Islam: Complete Code of Life
This day, I have perfected your Deen for you, completed My Favour upon you, and have chosen for you Islam as your Deen. [5:3] Deen : Complete code of Life.
  • Financial System is one of them.
  • It has personal life code, dress code, social code, international code, political code, code of conduct i.e. codes in all phases of life.
  • Islam have the only humane manual for mankind in the world.
Deen or Islam

To Understand Deen or Islam, needed understanding of the followings:

1. Allah
  • The Ever Living, self subsisting, Eternal. [2:255]
  • When He decrees a thing or a matter, He only says to it: ―Be!‖ –and it is. [2:117, 3:47 & 19:35]
  • [Fainnama Yakululahu Kun Fa ya kuun]
  • There is none comparable unto Him. [112:4]
2. The Holy Qur'an.
  • The month of Ramadan in which was revealed the Qur’an, a guidance and the criterion [between right and wrong] [ 2:185]
  • This is the Book [the Qur’an], whereof there is no doubt. [2:2]
3. The Holy Prophet [sm]
Allah [swt] chose His prophet to guide mankind. He says,
  • Muhammad [sm] is the Messenger of Allah [48:29]
  • He it is Who has sent His Messenger [Muhammad (sm)] with guidance and the Deen of truth to make it victorious over all other Deen even though the Mushrikun hate it. [61:9]



“If any religion has the chance of ruling over England nay Europe, within the next hundred years, it can only be Islam. - George Bernard Shaw,The Nobel Prize Winner in Literature 1925 [Islam: What others say, pp221- By Syed Ashraf Ali]”



M K Gandhi said,
“Muhammad was a great Prophet. He was brave and feared no man but God alone. He was never found to say one thing and do another. He acted as he felt.” [Islam: what others say pp 96]
M K Gandhi said,
“I have read sir Abdullah Suhrawardy’s collections of the sayings of the Prophet with much interest and profit. They are among the treasures of mankind, not merely Muslims.” [Islam: what others say pp 96]
The Holy Prophet [sm]
“My choice of Muhammad to lead the list of the world’s most influential persons may surprise some readers and may be questioned by others, but he was the only man in history who was supremely successful on both the religious and secular levels”.
Michael H. Hart, The 100, A Ranking of The Most Influential Persons In History, pp-33.
Islamic activity consists of 
1. Imaneeyat  -  Faith.
2. Ibadah  -  Salat, Zakat, Fasting, Hajj.
3. Akhlaq  -  Character and Conduct between two   human beings.
4. Masharat  -  Environment, Building of society,      equality and justice for all.
5. Muamelaat  -  Dealings, more particularly financial   dealings and business ethics.
 These are all called “Deen”.

Understanding System
  • All systems have- inputs, process and outputs or feedback mechanisms.
  • System is a set of detailed methods, procedures, and routines established or formulated to carry out a specific activity, perform a duty, or solve a problem.
  • System is an organized, purposeful structure regarded as a whole and consisting of interrelated and interdependent elements ( components, entities, factors, members, parts etc.) These elements continually influence one another (directly or indirectly) to maintain their activity and the existence of the system, in order to achieve the goal of the system.
  • The financial system is the processes and procedures used by an organization’s management to exercise financial control and accountability.
  • These measures include recording, verification and timely reporting of transactions that affect revenues, expenditures, assets and liabilities.
  • A system that aims at establishing and providing a regular, smooth, efficient and cost effective linkage between depositors and investors is known as financial system.
  • A well developed financial system allows for the transfer of resources from depositors to investors and thus plays a crucial role in the functioning of the economy. So Financial system means a system used to convert savings into productive investment.
A financial system can be focused from the  global, regional or firm point of view.

The firm's financial system is the set of implemented procedures that track the financial activities of the company. In other words, Within a firm, the financial system encompasses all aspects of finances. For example, it would include accounting measures, revenue and expense schedules, wages and balance sheet verification.

On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. In other words, Regional financial systems would include banks and other financial institutions, financial markets, financial services.

The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy. In other words, In a global view, financial systems would include the International Monetary Fund, Central Banks, World Bank and major banks that practice overseas lending.

Importance of a financial System
Financial system in today’s world is perhaps the most important system among all the systems, as all the economics of the world have become interlinked it has become a very complex system.

The financial system in it includes all, whether it’s banks or stock market or financial institutions.

A financial system plays a significant role in an economy with a set of complex and closely connected institutions, markets instruments and services.
1. Financial system provides an ideal linkage between depositors and investors, thus encouraging both savings and investments.
2. It facilitates expansion of financial markets over space and time.
3. It promotes efficient allocation of financial resources for socially desirable and economically productive purposes.
4. It influences both quality and the pace [speed in running] of the economic development.

