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Toward Fair Economy

Presentation of Fair Economy in light of the verses of the Holy Qur‟an

By

Maher Kababji [email protected]

mailto:[email protected]


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AUTHOR‟S PREFACE

In order that an organized body of knowledge might be classified as science, its hypothetical law

must be based on facts. Unlike any other social science, fallacies are the root of the technique of

thinking in economics. By the lapse of time theses fallacies have been accepted as if they

represent a part of the natural life which people have to live with. Present economic systems are

designed to concentrate wealth in few hands. Instability is the main character of present

economies. Monetary and fiscal policies failed to realize prosperity. Growing poverty and

oppression makes it necessary to review the foundations on which present economic systems are

based and to establish a fair economic system. No doubt that a system based on principles set by

the Creator of the people is the best for all communities.

Taking into consideration the complexity of recent economies, different approach has been taken

to identify economic topics and to understand the verses of the Holy Qur‟an which controls

present macroeconomic issues. This explains the different presentation of Islamic economy in

comparison with what was introduced by other researchers. First, the analysis highlights features

of Islamic economy. Each chapter explains how present economic principles are implemented

with regard to the subject economic topic and introduces the related ideological viewpoints of

Islam supported by the verses of the Holly Qur‟an and the sayings of the Prophet ((Pbuh).

Second, a fair integrated economic system based on the Islamic rules is introduced. It includes

monetary system, financial system and financial security system.


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Features of Islamic Economy Introduction

In general, all religions handled economic issues, but Islam has set constant comprehensive

concepts and rules for establishment of a fair economic system which suits all people in different

times and places.

In the first chapter of the Holy Qur‟an named Al-Fatihah, Muslims ask for guidance; ―Guide us to the straight way‖. In reply to their request, the second chapter named Al-Baqarah starts;

―This is the book, where is no doubt, a guidance to those who are the pious believers‖.

The Holy Qur‟an is in conformity with both Christianity and Judaism;‖We did send down the Taurat (Torah), therein was guidance and light … And whosoever does not judge by what

Allah (God) has revealed, such are the disbelievers.‖(Al-Ma‘adah 5:44).

―and We gave him the Injill (Gospel), in which was guidance and light and confirmation of

the Taurat …. Let the people of the Injill judge by what Allah has revealed therein. And

whosoever does not judge by what Allah has revealed therein, such are the rebellious.‖ (Al-

Ma‘adah 5:46,47).

―And this (Qur‘an) is a blessed book which We have sent down, confirming the Revelations

which came before it‖ (Al-An‘am 6:92).

The Holy Qur‟an introduces a message for all people regardless of their beliefs. ―We have sent down to you the book (Qur‘an) for mankind in truth‖ (Az-Zumar, 39: 41).

Unlike present living systems which are based on man-made constitutions, living systems in

Islam are based on Islamic beliefs. In economy, main Islamic beliefs can be summarized as

follows:

Allah is the Only Creator

Allah creates all things such as the heavens, the earth, natural resources, plants, and animals.

―Such is Allah, your Lord! none has the right to be worshipped but He, the Creator of all things‖

(Al-An‘am 6:102).

Allah creates people ―O mankind! Be dutiful to your Lord, Who created you from a single person

and from him He created his wife, and from them both He created many men and women‖ (An-

Nisa 4:1).

Allah creates the systems that organize the movement of creatures ―Verily, in the creation of the

heavens and the earth, and in the alternation of night and day, and the ships which sail through

the sea with that is of use to mankind, and the water which Allah sends down from the sky and

makes the earth alive therewith after its death, and the moving creatures of all kinds that He has

scattered therein and in the veering of winds and clouds which are held between the sky and the

earth are indeed signs for people of understanding.‖ (Al-Baqarah 2:164).

Allah creates the systems that facilitate living of people on earth ―And do not do mischief on the

earth, after it has been set in order‖ (Al-A‘raf 7:56).

Allah is the Only Owner

Allah is the only Owner of all creatures, ―Unto Allah belongeth the Sovereignty of the heavens

and the earth and whatsoever is therein.‖ (Al-Maeda 5:120).

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Allah is the Only Provider

Allah provides people with their living needs. ―And how many an animal there is that beareth

not its own provision! Allah (God) provideth for it and for you.‖(Al-Ankaboot 29:60). On the

international level, scarcity does not exist. Statistics show that the rate of the increase in

international output is much greater than the rate of the increase in world population.

People are trustees

Allah authorizes people to utilize available resources. ―and spend of that whereof He hath made

you trustees;‖ (Al-Hadid 57: 7).

People have to follow rules of trust

For utilization of resources, people, as trustees, are required to follow the rules and conditions

that set by the only Owner, ―And whosoever disobeys Allah and His Messenger, and

transgresses His limits, He will cast him into the fire‖ (An-Nisa 4:14). With regard to economy,

the Holy Qur‟an precisely states prohibited acts, presents permitted acts and sets rules to regulate

legalized acts.

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Features of Islamic Economy 1- Islamic Economy is a pure productive economy

Productive activities refers to the activities which result in excavation of new products, adding

value to available products, moving products to a different time or place. Production is a process

of converting inputs into outputs. Products take the form of goods, services, or assets. A mine

excavates raw material, a factory transforms raw material into products, a retailer adds marketing

services to products, and a doctor provides professional services.

Legality of productive activities

―Eat not up your property among yourselves unjustly except it be a trade amongst you‖

(An-Nisa‘. 4:29)

In general, the word “Trade or Trading” in the Holly Qur‟an refers to all types of productive

activities such as agriculture, industry, tourism, telecommunication, transportation, and software

programming. Eating propriety results in an increase of one‟s wealth on account of a decrease in

another‟s wealth. The principle is to respect private property. The case of trade is presented as

the ONLY exception of eating property because it involves profit or loss. Property is eaten by the

amount of profit or loss.

Islam legalizes production of both consumer and capital goods.

1- Legality of production of consumer goods

―O mankind! Eat of that which is lawful and good on the earth‖ (Al-Baqarah. 2:168).

Prohibition of some products such as: Intoxicants: ―Intoxicants and….., So avoid that‖. (Al-Ma‘idah. 5:90). Specific kinds of meat: ―Forbidden to you are: the dead animals, blood, the flesh of

swine, and that on which Allah‘s name has not been mentioned while slaughtering,

and that which has been killed by strangling, or by violent blow, or by headlong fall,

or by the goring of horns, and that which has been partly eaten by a wild animal

unless you are able to slaughter it before its death, and that which is slaughtered on

stone-alters.‖ (Al-Ma‘idah, 5:3).

2- Legality of production of capital goods

―And remember when He made you successors after ‗Ad people and gave you habitations in

the land, you build for yourselves places in plains, and crave out homes in the

mountains.‖(Al-A‘raf.7:74).

Factors of production

Most economists classify the factors of production under four headings; Land, Labor, Enterprise,

and Capital, giving to each heading a special meaning that do not correspond with ordinary usage

of the word. Land is used in a special sense which includes all natural resources such as minerals

and climate. The term capital refers, in general, to wealth used to produce further wealth such as

machines and premises. Enterprise or organization refers to some functions such as planning,

management, and the bearing of investment risk.

The factors of production are rewarded. Rent is the return to land, wages are the return to labor,

interest is the return to capital, and profit is the return to enterprise.

Giving such extraordinary meanings reflects pitfalls in economic thinking, and open the door to

establish conclusions based on fallacies. Economists employ these fallacies to legalize interest

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which is regarded as the return for capital, and to initiate a lot of controversy about the concept

of money and its value.

Including money in capital as a factor of production contradicts both the definition given by economists to money as anything acts as medium of exchange, and the definition of capital as

wealth set aside to produce future wealth.

Viewing interest as a return to capital entitles investors to generate interest in addition to profit. In reality, interest is the reward to lenders as the return to borrowed money.

Money should be first transformed into a real factor of production in order to deserve a return.

