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Islamic economics is the knowledge and application of injunctions and rules of the Sharia (Islamic Jurisprudence) that prevent injustice in the acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their obligations to Allah (God) and society.it aims to organizethe resources of earth on the basis of cooperation and participation.
The prohibition of riba is mentioned in different revelations in the Qur'an
The first revelation emphasizes that interest deprives wealth of God's blessings.
The second revelation:“O you who believe, fear Allah and give up what remains due to you of interest if you are indeed believers. And if you do not, then be warned of war (against you) by Allah and His Messenger, while if you repent you shall have your capital. Do not do wrong and you shall not be wronged.” (Al-Baqarah: 278-279)
The third revelation enjoins Muslims to stay clear of interest for the sake of their own welfare.
It is further declared in the Qur'an that those who disregard the prohibition of interest are at war with God and His Prophet.
The Prophet (peace and blessings be upon him) declared war on usury and those who deal in it; he pointed out its dangers to society, saying, “When usury and fornication appear in a community, the people of that community render themselves deserving of the punishment of Allah.” (Reported by Al-Hakim; Abu Y'ala has reported something similar on good authority)
Some writings have alluded to the 'unearned income' aspect of interest payments as a possible explanation for the Islamic doctrine. The objection that rent on property is considered halal (lawful) is then answered by rejecting the analogy between rent on property and interest on loans, since the benefit to the tenant is certain, while the productivity of the borrowed capital is uncertain. Besides, property rented out is subject to physical wear and tear, while money lent out is not. The question of erosion in the value of money and hence the need for indexation is an interesting one.
Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk.
The Islamic ban on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production but it does not allow the factor to make a prior or predetermined claim on the productive surplus in the form of interest. This obviously poses the question as to what will then replace the interest rate mechanism in an Islamic framework. There have been suggestions that profit-sharing can be a viable alternative (Kahf 1982a and 1982b). In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined.
Islam made a clear distinction between trade and Riba where trading is welcomed and Riba is prohibited. Islam does not consider money as a commodity such that there should be a price for its use. Money is a medium of exchange in asset-oriented economy, and a store of value. The prohibition can be expressed in more technical terms by saying that while money is recognized in Islam as a means of exchange it may not lawfully be regarded as a commodity for exchange. The important difference between trade and Riba is that the business risk in trading is allocated more evenly among all the parties involved, whereas in Riba operations the business risk lies heavily, if not solely, on the borrower.
Economic facts:
In the private sector, high interest rates have their most dramatic impact on equity investments - both stock market and private. High interest rates undermine equity investments in several ways.
One of their most important impacts is as a direct competitor for the investor's dollar. By increasing the difficulty of raising equity capital, high interest rates directly undermine financial stability and slow the growth of economic capacity needed to meet inflationary demand. They reduce price/earnings ratios.
High interest rates obviously increase economic costs and risks both for the individual business and the economy as a whole. In addition, high interest rates obviously reduce incentives for long term economic projects.
High interest rates reduce borrowing for consumption, production and investment purposes. Ultimately, efforts to keep interest rates down by means of rapid money supply increases MUST lead to higher interest rates than would otherwise occur.
-The condition where one's Standard Of Living (SOL) is lowered due to increases in living costs. This can be caused by increases in the two basic economic factors in all commodities:
(A) Cost of Labor; and (B) Cost of money;
For workers, Inflation is an indirect tax which reduces one's Standard of Living (SOL).
Unless compensation for one's labor is increased equal to the percentage increase in
the cost of living, your (SOL) goes down.
Higher costs of money--Interest--often cause management to raise prices.
If the results of your labor, products or services you create, are sold for a higher price, than last year's selling price, Inflation results.
-William Poole*
President, Federal Reserve Bank of St. Louis
Remarks before the Center for the Study of American Business
Washington University
St. Louis
July 29, 1999
in the short run, there may be effects that bring criticism on the inflation hawks-a higher interest rate might increase unemployment, and a lower interest rate might reduce unemployment. But,, analyzing short-run issues requires special care to be sure that the short run is linked correctly to the long run.
-Jean-Pierre Gerard
Economica 1999
c. 128pp.
Jean-Pierre Gérard has traced the beginnings of France's current problems to a sharp, worldwide upturn in real interest rates starting in 1982. Noting that the rate increase coincided with a slowdown in job creation and rise in unemployment, Gerard deduced that the increase in real long-term interest rates has two consequences: it creates both greater difficulty in making existing economic activities profitable and more obstacles to creating new businesses.
Main element in understanding how Islamic banking operates with out receiving or paying riba – interest.
Islamic banks accept deposits from their clients into different types of accounts: current, saving, general investment and special investment.
Banks accept into current account deposits from the clients looking for custody, and banks can use this money on the principle of trust. Saving accounts are rather similar to current, but banks can, at their own and non-mandatory discretion, reward the clients from time to time by returning a portion of the profits generated from their funds. Islamic banking accept into general accounts deposits from the clients seeking investment opportunities for their funds, on the principle of The deposits are held for a specified period. When operating fully, the Islamic banking intends to accept deposits with different maturities. Finally, special investment accounts, in addition to the general investment facilities for accepting deposits from its ordinary clients, the bank may also selectively accept deposits from its wealthy individual of corporate clients in the form of special investment accounts. Through these accounts, the modes of investment of the funds and the distribution of the profit may be and usually are negotiated individually but also on the principle of mudaraba.
Generally speaking, Islamic banks can earn profit in three areas: financing of Profit and Lost sharing Deposits, leasing and trading. Profit and Lost sharing deposits have several forms of implementation. Mudaraba is one of them. It is a partnership of two or more parties (one of them is a bank), when one (or more) party put money in some joint venture (or partnership), and other party (a bank) use these money. Islamic theorists have adopted the conception that banks are not liable for any losses suffered in their investment operations through investment deposits .Depositors are to be seemed as equal investors in a mudaraba as bank as.
Islamic scientists have elaborated also other instruments for banking operations. Thus, murabaha contract, which was developed in recent years, is among them. Under this contract the Islamic financial institutions purchases the goods on behalf of the Muslim client, and the latter agrees to repurchase the goods at a later date with the price adjusted upward by a specified amount .And vice versa, sometimes even a customer plays as a bank agent, buying the goods. Such contract allows the importer to obtain credit without riba – interest, until the contractual goods are received by Muslim importer or sold to local client of such importer.
Other form of Muslim client-Islamic bank co-operations is musharaka or sharika, which also form of sui generis partnership. Shari’a law divides these partnerships into two broad categories:
- Property partnership (sharikat mulk), which amounts to the ownership of a property without its joint exploitation, such as the joint ownership of a house transmitted, by devolution, to the heirs of a deceased person,
- Contractual partnership (sharikat ‘aqd), where emphasis is on joint exploitation of capital and the joint participation in profits and losses and where joint ownership is a consequence of, and not a prerequisite for, the formation of the partnership .
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