Understanding Islamic Finance - Doha Academy of Tertiary Studies

Distinguishing Features of the Islamic Economic System 41the adverse effect this erosion has on social justice and general welfare, which are amongthe central goals of the Islamic system. In the mutually interdependent global economyof today, it may not be fully possible for the small and open economy of an individualMuslim country to achieve the desired stability. However, what it does imply is that anIslamic state should itself be clear about its role with respect to price stability and shouldbe determined to contribute whatever it can to the attainment of that goal. 215. Harmonizing international relations and national defence. The Islamic State shouldencourage and support any constructive move towards peace, and should honour alltreaties and agreements to which it is a partner. Nevertheless, it should do its utmostto strengthen its defence so as to prevent or frustrate any aggression against its faith,territory, freedom and resources. 22As a corollary, governments and the central banks/monetary authorities would be requiredto ensure that banking and non-banking financial institutions function smoothly and theinterests of all stakeholders, particularly small savers and the masses in general, wereprotected and the cartels and monopolies did not exploit them. Regulators would also ensurethat the institutions did not get involved in antisocial activities injurious to individuals,society and human beings at large.Leaving the most strategic sector of money and finance to market forces without anyeffective overseeing role is bound ultimately to generate disastrous effects for the long-termhealth of economies. Governments/regulators must devise and adopt fiscal and monetarypolicies in their respective ambits in such a way that an expected rate of return emergingfrom real sector business in the economies becomes the benchmark and an effective signalfor the efficient allocation of funds to various sectors.2.6 SUMMARYBanking and finance are parts of economics or the economic system, as the rules governingactivities of banks and financial institutions stem from the overall economic framework inwhich these institutions operate. It is, therefore, worthwhile to discuss the structure of Islamiceconomics under which the Islamic financial system is supposed to work. In this chapterwe have discussed the fundamentals of the Islamic economic worldview having direct orindirect impact upon the business of Islamic financial institutions and markets.All economic and financial contracts in the framework of Islamic finance have to conformto the Sharī´ah rules, with the objective of helping to achieve the well-being of people inthe worldly life as well as in the Hereafter. Hence, studying economics is important for thedual purpose of having better sustenance and the religious imperatives. The sources of rulesdealing with economic aspects of human beings are the Holy Qur’ān and Sunnah of His lastMessenger, Muhammad (pbuh). In addition to the Qur’ān and Sunnah, Ijma‘a, Qiyās andIjtihad provide a hierarchical framework of sources of rules governing Islamic economicsand finance.21 Chapra considers that borrowing from the central bank should be the last resort, as it generates inflation unless accompanied bya corresponding increase in the supply of goods and services. However, according to the principle that a smaller sacrifice may beimposed to avoid a larger sacrifice and that the smaller of two evils may be tolerated, borrowing from the central bank may alsobe defended under certain special circumstances, even if there is no corresponding rise in output. Also see Chapra, 1985.22 See Holy Qur’ān; (8: 60) and (2: 190).