Technically, it restricts all Muslim residents of Malaysia from participating in online foreign exchange trading. It is important to add that no other Muslim fatwa institution in other countries has issued similar prohibition. On the contrary, the National Sharia Board of Indonesia had previous issued a fatwa the link is in Indonesian stating the legality of Forex.
Apparently, the situation with Islamic Forex trading still remains quite unclear. And what do you think about legality of currency trading for Islamic believers? You can share your thoughts or ask your questions on our Forex forum. If you want to get news of the most recent updates to our guides or anything else related to Forex trading, you can subscribe to our monthly newsletter.
What Is Forex? Please disable AdBlock or whitelist EarnForex. Thank you! EarnForex Education Guides. Website: www. Salman Ahmed Sheikh Ph. Islamic banking institutions were established in various parts of the world since the s to cater to this need.
Nevertheless, given the size and scale advantages enjoyed by the conventional banks, Islamic banking needs regulatory support to maintain the growth trajectory and sustainability. If tax distortions result in additional tax impacts on Islamic banking products, then they will become uncompetitive. Thus, it will result in failure to utilize the potential household savings that do not reach financial markets and institutions.
They can not merely lend money to earn compound interest. They provide asset backed financing for which they have to take ownership of real assets. Only after obtaining ownership and physical or constructive possession of these real assets, they can sell these assets at a profit or provide usufruct of the asset to earn rental income. This could create several tax issues, such as duplication of duties in assets transfer, registration and multiple sales for indirect taxes and in tax treatment of income for direct tax purposes.
These additional levies could render Islamic banking products uncompetitive and hence, their growth and penetration, especially in Muslim societies could be hindered where financial inclusion is already at a dismal level. Providing tax neutrality to Islamic banking products can help in utilizing the household savings in obtaining funds for both commercial and development finance projects.
Therefore, the tax systems should base treatment on economic substance and move away from distortionary transaction taxes for leveling the playing field. Rather than enacting new regulatory regime, the current regulatory impediments may be overcome through changes to existing laws to ensure equal treatment between the Islamic financial products and their conventional counterparts. Furthermore, in equity based modes of financing, the taxation needs to be lenient in order to encourage their use since their socio-economic implications are more egalitarian.
Thus, at least, the Muslim majority countries shall provide friendly tax framework to Islamic finance transactions that involve the use of equity financing. Equal treatment between debt and equity in addition to interest based debt and Islamic debt based modes of finance will help tilt the balance towards equity finance in the long term.
Contributions in this current issue discuss the theoretical underpinnings of an Islamic economy, contemporary issues in Islamic finance and performance based empirical studies on Islamic banking and finance. Below, we introduce the research contributions with their key findings that are selected for inclusion in this issue. The main issue with regard to currency is to establish whether paper currencies fall under thaman haqiqi gold and silver , or thaman istalahi inferior metals which serve as means of exchange.
If paper money is considered as thaman haqiqi, subsequently, the concept of bai-sarf exchange must be applied to them. Zakat might become a very important source of revenue for the Muslim states particularly for the poor Muslim states. The study highlights the problems and issues of Muslim states regarding collection and distribution of Zakat, particularly with respect to lack of confidence of the people upon the public officials.
Therefore, it is observed that the majority of the Muslims prefer to perform this religious duty themselves without any involvement of the government. This behavior is the biggest hindrance in effective utilization of this large source of revenue in the Muslim states. This paper gives suggestions on how to build and revive the confidence of the people in the effective utilization of Zakat.
Uzair Ashraf Usmani explains the different alternatives of bill discounting in Islamic finance. The author covers the rationale behind the Shariah rulings of prevailing bill discounting in conventional banks and discusses Bai Salam as an alternative. The paper discusses the different opinions of modern scholars regarding these issues. The paper uses the simple open economy version of the Solow model as a classical model to show the possibility of adopting Islamic bonds within a secular economy.
It also explores the possibility of political risk in adopting Sukuk. According to the authors, money laundering and terrorist financing are global threats for world economy, security and society. Islamic law cannot be separated from its moral, ethical and religious principles.
They conclude that Islam encompasses all affairs of human life and provides a regulatory system to address repercussions of money laundering and terrorist financing and condemns them even today. He acknowledges that there is a need to develop the Islamic economic system a great deal more and there would be many challenges as well to make it a workable solution to address poverty and social injustices of the world.
Disclaimer The authors themselves are responsible for the views and opinions expressed by them in their articles published in this Journal. Your fond memories are still etched in our minds and hearts. Your humility and steadfastness have always guided us. Your principles are the reasons of our position today. Your words of wisdom and paternal guidance would always be a source of inspiration for us, - today and forever. In a FOREX market, buyers and sellers trade exchange one currency with another on a published indexed rate of value.
In Islamic money market such transaction is recognised and is known as al-Sarf, which is justified by the Shari'ah principles. Allah swt directed mankind to exchange goods and utilities through buying and selling trading with mutual consent without allowing any wrongful objective or element involved herein. Because, the rational outlook of a legitimate transaction is to ensure a just and comfortable socio- economic status quo for all, besides encouraging mankind to be productive.
If paper money is considered as thaman haqiqi, subsequently, the concept of bai- sarf exchange must be applied to them. Allah has directed people to exchange goods and utilities through buying and selling trading , because these transactions are able to make socio-economic life function smoothly, besides encouraging people to be productive. For example, consider a Malaysian based company, selling its products to the United Kingdom UK , and the transaction is denoted in Pound Sterling.
