Journal of Islamic Banking and Finance April June

Transcription

1 Journal of Islamic Banking and Finance April June

2 2 Journal of Islamic Banking and Finance April - June 2016

3 Journal of Islamic Banking and Finance April June In The Name of Allah, The most Beneficent, The most Merciful O Believers: devour not Riba, doubled and redoubled; and fear Allah, in the hope that you may get prosperity. Sura Ale-Imran (verse No. 130) The articles published in this Journal contain references from the sacred verses of Holy Qur an and Traditions of the prophet (p.b.u.h) printed for the understanding and the benefit of our readers. Please maintain their due sanctity and ensure that the pages on which these are printed should be disposed of in the proper Islamic manner

4 4 Journal of Islamic Banking and Finance April - June 2016 Journal of Islamic Banking and Finance Founding Chairman Muazzam Ali (Late) Former Vice Chairman Dar Al-Maal Al-Islami Trust, Geneva, Switzerland Board of Editorial Advisors Ahmed Ali Siddiqui Mufti Bilal Qazi S. A. Q. Haqqani Dr. Hasan uz Zaman Dr. Mohammad Uzair Altaf Noor Ali (ACA) Chairman Basheer Ahmed Chowdry Shariah Advisor Uzair Ashraf Usmani Editor Aftab Ahmad Siddiqi Associate Editor Seemin Shafi Manager Publication Mohammad Farhan Published by: International Association of Islamic Banks Karachi, Pakistan. Ph: +92 (021) Fax: +92 (021) ia _ yahoo.com Website: Follow us on Facebook: cgisirsi/x/0/0/5/?searchdata1=37177{ckey} Registration No Printed at M/S Maaz Prints, Karachi Volume 33 April-June No. 2 International Advisory Panel Dr. Mohammad Kabir Hassan Professor of Economics & Finance University of New Orleans, USA Professor Dr. Mohd. Ma sum Billah IEI, King Abdul Aziz University, Kingdom of Saudi Arabia. Dr. Rodney Wilson Emeritus Professor, INCEIF, Lorong Universiti A Malaysia/France Dr, R. Ibrahim Adebayo Department of Religions, University of Ilorin, Nigeria Dr. Huud Shittu Department of Religion and Philosophy, faculty of Art University of Jos Plateau State, Nigeria Dr. Zubair Hasan, Professor Emeritus INCEIF Global University of Islamic Finance, Malaysia Dr. S. Nazim Ali, Professor and Director, Center for Islamic Economics and Finance, Hamad Bin Khalifa University, Doha, Qatar Dr. Mehboob ul Hassan Professor, Department of Economics, (CBA) King Saud University, Saudi Arabia National Advisory Panel Dr. Waheed Akhtar Assistant Professor, Comsats Institute of Information Technology (CIIT), Lahore, Pakistan Dr. Manzoor Ahmed Al-Azhari, Associate Professor (Islamic Law) Ph.D, Legal Policy, Fac. Shariah & Law. Alazhar University, Egypt. Post Doc. Fac. of Law, Univ.of Oxford, UK. Mr. Salman Ahmed Sheikh Ph.D Scholar & Research Associate National University of Malaysia Dr. Muhammad Zubair Usmani Jamia Daraluloom Karachi Muhammad Zeeshan Farrukh (MBA CPIF) Islamic Banking Group of National Bank of Pakistan Team Leader-Training & Development Unit, Karachi.

5 Journal of Islamic Banking and Finance April June Journal of Islamic Banking and Finance Volume 33 April June No. 2 C O N T E N T S 1. Editor s Note Shari'ah Model of Foreign Exchange By Prof. Dr Mohd Ma Sum Billah 3. The Potential Effectiveness of Financing Based on Musharkah and Ijarah on Agriculture: A Case Study of Pakistan By Shamim Saleem 4. The Need of Adequate Policies for Collection & Distribution of Zakat By Muhammad Zeeshan Farrukh 5. Sharia Rulings of Bill discounting and its Alternative (Bai Salam in Currency) By Uzair Ashraf Usmani 6. Islamic Bonds: Economic Benefits and International Political Risk By Ghada Gomaa A. Mohamed, PhD, PDF 7. Islamic View on Money Laundering and Terrorist Financing By Muhammad Fayyaz, Muhammad Subtain Raza 8. Economic Systems Human thoughts and Islamic Precepts By Maher Kababji 9. Book Review Early Islam & the Birth of Capitalism by Benedict Koehler 10. Country Model: Azerbaijan

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7 Journal of Islamic Banking and Finance April June Editor s Note Since Riba is prohibited in Islamic faith, Muslims need Shari ah compliant financial services which avoid Riba and other impermissible features. Islamic banking institutions were established in various parts of the world since the 1960s to cater to this need. Since the beginning of the twenty first century, the Islamic banking industry has achieved uninterrupted growth and now Islamic banking assets constitute a $2 trillion market. Nevertheless, given the size and scale advantages enjoyed by the conventional banks, Islamic banking needs regulatory support to maintain the growth trajectory and sustainability. If tax distortions result in additional tax impacts on Islamic banking products, then they will become uncompetitive. Thus, it will result in failure to utilize the potential household savings that do not reach financial markets and institutions. Islamic banks have to undertake unique risks and get involved in financial transactions in order to ensure Shari ah compliant income from financial intermediation services. They can not merely lend money to earn compound interest. They provide asset backed financing for which they have to take ownership of real assets. Only after obtaining ownership and physical or constructive possession of these real assets, they can sell these assets at a profit or provide usufruct of the asset to earn rental income. This could create several tax issues, such as duplication of duties in assets transfer, registration and multiple sales for indirect taxes and in tax treatment of income for direct tax purposes. These additional levies could render Islamic banking products uncompetitive and hence, their growth and penetration, especially in Muslim societies could be hindered where financial inclusion is already at a dismal level. Providing tax neutrality to Islamic banking products can help in utilizing the household savings in obtaining funds for both commercial and development finance projects. Therefore, the tax systems should base treatment on economic substance and move away from distortionary transaction taxes for leveling the playing field. Rather than enacting new regulatory regime, the current regulatory impediments may be overcome through changes to existing laws to ensure equal treatment between the Islamic financial products and their conventional counterparts. Furthermore, in equity based modes of financing, the taxation needs to be lenient in order to encourage their use since their socio-economic implications are more egalitarian. Thus, at least, the Muslim majority countries shall provide friendly tax framework to Islamic finance transactions that involve the use of equity financing. Equal treatment between debt and equity in addition to interest based debt and Islamic debt based modes of finance will help tilt the balance towards equity finance in the long term.

8 8 Journal of Islamic Banking and Finance April - June 2016 This issue of Journal of Islamic Banking & Finance documents scholarly contributions from authors around the globe. Contributions in this current issue discuss the theoretical underpinnings of an Islamic economy, contemporary issues in Islamic finance and performance based empirical studies on Islamic banking and finance. Below, we introduce the research contributions with their key findings that are selected for inclusion in this issue. Mohd Ma Sum Billah, PhD, Professor and Dr. Faisal Mahmoud Atabani former Vice Dean, both from Islamic Economics Institute of King Abdul Aziz University in their paper Shariah Models of Foreign Exchange discuss the issues pertaining to FOREX or currency exchange model under the Shari'ah principles. The main issue with regard to currency is to establish whether paper currencies fall under thaman haqiqi (gold and silver), or thaman istalahi (inferior metals which serve as means of exchange). If paper money is considered as thaman haqiqi, subsequently, the concept of bai-sarf (exchange) must be applied to them. The authors argue that further analysis ought to be made to rule out possible issues that facilitate FOREX trading under the broad principles of Shari ah. The Potential Effectiveness of Financing Based on Musharkah and Ijarah on Agriculture: A Case Study of Pakistan contributed by Shamim Saleem, a Phd student at the University of Management and Technology (UMT) Lahore, discusses the effective role that these two Islamic instruments can play in the micro finance market, He discusses how both can be used for small ticket financing to boost agriculture which is the mainstay of our economy. The paper The Need of Adequate Policies for Collection & Distribution of Zakat by Muhammad Zeeshan Farrukh highlights that the proper collection and effective distribution of Zakat in an appropriate manner is one of the biggest challenges of the present day Muslim world. Zakat might become a very important source of revenue for the Muslim states particularly for the poor Muslim states. The study highlights the problems and issues of Muslim states regarding collection and distribution of Zakat, particularly with respect to lack of confidence of the people upon the public officials. Therefore, it is observed that the majority of the Muslims prefer to perform this religious duty themselves without any involvement of the government. This behavior is the biggest hindrance in effective utilization of this large source of revenue in the Muslim states. This paper gives suggestions on how to build and revive the confidence of the people in the effective utilization of Zakat. The paper Shariah Ruling of Bill Discounting and Its Alternative by Dr. Uzair Ashraf Usmani explains the different alternatives of bill discounting in Islamic finance. The author covers the rationale behind the Shariah rulings of prevailing bill discounting in conventional banks and discusses Bai Salam as an alternative. The paper discusses the different opinions of modern scholars regarding these issues. The theoretical paper Islamic Bonds: Economic Benefits and International Political Risk by Ghada Gomaa A. Mohamed makes a comparison between the Islamic bonds Sukuk and the conventional bonds within a classical theoretical framework. The paper uses the simple open economy version of the Solow model as a classical model to show the possibility of adopting Islamic bonds within a secular economy. It also explores the possibility of political risk in adopting Sukuk.

9 Journal of Islamic Banking and Finance April June In Islamic View on Money Laundering and Terrorist Financing Muhammad Fayyaz and Muhammad Subtain Raza endeavor to highlight the Islamic legal framework and its contemporary perspective to denounce money laundering, other economic crimes and terrorist acts. According to the authors, money laundering and terrorist financing are global threats for world economy, security and society. Islamic law cannot be separated from its moral, ethical and religious principles. They conclude that Islam encompasses all affairs of human life and provides a regulatory system to address repercussions of money laundering and terrorist financing and condemns them even today. Maher Kababji, BS, CPA having vast exposure in Accounting and Banking, Ex General Manager Arab Islamic Bank (Palestine), in his article Economic Systems Human thoughts and Islamic precepts discusses that the western conventional economic system has failed to address the issue of world prosperity and presents the Islamic economic system as a more viable option. He acknowledges that there is a need to develop the Islamic economic system a great deal more and there would be many challenges as well to make it a workable solution to address poverty and social injustices of the world. Disclaimer The authors themselves are responsible for the views and opinions expressed by them in their articles published in this Journal. The opinions, suggestions from our worthy readers are welcome, may be communicated on ia_ib@yahoo.com, link:

10 10 Journal of Islamic Banking and Finance April - June 2016 IN MEMORIAM OF Late Mr. Muazzam Ali Founder Chairman International Association of Islamic Banks, Karachi (Pakistan) Quarterly Journal of Islamic Banking and Finance ISSN Left us 11 years ago on March 10, 2005 For the Eternal Abode Your Life A Most Beautiful Memory, Your Death an Eternal Sorrow. Your fond memories are still etched in our minds and hearts. Your humility and steadfastness have always guided us. Your principles are the reasons of our position today. Your words of wisdom and paternal guidance would always be a source of inspiration for us, - today and forever. May your soul rest in peace (Amen) Please recite Surat-ul-Fatiha for his Soul. Directors/ Management JIBF/IAIB, Karachi.

11 Journal of Islamic Banking and Finance April June Shari'ah Model of Foreign Exchange By Mohd Ma Sum Billah, PhD Dr. Faisal Mahmoud Atabani** Abstract Foreign exchange (FOREX) market is not a new phenomenon in the applied economic environment, which acts as a centre for facilitating legitimate currency conversion from one to another in standard and acceptable value. In a FOREX market, buyers and sellers trade (exchange) one currency with another on a published (indexed) rate of value. 1 As a sale contract, the currency of the seller and the currency of the buyer both position as the consideration in the deal, while the subject matter of the contract is the act of exchanging two different currencies. In Islamic money market such transaction is recognised and is known as al-sarf, which is justified by the Shari'ah principles. Allah (swt) directed mankind to exchange goods and utilities through buying and selling (trading) with mutual consent without allowing any wrongful objective or element involved herein. Because, the rational outlook of a legitimate transaction is to ensure a just and comfortable socioeconomic status quo for all, besides encouraging mankind to be productive. 2 Allah (swt) thus, commanded to the effect: O you who believe, do not consume your property among yourselves wrongfully, but let there be trade and traffic by mutual consent 3 The purpose of this research is to discuss the issues pertaining to FOREX or currency exchange model under the Shari'ah principles. The main issue with regard to currency is to establish whether paper Mohd. Ma Sum Billah is Professor (Finance, Insurance, Investment, Capital Market & Trade), Islamic Economics Institute, King Abdul Aziz University, Saudi Arabia. ( profdrmasumbillah@yahoo.com), Blog: ** Dr. Faisal Mahmoud Atabani, Assistant Professor of Law, former vice Dean of Islamic Economics Institute, King Abdul Aziz University, Saudi Arabia. PhD (IALS, University of London), ( famaat@gmail.com). 1 The foreign exchange market, Institute of Bankers Malaysia ( 20 th March 2000 at p Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p

12 12 Journal of Islamic Banking and Finance April - June 2016 currencies fall under thaman haqiqi (gold and silver), or thaman istalahi (inferior metals which serve as means of exchange). If paper money is considered as thaman haqiqi, subsequently, the concept of baisarf (exchange) must be applied to them. A further analysis ought to be made to rule out possible issues that facilitate FOREX (trading) under the broad principles of Shari ah. Central Idea Keywords: foreign exchange, shari'ah, islam, shuftaja, sarf, banking According to Saudi rules Governing Money Changing Business Issued by Decision of the Minister of Finance No dated 01/05/1432H, Money Changing Business means: (i) Purchase and sale of foreign currencies and traveler's cheques and purchase of bank drafts; (ii) Transfer of funds inside and outside the Kingdom by those who had previously acquired SAMA s licensing for such activity valid at the time of the issuance of these Rules 4. By virtue of Section 2 of the Money Services Business Act (Malaysia) 2011 provides that, an exchange transaction means an exchange of one foreign currency with another foreign currency. While money-changing business means: the business of entering into an exchange transaction at a rate of exchange, money services business means: money-changing business; or remittance business; or wholesale currency business. 5 The foreign exchange or FOREX market is where buyers and sellers trade one commodity, known as currency. 6 So, how does the FOREX market operate? Allah has directed people to exchange goods and utilities through buying and selling (trading), because these transactions are able to make socio-economic life function smoothly, besides encouraging people to be productive. 7 Allah said in the Qur an: O you who believe, do not consume your property among yourselves wrongfully, but let there be trade and traffic by mutual consent 8 Historically, and also presently, the practise of trading is not only limited to take place within the borders of one country; businessmen and merchants travelled the world to promote and sell their products. In the Qur an, travelling is referred to as seeking the bounty of Allah and it is mentioned side by side with those who fight in His cause: Others travel through the land, seeking the bounty of Allah, and still others fight in the cause of Allah 9 Furthermore, Allah (swt) also mentioned in the Qur an about merchant ships, which transport goods throughout the world; the verse thus asserts that Allah encourages Al-Qur an, Al-Nisa : 29. Article 1 (d) of the Rules Governing Money Changing Business Issued by Decision of the Minister of Finance No dated 01/05/1432H. Section 2, The Money Services Business Act (Malaysia) 2011 (Act 731). The foreign exchange market, Institute of Bankers Malaysia ( 20 th March 2000 at p. 1. Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p Al-Qur an, Al-Nisa : 29. Al-Qur an, Al-Muzzammil: 20.

13 Journal of Shari'ah Islamic Model Banking of and Foreign Finance Exchange April June people to engage in exports and imports of goods. 10 Allah (swt) said: And thou seest the ships in it (the ocean), cleaving the waves, that you may seek of His bounty and that you may be thankful. 11 Through cross-border trading, different currencies with different values and purchasing power are exchanged. For example, consider a Malaysian based company, selling its products to the United Kingdom (UK), and the transaction is denoted in Pound Sterling. Upon receiving money from the UK, the Malaysian company will want to exchange the Pound Sterling for Malaysian Ringgit; thus, the company will search for a counter party with opposite needs (wishes to sell Ringgit for Pound Sterling). The exchange of the currencies between both parties is then made possible through the FOREX market, at the current market level. To search for a counter party is not an easy task because the company will have to roam the market in search of a party with opposite needs for the same amount and delivery date. The process itself may be chaotic and inefficient when large number of corporations and companies are engaged in such an activity. Hence, financial institutions like the banks and exchangers are there to act as one-stop shop for foreign exchange. 12 As in Malaysia, financial institutions quote currencies in terms of USD as well as crosscurrency rates (quoting currencies in terms of Ringgit Malaysia) to facilitate the exchange of currencies in Malaysia. There are two main foreign exchange risks: transaction exposure risk and translation risk. The transaction exposure risk is the risk that takes place when an asset is sold and its value in domestic currency is uncertain due to the exchange rate fluctuations, while the translation risk is the risk that occurs when the value of an asset appearing in the financial statements is uncertain due to the exchange rate fluctuations. 13 To illustrate on the first type of risk, a company in Malaysia sells its goods to the United States (US) and the transaction is denoted in the USD. Due to the weakening of the USD, the amount received by the Malaysian company may be far less than the original amount calculated. In relation to the second type of risk, the translation risk, take an example of a Malaysian company, which has liabilities that are denoted in the USD. When the USD appreciated relative to the Malaysian Ringgit during the recent Asian crisis, and the liabilities of the company were revalued, the company would have reported a great loss due to the foreign exchange translation, when in fact, initially the company made profits. The short-term factors, which lead to the fluctuations of exchange rates, are: 14 Capital flows or hot money that enter and exit the market fairly quickly, hence creating volatility in exchange rates; Interest rate differentials, which play a big part in allocation of capital because short-term funds usually exploit any differences in interest rates, thus bringing exchange rates to reflect the interest differentials; and Politics whereby investors will invest in countries that they perceive as having stable government, and take out their investments from countries with unstable government. The purpose of this paper is to Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p Al-Qur an, Al-Fatir: 12. The foreign exchange market, Institute of Bankers Malaysia ( 20 th March 2000 at p. 1. Ibid at 2. Ibid at 2 and 3.

14 14 Journal of Islamic Banking and Finance April - June 2016 discuss the issues pertaining to FOREX or currency exchange, and to relate it to the current practises in Malaysia. The main issue with regard to currency is to establish whether paper currencies fall under thaman haqiqi (gold and silver), or thaman istalahi (inferior metals which serve as means of exchange). If paper money is considered as thaman haqiqi, subsequently, the concept of bai al-sarf (exchange) must be applied to them. A closer attempt is further made in this paper to look at other issues pertaining to FOREX-trading and practises and their Shari ah point of views. Paper Currencies: Thaman Haqiqi (gold and silver) or Thaman Istalahi (inferior metals which serve as means of exchange)? Functions of money Before categorizing paper currencies or fiat money as either thaman haqiqi or thaman istalahi, we will first look at the functions of money, and the views of Islamic scholars (past and present) in relation to the issue of gold and silver as money. The Dictionary of Finance outlines the functions of money as having the following combination: 15 i. As a medium of exchange, which permits the distinct act of buying and selling; ii. iii. iv. As a measure of value whereby it serves to express the relative value of different commodities and services; A standard for deferred payments, thus allowing calculation of payments due at some future date; and As a store of value, thus permitting saving. Similarly, Davies divided the function of money into two groups: 16 i. Specific functions whereby it represents unit of account, common measures of value, medium of exchange, means of payment, standard for deferred payments, and store of value. ii. General functions whereby it serves as liquid asset, framework of the market allocated system, a contributory factor in the economy, and a controller of the economy. Furthermore, to make money acceptable to the public, it must have three attributes: Mahmood M. Sanusi, Gold Dinar, Paper Currency and Monetary Stability: An Islamic View, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p. 75. Hafiz Majdi Ab. Rashid et. al., The Stability of Gold Dinar and accounting Implications: An Empirical Study, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p Mohd. Ma sum Billah, Possible Political and Regulatory Issues of Introducing the Islamic Dinar, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p. 321 and 322.

15 Journal of Shari'ah Islamic Model Banking of and Foreign Finance Exchange April June i. It is able to be stored, that is, the money can be kept for present as well as future usage; ii. iii. It must be a unit of account, meaning that different commodities can be measured with respect to money; and It should be exchangeable for goods and services to make it valuable. Thus, it can be seen that the important attributes of money centres on its ability to be exchanged, valued and stored. Views on paper money In the early days of Islam, gold and silver, which have known intrinsic values, performed all the functions of money (thaman) and they were described as thaman haqiqi or naqdain in the fiqh literature; while other commodities, such as various inferior metals, which also served as medium of exchange, but with limited acceptability (due to their values derived from the society s perceived values of the commodities, instead of from their intrinsic worth), were described as thaman istalahi or fals. 18 Generally, there are two schools of thought in Islamic scholarship pertaining to money: the first school views that money is limited to only gold and silver, while the second school views that money is not limited to only gold and silver. 19 Those in favour of the first school are: 20 i. Hanafi scholars: Abu Hanifah and Abu Yusuf; ii. iii. iv. Minority of Maliki scholars; Majority of Shafi scholars; One or two Hambali scholars; v. Tabi un: Mujahid and Nakhai ; and vi. Contemporary Scholars (around mid 20th century): Nabhani, Baqir Sadr and Makhluf. While those in support of the second school are: 21 i. Hanafi scholars: Shaybani; ii. iii. iv. Majority of Maliki scholars; Minority of Shafi scholars; Hambali scholars: including Ibn Taymiyyah; Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Mohamed Aslam Haneef and Emad Rafiq Barakat, Gold and Silver as Money: A Preliminary Survey of Fiqhi Opinions and Their Implications, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p Ibid at 143. Ibid at 144.

16 16 Journal of Islamic Banking and Finance April - June 2016 v. Ibn Hazm; vi. Tabi un: Laith ibn Sa ad and Al-Zuhri; vii. Majority of Contemporary Scholars: including Yusuf al-qaradawi and Muhammad Taqi Usmani; and viii. Contemporary Fiqh Councils. There are several reasons as to why different scholars support one school instead of the other. Those supporting the view that money is limited to only gold and silver based their arguments on the following: 22 i. Sunnah Taqririyya whereby the Prophet approved the use of gold and silver in Makkah and Madinah. Thus, making these two commodities as money falls under hukum shari, and as a result, only gold and silver must be used as money. ii. iii. Mu amalah (transactions) and ibadah maliyya (commercial activities as worship). For example, calculation of Zakat (alm), and diyya (blood-money) are based on gold and silver. Verses in al-qur an indicate that gold and silver are to be used as money. In relation to the function of gold and silver as a store or measure of value, Allah said: As to those who reject Faith and die rejecting, never would be accepted from any such as much gold as the earth contains, though they should offer it for ransom. For such is (in store) a penalty grievous and they will find no helpers. 23 Furthermore, the prohibition of hoarding of gold and silver indicates that gold and silver function as money. Allah (swt) said: And there are those who bury gold and silver and spend it not in the way of God: announce unto them a most grievous penalty. 24 Allah (swt) said further in the Qur an, indicating silver as a measure of value and medium of exchange: The (Brethren) sold him for a miserable price, for a few dirhams counted out: in such low estimation did they hold him! 25 i. Ijma Sahabah, for instance where the Khulafa al-rashidun also accepted gold and silver as money. ii. Gold and silver are money by nature. 22 Ibid at Al-Qur an, Ali-Imran: Al-Qur an, Al-Taubah: Al-Qur an, Yusuf: 20.

17 iii. iv. Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June A hadith reported by Abu Dawud and Ibn Majah which prohibits destruction of Muslims monetary system (using gold and silver) except in times of Darurah (Necessity). Shafi scholars limit the illah (cause) of thamaniyya (value) only to gold and silver. v. Due to the prohibition of using gold and silver for other uses like ornaments for men, this indicates that the function of these commodities is primarily as money. vi. Since gold and silver are relatively stable, which enables the achievement of justice in the monetary system, they must be used as money. On the contrary, those in support of the second school of thought, that is, they view that money includes other than gold and silver (for example currencies made of paper, leather or plastic) support their arguments based on the following: 26 i. Although Sunnah taqririyya indicated the use of gold and silver as money, it cannot be interpreted to limit money to only gold and silver. ii. iii. iv. The time when Khalifah Umar ibn al-khattab (r.a.) wanted to use leather from camels as money, but was then opposed by the Sahabah (Companion), demonstrated two points. Firstly, the fact that Umar wanted to use leather as money indicated that it is acceptable to use other than gold and silver; secondly, the Sahabah (Companion) objected to the idea not because it could not be done, rather, they were afraid that it could lead to shortage of camels. Principles of ibahah (worship), that is, everything is permissible unless stated otherwise in al-qur an and /or Sunnah; and since there is no prohibition for the use of other than gold and silver as money, therefore, it is acceptable to use other medium as money. Issues relating to money fall under the category of Masalih al-mursalah (public interest) and as a consequence, the authority is given to scholars to determine the type of money based on sources of Shari ah and on welfare of society. v. The meaning of money, as seen in its function, serves as a medium of exchange and measure of value. Hence, money also includes paper currencies and fiat money; it is not only limited to gold and silver. vi. The purpose of Shari ah is to remove hardship and there is a possibility that hardship will be apparent if money is restricted to only gold and silver. It is because these two items have limited supply to fulfil contemporary economic and financial needs. Thus, it is possible to use other than gold and silver as money. 26 Mohamed Aslam Haneef and Emad Rafiq Barakat, Gold and Silver as Money: A Preliminary Survey of Fiqhi Opinions and Their Implications, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p. 145 and 146.

18 18 Journal of Islamic Banking and Finance April - June 2016 vii. If only gold and silver are treated as money, Muslims may hinder from paying zakat and may also get involved in Riba (Usury), since items other than gold and silver will not be seen as representing money. Thus, in order to preserve and ensure the continuity of carrying out Shari ah obligations, medium other than gold and silver should be accepted as money. viii. The illah (cause) of thamaniyya (Value) is not limited only to gold and silver, but it is rather absolute in the sense that it is applicable to money in general, and this argument was supported by Ibn Taymiyyah who said that anything that performs the functions of a medium of exchange, unit of account and store of value is called thaman. 27 Since there are different views as whether paper money falls under thaman haqiqi (when scholars limit money to only gold and silver or thaman istalahi) (when scholars view that money is not only limited to gold and silver), hence, there are also different views on whether or not the transaction involving paper currencies should be governed by the Shari ah principles for bai al-sarf (exchange of thaman haqiqi). The hadith of Prophet Muhammad S.A.W. mentioned the exchange of six rabawi items, which act as a measure of value: 28 Exchange gold for gold, silver for silver, grain for grain, barley for barley, dates for dates, salt for salt in the same amount and of the same type and must be handed over in an aqd (contract) ceremony. If what you have exchanged differs in type, you can trade according to your wishes but it must be done on the spot. 29 The hadith asserts that the six rabawi (usurial) items must be exchanged in the same quantity and on the spot basis so as to avoid Riba (usury), which is prohibited under the Shari ah principles. Allah mentioned about prohibition of Riba in the Qur an: God hath permitted trade and forbidden usury. 30 Islamic scholars had extended the application of riba prohibition, by analogy (qiyas), to include the exchange of all other species which are governed by the same efficient cause ( illah) or which belong to any one of the genre of the six rabawi (usurial) items. 31 However, there is no general agreement among the scholars as to the definition Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Jalalullail Othman, Application of the Existing Laws and Regulations in Malaysia Relating to the Proposed Usage and Implementation of the Dinar from a Private Sector Perspective, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p Narrated by Muslim, as cited by Jalalullail Othman, Application of the Existing Laws and Regulations in Malaysia Relating to the Proposed Usage and Implementation of the Dinar from a Private Sector Perspective, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p Al-Qur an, Al-Baqarah: 275. Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p. 167.

19 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June and identification of illah (cause) of Riba' (usury), 32 which leads to the abovementioned variance in opinions in acknowledging paper currencies as thaman haqiqi or thaman istalahi. For instance, the Hanafi and Hambali scholars defined the illah of riba as having two dimensions: the exchange items belong to the same genus (jins), and these items have weight (Wazan) or measurability (Kiliyya); while the Shafi and Maliki scholars defined the illah (cause) of riba (in the case of gold and silver) to be their property of being money or medium of exchange, unit of account and store of value. 33 The scholars of Hanafi and Hambali schools also mentioned that when one of the two illah (cause) is present (for example, when the exchange items have weight or measurability but belong to different genus, or when the items belong to the same genus but are not weighable or measurable), therefore exchange with gain is permissible, but it must be carried out on a spot basis; however, when both elements of illah (cause) are absent, thus exchange with gain is permitted and it can be done on a spot or deferred basis 34. Therefore, in relation to foreign exchange whereby currencies of different countries are exchanged, we need to evaluate the currencies in relation to the two elements of illah (cause). Take for example the exchange of Malaysian Ringgit (RM) with Japanese Yen, both currencies are only valid within specific geographical boundaries (RM can only be used in Malaysia while the Yen can only be used in Japan) and their intrinsic worth differs due to the differences in purchasing power. Secondly, paper currencies, both RM and Yen are neither weighable nor measurable, unlike gold and silver that can be weighed. Therefore, since both elements of illah (cause) of riba are not apparent, exchange of RM with Yen (and vice versa) can be carried out with gain and on deferred basis. On the other hand, the scholars of Shafi and Maliki schools look at paper currencies in terms of them having the characteristics of being thamaniyya (value or money) or as being the medium of exchange, unit of account and store of value, which is the same as the illah of being currency for gold and silver. 35 One group of scholars form the two schools of fiqh view that when paper or leather are treated as medium of exchange and given the status of currency, then all rules with regard to exchange of thaman haqiqi must be applied; therefore, exchanging currencies belonging to different countries at a rate different from unity is permissible, provided that it is done on a spot basis. 36 The other group of scholars however stated that the illah of being currency is only applicable to gold and silver, and cannot be generalised; hence, currencies can be exchanged with or with out gain, on a spot or deferred basis. 37 In Malaysia, the general notion with regard to paper currency is align with the majority of contemporary scholars and contemporary fiqh councils view (including the views of Yusuf al-qaradawi and Muhammad Taqi Usmani) whereby money is not only limited to gold and silver, hence also includes paper currencies. As a consequence, neither gain on exchange nor deferred basis of exchange can be accepted. However, in Ibid at 167. Ibid at 167. Ibid at 167. Ibid at 167. Ibid at 168. Ibid at 168.

