Assessment of Macroeconomic and Monetary Developments during the First Half of 2006-07
Overall Assessment44. In the Indian economy, aggregate supply conditions appear to have strengthened in the first half of 2006-07, invigorated by the pick-up in activity in all constituent sectors of the economy. While growth in agriculture in the first quarter seems to have benefited mainly from the rabi season of 2005-06 (which came to a close in June 2006), the prospects for agriculture in the rest of 2006-07 seem to have improved. Hence, a resumption of trend growth in agriculture appears realisable for the current year, despite some setbacks on account of floods in various parts of the country and somewhat deficient rainfall in foodgrains growing areas. 45. Industrial production appears to be performing better than consensus expectations, propelled by growth in manufacturing which touched a ten-year high in April-August, 2006. The industrial climate is characterised by buoyant corporate sales/profitability and record tax collections. This is supported by the strength of domestic and export demand, resilient business confidence and improvement in financing conditions, particularly in sustained growth in bank credit. The momentum of industrial activity, if sustained, is likely to impart an upside bias to expectations of overall macroeconomic performance. 46. Lead indicators point to continued bright prospects for growth in services. There has been a sustained improvement in railway revenue earnings in freight traffic and in import/export cargo handled by civil aviation. Foreign tourist arrivals as well as passengers handled at domestic air terminals have recorded increases during the first half of 2006-07. Furthermore, there has been a noticeable addition to switching capacity under both telephone and cell phone connections. Accordingly, all sub-sectors under services, which account for about 70 per cent of overall GDP growth, display dynamism. 47. Turning to aggregate demand conditions, there seems to be some evidence of pressures firming up in the form of high growth in capital goods output, an upturn in investment in infrastructure and a quickening of the capital expenditure cycle. There are indications that strengthening investment demand is beginning to drive the economy. More importantly, consumption demand, which accounts for over two-thirds of aggregate domestic demand, also seems to be gathering strength. This is evident from high retail credit and double-digit growth in the production of consumer durables in the first five months of 2006-07. Consumer non-durables have shed their earlier sluggishness and picked up in July and August. Demand pressures are also visible in the expansion of money supply and reserve money which has been sizeably higher than anticipated. 48. The demand for bank credit has been growing at above 30 per cent for the third year in succession. Available information points to high growth in credit extended by banks to fast growing sectors such as housing, commercial real estate and retail loans. Asset prices remain at elevated levels and current levels of commodity prices make an overall assessment a complex task. 49. Against this background, it is critical to be watchful for early signs of overheating. An overheating economy is one which is growing rapidly and its productive capacity cannot keep up with resulting demand pressures. Emergence of inflationary pressures is usually seen as the first indication of overheating. In this context, policy makers keenly analyse the behaviour of the output gap, i.e., the excess of current output over potential or full capacity output. In the context of setting monetary policy, judging how close an economy is to operating at full capacity is crucial. If the monetary authority senses that there is unutilised capacity, the increase in demand generated by growth can be accommodated without inflationary pressures and, therefore, the need to act against overheating may not arise. On the other hand, if demand is running ahead of full capacity, there is a case for tightening of monetary policy with a view to slowing down the economy and heading off overheating. 50. Globally, there seems to be increasing difficulty in identifying the symptoms of overheating. There is some evidence of a blurring of the relationship between output gaps and inflation. Moreover, the size and direction of an economy’s potential output is becoming increasingly difficult to diagnose. In particular, globalisation has expanded the supply potential of various economies, especially emerging economies. In the recent period, it appears that the current positive supply shock has made the concept of potential output fuzzier than in the past. For a developing economy like India, the concept of overheating is less of a guide for monetary policy than in advanced economies on account of the existence of large unemployment/underemployment of resources and the absence of a clear assessment of potential output. Furthermore, it is difficult to obtain a clear judgement of potential output in an economy that is undergoing structural transformation. Nevertheless, recent developments, in particular, the combination of high growth and consumer inflation coupled with escalating asset prices and tightening infrastructural bottlenecks underscore the need to reckon with dangers of overheating and the implications for the timing and direction of monetary policy setting. While there is no conclusive evidence of overheating in the Indian economy at the current juncture, the criticality of monitoring all available indications that point to excess aggregate demand is perhaps more relevant now than ever before. 51. Monetary policy operates with lags that can be long and variable, depending on the specifics of the country situation. It is in this context that the setting of monetary policy is required to be forward looking with the full impact of current policy actions coming into play 12 to 18 months later. In India, the key policy signalling rates embodied in the LAF repo/reverse repo rates have been raised since October, 2004 by a cumulative 100/150 basis points, supported by a 50 basis points increase in the CRR. This calibrated withdrawal of accommodation is in the process of working itself through the various sectors of the economy. Hence, in addition to current signs of demand pressures, the evolution of demand conditions in the next few months is critical for considering the possible emergence of overheating, if any, with concurrent implications for both price and financial stability. 52. In the domestic financial markets, there seems to be some evidence of moderation in volatility in the second quarter of 2006-07 within an overall re-pricing of risks. Money markets continue to be characterised by conditions of excess liquidity, interrupted by brief spells of temporary tightness in the second half of September on account of advance direct tax outflows and balance sheet requirements. Short-term rates have generally evolved in alignment with policy rates and have responded favourably to the policy stance in June and July. In the foreign exchange market, the exchange rate of the rupee has exhibited two-way movements. Since end-July, however, the market sentiment has turned upbeat, mirrored in a modest nominal appreciation. In the Government securities market, yields have come off mid-July highs and have corrected substantially. 53. Inflationary pressures, as exhibited in wholesale and consumer prices warrant continued special focus. Despite recent easing, it will be prudent to presume that oil prices at current levels may still contain some elements of a ‘permanent’ component which is yet to be matched by full pass-through. Hence, the possible risks for inflation in the months ahead need to be viewed against this background. It is desirable to watch for incipient pressures building up on prices of manufactures with the quickening of domestic industrial activity and the elevated levels of international commodity prices. It is also necessary to monitor the seasonal movements in prices of food articles in the remaining part of the year, given their criticality for inflation perceptions and consequently, inflation expectations. In the months ahead, it is difficult to assess whether productivity gains and competitive conditions will be able to head off the squeeze on margins that seems to be setting in. Furthermore, it is possible to hold that positive base effects that have couched the impact of upside pressures on price changes so far would wear off and this could amplify measured inflation towards the close of 2006-07. 54. Fiscal spending has picked up in the first five months of 2006-07 and the Centre’s gross fiscal deficit has been running higher on an annual basis in relation to budget estimates. The buoyancy in tax revenues may, however, mitigate the expansionary impact if it gets entrenched in the remaining months of the year. Consumer prices for all categories have been rising through the first half of 2006-07, reflecting the impact of heightened primary product prices, including those of essential commodities. The wedge between consumer prices and wholesale prices remains larger than before. While a combination of fiscal and monetary measures seems to have reinforced each other and helped to mitigate the inflationary risks, there are reasons to be vigilant on this front. In particular, looking ahead, it may be appropriate to hold that the outlook for inflation in India is more likely to be driven by demand conditions rather than by the strong positive supply-side effects noticed in the recent past. 55. In an economy-wide sense, the faster growth of aggregate demand relative to aggregate supply during 2006-07 has begun to be manifested, to some extent, in the external sector. The merchandise trade deficit and the current account deficit have expanded despite buoyant export growth and some moderation in the growth of non-oil imports. So far, the high prices of international crude seem to have been driving the widening of the trade deficit. Softening of these prices in the months ahead could offset such pressures. Merchandise export growth has remained reasonably strong. Gross invisible earnings have expanded rapidly in recent years and are poised to equal merchandise exports. Fast growth in earnings from travel, software and other business service exports has complemented the stable support from inward remittances which is being increasingly regarded as a ‘permanent’ component of India’s external balance sheet. Capital flows seem to have recovered from the turbulence of May-June and have resumed strongly with debt flows in April-June, 2006 increasing to US $ 5.2 billion from US 1.0 billion a year ago. On the whole, it is reasonable to expect that, as in the recent past, capital flows will enable financing of the current account deficit and some continuing accretion to the level of foreign exchange reserves. 56. In recent months, there are some indications of a shift in the patterns of global growth. First, the US economy, which has powered the recent phase of global expansion, seems to be beginning to slow, driven down primarily by the contracting housing market. Second, activity appears to have gathered momentum in the Euro area and Japan but it is unclear as to whether or not this recovery is self-sustained. Third, the onus for sustaining global growth seems to be shifting to the emerging economies, particularly low per capita income countries. Financial upheavals right up to May-June this year are a reminder that market conditions in emerging economies have been relatively volatile in response to exogenous developments. Fourth, shifts in the pattern of international trade are also discernible. China’s rising importance has been paralleled by a reduced reliance of major emerging economies on the US as an important export destination. 