Human and natural resources represent the primitive factors of production. Only labor force out

of human resources may be employed for production. Out of natural resources, only discovered,

dominated, and extracted materials may be exploited in production. The production process

requires the combination of labor and materials. The combination cannot be achieved unless an

investor is willing to bear investment risk. Accordingly, the real factors of production and its

returns may be classified as follows:

Material refers to all productive items that add value to national product. It includes those resources ready to contribute in production process, such as machines, roads, equipments,

buildings, energy, seeds, and raw materials. The Holly Qur‟an legalizes the use of material

which comes out of natural resources ―And We have given you (mankind) power in the earth,

and appointed for you therein livelihood. Little give ye thanks!‖ (Al-Araf 7:10). While

investors pay for the cost of consumable material, Rent (or depreciation premium) is the

return to capital goods.

Labor refers to all types of physical and mental efforts directed at production. It includes planning, management, and decision-making. The verses of the Holly Qur‟an legalize manual

labor ―And he was building the ship‖ (Hud 11:38), as well as intellectual labor ―He said: Set

me over the storehouses of the land. Lo! I am a skilled custodian.‖ (Ysuf 12:55). Wages is the

return to labor.

Investment risk is an intangible asset which causes hardship for the investor. Trade involves investment risk ―Eat not up your property among yourselves unjustly except it be a trade

amongst you‖ (An-Nisa‘. 4:29). Exchange of properties based on its real values does not

involve eating of properties. If a seller bought a product for $4 and sold it for $4, the

exchange transaction would has no effect on the wealth of the buyer or on the wealth of the

seller. Normally, trade involves profit or loss. If the product was sold for $5, the wealth of

the seller would has been increased by $1 on account of an equal decrease in the wealth of

the buyer who paid $5 to acquire a product worth $4. Profit is regarded as reward given to

investors for bearing investment risk and for their contribution to the production process. In

the absence of profit, there will be no incentive for investors to take investment risk.

Regulations of Productive activities

Regulations of productive activities may be classified into three principals; mutual consent,

justice, and avoidance of prohibited acts.

1- Principle of mutual consent ―except it be a trade amongst you, by mutual consent‖ (An-Nisa‘. 4:29).

2- Principle of justice

Fair evaluation of wages and rights of others

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―The way is only against those who oppress men‖ (Ash-Shura, 42:42).

Fair evaluation of properties of others ―and reduce not the things that are due to the people‖ (Hud, 11:85).

Fair terms between partners in a company “And, verily, many partners oppress one another, except those who believe and do

righteous good deeds, and they are few‖ (Sad. 38: 24).

3- Principle of avoidance of forbidden acts

Environmental mischief such as pollution ―And when he turns away, his effort in the land is to make mischief therein and to

destroy the crops and the cattle, and Allah likes not mischief‖ (Al-Baqarah 2:205).

Mischief on natural systems ―And do not mischief on earth, after it has been set in order‖ (Al-A‘raf 7:56).

All types of corruption ―and do not commit mischief in the land causing corruption.‖ (Hud. 11:85).

Growth of output

The World Bank, World Development Indicators updated Jul 28,2011shows growth rate of world

gross product in comparison to world population growth rate for the period from 1985 to 2005 as

follows:

1985 1990 1995 2000 2005

Growth rate of world gross product 3.9% 3.0% 2.9% 4.3% 3.6%

Growth rate of world population 1.7% 1.7% 1.5% 1.3% 1.2%

The excess of the growth rate of world production over the growth rate of world population

provides evidence that scarcity of resources is not exist on the global level. Overutilization of

global resources is made on account of increased pollution and represents waste of resources that

encourage recycling activities.

On the national level, economic possibilities of the society restrict its growth. Economic

possibilities of a society refer to the existing resources which include labor, capital goods, raw

materials, natural resources, knowledge, and skills. Economic possibilities of a society are not

limited to the available domestic resources. A shortage in resources may be imported from other

nations. ―and have made you nations and tribes that ye may know one another‖ (Al-Hujraat

49:13). Islam legalizes international trade “And with all those Allah‘s Grace, and Protections,

We cause the (Quraish) caravans to set in winter and in summer‖ (Quraish 106: 2). Resources

that can possibly be imported from abroad to compensate the shortage in raw material,

technology, products and labor force are considered as part of national economic possibilities.

A society must be able to utilize its resources in order to produce at least a certain minimum

amount of all goods required for attaining at least a minimum level of prosperity. Prosperity is a

relative term. It is limited to the economic possibilities of the country.

A society may succeed to attain even higher level of growth needed for realization of prosperity,

but the collection of goods produced by using the available resources may differ from the

collection needed for prosperity. If the difference between the two collections can be

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overcompensated through international trade, the goal of prosperity will be attainable; otherwise

a problem of product mix will come up;

The difference may be a result of giving priority to development on account of consumption. More resources are devoted to produce capital goods such as factories, machineries,

railroads, and dams.

The difference may be a result of giving priority to produce goods necessary for war or natural disasters.

The difference may be a result of giving priority to luxuries on account of necessities. More resources are devoted to produce luxury goods such as pyramids and fancy squares.

The difference may be intentionally made by giving priority to produce goods of higher profits such as goods required for war in case of peace without expectation of wars.

A society may fail to achieve its goal of prosperity because resources are not fully employed or

inefficiently employed.

Unemployment of resources may be a result of lack of technology to discover or extract resources or because of a shortage of funds needed for discovery or extraction processes.

Resources which can be utilized may not be employed because the decision of utilization is still not yet taken for political reasons or for a decision made for increasing reserves even on

account of reasonable consumption.

Inefficient utilization of resources may be a result of low productivity, scarcity of skilled labors or lack of technology necessary for production.

An economy may be growing in the wrong direction. Growth may be achieved on account of

increased pollution or depletion of available stock of natural resources.

It is the responsibility of a government to plan for efficient utilization of available resources in

order to realize full employment and best product mix, and to avoid pollution and faster

exhaustion of resources. Optimal growth requires best utilization of available resources. It is a

planning issue. Unlike present economies where financial activities constitute an integral of

economic activities, Islamic economy emphasizes utilization of available resources in

production.

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Features of Islamic Economy 2- Islamic Economy is Free of Riba-based Lending

The word “Riba” refers to any direct or indirect return for lending. Returns for lending take

many forms such as interest, profit, commission, or free services. Present economic systems are

characterized by huge expansion of credit which is riba-based lending. The progressive shift

from productive activities to financial activities seeking for easy profit in short period inflicts

greatest harm to the society in form of inflation to help concentration of wealth and economic

instability.

Interests generated by lenders as return on public debts help redistribution of wealth from taxpayers to lenders because they are charged to taxpayers in form of tax. In his article “The

biggest financial crime in the history of the United States” addressed to the US citizen via

Internet, Dr. Don J. Grundmann, D.C., M.H. says: “Since in 1996 approximately 40% of the

United States budget went to the payment of interest on the national debt”.

Interests received by lenders on credits provided to finance productive activities help redistribution of wealth from consumers to lenders because they are charged to consumers in

form of price increase.

Interests earned by lenders on debts to finance speculative activities are charged to consumers in form of hidden inflation tax. The excess of money supply used to pay the

interest is translated into a reduction in the value of the currency unit. As a result wealth is

redistributed from consumers to lenders.

Money of innocent people is at risk. Most of money invested in financial markets is borrowed money. Banks and financial institutions lend money borrowed from depositors to

investors and speculators. Most of premiums paid by people to social security, retirement

entities, and insurance companies are deposited in banks or invested in speculative activities

and financial markets. Protection of deposits is introduced to justify the use of money owned

by public to support financial system in case of breakdown of the financial system.

Supporting financial institutions and speculators in case of crisis is a sort of social oppression

because people have to settle resulted public debts via increased taxes.

Reliance on foreign public debts for development involves an oppressive operation by which rich countries and giant lenders make profit in form of interests on account of poor countries.

Over and above a poor country has to respect the terms and conditions of granted loans

which may have severe impacts on its sovereignty. Natural resources of poor countries are

used to pay foreign public debts and interests.

