Topic: ISLAMIC MODES OF FINANCEING REDUCE THE INFLATION IN PAKISTAN Abstract: Islamic modes of financing plays very important role to reduce inflation in Pakistan. In this research our focus on the reduce in inflation, Islamic modes of financing as one of the most important tools in reducing inflation in Pakistan. In this research proposal I verify how Islamic Modes (Masharka, Mudaraba, and Murhabah) and assets reduce the inflation in Pakistan. Key term: Islamic modes of financing, Assets and Reduce inflation in Pakistan. Introduction:
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Islamic modes of financing are the main source to reduce inflation. Islamic banks operate in ways that differ from their conventional counterparts. Nonetheless, they Provide fund owners as well as fund users profitable opportunities. On the liability side, they provide owners of funds opportunities to place their financial resources profitably, as they become implicit partners of those institutions that share in their net profit, while carrying a proportional share in their risk.
On the asset side, they provide finance to enterprises through either sharing directly in the net results of their activities or financing their purchases of assets, goods, and services. Islamic finance is one of the fastest growing and most innovative financial disciplines in the international financial market. It is growing at a rate of 15% each year, and is expected to be US$2 trillion in size by 2010. It is one of the least understood both by the western financial community and indeed by those in Islamic communities.
This course offers a clear and understandable examination of this dynamic area of finance, and is essential for bankers, lawyers, institutional investors and corporate executives. This course will help participants to fully understand the fundamental religious principles underlying modern Islamic finance and banking. It will also provide comprehensive level of understanding of unique features of Islamic financial instruments as well as their usage in practice through real-life examples. Participants will also learn religious principles and their interpretation, as well as the diversity and adaptive mechanisms of Islam. Purpose Statement:
Very first and foremost aim of this research is to develop the interaction of reduce the inflation through Islamic modes of financing and why Islamic modes of financing is important for this situation. The research also investigates how Islamic modes (Masharka, Mudarba, and Murhaba) of financing reduce the Inflation. For this purpose, quantitative research are used to develop a questionnaire to quantify the findings and furthermore to examine the finding. Significance of the Study: The uniqueness of this research is that how Islamic modes of financing reduce the inflation to make the economy more committed in Pakistan.
Now this study focuses on the development of the economy in Pakistan because inflation can have negative and positive effect on economy. This study examines the influence of each Islamic mode of financing reduce the inflation. The findings would be more important and favorable for the development of the economy of Pakistan.. The findings would give me an opportunity to decide which Islamic mode are more important to reduce inflation and which do not. There has been little empirical research on the relationship between Islamic modes and inflation. The proposed study will clarify the concepts and relationship between Islamic modes of financing and economic development. * It will be Add value to students and scholars by introducing new dimensions of said topic. * It will help the government and policy makers for developing friendly procedure and policy. Main research question: Why Islamic modes of financing are important for the development of economy in Pakistan? Sub questions: 1 How Masharka, Madarba, Murhaba effect to reduce the inflation in Pakistan? 2 How Islamic modes of financing reduce the inflation in Pakistan? What is the relationship between Assets and inflation in Pakistan? Hypotheses: Three hypotheses with sub-hypotheses were proposed. They are as follows. Hypothesis 1: Islamic modes of financing will be positively related to reduce the inflation in Pakistan. Hypothesis 1a: Masharka will be positively related to Assets. Hypothesis 1b: Mudarba will be positively related to Assets. Hypothesis 1c: Marhaba will be positively related to Assets. Variables of this research: * Dependent variables (Inflation in Pakistan): In this research the reduce in inflation in Pakistan is dependent variable.
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rise, each unit of currency buys fewer goods and services Inflation can have positive and negative effects on economy. * Independent variable (Islamic Modes of Financing): In this research Islamic finance starts from one basic concept that is to avoid trading directly present for future money. Finance is provided in the form of money in return for either equity or rights to share Proportionately in future business profits.
It is also provided in the form of goods and services delivered in return for commitment to repay their value at a future date. * Mediator Variables in Study (Assets): Assets are very important for any finance fields. In this research assets relate all the independent and dependent variables. Literature Review: This proposal reviews the literature on Islamic modes of financing and its importance. Islamic Banking system has many characteristics that distinguish it from the conventional banking system: The receipt and payments of interest is strictly prohibited in Islam.