57. Globally, inflation risks remain, though incipient at the current juncture. While headline inflation rates are moderating, core inflation, especially in the US, has remained firm, indicating that upside pressures from oil and commodity prices persist across advanced and emerging economies, especially at the producer level. Potential risks from the possible full indirect effects of elevated and uncertain oil/commodity prices, some possible tightening of global production capacities and the remaining overhang of global liquidity continue to weigh upon the setting of monetary policy worldwide. There are also signs of wage pressures setting in. While some deceleration in economic activity in recent months seems to have induced a pause in the policy tightening cycle of several important central banks, the persistent threats of inflation constrain monetary authorities from possible moves towards a more neutral stance in an aggressive fashion. 58. Global imbalances have continued to widen during 2006. With some central banks actively reassessing their stance now, the potential drainage of global liquidity would test the resilience of world financial markets and weigh upon the outlook on the global economy. Globally, the concerns are not about the existence of current account deficits or surpluses per se, but the persistence of large deficits and surpluses, particularly in large and systemically important economies. It is in this context that the IMF’s projection of the U.S. current account deficit at about 7 per cent of GDP in 2007 with large surpluses continuing in Japan, emerging Asia and oil-exporting countries is disturbing. The sharp rise in the net foreign liability position of the US raises the risks of abrupt and disorderly adjustment of major currencies as the global imbalances unwind. However, there is an interesting lull in the serious concerns expressed both by policy makers and financial markets in regard to the global imbalances, possibly on the assumption that universal recognition of the problem would per se lead to harmonised actions that would avoid hard landing. 59. Global financial markets have revised expectations in response to the changes in the magnitude and pace of monetary tightening between June and September, 2006. In the money markets, there appear to be widening expectations that, at best, interest rates are expected to rise only gradually from now on. On the other hand, these revisions in expectations have coincided with falling long-term interest rates in the US, the Euro area and Japan leading to inversion/flattening of yield curves. Global equity markets have recovered some of the losses suffered in May and June with those markets that recorded the largest losses gaining the most. Spreads in corporate credit markets have remained tight, broadly unchanged from late June. A boom in global mergers and acquisitions has been underway and has been financed, to some extent, by increased leverage. Changes in expected short-term interest rate differentials have emerged as important drivers of foreign exchange markets, enabling a moderate strengthening of the euro. The yen’s role as a funding currency for carry trades remains significant. The pound sterling has strengthened in the wake of the increase in the policy rate by the Bank of England. Currencies of emerging economies have benefited from a reversal of May-June portfolio outflows. Renewed strength in commodity prices has also played a role in foreign exchange markets. Nevertheless, geopolitical risks remain a key factor in determining the evolution of major currency movements. It is also important to recognise the potential risks emanating from the possible moderation of liquidity and oil surpluses on account of the impact of monetary policy action as well as the likelihood of the ebbing of oil prices. 60. Credit markets, particularly in developing countries, have been experiencing heightened activity since 2004. During 2006, there seems to be growing evidence that a synchronised upswing in bank credit is taking hold across emerging economies in Asia and Latin America in an environment of strong growth and excess liquidity in banking systems. This recent surge is accompanied by compositional shifts on the assets side of banks’ portfolios. Households, not corporates – historically the most important borrowers from banks – have absorbed a significant portion of the credit growth. There seem to be some risks to sustainability of the recent rapid pace of bank credit growth to households. First, households could become overextended as reflected in credit card busts in several emerging economies. Second, large accumulation of debt could leave households prone to future interest rate/exchange rate shocks since banks have, in effect, transferred a large part of their market risks to households. Third, excessive reliance on debt-financed consumption could turn out to be a serious problem if refinancing options dry up. Fourth, moral hazard and adverse selection is a constant challenge facing banks. Fifth, housing markets continue to remain overheated and, therefore, a source of risk. 61. In the overall assessment, while global growth has been strong and broad-based, there seem to be some indications of moderation in recent months. There are also perceptions of risks to growth from the cooling of the housing market in the US and the potential drainage of liquidity from financial markets. While global inflation conditions have not worsened, concerns relating to potential price pressures persist, particularly in the context of the firming up of food and metal prices, the uncertainty surrounding international crude prices and the monetary overhang. While geopolitical risks continue to cast a shadow, it is necessary to recognise that global risks have not changed significantly from the time of the First Quarter Review of July, 2006. Domestic developments exhibit strength and resilience with some downside risks. There is a pick-up in the momentum of growth which also appears to be spreading across all constituent sectors of the economy. Domestic financial markets have exhibited stable and orderly conditions. In the external sector, there are signs of abiding strength and the current account deficit has been well-managed so far. On the other hand, there are indications of growing demand pressures and potential risks from rapid credit growth and strains on credit quality. High levels of monetary expansion and the evolution of the liquidity situation will need to be continuously monitored for any signs of risks to inflation. The elevated levels of asset prices also represent a risk to the outlook for macroeconomic and financial stability. In brief, at the current juncture, for policy purposes, the two major issues that exert conflicting pulls are exploration of signs of overheating firming up to warrant a policy response, and, the impact of lagged effects of earlier policy action on the evolution of macroeconomic developments.
Wednesday, May 30, 2007
Question about islamic system
Islam & the Economic Question
In order to address the economic system in Islam, we first of all need to clarify the position of Islam in relation to the quest for material well being. This is because the word dunya, which is associated with material wealth or worldly matters has become a dirty word for many Muslims. The separation of deen from dunya (secularism) is a Western-Christian concept that has recently become widely internalised amongst Muslims. Consequently, seeking to increase in economic or worldly matters is frowned upon, - while continuous engagement in prayer and other personal ibadat is regarded as meritorious. As such, many people get confused and conduct a double life. On the one hand, money talks, it gives status and makes life comfortable, so they seek it vigorously. On the other, they feel guilty, thinking that their effort should be spent on 'religious' duties. This is due to a misunderstanding of the position of the economic question in Islam. There is no doubt that Islam is opposed to monasticism and views the economic activities of man as quite lawful and sometimes even obligatory and necessary. We find many injunctions in Islam that allude to this. For example, Allah (SWT) says in the Qur'an: 'Disperse through the land and seek the bounty of Allah' (TMQ-62:10), He also says, 'Allah has permitted trade'(TMQ-2:275), And even more directly, Allah(SWT) says: 'Seek the other world by means of that which Allah has bestowed upon you, and do not be negligent about your share in this world.' (TMQ-28:77) These are all in reference to economic activity. In the sunnah, we find that one of the most commonly said du'as that the Prophet(SAW) taught us is: 'our lord give us the good in this life and the good in the hereafter'. But despite this, we find expressions in the Qur'an which state: 'The life of this world is but a delusion' -3:185 ; 'The mutual rivalry for piling up the good things of this world diverts you from the more serious things. - 102:1; and many others, stating that man has lust and greed for wealth(89:20) and that he is violent at this greed (100:8) and that he becomes boastfull and proud (11:10) and so on. This apparently sounds like a contradiction in terms. But actually, what we are taught by Islam is that the real objective of our existence is to worship Allah(SWT) through righteous conducts by living as humans in this world. So all those things that are necessary for this life become essential for man. It is one thing to say that material well being is important and even compulsory but it is quite another to say that it is the ultimate goal and centre of thought and action in life. This is where the confusion arises about the Islamic economic question. The fundamental difference between Islamic economics and all materialist ones is precisely this. The materialists view that economic well being is the ultimate end of human life, while Islam says that these things may be necessary and indispensable, but cannot be the true purpose of life. Economic endeavours only become an allurement or delusion if man loses sight of his real purpose in their pursuit.The right path to follow therefore is to fully engage into worldly economic life in the manner prescribed by Allah(SWT) and His Prophet(SAW), both at societal and individual level. The prophet said: 'Work for your worldly life as you were going to live forever, but work for the life to come as if you were going to die tomorrow.'The economic problem in Islam.Unlike the current world view as pushed by the capitalist west, Islam considers that the main economic problem that mankind will ever have is that of distribution of wealth and not of production. In the eyes of the capitalist West, there is relative scarcity of resources available in the world, and peoples demands for these resources are endless. Hence each nation and in fact the world should concentrate on more and more production. The higher the amount of wealth produced, the higher the number of people that will satisfy their demands through the process of economic activity. Islam distinguishes between basic needs which include food, clothing and shelter, and luxurious wants which includes all those things