Alternative Institutions to Riba - Halal Industry Development ...

ISLAMIC FINANCIAL INSTITUTIONS: REMEDY FOR THE CURRENT 

ECONOMIC & FINANCIAL CRISES 

BY 

DR. MAGDA ISMAIL

CONTENTS 

‣Background of the study. 

‣Global economic issues. 

‣Global financial crises. 

‣The way out! 

‣Islamic economic system is the solution 

‣Re-looking at the Islamic Financial Institutions

BACKGROUND 

OF THE 

STUDY 

‣At the present time almost all countries are 

following the capitalist system which approved 

its failure in the 21 st century. 

‣This urged economists to search for 

alternative system to solve the current 

economic and financial crises.

PYRAMID OF CAPITALIST SYSTEM 

(issued by Nedeljkovich, Brashick and Kuharich, Cleveland: The International Publishing Co., 1911) 

5

GLOBAL ECONOMIC ISSUES 

http://www.globalissues.org/issue/235/consumption-and-consumerism 

Global Priority 

$U.S. Billions 

Cosmetics in the United States 8 

Ice cream in Europe 11 

Perfumes in Europe and the United States 12 

Pet foods in Europe and the United States 17 

Business entertainment in Japan 35 

Cigarettes in Europe 50 

Alcoholic drinks in Europe 105 

Narcotics drugs in the world 400 

Military spending in the world 780




C 


Basic education for all 6 

Water and sanitation for all 9 

Reproductive health for all women 12 

Basic health and nutrition 13

TOTAL DEBT $40.83 TRILLION

THE WAY OUT ‣This crises raised the question of whether the Islamic 

economic system is capable of solving such crises or 

not, ignoring that Islam is suitable for all centuries and 

for all mankind. 

‣Allah (swt) in Surat al-Maidah 5:3 mentioned that: 

This day I have Perfected your religion For you, completed 

My favour upon you, And have chosen for you Islam as 

your religion. 

HENCE a perfect and a comprehensive system has been 

send by the Creator to serve mankind in the best way.

Hadith 

The Prophet (pbuh) also mentioned that in his hadith: 

…I have left two things behind me for you (the Ummah). You 

will never go astray as long as you follow these two things. 

One of these two things is Allahs Holy Book (the Quran al- 

Kareem) and the other is the Sunnah of his Most Beloved 

Prophet (pbuh). Muwatta Imam Malik

Cont... 

‣Hence, through Islamic teaching one can 

realized that many institutions have been 

provided, in the Quran and implemented by the 

Prophet (pbuh)ancd continued for 1300 years 

(great Islamic civilization) 

‣Each has its own role to play in solving the 

different economics, social and financial 

problems. 

‣Comparable to man‟s creation.

The Prophet (pbuh) said: 

Such as the believers in their mutual love, mercy and compassion is 

like one body if one part complained the whole body will suffer from 

fever and pain. 

KEY SOLUTION: Revive all Islamic financial institutions, within the 

Islamic Economic Structure, and put them in 

practice according to the teaching of Islamic for a 

just and a perfect society.

CHART (1): 

THE STRUCTURE OF ISLAMIC ECONOMIC SYSTEM 

HCD 

(KNOWLEDGE & ETHICS) 

SELF-MONITORING AND STATE MONITORING 

I‘MAR AL-ARD/ECONOMIC ACTIVITY 

1. HOW DOSE MAN ACQUIRE HIS WEALTH? 

2. HOW DOSE MAN SPEND HIS WEALTH?

WHAT IS THE 

ROLE OF MAN 

IN THIS 

WORLD? 

Man‟s role as came in the Quran: 

1. To worship Allah as mentioned in Surat al-Zariyat 

(51:56): 

“I have only created Jinns and men, that They may serve Me”, 

2. To develop this earth i„mar al-ard/ economic development as 

mentioned in Surat Hud (11:61): 

“…It is He Who hath produced you From the earth and settled you 

Therein…”

How to achieve „ibadah/worshiping and 

„imar al-ard/economic development 

according to Islam?

CONCEPT OF 

STRUGGLING 

To achieve falah/success in the hereafter Man 

has to struggle in this world in gaining his halal 

earning and fulfilling his responsibilities towards 

his society, as mentioned in al-Quran 

Verily We have created Man into toil and struggle 

(Surrat al-Balad 90:4) 

HENCE man has to struggle, according to the teaching of Islam, 

through out his whole journey in this life for a better place in the 

hereafter.