Furthermore, the emergence of Islamic banks introduced the ethical values to the banking industry. Moreover, an interesting result emerged from the analytical model developed by Khan (1986) is that an Islamic bank may be better suited to adjust to shocks that can lead to banking crises than conventional bank. Similar conclusion derived by Igbal and Mirakhor (1991). Islamic banks operate in ways that differ from their conventional counterparts. Nonetheless, they provide fund owners as well as fund users’ profitable opportunities.
On the liability side, they provide owners of funds opportunities to place their financial resources profitably, as they become implicit partners of those institutions that share in their net profit, while carrying a proportional share in their risk. On the asset side, they provide finance to enterprises through either sharing directly in the net results of their activities or financing their purchases of assets, goods, and services. An Islamic bank is a financial institution which identifies itself with the spirit of Shari’ah, as laid down by the Holy Qur’an and Sunnah, as regards its objectives, principles, practices and operations.
An Islamic bank does not normally lend money except interest-free loans which are termed as Qard Hasanah (Benevolent Loans) while loans on service charge, not exceeding the actual administrative cost of such loans, have also been permitted by Muslim Scholars. The most important and difficult task however, is the reformation of society which has to be undertaken as an on-going process. Some may think that Islamic finance is just “interest-free” finance. That could be construed as enforcing a zero interest rate on the economy. It can be criticized as running contrary to market rules.
Nothing can be farther from reality. The Islamic economic system, while based on market rules, has no integrated debt market and future money cannot be traded against present money. In this research inflation is dependent variable and Masharka, Madarba, Marhaba, are independent variable and Assets are mediator variables. * Masharka: Musharaka refers to profit and loss sharing between the lender and the borrower completely doing always with the interest. It is an arrangement of financing in which parties offer funds, efforts, or/and skills. Profits are share among them according to the rate investor.
In Pakistan, the musharaka Financing mode has be launched by commercial banks to meet their working capital requirement of the trade and industry . The Bank carry out musharaka functions out of profit and loss accounts (PLS) deposits. Borrower receives interest –free loans on the basis of equity participation and profit or loss from the bank or any other financial institution. The lending bank enjoys the right of participation in the borrowers business to the limit of amount of loan. In other words, the borrower is liable to the bank (the lender) up to the limit of the invested (i. . borrowed) amount. In case of profit (or loss) the lender will receive his prorate share or profit( or suffer a loss). The agreement between the investor and the company is referred to as muharaka investment agreement which stipulates that the operation of the musharaka will be carried out by the borrowing company. The bank as a trustee will watch, evaluate, and supervise the performance. Encourages partnerships with a recognized parry (i. e. , bank and so financial bottlenecks are less problematic for small entrepreneurs).
Most of unknown profit of business will be determined accurately, and major share of profit will go to bank and finally to its depositors unlike interest based banking when only determined accurately, and major share of profit will go to bank and finally to its Depositors unlike interest based banking when only determined interest rate goes to bank and its creditors, i. e. , the bank depositors. Role of Islamic Banks in Economic Development all this activity will help in removing the black economy and idle resources to use and shared with small savers of economy, reducing level of population below poverty line.
These individual very helpful for reducing inflation in Pakistan. * Mudaraba: Mudaraba is a very potent tool for removing interest from society by providing an interest free tool for skill utilization and especially can help in mobilizing resources of society by employing them as mudariba while bank will provide the finance and also bear the chances of profit and loss, which is absent in interest based financing for venture capital. Small traders and skill men of Pakistani villages especially agricultural and craftsmen can generate mass exports through it, reducing poverty.
Modaraba is a form of contract a subscriber participates with his money and the manager with his efforts and skills, after setting aside the agreed share of Modarib the profits earned on investments are distributed among the subscribers. In simple words, Modaraba means a business in which a subscriber participates with his money and the manager participates with his knowledge and skill, and profits on investment made out of the Modaraba funds are distributed among the subscribers.
Thus, it is a concept of Islamic finance through which one partner or more participate with the funds and another with his skill and efforts in some trade, business and industry permitted by Islam. They who participate with their efforts assume the role of manager, while the provider of funds becomes the beneficial owner. In modern terminology, a “modaraba’ is akin to the concept of mutual funds minus its unIslamic features. The concept of mutual funds has gained widespread acceptance in the country as is evident by the success of N. I. T. units and I. C. P. utual funds. In view of this back ground, it appears that the institutions of modaraba will play a vital role in mobilizing savings in the society and diverting them into productive channels of investments in the economy. It is an important feature of this kind of business that the money should be handed over by the Rab-ul-Mall to the Modarab and he should not control the money. Modaraba must be incorporated and register under Modaraba (Floatation and control) ordinance, 1980. Its activities are controlled by the Modaraba companies and Modaraba rules, 1981.