that are not necessities in life. It views that there are enough resources to satisfy the basic needs of all people all the time and to satisfy some of the luxurious wants of people and that economic problem is that of distribution and not production. There are enough resources to feed, clothe and house everybody in the world fully as can be seen by the food mountains of Europe and the excesses of the few rich in each country, including the 3rd world countries. In accordance with their capitalist philosophy of maximising profit, we find governments paying farmers to produce less as in the EC countries, or to destroy what has already been produced as happened in poor Latin America where a huge amount of coffee was burnt. Far more wealth leaves the poor countries of Africa for the rich West than vice versa due to unjust economic deals. Even at the height of the Ethiopean famine crises in the late eighties, the country was exporting millions of dollars worth of resources to the West. Allah (SWT) says in the Quran, 'It is Allah who created the heavens and the earth, and sent down from heaven water wherewith He brought forth fruits to be your sustenance. And He subjected to you the sea at His commandment; and He subjected to you the rivers and He subjected to you the sun and the moon constant upon their courses, and He subjected to you the night and the day, and gave you of all that you asked Him. If you count Allah's blessing, you will never number it; surely man is sinful, unthankful. (4:32-34). In another verse He says: 'Verily, thy lord doth provide sustenance in abundance for whom He pleases and He straiten it, for He doth know and regard all his creatures.' (17:30). These verses among many others show that Allah(SWT) has pooled in this universe all the needs and beneficial things for man, and has provided sufficient resources to satisfy material need of man. In Islam, a distinction is made between economic science, which is to do with the means of production and economic system is concerned with the problem of distribution of wealth, namely the rules by which wealth can be acquired, used and disposed of. It is through the economic system that is specific to Islam that wealth is distributed equitably, while economic science is not particularly specific to Islam as such but can be acquired from any other people or developed as seen fit.Objectives of the Islamic economic systemThe objectives of the Islamic economic system can be classified as follows:1) To satisfy the basic needs of each and every individual in the Islamic state completely2) To provide the citizens of the Islamic state with the means to satisfy their luxurious needs 3) To achieve 1) and 2) through a naturally workable system with due incentives for economic activity and an equitable system of distribution.Principles and policies to achieve the objectives1) Ownership. Ownership constitutes one of the important incentives for engaging into economic activity as the owner of wealth has the right to use or dispose of it. The means of acquiring such rights is one of the fundamental principles through which the objectives of the Islamic economic system are achieved.In the Islamic economic system, it is understood that the real owner(Creator) of all wealth is Allah(SWT). We only 'own' wealth by proxy as guardians. Some of us acquire wealth by engaging in the production process and hence have a direct access to wealth. These include the factors of production as defined by Islam. Others have an indirect access to wealth simply because Allah(SWT) as the real owner of wealth has stipulated that those with direct access to wealth through engagement in the production process must pass some of it on to them as He made clear in the Qur'an: 'Give to them from the property of Allah(SWT) which He has bestowed upon you.' 24:33. This usually takes the form of Zakat, kaffarat, sadaqat-ul-fitr, inheritance, etc. which are given to the poor, the needy and later generations. It is the duty of the government to ensure that such wealth is duly transferred by law.Notwithstanding this, Islam does not impose a limit on the amount of wealth that one can own. Rather, it controls the means of ownership such that people acquire the right to wealth in a just manner. This excludes speculation, forward transactions, lottery, and dealing with interest among other things. Additionally, Islam also stipulates in accordance to the ahadith of the prophet(SAW) that certain properties are to be collectively owned for the use of all citizens. These include sources of energy, pastures and natural resources including water. Through these ownership principles, Islam ensures that everyone gets what is rightfully due to him from his creator, unlike the capitalist system where only those who take part in the production process have the right to wealth. At the same time, it gives full incentives to individuals to fully participate in the economy by not imposing a limit on how much they can own. 2) Economic enterprises and the prohibition of interest and hoardingInterest rates form the backbone of the capitalist system in many ways. It is used as a tool to regulate economic growth and monetary supply by acting as an 'incentive' for those who have surplus money to save/hoard. In Islam both interest and hoarding are prohibited. Allah(SWT) says in the Qur'an: 'And those who hoard up gold and silver and do not spend in the way of Allah, announce to them a painful chastisement. (9:34). He also says: 'Allah has permitted trade and forbidden interest.' (2:275). Owners of capital therefore have to invest it either in the form of private business or partnership. The most fundamental criteria that must be met by all companies of partnership are that there must be offer and acceptance between two or more parties, and that once they become partners they have equal say in the running of the company. In addition to these criteria, the manner of sharing profit and loss is dependent on the type of company. In the Company of Equals (Anan) where partnership is formed by the wealth of two or more parties, any loss suffered by the company would be shared among the partners in proportion to the capital they put. In the Company of Persons (Abdan) where partnership is based on services provided by the partners, loss is shared according to the salaries/wages of the partners. In the company of Mudharaba where partnership is based on capital from one party and labour from another, loss is incurred by the owner of capital while the provider of labour loses their wage/salary. From these elementary rules and structures, many other forms of companies can be formed. In all cases, profit is shared according to mutual agreement independent of the amount of capital or service/labour provided. Through this arrangement, continuous business investment keeps employment level high and both the rich and the poor get richer.The role of the stateThe government plays an important role in the economic system of Islam.Islam makes it the responsibility of the state to provide food, clothing, shelter,education, health and security to every individual. It is also the responsibility of the state to enable citizens with the means of getting luxurious needs in addition to these basic needs by themselves. The state achieves this through the management of public property , through the use of income from other sources and through provision of good economic environment so that people satisfy their needs due to their involvement in economic activity. Sources of revenue for the state1) TaxationFai - Property captured from the enemy without fightingGhanima - BootyUshr - Land Tax on unconquered landKharaj - Land Tax on conquered landJizya - Head-tax on non-Muslims2) Others- Revenues from natural resources- Fines levied3) Facilitating luxurious needsIt is also the responsibility of the state to provide adequate infrastructure for the supply of such commodities to the people.The most fundamental aims of the economy of any nation is to provide adequate supply of goods and services for its citizens and to enable each citizen to acquire and use them to raise their standard of living. This requires that wealth be created in the form of usable goods and services and that people get the means of owning and/or using these goods or services. The degree to which these aims and objectives are met and the efficiency with which the citizens of the state participate depends on the specific rules of engagement, namely the economic system which the nation implements.Apart from the general ideological framework upon which the economic system is based, the key ingredients for the economic success of any nation include:1) Confidence in and stability of the system2) Workability of the system by providing appropriate economic incentives for wealth creation and distribution3) A just method of distribution.Although only the capitalist economic system is practised in the world today, the Islamic economic system gives the best rules of engagement in economic activity and would be the most successful towards raising the standard of living of any nation.a) On confidence and stabilityEconomic activity by its very nature is risky as those who partake in it directly can gain or lose wealth. Hence in all economic systems, there is always an understanding by those who participate that they may lose their capital or effort . However, there other phenomena that adversely affect the economic life of a nation by artificially creating an atmosphere of insecurity, and thereby reduce the level of economic activity. These arise because of the specific economic system implemented and include the followings:i) Booms and Busts: In the capitalist system, periods of good and bad trade have become evident from the records. Although opinions differ widely among economists on the conditions responsible for trade fluctuations, a common feature is that root cause of these conditions stems from the foundations of the capitalist economic system.ii) Runaway inflation: The fact that money continually loses its value has become an intrinsic part of capitalist economies. Here again there are quite a few opinions from economists as to what causes runaway inflation. But the recipe for runaway inflation lies at the heart of established financial controls in the capitalist system.iii) Money market crashes: These occur irregularly in the form of sudden exaggerated changes in foreign exchange rates and sudden fall in share prices. The most fundamental characteristics of the capitalist economic system which form the root of these phenomena are speculation and false representation. These are manifested in :The artificial creation of money: There is nothing to prevent governments from literally creating money at will. Excessive creation of paper money which cannot be represented by real wealth is the root cause of inflation.In addition, high street banks can lend money that is not existent by crediting peoples accounts on paper. This is false representation that is meant to keep the system going actually creates more artificial money. In conclusion, the above points clearly outline certain fundamental differences between the capitalist economic system and the Islamic economic system. The inherent failing of capitalist economies can be seen today throughout the world, even in the Muslim countries, where it has been forcibly applied by corrupt rulers. The details of Islamic economics should fill us with confidence that Islam provides solutions to the ‘economic’ problem’, which the world around us currently faces.