20 20 Journal of Islamic Banking and Finance April - June 2016 the case of foreign exchange involving fluctuating exchange rates, gains arising from FOREX can be accepted under the Shari ah principles, as will be discussed in the next section. The foreign exchange (FOREX) rate There are two main types of exchange rate regimes: 38 i. The fixed exchange rate regime- takes place when the exchange rate of a country is fixed at a certain rate relative to another currency(s) by the authorities. For example, the Malaysian Ringgit is currently fixed or pegged relative to the USD at a rate of RM3.80 to 1 USD. ii. The floating exchange rate regime- occur when the value between currencies are determined by the demand and supply forces in the FOREX market. From the Shari ah perspective, Islam advocates a free market whereby prices are determined by market forces of demand and supply. Prophet Muhammad S.A.W. said: If people are left alone, Allah will give them provision from one another. 39 This indicates that the market, its prices and sales should be left to respond freely to internal economic forces and natural competition without manipulation; 40 and there should be no interference in the price formation process even by the regulators or authority. 41 How about the case of Malaysia, pegging its Ringgit against the USD then? The general consensus that price control and fixation is perceived as un-islamic is due to the fact that it contradicts the hadith of not interfering with the free market; however, scholars like Ibn Taimiyyah do allow such practise in situation where the implementation of fixed exchange rate regime is needed to fight cases of market anomalies caused by the impairing condition of free competition. 42 For instance, consider the recent Asian economic crisis. Had Malaysia not pegged its currency against the USD, the damage caused by speculating activities might have been intensified amid the weakening of the economy. As a result, an Islamic country like Malaysia might fall prey to the power of non-muslim nations like the US. Hence, under the condition of Darurah (necessity), by fixing the rate at RM3.80 per USD, the authority was able to control and limit speculation activities, thus curbing the damage caused by anomalies in the economy of the country. Additionally, when the market conditions are normal, that is, when the economy gets The foreign exchange market, Institute of Bankers Malaysia ( 20 th March 2000 at p. 1. Reported by Muslim, as cited by Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p Dr Mohammed Obaidullah, Islamic FOREX Trading, at Refer to notes and references no. 8, as mentioned by Dr Mohammed Obaidullah, Islamic FOREX Trading, at

21 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June better and more stable, the authority should lift the peg against the USD and let the forces of demand and supply to once again determine foreign exchange rates. At present, as mentioned above, since paper currencies have completely replaced gold and silver as the medium of exchange, unit of account and store of value, thus paper currencies should be regarded as thaman (value) and no gain or deferred basis transaction can be carried out. However, this is true for domestic currencies, and foreign currencies whereby fixed exchange rate regime take place. As in the case of domestic currencies, it is clear that RM 1 must be exchanged for only RM 1 on the spot basis. If for example, RM 1 is exchanged for RM 1.50, then the RM0.50 constitutes Riba (usury), and thus not permissible under Shari ah principles. In the case of fixed exchange rate, whereby the rate is likely to remain fixed over a long period of time, if currencies are exchanged on deferred basis at rate different from the spot rate, this will indicate a clear-cut case of interest based borrowing and lending. 43 For instance, at the fixed rate of RM3.80 per USD, an individual purchases USD 100 from the bank at the rate of RM 4.00, to be settled in one month s time. Since the FOREX rate is very unlikely to change within a month due to the fixed rate regime, the borrower will be paying back the bank an amount of RM instead of RM The extra RM20.00 or about 5% predetermined return is in fact Riba (usury). However, when floating exchange rate regime takes place, the case or Riba (usury) breaks down- the floating exchange rate regime indicates that currency rates fluctuate and are volatile, hence giving rise to the existence of risk in the FOREX market; similar to the Islamically acceptable gains on stock market or commodity market due to price risk, this should also be the case when returns on foreign exchange are realised (only applicable with floating exchange rate regime). 44 As a consequence, exchanging one currency at a rate different from the current market rate and deferring the settlement is permissible. The argument put forward is that Riba (usury) and risk cannot coexist in the same transaction- when there is zero exchange rate risk (due to fixing of currency rates or exchanging the same domestic currency), any discrepancies in the buying and selling rate of currencies indicates the existence of Riba (usury); on the other hand, in the case of floating exchange rate, where exchange rate risk appears, the gains or losses from foreign exchange trading are justified by the risk borne by the parties to the contract. 45 Other issues on foreign exchange (FOREX) trading Currency speculation and arbitrage When exchange rates are in equilibrium, no one can make profit by just trading between currencies. 46 For example: Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Ibid at 170. Ibid at 171. Ahamed Kameel Mydin Meera, The Islamic Gold Dinar, Pelanduk Publications, Malaysia, 2002 at p. 46. Ibid at 46.

22 22 Journal of Islamic Banking and Finance April - June 2016 RM USD S$ 1.60 Therefore, when a person begins with one USD, exchanges it into Singapore dollars, then exchanges it for Malaysian Ringgit, and then back into USD, that person will get his or her one USD again. If however, currency traders attack only the Ringgit by selling it on a large scale, thus depreciating the Ringgit to RM3.80 per USD, traders can earn speculative and arbitrage profits, as depicted below: 48 RM USD S$ 1.60 The speculative profit is realised when a trader speculates that Ringgit would depreciate, thus he would sell short RM 2.4 million Ringgit when the exchange rate was RM2.40 per USD. The USD1 million would then be credited to his account until the day he closes position by buying back the RM2.4 million. If his prediction is correct, that is, the Ringgit depreciates relative to USD to RM3.80 per USD, the trader closes his position by buying back RM2.4 million at the new rate and makes speculative profit of about USD 0.37 million [USD1 million (RM2.4 million / 3.80)]. Aside from that, he is also able to earn arbitrage profit from the disequilibrium in exchange rates between the three currencies as a result of the attack on Ringgit. He would first borrow USD1 million and then exchange it into RM3.8 million. Then, he would exchange the RM3.8 million for S$2.533 million [RM3.8 million / S$1.50], and consequently, exchanging the S$ Ibid at 47.

23 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June million into USD million [S$2.533 / 1.60]. He would then return the USD1 million he borrowed and keep the remaining USD583, as arbitrage profit. Therefore, the total profit that he makes is USD 953, [USD370,000 + USD583,333]. Thus, it can be seen that speculators engaging in speculation and arbitraging can indeed make hefty profits. Now, let us look at speculation and arbitrage from the Shari ah perspective. Are these two currency-trading practices not permissible under the Shari ah law? In relation to speculation, there are two types of speculation: speculation with inadequate or without knowledge (Jahl), and speculation with knowledge. In the case of speculation with inadequate or without knowledge, the element of uncertainty (Gharar) increases; and to the extreme, speculation is akin to gambling. Take for example a Malaysian trader heard rumours that the USD will appreciate relative to Ringgit, thus, he would immediately buy USD in the expectation that he will be able to sell the USD in the future to gain some profit. Is this permissible under the Shari ah? No it is not, simply because acting on rumours involve uncertainty or Gharar as to whether the rumours are reliable or not. Let alone speculating without the existence of knowledge, this is a clear case of gambling. For example, a Malaysian trader hopes that the USD will appreciate relative to Ringgit, thus he buys USD, hoping that he will earn some profit in the future. In the absence of knowledge or information, trading in the FOREX market for gains is not permitted by the Shari ah principles, as it resembles gambling. Allah said: O you who believed! Truly, intoxicant and gambling and divination by arrows are an abomination of Satan s doing: avoid it in order that you may be successful. Assuredly, Satan desires to sow enmity and hatred among you with intoxicants and gambling, and to hinder you from the remembrance of Allah and from salat. Will you not then desist? 49 So, what about speculation with the existence of knowledge? Syed Othman Alhabshi argued that in any business venture one has to indulge in speculation, which is based on some prior fundamental knowledge. 50 This is supported by Muhamad Obaidullah, who said that all business decisions involve speculation because businesspersons are required to assume some level of risk, after making proper assessment of risk with the help of knowledge. 51 In light of this argument, speculating in the FOREX market and gaining from it is permissible. However, there is a limitation to speculation, that is, it should not involve manipulation of information in order to outperform the others, and as a result doing harm to other people; or simply to say, speculation should not give rise to one party gaining at the expense of the other party. Prophet Muhammad S.A.W. said: Whoever interferes with the prices of Muslims goods in order to raise them deserves that Allah should make him sit in the Fire on the Day of Resurrection Al-Qur an, Al-Maidah: at p. 3. Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Narrated by M aqal bin Yassar, as cited by Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p. 258.

24 24 Journal of Islamic Banking and Finance April - June 2016 In relation to the above hadith, Islamic scholars have deduced that manipulation is prohibited when two conditions exist: firstly, manipulation could harm the people of a country, and secondly, the manipulator s aim is to make profit. 53 The arguments for speculation can also be applied in the case of arbitrage: if arbitraging brings about harm to others, then, under Shari ah jurisdiction, it should not be permitted to take place. Currency hedging As discussed earlier, there is no divergence of opinions among Muslim scholars with regard to the exchange of currencies based on spot transaction, using spot rates (the current selling and buying prices for currencies). When dealing with banks, the settlement date for spot transactions is the second working day after the dealing date, as depicted below: 54 Dealing date (transaction made) Spot value date (settlement date) Two working days TIME For instance, a spot deal transacted on Monday, thus it will be settled on Wednesday of the same week; and a deal made on Friday will be settled on Tuesday the following week because Saturdays, Sundays and public holidays are not included in working days. 55 Due to the volatility of currencies in the FOREX market, derivatives like forwards and futures, and options are used as hedging tools to minimise (or even eliminate) risks associated with currencies fluctuations. In Malaysia, only forward currency contracts are present whereby they are traded Over The Counter (OTC) and are custom designed for contracting parties. On the other hand, neither futures nor option currency contracts are traded in Malaysia. 56 Forward and futures on currencies are similar in the sense that two parties enter into a binding contract to buy and sell currencies at a future date, for a specified price and amount. The only difference is that futures are monitored by governing bodies, for instance, in Malaysia, the crude palm oil futures is monitored by Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p Coyle, B., Foreign Exchange Markets, Glenlake Publishing Company, Ltd., Chicago, 2000 at p. 17. Ibid at 17. Ahamed Kameel Mydin Meera, The Islamic Gold Dinar, Pelanduk Publications, Malaysia, 2002 at p. 45.

25 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June the Malaysia Derivatives Exchange Bhd (MDEX). To illustrate, let us look at the diagram below: 57 Dealing date Spot value date Value date (forward contract) Two TIME working days Term of forward contract, e.g. 3 months January 3 January 5 April 5 A three month-forward contract is established on January 3 rd, thus, the value date, whereby the actual buying and selling of currencies will take place on April 5 th, three months after the spot value date. With forwards and futures, the exchange rate risk can be eliminated because exchange rates are fixed in the future. Thus, similar to the fixed exchange rate regime, as mentioned above, any gain resulting from the forwards and futures transactions would represent Riba (usury). 58 Then again, in the first place, are forward and futures contracts on currencies permitted under the Shari ah law? In the case of forwards, several problems arises: firstly, the exchange rates are fixed, and thus, the contracting parties are stuck with the contract, that is, they are obliged to fulfil their part of the contract, even when it is not beneficial to either party to do so in the future; secondly, the element of counter party risk is present whereby both parties have the probability to default on the contract because there is no standardized contract (the contracts are not governed by regulating body); and thirdly, it is difficult to coincide the wants of both parties with regard to price and amount of currencies to be traded, and the timing that the exchange should take place. The majority of Shari ah scholars have disapproved forward and futures contracts primarily based on the existence of risk and uncertainty, and the possibility of the nonpermissible speculation taking place. 59 Gharar (uncertainty), which is also defined in terms of settlement risk or the uncertainty surrounding the delivery of exchanged articles, 60 is present in the case of forwards and futures; the risk is known as counter party risk. However, some might argue that with futures, the probability of defaulting is minimized because of the standardize nature of the contract and the transparent operating procedures on the organized futures market. 61 Nevertheless, it is worth mentioning that Justice Mufti Muhammad Taqi Usmani said that in most futures transactions, the delivery Coyle, B., Foreign Exchange Markets, Glenlake Publishing Company, Ltd., Chicago, 2000 at p. 61. Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Ibid at 171. Ibid at 171. Ibid at 173.

26 26 Journal of Islamic Banking and Finance April - June 2016 of the commodities and their possession is not intended; as a consequence, the parties would end up with the settlement of difference of price only, which is not allowed in Shari ah. 62 With regard to speculation in forwards and futures contract, the gains of one party is equal to losses of the other party, which encourages traders to speculate on the future direction of the currencies. 63 The element of gaining at the expense of the counter party in forwards and futures contracts, apart from the existence of Gharar (uncertainty) in these transactions, consequently gave rise to the prohibition of engaging in these two trading by Islamic scholars. Currency option is also a vehicle to manage foreign exchange risk, whereby it implies a right without obligation of one party to either buy or sell currencies at a predetermined exchange rate, within or at the end of a specified time period for a sum of premium paid to the counter party. Since currency options allow the buyers of the contracts to either confirm or cancel the contracts, this feature is seen as violating the Shari ah principles. 64 Nevertheless, currency options bring about several larger benefits to society: 65 i. It serves as a medium to reduce, or even eliminate foreign exchange risk; ii. Options grant reassessment or cooling off period to the contracting parties, which enable them to rationalize their decisions; iii. Conflicts between parties because of their abrupt, irrational and wrong decisions are minimized; iv. Enables the act of undoing a wrong commitment by not exercising option within or at the end of the specified date. Furthermore, according to the traditions of Prophet Muhammad S.A.W., the disadvantaged party, during the time of entering into a contract has the option to end the contract. For example, when the purchaser of the right anticipates that a currency will move towards a certain direction (based on information available to him), as a hedger, he might protect himself by buying either call or put options. However, the actual movement of the currency might turn out to be towards the opposite direction from that anticipated by him, due to information manipulation activities of certain market players. Thus, the initial decision made while entering into the contract is based on inaccurate information available to him, hence giving him the right to not exercise the option. Therefore, in order to protect Muslim nations from the risk associated with foreign exchange, the benefits offered through option contracts should not be overlooked. Now comes the issue on premiums paid by the buyer to the seller of the option contracts. Justice Mufti Muhammad Taqi Usmani said that options are not permissible because the promisor (the obligated party) cannot charge the promisee (the buyer of the option) a fee (premium paid by the promisee) for making such a promise. 66 Some modern scholars argue that the premium Justice Mufti Muhammad Taqi Usmani, Futures, Options, Swaps and Equity Investments, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Muhamad Obaidullah, Islamic Contracts for Currency Exchange, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p Dr Mohammed Obaidullah, Islamic Financial Options at Ibid at Justice Mufti Muhammad Taqi Usmani, Futures, Options, Swaps and Equity Investments, Anthology of Islamic Banking, Institute of Islamic Banking and Insurance, London, 2000 at p. 491.

27 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June paid may be treated as compensation by the promisee to the promisor for his or her willingness to do business with the promisee, instead of viewing it as a fee imposed by the promisor. 67 Furthermore, Dr Mohammed Obaidullah also suggested that premiums or compensation money do not have to be paid separately upfront to the seller of options, in order to distinguish Islamic options from the conventional ones. 68 Recommendations As discussed above, the usage of paper currencies or fiat money brings about the element of gharar and riba into the picture when currencies are exchanged in the FOREX market. Furthermore, when currencies are regarded and thus treated as thaman haqiqi under the Shari ah principles, it can only be transacted on spot basis. Under the floating exchange regime, limiting currency transaction to only spot trading, could lead to Muslim currencies being the target for non-muslim traders who aim to gain hugely from speculative activities, and at the same time aim to damage the economies and well being of Muslim nations. As a consequence, protective measures like hedging of currencies using derivatives to manage the risk associated with foreign exchange should be in place in the financial system of a Muslim country. Nevertheless, the ultimate solution for Muslim nations is to of course re-implement the usage of gold or Dinar as mode of exchange, unit of account and store of value into the financial system of Islamic countries. Some important implications or advantages of the Islamic Dinar are: 69 i. Under the Dinar system, money creation and destruction cease to occur, thus eliminating the element of interest. As a consequence, a stable currency and monetary system can be accomplished, and so does its purchasing power. ii. Dinar is an excellent medium of exchange due to its inherent value and easy divisibility, thus people tend to prefer gold to paper currency. iii. If Dinar is used as a single global currency, fluctuation of exchange rates is absent, hence removing speculative, arbitrage and manipulative activities. iv. If Dinar is used as a single currency for Muslim nations, transaction costs can be reduced since there is no need to exchange currencies to facilitate imports and exports among Muslim nations. This will then promote international trade among Muslim nations. v. With stability in purchasing power of money and income under the Dinar system, social problems like poverty, unequal distribution of income and crimes like theft and robbery can be curbed. However, it should also be noted that in an attempt to create Dinar as a single currency for Muslim nations, there are several problems or obstacles that need to be overcome, they are: Dr Mohammed Obaidullah, Islamic Financial Options at Ibid at Ahamed Kameel Mydin Meera, The Islamic Gold Dinar, Pelanduk Publications, Malaysia, 2002 at p Mohd. Ma sum Billah, Possible Political and Regulatory Issues of Introducing the Islamic Dinar, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p

28 28 Journal of Islamic Banking and Finance April - June 2016 i. There is no strong representative organization from the Muslim nations that is respected by all; and the Organization of Islamic Conference (OIC) does not have enough authority or power to make decision. ii. iii. iv. Lack of unity among Muslim nations due to some Muslim nations having internal problems like wars and fights, which hinders them from paying attention to other external problems. The different level of interest in Dinar for every participating country due to the fact that its implementation might result in some countries being affected unfavourably. The existence of distinct culture for each Muslim nation, even though the religion is the same, might result in some countries opposing to the Dinar system. This could be true if the system is perceived as a capable of altering the traditions of a nation. v. The high variance in value of currencies of Muslim countries gives rise to the issue of what should be the appropriate price for the Dinar? Malaysia might not want to accept the Dinar if its value is far less than the current perceived value of the Ringgit, while countries like Pakistan and Bangladesh might not want to accept a value which is higher than their currencies. Therefore, in order to make the Dinar as a single currency for Muslim nations a success, Muslim nations will first have to resolve the abovementioned problems. Until then, the implementation of Dinar will only result in the fall down of the whole system. Final Remarks The Saudi legal system apply the international standard in dealing with the currency exchange. However, applying of Shari'ah principle of exchanging namely the spot basis must be considered and implemented by the parties, that is the responsibility of a Shari'ah Board of a bank or exchanger. Fiat money or paper currencies, which are interest-based, promote the creation of money in the economic system; while in the occasions of withdrawal of deposits, repayment of loans, and default on the part of borrower on loan repayments give rise to destruction of money in the financial system. 71 The interest-based element is one of the factors, which results in fluctuations of exchange rates, as mentioned earlier, and it is the same element that is prohibited under the Shari ah law. The reason being that it hinders people from doing good to one another and it burdens the needy with the requirement to pay back more than the amount borrowed. 72 There are two distinct views from Shari ah scholars with regard to money: the first stated that money should only be limited to gold and silver, while the other stated that it should not be limited to only gold and silver. As a consequence, there are disputes on whether or not the foreign exchange transactions involving paper currencies should be governed by the Shari ah principles for bai al-sarf (exchange). If paper currency fall Ahamed Kameel Mydin Meera, The Islamic Gold Dinar, Pelanduk Publications, Malaysia, 2002 at p. 15. Yusuf al-qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, 1986 at p. 266.

29 Journal of Shari'ah Islamic Model Banking of Foreign and Finance Exchange April June under the category of thaman haqiqi, then it should be traded on the spot basis and no gains or losses should arise out of the transaction as it indicates the existence of Riba (usury). However, due to the widely adopted flexible exchange rate system that causes exchange rates to be volatile, and thus giving rise to risk, gains or losses on foreign exchange transactions do not imply Riba (usury). Although flexible or floating exchange rate regime is in line with the Hadith of Prophet S.A.W., which stated that one should not interfere with the free market, as discussed earlier, the present flexible exchange rate system have been proven to be inefficient. The inefficiency of the system is proven by the repeated financial crises in countries like Malaysia since the inception of the system. 73 Furthermore, the current system gives huge advantage to large country issuing the de facto world currency, the US; 74 and it causes developing nations to suffer due to four reasons: their currencies tend to depreciate (due to weak trading fundamentals) but it does not improve trade balance because of the price-inelasticity attributes in exports and imports; reduction in inflow of capital because foreign investors are afraid of devaluation of currencies; shortages in foreign exchange reserves result in monetary policies of the developing nations to become ineffective; and the fact that developing nations have big amount of foreign debt, which inflates in real terms, makes their financial survival difficult. 75 We then looked at the issue pertaining to speculation and arbitraging activities and its relevant Shari ah response, which concludes that these activities, if carried out with knowledge, should not impose negative effects to others. If the element of harm appears, then such practises are not permitted under the Shari ah principles. With regard to currency hedging, forwards and futures contracts are not allowed to be put into practise, as agreed by majority of Islamic scholars, due to the existence of Gharar (uncertainty), and also because these contracts promotes the non permissible speculation to occur. However, there are divergences in opinion relating to currency options; nevertheless, the ability of this type of contract to reduce or eliminate risk, and the benefits that it offers should not be ignored. With problems and inefficiencies associated with the current foreign exchange system, a single currency, which is free from the element of Riba (usury), like the Islamic Dinar, ought to be implemented for the betterment of Muslims and also human in general. The sooner the implementation, the better it is. However, careful analysis and researches, and problematic areas should be identified and dealt with beforehand to ensure the continuance in existence of the new system Muhammad Mazhar Iqbal, International Financial Architecture: A Comparison of Gold Standard and Islamic Dinar, presented at the 2002 International Conference on Stable and Just Global Monetary System: Viability of The Islamic Dinar on 19 th and 20 th August 2002 at p Ibid at 177. Ibid at 184.

30 30 Journal of Islamic Banking and Finance April - June 2016 The Potential Effectiveness of Financing Based on Musharkah and Ijarah on Agriculture: A Case Study of Pakistan Abstract By Shamim Saleem * Microfinance has been identified as an important policy instrument that allows greater financial and social independence for poor and destitute by facilitating access to financial services for rural class. Microfinance institutions (MFIs) have mostly high concentration on providing self financing that generally is for women beneficiaries and aim at alleviation of poverty in all its forms. The principle purpose of microfinance institutions is to be social performing by reducing poverty. However, they have to reconcile this objective with financial performance by trying to be profitable and sustainable. The research paper is based on qualitative research. The researcher chose Pakistan and studied its agriculture financial sector, identified problems with present financial system developed a financial model based on Musharakh and Ijarah for farmers particularly and for sustainable development of rural in general where bank will provide all the assistance that includes technical as well as other assistance. It will provide credible alternative which allows poor population to have access to basic financial services at low cost. Keywords Islamic Banking, Agriculture Finance, Rural Finance, Musharakah, Ijarah, Diminishing Musharakah. 1. Introduction Financial engineering is driven by three things: changes in demand conditions, changes in supply conditions and changes in regulatory requirements. These changes prompt financial firms to innovate and come up with new products that will allow them to stay in business and remain profitable. This process is called financial engineering. (Iqbal, 2005:2). * Author: Shamim Saleem, PhD Student, University of Management and Technology UMT, Lahore.

31 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June The Islamic approach to financial engineering is to provide a level playing field to protect the interests of weaker parties to ensure justice and fairness and in general to ensure mutual benefit for the parties as well as society at large and to promote social harmony (Iqbal, 2005:3). In the Islamic theory of contracts, there are generally two kinds of contracts mu awadat (compensatory) and tabarru at (charitable). The purpose of compensatory contracts is to earn mutual material benefit and the guiding principle is value equivalence of such benefits for the two parties. (Iqbal, 2005:3). The purpose of this paper is to highlight the application and benefits extracted from Micro application of Musharkah finance in general and agriculture in particular. For this paper, qualitative method of research is adopted. Musharkah is one of the fundamentals of Islam that has direct economic implications. It requires Muslims to share a part of risk among the specified heads in order to achieve economic emancipation and it has wide economic implications. The objective of the proposal is to investigate how this financial instrument can be used in contemporary times for welfare of farmers and its impact on economy in particular. Islamic banks have taken the opportunity to extend the scope of their financial products but their focus is on macro economics and mostly ignored the impact of micro policies on bank s performance and on consumers as well. The importance of Musharkah as tool of risk management is being ignored by the Islamic banking financial system at micro level. Most of the Islamic countries are agriculturally backward and modernization of agriculture in these countries must be one of the primary concerns of their governments. Pakistan is an agriculture country and government has separate ministry for food and agriculture but its food import is quite high for past few years. The paper proposes alternative (Islamic) modes of financing application on agriculture after defining the current practice. Then, it shows macro economic implications of proposed Islamic modes of financing. This paper consists of three sections. The first section is based on the rationale behind applying Musharkah on agriculture in Pakistan and financial overview of financing of agriculture. Second section discusses Musharkah and Ijarah their characteristics and their relevance with agriculture and preference of Musharkah over other modes of (Islamic) finance. 2. The Rationale behind applying Musharkah on agriculture Pakistan has a rich and vast natural resource base covering various ecological and climatic zones; hence the country has great potential for producing all types of food commodities (Naseem, 1986:50). Pakistan s agricultural sector accounts for about 70 percent of rural household income and nearly 25% of Gross National Product (GDP). Raising agricultural productivity is thus crucial for rapid rural growth (World Bank, 20012). Pakistan s land is about 200 million acres but only 20-25% to a quarter of that area is actually cultivated. Cropped area allowing for fallows as well as double cropping has varied between 15 to 20% of total land area. Cultivated land area per person was a little over 1% at the time of independence thirty years back and has now decreased to 0.8 acres person, as population growth has far outpaced increase in cultivated land (Naseem, 1986:30). Though, it (agriculture) dominates the socio-economic scene with deep interlinkages with other sectors of the economy.

