Final Report

ISLAMIC JURISPRUDENCE FINAL REPORT

THE ECONOMIC AND FINANCIAL SYSTEM OF ISLAM

Group members:

Muhammad Omer (16089)

Muhammad Tariq (13166)

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THE ECONOMIC AND FINANCIAL SYSTEM OF ISLAM

Course

Islamic Jurisprudence

Submitted to

Dr.M. Nawaz

Submitted by

Muhammad Omer

Muhammad Tariq

Date of submission

Sunday, May 08, 2011

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Acknowledgement

This project report could not be completed without the immense support of our lecturer Dr. M Nawaz, whose

countless efforts to teach us the basic fundamentals of Islamic jurisprudence and lead us towards the

understanding of Islamic economic and financial system.

My deepest thanks to Dr M. Nawaz for guiding us through out the semester and help us understand the

concept of islamic jurisprudence, without all these understanding that we learn in this course we could not be

able to complete this report

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HOLY PROPHET (SAW) Said:

Whoever follows a path in the pursuit of knowledge, Allaah will make a path

to Paradise easy for him." (Al-Bukhaari)

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The Economic and financial System of Islam

What is Islamic Economics?

Islam is a complete way of life. It is not only concerned with the spiritual upliftment of human beings, it is

equally concerned about their material and physical well-being. Islam guides its followers in financial and

economic matters, in social and political affairs, and also in moral and personal spheres of human life.

Islamic economics refers to the body of Islamic studies literature that "identifies and promotes an economic

order that conforms to Islamic scripture and traditions," and in the economic world an interest-free Islamic

banking system, grounded in Sharia's condemnation of interest (Riba).

Islam is an entire way of life, and Allah's Guidance extends into all areas of our lives. Islam has given

detailed regulations for our economic life, which is balanced and fair. Muslims are to recognize that wealth,

earnings, and material goods are the property of God, and that we are merely His trustees. The principles of

Islam aim at establishing a just society wherein everyone will behave responsibly and honestly.

Islamic economics aims at the study of human recovery achieved by organizing the resources of earth on

the basis of cooperation and participation.

Traditional approach

While many Muslims believe Islamic law is perfect by virtue of its being revealed by God, Islamic law on

economic issues was/is not "economics" in the sense of a systematic study of production, distribution, and

consumption of goods and services. An example of the traditionalist ulama approach to economic issues

is Imam Khomeini's work Tawzih al-masa'il where the term `economy` does not appear and where the

chapter on selling and buying (Kharid o forush) comes after the one on pilgrimage. As Olivier Roy puts it,

the work "presents economic questions as individual acts open to moral analysis: `To lend [without interest,

on a note from the lender] is among the good works that are particularly recommended in the verses of the

Quran and the in the Traditions.

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Islamic economic and financial system is the most secure system in the world. It provides us the security of

our money and other property plus give us halal profit as islam prohibited us for consuming iterest and

considered it as riba

Islamic Economic system is based on four principles

All wealth belongs to Almighty Allah

Man is the trustee of the wealth

Hoarding of wealth is prohibited

Wealth must be in circulation at all time

The Islamic economic system is based upon the belief that only Allah is the real and actual owner of

everything. But God has also implanted the concept of ownership in our nature; and thus, we are allowed to

"own" the wealth of this world. The Qur'an says,"Whatever is in the heavens and the earth belongs to Allah."

(2:284) Allah is the owner of the whole universe. It is in this capacity that He has allowed us to own the

blessings of this world by saying,"He has created for you whatever that is in the earth."(2:29)

However, Islam also wants to prevent the excessive accumulation of wealth in the hands of a few people so

the society may not fall into two classes: one is overstuffing, while the other is starving. The chance of such a

situation is very real. A look at one of the richest nation in the world, the United States of America, and its

problem of the poor, hungry and homeless people will bear us out. The Qur'an justifies the concept of tax by

saying,"...so that (the wealth) may not become a monopoly of the rich among you." (59:7)

For any activity and for all purpose, Islamic Economic demands three main principles to be followed

by an individual in his day-to-day affairs and problems.

IJMA (Gathering),

QYAS (Discussion)

AMAL (Act).