In order to address the economic system in Islam, we first of all need to clarify the position of Islam in relation to the quest for material well being. This is because the word dunya, which is associated with material wealth or worldly matters has become a dirty word for many Muslims. The separation of deen from dunya (secularism) is a Western-Christian concept that has recently become widely internalised amongst Muslims. Consequently, seeking to increase in economic or worldly matters is frowned upon, - while continuous engagement in prayer and other personal ibadat is regarded as meritorious. As such, many people get confused and conduct a double life. On the one hand, money talks, it gives status and makes life comfortable, so they seek it vigorously. On the other, they feel guilty, thinking that their effort should be spent on 'religious' duties. This is due to a misunderstanding of the position of the economic question in Islam. There is no doubt that Islam is opposed to monasticism and views the economic activities of man as quite lawful and sometimes even obligatory and necessary. We find many injunctions in Islam that allude to this. For example, Allah (SWT) says in the Qur'an: 'Disperse through the land and seek the bounty of Allah' (TMQ-62:10), He also says, 'Allah has permitted trade'(TMQ-2:275), And even more directly, Allah(SWT) says: 'Seek the other world by means of that which Allah has bestowed upon you, and do not be negligent about your share in this world.' (TMQ-28:77) These are all in reference to economic activity. In the sunnah, we find that one of the most commonly said du'as that the Prophet(SAW) taught us is: 'our lord give us the good in this life and the good in the hereafter'. But despite this, we find expressions in the Qur'an which state: 'The life of this world is but a delusion' -3:185 ; 'The mutual rivalry for piling up the good things of this world diverts you from the more serious things. - 102:1; and many others, stating that man has lust and greed for wealth(89:20) and that he is violent at this greed (100:8) and that he becomes boastfull and proud (11:10) and so on. This apparently sounds like a contradiction in terms. But actually, what we are taught by Islam is that the real objective of our existence is to worship Allah(SWT) through righteous conducts by living as humans in this world. So all those things that are necessary for this life become essential for man. It is one thing to say that material well being is important and even compulsory but it is quite another to say that it is the ultimate goal and centre of thought and action in life. This is where the confusion arises about the Islamic economic question. The fundamental difference between Islamic economics and all materialist ones is precisely this. The materialists view that economic well being is the ultimate end of human life, while Islam says that these things may be necessary and indispensable, but cannot be the true purpose of life. Economic endeavours only become an allurement or delusion if man loses sight of his real purpose in their pursuit.The right path to follow therefore is to fully engage into worldly economic life in the manner prescribed by Allah(SWT) and His Prophet(SAW), both at societal and individual level. The prophet said: 'Work for your worldly life as you were going to live forever, but work for the life to come as if you were going to die tomorrow.'The economic problem in Islam.Unlike the current world view as pushed by the capitalist west, Islam considers that the main economic problem that mankind will ever have is that of distribution of wealth and not of production. In the eyes of the capitalist West, there is relative scarcity of resources available in the world, and peoples demands for these resources are endless. Hence each nation and in fact the world should concentrate on more and more production. The higher the amount of wealth produced, the higher the number of people that will satisfy their demands through the process of economic activity. Islam distinguishes between basic needs which include food, clothing and shelter, and luxurious wants which includes all those things that are not necessities in life. It views that there are enough resources to satisfy the basic needs of all people all the time and to satisfy some of the luxurious wants of people and that economic problem is that of distribution and not production. There are enough resources to feed, clothe and house everybody in the world fully as can be seen by the food mountains of Europe and the excesses of the few rich in each country, including the 3rd world countries. In accordance with their capitalist philosophy of maximising profit, we find governments paying farmers to produce less as in the EC countries, or to destroy what has already been produced as happened in poor Latin America where a huge amount of coffee was burnt. Far more wealth leaves the poor countries of Africa for the rich West than vice versa due to unjust economic deals. Even at the height of the Ethiopean famine crises in the late eighties, the country was exporting millions of dollars worth of resources to the West. Allah (SWT) says in the Quran, 'It is Allah who created the heavens and the earth, and sent down from heaven water wherewith He brought forth fruits to be your sustenance. And He subjected to you the sea at His commandment; and He subjected to you the rivers and He subjected to you the sun and the moon constant upon their courses, and He subjected to you the night and the day, and gave you of all that you asked Him. If you count Allah's blessing, you will never number it; surely man is sinful, unthankful. (4:32-34). In another verse He says: 'Verily, thy lord doth provide sustenance in abundance for whom He pleases and He straiten it, for He doth know and regard all his creatures.' (17:30). These verses among many others show that Allah(SWT) has pooled in this universe all the needs and beneficial things for man, and has provided sufficient resources to satisfy material need of man. In Islam, a distinction is made between economic science, which is to do with the means of production and economic system is concerned with the problem of distribution of wealth, namely the rules by which wealth can be acquired, used and disposed of. It is through the economic system that is specific to Islam that wealth is distributed equitably, while economic science is not particularly specific to Islam as such but can be acquired from any other people or developed as seen fit.Objectives of the Islamic economic systemThe objectives of the Islamic economic system can be classified as follows:1) To satisfy the basic needs of each and every individual in the Islamic state completely2) To provide the citizens of the Islamic state with the means to satisfy their luxurious needs 3) To achieve 1) and 2) through a naturally workable system with due incentives for economic activity and an equitable system of distribution.Principles and policies to achieve the objectives1) Ownership. Ownership constitutes one of the important incentives for engaging into economic activity as the owner of wealth has the right to use or dispose of it. The means of acquiring such rights is one of the fundamental principles through which the objectives of the Islamic economic system are achieved.In the Islamic economic system, it is understood that the real owner(Creator) of all wealth is Allah(SWT). We only 'own' wealth by proxy as guardians. Some of us acquire wealth by engaging in the production process and hence have a direct access to wealth. These include the factors of production as defined by Islam. Others have an indirect access to wealth simply because Allah(SWT) as the real owner of wealth has stipulated that those with direct access to wealth through engagement in the production process must pass some of it on to them as He made clear in the Qur'an: 'Give to them from the property of Allah(SWT) which He has bestowed upon you.' 24:33. This usually takes the form of Zakat, kaffarat, sadaqat-ul-fitr, inheritance, etc. which are given to the poor, the needy and later generations. It is the duty of the government to ensure that such wealth is duly transferred by law.Notwithstanding this, Islam does not impose a limit on the amount of wealth that one can own. Rather, it controls the means of ownership such that people acquire the right to wealth in a just manner. This excludes speculation, forward transactions, lottery, and dealing with interest among other things. Additionally, Islam also stipulates in accordance to the ahadith of the prophet(SAW) that certain properties are to be collectively owned for the use of all citizens. These include sources of energy, pastures and natural resources including water. Through these ownership principles, Islam ensures that everyone gets what is rightfully due to him from his creator, unlike the capitalist system where only those who take part in the production process have the right to wealth. At the same time, it gives full incentives to individuals to fully participate in the economy by not imposing a limit on how much they can own. 2) Economic enterprises and the prohibition of interest and hoardingInterest rates form the backbone of the capitalist system in many ways. It is used as a tool to regulate economic growth and monetary supply by acting as an 'incentive' for those who have surplus money to save/hoard. In Islam both interest and hoarding are prohibited. Allah(SWT) says in the Qur'an: 'And those who hoard up gold and silver and do not spend in the way of Allah, announce to them a painful chastisement. (9:34). He also says: 'Allah has permitted trade and forbidden interest.' (2:275). Owners of capital therefore have to invest it either in the form of private business or partnership. The most fundamental criteria that must be met by all companies of partnership are that there must be offer and acceptance between two or more parties, and that once they become partners they have equal say in the running of the company. In addition to these criteria, the manner of sharing profit and loss is dependent on the type of company. In the Company of Equals (Anan) where partnership is formed by the wealth of two or more parties, any loss suffered by the company would be shared among the partners in proportion to the capital they put. In the Company of Persons (Abdan) where partnership is based on services provided by the partners, loss is shared according to the salaries/wages of the partners. In the company of Mudharaba where partnership is based on capital from one party and labour from another, loss is incurred by the owner of capital while the provider of labour loses their wage/salary. From these elementary rules and structures, many other forms of companies can be formed. In all cases, profit is shared according to mutual agreement independent of the amount of capital or service/labour provided. Through this arrangement, continuous business investment keeps employment level high and both the rich and the poor get richer.The role of the stateThe government plays an important role in the economic system of Islam.Islam makes it the responsibility of the state to provide food, clothing, shelter,education, health and security to every individual. It is also the responsibility of the state to enable citizens with the means of getting luxurious needs in addition to these basic needs by themselves. The state achieves this through the management of public property , through the use of income from other sources and through provision of good economic environment so that people satisfy their needs due to their involvement in economic activity. Sources of revenue for the state1) TaxationFai - Property captured from the enemy without fightingGhanima - BootyUshr - Land Tax on unconquered landKharaj - Land Tax on conquered landJizya - Head-tax on non-Muslims2) Others- Revenues from natural resources- Fines levied3) Facilitating luxurious needsIt is also the responsibility of the state to provide adequate infrastructure for the supply of such commodities to the people.The most fundamental aims of the economy of any nation is to provide adequate supply of goods and services for its citizens and to enable each citizen to acquire and use them to raise their standard of living. This requires that wealth be created in the form of usable goods and services and that people get the means of owning and/or using these goods or services. The degree to which these aims and objectives are met and the efficiency with which the citizens of the state participate depends on the specific rules of engagement, namely the economic system which the nation implements.Apart from the general ideological framework upon which the economic system is based, the key ingredients for the economic success of any nation include:1) Confidence in and stability of the system2) Workability of the system by providing appropriate economic incentives for wealth creation and distribution3) A just method of distribution.Although only the capitalist economic system is practised in the world today, the Islamic economic system gives the best rules of engagement in economic activity and would be the most successful towards raising the standard of living of any nation.a) On confidence and stabilityEconomic activity by its very nature is risky as those who partake in it directly can gain or lose wealth. Hence in all economic systems, there is always an understanding by those who participate that they may lose their capital or effort . However, there other phenomena that adversely affect the economic life of a nation by artificially creating an atmosphere of insecurity, and thereby reduce the level of economic activity. These arise because of the specific economic system implemented and include the followings:i) Booms and Busts: In the capitalist system, periods of good and bad trade have become evident from the records. Although opinions differ widely among economists on the conditions responsible for trade fluctuations, a common feature is that root cause of these conditions stems from the foundations of the capitalist economic system.ii) Runaway inflation: The fact that money continually loses its value has become an intrinsic part of capitalist economies. Here again there are quite a few opinions from economists as to what causes runaway inflation. But the recipe for runaway inflation lies at the heart of established financial controls in the capitalist system.iii) Money market crashes: These occur irregularly in the form of sudden exaggerated changes in foreign exchange rates and sudden fall in share prices. The most fundamental characteristics of the capitalist economic system which form the root of these phenomena are speculation and false representation. These are manifested in :The artificial creation of money: There is nothing to prevent governments from literally creating money at will. Excessive creation of paper money which cannot be represented by real wealth is the root cause of inflation.In addition, high street banks can lend money that is not existent by crediting peoples accounts on paper. This is false representation that is meant to keep the system going actually creates more artificial money. In conclusion, the above points clearly outline certain fundamental differences between the capitalist economic system and the Islamic economic system. The inherent failing of capitalist economies can be seen today throughout the world, even in the Muslim countries, where it has been forcibly applied by corrupt rulers. The details of Islamic economics should fill us with confidence that Islam provides solutions to the ‘economic’ problem’, which the world around us currently faces.
