Interest Free Economy - Eco Project

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In the name of Allah, the Most Merciful, the Most Kind.

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DEDICATION We would like to dedicate all our efforts and spirits to our parents, without whom we never have been able to achieve our feat, and our honorable teacher Mr. Muahammad Yusuf. The treasure trove of knowledge imparted to us by our teachers, emboldened us to take up this

project and showed us the path to take it to completion.

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A WORD OF APPRECIATION First of all we would like to thank Almighty Allah for giving us the power and

wisdom to complete this project. And we would like to thank our teacher Mr. Muhammad Yusuf for the support and the knowledge that he imparted to us,

enabling us to take this project to completion.

We are deeply thankful to our parents, whose continuous support and commitment helped us to achieve our desired goals.

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GROUP DETAILS:

Name Registration

Number Signature

Faiq Khalid (Group leader)

254

Jawwad Hassan 266

M. Fakhar Ali Khan 277

Muhammad Yasin Malik

286

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TABLE OF CONTENTS

• Interest 1 o Interest in Islam 1 o Interest in Modern Economics 2 o Impacts of Interest Based Economic System 3 o Alternatives to Interest 3

• Zakat and Tax 6 o Zakat 6

Fundamentals and Concept of Zakat 7 Causes and Beneficiaries 7 On whom Zakat is Compulsory 8 Minimums and Amounts 8 Zakat in the Qur’an and Sunnah 9 Benefits of Zakat 12

o Tax 13 o Wealth Tax 13

Net Worth Tax 13 Property Tax 14 Arguments in favor of Wealth Tax 15 Arguments against Wealth Tax 15

o Comparison between Zakat and Tax 15 Law of Allah vs. Rule of Mankind 15 Payment Ratios 16 Application 16

• Banking 16 o Bank 16 o Conventional Bank 16

Commercial Banking 16 Universal Banking 17

o Islamic Banking 17 Classical Islamic Banking 18 Modern Islamic Banking 19 Principles 19 Islamic Laws on Trading 20

o Comparison of Islamic and Conventional Banking 21 The Major Differences 21 Comparison of Governing Principles 21 The main features 23

o A modern review of the Islamic Banking 24 o The performance if Islamic Banking – A realistic evaluation 26

Issues related to Islamic Banking 29 o List of financial institutions working the Interest-Free System 32 o Controversies 34

• Conclusion 35

• References 36

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INTEREST FREE ECONOMY INTEREST

Interest is the money paid for the use of money lent, or for delaying the repayment of a debt.

The economy today is based on the system of interest. It has its merits and demerits, but if we analyze it in accordance with the Islamic injunctions and teachings, then we come to realize that this system of interest is not viable for the Muslims, and it undermines the human and cultural values.

Interest is the basis of modern capitalism. It is completely opposite to Zakat. Zakat channels wealth from the rich to the poor while interest takes away wealth from the poor and hands it over to the rich.

Modern economics are so inter-linked with interest that people may think it is impossible to go without it.

The situation is really very complex. But, we must aim at getting rid of interest. Unless people fight against the tyrant rulers and establish an Islamic state -the problems will still be there. Further, until Islamic state established, it will make us feel impossible to solve this riba (interest) problem. Allah swt has not imposed on us something impossible. An interest-free economy will be a boon for all peoples of the world.

INTEREST IN ISLAM

Interest (riba) has been vehemently disapproved in Islam. Islam prohibits all transactions involving interest. 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. Interest is neither a trade nor a profit. It is a means of exploitation and concentration of wealth.

INTEREST IN QURAN AND SUNNA’H

"They say, trade is like interest and Allah has allowed trade and prohibited interest." (2:275).

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"Whatever you pay as interest, so that it may increase in the property of (other) men, it does not increase with Allah."(30:39).

"O you who believe, do not take interest, doubling and quadrupling, and keep your duty to Allah, so that you may prosper." (3:130).

"O you who believe, observe your duty to Allah and give up what remains (due) from interest, if you are believers. But if you do not do it, then be warned of war from Allah and His messenger; and if you repent, then you shall have your capital. Do not exploit and be not exploited." (2:278-279).

"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)

The Holy Prophet of Islam has advised Muslims to avoid seven harmful things and the third among these is interest, He stated,' although interest brings increase, yet its end tends to scarcity’.

INTEREST IN MODERN ECONOMICS

Modern economists, too, have slowly begun to realize the futility of interest. Keynes suggested the possibility of a zero rate of interest in stationary States, while Harrod advocated its total abolition, A number of modern economists have evolved the maintenance of a banking system without interest. A large number of failures in industrial and commercial enterprises in modern times are due to the high rate of interest charged on the money invested in them. A time comes when the borrower crumbling under heavy interest cannot borrow more money which results in the failure of his enterprise. Hence this institution is responsible for fluctuations in a number of ways. The well-known economist Marshall in his principles of Economics (Book IV, Chapter XIX) states,

"The danger of not being able to renew his borrowings just at the time when he wants them more, puts him (the borrower) at a disadvantage relatively to those who use their own capital much greater than is represented by the mere interest on his borrowing. And the failure of this renewal may cause him to succumb to what would have been a passing misfortune if he had been using no capital, but his own".

The depression and crisis in trade mostly results from the payment of high rate of interest. The socialists have wrongly attributed such crises to capitalism. In fact interest is the greatest evil of capitalism and it is rather the worst form of capitalism.

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Even such well-known Economists as Piogu and Fisher have acknowledged the harmful effects of interest in causing commercial fluctuations and industrial crises.

IMPACTS OF INTEREST BASED ECONOMIC SYSTEM

The present money system, based on the payment of interest, is unsustainable. Compound interest leads to exponential growth, which can be seen as a cancer on our social and economic system, a pathological growth pattern leading towards either economic or ecological collapse of unprecedented proportions. Inflation is generally seen as a given and interest as a natural antidote to counteract it, while in fact interest is the major cause of inflation. Economic growth is needed at any cost, by continually increasing public and private debts. The interest system leads to an uneven growth of different sectors of the economy, indicating a severe sickness in the economic system. While the Net Income in Wages and Salaries rose 18 times between 1950 and 1995 in Germany, for instance, the Monetary Assets increased 461 times and the Gross National Product 141 times. The global volume of speculative monetary transactions, arbitrating on the variability of currency values, amounts 97 % of all transactions, with a mere 3 % being in real goods and services. The daily volume of trading exceeds $ 2,000 billion; all the currency and gold reserves in the world would only amount to the volume of seven to eight hours of trading! The interest system has devastating effects on the culture, ecology and society. It sucks up resources from regions with lower returns and redistributes them to the regions with high returns.

ALTERNATIVES TO INTEREST

Islam not only prohibits interest but also provides alternatives to it for doing business and transactions. These include the Mudarbah and Musharkah as explained ahead.

MUDARABAH

“Mudarabah” is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-mal”, while the management and work is an exclusive responsibility of the other, who is called “mudarib”.

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BUSINESS OF MUDARABAH:

The rabb-ul-mal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only. This is called al-mudarabah al-muqayyadah (restricted mudarabah). But if he has left it open for the mudarib to undertake whatever business he wishes, the mudarib shall be authorized to invest the money in any business he deems fit. This type of mudarabah is called ‘al-mudarabah al-mutlaqah’ (unrestricted mudarabah) A rabbul-mal can contract mudarabah with more than one person through a single transaction. It means that he can offer his money to A and B both, so that each one of them can act for him as mudarib and the capital of the mudarabah shall be utilized by both of them jointly, and the share of the mudarib shall be distributed between them according to the agreed proportion . In this case both the mudaribs shall run the business as if they were partners inter se. The mudarib or mudaribs, as the case may be, are authorized to do anything which is normally done in a course of business. However, if they want to do an extraordinary work, which is beyond the normal routine of the traders, they cannot do so without express permission from the rabb-ul-mal.

