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CAPITALISM SOCIALISM MIXED ECONOMY ISLAMIC ECONOMY ISLAMIC MODE OF FINANCING

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CAPITALISM It is an economic system in which most property (land and capital etc,) is privately owned. In such an economy, private markets are the primary vehicles used to allocate resources and generate incomes. Individuals can use the resources in whatever manner they choose, subject to common protective legal restrictions. The role of government is limited to the provision of certain public goods such as defense, police protection and a legal framework for protecting rights of private property. The slogan of capitalism is to observe three Ps i.e. Profits, Prices, & Private property. The forces of demand and supply set prices of goods and services.
MAIN FEATURES OF CAPITALIS M

The main features of capitalistic economy are as under: 1. The right to own private property. 2. Freedom of economic activity. 3. Freedom of choice by the consumers for any good or service. 4. Profit motive of the businessmen. 5. Competition among producers for the sale of their output. 6. Existence of price systems 7. Unequal distribution of national income between the rich and poor. 8 All economic decisions are decentralized and made by individuals in a process of spontaneous coordination throughout the economy MERITS
1-----INCREASE IN EFFICIENCY

In order to earn greater profit, both businessmen and labor work hard. This i creases n national output and the economy of the country develops at a greater pace. There is a huge competition between the p roducers to maximize profits, therefore they produce more and try to avoid the wastages of the resources. In this way national resources are utilized in their best possible manner.
2-----INCREASE IN CAPITAL INVESTMENT

In order to earn profit businessmen invest more, and adopt new technologies and innovations for greater production, which results in the capital formation and rapid economic growth.
3----- INCREASE IN THE WELFARE OF THE PEOPLE

There is general increase in the supply of goods and services. Wage rates are high, and people work hard to increase their material welfare, therefore per capita income, prosperity and standard of living of the masses increases.
4----- FREEDOM OF CHOICE OF GOODS

Consumers are not dictated by any agency to purchase or not to purchase a particular type

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of good. They may do so as per their free will and choice and according to their purchasing power. The sovereignty of consumer is given its due importance. DEMERITS
1-----CLASS CONFLICT & EXPLOITATION

The rich people become richer and poor people become poorer. Working class desires to have more wages and less working hours, which is against this system. Therefore there is always a conflict and tussle between these sections of the society, which results in strikes, lock-outs and disturbances. The businesses develop into monopolies and cartels by controlling many types of business and industrials units. They exploit consumers by restricting their output and charging higher prices. In this system society is divided i to n Haves and Have-nots.
2-----IMPROPER UTILIZATION OF RESOURCES

In order to earn profit, national resources are used for the production of luxurious goods for rich people, who can afford to purchase them where as a large number of people who need the basic necessary items of daily needs are neglected. Therefore consumers goods for poor masses are not sufficiently produced.
3-----ECONOMIC INSTABILITY AND DEPRESSION

There is every possibility of over production of goods due to competition, which results in depression in the economy and workers get unemployed. There is no balance in the production and the actual demand for the goods and services, causing the economy to swing towards slump and depression.
4-----WASTEFUL COMPETITION

Businessmen indulge in competition to sell their output and there are cut throat competition between them. Huge resources are utilized on advertisements and salesmanship, which is just nothing but the wastage of national resources. SOCIALISM It is an economic system in whic h most of the major factors of production are owned by the state. Private property rights are strictly limited to small tools that an individual needs for his occupation. Land, factories and major machinery are not privately owned. Most prices are set by the state rather than by the forces of supply and demand. Economic decisions about what and how much, how and for whom are all made by the state through its central planning agencies and other administrative units. All the industries and land are collectively owned i.e. by the state and used for the common good of the people instead of private profit .

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MERITS
1----ECONOMIC EQUALITY AND SOCIAL JUSTICE

It aims at social justice in the distribution of national income, and steps are taken to reduce economic inequalities of income and wealth. Earnings vary according to the ability of the labor. Exploitation of man by man is not allowed. Taxation is used to redistribute national income
2----- ABOLITION OF PRIVATE ENTERPRISE

There is no private enterprise instead p roduction is carried on by the state which also fixes prices of finished goods and state gives to the consumers a free choice of the goods available in the market at fixed prices.
3----- ECONOMIC PLANNING FOR RAPID GROWTH

It ensures efficient allocations of resources for rapid progress and development of economy .It functions right according to the programs and in a systematic and o rderly fashion and marches rapidly on the road to economic progress.
4-----SOCIAL SECURITY

Things, which are essential for individuals health and training, are provided by state at the lowest cost or free. It provides social insurance covering, accidents unemployment, sickness, old age pensions, medical and education facilities etc . DEMERITS
1-----INEFFICIENCY

