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IEP Research Highlights

In developing Islamic Economics, first need is to present the thesis of Islam answering important arguments and questions about it and its teachings. Then, economic teachings of Islam can be presented which will act as broad guidelines for appropriate conduct in economic pursuits. Then, given the limits and constraints at the outset, utilizing both the literature and practice of Classical Economics and Islamic Economics, the foundations, institutions, instruments, mechanism can be developed and the role of each in the new Economic framework can be delineated. In this regard, IEP has done following researches:

In Islamic fiscal economics, working on previous researches and explaining with reasons that Zakat is the only compulsory payment to the government on one’s income and wealth in an Islamic economy. Zakatable assets should include all assets above the value of nisab except the assets in personal use and means of production. All types of production and income sources be subject to Income Zakat.

Investment in stocks should be interpreted as any other investment with some means of earning income. Stock is a means of earning dividend or capital gains. Just like means of production/income are exempted from Zakat, investment in stocks should be exempted from Wealth Zakat as investment in stocks means that the money is not kept idle. Therefore, any income arising from investment in stocks i.e. capital gains or dividend must be subject to Income Zakat.

Similarly, this argument could be extended to introduce Income Zakat on income from mutual funds, investment in other financial instruments etc. Likewise, if land/building/house is leased, the land/building/house becomes the means of earning rent. Hence, Income Zakat could also be introduced on rental income on houses, assets, buildings etc. Through an empirical study, it is concluded that Zakat in this way can relieve the government of Pakistan from deficits. An impact of this proposal on property market, asset market, equity market has been analyzed.

In Islamic corporate finance, IEP suggested an alternate approach to corporate finance in an interest free economy by looking beyond practiced Islamic finance and suggested alternatives for corporate finance in sourcing funds i.e. i) Ijara with embedded lease options, ii) limited liability partnership and iii) equity modes like Musharakah and Mudarabah with added covenants.

Then, IEP also suggested alternatives for corporate finance in using funds (investments) i.e. i) Islamic income funds, ii) Islamic REITs, iii) GDP growth rate linked sovereign bonds iv) foreign currency reserves, v) making strategic expansion, and vi) equity investments in other companies.

Ijara with embedded option can solve the paradox of unilateral undertaking and convert the sale of put option from the perspective of client into a call option.

In Mudarabah, following two covenants can be introduced. These two covenants will minimize the problem of adverse selection, moral hazard and agency problem.

  • Mudarib can be asked to contribute some capital. The contract will still remain different from Musharakah as only the Mudarib is the working partner.
  • Mudarib can be asked to share in loss to some extent.

In methods of valuation in Islamic Financial Management, IEP suggested an alternate means of pricing capital to rank projects and investment alternatives in interest free economy and use of appropriate discount rate i.e. Nominal GDP growth rate in public finance and corporate finance in CAPM, dividend discount model, project valuation, calculating NPV and valuing stocks.

Discussing the foundations of the ethical precepts of Islam, the thesis of religion, answering some of the questions in the comparative study of religion and trying to resolve few of the misconceptions about the faith of Islam.

Outlining the economic teachings of Islam with regard to earning and spending based on the study of relevant Quranic text and the narrations of Prophet Muhammad (pbuh).

Outlining the ideals that Islam set before its adherents in the ethical sphere of life based on the study of relevant Quranic text and the narrations of Prophet Muhammad (pbuh).

Analysis of the comparative economic systems.

Empirical investigation of the potential of the institution of Zakat to meet fiscal needs of the government and to assist it in doing away with deficit financing, fiscal bleeding, crowding out private sector and reducing deadweight loss by parting the way with private sector so as to ensure market economy operating on its own as far as is possible and playing an active regulatory role.

In monetary reforms, discussing how savings would feature despite discontinuation of interest and how inflation will be checked with central banks not having at their disposal the conventional OMO.

Discussing how balance of payments and exchange rate stability can be managed in an interest free economy.

Proposing that, if in the short term, the government or central bank needs alternate source of revenue other than Zakat, they can issue GDP linked bonds.

Critically analyzing the existing practices and prevalent modes of Islamic financing so that the ideals of Islamic Economics are not lost with innovative practices.

roposing new institutions and the role of those institutions with the comprehensive need fulfillment mechanisms to serve every major need of a sophisticated contemporary financial system.

Introducing the feasibility and structure of Micro equity finance as a substitute for interest based micro finance and discussing how the potential obstacles in the form of lack of trust, funding commitment, lack of collateral arrangement, lack of documentation etc could be handled.

Your comments, suggestions, queries and criticism are welcomed to convert these ideas into practicable models for the development of our people.

Important Please note that this project does not receive any funding yet nor does it want to in the near future. The Project Director makes himself available whenever and wherever possible to deliver lectures, conduct workshops, guest speaker sessions, delivering presentations in seminars and symposiums without any cost on Islamic Economics at any platform.



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Project Director, Islamic Economics Project