CH5 : ISLAMIC MACROECONOMICS (Fiscal policy (Objectives of FP (Economic…
CH5 : ISLAMIC MACROECONOMICS
Economic well-being with full employment & optimum rate of growth
Economic well being is being pursued through satisfying all human needs, removing all major sources of hardships and discomfort & improving the quality of life.
Full employment is necessary to ensure the dignity of human beings as the vicegerent of Allah. All resources are meant for human welfare and must be exploited without excess or wastefulness.
Socio-economic justice and equitable distribution of income wealth.
This objective indicates the total commitment of Islam to human brotherhood.
In Islamic teachings, some measures have been institutionalised like zakat & waqaf.
Stability in the value of money
Two important function of money are as medium of exchange and measurement of value. Thus stability of money is important so as to ensure honesty & fairness in all human dealings.
Mobilization of saving
Efficiently organised financial institutions must be established to mobilize idle saving & channel them effectively into productive uses.
Hoarding of savings is condemned in Islam because saving must be used in productive way in order to realize the socio-economic goals of Islam.
Conventional economics - Money anything that is generally accepted in making payment for goods/services/ in the repayment of debts
Function of money
Medium of exchange
Unit of account
-Store of value
Standard of deferred payment
Islamic economics - Money is the means of fulfillment of human needs & desires. It is a need of every society since it has been accepted as a medium of exchange,
Function of money
Medium of echange
Measure of value
Not for trading to exchange must be equal
Money creation in conventional banking system
Is a legal tender.
Its value is determined by the strength of economy & the capital owners who support
its is not backed by gold.
Problem of fiat money
Instability of currency that did not exist with the usage of the gold standard.
The government decides the money matters of a country & is also responsible for increasing the value of currency.
Inflation: Too much money chasing too little goods will end up rising average general price. Given rising prices, the value of value of money will fall.
Sidiqqi 1983: Monetary policy are economic growth, distributive justice, price stability, & balance of payment
To promote a sustained & balanced economic growth & mobilize resources for economics development.
To maintain stability in the value of money so as to avoid excessive periodic fluctuations.
To promote an equitable distribution of income & wealth
BNM: to promote price stability & sustainable economic growth
Instrument monetary policy
Legal reserve ratio/ Statutory reserve requirement
The purposes of liquidity management & for the contraction/ expansion of financing in the Islamic banking sytem.
Required maintain balance in their statutory reserve accounts by changing the rate.
Islamic banks must maintain their sra balances at the bnm at level that is at least equal to prescribed ratio.
Open market operation
It refers to the purchases & sales of financial instrument such as Islamic treasury bills & government investment.
Its considered the most important policy tool because they are primary determinant of changes in the reserves in the banking system & interest rate that will influence the size of bank deposits
Bank rate policy
refers to interest rate which central bank charges to commercial banks to lend money through changes in bank rate, the bnm indirectly changes the quantum of credit in the economy, lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. conversely, higher bank rate helps to reign in the economy, when inflation is higher than desire.
It would be desirable to fix ceiling on commercial bank credit to ensure that total credit creation is consistent with monetary targets.
Allocation of this ceiling among individual commercial banks should be taken appropriate care to ensure it does not harm healthy competition among banks.
Selective credit control
Quantitive measures control volume of credit
May be more relevant in developing countries
Either as interest free loan/ at lower profit sharing ratio.
Issues of directive
In the conventional system this is used to regulate interest rates & channel credit in desired direction
in the Islamic system the same directives may be used to influence profit sharing ratios
Profit Sharing ratio
Some scholars have suggested variations in the profit & loss sharing ratio for mudarabah advances provided by BNM to the commercial banks & for prescribing the depositors & the entreprenuers' share on the mudarabbah deposits & financing provided by the commercial banks
Informal contacts, consultations, meeting to explain position of central bank
the technique remains available in the interest free system. some economist are of opinion that this techniques may have to play greater role in the new system.
Refinance ration & lending ratio
would be move in the opposite direction of cash reserve ratio.
To reduce expansion of credit, refinance ratio would be lowered, to increase supply of credit. it would be raised.
Value oriented allocation of credit - BNM allowed the commercial bank involves the social welfare like CSR, help the NGO's
Fiscal policy is considered as an important tool to plan and control the behaviour of the people which can be influenced by incentives and hurdles that are present in the government revenue and expenditure (via taxation or loans or government spending.
Fiscal policy in an Islamic state must be in line with the principles of law and values in Islam. The basic objectives of shariah are to achieve human welfare which can only be achieved if the whole economic system and the laws are equivalent with the characters of Allah as the Beneficient, the Merciful.
Objectives of FP
Growth and development
Equitable distribution based on the needs and liabilities
Resources allocation between physical needs and spiritual needs
Spreading dakwah i.e part of public
spending must be allocated to support this task
Faridi (1983) attributes the following socioeconomic goals at the state level for fiscal policy:
Justice and equity
Provision of socioeconomic needs of the community or socioeconomic welfare
Enhancement of the community’s economic resources or economic growth
Improvement in the cultural milieu of the society
Measure of Fiscal Policy in IE
Metwally : (a) the tax of Zakah, and (b) the economic dues.
The Tax of Zakah
Zakah is one of the cornerstones of Islamic doctrine. Its collection is, therefore, independent of the economic conditions of the Muslim society.
The Economic Dues
dues are imposed on both incomes and idle assets with rates which vary with economic conditions and for purposes which could differ from those of Zakah.The dues need not be collected at the end of the year as with Zakah, but may be imposed at any time.
Expenditure Policy - Government activities that involve spending will generate substantial impacts on the social-economic aspect of the society.
Public activities that generate revenue to government must be based on the principle of welfare and focus on protecting the needy.
Based on the above argument, indirect taxes are condemned because the bulk of tax burden will be borne by the poor in particular when imposed on the necessities.
The taxation system in Islam must ensure that the main tax burden will be borne by the rich and wealthy people.
budget in Islam & modern Budget