DISTRIBUTION OF THE PROFIT:

It is necessary for the validity of mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each of them is entitled. No particular proportion has been prescribed by the Shar’iah; rather, it has been left to their mutual consent. They can share the profit in equal proportions, and they can also allocate different proportions for the rubb-ul-mal and the mudarib. However, they cannot allocate a lump sum amount of profit for any party, nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Rs.100000/- they cannot agree on a condition that Rs.10000/- out of the profit shall be the share of the mudarib, nor can they say that 20% of the capital shall be given to rabb-ul-mal. However, they can agree on that 40% of the actual profit shall go to the mudarib and 60% to the rabb-ul-mal or vice versa. It is also allowed that different proportions are agreed in different situations. For example the rubb-ul-mal may say to the mudarib, “If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit”. Similarly, he can say “If you do the business in your town, you will be entitled to 30% of the profit, and if you do it in another town, your share will be 50% of the profit.”

Apart from the agreed proportion of the profit, as determined in the above manner, the mudarib cannot claim any periodical salary or a fee or remuneration for the work done for him by the mudarabah. All the schools of the Islamic Fiqh are unanimous on this point. However,

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Imam Ahmad has allowed for the mudarib to draw his daily expenses of food only from the mudarabah account.

The Hanafi jurists restrict this right of the mudarib only to a situation where he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food etc., but he is not entitled to get anything as daily allowances when he is in his own city.

If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, and then the remainder, if any, shall be distributed between the parties according to the agreed ratio.

TERMINATION OF MUDARABAH:

The contract of the mudarabah can be terminated at any time by either of the two parties. The only condition is to give a notice to the other party. If all assets of the mudarabah are in cash form at the time of termination, and some profit has been earned on the principle amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of the mudarabah are not in the cash form, the mudarib shall be given an opportunity to sell or liquidate them, so that the actual profit may be determined.

There is a difference of opinion among the Muslim jurists about the question whether the contract of mudarabah can be affected for a specified period after which it terminates automatically. The Hanafi and Hanbali schools are of view that the mudarabah can be restricted to a particular term, like one year, six months, etc, after which it will come to an end without a notice. On the contrary, Shafi’i and Maliki schools are of the opinion that the mudarabah cannot be restricted to a particular time. However, this difference of opinion relates only to the maximum time limit of the mudarabah. Can a minimum time limit also be fixed by the parties before whichmudarabah cannot be terminated? No express answer to this question is found in the books of the Islamic Fiqh, but it appears from the general principles numerated therein that no such limit can be fixed, and each party is at liberty to terminate the contract whenever he wishes.

This unlimited power of the parties to terminate the mudarabah at their pleasure may create some difficulties in the context of the present circumstances, because most of the commercial enterprises today need time to bring fruits. They also demand constant and complex efforts. Therefore, it may be disastrous to the project, if the rabb-ul-mal terminates the mudarabah right in the beginning of the enterprise. Specially, it may bring a severe setback to a mudarib who will earn nothing despite all his efforts. Therefore, if the parties agree, when entering into the mudarabah, that no party shall terminate it during a specified period, except in specified

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circumstances it does not seem to violate any principle of Shar’iah, particularly in the light of the famous hadith, already quoted which says: “All the conditions agreed upon by the Muslims are upheld, except a condition which allows what is prohibited or prohibits what is lawful.”

COMBINATION OF MUSHARAKAH AND MUDARABAH:

A contract of mudarabah normally presumes that the mudarib has not invested anything to the mudarabah. He is responsible for the management only, while all the investment comes from rabb-ul-mal. But there may be situations where the mudarib also wants to invest some of his money into the business of mudarabah.

In such cases musharakah and mudarabah are combined together. For example, A gave to B Rs.100000/- in a contract of mudarabah. B added Rs.50000/- from his own pocket with the permission of A. This type of partnership will be treated as a combination of musharakah and mudarabah. Here the mudarib may allocate for himself a certain percentage of profit on account of his investment as a sharik, and at the same time he may allocate another percentage for his management and work as a mudarib. The normal basis for allocation of the profit in the above example would be that B shall secure one third of the actual profit on account of his investment, and the remaining two thirds of the profit shall be distributed between them equally. However, the parties may agree on any other proportion. The only condition is that the sleeping partner should not get more percentage than the proportion of the investment.

ZAKAT AND TAX Zakat and tax are two systems that are used for the monetary benefits of the people. In this topic we will compare the two systems.

ZAKAT

Zakat is one of the five pillars of Islam. The word zakat means both 'purification' and 'growth'. Zakat occupies a central position in the economic system of Islam.

One of the most important principles of Islam is that all things belong to God, and that wealth is therefore held by human beings in trust. Our possessions are purified by setting aside a proportion for those in need, and, like the pruning of plants, this cutting back balances and encourages new growth.

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Zakah does not only purify the property of the contributor but also purifies his heart from selfishness and greed. It also purifies the heart of the recipient from envy and jealousy, from hatred and uneasiness and it fosters instead good-will and warm wishes for the contributors.

As Muslims pay the Zakat they have the genuine feeling that it is an investment and not a debit helping to establish economic balance and social justice in the society.

Compulsory payment of Zakah is one of the main principles of an Islamic economy. Every Muslim who owns wealth more than his needs must pay the fixed rate of Zakah to the Islamic state. Zakah is a means of narrowing the gap between the rich and the poor. It helps the fair distribution of wealth. It is a form of social security. The Islamic state is responsible for providing the basic necessities of food, clothing, housing, medicine and education to every citizen. No-one should have any fear of insecurity or poverty (9:69, 103, 98:5).

FUNDAMENTALS AND CONCEPT OF ZAKAT

Zakāh "alms for the poor” is the Islamic principle of giving a percentage of one's income to charity. It is often compared to the system of tithing and alms, but it serves principally as the welfare contribution to poor and deprived people in the Muslim lands, although others may have a rightful share. Zakat's similar-sounding, Arabic language analog is the Hebrew word Tzedakah, the charitable obligation in ancient Israel through to present day Judaism. It is the duty of the Islamic state not just to collect Zakat, but to distribute it fairly as well. Zakat is one of the Five Pillars of Islam.

Believers in Islam are aware that by giving a fixed percentage of their surplus wealth, they are fulfilling this religious obligation. Muslims see this process also as a way of purifying themselves from their greed and selfishness. In addition zakat purifies the person who receives it because it saves him from the humiliation of begging and prevents him from envying the rich.

CAUSES & BENEFICIARIES

The Qur'an states that God revealed the beneficiaries of zakat:

دقات للفقراء والمساكين والعاملين قاب والغارمين وفي سبيل هللا وابن إنما الص عليها والمؤلفة قلوبهم وفي الرن هللا وهللا عليم حكيم بيل فريضة م o الس

"Alms are only for the poor and the needy, and the officials (appointed) over them, and those whose hearts are made to incline (to truth) and the (ransoming of) captives and those in debts

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and in the way of Allah and the wayfarer; an ordinance from Allah; and Allah is knowing, Wise." [Qur'an 9:60]

The people whose hearts are to be reconciled include (normally new Muslims or those close to becoming Muslim. Non Muslims cannot be included):

• Freed slaves

• Those heavily burdened with paying their debts

• Travelers who find themselves in difficult circumstances

There have been cases where you can't pay to the zakat for

• Traditional zakat laws generally do not cover trade. • It is not permissible to pay zakat to some members of the family (i.e. grandparents,

parents, spouses, children), for if they were needy or poor, they are under the custody of the eligible man, while Zakat is intended for public welfare.

