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Reference :
i. The Holy Quran
ii. Accounting, Auditing and Governance Standards for Islamic Financial
Institutions.
iii. The Bank Company Act-1991
iv. The Companies Act-1994
v. The Income Tax Ordinance -1984
vi. SEC Rules.
vii. International Financial Reporting Standards.
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MONETARY AND FISCAL POLICY IN ISLAM
In an Islamic economy Govt. as the solitary authority, has to ensure sufficient amount of
money to enable people in transacting their goods and services. In a capitalist economy the
transaction demand, the precautionary demand and the speculative demand for money is
taken into consideration to determine the amount of money to be supplied. However, in an
Islamic Economy, only the transaction demand, the precautionary demand is entertained.
Speculative demand for money is discouraged by Islam.
In an Islamic economy it is almost mandatory on the central Bank to preserve the value of
money to ensure honesty and fairness in all human dealings to bring socio-economic justice
and general welfare. But, rather than absolute, this objective would mean relative stability in
the general price level. Absolute price stability is neither feasible nor desirable as it may
conflict with the optimum growth and full employment objective of the monetary policy.
While inflation is incompatible with the goals of an Islamic economy, prolonged recession
and unemployment that cause human sufferings are also unacceptable. Monetary policy has,
therefore, to aim at a high rate of economic growth with full employment and utilization of
productive resources. Islam is in favor of “sustainable development “which means meeting
the needs of the present generation without compromising the needs of future generations.
Economic development and sound environmental management are complementary aspects
of the same agenda. Without adequate environmental protection, development will be
undermined; without development, environmental protection will fail.
DISTRIBUTIVE JUSTICE :
Monetary policy should be used actively to promote the goal of distributive justice and
prevent concentration of wealth and economic power in an Islamic economy. However, too
much concern with distributive justice in formulating and implementing monetary policy may
adversely affect its overall efficiency and effectiveness in attaining the other goals of
monetary policy e.g. growth, employment and development. Reduction in income inequalities
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and necessary redistribution should be and important policy objective of an Islamic state and
hence the domain, mainly, of its fiscal policy. Monetary policy can contribute to this objective.
Like all central Banks, the central Bank in an Islamic economy should be responsible for the
issue of currency and, in coordination with the government, for its internal and external
stability. Unlike the conventional central bank, it should also bear the responsibility of
preventing the concentration of wealth and power through the financial institutions.
Stabilization of the real value of money should be an important function of the central bank in
order to realize the healthy sustainable growth of the Islamic economy and to ensure socio-
economic justice.
The central bank should be the primary institution responsible for implementing the country’s
monetary policy. Further, since the central bank cannot realize the goal of monetary stability
without cooperation from the government, a harmonious fiscal-budgetary policy would be
indispensable.
i) FISCAL DEFICITS : Fiscal deficits can be, and have been, an important source of
excessive monetary expansion. According to one important study “the greater the
dependence of the public sector on the banking system, the harder it is for the central
bank to pursue a consistent monetary policy.
a) Primary deposit’, which provide the banking system with the base money
(cash-in tills plus deposits with the central bank)
Since derivative deposits lead to an increase in money supply in the same manner as
currency issued by the government or the central bank, and since this expansion, just like
government deficits, has the potential of being inflationary in the absence of an offsetting
growth in output, the expansion in derivative deposits must be regulated if the desired
monetary growth is to be achieved. This could be accomplished by regulating the availability
of base money to the commercial banks.
To realize the objectives of monetary policy in an Islamic framework, the central bank in an
Islamic economy may use the following instruments, jointly or separately, for regulation of
money and credit.
iv) ALLOCATION OF CREDIT : Since bank credit comes out of funds belonging
to the public, it should be allocated that it helps to realize general social welfare.
The criteria for its allocation, as for other Allah given resources, should be, first, the
realization of the goals of the Islamic society, and, second, the maximization of
private profit. This could be attained by ensuring that (a) credit allocation leads to
an optimum production and distribution of goods and services needed by the
majority of the society, and (b) the benefit of credit goes to an optimum number of
businesses in society.
vii) OTHER INSTRUMENTS : For proper functioning of the monetary and credit
system and to secure its objectives and mandate the Islamic central bank may also
use the following instruments to replace the Bank Rate or Discount Rate and
control through regulation of interest rates:
1) Fixing a minimum and / or maximum ratio of profit for Islamic banks in their
joint venture and Mudaraba activities. These ratios may vary for different fields of activity.