Upon receiving money from the UK, the Malaysian company will want to exchange the Pound Sterling for Malaysian Ringgit; thus, the company will search for a counter party with opposite needs wishes to sell Ringgit for Pound Sterling. The exchange of the currencies between both parties is then made possible through the FOREX market, at the current market level.
To search for a counter party is not an easy task because the company will have to roam the market in search of a party with opposite needs for the same amount and delivery date. The process itself may be chaotic and inefficient when large number of corporations and companies are engaged in such an activity.
There are two main foreign exchange risks: transaction exposure risk and translation risk. The transaction exposure risk is the risk that takes place when an asset is sold and its value in domestic currency is uncertain due to the exchange rate fluctuations, while the translation risk is the risk that occurs when the value of an asset appearing in the financial statements is uncertain due to the exchange rate fluctuations.
Due to the weakening of the USD, the amount received by the Malaysian company may be far less than the original amount calculated. In relation to the second type of risk, the translation risk, take an example of a Malaysian company, which has liabilities that are denoted in the USD. When the USD appreciated relative to the Malaysian Ringgit during the recent Asian crisis, and the liabilities of the company were revalued, the company would have reported a great loss due to the foreign exchange translation, when in fact, initially the company made profits.
The purpose of this paper is to 10 Yusuf al-Qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, at p. If paper money is considered as thaman haqiqi, subsequently, the concept of bai al-sarf exchange must be applied to them. Paper Currencies: Thaman Haqiqi gold and silver or Thaman Istalahi inferior metals which serve as means of exchange? Functions of money Before categorizing paper currencies or fiat money as either thaman haqiqi or thaman istalahi, we will first look at the functions of money, and the views of Islamic scholars past and present in relation to the issue of gold and silver as money.
The Dictionary of Finance outlines the functions of money as having the following combination i. As a medium of exchange, which permits the distinct act of buying and selling; ii. As a measure of value whereby it serves to express the relative value of different commodities and services; iii. A standard for deferred payments, thus allowing calculation of payments due at some future date; and iv.
As a store of value, thus permitting saving. Similarly, Davies divided the function of money into two groups i. Specific functions whereby it represents unit of account, common measures of value, medium of exchange, means of payment, standard for deferred payments, and store of value. General functions whereby it serves as liquid asset, framework of the market allocated system, a contributory factor in the economy, and a controller of the economy.
Furthermore, to make money acceptable to the public, it must have three attributes 15 Mahmood M. Rashid et. It is able to be stored, that is, the money can be kept for present as well as future usage; ii. It must be a unit of account, meaning that different commodities can be measured with respect to money; and iii. It should be exchangeable for goods and services to make it valuable. Thus, it can be seen that the important attributes of money centres on its ability to be exchanged, valued and stored.
Hanafi scholars: Abu Hanifah and Abu Yusuf; ii. Minority of Maliki scholars; iii. One or two Hambali scholars; v. While those in support of the second school are i. Hanafi scholars: Shaybani; ii. Majority of Maliki scholars; iii. Ibn Hazm; vi. Contemporary Fiqh Councils. There are several reasons as to why different scholars support one school instead of the other. Those supporting the view that money is limited to only gold and silver based their arguments on the following i.
Sunnah Taqririyya whereby the Prophet approved the use of gold and silver in Makkah and Madinah. For example, calculation of Zakat alm , and diyya blood-money are based on gold and silver. For such is in store a penalty grievous and they will find no helpers. Gold and silver are money by nature. Due to the prohibition of using gold and silver for other uses like ornaments for men, this indicates that the function of these commodities is primarily as money. Since gold and silver are relatively stable, which enables the achievement of justice in the monetary system, they must be used as money.
On the contrary, those in support of the second school of thought, that is, they view that money includes other than gold and silver for example currencies made of paper, leather or plastic support their arguments based on the following i. Although Sunnah taqririyya indicated the use of gold and silver as money, it cannot be interpreted to limit money to only gold and silver.
The time when Khalifah Umar ibn al-Khattab r. Firstly, the fact that Umar wanted to use leather as money indicated that it is acceptable to use other than gold and silver; secondly, the Sahabah Companion objected to the idea not because it could not be done, rather, they were afraid that it could lead to shortage of camels.
The meaning of money, as seen in its function, serves as a medium of exchange and measure of value. Hence, money also includes paper currencies and fiat money; it is not only limited to gold and silver. It is because these two items have limited supply to fulfil contemporary economic and financial needs.
Thus, it is possible to use other than gold and silver as money. The hadith of Prophet Muhammad S. If what you have exchanged differs in type, you can trade according to your wishes but it must be done on the spot. Take for example the exchange of Malaysian Ringgit RM with Japanese Yen, both currencies are only valid within specific geographical boundaries RM can only be used in Malaysia while the Yen can only be used in Japan and their intrinsic worth differs due to the differences in purchasing power.
Secondly, paper currencies, both RM and Yen are neither weighable nor measurable, unlike gold and silver that can be weighed. As a consequence, neither gain on exchange nor deferred basis of exchange can be accepted. However, in 32 Ibid at The fixed exchange rate regime- takes place when the exchange rate of a country is fixed at a certain rate relative to another currency s by the authorities.
