11/8/2025

Introduction – Islamic World View

ECO 4215 What binds all the generations is Tawhid – the same religion
revealed to all prophets (Surah Shurah Q42.13)
ISLAMIC ECONOMICS On the essence of creation (Surah Muminun Q23.115 & Q67.2)

Natural sense of justice, Adl, Q57.25

Satisfaction of human wants – Kulu washarabu wala tusrifu…

Wealth as a trust to mankind

Eat and drink and do not be extravagant, avoid prohibited things, tame
Prof. Shehu Rano Aliyu,
selfish desires, uncertainty, etc.
suarano.eco@buk.edu.ng
Man as a vicegerent
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Islamic Economics: Meaning & Objectives Islamic Economics: Meaning & Objectives
• A branch of study that seeks to apply economics principles from According to Ibn Khaldun “Economics is the study of human efforts in
the standpoint of the Shari'ah in the promotion of the socio- obtaining resources and using them, through exchange, for the
economic well-being of the society. fulfillment of necessities, needs, and refinements as well as for the
• Hasanuz Zaman defines Islamic economics as “the knowledge and purpose of acquisition”.
application of injunctions and rules of the Shari’ah that prevents
injustice in the acquisition and disposal of material resources to Objectives (from Ibn Khaldun’s definition)
provide satisfaction to human beings and enable them to perform Improving the overall well being of the state and this entails:
their obligations to Allah and the society”. Meeting the necessities (daruriyyat)
• Zaidan Abu Makarim defines the subject as “the science that deals Needs (hajiyyat)
with wealth and its relation to a man from the point of view of the
realization of justice in all forms of economic activities”. Perfections (tahsiniyyat)
• Akram Khan defines it as “the study of human falah (success) According to Al-Shatibi, necessities are the minimal requirements of
achieved by organizing the resources of the earth based on barely sustainable human livelihood even though hardship can be
cooperation and participation.” suffered for their satisfaction. The role of needs, therefore, is the
• Mohammed Ariff states that it is “the study of Muslim behavior that removal of hardship, while the extension of greater convenience
organizes the resources, which are a trust, to achieve falah”. achieves the last, which is the tahsiniyyat. 4

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Goals of the Islamic Economic System Goals of the Islamic Economic System
• Economic well-being within the framework of the moral norm of The socio-economic policy goals of an Islamic
Islam – Q2:60, 168; 5:87-88
• Universal brotherhood and justice – Q4:135; 6:152; Hujurat state are as follows:
49:13 1) Justice and equity.
– Social justice – see hadith on social justice in Islam.
– Economic justice – Ash-Shuara Q26:183,. In a hadith, the Holy 2) Provision of the socio-economic needs of the
Prophet said
• “Beware of injustice for injustice will be equivalent to darkness on the
community or socioeconomic welfare.
Day of Judgment”.
3) Enhancement of the community’s economic
• Equitable distribution of income – Hashr Q59:7
– Khalif Umar R.A emphasis on redistributive justice resources or economic growth.
– Khalif Ali R.A emphasis on redistributive justice 4) Improvement in the socio-cultural milieu of the
– Abu Zar R.A position on circulation of wealth.
• Freedom of individuals within the context of social welfare – Al-
community/environment.
Araf Q7:157
– Khalif Umar R.A. Said “ Since when have you enslaved people 6
although their mothers had born them free?”
5

Methodology of Islamic Economics Methodology of Islamic Economics

• The purpose of a scientific inquiry is to try to know the However, deriving from the absolute/universal truth or
unknown knowledge, science has evolved mechanical and mathematical
methods of enquiry with which further enquiries are made.
• A phenomenon that is absolute in nature is known from
absolute sources – revealed scriptures; e.g., Oneness of the Two known scientific methods are the Inductive and Deductive
creator, creation of man, seven heavens and earth, waters, methods of enquiry.
movement of earth, and the sun. Induction method refers to the process of determination of
• Western thinkers refer to these as meta-physics and meta- universal laws from individual or particular cases.
economics. E.g. if a set containing x, y, z, … up to n elements or human beings are
• The Holy Qur’an Suratul al-Rahman Says: mortal, then the conclusion or universal truth is that all the elements or
human beings are mortal.
– O ye assembly of Jinns and men! If it be Ye can pass beyond
the zones of the heavens and the earth, pass ye! Not without Deduction method refers to the process of knowing the
the authority Shall ye be able to pass!” Q55:33 ‘particular’ or individual cases from a general or universal
case/phenomenon.
For instance, if all human beings walk with two legs, then a particular
individual must also walk with two legs 8

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Methodology of Islamic Economics Sources of Methodology in Islamic Economics

The process, especially in the former begins with the The Holy Qur’an states:
formulation of a hypothesis. “Verily this Qur’an guides to the Way that is the Straightmost. To those
who believe in it, and do righteous works, it gives the good news that a
Then the scientific process is followed; data – which type, how
great reward awaits them, and warns those who do not believe in the
and where it is collected, instruments; analysis of data – Hereafter that We have prepared for them a grievous chastisement”.
method/ techniques, interpretation; testing of hypothesis and Q17:9
conclusion.
The Sunnah: verbal sayings, actions, and silent approvals of the
In Islamic economics, relationships between one variable and
Holy Prophet, Muhammad (SAW), and that of his rightly guided
other(s) have to be established before the steps are followed.
companions
The fundamentals, however, are ‘given’ (revealed) in terms of
the Holy Qur’an and Sunnah of the Holy Prophet, Muhammad The non-revealed sources of Shari’ah are the Ijma and Qiyas. The
(SAW) former refers to the consensus of Ulamas and the latter refers to
Holy Qur’an: The book containing the speech (communication) of the logical reasoning of Ulamas.
God revealed to the Prophet Muhammad conveyed by the angel The objective of scientific inquiry in Islam is to achieve the ideal
Gabriel in Arabic and transmitted to us by continuous testimony. of stable/equilibrium conditions, socially and economically.
9 10

Sources of Methodology in Islamic Economics Sources of Methodology in Islamic Economics

Describing the character or process of scientific inquiry
Often, validated theories disappear in the process of social and
in Islamic economics, Sharif (1985) states: economic change, which brings about different actual conditions
Since the scope of investigation towards the construction of theory out of which facts have to be observed again. This is the way
is too wide in terms of un-disciplined, unpredicted human behavior, how classical theories, causing a revolutionary change in
the range of the extents of trial and error involved is also very wide. thoughts and applications, yielded place to the neo-classical
In the case of the construction of theory for Islamic economics in an theorists who yielded to Keynes and Keynesians who again
Islamic society, human behavior is basically disciplined and made room for Neo-Keynesians, and anti-Keynesians, Radicalist,
perspective-oriented; as such, the hypothesis cannot be wild, and Socialist and Communist as new theorists.
deriving the implications also becomes relatively easy. In the former
case, it becomes a process of perpetual inquiry to make and un-
make theories only to count the latest position of result on some
particular element or an issue as the indication of the process of
knowledge achieved up to the given point of time. In that process,
old theories become dead bodies of logic to be kept in the archives
of history… 11 12
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Early Islamic Economic Thinkers Ibn Taymiyyah (1262 – 1328)

Abu Yusuf (731-798), a student of Imam Abu Hanifah. He was the The power of supply and demand was understood to
chief jurist for Abbasid Caliph Haroon Ar-Rasheed, for whom he some extent by Ibn Taymiyyah and he illustrates:
wrote the Book of Taxation (Kitabal-Kharaj). "If desire for goods increases while its availability decreases, its
His book focused on taxation, public finance, and agricultural price rises. On the other hand, if availability of the good
increases and the desire for it decreases, the price comes
production. down."
He discussed proportional tax on produce instead of fixed taxes
Ibn Taymiyyah also elaborated a circumstantial analysis of
on property as being superior as an incentive to bring more land
the market mechanism, with a theoretical insight unusual
into cultivation.
in his time.
He also advocated forgiving tax policies that favor the producer
and a centralized tax administration to reduce corruption. Abu
His discourses on the welfare advantages and
Yusuf favored the use of tax revenues for socioeconomic disadvantages of market regulation and deregulation
infrastructure and included discussion of various types of taxes, have an almost contemporary ring to them.
including sales tax, death taxes, and import tariffs. 13 14

Ibn Khaldun (1406 AD/808 AH) Ibn Khaldun (1332-1406 A.D)