Functions of Financial System
1. Channelization the savings of individuals : The first and foremost function which financial system perform is the channelization the savings of individuals and making it available for various borrowers which are the companies which take loan in order to increase the production of goods and services, which in turn increases the overall growth of the economy.
2. Payment could be done everywhere : It is with the help of financial system that one can make payment whenever and wherever he or she wants with the help of checks, credit card and debit card. In the absence of financial system one has to take cash wherever he or she goes which would have been impossible.
3. Risk Management : Financial system also provide an individual various options when it comes to protecting against various risks.
4. Liquidating any time: Financial system also makes sure that one can liquidate his or her savings whenever he or she wants it and therefore individuals can have both the things, which involve return on investments as well as comfort that they can liquidate their investments whenever they want.
5. Making smooth all transactions : All transactions whether they involve individual buying house or a big company coming with an initial public offer they are effected smoothly because of financial system.

Structure of the financial system
The financial system is complex in structure and function. Through the world, it is created in purpose to facilitate the flow of funds from savers to investors i.e. SSU’s to SDU’s. It includes many different types of institutions: Financial intermediaries (banks, insurance companies etc.), Financial Instruments (deposit and investment products, mutual funds etc.) and Financial markets (stock and bond markets).
  The main constituents of financial systems are :
01. Financial Institutions/Intermediaries:
    Financial Institutions are the modern names of financial intermediaries, because it mediates or stands between users and providers of Fund and helps transfer of funds from one to another. Financial Institutions are generally classified under two main heads : 01. Banks 02. Non-bank financial intermediaries. Bank includes Commercial Banks, Specialized Financial Institutions. Commercial Banks are : Nationalized and Private Commercial Banks [Local Or Foreign] Specialized Financial Institutions are : BKB, BSRS etc. Non-Bank Financial Institutions includes : Investment Intermediaries, Contractual Savings Institutions. Investment Intermediaries are : Investment Banks, Security Brokers, Mutual Funds. Contractual Savings Institutions are : Insurance Companies, Pension Funds etc.

02. Financial Instruments:
       Financial Instruments are two types.
                           01. Direct or Primary.
                           02. Indirect or Secondary.
        The instrument through which financial claims against real sector units could be raise is a primary instruments, because they are created by real sector units as ultimate borrowers for raising funds to finance their deficit spending. Bills, Bonds, Loans and advances, Shares, Debentures etc. The instrument through which financial claims against financial institutions or intermediaries could be raise because they themselves raise funds from the public is a secondary instruments; i.e. Share of Bank is a secondary instrument. Bank deposits, Life insurance policies, mutual fund certificates. Financial instruments can further be classified into Money Market Instruments and Capital Market Instruments.

03. Financial Markets.

       Flow of Funds Through Financial System
       Financial Markets Categories
       Primary market: is a financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency. This market is not well known to the public because the selling of securities to initial buyers often takes place behind closed doors.  An important financial institution that assists in the initial sale of securities in the primary market is the investment bank. It does this by underwriting securities: It guarantees a price for a corporation’s securities and then sells them to the public.
        Secodary market: is a financial market in which securities that have been previously issued can be resold.

     Money market: is a financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded. Shorter term securities have smaller fluctuations in prices than long-term securities, making them safer to invest. As a result, corporations and banks actively use the money market to earn interest on surplus working capital and to finance for shortage working capital. Money market instruments includes: Government Treasury bill, Commercial Paper, Bank Certification of Deposit etc.
        Capital market: is a financial market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded. Long term securities are often held by financial intermediaries such as insurance companies and pension funds, which have little uncertainty about the amount of funds they will have available in the future. Capital market instruments includes: Stock, Govt. Treasury bond, Corporate bond, Mortgage etc.

Islamic Financial System
A financial system that is based on Islamic Shariah, in which Riba is prohibited, implement a equity based profit sharing mechanism and doubtful transactions or Gharar, Stocks of companies dealing in unlawful activities, unethical or immoral transactions such as market manipulation, insider trading short selling etc. has zero tolerance, called IFS.


Understanding IFS

ü Nucleus of the System: However, describing the Islamic financial system simply as “interest-free” does not provide a true picture of the system as a whole. Undoubtedly, prohibiting the receipt and payment of interest is the nucleus of the system, but it is supported by other principles of Islamic doctrine advocating risk sharing, individuals’ rights and duties, property rights, and the sanctity of contracts.

ü  Covers All Financial Activity: Similarly, the Islamic financial system is not limited to banking but covers capital formation, capital markets, and all types of financial inter mediation.

ü  Globally Practiced: In fact, many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

ü  Rapidly Growing Sector: Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic world.

ü Not only for Muslims: Islamic finance is not restricted to Islamic countries, but is spreading wherever there is a sizable Muslim community.

