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

An Introduction to

Islamic Rules of Business & Finance

Prepared by Syed Mahmood Ali. M.com; MBA

Associate Professor,Royal Institute of Technology & Science.

Contents:1. Belief in Devine Guidance2. Capitalist & Islamic Economy3. Capital &Entrepreneur4. Currency meaning and its role5. Islamic Rules of Sales6. Modes of Islamic Finance Musharakah Mudaraba

1. Belief in Devine Guidance• The primary belief around which all the Islamic Concepts

revolve is, the whole universe is created and controlled by ONE GOD.

• He has created human being on the earth to fulfill certain objectives through obeying His commands.

• These commands not restricted to some modes of worship or religious rituals.

• On the contrary, these command cover a substantial area of almost every aspect of our life.

• These commands are neither so exhaustive nor so little or ambiguous. Far from these two extremes, Islam has a balanced approach to govern the human life.

Capitalist & Islamic Economy

Capitalist Economy• In Capitalism, the profit motive and private ownership are given

unbridled power to make Economic Decisions.• If there are some restrictions, they are imposed by human beings

and always subject to change through democratic Legislations, which accepts no authority of any super-human power.

• It allows number of practices which cause Imbalance in the society like Interest, gambling, speculative transactions.

• These transactions tend concentrate wealth in few hands.• Unhealthy human instincts are exploited to make money through

immoral and injurious products.• High profit earning motive create monopolies which paralyze or

hinder the market forces from their natural operations.• Certain Economic activities not in the interest of the society, yet,

allowed to be continued as it goes against the interest of some influential circles who dominate the legislature on the strength of their majority.

Islamic Economy• Islam does not deny the market forces and market economy.• Even the profit motive is acceptable to a reasonable extend.• Private ownership not totally negated. • It put some divine restrictions on the Economic activities.• These restrictions are imposed by ALLAH almighty.• Whose knowledge has NO limits and cannot be removed by any human

authority. • The prohibition of RIBA (usury or interest), gambling, hoarding,

dealing in unlawful goods or services, short sales and speculative transactions are some examples of these divine restrictions.

• It says that human should submit to the divine authority and obey its commands by accepting them as absolute truth and super human injunctions which should be followed in any case and at any price.

• All these prohibitions show collective impact on Socio Economic equality, maintaining balance, distributive justices and quality of opportunities

Capital &

Entrepreneur

Capitalist Economy

• Capital and Entrepreneur are two separate factors of production.

• Capital will get Interest Entrepreneur will get profit

(after distributing fixed return in the form of rent, wage, and interest)

Islamic Economy• It does not recognize

Capital and Entrepreneur as separate factors of production.

• Every person who contributes the capital to commercial enterprise assume the risk of loss, hence eligible to a proportionate share of profit

Currency meaning and its role

“Money is such a companion of yours that it does not benefit you, unless it leaves you.”

(Al-Zahabi, Siyar A’lam-al-Nubala’ v. 4, p.576, Beirut)

Conventional System• Money is a product besides

medium of exchange and store of value.

• It is recognised as subject matter of trade.

• Time value is the basis for charging interest on capital.

• Trading in money leads to inflation due to non existence of goods & services.

• Illusion of intrinsic value or utility of money

Islamic System• Real Asset is a product. Money

is just a medium or means of exchange.

• It is NOT recognized as subject matter of trade.

• Each unit of money is 100% equal to an other unit of the same denomination at any point of time.

• NO inflation as trading in money is prohibited & allowed in goods & services

• NO intrinsic value or utility.

Islamic Rules of Sales

• The subject of sale must be existing at the time of sale.• It must be in the ownership of seller at time of sale.• It must be in the physical or constructive possession of the seller when he sells

it to another person.• The sale must be instant and absolute. Thus a sale attributed to future date or a

sale contingent to future event is void. If the parties wishes to effect a valid sale, they will have to effect it afresh when the future date comes or contingency occurs.

• The subject of sale must be a property of value. Thus, the thing having no value according to the usage of trade cannot be sold and purchased.

• The subject of sale should not be a thing which is used for a Haram purpose only, like pork, wine etc.

• The subject of sale must be specifically identified and known to the buyer.• The delivery of the sold commodity to the buyer must be certain and should

not depend on a condition for the validity of a sale.• The sale must be unconditional. chance or unforeseen event.• The certainty of price is a necessary A conditional sale is invalid, unless the

condition is recognized as a part of the transaction according to the usage of trade.