A historical review of financial crises explains the destructive role of riba-based lending activities on societies and the failure of monetary remedies to prevent the ghastly impacts on

economic growth. The excessive expansion of credit is responsible for the Wall Street Crash

of 1929, the 2008 US Mortgage Crisis, the 1997 Asian Financial Crisis, 1998 Russian

Financial crisis, and the Latin American Debt crisis.

Reliance on public debts helps excessive expansion of government spending and growing financial corruption. World Bank report “The Many Faces of Corruption” underlines, “the

nature and quality of a country‟s PFM (Public Financial Management) system to a large

extent determine the ease with which public corruption can occur”.

http://www.igac.net/pdf/publications_adb_manyfacesofcorruption.pdf

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Money creation process and financial tools are responsible for the excessive expansion of

credits:

Money creation process refers to the ability of financial sector to issue money in form of deposits and use the created deposits to expand credits. Assume that a central bank sets the

obligatory reserve to be retained by banks to 10% of deposits. This allows banks to loan 90%

of deposits. If a bank received a deposit of $1000, the bank can lend $900. If the borrower

used the loan to buy products, and the seller deposited the amount into a bank account,

banking deposits will be $1900, out of which $810 can be loaned, making the total deposits

$2710, and so on. In theory, on receipt of an original deposit of $1000, the banking sector can

initiate new deposits which increase volume of money in circulation by $9000, and can lend

$9000.

The money creation process may explain why banks represent the wealthiest sector in all

economies. Assume 5% is the interest rate on deposits, and 8% is the interest rate on credits,

the banking sector will pay $500 to depositors and gain $720 from borrowers. As a result of

the money creation process, the banking sector makes profit of $220 or %22 instead of $22 or

%2.2 (((900 X 8%) – (1000 X 5%)) / (1000 X 100)). Over and above, calculating interest on a

compound base increases, created deposits, expanded credits, and profits of the banking

sector. The money creation process, as an advantage, is not available to other economic

sectors. Islamic banks, as a part of the interest-based banking sector, benefits from this

advantage, but they, indirectly, help excessive expansion of money and credit.

Refinancing products, such as discounting commercial bills and resale of mortgage securities, help banks to liquidate their credits in order to expand more credits.

Treasury bills are issued to finance public expenditures. Bonds are issued to finance operations of corporations.

While Islam prohibits riba-based lending, riba-free lending is legalized.

Prohibition of Riba

―Those who eat Riba will not stand except like the standing of a person beaten by Satan leading

him to insanity. That is because they say: ―Selling is only like Riba,‖ whereas Allah has

permitted selling and forbidden Riba‖ (Al-Baqarah. 2:275)

―But if you repent, you shall have your capital sums‖ (Al-Baqarah. 2:279)

In addition to Islam, Christianity and Judaism forbid usury.

―Give back to them immediately their fields, vineyards, olive groves and houses, and also the

usury you are charging them—the hundredth part of the money, grain, new wine and

oil."(Nehemiah 5:11)

―who lends his money without usury and does not accept a bribe against the innocent. He who

does these things will never be shaken.‖(Psalm 15: 5)

―He withholds his hand from sin and takes no usury or excessive interest.‖(Ezekiel 18:17)

"But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward

shall be great". (Luke 6:35)

―If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a

creditor; neither shall ye lay upon him interest.‖ (Exodus, 22:24 [14]

)- Hebrew Bible

―Thou shalt not give him thy money upon interest, nor give him thy victuals for increase.‖

(Leviticus, 25:35-37)- Hebrew Bible

http://www.biblegateway.com/passage/?book_id=16&chapter=5&verse=10&end_verse=12&version=31&context=contexthttp://www.biblegateway.com/passage/?book_id=23&chapter=15&verse=4&end_verse=5&version=31&context=contexthttp://www.biblegateway.com/passage/?book_id=33&chapter=18&verse=16&end_verse=18&version=31&context=contexthttp://mechon-mamre.org/p/pt/pt0222.htmhttp://en.wikipedia.org/wiki/Usury#cite_note-13http://mechon-mamre.org/p/pt/pt0325.htm

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―but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in

all that thou puttest thy hand unto, in the land whither thou goest in to possess it.‖

(Deuteronomy, 23:20-21)- Hebrew Bible

Difference between Usury and Selling

―Those who eat riba... they say: Selling is only like riba‖ (Al-Baqarah. 2:275)

The argument stated in this verse of the Holly Qur‟an indicates the importance of understanding

the difference between riba-based lending and selling.

The logic behind the argument is that the increase in profit from credit sale over cash sale is

considered as time value of money. Similarly, riba is the time value of money. This type of

similarity may be true to an extent, but the discrepancies should be considered.

Riba-based lending represents a transaction of exchanging money for debt, while credit sale refers to a transaction of exchanging real product for debt.

Riba may be considered as the time value of money, while profit, from sale, represents the return to investment risk which increases in case of credit sale.

Profit is the investor‟s reward for increasing national product and national supply and therefore helps price reduction, while riba is added to cost of products and hence causes

inflation.

Selling is the base of the real productive economy which results in prosperity, while riba-based lending is the base of present financial economy which causes havoc in society.

Legality of riba-free lending

―O you who believe! When you contract a debt‖ (Al-Baqarah, 2:282)

If lending does not involve riba, it will not cause inflation. Interest-free lending is regarded as a

social financial aid. A transaction of riba-free lending represents a money transfer from one party

to another party.

Regulations of riba-free lending as in Surat Al-Baqarah

Term

―O you who believe! When you contract a debt for a fixed period‖

Writing

―O you who believe! When you contract a debt for a fixed period, write it down. Let a scribe

write it down in justice between you…….‖

Witnesses

―And get two witnesses out of your own men.‖

Collaterals

―then let there be a pledge taken, then if one of you entrusts the other, let the one who is

entrusted discharge his trust‖

No return

―you shall have your principal sums‖

Collection

―And if the debtor is in a hard time, then grant him time till it is easy for him to repay; but if

you remit it by way of charity, that is better for you if you did but know.‖

http://mechon-mamre.org/p/pt/pt0523.htm

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Features of Islamic Economy 3- Islamic Economy is Free of Speculative Activities

Speculative activities refer to transactions of trading of assets in order to generate profit from the

appreciation of their value. Speculative activities take place in Money markets, Stock markets

and Commodities markets. Buying stocks based on fair prices in order to gain from their

dividends or to control the management of the corporation by which the stocks are issued is not

considered a speculative activity. Spot deals on money market as well as buying and receiving a

commodity for resale is a legal trading transaction.

In money market, forward deals involve speculation. In stock markets, prices do not reflect the

fair value of stocks as declared in financial reports of corresponding corporation. In commodities

markets, prices reflect interaction of demand and supply on contracts rather than on

commodities. This may provide an explanation for the very rapid increase in prices of oil in

previous years and in prices of gold and some foods in recent year. In most cases, prices in

financial markets reflect interests of large capitalists who dominate the speculative markets. In

case of instable financial markets, speculators may invest in real assets, mainly real estate.

Banks and financial institutions encourage speculative activities by granting credits based on

margin which allows speculators to buy financial assets in return for paying only a specific

percentage of the market price.

The progressive shift from productive activities to speculative activities inflicts greatest harm to

the society in form of inflation to help concentration of wealth and economic instability.

Profits generated by speculators are charged to public in form of hidden inflation tax. The excess of money supply used to pay the profits is translated into reduction in the value of the

currency unit. Speculative activities involve redistribution of wealth from consumers to

speculators.

Reliance on speculative investments for development can cause a breakdown of the market economy. Speculative investments are very unstable. The sudden removal of capital from a

country can result in a severe economic crisis and hardship for the people.

Currency speculation is considered a highly suspect activity. In 1992, currency speculation forced the central bank of Sweden to raise interest rates for a few days to 500% per annum,

and later to devalue the Swedish krona.

As a result of globalization and technological developments, financial markets, money markets, stock markets, and commodities markets all over the world are, directly or

indirectly, linked together. Globalization makes economic performance of other country or

countries affects domestic economy.

Unwise and excessive expansion of mortgage loans encourages speculative activities on real estate and represents the main reason of the 2008 World Financial Crisis.

