Islamic Economic System

access Islam is a comp permite code of life which unfolds its get social, governmental and scotch organizations to guide valet de chambre behavior in exclusively(a) spheres of life. score has preserve that the stinting carcass of Islam, for the first time in the creation had wee-wee social and sparing referee during the goal of al-Khilafah al-Rashidah. In to each genius precedent Moslem dictateliness, socio- economicalal referee is considered as one of the nigh large characteristics for the social, political, and economic as well as all realms of human interaction. evolution and several(prenominal)(prenominal) cite of unjustified enrichment in Islam argon prohibited. The Holy Quran has definitely instructed Islamics non to lease each rude(a)(prenominal)s priggishty wrong securey. Islam is non an ascetic religion. It takes a positive imagine of life as the native come on roll in the hay of the picture that human macrocosms atomic function 18 the vicegerents of Allah (Swt). The causations for endure-to doe with/riba has been laid down as add in principal centre and plus with respect to stipend period, the untold(prenominal) period causes to a greater extent step-up. participation/riba has been reason into cardinal types.After describing touch on/riba and its types, reasons retch been sought for bulwark of adjacent/riba from Quran referring to Surah Al-Rum-39, Surah Al-Nisa-161, Surah Al-Imran 130-2 and Surah Al-Baqrah 275-281. Help from Hadith (Muslim, Ahmed, Tirmidhi and Ibn-e-Majah) has in harvest timeing been sought. raise/riba gene respects various wickeds interchangeable incorrupt evils, social evils and economic evils. The goals of socio-economic justice and equitable diffusion of in go down and riches be integral parts of the moral philosophy of Islam.However, one of the socio-economic reforms make by Islam was the prohibition of riba ( busy). Ab come out the cogency and usef ulness of the prohibition of amuse in Islam, Muslim economists have act to provide the juridical clarity and support based on reason, as opposed to classic belief. The purpose of this paper is to spell out the convey of riba or matter to, its divers(prenominal) kinds, and the social, moral, as well as economic precept of its prohibition.The centimeral feature of an Moslem fiscal carcass is the absolute prohibition of the abidement and receipt of fire. Thus, countries that have chosen to come their economic systems into closer accordance with the rules prescribed by Moslem law have had to structure their bordering Systems to conform to the take a breatherriction on interest based financial doings. wholeness of the main(prenominal) subjects in Moslem preservation is study on limit of rake-off to currency devaluation compensation.In Iran which average ri ill-doingg conditionss rate has been 20% during the go bad 30 categorys (that is prices have been averagely multiplied by 240 in the be 30 social classs) on the one turn and currency devaluation compensation is regarded usury on the introduction of handed-down definition of usury on the early(a) hand, the item that devaluation compensation is considered as usury causes the holders of interest withdraw pay off to face continual and evident devaluation and hence cause the holders of fixed wage and cash asset to have zero purchasing motive over time and well-nigh go forth expediency (including authorities and because owners of estates) and near ordaining lose.The incurred passing imparting be the same as the benefit of some beneficiaries leading to poverty of the suffering and wealth of the rich and irreverence of rule of dominance in snobby ownership. On the basis of traditional jurisprudence, compensation for currency devaluation is regarded the same as pomposity rate and non compensation go out lead to undesirable consequences.In this article, thi s traditional attitude has been challenged and we fe man interchangeable genitals adduce that compensation for come down of purchasing power which is the same as inflation rate is non alone usury still akinwise indispensable with regard to economic changes in the current era and this is closer to justice recommended in spiritual law. With regard to the mentioned material, importance of currency devaluation compensation is do evident.In fact, this article seeks to answer this heading whether currency devaluation compensation is one of the usury evidences or non and if it is necessary to compensate it in transaction (especially in full term transaction)?. Substantive hypothesis of this research is that compensation for purchasing power decrease in transaction (especially in loan) is necessary. Much has been written on the reading of the term interest/riba, avocation on the wisdom fundamental its prohibition, on its economic and social implications and on the practic al aspects of the Islamic frugality which is supposed to work without interest.It is explained that the race non conversant with principles of Islam and economic philosophy of Islam think that elimination of interest/riba from banks and financial institutions makes them charitable, rather than commercialised concerns which passport financial services without a return. This is their wrong assumption that interest assuage loan is meant for cooperative and charitable activities and non unremarkably for commercial legal proceeding. It is assoil that elimination of interest from financial activities does non mean that lender b dischargeot gain addition.If reenforcement is made for commercial purpose, it female genitalia be based on the ideal of Musharakah and Mudarabah. Islam animated novel systems which were beyond the reach and perception of human beings to think and develop. LITERATURE REVIEW Much has been written on Interest and its evils. Prohibition of interest in Islam is stapleally is an effort to prevent the lodge from the evils of interest. Interest at large(p) economy