islamic economic system
“Creditors have better memories than Debtors”
The proverb in the title has an unfortunate reality. Many Muslims are finding themselves increasingly in debt. Creditors have to persistently remind the debtor of the loan they have ‘forgotten’ to pay. It is extremely rare, that you find the debtor reminding the creditor of his own debt. Often the relationship between the creditor and the debtor turns sour because Islamic principles are not the basis for their financial dealings and disputes. This article discusses the Shariah rules pertaining to loans and debts. Indeed, Islam is very strict upon the Creditor’s motive and the Debtor repaying back what he has borrowed.Characteristics of the LenderThe Prophet (saw) said: "Every loan is a sadaqah".Islam encourages those who have enough wealth to give loans to those who request it. However it is important that the creditor or the lender should not seek any material benefit from giving a loan. He must seek the ethical value when advancing money as a loan and not expect anything material in return. Hence the lender is enhancing his personal quality of generosity and trying to remove any traits of stinginess from his soul. This is the definition of a loan in Islam. The motive is to help a person in need and seek only the reward and pleasure of Allah (swt).This is often overlooked and sometimes the creditor may expect a material favour in return of his loan. Such a mentality by the lender is extremely dangerous, as the intent of a loan is not to seek the material value. This way of thinking produces a despicable being that thrives on personal greed and interests. This mentality of seeking a material benefit in every single action in life is a product of the Capitalist ideology that we unfortunately live under and sadly many Muslims are behaving in a similar manner.The source of our inclinations must come from the pure Islamic Aqeedah and not the Secular Creed of Capitalism. Only by referencing the divine sources for our mentality and inclinations can we say that we have an Islamic personality. Take the example of Abu Hanifah he indeed exhibited an Islamic personality. Once Imaam Abu Hanifah attended a Janaazah on an extremely hot day. The only shade in the vicinity was the shadow of a wall belonging to his debtor. However, Imaam Abu Hanifah remained standing in the blazing hot sun. When people insisted that he stand in the shade, he said: "The owner of the house is my debtor. It is not permissible for me to derive any gain from him because the benefit produced by every qardh (loan) is riba (interest)."Characteristics of the DebtorThe Prophet(saw) said: “All the sins of a Shahid (martyr) are forgiven except debt.”The above hadith clearly shows the severity of not paying back debts. The Muslim who dies before paying back his debt will be a sinner earning the displeasure of Allah(swt) in the life hereafter. The debtor or borrower must honour his promise of paying back what he has borrowed.Borrowers must appreciate the help they receive and try as best as they can to ensure repayment on time. Unfortunately, it is often the case that friends or relatives abuse the kindness given to them. In financial dealings, people often do not honour their promises. Many of us can relate stories that we, or some close relatives of ours experienced, and all confirm that many people are ready to request loans and credits, but they shy away when it is time for them to settle such debts.When trying to retrieve the loan back, some debtors act in a manner contrary to the etiquette of Islam. At times, the borrower is ready to insult the creditor who asks him for repayment and some will even go so far in persistently lying to the creditor to try and extend the repayment date or even not pay the debt at all.Narrated by Aisha,“Allah’s Messenger (saw) used to invoke Allah in the prayer saying, “ O Allah, I seek refuge with you from all sins, and from being in debt.” Someone said, O Allah’s Messenger! (I see you) very often you seek refuge with Allah from being in debt. He (saw) replied, “ If a person is in debt, he tells lies when he speaks, and breaks his promises when he promises.”What can be upsetting to the creditor is when the borrower has agreed to pay on a particular date but does not pay the amount due on time nor even contact the creditor. Weeks and months or even years can pass by without the borrower picking up the phone and explaining why he has not paid back the money he had borrowed. Long periods of non-communication by the debtor will only build suspicion and ill feeling towards the borrower.Such a mentality by the debtor is unacceptable and he must take the necessary steps to reassure the creditor that he is doing all he can to pay back what he has borrowed. He does not know when death will reach him and the debt will still be hanging on his neck even in the grave.It has been narrated:A dead person was brought to the Prophet so that he might lead the funeral prayer for him. He asked, "Is he in debt?" When the people replied in the negative, he led the funeral prayer.Another dead person was brought and he asked, "Is he in debt?" They said, "Yes." He (saw) refused to lead the prayer and said, "Lead the prayer of your friend." Abu Qatada said, "O Allah's Apostle! I undertake to pay his debt." Allah's Apostle then led his funeral prayer.”Unfortunately this has led many Muslims to refrain from the good deed of extending loans even to their immediate relatives because of their bitter experiences. When such a common mentality is widespread it clearly indicates a problem in society. The business environment can be extremely hostile and even abusive when the creditor is trying to retrieve his money from the debtor. This often will lead to Muslims falling out with each other and perhaps never talking to one another again. Often both parties will slander one another to the point that the creditor will eventually take legal proceedings against the debtor.This mentality of lying and giving excuse after excuse by the Muslim debtor is a result of the office environment that breeds the benefit mentality. Such atmospheres are driven to obtain the maximum amount of profit and benefit in any way they can, having no regard for honesty and fair-trading.Take for example a Muslim who owes money to somebody but delays the payment because he ‘perceives‘ that the lender is rich and that he is not in need of it urgently. The creditors financial status, i.e. whether he is rich or poor, should not be questioned nor should it be the reason for repaying a debt early or late. The moment the debtor has the capability of paying, he is obliged to do so from Shara’a. He would be sinful for holding onto something that doesn’t belong to him.Narrated Abu Huraira: Allah’s Messenger said: “ Procrastination (delay) in repaying debts by a wealthy person is injustice.”This illustrates how society is moulding his inclinations and not the divine texts.Thus if a lender anticipates that giving a loan to a Muslim will sow the seeds of discord then he would be prudent to refrain from giving a loan to such a person. Only until the borrower aligns his disposition in accordance with the divine text would it be safe to enter a loan agreement.Divine Rules regarding loan (Al Qardh) TransactionsIt is extremely important that the loan agreement fulfils the basic principles of contracts in Islam. These principles are as follows:§ Both parties should be legally from Shar’a capable to enter into the qardh contract.Islam obliges (fard) that the parties must fulfil the following requirements. Those entering the agreement must be:Baligh ( reached the age of puberty )'aqil ( sane )rashid ( of sound judgement )Allah (swt) says,"Make trial of orphans until they reach the age of marriage; if then you find sound judgement in them, release their property to them." [Al-Nisa : 6].This ayat states that the age of marriage and sound judgement is the age of maturity, and thereby a mature person is capable to enter into any transaction validly.The Prophet (saw) said,"The pen is raised for three groups (of people) that is, they will not be responsible for their actions: the insane until they become sane, those who are sleeping until they are awaken, and the youth until they reach puberty."The above hadith makes it clear that a person, who has not attained the age of puberty, may not be a responsible party for al-qardh agreement.§ Ijab (offer) and qabul (acceptance) of the qardh must be clearly made before entering into the loan contract:Both parties must be extremely clear on their agreement i.e. what is being offered and what is being accepted. The ijab and qabul should be clearly expressed and indicated in the contract, otherwise the loan contract might create a dispute in the future.§ The date of payment should be specifiedIt is recommended (mandoub) the date of payment should be mentioned in the loan agreement. If no date is specified, the transaction may lead to ambiguity and dispute in the future between the lender and the borrower."Whoever enters into a contract of salam should specify the date of delivery and the amount of subject matter."§ The loan contract should be written down.It is mandoub that both parties agree to write down the loan agreement. This will ensure that future disputes are avoided.Allah(swt) says,"O you who believe! When you deal with each other in transactions involving future obligations for a fixed period of time reduce them in writing." [Al-Baqarah : 282]Unfortunately, some of us think that if they are requested to write down the loan agreement, then such a request means that the creditors do not trust them, when it is Allah(swt) that has made this a recommendation.