• Zakat doesn't become obligatory on a Muslim if he doesn't have a minimum amount in his possession that has remained unchanged for a whole lunar year; any increase in that money during the year waits for the following year and any decrease as long as the total amount is still above the minimum amount is exempted.

In all the four recognized madhhabs the fiqh of Zakat is very much the same with the key elements that make Zakat compulsory for an individual being: Islam, Freedom, the Nisab, Ownership and a Year's Possession.

Zakat is a form of payment, which has the spiritual development of the believer.Therefore, it should not be looked at as being only an economic duty.

ON WHOM IS ZAKAT COMPULSORY?

Zakat is the amount of money that every adult, mentally stable, free, and financially able Muslim, male and female, has to pay to support specific categories people. This category of people has been defined above.

MINIMUMS AND AMOUNTS

1. PASSAGE OF ONE LUNAR YEAR:

Zakat is obligatory after a time span of one lunar year passes with the money in the control of its owner. Then the owner needs to pay 2.5% (or 1/40) of the money as Zakat. (A lunar year is approximately 355 days).

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2. DEDUCTION OF DEBTS:

The owner should deduct any amount of money he or she borrowed from others; then check if the rest reaches the necessary nisab, then pays Zakat for it.

NISAB

If the owner had enough money to satisfy the nisab at the beginning of the year, then the money increased (in profits, salaries, inheritance, grants...etc.), the owner needs to add the increase to the nisab amount owned at the beginning of the year; then pay Zakat, 2.5%, of the total at the end of the lunar year (there are small differences in the fiqh schools here) .

Zakat is not mandatory on harvest if the total did not reach the minimum limit of about 653 kilograms, nor on gold amounts if the owner has less than 85 grams of gold or less than 595 grams of silver.

CALCULATION OF ZAKAT

Each Muslim calculates his or her own Zakat individually. For most purposes this involves the payment each year of two and a half percent of one's capital.

ZAKAT IN THE QUR’AN AND SUNNAH

The root of the word Zaka(t) is Z-K-W (za-kaf-waw), which leads to the following meanings:

• To increase

• To grow

• To thrive

• To augment

• To increase in the purity of heart; to increase in integrity

• To befit

Primarily the root denotes an increase or augmentation (particularly of a positive, favourable or auspicious thing or virtue). Some also say that it means "to purify". However, in the Quran AZKA has been used along with ATHAR in 2:232. The root , T-H-R (ta-ha-ra) from which the word ATHAR is derived, has the meanings "to purify" but the meanings "to increase, grow, thrive, augment etc." are the primary significations of the root Z-K-W. TAHARA is a negative virtue which signifies being free from dirt, filth or derogatory things. ZAKA is a positive virtue which signifies positive growth and development. The following phrases further clarify the signification of the root Z-K-W.

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Zakat-il-ardh means the land throve or yielded increase

Zakaa-al-ghulam means the boy grew or throve

Al-ilmo yazkoo alal infaaq means the knowledge increases by spending

Zukkoo means he enjoyed or led a plentiful and a pleasant or an easy, and a soft or delicate life. OR he was in a state of abundance of the goods, conveniences or comforts of life OR he enjoyed a life of increase or plenty.

From this:

Zaka means increase or augmentation or growth or development.

The term aatoozzakaat كاةا الزوآت appears in the following verses:

2:43; 2:83; 2:110; 2:277; 4:77; 9:5; 9:11; 22:41; 22:78; 24:56; 58:13; 73:20;

The root of the word Aatoo is A-T-Y (alif-ta-ya), which has the following meanings (depending upon what word or preposition follows this word):

• To come (to or over someone)

• To arrive (at)

• To bring, bring forward, produce, accomplish or achieve (something)

• To bring, give or offer or provide (someone, something)

• To do or perform (a deed)

• To carry out or execute (e.g. a movement)

• To commit or perpetrate (e.g. a sin or crime)

The term aatoozzakaat is usually taken to mean "give the poor rate" where "poor rate" means "the local tax for the relief of the poor". This definition of the term aatoozzakaat is not correct and does not bring forth the true and complete concept of the term ZAKA. The term aatoozzakaat does not mean JUST to give some fixed sum from the money to the poor, (although it may be a means of accomplishing ZAKA). It is much more than that. Please see the verse 2:177 in which giving some of the wealth to the near of kin and the orphans and the needy and the wayfarer and the beggars and for (the emancipation of) the captives has been differentiated from the term aatoozzakaat.

Zakat is more than just giving from one's wealth to the poor. See the following:

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سلي لوا أن البروت كموهجل وبرق قشرب المغالمو نلكو البر نم نآم م باللهوالير وكة اآلخالئالمو

وفي لنيوالسائ السبيل وابن والمساكني واليتامى القربى ذوي حبه على المال وآتى والنبيني والكتاب

والضراء البأساء في والصابرين عاهدوا إذا بعهدهم والموفون الزكاة وآتى الصالة وأقام الرقاب

نيحأس والب كأولئ ينقوا الذدص كأولئو مقون هتالم

2:177 It is not righteousness that you turn your faces towards the East and the West, but righteousness is this that one should believe in Allah and the last day and the angels and the Book and the prophets, and Ugive away wealthU out of love for Him to the near of kin and the orphans and the needy and the wayfarer and the beggars and for (the emancipation of) the captives, and establish SALAT and provide UZAKAU; and the performers of their promise when they make a promise, and the patient in distress and affliction and in time of conflicts-- these are they who are true (to themselves) and these are they who guard (against the inevitable consequences of violating Allah's Commands).

Even from the language point of view the term aatoozzakaat cannot be translated as "give the poor rate". Although aatoo has one of the meanings "give" but Zakaat does not mean "poor rate". Zakaat means increase or augmentation or growth or development.

The term aatoozzakaat is very comprehensive. It signifies "(to) Do whatever it takes to provide the means for the development and growth of all", i.e. "(to) Do whatever is necessary to accomplish the physical and personal growth and development of all". [See the meanings, "do",

"accomplish", provide and "achieve" for the word aatoo given above]. The purpose of aatoozzakaat is to provide the means of development for all. It includes physical development and nourishment as well as development of the human personality i.e. mental/intellectual/personal development or development of the "self". Development of human hardware as well as human software. It involves development, increase and augmentation in the produce and resources to provide abundance of goods, conveniences and comforts to people as well as their self-actualization or development of their personalities. It is a complete economic system that ensures the provision of all the requisite resources for the physical and personal development of people. In order to establish such a system you have to have authority, power, dominion and government. If you already have such an authority and you are an Islamic Government, your primary task is to establish such a system. Please see 22:41.

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ينإن الذ ماهكني مض فوا األرالة أقاما الصوآتكاة ووا الزرأمو وفرعا بالموهنن وكر عنالم لهلو

األمور عاقبة

22:41 (Believers are} those who, if We establish them in the land, establish SALAT and provide ZAKA and enjoin good and forbid evil: ...

Notice in the above verse, the establishment in the land has been described as a prerequisite for the system of ZAKA.