Government pla nners are usually inefficient in preparing the economic plans and running a business, therefore much time is wasted and output is reduced.
2----- LACK OF INCENTIVE

Since there is no private profit motive, labor do not take much interest in the production activities. A creative work becomes impossible .
3----- LOSS OF CONSUMERS SOVEREIGNTY

The state fixes the prices at its own will and not by the market forces. Consumers are forced to purchase the goods at the fixed prices and to purchase the goods what ever are produced by the State. They have no choice of their own.
4----- MISALLOCATION OF RESOURCES

Some goods are produced more than the actual demand therefore they are wasted whereas there may be shortage of many other goods resulting in the unsatisfied demand of the people. It is because the single government cannot be able to utilize the whole countrys resources to the maximum benefit .

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MIXED ECONOMIC SYSTEM Mixed economy is an economy in which there are two sectors that is public and private sectors. The economy of Pakistan can be classified as a Mixed Economy. A mixed economy has the following characteristics.
CHARACTERISTICS

1----The first criterion is that the public and private ownership of the means of
production. The individuals carry on most of the productive activities in the fields of agriculture, industry and services in their private capacity. However, public sector i.e. government sector is also large enough. 2-----The second criterion is that the locus of decision-making power; private individuals and firms are free to determine the line of business and the level of their output. Governments over all economic policies and economic planning have a powerful influence on the decision of individuals and private businesses. Govt. through a variety of policy measures is able to modify economic decision in private sector. Govt. controls and manages inflation rate, it increases employment level, adopts the policies to improve the balance of payments position and improves the per capita income of its citizens. 3-----The third criterion is that the mechanism used to allocate resources amongst many alternative uses. It is predominant by the market system. The forces of d emand and supply and market prices influence the resource allocations in the different sectors of the economy. It controls and regulates monopolies so that they do not exploit general public. It adopts rules, regulations and policies for the equal distribution of national income. 4----The fourth criterion is that the Govt. intervenes in the economy to provide goods and services which private businessmen are hesitant and unable to produce and provide in sufficient quantities at a reasonable price for example, all socially desirable goods such as equipments for the retarded and handicapped people of society. Production of these goods may be unprofitable for private businessmen; therefore government produces such goods in state owned factories. Govt. puts bans on the imports and restricts the local production of those items, which may be harmful for the society such as hard drugs etc. The economy of Pakistan has become highly regulated over the years. Gradually it has changed from a free economy to a mixed economy. Today government owns and regulates natural gas, telecommunication, railways and many develo pment financial institutions. Now-a-days European countries have adopted the policies of mixed economy with a large private business sector and a substantial state controlled sector. In Pakistan a balance is being achieved through de-regulation and privatization of industries and services.

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ISLAMIC ECONOMIC SYSTEM Islamic economic system is a divine system, which is given by God in Quran and explained in Hadith by Holy prophet. This system has all the merits of Capitalism and Socialism and do not have any demerit of any of them. It advocates the welfare of the masses at large and wants to eliminate all the social and economic evils from the society so that material welfare of people may increase and people may have healthy and prosperous life. It emphasizes the fulfillment of all basic necessities of life without any undue restrictions.
CHARACTERISTICS

1----It allows right of private property, which is allowed in capitalism but not allowed in socialism 2-----It does not allow concentration of wealth in few hands, which is allowed in capitalism but not allowed in socialism. 3---It allows freedom of occupation, a person can adopt any profession of his choice in which he is more capable, which is allowed in capitalism but not allowed in socialism. 4---It stresses on equal distribution of national wealth so that all people may fulfill their basic necessaries of life properly. 5---It allows price system and its mechanism but prices should not be unjust and exorbitant and consumers should not be exploited. It is against profiteering, hoarding, black-marketing and smuggling of goods. 6---It does not allow interest. Loan should be on the basis of Qarz-e-Hasna. Profit on money lent should take the form of Modaraba and Musharka mode of investment. Any investment and undertaking on the basis of profit sharing is permitted in this system. 7--- It allows to earn profit with established business norms and do not allow the business of Haram items such as wine production, gambling, or with which the moral values of people diminishes. Production and supply of these goods and services are allowed in both socialism and capitalism. 8---It permits the inheritance system but do not allow Death Duty 9--- It forbids unnecessary competition to destroy each other and natural resources are wasted for nothing. 10--It allows free consumption of goods and services as per reasonable need of consumers but consumption for pomp and show is not permitted.