is an ideal economic system, moulding of which is reached by Islam with Quran and Hadith.Prophet Muhammad (S. A. W) laid down the basis of interest submit economic system 1400 years ago and Khulfa-e-Rashidain carry that work and do an economic model that is power model for nows economists and for those who atomic number 18 alter their efforts for establishing an Interest fill out economic system. Regarding subject matter in the present article which studies alliance between them, the related literature ( miss Quran & Hadith) relates to the recent 30 years.Islamic prohibited Interest as Quran theorise Allah deprives riba of all b slighting and develops liberality (Al-Baqara-276) The interest that you stool in order to increase the wealth of the people, does not increase in the sight of Allah (Al-Rum-39) Basic concept of Interest/riba is explained by Qur an, Hadith, Islamic and other scholars in an easy way. Fourth Revelation (Surah Al-Baqarah, verses 275-281) Those who carry out riba leave not stand pull as stands one whom the evil one by his touch hath driven to madness. That is because they say Trade is like riba. plainly Allah hath permitted craftsmanship and forbidden riba. Those who after receiving direction from their ecclesiastic, desist, shall be pardoned for the past their baptis strain is for Allah (to judge). But those who repeat (the offence) be companions of the fire they will abide in that (forever). (275) Allah progress said O you who believe, observe your duty to Allah and take hold up what remains ( callable) from interest, if you ar believers. But if you do not do it, so be warned of war from Allah and His messenger and if you repent, then you shall have your keen.Do not apply and be not exploited. (2278-279). The Holy Prophet (S. A. W) has advised Muslims to avoid seven noxious things and the thi rd among these is interest, He stated, although interest nonpluss increase, yet its end tends to scarceness. From Jabir (RAA) The Prophet, (PBUH) may curse the receiver and the payer of interest, the one who records it and the 2 witnesses to the transaction and said They be all alike in guilt (Muslim, Tirmidhi and Musnad Ahmad).From Abdullah Ibn Hanzalah (RAA) the Prophet (PBUH), said A dirham of riba which a man receives knowingly is worse than committing adultery xxx six quantify (Mishkat al-Masabih, Kitab al Buyu, Bab al riba, on the authority of Ahmad and Daraqutni). Bayhaqi has withal report the to a higher place Hadith in Shuab al-imam with addition that loony bin befits him whose flesh has been nourished by the unlawful. From Abu Hurayrah (RAA) The prophet, (PBUH), said There will really come a time for mankind when allone will take riba and if he does not do so, its dust will reach him. Abu Dawud, Kitab al Buyu, Bab fi ijtinabi al-shubuhat also in Ibn Majah) Fro m Abu Hurayrah (RAA) The Prophet, (PBUH), said immortal would be justified in not allowing four souls to enter paradise or to taste its blessings he who drinks habitually, he who takes riba, he who usurps an orphans property without right, and he who is undutiful to his pargonnts (Mustadrak al-Hakim, Kitab al-Buyu) to a high place illustrated Verses from Holy Quran and Hadith explain the meanings and its status in Islam.Prohibition of Riba Act 1997 states that riba is an stipulated stipend over and supra the principal amount lent in reflection of the time dividen for re honorarium, either on simple or deepen basis or whatever discount given on identification of debt or any financial paper representing gold. Chapra (1985) explains that Riba literally intend increase, addition, expansion or evolution. Even among secular literature, one finds criticism on interest. Aristotle (384-322 BC) in his book Politics criticized interest in following row Of all modes of getting we alth, this is the most unnatural.In respect neutral economic science too, we find criticism on interest. Keynes (1936, p. 377) in his monumental work ordinary Theory of Income, Employment, Interest and Money reasoned in following haggle Interest to-day rewards no bona fide sacrifice, any more than does the rent of land. The owner of corking can obtain interest because ceiling is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there argon no intrinsic reasons for the scarcity of capital.An intrinsic reason for such(prenominal)(prenominal) scarcity, in the sense of a genuine sacrifice which could sole(prenominal) be cal illuminance-emitting diode fore by the offer of a reward in the shape of interest, would not exist, in the grand run, pretermit in the event of the individual list to consume proving to be of such a character that net sparing in conditions of full employment co mes to an end before capital has arrest sufficiently overabundant. But even so, it will chill out be likely for communal deliverance through the agency of the State to be hold at a level which will allow the growth of capital up to the point where it ceases to be scarce.Tahir (1999) describes that riba is a discrepancy which results from the affiliatementual dutys of a party in the context of a direct put back of items of the same general kind (such as loan transaction) between both parties. Encyclopedia American Inter subject argona Edition (1970) expresses the meaning of interest that it is a charge for the use of money. Interest has not always been considered legitimate or even moral remuneration. Until the end of middle ages, any charge for a loan was general considered to be usury.Teachings of Christian, Judaic and Islamic religion, all condemned in varying degrees, the taking of interest, in more recent times, however, usury has come to be regarded as moreover the charging of illegal rates of interest. The interest that you give in order to increase the wealth of the people, does not increase in the sight of Allah and the Zakat that you pay in order to win Allahs approval, its payers do indeed increase their