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How Islamic Economic Models Contribute to the Productivity Increase

1. 1 ————————————————- INTRODUCTION 1. 2. 1 Islamic Finance In this day and age, crisis and challenges had continuously interrupted the worldwide financial environment. However, Islamic finance remains as a tough and viable financial intermediation. Moreover, it has become more important in the international financial system. As a result of developing a comprehensive Islamic financial system, Malaysia has gain experiences which brought it ahead toward development as well as advancement of the industry.

Furthermore, Islamic country was not the only player of Islamic financing but also non Islamic countries. We can observe globally that there are many countries have already encountered with Islamic finance and those which plan to develop Islamic finance in the future such as Japan, Russia, India, Bahrain, France, and so on. Expansion of Islamic finance leads to improvement in the economics of Islam. Islamic economics are discussed next. 1. 2. 2 Relationship between Islamic economic models and increase in productivity Both Western classical and Islamic economists classify economic activities as productive or unproductive.

An economic model defined as a simplified framework designed in order to illustrate complex processes. Islamic economic model is a simplified framework designed by a regime in order to reflect Islam’s overarching ethical vision of economic processes. Islamic economic model is also known as Islamic economic system. It is an economic system or framework which is based on the Shariah principles and rules. Krugman, 1994 defines productivity as a measures of how efficiently production inputs, such as labour and capital, are being used in the economic to produce a given level of output.

He noted that the productivity is considered as a key source of economic growth and competitiveness and thus it is also a basic statistical information for many international comparisons and country performance assessments. These productivity datas are used to investigate the impact of product and labour market regulations on economic performance. Productivity growth constitutes an important element for modelling the productive capacity of economies. It also allows analysts to determine capacity utilisation, which in turn allows one to auge the position of economies in the business cycle and to forecast economic growth. In addition, production capacity is used to assess demand and inflationary pressures. For this critiques paper, productivity is emphasized as the performance of a country mostly Malaysia which consist of effectiveness and effeciency but mainly its profitability. Hence, increase in productivity is also considered as increase in the national income of a country. However, we also consider that increase in company’s profit as an increase in productivity.

In addition, Malaysia’s Real Gross Domestic Product growth trend which may also refers to the country productivity is represented in figure 1. Other datas to show Malaysia performances can be obtain by referring to table 3. 4, table 3. 5 and table 3. 6 given in Monthly Statistical Bulletin datas by BNM (More in appendix). Figure 1: Malaysia: Real GDP Growth Trend The relationship between Islamic economic models or systems toward an increase in productivity is the issue we are trying to look into this critiques paper.

We will look into how the Islamic Economic System contributes to the productivity increase from the views of the Islamic economic experts. Figure 1 shows that Malaysia was most productive in 2000 with 8. 2% growths and most non-productive in 2009 with -1. 8% growths. 1. 2. 3 Critique Rationales There are three reasons for us to critique on the issue. Firstly, we would like to find out how much productivity made by Islamic finance since it began. Islamic productivity here includes the profitability made by an institution, banks or overall country which using the Islamic economic system.

Secondly, we would like to identify ways on how Islamic finance increases the said productivity through its system. These ways, however, will be based on the views of many Islamic economic experts which will also be criticized by us. Thirdly, we would to seek for improvements which Islamic finance can make whereby these improvements can be interpreted by understanding the ways and factors on how to increase productivity using the Islamic economic system. These improvements could be opportunities for

Islamic finance institutions, banks or country as a whole to improve their system in order to become better in the future. Next, Islamic economic experts’ ideas on the issue are summarized and criticized. 1. 2 ————————————————- Summary and Critiques Some researches mostly through the internet have been made and we have found several factors which help us to study more precisely about the issue. To explain the factors which are our points in a simple way, we generalize and divide those points we get into four main points or factors.