The floating exchange rate regime- occur when the value between currencies are determined by the demand and supply forces in the FOREX market. Prophet Muhammad S. The general consensus that price control and fixation is perceived as un-Islamic is due to the fact that it contradicts the hadith of not interfering with the free market; however, scholars like Ibn Taimiyyah do allow such practise in situation where the implementation of fixed exchange rate regime is needed to fight cases of market anomalies caused by the impairing condition of free competition.
Had Malaysia not pegged its currency against the USD, the damage caused by speculating activities might have been intensified amid the weakening of the economy. As a result, an Islamic country like Malaysia might fall prey to the power of non-Muslim nations like the US. Hence, under the condition of Darurah necessity , by fixing the rate at RM3.
Journal ofShari'ah IslamicModel Banking and Finance of Foreign April — June Exchange 21 better and more stable, the authority should lift the peg against the USD and let the forces of demand and supply to once again determine foreign exchange rates. At present, as mentioned above, since paper currencies have completely replaced gold and silver as the medium of exchange, unit of account and store of value, thus paper currencies should be regarded as thaman value and no gain or deferred basis transaction can be carried out.
However, this is true for domestic currencies, and foreign currencies whereby fixed exchange rate regime take place. As in the case of domestic currencies, it is clear that RM 1 must be exchanged for only RM 1 on the spot basis. If for example, RM 1 is exchanged for RM 1. In the case of fixed exchange rate, whereby the rate is likely to remain fixed over a long period of time, if currencies are exchanged on deferred basis at rate different from the spot rate, this will indicate a clear-cut case of interest based borrowing and lending.
Since the FOREX rate is very unlikely to change within a month due to the fixed rate regime, the borrower will be paying back the bank an amount of RM The extra RM If however, currency traders attack only the Ringgit by selling it on a large scale, thus depreciating the Ringgit to RM3. The USD1 million would then be credited to his account until the day he closes position by buying back the RM2.
Aside from that, he is also able to earn arbitrage profit from the disequilibrium in exchange rates between the three currencies as a result of the attack on Ringgit. Then, he would exchange the RM3. Therefore, the total profit that he makes is USD , Thus, it can be seen that speculators engaging in speculation and arbitraging can indeed make hefty profits. In relation to speculation, there are two types of speculation: speculation with inadequate or without knowledge Jahl , and speculation with knowledge.
In the case of speculation with inadequate or without knowledge, the element of uncertainty Gharar increases; and to the extreme, speculation is akin to gambling. Take for example a Malaysian trader heard rumours that the USD will appreciate relative to Ringgit, thus, he would immediately buy USD in the expectation that he will be able to sell the USD in the future to gain some profit.
No it is not, simply because acting on rumours involve uncertainty or Gharar as to whether the rumours are reliable or not. Let alone speculating without the existence of knowledge, this is a clear case of gambling. For example, a Malaysian trader hopes that the USD will appreciate relative to Ringgit, thus he buys USD, hoping that he will earn some profit in the future.
Assuredly, Satan desires to sow enmity and hatred among you with intoxicants and gambling, and to hinder you from the remembrance of Allah and from salat. Will you not then desist? Syed Othman Alhabshi argued that in any business venture one has to indulge in speculation, which is based on some prior fundamental knowledge.
However, there is a limitation to speculation, that is, it should not involve manipulation of information in order to outperform the others, and as a result doing harm to other people; or simply to say, speculation should not give rise to one party gaining at the expense of the other party.
Currency hedging As discussed earlier, there is no divergence of opinions among Muslim scholars with regard to the exchange of currencies based on spot transaction, using spot rates the current selling and buying prices for currencies. When dealing with banks, the settlement date for spot transactions is the second working day after the dealing date, as depicted below Dealing date Spot value date transaction made settlement date Two working days TIME For instance, a spot deal transacted on Monday, thus it will be settled on Wednesday of the same week; and a deal made on Friday will be settled on Tuesday the following week because Saturdays, Sundays and public holidays are not included in working days.
On the other hand, neither futures nor option currency contracts are traded in Malaysia. The only difference is that futures are monitored by governing bodies, for instance, in Malaysia, the crude palm oil futures is monitored by 53 Yusuf al-Qaradawi, The lawful and the prohibited in Islam, Hindustan Publications, India, at p. With forwards and futures, the exchange rate risk can be eliminated because exchange rates are fixed in the future.
However, some might argue that with futures, the probability of defaulting is minimized because of the standardize nature of the contract and the transparent operating procedures on the organized futures market. Currency option is also a vehicle to manage foreign exchange risk, whereby it implies a right without obligation of one party to either buy or sell currencies at a predetermined exchange rate, within or at the end of a specified time period for a sum of premium paid to the counter party.
It serves as a medium to reduce, or even eliminate foreign exchange risk; ii. Conflicts between parties because of their abrupt, irrational and wrong decisions are minimized; iv. Enables the act of undoing a wrong commitment by not exercising option within or at the end of the specified date. Furthermore, according to the traditions of Prophet Muhammad S.
For example, when the purchaser of the right anticipates that a currency will move towards a certain direction based on information available to him , as a hedger, he might protect himself by buying either call or put options. However, the actual movement of the currency might turn out to be towards the opposite direction from that anticipated by him, due to information manipulation activities of certain market players.
Thus, the initial decision made while entering into the contract is based on inaccurate information available to him, hence giving him the right to not exercise the option. Therefore, in order to protect Muslim nations from the risk associated with foreign exchange, the benefits offered through option contracts should not be overlooked.