32 32 Journal of Islamic Banking and Finance April - June 2016 Prosperity of the nation cannot be perceived without substantial development of this sector (Swati, 2006:33). However, Pakistan is facing food shortage though it is the one of largest producer of agriculture goods in region according to World Bank report. Reason for this crisis is that costs of inputs have gone up and farmer is unable to make tradeoff between his income and expenses. Despite ZTBL bank and other banks are involved in agriculture credit, Pakistan s agriculture is facing many challenges like water shortage, natural resource conservation rising prices of inputs including seeds, fertilizers, pesticides, electricity and gasoline. Abid stated one of the problems of low productivity as Size of land holding in Pakistan is very small and has decreased over time. According to Agricultural Census, there are 5.1 million farms in the country and 93 per cent of these are small and marginal farms accounting for 60 per cent of the total cultivated area. The large farms are only 7 per cent of the total farms accounting for 40 per cent of the total cultivated area. There has been further subdivision of farms because of inheritance and transfer. Since land in agriculture production process is natural agent, therefore decreasing size of holding has detrimental effect on investment, farm productivity and farm income resulting in 52 per cent poor Pakistanis. The paper explores the extent to which Islamic financial products can be helpful to boost economy. In particular the research focuses on the factors which when geared can lead towards the development of agriculture sector through provision of financial services and technical assistance (quality of seed, use of fertilizers, testing of soil, irrigation and storage are few of the provisions). The paper will further examine the role and scope of Musharakh in addressing the problem of farmers. The recent food crisis (2007) gave indication that there is something wrong with actual production and estimation of policy makers. Moreover, there is need for rural development to overcome this crisis in future and motivate people to be part of this development. In 2006/07 agriculture policy, government announced wheat production of about tonnes and exported wheat on the basis of this figure and it gave birth to recent problem that even people who harvested crop don t have enough to feed their own families as they sell the crop in fear of fall in prices. Shamshad Akthar, Governor of State Bank of Pakistan stated Islamic finance has to be recognized as a parallel system which will be augmented and be augmented by the deeper knowledge and experience of conventional financial system. Exploiting properly, the unique features of Islamic finance with appropriate adaptability, without compromising Shariah principles will be critical to the growth and promising future of Islamic industry. 3. Agricultural finance in Pakistan: an Overview The role of agriculture in Pakistan economy is of pivotal nature. Due to diverse geographical and climatic conditions the country has tremendous potential for growth and development in agriculture. However, adequate and timely financial assistance to the farmers will improve production potential of agriculture sector in the country. The modern concept of agricultural credit envisages establishment of an efficient institutional credit system to serve as a package of credit, supplies and knowledge for the overall strength of the farmers who at present suffer from low productivity and financial insecurity. A successful credit evaluation system, therefore, should have the basic ingredients to provide adequate amount at the right time and in the right form to help farmers in making a productive use of loan funds. Following are specialized institutions which provide credit for agriculture: ZaraiTaraqiati Bank Ltd (ZTBL) (1961) Rural Support Programmes (1991)

33 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June Punjab Provincial Cooperative Bank Ltd (PPCBL) Agriculture Credit Department of State Bank of Pakistan Askari Kissan Agriculture Finance Program ZTBL is a bank that works under government supervision and the one which has major share in agriculture credit. 3.1 Problems in Agriculture and Agric- Finance Agriculture is the mainstay of country s economy and provides livelihood to majority of rural population. However, Pakistan is facing food shortage though it is the one of largest producer of agriculture goods as mentioned above. Reason for this crisis is that costs of inputs have gone up and farmer is unable to make tradeoff between his income and expenses. Besides, ZTBL bank and other banks are involved in agriculture credit, today, Pakistan s agriculture is facing many challenges like water shortage, natural resource conservation rising prices of inputs including seeds, fertilizers, pesticides, electricity and gasoline Low productivity Abid stated one of the problems of low productivity as Size of land holding in Pakistan is very small and has decreased over time. According to Agricultural Census, there are 5.1 million farms in the country and 93 per cent of these are small and marginal farms accounting for 60 per cent of the total cultivated area. The large farms are only 7 per cent of the total farms accounting for 40 per cent of the total cultivated area. There has been further subdivision of farms because of inheritance and transfer. Since land in agriculture production process is natural agent, therefore decreasing size of holding has detrimental effect on investment, farm productivity and farm income resulting in 52 per cent poor Pakistanis. Agriculture has also been suffering from various problems such as traditional methods of farming, low yields, shortage of key inputs (credit, fertilizer, and improved seed), adulterated pesticides, improper plant protection measures etc Technology The farmers particularly the small farmers are facing problems in early adoption of new technologies because of financial shortages. Facilitation to this sector by expanding agricultural credit at the grass root level is a credible effort towards economic and rural development. All these factors in turn stem from lack of funds and technical know how. Dawn (leading English newspaper) reported that about 81 per cent farmers being small are not in a position to remove all these constraints because of lack of funds. Farmer doesn t go to above mentioned specialized banks because of fear that if he will be unable to pay off loan bank will take his land that is his only asset. This affects his ability to adopt new technologies hence, the production. Farmers don t have education or training for substantial production skills Credit Credit is also needed by the medium and large farmers in order to increase their productivity and for developmental purposes. To increase agricultural production it is imperative to increase the level of use of agricultural inputs (Hasan, 2005). However, the

34 34 Journal of Islamic Banking and Finance April - June 2016 financial position of small farmers is such that they are not in a position to raise the level of inputs to the desired level without the availability of agricultural credit (Ahmed). According to World Bank (2007) that agricultural growth has substantial benefits for low income farmers and tenants (approximately 37 percent of the rural poor), but another source of demand (besides agricultural growth linkages) is needed to rapidly raise the earnings of the rural non-farm sector. The limited impact of agricultural growth on incomes of the rural no farm poor is the result of two major factors: segmentation of Pakistan s agricultural labor market; and agriculture s declining contribution to both total GDP and rural household incomes. To overcome these problems following measures should be taken: The burden of bearing a loss by farmer should be made negligible There should be a system of social security that would share the subsistence of farmer during lean periods The price of commodities in the market should be set right so as to provide necessary incentive to agricultural sector Moreover, besides claim made by ZTBL that 70% of loans are given to small farmers but because of collateral they hesitate to get loan. Reason of hesitation is that cost of production has increased over time and it is hard for small farmer to meet the costs of production and servicing of debt. Behind the curtains of food crisis this phenomenon exists that to meet cost of production farmer prefers to grow cash crops instead of food crops. There is a need to diversify the sources of growth by promoting micro and smallscale enterprises particularly in the agriculture and informal sector Documentation Pakistan is a developing country and its various sectors are not documented. Agriculture is a sector which is not documented nor regulated and adverse effect on demand and supply of agriculture products is not fully understood. If some crop or vegetable gave cash profit to some farmer, all the farmers will grow it next year and because of excess supply demand will decrease and farmers will be in loss. Documentation and regulation is mandatory that will not only help farmer to cultivate crop that has demand in market but will also helps to export any excess of food commodities. 4. Alternative (Islamic) Modes of Financing for Agriculture The economy transforms into one in which service and productivity will drive growth. Different sources of financing are required whereby risks should be borne by those most able to absorb them although traditional (lending on interest rate) sources of funding through the banking institutions continue to be the main source of financing for economic activities. Agricultural Census stated that there are 5.1 million farms in the country and 93 per cent of these are small and marginal farms. Interest based lending is core of problem of low productivity as according to Mohsin (1995:23) the basis of differentiation is size and the collateral offered as security for funds. A result of regression analysis shows that one rupee increase in credit decreases production by 8% which shows ineffectiveness

35 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June of conventional system. One of the disadvantages of this is that credit controls and interest rate ceilings encouraged banks to favor large farms even more than their natural disposition to do so and other constraints include unequal distribution of financial resources (Mohsin, 1995:21). Though, ZTBL, PPCBL and other banks advanced loan of million rupees, however, the small farmers whose farm income is small and family size is relatively large are generally constrained for want of funds to meet their farm input requirements like seed, fertilizer, pesticide, etc (Hasan, 2005) couldn t benefit from it because of high inflation that increased input prices by 33% to 200%. To improve productivity and income of tillers of the soil who constitute more than three fourth of the farming community appropriate measures should be taken on great priority basis for a country like Pakistan. The financial sector infrastructure needs to be changed to accommodate the substantial financing requirements of formal and informal sector of agriculture. Alternative of conventional system can be Islamic banking which is interest free and has its own benefits. Interest has no place in an Islamic economy. The Islamic alternative is that financing either is free of any return or it should bear the risk of loss as well if it expects to earn a return (Khan, 1998:313). It is very encouraging to observe that the alternative approaches to mobilization of resources have already been recognized at the multilateral level and he further stated it would not be out of place to state that the modes of financing developed under the generic title of Islamic Finance have some specific features more favorable to poverty alleviation and debt reduction Ahmed Muhammad Ali (2002) at the International Conference on Financing for Development said that in his speech. The Islamic finance which operates on modes other than fixed interest rate aims to share profits from activities in the real sector. Hence, financing of development through such modes is likely to avoid undue economic and financial burden on the beneficiaries. Its emphasis on real sector should also contribute in avoiding instabilities in the financial markets. Islamic banking can have significance in micro finance sector. The failure of government support programs to achieve level of growth in small-scale business in the formal sector is due to number of interrelated factors and inherent nature of interest rate finance is the most important one (Mohsin, 1995:21) The author discussed in detail Musharkah and Ijrah their characteristics and their relevance with agriculture and on basis of discussion reasons are given for preference of Musharakh over other of finance discussed. 4.1 Musharakh Musharakh is an agreement between two persons or more sharing the obligations and profits as well. The shares offered by each one can vary. In general, it may be money or labour and can be the trust of the people (Siraj, 1998:88) Offer and acceptance is the cornerstone of the partnership contract and can be of three types: 1. Capital partnership: In this form of partnership, two or more individuals share their capital stipulating that whatever profits they earn are shared among them. The contract may be limited or unlimited (Zuhayli, 2003:451).

36 36 Journal of Islamic Banking and Finance April - June Credit partnerships: In this form of partnership, two or more creditworthy individuals join in a credit purchase and follow it with a cash sale, thus sharing the profits according to the conditions stipulated in the contract (Zuhayli, 2003:454). 3. Physical labour partnerships: In this form of partnership, two or more individuals agree to embark on a joint labour project (e.g. building a house) sharing the wages according to their stipulated conditions in the contract. The partners may be of similar or different professions (Zuhayli, 2003:455) Main Characteristics Bank/ financer is a partner in joint venture investment with partner(s) based on profit or loss sharing Bank/ financer is actively involved in realization of project taking, mainly, role in area of financial management and partner handle operational part of the project Bank/ financer and partner make agreement on profit/loss sharing ratio in advance Bank/ financer uses this product/instrument for Real Estate development projects Musharakh and Agriculture Musharakh can be employed for long as well as short periods for the industrial as well as the commercial, agricultural or service sector (Khan, 1991:24) and bank is able to invest in large concerns because the clients owning a large stake in the business, would not put the banks in a disadvantageous position in terms of risk (Khan, 1991:24). Ijaz Ahmed Khan at Islamic Relief Conference 2008 said that the most obvious advantage of Musharakh is the protection of the lender against inflation. Ahmed Ahmad (1993) provides the example of how the Sudanese Islamic Bank have developed a Musharakh contract in which the bank provides farmers with certain fixed assets such as ploughs, tractors, irrigation pumps, etc. and some working capital such as fuel, seeds, pesticides and fertilizers. The farmer s equity is confined to providing land, labour and management. Since it is a partnership contract, there is no need of collateral or guarantees other than personal guarantees. Profits are shared between the farmer and the bank in such a way that the farmer is first paid 30% of the net profit as compensation for his management, and then the remaining 70% is shared between the bank and the farmer on a pro rata basis based on each partner s respective share in the equity. 4.2 Diminishing Musharakh (DM) With a given economic environment different modes of financing are relatively more or lesser effective in meeting the financing requirements of different activities (Khan, 1995:23). Therefore, need for DM was realized where termination of one party s ownership can be possible. Now it is practiced by Islamic Banks for home mortgages especially Diminishing Musharakh and Agriculture Farm productivity can be improved by preparing land for optimal use which necessitates levelling land, preparing it for maximum crop production, ensuring optimal

37 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June development and use of water resources and developing a marketing link for the farm output (Bendjilali and Khan, 1995:32). It can be best applied for installing tube wells since formal financial institutions fail to improve water availability as cost of capital increases that make impossible for small farmers to utilize it. DM is not only cheap but it shares risk with farmer. Another land development agreement is known in Tunisia whereby the owner of land and the land developer enters into a contractual arrangement for the development of land. After the development of land according to agreed specifications a piece of land is given in reward to the developer (Khan and Bendjilali, 1995:33) Ijarah An Ijarah is a contract pertaining to usufruct with compensation as defined by Hanafis (Zuhayli, 2003:386). Shafi s defined it as It is a contract over a desirable, known, permissible and accessible usufruct in exchange for a known compensation (Zuhayli, 2003:387). Malikis and Hanabalis defined It is the transfer of ownership of permitted usufruct for known period in exchange for compensation (Zuhayli, 2003:387) Conditions for validity of Ijarah: 1. Conditions of conclusion 2. Executability 3. Validity 4. Bindingness Main characteristics Bank signs an agreement with service provider for purchase/reservation of specific number of services (1st separate contract) Bank makes available (dispose) the service through financing arrangement to the end user/bank client (2nd separate contract) Bank disposes service to the client on differed basis at agreed price on partnership basis. Bank leases its partnership share to the client. The client pays a rent and buys out the partnership share. Ijarah is a contemporary lending methodology that has been increasingly adopted by Islamic lenders and is similar to the concept of leasing. Under this arrangement an entrepreneur short of funds may approach the financier to fund the purchase of a productive asset. There is a wide scope for using Ijarah by Islamic banks to purchase expensive equipments and rent it for those who need them and can t afford purchasing them or not willing to extract their value from its budget. Certain forms of Ijarah have been introduced by these banks like hire purchase for car and homes (Siraj, 1998:92)

38 38 Journal of Islamic Banking and Finance April - June Ijarah and Agriculture Ijarah is a leased based finance. It is best suitable for agriculture related equipment (tractor, thrasher and trolleys etc). Banks can build storage houses for commodities. The user may be implied to be a little better off in Ijarah financing than in trading-based financing because of fewer repayment problems as in case of loss the lessor will simply take his asset back and the lessee will only be obliged to worry about the unpaid rent (Khan, 1991:19) 4.4 Preference of Musharakh over other modes of financing in Agriculture According to World Development Report 1990 only 5% of farms in Africa and 15% in Asia and Latin America had access to rural credit (Khan, 1994:12) because artificial low interest rates and credit regulations distort the allocation of resources and lend themselves to patronage and corruption (Khan, 1994:12). In Pakistan, whatever finance is provided it is against secured land collateral and large farmer s benefit from this. Asghr Nadeem Syed a columnist in leading Urdu Newspaper Jang (2015) gave suggestion of partnership in agriculture in order to increase productivity and share risk and financial burden with farmers. Alleviation of constraints which are obstacle for optimal utilization of resources is major concern of Islamic economic system and guideline of Muhammad (PBUH) can be inferred as: 1. The best strategy of poverty alleviation is to enable the concerned people to participate in the market by improving their capabilities 2. The best indicator of poverty alleviation is to make the poor permanent owners of certain income generating real assets. 3. The role of guideline, promotion and consultancy is vital in the alleviation of poverty ( Bendjilali and Khan, 1995:25) Musharakh is the best tool to the guidelines provided by Muhammad (PBUH).Islamic credit technology has evolved through the growth of the Islamic modes of financing and it is a great break through for small farmers and bankers. To enhance the capabilities of farmers to participate in the market for generation of productive lands and enhance the productivity of land Musharakh can be best alternative over conventional modes of financing. According to Mohsin (1995:25) potential benefits can be stated as: One of the best ways to ensure employment is to promote small businesses which are labour intensive and provide more jobs per unit of capital investment. The establishment of such businesses generated employment and income and also helps check rural-urban migration. He further stated that in most developing countries poverty is often caused less by an absolute shortage of resources than by their skewed distribution and decentralization of development through small scale business( SSB) can be one of the most important methods of action in preventing the urban pyramiding of industrial enterprises ( Mohsin, 1995:17). Bank being partner on Musharakh basis can train people for optimal use of resources because it will have stake in specific project. Literacy rate in Muslim

39 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June countries is very low and banks as sophisticated institution (knowledge, finance and expertise and economies of scale) have ability to overcome this problem. Furthermore, equity liberalization leads to an increase in annual real economic growth by 1% over a period of five years (Jahri, 2005:17). Musharakh can bridge the gap of negative trade off between credit and production as result of regression showed. Credit must has positive impact on crop production but results showed that one rupee increase in credit decreased the production by 8% which shows inefficient use of credit. Low literacy rate is one of the reasons for it since farmers don t have access to information and they buy inputs either by peer pressure or by looking at them. On the direction of causality between financial development and economic growth Jahri (2005:17) stated that empirical evidence shows that financial development generally leads to economic growth and financial deepening contributes to economic growth more in developing countries than in industrial countries. The intermediary-based view emphasizes the importance of intermediaries in project identification, resource mobilization, monitoring firms and managing risks. They are more effective in countries which are at an early stage of development than marketbased financial systems (Jahri, 2005:18). The advantages of Musharaka for agriculture can be summarized as follows: The possibility of moral hazard is reduced since the client would be making his own investment as well. The problem of informational asymmetry would also be reduced as the bank would have a right to interfere in the management of farm in which it has invested The bank is able to invest in large concerns because the clients owning a large stake in the business would not put the banks in a disadvantageous position in terms of risk. This may help in improving the bank s profitability by enabling it to invest in larger and already established concerns with high profitability and low risk. It can be employed to long as well as short periods in formal and informal sectors of agriculture. Musharakh is more efficient at micro-level as it avoids interest- based lending. Monetary economists (Friedman, 1969) have established that a zero nominal interest rate is a necessary condition for the optimal allocation or resources (Jahri, 2005:19). Without interest more real resources can be directed to consumption and investment (Jahri,2005:19) as in general equilibrium models, zero interest rate is both necessary and sufficient for allocative efficiency (Wilson, 1979:81; Cole and Kocherlakota, 1998:2-10) 5. Proposed Model The traditional approaches to rural finance tried to intervene in the open market process (Khan, 1994:14). Concessional interest rates demotivate the financial institutions who considered rural loans to be risky and unremunerative. As a result financial institutions became lukewarm in their efforts to achieve the objective of rural development. Their main concern was to safeguard their capital (Khan, 1994:15).

40 40 Journal of Islamic Banking and Finance April - June 2016 Therefore, they often chose to advance loans to those clients who had adequate capital and so resources were siphoned off to the non-poor. Simultaneously, the poor were discouraged from contacting the financial institutions because of lengthy procedures, long waiting times and heavy bank charges. A very important factor in the failure of rural finance to achieve its primary objective has been interest on loans. Interest- bearing finance adds to the cost of production. As most poor people don t have ready access to formal financial institutions they have tended to seek informal credit from moneylenders which is very exploitative (Khan, 1994:15). The interest rate is a severe limiting factor on the investment opportunities available to poor. The investment is inversely correlated to the rate of interest. The higher the rate of interest the lower the volume of investment because it lowers the overall profitability of the business enterprise, and regression analysis proves this statement. If we increase the volume of investment we have to find a solution to the problem of interest. The farm productivity can be improved by preparing land for optimal use which necessitates leveling land, preparing it for maximum crop production, ensuring optimal development and use of water resources and developing marketing link for the farm output. This requires an initial investment outlay for which suitable Islamic modes of finance can be applied. Islamic bank has ability to diversify its portfolio and hence ensure a certain return R on its investment with negligible risk. The diversification of investment in a large proportion enables bank to reduce risk significantly. By adopting Islamic modes of financing for agriculture sector (formal and informal) bank can has following benefits: The risk associated with investment does not increase with increase investment The investor has access to and enjoys the credibility of large number of clients There are large number of feasible projects available to the bank The bank is able to adequately diversify its investment over such large number of clients that risk is reduced to almost negligible level (Khan, 1998:326) Hybrid contracts (Musharakh, Diminishing Musharakh and Ijarah) can be devised within the limit of Shariah for agriculture. The feasibility of each of them changes depending on society s financial and technological apetite and this results in the disappearance of some instruments and appearance of new ones. Financing for agriculture inputs Joint farming was practiced in Prophet Muhammad (PBUH) in Medina (Hussain, 1983:17). Under this agreement both partners (one ansar, one muhajir) worked on these joint farms in turn on alternate days. Moreover, with two families working at one farm turn by turn farming became labour intensive which made the farms more productive. Furthermore, this system of joint farming proved a useful system for land consolidation and prevented fragmentation of land (Hussain, 1983:17).

41 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June The above mentioned broad outlines of the policy/ strategy adopted for the development of agriculture by Holy Prophet (PBUM) are inspiring guidelines for the formulation of any modern agricultural policy. Musharakh can be best tool applied to agriculture keeping in view the Medina Agriculture Model since profit sharing is bound to raise productivity through higher individual motivation (Nuti, 1995:37) and productivity gain can be expected from farmers cost less to them making intelligent and effective use of any given individual level of effort, cooperating with other workers and management and monitoring and supervising each other s effort, efficiency and cooperation ( Reich and Devine 1981; Fitzory and Kraft 1985). Land is considered as one of the most secure assets and owner- operated farms are still considered to be the most efficient forms of land utilization (Gulaid, 1990:30) Working of Musharakh between bank and farmer Bank is a large financial institution and possesses huge resources either to establish advisory board or outsource advisory service. Advisory board for agriculture is required since bank is an intermediary and doesn t have expertise in agriculture. Professional advice not only helps to increase production of land but also helps to manage demand and supply of agriculture products. It gives economies of scale to bank being partner with farmer. Cost will be divided among all farmers and will benefit farmer as being small landowner it is beyond his capacity to seek professional advice. The large farms are only 7 per cent of the total farms accounting for 40 per cent of the total cultivated area (Khan, 2005). Any XTY Islamic bank set up agriculture board consists of agriculture specialists of crop, fertilizer, pesticide, seeds and water. The board will design strategies for levelling land, preparing it for maximum crop production, ensuring optimal development and use of water resources along with usage of which kind of fertilizers, seeds and pesticide to use when to use and how to use. How it works For optimal utilization of resource (land, inputs, capital goods and water) a farm must be some large area so, it will not only make farm more productive but generate employment as well. Furthermore, this system of joint farming proved a useful system for land consolidation and prevented fragmentation of land (Hussain, 1988:17). There will be three parties to the structure: bank as finance provider for agriculture inputs, farmer as partner with land and labor and third one is investor (person or another bank) who will provide services (tractors, storage houses, transportation etc) on basis of Ijarah and diminishing Musharakh (tube wells and turbines). To develop one large farm of 25 acres bank will join some farms of small area. To avoid any conflict of interest bank will document each piece of land owned by farmer. After selling the production (crop) bank will distribute profit/ loss per acre to farmers and each one will get his share of profit/loss according to proportion of his land. Common structural properties are as follows: Bank signs a Musharakh contract with farmer on profit loss sharing of 60 % for farmer and 40% for bank after deducting expenses. Bank signs contract with other bank or person for usufruct of capital goods. Bank buys agriculture inputs (seeds, fertilizers, pesticides) and provide it to farmer.

42 42 Journal of Islamic Banking and Finance April - June 2016 Farmer levels the land, plough field, irrigate it does spray according to the given advice. Bank will pay water charges. Farmer will reap the crop and pays out for people who help him or will hire labor on Ijarah basis. the bank will collect the crop installments and be responsible for its storage in warehouses on Ijarah basis. Bank will sell it to market at bargain price. Bank will pay transportation charges to take crop to market. The following features can be noted with specific reference to mobilization of human resources in agriculture: 1. Musharakh entitles the capital to earn a return only by bearing some of the risk associated with the activity. It makes farm labour intensive which makes farm more productive 2. It is a system of social insurance that is meant to share the credit needs and risk of those who don t have access to credit through conventional system Implementation of participatory mode of financing (Musharakh) as core of financial tool in agriculture allows the following features to emerge and prevail in economy. Profitability of the project becomes the primary consideration for the financial accommodation. Credit- worthiness becomes the secondary consideration because return on project is not fixed but depends on the profitability of the project Financial institutions may not be inclined to finance large enterprises as they are in the interest-based system. Neutrality to the size of the enterprise is more likely to prevail Finances have a chance to be more widely spread and distributed in the economy. Since, the return on financial capital is associated with risk, bearing diversity of the portfolio is a key to minimizing risk There is more likelihood of the efficient utilization of capital under the Islamic financial system which forces financial institutions to look for most profitable and feasible projects. (Khan, 1992:36) Financing Fixed-Asset (Agriculture Machinery, transportation and storage houses) Fixed assets are those that provide service over a period of time. They are deferred expense and determine the production capacity of a firm. A cash outlay is made at one point of time but benefits accrue over a period of time. Fixed asset formation has two distinct characteristic features. Firstly, the expenses planned are generally of a considerable size and secondly, capital expenditure decisions are often irreversible within

43 The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June a short period of time (Mohsin, 1995:41). In order to accommodate these aspects of fixed assets formation contemporary Islamic financing technique Ijarah can be adopted to finance tractors, trolleys, thrashers, godowns to store food etc. There is a wide scope for Ijarah either by bank or cooperatives who want to establish Ijarah Company. During Prophet s (PBUH) time in Medina there are reports that Baitul Mal (national bank) had started working in Arafah (tehsil councils). These banks were created on cooperative basis. Some time collective fines would be paid out of the money deposited into these banks on cooperative basis (Hussain, 1988:19). Agriculture Machinery and Transportation Agricultural machinery is one of the most revolutionary and impactful applications of modern technology. The truly elemental human need for food has often driven the development of technology and machines. Over the last 250 years, advances in farm equipment have transformed the way people are employed and produce their food worldwide. Introduction to low cost and locally available transportation lowers transportation cost for agriculture and road sector. Local labor can be productively employed on roads to supplement their subsistence from farm livelihood. Ijarah is a lease contract where contract transfers the services or use of a property for certain time. Capital asset owners bring their assets altogether under one roof to form Ijarah firm (cooperative) and would be responsible for collecting the rent from the farms for assets/ services rented to them. Since these are people of, live in a village it would be much simpler for them to recover these dues at harvest time than for the financial institution. It will enhance utilization of assets at optimal level and would give economies of scale to asset owners. Ijarah firm then sub-rent this equipment to partner bank of farmer for specific period and time. Working of Ijarah (cooperative) Cooperative signs a forward Ijarah deal with its Customer Cooperative sub-rents the capital assets to farmer and his partner bank Cooperative packages the asset into units for issuance to potential Investors Investors subscribe to capital assets Capital asset subscription generates required production Capital asset user disburses progress payments to bank/ entrepreneur Contractor (cooperative )delivers completed asset to customer (farmer) Farmer delivers completed asset to contractor These cooperatives will be catalyst for employment in informal sector. One person will start a business of capital goods repair, dbaha (cheap food seller). Water resources The Holy Prophet (PBUM) paid special attention to the development of water resources. In this connection he urged the people to attend the development work on selfhelp basis. People were asked to dig wells jointly for irrigation purposes (Hussain,

44 44 Journal of Islamic Banking and Finance April - June :18). This demonstrates that water development is a collective effort. Joint working is not only effective, it saves time and cost as well. Water resource development has remained hampered due to lack of non-availability of proper finance. Formal private financial institutions have no rural spread in general. Development of Diminishing Musharakh has made water resource development easier. Working of Diminishing Musharakh Owner of land and its partner (bank) enters into a contractual arrangement for the development of water resource (tube well/turbine). After the installation of tube well according to agreed specifications, farmer and bank buys out developer s (bank/ entrepreneur) partnership over the financing period. Farmer utilizes the tube well and pays agreed rental amount. Working of Diminishing Musharakh on Salination Land Saim and Thor are quite problematic for agriculture in Pakistan. Generally farmer doesn t have financial resources to make that land cultivatable. With diminishing Musharakh bank can work with farmer like land development agreement is known in Tunisia whereby the owner of land and the land developer enters into a contractual arrangement for the development of land. After the development of land according to agreed specifications a piece of land is given in reward to the developer (Khan and Bendjilali, 1995:33). In proposed model developer is bank and it can sell its land to its partner farmer. This approach will increase the production and utilization of human capital and generate employment. Conclusion Agriculture plays a vital role in the agricultural and rural economies of the developing world like Pakistan. It not only produces food directly it also provides foreign exchange to country. Share of Agriculture in Pakistan s GDP is 24/25% and it employed 43% of total labour force. However, concessional interest rates de motivated the financial institutions who considered rural loans to be risky and un-remunerative. As a result financial institutions became lukewarm in their efforts to achieve the objective of rural development. Their main concern was to safeguard their capital (Khan, 1994:15). Islamic modes of finance have ability to overcome short comings of conventional system. Musharakh can work well on agriculture since it will give returns semi-annually which is a limitation when it applied to corporations. Khan (1997:159) suggested that Agriculture provides ample opportunities for Islamic banks to operate particularly in the trade and commodity financing. Giving the finances to farmers will help the farmers in improving their productivity and Islamic banks can take advantage of their peculiar nature of operations which other conventional banks cannot enjoy (Khan, 1997:57). Consequently, Islamic banks can successfully operate in a sector where conventional banks have failed despite all the support from governments as well as from international bodies (Khan, 1997: 161). Ahmed s saying that working in agriculture and rural sectors of an economy is something the Islamic banks can really prove their worth at, as a unique institution with their philosophy and modes of financing because of ethical dimension, contribution to agriculture and elimination of poverty and most importantly economically and commercially feasible (Khan, 1997: 159, 160).

45 References The Journal Potential of Effectiveness Islamic Banking of Financing and Finance Based on April Musharkah.. June Afzal, M. (2006). Investment opportunities in live stock sector. Business and Finance Review. Available at :< URL: weekly/busrev /p6.htm> Access Date: 25 th July, Asghar Nadeem Syed s column on Agriculture in Pakistan is available at < Access Date 10 th July 2015 Al-Zuhayli, Wahbah. (2003). Financial Transactions in Islamic Jurisprudence (Vol1). Damascus, Syria: Dar-al-Fikr Bendjilali, Boualem and Khan, Tariqullah. (1995). Economics of Diminishing Musharakh. Jeddah: Islamic Research and Training Institute, Islamic Development Bank Economic Survey of Pakistan 2015 is available at : < Access Date 30 July, 2015 Fitzroy, Felizr and Kraft. ( 1985). Profitability and Profit Sharing Discussion papers of the International Institute of Management, December, Berlin Gulaid, M.A. (1990). Effects of Islamic Laws and Institutions on Land-Tenure with Special Reference to Some Muslim Countries. Jeddah : IRTI Hussain, Muzaffar. (1988). Agricultural Extension in Islamic Cultural Milieu. Islamabad: National Science Council Iqbal, Munawar.(2001). Islamic Banking and Finance: Current Developments in Theory and Practice. Leicester: Islamic Foundation. Iqbal, Manwar.(2007). A Guide to Islamic Finance. London: Risk Books. Iqbal, Munawar and Khan,Tariqullah. (2007). Financial Engineering and Islamic Contracts. New York: Pal grave Macmillan Khan, M. Fahim. (1991). Comparative Economics of Some Islamic Financing Techniques. Jeddah: Islamic Research and Training Institute, Islamic Development Bank Khan, M.H. (1995). The Role of Agriculture in Economic Development: A Case Study of Pakistan. Wageningen: Centre for Agricultural Publications and Documentation Khan, Muhammad Fahim. (1994). Investment Demand Function in Profit-Loss-Sharing Based System, in MonzerKahf (Ed.} Lessons in Islamic Economics. Jeddah: Islamic Research and Training Institute, Islamic Development Bank. Khan, Muhammad Fahim. (1998). Investment Demand Function in Profit-Loss-Sharing Based System, in MonzerKahf (Ed.} Lessons in Islamic Economics. Jeddah: Islamic Research and Training Institute, Islamic Development Bank. Mohsin, Muhammad. (1995). Economics of Small business in Islam. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.

46 46 Journal of Islamic Banking and Finance April - June 2016 M. Jahri.(2005). Handbook on Islam and Economic Life. Jeddah: Islamic Research and Training Institute, Islamic Development Bank Statement by Mr. Ahmed Muhammad Ali at the International Conference on Financing for Development in Mexico on March, Available at: <URL: Access Date 17 th July, 2015 Nutti, Farhad and Rahnema, Ali. (1995).Islamic economic systems. London & New Jersey: Zed Books Ltd. Naseem,S. M. (1986). Underdevelopment, Poverty and Inequality in Pakistan. Lahore: Vanguard Publications Ltd Nasim, Anjum. (1992). Financing Pakistan s Development in The 1990s. Karachi: Lahore University of Management Sciences & Oxford University Press. Reich Michal and J. Devine. (1981). The Microeconomics of Conflict and Hierarchy in Capitalist Production The Review of Radical Political Economics,7(2) pp World s Bank Balochistan Irrigation and Agriculture Project is Available at: <URL: EXT/PAKISTANEXTN/0,,contentMDK: ~pagePK: ~piPK: ~theSitePK:293052,00.html> Access Date: 19 th July, 2015.