An Arab Tunisian historiographer and historian who is often
viewed as one of the forerunners of modern historiography, Later in the 19th century, Western scholars recognized
sociology, and economics. him as one of the greatest philosophers to come out of
He was considered as the father of modern economics. Ibn the Muslim world.
Khaldun wrote on economic and political theory in the He wrote extensively on
introduction, or Muqaddimah (Prolegomenon), of his History Social Cohesion
of the World (Kitab al-Ibar).
Labour theory of value
He discussed what he called asabiyya (social cohesion), which
Population and economic growth
he cited as the cause of some civilizations becoming great
and others not. Concept of Supply Side Economics and adverse effects of
taxes
He is best known for his Muqaddimah (known as
Concept of Money
Prolegomenon in English), which was discovered, evaluated,
and fully appreciated first by 19th-century European 15
Concept of Giant Corporate and Multinationals 16

scholarship.
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Functions of an Islamic State Functions of an Islamic State

According to Imam Al-Ghazali (505AH) Al-Mawardi identified the functions of an Islamic as:
“The very objective of the shari’ah is to promote the welfare 1) Protection of religion,
of human beings, which lies in safeguarding their Religion,
Selves, Minds, Progeny and Wealth. Whatever ensures and 2) Maintenance of Laws and Order,
safeguards these five fundamentals serves the public 3) Protection of the frontiers of an Islamic State,
interest and is desirable. Whatever hurts them is against the
public interest and its removal is desirable”. 4) Provision of conducive environment for economic activities,
Explore the shari’ah position on how an Islamic state 5) Provision of public administration, judiciary and enforcement
seeks to achieve these: of Islamic code,
a) Religion, 6) Collection of revenue from available sources and also to raise
b) Selves, revenue by imposing new taxes if the situation so requires,
c) Minds, and,
d) Progeny, and
7) Disbursement of funds on those heads that are obligations on
e) Wealth. 17
the treasury.
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Functions of an Islamic State

Section 2
Ibn Khaldun (1332-1406 A.D)
1) Protection of the community from its enemies, o Meaning of Public Finance,

2) Maintenance of law and order among the people in o Taxation in Islam – types of taxes in Islam; Zakah, Ushr, Jizyah,
order to prevent mutual hostility and attack upon Kharaj, tax on treasures/ troves, custom duties and tolls, etc.
property. This includes improving the safety of the
o Principles of Islamic Taxation
roads,
3) Supervision of such general matters that involve their o Other sources of revenue: Sadaqa, War booty, Waqf,
livelihood and mutual dealings as food stuffs and Inheritance, etc.
weights and measure in order to prevent cheating, and o Islamic Fiscal policy, instruments and goals of Islamic fiscal
4) Overseas the mint to prevent fraud in currency.
policy.
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Main Elements of Islamic Fiscal Theory 3 Sector Islamic Economy

• Unlike in the conventional economic system where the two
key sectors – Private and Public, operate hand in hand in
resource mobilization, allocation and distribution, an Islamic Islamic
economy operates through 3 key sectors; Economy
1) The private sector with profit,
2) the voluntary sector, and
3) the public sector – Government.
Voluntary Sector
• The allocation, distribution and stabilization functions of an Public Sector Private Sector
(Profit Oriented) (Private Non
(Social Welfare)
Islamic economy are processed and implemented through the Social and Economic Provision of
profit)
three sectors jointly. Justice, Managing Private good, Awqaf institutions,
Public Institutions, Trade, Commerce, health, education,
• The public sector's role is minimal but crucial in so far as it Provision of Public Finance and other security, water
supply,
operates continuously to ensure an optimal allocation of the Good, Promotion of
Economic Growth
Economic
accommodation,
Activities
community's resources and stability of the economy. mosques, etc.
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Public Revenue and Expenditure Public Revenue and Expenditure

The basic tools of Islamic fiscal policy like those of its
Fiscal policy can be seen as an instrument through which an conventional counterpart are: government spending, taxation
Islamic state makes use of its income, expenditure, taxation and public borrowing.
and borrowing powers to achieve positive effects on the The policy must be situated within the ideological framework of
economy.. Islam – value loaded and married to both the material and
spiritual welfare.
Monzer Kahf (2011) defined Islamic fiscal policy as "the set of Absence of permanent and organized form of public treasury
laws, regulations, instructions, procedures and processes related during the life time of the Holy Prophet and the first Caliph,
to structuring and collecting public revenues, determining and Abubakar (R.A).
spending public expenditures, public deficit/surplus and its
Caliph Umar (R.A) established a permanent and organized
management and the public budget". department of finance called diwan. E.g., Khaybar land was
Aliyu (2012) defined it as the manipulation of relevant distributed to Muslim warriors while Banu Nadir and Fadak
sources of government revenues, direction as well as the size lands were left at the disposal of the Holy Prophet.
of government expenditure, its level of borrowing and taxes Al-Mawardi stated that the need for the treasury arose from
for achievement of desirable effects on the economy. 23
large revenue coming to the state from conquered lands – Syria
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and Iraq.
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Sources of Public Revenue in Islam Sources of Public Revenue in Islam

Revenue side:
side: Taxation:
Taxation: Classical Islamic scholars like Abu Yusuf,
Islamic theorist argued that fiscal system beyond what is defined by Zakah is un-
islamic because of the sanctity of private property
Imam Yahya Ibn Adam and Ibn Qudama have justified
Later, scholars such as Al Ghazali, Abu ‘Ubaid, Abu Yusuf, Ibn Taymiyyah, Al Shatibi,
the use of tax as a main source of revenue to an
etc., have stressed the need for some form of taxes. Islamic state.
The main sources of revenue in an Islamic state are: These are in the form of kharaj (land tax) jizyah (tax
Taxation
paid by non muslims under the protection of an
Fees from Government provided services – moderate fees
Islamic state) and ushur (import and export tax).
Equity Financing in Public Enterprises – Public Good and exploitation of strategic
resources According to Caliph Umar (R.A)
Government Borrowing – money and capital markets
“Taxes are justified if they are collected in a just, legal way,
Zakah
and that they are spent justly and legally. I consider myself,
Jizyah
with regard to the taxes collected, as a guardian of an
Others include: orphan’s property. The people have the right to question
Kharaj, al Ushr, Ushur, Waqaf, Sadaqah, Ghanimah, etc. 25 whether I spend the taxes collected, in a legal way” 26

Sources of Public Revenue in Islam Sources of Public Revenue in Islam

• Furthermore, Imam Malik states: Zakah:
Zakah: is one of the five pillars of Islam and is compulsory financial
– “If there were no funds in the treasury or the needs of the army levy on all surplus wealth and agricultural income of muslims.
increased above the capacity of the treasury, the state has the It is charged in varying rates and is collected by the state:
right to levy taxes on the rich up to the level that satisfies the 2.5% on all financial assets and stock-in-trade
need immediately and until the revenue of the treasury appear”. 10% on agricultural produce

• Some considerations: 5% from irrigation farming

– The levy should be proportional, i.e., based on ability to pay, The rate differs in the case of livestock animals

– It should promote social welfare – poverty reduction, Generally, zakah is another form of proportional tax

– Such levies must not kill incentives to work. It is a major instrument for providing social security, poverty
eradication, income, inequality, stimulating economic growth, etc.
There are two main types of zakah; the zakah fitr and zakah al-maal.

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Zakah Typology Sources of Public Revenue in Islam

• In Malaysia, for instance, zakah is paid on:
– Personal income (i.e. Salary)
Zakah – Goods of trade and business
– Animals and livestock
– Crops
– Savings
Zakah Al-maal Zakah Fitr – Gold and silver
– Investment (i.e. Shares/stock)
• Redistributive nature of zakah
Zakah on self paid on
• The Holy Qur’an states:
Natural Resources
Acquired wealth: and Farm produce: completion of fasting – “Zakah is for the poor (faqir) and the needy (miskin) and those
during the Holy employed (amil) to administer and collect it, and the new
- Animals - Crops month of Ramadan on converts (muallaf), and those in the bondage (riqab) and those
- All material and - Mining products every member of the in debt (garim) and in the cause of Allah (fisabilillah), and the
immaterial assets. family wayfarer (ibn al-sabil), a duty ordained by Allah, and Allah is the
-Unearthed treasure
All-knowing, the wise”. Q9:60
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Sources of Public Revenue in Islam Sources of Public Revenue in Islam

