1. Islamic Worldview and Its Implications on Banking and Finance

2. بِسْمِ اللَّـهِ الرَّحْمَـٰنِ الرَّحِيمِ
وَلْتَكُن مِّنكُمْ أُمَّةٌ يَدْعُونَ إِلَى الْخَيْرِ وَيَأْمُرُونَ بِالْمَعْرُوفِ وَيَنْهَوْنَ
سورة آل عمران- آیه 104. عَنِ الْمُنكَرِ ۚ وَأُولَـٰئِكَ هُمُ الْمُفْلِحُونَ

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. (Qura’an, Al Imran. 3:104).

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 (ma’ruf) and forbidding what is wrong (munkar) (Qura’an, Al Imran. 3:104).

5. FOUNDATION OF ISLAMIC ECONOMICS
What is Worldview?
Vision of reality and truth that appears before one’s 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 can’t Muslims rely on conventional worldview? No human endeavor is value free
FOUNDATION OF ISLAMIC ECONOMICS

6. FOUNDATION OF ISLAMIC ECONOMICS
Islamic Worldview
Centered on principle of Tawhid or unity of God
Al-Attas (1978) : “Ru’yat al-Islam Lilwujud” or “The View of Islam About Existence”:
-Man, his aim in life, the universe, way he interacts are all inter-relate
-Man’s 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
FOUNDATION OF ISLAMIC ECONOMICS

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 Qur’an
Comes from root word “dana” mentioned 92 times in Qur’an
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. FOUNDATION OF ISLAMIC ECONOMICS
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 shari’ah
FOUNDATION OF ISLAMIC ECONOMICS

10. ISLAM IS AD-DIN
Islam as a complete religion, guides a person’s 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-Shari’ah
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)
یا أَيُّهَا الَّذِينَ آمَنُوا أَطِيعُوا اللَّـهَ وَأَطِيعُوا الرَّسُولَ وَأُولِي الْأَمْرِ مِنكُمْ ۖ فَإِن تَنَازَعْتُمْ فِي شَيْءٍ فَرُدُّوهُ إِلَى اللَّـهِ وَالرَّسُولِ إِن كُنتُمْ تُؤْمِنُونَ بِاللَّـهِ وَالْيَوْمِ الْآخِرِ ۚ ذَٰلِكَ خَيْرٌ وَأَحْسَنُ تَأْوِيلًا . (سورة النساء-آیه 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. SHARI’AH
AND
ISLAMIC FINANCE

19. Islam & Al-Shari’ah
Shari’ah is guidance in all aspects of Muslim’s 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 God’s 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.

25. INTERPRETATION OF SHARI’AH 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 man’s 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 Shari’ah 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 shari’ah boundaries to seek Allah’s 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 SYSTEMWV
SUB-ST
Political
Economic
Social
Phil
Op-P
Goals
Tawhid
Ibadah
Khilafah
Tazkiyah
‘Adl/Ihsan
Takaful
Resp’ty
Accnt’ty
S-E Justice
Econ Dev
Efficiency
Stability

33. FOUNDATION OF ISLAMIC ECONOMICS4.
ISLAMIC ECONOMICS
AND
FINANCE
FOUNDATION OF ISLAMIC ECONOMICS

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 / shari’ah boundaries of economics and finance must be determined
Shari’ah 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
FOUNDATION OF ISLAMIC ECONOMICS

36. FOUNDATION OF 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 man’s economic problems based on the values, norms, laws and institutions found in and derived from the sources of Islam
FOUNDATION OF ISLAMIC ECONOMICS

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 Allah’s command)

38. FOUNDATION OF 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 shari’ah
Shari’ah constraints to be observed in making choices
Resources are unlimited
FOUNDATION OF ISLAMIC ECONOMICS

39. FOUNDATION OF ISLAMIC ECONOMICS
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 shari’ah
Observe basic prohibitions in business transaction: riba, gharar and maysir
Products involve must be halal
Profit must come from trading transactions
FOUNDATION OF ISLAMIC ECONOMICS

40. Maqasid al-Shari’ah Objectives and rationale of Shari’ah
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 shari’ah texts clearly state reasoning behind certain shari’ah 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. A Comparative Analysis
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 customer’s 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 Bank’s discretion.
7. Very often it results in the bank’s 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. Haron and Azmi (2009) Haneef (1997) Zaharuddin.net
References
Haron and Azmi (2009)
Haneef (1997)
Zaharuddin.net