Now comes the issue on premiums paid by the buyer to the seller of the option contracts. Justice Mufti Muhammad Taqi Usmani said that options are not permissible because the promisor the obligated party cannot charge the promisee the buyer of the option a fee premium paid by the promisee for making such a promise.
Shari'ah Journal of IslamicModel of Foreign Banking Exchange and Finance April — June 27 paid may be treated as compensation by the promisee to the promisor for his or her willingness to do business with the promisee, instead of viewing it as a fee imposed by the promisor. Under the floating exchange regime, limiting currency transaction to only spot trading, could lead to Muslim currencies being the target for non-Muslim traders who aim to gain hugely from speculative activities, and at the same time aim to damage the economies and well being of Muslim nations.
As a consequence, protective measures like hedging of currencies using derivatives to manage the risk associated with foreign exchange should be in place in the financial system of a Muslim country. Nevertheless, the ultimate solution for Muslim nations is to of course re-implement the usage of gold or Dinar as mode of exchange, unit of account and store of value into the financial system of Islamic countries.
Some important implications or advantages of the Islamic Dinar are i. Under the Dinar system, money creation and destruction cease to occur, thus eliminating the element of interest. As a consequence, a stable currency and monetary system can be accomplished, and so does its purchasing power. Dinar is an excellent medium of exchange due to its inherent value and easy divisibility, thus people tend to prefer gold to paper currency.
If Dinar is used as a single global currency, fluctuation of exchange rates is absent, hence removing speculative, arbitrage and manipulative activities. If Dinar is used as a single currency for Muslim nations, transaction costs can be reduced since there is no need to exchange currencies to facilitate imports and exports among Muslim nations. This will then promote international trade among Muslim nations.
With stability in purchasing power of money and income under the Dinar system, social problems like poverty, unequal distribution of income and crimes like theft and robbery can be curbed. There is no strong representative organization from the Muslim nations that is respected by all; and the Organization of Islamic Conference OIC does not have enough authority or power to make decision.
Lack of unity among Muslim nations due to some Muslim nations having internal problems like wars and fights, which hinders them from paying attention to other external problems. The different level of interest in Dinar for every participating country due to the fact that its implementation might result in some countries being affected unfavourably.
The existence of distinct culture for each Muslim nation, even though the religion is the same, might result in some countries opposing to the Dinar system. This could be true if the system is perceived as a capable of altering the traditions of a nation. The high variance in value of currencies of Muslim countries gives rise to the issue of what should be the appropriate price for the Dinar?
Malaysia might not want to accept the Dinar if its value is far less than the current perceived value of the Ringgit, while countries like Pakistan and Bangladesh might not want to accept a value which is higher than their currencies. Therefore, in order to make the Dinar as a single currency for Muslim nations a success, Muslim nations will first have to resolve the abovementioned problems.
Until then, the implementation of Dinar will only result in the fall down of the whole system. Final Remarks The Saudi legal system apply the international standard in dealing with the currency exchange. However, applying of Shari'ah principle of exchanging namely the spot basis must be considered and implemented by the parties, that is the responsibility of a Shari'ah Board of a bank or exchanger.
Fiat money or paper currencies, which are interest-based, promote the creation of money in the economic system; while in the occasions of withdrawal of deposits, repayment of loans, and default on the part of borrower on loan repayments give rise to destruction of money in the financial system.
The reason being that it hinders people from doing good to one another and it burdens the needy with the requirement to pay back more than the amount borrowed. Although flexible or floating exchange rate regime is in line with the Hadith of Prophet S. The inefficiency of the system is proven by the repeated financial crises in countries like Malaysia since the inception of the system.
With regard to currency hedging, forwards and futures contracts are not allowed to be put into practise, as agreed by majority of Islamic scholars, due to the existence of Gharar uncertainty , and also because these contracts promotes the non permissible speculation to occur.
However, there are divergences in opinion relating to currency options; nevertheless, the ability of this type of contract to reduce or eliminate risk, and the benefits that it offers should not be ignored. The sooner the implementation, the better it is. However, careful analysis and researches, and problematic areas should be identified and dealt with beforehand to ensure the continuance in existence of the new system.
Microfinance institutions MFIs have mostly high concentration on providing self financing that generally is for women beneficiaries and aim at alleviation of poverty in all its forms. The principle purpose of microfinance institutions is to be social performing by reducing poverty. However, they have to reconcile this objective with financial performance by trying to be profitable and sustainable. The research paper is based on qualitative research. The researcher chose Pakistan and studied its agriculture financial sector, identified problems with present financial system developed a financial model based on Musharakh and Ijarah for farmers particularly and for sustainable development of rural in general where bank will provide all the assistance that includes technical as well as other assistance.
It will provide credible alternative which allows poor population to have access to basic financial services at low cost. Introduction Financial engineering is driven by three things: changes in demand conditions, changes in supply conditions and changes in regulatory requirements. These changes prompt financial firms to innovate and come up with new products that will allow them to stay in business and remain profitable.
This process is called financial engineering. Iqbal, The purpose of this paper is to highlight the application and benefits extracted from Micro application of Musharkah finance in general and agriculture in particular. For this paper, qualitative method of research is adopted. Musharkah is one of the fundamentals of Islam that has direct economic implications. It requires Muslims to share a part of risk among the specified heads in order to achieve economic emancipation and it has wide economic implications.
The objective of the proposal is to investigate how this financial instrument can be used in contemporary times for welfare of farmers and its impact on economy in particular. The importance of Musharkah as tool of risk management is being ignored by the Islamic banking financial system at micro level. Most of the Islamic countries are agriculturally backward and modernization of agriculture in these countries must be one of the primary concerns of their governments.
