CHAPTER 5 23/05/2001 12:01 pm Page 1 5. Islamic financial systems OBJECTIVES OF AN ISLAMIC FINANCIAL SYSTEM This chapter examines the appropriate structure of a complete financial system based on Islamic principles. Three countries which have sought to develop such a system are Pakistan, Iran and Sudan. Pakistan was the first to move in this direction, and a major part of this chapter is devoted to a study of the legal framework and the legislative and other changes instituted in Pakistan to bring this about. The transition in Iran and Sudan has been abrupt, in the wake of political transformations. But, to begin with, we outline the objectives and then the ideal structure of an Islamic financial system. An Islamic banking and financial system exists to provide a variety of religiously acceptable financial services to the Muslim communities. In addition to this special function, the banking and financial institutions, like all other aspects of the Islamic society, are expected to ‘contribute richly to the achievement of the major socio-economic goals of Islam’ (Chapra, 1985, p. 34). The most important of these are: economic well-being with full employment and a high rate of economic growth, socio-economic justice and an equitable distribution of income and wealth, stability in the value of money, and the mobilisation and investment of savings for economic development in such a way that a just (profit-sharing) return is ensured to all parties involved. Perhaps the religious dimension should be presented as a further explicit goal, in the...
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