47 Journal of Islamic Banking and Finance April June The Need of Adequate Policies for Collection & Distribution of Zakat By Muhammad Zeeshan Farrukh Abstract The proper collection and effective distribution of zakat in an appropriate manner is one of the biggest challenges of the present day Muslim world. Zakat might be the very important source of revenue for the Muslim states particularly for the poor Muslim states. This paper elaborates the commandments of Almighty Allah with respect to collection and distribution of zakat along with practice in the early Islamic period and highlights the problems and issues of Muslim states regarding collection and distribution of zakat particularly with respect to lack of confidence of the people upon the public officials. Therefore, it is observed that the majority of the Muslims prefer to perform this religious duty themselves without any involvement of the government. This behavior is the biggest hindrance in an effective utilization of this large source of revenue in the Muslim states. This paper gives suggestions how to build and revive the confidence of the people as they can think to use this money on a large scale rather on a small scale with the peace of mind that their money will be utilized and distribute more efficiently and effectively. This paper deals this issue not only on the national level but also on international level keeping in view the constructive usage for the prosperity of the Muslim population living both in Muslim or non-muslim states. Key Words: Zakat, Islamic Economic System 1. Introduction Zakat is one of the five things upon which Allah has founded Islam as evident from the sayings of Prophet Muhammad (SAW): Ibn Umar has reported the Messenger of Allah (SAW) as saying: The (edifice of) Islam is founded on five (things): Testimony to the fact that there is no deity save Allah, that Muhammad (SAW) is the Messenger of Allah, the establishment of prayer, payment Author: Muhammad Zeeshan Farrukh, Islamic Banking Group of National Bank of Pakistan as Team Leader- Training & Development Unit, zeefar82@gmail.com,

48 48 Journal of Islamic Banking and Finance April - June 2016 of zakat, (the performance of ) Hajj and the fasts of Ramadan. (Sahih Bukhari and Sahih Muslim) It has been narrated on the authority of Abdullah b. Umar that the Messenger of Allah (SAW) said, I have been commanded to fight against people till they testify that there is no god but Allah, that Muhammad (SAW) is the Messenger of Allah, and they establish prayer, and pay zakat and if they do it, their blood and property are guaranteed protection on my behalf except when justified by law, and their affairs rest with Allah. (Sahih Bukhari and Sahih Muslim). It is the mandatory monetary obligation upon the wealth of Muslims on yearly or other specified timely basis according to specified ratio or quantity. It is the essential element of the economic system of Islam. As Zakat is one of the five pillars of Islam, the refusal from zakat and its obligation would result in exit from Islam and that person would not more a Muslim. According to Imam Navavi, if a person, who has recently embraced Islam or lived somewhere else far from Islamic culture and environment, refuses the obligation of zakat then first the obligation of zakat in Islam and its reasons would be communicated to that person. If he does not change its attitude and opinion even though the importance and obligation of zakat has been communicated to him then the order of infidelity (Kufr) would be imposed upon him but if a person who lives in a Muslim society and knows very well about zakat and its obligation in Islam and he commits a sin of refusal in this respect then he becomes infidel and the order of apostate would be imposed upon that person. He will be asked for apology in this respect and if he does not apologize and commit their sin, he will be killed because this act is considered as a blasphemy of Allah and His Messenger (SAW). In the era of the first caliph, Abu Bakr, the war was conducted against the group of people who refused to pay zakat. After the death of Prophet Muhammad (SAW), a group of people was refused to pay zakat. To tackle this problem, Abu Bakr opined to conduct a war against such persons. This opinion was supported by majority of the companions of Prophet Muhammad (SAW) and the war was conducted against them. Those companions also participated in the war who did not agree with this act at the initial level. Therefore, this opinion was accepted by all companions and Ijma a (scholarly consensus) was created upon the opinion of Abu Bakr. The verses with respect to inducement of zakat were revealed when Prophet Muhammad (SAW) was in Makkah but at that time, zakat was no more than just a good deed and no detailed commandments, even amount, were in place. There has been a dispute between scholars upon the period of obligatory implementation of zakat but the majority of the scholars agree upon that the zakat was made compulsory after the conquest of Makkah in 8 th Hijri and Prophet Muhammad (SAW) appointed the zakat collectors in Muharram, 9 th Hijri. For every tribe and region, separate collectors were appointed from their respective regions. 2. Guidelines & Practices of Collection & Distribution of Zakat The guidelines, with respect to collection and distribution of zakat, with the reference of sayings and practices of Prophet Muhammad (SAW), his companions and analysis of jurists are mentioned below:

49 Journal The Need of Islamic of Adequate Banking Policies and for Finance Collection.. April June Administration of Zakat The state is responsible for the administration i.e. collection and distribution of zakat. The state's role in the collection and distribution of zakat is best supported by the verse, 9:60, which mentions "the workers on zakat" as one of the categories to whom zakat is distributed. This verse is clearly directing towards the organized team of collectors that must be formulated for the purpose of zakat collection. Moreover, Allah says, "Out of their wealth take a sadaqah so thou might purify and sanctify them". "Take" is addressed to the Prophet Muhammad (SAW) as head of the Islamic state and after Prophet Muhammad (SAW), this order had been transferred to the successors of Prophet Muhammad (SAW) as Abu Bakr continued the process of collection and distribution of zakat. The administration of zakat and other revenues was at elementary stage during the life time of the Prophet Muhammad (SAW) but the general framework was laid down including responsibilities and duties of zakat collectors ( amilin) and obligations of zakat payers. Zakat was the fundamental pillar of financial system in the era of Prophet Muhammad (SAW). Prophet Muhammad (SAW) elaborated the responsibilities of the ruler of the state with respect to administration of state: Abdullah reported that Allah s Messenger (SAW) said: Every one of you is a guardian and he is accountable for his charge. Thus, the ruler is a guardian of the people and he is accountable for them. (Sahih Bukhari and Sahih Muslim). Hasan reported that Ma qil said: Verily, I have heard the Messenger of Allah (SAW) say: There is none amongst the bondsmen who was entrusted with the affairs of his subjects and he dies in such a state that he was dishonest in his dealings with those over whom he ruled, but Allah has forbidden Paradise for him. (Sahih Muslim and Musnad Ahmad Bin Hanbal). The above-mentioned sayings of the Prophet Muhammad (SAW) clearly indicates that the ruler must be vigilant and honest in the matters of the State as he is assigned the task for the effective utilization of resources of the State that lead to the welfare of the State. As far as collection and distribution of zakat is concerned, the Prophet Muhammad (SAW) was very strict in protecting the public funds of zakat, and allowed no nondeserving to take benefit from the collection of zakat. 'Adi bin 'Umairah reports, "I heard the Messenger of Allah (SAW) saying, "Whoever is employed on any collection job, and hides from us even a needle or more, it is embezzling, and he will carry what he embezzled on the Day of Judgement." (Abu Daud and others). In another hadith on the same topic, Uqba b. Amir said: I hear the Prophet of Allah (SAW) saying: Collector of sadaqah who acts unjustly will not enter the Paradise. (Abu Dawood and Al Darimi). The state s responsibility regarding collection and distribution of zakat is evident from the sayings and practice of Prophet Muhammad (SAW). Bukhari, Muslim and others report from Ibn 'Abbas that the Prophet Muhammad (SAW) told Mu'adh, when he sent him to Yemen, "Inform them that Allah obligates sadaqah on their wealth, to be taken from the rich among them and rendered to the poor among them." Al Hafiz Ibn Hajar says, "This saying is evidence that the state is the authority that takes zakat and

50 50 Journal of Islamic Banking and Finance April - June 2016 distributes it. Those who refuse to pay are forced to do so." Al Shawkani quotes the same from Ibn Hajar in his Nail al Awtar. Additionally, there are several sayings which instruct workers on zakat, who were called al su'at or al musaddiqin. Ibn Hajar, in al Talkhis, notes that the Messenger of Allah (SAW) and his successors sent zakat collectors. Bukhari and Muslim report from Abu Huraira that the Prophet (SAW) sent Umar as a collector of zakat. There are many other sayings that refer to such appointments. The Prophet Muhammad (SAW) sent the best of his companions as zakat collectors to each region with proper guidelines and instructions with respect to treatment with zakat payers and the collection from the assets of the people. The appointment of zakat collectors was necessary as they could guide people towards the payment of zakat and take the full amount and assets that were obligated upon the certain people in the way of payment of zakat. In this way, those people who might hide their assets will also pay zakat. The companions of Prophet Muhammad (SAW) opined that zakat must be given to the ruler of the Islamic state even though the character of the ruler is not ideal or matters of the state are not being run in accordance with the teachings of Islam. They were of the view that the collection and distribution of zakat is one of the responsibilities of the state and it is the duty of the people to give zakat to the government as the Prophet Muhammad (SAW) guided and ordered Ummah in this respect. If the ruler or government will not fulfill its duty, he will be answerable before Allah. The above mentioned verses, sayings and opinions of Companions indicate that in principle, zakat must be administered by the Islamic government. 2.2 Apparent and non-apparent Assets Jurists usually divide zakatable assets into two groups, i.e. apparent and nonapparent assets. Apparent assets are those that are visible and can easily be counted by people other than the owner. They include agricultural crops and livestock. Non-apparent assets are those that can easily be hidden away by the owner. They include money and business assets. In the era of Prophet Muhammad (SAW) and first two Caliphs of the Ummah, Abu Bakr and Umar, there was no distinction considered between apparent wealth (amwal-ezahira) and non-apparent wealth (amwal-e-baatina) of the people while collecting zakat from the people and zakat was deducted on both types of wealth. In the period of third caliph, Uthman Ghani, the economic and financial circumstances changed to some extent and zakat deductible wealth increased. He realized the fact that if the zakat collectors would investigate the non-apparent wealth of the people, privacy of the places would be affected and the people would feel uncomfortable. Due to this reason, he decided to take zakat only on those assets of the people that were disclosed in general. There were of two types i.e. animals and agricultural production. The responsibility for the payment or distribution of zakat on remaining assets was delivered to the respective owners. In the era of Umar bin Abdul Azeez, the zakat was collected at the posts established outside the cities. The zakat was collected when the people moved their

51 Journal The Need of Islamic of Adequate Banking Policies and Finance for Collection.. April June commercial wealth outside the city. At that time, the wealth became apparent wealth and there was no need for searching the wealth of people at their private places. In the light of the explanation of jurists, there are two conditions to call the wealth as apparent wealth: 1. No need to investigate the certain wealth at private places. 2. The wealth which is disclosed before the government and the wealth is considered under the protection of the government. It is evident from the books of fiqh that Khulafa-e-Rashideen (the four caliphs of the Ummah) and the rulers afterwards deducted the amount of zakat at the time of distribution of annual salaries and stipends etc. and there were not any argument raised upon this way of collection by companions of Prophet Muhammad (SAW) and other jurists but shown agreement in this respect. In Mu atta Imam Malik and Kitab-ul-Amwal, it has been written that Qasim Bin Muhammad says that at the time of payment of salary or stipend etc., Abu Bakr asked, from every person, about the wealth upon which zakat became due. If the zakat became due, he deducted zakat otherwise not. Imam Ibn-e-Abi Shaiba and Imam Abu Ubaid narrated the practice of Umar that at the time of distribution of annual salaries, Umar accumulated all commercial wealth and called all traders. Then, after analysis of cash and credit & apparent and non-apparent wealth, the zakat was deducted. As it is mentioned above that that in the era of Abu Bakr and Umar, there is no distinction between apparent and non-apparent wealth and they collected zakat on every type of wealth but this practice was also being continued in the era of Uthman as well as narrated by Aysha Binte Qadama from her father that at the time of payment of salary, Uthman asked from her father about the wealth upon which zakat became due. If I say, Yes then he collected zakat and if I say, No, then he paid my salary. Some narrations also show the continuance of procedure for collection of zakat in the era of Ali as well but it is evident that zakat on non-apparent wealth was deducted only upon the wealth of those people whose salaries were paid by Bait-ul-Maal. Mua awiya set the same procedure as well. It is narrated by Hubaira bin Yaryam about the practice of Abdullah bin Masood while payment of salaries that he collected zakat of salaries also. In this way, he collected 25 upon each thousand. This collection was done after giving the possession of salary to the person due to the aspect of ownership in the payment of zakat. Therefore, Abdullah bin Masood handed over the salary first and then collected zakat upon certain salary amount. The practice of collection of zakat at the time of payment of salaries and stipends etc. was continued after the period of Khulafa-e-Rashideen also. In the period of Umar bin Abdul Azeez, the distinction of apparent and non-apparent wealth had been established but it is evident that he collected zakat from salaries and stipends as well. It must be noted here that the above-mentioned practice was not confined to only the distribution or payment of salaries and incentives only. In case of any financial right

52 52 Journal of Islamic Banking and Finance April - June 2016 of any person, zakat was collected at the time of payment of certain financial right. It is narrated in Musannaf Ibn-e-Abi Shaiba and Sunan-e-Baihqi that in the period of Waleed bin Abdul Mulk, a certain governor had forcefully collected 20 thousand and submitted to Bait-ul-Maal. When Umar bin Abdul Azeez taken over as caliph then he returned the certain amount upon the request of the sons of that person and ordered to deduct zakat of the current year only and not of the previous years due to forceful collection of that wealth. As far as non-apparent wealth is concerned, the ruler has quite absolute right either to collect zakat or deliver the responsibility for payment of such zakat to the owner. It is the discretion of the certain ruler keeping in view the conditions and circumstances of the certain era and financial matters of the public and traders. In case of non-payment of zakat upon non-apparent wealth, the ruler can take concrete action. According to Islamic guidelines, the state has full authority to collect zakat and he can send people for verification of the wealth of people. Now, if there is any expedience (maslaha), the state may transfer his responsibility to owners of wealth but in those areas where is not any expedience (maslaha), the state must collect zakat as evident from the above-mentioned practices of the early Islamic period. The state may consider the fact of maslaha according to the conditions of the society to avoid any action that may cause disturbance or disorder in the society. It is a fact that the trend of living of style of people changes with the passage of time and keeping in view the change, the state may decide according to the circumstances as Uthman Ghani considered the fact of maslaha in his period. In the period of Prophet Muhammad (SAW), the zakat was collected without any discrimination of apparent and non-apparent wealth but one point must be considered here that to collect zakat on animals and agricultural production, the verification officers were sent but in case of cash and commercial wealth, the order was to pay zakat themselves to the government. In the period of Umar, a change in this scenario was done that he appointed verification officers at the exit routes of the cities where they collected zakat upon the wealth which was going outside the cities. The zakat on non-apparent wealth (the wealth inside the cities) was paid by the owners themselves to the government. Uthman provided the proper permission to the people to pay zakat themselves upon non-apparent wealth. But the act of Uthman Ghani has not abolished the right of collection of zakat on non-apparent wealth. In case of non-payment of zakat on non-apparent wealth and in cases of declaration of non-apparent wealth as apparent wealth, the zakat may be collected. The act of Uthman Ghani was due to the reason to avoid investigation of assets of the people at their private places. Hanafites argue that zakat on non-apparent assets should be left to the owners to distribute. If the state is informed that owners of wealth in certain areas do not pay zakat on their non-apparent assets, its payment can be enforced by the public law enforcement authority. Zakat on trade assets may be collected by the state if they are being transported from one place to another, but if trade assets are not transported, they are treated like other non-apparent assets. Malikites argue that zakat must be given to a just government without differentiation between apparent and non-apparent assets. If the state is just only in the

53 Journal The Need of Islamic of Adequate Banking Policies and for Finance Collection.. April June matter of zakat collection and distribution and is unjust in other affairs, some Malikites argue that all zakat must still be paid to the state. It is evident from the above-mentioned discussion that the Islamic State may formulate zakat policies keeping in view the circumstances and situation of the society but it is the absolute right of the government to collect zakat from the people on all zakatable assets without any discrimination. 2.3 Region of Zakat Distribution Fourteen hundred years ago, Islam introduced its unique principle that zakat must be distributed in the region in which it is collected. Muslim scholars agree that zakat should be distributed to deservants in the same geographical area from which it was collected. This principle is based on the tradition of the Prophet Muhammad (SAW) and his successors. When the Prophet Muhammad (SAW) sent zakat officers to any area or region, he instructed them to distribute to the poor in the same region. The Prophet Muhammad (SAW) gave instruction to Mu'adh, (its authenticity is agreed upon): "Zakat is to be distributed to the poor among them." Mu'adh implemented the instructions of the Prophet to the letter. He divided Yemen into regions such that zakat was collected and distributed within each region autonomously. The author of al Mughni says "since zakat is meant to enrich the poor, permitting transporting it leaves the poor of that region in need." Scholars and governors after the Prophet Muhammad (SAW) followed the same guidance. Imran bin Husain, a Companion, was appointed zakat officer at the time of the Umayyads. When he returned from his mission, he was asked "Where is the money?" 'Imran said, "Did you send me to bring you money?" I collected it the same way we used to at the time of the Messenger of Allah (SAW), and distributed it the same way we used to." Taus was appointed zakat officer in one of the regions in Yemen. He was asked for his account by the governor and his answer was, "I took from the rich and gave to the destitute. Farqad al Sabkhi says, I took zakat due on my wealth to distribute it in Makkah. There I met Said bin Jubair, who said, Take it back and distribute it in your hometown. Sufyan narrates "Zakat was taken from al Riy to al Kufah, but Umar bin Abdul Azeez ordered it taken back to al Riy." Scholars agree that all excess zakat funds may be transported to neighboring areas or to the central government. Abu Ubaid reports that Mu'adh stayed in Yemen until the Prophet Muhammad (SAW) died and during the era of Abu Bakr, then went to ' Umar who confirmed his position. One year Mu'adh sent 'Umar one third of the zakat collected in that year. 'Umar was annoyed and told him, "I did not send you as a collector or as a taker of jizyah. I assigned you to take from the rich and render to the poor." Mu'adh answered, "I have not sent you anything that I can find anyone to take from me here." The following year, Mu'adh sent 'Umar one half of the collected zakat. They exchanged statements similar to the previous year. In the third year, Mu'adh sent 'Umar all the collected zakat. 'Umar questioned him the same way he did the previous years, whereupon Mu'adh said, "I could not find anyone who would take any of it." 'Umar's objection indicates that zakat must be distributed in the land where it is collected but his acceptance after Mu'adh's explanation shows that it is permissible to transport zakat when no deserving exists in its region.

54 54 Journal of Islamic Banking and Finance April - June Responsibility of Zakat Workers The responsibilities of zakat workers include the collection and distribution of zakat. The brief information regarding the functions of zakat workers are as under: Collection Function The collection of zakat will need proper documentation and information of those people upon which zakat is due. The collection agencies must try to gather the data to the possible extent. Due to this update, those people, who will be avoiding to pay zakat will be identified and appropriate action might be taken against them. The zakat workers have the responsibility to collect zakat on the following items and assets: A. Gold equivalent to grams. (2.5% at the end of the year) B. Silver equivalent to grams. (2.5% at the end of the year) C. Money and Business Assets: 2.5% at the end of the year if equivalent to the price of grams of silver or grams of gold. D. Agricultural Production: At the time of production, 10% of the production is obligatory on that which is watered by rain and 20% is obligatory on that which is watered by carried water as from tube wells, wells and other sources etc. E. Rikaz i.e. Minerals & Buried Treasure. 20% of explored wealth when found. F. Livestock. Applicable according to the kind and number of animals Distribution Function The Prophet Muhammad (SAW) reported to have said: Allah verily did not accept the judgment of a Prophet or anybody else in (the distribution of) zakat, so He (himself) gave the judgment on it. He divided it into eight parts. (Abu Dawood). This Saying refers to Verse 9:60 as Allah describes: Sadaqaat are only for the poor, and the needy, and those employed to administer (the funds), and those people whose hearts are being reconciled (to the truth), and for those in bondage, and those in debt, and in the cause of Allah, and for the wayfarer; (thus is it) ordained by Allah, and Allah is full of knowledge and wisdom. In the light of the above-mentioned saying and verse, the zakat workers must maintain the proper record and do investigation of eligible and needy people therefore they must be very vigilant in this respect that zakat must be reached in the right hand and to the following categories of the people: The poor and the needy are the first two categories of zakat deservants mentioned in Surah al Taubah, which illustrates that the first target of zakat is to eliminate poverty from society. The first two categories are very often discussed together since, by definition, they are close to each other. Some scholars define the poor as a person who has less than the

55 Journal The Need of Islamic of Adequate Banking Policies and Finance for Collection.. April June amount needed to fulfill his/her basic needs in terms of wealth and income, whereas the needy is that owns nothing. Some others consider that the poor is in a worse situation than the needy. The definitional issue is merely scholastic or linguistic but it is a fact that both the poor and needy cannot support all their basic needs by their own means, and they require necessary support. Workers in the collection and distribution of zakat are the third category of zakat recipients. This emphasizes the autonomy of the zakat institution. Qur'an immediately mentions this category after the poor and the needy and it is a clear indication that zakat collection and distribution are functions of an organization of paid employees. It is part of the social structure of the Islamic state and not an individual practice or an activity of a certain religious body. Those whose hearts are being reconciled include persons who have recently been brought to Islam, or who need to strengthen their commitment to this faith, and individuals whose evil can be anticipated or who can benefit and defend Muslims. Distribution to this category is not a job of an individual but it is a political decision and only the state can determine the need at a given time for reconciling hearts and the qualifications of deservants under this title. Liberating Slaves: This category is to liberate slaves by purchasing them from their masters and get them free. In the present world as the slavery does not exist, this amount might be used for those Muslims who are fighting against the enemy in different parts of the world and captives in non-muslim territories etc. with the consultation of Shariah scholars. The sixth category of zakat deservants is persons under debt. It does not matter whether debts arose from natural catastrophes, business practices, borrowing to spend on family needs or from pledging compensational funds in the process of reconciling differences and disputes between individuals, communities and tribes, especially blood money. By the same token, debts on deceased persons may also be included in this category. The seventh category of zakat distribution is expressed in the Qur'an as "fi sabil Allah" [in the way of Allah]. The linguistic meaning of the term is quite obvious. "Sabil" means way, and "Sabil Allah" is the way that leads to pleasing Allah. Ibn al Athir did analysis of the term and shows two important points: 1. The term originally means every action intended to serve the cause of Allah, including all good deeds, individual and collective. 2. The term is commonly understood to mean fighting for the sake of Allah. All scholars agree that fighting for the sake of Allah is included in this category. Their differences arise on whether this category may also cover other good deeds intended to please Allah. Wayfarer: According to the majority of scholars, the wayfarer, ibn al Sabil, is the traveler on the way from one place to another. Al Tabari reports from Mujahid, The wayfarer has a right to zakat even if rich, as long as he or she is cut off from his or her wealth. Ibn Zaid says, 'The wayfarer is the traveler, rich or poor, who has lost his means of expenditure or depleted them while on the road. Helping this person is obligatory.

56 56 Journal of Islamic Banking and Finance April - June 2016 The distribution of total proceeds of zakat among the different categories of recipients is subject to the discretion of the state and its Shura (parliament) keeping in view the local, national, and global interests of Muslims. 2.5 Gories to Whom Zakat Must Not Be Paid The zakat workers should be vigilant and ensure that zakat must not be given to the following: 1. The rich. 2. Those capable of earning. 3. Disbelievers and apostates who fight against Islam, and, according to the majority of jurists, People of the Pledge i.e. the people of the Book, and all who like them, live within the Muslim society, pledging their sincerity to the state, and obeying its laws. 4. Children, parents, and wives of Zakat payers. 5. Descendants of the Prophet Muhammad (SAW). 3. Deviation from the Right Path Unfortunately, the Muslim history took a wrong turn when the Khilafah al- Rashidah was brought to an end with the establishment of Umayyad dynasty (41-132/ ). The hereditary monarchy begun with the evils of political illegitimacy, with absolute power and without accountability, which were the clear violation of the moral imperative of khilafah or the ideal political system according to Islamic posture. It is a fact that the ideal political structure, as laid down by Khulafa-e- Rashideen, was badly affected as there is no place of monarchy in Islam. That violation generated discontent in Muslim society, particularly among those of the Prophet s Companions because they could not bear such illegitimacy and divergence from Islamic guidelines in such a way. Due to the reason of this dissatisfaction, there were also revolts, but these proved unsuccessful. The Umayyads had set the example of monarchy therefore after the Umayyad dynasty; the Abbasids came into power in 132/750 after overthrowing the Umayyads. At the outset, they came with the ambition to abolish the ills that Umayyads had left but it is a natural factor of hereditary monarchy that due to having full authority and lack of fear of accountability, this type of ruling cannot show itself the best ruling system. If one ruler is good, it is not a guarantee that the succeeding ruler will be the same or better than the present. Once again, due to illegitimate activities of Abbasids, dissatisfaction among the public caused revolts which were mercilessly crushed. It is a worth mentioning factor that although the irregularities on the part of the government were increasing but it is a fact that in the dynasties of Umayyad and Abbasid, the zakat system was continued and run by the state and it is also a fact that even after splitting of Muslims into a number of regions and areas, zakat system was being run by the government. The rulers attached the title of khalifah in different dynasties i.e. Umayyad (41-132/ ), the Abbasid ( / ), and the Ottoman ( / ) etc. but did not think the real sense of this word as khalifah which means the representative of Allah on the land. Other than khalifah, the words sultan and malik became common. Except for some rulers, at different times in all dynasties, who were

57 Journal The Need of Islamic of Adequate Banking Policies and Finance for Collection.. April June pious and competent and who tried to perform at least some of the functions associated with the khilafah, most rulers were absolute monarchs and their rule did not reflect the teachings of Islam. One of the first things to happen was loss of control over public finances. Actually, the rulers were ruling as a king and thought the public finance and treasury as their own wealth, state as its own property and people as their slaves. They thought their ruling as their absolute right. That thinking was leading to luxurious life of the monarchs with the cruel and irresponsible utilization of the public wealth. The desired thinking was forgotten that they should be custodians rather than owners of that wealth and resources. Due to these wrongdoings, the Muslim history is evident that Muslims faced the political and power decline in almost all parts of the world and external powers or non- Muslims captured most of the regions and abolished our rest of the social and economic structure that had been protected to some extent and Muslims were enforced to follow the policies and procedures pertaining to education, law, economic, social and cultural aspects etc. The Muslim world has got liberations from the non-muslim powers and obtained new pace in the preceding century. They have shown commitment also to establish the golden rules and principles of Islam once again but it is also a fact that they are still lacking one collective smooth thinking which might be helpful in obtaining the best system as desired by Islam. The main reason of this continuous deviation is the inclusion of secular and non-islamic thoughts in our generations and people along with the lacking of the ideal government structure. It is a worth-mentioning fact that the gap between the government and public is still wide and continuing towards wider. 4. Possible Strategy for the Best Practice If we want to get the fruits of zakat in a real sense, we have to formalize the effective strategy keeping in view our history and Islamic guidelines and also some other determinations in this respect. Some of the possible steps that might be taken in this respect are as under that can build confidence and narrowing the gap among the Ummah at public and government level and provide track to achieve the best practicing model at both national and international level. 4.1 Return to the Actual Heritage Unfortunately, the Muslims around the world have ignored each and every thing that has commanded by Islam and following the baseless and man-made theories of the capitalists around the world without any consideration of right and wrong. It is a tragic fact that some Muslims itself having a confusion of the applicability of the principles of Islamic Economics in the present era. The reason is that they have not studied well the Islamic theories and got higher degrees from the West. Due to this reason, we could not be practicing and following our real economic models that had been implemented and practiced in the era of our beloved Prophet Muhammad (SAW) and in the era of four caliphs. It is amazing that we are still thinking and searching the ideal model like the West but do not think for a while that the ideal model with real experienced successful models are found in our history and literature. In our daily life; we observe that to implement a certain thing in an absolute sense, we must consider and fulfill other requirements as well that are interrelated to certain thing otherwise the certain implementation is quite ineffective. When we talk about effective system of collection and distribution of zakat, we must admit that we must return to our actual heritage. We know that Islam is a complete code of life and as long as

58 58 Journal of Islamic Banking and Finance April - June 2016 we would not implement Islam as a whole in our states and in our daily lives, we cannot implement any thing in an effective way and cannot get fruits. It must be noted that poverty alleviation and effective collection and distribution cannot be possible as long as we would not change ourselves and would not consider in a true sense that what is our real situation and what should be our real situation? Are we practicing Islam as we should? Obviously, the answer is in negative therefore we must try to change ourselves keeping in view the commandments and guidelines as laid down by Almighty Allah. It is amazing to note that the Muslim countries do not even declare themselves as Islamic countries even though they have a clear majority. What is the reason? When we call ourselves as secular nation then in what sense and with what enthusiasm, we can design the best framework of the collection and distribution of zakat. We must consider the effect of such thinking upon our children and upon our people. It is very sorry to say that in Muslim countries, some parties want to implement Islam and some not. When we call ourselves Muslims then what is the logic behind the arguments towards the implementation of Islamic ideology in our countries. It is very important to note that when a state or government does not represent itself a true Islamic picture, how the state claims itself the right of collection and distribution of zakat. 4.2 Implementation of Islamic Economic System It is a tragic fact that the economic structures of Muslim countries are also not complied with the commandments of Almighty Allah. It must be understood that the implementation of Islamic economic system is mandatory. The talking about the implementation of the best practices of zakat is only the one aspect of Islamic economic system. What about the other aspects? We will get the real success only when the interest-based and immoral capitalist-based economy, in which everybody is selfish, will be abolished. It is a point of consideration that in the interest based selfish capitalist society, how we get the real fruits of zakat distribution. Zakat is the crucial part of Islamic economics and social system and we must accept and implement Islamic economics as a whole and not only Islamic economics but Islam as a whole. Then, we will get the real fruits in every walk of life. When we go to implement the real Islamic economic system, we will be automatically implementing the best practice of collection and distribution of zakat, obtaining the confidence of the people and narrowing the gap between the government and people of the State. 4.3 Awareness & Knowledge of Fiqhi Issues of Zakat The awareness among public with respect to fiqh issues of zakat is very crucial because with the passage of time, many issues have been arisen. Without the proper strategy in this respect, the zakat payer might get confused and they may not take out zakat properly from their assets. The lack of knowledge, in this respect, might cause problem in the effective collection of zakat from the people. Keeping in view the present complex financial system, many issues have been arisen that are being addressed by our Shariah scholars and the books have also been written in this respect but it is also a fact that many people do not read books or cannot read books due to illiteracy therefore for these people, special sessions might be conducted in mosques, town halls etc. where these people can come and interact with Shariah scholars and experts of shariah issues of zakat easily. In

59 Journal The Need of Islamic of Adequate Banking Policies and for Finance Collection.. April June this way, the people would get know-how of their zakatable assets with respect to apparent and non-apparent wealth and they would pay zakat in the right manner. The delivery of knowledge must include both the issues of payment of zakat and real practices as people might understand about responsibilities of certain parties in this respect. In this respect, shariah scholars might convince people to give zakat to the state as their zakat can be effectively utilized in a collective manner rather than giving zakat to the individuals. 4.4 Need of Islamic Curriculum Our educational structure should be changed as well. What is being taught in our schools, colleges and universities? As far as economics is concerned, we are still teaching western theories as a primary or main curriculum and Islamic Economics (if included) as a secondary section. In this way; we, themselves, are approving the man-made theories and embracing them by heart and treat Islamic thoughts at the second level or even not included in the curriculum. It is affecting upon the thinking approach of our young generation. As zakat is the main part of Islamic economic system, the curriculum should be effective and updated with the passage of time. 4.5 Need for International Zakat Organization The International Zakat Organization may be formalized in which the representation from different schools of thought and countries can be made possible and tried to minimize juristic differences in this respect. From this platform, the panel of shariah scholars may encourage people towards the payment of zakat on a collective level rather than individual level. In this way, the comprehensive guidelines of zakat will be available in the context of prevalent complex financial system with the continued research and thought process. At this level, the best uniform procedures and guidelines may be formalized that will be following and implementing by all the Muslims and Muslim states in the world keeping in view the certain circumstances and conditions of their states or regions. It is a fact that continued research and thought process is mandatory within this rapidly changing world. It is important to note here that in the era of Umar, the Second Khalifah-e-Rashid, Umar imposed the zakat on horses despite the fact that Prophet Muhammad (SAW) exempted horses from the payment of zakat. Umar imposed zakat keeping in view of the fact that the horses were being used for trade purposes in the era of Umar and not in the era of Prophet Muhammad (SAW). Therefore, it is evident that the continued thought process is very important. 4.6 Formation of Regional Zakat Organizations To build confidence among people and in order to comply with the Islamic guidelines of distribution of zakat, there is a need of formation of zakat collection and distribution organizations at regional levels within the certain state. In this case, even though that the organizations will be made under the direction and supervision of the government and administration of Central Zakat Organization but will work in the capacity of statutory organization. The government must not intervene in the working and management of these organizations without any valid reason. In non- Muslim countries, these organizations can also be formed. The members of regional zakat organizations must be accompanied by prominent Shariah scholars as advisors for collection and distribution system of zakat.