§ Getting two witnesses.It is mandoub that both parties agree upon witnesses being present. This will ensure that future disputes are avoided.Allah(swt) tells us that two male witnesses should be present, if two men are not available, then one man and two women will have the same effect."And get two witnesses out of your own men and if there are not two men, then a man and two women." [Al-Baqarah : 282]Being patient with the struggling DebtorThe Prophet (saw) said, "Whoever relieves a believer from a difficulty in this world, Allah will relieve him from his difficulty and Allah will facilitate him in this world and the world hereafter."Taking all the above considerations into account will not guarantee your loan being returned on time. A debtor may be struggling to repay his debt despite his promise to pay it back on a particular date. He is doing all he can within his capability to pay it back. He keeps in regular contact with the lender to update him on his efforts to pay back what he borrowed. He is conscious of the severity of not paying the loan back and he makes a plea to Allah(swt) to aid him in his difficult times. Such a person who exhibits ikhlas khalis (pure sincerity) deserves help and the lender must be patient with him and understanding of his difficult circumstances.The Prophet (saw) said, "Once a man died and was asked, 'What did you use to say (or do) (in your life time)?' He replied, 'I was a businessman and used to give time to the rich to repay his debt and (used to) deduct part of the debt of the poor.' So he was forgiven (his sins.)"The Debtor showing his appreciation towards the CreditorThe Creditor is forbidden to ask for anything extra from his loan, as this is clearly Riba (interest). However it is perfectly acceptable for the Debtor to give something more than he received, as a token of appreciation for the creditors good deed.The Prophet(saw) said,A man demanded his debts from Allah’s Messenger in such a rude manner that the Companions of the Prophet intended to harm him, but The Prophet (saw) said: “ Leave him, no doubt, for he (the creditor) has the right to demand it (harshly). Buy a camel and give it to him.” They said, “ The camel that is available is older than the camel he demands. The Prophet (saw) said “ Buy it and give it to him, for the best among you are those who repay their debts handsomely.”ConclusionEthical trading is absent from the Capitalist mentality. This corrupt way of thinking is firmly embedded in the Aqeedah of Capitalism. Morality does not enter the financial world because there is nothing to gain materially from ethical trading in Capitalist societies. Hence the relationship between the Muslim Creditor and Muslim Debtor must at all times be based on the pure Islamic Aqeedah. The Creditor must ensure his motive is free from any material gain, he must be patient and compassionate with the sincere struggling debtor if he wishes to earn a place in Jannah. The Debtor must be honest, sincere and appreciative for the kindness shown to him. His attempt to repay his loan on time must be serious and genuine if he too wishes to enter Jannah.Muslims must abandon this benefit mentality and adopt the Islamic mentality in their financial dealings. This is paramount when dealing with your Muslim brother or a Non-Muslim. Indeed the Muslim must adopt the purity of Islamic trading, as this will demonstrate to the non-Muslims the stark difference in our personality to that of the Capitalist personality.By S. al-Baruchi
The proverb in the title has an unfortunate reality. Many Muslims are finding themselves increasingly in debt. Creditors have to persistently remind the debtor of the loan they have ‘forgotten’ to pay. It is extremely rare, that you find the debtor reminding the creditor of his own debt. Often the relationship between the creditor and the debtor turns sour because Islamic principles are not the basis for their financial dealings and disputes. This article discusses the Shariah rules pertaining to loans and debts. Indeed, Islam is very strict upon the Creditor’s motive and the Debtor repaying back what he has borrowed.Characteristics of the LenderThe Prophet (saw) said: "Every loan is a sadaqah".Islam encourages those who have enough wealth to give loans to those who request it. However it is important that the creditor or the lender should not seek any material benefit from giving a loan. He must seek the ethical value when advancing money as a loan and not expect anything material in return. Hence the lender is enhancing his personal quality of generosity and trying to remove any traits of stinginess from his soul. This is the definition of a loan in Islam. The motive is to help a person in need and seek only the reward and pleasure of Allah (swt).This is often overlooked and sometimes the creditor may expect a material favour in return of his loan. Such a mentality by the lender is extremely dangerous, as the intent of a loan is not to seek the material value. This way of thinking produces a despicable being that thrives on personal greed and interests. This mentality of seeking a material benefit in every single action in life is a product of the Capitalist ideology that we unfortunately live under and sadly many Muslims are behaving in a similar manner.The source of our inclinations must come from the pure Islamic Aqeedah and not the Secular Creed of Capitalism. Only by referencing the divine sources for our mentality and inclinations can we say that we have an Islamic personality. Take the example of Abu Hanifah he indeed exhibited an Islamic personality. Once Imaam Abu Hanifah attended a Janaazah on an extremely hot day. The only shade in the vicinity was the shadow of a wall belonging to his debtor. However, Imaam Abu Hanifah remained standing in the blazing hot sun. When people insisted that he stand in the shade, he said: "The owner of the house is my debtor. It is not permissible for me to derive any gain from him because the benefit produced by every qardh (loan) is riba (interest)."Characteristics of the DebtorThe Prophet(saw) said: “All the sins of a Shahid (martyr) are forgiven except debt.”The above hadith clearly shows the severity of not paying back debts. The Muslim who dies before paying back his debt will be a sinner earning the displeasure of Allah(swt) in the life hereafter. The debtor or borrower must honour his promise of paying back what he has borrowed.Borrowers must appreciate the help they receive and try as best as they can to ensure repayment on time. Unfortunately, it is often the case that friends or relatives abuse the kindness given to them. In financial dealings, people often do not honour their promises. Many of us can relate stories that we, or some close relatives of ours experienced, and all confirm that many people are ready to request loans and credits, but they shy away when it is time for them to settle such debts.When trying to retrieve the loan back, some debtors act in a manner contrary to the etiquette of Islam. At times, the borrower is ready to insult the creditor who asks him for repayment and some will even go so far in persistently lying to the creditor to try and extend the repayment date or even not pay the debt at all.Narrated by Aisha,“Allah’s Messenger (saw) used to invoke Allah in the prayer saying, “ O Allah, I seek refuge with you from all sins, and from being in debt.” Someone said, O Allah’s Messenger! (I see you) very often you seek refuge with Allah from being in debt. He (saw) replied, “ If a person is in debt, he tells lies when he speaks, and breaks his promises when he promises.”What can be upsetting to the creditor is when the borrower has agreed to pay on a particular date but does not pay the amount due on time nor even contact the creditor. Weeks and months or even years can pass by without the borrower picking up the phone and explaining why he has not paid back the money he had borrowed. Long periods of non-communication by the debtor will only build suspicion and ill feeling towards the borrower.Such a mentality by the debtor is unacceptable and he must take the necessary steps to reassure the creditor that he is doing all he can to pay back what he has borrowed. He does not know when death will reach him and the debt will still be hanging on his neck even in the grave.It has been narrated:A dead person was brought to the Prophet so that he might lead the funeral prayer for him. He asked, "Is he in debt?" When the people replied in the negative, he led the funeral prayer.Another dead person was brought and he asked, "Is he in debt?" They said, "Yes." He (saw) refused to lead the prayer and said, "Lead the prayer of your friend." Abu Qatada said, "O Allah's Apostle! I undertake to pay his debt." Allah's Apostle then led his funeral prayer.”Unfortunately this has led many Muslims to refrain from the good deed of extending loans even to their immediate relatives because of their bitter experiences. When such a common mentality is widespread it clearly indicates a problem in society. The business environment can be extremely hostile and even abusive when the creditor is trying to retrieve his money from the debtor. This often will lead to Muslims falling out with each other and perhaps never talking to one another again. Often both parties will slander one another to the point that the creditor will eventually take legal proceedings against the debtor.This mentality of lying and giving excuse after excuse by the Muslim debtor is a result of the office environment that breeds the benefit mentality. Such atmospheres are driven to obtain the maximum amount of profit and benefit in any way they can, having no regard for honesty and fair-trading.Take for example a Muslim who owes money to somebody but delays the payment because he ‘perceives‘ that the lender is rich and that he is not in need of it urgently. The creditors financial status, i.e. whether he is rich or poor, should not be questioned nor should it be the reason for repaying a debt early or late. The moment the debtor has the capability of paying, he is obliged to do so from Shara’a. He would be sinful for holding onto something that doesn’t belong to him.Narrated Abu Huraira: Allah’s Messenger said: “ Procrastination (delay) in repaying debts by a wealthy person is injustice.”This illustrates how society is moulding his inclinations and not the divine texts.Thus if a lender anticipates that giving a loan to a Muslim will sow the seeds of discord then he would be prudent to refrain from giving a loan to such a person. Only until the borrower aligns his disposition in accordance with the divine text would it be safe to enter a loan agreement.Divine Rules regarding loan (Al Qardh) TransactionsIt is extremely important that the loan agreement fulfils the basic principles of contracts in Islam. These principles are as follows:§ Both parties should be legally from Shar’a capable to enter into the qardh contract.Islam obliges (fard) that the parties must fulfil the following requirements. Those entering the agreement must be:Baligh ( reached the age of puberty )'aqil ( sane )rashid ( of sound judgement )Allah (swt) says,"Make trial of orphans until they reach the age of marriage; if then you find sound judgement in them, release their property to them." [Al-Nisa : 6].This ayat states that the age of marriage and sound judgement is the age of maturity, and thereby a mature person is capable to enter into any transaction validly.The Prophet (saw) said,"The pen is raised for three groups (of people) that is, they will not be responsible for their actions: the insane until they become sane, those who are sleeping until they are awaken, and the youth until they reach puberty."The above hadith makes it clear that a person, who has not attained the age of puberty, may not be a responsible party for al-qardh agreement.