Islam specifically considers distribution as economic problem,It differ to application of capitalists &

communists system for production.Islam differentiates between basic needs and luxuries,It not accept the

concept of effective scarcity of resources. Holy Quran identify resources in sufficient, unlimited and number

of qualities to fulfill basic needs like food, clothing and shelter for over fifty billion human beings at all time.

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Conventional economics misguide this reality with starvation, poverty, & economic backwardness. It resulted

from misdistribution, originated by man-made laws and systems.

The financial matters in the human life play a vital role

It identifies principles of finance including earnings, income, and distribution of wealth & utilization

of these same.

Matters pertaining to money must be fare and transparent and useful for developing socio-economic

life of the community.

Islamic Economic eliminate monopoly of a group or individual who

Keep a control on world monetary polices.

Who gets most out of these resources?

Blocks wealth to cross their jurisdictions

Remain in between privileged society.

This is classified as Capitalist form of Economy that protects the class of influence and

privileged.

It does not impose any limits on amount of wealth that an individual can acquire.

It guides maintaining of wealth in proper form of distribution & incentive on work and efforts.

It show opposition & defend against misuse of exploitation in getting hold of wealth through unfair

means.

It clearly denies "free" market of Capitalism, which has led to the situation of survival of the large

part of the society.

In Islamic Economics public revenue from natural resources used to secure needs of community and

not to fill pockets of casino owners.

Basic Components of Islamic Economic

The Islamic economy is composed of three basic components

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The principle of adaptable ownership

The principle of economic freedom within a defined limit

The principle of social justice.

Islamic law permits three types of ownership,

The individual ownership.

The state ownership.

The public ownership.

Principle of Economic Freedom within a Defined Limit

Islamic law is the source that that prohibits all such social and economic activities that differ to the

teaching of Islam and the principles and values that are approved by Islam. Such social and

economical activities fall under the categories of Riba, like holdings, monopoly, gambling and

speculation

It clearly defines principal on which ruler of an estate sworn in for the supervision of general

activities and intervenes in anti Islamic economic activities.

The state must protect and safeguard the public interest through the control on individual freedom in

the illegal and non-permitted actions they involve due to which the economic activity of the

community and society suffer.

Men have no right to possess unlimited wealth and desire to obtain wealth by any means and way he

may choose of his like.

Right is given to every member of the society by appointing each one is a guardian of the public trust

and the ownership is limited for the public welfare and in the betterment of mankind.

Taxation in Islam

Taxes and tax systems are among the most potent policy tools at any policy makers’ disposal. In many

situations, tax policies can foster or hinder the plan in its entirety. Under Islamic jurisprudence, specific

taxes and tax systems are prescribed. Accordingly, disregarding, degrading, or contradicting these

prescriptions could prove catastrophic to the developmental policies and policy-making institutions in

Muslim societies. Thus, familiarity with and understanding of the Islamic taxes, their underlying philosophy,

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their impacts, and the overall tax system are imperative for both decision makers in the Muslim world, as

well as all outsiders who deal with these communities. To enhance the possibility of success, prior to

devising or implementing any plan or policy, many questions must be answered. For instance, what are the

Islamic taxes? What philosophy they subscribe to? What aims and policies do they pursue? What outcome

do they seek? What are their impacts? What are their institutional requirements? Can they be integrated into

modern tax policy and systems? Are they subject to changes and revisions? And so forth.

The current study is an attempt to address some of these and similar questions. The task will be carried out in

two installments. Part one, the present paper, is a descriptive explanation of Islamic taxes. Accordingly, it

lays the foundations and presents the origin, the structure, and the basis of Islamic taxes. The second

installment on this work will discuss the methodology and philosophy of Islamic taxation and will engage in

their critical analysis and assessment.

Muslims are not to deal in interest. 

"Those who devour usury will not stand....Allah has permitted trade and forbidden usury.... Allah will

deprive usury of all blessing, but will give increase for deeds of charity..." (Qur'an 2:275-6). "O you who

believe! Devour not usury, doubled and multiplied. But fear ALLAH ALMIGHTY that you may really

prosper" (Qur'an 3:130) this prohibition is for all interest-based transactions, whether giving or receiving,

whether dealing with Muslims or non-Muslims. It is reported that the Prophet Muhammad (peace be upon

him) cursed those who pay interest, those who receive it, those who write a contract based on it, and those

who witness such a contract.