Pakistan is an agriculture country and government has separate ministry for food and agriculture but its food import is quite high for past few years. The paper proposes alternative Islamic modes of financing application on agriculture after defining the current practice.
Then, it shows macro economic implications of proposed Islamic modes of financing. This paper consists of three sections. The first section is based on the rationale behind applying Musharkah on agriculture in Pakistan and financial overview of financing of agriculture. Second section discusses Musharkah and Ijarah their characteristics and their relevance with agriculture and preference of Musharkah over other modes of Islamic finance.
The Rationale behind applying Musharkah on agriculture Pakistan has a rich and vast natural resource base covering various ecological and climatic zones; hence the country has great potential for producing all types of food commodities Naseem, Raising agricultural productivity is thus crucial for rapid rural growth World Bank, Though, it agriculture dominates the socio-economic scene with deep inter- linkages with other sectors of the economy.
However, Pakistan is facing food shortage though it is the one of largest producer of agriculture goods in region according to World Bank report. Reason for this crisis is that costs of inputs have gone up and farmer is unable to make tradeoff between his income and expenses.
According to Agricultural Census, there are 5. The large farms are only 7 per cent of the total farms accounting for 40 per cent of the total cultivated area. There has been further subdivision of farms because of inheritance and transfer. Since land in agriculture production process is natural agent, therefore decreasing size of holding has detrimental effect on investment, farm productivity and farm income resulting in 52 per cent poor Pakistanis.
In particular the research focuses on the factors which when geared can lead towards the development of agriculture sector through provision of financial services and technical assistance quality of seed, use of fertilizers, testing of soil, irrigation and storage are few of the provisions.
The paper will further examine the role and scope of Musharakh in addressing the problem of farmers. The recent food crisis gave indication that there is something wrong with actual production and estimation of policy makers. Moreover, there is need for rural development to overcome this crisis in future and motivate people to be part of this development. Exploiting properly, the unique features of Islamic finance with appropriate adaptability, without compromising Shariah principles will be critical to the growth and promising future of Islamic industry.
Agricultural finance in Pakistan: an Overview The role of agriculture in Pakistan economy is of pivotal nature. Due to diverse geographical and climatic conditions the country has tremendous potential for growth and development in agriculture. However, adequate and timely financial assistance to the farmers will improve production potential of agriculture sector in the country. The modern concept of agricultural credit envisages establishment of an efficient institutional credit system to serve as a package of credit, supplies and knowledge for the overall strength of the farmers who at present suffer from low productivity and financial insecurity.
A successful credit evaluation system, therefore, should have the basic ingredients to provide adequate amount at the right time and in the right form to help farmers in making a productive use of loan funds. However, Pakistan is facing food shortage though it is the one of largest producer of agriculture goods as mentioned above. Facilitation to this sector by expanding agricultural credit at the grass root level is a credible effort towards economic and rural development.
All these factors in turn stem from lack of funds and technical know how. Dawn leading English newspaper reported that about 81 per cent farmers being small are not in a position to remove all these constraints because of lack of funds. This affects his ability to adopt new technologies hence, the production. To increase agricultural production it is imperative to increase the level of use of agricultural inputs Hasan, According to World Bank that agricultural growth has substantial benefits for low income farmers and tenants approximately 37 percent of the rural poor , but another source of demand besides agricultural growth linkages is needed to rapidly raise the earnings of the rural non-farm sector.
Reason of hesitation is that cost of production has increased over time and it is hard for small farmer to meet the costs of production and servicing of debt. Behind the curtains of food crisis this phenomenon exists that to meet cost of production farmer prefers to grow cash crops instead of food crops.
There is a need to diversify the sources of growth by promoting micro and small- scale enterprises particularly in the agriculture and informal sector. Agriculture is a sector which is not documented nor regulated and adverse effect on demand and supply of agriculture products is not fully understood. If some crop or vegetable gave cash profit to some farmer, all the farmers will grow it next year and because of excess supply demand will decrease and farmers will be in loss.
Documentation and regulation is mandatory that will not only help farmer to cultivate crop that has demand in market but will also helps to export any excess of food commodities. Alternative Islamic Modes of Financing for Agriculture The economy transforms into one in which service and productivity will drive growth.
Different sources of financing are required whereby risks should be borne by those most able to absorb them although traditional lending on interest rate sources of funding through the banking institutions continue to be the main source of financing for economic activities. Agricultural Census stated that there are 5.
April — June 35 of conventional system. One of the disadvantages of this is that credit controls and interest rate ceilings encouraged banks to favor large farms even more than their natural disposition to do so and other constraints include unequal distribution of financial resources Mohsin, To improve productivity and income of tillers of the soil who constitute more than three fourth of the farming community appropriate measures should be taken on great priority basis for a country like Pakistan.
The financial sector infrastructure needs to be changed to accommodate the substantial financing requirements of formal and informal sector of agriculture. Alternative of conventional system can be Islamic banking which is interest free and has its own benefits. Interest has no place in an Islamic economy. The Islamic alternative is that financing either is free of any return or it should bear the risk of loss as well if it expects to earn a return Khan, The Islamic finance which operates on modes other than fixed interest rate aims to share profits from activities in the real sector.
