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Islamic Worldview and Its Implications on Banking and Finance

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Title: Islamic Worldview and Its Implications on Banking and Finance


1
  • Islamic Worldview and Its Implications on Banking
    and Finance

2
  • ?????? ???????? ????????????? ??????????
  • ????????? ???????? ??????? ????????? ?????
    ????????? ????????????? ??????????????
    ????????????
  • ???? ?? ?????- ??? 104. ???? ?????????? ?
    ????????????? ???? ??????????????

3
The Foundation for Islamic Finance
  • And let there be arising from you a nation
    inviting to all that is good, enjoining what is
    right and forbidding what is wrong, and those
    will be the successful. (Quraan, Al Imran.
    3104).

4
Islamic Worldview and Islamic Finance
  • Islamic worldview has significant influence on
    all aspects of Muslims life (Islam is ad-deen)
  • Allah describes people who attain success as
    those who are inviting to all that is good
    (khayr), enjoining what is right (maruf) and
    forbidding what is wrong (munkar) (Quraan, Al
    Imran. 3104).

5
What is Worldview?
  • Vision of reality and truth that appears before
    ones mind eye, revealing what existence is all
    about
  • Governs way people interpret the world
  • Schumpeter (1954) Analytic effort is of
    necessity preceded by a pre-analytic cognitive
    act, called vision
  • Acikgene (1994) Nature of human mind perceives
    problem within a scheme of constructive unity
  • J. S. Mill (1836) Political economy, therefore,
    reasons from assumed premises
  • Why cant Muslims rely on conventional worldview?
    No human endeavor is value free

6
Islamic Worldview
  • Centered on principle of Tawhid or unity of God
  • Al-Attas (1978) Ruyat al-Islam Lilwujud or
    The View of Islam About Existence
  • -Man, his aim in life, the universe, way he
    interacts are all inter-relate
  • -Mans behavior governed by rules of Quran and
    Sunnah
  • -Pursue material gain with a view that
    existence in this world and hereafter
  • -Emphasize the importance of hereafter

7
ISLAMIC VS WESTERN WORLDVIEWS
  • Islamic worldview based on Islam and its
    sources of knowledge
  • A complete worldview at time of revelation
  • -fundamental concepts in Quran are not open for
    changes in meaning
  • Based on revelation flexible but not replaceable
  • Does Islamic worldview different from
    conventional worldview?
  • Since factors affecting worldviews differ, it is
    natural to also have different worldviews
  • Different theories to explain human behaviour
  • Western scientific worldview, purely relies on
    human thinking/logic

8
ISLAM IS AD-DIN
  • Meaning of Islam
  • Al-Silm means to surrender, to submit Salam
    means peace
  • Achieve peace by submitting/surrendering oneself
    to Allah
  • Term din used to denote religion in Quran
  • Comes from root word dana mentioned 92 times
    in Quran
  • Meaning debt, obedience, judgment / way /
    custom inter-connected to explain religion
  • Islam is a way of life
  • Not limited to rituals/faith
  • Detailed code of conduct
  • Willing and conscious submission to Allah in
    all aspects of life
  • Economics and its related activities are
    potentially Ibadah or acts of worship

9
ISLAM IS AD-DIN
  • Al-Attas (1978) on relationship between din,
    Islamic worldview and implications on ethics and
    morality
  • Indebtedness, submissiveness, judicious power,
    natural inclination
  • Man is indebted to God for his existence
  • Man submits himself willingly and consciously to
    God
  • Man given the judicious power (aql) that enables
    him to make decisions
  • Man born with a natural inclination (fitrah) to
    submit to God remembers covenant
  • Based on revealed knowledge, man uses his
    intellect to organize life on earth Intention
    and action according to shariah

10
ISLAM IS AD-DIN
  • Islam as a complete religion, guides a persons
    life in all aspect, moral, social, ethical,
    economics and political
  • God entrusted man with wealth as vicegerent
    (khalifah) on this earth
  • As a khalifiah, man acts as a trustee to God in
    carrying out his duties fairly towards human
    being and society following the means
    permissible by the Shariah
  • God has also entrusted man as a custodian of
    wealth. In order for him to carry out his duties
    and obligations materially, he has been given the
    right of possession

11
Al-Islam
Al-Shariah
Al-Aqidah (Belief)
Al-Akhlaq (Behaviour)
Al-Fiqh (Jurisprudence)
12
  • 2.
  • Islamic Economic Methodology

