The traders often take recourse to swearing to emphasize that their items are of good quality. They
claim qualities in the merchandise, which dont exist. They try to persuade the buyers to purchase
their commodity by invoking Allahs name. Swearing in business for such purposes is forbidden in
Islam, be it false or true. False swearing is an act of sin punishable by hellfire. Swearing by
Almighty Allah is too great a thing to be used as a means to sell a commodity. The desirable thing
in business transaction is that both the buyer and the seller remain straightforward and truthful in
their dealings, so that no one will feel the need to swear by Allah in order to create conviction in
the mind of the other party.
Narrated 'Abdullah bin Abu Aufa: A man displayed some goods in the market and
swore by Allah that he had been offered so much for that, that which was not
offered, and he said so, so as to cheat a Muslim. On that occasion the following
Verse was revealed: "Verily! Those who purchase a small gain at the cost of Allah's
covenant and their oaths (They shall have no portion in the Hereafter ..etc.)' (3.77)
[Hadith Bukhari 34:301]

15.4.H Giving Short Measures

Another form of deceit is to manipulate weights and measures. It refers to the act of taking full
measures from others and giving them short measures in your turn. Giving short measures was a
common malaise plaguing the pre-Islamic days. The community of the Prophet Shuayb (sws) was
known for practising it with impunity. Consequently, they were destroyed for their persistence in
deceit and disbelief in Allah and His Messenger. Allah the Almighty has repeatedly commanded
exactitude in weights and measures. One of the verses says:

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Give full measure when ye measure, and weigh with a balance that is straight: that is the
most fitting and the most advantageous in the final determination. (Quran 17:35)

15.4.I Dealing in Stolen Goods

Almighty God has declared thievery unlawful and warned of severe punishment. Even if the thief
escapes worldly punishment and gets away with stolen goods, it is not permissible for a Muslim to
knowingly purchase or sell these items. The stolen items are neither to be bought nor sold by those
who know the reality. The Prophet (sws) made the person knowingly buying a stolen commodity a
partner to the crime. He said:
The one who knowingly purchases a stolen good, is a partner to the act of sin and the shame.
[Hadith Kanz Al-Ammal, No: 9258]41

41

This Hadith is taken from paper of Dr. Sabahuddin Azmi, Ph. D. (Economics), Lecturer, College of Islamic Banking,
World Al-Lootah University (Internet), Dubai. Authenticity is still to be checked.

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16. Conclusion for Islamic Commerce

Muhammad (PBUH) was bestowed with prophethood at the age of 40 and he died at the age of 63.
During this period of 23 years, historians say, that he developed such a high degree of discipline in
his followers that a lady with loads of jewellary could have travelled alone between Mecca and
Madina without any sort of unwanted incidence. This discipline of his followers was not only seen
in social issues but also in commercial, political, judicial, environmental and many more fields.
Commerce is an unavoidable practice and is believed to have been always in existence. However
the recent surge in commercial activities due to technological changes has bought the need of a
proper framework. And this need has given rise to many acts and laws like Consumer Protection
Act, SEBI Act, Trade Union Act etc. However it is now realized that Islam had a much more
sophisticated and strong foundation of commerce than any other.
Islamic Commerce has high priority for rights, ethics and social responsibility. However it cannot
work independently in todays environment. It is necessary to have all other Islamic laws (Sharia
laws) together as each law supports every other. For example if a strong Judicial system like that
of Islam doesnt exist people may not fear breaking commercial laws. Thus all laws go hand-inhand and breaking this chain may not give desired results.
However the amount of corruption and illegal practices existing today in world is not a surprise for
muslims, as Prophet Muhammad (PBUH) said:Narrated Abu Huraira: The Prophet said, "A time will come when one will not care how one
gains one's money, legally or illegally." [Hadth Bukhari 34:275]

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17. Case Study Islamic Economics & Banking: The Crisis