• Al-Mawardi (1978) illustrates that the term kharaj is the levy
Jizyah:
Jizyah: tax paid by non-Muslim adults living in an Islamic on the land/land produce which the peasants of the
state, especially during the early days of Islam. conquered territories pay to the Islamic state.
The holy Qur’an states: • Abu Ubayd, for instance, elaborates that after the conquest
“Until they pay the jizyah with submission, and feeling of and other territories, the Islamic state became the owner
themselves subdued”. Q9:29 of the landed property and the tenants attached to it became
the tenants of the Islamic state. They cultivated the soil for a
However, the poor, sick, young, disabled men, women, aged, known payment and keep the rest of the crop for themselves.
Priest and Monks are all exempted from Jizyah.
• Ushur:
Ushur: this is a commercial or business tax, which is similar
Kharaj:
Kharaj: a tax on agricultural land, a rental fee on to import and export tax. It is collected from three different
conquered land. Muslim jurists agreed that such traders:
agricultural land should be kept as public property so – 10% rate for traders from foreign countries
that future Muslims may benefit from them. The rate of – 5% for non-Muslim local traders, and
the tax depends on the quality of the land. – 2.5% for local Muslim traders per annum.
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Sources of Public Revenue in Islam Sources of Public Revenue in Islam

• Ushr:
Ushr: this is agricultural tax where one-tenth of total Sadaqah:
Sadaqah: a moral obligation on every Muslim where after paying
agricultural produce is collected by the Islamic State for Zakah, and their daily needs, they contribute their money for
the benefit of the needy to seek the pleasure of God. The Holy
rain-fed or irrigated from water reservoirs, streams, rivers Qur’an states:
and canals for which no expenses are borne by the “Who are steadfast in seeking the good pleasure of their Lord; who
cultivators. One-fifth is, however, collected from irrigation establish Prayer and spend both secretly and openly out of the wealth
We have provided them, and who ward off evil with good. Thiers shall be
farming where expenses are borne by the cultivators. the ultimate abode”. Q13:22
• Waqf:
Waqf: is a charitable endowment. A waqf institution is a Ghanimah:
Ghanimah: this constitute holy war (jihad) booty. It is such
foundation which is set up to manage properties/assets in wealth acquired from the enemy after an encounter.
perpetual existence and making its income available for The Holy Qur’an regarding this states:
specified beneficiaries. Waqf properties have traditionally “Know that one-fifth of the spoils that you obtain belongs to Allah and
to the Messenger and to the near of kin, to the orphans and the needy,
been used to finance expenditure on mosques, schools, and the wayfarer. This you must observe if you truly believe in Allah and
hospitals, social services and defense as well as other areas in what We sent down to Our servant on the day when the true was
distinguished from the false, the day on which the two armies met in
of great importance to the ummah. battle. Allah has power over all things”. Q8:41 34

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Theory of Taxation Theory of Taxation

Al-Mawardi (1978) identified the following as the factors that
Tabari (1961) reports that before the sixth century A.D., the land determine the tax-bearing capacity of land for proper tax
tax and rents were levied as the proportion of agricultural assessment.
produce which ranged from one-third to one-sixth of the total
crop according to the fertility of land and system of irrigation. Fertility of land
However, in the last days of Sasanid rule, it was transformed into Type of crop
a fixed tax either in cash or kind. System of irrigation
Because of lack of clear instruction from the Holy Qur’an, tax Modes of Kharaj Assessment
administrators during the caliphate period used to charge tax Al-Mawardi recommended that tax assessment should take either of
based on the paying ability of the peasants and on what the land the following forms:
could pay.
1) Misahah: a fixed rate based on the measurement of the land, regardless of
Abu Yusuf says that Caliph Umar (R.A) expressed his whether it is cultivated or not, provided it is cultivatable,
apprehension that his tax collectors might charge a rate more 2) Assessment based on the size of only cultivated land,
that what the land could bear – he appointed the companions of
3) Muqasamah: a form of proportional kharaj, which is levied as a percentage
the Holy prophet because of this fear. of total produce after harvest.
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Theory of Taxation Principles of Taxation

Abu Yusuf, a famous tax expert during the reign of caliph This refers to the features or characteristics of the Islamic
Harun Rashid advocated for Muqasamah where he stated tax system and these includes:
as: 1) Conditions for imposing taxes – for zakah it has to reach the
nisab, while some exemptions and concessions are made.
“in my view, the best system of taxation for generating more 2) Definition of tax base and tax rate
revenue for the treasury and the most adequate one to prevent
3) Principle of equity – the benefit received principle and the
injustice to the tax payers by tax collectors is the proportional ability to pay principles (vertical and horizontal equity) are
agricultural tax. The system will alleviate injustice to the tax applied.
payer and will benefit the treasury” Although Muslim scholars favour ability to pay, Abu Yusuf
suggested the use of general benefit received principle where he
argued that ‘each tax payer should be taxed in line with his or her
demand for public services’.
4) Flexibility in the imposition of taxes
5) Principles of economy – Abu Yusuf states that “the collectors of
37
the taxes should be paid a fair salary but not such that will 38

consist of the greater share of the sadaqat collected”.

Principles of Taxation Principles of Taxation

Other issues:
6) Principle of convenience to the tax payer – even Adam Smith Supply-side tax system policy – Abu Yusuf enunciated the adverse effects
argued that “the tax levy should be in a manner most of high tax rates and oppression of taxpayers on productivity.
convenient for those taxed and they should be so contrived as In the fourteenth century, Ibn Khaldun held the view that high
to be most economically collected”. tax rates discourage business activities where he states:
7) Avoidance of double taxation “Eventually, the taxes will weigh heavily upon the subjects and overburden
them. As a result, their interest in economic activities disappears, since
they compare expenditure and taxes with their income and gain and see
Abu Yusuf summarized some of these principles as the little profit they make, they lose all hope. Many of them refrain from all
follows: activity. The result is that the total tax revenue goes down”.
Western scholars hailed Ibn Khaldun who was the forerunner of
“the evaluation of kharaj should be based on a just appraisal, the supply-side ideals of Arthur Laffer
neither overcharging the tax payers nor damaging the b) Tax incentives/subsidies in Islamic State
authorities. What is due should be taken in kind, but if
c) Effect of taxes on production and consumption
convenient for both sides, the yield may be sold and its price
d) Effects of taxes on inflation
should be divided proportionally between tax payers and
authorities”. 39 40
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Economic Impact of Zakah Economic Impact of Zakah

1. Incentive to Produce:
Produce: Those with higher MPC are most favoured 2. Incentive to Invest:
Invest: Zakah encourages investment because
be it in manufacturing, agriculture or any form of activity because it fights hoarding (Q59.8) and encourages spending. At
of the proportional nature of zakah and other forms of taxes. See 2.5% fixed rate, it takes 40 years to exhaust any idle
diagram
wealth. Property of orphans should be invested as
Figure 2: Economic Effect of Zakah and Sadaqa on GDP enjoined by the Holy Prophet.
Aggregate Supply Curve
3. Incentive to Save:
Save: Zakah does not discourage savings
Consumption

C + Zt + I(S) + G + X-M
rather, it encourages it. The Holy Prophet advised Sa’ad
C + Zt + I(S) + G
C + Zt + I(S)
ibn Abi Waqqas to save for his children. Islam encourages
C + Zt
investment which is only possible when saving is made
C and guarantees a predetermined return from investment.

41 42
0 Y0 Y1 Y2 Y3 Y4 Income - GDP

Economic Impact of Zakah Economic Impact of Zakah

Islam further discourages miserliness and condemns
conspicuous consumption. One’s wealth is purified as he 4. Incentive to Consume:
Consume: Zakah encourages spending on basic
needs by giving preference in the share of zakah, it
fulfils Allah’s command. discourage wasteful consumption, wastages, gambling, and
The Holy Qur’an states alcohol etc Q4:30, 5:92. It calls for a modest way of life like
that of the Holy Prophet and the Sahabas.
Those who are niggardly about what Allah has granted them out
of His bounty think that niggardliness is good for them; rather, it 5. Redistribution of income/Assets:
income/Assets: Only two out of the eight
is bad for them. What they were niggardly about will turn into a categories of beneficiaries of zakah are for non-direct
halter round their necks on the day of resurrection. To Allah consumption. Islam further encourages spending for the poor
belongs the inheritance of the heavens and the earth. Allah is
and needy sadaqa and other forms of voluntary spending.
well aware of what they do”. Q4.180 6. Incentive to work:
work: Physical labour enjoys a very high regard
in Islam. Believers do not stay idle expecting zakah, in fact
The true servants of the Merciful One are those who are neither the Holy Prophet calls on believers to eat from what their
extravagant nor niggardly in their spending but keep the golden hands toil, like Prophet Dawud (A.S). Besides, higher
mean between the two”. Q25:68 spending by those with higher MPC (beneficiaries of zakah)
43
will encourage small and medium scale activities and 44

promote employment.
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Economic Impact of Zakah Economic Impact of Zakah