13
Developing Islamic Economics
  • Islamic economic and financial disciplines are
    being developed based on the Islamic economic
    methodology
  • -Derive accepted criteria from Islamic worldview
  • -Judge economic theory from Islamic perspective
  • -Conduct economic enquiries within Islamic
    framework
  • -Reduce/eliminate reliance on western methodology
  • Methodology discusses
  • -Process of building models
  • -Developing theories validate existing theory or
    build a new one
  • -Testing hypothesis
  • -Establishing and using criteria to evaluate our
    process
  • How do we know that our models, theories and
    hypotheses are correct and on what authority do
    we say so

14
CHANNELS OF ACQUIRING KNOWLEDGE
  • Primary sources Divine sources
  • Revelation the Holy Quran
  • Sunnah of the Prophet (saw)
  • ?? ???????? ????????? ??????? ????????? ????????
    ??????????? ?????????? ???????? ????????? ???????
    ? ????? ????????????? ??? ?????? ?????????? ?????
    ???????? ???????????? ??? ??????? ???????????
    ?????????? ??????????? ???????? ? ??????? ??????
    ?????????? ?????????? . (???? ??????-??? 59)
  • O believers, obey Allah and obey the Prophet
    and those of you who are in authority. Then if
    you have a dispute concerning any matter, refer
    it to Allah and the Prophet if you are the
    believers in Allah and the Last Day

15
  • Secondary sources Human sources
  • Ijtihad interpretation/opinion of scholars can
    be reviewed ijma consensus
  • Sound senses perception through five senses
    observation
  • Sound reason and intuition intellect/ aql,
    sound reasoning connected to heart/ qalb
    /intuition or spiritual heart and intuition

16
ISLAMIC ECONOMIC METHODOLOGY
  • The Quran as guidance in the process of
    developing Islamic economics and finance
  • This entails a process of deriving answers based
    on the sources of Islam

Islamic Worldview
Islamic Economic Vision
Islamic Economic Theory
17
ISLAMIC ECONOMIC METHODOLOGY
Islamic Worldview
Islamic Economic Vision
Islamic Economic Theory
  • Examples
  • Based on the Islamic worldview which emphasizes
    the concept of brotherhood in Islam ? economic
    equitability ? just society? distributive justice
    ?how zakat can be used in macroeconomic
    management
  • Islamic banking and finance?

18
SHARIAH AND ISLAMIC FINANCE
19
Islam Al-Shariah
  • Shariah is guidance in all aspects of Muslims
    life
  • Private and public
  • Individual and social
  • Spiritual and material
  • Political, economics and finance

20
Shariah and Islamic Finance
  • Two concepts have important influence on
  •  
  • Tawhidic paradigm
  • Concept of vicegerency (Khalifah)

21
1. Tawhidic Paradigm
  • Islam means submitting to the Will of the One and
    Only God, Allah concept of tawhid - belief in
    the oneness of God
  • Thus, every discussion of economics, business,
    ethics and morality is Islam must be of
    necessity, precede from the tawhidic dimensions
  • Tawhid provides the answer to the question on
    purpose of human existence on earth. Indeed, it
    is within this tawhidic paradigm that the vision,
    objectives and fundamental concept of Islam is
    rooted on
  • It presents a picture of the kind of people and
    society Islam aims to build
  • A manifestation of God-consciousness (taqwa)

22
1. Tawhidic Paradigm
23
2. Concept of Vicegerency
  • Human beings have been created by Allah as His
    servant and vicegerents, trustees and
    representatives on earth
  • Thus, objective of human life is to manage and
    develop the world in accordance with Gods plan,
    as enshrined by the Shariah, so as to gain
    goodness in this world and in the Hereafter
  • Harmonizes and integrates material well-being
    with moral-spiritual values
  • Man directly responsible and accountable to Allah
    for all his deeds.