Speculative investments are very unstable. The sudden removal of capital from a country can result in a severe economic crisis and hardship for the people. Inflationary process is

potentially unstable, and can accelerate into hyperinflation. Soviet economy had a period of

hyperinflation from 1921 to 1924.

Prohibition of speculative activities

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Speculative activities involve unlawful eating property ―And eat up not one another‘s property unjustly‖ (Al-Baqarah. 2:188).

Speculative activities cause inflation. Speculators gain profits on account of public in form of

hidden inflation tax.

Speculative activities involve unfair valuation of assets and commodities ―And O my people! Give full measure and weight in justice‖ (Hud. 11:85).

In speculative markets, prices do not reflect fair value of underlying assets. Optimistic

speculations raise market prices, while pessimistic speculations cause price decline.

Speculative activities involve gambling ―Intoxicants and maisir, and animals that are slaughtered as a sacrifice for idols, and

arrows for seeking luck are an abomination of Satan‘s handiwork, So avoid that‖. (Al-

Ma‘idah. 5:90).

The word used by the Holy Qur‟an for gambling is „maisir‟ which literally means „getting

something too easily or getting a profit without working for it‟. Speculative activities

represent a sort of gambling. Also Christianity and Judaism forbid gambling.

Speculative activities in commodities markets involve Riba ―Yahya related to me from Malik that he had heard that receipts were given to people in the

time of Marwan ibn al-Hakam for the produce of the market at al-Jar. People bought and

sold the receipts among themselves before they took delivery of the goods. Zayd ibn Thabit

and one of the Companions of the Messenger of Allah, may Allah bless him and grant him

peace, went to Marwan ibn al-Hakam and said, "Marwan! Do you make usury halal?" He

said, "I seek refuge with Allah! What do you mean?" He said, "These receipts which people

buy and sell before they take delivery of the goods." Marwan therefore sent a guard to follow

them and to take them from people's hands and return them to their owners.‖ (The Muwatta

of Imam Malik).

Speculative activities involve unlawful bargain sale ―Ibn 'Umar (Allah be pleased with them) reported Allah's Messenger (peace be upon him) as

having said this: One amongst you should not enter into a transaction when another is

bargaining‖ (Sahih Muslim).

Speculative activities in commodities markets involve unlawful sale before taking possession ―Ibn Abbas (Allah be pleased with them) reported Allah's Messenger (peace be upon him) as

saying: He who buys food grain should not sell it until he has taken possession of it‖ (Sahih

Muslim).

Speculative activities in money markets involve unlawful forward sale of currencies ―The prophet (Pbuh) prohibited the sale of silver for gold on credit.‖(Muslim).

Speculative activities in forward deals and in most derivatives involve riba ―whereas Allah has permitted selling and forbidden Riba‖ (Al-Baqarah. 2:275).

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Features of Islamic Economy 4- Islamic Economy is Free of Inflation

In economics, inflation is defined as a rise in the general level of prices of goods and services.

Keynesians believe that inflation is a pricing phenomenon. They propose that inflation is the

result of pressures in the economy; an increase in aggregate demand, a drop in aggregate supply,

or a rise in labor cost. From the viewpoint of the Monetarists, inflation is regarded as erosion in

the purchasing power of money. They assert that inflation has always been a monetary

phenomenon. When the price level rises, each unit of currency buys fewer products.

Inflation as a pricing phenomenon

A distinction between fair price and market price introduces a different approach for

understanding the phenomenon of inflation from the pricing aspect.

In natural economy which is free of human intervention, sellers set prices equal to the total of

returns to the real factors of production (Rent, Wages and Profit). The fair price of a product is

determined as a result of free interaction between the factors of demand and supply in

conjunction with the price set by the seller.

In present economies, market prices are much higher than fair prices. Market price of a product

represents the amount paid by a consumer to acquire the product. It includes additional charges

over the fair price. Such charges, which are not related to production, will be referred to as

“inflation charges”.

Inflation charges constitute a major part of the market price of any product. They are included,

directly or indirectly, in the total cost of products. A breakdown of market prices shows that

inflation charges include taxes, financing charges, and hidden inflation tax, in addition to the

excess profits generated by producers.

Regardless the types of taxes, business owners, who care about the net profit after tax, include all

taxes on products, on their income or on the income of labors, directly or indirectly, in prices.

After-sale taxes are added to market prices. Interests on credits provided to business owners are

considered an element of cost of products. Interest on credits provided to other than business

owners, speculative gains and illegal earnings represent hidden inflation tax that reduces the

value of the currency unit. Illegal earnings paid by business owners and excess profits of

business owners are included in prices.

The excess of market prices over fair prices results in an intentional increase in prices of all

products and the general level of price where prices are expressed in term of currency units. If

National Product at fair prices equals $1 billion, while National Product at market prices equals

$5 billion; the general level of price will increase from 1 to 5 times.

Inflation as a monetary phenomenon

National accounts translates an equilibrium situation which is based on the balance between

National Product, National Expenditure and National Income, where; National Product

represents the sum of value added over whole economy in form of final sales, National

Expenditure represents the total of purchases of final goods, and National Income refers to the

sum of all types of incomes received by all members of the society. Income forms the link

between output and expenditures and explains the equilibrium situation. The sale of output is

paid out as incomes used to buy the output. Members of the equation are expressed in term of

currency units.

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National Output = National Expenditure = National Income

In addition to the returns to the real factors of production received by business owners and

labors, National Income includes taxes received by a government, interests or financing charges

received by lenders, speculative gains received by speculators, and illegal earnings received by

corruptors. Taxes, interests, speculative gains, and illegal earnings represent inflation charges.

The excess profits generated by business owners as a return to inflation charges and as a result of

monopolistic advantages also constitute a part of inflation charges. Inflation charges are not

related to production.

The excess of National Income from all economic activities over National Income received as

returns to the real factors of production results in an intentional decrease in the value of the

currency unit. If National Income from all economic sources activities equals $5 billion while

National Income received as returns to the real factors of production equals $1 billion; the value

of the currency unit will decrease from 5 to 1 times.

Equality of National Product and National Income in National accounts makes National Output

is overvalued by the amount of inflation charges. As a result, the reduction in the value of the

currency unit reflects an equal increase in the general level of price.

Definition of inflation

Having both pricing and monetary aspects into consideration, it is obvious that, inflation charges

results in intentional inflation. From one side, inflation represents the excess of National Product

valued at market prices over National Product valued at fair prices. From the other side, inflation

represents the excess of quantity of money as equal to National Income from all economic

activities over quantity of money as equal to National Income from real factors of production.

Inflation can be defined as an intentional decline in the value of the monetary unit or as an intentional rise in the general level of price.

Effects of inflation

Inflation represents the main cause of concentration of wealth. Also, it causes economic

instability.

1- Concentration of wealth Inflation is the magic used by rich to intentionally concentrate wealth in few hands. Inflation

creates intentional inequality through making private gains on account of public losses.

Special advantages are legally given to a group of individuals or corporations so that they can

increase their share in national income.

Interests generated by lenders as return on public debts are charged to public in form of tax which is public loss. Interests earned by lenders on debts to finance non-productive

activities are charged to public in form of hidden inflation tax.

Taxes paid by sellers to government, interests generated by lenders on credits provided to sellers, and excess returns to suppliers as a result of monopoly or intentional inflation are

charged to consumers in form of price increase.

Profits generated by speculators and those who act corruptly, are charged to public in form of hidden inflation tax. The excess of money supply used to pay the profits is

translated into reduction in the value of the currency unit.

Money creation process and refinancing products make the banking sector the wealthiest sector. These advantages are not available to other economic sectors.

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Intentional concentration of wealth has destructive social impacts on societies. Poor becomes

poorer. Living standard of middle class declines. Those living on fixed incomes suffer a

severe decline in their living standard. Living standard of rich rises. Rich generate profits

from appreciation of their assets, and business owners stand to gain from increased profits.

Alcoholism, families breaking up and increased criminal rate, public demonstrations,

political instability and revolutions represent costs of concentration of wealth. The state of

harmony and cooperation between peoples is replaced by a state of hate, hostility, and envy.