§ Ijab (offer) and qabul (acceptance) of the qardh must be clearly made before entering into the loan contract:Both parties must be extremely clear on their agreement i.e. what is being offered and what is being accepted. The ijab and qabul should be clearly expressed and indicated in the contract, otherwise the loan contract might create a dispute in the future.§ The date of payment should be specifiedIt is recommended (mandoub) the date of payment should be mentioned in the loan agreement. If no date is specified, the transaction may lead to ambiguity and dispute in the future between the lender and the borrower."Whoever enters into a contract of salam should specify the date of delivery and the amount of subject matter."§ The loan contract should be written down.It is mandoub that both parties agree to write down the loan agreement. This will ensure that future disputes are avoided.Allah(swt) says,"O you who believe! When you deal with each other in transactions involving future obligations for a fixed period of time reduce them in writing." [Al-Baqarah : 282]Unfortunately, some of us think that if they are requested to write down the loan agreement, then such a request means that the creditors do not trust them, when it is Allah(swt) that has made this a recommendation.§ Getting two witnesses.It is mandoub that both parties agree upon witnesses being present. This will ensure that future disputes are avoided.Allah(swt) tells us that two male witnesses should be present, if two men are not available, then one man and two women will have the same effect."And get two witnesses out of your own men and if there are not two men, then a man and two women." [Al-Baqarah : 282]Being patient with the struggling DebtorThe Prophet (saw) said, "Whoever relieves a believer from a difficulty in this world, Allah will relieve him from his difficulty and Allah will facilitate him in this world and the world hereafter."Taking all the above considerations into account will not guarantee your loan being returned on time. A debtor may be struggling to repay his debt despite his promise to pay it back on a particular date. He is doing all he can within his capability to pay it back. He keeps in regular contact with the lender to update him on his efforts to pay back what he borrowed. He is conscious of the severity of not paying the loan back and he makes a plea to Allah(swt) to aid him in his difficult times. Such a person who exhibits ikhlas khalis (pure sincerity) deserves help and the lender must be patient with him and understanding of his difficult circumstances.The Prophet (saw) said, "Once a man died and was asked, 'What did you use to say (or do) (in your life time)?' He replied, 'I was a businessman and used to give time to the rich to repay his debt and (used to) deduct part of the debt of the poor.' So he was forgiven (his sins.)"The Debtor showing his appreciation towards the CreditorThe Creditor is forbidden to ask for anything extra from his loan, as this is clearly Riba (interest). However it is perfectly acceptable for the Debtor to give something more than he received, as a token of appreciation for the creditors good deed.The Prophet(saw) said,A man demanded his debts from Allah’s Messenger in such a rude manner that the Companions of the Prophet intended to harm him, but The Prophet (saw) said: “ Leave him, no doubt, for he (the creditor) has the right to demand it (harshly). Buy a camel and give it to him.” They said, “ The camel that is available is older than the camel he demands. The Prophet (saw) said “ Buy it and give it to him, for the best among you are those who repay their debts handsomely.”ConclusionEthical trading is absent from the Capitalist mentality. This corrupt way of thinking is firmly embedded in the Aqeedah of Capitalism. Morality does not enter the financial world because there is nothing to gain materially from ethical trading in Capitalist societies. Hence the relationship between the Muslim Creditor and Muslim Debtor must at all times be based on the pure Islamic Aqeedah. The Creditor must ensure his motive is free from any material gain, he must be patient and compassionate with the sincere struggling debtor if he wishes to earn a place in Jannah. The Debtor must be honest, sincere and appreciative for the kindness shown to him. His attempt to repay his loan on time must be serious and genuine if he too wishes to enter Jannah.Muslims must abandon this benefit mentality and adopt the Islamic mentality in their financial dealings. This is paramount when dealing with your Muslim brother or a Non-Muslim. Indeed the Muslim must adopt the purity of Islamic trading, as this will demonstrate to the non-Muslims the stark difference in our personality to that of the Capitalist personality.By S. al-Baruchi
Insurance prohebited in islam
The prohibition of Insurance in Islam
The following is a translation of a section from the excellent book 'The Economic System of Islam' by Sheikh Taqi ud-deen an-Nabhani.Insurance (Ta’meen)Insurance whether on life, goods, property or any of its numerous types is a contract. It is a contract between the insurance company and the insuring person in which the latter asks the insurance company to give him a promise that it will compensate him for that (‘Ayn) which is spoilt or destroyed or for its price with regard to goods or property, or a certain sum of money with regard to life and the like. This takes place if the accident occurs within a defined period, in exchange for a certain amount of money (premium); and the (Insurance) company accepts this.Based upon this offer and acceptance, the insurance company undertakes to compensate the insuring person, within certain conditions approved by the two sides, either for the thing which he loses or its price when an accident occurs, or a sum of money which they have agreed upon e.g. in the event of his goods being destroyed, his car being damaged, his house being burnt down, his property being stolen, him dying or the like occurred during a certain period of time, he will be compensated, in exchange for a certain amount of money (premium) which the insuring person pays to the company during that defined period of time.It appears from the above that insurance is an agreement between the insurance company and the insuring person over the type of insurance and its conditions, so it is a contract. However, according to this contract which was concluded between the two sides . i.e. the agreement . the company gives an undertaking to compensate or to pay a certain amount of money within the agreed conditions. So if an accident occurred to the insuring person upon which the terms of the contract apply, then the company becomes obliged to compensate him for the destroyed thing orits price according to the market price at the time of the accident. The company is free to pay the price or to compensate for the loss to the insuring person or to others. This compensation becomes a right due to the insuring person, in the company’s responsibility (Dhimma) once the matter mentioned in the contract has occurred, provided the insurance company is convinced that he deserves it or if the court gave such a verdict.The term ‘insurance’ has been used in this matter. Insurance could be to the benefit of the insuring person, or to the benefit of others such as his children, wife, inheritors, or any other person or group (beneficiary) assigned by the insuring person. Calling this contract ‘life insurance’, or insurance on goods, the voice or any other asset is aimed to market this transaction to the people. Otherwise, the fact of the matter is that the insuring person does not insure his life. He, rather, insures that a certain sum of money will be paid to his children, wife or inheritors or to any other named beneficiary designated by him, when his death occurs. Similarly he does not insure his goods, car, property etc: rather, he insures so as to be compensated for the insured object or its price in case it is injured or damaged. So it is, in fact, a guarantee (Dhamaan), for him or others to obtain a certain sum of money or compensation if something occurred to him that took his life or damaged his property, and therefore it is not a guarantee for his life or his property. This is the reality of insurance. The accurate study of it shows it to be invalid (Batil) from two angles:Firstly: It is a contract because it is an agreement between two parties, and it includes offer and acceptance, where the offer is from the insuring party and the acceptance is from the company. So in order that this contract be legitimately valid from the Shar’a (divine revelation) point of view, it must contain the Shar’a conditions of the contract. If it contains such conditions it becomes valid, otherwise not. From the Shar’a point of view, the contract should apply upon an object or a benefit. So if it did not apply upon either a thing or benefit it would be invalid, because it would not apply upon a matter that makes it a legitimate contract. This is so because the legitimate contract applies either to a thing in exchange for something else as is the case with selling, forward buying/advance sale (Salam), company and the like; or it applies upon a thing without an exchange like the gift; or it applies upon a benefit in exchange for compensation like leasing; or to a benefit without compensation like lending. Thus the legitimate contract must apply upon something.The insurance is not a contract that applies upon an object or a benefit; rather it is a contract that applies upon a pledge i.e. guarantee (Dhamana). The