24
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25
INTERPRETATION OF SHARIAH ON ISLAMIC FINANCE
  • IBF includes justice, fairness and equal
    distribution of wealth which can be best achieved
    by means of profit and loss sharing rather than
    debt financing
  • Islamic financial principles share risk and
    rewards in wealth creation by means of profit and
    loss sharing
  • It promotes entrepreneurship and creativity in
    the economic cycle whereby individuals put their
    effort to generate economic activity
  • Differs from modern capitalism where profit
    maximization is the sole motive and bank is
    broadly content with earning interest for
    financial gain regardless of real economic
    activity and social benefits

26
  • 3.
  • Major Attributes of Islamic Economics and Islamic
    Economic System

27
Basis for IES
  • In contrast to conventional economics, the
    Islamic approach to economics is holistic, offers
    integralistic spiritual view, which is based on
    the teachings of the Quran and Sunnah, providing
    a better alternative philosophical framework for
    mans interaction with nature and his fellow men.
  • Many scholars have defined the activities of
    Islamic economics as follow
  • Islamic economics is the knowledge of the
    application of the injunctions and rules of the
    Shariah regarding acquisition and disposal of
    available resources for providing satisfaction to
    the individuals in order to enable them
    individually and collectively to perform their
    obligations to Allah and the society.

28
1. PHILOSOPHICAL FOUNDATIONS
  • CONVENTIONAL Economic System
  • Derived from theories developed by western
    scholars
  • Specific philosophical foundations
  • Concept of scarcity nature is niggardly and
    human wants unlimited
  • Self-interest priority to individual goals
  • Absolute freedom survival of the fittest
  • Materialism and utilitarianism
  • Positivism (science) versus norms (religion)

29
1. PHILOSOPHICAL FOUNDATIONS
  • ISLAMIC Economic System
  • Derived from Quran and Sunnah
  • Specific philosophical foundations
  • Tawhid Accepting Allah as the only sovereign
    power
  • Ibadah Any act must be within shariah
    boundaries to seek Allahs pleasure
  • Khilafah Vicegerency, man recognizes his duty as
    servant of God
  • Tazkiyyah Process of economic activity must be
    seen as a process that purifies soul

30
2. OPERATIONAL PRINCIPLES
  • ISLAMIC ES
  • Philosophical foundations to a set of operating
    principles
  • Specific operational principles
  • Adl/Ihsan adl - giving what is due, Ihsan-giving
    more than what is due
  • Takaful/Taawun cooperation, brotherhood
  • Responsibility/accountability individual is
    responsible to society, but ultimately to Allah
  • Moderation in consumption, production,
    distribution

31
3. GOALS
  • ISLAMIC ES
  • Value loaded, directed towards achieving maqasid
    al-shariah
  • Promoting virtues and preventing harm
  • To achieve public welfare (maslahah)
  • Socio-economic justice
  • Economic development

32
ISLAMIC ECONOMIC SYSTEM
WV
SUB-ST
Political
Economic
Social
Phil
Op-P
Goals
  • Tawhid
  • Ibadah
  • Khilafah
  • Tazkiyah
  • Adl/Ihsan
  • Takaful
  • Respty
  • Accntty
  • S-E Justice
  • Econ Dev
  • Efficiency
  • Stability

33
4. ISLAMIC ECONOMICS AND FINANCE
34
ISLAMIC ECONOMICS
  • From definition of Islamic economics
  • Find values/rules directly in the sources
  • If not directly available, then have to derive
    the meaning
  • Most economic applications will have to be
    derived
  • Need to understand Islamic worldview especially
    Islamic vision of economics
  • Islamic / shariah boundaries of economics and
    finance must be determined
  • Shariah must be interpreted and applied

35
ECONOMICS AND ISLAMIC ECONOMICS
  • Economics study of human behavior in relation
    to the use of scarce resource to fulfill
    unlimited wants
  • Economics is a field that deals with management
    of scarce resources (production, consumption and
    distribution)
  • Due to scarcity, we have to make choices
  • Man interacts with other human beings and
    nature to make these choices

36
ISLAMIC ECONOMICS
  • Part of din
  • Economic activities based on the Islamic
    worldview
  • Make choices and decisions according to Islamic
    description, analysis, prescription
  • Production, consumption and distribution
    activities
  • Approach to and process of interpreting and
    solving mans economic problems based on the
    values, norms, laws and institutions found in and
    derived from the sources of Islam

37
Islamic Economics
  • Islam provides unique prescription for economic
    problems/issues
  • Definition The social science which studies the
    economic problems of people while incorporating
    the values of Islam.
  • Main objective To achieve falah (Success,
    happiness well-being by conforming to Allahs
    command)

38
ISLAMIC ECONOMICS
  • Major economic issues
  • Conventional economics
  • Unlimited wants
  • Limited resources
  • Achieving the highest utility
  • Islamic economics
  • Economic pursuit must be derived from Islamic
    worldview
  • Economic goals do not contradict the shariah
  • Shariah constraints to be observed in making
    choices
  • Resources are unlimited