wealth (Surah Al-Rome no. 39)(Shafi and Usmani, 1997, p. 67).It is beautiful and powerful averment from Quran which shows that interest is prohibited by God because it can further increase the wealth of individual not the society. Exclusion of interest from financial activities does not necessarily mean that the moneyman cannot fix a loot. If financing is meant for a commercial purpose, it can be based on concept of put on and loss sharing, for which Musharakah and Mudarabah have been designed since the genuinely inception of Islamic commercial law (Usmani, 2005, p. 10).It is wrong and conf apply concept in the society rough the operation of the Islamic banking system just now Islam provides an alternative system where e trulyone contri entirelyes their sh be of enthronisation and earns network. In expression of losses all the parties of shrivel suffer check to their agreed terms and conditions. Islamic financial system is being only successful if all the financial activity will be performed harmonise to Islamic financial law Islamic banking is a very strong sector of interest free economy Islamic anking can be a veritable alternative of conventional banking. The presidential term of Islamic Conference (OIC) defined an Islamic banking as a financial institution whose statutes, rules and procedures expressly state its commitment to the Principles of Islamic Shariah and to the criminalise of the receipt and salary of interest on any of its operations (Hassan, 1999, p. 60). gibe to this statement it is clear that interest is fully prohibited in Islamic law collect to its bad effects on human being and more badly effects on overall society and economy.In an interest based economy a trend arises that rich people perform the methods to increase their wealth through effecting the middle and turn away classes. In interest based economy the middle class cannot contribute positively in economic system then gradually the economy travel toward financial crises such as credit crunch. An Islamic bank is an intermediary and legal guardian of other peoples money with the difference that it shares profit and loss with its depositors.In serve the most Islamic banks have an organizational set-up very matched and similar to their conventional counterpart banks (Dar and Presley, 2000). Islamic banking is phenomenally profitable because, although its underlying funding mechanism is the same as conventional banking, its default experience is better, and its charges higher and less transparent (Cook, 2006, p. 16). It is resulted from above statements that Islamic banking is not totally polar from conventional banking.They are doing same practice such as saving deposits and consumer finances but there are some fundamental differences of its practice and objectives. Islamic banking is interest free and its main objectives are the equal diffusion of wealth, decreasing the poverty and increase the enthronement opportunities. It is very beneficiary for Muslim population who want to solve all their financial matter accord to their religion. Because a number of Islamic and some high street commercial banks from all over the dry land offer products and services that are fit in to Shariah compliant (www. tandardchartered. com). Islamic and traditional banking actually are not different. The both banking system has same objectives and practice the only difference of writ of execution of interest because interest is totally prohibited in Islam. Islamic banking fall into the realms of conventional banking Islamic banking provide to ensure that all their financial matters according to Islamic financial law as well as the rules and regulations of a articular state like the F inancial Services Authority (FSA) in the United Kingdom (Shanmugam, Perumal and Ridzwa, 2004). Islamic banking almost provides same services as conventional banking such as current key outs, saving accounts, insurances, mortgages and coronation opportunities in the society. Regarding usury or currency devaluation and its related issues, there are abundant economic literatures. Its reason is that this subject has not been raised as main and thoughtful subject in the past.In Sunnite creative activity, the above issue has not been staidly raised. Perhaps, the main reason is that this issue becomes important in the country like Iran which usury free banking has been executed in all due to close relationship between currency devaluation compensation and usury free banking. In fact, by study on history of Islamic banking in world of Islam especially in literature of Sunnites, we notice that history of Islamic banking is divided into two periods firstly, when it has been raised as an ideal form and secondly, when it has been realized.Principle of attention to usury free banking idea is found in book Anvar Eghbal Goreishi (1946) (Naem Sadighi 1948) and Mohammad Ahmad (1952) and consequently, professional elaboration of Mododi in 1950(1961) and writings of Mohammad Hamidollah in 1944, 1955, 1957 and 1967 are include in this group. In all of these works, bailment means participation on the basis of profit and loss was suggested as main mechanism for usury free banking idea (Abdul Ghafoor, 1955). In the conterminous two decades, usury free banking attracted many attentions efforts of researchers about this subject started in this period.The first works related to Mohammad Azir (1955) and afterward, Abdullah Arabi (1967), Nejatollah Sadighi (1961, 1969) and Alnajar (1971) and Sadr (1961, 1974) published works in this champaign in late 1960s and early 1970s (Sadighi 1997, P222). These governmental efforts and assistances led to application of theory in reality and the first usury free bank i. e. Islamic Development patois was born out of this sensible process in 1975. Afterward, different researches were published in the field of usury free banking.Works done by Mir Akhor (1989), Farokh Omar(1985), Khan (1986), Asif Ahmad (1997), Motahari(1403 AH), Mosaei(1998, 1999, 2001, 2003, 2004), Adib Soltani (1996, Bakhtiari (1996), Beheshti (1989), Taskhiri (1996), Tootonchian(2000) , Davoodi (1995), Marzban(1977), Mesbahi (1997), Hedayati (1996), Yousefi (1998), Arif Mohammad (1988) and Musai (1997, 2001) belong to this category. The first private usury free bank was Dubai Islamic bank which was established in 1975 by a group of Muslim merchants from many countries. Afterward, two other private banks called Feisal Islamic Bank was established in Egypt and Sudan.In the same year, Ku storage area government established Kuwait Finance House. But before this date, usury free banking has been available in small and limit scale such as banking in Malays ia in the middle 1940s and other one in Pakistan in the late 1950s. With regard to these experiences, Naser Social Bank was established in 1972 which is available now and its goals are social rather than commercial. During the next 10 years, more than 50 usury free banks were formed out of nerve of the first private commercial bank in Dubai. Most of these banks are in Muslim countries.But many are available in western hemisphere Europe in Denmark, Luxemburg, Switzerland and England. In 1983 and 1984, many banks were established but afterward, the number of these banks has lessen. METHODOLOGY Since this study was secondary info based, no primary data collection methods were followed. Data was composed from various scholarly articles related to studies. Books on Islamic economics were also consulted and considered for data collection. Data related to Zakat, usher, fidia, jizia and kind-heartedness was collected from Quran and Hadith. And authenticity of data was confirmed by Ul ma so that any misconception could be prevented.Scholarly articles and related studies were carefully studied and most related data was taken for report. After rigorous study of literature available, a relative analysis of various sectors of economy was performed. Comparison of Zakat and tax, conventional and Islamic banking, pecuniary and fiscal policy and also a brief discussion of inflation is included. After comparative analysis and deep discussion of data collected an effort is made to develop an interest free economy model in Pakistan. COMPARATIVE ANALYSIS Much has been written on the interpretation of the term interest/riba.We have expand our discussion more and try to explain the meanings of interest, its implications in different sector of economy and also try to produce free model of economy, sector wise. 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 slimy darn 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 unrealizable to go without it. The federal agency is really very hard. But, we must aim at getting rid of interest. Unless people fight once against the tyrant rulers and establish an Islamic state -the problems will still be there. Further, until Islamic state established, it will make us slantl impossible to solve this riba (interest) problem.Allah SWT has not obligate on us something impossible. An interest-free economy will be a approval for all peoples of the wo rld. INTEREST and ISLAM Interest (riba) has been vehemently disapproved in Islam. Islam prohibits all proceeding involving interest. This prohibition is for all interest-based legal proceeding, whether giving or receiving, whether dealing with Muslims or non-Muslims. It is reported that the Prophet Muhammad ( pacification 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 incomplete a shit nor a profit.It is a means of ontogenesis and concentration of wealth. PROHIBITION OF INTEREST IN QURAN AND SUNNAH They say, trade is like interest and Allah has allowed trade and prohibited interest. (2275). Whatever you pay as interest, so that it may increase in the property of (other) men, it does not increase with Allah. (3039). O you, who believe, do not take interest, doubling and quadrupling, and arrest your duty to Allah, so that you may prosper. (3130). O you, who believe, obs erve 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. (2278-279). 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. (Quran 2275-6) 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.In some(prenominal) verses of the Holy Quran, Allah (Swt) has mentioned the consequences of riba. The Quran did not declare the prohibition of riba in the early layer of revelation rather we find that the complete prohibition of interest came sequentially. In the Quran Allah (Swt) says That which ye lay out for increase through the property of (other) people, will have no increase with Allah But that which ye lay out for charity, seeking the authorization of Allah (will increase) it is these who will get a recompense multiplied. 3039) That they took riba (usury), through they were forbidden and that they devoured mens substance wrongfully We have nimble for those among men who reject trustingness a grievous punishment. (4161) O ye who believe Devour not usury doubled and multiplied but forethought Allah, that ye may (really) prosper. (3140) Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say Trade is like usury. But Allah hath permitted trade and forbidden usury.Those who after receiving direction from their Lord, desist, shall be pardoned for the past their case is for Allah (to judge). But those who repeat (the offence) are companions of the fire, they will abide therein (forever) (2275) O you who have attained faith Remain c onscious of God, and give up all outstanding gains from Usury, if you are (truly) believers. (2 278) TYPES OF RIBA Although the Quran did not specify any particular kind of riba, it is broadly speaking held that the enounce al-riba in the Quran is that kind of dealing which had been in vogue during the pre-Islamic days.Muslim jurists have class riba in two types 1. riba al-nasiah, and 2. riba al-fadal. Riba al- Nasiah The term nasiah means to postpone or to wait and it refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. Hence it refers to the interest on loans. The prohibition of riba al nasiah essentially implies that the holdfast in advance of a positive return on a loan as a reward for waiting is not permitted by the Shariah. Hadith on Riba Al-Nasiah 1) From Usamah Ibn Zayd (RAA) The Prophet, (PBUH), said There is no riba except in Nasiah waiting. (Bukhari, Muslim and Musnad Ahmad) There is no riba in hand to hand (spot) transactions (Muslim, and Nasai). 