Module 5. Islamic alternatives to riba.pptx

PROFIT LOSS SHARING TECHNIQUES
MUTUAL CO-OPERATION
GOVERNANCE AND TRANSPARENCY
INTEREST AND ECONOMIC GROWTH
Riba is generally termed for interest or usury
Riba is prohibited by Islam
With the prohibition of Riba Quran has suggested that trade has permitted by Allah
"But Allah has permitted trade and has forbidden interest.” (Surah al-Baqara: 275)
According to this ayah, trading and business activities should be promoted instead of taking loans and advance on the basis of interest.
Riba is forbidden because;
It corrupts society,
It implies improper appropriation of other people's property,
It acts such a way which ultimate effect is negative growth,
It demeans and diminishes human personality,
It is unjust
Prohibition of Riba: Prohibits Riba (Usury) or any other addition like this as it is not permissible in Shariah.
Profit-loss sharing (PLS) mechanism: Use profit-loss sharing mechanism in mobilizing as well as in investing the fund. It implies that rewards and risks are assumed equally by all parties.
Mutual co-operation: The Quran has explicitly ordered Muslims to help one another in furthering piety of God (taqwa) and virtue (birr) (Al-Quran 5:2).
Excessive risk is forbidden: Do not allow or assist in any excessive risky work like 'Gharar' or 'Mysir' as they are forbidden in Islam for their excessive risk or absolute uncertainty.
Money is a potential capital: The money is considered as a potential capital which will be actual capital only when it joins hands with other resources to undertake a productive activity. Money is not considered as a product but, just a medium of exchanging goods and services.
Unethical businesses are forbidden: Do not operate, finance or support any business engaged in 'Haraam' activities, such as wine business.

1. ISLAMIC ALTERNATIVES TO RIBA PROFIT LOSS SHARING TECHNIQUES MUTUAL CO-OPERATION GOVERNANCE AND TRANSPARENCY INTEREST AND ECONOMIC GROWTH

2. RIBA Riba is generally termed for interest or usury Riba is prohibited by Islam With the prohibition of Riba Quran has suggested that trade has permitted by Allah " But Allah has permitted trade and has forbidden interest. ” ( Surah al- Baqara : 275) According to this ayah, trading and business activities should be promoted instead of taking loans and advance on the basis of interest. Riba is forbidden because; It corrupts society, It implies improper appropriation of other people's property, It acts such a way which ultimate effect is negative growth, It demeans and diminishes human personality, It is unjust

3. PRINCIPLES OF ALTERNATIVE FINANCE Prohibition of Riba : Prohibits Riba (Usury) or any other addition like this as it is not permissible in Shariah. Profit-loss sharing (PLS) mechanism: Use profit-loss sharing mechanism in mobilizing as well as in investing the fund. It implies that rewards and risks are assumed equally by all parties. Mutual co-operation: The Quran has explicitly ordered Muslims to help one another in furthering piety of God ( taqwa ) and virtue (birr) (Al-Quran 5:2) . Excessive risk is forbidden: Do not allow or assist in any excessive risky work like ' Gharar ' or ' Mysir ' as they are forbidden in Islam for their excessive risk or absolute uncertainty. Money is a potential capital: The money is considered as a potential capital which will be actual capital only when it joins hands with other resources to undertake a productive activity. Money is not considered as a product but, just a medium of exchanging goods and services. Unethical businesses are forbidden: Do not operate, finance or support any business engaged in ' Haraam ' activities, such as wine business.

4. PROFIT-LOSS SHARING (PLS) MECHANISMS MUSHARAKA: Partnership contract in which each parties contributes a share of capital and their time and effort DIMINISHING MUSHARAKA: Partnership contract like a Musharaka in which one of the partners buys the equity share of the other partner gradually until the title to the equity is completely transferred to the buying partner. MUDHARABA: Partnership contract of venture capital by which one party provides capital and other party provides their management skill or labour , time and effort MURABAHA: Markup sale contract that is sale of a product at the price as per the purchasing price with an agreed profit markup IJARAH: Lease based contract that the contract under which a specified permissible usufruct on rental basis ISTISNA: Manufacturing contract that involves the s ale of specified items required by customers to be manufactured or constructed BAI’ AL SALAM : It is a forward sale in which the purchase of a commodity for deferred delivery in exchange for immediate payment

