This document discusses potential Islamic economic solutions to improve Pakistan's struggling economy. It provides an overview of challenges facing Pakistan's economy, including importing more than exporting, low savings rates, high government spending, and political instability. It then outlines some key principles of an Islamic economic system, including that property is held in trust for God, equitable distribution of wealth through zakat and inheritance laws, freedom and prohibition of interest in financial transactions. The document argues these Islamic economic principles could help address Pakistan's economic issues if implemented.

1. Faculty of Engineering, Sciences & Technology
INDUS UNIVERSITY
GROUP DISCUSSION ON
REASON OF DECLINE ECONOMY OF PAKISTAN AND
SOLUTION IN THE LIGHT OF QURAN AND SUNNA
Submitted by Group Members:
1. Bilal Raza (2383-2017)
2. Hamza Kaiser (3126-2017)
3. Abdullah Khero (2862-2017)
4. Ikram Arshad (1897-2017)
5. Muhammad Ahsan (2767-2017)
6. Aqsa Maria (3127-2017)
Submitted to Sir Owais Anwer

2. TOPICS INCLUDED
 IMPORTANCE OF ECONOMY
 AN OVERVIEW OF PAKISTAN’S ECONOMY
 CHALLENGES TO PAKISTAN’S ECONOMY
 ISLAMIC SOLUTIONS TO IMPROVE THE ECONOMY

3. WHY IS ECONOMY IMPORTANT?
The economy is an indicator of development and sustainability.
A good economy ensures better chances of survival and development or a state.
If we understand the cycles and system in Economics, we can better understand how to
manage our money and society!
AN OVERVIEW OF PAKISTAN’S ECONOMY
 The economy of Pakistan is the 26th largest in the world in terms of purchasing power
parity (PPP), and 44th largest in terms of nominal GDP
 In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture
accounted for almost 50% of economic output with hardly any manufacturing, as all
industries were located in India.
 Therefore, it was unable to feed 30 million people and was dependent on imports from
the USA. From thereon, Pakistan has come a long way. Today with 170 million people,
our per capita income in 2008 was 1000$ which is ten times more than it was in the
beginning.
AGRICULTURE
 Pakistan is the third largest exporter of rice in the world and producing enough food grains to feed
its people
 Pakistan is also one of the five major textile producing countries in the world.
 Pakistan also produces third largest quantity of milk in the world.
MANUFACTURING AND INDUSTRY
 Manufacturing and industry now account for 25% of the income; when we recall there was not even
a single industry worth its name at the time of partition.
 So if we look where we were and where we are, I think the justification for Pakistan in terms of
betterment of economic conditions of Muslims in this part is very strong.
 But, we have not lived up to our potential. We can do much better
 than this.
WHERE ARE WE LAGGING BEHIND?
 In 1969, Pakistan exports of manufactured goods were higher than the combined exports of
Indonesia, Malaysia, Philippines and Thailand.
 In 1960’s Korea emulated Pakistan in its five years planning process.
 The tragedy is that even a country such as Vietnam which was completely devastated by the war
has now overtaken Pakistan.
 Ten years ago, India which was way behind Pakistan (till 1990’s)is now way ahead.

4.  As an economist the biggest challenge is: how can we organize ourselves to improve our economy.
 We Import More and Export Less.
 We Consume More and Save Less.
 Government Spends More than it Earns as Revenues
 Our Share in the World Trade is Shrinking
 We Face Energy and Water Shortages
 Crisis of Governance and Implementation Weaknesses
 Political Stability, Law and Order/Security
WE CONSUME MORE AND SAVE LESS.
 Out of every hundred rupees of our national income, we consume 85 rupees and save only 15
rupees.
 Pakistan’s saving rate is 6%. We need at least 24-25% investment rate to grow, and if we want to
rely on domestic savings, your saving rate should be 25%.
 India has 34% saving rates. While China’s saving rate is 50%.
WE IMPORT MORE AND EXPORT LESS
 Till 2007-2008, 80% of our imports were financed by our export earnings.
 This ratio has come down to only 50%, it may go up to 60% but a gap of 40% of financing needs in
order to keep with the import level still exists.
 We have to change the attitude of preferring the imported goods in order to fill in the gap b/w our
imports and exports.
 Government Spends More than it Earns as Revenues.
 Pakistan’s government takes away 20% of national income as its own.
 80% is left in the private sector and 20% in the hands of the government is spent on defense, debt
servicing, development on education, health, general administration etc.
 The revenue generated is only 15% of the GDP at best, and in the worst days it is 12 to 13%.
 Out of every rupee of income received by a Pakistani, on average, tax paid is only 9 paisas and 91
paisas remain withthe individual.
 In 2007-2008, Pakistan’s fiscal deficit was more than 7% which means its income or revenues were
only 13% of GDP whereas, expenditures were 20%.
 Therefore, fiscal deficits have to be financed from somewhere, so how do you finance them; you
either go again begging the external donors, or to the State bank of Pakistan.
 The financing provided by the State bank of Pakistan is dangerous because it creates high inflation
in the economy, which is injurious to the middle class, those earning fixed wages and salaries, and
the poor.
 The country if the inflation rate goes up. In 1999, our Debt to GDP ratio was 100%, which means
that the entire national income was pledged as debt.
 So Pakistan is way below the norm for developing countries.
 Many people say that defense takes away a lot of government expenditure.
 The fact is that defense expenditure is only 20% of government expenditure. It is only 4% of GDP,
and is not such a large expenditure as compared to debt servicing which is 7-8% of GDP and
almost 40% of government expenditure. Therefore, government has to contain its fiscal deficit by
raising revenues.