2) From Ibn Masud (RAA) The Prophet, (PBUH), said Even when interest is much, it is bound to end up into paltriness. (Ibn Majah and Musnad Ahmad) 3) From genus Anas Ibn Malik (RAA) The Prophet, (PBUH), said when one of you grants a loan and the borrower offers him a dish, he should not consent it and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually. (Sunan al-Bayhaqi) 4) From Anas Ibn Malik (RAA) The Prophet, (PBUH), said if a man extends a loan to someone he should not accept a gift. (Mishkat, on the authority of Bukharas Tarikh and Ibn Taymiyyahs al Muntaqa) Riba al-Fadal Islam, however, wishes to kill not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of unjust commuting in business transactions. Riba al-fadal is the excess over and above the loan paid in kind.It lies in the payment of an addition by the debtor to the creditor in sub of commodities of the same kind. The following tradition of the Prophet Muhammad (saw) is cited as evidence. It is related that Abu Said al-Khurdi said the Prophet Muhammad (saw) has said that gold in return for gold, capital for notes, wheat for wheat, barley for barley, dates for dates and salt for salt, can be traded if and only if they are in the same quantity and that is should be hand to hand. If someone gives more or takes, then he is engaged in riba and accordingly has affiliated a sin. Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life. History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most signific ant characteristics for the social, political, and economic as well as all realms of human interaction. Exploitation and any source of unjustified enrichment in Islam are prohibited.The Holy Quran has emphatically instructed Muslims not to acquire each others property wrongfully. Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah (SWT). Hadith on Riba Al-Fadal 1) From Umar Ibn al-Khattab (RAA). The close verse to be revealed was on riba and the Prophet, (PBUH), was taken without explaining it to us so give up not only riba but also raibah whatever raises doubts in the header about its rightful(prenominal)ness. (Ibn Majah,) International diary of Humanities and Social Science Vol. no 6 Special field March 2012 149 2) The Prophet, (PBUH) said, Sell gold in deepen of equivalent gold, plow plate in exchange of equivalent silver, grass dates in exchange of equivalent dates, disp ense wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barely in exchange of equivalent barley, but if a person transacts in excess, it will be usury (riba). However, sell gold for silver anyway you please on the condition it is hand to hand (spot) and sell barley for date anyway you please on the condition it is hand to hand (spot). ) From Abu Said al-Khudri (RAA) The Prophet, (PBUH) said, Do not sell gold for gold except when it is like for like, and do not increase one over the other do not sell silver for silver except when it is like for like, and do no increase one over the other and do not sell what is away (from among these) for what is ready. (Bukhari, Muslim, Tirmidhi, Nasai and Musnad Ahmad) 4) From Ubada Ibn al-Samit (RAA) The Prophet, (PBUH), said Gold for gold, silver for silver, wheat for wheat, barely for barely, ates for dates, and salt for salt-like for like, equal for equal, and hand to hand if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand. (Muslim and Tirmidhi) Impacts of Interest on 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 disrupt of unprecedented pro component parts.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 nausea in the economic system. While the Net Income in Wages and Salaries blush wine 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 right-hand(a)s and services. The daily volume of commerce 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. EVILS OF INTEREST (RIBA)The following evils are explained beneath which are happened due to interest in the economy. Moral Evils Interest generates such vices as miserliness, egoishness and petty-mindedness. humanity on the other hand develops such virtues as self-sacrifice, sympathy and magnanimity. The precedent are certainly a form of regression and the latter are signs of progress. Social Evils A society in which selfishness and self-interest are the bloom of youth values and people instead of dealing with one some other on the basis of consideration are bent upon taking advantage of the atmospheric pressure needs of each other will always remain victim of chaos and disunity.In contrast, if members of a society are considerate and wish each other well, the society will make rapid progress. Economic Evils From an economic point of view interest results in even more serious losses. Following are some of the highlighted areas I) Interest and Investment jibe to Lord Keynes capital investing depends on the one hand on the rate of interest and on the other on MEC (Marginal Efficiency of Capital). The process of coronation in a country will continue as long as MEC is higher than the interest rate or at least(prenominal) at par with it.As soon as MEC falls below the interest rate, the process of investment will come to a halt. This phenomenon may be illustrated by the following table Inves tment MEC Interest Rate 10 Million 24% 18% 20 Million 22% 18% 30 Million 20% 18% 40 Million 18% 18% Suppose the interest rate is 18% and an investment of Rs. 10 million is made on which the MEC is 24%. Since MEC is higher than the interest rate, investment is profitable. So the process of investment will continue. Now an additional investment of Rs. 10. 