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11--It introduces Zakat and Usher system so that requirement of needy persons is fulfilled and wealth is not accumulated in the hands of lucky few. It emphasizes payment of Zakat and Fitra for welfare of all people of society. This increases total consumption and business activity in the economy and there appears no slump or depression in economy. 12--There is no class conflict in Islamic economic system, because it advocates Adl , Ehsan, Sakhawat and payment of Zakat to the needy people of society. 13--It is against misery and accumulation of wealth, rather it advocates people to spend money for reasonable material welfare and not to keep money idle as cash balances. Islam directs to keep the money in circulation so that Effective Demand may continue to increase and economy may prosper. ISLAMIC MODES OF FINANCING
1 2 3 4 5 6 Modaraba Musharika Hire purchase Leasing Term Finance Certificate Islamic Equity Funds

MODARABA Modaraba means a business in which one person participates with his money and another with his efforts or skill. The investors participates with their money and the Managers participates with their efforts and skill and profits on investment made out of modaraba fund are distributed among the investors. Modaraba Law governs the floatation and operation of Modarabas. Under this la w management companies, banks and financial institutions can register themselves as modaraba companies and float a modaraba for a specific or general purposes. Objects of Modaraba are to be restricted to only such business as are permitted under Sharia. In order to ensure that modarabas do not engage in any activity repugnant to the tenets of Islam, prospectus of each modaraba need a prior clearance from a Religious Board.
SALIENT FEATURES OF MODARABA

1--- The investors owns the property but no managerial rights. Investors are not supposed to work nor they are allowed to interfere in the affairs of business. Investors may take part in decision-making and can terminate modaraba . 2--- Manager (bank, investment company or any one) or the one, who manages, does not contribute capital but enjoys complete control on finance and resources.

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3--- Basic objectives of modaraba are determined by the investors and they appoint managers (any company, bank etc) of their own choice. This management company can have 10 percent share of the total profit of the Modaraba Fund as a consultancy or managerial fee and the rest of the profit is distributed among the investors ie modaraba certificate holders. 4--- Loss is borne by he investors (modaraba certificate holders) and not by the management company of the modaraba fund. 5--- The manager (bank, investment company etc.) is entitled to remuneration for his services on mutually agreed basis. Banks and investment companies etc. can participate in modaraba just like any individual investor. 6-- No business will be carried out under modaraba, which is against the Islamic teachings. MUSHARIKA It is an arrangement of temporary partnership/sharing between the bank or Investment Company and its client under which the bank or investment company provides working capital finance to the business of the client as per terms agreed upon. Funding of the musharika means clients investment in the business prior to entering into musharika agreement with the bank or investment company and secondly banks invstment as per terms agreed with the client in the musharika agreement. Profits generated by the Musharika are shared in the ratio as per profit ad loss sharing agreement.In case of loss the same is borne by each party in actual proportion of their funds contributed by each party.Under it working capital financing is provided for large and small industries, trade and commerce.
SALIENT FEATURES OF MUSHARIKA

1--- Bank/investment company provides working capital whereas other party that is client along with his share capital, invest his skills and energies in the business. 2--- Bank/investment company monitors the performance of the musharika business and do not interfere into the operation and the management of the business. 3--- Bank/investment company shares the profits in the ratio agreed to between the bank and the client.In the musharika agreement. In the event of loss, the bank/investment company would share the loss as per proportion to the funds invested by it towards

financing of the working capital requirement of the musharika business.

4--- The funds provided by the bank to the business venture may be for a period of one year.

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5--- It is based on actual profit earned by joint venture and not to the capital invested. In interest bearing mode of financing the bank/investment company cannot suffer loss, while in musharika it may suffer losses if bus iness does not produce good results. 6--- It is a kind of financing which secures both the debtor as well as creditor. If debtor suffers loss, it is unjust on the part of creditor (bank) to claim a fixed interest and if debtor (company) earns profit it is unjust on the part of debtor (company) to give a small portion of profit by way of interest to the creditor. HIRE PURCHASE This financing has been adopted for supply of machinery/vehicles on the basis of payment in installments. The bank/investment company owns the item acquired but possession is passed on to Hirer for his exclusive use and possession. The hirer pays the acquisition value in installments spread over the agreed period together with the agreed amount of rent on item provided. After amount value and rent is paid in full, the ownership is passed on to Hirer. Hire purchase is available to companies, firms or individuals engaged in manufacturing, production, transportation or running any business, or industry. It may be noted that under this mode of financing hire purchase is available only for productive purposes, which are necessary for business, trade and industry. Monthly Rental installment shall be so fixed that the actual amount invested by bank, Investment Company along with rental income shall be fully paid during the validity of the agreement. LEASING A lease is a contractual agreement whereby one party the lessor (owner of the property) grants rights to another party the lessee (borrower of the property) to use his property/specific asset for a specified time in consideration of a certain payment known as rent. Leasing i permissible under the Islamic mode of financing, as the return on s investment is not interest but Lease rent.
TYPES OF LEASING 1----OPERATING LEASE