ü Practiced & Tested: Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering [development of] trade and business activities with the development of credit.

Significance of Islamic Financial System

From Hazrat Jabir Ibn-e-Abdullah (RA):

The Prophet, peace be on him, cursed :

–        The receiver and the payer of interest,
–        The one who records it and
–        The witnesses to the transaction

•          And said: "They are all alike [in guilt]."

 (Muslim, Tirmidhi and Musnad Ahmad)
  • Prohibition of interest is not limited to Islam;
  • It is prohibited in Judaism and   Christianity also.
Exodus 22:25, Leviticus 25:35-36, Deuteronomy 23:20,Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezakhiel 18:8,13,17 & 22:12 
  •  Money The Life Blood : Money; the element of finance is life blood for any individual, firm or institutions; irrespective to regional or global.
  • Success In Both Life : Believers have to think of regarding the success of both worldly life and the life after death. As the Riba is directly prohibited by Allah [swa] and his messenger Rasulullah [saw].
  • Eliminating the poverty : Compulsory Charity, Voluntary Charity, Benevolent Loan, Sharing P&L etc. -  with all this humane options Islamic Financial System is the only system which only have the capacity to ensure the eliminating the poverty.

Significance of Islamic Financial System
Islam & Charity
“Zakat” the compulsory charity and a major financial activity is one of the five pillars of Islam.
It binds the community together and a effective financial tools for eliminating poverty.
 “Zakat” is the means of re-distribution of wealth.
2.5% of eligible assets [Nisab] – payable once a year.
To have a effective Islamic Financial System the compulsory charity must draw and distributed by the government. Which is now-a-days is left to individual believer.

The Basic Instruments In IFS
Basic instruments include –
  1. Cost-plus financing (Murabaha),
  2. Profit-sharing (Mudaraba),
  3. Leasing (Ijara),
  4. Partnership (Musharaka), and
  5. Forward sale (Bai’ Salam).
These instruments serve as the basic building blocks for developing a wide array of more complex financial instruments, suggesting that there is great potential for financial innovation and expansion in Islamic financial markets.

BASES OF PRINCIPLES OF AN
ISLAMIC FINANCIAL SYSTEM

ü  Shariah: The basic framework for an Islamic financial system is a set of rules and laws, collectively referred to as Shariah, governing economic, social, political and cultural aspects of believers societies.
ü  Shariah originates from the rules dictated by the Quran and its practices, and explanations rendered (more commonly known as Sunnah)    by the   Prophet Muhammad [saw]. Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the framework of the Quran and Sunnah.

Basic Principles of Islamic Financial System

The basic principles of an Islamic financial system can be summarized as follows:
  1. Prohibition of interest (riba’).  
  2. Money as “potential” capital.  
  3. Risk sharing.  
  4. Prohibition of speculative behaviour.  
  5. Sanctity of contracts.  
  6. Shari’ah approved activities.  
  7. Social justice.
The basic principles of an Islamic financial system can be explored as follows:

Prohibition of interest (riba’). Prohibition of riba – a term literally “an excess” and interpreted as “any  unjustifiable increase of capital whether in loans or sales”. 

Money as “potential” capital. Money is not a commodity, but a medium of exchange, a store value and a unit of measurement. Money represents purchasing power and cannot be utilised to increase the purchasing power without any productive activity. Islamic finance advocates the creation of wealth through trade and commerce. 

Risk sharing. Because interest is prohibited, suppliers of funds become investors, rather than creditors.

Prohibition of speculative behaviour. Islamic finance discourages hoarding and prohibits transactions featuring extreme uncertainties (gharar), and gambling (maysir).

Sanctity of contracts. Islamic finance upholds contractual obligations and the disclosure of information as a sacred duty. This feature is intended to reduce the risk of asymmetric information and moral hazard.

Shari’ah approved activities. Only those business activities that do not violate the rules of the Shari’ah qualify for investment. For example, any investment in a business dealing with alcohol or gambling is prohibited.

Social justice. Any transaction leading to injustice and exploitation is prohibited.

DIFFERENCES BETWEEN CFS & IFS
The conventional financial system is of two types.
  •  Socialistic financial system and
  • Capitalistic financial system
Both systems have been proved inefficient to establish economic balance in the society. 



Issues and challenges for IFS
A number of limitations will have to be addressed before any long-term strategy can be formulated:
 A uniform regulatory and legal framework.
  1. There is [that can claim to] no single, sizable, and organized financial center.
  2. The pace of innovation is slow.
  3. Western accounting procedures are not adequate.
  4. Absence of a universally accepted central religious authority.
  5. Differences in interpretation of Islamic principles by different schools of thought.

No comments:
Subscribe to: Posts (Atom)