A tiny group of oligopolists dominates both economy and policy through direct involvement

in the ruling system or as a return for their spending on the election campaigns. For

generating more profits, they create a constant pressure for the most profitable large scale

investments rather than ecological investments related to prosperity and encourage the shift

of investments toward financial and speculative activities.

2- Economic instability

As an intentional rise in the general level of prices, inflation is responsible for market fluctuations that do not secure steady exchange of goods and services. Prices soar,

workers have less money to consume, demand falls because each monetary unit buys

fewer goods and services, exports become more expensive to sell, imports increase

because they are relatively cheaper than locally produced products, saving is discouraged

because consumers have to spend more, pressure for increased wages mounts to keep up

with consumer prices. Unemployment rate rises as a result of a decline in output growth

rate.

As an excessive expansion of credit, inflation is responsible for the progressive shift from production to financial and speculative activities. Financial and speculative activities

inflict greatest harm to the society.

As an intentional decline in the value of the monetary unit, inflation is responsible for the deterioration of the confidence in the currency. Inflation rate may rise at very high levels

destroying the confidence in the currency and leading to currency devaluation.

Control of inflation

Control of inflation is one of the most intractable economic problems facing a government. In its

effort to control inflation, monetary authorities apply monetary controls over interest rate, bank

discount rate, money supply, and currency exchange. Also governments employ fiscal controls

over prices, wages, government expenditure, and taxes. In general, the common impact of all

these remedies is that they control, directly or indirectly, the expansion of credit. Credit squeezes

may discourage investment in financial economy, but it causes economic slump, reduces national

product, and raises unemployment rate. Expansion of credit may stimulate investment in

financial economy, but it has bad impact on productive economy because it raises the inflation

rate and develops destructive inflation‟s consequences. A monetary authority tries to balance

between positive and negative results of the controlling process, but in all cases they cannot

prevent economic instability. Markets may not respond in the way expected by the authority. A

failed monetary policy can have significant detrimental effects on the society. These include

hyperinflation, stagflation, recession, high unemployment, inability to export goods, and even

total monetary collapse.

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Do we have to live with inflation?

In spite of its horrible impacts on societies, most economists recommend living with moderate

inflation. They claim that:

While the primary aim of macroeconomic policy is stated to be realization of full employment and optimal growth without inflation, this objective is not yet a feasible target.

The real choice is different combinations of growth and employment from one side and

inflation on the other side.

Moderate inflation helps realization of full employment and optimal growth because it provides an incentive for investment as long as prices are rising and are expected to continue

rising. By moving to full employment, a country could have more output and more income

for everyone.

There is no way to cure inflation without moving the economy into recession. It may be better to live with moderate inflation than to pay the costs of its cure.

No doubt that inflation provides an incentive for investment because of the increased profits

generated by investors, and that the direct result is an increase in supply and a decline in

unemployment rate, but this is just a temporary reaction. It will not last too long as supply will be

reduced to balance with the fall in demand which is the result of inflation. Inflation makes labors

in worst shape. Normally, the rate of increase in wages is less than the rate of the rise in cost of

living.

The simple relationship between growth and employment is quite clear. Optimal growth refers to

the level of output when economy is operating at capacity. Also, full employment refers to the

level of employment when economy is operating at capacity. The shortage of actual output in

comparison to the possible output reflects unused resources. Also, unemployment represents

unused resources.

The conflicted relationship between these two variables (growth and employment) and inflation

is a false statement made to present inflation as unavoidable phenomenon;

Production has relation with productive money. An increase in productive money is translated into growth of output and decline in unemployment rate by creating employment

opportunities in productive sector.

Inflation represents inflation money. An increase in inflation money is translated into growth of financial and speculative activities and decline in unemployment rate by creating

employment opportunities in non-productive sector. If equal amount of inflation money is

used in productive activities, equal or more employment opportunities shall be created.

Moderate steady inflation is a hypothetical target. Present economic policies failed to introduce an example of a society living permanent moderate inflation. Economic instability

is a common feature of present economies.

Should the inflationary charges (taxes, interests, speculative profits, and illegal earnings) are

discarded; both targets of higher rate of growth and lower unemployment rate can be realized

without inflation. It is possible but not so simple, because present economic systems have

assigned important roles for inflation charges; taxes normally represent a main source of revenue

to finance public spending, part of lending transactions are directed to finance development and

productive activities, financial and speculative activities provide opportunities to invest the

excess of money supply. Viewing inflation as an unavoidable phenomenon is one of the main

pitfalls in economic thinking.

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In Islam, natural price system is the Islamic conceptual framework of pricing. People are not

allowed to disrupt the natural price system which is created by the Only Creator. Intentional

inflation is a man-made phenomenon. It is prohibited because of its effect on prices.

―And do not do mischief on the earth after it has been set in order …‖ (Al-A‘araf, 7:56)

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Features of Islamic Economy 5- Natural price system is the Islamic conceptual framework of pricing

A market provides appropriate conditions for sellers and buyers to conduct exchange

transactions. In general the word “Selling or Sale” refers to the last stage of any productive

activity in which a seller, or an investor, hands over one or more of his property rights through

cash sale, credit sale, renting, leasing, rental sale, giving right to use in return for toll or service

fee, or any other legal way of alienation.

Selling

Legality of sale

―except it be a trade‖ (An-Nisa 4:29).

Selling process derives its legality from the legality of trade. Trade involves sale of products.

Legality of credit sale ―That is because they say: ―Selling is only like Riba,‖ whereas Allah has permitted selling

and forbidden Riba‖ (Al-Baqarah. 2:275)

The similarity between selling on credit and riba is that usury generates profit in return for time

and credit sale generates excess profit for delay in payment. Cash sale does not generate profit

for time.

Regulations of Sale

In conformity with regulations of productive activities (Principles of mutual consent, justice, and

avoidance of forbidden acts), some methods of sales are prohibited, such as;

Gharar sale ―On the authority of Abu-Hurayra (mAbwh) that: The prophet (Pbuh) prohibited the pebble

sale and the Gharar sale‖ (Muslim, Abu Dawud).

The word “Gharar” refers to the sale of products whose existence or characteristics are not

certain such as the sale of fish in the sea, unborn calf in its mother‟s womb, birds in the sky,

runaway animal, and un-ripened fruits on the tree.

Sale of what is not in possession ―Hakim-bin-Hezam reported: The Messenger of Allah prohibited me to sell what is not in my

possession.‖ (Tirmizi).

Forced sale ―Ali reported that the Messenger of Allah forbade the (forced) purchase from a needy person,

and purchase from the inconsiderate and purchase of fruit before it reaches maturity.‖ (Abu

Daud).

Deceiving Sale ―Waselah-bin-Asqa‘a reported: I heard the Messenger of Allah say: Whoso sells a defective

thing without disclosing it continues to be in the wrath of Allah or angels continue to curse

him.‖ (Ibn Majah).

Pricing

Natural price system is one of many natural systems created by Allah to organize movement of

creatures and to facilitate life on earth. It refers to the ability of the market to correct itself with

no external intervention benefiting from environment of free competition. Sellers set prices equal

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to the total of returns to the real factors of production (Rent, Wages and Profit). Natural price

system controls reasonability and fairness of prices set by sellers. Fair price of a product is

determined as a result of free interaction between the factors of demand and supply in

conjunction with the price set by the seller.

.

Adam Smith, in his book “The Wealth of Nation” (1776) refers to the natural price system as

“invisible hand”. He explains the mechanism of demand and supply to control reasonability of

prices set by sellers in environment of free competition. Smith says, "If a product shortage were

to occur, that product's price in the market would rise, creating incentive for its production and a

reduction in its consumption, eventually curing the shortage. The increased competition among

manufacturers and increased supply would also lower the price of the product to its production

cost plus a small profit, the "natural price." Smith believed that while human motives are

ultimately out of self interest, the net effect in the free market would tend to benefit society as a

whole.