5.  Our Share in the World Trade is Shrinking.
 In 1990, Pakistan’s share was 0.2% of the world trade.
 After 20 years it has come down to 0.12% in a very buoyant world economy.
 World trade has been growing faster as compared to the world output. India in the same period had
doubled its share from 0.7% to 1.4%, while Pakistan is going the other way and that is the reason
why exports/imports imbalance is increasing.
 All our exports are to a few markets – the USA, EU and the Middle East.
WE BADLY LAG IN SOCIAL INDICATORS
 One of the most glaring weaknesses is that a country like Pakistan that should have had best
indicators in literacy, infant mortality, fertility rates, in access to water supply, in primary enrolment
ratios has social indicators which are more comparable to Africa rather than to the countries of
similar per capita income.
 Even Tajikistan, which is a very poor country, has better literacy rate and primary enrolment ratios
than Pakistan.
 If we had literacy rate of 100% instead of 55%, then in 2009-2010 our per capita income would
have been 2000$ rather than 1000$. Instead of 30 million middle class in Pakistan we would have
60-70 million middle class people; we would have poverty reduced to 15- 20%.
 Another challenge we face today is energy and water shortages, and that is not because we are
not generating enough electricity or we are not having enough water. With the losses of KESC from
the point it has generated to the point they realize the billing is 45%, so 55% people are paying for
those who are stealing the electricity. Government of Pakistan out of its own limited resources is
paying 200 billion rupees every year as subsidies for electricity.
 The productivity of poor farmer is only one ton per acreas compared to 3 tons by large holders
 POLITICAL INSTABILITY, LAW AND ORDER/SECURITY. The overall arching theme is that for a
robust economy we should have political stability, law and order and security. Until country has
gotten rid of the image of political instability, poor law and order situation and insecurity, where
investors from all over the world hesitate from coming to Pakistan and invest, we will not be able to
make any progress in this country.

6. SOLUTIONS TO IMPROVE THE ECONOMY ISLAMIC ECONOMIC SYSTEM
The Islamic economic system is the collection of rules, values and standards of conduct that
organize economic life and establish relations of production in an Islamic society. These rules
and standards are based on the Islamic order as recognized in the Koran and Sunna and the
corpus of jurisprudence opus which was developed over the last 1400 years by thousands of
jurist, responding to the changing circumstances and evolving life of Muslims all over the
globe.
Three aspects of the economic system are usually referred to as the major distinguishing
elements of any economic system.
1. PROPERTY
In the Islamic system, property is a trust. The real owner is Allah (Subhanahu Wa Ta’ala).
Man’s disposal of worldly goods is in the capacity of a viceroy and a trustee. His rights are,
therefore, circumscribed by the limits Allah has prescribed, and should be exercised toward
the ends Allah has defined. Unlike the capitalist system, the right to property is not absolute
but has limitations and qualifications enforced not by the power of the government but by the
power of one's faith and desire to be a pious Muslim. Hence, the common-good and the
welfare of fellow Muslims are internalized in the decision making process of every Muslim. It
is Socialism with at the state.
In view of the purposive nature of man's life in the Islamic world view, even these limited
rights of ownership are not devoid of purpose. Wealth is an instrument in the effective
discharge of man responsibilities as the viceroy of Allah, and the achievement of well-being in
the life for himself, his fellow Muslims and fellow human beings. No where this viceroy ship is
displayed like in the Shari’ah laws of inheritance. These laws clearly assume that once the
individual is dead, his wealth goes back to the original owner, who specifies to whom the
wealth should go. The laws of inheritance specify where exactly this wealth should go,
regardless of the approve or the consent of the deceased owner. He is permitted to endow
only 1/3 of his legacy. Even then, such endowment should not go to a beneficiary (one also is
included in the inheritors) not to uses that are not considered is Shari’ah a charity.
2. DISTRIBUTION
Because al-adl (justice and fairness) is a basic value of the Islamic economic order,
distributive justice is a major concern of the system. Equitable distribution of income and
wealth is therefore an objective by itself. Operationally, this is accomplished through certain
institutions which form the backbone of the social security in Islam. Examples are a bound:
3. ZAKAH
Zakah is the third pillar of the Islamic faith. It is a unique system of social security. Zakah is
not a hand-out from the rich to the poor. It is a right of the have nots in the wealth of the
haves. It is a measure designed to directly transfer part of the wealth from the well-to-do to
the poor and not to the government. Because the purpose is redistribution of income and