“and that the man shall have nothing but what he has striven 8. Redirection of investment:
investment: Investment should not only be on high
for and that (the result of) his striving shall soon be seen” technology; capital intensive technique, but on also small scale,
Q53:40-41 labour intensive technique regardless of whether it is highly
7. Control of Business fluctuation/circle:
fluctuation/circle: Evidences have profitable or not. This should be through profit and loss sharing –
musharakah, mudharabah, etc., in order to promote social justice in
shown that the worst hit during depression and famine are
the society. The success story, for instance, of Grameen (Rural) Bank
those who live by selling only their physical labour. The project by Muhammad Yunus, and the first Islamic Bank-Egypt Mit
hardship is more due to inability of the landless, small Ghamir, are good references for Muslim States.
farmers and artisans to exchange what they have for a
9. Appropriate Pricing Policy:
Policy: Pricing policy of Islamic institutions –
living rather than by actual shortage of foodstuff. The money and capital market should promote greater equality in the
1930’s Great depression on one hand, and the 1943 and distribution of income and reduction in poverty, especially where
1974 Great Bengal Famine and Bangladesh Famine (Sen, starvation is caused more by decline in exchange entitlement than
Amartya) were largely due to constraints imposed on these by simple shortage of food supplies.
categories of economic agents. 45 46

Economic Impact of Zakah Economic Impact of Zakah

For instance, most small holder farmers sell their output shortly after
harvest only to buy it later at higher prices. This should be 12.
12. Labour:
Labour: Labour should not be paid/traded according to
discouraged through credit availability to the farmers on the basis of value marginal products (VMP) supply side but according
profit and loss sharing through organised farmers’ associations, to their basic needs – demand side. Labour, like capital
artisans, etc.
10.
10. Products:
Products: Capitalist system condones factors governing oppressive
should also share in the net profit with the management.
pricing policies through hoarding of products, suppression of market 13.
13. Land:
Land: Islam discourages keeping land idle because:
information, speculation, advertisement expenditure, cut-throat
competition, monopolies, rent-seeking activities, cartels, collusion, a) Those without land will be deprived from the benefits of using
etc. Rivalry has no place in Islam, instead, Islam encourages mutual such product asset
cooperation-Mudaraba, Musharaka, Murabaha, etc., for the
betterment of welfare and pleasure of Almighty. b) Such actions will lower overall productivity in the Islamic States.
11. Capital:
11. Capital: Shari’ah principle condemns interest because: Accordingly, a number of practices emerge since the life
 It exploits savers, especially at lower income group
time of the Holy Prophet. The land to the tillers principle,
 Concentration of wealth in the hand of the rich
for instance, was practiced during the early days of Islam.
 Exacerbate poverty, inequality, unemployment, etc. 47 48
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Economic Impact of Zakah Economic Impact of Zakah

14.
14. Law of Inheritances
Inheritances:: sharing of the property of
15. Zakah protects wealth
deceased is also one way of redistributing wealth.
The impact of this to production, consumption, and
employment, etc., is direct on the economy.
The Holy Qur’an states:
“Just as the there is a share for men in what their parents and
kinsfolk leave behind, so there is a share for women in what
their parents and kinsfolk leave behind – be it little or much –
a share ordained (by Allah)”. And if other near of kin, orphans
and needy are present at the time of division of inheritance
give them something of it and speak to them kindly”. Q4:7-8

49 50

Objectives of Islamic Fiscal Policy Modelling Zakah in the Macroeconomy

These are:
Ausaf Ahmad (1987) A Model of Income
1) Justice and equity
Determination in an Islamic Economy (Jeddah: IER,
2) Provision of the socio-economic needs of the community
KAU)
3) Enhancement of the community's economic resources or economic growth
4) Improvement in the cultural milieu of the community
A pioneer work that sought to lay down
foundation of Islamic macroeconomics.
According to Monzer Kahf
1) Maintaining economic justice The author consciously seeks to present Islamic
2) Improving economic capability income determination model against the backdrop
3) Improving welfare and economic satisfaction of the simple Keynesian model.
4) Maximizing benefits of public properties
5) Sufficient financial resources
51 52
6) Protecting the moral and legal framework
 11/8/2025

Ausaf Model cont. Ausaf Model cont.

First model Second Model 3rd Model
Y=C+I Y=C+I+G I = I(Y, μ) (∂I/∂Y) > 0, ∂(I/∂μ) < 0
I = I0 I = I0 G = G0 S = I(Y, μ) (∂S/∂Y) > 0, ∂(S/∂μ) > 0
C = C1 + C2 C = C1 + C2 S=I
C1 = a + b[Y – Z – E] Z = z.Y E = γ.Y μ is Savers’ profit-sharing ratio
C1 = a + b[Y – Z – E]
Where: 0 < b < 1
Where: 0 < b < 1
C2 = Z + E
C2 = Z + E Analysis
Yd = Y – T T = t.Y
Z = z.Y 0<z<1 a) The author holds the view that Islamic economy is like the
Z = z.Y0 < z < 1 conventional economy except that there is zakah in the system
E = γ.Y 0<γ<1 E = γ.Y0 < γ < 1 and the absence of interest.
C1 and C2 – consumption expenditures of the rich and the poor b) The first and second models: novelty in the consumption
Z and E – Zakah and Infaq going from the rich to the poor function. Values of coefficient could be estimated.
Other symbols hold their usual meaning and size 53 c) Third model: incomplete 54

Iqbal Mahdi and Mahyoub al-Aslay (1991) Iqbal Mahdi and Mahyoub al-Aslay (1991)
 Iqbal Mahdi Saif and Mahyoub al-Aslay (1991) “A Equilibrium in the Goods Market – IS curve:
Model of Income Determination in an Interest Free Y = C + I + Gt + Gz
Islamic Economy” in F. R. Faridi (ed.) Essay in Islamic
C = f(Yd) f’ > 0 Yd = Y – T – Z
Economic Analysis (New Delhi: Genuine Publications,
pp.52-66 Z = z.S [Zakah on savings]
I = I(P) I’ < 0 P is the PLS ratio
 The requirements for Islamic economy are two:
absence of interest and imposition of Zakah Gt and Gz are tax and zakah-based government expenditure,
respectively and both are exogenously given.
 IS-LM framework was employed by the author.
Equilibrium in the Money Market – LM curve:
 Banks replace interest with PLS-ratio P that stands for Ms = Md
‘percentage of expected profit given to the bank as an
Ms = M0
equity owner of business’. The author describes it as
the percentage of profit going to the capital 55
Md = m(Y, P), (∂m/∂Y) > 0, (∂m/∂P) < 0 56
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Iqbal Mahdi and Mahyoub al-Aslay (1991) Expansionary Fiscal Policy

P • An expansionary fiscal policy
LM such as an increase in Gz will shift
P the IS curve outward and raise the
LM
e level of Income.
Pe e’ •The rise in P will stimulate
e
Pe savers to save and lend to the
investors in the economy.
IS IS’
•The economy attains a higher
IS level of income along the
0 Ye Y horizontal axis.
0 Ye Y

IS-LM Diagrammatic Analysis 57 Expansionary Fiscal policy 58

Expansionary Monetary Policy Zakah and Redistributive Justice

• Zakah plays great role in fighting poverty and inequality,
P • An expansionary monetary distribution of land, distributive justice;
LM policy such as an increase in M0 Poverty: conventionally, its meaning is devoid of moral
LM’ will shift the LM curve outward and spiritual significance, whereas it is not so in Islam.
to LM’ and this lowers P and
e Materialistically, any standard of living below subsistence
Pe causes raise the level of Income.
e’ level implies poverty.
•The fall in P will stimulate
more investment in the investors It is when ones income can’t sustain a decent living in
IS in the economy. health, education, food, shelter and clothing.
•The economy attains a higher In Islam poverty could lead to disbelief in the Almighty. In
0 Ye Ye’ Y level of income along the a hadith from the Holy Prophet reported by Ahmad
horizontal axis at Ye’. “Poverty is almost disbelief”.
Expansionary Monetary policy
Poverty could affect one’s faith, it breeds envy and hatred
59
and envy like fire, annihilates good deeds. 60
 11/8/2025

Zakah and Redistributive Justice cont. Zakah and Redistributive Justice cont.
In another hadith, the Holy Prophet (SAW) used to Inequality: Islam recognizes that resources are not
pray: equally distributed and neither is it calling for equal
Oh Lord, I seek refuge from Thee from unbelief and distribution.
poverty, and from the torment of grave yard. There is no
Lord save Thee. However, Islam places emphasis on social inequality
The Holy Qur’an states: rather than economic inequality, the former implies
“Did He not find you an Orphan and He gave you shelter equality in opportunities, attention, care, or more
(and care). And He found you Wandering, and He gave you broadly, socio-political justice.
Guidance. And He found you in need, and made you
independent.” Q93:6-8
Eloquently, the Holy Qur’an states:
Poverty is considered to be the greatest evil in Islam “It is He Who has made you (His) agents, inheritors of the
because it could lead to disbelief in the Almighty and earth: He has raised you in ranks, some above others: that
could be the source of many crimes. He may try you in the gifts He has given you: for your Lord
61 is quick in punishment: yet He is indeed Oft-forgiving, Most
62

Merciful.” Q6:165

Zakah and Redistributive Justice cont.