Modes of Islamic Finance

Islam is the only religion in the world, provides guide lines and rules and

regulations for financing and business

Musharakah(Joint Venture or Partnership)

It is a most ideal form of financing advocated by Islam. It refers to sharing of profits and losses in joint ventures. Here the financer instead of giving fixed or predetermined rate of loan will invest his money in a joint venture on the condition of sharing actual profits and losses. It is a relationship established by the parties through mutual contract and it contains all the necessary requirements of valid contract such as capability of the parties, free consent and no fraud and misrepresentation etc.

Basic Concepts of Musharakah

• The profit sharing ratio must be agreed at the time of signing the agreement.

• Fixed lump sum amount for any partner as profit NOT ALLOWED• Any fixed amount drawn by the partner will be adjusted to actual share of

profits one may deserve at the end of the period. Amount drawn less than the actual share of profit can be withdrawn or more should be returned.

• Only Actual profits accrued to the firm are distributed among the partners.• Share of profit can be any ratio agreed by the partners i.e. it may differ

from the ratio of investment.• In case of loss all the partners has to suffer the loss exactly to their ratio of

INVESTMENT/CAPITAL.• The share capital of Musharakah can be contributed either in cash or in the

form of commodities or kind subject of the determination of market value as share of the partner in the capital.

• As far as the management of Musharakah is concerned all the partners can participate or any one of them acting for all can participate.

• Every partner has right to terminate the Musharakah at any time after giving other partners a notice of termination.

• Any partner dies during the Musharakah the contract with died partner terminated. The legal heirs will have the option either to draw the died partner share or to continue with the contract of Musharakah

• If any partner becomes insane of incapable in discharging commercial transactions, the Musharakah stands terminated.

• If one of the partners wants to terminate the Musharakah, while other partners wants to continue, this can be resolved by mutual agreement. The partner who wants to terminate Musharakah can sell his share to the partner who wants to continue the business.

• The selling price of the leaving partner must be determined by mutual consent. If there is a dispute about the valuation of the share and the partners do not arrive at an agreed price, the leaving partner may force other partners to liquidate or distribute the assets.

• If the assets of Musharakah are in the form of cash, will be distributed in the pro rata. If the partners agree to liquidate assets and distribute, can be done accordingly. If the partners want to distribute assets as they are, can be done accordingly. If one of the partners want liquidation and others wants to distribute assets as they are, the distribution of assets will be preferred.

Mudarabah

It is special type of partnership where one partner provides funds to another for investing in a commercial enterprise. The fund provider is called as “Rabb

-ul-mal”, while the management is a sole responsibility of other partner called as “Mudarib”

Basic Concepts of Mudarabah

• Investment is the exclusive responsibility of Rabb-ul-mal• Mudarib will carry out the management activities while Rabb-ul-mal has no

right to take part in management.• Loss, if any, is suffered by the Rabb-ul-mal only, as Mudarib does not

invest anything. Efforts and work of Mudarib will be lost and will not get any fruits for him.

• Mudarib should work with due diligence which is required normally for the business of that type while for negligence and dishonesty he is liable for the loss.

• The liability of Rabb-ul-mal is limited to his investment.• Mudarib has to bear the debt incurred without the consent of Rabb-ul-mal.• Rabb-ul-mal is the sole owner of goods purchased by Mudarib.• Mudarib is entitled to his share of profit only, if, he could able to generate

profits.• Mudarib or Rab-ul-maal CANNOT claim any Salary, Fee or Remuneration

• Mudarib cannot claim any share in the assets or in its increased value if any.

• Restricted Mudarabah: if Rabb-ul-mal specifies any particular business for Mudarib, he shall invest the money in that particular business only.

• Unrestricted Mudarabah: when Rabb-ul-mal left the option open for Mudarib to undertake whatever business he wishes.

• The Mudarib is authorised to do anything which is normally done in the course of business. However, if he wants to do any thing which is beyond the scope of normal routine of the business, he cannot do without the express permission of Rabb-ul-mal

• The profit Ratio can be anything mutually agreed.• The contract of Mudarabah can be terminated at any time by

either of the parties by giving notice to other party.

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