It is forbidden to gain property or wealth by fraud, deceit, theft, or other falsehoods. 

"...Give just measure and weight, and do not withhold from people the things that are their due. And do not

do mischief on the earth after it has been set in order. That will be best for you, if you have faith" (Qur'an

7:85).

It is particularly hateful for a guardian to take from an orphan's property.

 "To orphans restore their property (when they reach their age). Do not substitute your worthless things for

their good ones, and do not devour their property by mixing it up with your own. For this is indeed a great

sin" (Qur'an 4:2).

Forbidden are earnings from gambling, lotteries, and the production, sale, and

distribution of alcohol. 

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"O you who believe! Intoxicants and gambling, sacrificing to stones, and divination by arrows are an

abomination of Satan's handiwork. Eschew such abomination, that you may prosper" (Qur'an 5:90).

It is unlawful to hoard food and other basic necessities. Everyone should take what they need and no

more. "And let those who covetously withhold of the gifts which Allah has given them of His Grace, think

that it is good for them. No, it will be the worse for them. Soon it will tied to their necks like a twisted collar,

on the Day of Judgment. To Allah belongs the heritage of the heavens and the earth, and Allah is well-

acquainted with all that you do" (Qur'an 3:180).

A Muslim should be responsible in spending money. 

Extravagance and waste are strongly discouraged. "[The Servants of Allah are] those who, when they spend,

are not extravagant and not stingy, but hold a just balance between those extremes" (Qur'an 25:67). "O

Children of Adam! Wear your beautiful apparel at every time and place of prayer. Eat and drink, but waste

not by excess, for Allah loves not the wasters" (Qur'an 7:31).

Muslims must pay Zakat (alms).

 "And they have been commanded no more than this: to worship ALLAH ALMIGHTY, offering Him sincere

devotion, being true in faith. To establish regular prayer, and to give zakat. And that is the religion right and

straight" (Qur'an 98:5). Every Muslim who owns wealth, more than a certain amount to meet his or her

needs, must pay a fixed rate of Zakat to those in need. Zakat is a means of narrowing the gap between the

rich and the poor, and to make sure that everyone's needs are met.

Muslims are encouraged to give constantly in charity. 

"Your riches and your children may be but a trial. Whereas ALLAH ALMIGHTY, with Him is the highest

reward. So fear Allah as much as you can, listen and obey, and spend in charity for the benefit of your own

souls. And those saved from the selfishness of their own souls, they are the ones that achieve prosperity"

(Qur'an 64:15-16). The Prophet Muhammad once said that "nobody's assets are reduced by charity."

What is Islamic finance?

Islamic finance was practiced predominantly in the Muslim world throughout the middle Ages, fostering

trade and business activities with the development of credit. In Spain and the Mediterranean and Baltic

states, Islamic merchants became indispensable middlemen for trading activities. In fact, many concepts,

techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.In

contrast, the term “Islamic financialsystem” is relatively new, appearing only in the mid-1980s. In fact, all

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the earlier references to commercial or mercantile activities conforming to Islamic principles weremade

under the umbrella of either “interestfree” or “Islamic” banking. However, describing the Islamic financial

system simply as “interest-free” does not provide a true picture of the system as a whole. Undoubtedly,

prohibiting the receipt and payment of interest is the nucleus of the system, but it is supported by other

principles of Islamic doctrine advocating risk sharing, individuals’ rights and duties, property rights, and the

sanctity of contracts. Similarly, the Islamic financial system is not limited to banking but covers capital

formation, capital markets, and all types of financial intermediation. Interpreting the system as “interest free”

tends to create confusion. The philosophical foundation of an Islamic financial system goes beyond the

interaction of factors of production and economic behavior. Whereas the conventional financial system

focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal

emphasis on the ethical, moral, social, and religious dimensions, to enhance equality and fairness for the

good of society as a whole. The system can be fully appreciated only in the context of Islam’s teachings on

the work ethic, wealth distribution, social and economic justice, and the role of the state.