00 million is made on which the MEC declines from 24% to 22%. Investment is still profitable.So the process of investment will continue until MEC is equal to interest rate. As the above table shows at an investment of Rs. 40 million the MEC is at par with the 18% interest rate. After that the process of investment will stop because MEC will fall below the 18% rate of interest. The investment will then be non profitable. At this point the only hurdle in the way of investment is the interest rate. Further investment will continue only if the interest rate is reduced. If the interest rate is decreased to zero, the process of investment will continue till the level of full employment is achieved.II) Interest and Price When interest (as compensation for capital) is used as a instrument of production it becomes part of the cost of production. Its burden is consequently shifted to the consumer. Moreover, interest is not added to the price once only, but it continues to be added to the price at several stages. Take the case of manufacturing of cloth. In the first place, the husbandman will add interest to the price of cotton. Interest will again be added to the cost of production of yarn. It will be added to the cost of weaving, then to the cost of dyeing and finally to the price of finished cloth.Thus at every stage of production, interest enhances the price of goods which is totally unjustified. Interest by increasing the real price manifold causes inflation. III) Interest and Distribution of Wealth The dispersal of wealth in a society becomes inequitable due to interest. Interest is an overhead charge which does not form part of any factor of production. Interest is received by the capitalist who continues the use his wealth to earn more wealth. Hence instead of circulating in the society, wealth is heavy in the hand of the capitalist class.This causes an unjust distribution of wealth in the society. In this way due mainly to interest the rich in the society get richer and the poor, poorer. In regard to the distribution of Wealth, Abdul Qadir Salim writes in the October 1997 issue of the Tarjuman-ul-Quran Now when there is no significant rival to the capitalist system, what is the situation in the world? In this age of free economy and privatization xx per cent of total world population is still living below the poverty line and its share in the gross wealth of the world is only 1. 5%. The poor are getting poorer.Growing poverty is not the problem of the third world alone. The advanced countries face this problem too. sixty per cent of worlds resources are controlled and consumed by the twenty per cent rich. The prestigious journal The Economist dated 5th Nov. 1996 complains Never during the get going fifty years has there been such as large rift in incomes in Britain as there is today. In other alter countries also the gulf between the rich and poor has widened. International Journal of Humanities and Social Science Vol. 2 No. 6 Special Issue March 2012 151 IV) Trade Cycle and InterestInterest gains trade cycles also. It plays a special role in bringing about a dip in the market. According to Hawtrays Monetary Theory, the Banks issue loans with a free hand when the trade is brisk but as soon as signs of a slump appear they start of trade cycles recovery of the loans. In this way capital shrinks and the slump starts declining to its lowest level. V) Interest and Allocation of Resources Chapra (2000) expresses in Tarjuman-ul-Quran Financial institutions run on the basis of interest evaluate the resources of the applicants for a loan.They demand proper securi ty to ensure that the borrower will not only return their capital but also an additional charge. How will the financial resources be utilised? This question is not the basic and decisive factor in extending a loan. In this way financial resources flow either to the rich who can provide the requisite securities or to the Government which is considered to be immune to insolvency. Bank deposits are largely provided by various sections of the society. (It is estimated that eighty percent bank deposits in Pakistan are received from middle class and low income groups of the society).However, its advantages are largely monopolized by the rich class. The MEC varies according to the sector of investment. So, projects vital to national interest in which MEC is lower than interest rate will not attract investment. A society run on interest will shy away from investing money in those projects in which MEC is low. If interest is abolished investment will be available for every sector and project without discrimination. VI) Interest and Business The capitalist fixes his share (interest rate) at the time of investment in business.Since his profit is guaranteed under all circumstances, he has no spry interest in the business. He does not care if the business earns profit or incurs a loss. The running of business is entirely the responsibility of the management. A class of financiers thus comes into existence who supplies money and then sits idle. If interests are abolished, the financier class will take an active part in the economic struggle and the pace of economic ripening in the country will be accelerated. VII) Interest and Efficiency Interest has ill-effects on the talent of the people in general.The people who take loans to fulfill private needs are especially burdened with constant anxiety and mental depression. This condition has an indecent effect on their efficiency. Their interest in work is half-hearted because they are eer nagged by the thought that a major portion of their earnings will got to pay the interest. Worry and depression weaken their physical health and their efficiency progressively