pledge or the guarantee does not represent an object for it cannot be consumed nor its benefit be used; nor does it represent a benefit, because no benefit derives from that guarantee itself either by leasing or by lending. As for obtaining money based upon this guarantee, this is not considered its benefit; rather it is a result of a transaction. Therefore, the insurance contract is not considered to apply upon a thing or a benefit, and it does not include all of the conditions required by the Shar’a in a legitimate contract, so it is void.Secondly: The company gives a pledge to the insuring person within certain conditions, so it is a form of guarantee (Dhamaan). Accordingly, the conditions required by Shar’a in relation to the guarantee have to be applied to the insurance contract so as to be considered a legitimate guarantee. If it contained these conditions it would be legitimate, otherwise not. Referring to the guarantee we find:The guarantee is where the guarantor (Dhaamin) joins his responsibility (Dhimma) to the responsibility of the person guaranteed for (Madhmoon ‘Anhu) in committing oneself to a certain right (Haqq). So it must include joining one’s responsibility to another’s responsibility; also there must be a guarantor, a person guaranteed for and a person guaranteed (Madhmoon Lahu). So the guarantee is the mandatory commitment (Iltizam) of a right as one’s responsibility without compensation. A condition of the guarantee’s validity is that it should be with regard to a financial right which is already due (for repayment) or which will become due. So if the pledge was not in respect of a due right or a right that will become due, the guarantee is not valid. This is so because a guarantee is the joining of one’s responsibility to another’s responsibility in relation to its fulfilment, so if there is no right in the responsibility of the person guaranteed for, then there is no joining of responsibilities. This is quite clear in the due right.As for the right which will become due later, as for example when a man says to a woman: ‘Marry this person and I guarantee your dowry’, the guarantor has joined his responsibility to the responsibility of the person guaranteed for such that the guarantor will be bound like the guaranteed for, and that which is proved in the responsibility of the guaranteed for is similarly proved in the guarantor’s responsibility. Whereas, if there is no right due upon anyone or a right that will become due later, then there is no meaning to the guarantee as there is no joining of responsibilities; such a guarantee therefore is not valid. Therefore, if the right was not due upon the neck of the person guaranteed for or it does not become due later, the guarantee is not valid. This is because it is a condition that the person guaranteed for has a guarantor for an object if it is damaged or destroyed, or he is responsible for a debt whether the matter is actual in the case where the right was due and proved to be his responsibility or he is potentially responsible in the case where the right will become due later. So, if the person guaranteed for was not responsible, whether immediately or potentially, the guarantee is invalid because whatever is not due upon the person guaranteed for is not due upon the guarantor. So, for example, in the case of a person who receives clothes from (e.g. cleaner), and somebody told another person: ‘Send your clothes to him and I will guarantee them.’ If the clothes were then damaged, would the guarantor be responsible for the price of the clothes on behalf of the person who received them? The answer is as follows: If the clothes were damaged without his (i.e. the cleaner’s) action or negligence, then the guarantor guarantees nothing because, in the first place, the person guaranteed for (the cleaner) bears no responsibility for the damage. Since the principal (Aseel) is not liable for the damage then, with greater reason, neither is the guarantor. Therefore, there should be a right due to the person guaranteed for from other people, or it will become due later, in order that the guarantee becomes valid. So establishing the right for the person guaranteed for, whether immediately or potentially, is a condition for the validity of the guarantee. However, it is not a condition that the person guaranteed for (Madhmoon ‘Anhu) nor the guaranteed person (Madhmoon Lahu) be named; thus the guarantee will be valid if these were unknown (i.e. not named). So if a person said to another: ‘Give your clothes to a cleaner,’ and the latter said: ‘I am afraid that he will damage them.’ Then the former responded: ‘Give your clothes to a cleaner and I guarantee them if they are damaged’ without specifying the cleaner, the guarantee is valid. So if he gave them to a cleaner and they were damaged, the guarantor would be responsible even if the person guaranteed for was not named. Similarly, if he said: ‘so and so is a good cleaner, and I guarantee him against any damage for any person who gives to him his clothes,’ the guarantee is valid though the guaranteed person is unknown.It is clear in the evidence of the guarantee that there is a joining of one’s responsibility to another’s responsibility, and it is a guarantee of a right due upon the responsibility (Dhimma). It is also clear that there is a guarantor, a person guaranteed for and a guaranteed person. It is also clear that it is given without compensation, and that the person guaranteed for and the guaranteed person could be unknown. The evidence for that is what Abu Dawud narrated from Jabir who said: “The Prophet (saw) would not pray over any person who died while indebted. A dead man was brought. He (saw) said: ‘Is he indebted?’ They said: ‘Yes, two dinars.’ He (saw) said: ‘Pray for your companion.’ Abu Qatadah al-Ansari said: ‘O Messenger of Allah, they are upon me.’ The Messenger of Allah (saw) then prayed over him. When Allah (swt) opened the land (i.e. conquests in Jihad) for the Messenger of Allah (saw), he (saw) said: ‘I am more entitled to (i.e. responsible for) every believer than his own soul. So if anyone leaves a debt it is upon me to repay, and whoever leaves wealth it is for his inheritors.”’ It is clear in this Hadith that Abu Qatadah had joined his responsibility to the responsibility of the dead man in committing a financial right due upon the debtor. And it is clear in the Hadith that the guarantee includes a guarantor, a person guaranteed for and a guaranteed person; and the guarantee which each of them (the dead person and the guarantor) guaranteed to pay was a right due upon the responsibility (of the deceased) and it was given without compensation. It is also clear that the person guaranteed for i.e. the deceased and the guaranteed person i.e. the owner of the debt were unknown at the time of the guarantee. So the Hadith contained the conditions for the validity of a guarantee, and the conditions for its contracting (In’iqad).This is the guarantee in view of the Shar’a. By applying the pledge of insurance which is definitely a guarantee, upon it, we find that insurance is devoid of all the conditions which the Shari’ah enunciated regarding the validity and contracting of the guarantee. In insurance, there is no joining of a responsibility to a responsibility in any way. The insurance company did not join its responsibility to the responsibility of another to commit itself in paying money due to the insuring person so there is no guarantee; thus the insurance is void. In insurance, there is no financial right due to the insuring person from anyone that the insurance company committeditself to pay. This is because the insuring person has no financial right against anyone that the company guaranteed, so insurance is devoid of the financial right. So the insurance company did not commit itself to any financial right so as to validate it as a guarantee in Shar’a. Moreover, what the company was committed to pay of compensation, price or money, was not a right due to the guaranteed person from other people at the time of concluding the insurance contract, whether immediately or potentially, so as to validate it as a guarantee. So the insurance company has guaranteed that which is not due either immediately or potentially, making the guarantee invalid and the insurance consequently becomes void. Furthermore, insurance does not include a person guaranteed for, because the insurance company did not guarantee for anyone a right due upon him so as to be called a guarantee; thus the insurance contract was devoid of an essential element required to exist in the view of Shar’a, namely the presence of the person guaranteed for. This is because it is essential that there should exist in the guarantee, a guarantor, a person guaranteed for, and a guaranteed person. Since the insurance contract did not include a person guaranteed for, it is void. Additionally, when the insurance company pledged to compensate for the object or pay its price if it was damaged, or pay money in case an accident occurred, it pledged to make this payment in return for a certain amount of money (or premium). So this is a commitment (Iltizam) in return for compensation which is not allowed, as one of the conditions for the valid guarantee is that it is without compensation. Thus the presence of compensation (premium for the insurance company) invalidates it. This clarifies the extent to which the contract of insurance is devoid of the conditions of guarantee which Shar’a has stated, and its failure to satisfy the conditions for concluding the guarantee and the conditions for its validity. Therefore, the pledge document (Sanad) which the company gives, guaranteeing thereby compensation and price or guaranteeing property is void from its basis, such that insurance, in its totality, is void in the view of Shar’a.Therefore, insurance in its totality is prohibited by Shar’a, whether it is insurance on life, goods, property or any other thing(s). The reason for its prohibition is that its contract is void in the view of Shar’a; and the pledge which the insurance company gives according to this contract is void according to Shar’a. So taking money because of this contract and this pledge is prohibited, and it is considered to be the earning of money illegitimately which is included as illicit money (Mal as-Suht).
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