These four main points include the absence of prohibited elements, existence of governance to ensure moral values and ethics, the diversification of players and comprehensive human capital as well as the attractiveness of Islamic economic products and services. Each of the factors is discussed. Before that, let us take a look at the performance of Islamic banking in Malaysia by referring to table 1. 7. 1, 1. 9. 1, 1. 18. 1, 1. 24. 1, and 2. 2 (Bank Negara Malaysia, 2010). 1. 3. 4 Absence of Prohibited Elements

One of the points we have identified is productivity increased by Islamic economic system trough the absence of prohibited elements in the system. Prohibited elements here mainly refer to riba, gharar and maysir. These prohibited elements are mostly included in the conventional system. As Muslims are strictly prohibited to involve with any of the prohibited elements, Islamic economic system was developed to be their alternative. The absence of these prohibited elements is said to be one of the factor toward an increase in productivity.

Most of our research on many articles and journals shows that the early years of Islamic finance development, the relationship between the system and the productivity increase was quite infancy. However, currently the views have changed. According to Parker, 2007, Bank Negara Malaysia stated that the number of branches of Islamic banks increased from 766 at end 2005 to 1,167 at end 2006 in Malaysia (Erusan & Ibrahim, 2007). In our opinion, the increase in number of Islamic banking in Malaysia may due to the increasing in demand on Islamic finance locally.

Table 1 shows that the highest total average of mean return of 3. 350 is offered by the finance companies compared to Islamic, local and foreign conventional banks which are offered total average of mean return of 2. 473, 3. 301 and 3. 305 respectively (Erusan & Ibrahim, 2007). By looking at the individual month of the year period between 2002 and 2006, the highest average of mean return of 2. 835 for Islamic banks is offered in November. Meanwhile, the highest average of mean returns of 3. 392, 3. 333 and 3. 57 are offered in January for finance companies, local and foreign conventional banks respectively. This research paper compare the Islamic bank mean of return with conventional banks (local and foreign) as well as finance company and found out that the productivity of Islamic bank is lower compared to conventional in the research years. Generally, most people knew that the local conventional banks, foreign banks and finance companies provide higher return than Islamic bank to their investors. In our point of view, this is due to the way of those banks to obtain interest income based on lending and borrowing.

Moreover, people are likely to keep their deposit with the conventional banks because they are attracted to the favorable interest or return on saving. Table 1: Descriptive Statistics for Islamic Bank, Local Conventional Banks and Foreign Conventional Banks for Year 2002 to 2006 variable| Islamic Bank(N=1)| LocalConventionalBanks (N=10)| ForeignConventionalBanks (N=13)| FinanceCompany(N=11)| | Mean | Std dev| Mean | Std dev | Mean | Std dev| Mean | Std dev | January | 2. 766| 0. 531| 3. 333| 0. 349| 3. 357| 0. 377| 3. 392| 0. 348| February | 2. 698| 0. 576| 3. 274| 0. 343| 3. 302| 0. 69| 3. 369| 0. 348| Mac | 2. 706| 0. 489| 3. 273| 0. 344| 3. 302| 0. 369| 3. 367| 0. 348| April | 2. 649| 0. 506| 3. 273| 0. 344| 3. 302| 0. 369| 3. 367| 0. 348| May | 2. 679| 0. 474| 3. 332| 0. 363| 3. 333| 0. 368| 3. 377| 0. 336| June | 2. 610| 0. 555| 3. 301| 0. 348| 3. 288| 0. 366| 3. 332| 0. 333| July | 2. 664| 0. 483| 3. 305| 0. 349| 3. 296| 0. 360| 3. 333| 0. 332| August | 2. 684| 0. 429| 3. 303| 0. 349| 3. 289| 0. 370| 3. 333| 0. 332| September | 2. 708| 0. 395| 3. 305| 0. 349| 3. 298| 0. 363| 3. 330| 0. 329| October | 2. 667| 0. 393| 3. 304| 0. 349| 3. 299| 0. 365| 3. 333| 0. 30| November | 2. 835| 0. 397| 3. 304| 0. 349| 3. 299| 0. 364| 3. 332| 0. 330| December | 2. 688| 0. 411| 3. 299| 0. 343| 3. 297| 0. 365| 3. 334| 0. 333| Total | 2. 473| | 3. 301| | 3. 305| | 3. 340| | However, Muslims cannot take riba thus they need to find other alternative than conventional banks and finance companies. Currently, we view that the demand for Islamic banks are getting higher due to the increasing number of Muslims population throughout the world. They need Islamic banks to fulfill the Shariah principles and rules whereby Islamic banks are free from prohibited elements.