7. wealth, without creating a class society zakah is levied on almost everyone. Even the not very
well to do, pay zakah. He may then receive the zakat of others at the same time. Zakah is
levied annually on the wealth itself and not on the individual or income, at a general rate of
2½ % per annum. This is not all. Zakah is a requirement. However, a Muslim is always
engaged not to confine his charity to that requirement by giving alms (sadaqat).
4. LAWS OF INHERITANCE
It would not be possible to guarantee the functioning of the system free from injustices without
a built-in-mechanism to prevent injustice reproducing itself generation after generation.
Studies show that one of the major causes of inequality in income distribution, is the
distribution of wealth. One major outcome of the Islamic laws of inheritance, is to prevent
concentration of wealth. This is because legacy is distributed in a pre-set ratio which take into
consideration need and closeness to the deceased. Yet giving the deceased the right to
assign part of his wealth (not exceeding 1/3) to charitable uses.
5. ECONOMIC FREEDOM
Freedom is a cornerstone in the Islamic economic system. In fact, it is so basic that the whole
message of Islam came to free man from all kind of slavery. Freewill is a necessary condition
for the validity of all contracts. The basic human rights which are now included in the laws of
civilized countries has been a part of legal system of Islam since the Prophet (P.B.U.H) . In
fact, all the so-called Magna Charta has been enjoyed as the basic individual rights in Islam
for centuries. Furthermore, to guarantee competition in the marketplace and freedom of
transaction, many measures were adopted by the Prophet (P.B.U.H). Prohibition of
monopoly, manipulation of prices and restricting entry to the market are but a few of these
measures.
6. THE ISLAMIC ECONOMY IS INTEREST-FREE
Today’s trade and commerce in the whole world is run on the basis of interest-based debt. If
we look at the money and capital markets in any country, we find that they are basically
markets for exchanging financial obligations and receivables. It is no wonder that just the
mere thought that interest rate may go up (or down) will bring havoc to all sectors of the
economy. Standard economic analysis tells that interest rates play important roles in the
economy. Firstly, that it provides incentives for savings, and secondly that it performs an
allocative function with regard to capital. The argument goes as follows:
Saving is essential to any economy because on which depends the rate of investment, and
hence the rate of growth of the economy and the property of its citizens. Since economic
development is the objective of every society, improving the nascent rate of saving becomes
a basic requirement for the achievement of a viable and sustainable economic
growth. Because too much saving may be just as unproductive as too little, interest rates,
furthermore, provide a tool for policy as regards savings where this rate is controlled in such a
way as to attain the right magnitude of savings as required by the going economic

8. circumstances.
7. IS INTEREST RIBA?
It is not difficult to see that interest in conventional banking is riba. It does fit the definition: an
increase stipulated in a loan contract. Credit provided by the bank to its clients which is based
on interest is clearly so. But even time deposits and current accounts are nothing but loan
contracts (The lender here is the depositor and the borrower is the bank) with stipulated
increase. (current accounts are loans with no stipulated increase). Furthermore, revolving
credit is a type of loan where interest calculation is based on outstanding debt which is
payment postponed. Claiming that interest is not riba is therefore unattainable.
8. ISLAMIC MODEL OF FINANCIAL INTERMEDIATION
The function of banks is financial intermediation. While experts may differ on the history of
banking, there is no question that the importance of financial intermediation had been
recognized even by ancient societies. It is because of this, we find that people in antiquity had
always had arrangements to carry out such function. Temples and chapels at the time of the
Pharaohs and the time of Hamorabi carried out the function of by arranges the transfer of
funds between lenders and borrowers financial intermediation. The Greeks did have an even
more advanced arrangements for financial intermediation.
What gave rise to such financial intermediation is the fact that human societies, since time
immemorial had been divided to two groups. One with more resources that it needs now and
the other needs more resources now that it owns today. People discovered very early that the
welfare of both groups will be significantly improved if a process of transferring resources
from the first to the second group was initiated. Because every individual in society is prone to
be m the first or the second, it is quite advantages to everyone to participate in this process.
The ‘bank” as an institution for financial intermediation was born.
It was quite natural that such institution is built on the same arrangement which was the basis
of financial intermediation in almost all historical stages, that is the Loan contract.
The bank is, therefore, based on a borrower-lender relationship. The bank borrows (and
depositors lend) and then lends (and users of tends borrow)
In both asset and liability sides of the bank’s balance sheet, this borrower lender relationship
is easily recognizable. The term "loan" is never used in the realign of banks relations with its
sources of funds (depositors). This, however, doesn't hide the legal and actual fact that all
bank deposits are loans; the borrower is the bank and the lender is the bank client.
But why didn't savers go directly to borrowers and cut the cost of the middle man? In other
words: why did bank came to existence? The answer relates to the cost of information. An
institution that specializes in credit analysis is more efficient in minimizing the risk involved in
lending because of its ability to gather and analysis information. It is because of this the role
of banks is decreasing as the cost of information is reduced, giving more space to finance
market where savers select their choice of visits.

9. Source: An Introduction To Islamic Banking, Shaykh Dr Mohamed Ali Elgari.