Hence, financing of development through such modes is likely to avoid undue economic and financial burden on the beneficiaries. Its emphasis on real sector should also contribute in avoiding instabilities in the financial markets. Islamic banking can have significance in micro finance sector. The failure of government support programs to achieve level of growth in small-scale business in the formal sector is due to number of interrelated factors and inherent nature of interest rate finance is the most important one Mohsin, The author discussed in detail Musharkah and Ijrah their characteristics and their relevance with agriculture and on basis of discussion reasons are given for preference of Musharakh over other of finance discussed.
The shares offered by each one can vary. In general, it may be money or labour and can be the trust of the people Siraj, Offer and acceptance is the cornerstone of the partnership contract and can be of three types: 1. Capital partnership: In this form of partnership, two or more individuals share their capital stipulating that whatever profits they earn are shared among them.
The contract may be limited or unlimited Zuhayli, Credit partnerships: In this form of partnership, two or more creditworthy individuals join in a credit purchase and follow it with a cash sale, thus sharing the profits according to the conditions stipulated in the contract Zuhayli, Physical labour partnerships: In this form of partnership, two or more individuals agree to embark on a joint labour project e.
The partners may be of similar or different professions Zuhayli, Ijaz Ahmed Khan at Islamic Relief Conference said that the most obvious advantage of Musharakh is the protection of the lender against inflation. Ahmed Ahmad provides the example of how the Sudanese Islamic Bank have developed a Musharakh contract in which the bank provides farmers with certain fixed assets such as ploughs, tractors, irrigation pumps, etc.
Since it is a partnership contract, there is no need of collateral or guarantees other than personal guarantees. Now it is practiced by Islamic Banks for home mortgages especially. April — June 37 development and use of water resources and developing a marketing link for the farm output Bendjilali and Khan, It can be best applied for installing tube wells since formal financial institutions fail to improve water availability as cost of capital increases that make impossible for small farmers to utilize it.
DM is not only cheap but it shares risk with farmer. Another land development agreement is known in Tunisia whereby the owner of land and the land developer enters into a contractual arrangement for the development of land. After the development of land according to agreed specifications a piece of land is given in reward to the developer Khan and Bendjilali, Ijarah An Ijarah is a contract pertaining to usufruct with compensation as defined by Hanafis Zuhayli, Conditions of conclusion 2.
Executability 3. Validity 4. Bindingness 4. The client pays a rent and buys out the partnership share. Ijarah is a contemporary lending methodology that has been increasingly adopted by Islamic lenders and is similar to the concept of leasing. Under this arrangement an entrepreneur short of funds may approach the financier to fund the purchase of a productive asset. It is best suitable for agriculture related equipment tractor, thrasher and trolleys etc. Banks can build storage houses for commodities.
The user may be implied to be a little better off in Ijarah financing than in trading-based financing because of fewer repayment problems as in case of loss the lessor will simply take his asset back and the lessee will only be obliged to worry about the unpaid rent Khan, 4. Asghr Nadeem Syed a columnist in leading Urdu Newspaper Jang gave suggestion of partnership in agriculture in order to increase productivity and share risk and financial burden with farmers.
Alleviation of constraints which are obstacle for optimal utilization of resources is major concern of Islamic economic system and guideline of Muhammad PBUH can be inferred as: 1. The best strategy of poverty alleviation is to enable the concerned people to participate in the market by improving their capabilities 2. The best indicator of poverty alleviation is to make the poor permanent owners of certain income generating real assets.
The role of guideline, promotion and consultancy is vital in the alleviation of poverty Bendjilali and Khan, Musharakh is the best tool to the guidelines provided by Muhammad PBUH. Islamic credit technology has evolved through the growth of the Islamic modes of financing and it is a great break through for small farmers and bankers.
To enhance the capabilities of farmers to participate in the market for generation of productive lands and enhance the productivity of land Musharakh can be best alternative over conventional modes of financing. Bank being partner on Musharakh basis can train people for optimal use of resources because it will have stake in specific project. Musharakh can bridge the gap of negative trade off between credit and production as result of regression showed.
On the direction of causality between financial development and economic growth Jahri stated that empirical evidence shows that financial development generally leads to economic growth and financial deepening contributes to economic growth more in developing countries than in industrial countries.
The intermediary-based view emphasizes the importance of intermediaries in project identification, resource mobilization, monitoring firms and managing risks. They are more effective in countries which are at an early stage of development than market- based financial systems Jahri, Monetary economists Friedman, have established that a zero nominal interest rate is a necessary condition for the optimal allocation or resources Jahri, Without interest more real resources can be directed to consumption and investment Jahri, as in general equilibrium models, zero interest rate is both necessary and sufficient for allocative efficiency Wilson, ; Cole and Kocherlakota, 5.
Proposed Model The traditional approaches to rural finance tried to intervene in the open market process Khan, Concessional interest rates demotivate the financial institutions who considered rural loans to be risky and unremunerative. As a result financial institutions became lukewarm in their efforts to achieve the objective of rural development. Their main concern was to safeguard their capital Khan, Simultaneously, the poor were discouraged from contacting the financial institutions because of lengthy procedures, long waiting times and heavy bank charges.
A very important factor in the failure of rural finance to achieve its primary objective has been interest on loans. Interest- bearing finance adds to the cost of production. The interest rate is a severe limiting factor on the investment opportunities available to poor.
The investment is inversely correlated to the rate of interest. The higher the rate of interest the lower the volume of investment because it lowers the overall profitability of the business enterprise, and regression analysis proves this statement.
