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Islamic Financial System
IPIEF Week 2nd
The Concept of Money
 Money is essential for the activity of IFIs.
 Definitions of money:
 Based on fiqh, money is synonym of nuqud or
tsaman, which is defined as a medium of
exchange or transaction as well as a
measurement of the value of goods or services.
 Legally, it’s defined as thing that’s formulated by
law as a money.
 Based on its function, it’s defined as everything
that performs the functions of money included as
a medium of exchange, a mode of payment, a
value store and as a unit of measurement.
The Forms of Money
 Full bodied money/commodity money
 Fiat money
Commodity Money
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Has intrinsic value and long lasting
Gold and silver
Applied in the Islamic State period
In the next development, modified as a
gold reserve standard
 paper money supported by gold and
silver
 printed only if gold/silver is provided
 gold standard
Fiat Money
Paper money
Not supported by commodity
Only supported by government policy
Managed money standard
Government responsible for the
maintaining of the paper value
 The paper its self has no value actually
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Forms of Fiat Money
 Cash
 Non cash
Discussion in depth provided in
the macro economic subject
Financial System
 Subsystem of economic system;
 Allows the transfer of money between
savers and borrowers;
 Comprises a set of complex and
closely interconnected financial
institutions, markets, instruments,
services, practices, and transactions.
The Importance of Financial System
 Crucial to the allocation of resources in a
modern economy;
 Channels household savings to the corporate
sector and allocate investment funds among
firms;
 Allows inter temporal smoothing of
consumption by households and expenditures
by firms;
 Enables households and firms to share risks
 Has impact on saving, investment, technology
innovation, and economic development;
 Controlling and monitoring managers of firms.
Islamic Financial System
 A set of rules and laws, collectively
referred to as shariah, governing
economic, social, political, and
cultural aspects of Islamic societies
(Iqbal, 1997);
 Comprises of:
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Islamic
Islamic
Islamic
Islamic
Financial
Financial
Financial
Financial
Instruments
Institutions
Rules and Regulations
Control and Supervision
Basic Principles of Islamic Financial System
 Syar’i principles
 Based on Al Qur’an and As Sunnah
 Tabi’i principles
 Based on the ijtihad and ijma’
 Related to contemporary issues such
as risk management, cash flow
management, technical analysis,
capital management and so forth.
Syar’i principles
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Prohibition of interest (riba)
Prohibition of speculative behavior (maisir)
Prohibition of uncertainty (gharar)
Risk sharing between suppliers of fund (investor) and
enterpreneur
Money as “potential” capital
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Sanctity of contracts
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Money becomes actual capital only when it joins hands with
other resources to undertake a productive activity
time value of money, only when it acts as capital, not when it
is “potential” capital.
Disclosure of information and upholding the obligation contract
is sacred duty
To reduce information asymmetric and moral hazard
Shariah-approved activities
Riba
 Usury
 Excess, increase or addition
 Types:
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Riba
Riba
Riba
Riba
Riba
Riba
Al
Al
Al
Al
Al
Al
Buyu’
qard
Jahiliyah
Fadhl
Nasa
Nasia
Riba Al Buyu’
 Usury of trade
 Referring to instances where the
usury is achieved through a trading
transaction as opposed to a loan
transaction
Riba Al Qard
 Usury on a loan
 Analogous to the charging of interest
on the loan of an asset
 Any excess for precondition to the
borrower
Riba Al Jahiliyah
 The kind of usury practised during the
pre-Islamic times among the Arabs
 Involving a delay in payment of a
debt in return for an increase in its
amount
 Debt payment above the actual amount
of the debt because the debtor fails to
pay on time
Riba Al Fadhl
 Usury of surplus
 The usury is achieved through an unequal
exchange of quality or quantity
 An exchange of unequal qualities or quantities
of the same commodity simultaneously
 The exchange of ribawi commodities at the
different quality and or quantity
Riba Nasa
 Usury of postponement
 A form of usury in which an exchange of
two equal qualities or quantities occurs, but
where the exchange is not completed on
the spot (i.e. hand to hand).
 There is thus a postponement in the
completion of the exchange.
 The term is sometimes used
interchangeably with 'riba al-nasia'
Riba Nasia
 Usury of waiting
 Used variously by scholars:
 some regarding it as being that usury which is
achieved solely by effecting a delay in the
exchange of two countervalues in a transaction
 others regarding it as a combination of riba alfadl and riba al-nasa thus giving rise to both a
delay and an unequal exchange of quality or
quality
 Differences/excess/additional to the
exchanged commodity because of the
different time of delivery/payment
The Implication of Riba to the Sale
and Purchase Transaction
 Sale and purchase of similar ribawi commodities
should be performed at the same quantity and quality
and must be hand to hand.
 Sale and purchase of different ribawi commodities at
the different quantity and quality is permissible but it
should be performed on the spot.
 The exchange of ribawi commodities to non ribawi
commodities may not be at the same quantitiy as well
as quality. The commodities should be transferred at
the same time of aqad.
 The exchange of non ribawi commodities at the
different quality and quantity is permissible but must
be deliverd on the spot.
Characteristics of Islamic Financial System
Chapra (2000)
 To achieve the economic welfare through
utilizing resources efficiently;
 Without producing unlawful product
 Without great gap between the poor and the rich
(Equitable distribution)
 Without harming current/next generation as well
as environment
 Stability of currency value
 Mobilization of saving investment to
encourage productive activity
 To provide effective financial services.