As has been mentioned above that growth and development is of two types: Physical (i.e. of the human hardware or body) and Personal (i.e. of the human software or the self or the personality). For physical development you have to have something added to your body as a nourishment but for the development of the self or self-actualization, you need to give something out of your wealth or resources for others. See the following verses (which state that TAZKIYA or personal development is achieved by giving from your wealth to others:

اللهو مله كنس كالتإن ص همليل عصا وبه كيهمزتو مهرطهقة تدص همالوأم نذ مخ يعمس

يملع

9:103 Accept their contribution for the community. Purify their thoughts with proper education

and training so that their "Self" may grow. Appreciate and Help them! Your appreciation and

support is a great source of peace in their hearts. Allah is Hearer, Knower.

الذي يؤتي ماله يتزكى

92:18 Who gives his wealth (for the benefits of others) so that he may attain self-development (and grow in goodness)

BENEFITS OF ZAKAT

Through the payment of Zakat, the rich share their wealth with the poor and thus the process of concentration of wealth is checked and fair distribution ensured.

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It also provides a path for the purification of the soul, and evokes the spirit of sacrifice in a person.

A giver of zakat learns not to love the wealth, rather to use it for the welfare of humanity.

TAX

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, secessionist movements or revolutionary movements). Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid). A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government […] a payment exacted by legislative authority." A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."[1]

In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration may be imposed on the non-paying entity or individual.

WEALTH TAX

A wealth tax is generally conceived as a direct tax on all household wealth holdings, including owner-occupied housing; cash, bank deposits, money market funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.[1] Because of the broad term "wealth", property tax, capital transfer taxes (inheritance tax, estate tax, gift tax), endowment tax and capital gains taxes are also sometimes referred to as "wealth taxes".

NET WORTH TAX

Some governments require declaration of the tax payers balance sheet (assets and liabilities), and from that ask for a tax on net worth (assets minus liabilities), as a percentage of the net

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worth, or a percentage of the net worth exceeding a certain level. The tax is in place for both "natural" and in some cases legal "persons".

In France, the net worth tax on "natural persons" is called the "solidarity tax on wealth". In other places, the tax may be called, or known as, a "Capital Tax", an "Equity Tax", a "Net Worth Tax", a "Net Wealth Tax", or just a "Wealth Tax".

Most of the governments levying this net worth tax are big spenders with a relatively high government spending to GDP rate.

Apart from France, within Europe, Greece, Norway, Switzerland and Liechtenstein impose a wealth tax, although often with lower rates and higher thresholds of imposition than in France (which France recently implemented some measures to reduce the burden of wealth tax). European countries that have abandoned any tax of this type in the past five years (since 2003) are Austria, Denmark, the Netherlands, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg. In other countries, like Belgium or Great Britain, no tax of this type has ever existed, although the Window Tax of 1696 was based on a similar concept. In India, the rate of wealth tax is 1% on wealth exceeding Rs 15,00,000. However, non-residents who are returning to India are given exemption for seven years.

PROPERTY TAX

In the United States, property taxes are annual taxes on the market value of real estate (ranging from about 0.4% in AL to 4% in NH), assessed both locally and by state governments to pay for local schools, as well as other services and infrastructure of various kinds. Local jurisdictions rely upon property taxes because real estate cannot be moved out of a jurisdiction, whereas paper wealth, income, etc. are more easily moved to other localities where they may be taxed less or not at all.

Over time, the property taxes add up significantly, such that over a generation of 25 years, a family may pay, with annual increases for inflation, up to 50% of a property's market value in taxes (though over the same period of time, the land value of the family's home could have increased substantially as well). Heavy property taxation and especially sudden, large increases in appraised valuations caused by infrequent or inaccurate appraisals are major causes of local political discontent in jurisdictions throughout the United States and in other countries.

Because property taxes have often been labeled unfair (other assets such as CDs, equities, or partnerships are taxed rarely, if at all), some properties, such as certain farms or forest land, may have reduced valuations. However, unlike the value of most other assets, the value of land is largely a function of government spending on services and infrastructure (a relationship

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demonstrated by economists in the Henry George Theorem). This relationship argues that the land value portion of property taxes, at least, satisfies the "beneficiary pay" criterion of tax fairness.

Non-profit (especially church) and government-owned properties are often exempt from property taxes.

ARGUMENTS IN FAVOR OF WEALTH TAX

In 1999, Donald Trump proposed a once off 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.

ARGUMENTS AGAINST WEALTH TAX

A 2006 article in The Washington Post titled "Old Money, New Money Flee France and Its Wealth Tax" pointed out some of the harm caused by France's wealth tax. The article gave examples of how the tax caused capital flight, brain drain, loss of jobs, and, ultimately, a net loss in tax revenue. Among other things, the article stated, "Eric Pinchet, author of a French tax guide, estimates the wealth tax earns the government about $2.6 billion a year but has cost the country more than $125 billion in capital flight since 1998." And wealth taxes generally have high management costs, for both the taxpayer and the administrating authorities, compared to other taxes. Per one study in the Netherlands the aggregated cost of the tax’s yield was roughly five times that of income tax.

COMPARISON BETWEEN ZAKAT AND TAX

1. LAW OF ALLAH VS RULE OF MANKIND

Zakat is a system that is given to us by Allah almighty; it is a system of welfare, and well being of the human society. It not only provides benefit to the needy but also serves to increase the Ima’an and the builds the spirituality in the giver of Zakat.

Taxation is system that is developed by the mankind, it has its benefits but it is not without its demerits. It is needed by the government for the good running of a state. It provides only a worldly benefit to the giver of tax. Sometimes it also becomes burdensome on the people, because people have to give tax whether they have money or not.

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2. PAYMENT RATIOS

The ratio of Zakat has been fixed i.e. 2.5% of one’s capital; one only has to give Zakat when one’s wealth exceeds the nisab and has been hoarded for a year.

The ratios of tax keep changing with time to time, and from one state to the other, and one government to the next.

3. APPLICATION

Zakat is only applicable on the Muslims of a state; but tax is levied on all the citizens of a state.

Zakat can only be given to the beneficiaries of Zakat, whereas tax can be spent on any purpose deemed useful by the government.

BANKING In this topic we will cover the banking systems that are currently prevalent, and evaluate the interest-free system of Islamic banking.

BANK

Bank is an institution that takes loan to give loan. It is a system developed by the west and the first bankers were the Templars.

CONVENTIONAL BANKING

Conventional banking does not follow one pattern. There are several systems that are used throughout the world.

COMMERCIAL BANKING

In Anglo- Saxon countries, commercial banking dominates, while in Germany, Switzerland, the Netherlands, and Japan, universal banking is the rule. Naturally, then, a comparison between banking patterns becomes inevitable Commercial banking is based on a pure financial intermediation model, whereby banks mainly borrow from savers and then lend to enterprises or individuals. They make their profit from the margin between the borrowing and lending rates of interest. They also provide banking services, like letters of credit and guarantees. A

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proportion of their profit comes from the low-cost funds that they obtain through demand deposits. Commercial banks are prohibited from trading and their shareholding is severely restricted to a small proportion of their net worth. Because of the fractional reserve system, they produce derivative deposits, which allow them to multiply their low-cost resources. The process of bank lending is, however, subject to some problems that can make it inefficient. Borrowers usually know more about their own operations than lenders. Acting as lenders, banks face this information asymmetry. Because borrowers are in a position to hold back information from banks, they can use the loans they obtain for purposes other than those specified in the loan agreement exposing banks to unknown risks. They can also misreport their cash flows or declare bankruptcy fraudulently. Such problems are known as moral hazard. The ability of banks to secure repayment depends a great deal on whether the loan is effectively used for its purpose to produce enough returns for debt servicing. Even at government level, several countries have borrowed billions of dollars, used them unproductively for other purposes and ended up with serious debt problems. Banks can ascertain the proper use of loans through monitoring but it is either discouraged by clients or is too costly and, hence, not commercially feasible. Hence, why the purpose for which the loan is given plays a minimal role in commercial banking. It is the credit rating of the borrower that plays a more important role.