If we increase the volume of investment we have to find a solution to the problem of interest. The farm productivity can be improved by preparing land for optimal use which necessitates leveling land, preparing it for maximum crop production, ensuring optimal development and use of water resources and developing marketing link for the farm output. This requires an initial investment outlay for which suitable Islamic modes of finance can be applied. Islamic bank has ability to diversify its portfolio and hence ensure a certain return R on its investment with negligible risk.
The diversification of investment in a large proportion enables bank to reduce risk significantly. Under this agreement both partners one ansar, one muhajir worked on these joint farms in turn on alternate days. Moreover, with two families working at one farm turn by turn farming became labour intensive which made the farms more productive. Furthermore, this system of joint farming proved a useful system for land consolidation and prevented fragmentation of land Hussain, Land is considered as one of the most secure assets and owner- operated farms are still considered to be the most efficient forms of land utilization Gulaid, Working of Musharakh between bank and farmer Bank is a large financial institution and possesses huge resources either to establish advisory board or outsource advisory service.
Professional advice not only helps to increase production of land but also helps to manage demand and supply of agriculture products. It gives economies of scale to bank being partner with farmer. Cost will be divided among all farmers and will benefit farmer as being small landowner it is beyond his capacity to seek professional advice.
The large farms are only 7 per cent of the total farms accounting for 40 per cent of the total cultivated area Khan, Any XTY Islamic bank set up agriculture board consists of agriculture specialists of crop, fertilizer, pesticide, seeds and water. The board will design strategies for levelling land, preparing it for maximum crop production, ensuring optimal development and use of water resources along with usage of which kind of fertilizers, seeds and pesticide to use when to use and how to use.
How it works For optimal utilization of resource land, inputs, capital goods and water a farm must be some large area so, it will not only make farm more productive but generate employment as well. There will be three parties to the structure: bank as finance provider for agriculture inputs, farmer as partner with land and labor and third one is investor person or another bank who will provide services tractors, storage houses, transportation etc on basis of Ijarah and diminishing Musharakh tube wells and turbines.
To develop one large farm of 25 acres bank will join some farms of small area. To avoid any conflict of interest bank will document each piece of land owned by farmer. The following features can be noted with specific reference to mobilization of human resources in agriculture: 1.
Musharakh entitles the capital to earn a return only by bearing some of the risk associated with the activity. It makes farm labour intensive which makes farm more productive 2. Khan, Financing Fixed-Asset Agriculture Machinery, transportation and storage houses Fixed assets are those that provide service over a period of time. They are deferred expense and determine the production capacity of a firm.
A cash outlay is made at one point of time but benefits accrue over a period of time. Fixed asset formation has two distinct characteristic features. April — June 43 a short period of time Mohsin, In order to accommodate these aspects of fixed assets formation contemporary Islamic financing technique Ijarah can be adopted to finance tractors, trolleys, thrashers, godowns to store food etc.
There is a wide scope for Ijarah either by bank or cooperatives who want to establish Ijarah Company. These banks were created on cooperative basis. Some time collective fines would be paid out of the money deposited into these banks on cooperative basis Hussain, Agriculture Machinery and Transportation Agricultural machinery is one of the most revolutionary and impactful applications of modern technology.
The truly elemental human need for food has often driven the development of technology and machines. Over the last years, advances in farm equipment have transformed the way people are employed and produce their food worldwide. Introduction to low cost and locally available transportation lowers transportation cost for agriculture and road sector. Local labor can be productively employed on roads to supplement their subsistence from farm livelihood.
Ijarah is a lease contract where contract transfers the services or use of a property for certain time. Since these are people of , live in a village it would be much simpler for them to recover these dues at harvest time than for the financial institution. It will enhance utilization of assets at optimal level and would give economies of scale to asset owners.
Ijarah firm then sub-rent this equipment to partner bank of farmer for specific period and time. One person will start a business of capital goods repair, dbaha cheap food seller. In this connection he urged the people to attend the development work on self- help basis. This demonstrates that water development is a collective effort. Joint working is not only effective, it saves time and cost as well. Water resource development has remained hampered due to lack of non-availability of proper finance.
Formal private financial institutions have no rural spread in general. Development of Diminishing Musharakh has made water resource development easier. Farmer utilizes the tube well and pays agreed rental amount. With diminishing Musharakh bank can work with farmer like land development agreement is known in Tunisia whereby the owner of land and the land developer enters into a contractual arrangement for the development of land.
In proposed model developer is bank and it can sell its land to its partner farmer. This approach will increase the production and utilization of human capital and generate employment. Conclusion Agriculture plays a vital role in the agricultural and rural economies of the developing world like Pakistan. It not only produces food directly it also provides foreign exchange to country. However, concessional interest rates de motivated the financial institutions who considered rural loans to be risky and un-remunerative.
Islamic modes of finance have ability to overcome short comings of conventional system. Musharakh can work well on agriculture since it will give returns semi-annually which is a limitation when it applied to corporations. Giving the finances to farmers will help the farmers in improving their productivity and Islamic banks can take advantage of their peculiar nature of operations which other conventional banks cannot enjoy Khan, Consequently, Islamic banks can successfully operate in a sector where conventional banks have failed despite all the support from governments as well as from international bodies Khan, Business and Finance Review.
Financial Transactions in Islamic Jurisprudence Vol1.
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These can set up Shariah-compliant mutual funds, private equity and venture funds and also provide portfolio management services. A couple of Islamic equity funds and a venture fund have been permitted by SEBI and been in operation for a few years.
