Islamic Economic Principles IBM 11013 Introduction to Islamic Economics Lecturer in charge RA.Sarjoon 17.04.2011

Religion of Islam Islam: submission to the will of God Emerged 1400 years ago in Arabia Within 100 years, it expended to Persia, Fertile Crescent, India, North Africa, and southern Spain

Prophet Mohammed He traveled across Arabia and Syria, learning about trade and religion He married one of the richest women of his tribe and managed her business

Islamic Economic Principles Economic System: Capitalism: Private ownership and profit-making motive from trade Socialism: State control of resources and income redistribution Altruism: Voluntary redistribution of income & wealth through charity contributions

Islamic Economic Principles Property Rights: God has created the earth for people to use Man can use the land to produce food Labor must be rewarded for the value of his work

Religion of Islam Profit Motive: Business and trade are encouraged Businessman should use profits to build an affluent life and to help the poor & needy

Islamic Economic Principles Taxation: Zakat: A generalized wealth tax Ushr: A property tax depending of the quality of land Kharaj: An income tax on revenues from land Jizyah: A protection tax payable by non-Muslims Note: only Zakat is Quranic

Islamic Economic Principles Family Law: brides are entitled to dowry with full property rights. They receive Deferred Dowry: Monetary obligation of groom to bride in case of divorce Prompt Dowry: Payment from the groom to bride family to finalize the marriage agreement Gifts from parents & others to the bride for starting a family

Islamic Economic Principles Inheritance Law: One could transfer up to 1/3 of his/her property if desired Only immediate family members could bequeath property Government takes the property in case of no legal inheritors

Islamic Economic Principles Inheritance Law: The inheritors must pay property taxes Both male & female can inherit property The inheritance share of a female is ½ of the share of a male with similar rank Women have full property rights over their bequest, but men must provide for family members

Islamic Economic Principles Example of Inheritance Distribution: one widow, one son, and one daughter Share of widow = 1/8 or 12.5% Share of son = 7/8 * 2/3 = 7/12 or 58.3% Share of daughter = 7/8 * 1/3 = 7/24 or 29.2%

Islamic Economic Principles The taking of interest (riba) is sinful: Exploitation of borrower by lender because money is not earned from labor Increasing concentration of money in the hands of wealthy money lenders Interest is earned from a riskless venture as borrower loses collateral in case of loan default

Islamic Economic Principles Islamic banking system: Depositors share profit/loss of the bank Bank provides interest-free loans, but adds a % service charge

Islamic Economic Principles Islamic banking system: Bank buys equipment for a business and adds a % mark-up to the price. After a certain time period, business has the option to buy the equipment from the bank Bank and business enter a joint investment venture and share the profit/loss

Islamic Economic Principles Economic Development Funds: Oil-rich countries (e.g., Saudi Arabia & UAE) provide grants and interest-free loans to finance developmental projects and plans in Third World countries