Types of Islamic Financial Instruments

Demand for monetary instruments is influenced by the variation and level in the market rate what is meant as

the market rate of return. The demand for household monetary instruments is mainly for the purpose of

circulation of income. Banks need these instruments for:

1. transaction purposes;

2. precautionary purposes, in that some unexpected payments have to be made while some expected

inflows may not be forthcoming on their due date, and;

3. not only to avoid loss but also to obtain gains in the capital value of financial assets under the

expectation that the market rate of return may move in a certain direction.

What differentiates a traditional financial market from others markets is that no tangible good or service is

exchanged for any monetary consideration; only a "financial claim" changes hands in the form of a

promissory note or a title to any future flow of income adjusted for any capital appreciation. Not all Islamic

instruments are purely financial claims. Some of the instruments also represent ownership of the underlying

assets together with a claim to underlying cash flows. Basically there are the following four types of Islamic

financial instruments:

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A. Type "A" is a financial claim of monetary value with recourse to underlying durable assets and related

cash flows. This type has a predictable future income stream, is marketable and can be discounted

since with the changing of hands, the instrument passes title to the goods and not to the debt. It is

basically lease-based.

B. This instrument is partly backed by durable assets and its income is not predictable, but evaluated

through an asset valuation process at the end of an agreed and declared duration. The underlying

transactions can be a mix of ijara, modaraba, musharaka etc., contracts. This Type may be traded in

the secondary market at its fair market price acceptable to the parties involved but not discounted.

C. Type "C" is purely a monetary claim to an expected income stream forthcoming from underlying

commercial transactions. Income is evaluated through an asset-valuation process at the end of an

agreed and declared period. A transaction of this type may comprise morabaha, istasna etc., contracts

which are debt claims against third parties in respect to actual commercial transactions.    The Type

may be traded at its face value declared at the end of each accounting period but cannot be

discounted.

D. The Type "D" is purely a financial claim of monetary value but with recourse to certain precious

metals such as gold, silver, platinum, etc., or commodities quoted on exchanges. The instrument

entitles the holder to take delivery of the underlying asset but does not carry any attached revenue

stream except that its price is pegged to the price of the underlying precious metal or commodity

quoted at recognised international exchange rates. It can be traded but not discounted. 

Two Financial Systems for Monitory & Financial Markets

First system which base on RIBA means bad earning, commonly known as Interest (Price of Money and a

part of Riba). Second system emerged on factual and authentic principles of Islam on the guidance of Holy

Quran, explained in Hadiath (Prophet May Peace Be upon Him sayings) and practiced by Muhammad, May

Peace Be upon Him, last and most Honored and Blessed messenger of Almighty ALLAH.

Basic principles of Islamic financial system

Prohibition of Riba in Financial Practice

Any unjustifiable increase of capital whether in loans or sales is central belief of system.

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Any positive, fixed, predetermined rate tied to maturity and amount of principal (i.e., guaranteed regardless

of performance of the investment considered Riba

Risk Sharing

Because interest is prohibited, suppliers of funds become investors instead of creditors.

Money as "potential" capital

The provider of financial capital and the entrepreneur share business risks in return for shares of the profits.

Money is treated as "potential" capital

It becomes actual capital only when it joins hands with other resources to undertake a productive activity.

Islam recognizes the time value of money, but only when it acts as capital, not when it is "potential" capital

Prohibition of speculative behavior

An Islamic financial system discourages exhibition of wealth and prohibits transactions featuring extreme

uncertainties, gambling, and risks

Transparency of contract

Islam upholds contractual obligations and the disclosure of information as a sacred duty. This feature is

intended to reduce the risk of information and moral hazards.

Shariah-approved activities

Only those business activities that do not violate the rules of Shariah qualify for investment.

For example, any investment in businesses dealing with alcohol, gambling, and casinos would be prohibited

The concept of riba in Islam

Riba is an earning on lending of money by lender from Brower on condition that lender shall charge a fixed

amount of money in addition to the principal. Interest is prohibited in Islam and people are not allowed to

make money by leading their capital on interest. Capital to invest in productive manner that increases the

profits.