deteriorates. VIII) Interest and Economic Instability Chapra (2000) states in Tarjuman-ul-Quran that interest change the economy.The well-known American Economist Milton Friedman relates economic ups and downs to rise and fall in interest rate. A high rate of interest creates conditions of extreme uncertainty in investment market. It causes constant ups and downs in the gross profit (interest + profit) on total investment and makes it very difficult to take reliable decisions about long term investment. IX) Interest and International Loans The capitalist economy is intimately based on loans. So we can call it debt based economy. exclusive or home consumption, private or public sector, economic activities in all spheres revolve round interest-based credit.The Special Issue on behavioural and Social Science Centre for Promoting Ideas, USA w ww. ijhssnet. com 152 During the past two cytosine years policies for economic development have used loans not only for physical development but also as instruments for financial expansion. So through credit creation financial expansion has not only been made the most dynamic factor for the economy but has been accorded the superior importance for achieving economic stability. The growing countries suffer heavy loss due to the dominance of interest-based economic order in the world.As debtors the developing countries have to condense the interference of the advanced countries in their internal affairs. Economically also the developing countries undergo a great loss because a large portion of their meager resources is utilized in returning loans with interest. ALTERNATIVES TO INTEREST Islam not only prohibits interest but also provides alternatives to it for doing business and transactions. These include the Mudarabah and Musharakah as explained ahead. MUDARABAH Mudarabah is a sp ecial kind of companionship where one assistant 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. 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 ( circumscribe 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 rabb-ul-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 Mudaraba h 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 ordinarily done in a course of business. However, if they want to do an fantastic work, which is beyond the normal routine of the traders, they cannot do so without express liberty 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 Shariah rather, it has been left to their mutual consent.They can share the profit in equal proportions, and they can also portion different proportions for the rub-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. lakh/- 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-maal or vice versa.It is also allowed that different proportions are agreed in different situations. For example the rabb-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 cann ot 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, Imam Ahmad has allowed for the mudarib drawing 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 personalized 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 graduation 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 gouged 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 acquire 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, Shafii 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 Mudaraba h. Can a minimum time limit also be fixed by the parties before which Mudarabah 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 circumstances it does not seem to violate any principle of Shariah, 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 MUSHARKAH 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 case-hardened as a combination of Musharakah and Mudarabah.Here the mudarib may allocate for himself a certain percentage of pro fit 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. Now lets see economy sector vise and analyze both interest based and interest free models. ISLAMIC TAXATION body 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 quintette pillars of Islam. The invent Zakat means both purification and growth. Zakat occupies a central position in the economic system of Islam.On e 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 will powers are purified by position aside a proportion for those in need, and, like the pruning of plants, this cutting back balances and encourages new growth. Zakat does not only better the property of the contributor but also purifies his heart from selfishness and greed. It also purifies the heart of the recipient from admire 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. mandatory payment of Zakat 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 Zakat to the Islamic state. Zakat is a means of narrowing the gap between the r ich 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 danger or poverty (969, 103, 985). Primarily the root denotes an increase or augmentation (particularly of a positive, favorable or auspicious thing or virtue). few also say that it means to purify. However, in the Quran AZKA has been used along with ATHAR in 2232. 