A natural rise in cost of material, wages paid to labors, supplier‟s profit margin, or volume of

demand relatively to the volume of supply results in natural price increase. Natural rise in price

of a product reflects an increase in its real value. If the price of steel goes up because of a

shortage of supply, the rise of the price of buildings will reflect an increase in the real wealth of

its owners. Natural increase in prices of some products has negligible impact on the general level

of fair prices because of the interaction of market forces, the huge variety of products and the

continuous discoveries and technological developments;

Higher price encourages investors to increase quantity of supply. Lower price encourages consumers to increase quantity of demand. Natural free interaction of demand and supply

returns the market price to the equilibrium point where quantity of demand balances with

quantity of supply and fair price is determined. Increased competition among suppliers

lowers their profit rates and prevents greed.

The huge variety of products makes the fall in prices of some products offsets the increase in prices of some other products.

Continuous discoveries and technological developments help price reduction because they provide competitive products, cheaper substitutes, and economical methods of production.

For example; prices of electronic equipments are continuously declining.

In present economic systems, applicable price system is full of human interventions. Market

prices do not reflect fair prices. Government may disrupt the natural price system through fixing

prices or setting minimum wages. Inflation charges (Taxes, financing charges, speculative gains,

illegal earnings, and excess profits generated by sellers) constitute a major part of the market

price of any product.

In Islam, natural price system is the conceptual framework of pricing. Humanity disruption into

the natural price system is prohibited.

―And do not do mischief on the earth after it has been set in order …‖ (Al-A‘araf, 7:56) The verse prohibits all types of humanity interventions that may result in a fall or a rise in prices

or may affect real demand or supply. Intervention into the natural price system takes two forms.

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A government may fix prices or set a minimum wage. Inflationary economic systems allow

intentional increase in prices.

Prohibition of fixing prices Prices may not be fixed. Greed may be avoided by encouragement of clean competition

through investment banks or establishments owned by the government.

―Anas reported that the current price once became dear at the time of the Messenger of

Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet replied: Verily

Allah is One who controls price, curtails, gives amply and provides sustenance; and

certainly I hope that I should meet my Lord while there will be none amongst you who will

hold me responsible either for blood or for property.‖(Tirmizi, Abu Daud, Ibn Majah).

Prohibition of inflation charges Inflation charges cause intentional inflation that represents humanity disruption into the

natural price system. Natural price system is free of intentional inflation. Islam prohibits

taxes, financing charges, speculative gains, illegal earnings and excess profits generated by

sellers.

Prohibition of taxes

Present direct and indirect taxes ―And eat up not one another‘s property unjustly nor give it to the rulers that you may

knowingly eat up a part of the property of others sinfully ….‖ (Al-Baqarah. 2:188).

Taxes are paid twice. Firstly, taxes reduce income of taxpayers in return for government

services and for settlement of public debts. Secondly, taxes are charged to consumers in

form of an increase in prices.

Custom duties, production tax, purchase tax, and any other before-sale tax imposed on

products are added to the cost of products. Suppliers care about their net after-tax profit

by considering their income tax when calculating prices. Sales tax represents direct

increase in market prices. Income tax paid by labors increase cost of labor and thus

increase the total cost of products. Social security tax which is paid by suppliers or labors

increases cost of products.

―Even if a wrongful Tax-collector were to repent, he would have been forgiven. (Sahih

Muslim, Book #017, Hadith #4206)

Hidden inflation tax ―and reduce not the things that are due to the people…‖ (Hud. 11:85).

Inflation reduces the value of the currency unit. Suppliers have to pay higher prices for

material and labor. Consumers have to pay higher prices for products.

Prohibition of interests

―whereas Allah has permitted selling and forbidden Riba‖ (Al-Baqarah. 2:275).

Interest is the return to lending money. Sellers benefit from borrowing, but they unjustly

charge financing cost to consumers who do not borrow money. ―And eat up not one

another‘s property unjustly‖ (Al-Baqarah. 2:188).

Prohibition of speculative gains

―And do not do mischief on the earth after it has been set in order‖ (Al-A‟araf, 7:56).

Speculative activities involve intervention into the natural price system. The price of an asset

in financial markets does not reflect free interaction of real demand and supply on the asset

itself. Speculation on commodities and shares in international markets is based on

contracted demand and supply rather than real demand and supply In most cases; prices

reflect interests of large capitalists who dominate the speculative markets.

http://www.searchtruth.com/book_display.php?book=017&translator=2&start=0&number=4206http://www.searchtruth.com/book_display.php?book=017&translator=2&start=0&number=4206#4206

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―They ask you concerning alcoholic drink and maisir. Say: In them is great sin, and some

benefits for men, but the sin of them is greater than their benefit‖ (Al-Baqarah 2: 219).

This verse refers to the conflict between the interest of speculators and the interest of the

society with regard to speculative activities.

Prohibition of illegal earnings

―and do not commit mischief in the land causing corruption.‖ (Hud. 11:85).

The verse prohibits all forms of financial corruption such as:

Deceiving: ―And give full measure when you measure, and weigh with balance that is straight‖ (Al-Isra‘, 17:35).

Bribery: ―Abdullah-b-Amr reported that the Messenger of Allah cursed the bribe-taker and the bride-giver.‖(Abu Daud, Ibn Majah).

Theft: ―And, the male thief and the female thief, cut off their hands‖ (Al- Ma‘idah 5:38). Embezzlement: ―Verily, Allah commands that you should render back the trusts to those,

to whom they are due‖ (An-Nisa, 4: 58).

Greed “And O my people! Give full measure and weight in justice” (Hud. 11:85).

Prohibition of excess profits generated by sellers

As a result of Monopoly Ma‘mar reported that the Messenger said: Whoever monopolizes is a sinner. (Muslim).

As a result of inflation charges Excess profits generated by sellers as a result of inflation charges will be abolished by

abolishment of inflation charges.

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Features of Islamic Economy 6- Musharaka is the Islamic conceptual framework of financing

In present economic systems, interest-based lending is the most common financing product.

Interest-based lending refers to the transactions that involve exchange of money for debts for

generating profits on money. Musharaka refers to a companionship based on sharing profit or

loss. It introduces contribution to investments with or through others. Stocks introduce a recent

type of Musharaka in shareholding corporations provided that buying stocks does not represent

speculative activity. Mudaraba refers to a Musharaka in which only one party (the investor) pays

the full capital of the company, while the other partner (Mudareb) provides his efforts into the

company. While lending gives a right to the lender to claim his debt, Musharaka creates an

ownership relation.

Legality of Musharaka

―And, verily, many partners oppress one another, except those who believe and do righteous

good deeds, and they are few‖ (Sad 38:24)

Regulations of Musharaka

Terms of a Musharaka must be based on the regulations of productive activities; principles of mutual consent, justice, and avoidance of prohibited acts.

―And whose obey Allah and the Messenger, then they will be in the company of those on

whom Allah has bestowed His Grace …‖ (An-Nisa 4:69).

Subject of Musharaka must be a type of productive activities. ―except it be a trade‖ (An-Nisa 4:29).

Return to Musharaka must be in form of profit not riba ―whereas Allah has permitted selling and forbidden Riba‖ (Al-Baqarah. 2:275).

While the Holy Qur‟an governs all macroeconomic issues, the Sayings of the Prophet (Pbuh) and

Islamic Fiqh controls commercial transactions under what is known as Kitab Al-Buyu.

In order to be in conformity with the principles of mutual consent, justice and avoidance of

prohibited acts, old Fiqh introduced rules of fixed capital company between individuals or

entities, and controls over the issue of capital mix. According to old Fiqh, main rules of

Musharaka may be summarized as follows:

Investment must be made in a clearly specified business in order that profit or loss can be accurately computed. An independent company is allocated for each business.

Capital must be invested in the specified business. Investment is the reason for generating profit or bearing loss. A partner may not use capital of another partner in other than the

specified business in order to avoid eating up property unjustly.

Profit must be recognized on cash base or liquidation, and distributed according to predetermined rates.

Loss must be recognized on cash base, and distributed as per capital shares.

A company may not lend or borrow unless within limits pre-specified by partners.