UNIVERSAL BANKING

By contrast, universal banks are allowed to hold equity and also carry out operations like trading and insurance, which usually lie beyond the sphere of commercial banking. Universal banks are better equipped to deal with information asymmetry than their commercial counterparts. They finance their business customers through a combination of shareholding and lending. Shareholding allows universal banks to sit on the boards of directors of their business customers, which enables them to monitor the use of their funds at a low cost. The reduction of the monitoring costs reduces business failures and adds efficiency to the banking system.

ISLAMIC BANKING

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment of fees for the renting of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

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CLASSICAL ISLAMIC BANKING

During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate, where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism". A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see Waqf), startup companies, transactional accounts, loaning, ledgers and assignments. Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.

RIBA

The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).

Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value [“fiat money”] or based on other materials such as paper or base metals were allowed to have interest applied to them When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).

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MODERN ISLAMIC BANKING

The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.

In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.

PRINCIPLES

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower forms a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rent out the property to the borrower and charges rent. The bank and the borrower will then share the proceed from this rent based on the current equity share

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of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share on the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receives the proceeds from an auction based on the current equity. This method allows for floating rates according to current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.

There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

And finally, Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.

MICRO-LENDING OR MICRO-FINANCING

Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).

ISLAMIC LAWS ON TRADING

The Qur'an prohibits gambling (games of chance involving money) and insuring ones health or property (also a game of chance). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainity).

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The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.

What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading.

COMPARISON OF ISLAMIC AND CONVENTIONAL BANKING

THE MAJOR DIFFERENCES

There are two major differences between Islamic Banking and Conventional Banking:

1. Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction.

2. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam.

COMPARISON OF GOVERNING PRINCIPLES

The key difference is that Islamic Banking is based on Shariah foundation. Thus, all dealing, transaction, business approach, product feature, investment focus, responsibility are derived from the Shariah law, which lead to the significant difference in many part of the operations with as of the conventional

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The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the Arabic word Shariah is 'the way to the source of life' and is now used to refer to legal system in keeping with the code of behaviour called for by the Holly Qur'an (Koran).

GOVERNING PRINCIPLES OF ISLMAIC BANKING

• Amongst the governing principles of an Islamic bank are: • The absence of interest-based (riba) transactions; • The avoidance of economic activities involving oppression (zulm) • The avoidance of economic activities involving speculation (gharar); • The introduction of an Islamic tax, zakat; • The discouragement of the production of goods and services which contradict the

Islamic value (haram)

Islamic law considers a loan to be given or taken, free of charge, to meet any contingency. Thus in Islamic Banking, the creditor should not take advantage of the borrower. When money is lent out on the basis of interest, more often that it leads to some kind of injustice. The first Islamic principle underlying for such kind of transactions is "deal not unjustly, and ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in an Islamic framework is not based on the debtor-creditor relationship.

The other principle pertaining to financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk.

Thus, financial intermediation in an Islamic framework has been developed on the basis of the above-mentioned principles. Consequently financial relationships in Islam have been participatory in nature.

GOVERNING PRINCIPLES OF CONVENTIONAL BANKING

On the other hand, conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank on one hand, and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money.

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THE MAIN FEATURES OF ISLAMIC AND CONVENTIONAL BANKING

The unique features of the conventional banking and Islamic banking are shown in terms of a box diagram as shown below.

Conventional Banks Islamic Banks

1 The functions and operating modes of conventional banks are based on fully manmade principles.

The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

2 The investor is assured of a predetermined rate of interest.

In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).

3 It aims at maximizing profit without any restriction.

It also aims at maximizing profit but subject to Shariah restrictions.

4 It does not deal with Zakat.

In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.

5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks.

Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer's business very well.

6 It can charge additional money (penalty and compounded interest) in case of defaulters.

The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are give for early settlement at the Bank's discretion.

7 Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity.

It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

8 For interest-based commercial banks, borrowing from the money market is relatively easier.

For the Islamic banks, it must be based on a Shariah approved underlying transaction.

9

Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.

Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.

10 The conventional banks give greater emphasis on credit-worthiness of the clients.

The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.

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11 The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller.

12 A conventional bank has to guarantee all its deposits.

Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position..

A MODERN REVIEW OF THE ISLAMIC BANKING

SHARI'A-COMPLIANT BANKING IS FAST MOVING FROM NICHE TO MAINSTREAM, SAYS CHRISTOPHER WATTS. BUT WHILE CONTINUING GROWTH SEEMS CERTAIN, CHALLENGES REMAIN.

In January this year when the UAE's Sharjah Electricity and Water Authority (SEWA) needed cash to construct a power generation and desalination plant in the town of Hamriyah, it was Islamic finance that provided the answer: The utility raised USD 350 m by issuing its first ever sukuk – asset-backed bonds that comply with Shari'a, the Islamic legal code that prohibits interest.

By no means is SEWA alone in venturing into the Islamic capital markets. Corporate sukuk issuance leapt from USD 0.4 billion in 2000 to USD 24.5 billion in 2006, according to International Islamic Financial Market (IIFM), an industry association. Growth topped 122% in 2006 alone. "Islamic finance is no longer a niche market," says David Pace, CFO of Bahrain-based Unicorn Investment Bank (UIB), a Shari'a-compliant house. "It is increasingly a mainstream component of the global banking system."

To be sure, while the world's first Islamic bank was founded back in 1975, it is only in the last five years or so that Islamic finance has surged. Sniffing opportunity, conventional banks are now scrambling to set up Shari'a-compliant operations; and there has been a flurry of all-Islamic start-ups, from full-service investment banks to specialist advisory firms. Products have moved beyond lending, insurance and investment funds to include sukuk, hedge funds, currency swaps, and more.

Despite this boom – largely concentrated in the Middle East and South-East Asia – it's plain the Islamic finance industry still lacks global scale. Professor Rodney Wilson of the Institute for Middle Eastern and Islamic studies at Durham University in the UK estimates Islamic banking

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assets speak for less than 0.5% of the world's total. And worldwide sukuk debt outstanding amounts to perhaps USD 100 billion – just 0.1% of the global bond market.

Still, the signs point to a continuing surge in Islamic finance. Take economic growth: The Middle East and Asia are the two fastest-growing areas of the world. Kuwait Finance House expects 2007 GDP to rise 6.1% in the GCC and 6.2% in South-East Asia – in contrast to 2.4% in the EU and 2.2% in the US. Oil revenues lie behind the boom in the GCC; and in South-East Asia it is "the financial rigour adopted in the wake of the Asian currency crises," according to Douglas Clark Johnson, CEO of Calyx Financial, an alternative investment adviser based in New York.

Continuing growth in the GCC states and South-East Asia is fast creating a prosperous middle class among the regions' combined 410 m-strong Muslim population. As the ranks of the regions' newly well-off snap up credit to buy homes and cars, and invest in savings and retirement plans, demand for Shari'a-compliant retail financial services is set to accelerate. Behind such consumer products is a need for Islamic institutional finance too.