60 60 Journal of Islamic Banking and Finance April - June 2016 Therefore, the representation from each group in the organization and presence of Shariah scholars as advisors will minimize the risk of corruption and enhance the confidence among the public. The Shariah scholars must present in both the central and regional zakat organizations. With the above-mentioned set up, the issue of corruption or misdeed will be minimized or may come to an end so that people will make payment of zakat to these organizations with full confidence and peace of mind that their zakat will be utilized in a right manner under the supervision of right persons. The regional and central zakat organizations at the state level will get in contact with International Zakat Organization and keeping in view the social, political and economic circumstances of Muslim Ummah, they might decide to distribute the collected zakat in the best interest of the Ummah. 4.7 Uniform Period for Zakat Collection & Distribution around the World The uniform period for zakat collection and distribution may be the great achievement in the way of unification of the Ummah. In this way, the environment might be built in which the whole Ummah will feel unity. In this way, the payment of zakat may be made one time by all Muslims. The month of Ramadan is the best month for this purpose in which the reward for good deeds from Almighty Allah is more than the other months. The uniform period will help a lot in order to minimize different complex issues and problems of Ummah as the zakat, all over the world, will be collecting and distributing at the same time in a year. References Maulana Muhammad Riffat Qasmi. (2009). Masail-e-Zakat, Lahore, Pakistan: Al Meezan. Muhammad Akram Khan. (1989), Economic Teachings of Prophet Muhammad (SAW), Islamabad, Pakistan: International Institute of Islamic Economics. M. Umer Chapra. (2000). The Future of Economics: An Islamic Perspective, Markfield, United Kingdom: The Islamic Foundation. Prof. Dr. Noor Muhammad Ghaffari. (2008). Nabi Kareem (SAW) ki Ma ashi Zindagi, Karachi, Pakistan: Shaikh-ul-Hind Academy. Allama Shibli Nu mani. Al-Farooq, Lahore, Pakistan: Al-Misbah. Shahzad Iqbal Shaam. (2002). Islam ka Nizam-e-Mahaasil, Islamabad, Pakistan: Shari a Academy, International Islamic University. Maulana Mufti Muhammad Taqi Usmani. (1999). Fiqhi Maqalaat, Karachi, Pakistan: Memon Islamic Publishers. Monzer Kahf, Zakah. (2011, June 21). Retrieved from monzer.kahf.com/papers/english/zakat.pdf Dr. Yusuf Al Qardawi. Fiqh al Zakah. (2011, June 21). Retrieved from monzer.kahf.com/books/english/fiqhalzakah_vol2.pdf

61 Journal of Islamic Banking and Finance April June Shariah Ruling of Bill Discounting and its Alternative Abstract: (Bai Salam in Currency) By Uzair Ashraf Usmani With the growing use of financial services in international trade, the importance of bill discounting is not beyond comprehension. It is undoubtedly one of the most important tools of trade financing. Now, it has become very easy for importers and exporters to sale any product to a complete stranger anywhere in the world and get the bill against it discounted before its maturity date. That is why; this tool is in the practice of all conventional banks. But, regarding Shariah rulings, the prevailing practice in conventional banks is not Shariah compliant as this transaction consists of debt sale and interest. But, due to its vital need, Islamic Shariah jurists have stepped forward with its different alternatives based on Murabaha, Wakalah, Musharkah and Bai Salam in currency. In this article, we have covered the rationale behind the Shariah rulings of prevailing bill discounting in conventional banks and addressed the Bai Salam as an alternative in currencies and its executive model in Islamic banks. Furthermore, we have discussed the different opinions of modern scholars regarding these issues. Keywords: bill discounting, letter of credit, alternative of bill discounting, bai Salam in Currency. 1. Significance of bill discounting With the rapidly growing economy, the importance of bill discounting is not obscured any more. This bill has just not only become almost mandatory in trade financing but it is also a very important business tool among traders in the current round of world trade. Undoubtedly, the traders who deal in imports and exports have to use this product constantly. Through this product, the traders get the benefit of not only staying at home and selling their commodities to a completely unknown part of the world but also Author: Uzair Ashraf Usmani, Affiliation: Jamia Darululoom Karachi (fatwa writer), MEEZN BANK Shariah Scholar, M phill PhD: Karachi University, uzair.usmanii@gmail.com,

62 62 Journal of Islamic Banking and Finance April - June 2016 have an opportunity to get their bills discounted against the payable amount before their maturity, and then with that amount they generate more earnings and profit by investing and placing it in different financial institutions. That is the reason why this tool is in the practice of all conventional banks. According to the practice in vogue the exporter sells his goods at an agreed price to someone living in other country in exchange of a bill for payables. As soon as the trader loads his goods on the ship, the importer signs a bill to transfer it to the exporter from his bank; the bill actually is a promissory note on behalf of the importer that he will pay the amount on mutually agreed date to the exporter. This bill is known as a letter of credit or bill i of exchange that is known as "کمبيالہ in Arabic and the ii date at which amount will be paid is the maturity date known نضج الکمبيالہas in Arabic. After that, most of the time, the exporter is in a hurry to get the amount as soon as possible so that he can make further investments, therefore, the bill is taken to a bank for discounting. This process is called endorsement and known as inتظہير Arabic and the person who signs is known as endorser and is known as inمظہر Arabic. Bank accepts this receipt against the receivable amount, and reimburses some amount which is much lesser to the amount receivable (depending upon the outstanding number of days left from the maturity date) to exporter at that time. This procedure is identified as Bill discounting and iii in Arabic it is called حسم الکمبيالہ or. خصم الکمبيالہ.Banks most often take its profit according to the corresponding number of days left from the maturity date. Bill discounting's Mechanism which is prevailing and is in practice under all conventional banks in summarized from is that suppose a manufacturer name Zaid manufactures shoes and imports and sells them to importer Umar who lives in America on mutually agreed price, let s say one lac dollars. They finalize this deal on first of January and they already have decided that with mutual understanding Umar, the exporter, is going to pay him on 1 st of March, now Zaid gets the shoes shipped, let s say on 15th January and informs Umar about it. Umar upon being informed sends a bill on behalf of his bank to the Zaid in which he undertakes the promise to pay the amount on 1st march as mutually agreed in the contract of sale, this bill is called bill of exchange or letter of credit which mostly is of two types: usance LC and sight L.C. It is termed as inکمبيالہ Arabic, now after receiving the bill Zaid wants financial assistance to make more investments he takes the bill to the bank and signs on the back of receipt of the bill and asks bank to pay him some money let s say 90,000 dollars and in exchange bank keeps receivable amount which is 100,000dollars from the exporter. Bank mostly pays him the lesser amount as compared to the amount to be received, and the discounted amount which is dollars, in our case, is bank's profit. Mostly it depends upon the number of days which are left from the maturity date. Bank discounts Supplementary money if the number of days are more to the date of maturity, this discounting is called bill discounting and it is termed as الکمبيالہ الکبميالہ orحسم inخصم Arabic and person who signs who is exporter in our case is called endorser and it is called inمظہر Arabic and this ہنڈی پر بٹہ لگانا Inتظہير Urdu this process is called. or process is termed as endorsement We can divide bill discounting into two types: رفا ان ا 2015 ص 1120 ا ع ا رفا ان ا 2015 ص 1120 ا ع ا رفا ان ا 2015 ص 1120 ا ع ا i ii iii

63 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June First type In first type the bill holder (مظہر) receives the amount from the bank and gets himself free from any kind of liability. In other words if the importer did not pay amount to the bank, he would not be questioned to pay. This is called without recourse. v iv 1.2 Second type In second type of bill discounting after receiving the amount from the bank the bill holder or the exporter doesn t get himself from the liability of payable of importer. So he will be questioned if importer defaults. This is called with recourse. vi 1.3 Shariah rulings of first type The first step will be the proper understanding of debt. Debt is discussed in the book ALMOSUATUL FIQHIYYA ALKUWETIYA vii, viii according to which in a summarized form debt means an indemnity which becomes mandatory in the liability of the person due to the execution of the transaction or due to dispose of the property or due to taking loan from someone Suppose if a person has bought something like wheat in exchange of Rs.100 from the shopkeeper, now on because of this transaction providing 10Kg wheat is debt on the shopkeeper and paying Rs.100 is debt on the buyer. If we observe bill discounting closely we conclude the result that it is mandatory for the importer to pay debt to the exporter, but exporter therefore sells the debt to the third party which is the bank lower than the face value, and we already mentioned that the bill of exchange is actually the promise of importer which shows that he will pay the due debt on him in the future. So, following the Shariah rulings of first type, we can say that it s a debt sale to third party transaction. We consider first type as sale because the liability of exporter gets over after he receives the amount from the bank. According to Islamic law of sale, sale possess the same feature because after the sale the responsibility of the vendor from the subject-matter gets finished until or unless subject-matter appears iv vi uniform commercial code 3.415(b) If an endorsement states that it is made "without recourse" or otherwise disclaims liability of the endorser, the endorser is not liable under subsection (a) to pay the instrument. v رفا ان ا 2015 ص 1121 ا ع ا Uniform commercial code if an instrument is dishonored, an endorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed, or (ii) if the endorser indorsed an incomplete instrument, according to its terms when completed, to the extent stated in Sections and The obligation of the endorser is owed to a person entitled to enforce the instrument or to a subsequent endorser who paid the instrument under this section الموسوعة الفقهية الكويتية (21/ 102) صادر عن: وزارة الا وقاف والشي ون الا سلامية الكويت الطبعة: (من ه)الا جزاء : الطبعة الثانية دارالسلاسل - الكويت قيل في معناه أقوال متعددة أوضحها ما قاله ابن نجيم: " الدين لزوم حق في الذمة ". فيشمل المال والحقوق غير المالية آصلاة فاي تة وزآاة وصيام وغير ذلك آما يشمل ما ثبت بسبب قرض أو بيع أو إجارة أو إتلاف أو جناية أو غير ذلك الموسوعة الفقهية الكويتية (21/ 103) صادر عن: وزارة الا وقاف والشي ون الا سلامية الكويت الطبعة: (من ه)الا جزاء : الطبعة الثانية دارالسلاسل الكويت عرف الحنفية الدين با نه عبارة عن " ما يثبت في الذمة من مال في معاوضة أو إتلاف أو قرض " وهو عند جمهور الفقهاء من الشافعية والمالكية والحنابلة عبارة عن " ما يثبت في الذمة من مال بسبب يقتضي ثبوت vii viii

64 64 Journal of Islamic Banking and Finance April - June 2016 to be defected or anyone else s share appears in the subject-matter. So it will be called debt sale. So in other words it s a debt sale to third party and regarding the debt sale to third party, the jurists have given their words by which laws of bills of exchange can be used for a verdict Hanafi school of thought By observing the religious text of Hanafi school of thought, it is evident that near the Hanafi jurists selling the debt to a third party is not admissible because uncertainty is being found in it. And according to hadith such sale and purchase, in which uncertainty is being found, is prohibited. Therefore the Holy Prophet (pbuh) said: ix عن أبي هريرة قال: «نهى رسول االله صلى االله عليه وسلم عن بيع الحصاة وعن بيع الغرر Translation: Hazrat Abu Hurairah (RA) said: Holy Prophet (pbuh) has prohibited the sale and purchase of gravel and uncertainty. The description of uncertainty is that the seller is legally obliged to do in terms of buying and selling that the subject matter which is being sold or purchased should be given in the risk of the buyer. Therefore, if the seller sells subject matter without giving in risk to the buyer then because of this unaffordable delivery, the sale becomes x void. In aforementioned situation the person who has to receive the debt sells the debt to the third party then the third party has no idea that whether the debtor(the one who pays the debt) will pay the debt or not. Therefore, ambiguity is being found in it and that debt is an unaffordable delivery. Hence, uncertainty is found in it so selling or purchasing of this debt is not permissible. We also come to know that the actual reason behind the illegitimacy of debt sale to third party is the uncertainty therefore if the debt is sold on the face value or more than or lesser than the face value, debt sale to third party will remain illegitimate. The Hanafi text, in a summarized form, is mentioned below: xi In MOUTA Imam Muhammad, Imam Muhammad (May Allah bless his soul) said that a person who has a debt on another person, it is inappropriate for him to sell the debt because the other person doesn t know that whether the debtor will pay debt or not. This is also the opinion of Imam Abu Hanfia (May Allah bless his soul). Allama Kasaani xii (May Allah bless his soul) narrates in his famous book that the sell or purchase of the debt is forbidden to any third person, because either the meaning المو لف: مسلم بن الحجاج أبو الحسن القشيري النيسابوري (المتوفى: 261 ه)صحيح مسلم (3/ 1153 )الناشر: دار إحياء التراث العربي - بيروت x مفتی تقی عثمانی 2015 ص 338/1 فقہ البیوع پہلا ایڈیشن لمکتبة معارف القران کراچی المو لف: مالك بن أنس بن مالك بن عامر الا صبحي المدني (المتوفى: 179 ه)موطا مالك رواية محمد بن xi الحسن الشيباني (ص: 292) الطبعة: الثانية م ز ي دة منقح ة الناشر: المكتبة العلمية xii المو لف: علاء الدين أبو بكر بن مسعود بن أحمد الكاساني الحنفي (المتوفى: 587 ه) الطبعة: الثانية ( 1406 ه م )بداي ع الصناي ع في ترتيب الشراي ع (5/ 148) الناشر: دار الكتب العلمية ix

65 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June of debt is the amount receivable or delivering the debt to under the ownership of someone else, both the cases are not allowed regarding to Shariah because in both the cases the vendor cannot give it to the customer since he doesn t have the debt Hanbali school of thought By looking at the text and narration of the Hanablah, it can be said that debt sale to third party is not allowed because uncertainty is being found in it; the details of which are given in the explanation of Hanafi religion above. However it is said in the book Masail Ishaqubnurahveh that the selling or purchasing of debt is permissible to the debtor for example dowry is to be paid by husband to wife which means that except the debtor, no one else is permissible to pay it. Hence it is permissible to the debtor to sell the debt. xiii It is said in the book ALMUHARRAR that except to the debtor, no one else is permitted to be sold the debt to xiv It is said in the book SHARUL KABIR xv that except to the debtor no one else can be sold the debt to because regarding to this chapter narration of Hazrat Ibn Umar االله عنہ hadithرضی is that Hazrat Ibn Umar االله عنہ usedرضی to sell camels in the grave yard of Baqi and sometimes he used to decide dirham for it and used to take dinar and vice versa so interrogated once this to Holy Prophet (P.B.U.H) about it and the Holy Prophet (P.B.U.H) said that there is nothing wrong in it. Through it we came to know that sell or purchase was done in dananir and that was mandatory to be paid but in exchange to that, dinar or dirham were being received from the debtor. Therefore, except to the debtor no one else is allowed to sell the debt to. It is said in the book ALINSAF that according to right opinion debt sale to third party is forbidden. xvi Zawahri school of thought Allama Ibnul Hazam writes about debt sale its summary is that debt sale is not allowed to third party whether this sale is done in the cash or against any commodity because ambiguity is there and this sale which produces uncertainty, regarding its brief explanation we already have mentioned before. xvii Maliki School of Thought In Malki school of thought, the following context is followed: المو لف: إسحاق بن منصور بن بهرام أبو يعقوب المروزي المعروف بالكوسج (المتوفى: 251 ه) مساي ل الا مام أحمد وإسحاق بن راهويه (6/ 3009) الطبعة: الا ولى 1425 ه م الناشر: عمادة البحث العلمي الجامعة الا سلامية بالمدينة المنورة المملكة العربية السعودية المحرر في الفقه على مذهب الا مام أحمد بن حنبل (1/ ( 338 المو لف: عبد الرحمن بن محمد بن أحمد بن قدامة المقدسي الجماعيلي الحنبلي أبو الفرج شمس الدين (المتوفى: 682 ه) الشرح الكبير على متن المقنع (4/ 342) الناشر: دار الكتاب العربي للنشر والتوزيع المو لف: علاء الدين أبو الحسن علي بن سليمان المرداوي الدمشقي الصالحي الحنبلي (المتوفى: 885 ه) الا نصاف في معرفة الراجح من الخلاف للمرداوي (5/ 112) الطبعة: الثانية الناشر: دار إحياء التراث العربي المو لف: أبو محمد علي بن أحمد بن سعيد بن حزم الا ندلسي القرطبي المحلى بالا ثار (7/ 487) الناشر: دار الفكر - بيروت xiii xiv xv xvi xvii

66 66 Journal of Islamic Banking and Finance April - June 2016 It is discussed in the book Manhul Jaleel xviii its summary is basically it is not allowed to sell any debt to any one (third party) except for the debtor himself. However, they allow to sell debt with certain restrictions. Debtor should be available and should not busy in travelling. If the debtor is not available in council contract where selling and purchasing is going on than this selling is not permissible. Debtor admits the due able debt on him. Debt should be something which is permissible to be sold before taking its possession of it. If debt is wheat then it is not permissible to sell it to the third party before taking its possession as it is not permissible to sell or purchase anything before taking possession. In Maliki school of thought short sale is allowed in everything except in the wheat. Hence, except wheat debt sale upon anything is permissible if other corresponding conditions are followed too. Debt sale should not be in form of homogenous goods consequently as a result of it if debt is in the form of dirham and transaction is also executing in dirham then this transaction will be illegitimate, at this point Allama Dasouqi further added if both subject matter and consideration are homogeneous then uniformity on both the counter values will be prerequisite in order to make this transaction legitimate. Sale purchase of silver and gold against each other or against their selves should not be allowed despite from the fact that they are not homogeneous when it comes to sale against one another, but because aforementioned transaction is SARF and in sale of SARF taking possession on both subject matter and consideration in the council contract is one of the two stipulations, and in this case this condition is not getting full filled so this transaction is void. There should not be prevailed any hostility among the vendor and the debtor so the customer could not able to get the debt. Allama Dsouqi further added two more conditions which have been explained by mufti Taqi Usmani in his latest book name fiqhul biyoo. Consideration against debt should be in cash and in spot otherwise if we consider consideration as loan or debt then transaction becomes bai alkali bilkaali which is not permissible in the eyes of shariah. Debtor should be from those who can be enforced by law and regulative authorities so if he defaults from paying his debt then debt can be recovered through the mean of xix xx xxi court Shaafi school of thought On this issue, we may find contradiction among shawafy s narrations in some books we find legitimate to sale the debt to a third party, some narrations suggest that it is allowed if customer and the vendor take the possession on both consideration and the subject matter respectively in the council contract and then customer sells to the third المو لف: محمد بن أحمد بن محمد عليش أبو عبد االله المالكي (المتوفى: 1299 ه) منح الجليل شرح مختصر خليل (5/ 46) الناشر: دار الفكر - بيروت المو لف: محمد بن أحمد بن عرفة الدسوقي المالكي (المتوفى: 1230 ه) حاشية الدسوقي (3/ 63) الناشر: دار الفكر مفتی تقی عثمانی 2015 ص 351/1 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی مفتی تقی عثمانی فقہی مقالات ص 6/98 پہلا ايڈيشن ميمن پبلشرز xviii xix xx xxi

67 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June party. Their opinion has been described in the book Raouzatu Talibeen. xxii And the book of Imam Abu Zakriya Mahyoddin may Allah bless his soul xxiii MUHAZZAB The summary of this is that according to Shawafa, the selling of debt except to the debtor which is the third party is not permissible If customer takes the possession on the debt in the council contract, the fact is that this condition is indicating the illegitimacy of debt sale as when the debt has been taken under possession it will not remain debt according to Shariah that is the reason why Allama Nawavi has written the opinion of inadmissibility of this transaction in his book MINHAJ UL TALIBEEN But number of Shaafi scholars and jurists did not mention this condition in their books even Allama Sheraazi did not mention this condition on the context of MUHAZZAB one of his written books. Summary of Shaafi School of Thought Justice rtd Mufti Taqi Usmani after mentioning all the opinions and the brief research study, which have been made on Shaafi school of thought, says that Shawafy has 3 opinions: Permissibility of debt sale Impressibility of debt sale Permissibility of debt sale with condition of taking possession in the council contract on the compensation and the debt However, it means that all Shafi jurists who mention the permissibility of debt sale are basically adopting this view with condition of taking the possession on the debt and its compensation in the at the meeting of the contract, therefore uncertainty which is the basic reason of getting this transaction impermissible does not exist in the aforementioned case, therefore in other words if uncertainty exist then Shafi jurists would not allow the debt sale to the third party too. Summary Summary of the research study is jurists have three opinions regarding to this issue: According Hanafi, Hanbali and one of the opinions of shawafy debt sale is not a Shariah-compliant activity as this sale is based on uncertainty as it is unknown in the transaction whether debt will be received or not after it is being purchased. Permissibility of debt sale according to some shawafy According to some Shaafi and Malki jurists debt sale is Shariah-compliant with some specific conditions, Malki jurists allow this sale if debtor accepts the due able debt on him and he is present in the court, so it means that receiving of debt is absolute so there will not remain any more uncertainty in the transaction. Sheikhul Islam Mufti Taqi Usmani, after addressing above mentioned issues and opinions, says that argument of majority jurists is very strong because debtor admits due able debt when there is an actual debt on him but conviction of paying debt will not be المو لف: أبو زآريا محيي الدين يحيى بن شرف النووي (المتوفى: 676 ه) روضة الطالبين وعمدة المفتين (3/ 516) الطبعة: الثالثة 1412 ه / 1991 م الناشر: المكتب الا سلامي بيروت- دمشق- عمان االمو لف: أبو زآريا محيي الدين يحيى بن شرف النووي (المتوفى: 676 ه) لمجموع شرح المهذب (9/ 275 )الناشر: دار الفكر xxii xxiii

68 68 Journal of Islamic Banking and Finance April - June 2016 achieved just by admitting as there are number of debtors who admit the payables but do not pay their payables but they rather mostly default and work with deferment and several debtors not only default but refer back their admission and declaration, so then this issue leads towards the court with all the fights and disputes, so when the conviction of paying debt is not achieved it will become uncertainty. Shariah rulings of first type: According to the above mentioned views and opinions of jurists fist type of bill of exchange is not allowed according to Hanafi, Hanbali Zawahri and of the opinions of Shafi school of thought even if it is sold on the face value as that sale will be based on uncertainty, jurists has mentioned another document in their books which resembles with the bill of exchange it was called JAMKIYAA, this document used to be issued on behalf of baitul maal or on the half of supervisor of the Waqf in the favor of the person whom had any financial right on them. Jurists of ahnaf and HANABILAH do not allow sale of that document as this sale is actually the sale of debt to the third party, just like that they also do not allow the sale of first type of bill of exchange. But ALLAM Ibn UL HATTAB one of the jurists of Malkiya has allowed sale of that document: xxiv بخلاف الجامكية فا ن الملك محصل فيها لمن حصل له شرط الواقف فلا جرم صح أخذ العوض بها وعنها But regarding to the conditions that malkiyaa impose on the debt sale we observe that they allow the sale of the debt with condition of in homogeneity of both the consideration and subject matter however if they are homogenous then they should have to be equal in the quantity, in the aforementioned case there isn t any equality in the transaction of bill discounting so bill discounting should be impermissible according to malkiyaa too. Regarding to shawafy and their opinions some of them allow the debt sale or sale of jamkiyaa with the condition of having the possession on both the consideration and subject matter in the council contract however if we take that specific opinion then bill discounting will be not allowed too according to them as they also impose the condition that consideration should be equal to the face value of the debt and in the aforementioned case consideration is less than face value of bill of exchange so its sale is forbidden too. So our discussion proves that first type of bill discounting is impressible near all authentic jurists. 1.4 Shariah rulings of Second Type If we observe closely the second type of bill discounting we come to the result that the liability in the favor of exporter does not get over when the he discounts the bill and receives the amount from the bank, in fact still bank shall has the right to receive his amount if the importer defaults from paying the amount, regarding its Shariah adaptation it is actually the combination of loan and Hawala as bank first lends loan to the exporter with the condition that he will do the hawala (transfer of loan) towards the importer means the importer must repay the loan that had lent to the exporter and then bank will take that loan given to the exporter plus the extra amount as its fee. Therefore it can be assumed as hawala acting upon the Hanafi school of thought. المو لف: شمس الدين أبو عبد االله محمد بن محمد بن عبد الرحمن الطرابلسي المغربي المعروف بالحطاب ال رعيني المالكي (المتوفى: 954 ه)مواهب الجليل في شرح مختصر خليل (4/ 224) الطبعة: الثالثة 1412 ه مالناشر: دار الفكر xxiv

69 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June (What is hawala?) وفي اصطلاح الفقهاء تحويل الدين من ذمة الا صيل إلى ذمة المحتال عليه على سبيل التوثق به Hawala is the transfer of debt from the transferor (muheel) to the payer (muhalalaieh) xxv suppose if 100 rupees are payable in the liability of Zaid as debt and he has to pay this debt to the Umar then Khalid comes and says I will reimburse the debt on the Zaid to the Umar then this transaction is called hawala according the Islamic jurists. In the aforementioned case Zaid ismuheel, aseel or the debtor, Umar is the person who has to be paid the debt is muhtallaho and Khalid who has taken the responsibility of paying the debt is muhtalalaieh. Basic principal of Ahnaf is if the debt gets lost then muhtal can receive the payable debt from the muheel. In the aforementioned case muheel is the exporter bank is the muhtal who has lent the loan to the exporter and exporter has transferred the loan towards the importer who is the muhtalaliehi. Reason of saying this adaption hawala is that there is a law in number of countries that if the importer didn t pay the debt then bank would have been granted a right to receive the debt from exporter, so according the following type of hawala liability of the exporter does not get over so if the bank didn t get its debt received from the importer he would have been received it from the exporter. This is exactly the same situation that Ahanf has mentioned in their books. According to that if the debt gets lost then the creditor can receive the debt from debtor. Although ahnaf allows hawala itself but the aforementioned type of bill discounting is illegitimate as it is necessary if the debt is in the form of loan then the receivable amount from the importer should have to be equal to the amount paid to the exporter (means as much loan has paid the bank as much he should receive from the importer) but the ongoing practice of all conventional banks is to receive extra amount of money from the exporter which is Riba. So this type is also impermissible xxvi and that is the reason why second type of bill discounting is also declared as illegitimate in the AAOFI xxvii standards. xxviii 2. Alternative of Bill Discounting Apart from being its impermissibility, its importance is undoubtedly not obscured anymore. For the development of society the bill of exchange financially plays an extra ordinary role. Therefore, it was an exigency of the time for the contemporary scholars and jurists to present its alternative and they have come up with the following alternatives: Murabaha model Wakalah model Salam model xxv AAOIFI STANDARDS 99 CHAPTER NAME HAWALA لمفتی تقی العثمانی بحوث القضايا ص 2/35 الطبع 2013 وزارة الاوقاف والشو ن الاسلاميہ مجمع فقہ الاسلامی 2/217 ہي يۃ المحاسبۃ والمراجعۃ مفتی تقی عثمانی فقہی مقالات ص 6/125 پہلا ايڈيشن ميمن پبلشرز xxvi xxvii xxviii