39
ISLAMIC FINANCE
  • To finance economic activity in an Islamic
    framework
  • Must have institutions using instrument
    according to rules and regulations which are all
    bound by the shariah
  • Observe basic prohibitions in business
    transaction riba, gharar and maysir
  • Products involve must be halal
  • Profit must come from trading transactions

40
Maqasid al-Shariah
  • Objectives and rationale of Shariah
  • Aims to protect all aspects and segments of life
  • Faith (ad-din), human self (nafs), intellect
    (aql), posterity/descendents/generations (nasl)
    and wealth (mal)
  • Many shariah texts clearly state reasoning
    behind certain shariah rulings
  • Preserve public interest (maslahah)
  • Implications to IBF
  • Purely financial goals (profit, growth, market
    share) are insufficient
  • Profit-sharing vs fixed-return techniques
  • Need to achieve the objectives of Islamic
    economics incorporate spiritual well-being
  • distributive justice
  • cooperation
  • equitable access to economic resources

41
Islamic Worldview and Islamic Finance
  • In the overall context of Islamic worldview, IBF
    is established to
  • Requires financial activities which are
    consistent within shariah guidelines
  • follow ethical principles and aim to eradicate
    all kinds zulm (injustice) which are related to
    business activities and financial dealings
  • contribute significantly to the accomplishment of
    the socio-economic goals of Islam

42
Implications on IF
  • The goals of the Maqasid al Shariah entail
    intense commitment of every individuals and
    organizations to justice, brotherhood and social
    wellbeing
  • This will inevitably lead to a society whereby
    every member will cooperate with each other and
    achieve the success in life for ultimate
    happiness
  • In the context of Islamic finance, this means the
    products offer by financial institutions should
    reflect ethical values, fairness and justice
    (Ahmad, 2009)


43
Implications on IF
  • The implications on Maqasid al Shariah in IF can
    be measured based on the extent to which the
    goals in promoting justice and fairness to
    individuals and society well being can being
    achieved.
  •  
  • Have religious principles in the Quran and Sunnah
    of avoiding riba, ghahrar and maysir be observed
    in product development and transactions between
    the customers and bank?
  •  Has individual need been met fairly met? Is
    interest still being used in pricing the product?
  •  Has true knowledge (intellect ) being used to
    benefit human kind e.g. is the product being
    developed brings benefit to customers or banks?
  •  What is the long term effect of developing the
    product? Does it benefit individual or further
    burden them?
  •  How is wealth being shared between the bank and
    customers? Is profit sharing being practiced or
    it is still based on time value of money?


44
Important Caveat
  • Conventional knowledge should not be completely
    rejected
  • Common grounds or areas of conventional knowledge
    which are acceptable to Islam
  • Some general concepts can be adopted and amended
  • Economic growth
  • Efficiency
  • Productivity

45
  • 4.
  • Objectives of Banking and Finance Conventional
    versus Islamic Perspectives

46
Banking and Finance A Comparative Analysis
  • Objectives of banking and finance from
    conventional perspectives vs Islamic perspectives
  • -Motivations to save and borrow
  • -Bank-customer relationship
  • -Overall objectives

47
Conventional Banks Islamic Banks
1. The functions and operating modes of conventional banks are based on fully manmade principles. 1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.
2. The investor is assured of a predetermined rate of interest. 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
3. It aims at maximizing profit without any restriction. 3. It also aims at maximizing profit but subject to Shariah restrictions.
4. It does not deal with Zakat. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.
5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks. 5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customers business very well.
48
Conventional Banks Islamic Banks
6. It can charge additional money (penalty and compounded interest) in case of defaulters. 6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are given for early settlement at the Banks discretion.
7. Very often it results in the banks own interest becoming prominent. It makes no effort to ensure growth with equity. 7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.
8. For interest-based commercial banks, borrowing from the money market is relatively easier. 8. For the Islamic banks, it must be based on a Shariah approved underlying transaction.
9. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. 9. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.
49
Conventional Banks Islamic Banks
10. The conventional banks give greater emphasis on credit-worthiness of the clients. 10. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects (prospects of growth of business)
11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. 11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller.
12. A conventional bank has to guarantee all its deposits. 12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position.
50
References
  • Haron and Azmi (2009)
  • Haneef (1997)
  • Zaharuddin.net
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