HCD 

(KNOWLEDGE & ETHICS) 


I‘MAR AL-ARD/ECONOMIC ACTIVITY 



PILLARS FOR HCD 

1. SEEKING KNOWLEDGE 

“Proclaim! (or Read!) In the name Of thy Lord and Cherisher,Who 

created…” (Surat Al-„Alaq, 96:1) 

2. PERFECTING ONES’ KHULUQ/ETHICS (measurement of ethics) 

“And thou (standest) On an exalted standard of character” 

(Surat al-Qalam 68:4) 

The Prophet (pubh) said: 

“I have been sent for the purpose of perfecting good morals”.


(HCD) 

KNOWLEDGE & ETHICS 


RESOURCE ALLOCATION AND I‘MAR AL- 

ARD/ECONOMIC ACTIVITY 



HOW TO ACHIEVE 

DEVELOPMENT IN 

ISLAM 

To be involved in the process of any economic activity two types of 

monitoring is needed in Islam. 

1. Self Monitoring 

Through practicing Ihsan man can convert his daily activities into 

worshiping Allah swt with such a presence and concentration as if one 

can see Allah and if being unable to see Allah, Allah nevertheless sees 

man. 

2. State Monitoring 

Islam gives the state a great responsibility in setting up the guidance 

for „imar al-ard and through close monitoring through the institution 

of Al-Hisbah which is to encourage all halal/lawful activities in the 

society and to discourage all haram/unlawful activities form the 

society.


(HCD) 

KNOWLEDGE & ETHICS 


I‘MAR AL-ARD/ECONOMIC 

ACTIVITY 



1. Acquiring wealth in Islam 

from any sector? 

As a khalifah /vicegerent in this 

world every individual is 

responsible for developing his 

society in order to gain his living. 

Each can participate in the sector 

he prefers according to his 

knowledge and skills.

Alternative 

Institutions 

to Riba 

In Islam the issue of riba/interest and selfinterest 

maximization is not allowed hence, 

Islam provides alternative financial 

institutions to riba.

CHART 2: 

RESOURCE ALLOCATION & I‘MAR AL-ARD/ECONOMIC DEVELOPMENT 

1. HOW MAN ACQUIRES HIS WEALTH? 

FINANCIAL INSTITUTIONS 

1. PRIVATE ENTERPRISE INSTITUTION 

2. ALTERNATIVE INSTITUTIONS TO RIBA 

• TRADE & BUSNIESS (COMMERCIAL ACTIVITIES) 

• COMPULSORY INSTITUTION 

• VOLUNTARY INSTITUTIONS 

• LENDING INSTITUTION (AL-QARD HASSAN) 

Alternative institutions to Riba 

Agriculture Sector Industrial Sector Infrastructure Sector 

Mining & Constructions 

Service Sector 

INCOME AND WEALTH ACQUIRED 

-Rent 

-Wages, Salaries 

-Profit, Dividends, etc. 

2. HOW DOES MAN SPEND HIS WEALTH? 

SPENDING ON MAN’S NEED 

(Hierarchy of Muslims’ Needs) 

RE-DISTRIBUTION 

Compulsory and Voluntary

TRADE & BUSINESS INCLUDING ISLAMIC BANKS 

AN ALTERNATIVE INSTITUTION TO RIBA 

“…Allah hath permitted trade and forbidden usury…” 

(Surat al-Baqarah 2: 276)

ZAKAH AN ALTERNATIVE INSTITUTION TO RIBA 

“And that which you give in gift (to others), in other that it may 

increase (your wealth by expecting to get a better one in 

return) from other people‟s property, has no increase with 

Allah; but that which you give in Zakat seeking Allah‟s 

Countenance, then those they shall have manifold increase.” 

(Surat al-Rum, 30:39)

SADAQAH AN ALTERNATIVE INSTITUTION TO 

RIBA 

“Allah will deprive usury of all blessing, but will give increase 

for deeds of charity…” 

(Surat al-Baqarah 2: 276)

QARD HASSAN 

AN ALTERNATIVE INSTITUTION TO RIBA 

Who is he That will loan to God A beautiful loan, which God Will 

double unto his credit And multiply many times? 

(Surat al-Baqarah 2:245)

CHART 2: 















-Rent 








HOW DOES MAN SPEND 

HIS WEALTH? 

After acquiring wealth through 

the process of economic 

activities, and according to the 

teaching of Islam, man has to 

spend part of his wealth to satisfy 

his needs and part to be 

redistributed to ensure a just and 

equitable distribution of wealth

CHART 3: 

SPENDING WEALTH FOR MAN’S NEED 

HIERARCHY OF MUSLIM’S NEED 

Daruriyyat 

(Necessities) 

Hajiyyat 

(Conveniences) 

Tahsiniyyat 

(Refinements/Beautifi 

cation)

HIERARCHY OF 

MUSLIM’S NEED 

Daruriyyat /Necessities: needs to protect alnafs/man‟s 

physical existence, i.e. food, 

clothing and shelter; protection of din/ 

religion; protection of al-„aql/mind, protection 

of al-nasl/progeny or pedigree, and almal/property. 

