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The financial system for the Islamic state

Islam has placed a financial system in accordance of which money does not exceed the goal for which it was [intended]. Among the most prominent features of the Islamic financial system is that it is a system that exists within the religious, social and economic directives of Islam; that its task is to support the message of Islam in the aforementioned areas; that the goal [of having the system] is to protect the Islamic economy; to provide work for every capable [person]; protecting such work; supporting production with its various kinds and work in its abundant availability and quality; distributing income to those deserving it in a just manner and guiding public and private spending. Financial resources at the time of the Prophet (peace and blessings be upon him) used to rely on obligatory alms, [items of] seized and surrendered [or ‘free’ Tr.] booty and the Jizya tax. During the time of the second caliph, Umar ibn al-Khattab, financial resources became plentiful and projects appeared that require multifarious expenditure, consequently other financial resources were created such as land tax and commercial tithing.

[NOTE: Jizya tax is a head tax on free non-Muslims under Muslim rule. [Hans Wehr Dictionary]]

 

 

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The Islamic organisation of stock exchanges require that chief elements of the salam contract [a type of forward sale contract], in that it is the selling of a known thing up to a certain term, be applied to future contracts in both paper money markets and commodities markets with the availability of the most important pillar of the forward sale contract, namely the intention to hand over the commodity. It is incumbent on Islamic governments to allocate equipment for surveillance over companies that deal in the stock exchange so that heads or managers of companies do not tamper with budgets thereby affecting the prices in the stock exchange and they and their subordinates gain benefit from differences in prices. This is in addition to strengthening surveillance on stock exchange traders generally so that no swindling takes place at the stock exchange. Consequently, those markets are able to perform an active role as a system for finance and investment.

 

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Commercial insurance, which insurance companies carry out, does not achieve the legal characteristic for co-operation and joint responsibility though both reciprocal insurance and social insurance achieve the functional characteristic which Islam prescribed for co-operation and making sacrifices. So these two types of insurance exist [based] on the intention of co-operation, joint responsibility and donation without desiring to pursue profits. Accordingly, they are both hence considered, in our view, a proper application of the theory of insurance. Moreover, one may apply reciprocal insurance through co-operatives in all its forms, trade unions and mass institutions. As for social insurance, the state carries it out with the intention of insuring some classes of the nation against specific dangers.

 

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The objective of [having] Islamic banks is that they take the place of commercial banks considering that they operate on interest, and it is here that some Islamic jurists are of the opinion that the mudaraba (silent partnership) contract1 in Islam is considered a legal basis for some contemporary credit processes, accordingly, it modifies the banking regime until it is consistent with the laws of the Islamic silent partnership contract and until the profits from silent partnership take the place of prohibited interest. On the other hand, there are those who think that the bank is not a silent partnership investment agent and that the depositors are not financiers but rather they are all merely partners. Hence, it is the principles of partnership that must gain currency and not the principles of silent partnership. In any case, the value of Islamic bank operations will become clear to us whenever we recognise that the relation between transactions that involve the cost of interest and transactions conducted upon the principle of equity partnership in profit (through the silent partnership contracts or partnership contracts) the relation will, to a large extent, resemble the relation between fantasy and fact or imagination and reality.

1. NOTE: “Mudaraba is a partnership where capital is provided, in cash or assets (no debt is accepted) by one party – the fund provider – and labour is provided by the other party – mudarib.” http://lexicon.ft.com/Term?term=mudaraba [Translator]

 

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Production, distribution and exchange

In the view of Islamic jurisprudence, which is deduced from the Qur’an and the Hadith, the state intervenes in order to expand production within the framework of the lawful and the forbidden, with the following things:

a) occurrence of a specific or general harm

b) exploitation

c) earning through [the act of] scrounging and bogus jobs

d) municipal facilities

e) activities that clash with the ethical objectives approved by Islam

f) guaranteeing the minimum production level of basic needs

g) achieving the concept of social justice which Islam advocated

Perhaps the most important assurance to achieve and continue development is what Islamic jurists have unanimously agreed on, namely to divide commodities and services that concur with human interests into three groups: necessities, needs and beautifying enhancements and what these jurists determined, namely, the necessities taking precedence over the needs and the needs taking precedence over the beautifying enhancements. This is what is called priorities of development in modern terminology.

Islam treats distribution issues on a wider scale and more comprehensively as Islam does not suffice with distributing national income, that is, only the total commodities and services produced, but it also treats the most profound aspect of distribution: distribution of natural resources. It is known that the distribution of natural resources precedes the production process itself. That is to say, individuals carry out their productive activity in accordance with the way by which productive resources are distributed. Accordingly, the distribution of natural resources takes place before production; as for the distribution of national income, it is linked to, and depends on, the production process itself because it treats the results yielded by production.