Proof System (Relating with 2007-10 Cisis)
17.1 Key statistics about the Crisis
Let me present you with some numbers:
-The UK bail out plan has cost 500 billion. That results in a potential additional tax liability of
8,000 for each person in the UK. To put that in context, this sum could build 4000 new hospitals.
-The Royal Bank of Scotland needed 20 billion from taxpayers to stay afloat.
-The cost to the global economy of the credit crunch is 1.8 trillion.
-The average amount that will be wiped off the value of each home is 50,000.
-General Motors, the USAs biggest car maker is losing 52 million Dollars every minute as a result
of the economic meltdown in the US.
These figures paint a bleak picture. A picture of broken business, bust banks and a fractured
financial system. The economy is weak and it is the common man that is paying the price. Ill
speak more about that later on. For now, I want to speak briefly on what caused the Credit
Crunch.

17.2 What caused the Crisis?

17.2.A History of Banking
The global credit crunch was caused by many factors. But its roots lie in the very structure of the
modern banking system. The principle of modern banking was first started by Goldsmiths many
centuries ago. At that time, Goldsmiths would keep gold safe for wealthy merchants and give
them notes of ownerships to exchange at other Goldsmiths branches in distant countries. These
were the beginning of the first banknotes.
As the banking system developed, it became apparent that on average, depositors usually extracted
some 10% of their gold out during any one year. The rest was saved with Goldsmiths.
Since they generally kept 90% of the Gold, Goldsmiths began to lend out the remaining gold at
interest which created profits from the merchants gold deposits.
The gold was lent out and interest was charged on such loans. The interest and capital repayments
were secured on property. Essentially, this created money from nothing by satisfying the need for
capital on the basis that it would be returned in the form of a healthy interest based profit. This
was the beginning of modern banking. It created the ability to make money from money itself. A
principle that was prohibited both in Christianity, as a prohibition on usury and in Islam.
This basic principle of creating money from money has continued with minimal regulation, and is
the basis of how the financial crisis came into being.

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17.2.B The Collapse of the Financial Markets Sub Prime and Interest only mortgages
Of course there is not one single cause. The crisis can be attributed to a number of factors which
include both housing and credit markets. Causes attributed include the inability of homeowners to
meet mortgage payments. The main reason for this was that interest rates on low rate mortgages
given to people who were less creditworthy rose significantly leaving borrowers in the sub prime
market unable to meet their repayments. This form of predatory lending, speculation, risky
mortgage products, high personal and corporate debt levels, financial products that distributed and
perhaps concealed the risk of mortgage default, monetary policy, international trade imbalances,
and government regulation were and in part, remain causal factors.
There were three crucial catalysts of the subprime
crisis. One of these was predatory lending practices
of mortgage brokers, specifically the adjustable-rate
mortgage, that I have just described.
In its Declaration of the Summit on Financial
Markets and the World Economy, dated 15
November 2008, leaders of the G20 cited the
following causes:
During a period of strong global growth, growing
capital flows, and prolonged stability earlier this
decade, market participants sought higher yields
without an adequate appreciation of the risks and
failed to exercise proper due diligence. At the same
time, weak underwriting standards and unsound risk
management practices combined to create
vulnerabilities in the system.
In the years before the crisis, the behaviour of lenders changed dramatically. Lenders offered more
and more loans to higher-risk borrowers. The Subprime mortgages market amounted to $35
billion in 1994 and $600 billion in 2006. In addition to considering higher-risk borrowers, lenders
had offered increasingly risky loan options and borrowing incentives. 43% of borrowers in the US
made no down payment on a mortgage whatsoever and those who did, might only have contributed
2% .
17.2.C Interest-only adjustable-rate mortgages were another significant cause.
And so, in the same way as Goldsmiths, banks took deposits from savers and used it to lend. They
did so excessively on high rates of interest. When US mortgage holders on low incomes were
unable to meet their loan repayments, their homes were repossessed, and banks were forced to
write off their so-called sub-prime loans.
The widespread default on repayments caused panic in the markets. Many banks in the US and
Europe had bought these sub-prime loans, often packaged up in pools of debt called collateralised
debt obligations. These debt pools increased and their value diminished resulting in their asset
value being far less than banks had paid for them. This made them difficult to sell.
Banks stopped lending and central bankers became concerned about a squeeze on the amount of
cash in the financial system.