2) Designation of various fields for investment and partnership within the
framework of the approved economic policies, and the fixing of a minimum prospective rate
of profit for the various investment and partnership projects. The minimum prospective rate of
profit may vary with respect to different branches of activity.
3) Fixing a minimum and maximum margin of profit, as a proportion to the
cost price of the goods transacted, for banks in installment and hire-purchase transactions.
4) Determination of types and the minimum and maximum accounts of
commissions for banking services.
5) Determination of the types, amounts, minimum and maximum bonuses,
and the establishment of guidelines for advertisements by banks.
6) Determination of the minimum and maximum ratio in joint venture,
Mudaraba investment, hire-purchase, installment transactions, buying or selling on credit,
forward deals with respect to various fields of activity; and also fixing the maximum facility
that can be granted to each customer.
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ISLAMIC DEVELOPMENT BANK (IDB)
The functions of the Bank are to participate in equity capital and to grant loans for productive projects
and enterprises besides providing financial assistance to member countries in other forms for
economic and social development. The Bank is also required to establish and operate special funds for
specific purposes including a fund for assistance to Muslim communities in non-member countreis, in
addition to setting up trust funds. The Bank is authorized to accept deposits and to mobilize financial
resources through Shariah compatible modes. It is also charged with the responsibility of assisting in
the promotion of foreign trade, especially in capital goods, among member countries; providing
technical assistance to member countries; and extending training facilities for personnel engaged in
development activities in member countries to conform to the Shariah.
The persent membership of the Bank consists of 53 countries. The basic condition of membership is
that the prospective member country should be a member of the ‘Organization of the Islamic
Conference’ OIC, pay its contribution to the capital of the Bank and be willing to accept such terms
and conditions as may be decided upon by the IDB Board of Governors. Up to the end of 1412H (June
1992), the authorized capital of the Bank was two billion Islamic Dinars. Since Muharram 1413H
(July 1992). in accordance with a Resolution of the Board of Governors, it became six billion Islamic
Dinars, divided into 600,000 shares having a per value of 10,000 Islamic Dinars payable according to
specific schedules and in freely convertible currency acceptable to the Bank.
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THE OBJECTIVES OF ISLAMIC
ECONOMICS
ii) Islamic Economics aims at the study of human falah achieved by organising the
resources of the earth on the basis of co-operation and participants (Muhammad
Akram Khan).
iii) Islamic Economics is the Muslim thinker’s response to the economic challengers of
their times. In this endeavour they are aided by the Quran and the Sunnah as well
as by reason and experience – M negatullahh Sidddiq.
iv) Islamic Economic is the sciences of how man uses resources and means of
production to study his worldly needs according to a predetermined code given by
Allah (SWT) in order to achieve the greatest equity-Princes Muhammad Al-Faisal
Saud.
v) Islamic Economics is a social which studies the economic problem of the people
imbued with the values of islam. It is a composite social science which studies the
problem of production, distribution and consumption through integrative system of
exchange and transfer overtime and their social through integrative system of
exchange and transfer overtime and their social and moral consequences in the
light of Islamic rationalism. It assumes the presence of Islamic man. M.A. Mannan.
03. Preliminaries :
i) There is a misconception in some sections that establishment of Islamic economy
means establishment of Arab economy as it existed 1400 years back at the time of
the Prophet (SM). This is not correct Islamic economy would be totally upto-date in
its method of organization and use of technology. Only the principles and
framework will be derived from the Quran, the teachings of the Prophet and the
practices of the early days of Islam.