Consider, too, the vast cash-flows into the GCC region and South-East Asia: The IMF expects Indonesia and Malaysia alone to record a cumulative current account surplus of USD 132 billion for the five-year period to end-2008, in contrast to a deficit of USD 32 billion for the same period a decade earlier. And in the GCC, the surplus should reach USD 680 billion, versus a prior deficit of USD 8 billion.

Buoyed by this cash, regional governments are planning ambitious infrastructure programmes: Indonesia alone expects USD 110 billion of expenditure in the five years to end-2010; and consulting firm McKinsey estimates the GCC will invest USD 200 billion in the same period. Much of this spending is already being financed by sukuk – and the volume is set to balloon: Following its successful sukuk issue, SEWA hopes to raise another USD 2.7 billion. And in neighbouring Dubai, the electricity and water authority is eyeing a debut sukuk issue, with plans to raise USD 2.5 billion.

With ever-stronger foundations in the Middle East and Asia, Islamic finance is now starting to take hold in London, too. The UK's first standalone Shari'a-compliant bank opened its doors in 2004; two others have followed; another is on the way. (All are backed by Middle Eastern institutions.) And in April this year the London Stock Exchange listed its maiden sukuk, adding much-needed depth and liquidity to the market. Another milestone is in sight: the UK government is mulling its first sovereign sukuk issue, perhaps as soon as early-2008.

But challenges remain. If Islamic finance is to move deeper into mainstream global finance, the industry needs to improve transparency and foster credibility by harmonising standards and practices. Not least, Shari'a interpretation varies between regions and even institutions. Regulatory oversight need to be sharpened as well. These measures – and others – could be

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critical in broadening the appeal of Islamic finance and bridging the gap between Islamic and conventional financial systems.

The Islamic finance industry needs to work on innovation, too. Shari's-compliant products can be more complex than conventional ones because every transaction is backed a non-financial trade. Many instruments are still lacking, including corporate treasury and derivatives products. As UIB's Pace points out: "We [in the industry] need to change our perception of R&D, and view it as a core ingredient of success." But at the same time, innovation is hampered by the limited number of Islamic scholars able to vet financial products for Shari'a compliance.

For certain, industry practitioners are making progress. Earlier this year the International Capital Market Association and the IIFM agreed to develop standard contracts and common best practice for secondary trading of sukuk and other Islamic instruments. And it may help, too, that global banking giants are putting their weight behind Islamic finance. (Deutsche Bank, Barclays Capital and BNP Paribas are already among the world's top five issuers of sukuk.)

The question whether Islamic finance has reached critical mass remains open, of course. But Johnson of Calyx Financial is optimistic: "The tipping point may already have arrived," he ventures. Even if Johnson is wrong in his optimism, it seems unlikely history will prove him to have been very far wide of the mark.

THE PERFORMANCE OF ISLAMIC BANKING – A REALISTIC EVALUATION

Islamic banking has become today an undeniable reality. The number of Islamic banks and the financial institutions is ever increasing. New Islamic Banks with huge amount of capital are being established. Conventional banks are opening Islamic windows or Islamic subsidiaries for the operations of Islamic banking. Even the non-Muslim financial institutions are entering the field and trying to compete each other to attract as many Muslim customers as they can. It seems that the size of Islamic banking will be at least multiplied during the next decade and the operation of Islamic banks are expected to cover a large area of financial transactions of the world. But before the Islamic financial institutions expand their business they should evaluate their performance during the last two decades because every new system has to learn from the experience of the past, to revise its activities and to analyze its deficiencies in a realistic manner. Unless we analyze our merits and demerits we cannot expect to advance towards our total success. It is in this perspective that we should seek to analyze the operation of Islamic banks and financial institutions in the light of Shariah and to highlight what they have achieved and what they have missed.

Once during a press conference in Malaysia, this author was asked the question about the contribution of the Islamic Banks in promoting the Islamic economy. My reply to the question

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was apparently contradictory, I said it he has contributed a lot and they have contributed nothing. In the present chapter an attempt has been made to elaborate upon this reply. When it was said that they have contributed a lot, what was meant is that it was a remarkable achievement of the Islamic banks that they have made a great break-through in the present banking system by establishing Islamic financial institutions meant to follow Shariah. It was a cherished dream of the Muslim Ummah to have an interest-free economy, but the concept of Islamic banking was merely a theory discussed in research papers, having no practical example. It was the Islamic banks and financial institutions which translated the theory into practice and presented a living and practical example for the theoretical concept in an environment where it was claimed that no financial institution can work without interest. It was indeed a courageous step on the part of the Islamic banks to come forward with a firm resolution that all their transactions will conform to Shariah and all their activities will be free from all transactions involving interest.

Another major contribution of the Islamic banks is that, being under supervision of their respective Shariah Boards they presented a wide spectrum of questions relating to modern business, to the Shariah scholars, thus providing them with an opportunity not only to understand the contemporary practice of business and trade but also to evaluate it in the light of Shariah and to find out other alternatives which may be acceptable according to the Islamic principles.

It must be understood that when we claim that Islam has a satisfactory solution for every problem emerging in any situation in all times to come, we do not mean that the Holy Quran or the Sunnah of the Holy Prophet (S.A.W) or the rulings of the Islamic scholars provide a specific answer to each and every minute detail of our socio-economic life. What we mean is that the Holy Quran and the Holy Sunnah of the Prophet(S.A.W.) have laid down broad principles in the light of which the scholars of every time have deduced specific answers to the new situation arising in their age. Therefore, in order to reach a definite answer about a new situation the scholars of Shariah have to play a very important role. They have to analyze every new question in the light of the principles laid down by the Holy Quran and Sunnah as well as in the light of the standards set by the earlier jurists, enumerated in the books of Islamic jurisprudence. This exercise is called Istinbat or Ijtihad. It is this exercise which has enriched the Islamic jurisprudence with a wealth of knowledge and wisdom for which no parallel is found in any other religion. In a society where the Shariah is implemented in its full sway the ongoing process of Istinbat keeps injecting new ideas, concepts and rulings into the heritage of Islamic jurisprudence which makes it easier to find out specific answer to almost every situation in the books of Islamic jurisprudence. But during the past few centuries the political decline of the Muslims stopped this process to a considerable extent. Most of the Islamic countries were captured by non-muslim rulers who by enforcing with power the secular system of government,

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deprived the socio-economic life from the guidance provided by the Shariah, and the Islamic teachings were restricted to a limited sphere of worship, religious education and in some countries to the matter of marriage, divorce and inheritance only. So far as the political and economic activities are concerned the governance of Shariah was totally rejected.

Since the evolution of any legal system depends on its practical application, the evolution of Islamic law with regard to business and trade was hindered by this situation. Almost all the transactions in the market being based on secular concepts were seldom brought to the Shariah scholars for their scrutiny in the light of Shariah. It is true that even in these days some practicing Muslims brought some practical questions before the Shariah scholars for which the scholars have been giving their rulings in the forms of Fatawas of which a substantial collection is still available. However, all these Fatawas related mostly to the individual problems of the relevant persons and addressed their individual needs.

