MODULE 1 ; ISLAMIC ECONOMIC SYSTEM

LESSON 4 ; THE BASIC PROHIBITIONS

EXPLAIN WHY RIBA AND GHARAR IS PROHIBITED IN ISLAMIC ECONOMIC SYSTEM , GIVING AND EXAMPLE .
Technically RIBA includes all forms of income which is not earned by an individual { un earned income } it is not restricted to usury .
Islam has categorically prohibited unearned income , for the sake of convenience we can only site the source of prohibition {QURAN 2:278-279}.
Some scholars have gone on to distinguish between interest on load { RIBA AL NASIAH } and interest that is over and above {excessively } the load paid in kind { RIBA AL FADL} .
The first type of RIBA is fixed in advance for waiting. SHARIAH wishes to extinguish all forms of exploitation , those with financial capital should not use their financial muscle to exploit the rest .
Moreover SHARIAH wishes to eliminate all forms of unjust exchanges that may result in business transactions .
In making trade permissible and making interest illegal Islam has put it clear that the two are different . the principle source of difference is the nature of profit gained from charge interest is different from the one gained from trading .
The person in debt can not extinguish the burden unless he pays off the entire loan , as long as the loan or part of it still remains , the cumulative effect is to add on the interest charge , which in turn keeps the person who is already in difficulties , into more financial troubles.
The main example is the plight affecting many developing countries at the moment . Not only that they have to repay the loans they took but also the interest bit which is cumulative in nature .
In truth these countries can not pay these debts despite concerted efforts.
There is an issue of collateral , which has to be offered before the loan if given , someone who is already in financial difficulties is required to offer collateral , most of the time they can not offer that said collateral , hence those who have the means will be the ones able to borrow more and have access to sources of capital , it is this imbalance in economic opportunities and provision of these opportunities that Islam stands against .

Fundamentally the lender stand RISK free , he lend out the money and he is sure of his return whatever happens to the entrepreneur .
Entrepreneur bears the risk and undertakes the business but he is also burdened by the likelihood of business failure that is likely to damage him altogether.
Financial institution that does not undertake any risk apart from lending out the money stands to gain a guaranteed sum .

There has been continuing debt affecting developing countries , this has led them into incurring further debts or over using their resources in order to extinguish their debts. Leading to un healthy economic situation to them and the rest of the world .
There is the issue of interest rate volatility that affects financial stability in investment market affect long term vision of entrepreneurs .

THE CONCEPT OF GHARAR

The Arabic word GHARAR is broad that literally means deceit, risk , uncertainty that might lead to destruction or loss. GHARAR in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it.

For example, the Prophet (PBUH) has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.

Islam has clearly forbidden all business transactions, which leads to exploitation and injustice in any form to any of the parties of a contract.

It seeks protecting the different parties from deceit and ignorance by forbidding GHARAR in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations.

It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.

The rationale behind the prohibition of GHARAR is to ensure full consent and satisfaction of the parties in a contract.
Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged.

The prohibition of GHARAR protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.

SHARIAH promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships.

Mutual risk-sharing could help absorbing the weight of loss by sharing it equitably between all parties. However, risk and uncertainty are conditioned by enough adequacy and accuracy of information to make reasonable estimates of the outcomes. Tolerable risk and uncertainties cannot exist in contractual obligations.

Islam has also categorically and firmly prohibited all forms of gambling . MAYSIR and QIMAR are forms of gambling transactions that are considered as totally inequitable in Islam. MAYSIR refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s right. QIMAR means the game of chance in which one gains at the cost of others.

Even though, gambling consists in a form of speculation and that There should not be any place for commercial operations in Islam as it is purely SPECULATIVE .

The prohibited speculation under the SHARIAH is not that, which relies on the analysis of a lot of economic and financial data and which involves the investment of assets, skills and labour. Rather, it is one involving an effortless gain similar to a gambling scheme or activity. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others.

Conclusion ;
Islam calls for equitable distribution of wealth , it stems from the belief that the resources of the world are enough to sustain all the people of the world and that exploitation of man by man should be eliminated by all means .
Presence of interest charging institutions as well a system of exploitation of man by man tends to go against this belief .