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Western economist Keynes defined

"Interest has nothing to do with influencing volume of savings. Practically it is rate of return on

investment that determines rate of saving”

Holy Quran and Riba

Holy Quran clearly inform that

It is clearly indicated that Riba must be eliminating from the financial transactions. Nothing is more horrific

as compare to Riba that Islam has prohibited. Nothing more dreadful than Riba, that remains in widespread

threatening to socio economic activities in both theory and practice.

This compulsory return, income, earning on a fixed term & fixed percentage, upon principal amount, is an

Interest.

Interest is the price of money whereas money is just an intermediary between exchanges of transaction.

1. Riba is as a combination of evil & sins, whereas Interest categorized as one of elements of Riba.

2. Riba is bad practice to earn & gain while Interest is price of Wealth, demanded for assistance and

need of money from the user by the lender”.

3. There are many categories of Riba; Interest is one of the categories among them.

Classifications of Riba

Some of the categories are mention and clearly defined in Islamic Economics. Islam strictly prohibits these as

well as society disregard them due to their dreadful effect on social, moral, cultural, economical, financial

and legal life styles of the society. :

Fundamental Facts on Riba

The bases of Islamic thoughts have a conflict directly with the Riba based system.

“No Islam exists in a place where there is Riba based system”

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Riba based system is a misery on humanity as faith, morals or imagination of life, but also in every

core of economic and practical life.

It is the most hateful system, which eradicates human satisfaction and frustrates its civilized and

neutral developments.

Islam has complete ethical system supported by realistic system as interlink.

Ethnics & reality cannot separate in Islam & cannot be practice alone.

Islam has clearly stated benefits of followings of ethics & reality and followers follow in daily life.

Successful Islamic economics does not rise without Ethics which cannot be separate to reality of life

and its rational approach.

Practical life of people cannot prosper without proper ethics.

Riba practices corrupt the individual’s ethics, behavior, and feelings towards community and the

society.

It also corrupts the human life, culture and the relationship by spreading the spirit of greed,

selfishness, sneakiness and gambling in general.

Today investing the capital on minimum risk based over guaranteed return is commonly practice for

the funds received as deposit, and investing on risk and return.

Thus, interest (Riba) is repaid at lower to the depositor’s investment and higher to investment

managers or vis-à-vis.

Money lent on higher Interest (Riba) does not grow useful projects but seeks the most lucrative

opportunity even if profit comes from the lowest nature and the meanest tendency.

Types of riba

Riba al nasseieah

Riba al Nassieah practice before Islam because as the man had to pay his money to another for a pre agreed

period. In return, he took from him a certain amount every month without taking the principal amount. When

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date of payment came, he asked him for his capital and if he was unable to repay he increased in his fund and

the term of repayment.

Riba Al fadi

A man sells an article in exchange of another article having same quality and nature with an increase or

decrease as like gold sold for gold, rupee for a rupee, corn for corn and barley for barley. This kind is

considered as Riba as commodities are similar to each with different values not ascertain. Such transaction

has the involvement of exploitation and injustice on any one’s part of the two.Riba establishes a feeling of

liberty among humans for ways and means of obtaining wealth, encouraging them to adopt more unfair

means t multiply it. Riba provides an individual a feeling that he is free to enjoy his wealth without abiding

the contract of faith and trust in Almighty Allah or obeying any condition as holder of wealth, for which he is

not bound to keep the interest of others

Riba Free Mode of Financing

Modarba

Three names with an ancient background of transactions used for economic activities classified as business

activities under a contract of “Money and Ability”. The owner of money, the financier is called Rab-Al-Maal.

The worker is called Modarib. According to Fuqaha Modaraba

It is a partnership contract between two parties, persons or organizations in which one brings the capital, the

other shares his time and skill for a specified project or transaction. Upon the maturity, profit is divided

according to the agreement, which will either be equal or one third, in proportion. In case of loss the

Financier looses the Capital Investment and Skill lose its Time, Efforts and Reputation. The history of

Modaraba reveals that the business under the concept of Modaraba was in practice before the rise of Islam,

emerging from Italian city of Rome, which was the center for trade and culture in the Christian world.