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Banks led by the European Central Bank then decided to make large amounts of cash available to
commercial banks to try to alleviate any shortages and to pump money into the economy to keep it
moving. This caused governments to incur massive debts.
The results are before us today.

17.3 The consequences for Government

Brown, Bush and Obama administrations have managed to avert a depression, but not the
crisis. The economy is only slightly recovering largely due to the unprecedented and enormous
amounts of money being injected into the economy. Apart from war time years Americas largest
deficit has been 6% of GDP. In 2009-2010 it will rise to 13% of GDP, more than twice the
wartime record and equating to some $1.8 trillion. In Greece, the national debt is at 13% with the
EU demanding that it reduce its national debt for fear that Greece will default on its debts. And
now the EU has decided to rescue Greece by injecting billions into its economy. Britains national
debt is not far behind at 12.6%, and is one of the highest levels in Europe.
There are three ways of financing these debts:
-Borrowing from foreigners.
That is through the purchase by other countries or investors of our currency or shares, bonds or
companies. The purchase of Cadbury by Kraft is a good example.
-Borrowing from citizens
If British savers save 500 billion a year, the money that they put through intermediaries like
banks will become available to the Treasury.
-Printing Money. This is called quantitative easing and injects money electronically into the
market.
Right now, the government is spending 185% of what it earns and so at some point more income
and less spending will be required. Raising taxes and cutting expenditure is politically unpopular.
Financing the recovery through debt is temporary fixes. It fixed hole of debt by digging another
hole of debt. At some point, that hole needs to be filled. One way of dealing with the deficits
would mean making massive spending cuts. That would be unpopular and it may be that a simple
default on debts would be less damaging economically and politically than the alternatives. That
has its own consequences, such as deep economic downturns and/or hyperinflation.
Governments do need to fix their balance sheets but only when the economy has become
stronger. It may be that this takes the form of spending cuts and where more revenue is needed
taxes on consumption or carbon, not wages or profits. Governments need encourage productivity
but not by subsidising specific industries. They also need to think very carefully about the
structure of the banking system and hugely detrimental effects it imposes upon society.
What I have presented you with so far is an analysis of the issues and what must be done to escape
this crisis.

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17.4 Islamic Banks Weather Global Crisis

Thanks to its ethical low-risk approach, Islamic banks have managed to weather the global
financial crisis, achieving high growth rates in 2009, a new study has found.
"A conservative approach to risk and close links between the financial sector and real assets has
helped shield the sector from the worst of the credit crisis," Brian Caplen, editor of the Banker
Magazine, said in the study cited by Agence France-Presse (AFP).
The study, commissioned by the London-based magazine and a unit of HSBC Bank, said Islamic
finance institutions have overcome the crisis that harshly hit conventional banks.
A financial firestorm swept the US and the world in September 2008, after the demise of Lehman
Brothers, one of the Wall Street giants. It has knocked down many major companies worldwide,
causing mounting job losses, falling household wealth and forcing consumers to hold back on
spending. The study attributes success of the Islamic banks to rules that forbid investing in
collateralized debt obligations and other toxic assets that caused the financial crisis. The rules of
Islamic banking and finance read like a how-to guide on avoiding the kind of disaster that is
currently gripping world markets. Islam forbids Muslims from usury, receiving or paying interest
on loans. Transactions by Islamic banks must be backed by real assets -- not shady repackaged
subprime mortgages. Shariah-compliant financing deals resemble lease-to-own arrangements,
layaway plans, joint purchase and sale agreements, or partnerships. Investors have a right to know
how their funds are being used, and the sector is overseen by dedicated supervisory boards as well
as the usual national regulatory authorities.
Booming
Due to its safety, the Islamic finance industry is building a solid track record," on the global
market, the study says.
At the moment there is a great demand for capital guaranteed or capital secured products,"
David Dew, Deputy CEO of HSBC Amanah, told Reuters.
The study notes that assets held by Shari`ah-compliant banks or the Islamic units of conventional
banks rose by 28.6 percent to 822 billion dollars in 2009, up from 639 billion dollars in 2008. This
contrasts sharply with the stagnation in the conventional banking sector. A Banker's survey of the
top 1,000 world banks published in July showed annual asset growth of just 6.8 percent.
Islamic finance is one of the fastest growing sectors in the global financial industry. Starting
almost three decades ago, the Islamic banking industry has made substantial growth and attracted
the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going
into the Islamic banking business. Currently, there are nearly 300 Islamic banks and financial
institutions worldwide whose assets are predicted to grow to $1 trillion by 2013