While sukuk are yet to make a beginning in India, asset securitization itself has a long history in India with a sound enabling framework. Shariah compliant sukuk based on pass-through structures, such as, sukuk-al-ijara are a clear possibility under SEBI regulations. Islamic financial cooperatives are also a clear possibility under the Indian Co-operative Societies Act Such institutions may be set up at national level or regional levels or as a network of cooperatives, similar to the Credit Unions in USA.
The regulations provide ample flexibility to the institution to accept deposits from members and design financial instruments that conform to Shariah. A cooperative-based model however, may be perceived as less robust and credible due to lax regulatory and supervision norms. Further, since the cooperation model permits increase in capital through increased membership alone as it employs one-member-one-vote rule in contrast to one-share-one-vote rule under the corporate model , funding remains a major constraint.
The NBFC framework permits a range of Islamic modes, such as, financial and operating leasing, trade financing through deferred-payment-sale, sale and buy back and profit sharing through the private equity route. Islamic NBFCs can therefore, provide financial services in several forms, e. Other laws like Foreign Exchange Management Act and rules and policies framed there under impact foreign investment and external commercial borrowings by Islamic NBFCs and as they regulate other companies also.
Then there are general commercial laws which govern any transactions whether Islamic or otherwise, e. What are the major provisions that compel NBFCs to engage in activities that are not exactly Shariah-compliant? The fair practices code requires all NBFCs to declare the rate of interest they will charge from clients. It also requires an NBFC to adopt an interest rate model taking into consideration cost of funds, risk premia for different sectors and declare the same in its website.
This makes musharakah and mudarabah financing for business difficult. It may be noted that one of the two Islamic NBFCs that has been using participatory financing recently was disallowed by RBI from continuing in financing business. This will be a problem if murabaha income exceeds financing income except if murabaha is so structured to fall within the ambit of financing.
Moreover the assets will be taxed at the point of purchase and for the value addition i. Thirdly, while accepting deposits the NBFC has to declare a rate of interest or at least a minimum rate of interest. Notwithstanding the above constraints, an NBFC enjoys greater regulatory and operational freedom than its commercial bank counterpart. It also enjoys greater support among policy makers as far as interest-free finance is concerned. The concept of Islamic NBFC is strengthened by the following observations of the Raghuram Rajan Committee Report on Financial Sector Reforms in India: i Measures should be taken to permit the delivery of interest-free finance on a larger scale through NBFCs; ii It would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.
The Report strongly advocates Islamic microfinance as a way to enhance financial inclusion and address poverty. There is a huge need for infrastructure finance in India and various policy measures under discussion at highest levels are infrastructure sukuk and infrastructure NBFCs. Also expected is a relaxation in norms for foreign direct investment in NBFCs. In the backdrop of the recent concerns pertaining to levy of usurious rate of interests by Micro Financial Institutions and earlier RBI guidelines on Fair Practice Code in to ensure transparency in charging high rates of interests by NBFCs , charging of high interests on loans disbursed to retail borrowers, has always raised issues in India.
This can be mitigated if NBFCs are expressly allowed to undertake participative financing which consist of financings in a manner that returns are linked to the actual cash flows of the venture for which financing was availed but such that the returns are capped. Mezzanine financing is one such form…. He has already articulated the strategy and has rightly identified SME financing, financing of waqf development and financing for the artisans as his priorities.
Assalam wallaikum I am Iqbal Shaikh from Pune I am a mechanical engineer and served Indian Airforce For 20years and there after worked in Bharat Forge for 16 years as Manager Maintenance I want to buy a running polymer factory situated in Jejuri midc near Pune land is 1. Fund requirement is around 40L to 45L. Kindly provide the details in this matter which is based on shariah compliance.
Assalam walikum I am akbar shaikh from hubli Karnataka I need loan for my business we are manufactur aluminum cake mould plz support me market is good I am doing this business last year. I do not have any children and neither wife nor I am alone nor do I have any work. It is also recommended to look at the list of Forex brokers that offer Muslim-friendly trading accounts with no overnight-interest applied on the open positions.
Islamic thought doesn't stand still and as Forex trading is a point of contention for scholars, and things change quickly in this field. For example, In February 16, , the National Fatwa Council of Malaysia nation's supreme Islamic legal body announced that spot Forex trading performed by individual traders contrary to authorized dealers is considered haram sinful.
Technically, it restricts all Muslim residents of Malaysia from participating in online foreign exchange trading. It is important to add that no other Muslim fatwa institution in other countries has issued similar prohibition. On the contrary, the National Sharia Board of Indonesia had previous issued a fatwa the link is in Indonesian stating the legality of Forex. Apparently, the situation with Islamic Forex trading still remains quite unclear.
And what do you think about legality of currency trading for Islamic believers? You can share your thoughts or ask your questions on our Forex forum. If you want to get news of the most recent updates to our guides or anything else related to Forex trading, you can subscribe to our monthly newsletter. What Is Forex?
ISLAMIC FOREX TRADING. By. Dr Mohammed Obaidullah. 1. The Basic Exchange Contracts. There is a general consensus among Islamic jurists on the view that. Dr Mohammed Obaidullah has been serving several international and national institutions of repute, including the Jeddah-based Islamic Development Bank Group. Mohammed OBAIDULLAH, Senior Economist | Cited by | of The Islamic Research and assessment of financial contracting in the global currency markets.