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ii) Similarly, it is wrong to say that Islam does not give an economic system. We
recognize capitalism as an economic system, though its basic characteristics are
only the recognition of the private right of ownership and freedom of economic
activities for the individual. Likewise, socialism is treated as an economic system,
even though its only basic characteristic is the social ownership of means of
production. Islam gives us an much more comprehensive guidance in economic
matters such as prohibition of interest compulsory levy of Zakat, freedom of work
and enterprise, concern of the poor, distinction between the Halal (permissible)
and Harm (prohibited) in income, consumption and production and so no. As such
Islam undoubtedly gives mankind and economic system not found in other
religions. An economic system does not mean only the details of organization,
which are more or less the same in all economic systems.
iii) It is also necessary to bear in mind that an Islamic solution of the same problem
may be more that one. There can be alternative solutions or models for the same
problems or issues. The difference can be quite acute in such sectors as land
reform and role of government is economy. As long as the alternative solutions
proposed by Islamic scholars through Ijtihad had remained within the explicit
framework of the Quran and the Sunnah, the alternatives should be considered
Islamically valid and legitimate.
iv) The Islamic economy which established by the Prophet (SM) and developed by the
Khulafa-i-Rashideen in Medina is the first model of Islamic economy in. so far as
basic principles and values are concerned. This should always remain as a
reference point along with the Quran and the Sunnah. We should remember that
the Prophet freed the pre-Islamic Madinite economy from Jahiliya, or all un-Islamic
practices. As such none can say that what was allowed in Madinite economy, at
that time as not permissible today, or what was not permitted in that economy as
permissible now.
(a) Establishment of Adl. (justice), to attain Hasanah (good) and Falah (welfare) in
this life and the life hereafter.
(d) Elimination of Munker (evil, wrong or injurious practices from Economic life).
(e) Freeing humanity from un-wanted burdens and shackles and to make life easier
for them.
(f) Ensure economic efficiency and accelerated rate of growth. Ensure maximum
production & useful production.
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(j) To ensure full utilization of resources.
b. The wealth and asset in all their forms given under trust by Allah.
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06. The following Verses of the Holy Quran
clearly point out the aforesaid objectives of
Islamic economy:
i) Allah enjoins on you justice and gracious conduct (Sura Nahl : Ayat-90).
ii) When we give them power on earth, they establish prayer, give Zakat,
enjoin Maroof and Prohibit Munkar (Sura : Hajj : Ayat : 41).
iii) He (the Prophet) enjoins them to follow right things and forbids them
from evil, he makes pure things lawful for them and impure things unlawful,
he relieves them of their burdens and frees them from shackles that bound
them (Sura Araf Ayat : 157).
iv) Our lord, grant us good in this word and in the hereafter (Sura Baqara;
Ayat:20).
v) We desired to show favour into those who were depressed in the earth,
and to make them leaders and to make them inheritors and to establish
them on earth (Sura Qasas, Ayat: (5-6)
vi) Co-operate in acts of piety and virtue and do not co-operate in acts of
sin and transgression (of laws of God) (Sura Al-Maida, Ayat :2).
vii) So that wealth does not circulate only among rich people of you (Sura
Hashr, Ayat :7)
There are many other verses of similar nature in the Holy Quran which clearly
establish the aforementioned goals of Islamic economy.
viii) As regards achieving maximum economic growth, we can point out that
Islam did not allow any owner to keep his agricultural land uncultivated for a
long time. Islam also encouraged cultivation of barren land by any body who
could do so. Hazrat Omar-bin Abdul Aziz directed his governors to lease all
uncultivated state lands to any body who could cultivate against even one-
tenth share of the crop. This indicates Islam’s concern for maximum
utilization of resources for maximum economic growth. (Dr. Yusuf Al-
Qaradawi: Al Halal, Wal Haram).
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ii) Free Economy : Islam allows economy to cooperate freely according to
the market forces subject to Islamic restrictions and guidelines on
production. Distribution, marketing, investment trade, exchange, wages etc.
The state can also further interfere in this free economy to restore
equilibrium and establish justice and other Islamic objectives as explained
above. In an Islamic economy, there is an “allowability constraint” in every
idle (a terms introduced by Dr. S.N.H Naqvi in his above mentioned book).
An entrepreneur can produce only permitted things, Profit should be normal
in such an economy after giving proper wages to the labourers in
accordance with Islamic principles. Some forms of trade practices,
exchange, investment and land tenancy in agriculture are prohibited in Islam.