Furthermore,
“And Allah hath favoured some of you above others in provision. Now those
who are more favoured will by no means hand over their provision to those
(slaves) whom their right hands possess, so that they may be equal with
them in that respect thereof. Is it then the grace of Allah that they deny?”
Q16:71
Social Justice: The major proposition in the Socialist economic system
is: “from each according to his ability and to each according to his Section 3: Islamic Social Security
needs”. To them, inequality is largely a money wage affair. While
capitalist push everything to markets.
Furthermore, the Socialist system retards productivity and innovation,
while the Capitalist breeds exploitation, deprivation, jealously,
inequality, injustice, etc.
Islamic system is a balanced one in that it neither claims ownership
and control of all resource like – the Socialist nor does it surrenders
63 64
all powers to markets as in the case of Capitalism.
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Islamic Social Security Islamic Social Security cont.

It is part of the duties of an Islamic state to provide guarantee Islamic social security provides assistance either from the
against various kinds of hazards to its citizens as their guardian obligatory sources-Zakah, jizya, or voluntary sources-waqf, sadaqa.
The Prophet (PBUH) Says: "The son of Adam has basic rights for three It provides protection against the contingencies of old age,
things: a house to live in, a piece of cloth to cover his body, a loaf of
bread and water".
unemployment, education, medical care, heavy debts, conciliation
of hearts, afflictions of natural disasters, assistance to travelers,
Caliph Umar ibn Khattab says: “each and every individual Muslim has a
right in the property of the state treasury whether he exercises it or not”.
those in distress, etc.

Islamic social security involves provision of as a decent standard Islamic social security system is based on two principles:
of living, including food, clothing, shelter, medical and
All wealth belongs to Allah and the state is only a vicegerent of Allah and
educational facilities, etc., to every citizen of the state.
hold the wealth as trust from Allah, and
(1) primary needs i.e., food, clothing, housing and necessary medical care,.
(2) secondary needs, i.e., education, matrimony, old age benefits and The Islamic State guarantees social security for all its citizens is based on
social services. condition of peoples’ obedience of state laws and vice versa.
65 66

Objectives of Islamic Social Security

1) To prevent and eradicate poverty Social Security during the Early Period
2) To settle the debts of the destitute The holy Prophet himself was reminded of these needs as:
3) To assist widows and uncared orphans
“Did He not find you an Orphan and He gave you shelter (and care). And He
The holy Qur’an and Sunnah encouraged catering for the needs of the widows and orphans. found you Wandering, and He gave you Guidance. And He found you in need,
4) The aged, disabled and prisoners of war and made you independent.” Q93:6-8
'Umar ibn 'Abd al-'Aziz wrote a letter to Adi ibn Artah, "Be kind towards dhimmis. If you find
some of them old or helpless, give maintenance to them". The holy Qur’an equates piety with spending on the needs of the
5) To provide medical care facilities and assistance poor and needy
6) To provide stipends for educational pursuits, for example, Umar (RA) used “By no means shall you attain Al-birr (righteousness, piety), unless you spend
to fund the education of children during his reign (in Allah’s cause) of that which you love; and whatever of good you spend,
Allah knows it well.” Q3:92,
7) Other forms of assistance the Islamic state under its social security programmes can
“He who spends his wealth for increase in self purification, and who has no
support its citizens who are unemployed “And they give food in spite of their love for it to favour from anyone to be paid back, except to seek countenance of his Lord
the needy, the orphans and the captives (saying) we feed you seeking Allah’s countenance Most High, He surely will be pleased”. Q 92:18-21,
only. We wish for no reward, nor thanks from you” Q:76:8&9
“Have you seen him who denies the recompense?, That is who repulses the
67 orphan, and urges not on the feeding of Al-miskin” Q107:1-3 68
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Social Security in the Early Period cont. Social Security in the Early Period cont.
“Whatever (from the possessions of the towns’ people) Allah has Provision of social security continued under the four rightly guided
bestowed on His Messenger belongs to Allah, and to the Messenger, and Caliphs:
to his kinsfolk, and to the orphans, and the needy, and the wayfarer so
that it may not merely circulate between the rich among you”. Q59:7. Khalid ibn al-Walid during the reign of Caliph Abubakar, the treaty
reads: "And I have granted the right that if an old person becomes
He (SAW) stipulates that: “the state is the guardian of anyone who has incapable of working or is suffering from ill health or is a destitute
no guardian”. after being rich, so much so that his co-religionists start giving him
He (SAW) states that: “If somebody in a community sleeps hungry until alms, then his Social Security in Islam-jizyah will be remitted; he and
the next morning, Allah will withdraw His security from the community”. his family will receive the allowance for maintenance from public
In the same vein, the prophet stated that; “he is not a believer, he who treasury as long as he lives in the Islamic State".
fills his stomach while his neighbor sleeps in hunger’’.
Umar (RA) once saw an old Jew begging and after giving some
He (SAW) equalized he who strives for the widows and the poor as one charity, he ordered the Treasury officer that such people who could
who fights in the way of Allah in reward and stressed that, the reward is
not earn their living should be granted stipends from the public
also similar to that of a person who spend his nights praying and fasting
throughout his lifetime treasury.
69 70

Social Security in the Early Period cont.

Usman Bin Affan – Bi'ir Rumah 1) Provision of food during famines to the people according to the family size.
2) Food for the poor and disabled.
3) Provision of support for education to the children.
4) Financing marriages of the unmarried poor or needy persons.
5) Provision of grant old age benefits.
6) Provision of loans for boosting economic activity.
7) Granting interest-free loans.
8) Pay-off the debts of persons under obligation.
9) Social insurance to pay blood money of convicts in involuntary homicide.
10) Stipends to widows, married and unmarried women, young men &
immigrants.
11) Payment of expenses for nursing and breeding of the newborn children
71 72
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Introduction to Islamic Banking and Instruments of Islamic Social Security

1) Zakah (compulsory charity due on the rich):
Finance 2) Zakatul - Fitr:
3) Sadaqa (voluntary charity):
History of IBF 4) Auqaf (charitable endowments):
Components Umar ibn Khattab (R.A) and Uthman ibn Affan (R.A) endowed a piece of land in Khaybar and Rumah well,
respectively, for the benefit of the Muslim ummah.
Islamic banking
5) Wasiyya (Will or bequeath):
Islamic capital market
6) Kaffarah (religious expiration)- breaking of an oath/promise, zihar (a form of pre-
Takaful Islamic divorce), accidental killing, breaking of fast, killing and animal during Hajj,
etc.
Islamic Social Finance
7) Fidyah (ransom): for commission or omission during Hajj, inability to fast the month
Principles of IBF of Ramadan
8) Qard Hassana (benevolence):
Contracts and Applications
9) Al-Wirathah (inheritance)
73
10) Manihah (free lease) 74

Principles of Islamic Social Security

1) Principle of ultimate ownership and control of resources:
INTRODUCTION TO ISLAMIC BANKING (IB)
2) Socioeconomic justice: CONTRACTS
1) “Beware of injustice for injustice will be equivalent to darkness on the Day of
Judgment”
To trace the history and development of IBF
3) Principle of collective social responsibility:
and the principles governing the operations
4) Principle of Morality:
of the IBF. The Islamic Banking and finance
1) “charity is for the poor, who in Allah’s cause are restricted from travel and
cannot move about in the land for trade or work. The one who knows them contracts of Musharakah, Mudarabah,
not, thinks that they are rich because of their modesty. You may know them
by their mark, they do not beg of people at all….” Q2:273
Murabahah, Ijara, Salam and Istisna’ are also
discussed.
5) Principle of liberalism: Islamic system is very flexible in matters
which are not specifically mandated by the Shari’ah.
1) “And it is thus that We appointed you to be the community in the middle
way so that you might be witnesses to all mankind and the Messenger might
be a witnesses to you…” Q2:143. 75 76
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Evolution of Modern Islamic Banking Evolution of Modern Islamic Banking

Initial Reforms in the Banking Industry in Pakistan in 1962
Mit Ghamr Local Savings Bank in Egypt in 1963 (“the first
modern-day trial of Islamic baking”)
The Malaysian Pilgrims’ Savings
Board, Tabung Haji of 1969
(managing savings of prospective
pilgrims by investing in Shari'ah-
compliant investments)
The Founding of the Islamic
Development Bank (IDB) in 1975
78