Musharaka (or Mudaraba) in practice by present Islamic banks

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In order to solve the problem of the differential in dates of deposits, investments, and accounting

in banking business, contemporary Islamic Fiqh introduced Common Mudaraba as the base of

the contractual relationship between a bank and owners of investment deposits. According to

Common Mudaraba, owners of investment deposits (Capital owners) share reconciled profit or

loss of investments recognized by a bank (Mudareb) within its financial year. Common

Mudaraba is in conflict with Shari‟a rules and involves eating up other‟s property unjustly;

Rules of capital mix are not respected. A deposit is not invested in specified project.

Different partners invest in the Mudaraba and different partners withdraw their capital shares.

Musharaka‟capital may not be mixed with another Musharaka‟s capital. Musharaka‟s profit may not be netted to reconcile another Musharaka‟s loss.

A depositor will not receive (or bear) exact amount of profit (or loss) that he justly deserve as a return to his invested money. He will receive profit or bear loss recognized on current

financial year but related to investments made by other investors. He will not receive profit

or bear loss on investments made by him but will be recognized on next financial year or

years.

Profit or loss is recognized on accrual base according to accounting principles rather than on cash base according to Shari‟a principles.

For distribution of profit amongst depositors, profit from investments is reduced by amounts determined and retained by a bank as provisions and reserves.

Contemporary Islamic Fiqh legalizes Musharaka (and Mudaraba) with customers without taking

into consideration the special characters of banking business. A bank opens an account of

Musharaka. A customer deposits his share in capital into the Musharaka‟s account. The bank

credited Musharaka‟s account by its share in capital by internal entry. The internal entry (By

investments account … To Musharaka‟s account) is regarded by present scholars as a real

payment of the bank capital share while the cash balance in the bank is not affected. After the

customer‟s capital is invested, the bank will gradually invest in the Musharaka. Musharaka of

customers with present banks is in conflict with the Musharaka‟s contract which is based on

predetermined fixed capital, and is not in conformity with Shari‟a rules, and involves eating up

other‟s property unjustly;

While capital share of the customer is paid at once in full in the Musharaka, capital share of the bank is paid gradually after the customer‟s capital is being invested.

Full or part of the capital share of the bank which is not yet invested in Musharaka or Mudaraba is invested by the bank in other businesses.

Distribution of profit (or loss) based on contractual capital shares does not reflect an accurate return (or loss) to invested capital.

Other products introduced by present Islamic banks as financing products

While Murabaha, Salam, Istisna‟a, lease, and rent represent some types of sales (mostly credit

sales), they are introduced by what so called Islamic banks as financing products.

Murabaha in old Islamic Fiqh refers to a transaction of selling a product based on predetermined

profit over the cost of the product. Present banking Murabaha, involves two transactions. First,

on request of a customer a bank buys a specific product in cash. Second, the bank sells the

product to the customer on credit. Profit of the bank equals to the difference between the price

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paid by the bank to the seller and the price charged by the bank to the customer. Not all present

scholars are in agreement about legality of banking Murabaha.

―Nu'man b. Bashir (Allah be pleased with him) reported: I heard Allah's Messenger (may peace

be upon him) as having said this (and Nu'man) pointed towards his ears with his fingers): What

is lawful is evident and what is unlawful is evident, and in between them are the things doubtful

which many people do not know. So he who guards against doubtful things keeps his religion

and honor blameless, and he who indulges in doubtful things indulges in fact in unlawful things,

just as a shepherd who pastures his animals round a preserve will soon pasture them in it.

Beware, every king has a preserve, and the things God his declared unlawful are His preserves.

Beware, in the body there is a piece of flesh; if it is sound, the whole body is sound and if it is

corrupt the whole body is corrupt, and hearken it is the heart.‖

(Sahih Muslim)

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Features of Islamic Economy 7- Money is just a valueless medium of exchange

Money was a product made of precious metal, or fully backed, directly or indirectly, by precious

metal, but it is no longer a commodity. Present money includes paper money or coins made of

material of negligible cost and issued by the monetary authority, substitute money such as

checks, or credit money created by banks.

Money as a commodity

In spite of the change in its nature, present money is still regarded as a commodity. Viewing

money as a commodity subject to demand and supply reflects pitfalls in economic thinking, and

open the door to establish conclusions based on fallacies;

1- Money plays inflationary role to help concentration of wealth in few hands.

The function of present money is not limited to its role as a medium of exchange of products.

Money is used to play an inflationary role. It is used to pay inflation charges (taxes, interests,

speculative gains, illegal earnings, and excess profit generated by sellers).

2- Money acts as a capital to restrict economic growth.

Economists in charge monitor changes in money supply because of its possible effects on

price level. This leads to a lot of controversy about the concept of money and its value and

underlies reliance on fiscal and monetary policies as a means of controlling inflation. Fiscal

and monetary policy controls quantity of money. Unused money, which includes saved

money as liquidity, hoarded money, and money invested abroad, constitutes a part of quantity

of money because it has value. Applying controls over quantity of money makes money acts

as a capital to restrict economic growth by making utilization of available resources depends

upon availability of money.

3- Currency backing, or reserve, represents hoarding resources that can be utilized in production.

Since money is viewed as a valued commodity, the issuance process represents a transaction

of buying money. Issuer of money sets a selling price. Money is sold at its face value for a

price to be paid at issuance or at later date. For spot buy, public resources are used to buy

currency backing in form of precious metal or foreign currency reserve. For credit buy, a

public debt is initiated.

In his book “Modern Economics – Principles and Policy (1972), Kelvin Lancaster of

Colombia University says “From one point of view, currency backing is inherently ridiculous

and based on public lack of comprehension about the nature of money, but it has one aspect

that was of great historical importance: If the currency must be backed, wholly or partially, by

something that is inherently scare, there is a built-in-guarantee that the currency itself will

remain scarce.”. In practice, getting rid of the currency backing is justifiable;

Most of money in circulation worldwide is credit and substitute money, not issued money. Issued money in USA as at January, 2007 was 750.5 billion dollars, while commercial

bank money (in M2) was 6.33 trillion dollars. Credit money is not backed.

Since the President Richard Nixon declared the end of direct convertibility of the dollar to gold, the biggest economy in the world becomes not liable to retain currency backing.

Currency backing has no effect on prices of products. If the price of oil in the international market is stated to be $70 per barrel, this price will apply for exports of oil from Saudi

Arabia which has stable currency as well as from Iraq which has deteriorated currency.

http://en.wikipedia.org/wiki/Richard_Nixon

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Backing gives a changeable value to the currency unit. Money backed by gold, silver, or other foreign currencies derives its value from the material by which it is backed. Giving a

changeable value to the currency unit does not comply with the function of money as a

measure of values.

4- Issuance of money backed by public debts unjustly assumes liability on public.

Taxes levied to settle the public debt are translated into intentional inflation. Issuance of fiat

money based on initiating public debt contradicts the definition of a debt as a result of

borrowing or credit sale. Fiat money is regarded as a legal tender.

On issuance, public receive nothing. Neither they acquire money on credit nor do they borrow money. Legally and logically, it is unfair to make public liable for issuance of

things not yet delivered to them.

On delivery, in form of public expenditures or loans provided by the government to others, fiat money is transformed into real assets or debts.

5- Viewing money as a valued commodity questions its reliability as a measure of value.

As a valued commodity, money becomes subject to demand and supply. Demand expresses

the desire to buy money as a property. Supply refers to the quantity of money offered for sale.

The value of currency unit fluctuates. Money supply is affected by the fiscal and monetary

policies applied by money suppliers. Demand on money is affected by the flow of

investments. The exchange process represents a process of selling money;

Money is sold for free. Payment of inflation charges (Taxes, Interests, Speculative profits, and Illegal profits) does not involve an exchange process, as payers (the public) receive

nothing in return of selling money. Those who receive income from non-productive

activities steal money from public.

Money is sold for profit. Lending money for profit represents a process of sale of money on credit in return for interest.

Money is sold for a product (goods, assets, or service). Selling for a product involves an evaluation process in which money acts as a measure of value.