Hajiyyat/Conveniences: which include things 

that improve on the quality of life and remove 

bearable hardship and difficulties. 

Tahsiniyyat/Refinements/Beautification: 

which adds beauty and elegance to life without 

transgressing the limits of moderation as 

defined by the Shariah.





Cosmetics in the United States 8 

Ice cream in Europe 11 

Perfumes in Europe and the United States 12 

Pet foods in Europe and the United States 17 

Business entertainment in Japan 35 

Cigarettes in Europe 50 

Alcoholic drinks in Europe 105 

Narcotics drugs in the world 400 

Military spending in the world 780

CHART 2: 















-Rent 








RE-DISTRIBUTION OF 

WEALTH IN ISLAM 

‣Part of the acquired income and 

wealth must be redistributed in order 

to ensure a just and equitable 

distribution of wealth. 

‣This is done through the process of 

redistribution which is classified into 

compulsory and voluntary financial 

institutions:

CHART 4: 

REDISTRIBUTION OF INCOME & WEALTH IN ISLAM 


(Compulsory and Voluntary) 

MUSLIM 

NON-MUSLIM 

COMPULSORY 

INHERITANCE 

INSTITUTION 

COMPULSORY ZAKAH 

1.Zakah on Wealth 

2.Zakah on Agriculture land 

& products (ushr) 

3.Zakah al-fitr 

1.Jiziah 

2.kharaj 

COMPULSORY TAX 

(Current Taxation) 

BAIT A- MAL 

1-Zakah & Ushr 

2-Jiziah & Kharaj 

3-Others 

VOLUNTARY 

Waqf Takaful Sadaqah

8 ALTERNATIVE 

FINANCIAL 

INSTITUTIONS TO 

RIBA 

UNDER ZAKAH 

• Faqir/Poor (satisfy the needs of the poor) 

• Miskeen/Needy (assist the needy to find 

additional job) 

• „Amil/Zakah Manager (pay salary to zakah 

staff) 

• Muallafah Qulubuhm/Converts to Islam 

(convey the message of Islam to the whole 

world, through education.

CONT. 8 

ALTERNATIVE 

FINANCIAL 

INSTITUTIONS 

TO RIBA 

UNDER ZAKAH 

• Fi ar-Riqab/Liberating Slaves/Captives 

(looking at the prisoners needs and prepare 

them in facing the challenge once they are 

out from prison) 

• Gharimin/ Debtor (assist the debtor to 

repay back their loans) 

• Fisabillillah/for the Sake of Allah (secure 

the country) 

• Ibnus Sabil/Those who are stranded 

during a Journey (encouragetravelling for 

seeking knowledge and enhance the tourist 

sector)

CHART 4: 




MUSLIM 

NON-MUSLIM 

COMPULSORY 

INHERITANCE 

INSTITUTION 






1.Jiziah 

2.kharaj 



BAIT A- MAL 



3-Others 

VOLUNTARY 


INSTITUTION OF JIZIAH AND KHARAJ 

Under an Islamic country Non-Muslims are exempted from 

military service, besides being guaranteed the safety of 

themselves and their properties in exchange of the payment 

of Jizyah & Kharaj which resembles the current tax as agreed 

by contemporary Muslim scholars.

OTHER 

INSTITUTIONS 

• Historically speaking this includes ghanimah, fai‟ 

and rikaz. 

• At the present time rikaz is known as any hidden 

natural resources such as oil, gold and silver and 

all types of minerals hidden in earth. 

• All these are income for the government and 

have to be placed in the state treasury in order 

to assist the government in fulfilling its 

responsibilities in securing the country and in 

close monitoring the process of i„mar al ard.

CHART 4: 




MUSLIM 

NON-MUSLIM 

COMPULSORY 

INHERITANCE 

INSTITUTION 






1.Jiziah 

2.kharaj 



BAIT A- MAL 



3-Others 

VOLUNTARY 


1. 

SADAQAH AN 

ALTERNATIVE 

FINANCIAL 

INSTITUTION TO 

RIBA 

• This is a voluntary act of giving alms for the 

cause of Allah/fisabillilah by individuals who 

want to contribute more than the obligatory 

due. 

• This is the type of hidden sadaqah to be given 

to needy relatives, needy friends or needy 

neighbors in situation where they face 

temporary difficulties. 

• The main objective of this hidden sadaqh is to 

finance those people rather before they will be 

forced to borrow with riba.

2. 

TAKAFUL AN 

ALTERNATIVE 

FINANCIAL 

INSTITUTION 

TO RIBA 

• Takaful is an institution of mutual 

cooperation for financial assistance and 

kind of protection based upon the 

principles of ta'awun, or mutual 

assistance. 