The certificates issued by Modaraba are transferable. The Modaraba has right to receive at least 10% share in Modaraba business. The profit of Modaraba business is distributed among the partners according to the agreement, and one partner cannot enjoy entire profit of the business. The money of Modaraba cannot be contributed to another person without the prior consent of Rab-ul-Mall. It may be formed for specific period and it will be dissolved by the expiry of that time. It may be formed for single purpose or for multiple purposes. The Modaraba will be dissolved by the death of any partner. Murhaba: Murhaba has no direct effect upon poverty role of Islamic Banks in Economic Development 19 reduction, but indirectly it provides a good tool for an efficient deferred sale, providing business men asset of its choice and bank of its profit for effort and risk taking. Under this contract the client orders an Islamic bank to purchase for him a certain commodity at a specific cash price, promising to purchase such commodity from the bank once it has been bought, but at a deferred price, which include an agreed upon profit margion called mark up in favor of the bank.
Under murabaha, the Islamic bank purchases, in its own name, goods for an importer or buyer who cannot afford to pay directly, and then sells them to him at an agreed mark-up. This is the sale of a commodity at a price, which includes a stated profit known to both vendor and purchaser (a cost plus profit contract). This technique is usually used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling, its profit derives from a real service that entails a certain risk, and is thus seen as legitimate.
Simply advancing the money to the client at a fixed interest rate would not be legitimate. Only a legitimate profit is Under murabaha, the Islamic bank purchases, in its own name, goods for an importer or buyer who cannot afford to pay directly, and then sells them to him at an agreed mark-up. This is the sale of a commodity at a price, which includes a stated profit known to both vendor and purchaser (a cost plus profit contract).
This technique is usually used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling, its profit derives from a real service that entails a certain risk, and is thus seen as legitimate. Simply advancing the money to the client at a fixed interest rate would not be legitimate. Only a legitimate profit is considered lawful under Islamic law; any excessive addition on account of deferred payments would be disallowed as it would amount to a payment based on the value of money over time i. e. interest. Frame Work: Independent variable * Mediating variable * Dependent variable Islamic Modes of Financing Reduce in Inflation Assets Methodologies Rational for the selection of research quantitative Approach: The most important and basic purpose of using this approach I want investigate the how the so I have decided to choose quantitative research approach as to accommodate my first objective of how and why Islamic modes of financing are most important to reduce the inflation in Pakistan. The positivism methods will be chosen supported by survey method in the circumference of quantitative paradigm.
Research Design: This research will be utilize a relational research design in an effort to examine the mediating effects of Assets on the relationship between Islamic modes of financing which reduce the inflation in Pakistan. Now the research proposal reduces the inflation in Pakistan through Islamic modes of financing. Population and Sample: * Population: The target population for this research consists of increase in the economy allover the Pakistan. * Sample size: In this research the survey questionnaires will be distributed to 100 mployees who working in the different organization in Pakistan. Method of data analysis: After the data collection we shall be analysis the data through SPSS software because we shall collect data through questionnaires. Validity Procedures: According to Ary et al. (2002), validity is defined as “the extent to which a measure actually taps the underlying concept that it purports to measure”. The instrument used in this study will be evaluated for face and content validity. The questionnaire actually measures the construct, understandable.
Based on their suggestions, some of the questions will be simplified to make it more clear and understandable, Even though the items included in the questionnaire will from develop studies with established reliability score; the members suggested conducting a reliability test. Finally, the members also compared the items included in the questionnaire with the research objectives. Reliability Procedures: Reliability is defined as “the extent to which a measure yields consistent results; the extent to which scores are free of random error” (Ary et al. , 2002, p. 566).
Although the measures of the instrument in this study adopted from previously developed studies, the reliability of each construct will be examined through a pilot-test. Ethical Considerations: Before collecting the date of respondents provide whole information about the research. The data provided by the respondents will be kept confidential. Further, the data collected from students, peers and immediate-supervisor. Those respondents want the results of the research it would be provided the end results of the research. * We will not criticize the previous researches. The copy of the results will be also given to the respondents if they want. * The purpose of the study is made clear and simple as it easily understand by the reader. * The personal information of the respondent must be confidential. Delimitations and Limitations Delimitations: This study is restricted to reduce the inflation in Pakistan. Limitations: 1 This research is not the last research may be the next research is better of this research. 2 The reduce in inflation is not only through the Islamic modes of financing but also it’s through other elements of the organizations.