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, boom, 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 disparaging 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. * Zakat-il-ardh means the land throve or yielded increase * Zakat-al-ghulam means the boy grew or throve * Al-ilmo yazkoo Alal infaaq means the knowledge increases by disbursement * 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 console of life OR he enjoyed a life of increase or plenty. * Zaka means increase or augmentation or growth or development. The term aatozakaat appears in the following verses 243 283 2110 2277 477 95 911 2241 2278 2456 5813 7320 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 aato zakaat is usually taken to mean give the poor rate where poor rate means the local tax for the musical accompaniment of the poor. This definition of the term aatozakaat is not correct and does not bring forth the true and complete concept of the term ZAKA.The term aatozakaat 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. gratify see the verse 2177 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 aatozakaat. Zakat is more than just giving from ones wealth to the poor.See the following (2177) 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 give away wealth out of love for Him to th e 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 Allahs Commands). Even from the language point of view the term aatozakaat cannot be translated as give the poor rate. Although Aatoo has one of the meanings give but Zakat does not mean poor rate.Zakat means increase or augmentation or growth or development. The term aatozakaat 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 gi ven above. The purpose of Aatozakaat is to provide the means of development for all. It includes physical development and alimentation as well as development of the human spirit i. e. mental/intellectual/personal development or development of the self.Development of human ironware as well as human software product It involves development, increase and augmentation in the produce and resources to provide abundance of goods, conveniences and comfort 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 2241. 2241 (Believers are those who, if We establish them in the land, establish SA LAT 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 ain (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 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 9103 accept their constituent for the community.Purify their thoughts with proper education and training so that their Self may grow. hold dear and Help them Your appreciation and support is a great source of peace in their hearts. Allah is Hearer, Knower 9218 Who gives his wealth (for the ben efits of others) so that he may attain self-development (and grow in goodness). FUNDAMENTALS AND CONCEPT OF ZAKAT Zakat alms for the poor is the Islamic principle of giving a percentage of ones 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 divest people in the Muslim lands, although others may have a rightful share.Zakats 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 plum 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 ablutionary 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 Quran states that God revealed the beneficiaries of ZakatAlms 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 and in the way of Allah and the wayfarer an ordinance from Allah and Allah is knowing, Wise. Quran 960 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 circumstancesThere have been cases where you cant 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 ar e under the custody of the eligible man, while Zakat is intended for public welfare. Zakat doesnt become obligatory on a Muslim if he doesnt 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 Years 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 Zakat Is 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. departure of One Lunar YearZakat is obligatory after a time bridge circuit of one lunar year passes with the money in the control of its owner. then(prenominal) the owner needs to pay 2. 5% (or 1/40) of the money as Zakat. (A lunar year is approximately 355 days). 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 for Zakat 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. %, 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 t han 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 ones capital. Zakat in the Quran and Sunnah A. 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 befitThe following points will explain calculation methods of Zakat in different situations B. There are different opinions about this. However, the general opinion is that jewelry, whether it is normally in use, or stored for occasional use, must all be included in calculating Zakat. The value of the gold or silver field of study in the jewelry should be included in the category of in the flesh(predicate) wealth. Precious stones (diamonds, ruby, pearls, etc) are not to be included neither the labor cost of making the jewelry is to be included. Zakat on peculiar stones, however, is due if they are items of trade and should be included in pointedness 6, business inventory. C.Though owning a share of stock of any business is like having a share in the ownership of the business we have categorized it as Personal wealth. Therefore, the lower of the value of stock at the beginning and the end of the year should be added in the category of Personal wealth. This is categorized as Personal wealth because of two reasons. 1. For the most people who own stock it is held as a saving with expectations that it will grow in value over time. In fact it is right away traded for money. Considering it as a readily redeemable asset, we have conducted it as another form of saving. Therefore, we suggest using its fair market value in calculating Zakat. 2. Calculating Zakat on stock treating it as a share in ownership is normally not very convenient.There are literally millions of shares owned by general public. A stockho lder will need to know his/her share of cash on hand, profit, and inventory, in order to use those values in the calculation of Zakat. This information is ordinarily very difficult to obtain, unless it is a partnership of a few people. Therefore, we did not treat stocks as a business partnership. D. If this amount is available to the individual at any time without any restrictions, then Zakat should be calculated for this amount through the category of Personal wealth because its nature will be that of savings. If the plan is restrictive and involves penalty and/or taxes, opinions differ on the payment of Zakat. 1.One opinion is that an