70 70 Journal of Islamic Banking and Finance April - June 2016 We will discuss the main frame work and structure of Salam model in our ongoing discussion and conclude this research with the legitimacy of this model. 2.1 Salam Based Currency Model To get fully understand Salam based currency model it would be better for us to understand bai Salam and bai Sarf first. We also have to understand the meaning of fuloos and Shariah rulings of executing Salam in the currency and fuloos as well Definition of Salam Salam may be defined as: "ہو بيع الاجل بالعاجل" In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange for some advance price fully paid on the spot. The price is in cash but the supply of purchased goods is deferred. Suppose if a vendor sells wheat and says that he will undertake to supply the specific quantity of wheat, let s say 100 tons, after 6 specific months and customer agrees and pays the amount as consideration in advance on the spot then this type of transaction is called bai Salam. As at the time of transaction the subject-matter is not available, consequently, according to the qayas, this sale should be void ab initio because it is necessary in the contract of sale for the subject matter to be available at the time of sale but this sale has been proven by the hadith. So, shariah has allowed to use this as a mode of financing with some certain unambiguous conditions. Under such a sale contract the subject matter is called muslamfih and the consideration is termed as rasulmaal What is the Role of Sarf The author of one of the famous books of Ahnaf Allama Kasaani (may Allah swt bless him) says in his book BADAIE ALSANAAIE: الا ول فالصرف في متعارف الشرع " اسم لبيع الا ثمان المطلقة بعضها ببعض وهو بيع الذهب بالذهب والفضة xxix بالفضة وأحد الجنسين بالا خر Sarf means the exchange of some Athman e mutlaqa with some other, Athman mutlaqa is the term that means exchange or sale and purchase of gold against gold or silver against silver or sale purchase of one of the genus is against one another, according to Islamic jurisprudence if both commodities are homogenous then there should be prevailed uniformity among the both commodities and taking possession on both the commodities should be necessary and if they are not homogenous like exchange of silver against gold then it is allowed to execute it without uniformity but taking possession is still necessary. To know the Shariah rulings of currency we have to understand the meaning of fuloos and we also have to understand whether rulings of sarfare implemented on the fuloos too or not because if the rulings are implemented on fuloos then it means execution of Salam in the fuloos will be forbidden as in sarf it is necessary to take the المو لف: علاء الدين أبو بكر بن مسعود بن أحمد الكاساني الحنفي (المتوفى: 587 ه) الطبعة: الثانية 1406 ه بداي ع الصناي ع في ترتيب الشراي ع (5/ 215) الناشر: دار الكتب العلمية xxix

71 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June possession on both the counter values and where as in Salam it is only necessary to take possession on the rasulmaal only. 2.2 What are Fuloos It is written in the book ALMOSUATUL FIQHIYAA ALKUWETIYA: وفي الاصطلاح: xxx آل ما يتخذه الناس ثمنا من ساي ر المعادن عدا الذهب والفضة Fuloos means anything from the metals except silver or gold which have been made Thaman (consideration) by people. So fals is not itself is a Thaman but it has been made and treated as Thaman due to custom of the people or the orders of the government, so if that custom has changed or the government has stopped treating as legal tender then the actual status of fuloos will be revoked too and it will remain not more than a metal which has its own made up value. On the other hand gold and silver both are Thaman itself as they are genetically Thaman whether people or government call it Thaman or not. That is why silver and gold are called genetically Thaman Shariah Ruling of Fuloos Based Salam From the four schools of thoughts it is not allowed to execute the Salam in the fuloos xxxi near Imam Malik may Allah swt bless him because according to him verdicts of Sarf are implemented on fuloos and it is compulsory in Sarf to take possession on both the counter values whether they are homogenous or not where as in Salam it is not compulsory for the subject matter to be taken in possession, so the execution of Salam based fuloos is not allowed near to him. xxxii Hanbali School of Thought There are two narrations of Imam Ahmad bin Hanbal (may Allah swt bless his soul) regarding the issue of the implementation of the verdicts of sarf on the fuloos, according to the first narration its verdicts are not implemented on fuloos and according to second narration its verdicts are implemented on the fuloos. Following the second narration some of the Hanabila jurists say that it is allowed to execute the fuloos based Salam if the rasulmaal is in the form of goods, in other words it should not have to be in the form of cash no matter the transaction is executing as in weights or in numbers, execution is allowed, and this is the right narration and the opinion regarding to this issue. Shaafi School of Thought According to Imam Shaafi may Allah swt bless him fuloos genetically is not Thaman so the rulings of sarf are not implemented on the fuloos and when the rulings are الموسوعة الفقهية الكويتية (32/ 204) صادر عن: وزارة الا وقاف والشي ون الا سلامية الكويت الطبعة: (من ه)الا جزاء : الطبعة الثانية دارالسلاسل - الكويت المو لف: مالك بن أنس بن مالك بن عامر الا صبحي المدني (المتوفى: 179 ه) المدونة (3/ 5) الطبعة: الا ولى 1415 ه م الناشر: دار الكتب العلمية المو لف: أبو عمر يوسف بن عبد االله بن محمد بن عبد البر بن عاصم النمري القرطبي (المتوفى: 463 ه)الكافي في فقه أهل المدينة (2/ 644) الطبعة: الثانية 1400 ه/ 1980 م الناشر: مكتبة الرياض الحديثة الرياض المملكة العربية السعودية xxx xxxi xxxii

72 72 Journal of Islamic Banking and Finance April - June 2016 not implemented then the execution of fuloos based Salam and its transaction is legitimate too. xxxiii Hanafi school of thought According to Ahnaf, to prove Riba in any commodity, availability of homogeneity with volume is indispensable. Volume means weight of gold and silver. xxxiv. So weight is one of the prerequisites of having Riba in gold and silver.therefore it means verdicts of Sarf are not implemented on fuloos according to the Hanafi school of thought as fuloos are countable numerical object, therefore this opinion demands the legitimacy of sale purchase of excessiveness of fuloos with one another and the non-prerequisites of taking possession on both the counter values. But HANFI somehow impose the condition of taking possession with another angle i.e. fuloos are basically from the ATHMAN (consideration) and the ruling of Thaman is that they are not get specified with specification xxxv but they get specified with taking the possession. So if they are sold without specification, then it will expose to usury or Riba. It can be explained with an example. For instance, Zaid sold Umar 2 fals against one fals. And this sale was just executed verbally not physically then Zaid said: now I have to pay you two fals and you have to pay me one fals therefore I execute the settlement agreement with you as two payable fals on mine are settled against one fals payable on you therefore there remain one fals only which is in my liability and now I have to pay you only one fals, so in the end without any physical actual sale purchase paying of fals has become liability of Zaid and this one fals is not against any compensation which is usury and Riba and clear violation of xxxvi Shariah rulings. Therefore to avoid the transaction without any compensation Hanafi impose the condition of taking possession in the council contract so the fuloos get specified. And if specified fuloos are sold against one another with excessiveness then issue will be disputed and debatable among Hanafi jurists, according to Imam Abu Yousuf and Imam Abu Hanifa (may Allah swt bless them) sale purchase of fuloos with excessiveness is legitimate because specified fuloos are like goods therefore as selling of goods with excessiveness is legitimate so the selling of fuloos is legitimate too, fuloos are like goods because they are actually made up of metals like paper, steel etc, they are not genetically Thaman so they are called Thaman due to the custom of the people consequently if both the counter parties are agreed for the revocation of custom then a fals will not remain more than a thing made up of metals and its value will be the equivalent to the value of goods. And both counter parties can revoke the custom as no one else has the authority on them. So it means that fuloos can be sold after getting specified with excessiveness. المو لف: الشافعي أبو عبد االله محمد بن إدريس بن العباس بن عثمان بن شافع بن عبد المطلب بن عبد مناف المطلبي القرشي المكي (المتوفى: 204 ه)الا م للشافعي (3/ 98 )سنة النشر: 1410 ه/ 1990 مالناشر: دار المعرفة - بيروت مفتی تقی عثمانی 2015 ص 665 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی المو لف: أحمد بن محمد مكي أبو العباس شهاب الدين الحسيني الحموي الحنفي (المتوفى: 1098 ه)غمز عيون البصاي ر في شرح الا شباه والنظاي ر (3/ 351) الطبعة: الا ولى 1405 ه م الناشر: دار الكتب العلمية قوله: وما يتعين فيه وما لا يتعين لا يتعين في المعاوضات أي النقد وهو الدراهم والدنانير وإنما لم يتعين في عقد المعاوضة لا ن النقد خلف ثمنا فالا صل إذا قام فيه وجوبه في الذمة لتوسله إلى العين المقصورة واعتبار التعيين فيه بخلاف ذلك بخلاف تعيينه في الهبة لعدم وجوبه في الذمة وآذا في الصدقة والشرآة والمضاربة والوآالة والغصب إذا قام عينه ولو هلك النقد في يد الوآيل انعزل ولو هلك بعد البيع قبل التسليم انفسخ البيع ولا يطالب الوآيل بعد التسليم مثله مفتی تقی عثمانی 2015 ص 719 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی xxxiii xxxiv xxxv xxxvi

73 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June On the other hand Imam Muhammad says that fuloos cannot be sold after getting specified with excessiveness because fuloos are declared Thaman due to the convention and custom of the people so it cannot be revoked with the revocation of both counter parties therefore they will remain Thaman and when they will remain Thaman then will not be specified with the specification so their sale purchase will be like the sale purchase of non-specified fuloos with excessiveness which is forbidden near Ahnaf so the aforementioned situation will be forbidden too. However apart from the aforementioned disputed issue Hanafi jurists agree that rulings of sarf are not implemented on the fuloos because the transaction is not sarf therefore if they both the counter values are exchanged and they are homogenous then their excessiveness will be illegitimate and taking possession of both the counter parties on the counter values in the council contract will be the condition. Because every single value is Thaman and Thaman cannot be specified with the specification but it can be specified with taking the possession, therefore taking possession is the stipulation otherwise sale of debt against debt will be exposed which is a non-shariah-compliant. And if both counter values of fuloos are not homogenous then taking possession on one of the counter values will be prerequisite. xxxvii From the above mentioned research study we conclude the result that according to hanafi rulings sarf are not implemented on fuloos, regarding the Salam based fuloos transaction it is written in the books of Ahanf that its sale purchase is permissible if it is sold numerically, there is no doubt it is legitimate near Imam Abu Hanifa and Imam Abu Yousuf (May Allah swt bless them) but near Imam Muhammad (May Allah swt bless him) it is written in different books of jurisprudence of Ahnaf that its sale numerically is not allowed near him because fuloos do not get specified so they will remain in the ruling Thaman and will not become a good therefore its sale as Salam is illegitimate. But Allama Ibnul Hummam xxxviii and the author of the book of Inayah have written his opinion as legitimate and said that for the legitimacy of Salam it is necessary that muslamfiihi (subject matter) should have to be a thing which should not be Athaman but a thing that can be purchased by the Thaman means it should be a subject matter. And common rule regarding the contract of sale is that it should have to be kept legitimate as far as possible. Therefore to make the aforementioned transaction legitimate it will be assumed that both the counter parties have revoked custom and convention of fuloos as Thaman and made them in the ruling of goods, therefore as the execution of Salam is legitimate in the goods so as its execution legitimate too near imam MUHAMMAD. We also came to know from the above mentioned result that if fuloos are not specified like the currency is admitted as legal tender by the government on government مفتی تقی عثمانی 2015 ص 721 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی المو لف: آمال الدين محمد بن عبد الواحد السيواسي المعروف بابن الهمام (المتوفى: 861 ه)فتح القدير للكمال ابن الهمام (7/ 75 )الناشر: دار الفكر وروى عنه أبو الليث الخوارزمي أن السلم في الفلوس لا يجوز على وفق هذا التخريج لكن ظاهر الرواية عنه الجواز. والفرق له بين البيع والسلم أن من ضرورة السلم آون المسلم فيه مثمنا فا ذا أقدما على السلم فقد تضمن إبطالهما اصطلاحهما على الثمنية ويصح السلم فيها على الوجه الذي يتعامل فيها به وهو العد بخلاف البيع فا نه يجوز وروده على الثمن فلا موجب لخروجها فيه عن الثمنية فلا يجوز التفاضل فامتنع بيع الفلس بالفلسين وقد تضمن الفرق المذآور جواب المصنف المذآور على تقدير تخريج الرواية عنه xxxvii xxxviii

74 74 Journal of Islamic Banking and Finance April - June 2016 level therefore regarding the execution of Salam based fuloos sale purchase of specified and unspecified of fuloos following types are achieved: Fuloos are unspecified and homogeneous, regarding this type transaction is illegitimate because fuloos when they are homogenous then taking possession on both the counter values from subject matter and consideration is prerequisite and in the execution of Salam based fuloos counter values are not taken in the possession. So the following type is illegitimate. Fuloos are unspecified and inhomogeneous,the clear verdict regarding to this type isn t found in the books of fiqah but following the rules and regulations set by the jurists regarding to this chapter demand that their transaction with excessiveness should be legitimate and taking possession on one of the counter values should be stipulation, because this is not transaction of sarf where lending debt is forbidden subsequently it proves excessiveness and taking possession just on one value is legitimate too in this type. xxxix Transaction of gold and silver against fuloos whether are they are specified or unspecified. Execution of Salam is legitimate in this type as gold and silver are measured with weightage whereas fuloos are numerical countable object so the both counter values are inhomogeneous as a result of that lending loan for the future and the excessiveness in the counter values are allowed and legitimate in this transaction so the execution of Salam based fuloos is allowed too. Transaction of fuloos against gold and silver, like the clause no three this type and xliixlixl execution of Salam is allowed too. SUMMARY Execution of Salam is not legitimate in fuloos near Imam Malik (may Allah swt bless him) because according to him verdicts of Sarf are implemented on fuloos and it is prerequisite in Salam to take possession on both the counter values. Following that right narration of Imam Ahmad bin Hanbal (may Allah swt bless him). Execution of Salam in fuloos will be legitimate if the rasulmaal is in the form of goods because verdicts of Sarf are not implemented on fuloos according to him. Execution of Salam based fuloos is legitimate because fuloos are not genetically Thaman as mentioned earlier therefore verdicts of Sarf are not implemented on fuloos. According to Ahnaf verdicts of Sarf are not implemented on fuloos, hence, execution of Salam in numbers will be legitimate. And if they are sold against one مفتی تقی عثمانی 2015 ص 724 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی المو لف: أبو عبد االله محمد بن الحسن بن فرقد الشيباني (المتوفى: 189 ه)الا صل المعروف بالمبسوط للشيباني (5/ 7) الناشر: إدارة القرا ن والعلوم الا سلامية - آراتشي المو لف: محمد بن أحمد بن أبي سهل شمس الا ي مة السرخسي (المتوفى: 483 ه)المبسوط للسرخسي (12/ 136) تاريخ النشر: 1414 ه م الناشر: دار المعرفة - بيروت المو لف: محمد بن محمد بن محمود أآمل الدين أبو عبد االله ابن الشيخ شمس الدين ابن الشيخ جمال الدين الرومي البابرتي (المتوفى: 786 ه)العناية شرح الهداية (7/ 75) الناشر: دار الفكر xxxix xl xli xlii

75 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June another then transaction will be illegitimate if both counter values are homogenous because in this situation taking possession on both counter values is prerequisite and in transaction of Salam possession is not be taken in the council contract. And if they are sold against their opposite genus then taking possession on one single counter value will be prerequisite however excessiveness will be allowed. 3. Currency based Salam Transaction From the above mentioned brief research study we conclude that, if fals of one genus is sold against fals of another genus then transaction will be legitimate if one of the values is taken in the possession therefore in this situation execution of Salam is legitimate. Furthermore it should be made clear that modern jurists have three point of views regarding the issue of prevailed currency: According to first point of view the prevailing currency is not generic Thaman but its verdict is like verdict of fuloos. So, if the verdict of the fuloos is implemented on the currency then concerning the opinions of Imam Shaafi and Imam AHAMD BIN HAMBAL in which verdicts of sarf doesn t implement on the fuloos, therefore execution of Salam should have to be legitimate near to them. Whereas, according to imam Malik execution of Salam should not have to be legitimate; and according to Ahnaf execution of Salam should have to be legitimate if they are dealt numerically, but this opinion also demands the legitimacy of the excessiveness in the exchange of currency too. Subsequently, if opinion of IMAM SHAAFI and right opinion IMAM AHMAD BIN HANBAL in addition to the opinion of SHEKHAIN were also taken as fatwa then door of Riba shall open because the current practice in all the conventional banks and in the world is taking back the currency with interest after lending it to the borrower which falls under the category of Riba. So this opinion has not gotten any acceptance from the modern jurists Second point of view concerning the Shariah status and the verdict of prevailing currency is like the generic Thaman and it has taken the place of generic Thaman,so point of view demands that,verdicts of should be implemented on currency and Zakat should be paid up with this currency, in addition to this currency should be considered as rausul maal too but should not be considered as musalmfiih or subject matter in the transaction of Salam, so if this point of view was taken then execution of Salam would be illegitimate In the views of all authentic jurist which we have already mentioned earlier, this point of view has gotten the acceptance in the conference of AAOFI,and almost all the Arab jurists are acting upon this point of view. Third point of view is based on the opinion of IMAM MUHAMMAD (may Allah bless him) and this point of view has gotten the acceptance of sheikh ul-islam, Mufti Taqi Usmani. Conclusion regarding to this point of view is that prevailed currency is in the verdict of Thaman e urfi or Thaman e istalahi which means that currency has become the Thaman or consideration due to the custom or convention of the people due to the treatment of the government it as Thaman. Therefore, every country s currency is considered as one single genus, subsequently Zakat should be allowed to pay with the currency and considering this currency as rausul maal should be allowed too, furthermore if the genesis were different then execution of Salam in currency would be legitimate

76 76 Journal of Islamic Banking and Finance April - June 2016 too, however danger of considering currency as the mean of Riba as the condition of exchanging the currencies on market rate isn t there in this point of view therefore Sheikh ul-islam mufti Taqi Usmani has included this condition in the execution Salam and in the exchanging of currencies. So it will not be sold unless on market rate. xliii The result of the contradiction among the modern jurists is that execution of Salam in the currency is illegitimate with reference to first point of view because in that situation it is in the verdict of sale of sarf due to treating it as genetic al-thaman therefore its sale purchase is illegitimate too no matter they are homogenous or inhomogeneous, that is the reason why modern Arab jurist don t allow the execution of Salam against one another in currencies. Whereas with reference to the third point of view fatwa is on the opinion of Imam Muhammad (may Allah bless him ) consequently if currency of one genus is sold against the currency of another genus then execution of this sale will be legitimate because it s not sale of Sarf,furthermore taking possession on one of the genesis or the counter values should be prerequisite however in Salam rasulmaal is taken under the possession on the spot so the execution of sale Salam will be legitimate,but to refrain from the Riba exchange rates of currencies should be subject to the market rate. This is the opinion of sheikh ul-islam Mufti Taqi Usmani. Meezan Bank was the first bank who came up with this newly design model of exchanging of currencies in Pakistan and following Meezan s Footstep State Bank of Pakistan also adopted this currency model. 4. Salam based Model In this model sale of Salam is executed in currency, after shipping goods as per the L/C contract terms,exporters do not wish to wait for the proceeds, that are expected as future date, in order to generate liquidity exporters bring bill of exchange to the Islamic bank counter and get the bill against it discounted using the mechanism of currency based Salam, under this mechanism Islamic bank purchases the foreign currency on the market rate from the exporter to be delivered on the future date against the immediate payment in local currency on market rate, mostly in Pakistan its PKR. Exporter takes the local currency (rausul mal) in his possession immediately and it becomes mandatory in his liability to pay the foreign currency (muslamfihi) on the agreed future date, when he receives that on the he instantly reimburse the foreign currency to the bank. Treasury department of the bank plays a very significant role in the execution of sale of Salam. It gathers the liquid cash from the market and from the deposit of the bank then executes this deal. Islamic bank normally doesn t take the profit more than the profit of conventional bank, however, the main difference is that in conventional banks the profit is haram as it consists of the debt sale or Riba whereas in Islamic bank its halal profit base on the sale purchase of a currency. In short if we observe closely the contraction between the modern jurists and the sheikh ul-islam Mufti Taqi Usmani we conclude the result in the end that Mufti Taqi Usmani s view is substantial after observing the situation in the market, because in other alternatives like Murabaha customer or exporter doesn t need the required commodity to be purchased but he needs money in cash, and alternative Murabaha basically depends upon on the required commodity, so the need of required is created for the sake of the مفتی تقی عثمانی 2015 ص 733 فقہ البيوع پہلا ايڈيشن لمکتبۃ معارف القران کراچی xliii

77 Journal Shariah of Ruling Islamic of Banking Bill Discounting and Finance and its April Alternative June execution of Murabaha sometimes but in Salam his need can be full filled with the amount of cash he received from the as rasulmaal. 4.1 Process flow Exporter comes to the bank and a final approval for bai Salam will be sought as per the standard credit approval policy of the bank. After the approval, master agreement for the overall facility will be signed between the customer and the bank. Whenever customer has the need of the PKR, he will bring his export LC bills to the bank. The banks treasury based on the market price of the day, will set a range for the spot this rate will be used for conversion (purchase) rate negation between the bank and the customer. After finalization of the deal bank purchases the foreign currency to be delivered at future known specific date (due date) and pay the price in PKR as per agreed rate. To extend the facility the Islamic bank may ask the exporter to assign its receivable under this L.C to the bank, it may also ask the exporter to furnish the other securities to protect itself incase if exporter defaults. The customer will deliver the foreign currency on the due date to the bank but will not be contingent to the arrival of the L.C proceeds, in case if L.C doesn t arrive on due time the customer will have to arrange foreign currency from his own sources and ensure payment on the due date and transaction will be concluded.

78 78 Journal of Islamic Banking and Finance April - June 2016 Islamic Bonds: Economic Benefits and International Political Risk Abstract Mathematical Theorizing - Thinking outside the Box By Ghada Gomaa A. Mohamed, PhD, PDF *xliv This paper makes a comparison between the Islamic bonds "Sukuk" and the conventional bonds within a classical theoretical framework. The paper uses the simple open economic version of the Solow model as a classical model to show the possibility of adopting Islamic bonds within a secular economy from one side and the economic benefit in addition to the possible political risk behind adopting such different financial instrument from the other side. This paper is considered a different way of thinking outside the mainstream boxes. It gives an indication of the evolution of different types of economic thought that could be added to the economic literature in general. Keywords: Sukuk, Islamic bonds, Bonds, Conventional System, Classical Models, Solow Growth Model, Political Risk, Economic Benefit. 1. Introduction Islamic bonds "Sukuk" are considered the most important Islamic financial instruments when discussions come to Islamic finance in general. The main criterion that differentiates the Islamic bonds from the conventional bonds is that the Islamic bonds are mainly asset-based investment not just asset- backed investment. In different words they are not just about debt and loans secured by collateral but they are types of shares in the financed asset that better guarantee rigorous censorship. However, the Islamic bonds might hold political risk if they're used in the international transactions. Nowadays almost all countries trade in Islamic bonds and trillions of money is circulated in all international financial markets out of those Sukuk. It's also worth mentioning that in 2009 the Author: Ghada Gomaa A. Mohamed PhD (Economics) PDF, Communication/Management, ECO-ENA: Economics & ECO-Engineering Associate, Inc., ghadagomaa1@yahoo.ca; gmohamed@eco-ena.ca.

79 Islamic Journal Bonds: of Economic Islamic Banking Benefits and Finance International April Political June 2016 Risk 79 S&P/TSX 60 Shari ah Index was already launched. On the other hand; almost all giant important international industries deal with those types of Islamic financial instruments. In this paper I don't aim to review the literature of this domain or the conceptual comparisons between the conventional bonds and the Islamic bonds but rather I address mathematically the economic benefit and the political risk of Sukuk within a classical simple open economy model; the Solow model in its open economy version depending on the definition of the Islamic bonds used in this paper; i.e., Islamic bonds are mainly asset-based investment so both the debtor and the lender share the risk of the investment in question. This paper is structured into three main sections after the introduction. Section II presents the mathematical framework, section III presents the optimal solution of the mathematical model, section III presents the results, the implication and the conclusion. This paper adds to the literature in this domain by adding a new way of thinking in evaluating relatively new financial instruments that might be adopted by many countries worldwide regardless of any ideological bias. 2. Mathematical Model Consider a simple open economy version of the Solow model by adding features that suit the target of the paper. Let us assume that firms produce a single commodity; Y by means of capital; K and labor; N. For simplicity, assume further that the technology is Cobb-Douglas with constant return to scale. Y = K α N (1-α), (1) The number of workers equals the population size. Consider t; the time is omitted from all variables to save notations. Domestic output can be devoted to consumption; C, investment; I, and net exports X. Y = C + I + X, (2) Assume that domestic residents save a certain fraction of their income: S = s. (Y -.D(I)), (3) Assuming that the country in question is a debtor or a country sells Sukuk internationally to finance its domestic projects and hence its debts depend on its ambition of domestic investment. Consider is the share rate of the foreigner in the domestic asset in exchange for debts they lend (in different words the return rate for the foreigner). In the same time it's considered the capital cost rate for the country in question. The D(I)) is the reward outflow. Because lenders share the borrowers same risk and same reward; then the domestic interest rate is assumed to equal as well. Consider the B is the current account deficit, B = - X + D(I)), (4) Assume that the foreign borrowings add to the foreign debt. D = B, (5)

80 80 Journal of Islamic Banking and Finance April - June 2016 Investment adds to the stock of capital; assuming zero depreciation rates to simplify the analysis. dk/dt = I, (6) The representation of the model in per capita terms: d(d)/ dt = d = i s(y - d f(i) nd, (7) This is the fundamental equation derived from the proposal model. Per capita current account deficit equals the difference between per capita domestic saving and per capita domestic investment. Lower letters are used here to refer to per capita variables. S = s. (y - d f(i)), (8) b = - X + d f(i)), (9) d = b nd, (10) i = nk. (11) This leads to: y = -(α/ ) ((α/ (1-α)), (12) y = c + i + x. (13) Where; the per capita real GDP equals the per capita real consumption plus the per capita real investment plus the real capita real exports. 3. The Steady State Equilibrium & the Optimal Solution This section gives the optimal solution of the model at the steady state level. Let d(d)/ d(t) = zero; thus; nd = nk s(y -. D f(i)), i = nk, (14) To check the stability of the steady state; Recall equation (7) from section II the fundamental equation of the motion of the per capita foreign debt; d(d) / dt = i s(y - d f(i)) nd, (7)' Which can give the following equation by taking the first differentiation with respect to the foreign debt; d: (d(d))/ dt)/ d(d) = s.. d f'(i) n; (15)

81 Islamic Journal Bonds: of Economic Islamic Banking Benefits and Finance International April Political June 2016 Risk 81 And since is pinned down in the model by the per capita capital stock as it appears in equation (11) in section (2); then; f'(i) is zero and hence; ((d(d)/dt)/d(d)) = - n < zero; thus; the steady state is stable; a mathematical evidence of economic growth rate convergence in the long-run. 4. Intuitive Results, Implications & Conclusions From section 3, the optimal solution confirms that the steady state equilibrium is stable and hence the growth converges in the long run as a normal result of the Solow model and its derivation within its limits and assumptions. Yet, the transition to the long run growth takes a longer time since the distance enlarges before convergence in the case of adopting the Islamic bonds instead of the conventional bonds which gives an indication of the slower growth during the transitional period from one side and a higher political risk since the lender owns with the debtor the domestic assets and their accumulation over time according to the steady state equations in section 3. Figure (1) shows the result of the conventional case; see Carlberg, M. (1997) for the complete discussion of the conventional case, while; figure (2) shows the transitional analysis of the scenario of adopting the Islamic bonds Sukuk -. nd nd nk s(y - f(d)) nk s(y rd) d Figure 1 Figure 2 d Mathematically speaking; equations (7)'' shows the mathematical scenario of adopting the Islamic bonds case Figure 2 whereas equation (16) shows the mathematical scenario of adopting the conventional bonds case Figure 1. d(d) / dt = nk s(y - d f(d)) nd, (7)" d(d) / dt = nk s(y-rwd) nd. (16); Calberg (1997) It appears from both equations (7)" and (16) that the intercept parameter of the per capita saving term is the same but the per capita saving term in equation (7)" is steeper than the per capita saving term in equation (16) which gives the mathematical evidence of the slower growth to the long run equilibrium which can conclude that the growth of the country in question lasts for a higher period of time during the transitional period than the case of the scenario of adopting the conventional bonds which is a positive advantage for

82 82 Journal of Islamic Banking and Finance April - June 2016 adopting the Islamic bonds, but at the same time and because of the sharing percentage of the foreigner in the domestic assets, adopting the Islamic bonds holds higher political risk than adopting the conventional bonds which can be considered a negative impact of choosing the Islamic bonds for international finance. References Carlberg, M. (1997), International Economic Growth, Hamburg: Physica-Verlag. Mohamed, Ghada, External Shocks and Sustainable Development: A Test of the Interruption of Foreign Borrowings on a Target Small Open Economy, World Review of Science, Technology and Sustainable Development, Second International Conference, Napier University, Edinburgh, Scotland, 10 November Mohamed, G. (2002). Basics of Exogenous Economic Growth Models: Mathematical Approach. Dar ElMa aref; Egypt. Mohamed, G. & Handley-Schachler M. (2011). Population Growth and Transitional Dynamics of Egypt: Basic Exogenous Growth Theories with Perfect Capital Mobility. The 45th Annual Conference of the Canadian Economic Association; University of Ottawa: Canada

83 Journal of Islamic Banking and Finance April June Islamic View on Money Laundering and Terrorist Financing By Muhammad Fayyaz, Muhammad Subtain Raza * Abstract Money laundering and terrorist financing are global threats for global economy, security and society. Islam is not just a religion; it is a comprehensive system that includes all aspects of human life. Islamic law cannot be separated from its moral, ethical and religious principles. This paper is an endeavor to highlight the Islamic legal framework s contemporary perspectives to denounce the money laundering, other economic crimes and terrorist acts. Further this paper signifies the Islamic approach on financial crimes and appraises its uniformity with the international conventions in this arena. The first part of paper introduces the basic concepts, related offences and international conventions on money laundering & terrorist financing. The second part accentuates Islamic viewpoints and compliance regime on two menaces. Final part concludes that Islam encompasses all affairs of human life and provides a regulatory system to repercussions of money laundering and terrorist financing and deprecates them even today. Introduction Keyword: Islam, Money laundering, Terrorist financing Perhaps, money laundering is as old as money itself, but it never magnetized a significant position as crime in the past. It is about two decades ago that money laundering and financing of terrorist activities attained top priorities agenda for world policy makers when they realized that these menaces pose a great threat to the world s socio-economic framework. Money laundering is a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity. Terrorist financing involves the raising and processing of assets to supply terrorists with resources to pursue their activities. The international community has made the fight against money laundering and terrorist financing a priority. The nations are concerned about the possible consequences * Author: Muhammad Fayyaz, MBA and Muhammad Subtain Raza, MBA, JAIBP, Certified Anti Money Laundering Specialist, USA. sibtain1232@gmail.com