In Islamic jurisprudence, Modaraba is a contract between persons, between persons and institutions, and

between institutions, through which finances are given for trading or manufacturing purpose. Profit sharing is

agreed upon beforehand at a predetermined ratio. In case of loss, the financier loses the money used to

finance and the worker loses his time, efforts and talent.

Al KASSANI says

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Modaraba becomes invalid if it is on the basis of Qiyas as it involves an unknown salary for an unknown

amount of work. Qiyas is only allowed in accordance with the teachings of the Holy Quran, Sunnah and

the Ijma

IBNE TAYMIYA  

Modaraba is valid on the basis of Qayas. Fuqaha had invalidated Modaraba on the basis of Qayas

(wages).

IBNE GHAZI says

Modaraba is permissible as an exception to Gharar (fraud) and unknown remuneration

Modaraba falls in the partnership type of contract, which has a vague similarity to Mufawadah. It differs

because money is the main objective in Modaraba and work in the second. Rab-al-Maal (the financier) does

not have to take an active part in the daily operations as in the case of employment. There will be no return

for Modarib if a profit does not result in the transaction. In case of loss Rab-al-Maal has the right to

investigate the cause of loss, whereas, in case of any negligence or misappropriation or a purposeful mistake

by the Modarib, financier can claim the financing.

As the Modaraba mode penetrated in the economic activities and Shariah accepted the

mode, scholars laid down Modaraba conditions & rules.

Though rules and conditions of Modaraba are in accordance with the teachings of the Holy Quran and Sunna,

different scholars have interpreted them differently.

SAMARKANDI has given his views that capital should consist of consummate value. Here is the reason:

Modaraba transaction with paper currency is permissible. Even gold, silver and precious metals are not

permitted for the capital of Modaraba

Musharka

Musharka or Shirkah can be defined as a form of partnership where two or more persons combine either their

capital or labor together to share the profits & enjoying similar rights and liabilities.A contract between two

or more persons who launch a business or financial enterprise to make profit. Musharka is a technique of

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financing used as a partnership. Two or more parties provide finance for a project. All partners are entitled to

a share in the profits resulting from the project in a ratio which is mutually agreed upon.In case of loss it is

shared exactly in the proportion of capital. All partners have a right to participate in managing the project.

Any one can waive the right of participation in favor of partner or partners. The Arab society at the time of

the rise of Islam had very simple financing methods and forms of business peculiar to that society Birth of

Islam saw Musharka practice in Arabia in commercial activities.

Two main form of musharka

Permanent Musharka

In this form the parties of Musharka participates in the equity of a project or transaction and receives a share

of profit on a pro rata basis.The period of contract is not specified. It can continue so long as the will of the

parties.This technique suits for long terms projects as funds and development are committed and protracted.

Diminishing Musharka

It allows equity participation on a pro-rata basis system by which equity of parties keeps on reducing

ultimately the ownership of the asset on any one or more participants is transfers.Partners gets dividend on

their equity and if any of the partner sell or buy other partner some of its equity, it is allowed to do so.

Type of musharka

Shirkah -Al-Milk (non-contractual)

It involves co-ownership and form when two or more persons get joint-ownership of some asset without a

formal partnership agreement. Example

Two persons receiving an inheritance or a gift of property which mayor may not be divisible?

Partners have to share property or its income in accordance with their share until they decide to

divide.

If the property is divisible and partners still decide to stick together, It is Shirkah al-Milk

Ikhtiyariyyah (voluntary).

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If it is indivisible and they are forced to stay together it is characterized as Jabriyyah (involuntary).

It is a proper partnership as the parties concerned willingly entered into a contractual agreement for

joint investment and the sharing of profits and risks

Shirkah al-Uqood (contractual partnership)

The agreement need not necessarily be formal and written; it could be informal and oral.

Just as in Modaraba, the profits can be shared in any equitably agreed proportion.

Losses must, however, be shared in proportion to the capital contribution.