It is a major contribution of the Islamic banks that, because of their entry into the field of large scale business, the wheel of evolution of Islamic legal system has re-started. Most of the Islamic banks are working under the supervision of their Shariah Boards. They bring their day to day problems before the Shariah scholars who examine them in the light of Islamic rules and principles and give specific rulings about them. This procedure not only makes Shariah scholars more familiar with the new market situation but also through their exercise of Istinbat contributes to the evolution of Islamic jurisprudence. Thus, if a practice is held to be un-islamic by the Shariah scholars a suitable alternative is also sought by the joint efforts of the Shariah scholars and the management of the Islamic banks. The resolutions of the Shariah Boards have by now produced dozens of volumes - a contribution which can never be under-rated.

Another major contribution of the Islamic banks is that they have now asserted themselves in the international market, and Islamic banking as distinguished from conventional banking is being gradually recognized throughout the world. This is how I explain my comment that they have contributed a lot. On the other hand there are a number of deficiencies in the working of the present Islamic banks which should be analyzed with all seriousness.

First of all, the concept of Islamic banking was based on an economic philosophy underlying the rules and principles of Shariah. In the context of interest-free banking this philosophy aimed at establishing distributive justice free from all sorts of exploitation. As I have explained in a number of articles, the instrument of interest has a constant tendency in favor of the rich and against the interests of the common people. The rich industrialists by borrowing huge amounts from the bank utilize the money of the depositors in their huge profitable projects. After they earn profits, they do not let the depositors share these profits except to the extent of a meager rate of interest and this is also taken by them by adding it to the cost of their products. Therefore, looked at from macro level, they pay nothing to the depositors. While in the

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extreme cases of losses which lead to their bankruptcy and the consequent bankruptcy of the bank itself, the whole loss is suffered by the depositors. This is how interest creates inequity and imbalance in the distribution of wealth.

ISSUES RELATED TO THE ISLAMIC BANKING

Contrary to this is the case of Islamic financing. The ideal instrument of financing according to Shariah is Musharakah where the profits and losses both are shared by both the parties according to equitable proportion. Musharakah provides better opportunities for the depositors to share actual profits earned by the business which in normal cases may be much higher than the rate of interest. Since the profits cannot be determined unless the relevant commodities are completely sold, the profits paid to the depositors cannot be added to the cost of production, therefore, unlike the interest-based system the amount paid to the depositors cannot be claimed back through increase in the prices. This philosophy cannot be translated into reality unless the use of the Musharakah is expanded by the Islamic banks. It is true that there are practical problems in using the Musharakah as a mode of financing especially in the present atmosphere where the Islamic banks are working in isolation and, mostly without the support of their respective governments. The fact, however, remains that the Islamic banks should have gressed towards Musharakah in gradual phases and should have increased the size of Musharakah financing. Unfortunately, the Islamic banks have overlooked this basic requirement of Islamic banking and there are no visible efforts to progress towards this transaction even in a gradual manner even on a selective basis. This situation has resulted in a number of adverse factors :

FIRSTLY, the basic philosophy of Islamic banking seems to be totally neglected.

SECONDLY, by ignoring the instrument of Musharakah the Islamic banks are forced to use the instrument of Murabahah and Ijarah and these too, within the framework of the conventional benchmarks like Libber etc. where the net result is not materially different from the interest based transactions. I do not subscribe to the view of those people who do not find any difference between the transactions of conventional banks and Murabahah and Ijarah and who blame the instruments of Murabahah and Ijarah for prepetuating the same business with a different name, because if Murabahah and Ijarah are implemented with their necessary conditions, they have many points of difference which distinguish them from interest-based transactions. However, one cannot deny that these two transactions are not originally modes of financing in Shariah. The Shariah scholars have allowed their use for financing purposes only in those spheres where Musharakah cannot work and that too with certain conditions. This allowance should not be taken as a permanent rule for all sorts of transactions and the entire operations of Islamic Banks should not revolve around it.

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THIRDLY, when people realize that income from in the transactions undertaken by Islamic banks is dubious akin to the transactions of conventional banks, they become skeptical towards the functioning of Islamic banks.

FOURTHLY, if all the transactions of Islamic banks are based on the above devices it becomes very difficult to argue for the case of Islamic banking before the masses especially, before the non-muslims who feel that it is nothing but a matter of twisting of documents only.

It is observed in a number of Islamic banks that even Murabahah and Ijarah are not affected according to the procedure required by the Shariah. The basic concept of Murabahah was that the bank should purchase the commodity and then sell it to the customer on deferred payment basis at a margin of profit. From the Shariah point of view it is necessary that the commodity should come into the ownership and at least in the constructive possession of the bank before it is sold to the customer. The bank should bear the risk of the commodity during the period it is owned and possessed by the bank. It is observed that many Islamic banks and financial institutions commit a number of mistakes with regard to this transaction.

Some financial institutions have presumed that Murabahah is the substitute for interest, for all practical purposes. Therefore, they contract a Murabahah even when the client wants funds for his overhead expenses like paying salaries or bills for the goods and services already consumed. Obviously Murabahah cannot be effected in this case because no commodity is being purchased by the bank.

In some cases the client purchases the commodity on his own prior to any agreement with the Islamic Bank and a Murabahah is effected on a buy-back basis. This is again contrary to the Islamic principles because the buy-back arrangement is unanimously held as prohibited in Shariah.

In some cases the client himself is made an agent for the bank to purchase a commodity and to sell it to himself immediately after acquiring the commodity. This is not in accordance with the basic conditions of the permissibility of Murabahah. If the client himself is made an agent to purchase the commodity, his capacity as an agent must be distinguished from his capacity as a buyer which means that after purchasing commodity on behalf of the bank he must inform the bank that he has affected the purchase on its behalf and then the commodity should be sold to him by the bank through a proper offer and acceptance which may be effected through the exchange of telexes or faxes.

As explained earlier Murabahah is a kind of sale and it is an established principle of Shariah that the price must be determined at the time of sale. This price can neither be increased nor reduced unilaterally once it is fixed by the parties. It is observed that some financial institutions increase the price of Murabahah in the case of late payment which is not allowed in Shariah.

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Some financial institutions roll-over the Murabahah in the case of default by the client. Obviously, this practice is not warranted by Shariah because once the commodity is sold to the customer it cannot be the subject matter of another sale to the same customer.

In transactions of Ijarah also some requirements of Shariah are often overlooked. It is a prerequisite for a valid Ijarah that the lessor bears the risks related to the ownership of the leased asset and that the usufruct of the leased asset must be made available to the lessee for which he pays rent. It is observed in a number of Ijarah agreements that these rules are violated. Even in the case of destruction of the asset due to force majeure, the lessee is required to keep paying the rent which means that the lessor neither assumes the liability for his ownership nor offers any usufruct to the lessee. This type of Ijarah is against the basic principles of Shariah.

The Islamic banking is based on principles different from those followed in conventional banking system. It is therefore logical that the results of their operations are not necessarily the same in terms of profitability. An Islamic bank may earn more in some cases and may earn less in some others. If our target is always to match the conventional banks in terms of profits, we can hardly develop our own products based on pure Islamic principles. Unless the sponsors of the bank as well as its management and its clientele realize this fact and are ready to accept different - but not necessarily adverse - results, the Islamic banks will keep using artificial devices and a true Islamic system will not come into being.

According to the Islamic principles, business transactions can never be separated from the moral objectives of the society. Therefore, Islamic banks were supposed to adopt new financing policies and to explore new channels of investments which may encourage development and support the small scale traders to lift up their economic level. A very few Islamic banks and financial institutions have paid attention to this aspect. Unlike the conventional financial institutions who strive for nothing but making enormous profits, the Islamic banks should have taken the fulfillment of the needs of the society as one of their major objectives and should have given preference to the products which may help the common people to raise their standard of living. They should have invented new schemes for house-financing, vehicle-financing and rehabilitation-financing for the small traders. This area still awaits attention of the Islamic banks.