84 84 Journal of Islamic Banking and Finance April - June 2016 money laundering, terrorist financing, and related crimes have on the integrity and stability of the society, financial sector, economies and global peace. Islam s legal framework has comprehensive and justified concepts to denounce and combat the financial crimes like money laundering etc. Further it may furnish a harmonized regulatory framework that promotes an established and protected international financial system. Design/methodology/approach The research is based on references from secondary data. The data has been taken from the Holy Quran, Sunna, Financial Action Task force s documents and related conventions. Objective of study The core objectives of this particular study are; 1- To highlight the basic concepts and related offences of money laundering and terrorist financing. 2- To enumerate the international conventions on money laundering and terrorist financing. 3- To accentuate Islam s stance by quoting the related references from Quran and Sunna about money laundering & terrorist financing. What is Money laundering and Terrorist Financing? Money laundering (ML) is defined as the process whereby criminals attempt to obscure the illegal origin and/or illegitimate ownership of property and assets that are the results or proceeds of their criminal activities. In Financing of Terrorism (FT) both legitimate and illegitimate money characterized by concealment of the origin or intended criminal use of the funds is included. The term Terrorist refers to any natural person who commits, or attempts to commit, participates as an accomplice, organizes or directs others or contributes to terrorist acts. Money laundering and terrorist financing are making global threats to international peace and security which could destabilize world s development and progress. The United Nations 2000 Convention against Transnational Organized Crime, also known as the Palermo Convention, defines money laundering as the conversion, transfer, concealing, disguising, acquisition or possession of property associated with illegal origins or intents/acts of criminals. Financial Action Task Force (FATF) has designated following categories of offences which heavily contribute to Money Laundering & Terrorist Financing. Participation in an organized criminal group and racketeering Terrorism, including terrorist financing Trafficking in human beings and migrant smuggling Sexual exploitation, including sexual exploitation of children

85 Islamic Journal View of Islamic on Money Banking Laundering and Finance and Terrorist April Financing June Illicit trafficking in narcotic drugs and psychotropic substances Illicit arms trafficking Illicit trafficking in stolen and other goods Corruption and bribery Fraud Counterfeiting currency Counterfeiting and piracy of products Environmental crime Murder, grievous bodily injury Kidnapping, illegal restraint and hostage-taking Robbery or theft Smuggling Extortion Forgery Piracy Insider trading and market manipulation International Conventions on Money Laundering & Terrorist Financing Money laundering and terrorist financing are serious threats to global security, the legal economy and affect the integrity of financial institutions. Over the last three decades phenomenal growth of financial services has been observed due to advancement in technology and globalization. This growth has led to increased cross-border activities to boost up global financial intermediation. But on the other side, this development has promoted transnational organized crimes including Money Laundering and Terrorist Financing (ML/ TF) enacted by underground economies. In response to the growing concerns about money laundering and terrorist activities, the international community has acted on many fronts in terms of organizations, conventions, regulations and laws. Some are listed as under; UNO s Global Program against Money Laundering (1945) The Basel Committee on Banking Supervision (1974) United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) also named as (Vienna Convention). Financial Action Task Force on Money Laundering (1989) The International Association of Insurance Supervisors (1994)

86 86 Journal of Islamic Banking and Finance April - June 2016 The Egmont Group of Financial Intelligence Units (1995) International Convention for the Suppression of the Financing of Terrorism (1999) Security Council Resolution 1267 & Security Council Resolution 1373 (1999 & 2001) International Convention against Transnational Organized Crime (2000) also named as (Palermo Convention). The International Organization of Securities Commissioners (2002) USA Patriot Act (2001) UN Convention against Corruption (2003) European Union Directives on Money Laundering (1991, 2001 & 2005) Council of Europe Convention on laundering, search, seizure and confiscation of the proceeds from crime and on the financing of terrorism (2005) These are key initiatives enacted by modern world to; define money laundering and related offences, terrorist financing, highlight red flags, possible prevention measures, more susceptible professions, fundamental nature of economic crimes, limitation, stipulations, mental state of offender, domain of application and punishments. Islamic View on Money Laundering It is worth noting that most of categories of offences which heavily contribute to Money Laundering and Terrorist Financing as designated by global regulatory standards e.g., FATF are considered as haram activities in Islam. The concepts of illicit (Haram) money in Islam have contemporary stances and also applicable as modern anti money laundering frameworks. There are numerous trading activities that Islam prohibited during the time of Prophet Muhammad (peace be upon him) which are codified in modern money laundering acts and regulations as illegal activities and proceeding, such as counterfeiting, forgery, embezzlement, funding activities that endangers the society, funding suicide, murder, etc. Atbani (2006) concluded that money laundering is a contemporary crime over 1,400 years; it has been addressed through many provisions in Quran and Sunna that contain the conception of money laundering. Money laundering as a financial transgression is utterly denounced in Islam. The Islamic financial system is based on a comprehensive system of moral and divine principles regulating socioeconomic interactions of the people in terms of their business conducts; consumption and protection, wealth creation and distribution. Economic and financial crimes under Islamic law have been classified under four major headings and sub-categories; theft, confiscation, bribery and gaining money or acquiring wealth illegally. The first may include stealing, robbery, mugging, burgling and shoplifting. It also includes speculation, which is gaining money or property secretly

87 Islamic Journal View of Islamic on Money Banking Laundering and Finance and Terrorist April Financing June using one s official position. The last one includes gambling and promoting the sales of illegal products, such as trafficking in alcohol, drugs and confiscated commodities; and making illegal dealings, such as a loan that stipulates usury. The last classification may also include all illegal transactions that have been internationally banned, for instance, Harabah (i.e. organised or serial crimes), money forgery, money laundering, money whitewashing and the sex trade. Islamic law has focused every aspect of money laundering and related offences with comprehensive and elucidated way. Few paradigms have been cited as below; Money Laundering The concept of money laundering has been discussed by many provisions in Quran and Sunna. One of the verses that could be indicative the prohibition of money laundering is as follows. Do not eat each other's property in a wrong way (Surah Nisa, verse 29). Muhammad (PBUH) prohibits any activity funded by money derived from Souht (unlawful trade or ill-gotten property). He said: Any activity built from Souht, will be cast into Fire. Prophet Mohamed (Pbuh) prohibited the use of money generated from illegal activities even if it goes to poor people or to charities. He said: Sadakah coming from theft are not acceptable (Saheh Muslim 1/204). The final group of financial crimes is gaining money in illegal ways. This is described by the word Soht, which means any earnings that come from illegal sources or illegal works ( Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Suht) Under this section, several acts, such as Harabah, usury, gambling, forgery, the sex trade and selling illegal products, can be considered as financial crimes. The first crime mentioned in this group is Harabah. The Prophet (Pbuh) was also reported to have warned that prayers and supplications of the one who lives on property or income derived from unlawful means will not be accepted by Allah and in case he does good deeds, they will not avail him. Similarly, The Holy Quran negates the illegal earnings who enjoins upon them what is right and forbids them what is wrong and makes lawful for them the good things and prohibits for them the evil and relieves them of their burden and the shackles which were upon them (Surah Al Araf - verse 157). This verse indicates that the money laundering is deemed as a prohibited earning of money. In reference to Sahih Al Bukhari No The prophet Mohammed (PBUH) said "A time will come when one will not care how one gains one's money, legally or illegally. The Hadith expects the future of corruption of consciences and immorality. Therefore, people became indifferent to the source of money, whether it is Halal (legal) or Haram (illegal). Theft Theft is the taking of property possessed by other people secretly and fraudulently. ( Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Ghasab.) According to this definition, theft includes three elements. The first element is to possess another s property without their permission. The second element is using means of sharp practice, such as secrecy and fraudulence, to achieve this intention. The third element implied from the definition is the intention of taking the possessed property from a safeguarded place, so that if the property is not kept in a reasonably safe place, then the intention cannot be qualified as a theft act. (The word possession corresponds to the Arabic word Hirz, which means to hold something in a safe place. (Alfairuzabady, 1994, p. 653).)

88 88 Journal of Islamic Banking and Finance April - June 2016 Taking into account the consequential effect of the crime, the punishment for theft liable to hadd is amputation of the right hand of the convict from the joint of the wrist. Sharia t law prohibits theft and imposes a massive penalty for that: cutting the hands of thieves. A Quranic verse says: As for the thief, both male and female, cut off their hands. It is the reward of their own deeds, an exemplary punishment from Allah. Allah is Mighty, Wise (verse 38). In addition, prophet Mohamed (Pbuh) says: if Fatima (the daughter of prophet Mohamed) stole, I would cut her hand. Similarly, stealing from the public sector or any government agency leads to a similar conclusion. Public money or communal property belongs to the whole community, which means that an individual cannot enjoy it alone. On this basis, public money must not be abused or confiscated, and officials who are in charge of the operation of a public property must not own it. Otherwise this is considered as speculation. This act is more hazardous to the national economy than stealing from individuals, as it severely affects the economy. The Prophet has said, Whoever gathered unlawful riches and then gave out in charity, he will have no reward; on the contrary he will have to bear the burden of his evil deed. Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Ghasab Confiscation is defined as taking away other people s property overtly and unjustly by defeating them using political, economic or social power. Bribery Bribery is also prohibited in Islamic law. (The Prophet (Pbuh) has said, Allah has cursed one giving bribe and one receiving bribe as well as the go between.) It is a type of financial crime which leads to the risk of economic corruption. Basically, it refers to an incentive that is illegally given as a means of promotion in order to acquire, in return, an illegal advantage. It is a way for someone to prevent others from having their rights, or to illegally enjoy others rights. ( Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Rashwa.) According to this definition, a gift presented to an official purely because of his position is considered as bribery. Bribery leads to massive corruption in political and economic systems, therefore Islamic law has paid great attention to warning people about such crime. It is stated:... And eat up not one another s property unjustly [in any illegal way, e.g. stealing, robbing, deceiving etc.], nor give bribery to rulers [judges before presenting your cases] that you may knowingly eat up a part of the property of others sinfully. (The Nobel Quran [2:188].) Bribery is completely prohibited in Islam. Allah says: "And eat not up your property among yourselves in vanity, nor seek by it to gain the hearing of the judges that you may knowingly devour a portion of the property of others wrongfully" (Quran 2:188). The Messenger of Allah (peace be upon him) cursed the one who pays bribes and the one who takes bribes (Abu Dawud, hadith no. 3573). And do not consume one another's wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful] (Suart al Baqarah - verse 188). The verse states expressly the prohibition of illegal earning of money such as bribery and theft. Islam prohibits bribery clearly. Prophet Mohamed (Pbuh) says: Allah damned briber and bribee. Organized Crime Harabh in Islam means organised crime. Islam forbids organised crimes. A Quranic verse says:

89 Islamic Journal View of Islamic on Money Banking Laundering and Finance and Terrorist April Financing June The only reward of those who make war on Allah and His messenger and strive after corruption in the land will be that they will be killed or crucified, or have their hands and feet on alternate sides cut off, or will be expelled from the land. Such will be their degradation in the world, and in the Hereafter theirs will be an awful doom (Pickthall, 2005, verse 33). Illicit Gains The Prophet (Pbuh) stated; Whoever gathered unlawful riches and then gave out in charity, he will have no reward; on the contrary he will have to bear the burden of his evil deed (Ibn Habann 3368). In another similar narration, the Messenger of Allah (Pbuh) says; When a servant of Allah earns property in an unlawful manner and then gives it in charity, it will not be accepted by him. There will be no blessing in that he spends and that he leaves behind, but it becomes a provision for the fire of Hell. In reality, Allah does not wipe out evil with evil, but erases evil with good action. Undoubtedly, dirt does not clean dirt (Ahmad, Mishkat, No, 301). Surah Al Nisa - verse 29 O you who have believed, do not consume one another s wealth unjustly but only in lawful business by mutual consent. The verse includes a general legislation prohibiting invalid treatment and the circumvention of people s money through injustice. Insider Trading In this way, bribery could be an essential means to motivate people within a corporation or public bodies to work as insiders. An insider can benefit directly by selling information that he is entrusted to keep secret, or by passing such information on to relatives, or by attaining money as bribery. Gambling The second crime that is related to the economy and categorised as gaining money illegally is gambling. It is prohibited by the primary legal sources: Quran and Sunnah. Gambling is called Qimar or Mayser, which refers to uncertainty. The prohibition of gambling is based on Gharar: risk, which is a banned act, whether in financial or any other social transactions. Price Manipulations Islamic law has an essential norm based on the prophet s saying: He who deceives is not of me or He who deceives is not of us. (Sahih Muslim: An Islamic Legal Texts, book 1, No. 183.) Therefore, any practice that negatively affects the market prices and stability is illegal and prohibited by the law. The Prophet (peace be upon him) said: "It is not permissible for a man to take his brother's wealth unlawfully" (Ahmad, hadith no. 426). Corruption The people, who rise against Allah and His Prophet and cause corruption on the earth, are sentenced to be killed, crossed, and executed and amputation of hand and opposite leg and also rejected and exiled (Maedeh, verse 33). Corruption is a financial crime in Islam that is committed by political office holders or civil servants, private individuals or groups through which the nation s resources, privileges and economic order are abused or used for individual benefit. Corruption from Islamic perspective includes embezzlement, fraud, bribery and forgery.

90 90 Journal of Islamic Banking and Finance April - June 2016 The Prophet (Pbuh) condemned corrupt practices when on one occasion he questioned his administrator regarding a property which he claimed to have received as a gift. Ghlool in Islam means embezzlement. Ghlool is taking money from public treasury. The Islamic penalty is lifetime in prison and returning the money to its origin place. A Quranic verse says:... it is not for any prophet to deceive. Whoever deceives will bring his deceit with him on the Day of Resurrection. Then every soul will be paid in full for what it has earned; and they will not be wronged (Pickthall, 2005, verse 161). (4) Ehtikar in Islam means monopoly (the black market). Monopoly has existed since the early history and still on by now when goods and commodities are hidden until finished in the market, and then re-emerge again to be sold with excessive price. Prophet Mohamed (Pbuh) says: monopolist is damned (Al-Mustadrak 14/2 number 216 in Saleh and Saleh, 2006). Cyber Laundering Cyber piracy and theft of intellectual property are both economic crimes under Islamic law. The legal basis for criminalizing theft of intellectual property as unanimously agreed upon by contemporary Muslim scholars is that intellectual property constitutes mal as it possesses value to be preserved and protected like any other property. Therefore exploiting the economic value and benefits of others intellectual property, brings with it not only moral apprehensive but also legal liability. Islam & Terrorist Financing Many western scholars misinterpret the concept of zakat in Islam. They falsely claim that Islam s motive on Zakat is to promote funding for terrorism. But Quran and Sunna interpret Zakat as referenced here; (The Holy Quran - Al-Baqarah (2), verse 267) O you who believe! Spend of the good things which you have (legally) earned, and of that which We have produced from the earth for you, and do not aim at that which is bad to spend from it, (though) you would not accept it save if you close your eyes and tolerate therein. And know that Allah is Rich (Free of all wants), and Worthy of all praise. (The Holy Quran, Surah Taubah (9), verse 60) Zakat is only for the poor, and the needy and those who collect them, and for to attract the hearts of those who have been inclined (towards Islam); and to free the captives and those in debt, and for the cause of Allah, and for the wayfarers; a duty imposed by Allah. And Allah is Knower, Wise. (The Holy Quran, Surah Taubah (9), verse 34) "O ye who believe! there are indeed many among the priests and anchorites, who in Falsehood devour the substance of men and hinder (them) from the way of Allah. And there are those who bury gold and silver and spend it not in the way of Allah. Announce unto them a most grievous penalty. According to the The Holy Quran, only the poor and needy deserve Zakat. Basically, Zakat takes three forms, depending on its recipients, Feesabeelillah (in the way of Allah), Lil-Fuqara (for the poor), and Lil-Masakeen (for the needy). Only the first form of Zakat has raised questions and various interpretations among Muslim scholars, mostly those influenced by Wahabbism doctrine of Islam. Feesabeelillah is used to describe money spent in fighting for the cause of Allah (Jihad). Jihad refers to striving for excellence on one of several levels. The first involves individual efforts, spiritual and intellectual, to become a better Muslim. The second addresses efforts to improve society. The third and last level, or "holy war," involves self-defense or fighting against oppression.

91 Islamic Journal View of Islamic on Money Banking Laundering and Finance and Terrorist April Financing June The personal Jihad states that the most excellent jihad is that of the soul. This jihad, called the Jihadun-Nafs, is the intimate struggle to purify the soul of satanic influence both subtle and overt. It is the struggle to cleanse one's spirit of sin. This is the most important level of jihad. The verbal Jihad is based on Prophet s (Pbuh) words that "The most excellent jihad is the speaking of truth in the face of a tyrant." He encouraged raising one's voice in the name of Allah on behalf of justice. Finally, physical Jihad is combat waged in defense of Muslims against oppression and transgression by the enemies of Allah, Islam and Muslims. We are commanded by Allah to lead peaceful lives and not transgress against anyone, but also to defend ourselves against oppression by "fighting against those who fight against us." This "jihad with the hand" is the aspect of jihadthat has been so profoundly misunderstood in today's world. According to Al Azhar's Islamic Research Academy, the concept of Jihad refers to the defense of the nation against occupation and the plunder of its resources. But it does not cover the killing of innocent people, the elderly, women, and children, which is forbidden by Islam. The teachings of Islam also forbid the destruction of buildings and establishments not connected with a specific battle. The statement draws a distinction between violence perpetrated by oppressors who have no respect for what is sacred and violence as a legitimate defense launched by the weak to win their rights. There is a clear distinction between the The Holy Quran s concept of a defensive Jihad and the usurped form of offensive Jihad developed by several scholars, including Omar Abu Omar (aka Abu Kutada), al-qaida principal in the UK, who influenced a trend to support those fighting in the Cause of Allah (the Mujahideen), thus justifying Zakat for un-legitimate violence against peaceful nations. Islam and Compliance Program for Money Laundering & Terrorist Financing Compliance is defined as the adherence to laws, regulations, rules, related selfregulatory organization standards and codes of conduct in matters to ensure the observing proper standards of market conduct, managing conflicts of interest, specifically dealing with matters such as prevention of money laundering and terrorist financing, and investigations of alleged corrupt and fraudulent behaviour. Generally a compliance program is based on risk assessment, a set of policies and monitoring. Islamic authorities and Islamic financial institutions are expected to strive towards eliminating money laundering operations in line with the objectives of sharia (maqasid shariah) and Islamic moral code. The Islamic concept of Al- Hisbah offers a framework for social morality and ethics which may also be relevant to monitor money laundering activities. Al-Hisbah therefore is similar to the conventional whistle-blower who has the duty of observing and reporting social vices to the authority concerned. Therefore Al- Hisbah institution is one of the Islamic methods of controlling socio-economic vices. Accordingly, the institution is one of the Islamic methods of controlling socio-economic values. The legality of this institution can be justified in view of Quranic command which provides; al-anur bil ma ruf wal al-nabu an al munkar (that is to ordain good and forbid evil).

92 92 Journal of Islamic Banking and Finance April - June 2016 Surah Al Maidah - verse 2 And cooperate in righteousness and piety, but do not cooperate in sin and aggression. This verse refers to the prevention of cooperation with any individual trying to affect the society. Findings and Conclusion In reference to various citations of the Holy Quran and Sunnah, we may conclude that Islam counteracts the trends of money laundering and terrorist financing, any form of them, whatever. As religion of peace and civilization, Islam promotes social, economic and behavioral justice. Islam is a comprehensive and authoritative sources of jurisprudence in all periods. Islamic law cannot be separated from its moral, ethical and religious principles; otherwise its rules will be useless. Thus, Islam is not just a religion; it is a system that includes all aspects of human life. In light of teachings of the holy Quran and Sunnah, the money laundering and terrorist financing are deemed as a legal crime and contrary to the Shariah. The uniformity of the legal framework for financial crimes enables an Islamic approach to be consistent or maybe harmonized with the international agreements in this arena. References 1. Abu Dawud, No Abu Dawud, hadith no Ahmad, Mishkat, No, Ahmad, Hadith no Al-Baqarah, The Holy Quran (2), verse Alfairuzabady, (1994), p Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Ghasab. 8. Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Rashwa. 9. Almawsooah Alfikhiah; Jurisprudence Encyclopedia, section Suht. 10. Al-Mustadrak 14/2 number 216 in Saleh and Saleh, Atbani, F. (2006), A Draft IEA Paper, the Legal Attitude of Financial Crimes in Islamic Legal 12. System, Institute of Advanced Legal Studies, London. 13. Financial Action Task Force (FATF), Ibn Habann, Hadith no Pickthall, M. (2005), The Meaning of the Glorious Qura an, Al-Aar ff Surah, Islamic Dawah 16. Centre International (IDCI), London, trans.

93 Islamic Journal View of Islamic on Money Banking Laundering and Finance and Terrorist April Financing June Saheh Al Bukhari No Saheh Muslim 1/ Sahih Muslim: An Islamic Legal Texts, book 1, No Saleh, A. and Saleh, M.B.A. (2006), Money laundering in positive laws, Islamic Version, 21. available at: ¼ 968book ¼ 1813 (accessed 1 August 2006) 22. Surah Al Araf, The Holy Quran, verse Surah Al Baqarah, The Holy Quran, verse Surah Al Baqarah, The Holy Quran, verse Surah Al Maidah. The Holy Quran - verse Surah Al-Nisa, The Holy Quran 4 -verse Surah Al Taubah, The Holy Quran (9), verse Surah Al Taubah, The Holy Quran (9), verse The Nobel Quran [2:188]. 30. The United Nations Convention against Transnational Organized Crime, 2000.

94 94 Journal of Islamic Banking and Finance April - June 2016 Economic Systems Human Thoughts and Islamic Precepts By Maher Kababji Abstract Fallacies are the root of the technique of thinking in economics. By the lapse of time theses fallacies have been blindly accepted as if they represent a part of the natural life which people have to live with. The outcome is that present economic systems failed to realize prosperity. This paper aims to highlight the pitfalls in economic thinking, introduce the basic concepts of Islamic economic system, and present an integrated economic system in light of the Holy Qur an and the sayings of the Prophet (Pbuh). Key Words: Economic system, Holy Qur'an, Prophet (Pbuh,), Prosperity, Activities, Income Financial distress is increasing. Corruptions are going on around the world. Public debt is growing. Financial crisis continue to occur from time to time. Confidence in currencies deteriorates. Unemployment rate rises. Poor become poorer. Living standard of middle class and those living on fixed incomes declines. Pressure for increased wages mounts to keep up with consumer prices. Economic Instability, growing inflation, and concentration of wealth become the main features of present economies. Demonstrators make concerted efforts to embrace an alternative economic system that would reflect fair economy and advance the needs of humanity as a whole. Failure of present man-made economic systems to realize prosperity makes it necessary to review the foundations on which present economic systems are based and look for an alternative system based on principles set by the Creator of people. The Almighty says: "And who is more astray than one who follows his own lusts, without guidance from Allah" (Al-Qasas 28: 50). In general, all religions handled economic issues, but Islam has set constant comprehensive concepts and rules for establishment of a fair economic system which suits all people in different times and places. With regard to economy, the Holy Qur an precisely states prohibited acts, permitted acts, and sets rules to regulate legalized acts. Author: Maher Kababji, BS, CPA having vast exposure in Accounting and Banking, Ex General Manager Arab Islamic Bank (Palestine) maherkababji1@hotmail.com

95 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June Economics studies the many activities undertaken in relation to wealth. Economic activities take place in the framework of an economic system. Material prosperity is the main objective of any sound economic system. In order to realize prosperity a society has to achieve three goals. 1. To reach an optimal level of output growth that satisfies the economic requirements of the community and maintains full employment. Production refers to the processes that convert natural resources into products in form of goods and services in addition to the processes that add value to products. National output represents the market value of all goods and services that are produced and sold within a certain period of time. 2. To raise sufficient funds in order to exchange products. Sellers exchange products for money. Money represents income. National income is the total sum of incomes received by all members of the society within a certain period of time. 3. To redistribute national income in order to cover the deficit in government's budget and sustain all members of society at or above a specified material standard of living. Each of the present economic systems advocates different features that represent the ways by which a society utilizes available resources so as to produce, exchange, and distribute wealth; Economic Activities Before establishment of banks and financial markets, economic activities were limited to the productive activities which refer to the activities undertaken in order to produce wealth. In present economies, inflationary financial activities became an integral part of economic activities. Unlike productive activities, Inflationary activities do not add value to the national output. Present economies are characterized by progressive shift from productive activities to inflationary activities seeking for easy and quick profit. Inflationary activities include interest or profit-based lending, speculative activities, financial corruption, and taxation. Islam introduces pure productive economy. Inflationary activities are prohibited; 1. Interest or profit-based lending "Allah has permitted selling and forbidden Riba (Al-Baqarah. 2:275). 2. Speculative activities: In capital markets, bonds markets, and derivatives markets, speculative activities involve riba. In commodities markets, speculative activities involve unlawful sale of what is not in possession. Hakim-bin-Hezam reported: The Messenger of Allah prohibited me to sell what is not in my possession. (Tirmizi). In money markets, speculative activities involve unlawful forward sale of currencies. The prophet (Pbuh) prohibited the sale of silver for gold on credit. (Sahih Muslim).

96 96 Journal of Islamic Banking and Finance April - June 2016 In stock markets, Trades do not reflect fair value of underlying stocks. And O my people! Give full measure and weight in justice (Hud. 11:85). 3. Financial corruption and do not commit mischief in the land causing corruption. (Hud. 11:85). 4. Taxation Taxes include levied taxes on products, income, and assets in addition to the hidden tax which result from printing money in order to support financial institutions in case of crisis, pay off interest on public debts, or cover financial corruption. And eat up not one another s property unjustly nor give it to the rulers that you may knowingly eat up a part of the property of others sinfully. Fatima Bint Qais narrated that: She heard him, meaning the Prophet says: There is nothing due on wealth other than Zakat. Output Growth Economists believe that scarcity of resources restricts output growth because wants are innumerable but the resources for satisfying those wants are limited. On the contrary, the Holy Qur'an emphasizes the abundance of natural resources on the global level. and caused to grow therein all kinds of things in due proportion. (Al- Hijir 15: 19). The excess of the world output growth over the growth of the world population provides evidence that scarcity of resources does not exist at the global level. The World Bank, World Development Indicators updated Jul 28, 2011 shows the world output growth in comparison to the world population growth for the years 1985, 1990, 1995, 2000, and While the growth rates of the world population were 1.7%, 1.7%, 1.5%, 1.3%, 1.2% respectively, the growth rates of world gross product were 3.9%, 3.0%, 2.9%, 4.3%, 3.6% respectively. On the national level, the collection of available resources may differ from the resources needed for satisfying the requirements of the community. The Holy Qur'an legalizes international trade so that resources and products can be exchanged. Their accustomed security [in] the caravan of winter and summer" (Quraish 106: 2). A society may fail to produce even what would be possible with its existing resources. Natural resources may be underutilized because of the lack of technology to discover or extract resources. Resources maybe inefficiently employed because of the lack of skilled labors or technical knowledge. The stock of natural resources maybe depleted because of the overutilization of resources. A society may succeed to attain even higher level of growth required for realization of prosperity, but the collection of national output may differ from the collection that satisfies the requirements of the society. More resources may be devoted to produce goods of higher profits such as weapons, producers goods such as machineries, or luxury goods such as pyramids and fancy squares.