EXAMINE THE LINKAGE OF THE REAL ECONOMIC ACTIVITY TO FINANCIAL ACTIVITY IN AN ISLAMIC ECONOMIC FRAMEWORK , GIVING EXAMPLES .

Islamic finance ensures a closer linkage between real economy and finance, the former dictating and the latter following. The linkage is obvious in sharing-based modes of investment and financial services.
When two parties, the financier and the entrepreneur, agree that an opportunity for creating additional value exists, they come together to realize the gain and share it. Since economic activities are, by definition, value-creating activities, sharing as a basis of finance is inconceivable without economic activity.

In the uncertain world in which these activities have to be conducted, they do sometimes fail to create additional value. There is nothing to share. Sometimes part of the existing wealth may be destroyed-the losses borne by capital, the entrepreneurial efforts gone unrewarded.
This linkage between real economic activity directed toward creation of additional wealth and financial transactions continues in case of non-sharing Islamic modes of finance such as MUDARABAH (cost-plus), and IJARA (leasing).

These deals, which are being used by contemporary Islamic banks to secure predetermined returns on their investments, are possible only when some real economic activity is involved.

There have to be some goods and services to be objects of MURABAHA and IJARA. The demand and supply of these goods and services whose exchange is "financed" through the above mentioned contracts ensures that financial activity is the servant not the master of real economic activity.
Prohibition of "interest" has closed the door on exchange of more money for less money, even when a period of time intervenes. Stratagems (HIYAL) securing the same goal by bringing in a commodity in a nominal way as impermissible.
Sovereign states are supposed to take care of themselves. Those who feel the need enter into alliances for defending their boundaries , even enlist foreign cooperation in maintaining internal security.
Vulnerability to the manipulations of multi national corporations and financial giants is however a new kind of danger, which the traditional modes of " defence " fail to handle.
All the shortcomings like Primitive administrative structures, inexperienced political elite, largely illiterate electorate-that is not a position very helpful in dealing with the new danger. Protection is needed which can come only in the form of advice and, if needed, intervention, by some international agency, preferably working under the united nations system.
In view of the above Islam is offering an alternative way through which all and sundry can be protected .
First, it is to reassure all concerned that the Islamic economists share the anxiety justifiably caused by the current happenings in the financial markets in particular and in the economic aspect of living in general. They too share the search of a better way for managing our affairs.
Second, it is to shake out those sympathizers of Islamic economics who might presume that abolition of interest takes care of all the current problems in finance and economics. There is a need to go beyond that necessary but not sufficient step in an Islamic reconstruction of man's economy.

More than anything else, Islamic banking and finance, a sub-section of Islamic economics, has been a quest for justice and morality into "the ordinary business of life." Justice and morality cannot, however, be all put into laws and regulations, especially when it comes to protecting the small and weak from the big and strong. Some behaviour changes are called for. Justice and morality have to penetrate the behaviour of all economic agents, including the decision-makers at the national and international level, so that all can live together in peace and harmony. Has Islamic economics something to offer in making this possible?
At the heart of the Islamic economic culture lies care for others as a force tempering man's innate selfishness. In sharp contrast to neoclassical economics, which dominated the scene during the twentieth century .

BIBLIOGRAPHY ;
Dr Maulana Ejaz Ahmad Samadani , ISLAMIC BANKING AND UNCERTAINTY. Darul ishaat urdu bazaar , KARACHI , 2007

Kahf , Monzer . INTRUMENTS OF MEETING BUDGET DEFICIT IN ISLAMIC ECONOMY . Islamic Research and Training Institute, Research Paper No. 42. Jeddah: Islamic Development Bank, 1997.

Tobin, James. "FINANCIAL GLOBALISATION : Can National Currencies Survive?" in Annual World Bank Conference on Development Economics, 1998. Washington: The World Bank, 1999. pp. 63-75.

Siddiqi , M.N. and S.M. Ghazanfar . "Early Medieval Arab-Islamic Economic Thought: Abu Yusuf's Economics" in a forthcoming issue of History of Political Economy; Ghazanfar, S.M.