An Overview of Islamic Economic

System and
Islamic Banking

by
A.R.SAJID
 Economic System

An economic system may be defined as,

“ A set of entities, which are inter-connected
and behave in unison to achieve economic
objectives of a society.”
It implies, of course that the entities are
economic institutions, organizations, norms
and rules of conduct.
.
 Criteria to Judge the distinctiveness of
an economic system
 Property relations (or ownership of
resources)
 Nature of economic freedom
 Incentive mechanism
 Decision making process and
institutions
 Distribution of income
 Capitalism

 Private ownership of resources

 Full freedom
 Personal benefits
 Market based solutions
 Every one receives the share according to
the level of ownership of resources and
level of participation in economic activities.
 Socialism

 Collective ownership of resources

 Government decision
 Social well-being
 Central Planning
 Equal Distribution of Income
 Basic Principles of Islamic
Economics
 Real and Ultimate owner of every thing
is Allah (SWT)
 "To God belongeth all that is in the
heavens and on earth;
 (The Qur'an 2:284, 3:129)
 "Say: "To whom belong the earth and
all beings therein? if you know!" They
will say: "To God!" ───────────."
(The Qur'an 23:84-85)
Man in the capacity of Khalifatullah on the Earth
has distinguished status. Allah (SWT) has
made every thing subservient to him in this
world. Things are given to him as a trust and
he will be accountable about these things.
 "Behold, thy Lord said to the Angels: "I will

create a trustee on earth (The Qur'an

2:30)
 "─── Give them something yourselves out of

the means which God has given to you;

──."(The Qur'an 24:33)
 "─── And spend (in charity) out of the

substance) whereof He has made you

heirs;─." (The Qur'an 57:7)
 Then, on the day, ye will be asked concerning

the bounties. (The Qur’an 108:8)

 Full Freedom within the Halal
(Permissible) limits
 Achievement of Falah
 So keep your duty to Allah as the
best ye can, and listen, and obey,
and spend; that is better for your
souls. And whoso is saved from
his own greed, such are the
successful. (The Qur’an 67:16)
 Supervisory role of the
Government
 Equitable Distribution of Income,
Economic Inequalities in natural
Limits are acceptable but not
allowed to grow beyond this level.
 “… We have apportioned among
them their livelihood in the life of
the world, and raised some of
them above others in rank that
some of them may take labour
from others….”
(The Qur’an: 43: 32)
 Salient Features of Islamic
Economic System
 It is Based on Revelation(Wahi)
 Believes and Values are given Central
place in this system
 Concept of Halal and Haram
 It requires moderation in all aspects
 Both Material and Spiritual Concerns are
taken care
 Well-Being of whole the Society
 A Comprehensive Social Security System
 Islamic Banking and Finance
 It is a part of Islamic System
 It is based on the Shariah Principales
regarding business and Finance
 It is to achieve the economic
objectives of Shariah like,
improvement in the well being of
people, Reduction in income
inequalities etc.
 Present State of Islamic Financial
Institutions OR Evolution of IFS
 Islamic Finance movement started in
50’s. Establishment of Mit Ghumar
Saving Bank in Egypt and Tabung
Haji in Malaysia took place in 1963.
 Now more than 400 Islamic financial
institutions are Working in 60
countries in almost every corner of
the globe. Whereas 350 IBIs&IBBs
are in action,throughout Pakistan.
 Islamic Modes of Financing
A. Trade Based Modes (Low Risk)
1. Muajjal (sale with deferred payment)
2. Murabaha (Sale on Profit)
3. Salam (Sale on Advance Payment)
4. Istisna’a (Order to Manufacture)
B. Partnership Based Modes (Full Risk)
1. Musharakah (Close to Venture Capital)
2. .Mudarabah
3. Diminishing Musharakah
C. Leasing Based Modes (Medium Risk)
1. Ijarah (Leasing)
2. Ijarah wa Iqtina’ (Hire-Purchase)
D. Debt based modes (More than Full Risk)
1. Qard-e-Hasanah
 Musharakah

 It is an agreement between two or

more individuals to provide capital
and efforts to perform a business
activity. The profit is distributed
among the partners in pre-
determined ratio, while the loss is to
be borne by each partner in
proportion to his contribution.
 Mudarabah
 In Mudaraba; one party provides
capital and the other party
provides entrepreneurship. The
Profit is distributed according to
pre-determined ratio, while the
loss is to born by financier only.
The loss of working partner
(mudarib) is in the form of
unrewarded efforts.