5. MUTUAL CO-OPERATION It m eans cooperation and voluntary provision of resources, services, and facilities, particularly among neighboring regional, zonal and local administrations to assist each other when existing resources prove to be inadequate and there is a need for additional support. The Quran has explicitly ordered Muslims to help one another in furthering piety of God ( taqwa ) and virtue (birr). Cooperation is the inter-personal relationship in Islam are based on the Universal brotherhood of all human beings. The mutual help rather than conflict should be the basis of all economic relationship. As members of a community the Muslims are visualized like one body, such as the whole body senses pain of any organ

6. GOVERNANCE AND TRANSPARENCY Combination of rules, processes or laws by which businesses are operated, regulated or controlled. The term governance evolves the internal and external factors that affect the interests of all parties. Key concepts of corporate governance are fairness, independence, honesty, transparency, accountability, integrity and responsibility Processes in governance involves: - Action plans Performance measurement Disclosure practices Executive compensation decisions Dividend policies Procedures for reconciling of conflicts Explicit or implicit contracts

7. BENEFITS OF GOVERNANCE Corporate success and economic growth. Maintains investors’ confidence. Capital raise efficiently and effectively. It lowers the capital cost. positive impact on the share price. Proper inducement to the owners as well as managers to achieve organizational objectives. Minimizes wastages, corruption, risks and mismanagement. Helps in brand formation and development. It ensures organization at fits the best interests of all

8. SCOPE OF GOVERNANCE Economic growth: It facilitating transparency, accountability, fairness & equity. It expedite financial market liquidity by boosting the confidence of investors. Regulatory authorities being professional, competent and fast Social responsibility: The companies would practice the social welfare as well as profit maximization. Increase investor confidence leading to boost investments and income generation for the society. Business expansion and development: Faster raising capital due to increased public confidence level. It causes a hike in demand and supply of stocks which reflects in Increase in stock price. Also minimize the mismanagement Increased efficiency, Lowered illegalities and mismanagement: It avoid impartial decision making and facilitate the relevant information adequately to the concerned. It lower illegal & unfair governance due to transparency promote a fair legal remedy to the aggrieved party by Accountability. Also lower market illegalities by the Surveillance of outside market players.

9. IMPORTANCE OF GOVERNANCE It ensures that board is able Recruiting independent directors It rationalizes the corporation’s internal and external management, Advancements in surveillance methods Appropriate risk management policies Promotes the transparent and fair procedures, thereby increasing management integrity Codes & norms improves its quality on global market Reduces illegal and defrauding practices

10. IMPORTANCE OF GOVERNANCE It provides adequate mechanisms for grievance redressal. It helps to cultivate ethical standards in management and company culture of integrity It facilitating an overall positive performance and sustainable growth. It promotes healthy competition among companies. It enhances corporate social responsibility in the economy, It aiding for socio-economic growth of the country.

11. INTEREST AND ECONOMIC GROWTH Higher central bank interest rates affect the cost of borrowing for banks, which then pass those costs onto businesses, consumers and even governments. Higher borrowing costs eventually slow borrowing and thus economic activity. Higher rates are affecting the value of currencies. Interest also affect borrowings for many emerging market countries who borrow on international markets. Lenders demand higher returns than those they can receive from safer investments This can quickly crimp many emerging market governments, which are already facing stiff increases in energy and food import costs. High interest rates encourage more people to save because they receive more on their savings. Demand falls and companies sell less.  When there is less money circulating in the economy, the economy slows down.

12. EFFECT OF RAISING INTEREST RATES

13. ……….. Increases the cost of borrowing . With higher interest rates, payments on credit cards and loans are more expensive. Thus it discourages people from borrowing and spending. Hence other areas of consumption will fall. Increase in mortgage interest payments.   I nterest payments on variable mortgages will increase. This will have a significant impact on consumer spending. Increased incentive to save rather than spend.  Higher interest rates make it more attractive to save in a deposit account because of the interest gained. Rising interest rates affect both consumers and firms . Therefore the economy is likely to experience falls in consumption and investment. Government debt interest payments increase.  Higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future. Reduced confidence . Interest rates affect consumer and business confidence. A rise in interest rates makes firms and consumers less willing to take out risky investments and purchases.

14. EFFECT OF HIGHER INTEREST RATES IN A PERSON AND AN ECONOMY

15. MUHAMMED ROSHAN P A ASSISTANT PROFESSOR B.Voc Islamic Finance EMEA College of Arts and Science, Kondotty [email protected] THANKS