lecture 02 islamic financial system

7/27/2019 Lecture 02 Islamic Financial System

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The Concept of Money

Money is essential for the activity of IFIs.

Definitions of money:

Based on fiqh, money is synonym ofnuqud, which

is defined as a medium of exchange ortransaction as well as a measurement of the valueof goods or services.

Its defined as everything that performs

the functions of money included as amedium of exchange, a mode of payment, a valuestore and as a unit of measurement.


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The Forms of Money

Commodity money refers to moneywhose value comes from a commodity.Examples of commodities that have been usedas money include gold, silver, large stones.This is basically how it worked: twoindividuals each possessing a commodity theother wanted or needed would enter into anagreement to trade their goods.

Fiat money, any money declared by agovernment. Most of the world's papermoney is fiat money. Because fiat money

is not linked to physical reserves.
http://www.investordictionary.com/definition/moneyhttp://www.investordictionary.com/definition/valuehttp://www.investordictionary.com/definition/commodityhttp://www.investordictionary.com/definition/commodityhttp://www.investordictionary.com/definition/valuehttp://www.investordictionary.com/definition/money


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Commodity Money

Gold and silver

Applied in the Islamic State period

In the next development, modified as agold reserve standard

paper money supported by gold andsilver

printed only if gold/silver is provided

gold standard


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Fiat Money

Paper money

Not supported by commodity

Only supported by government policy Managed money standard

Government responsible for the

maintaining of the paper value The paper its self has no value actually


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Forms of Fiat Money

Cash

Non cash


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Financial System

Subsystem of economic system;

Allows the transfer of money between

savers and borrowers; Includes a set of complex and closely

interconnected financial institutions,markets, instruments, services,

practices, and transactions.


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The Importance of Financial System

Crucial to the allocation of resources in amodern economy;

Channels household savings to thecorporate sector and allocate investment

funds among firms; Allows smoothing of consumption by

households (Family Unit) and expendituresby firms;

Enables households and firms to share risks

Has impact on saving, investment,technology innovation, and economicdevelopment;

Controlling and monitoring managers of

firms.


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Islamic Financial System

A set of rules and laws,collectively referred to asshariah,governing economic, social,

political, and cultural aspects ofIslamic societies (Iqbal, 1997);

Includes of: Islamic Financial Instruments

Islamic Financial Institutions

Islamic Financial Rules and Regulations

Islamic Financial Control andSupervision


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Basic Principles of Islamic FinancialSystem

Syari principles Based on Al Quran and As

Sunnah

Tabii principles Based on the ijtihadand ijma Related to modern issues such as

risk management, cash flow

management, technical analysis,capital management and so forth.


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Syari principles

Prohibition of interest (riba) Prohibition of speculative behavior (maisir) Prohibition of uncertainty (gharar) Risk sharing between suppliers of fund (investor)

and entrepreneur Money as potential capital

Money becomes actual capital only when it joinshands with other resources to undertake aproductive activity

Purity of contracts Disclosure of information and maintenance the

responsibility contract is duty To reduce information unequal and moral hazard

Shariah-approved activities


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Riba

Usury Excess, increase or addition Types:

Riba Al Buyu Like Barter System Riba Al qard Like Banks Loans Riba Al Jahiliyah Riba Al Fadhl Riba Al Nasa Riba Al Nasia


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Riba Al Buyu

Usury of trade

Referring to instances where the

usury is achieved through atrading transaction as opposedto a loan transaction


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Riba Al Qard

Usury on a loan

Analogous to the charging of

interest on the loan of an asset Any excess for precondition to the

borrower


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Riba Al Jahiliyah

The kind of usury practisedduring the pre-Islamic timesamong the Arabs

Involving a delay in payment of adebt in return for an increase inits amount

Debt payment above the actualamount of the debt because thedebtor fails to pay on time


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Riba Al Fadhl

Usury of surplus

The usury is achieved through anunequal exchange of quality or

quantity An exchange of unequal qualities or

quantities of the same commoditysimultaneously

The exchange of commodities at thedifferent quality and or quantity


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Riba Nasa

Usury of postponement

A form of usury in which an exchangeof two equal qualities or quantities

occurs, but where the exchange is notcompleted on the spot (i.e. hand tohand).

There is thus a postponement in the

completion of the exchange.

The term is sometimes usedinterchangeably with 'riba al-nasia'


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Riba Nasia

Usury of waiting Used variously by scholars:

some regarding it as being that usurywhich is achieved solely by effecting a

delay in the exchange of two countervaluesin a transaction

others regarding it as a combination of ribaal-fadl and riba al-nasa thus giving rise toboth a delay and an unequal exchange ofquality or quality

Differences/excess/additional to theexchanged commodity because of thedifferent time of delivery/payment


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The Implication of Riba to theSale and Purchase Transaction

Sale and purchase of similar ribawi commoditiesshould be performed at the same quantity andquality and must be hand to hand.

Sale and purchase of different ribawi

commodities at the different quantity andquality is permissible but it should be performedon the spot.

The exchange of ribawi commodities to nonribawi commodities may not be at the samequantitiy as well as quality. The commoditiesshould be transferred at the same time of aqad.

The exchange ofnon ribawi commodities at thedifferent quality and quantity is permissible butmust be delivered on the spot.


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Characteristics of Islamic FinancialSystem

Chapra (2000) To achieve the economic welfare

through utilizing resources efficiently; Without producing unlawful product

Without great gap between the poor andthe rich (Equitable distribution)

Without harming current/next generationas well as environment

Stability of currency value Mobilization of saving investment to

encourage productive activity To provide effective financial services.

lecture 02 islamic financial system

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