unit 1 islamic economics

8/7/2019 Unit 1 Islamic Economics

http://slidepdf.com/reader/full/unit-1-islamic-economics 1/15

Islamic Economics



C onventional Economic system

The social science that deals with the production,distribution, and consumption of goods and

services and with the theory and management of

economies or economic systems.

In other words, the study of how people make

decisions about how to spend their resources on

needed goods and services, relies on a series of assumptions that haven't changed much in more

than 80 years.



F actors of Production in C onventional

Economics

The requirements for production are usually

represented as:

Capital: man-made aids to future production; fixed capital; plant, buildings, tools and machinery.

circulating capital; raw materials and components.

Labour: human resources.

Land: natural resources, as in mining, and space

require for storage and parking.



F unctions of Money in the C onventional

Economic System.

Medium of Exchange

Money acts as a medium of exchange and facilitates

the exchange of goods and services in the economy.

Unit of Account

Values of goods and services are stated, recorded and

settled through use of money; hence, it acts as a unit

of account.

Measure of Def erred Payment

Deferred payment means a payment in the future, not

now; settling of debt in future.



C oncept of the Time Value of Money in

C onventional Economics

The time value of money (TVM) (or the discounted

present value) is one of the basic concepts of finance,

developed by Leonardo Fibonacci in 1202.

This means that, the present value of an ³X´ amount

of money is greater than the right to receive the same

amount of money in future, therefore, the debtor must pay to the creditor the amount ³X´ and an addition

over it. Hence all loans, credits and have a charge

normally known as interest or opportunity cost.





F uture Value:

Future Value is the amount of money that an

investment made today (the present value) will growto by some future date. Since money has time value,

we naturally expect the future value to be greater than

the present value.

The difference between the two depends on

the number of compounding periods involved and

the going interest rate.





F uture Value:

FV = PV(1+i)n

Where:

FV = Future Value

PV = Present Value

i = Interest Rate Per Periodn = Number of Compounding Periods.





F uture Value:

FV = PV(1+i)n

Example: You can afford to put £10,000 in a savingsaccount today that pays 6% interest compounded

annually. How much will you have 5 years from now

if you make no withdrawals?

PV = 10,000

i = .06

n = 5

FV = 10,000 (1 + .06)5

= 10,000 (1.3382255776) = 13,382.26





Present Value:

PV = FV/(1+i)n

Where:

PV = Present Value

FV = Future Value

i = Interest Rate Per Periodn = Number of Compounding Periods.





Present Value:

PV = FV/(1+i)n

Example: You want to buy a house 5 years from nowfor £150,000. Assuming a 6% interest rate

compounded annually, how much should you invest

today to yield £150,000 in 5 years?

FV = 150,000i =.06

n = 5PV = 150,000 / (1 + .06)5 = 150,000 / 1.3382255 = 112,088.73



H ow Debts are C reated in the


Relies on taking deposits from, and providing loans to, the

public. Therefore, the banker-customer relationship is

always a debtor-creditor relationship. A key aspect of

conventional banking is the giving or receiving of interest.

Conventional banks accept a deposit and repay the money

plus interest which is fixed at, let us say, 3%. As a

financial intermediary, the bank will use this depositedmoney to lend customers who need a loan. Here, the bank

will charge the customers interest at, let us say, 4%. The

difference, between the interest paid and interest charged is

the bank¶s profit, which in this case is 1%.



H ow Debts are C reated in the


Another process, called µfractional reserve banking¶.

This means that banks keep only a fraction (i.e. Part) of

their deposits in reserve (as cash and other highly liquid

assets) and lend out the remainder, while maintaining thesimultaneous obligation to redeem all these deposits upon

demand. Fractional reserve banking occurs when banks

lend out any fraction of the funds received from demand

deposits. This practice is universal in modern banking.

Problems can arise, however, when a large number of

depositors seek withdrawal of their deposits, which can

cause a bank run or, in extreme cases, a systemic crisis.



Impact of Debt C reation on the

Economies and Societies

Following are some of the main impacts of interest-based

debt creation:

a)E

asy availability of debt (without backing of real assetsor link to productive economic activity) is creating un-

repayable debt; it is making a select class of people richer

and leaving others poorer.

b) Problems in debt servicing: yesterday¶s debt is

sometimes repaid by taking out more debt today.



Impact of Debt C reation on the

Economies and Societies

c) The cost incurred in the form of interest has to be paid

by successive governments through increasing rates of

goods under government control and taxes on consumption

of goods and utilities. Governments are unable to provideany relief to the public despite ever-increasing taxes as

they have to pay more and more towards debt servicing.

d) The increasing inability of the poor nations to servicetheir growing indebtedness requires them to exploit their

natural resources more and more which creates a vicious

circle as their repayment capacity goes on decreasing. All

this creates instability and leads to natural destruction.



Interest-Based F iscal Operations in the

C onventional Economic

Fiscal operations in the conventional economic framework

may be regarded as deliberate manipulation of the relation

between government expenditure and government receipts

(revenue) with a view to influence the direction of theeconomy. If the amount of government revenue is greater

than its expenditure, this is called µfiscal surplus¶ and if

the amount of revenue is less than expenditure, this is

referred to as µfiscal deficit¶.

In case of µfiscal deficit¶ is financed either by raising taxes

or borrowing money, referred to as µpublic borrowing¶.

unit 1 islamic economics

Documents