It also disallows monopoly and hoarding as social evils. The aforesaid
restrictions make free economy in Islam qualitatively different form
capitalism. Islam can not be said to be capitalistic only because it allows
forces of demand and supply are fundamental economic forces, which were
operational in all ages even before capitalism.
b) Do they not see that we have created for them ---- among the things
fashioned by us ---- cattle of which they become owners? (Sura Yasin,
Ayat : 29). Islam, therefore, allows man as Vice-grant, to inherit from
Allah (that is to own) wealth. This is indeed a truss’ for proper use.
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vii) Prohibiting of Interest : Islam prohibits interest. This requires a
total reorganization of the economy, banking, investment, exchange,
business and international trade. A big effort is under way in the Muslim
world in this direction. A body of literature has already come up on this
subject.
viii) Zakat : Islam has made Zakat compulsory on the wealth of rich
Muslims. This is spent for the weaker and distressed sections of the society.
Zakat not only distributes wealth between the rich and the poor of the
society, it also influences investment, savings and allocation of income and
resources. A detailed study has been made in this regard by Dr. Monzer
Kahf in his book “Islamic Economy” American Trust Publications, USA, A
rich body of literature has come up in recent times on Zakat. The Zakat and
Ushr ordinance of Pakistan can be particularly referred to in this connection.
ix) Concern for Poor : This is a special feature of Islam. Zakat is one
institution which testifies to this. In this connection we may refer to ayat 5-6
Sura Qausar as quoted in para 6 above, is particularly significant, where
Allah, the Almighty has expressed this desire to show favour on the
depressed people, Islamic economy shall establish all possible institutions to
carry out this desire of the Almighty.
a) Children
b) Husband / Wife
c) Parents
d) Brothers and sisters in certain situations.
This distribution has taken care of different groups keeping in view their social role,
requirements proximity of kinship relationships. For those who remain outside the list of
inheritors. Islam has provided for wasiat (will) for all such relations if they are in a distressed
condition. A person can will upto one 3rd of his property for distressed relations or others
outside the inheritors.
Time and again as we were from the clear injunctions of Allah, we hark back discouraged
and crest fallen. Islam provides us the principles of social behavior in our economic life. It is
upto us to develop the technology for the implementation of such principles. Already there is
a resurgence over the Islamic World towards these ends. We pray to Allah for his blessings
and continued guidance. (Summary of speeches given in Islamic Banking course held in
BIBM in January, 1982).
The End
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01. ISLAMIC FINANCIAL SYSTEM (IFS) :
A financial system that is based on Islamic principles and values, which eliminates Riba and
ensure a profit sharing mechanism in the financial system may be called IFS. It may be
characterised by the absence of interest based financial institution & transactions, doubtful
transactions or gharar, Stocks of companies dealing in unlawful activities, unethical or
immoral transactions such as market manipulation, insider trading short-selling etc.
Socialistic financial system and 2) capitalistic financial system both systems have been
proved inefficient to establish economic balance in the society.
The basic framework for an Islamic financial system is a set of rules and laws, collectively
referred to as shariah, governing economic, social, political and cultural aspects of Islamic
societies. Shariah originates from the rules dictated by the Quran and its practices, and
explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad.
Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the
framework of the Quran and Sunnah. The basic principles of an Islamic financial system can
be summarized as follows :
This prohibition is based on arguments of social justice, equality, and property rights. Islam
encourages the earning of profits but forbids the charging of interest because profits,
determined ex post, symbolize successful entrepreneurship and creation of additional wealth
whereas interest, determined ex ante, is a cost that is accrued irrespective off the outcome of
business operations and may not create wealth if there are business losses. Social justice
demands that borrowers and lenders share rewards s well as losses in an equitable fashion
and that the process of wealth accumulation and distribution in the economy be fair and
representative of true productivity.
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Prohibition of speculative behavior . An Islamic financial system
discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling,
and risks.
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HIRE-PURCHASE & HPSM INVESTMENT –
MEANING, FEATURES, APPRAISAL,
SANCTION, DISBURSEMENT, RECOVERY,
FOLLOW-UP
HIRE PURCHASE
It is a contract two parties, one is lessor & another is Lessee to acquire a rentable asset
by the Lessor and for taking the services of the Asset by the Lessee against rent and
payable the value of the asset to the Lessor at a time for getting the Ownership of the
Asset.