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17.5 What IMF (International Monetary Fund) Has To Say on Islamic Banks:(EXTRACT FROM IMF.ORG WEBSITE)
17.5.A Crisis impact
To control for varying conditions across financial systems, the paper looks at the actual
performance of Islamic banks and conventional banks in countries where both have significant
market shares (see Chart 1). It uses bank-level data covering 200710 for about 120 Islamic banks
and conventional banks in eight countriesBahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi
Arabia, Turkey, and the United Arab Emirates. These countries host most of the worlds Islamic
banks (more than 80 percent of the industry, excluding Iran) but also have large conventional
banking sectors. The key variables used to assess the impact are the changes in profitability, bank
lending, bank assets, and external bank ratings.

The analysis suggests that Islamic banks fared differently from conventional banks during the
global financial crisis. Factors related to the Islamic banking business model helped contain the
adverse impact on their profitability in 2008 (see Chart 2). In particular, smaller investment
portfolios, lower leverage, and adherence to Shariah principleswhich precluded Islamic banks
from financing or investing in the kind of instruments that have adversely affected their
conventional competitorshelped contain the impact of the crisis on Islamic banks in that year.

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17.5.B Source of stability

Islamic banks contributed to financial and economic stability during the crisis, given that their
credit and asset growth was at least twice as high as that of conventional banks. The paper
attributes this growth to their higher solvency and to the fact that many Islamic banks lent a larger
part of their portfolio to the consumer sector, which was less affected by the crisis than other
sectors in the countries studied. These findings were corroborated by external rating agencies
reassessment of Islamic banks risk, which was generally found to be more favorable thanor
similar tothat of conventional banks.
In view of their robust growth during the crisis, Islamic banks will likely take a growing market
share in the futurebut this implies greater supervisory responsibility, the authors note.

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18. Conclusion
Before Muhammed (PBUH) was bestowed with prophethood the economic situation of Arabia ran
in line with the social atmosphere. The Arabian ways of living would illustrate this phenomenon
quite clearly. Trade was the most common means of providing their needs of life. The trade
journeys could not be fulfilled unless security of caravan routes and inter-tribal peaceful coexistence were provided these were unfortunately lacking in Arabia except during the prohibited
months within which the Arabs held their assemblies of 'Ukaz, Dhil-Majaz, Mijannah and others.
Industry was alien to the Arabian psychology. Most of available industries of knitting and tannage
in Arabia were done by people coming from Yemen, Heerah and the borders of Syria. Inside
Arabia there was some sort of farming and stock-breeding. Almost all the Arabian women worked
in yarn spinning but even this practice was continually threatened by wars. On the whole, poverty,
hunger and insufficient clothing were the prevailing features in Arabia, economically. In fact to
mention the facts rightly, Arabia until 6th century was nowhere on the maps. Persians and Romans
were two main empires which had most of the known world under them.
Thus the fact remains, that Muhammed (PBUH) all together alone designed an absolutely flawless
and complete web of systems (economic, social, political, environmental, international etc) which
were a remote thaught to Arabia in those days; or say rather these things were revealed to him by
God. Islamic Economics and Commerce thus not only protect the rights of people but also looks at
overall development of standard of living.
In this way the revelation sent to prophet Muhammad (PBUH), the last and final messenger to
mankind, has indeed stood the test of time. Earlier Quran was seen as a linguistic miracle, then as
science developed it emerged as a scientific miracle (e.g. Quran talks about Sun having own light
and moon reflecting the same, Motion of sun, sex in plants, Female honeybee building cells, exact
narration of embryology discovered only recently etc). And now in the age of globalization and
financial hick-ups it is being looked upon as an Economic Miracle.