MEANING AND FEATURES OF ISLAMIC PRINCIPLES OF ISLAMIC

BANKING BANKING & FINANCE
An Islamic bank complies with the Shari'ah (Islamic law) in its entire
operations.
A banking system that aligns with the spirit, ethos, and value system Prohibition
of Islam, governed by the principles laid down by Islamic Shariah. Riba Maisir of harmful
(Usury/ (Gambling) activities
Islamic banking and finance generally treat money as a medium of Interest)
exchange rather than as a commodity.
1 3 4
The system operates based on the principles that prohibit interest, Gharar
(Extreme
excessive risk, and speculation, and encourages profit-sharing, Uncertainty)
fairness, transparency, and ethical investing.
2
79
 11/8/2025

Non-Interest Financial Institutions in Nigeria

Takaful Non-Interest
Non-Interest Non-Interest Islamic Mutual
Insurance Microfinance
Banks Window Banks Funds

Understanding
Institutions Banks
1)Jaiz Bank lc 1)Jaiz Takaful 1)I-Care 1)Suntrust 1)Lotus Capital
2)Lotus Bank Insurance Plc Microfinance Bank Nigeria Ltd
Ltd 2)Noor Takaful Bank (Kano) Ltd
3)TAJ Bank Ltd
4)Summit
Insurance Plc
3)Salam
2)Tijarah
Microfinance Musharakah
Bank Limited Takaful Bank Ltd
5)The
Alternative
Insurance Ltd
4)Cornerstone
Takaful
(Bauchi)
3)Halal Credit
Microfinance
Contract
Bank
Insurance Ltd Bank
(Katsina)

MUSHARAKAH - Classifications of
Sharikat al-’Aqd

A contract where two parties or more

combine assets, labour or liabilities to
MUSHARAKAH make profit

TRADITIONAL FIQH- MODERN CORPORATIONS

NOMINATE PARTNERSHIPS
 11/8/2025

Rulings on Musharakah MUSHARAKAH cont.

• Capital should be money, but tangible assets

may be considered with the agreement of
partners
01 02 03 04 • Share of each partners must be determined
Each party Each party has Profits shared Losses are
Capital • Debts alone cannot be capital unless where
contributes right to deal based on borne based on they are inseparable from other assets
capital with the mixed agreement capital • Funds from current account may be
capital contribution considered as capital although they are
considered as loans to the banks

MUSHARAKAH cont. MUSHARAKAH cont.

• Partners may agree to share profits not in
proportion to Sharikah capital but not in
• Each partner is entitled to work for the interest of the
favour of a sleeping partner.
venture, e.g., make sales, make payments, take
possession, take legal action, etc. • Profits must be shared in percentage of
Managing profits, not a sum of money or percentage of
the • They may agree on the party that will only work
Profits and loss capital
Musharakah • They may appoint a third party to manage the venture
Venture • Determination of profits must not be deferred
for remuneration, in the form of Wakalah or Mudarabah
until realisation of profit
• A partner cannot get a fixed remuneration for additional
• Profits can be fixed percentages or variable
services. He may be appointed in a separate contract
percentages
• They can set aside some profit for donations
 11/8/2025

Stock company
MUSHARAKAH cont. • Capital is partitioned into equal units of tradable shares and
the liability of each shareholder is limited to his share in the
capital.
• Has a juristic personality
• A partner can withdraw with the permission of the other • It is a binding contract for the duration specified
partners anytime Modern • A party may sell his share or relinquish his share to another
• A partner can make a binding promise to buy all the assets of the Corporation party
Musharakah but at market value only • It is not permitted to sell shares that one does not own
• May end at an expiry date or even before if they agree to do so s
Termination • It is permissible to mortgage the company’s shares
• When ending a Musharakah, the proceeds should be used for: • Ordinary/Common shares in the name of the shareholder
Payment of liquidation expenses are permissible
Payment of financial liabilities • Preference shares are not allowed
Distribution of the remaining assets among the partners based • Tamattu’ (enjoyment) shares are not allowed. The shares
on capital contributions are like the preference shares, but redeemed before the
termination of the company

Musharakah Financing Structure

• A form of personal partnership 1) Client and Bank discuss the business
• Has a juristic personality plan and jointly contribute to the
Joint-liability company

• Rulings capital of the venture;

• A creditor may request his debts from 2) Client and Bank jointly set up the
Modern any of the partners business venture and manage its
operations, sharing the responsibilities
Corporation • Non-binding and a partner may withdraw: as per pre-agreed terms; Business
s cont. • If they set a duration generates positive or negative profits;
• Notify other partners 3) Profits if positive, are shared as per a
• If withdrawal will not cause harm to pre-agreed ratio;
others 4) Profits if negative, are shared in
• A partner can substitute only with the proportion to capital contributions;
consent of others effectively bringing down the asset
value while keeping their respective
shares in it unchanged.
 11/8/2025

Diminishing Musharakah DIMINISHING MUSHARAKAH CONT.

 Each must contribute part of the capital
• Customer/Partner and Bank discuss the
 One partner promises to buy the equity share of the other partner business plan and jointly contribute to
 The buying must be in a separate contract the capital of the venture (House);
 It must not be a condition for the parent contract • Bank acquires and leases the asset to the
Customer
 Rules for Musharakah (particularly Inan) must be applied • Customer pays rent as well as the value
 Insurance must be borne by both parties of the asset instalmentally over the
agreed period of the contract
 No partner will be allowed to withdraw his share in the capital
• The Bank in a diminishing pattern, loses
 Losses are shared according to share as it diminishes its ownership and eventually transfers the
asset at the end of the maturity of the
 The subject matter may be divided into shares and the other partner buys the contract to the customer, that is, the
shares over time period by which the Customer has fully
 A lease contract can be introduced, such that a partner leases the property paid for the asset and rent.

Mudharabah
Contract

Understanding A partnership contract where

one party provides the wealth/
Mudharabah capital, and the other party
provides the labour/expertise.
Contract
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Type of Mudharabah Contract

Typical Mudharabah Agreement
A typical Mudharabah agreement contract contains
the following parts: Unrestricted Mudharabah Restricted Mudharabah
 Type of Mudharabah
 Sum of money • E.g., “Do the business • Restriction may be based
 Duration of agreement
according to your on location or type or
expertise” investment
 Indication of intention
• However, it must be in • Restriction should
 Based on revolving or separate transactions the interest of both contain the Mudharib
 Profit ratio • Also, in accordance with
 Type of guarantee in case of negligence acceptable customs
 Other relevant issues

Capital for Mudharabah Contract Mudharabah Contract cont.

Rulings and Requirements Relating to Profit

Requirements Relating to Capital
• Must be clearly stated leaving no ambiguities
• Determined based on percentage, not lump sum or percentage
• Cash, but assets may also be valued of capital
• Quality and Quantity must be known to all parties • The profit ratio may be changed at any time. If no profit ratio,
• Debts cannot qualify as capital then use customary otherwise contract is void
• Must be given to the Mudharib partly or wholly or must have • Mudharib is only entitled to a share of the profit. They may
access to the capital agree otherwise in a separate contract. That separate must not
• Where a Mudharib comingles with his funds he becomes be part of the main Mudharabah
Mudharib in respect to that particular fund alone • One party cannot stipulate lump sum, but may be allowed to
take above a ceiling amount
 11/8/2025

Mudharabah Contract cont. Duties of the Mudharib and Sahibul Mal

For unrestricted Mudharabah, he should:
Rulings and Requirements Relating to Profit • The Mudharib should accomplish the objectives of the Mudharabah
• Go into investments in his expertise
• Do the work himself or appoint someone
• Differential treatments in sharing profit may be allowed based • Choose less risky investments
on two separate amounts, based on financial years or based on • Safeguard the Mudarabah funds
transactions • Buy and sell on a deferred basis
• May with the permission of Sahibul mal commingle Mudharabah funds with
• Profits are shared after preserving capital while Losses are Musharakah funds and may accept another Mudharabah funds, if it does not affect
covered with subsequent profits the first contract
• Profits could be shared when realized. This is not an absolute • The Sahibul Mal (capital provider) cannot stipulate where he will work
profit. Profit will be revised at the end of the contract. Time • Mudharib should not buy at higher prices or sell at lower prices
value or discount for delay should not be considered • Give loans or donations except with the consent of the capital provider
• Mudharib is entitled to living expenses and travel expenses with the approval of
the capital provider

Liquidation of Mudharabah Mudharabah Financing

Structure
1) Bank and Client discuss business plan;
Bank provides funds to the Client
As a non-binding contract, it can be towards capital investment;
terminated 2) Client sets up the business and
manages its operations;
3) Business generates positive or
• Unilaterally by one party negative profits;
• With the agreement of both parties 4) Profits if positive, are shared between
the Client and the Bank as per a pre-
• At a date of maturity agreed ratio;
• When funds are exhausted or losses 5) Profits if negative, are absorbed by
• Death of the Mudharib or liquidation of the institution the Bank; effectively bringing down
the value of the asset created with its
investments
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Murabahah contract
Murabahah is a trade-based contract.
A sale in which the buyer knows the price at
Understanding which the seller obtains the object to be
financed and agrees to pay a mark-up over that
initial price.
Murabahah The price in this sale can be on a spot or
deferred.
Contract This type of sale satisfies all legal requirements
for sale, and it provides a valuable service in the
economy since it allows those bank clients to
obtain the commodities at a good price.