97 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June Failure to realize the optimal output growth that satisfies the economic requirements of the community and maintains full employment is the direct result of the lack of qualified decision makers. It is the responsibility of the decision makers to set proper product mix, raise efficiency through education and training, utilize resources moderately, and encourage local production in order to reduce unemployment rate and reach higher level of output growth. According to the Holy Qur'an, people are authorized to exploit resources moderately, "And those who, when they spend, are neither extravagant nor niggardly, but hold a medium (way) between those (extremes)" (Al-Furqan 25: 67). The Holy Qur'an introduces Shura as the legal consultative decision making process. and whose affair is [determined by] consultation among themselves (As-Shura 42: 38). Unlike democracy, Shura recognizes the limitation of personal knowledge, and decision makers are elected or selected based upon their honesty, skills, and qualifications. Market Freedom In socialism, economic activities including production, exchange and distribution are adjusted by the State to meet human needs and prices are fixed. In capitalist countries, different impediments, such as price controls, taxation, minimum wage legislation, and monopolistic acts restrict market freedom. Unlike present economic systems, Islam emphasizes freedom of the market. The natural market is the conceptual framework of pricing. It is one of the many natural systems which is created by Allah to organize movements of the creatures and to facilitate life on earth. Humanity interventions in the natural market system are forbidden. And do not mischief on earth, after it has been set in order (Al-Araf 7: 56). Monopoly is also forbidden. Ma mar reported that the Messenger said: Whoever monopolizes is a sinner" (Sunan Ebn-Magah). Fixing prices is prohibited. Anas reported that the current price once became dear at the time of the Messenger of Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet replied: Verily Allah is One who controls price, curtails, gives amply and provides sustenance; and certainly I hope that I should meet my Lord while there will be none amongst you who will hold me responsible either for blood or for property. (Sunan Abe-Dawood- Sales). Ownership rights Socialism denotes an economic system of state ownership of the means of production. Private ownership is limited to the personal properties, such as houses, clothing, and food. On the contrary, capitalism is centered about private ownership. It is believed that the society's interests are served by the individual's motives. Individuals are permitted to manipulate their wealth in all ways and means. In Islam, Allah is the Only Owner "To Allah belongs all that is in the heavens and all that is on the earth" (Al- Baqarah2: 284). People act as trustees. And We have given

98 98 Journal of Islamic Banking and Finance April - June 2016 you (mankind) power in the earth, and appointed for you therein livelihood (Al-Araf 7:10). The beneficial ownership rights are regulated; 1. Natural resources are public property It was narrated from Ibn 'Abbas that the Messenger of Allah (Pbuh) said: The Muslims are partners in three things: water, pasture and fire, and their price is unlawful. (Sunnan Ebn-Magah Mortgage). Also, it was narrated from Abyad ibn Hammal that Abyad went to the Messenger of Allah (Pbuh) and asked him for assigning him (the mines of) salt as fief. (The narrator Ibn al-mutawakkil said: (which was in Ma'arib.) So he assigned it to him as a fief. When he returned, a man in the meeting asked: Do you know what you have assigned him as a fief? You have assigned him the perennial spring water. So he took it back from him. He asked him about protecting land which had arak trees growing in it. He replied: He could have such as was beyond the region where the hoofs (of camels) went. The narrator Ibn al-mutwakkil said: "that is the camel hoofs." (sunan Abe-Dawood). On the analogy of the sayings of the Prophet (Pbuh), things of common use or of public benefit must be held as public property. Muslim thinkers throughout the Islamic history accepted the generalization of this statement to include all natural resources. Water, electricity, minerals, communications, roads, dams are things of common use. A government has to exploit public property in favor of the community. It has no right to privatize public property. An individual has no right to own things of common use or of public benefit. 2. Things that are exploited for personal living or business are private property An individual has ownership right of all the things that are invested, exploited, or used for his living such as his house, business, and furniture. and settled you in the land, [and] you take for yourselves palaces from its plains and carve from the mountains, homes (Al_Araf 7: 74). An individual has no right to own or possess things that are not used for his living or business; Ownership of land is subject to exploitation Jabir (Allah be pleased with him) reported Allah's Messenger (Pbuh) as saying: He who has land should cultivate it, but if he does not find it possible to cultivate it, or finds himself helpless to do so, he should lend it to his Muslim brother, but he should not accept rent from him (Sahih Muslim Sales). Goods for trade may not be hoarded It was narrated from Ma mar bin Abdullah bin Nadlah that the Messenger of Allah (Pbuh) said; No one hoards but a sinner (Sunnan Ibn Magah, Book 12). Money may not be hoarded

99 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June Woe to every slanderer and backbiter. Who has gathered wealth and counted it. He thinks that his wealth will make him immortal. No! He will surely be thrown into the Crusher (Al-Humazah 104: 1-4). Gold and silver, as money, may not be hoarded And those who hoard up gold and silver and spend them not in the way of Allah, announce unto them a painful torment (At-Taubah 9: 34). Earned Income Earned income includes all incomes received as return to economic activities. In socialism, an individual is compensated based on his contribution to the productive activities. Private savings can be invested in bonds issued by the public enterprises. Financial activities are encouraged to attract foreign investments. In capitalist countries, an individual has full economic freedom to earn as much income as he can. Private savings are encouraged to be invested in financial activities. Islam prohibits earning income as return to financial activities or illegal productive activities. Earned income is limited to the earnings from the legal productive activities. Eat not up your property among yourselves unjustly except it be a trade (An-Nisa 4: 29). Unearned Income Unearned income includes all legal incomes received from others in return for nothing. While earned income represents a reward for the individual s contribution to building the society, unearned income represents redistribution of wealth. Unearned income includes inheritance, bequest, Zakat, almsgivings, and gifts. Under socialism, inheritance law aims at satisfying the personal needs of citizens and eliminates the possibility of exploiting the labor of others. Under article 10 of the Constitution of the USSR, the right to inherit personal property is protected by law. In capitalist countries of continental Europe, inheritance is regulated by civil codes or judicial precedent. In USA, every state has its own inheritance law. The Holy Qur'an and the sayings of the prophet (Pbuh) set rules to regulate distribution of bequests, inheritances, and Zakat. Several verses in Surat An-Nisa show how an estate is distributed among different heirs. National Money Unlike the old commodity money that was made of gold or silver or of paper fully backed by gold, present money consists of state-issued money made of paper or metal of negligible cost in addition to banking deposits. Most of money in circulation is banking deposits. Issued money in USA as at January, 2007 was billion dollars, while commercial bank money (in M2) was 6.33 trillion dollars. In present economies most of funds are raised through borrowing. Governments print fiat money. Fiat money refers to the currency that a government has declared to be legal tender recognized by law to be valid for meeting financial obligations and to be exchanged for goods and services. In addition to the state-issued money, governments raise funds through selling government bills, or borrowing money from rich countries or giant lenders. Public debt is growing rapidly. In his article The biggest financial crime in

100 100 Journal of Islamic Banking and Finance April - June 2016 the history of the United States addressed to the US citizen via Internet, Dr. Don J. Grundmann, D.C., M.H. says: Since in 1996 approximately 40% of the United States budget went to the payment of interest on the national debt. More taxes are levied to pay interest on public debts and to cover financial corruption in public sector. Banking deposits are borrowed money. Banks use public and private deposits to grant credits. In order to generate more profits and expand more credits, banks practice what is so called Money Creation Process which entitles the banking system to raise funds through lending. Business entities, speculators, and individuals borrow money from banks and financial institutions. Public and private corporations including banks borrow money through financial markets. Financial markets introduce financing instruments such as treasury bills and corporate bonds, as well as refinancing products such as mortgage securities. As alternatives to borrowing, a country may seek foreign investments, ask rich countries for grants, or apply spending-cut policies. Borrowing, grants, and foreign investments normally have severe impacts on sovereignty of poor countries. Spending cut policies reduce the rate of output growth and increase the unemployment rate. In order to increase the national output, more money must be injected to the system. Keeping into consideration the velocity of money, which refers to the number of times a currency unit is used to purchase goods and services within a given time period, the growth of quantity of money in circulation must be justified by the growth of national output. This explains the equation of the theory of quantity of money; National output = Quantity of money in circulation X Velocity of money Assume that the velocity of money = 4 times. In order to increase the national output by 12 billion currency units, the quantity of money in circulation should be increased by 3 billion currency units. The purchasing power of the currency unit = 12 / 3 = 4 worth of goods. Suppose that the quantity of money in circulation is increased by 4 billion currency units, the purchasing power of the currency unit will decline to be = 12 / 4 = 3 worth of goods, and the market value of the output will increase to become = 4 X 4 = 16 billion currency units. Injecting more money to the system without adding real value to the national output causes inflation. The excessive expansion of money reduces the purchasing power of the currency unit since each currency unit buys fewer goods and services. The general level of prices rises. In present economies, quantity of money in circulation exceeds the quantity of money needed to realize the output growth. The excess is used to pay inflationary incomes as return to the inflationary financial activities. The natural increase in prices of some products due to an increase in cost of material, wages paid to labors, supplier s profit margin, or volume of demand relatively to the volume of supply is not inflation. It reflects an increase in the real value of products. Money is used to measure values. Unlike the natural increase in prices, inflation is a human-made phenomenon. It is the root of all evil. Due to inflation, wealth is concentrated in few hands. Inflation is behind economic instability and deterioration of the confidence in currencies. It is the main cause of financial crises such as the Wall Street Crash of 1929, the 2008 US

101 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June Mortgage Crisis, the 1997 Asian Financial Crisis, 1998 Russian Financial Crisis, and the Latin American Debt Crisis. Soviet economy had a period of hyperinflation from 1921 to 1924 due to the sudden removal of speculative capital. In 1992, currency speculation forced the central bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the Swedish currency. Because the currency unit gets different purchasing powers due to inflation or deflation, money loses its reliability as a measure of value, and money, as a store of value, cannot protect the right of its holder to obtain products of future value equal to the value of the products he might acquire when he received or lent the money. In spite of the ghastly impacts of inflation, most economists recommend living with moderate inflation. They claim that inflation provides an incentive for investment as long as prices are rising and are expected to continue rising. In order to avoid the probable detrimental effects of inflation, monetary authorities apply monetary controls over interest rate, bank discount rate, expansion of money, and currency exchange, and governments employ fiscal controls over prices, wages, government expenditure, and taxes. Markets may not respond in the way expected by the authority. High rate of inflation may lead to hyperinflation, stagflation, recession, high unemployment rate, and even total monetary collapse. This way of thinking is based on fallacies. The main objective of a sound monetary system is to raise as much funds as needed for the output growth. Since funds are raised through encouragement of inflationary activities that produce inflation and restrict output growth, the objective of the monetary system has been changed. Monetary policies are directed toward controlling quantity of money in order to prevent the probable ghastly impacts of inflation. Since there are no restrictions on the government to print as much money as needed for economic growth without producing inflation, the only explanation for raising funds through producing inflation is to concentrate wealth in few hands at the expense of all others. A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total assets. The bottom half of the world adults owned 1% of global wealth. Islamic precepts regarding present national money are completely different than the concepts on which present monetary system is based. The Holy Qur an recognizes the nature of present money as a valueless thing used as a medium of exchange. The verses of the Holy Qur'an highlight the features of the Islamic monetary system. The purchasing power of the currency unit must be stable And O my people! Give full measure and weight in justice and reduce not the things that are due to the people (hud 11: 85). Inflation is forbidden. It causes concentration of wealth in order that it may not become a fortune used by the rich among you (Al-Hashr. 59:7). It represents mischief on the natural market system And do not mischief on earth, after it has been set in order (Al-A raf 7:56). It declines the value of money and reduce not the things that are due to the people (Hud. 11:85).

102 102 Journal of Islamic Banking and Finance April - June 2016 Raising funds through interest or profit-based borrowing is forbidden..and forbidden Riba (Al-Baqarah. 2:275). Equity finance through companionship (Musharakah and Mudarabah) is permitted And, verily, many partners oppress one another, except those who believe and do righteous good deeds, and they are few (Sad. 38: 24). In order to stand firm in justice, old scholars set rules to govern the Musharakah and Mudarabah. Finance through interest-free lending is permitted when you contract a debt for a specified term, write it down (Al-Baqarah 2: 282). Universal Money The measures of accepting a currency in foreign trade and for settlement of foreign obligations differs from those of a currency in domestic transactions. Gold is the historically accepted backing for the currency that was used in international transactions. The universal currency must be fully backed by gold so as to protect rights of exporters and foreign creditors. During the age of the gold standard, the British pound sterling was the universal reserve currency. After World War II, the US dollar was given this status by international treaty according to which the Fed was committed to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. In 1971, the Fed abrogated its responsibilities to honor dollar for gold entirely. Since the 2008 financial crisis, the Fed has been inflating the dollar massively, Public debt grows sharply, and the purchasing power of the dollar falls dramatically. In the absence of an international monetary system, rights of exporters and holders of foreign currencies become questionable. Some countries try to eliminate the risk through holding currency reserve in form of a basket of currencies. Other countries start to barter their products or accept domestic currencies in exchange for exports. When the Holy Qur an was revealed to the Prophet (Pbuh), Muslims were using Byzantine and Tasmanian gold and silver coins that were in circulation before Islam. The Holy Qur'an recognizes gold and silver as money And those who hoard up gold and silver and spend them not in the way of Allah, announce unto them a painful torment (At-Taubah 9: 34). According to Islam, currency exchange must be based on spot exchange rate It was narrated that Ibn Umar said: I came to the Prophet and said: Wait I want to ask you something. I sell camels in Al-Baqi with a price set in Dinars but I accept Dirhams instead. He said: There is nothing wrong with it if you take the price on that day, still unfinished business between you both (buyer and seller). Also, forward currency exchange is forbidden Abu Al-Minhal said: I asked Al- Bara bin 'Azib and Zaid bin Arqam and they said: 'We were merchants at the time of the Messenger of Allah and we asked the Prophet of Allah about money exchange. He said: "If it is done hand to hand there is nothing wrong with it, but if it is done on credit then it is not right".

103 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June Distribution of Wealth Distribution refers to the sharing of the national income amongst the members of the community including the government. The necessity of redistribution policy arises from the insufficiency of public revenue to meet public expenditures and the insufficiency of private income to meet cost of living. Socialism denies any natural difference among people and forces its concept of equality on the society. Socialists favor distribution process based on an individual s needs. Economic activity and production are adjusted by the State to meet human needs and economic demands. Redistribution of national income among members of the society is regarded by capitalists as public assistance. Welfare programs are directed to serve those of limited income. Social security and retirement programs aim to help those of older age. Unemployment compensations are paid to those who do not have jobs. Taxes are imposed in order to finance the deficit in government budget. Taxation is regarded by economists as the tool for redistribution of national income. The government borrows money in case taxes do not cover the deficit. Both taxation and borrowing are inflationary activities. On the one hand, Islam recognizes the differential in wealth Say (O Muhammad): Verily, my Lord enlarges the provision to whom He wills and restricts. (Saba 34: 36). On the other hand, the Holy Qur'an prohibits concentration of wealth in order that it may not become a fortune used by the rich among you (Al-Hashr 59: 7). Islam sets rules to explain how wealth can be redistributed; Every individual is liable to pay for his cost of living including the cost of the benefits he gets in form of public services (Nothing for free) There is nothing for man but what he strives for (An-Najm53: 39). Individual s liability is limited to his capacity Allah burdens not a person beyond his scope (Al-Baqarah 2: 286). The needy has right in the wealth of rich And in their properties there was the right of the beggars and the poor (Adh-Dhariyatt 51:19). Since rich benefit from economic inequality, they have to recognize the right of others to be compensated by them for the natural differential in personal capacities in order to maintain social stability and continuously acquire contributions of others in building the society. Zakat is a wealth duty levied on wealthy individuals in favor of needy persons Take Sadaqah from their wealth in order to purify them and sanctify them with it (At-Taubah 9: 103). Unlike taxes which represent government s revenue, Zakat is an obligatory duty to be collected by the government for distribution amongst the needy As-Sadaqat are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled, and to free the captives and the debtors, and for the cause of Allah, and (for) the wayfarer; a duty imposed by Allah. (At-Taubah 9: 60).

104 104 Journal of Islamic Banking and Finance April - June 2016 Total amount of Zakat should be quite enough to cover needs of poor Ali (RAA) reported: the Messenger of Allah (Pbuh) said: Allah has enjoined on rich Muslims in their wealth as much as needed for poor Muslims (Narrated by Tabarani). Zakat and spending in the way of Allah are up to full financial capacity And they ask you what they ought to spend. Say: that which is beyond your needs (Al-Baqarah 2: 219). Zakat is imposed on yearly basis. Aishah said: I heard the Messenger of Allah (Pbuh) say: 'There is not Zakat on wealth until Hawl (one year) has passed (Sunan Ibn Magah). Presentation of an Economic System in Light of the Islamic Precepts Unlike present inflationary economic systems, Islam introduces productive economic system. The proposed economic system, which is based on the Islamic precepts, includes a national monetary system, a redistribution system, and an international monetary system. National Monetary System A sound national monetary system has four main objectives; To provide funds required for the exchange of the goods and services that are produced in the economy. To finance the deficit in the cash flows of productive businesses and projects. To ensure stability of the purchasing power of the currency unit in order to protect the rights of money holders. To combat financial corruption. If money supply is growing at the same rapid pace that is justified by the growth of national output, funds can be freely raised, without causing inflation and with no need to borrow money, retain currency reserve, apply spending-cut policies, ask for foreign grants or even seek private investments. The national output is the real currency backing. Instead of directing the domestic monetary policy toward controlling quantity of money in order to limit the growth of inflation, the domestic monetary policy should be directed toward controlling movement of money in order to limit the growth of money supply to the growth of national output. Looseness of present monetary system does not help controlling movement of money. Funds are raised by the monetary authority and all banks. Money is available in form of banknotes, coins and banking deposits. It circulates in hands of individuals, public entities, private entities, and the government. Part of money is hoarded or saved, and another part is invested abroad. Effective control of movement of money requires transformation into a closed monetary system by which funds are provided by and circulated within the governmental monetary authority or central bank. The closed monetary system is presented as an

105 Economic Journal of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June alternative to both present monetary system and financial system. In practice, it requires changing the functions of the central bank and banks; Central bank (CB) does not issue money. Instead, it provides all banking services in local and foreign currencies. Cash money in local currency is recalled for cancellation. Banking deposits in local currency are transferred to CB. Accounts of banks with CB are charged for the amount of transfers. The debit balance will be settled by the proceeds from liquidating the banking credits. Cash money and banking deposits are retained by CB in unrestricted interest-free current accounts in the name of the money owners. CB. All payments in local currency are made by transfers between the accounts within Banking deposits in foreign currencies are transferred to be retained in accounts in the name of the money owners with CB. Foreign currencies are exchanged at the spot rate determined by the exchange market. CB issues prepaid smart cards to be used by consumers for paying sundry expenses. CB issues Interest-free credit cards to consumers in order to encourage consumption. CB grants temporary interest-free lines of credits to governmental agencies in order to cover the deficit in the cash flows. Under its supervision and control, CB finances private and public productive activities through banks. Banks do not retain deposits. Instead, they, as specialized financial institutions, use funds received from CB to finance productive activities. For predetermined management fees, a bank invests money to establish a productive project, or business, in favor of CB. A bank invests money with one or more partners in a productive project (or business). CB is a partner liable to cover the shortage in the cash flow. A current equity finance contract translates the relationship between the bank and the partners. It shows type and terms of finance, the profit share of every party, including the bank, in return for his efforts or work, the initial capital of the project, the minimum of the capital share of every partner. A partner has the right to change his capital share provided that it will not be less than the predetermined minimum share. All payments and receipts are made by transfers through accounts with CB. Liquidation is made by selling the assets in cash to others or to a partner or to CB at market price. If CB is the buyer, it will sell or rent the assets at its own risk. On liquidation, accounting is made on cash base. In case of profit, the profit share of every party for his efforts or work is paid. Capital is recovered and net profit or loss is distributed in proportion to the accumulated invested capital computed by using the well known Daily Numbers Method. The balance sheet of CB will show real assets and debts on one side and deposits on the liability side. Since each account will provide a complete record of receipts and payments of the account holder, the records will help combating financial corruption

106 106 Journal of Islamic Banking and Finance April - June 2016 including illegal operations, tax evasion and procrastination in paying debts by a wealthy man. The purchasing power of money will be stable. Domestic prices and unemployment rate will sharply decline, national output and exports will increase, and the balance of payments will improve. The need for money will be limited to the amount of foreign currency for buying foreign goods and paying foreign liabilities.. Redistribution system A sound redistribution system aims to achieve two main goals; To sustain individuals at or above a specified material standard of living. To provide sufficient funds to cover the deficit in government s budget. A financial security system is introduced to replace both present public finance system and redistribution system. According to the financial security system; Public services are provided to all members of the community at real cost. An individual may enjoy private services provided that he/she pays the difference in cost. The government determines the individual s share in the deficit of government budget. The deficit is charged to all members of the society and distributed evenly among individuals. The government estimates an individual s standard cost of living with consideration given to age, gender, and living standard in the community. An individual s standard cost of living represents the total of the individual s standard cost of living in addition to his/her share in the public deficit. Standard cost of living is not a stable figure. It can be changed according to the changes in development needs, product mix and living standard in the community. It can be increased in emergency cases such as war and natural catastrophes. A wealth duty (Zakat) is levied on those whose incomes exceed the standard cost of living in order to cover the deficit in the incomes of those whose incomes are less than the standard cost of living. Unlike taxes, wealth duty is not public revenue. International Monetary System A sound international monetary system aims to protect the rights of exporters and foreign creditors. It must be based on facts. First; the price of gold is unstable. Second; the universal currency must be fully backed by gold so as to protect rights of exporters and foreign creditors. USA was liable to convert the dollar into gold at fixed price. The international monetary system failed because it was based on a commitment that ignores the fact that gold is naturally a commodity with variable market price. A new independent universal currency can be considered for international trade and foreign transactions if the price of each unit of the universal currency is set to be equal to a fixed quantity of gold.

107 Journal Economic of systems Islamic Human Banking thoughts and Finance and Islasmic April Precepts June The universal currency can be issued by an independent universal bank. The universal bank sells universal money to central banks in exchange for the appropriate quantity of gold. Assume that each unit of the universal currency is set to be equal to 1/1000 of ounce of gold; a 1 million of the universal currency will be sold to central banks in exchange for 1000 ounce of gold. Delivery of the universal money can be made in form of banknotes or credited to the account of the central bank with the universal bank. It is the responsibility of the universal bank to honor universal money for the appropriate quantity of gold. For the universal bank, price of gold is irrelevant. The universal currency derives its value from the market price of gold. International currency exchange markets determine the exchange rate of the universal currency in terms of the different domestic currencies. The higher price of gold is the lower exchange prices of all national currencies for the universal currency. Prices of exports and foreign obligations are set in term of units of the universal currency which is fully backed by gold. Since the exchange is actually made between two valued commodities, the rights of exporters and foreign creditors are protected. Corruption has appeared throughout the land and sea by [reason of] what the hands of people have earned so He [Allah] may let them taste part of [the consequence of] what they have done that perhaps they will return [to righteousness] (Ar-Rum 30: 41).

108 108 Journal of Islamic Banking and Finance April - June 2016 Book Review Early Islam & the Birth of Capitalism Benedict Koehler By Salman Ahmed Shaikh The birth of capitalism as per Max Weber in The Protestant Ethic and the Spirit of Capitalism began in Western Europe and spread to North America. Benedict Koehler in his recent book Early Islam and the Birth of Capitalism argues that it is Islam, rather than Christianity that provided the organizational and ideological elements that combined and gave rise to capitalism. The author explains that Prophet Muhammad (pbuh) was Himself an established entrepreneur. The author further emphasizes that Mecca was not only a Holy place, but also a very significant trading centre at that time. The author contends that Islamic teachings provided extensive guidelines on fair trade. Islamic teachings also gave due importance to writing business contracts and honoring them, both as a religious and civil duty. Islamic venture capitalism based on Mudarabah and Musharakah were conducive for long distant trade and matching the skills and endowments of labor and capitalists respectively. The currency system based on commodities like gold and silver was also advanced enough at that time to avoid the problems of barter trade, such as indivisibility of tradable commodities and having to match double coincidence of wants. The right to private property for men as well as women was also duly recognized in Islamic law even 15 centuries ago. Islamic institutions and business practices were later on adopted and adapted in Venice and Genoa. Thus, as argued by the author, capitalism first emerged in Arabia, not in late medieval Italian city states as is commonly assumed. There were other Islamic institutions assimilated in Europe like Charities, Waqf and institutions of higher learning, like the Madrasas. The author argues that these higher learning institutions were models for the oldest colleges of Oxford and Cambridge. As such it can be rightfully said that these essential aspects of capitalist thought all have Islamic antecedents. Salman Ahmed Shaikh is a PhD Scholar in Economics. He can be contacted at: salman@siswa.ukm.edu.my

109 Journal of Islamic Banking Book Review and Finance April June It is a good attempt by the author to highlight the historical origins of capitalism. However, it must be emphasized that the commonality that exists between mainstream capitalism and Islamic economic principles must not be taken as evidence of Islam being a subset, pioneer or promoter of unfettered capitalism. Islam is not just an economic system, but, a comprehensive doctrine. A comprehensive doctrine is not just concerned with one particular aspect of human life; rather it is concerned with all aspects of human life. Islam recognizes the importance of trade based enterprise over interest based financial enterprise. Barring certain impermissible businesses, Islamic principles are neutral to the use of market mechanism for allocation and price determination, but these principles render the use of market as an instrument rather than placing them as sacred. Thus, markets can be supplemented, intervened or even replaced for ethical considerations in some cases. For instance, markets for ethical bads should not exist as per Islamic principles and the consumer sovereignty is not recognized unconditionally in such instances for the greater benefit of society at large. Trade based on voluntary exchange is beneficial as collectively we can have better and more consumption bundles at our disposal if we engage in voluntary exchange. Islam is neutral to voluntary exchange in general, but market mechanism is supplemented by divine injunctions and by educating people of the desired behavior expected by their Creator. Furthermore, Islam has a very clear view on certain extractive institutions like interest based lending. By disallowing interest based earnings, exploitative forms of trade and imposition of excessive taxes, Islamic principles ensure socio-economic justice and individual freedom in a much wider sense than the mainstream capitalism.

110 110 Journal of Islamic Banking and Finance April - June 2016 Country Model: Azerbaijan * The launch of Islamic finance in Azerbaijan can be credited to the Islamic Development Bank (IDB) which was involved in setting up of an Islamic investment fund known as the Caspian Investment Company (CIC) in 2012, a joint-venture of the IDB and Azerbaijani government. Commencement of the joint-venture helped in increasing interest of Azerbaijan towards Islamic finance. Consequently, International Bank of Azerbaijan (IBA), the largest bank of the country, started offering Shariah compliant financial services through its window in Since its initiation, Islamic banking has developed slowly in the former Soviet State, mainly due to absence of appropriate legislation and regulation for Islamic banking in the country. Despite slow growth of Islamic banking and finance in the country, the authorities in the country have ambitions of elevating Baku, capital of Azerbaijan, as a regional hub of Islamic finance. The country is in negotiations with Iran for creation of a joint bank. Moreover, work on Islamic banking law is in progress. Apart from Islamic banking services, Islamic leasing, Islamic microfinance and Islamic takaful services are also being offered in Azerbaijan. Amongst various modes used for Shariah compliant financing in the country, Ijara, Wakala, Murabaha and Mudaraba remain prominent. Role of IBA in Promotion of Islamic Banking in Azerbaijan Since starting Islamic banking services in 2013, IBA has remained at the forefront of all Islamic banking activities in Azerbaijan. In 2014, a dedicated Islamic banking department was established in IBA for promoting Islamic banking activities. The Shariah compliant financial services of IBA are not just confined to Azerbaijan, but the bank has also established a subsidiary in Moscow, Russia. The bank has not only been working with various international Islamic banks but is also engaged with national authorities for drafting Islamic banking law. Moreover, the bank has plans to issue the country s first Sukuk in near future. Legal Framework for Islamic Banks in Azerbaijan As stated earlier, there is absence of appropriate legislation and regulation for Islamic banking in Azerbaijan. Though the existing banking law does not prohibit Islamic banking, however, there are no specific regulations for Islamic banking. In order to establish legislation for Islamic banking in the country, Central Bank of Azerbaijan, IBA and various ministries of the country are working with IDB. In this regard, a package of amendments and additions to existing legislation in areas including taxation, corporate * Source: State Bank of Pakistan, Quarterly Islamic Banking Bulletin Oct-Dec 2015

111 Journal of Islamic Country Banking Model: and Azerbaijan Finance April June law, contracts, banking law, real estate, licensing and securities are under consideration for regulating Islamic banking activities in the country. The new regulations are expected to materialize in 2016 and would allow Islamic banking to operate in parallel to conventional banking. Way Forward Considering the geographical location of Azerbaijan and having Muslim population of more than ninety percent, there are opportunities for Islamic banking and finance to develop in the country. The authorities in the country are also working for creating a conducive environment for Islamic banking and finance by introducing legal amendments to cover Islamic banking and finance. Islamic capital market in the country is also likely to get a boost as issuance of Azerbaijan s first Sukuk is likely in near future. If developments like these continue, the presence of Azerbaijan in Islamic finance industry is likely to improve in coming years. Sources Global Islamic Finance Report, Edbiz Consulting Limited, various editions

112 112 Journal of Islamic Banking and Finance April - June 2016 Note to contributors Journal of Islamic Banking and Finance is an official publication of International Association of Islamic Banks Karachi, Pakistan. It is a refereed quarterly journal, as well as a pioneer in the field of Islamic banking and finance being published since It provides a forum for researchers, particularly in Islamic Banking and Finance, wishing to share their expertise with a vast intelligentsia in the form of articles, research and discussion papers and book reviews. Major areas of interest for the journal include: (i) Theoretical issues in banking and financial industry specially from Islamic perspective; (ii) Empirical studies about the Islamic banking and financial institutions; (iii) Survey studies on issues in Islamic banking and finance; (iv) Analytical studies of applied Islamic banking; (v) Comparative studies on Islamic and conventional banking systems; and (vi) Short communications and interviews investigating the perceptions of leading bankers and banking experts as well as policy makers. Articles Submission: The contributors are requested to observe the following rules. Articles should be typed in M.S. Word and restricted to 10 to 15 pages of A-4 size paper. We accept original contributions only and if the material is taken from some book or any other source, the source may be mentioned. The editorial team does not assume any liability for the views of the writers expressed in their articles nor may necessarily agree with their views. The articles should be submitted before start of the first month of each quarter, beginning from January, April, July & October enabling review and approval of the material by the editorial board for publication in the issue in hand. If the editorial Board is of the opinion that the article provisionally accepted for publication needs to be revised, shortened, or the particular expressions therein need to be deleted or rephrased, such opinions will be communicated to the author for appropriate action. The author may also be requested to recast any article in response to the comments made thereon by the reviewers. The numbering of footnotes will be consecutive, and the footnotes themselves will be placed at the end of the article. The author(s) of articles published will receive 2 complimentary copies of the Journal of Islamic Banking & Finance and the IAIB reserves all rights in the material published in the Journal. Abstract: The articles should contain well summarized abstracts between 100 to 200 words, covering the subject matter of the articles, its conclusion and the result arrived at, with key words. Tables and Figures: Figures, tables and boxes should be numbered consecutively in Arabic numeral (i.e figure 1, figure 2 and Table 1 & Table 2) Book Review: New books (on Islamic economics, finance and banking, as well as on issues and problems of economic development) will be reviewed in the Journal on request. Authors/publishers may send two copies of each book to the editor for purpose of review. All communications should be addressed to the editor.

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114 114 Journal of Islamic Banking and Finance April - June 2016 International Association of Islamic Banks B-5 (1st Floor), Kehkashan Apartments, Block No. 7 Main Clifton Road, Karachi (Pakistan) Phone: 92(021) ia_ib@yahoo.com Quarterly Journal of Islamic Banking and Finance Subscription order form Subscription Rates (Including postage) One year Two years Per single copy Pakistan Rs Rs Rs Overseas US$ US$ US$ For Students* Pakistan Rs Overseas US$ Old Issues of One Year Pakistan Rs Overseas US$ * Photocopy of the proof of the existing status of the students required Please print clearly in Capital Letters: Name Position Company Postal Address City Post Code Country Telephone Fax. Note The Subscriptions may be sent directly by a banker s draft/telegraphic Transfer favouring International Association of Islamic Banks payable in Karachi, Pakistan. Back issues can be supplied on request. However the subscriber should specify the period.

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116 116 Journal of Islamic Banking and Finance April - June 2016