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For centuries Muslims have developed ways to integrate their religious beliefs with the external economic realities of the nations they live in. This has had varying degrees of compatibility with the empires and customs they encountered. Like most things in Islam, commerce adapts to al-urf, "the custom".
In the 1980s and 1990s Muslim bankers and religious leaders developed ways to integrate Islamic law on usage of money with modern concepts of investing and ethical investing. In parallel, a sophisticated economic discipline has emerged, almost an Islamic science, with its own categories, concepts, analytical tools and institutions. Some of these revived traditional micro-venture capital and ethical investing frameworks that thrived in medieval times. However, they incorporated many modern techniques and technologies. Some consider the emergence of these economic practices to be part of a revival of Islam and an Islamization of knowledge. Others see them simply as a practical and wise response to problems of global debt and debt slavery.
Islamic economic institutions, not just the Islamic bank but all those connected with Islamic bankingIslamic banking refers to a system of banking which is consistent with Islamic law and guided by Islamic economics. In particular, Islamic law prohibits the collection of interest, also commonly called riba in Islamic discourse. One form of the argument a, claim to operate on the basis of "zero interest." However, the fundamental characteristic of charging interest (i.e. charging a premium, on the principal amount of a loan, for the time value of the loaned money) is not truly eliminated in Islamic economics, but merely hidden and relabeled. For example, consider the practical reality of purchasing a vehicle from an Islamic bank under an allegedly "zero interest" loan. The procedure, generally, is that the client tells the Islamic bank which vehicle he or she would like to own. The Islamic bank then purchases that vehicle in its name, and sells it to the client at a marked-up price, under an agreement that the new price marked-up price of the vehicle must be payed in a certain number of installments of a certain time period. Thus a $20,000 car might cause $35,000 if purchased from an Islamic bank at "zero interest," 5 year loan. Of course, the bank charges the extra $15,000 on top of the $20,000 cost of the car because money has a time value (that is to say, a payment of $20,000 5 years from now is worth less than a payment of $20,000 today). Usually, this time value of money is compensated to the lender by the lender charging the borrower interest on the principal amount of the loan. In the case of Islamic banking, the lost time value is compensated by charging a mark-up on the home or vehicle that the client might be seeking to purchase by way of a loan. The vehicle or mortgage usually remains in the name of the bank, until the principal loan including the mark-up has been paid. In the case of a business loan, instead of charging interest over the time that the principal amount is loaned out, an Islamic bank will demand a certain percentage of the borrower's business profits for an indefinite period of time.
Under a conventional interest based loan it is possible to "call" the loan if the interest rate drops and the borrower finds that he can find cheaper financing (i.e. pays off the entire loan before the end of its term, thus paying less interest). However, there is no way to call a loan issued by an Islamic bank. Thus while the borrower from Islamic bank is protected against rises in interest rate, the borrower cannot benefit from drops in the interest rate.
Most Islamic economic institutions advise participatory arrangements between capitalCapital has a number of related meanings in economics, finance and accounting. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. Initially, it is assumed here that other styles o and laborIn classical economics and all micro-economics labour is one of three factors of production, the others being land and capital. It is a measure of the work done by human beings. There are macro-economic system theories which have created a concept called. The latter rule reflect the Islamic norm that the borrower must not bear all the cost of a failure, as "it is Allah who determines that failure, and intends that it fall on all those involved."
Conventional debt arrangements are thus usually unacceptable - but conventional venture investment structures are applied even on very small scales. However, not every debt arrangment can be seen in terms of venture investment structures. For example, when a family buys a home it is not investing in a business venture - a person's shelter is not a business venture. Similarly, purchasing other commodities for personal use, such as cars, furniture, and so on, cannot realistically be considered as a venture investment in which the Islamic bank shares risks and profits for the profits of the venture.
Perhaps due to resource scarcity in most Islamic nations, this form of economics also emphasizes limited (and some claim also sustainableSustainability is an economic, social, and ecological concept. It is intended to be a means of configuring civilization and human activity so that society and its members are able to meet their needs and express their greatest potential in the present, wh) use of natural capitalNatural capital refers to the mineral, plant, and animal formations of the Earth's biosphere when viewed as a means of production of oxygen, water filter, erosion preventer, or provider of other natural services. It is one approach to ecosystem valuation,, i.e. producing land. These latter revive traditions of haramHaram means (is Arabic for) "inviolate zones", an important aspect of urban planning in Muslim civilization. Towns were usually built near a river which provided drinking and domestic water (upstream) and carried away waste and sewage (downstream, usually and himaHima means (is Arabic for) "inviolate zones" solely for the conservation of natural capital, typically fields, wildlife and forests (contrast haram to protect areas for more immediate human purposes). A Muslim has a specific obligation to practice khalifa that were prevalent in early Muslim civilization .
Social welfareSocial Justice This article looks at social welfare from a political perspective. Economists use the term in a very different manner. For social welfare in the economic sense, see welfare economics and social welfare function. In common United States parl, unemployment, public debt and globalization have been re-examined from the perspective of Islamic norms and values. Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. It remains to be seen if they will find niches -although hybrid approaches, e.g. Grameen Bank which applies classical Islamic values but uses conventional lending practices, are much lauded by some proponents of modern human development theory.
See also: modern Islamic philosophy, Islamic bank, Islamization of knowledge, green economics, creditary economics