Murabahah contract
Murabahah contract cont.
cont.
It is different from an ordinary sale as the seller
discloses the cost of the commodity to the
buyer there is a known profit to all the parties.
When a customer
Typically, the payment is on a deferred basis, In such cases, there would approaches an Islamic bank
but it may be on a spot, deferred, in be no financing included, to finance a purchase
instalments, or lumpsum and the bank would simply through Murabahah, the
Very rarely is Murabahah used in Islamic banks be a middle-man or broker- payment of the price is
agent usually deferred, that is,
with the price paid immediately by the paid in instalments
customer
 11/8/2025

Murabahah contract cont. Murabahah rules cont.

Rules of Murabahah Rules of Murabahah
• The subject matter of the sale must exist at the time of
sale; • It should be specifically known and identified by the
buyer;
• It must be in the ownership or possession of the seller;
• It must be in the physical or constructive possession of • The price must be certain;
the seller when he sells it to another; • The sale must be unconditional;
• The sale must be instant and absolute, that is, it cannot • Re-negotiation of price and rollover of Murabahah
be attributed to a future date; are not permitted;
• The subject matter must have value; • Discounting Murabahah instrument is not permitted;

Murabahah contract cont. MURABAHAH FINANCING STRUCTURE

1)Client applies for financing and signs a promise to purchase
agreement with the bank. The bank prepares an offer letter
Rules of Murabahah that covers the agreed profit rate or mark-up to be added to
the cost, which is already known to the Client, and the
payment schedule.
• When this mode is employed by Islamic banks to 2)Bank appoints Client as its Agent;
finance a purchase, the bank owns the commodity; 3)Client identifies the Vendor, selects the goods on behalf of
• The bank bears the risk of an owner; the Bank, and advises its particulars, including the Vendor's
name and its purchase price to the bank in writing;
• There must be real goods changing hands; 4)Vendor makes physical delivery of commodity to Agent
• The size of financing cannot exceed the exact (Client) of Bank; trained staff from bank oversee the process
of client taking physical possession of goods;
amount of cost + profit; and 5)Bank arranges payment of purchase price to Vendor;
• Rescheduling of payment for any increment is not 6)The agency contract comes to an end; the Bank sells the
permissible to avoid the risk of delinquency. commodity based on the agreement of mutual promise, and
transfers ownership to the Client at a marked-up price;
7)The Client pays marked-up price in full or in parts over future
(known) period(s).
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Understanding
Ijarah, Salam &
Istisna’ Contracts

Ijarah (Lease) Contract cont.

Transferring of usufruct of an asset to another
Ijarah person for an agreed period, at an agreed Basic Rules of Ijarah
(Lease) consideration.
Forms of Ijarah: • Anything that can be consumed while using it cannot be leased out. E.g.
Contract  Successive leases: This involves one asset with different
Money, wheat, etc.
• Leasing is not originally a mode of financing but it is a sale transaction. So,
periods and several people all basic elements of lawful sale transactions must be present.
• It is necessary for a valid lease that the leased asset is fully identified by the
 Time sharing: This involves the same specified usufruct, parties.
particular duration, and several lessees such that each • It is necessary for a valid lease that the corpus of the lease property remains
party uses the asset the time assigned to him/her in the ownership of the lessor.
• The period of the lease must be determined in clear terms.
 Ijarah leading to ownership (wal iqtina): the lessee owns • The lease period shall start from the date on which the leased asset has
or is transferred ownership of the asset at the end of the been delivered.
contract
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Ijarah (Lease) Contract cont.

Ijarah (Lease) Contract cont.
Guarantee of Ijarah Assets
Rentals • All kinds of securities may be taken to secure the rental
payments including permissible life or property insurance
• The rental can be cash, kind, or benefit (Service) • No increase in the rental should be made in case of delay in
• The rental must be specified, either as a lump sum or by payment by the lessee. If the delay was for no good reason,
installments then he may undertake to donate a certain amount or
percentage of the rental.
• The two parties may agree that the rental be paid fully in
• In case of foreclosure of the security provided by the lessee,
advance the lessor may deduct from such amounts only what is due
• The rental payment for the first period must be specified for previous periods, and not all rental instalments
• Future rentals can be fixed or variable amount • Other legitimate compensations may be taken because of
the (breach of contract)

Lessor’s Responsibilities: Lessee’s Responsibilities

Ijarah (Lease) • Since the corpus of leased • Being user of the leased asset lessee can be
Contract cont. property remains in the Ijarah made liable to any normally occurring wear
and tear.
ownership of the lessor
therefore all liabilities of (Lease) • The lessee cannot use the leased asset for
any purpose other then the purpose specified
ownership are borne by the in the lease agreement.
lessor. Contract • If no such purpose is not specified in the
agreement, the lessee can use it for whatever
cont. purpose it is use in normal course.
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Ijarah (Lease) contract cont.

Lessee as Ameen Expenses:

Ijarah
(Lease) • As the lessor is the owner of the assets, he is
• The lessee is liable to compensate
Contract the lessor for every harm caused to liable to pay all the expenses incurred in the
the leased asset by his misuse or process of its purchase and its import to the
cont. country of the lessor. Example expenses of
negligence.
shipment and customs duty, etc.

Ijarah Financing Structure

1) There is an agreement of mutual promise between the Bank and
Client whereby the Bank promises to lease and the Client
promises to take on lease the asset against predetermined
Ijarah Termination of Ijarah Contractual rentals for a definite period;
2) Bank appoints Client as its Agent;

(Lease) • A lease is a binding contract.

3) Client identifies the vendor, selects the asset on behalf of the
bank, and advises its particulars, including the vendor's name
• It can be terminated by mutual consent. and its purchase price to the bank in writing;
Contract • The lessor may terminate it when the lessee doesn’t
4) Vendor makes physical delivery of asset to Agent (Client) of
Bank; trained staff from bank oversee the process of client
pay the rent or fails to pay it on time or because of taking physical possession of asset;
cont. a violation of any other term and condition of the
agreement such as a destruction of the leased asset.
5) Bank arranges payment of purchase price to Vendor;
6) The agency contract comes to an end; the Bank leases the asset
• Upon the expiry of the term. based on the agreement of mutual promise, transfers possession
and right of specified use to the Client;
• Two parties may terminate it before it begins to run. 7) Client pays known rentals over future (known) period (s).
8) Bank transfers ownership of the asset to the client at the end of
ijarah period either through a gift or sale.
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YouTube on Ijarah

https://youtu.be/oNiqexnO-nk
3
BANK LEASES TO THE CUSTOMER

Example of
AT N100,000 + PROFIT
BANK CUSTOMER
(LESSOR) (LESSEE)
4
CUSTOMER PAYS MONTHLY RENTAL

Ijarah 2
BANK PURCHASES
THE ASSET FROM THE
1
CUSTOMER IDENTIFIES
COMPUTER TO BE
VENDOR AT LEASED AND SUBMIT

Application N100,000 VENDOR OF

THE
ASSETS
QUOTATION TO THE
BANK

Salam and Istisna’ contracts are exceptions

Salam to the general rules of engaging in trade
Salam is a sale in which the seller undertakes to Contract contracts, i.e.
1) Existence of the object of sale. A commodity that does
supply some specific goods to the buyer at a future
date in exchange for an advanced price fully paid on cont. not exist at the time of sale cannot be sold.

Definition the spot. 2) Ownership of the object of sale. If the commodity is

existing, but the seller does not own it, he cannot sell
The price is paid in cash, while the supply of the it to anybody.
purchased goods is deferred.
3) Possession of the object of sale by the seller. The
Salam was beneficial to the seller, because he seller must, either physically or constructively have a
received the price in advance, and it was beneficial to commodity before he can sell it. If the seller owns a
the buyer also because normally, the price in Salam commodity, but he has not taken its delivery himself or
used to be lower than the price in spot sales. through an agent, he cannot sell it.
 11/8/2025

Salam Contract cont.