In Fiqh Shirkah al-Uqood divided into four kinds:

Al-Mufawadah (full authority & obligation)

Al-Inan (restricted authority & obligation)

Al-Abdan (labor, skill and management)

Al-Wujuh (goodwill, credit-worthiness and Mufawadah)

In Mufawadah partners are adults, equal in their capital contribution, their ability to undertake responsibility

and their share of profits and losses. They have full authority to act on behalf of the others jointly and

severally responsible for the liabilities of their partnership business, provided that such liabilities have been

incurred in the ordinary course of business. Each partner can act as an agent (Wakil) for the partnership

business and stand as surety or guarantor (Kafil) for the other partners

Modern Musharka and its Conditions

The modern business concerns being run on the basis of Musharka

Partnership: It is regulated by Partnership: It is regulated by-

1. Partnership rules framed by the government,

2. Business practices prevailing in the business community.

Limited company

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This type of Musharka is strictly controlled by the statutory rules framed by the government its commercial

activities are, however, influenced by the business practices.

Cooprative society

This Musharka is also governed by statutory rules. Its commercial activities are influenced by the practices

prevailing in the business community. The modern Musharka principally resembles Shirkah al-Inan. The

details are, however, considerably different due to change of Urf and other factors including modem

commercial techniques, economic conditions and legal requirements. Let us discuss briefly the conditions of

Musharka, which are those of Shirkah al-Inan. Other types of Musharka mentioned by jurists are nearly

obsolete nowadays.

Ijara

“Ijara (leasing) is the contract in which asset is transfers to user for an agreed period on an agreed

consideration”

Basic rules

Transferring of usufruct not ownership

To another person for an agreed price, at an agreed consideration

Subject of lease

Valuable, Identifies and Quantified

Consumable things cannot be leased out

Anything which cannot be used without consuming cannot be leased out; e.g., money, wheat etc.

All Liabilities of ownership are borne by lessor

Corpus of leased property remains in the ownership of the seller.

Period of lease

Must be determined in clear terms at the time of contract

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Lease for specific purpose only

If no specific purpose is identified in the agreement, then it can be used for any purpose for which it is used

in normal course

Lessee as Ameen

The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or

negligence. The leased asset shall remain in the risk of the lessor throughout the lease period.

Lease of jointly owned property

Is permitted and rentals shall be distributed between all the joint owners according to the proportion of their

respective shares in the property.

Determination of Rental

The rental must be determined at the time of contract for the whole period of lease.It is permissible that

different amounts of rent are fixed for different phases during the lease period, provided that the amount of

rent for each phase is specifically agreed upon at the time of affecting a lease. The determination of rental on

the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in

financial leases, is not against the rules of Shariah.

Ijara as a mode of financing

1. The commencement of lease

Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. Hence, it is different

from Murabaha.

2. Rent should be charged after the delivery of the leased asset to the lessee

And not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full

price, the lessee should not be liable for the rent of the period of delay.

3. Different relations of the parties

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There are two separate relations between the institution and the client: one of an agent and the other of a

lessee.

4. Sale and lease back

When the client sells the asset to the bank the entire risk and rewards are transferred to the bank who is then

is responsible for the ownership related expenses. In this case the bank is allowed to lease the asset to the

client but there are conditions which have to be followed to make the entire transaction Sharia compliant.

There should be at least one year lease period

There should be separate contracts for sale and lease

The agreement to sell at the end of the lease must be separate

The intention of the client is to avoid interest related transactions

Islamic way of living a life is the ultimate way, its not only teaches us how to live the basic life, but it also

teaches us the concept of business through Islamic economic and financial system. Today we see when whole

world is suffereing from cash deficit, big multinational firms are in a state of stress because of financial

crises, big business has been shutoff ,no one is ready to invest their money because of uncertainity in

situation, the islamic finanical system is working ate their best. In the western countries they are shocked to

see the growth in Islamic financial system when whole world is facing crises. It shows how efficient this

system is working. How clean this system is. In Islamic economic system the line between the halal and

haraam is clearly explained and defined. No concept of riba is providing the strenght that is reuired to run the

financial system effectively. This is the best economic and financial system in the world and it will remain

the best system because it’s a concept of Islam. Islam the best and save religion of the world and Islamic

system is also considered to be the best and secure system.