The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest. The creation of an inter-bank relationship based on Islamic principles should no longer be deemed difficult. The number of Islamic financial institutions today has reached around two hundred.

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They can create a fund with a mixture of Murabahah and Ijarah instruments the units of which can be used even for overnight transactions. If they develop such a fund it may solve a number of problems.

Lastly, the Islamic banks should develop their own culture. Obviously, Islam is not restricted to the banking transactions. It is a set of rules and principles governing the whole human life. Therefore, for being 'Islamic' it is not sufficient to design the transactions on Islamic principles. It is also necessary that the outlook of the institution and its staff reflects the Islamic identity quite distinguished from the conventional institution. This requires a major change in the general attitude of the institution and its management. Islamic obligations of worship as well as the ethical norms must be prominent in the whole atmosphere of an institution which claims to be Islamic. This is an area in which some Islamic institutions in the Middle East have made progress. However, it should be a distinguishing feature of all the Islamic banks and financial institutions throughout the world. The guidance of Shariah Boards should be sought in this area also.

The purpose of this discussion, as clarified at the outset, is by no means to discourage the Islamic Banks or to find faults with them. The only purpose is to persuade them to evaluate their own performance from the Shariah point of view and to adopt a realistic approach while designing their procedure and determining their policies.

LIST OF FINANCIAL INSTITUTIONS WORKING ON THE INTEREST–FREE SYSTEM

CENTRAL BANKS OF THE DIFFERENT COUNTRIES

• Bank Negara Malaysia

• Bank Indonesia

• Central Bank of Jordan

• Central Bank of Kuwait

• Central Bank of Egypt

• Jordan National Bank

• National Bank of Egypt

• National Bank of Kuwait (Watani)

• National Bank of Bahrain

• National Bank of Oman

OTHER BANKS

• ABC Islamic Bank (E.C.)

• Al Baraka Bank

• Arab Bank

• Arab National Bank

• Al Bank Al Saudi Al Fransi

• Al Baraka Bank of Algeria

• Arab Malaysian Banking Group

• Al Watany Bank of Egypt

• Al-Ahli Bank Bahrain

• Al-Baraka Islamic Bank Bahrain

• Al Watany Bank Of Egypt

• Bank Muamalat

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• Bank Islam

• Bank Negara Indonesia

• Bank Saderat Iran

• Bank of Kuwait and the Middle East

• Bank Rakyat Malaysia

• Bank Simpanan Nasional

• Bank Utama (Malaysia) Sdn. Bhd

• Bank of Palestine

• Banque Misr, Egypt

• Beirut Riyad Bank

• Banque Extérieure d'Algérie

• Bahrain Development Bank

• Bahrain Islamic Bank

• Bank of Algeria (Banque d'Algerie)

• Banque National d'Algérie

• Bank of Bahrain and Kuwait B.S.C

• Baiduri Bank Brunai Darussalam

• Bank PSP

• Commercial Bank of Kuwait

• Egyptian American Bank

• El Khalifa Bank Algeria

• Faysal Islamic Bank of Bahrain

• Gulf International Bank

• Islamic Development Bank

• Islamic Development Bank Group

• Jordan Kuwait Bank

• Jordan Islamic Bank

• Muslim Commercial Bank Pakistan

• Misr Exterior Bank

• Oman Arab Bank

• OCBC Bank, Singapore

• Oman International Bank S.A.O.G

• Palestine International Bank

• Perwira Affin Bank

• Seyad Shariat Finance

• Shamil Bank of Bahrain

• Taib Bank Bahrain

• United Bank of Egypt

• United Bank of Kuwait

OTHER FINANCIAL INSTITUTES

• Kuwait Finance House

• American Finance House LARIBA Bank

• Amman Financial Market Jordan

• Amana Mutual Funds Trust

• Faisal Finance

• ICIEC

• Mayban Finance

• Manzil USA

STOCK MARKETS

• Bahrain Stock Market

• Bombay Stock Exchange India

• Beirut Stock Exchange

• Saudi Stock Market

• Dow Jones Islamic Index Fund

• Teheran Stock Exchange

• Istanbul Stock Exchange Turkey

• Jakarta Stock Exchange

• Kuala Lumpur Stock Exchange Malaysia

• Karachi Stock Exchange

• Kuwait Stock

INSURANCE COMPANIES

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• Takaful Islamic Insurance International

• Takaful USA

• Takaful Asuransi Syari'ah

• Oman Insurance Company

INVESTMENT COMPANIES

• Al Baraka Investment & Development Co.

• Al Rajhi Banking & Investment Corporation

• Al-Falah Investments Ltd

• Al-Ameen Islamic Fin & Inv Corpn

• Arab Jordan Investment Bank

• The International Investor

• Dallah Al Baraka

• Dar Al Maal Islami Group

• Failaka Investments Inc

• MSI Financial Services Corporation

CONTROVERSIES

In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.

Some Islamic banks generate profits by charging for the time value of money, the common economic definition of Interest|Riba. These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.

The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The

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reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia.

Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place.

CONCLUSION In addition to the above basic principles Islam has laid down many more rules about economic life. An Islamic state must bring all productive resources into use, including unemployed man-power, unused land, water resources and minerals. An Islamic state must take steps to root out corruption and all harmful pursuits even if they are economically lucrative. Individual freedom may have to be sacrificed for the social good.

Islam encourages simplicity, modesty, charity, mutual help and cooperation. It discourages miserliness, greed, extravagance and unnecessary waste. Here, we have discussed the main points of the Islamic economic system and we have no scope to go into the details in depth. It would be better for you to study some standard books on Islamic Economic from reliable sources (i.e. Islamic book shop etc.) to have a good grasp of this important aspect of our life.

In addition, the effectivity with which the Islamic economic systems correctly defines the economic problem and secures the needs of every individual, and eliminates all forms of economic and social corruption, would provide fuel for the foreign policy of the state that would enable the Khilafah to easily spread Islam ideologically throughout the world.

For an interest-free system to emerge and get implemented successfully, the Ummah must revitalize within itself the Islamic way of life and cultivate the Islamic culture and the Islamic Aqeedah as the sole basis for providing solutions to its problems. Without the clear conviction in the Islamic Aqeedah and the comprehensive understanding of the Islamic system, the corrupt regimes will continue to tame and manipulate the Muslim masses with empty slogans, while behind the curtains; the feudal landlords of Pakistan will maintain their status and the Gulf sheikhs will continue to squander the public resources of the Ummah.

"Now have come to you from your Lord proofs to open your eyes: if any will see, it will be for (the good of) his own soul; if any will be blind it will be to his own (harm): I am not (here) to

watch over your doings." [The Qur’an 6:104]

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REFERENCES:

http://islam.about.com/

http://www.inomics.com/cgi/econdir?path=Science/Social_Sciences/Economics/Economic_Systems/Islamic_Economic_System

http://quranicteachings.co.uk/economy.htm

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

http://www.readingislam.com/

http://www.islamic-world.net/economic/main_page.html

http://www.angelfire.com/bc3/johnsonuk/eng/dawa/economic.html

http://beachange.org/

http://www.islamic.org.uk/

http://www.islamicity.com/

http://www.zaharuddin.net/

http://www.uwt.org/

http://www.blurtit.com/Society/Economics/

http://www.religionfacts.com/