Salam To provide Salam financing, banks use an
arrangement that is called Parallel Salam.
Rules of Salam
• Payment of the price in full.
Contract: In Parallel Salam, a bank enters into two
different contracts. In one of them, the bank is
• Salam can only be made in commodities whose quality and quantity can
be specified exactly devoid of any room for ambiguity.
Application the buyer, and in the second one, the bank is
the seller. Each one of these contracts must be
• Salam cannot be made on a particular commodity or a product of a
particular field or farm i.e., the subject matter must not be over- in independent of the other.
specified. Parallel Salam is allowed with a third party only.
• The exact date and place of delivery must be specified in the contract. Financing The seller in the first contract cannot be made
• Salam cannot be made in respect to things or commodities that must be
delivered on spot, for instance, currency exchange. purchaser in the parallel contract of Salam,
because it will be a buy-back contract, which is
not permissible in Shari‘ah.

Salam Financing Structure Parallel Salam Financing

1) An Islamic Bank finances the 1) Client 1 sells commodity X to an Islamic
production of X quantity of wheat
which it pledges to purchase after Bank on a forward basis and receives price
harvest P at period t.
2) Client sells the exact commodity X to 2) The Bank sells the commodity X to Client 2
the Bank on a forward basis and on a forward basis and receives price S in
receives price P (financing) at period t. period t.
And at period t +1, the Client delivers 3) At period t + 1 Client 1 delivers X to the
X to the Islamic Bank.
Bank.
3) The Bank sells X in the market at
period t +1 or later and realizes S. 4) At period t + 1, the Bank delivers X to
• Thus, the amount S minus P constitutes Client 2.
profit for the Bank. • The amount S – P constitutes profit for the
Bank.
 11/8/2025

YouTube on Salam Contract Istisna’ (Manufacture)

Contract
Istisna’ is a contract of manufacture.
https://youtu.be/Sssc2IXx7rs A seller under Istisna’ contract undertakes
to develop or manufacture a commodity
with clear specifications for an agreed price
and deliver after an agreed period.
The unique feature of Istisna’ is that nothing
may be exchanged on the spot or at the
time of contracting.
It is the only forward contract where the
obligations of both parties relate to the
future.

Istisna’ Contract cont.

The buyer makes payment of the price in parts
Istisna’ contract cont.
over the agreed period or in full at the end of the Manufacturer
period. Client asks Bank to Bank asks a manufactures asset X,
develop or Manufacturer to and receives progress
Istisna’ In Istisna the seller and the manufacturer may be
Application of
Istisna’ in
Financing
construct or
manufacture an
develop or
manufacture asset
payments from the
Bank as per agreed
different entities. asset X with clear X with the same terms at different
Contract This allows financiers or intermediaries like Islamic
specifications; specifications stages of
manufacturing;
banks to engage in Istisna’ by assigning the job of
cont. development, manufacture, or construction to a Manufacturer gives Bank gives delivery Client pays in full
third party under a parallel Istisna arrangement. delivery of the of the asset to or in parts over the
asset to Bank; Client; agreed period
Istisna’ thus, is now transformed into a financing
product.
 11/8/2025

Istisna’ Financing Structure Istisna’ Contract cont.

1) Client asks Bank to develop or construct
or manufacture an asset X with clear
specifications;
2) The bank asks the Manufacturer to
develop or manufacture asset X with the Applications:
same specifications
3) Manufacturer develops or constructs or
 Home finance
manufactures asset X, receives progress
payments from Bank as per agreed terms  Equipment Finance
during different stages of manufacturing;
 Manufacturing plant finance
4) Manufacturer gives delivery of the asset
to Bank;
5) Bank gives delivery of the asset to Client;
6) Client pays in full or in parts over an
agreed period.

REFERENCES
Istisna’ (Manufacture) Contract Ahmad, Kurshid & Azzam, Salem, eds. (1977) Islam – Its meaning and message,
Part III, pp. 101 – 173, Islamic Publications Bureau, Lagos, Nigeria.
Ahmed, Z., M. Iqbal & M. Fahim Khan, eds. (1983) Fiscal policy and resource
allocation in Islam, Edited by International Centre for Research in Islamic
Economics, King Abdulaziz University, Jeddah and Institute of Policy Studies,
Islamabad, Pakistan.
https://youtu.be/M_ Aliyu, S. U. R. (2002) “An appraisal of the performance and predicaments of the

T3ppCAav0?t=50 Kano Zakah Foundation”, Al Ijtihad Journal of Islamization of Knowledge and

Contemporary Issues, Published by the International Institute of Islamic Thought
(IIIT), Kano Office, Vol. 3(1), 70 – 87, iiitnigeria.org/journals.htm
Aliyu, S. U. R. (2019). A treatise on socioeconomic roles of Zakah, International Journal
of Islamic Economics and Finance Studies, 2019/1: 77-92 – Journal homepage:
http://ijisef.org/
Aliyu, S. U. R. (2019). Reflections on socioeconomic role of waqf, International
Journal of Umranic Studies, 2(1), 29-41. Journal Homepage:
www.unissa.edu.bn/ijus 140
 11/8/2025

REFERENCES cont. REFERENCES

Aliyu, S. U. R., M. Idris & I. Amina. (Ed.). (2013). Book of Readings on Islamic
Economics, A publication of International Institute of Islamic Banking and Azmi, Sabahuddin (2009) Islamic economics: Public finance in early
Finance, Bayero University Kano, Nigeria. Chapter 1-9, 1-139. Islamic thought, Goodword Books, New Delhi, India.
Aliyu, S. U. R. & M. I. Ishaq (2013). Principles of Islamic fiscal policy, Book of Ishaq M. I., Aliyu, S. U. R. & Jibril, B.T. (2013). Principles of Islamic taxation,
Readings on Islamic Economics, Publication of the International Institute of Book of Readings on Islamic Economics, Publication of the International
Islamic Banking and Finance, Bayero University Kano, Nigeria, Chapter 6, pp. Institute of Islamic Banking and Finance, Bayero University Kano, Nigeria,
73-93. Chapter 7, pp. 94-106.
Aliyu, S. U. R. (2019). A treatise on socioeconomic roles of Zakah, International Safiyya, A. A. & Aliyu, S. U. R. (2013). Principles of Islamic social security,
Journal of Islamic Economics and Finance Studies, 2019/1: 77-92, Book of Readings on Islamic Economics, Publication of the International
http://ijisef.org/ Institute of Islamic Banking and Finance, Bayero University Kano, Nigeria,
Aliyu, S. U. R. (2019). Reflections on the socioeconomic role of waqf in an Chapter 9, pp. 121-139.
Islamic economic system, International Journal of Umranic Studies, 2(1), 29-41. Saleem, Shehzad (1992). “Islamic concept of taxation”. Renaissance. 02 (10).
Journal Homepage: www.unissa.edu.bn/ijus
Umar, A & S. U. R., Aliyu (2019). Sukuk: A veritable tool for effective Waqf fund
Ariff, Mohammad. (1982) Monetary and fiscal economics of Islam III, Selected
management in Nigeria, IQTISHADIA Journal, 12(1), 1-15, Indonesia.
Papers, Edited by International Centre for Research in Islamic Economics, King
141 http://dx.doi.org/10.21043/iqtishadia.v12i1.4618 142
Abdulaziz University, Jeddah.

ASSIGNMENT TOPICS ASSIGNMENT TOPICS

1) Islamic Economics in the context of Tawhid
10) Islamic Monetary Policy Management
2) Islamic Economics in the context of Islamic World View 11) Economic Roles of Zakah
3) Roles of Early Islamic Scholars in the Field of Islamic Economics 12) Economic Roles of Voluntary Sector in an Islamic Economy
4) Goals of Islamic Economic System 13) Attaining inclusive growth through Zakah
5) Role of the State in an Islamic economy 14) On Islamic Redistributive Justice
6) On the Sources and Research Methodology in Islamic Economics 15) Attaining inclusive growth through the instrument of Awqaf
7) Relationship between Maqasid al-Shari'ah and Islamic Economy 16) Application of Benefit Received and Ability to Pay Principles in the
Context of Islamic Economics
8) Revenue Mobilization and Utilization in an Islamic Economy 17) Nature and Purpose of Islamic Social Security
9) Islamic Fiscal Policy Management 18) Principles of Islamic Social Security
143
19) Islamic Insurance: Features, Principles and Application 144