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19. Bibliography
Books:1.
2.
3.
4.

Al-Quran (Translated by Ali Unan, Yusuf Ali, Mohsin Khan, Shakir)

Hadith Saheeh Bukhari. (Translated by Muhsin Khan)
Hadith Saheeh Muslim. (Translated by Abdul Hamid Siddique)
Hadith Sunan Abu Dawud. (Translated by Aisha Abdarahman at-Tarjumana and Yaqub
Johnson)

5. Hifzur Rab, 2006. Economic Justice in Islam: Monetary Justice and the way out of Interest
(Riba), First Edition, Pulished by A.S.Noordeen, 53800 Kuala Lumpur.
6. Jalal Al-Ansari, Introduction to systems of Islam, Revival Publications, J-76 Abdul Fazl
Enclave, Jamia Nagar, Okhla, New Delhi 110025.
7. Waqar Masood Khan, 1989, Chief Economist and Vice President Bankers Equity Limited,
Karachi, Pakistan, Towards An Interest Free Islamic Economic System, For King Abdul Aziz
University.
8. Mohsin.S.Khan & Abbas Mirakhor, 1989, Assistant Director, and Economist Research
Department, International Monetary Fund, Washington, D. C., The Financial System and
Monetary Policy in an Islamic Economy, For King Abdul Aziz University.
9. Imran.N.Hosein, 2007; Gold Dinar and Silver Dirham; Published by Masjid Jamiah, City of
San Fernando, Trinidad and Tobago.
10. Dr. Yusuf Qardawi, Fiqh Al-Zakah (Volume 1); Translated by Dr.Monzer Kahf, For King
Abdul Aziz University.
11. Zakah and Fasting Compiled by Research division Darussalam.
12. The State Of Indian Economy 2009-10 ICRIER (Indian Council For Research on
International Economic Relations)
13. C.Rangarajans, 2010, India: Monetary Policy Financial Stability and other Essays.
Articles1. An Islamic Approach to Business Ethics Sabahuddin Azmi.
2. Summary of Golden Constant World Gold Council.
3. The Gold Standard Prof. Roy.W.Jastram.
4. Islamic Finance to Reduce Fiscal Deficit in India Syed Zahid Ahmad.
5. Islamic Banks: More Resilient to Crisis? International Monetary Fun (IMF)
6. Islams Response to the Global Economic Crisis - Dr. Ifthikhar Ahmad Ayaz

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Websites1. www.wealthcity.in
2. www.aicmeu.org
3. www.youtube.com
4. www.islamreligion.com
5. www.indiabudget.nic.in
6. www.planningcommission.nic.in
7. www.islamonline.net
8. www.scanislam.com
Magzines and Newspapers1. Outlook Money 14th July 2010
2. DNA Money
3. Times Of India
Lectures1. Shaykh Salim Morgan (Phd in Islamic Economics).
2. Dr. Jamal Badawi .

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19. Glossary
Allah It is Islamic Concept of One True God, who is self-sufficient and entirely different from
His creation
Fiqh - Islamic jurisprudence or expansion by explanation of Sharia Islamic Laws.
Hadith Linguistically means Sayings, however in Islam it means Sunnah.
Halal Lawful
Haram Unlawful
Islam Acquiring of Peace through complete submission to One True God.
Muhammad The last and final messenger to mankind
PBUH Peace and Blessings be Upon Him.
Quran The revealed word of God to Muhammad (PBUH)
Sharia Islamic legal system.
Sunnah Actions, Sayings and Approvals of Prophet Muhammad (PBUH).
Zakah/Zakat Islamic Obligatory Charity