Under this leasing, the lease is for a short period and does not cover the entire useful life of an asset. It is cancelable by either party on a short notice. The lessor (owner) retains the usual risks and rewards of ownership, paying insurance, maintenance and providing for depreciation.
2--- FINANCE LEASE

Under this leasing, the lease is for a long period and covers the entire useful life of the asset. The lease is non-cancelable. The risks of the asset is passed on to the Lessee without on actual transfer of title (ownership) Thus the Lessor (owner) remains formal owner of the property although the Lessee actually uses the asset, pays the insurance

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taxes, maintenance and agreed rentals. Equipment which are leased under Finance Lease are cars, computers, factories, and plants PARTICIPATION TERM CERTIFICATES The borrowing company in favor of any bank/investment company on profit and loss sharing basis issues these certificates. These certificates are actually the replacement of the debenture financing, on which a fixed interest is paid .The banks/investment companies provide their investment by way of partici ation term certificates provided the p sponsors (owners) of the company have already subscribed their share capital in the company and this amount has been fully utilized in the implementation of the project of the company. The amount of Partic ipation Term certificates may make wholly or in installments to the company. For the security of the banks (lenders) money, the land property of the company is transferred in the name of the bank/investment company. The Participation Term certificate holders shall be entitled for profit of the company as the other shareholders. In the same way, if the company suffers losses, the PTCs holders will also suffer the losses. Since this is the type of loan, Company shall try its best to clear it off by paying agreed installments. ISLAMIC EQUITY FUNDS An Islamic Equity Fund is a joint pool wherein the investors contribute their surplus money for the purpose of its investment in joint stock companies to earn Halal profits in strict conformity with the teachings of Islamic Shariah. The profits are mainly achieved through capital gains by purchasing shares and selling them when their prices appreciate or through dividends distributed by the relevant companies. The fund managers at the helm of affairs in an Islamic Equity Fund are better equipped than an average investor to recognize profitable opportunities in the market and in determining the Shariah compatibility of an individual stock or sector. These funds are generally backed by the approval of prominent scholars from around the world and these funds are generally considered to generating Halal and Shariah compliant profits. RESTRUCTURING OF ECONOMIC SYSTEM The twentieth century has witnessed rise of communism, conflict between capitalist and communist countries and the fall of communism. The capitalist Western countries are celebrating the fall of communism as if it was an empir ical evidence of their own victory, not only on a political front but also on ideological plane. The fact is, that communism was based on an emotional reaction against some evil consequences of capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in capitalist countries throughout the centuries. The failure of communism was not due to its justified criticism of evils of capitalism. Rather it was caused by the inherent defects of the alternative system suggested by it. The capitalist economies still suffer from inequalities in the distribution of wealth. There is still a large

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gap between haves and Have-nots and poverty in the midst of plenty is still the major problem of their economy. These are real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism. The economic principles taught by Quran and Sunnah is quite capable of solving the major economic problems faced by the world today. While they allow private ownership and market economy, they also provide a well-considered system of distributive justice, which may eliminate the inequalities and bring about a system in which profit motive works with the collective interest of the society. The basic fault of communism was that frustrated with the inequality of capita lism, it assailed the very institutions of private ownership and market forces and developed a utopian idea of planned economy which was unnatural, artificial and oppressive. The denial of individual liberty curtailed the zeal for production and the wide powers of the state left the destiny of people in he hands of ruling class. It was neither private ownership nor the institution of market forces that was the basic cause of injustice in the capitalist system. The basic factor for creating inequalities in the capitalist countries was the absence of a criterion to differentiate between just and unjust earnings. The instruments of interest, gambling, speculative transactions and the tools of exploiting immoral desires of the consumers to secure huge profits were allowed which tend to create monopolies and in turn paralyze the forces of demand and supply or at least obstruct their operation. It is thus ironical that the capitalist theory on the one hand assets the principles of lassiez-faire but on the other, by allowing the aforesaid instruments, interferes with their natural function and stop the market forces from playing their due role by creating monopolies that impose their arbitrary decisions on the bulk of the common people. The system of interest favors rich industrialists who benefit from the wealth of the common people who deposit their savings in banks and after making huge profits do not allow common people to share these profits except to the extent of a fixed rate of interest that is again taken back by them as it is charged to the cost of production. Islam not only allows the market forces but also provides mechanism to keep them operative with their natural force without their being hindered by monopolies. It applied two types of controls on he economic activities. If we are not prepared to mend our ways, some natural process of revolution is bound to find its way. If we want to avoid disastrous consequences of such revolution, we will have to restructure our economic system on the basis of clear guidance provided by Holy Quran and Sunnah.

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