STAGES OF HPSM
a) Purchase under Joint Ownership
b) Hire and
c) Sale and/or transfer or Ownership to the other partner lessee
DEFINITION : HPSM is a special type of contract where both the Bank and the Client
supply equity in equal or unequal proportion for purchase of an asset, own the same
jointly, share the benefit as per agreement and bear the loss in proportion to their
respective equity. The share in the asset owned by the Bank is hired out to the Client and
eventually the Bank sells and transfers its ownership to the Client against payment of
price as per agreement.
2. Though ownership is joint, asset may be registered in the name of any one
mentioning in the HPSM agreement.
4. In the HPSM agreement Hiree does not sell or Hirer does not purchase the
asset but they promise to sell and purchase the same part by part only.
5. The hire contract become effective from the day on which the Hiree transfer the
possession of the asset in good order and assemble condition to the Hirer.
6. As the portion of the Bank is sold and transferred part-by-part the rent will be
reduced proportionally.
7. Under HPSM agreement bank will act as partner, Hiree and at last as a seller
and client will act as partner, as a hirer and lastly as purchaser. The sale and
purchase will be effected by a separate sale contract.
8. Ownership risk will be borne by both the parties proportionally. The Hirer will
maintain the asset with due prudence and shall not be held responsible for the
damage or destruction of the asset without transgression, default or negligence,
otherwise he must be responsible for the same.
9. The Hirer is responsible for keeping the asset in goods condition as a trustee.
10. The Hirer cannot change or remove the property without the permission of the
Hiree.
RULES OF HPSM
• Ownership of the asset of both the Hiree and the Hirer should be recognized as
per law of the land.
• The asset(s) and the benefit/service drived from it is within the category of
‘Halal’ or at least ‘Mobah’ as per Islamic Shariah.
• The Hiree is under obligation to enable the Hirer to the benefit from the asset(s)
by putting the possession of the asset(s) at his disposal in useable condtion at
the commencement of the hire period.
• In a hire contract, the period of hire and the rental to be paid per unit of time be
clearly stated.
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• It is a condition that the rental falls due from the date of handing over of the
asset to Hirer and not from the date of contract or use of the asset.
• The hired assest is a trust in the hands of the Hirer. He will maintain the asset(s)
with due produce and shall not be held responsible for the damage or
destruction of the asset without transression, default or negligence; otherwise
he must be responsible for the same.
• The Hiree/owner bears all the basic costs for repairs & maintenance as per
contract.
• The hire contract is binding and no one party shall unilaterally reseined except
reasons that abrogate binding contract such as damage or destruction.
• If the hired asset is damaged or destructed by the act of Allah and if the Hiree
offers a substitute with the same specifications agreed upon in the hire contract
the contract does not terminate.
• It is also permissible to sell the hired asset by the Hiree to the Hirer during the
tenure of the hire period either part by part or in full at a time.
GESTATION PERIOD
The period from the date of 1st disbursement for acquisition of the asset/property to the
date of handing over of the asset/property to the Hirer in good order and useable condition
to derive the desired service (s)/benefit(s) is called “Gestation/Interim period”.
During the gestation period, the asset remains under construction /installation/making
form, so the asset can not yeild the desired services/benefit(s) and as such no rent should
be charged for that period.
Taking the cost, utility, value addition, market demand for the asset, the sale Price of the
Bank’s share of the asset/property may be fixed at a higher Level to cover the cost/benefit
of the “Gestation Period” or in other words, the Bank may sell its share in the asset at a
higher price with mutual consent of the Bank and the purchaser.
Calculation of monthly installment for the Investment allowed under HPSM mode (or
Investment allowed against payment in installment basis).
OR
Average monthly rent = ( I x R) / 2400
Where
Rent of the gestation period is to be calculated also & spreaded over the whole period of
the investment and to be added up with the monthly installments.
Problem :
Suppose an HPSM Investment of Tk. 5,00,000/- was allowed to a client for a period of 5
years excluding gestation period of 1 year at 15% RR.
No rent on rent
2. Rent of the gestation period is not recovered during the said
period.
3. Presession of the asset is being handed over to the client.
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It has nothing to do with interest ?
It is the expression of service equaty.
1. Dr. HPSM
Cr. P.O
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