• In this case all participants will contribute 

to finance any needy participant in their 

group rather than letting them borrow 

through riba in case of financial problem.

3. 

WAQF AS AN 

ALTERNATIVE 

FINANCIAL 

INSTITUTION TO 

RIBA 

This is the voluntary act which is much 

recommended in Islam because it provides 

perpetual services. 

The beauty of this institution is that it 

provides different institutions offering 

perpetual services needed in each society.

CONT… 1. Institution of Waqf (Immovable) 

2. Institution of cash-waqf (movable) 

i. Waqf Shares Model 

ii. Waqf Takaful Model 

iii. Direct Model 

iv. Mobile Model 

v. Corporate Cash Waqf Model 

vi. Compulsory Model 

vii. Deposit Product Model 

viii. Co-Operative Model 

ix. Waqf Mutual Fund Model

CONT 

…. 

Historically speaking the institution of waqf provide many services needed in the different 

societies: 

• Build mosques, schools, hospitals, guest house, orphanage, students‟ hostels. 

• Jobs for the majority of the people in the different sectors. 

• Salaries for the Imams, muezzin, teachers, doctors, wages for workers. 

• Food for the employees and oil for the lighthouse lamps. 

• Transportation facilities such as roads, ferries and bridges. 

• Supply fresh drinking water for villages. 

• Build factories, provide machineries, and salaries for the employees. 

• Helped the poor and the needy and build for them small houses. 

• Besides, it took care of prisoners and helped their relatives too. 

• Took care of animals and build hospitals to cure them. 

NOTE: All these services were provided without any cost to the government.

PAYMENT OF ZAKAT & CASH WAQF THROUGH TAX REBATE 

{CASE STUDY MALAYSIA} 

Monthly income 

RM 

Income tax paymen 

RMt 

Considered 1 wife & 1 child 

2,500 Nil 

3,000 0 

4,000 130 

5,000 250 

6,000 424 

7,000 620 

8,000 860 

9,000 1100 

10,000 1352 

11,000 1612 

12,000 1872 

13,000 2132 

14,000 2392 

15,000 2652 

16,000 2899 

17,000 3172 

18,000 3432 

19,000 3692 

20,000 3952 

21,000 5460 

22,000 5720 

23,000 5790 

24,000 5980 

25,000 6500 

Zakat Payment 

RM 

Considered 1 wife & 1 child 

30.42 

41.92 

64.92 

87.92 

110.92 

133.92 

156.92 

179.92 

202.92 

225.92 

248.92 

271.92 

294.92 

317.92 

340.92 

363.92 

386.92 

409.92 

432.92 

455.92 

478.92 

501.92 

524.92 

547.92 

Tax-Rebate 

Can be directed to waqf 

-- 

-- 

65.08 

162.08 

322.08 

486.08 

703.08 

920.08 

1149.08 

1386.08 

1623.08 

1860.08 

2097.08 

2334.08 

2558.08 

2808.08 

3045.08 

3282.08 

3519.08 

5004.08 

5241.08 

5288.08 

5455.08 

5952.08

MONTHLY SALARIES 

MUSLIM POPULATION IN MALAYSIA 

(LABOR FORCE) 

10,000,000.00 X RM100 = RM1000,000,000.00 

RM 1 billion will be collected within on month 

RM 1 billion x 12 month= RM 12 billion/year 

($4 billion)

Zakah form Monthly salaries selected Muslim 

countries 

Country 

Population 

In 2009 

Million 

People who 

live below 

poverty 

% 

Population 

who live 

below 

poverty 

Million 

Labor 

Force 

(a) 

Million 

Monthly 

Zakah 

Payment 

(b) 

$ 

Money 

collected 

from 

Zakah 

(a x b x 

12mths) 

$ billion 

Pakistan 175 24 42 55 50 33 

Afghanistan 28 53 15 5 50 3 

Indonesia 245 18 44 100 50 60 

Iran 73 18 13 35 50 21 

Bangladesh 150 45 65 60 50 36 

Sudan 42 40 17 12 50 7.2 

Yemen 23 45 10 5 50 3 

Algeria 36 23 8 15 50 9 

Egypt 82 20 16 40 50 24 

Turkey 77 20 15 24 50 14.4 

4/12/2012 52




C 


Basic education for all 6 

Water and sanitation for all 9 

Reproductive health for all women 12 

Basic health and nutrition 13

HOW THE ISLAMIC ECONOMIC SYSTEM SHAPE 

LOOK LIKE?

STRUCTURE OF ISLAMIC ECONOMIC SYSTEM

TO CONCLUDE 

To come out from these economics and financial crises 

the best way is to re-look at the Islamic Institutions for 

a just society.

END OF PRESENTATION 

Q & A

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