Because the currency unit, as a commodity, is given fluctuated values during circulation,

prices of products are given in terms of currency units valued at the date of selling. As a

result of the exchange process, money does not express the real price of the product

subject to evaluation. Its value reflects a mix of impacts of the market forces on both the

product and the money itself. For an object to be fairly measured, a measure must be

subject to the criterions of the measuring units. A measure must be stable so that objects

can be valued and compared in constant common terms. A certain length of a road

measured as 10 kilometers in a certain moment, may not be measured as 11 kilometers in

other moment without the road becomes longer. Similarly, a ton of cement valued at $40

in a certain moment, may not be valued at $45 in other moment without the market price,

which is freely determined by demand and supply, becomes higher.

6- Viewing money as a valued commodity questions its honesty as a store of value.

After being used in exchange, value of money changes as a result of the interaction of demand

and supply. Money cannot protect the rights of its holder to obtain products of future amount

equals the amount of the products he might acquire when he received the money.

7- Money as a commodity is traded in Money markets on spot and for future delivery.

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Money in light of the verses of the holy Qur’an

Money is just a social invention. Economists define money as anything that is widely used as

means of exchange and agree that money is not in itself wealth and that it has no intrinsic value.

The verses of the Holy Qur‟an set rules to govern money and regulate its function.

Money as a social invention

As a social invention, money may not disrupt the natural pricing system. Products are priced in

term of money. Prices of products should not be affected by the use of money as a medium of

exchange of products.

Prohibition of humanity disruption into the natural price system ―And do not do mischief on the earth after it has been set in order‖ (Al-A‘araf, 7:56)

Currency backing

Prohibition of hoarding precious metals or other commodities as currency backing ―And those who hoard up gold and silver and spend them not in the way of Allah, announce

unto them a painful torment‖ (Al-Taubah. 9:34).

Prohibition of hoarding foreign money as currency backing ―Woe to every slanderer and backbiter. Who has gathered wealth and counted it. He think

that his wealth will make him last forever. Nay! Verily, he will be thrown into the crushing

Fire.‖ (Al-Humazah.104: 1-4).

Prohibition of initiating public debt as currency backing ―And eat up not one another‘s property unjustly‖ (Al-Baqarah. 2:188).

Money as a measure of value

Prohibition of devaluation of money ―and reduce not the things that are due to the people‖ (Hud, 11:85)

The word “Things” in this verse refers to properties and any other dues. Money is something

due to people. This principle requires that value of money should not be intentionally

devaluated through excessive expansion of money.

Principle of fair valuation of products ―And O my people! Give full measure and weight in justice….‖ (Hud. 11:85).

Money acts as a measure of value of products. This principle requires that value of products

should be fairly measured and money should express the exact value of the underlining

product. Simply, money has to act as constant common denominator (standard).

Money as a store of value

As a store of value money acts as a trustee. The Holy Qur‟an introduces the rule of trust.

Principle of trust ―Verily, Allah commands that you should render back the trusts to those, to whom they are

due‖ (An-Nisa, 4: 58).

This verse requires stability of the value of the currency unit so that the owner can obtain

products of future amount equals the amount of the products he might acquire when he received

the money. As a result of equality of future value and present value, the inflationary role of

money will be avoided.

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Money as a legal tender

Unlike like a commercial paper which represents a legal right that can be claimed by the creditor

through following some legal procedures, money, as legal tender, represents an obligation

guaranteed by the government that should be fulfilled upon request by the owner with no need to

follow legal procedures. As long as money is a legal tender the principle of guarantee will apply.

Principle of guarantee Hadith ―Al kharaj bel Daman‖ (Abu Daud, Ibn Majah)

The Arabic word “Al kharaj” refers to any type of revenue as a result of investment and the

Arabic word “Daman” refers to the guarantee. The meaning is that the profit of guaranteed

money is for the guarantor.

Foreign currency exchange

Legality of spot exchange 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." (Sahih Al-Bukhari).

Prohibition of forward exchange ―The prophet (Pbuh) prohibited the sale of silver for gold on credit.‖(Muslim).

Money as a valueless medium of exchange

When money is viewed as a valueless medium of exchange, the issuance process is regarded as a

process of issuing a valueless thing. At issuance, money will not be given a value. Money is of

zero value. The face value is just an indicator to the number of currency units expressed by the

monetary instrument. Neither currency backing will be required to be retained nor will a public

debt be required to be initiated. Money will not be subject to the market forces because it is not a

product. It will be retained with its zero value until being used in exchange transactions.

When money will be used in exchange, it will act within its scope of function as a medium to be

exchanged for products.

1. Money will not be used to pay inflation charges (Taxes, Interests, Speculative profits, and Illegal profits). Inflation charges are not products.

2. Money will not be used as a profit generator. Interest-free lending will reflect social cooperation and represent a transaction of money transfer.

3. Money will practice its function as a medium of exchange. Exchanging money for a product (goods, assets, or service) involves an evaluation process in which money acts as a measure

of value. The currency unit will act as a constant common denominator to measure values.

The currency unit will derive a value from the price of the product subject to evaluation. It is

a matter of truism to say that;

Value of currency unit at exchange = Quantity produced / Amount of production OR

Value of currency unit at exchange = 1 / Price of one unit of the product

Value of currency unit is expressed in term of number of units of product. If the price of one

kilo of rice equals 2 currency units, the currency unit will derive a value equals to 0.5 kilo of

rice.

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After being exchanged by a product, the valueless money will become a legal tender with certain

value which fairly expresses the market price of the product at the date of exchange. The legal

warranty is necessary to ensure public acceptability of money and confidence in money as a fair

measure and honest custodian of value.

As a constant measure of value and honest store of value, money which becomes legal tender

will be able to protect the rights of its holder to obtain products of amount (future value) equals

the amount of the products he might acquire when he received the money (present value). If 1

Kilo of rice was sold for $1, the seller will be able to buy, in the future, the same 1 kilo of rice

for $1, unless the free interaction between demand and supply will determine a different market

price of rice. National product is the real currency backing. National product evaluated by a

constant measure of value will be sufficient for the rights of money holders to be practically

exercised.

The excess of quantity of money over the quantity of money needed to pay returns to the real

factors of production will not bring up inflation or harmful impacts on a society. Value of

national product will not be affected by the excess in quantity of money. Unused money has zero

value. The inflationary role of money will be abolished. Reliance on fiscal and monetary policies

to control quantity of money will be avoided. Economists in charge shall consider the shortage of

quantity of money so that to avoid economic recession. Unlike inflation, cure of recession is so

simple. Quantity of money will be increased as needed for productive activities.

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Features of Islamic Economy 8- The right of living means is fully respected

Present economies are characterized by growth in the rate of poverty and expansion of the

income gap amongst people. A study by the World Institute for Development Economics

Research at United Nations University reports that the richest 1% of adults alone owned 40% of

global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world

total assets. The bottom half of the world adults owned 1% of global wealth.

Economic inequality has existed in a wide range of societies and historical periods; its nature,

cause and importance are open to broad debate. Marxists believe that economic equality is

necessary for political freedom. They favor distribution process based on an individual‟s needs.

Libertarians argue that it is natural to reward some vastly more than others because men are born

unequal. The Capabilities Approach looks at income inequality and poverty as form of

“capability deprivation”. When a person‟s capabilities are lowered, they are in some way

deprived of earning as much income as they would otherwise.

Policies used by governments to eliminate the income gap differ according to its economic

system. Capitalists adopt some welfare systems. Welfare systems include all forms of public

assistance, such as unemployment compensation, housing, food stamps, free services, subsidies

and cash aid in addition to social security and retirement systems. Present welfare systems

increase public expenditures and labor cost. In general present socioeconomic systems result in

inflation and failed to ensure financial security for the public. Socialism failed to realize its

objective of equality because labors lose their incentive for work and because strong dictatorship

of the proletariat class is established. In both capitalism and socialism, redistribution policies are

based on extensive growth in the function of government. This helps concentration of power in

addition to wealth in few hands. Socialism neglects pri

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