The most well-known difference between Islamic and conventional banking is the prohibition of interest. Islamic banking activity is based on the trading principles of buying and selling of assets. Following that, in conventional financing, customer’s outstanding loan consists of principal plus the interest charged onwards. Although in the early of its establishment, the productivity growth is seem blur, Islamic economic system which mostly used in Islamic banking and financing still contribute toward productivity increase through the absence of prohibited elements in line with Shariah principles.

Islamic banking sectors strive continuously in their operation as a commercial banks based on Shariah laws in facilitating and banking services to both the Muslim and non-Muslim societies in Malaysia by achieving strength and capacity to develop from time to time. The Islamic banks act as alternative to the conventional banking whereby it does not promoting riba in financing activities and only involve in halal operations. We do agree that in order to operate banking business and other financial dealings, the bank has to operate based on profit and loss sharing mechanism.

This is to ensure social justice in the distribution of profits and wealth by the bank to the depositors, customers benefiting from financings and the equity holders of the bank. Based on the study done by Mohd Nasir and Amirul Hafiz, 2006, the bank has to ensure it may become strong financially and expanding in all aspects of its operation as this will then become the measure on the ability of Shariah laws and rules as well as capabilities of the Muslims in offering an alternative way of life when dealing with banking business (Erusan & Ibrahim, 2007).

Other than the avoidance of usury, there are other prohibited elements in Islamic finance or banking including prohibition of gharar (uncertainty) and maysir (gambling). The main objective of Islamic banking is to provide financial services and generation of profits based on Shariah compliant that is beneficial to everybody that is important for hereafter reward. In terms of Islamic bank, Wan, 2008 emphasized that Islamic bank is important in Malaysia due to response the need of Muslim community, to provide Islamic fund as an alternative for Muslim community, to support economic growth and to fulfill the demand for the whole Malaysia.

To put it briefly, the absence of prohibited elements in Islamic economic system as in line with the Shariah principles caught the interest of people all over the world (Muslims and non-Muslims) to do financing and banking with institution and country which are using the Islamic economic system. In addition, the Muslim population growth trend is growing and expected to reach approximately 30% of world population (Based on figure 2) which will increase the demand for Islamic finance that is free from any prohibited elements as strictly prohibited by the religion.

This in turn provides an increase in Islamic institution or country assets and profitability. Thus, Islamic economic system increases productivity of an institution or a country by the absence of prohibited elements. Figure 2: World’s Muslim Population Growth Trend 1. 3. 5 Governance to Ensure Moral Values and Ethics Throughout the research on several references, we found out an idea that governance to ensure moral values and ethics in Islamic economic system contribute to the productivity increase. Thoughts and arguments toward this factor are further summarized and criticized.

In Islamic economic system, governance is an important element to make sure that their players are in line with the Shariah principles and rules. The governance in Islamic finance include legal and regulatory such as Islamic Banking Act, Takaful Act, Government Funding Act, Capital Market Services Act and New foreign legal firm, Shariah Advisory Council consist the Central Banking Act as well as dispute resolution such as Judicial system which is dedicated high court, KL Regional Centre for Arbitration and Financial Mediation Bureau.

According to Naqvi, May 1997, the factor of Islamic economy that can increase productivity is the economy philosophy itself. Formally, the Islamic economic system is presented as an optimum regime. An Islamic economic system exists in the sense of having its own ethical values, a set of economic objectives, as well as policy instruments. In other words, it can be seen as an optimum regime which optimally combines the concerns of social justice with those of economic growth.

On the methodological plane, such a regime gives due prominence to both value judgments and positive judgments in making generalizations about an idealized Islamic economy. At the theoretical level, it is a way of transforming their refutable ethical principles into refutable statements about the behavior of economic agents in typical real-life Muslim society. In practice, for such a regime to reflect Islam’s overarching ethical vision of economic processes, it would take assigning top priority to the needs of the least-privileged people in a growing economy.

This implies giving greater weight to the wage-goods in total output, minimizing the production and consumption of wasteful luxuries, and redistributing income and wealth from the rich to the poor. Islam economy is a philosophy of the ‘right’ such as first specifies what is ‘right’ and then allows human beings to work out the most profitable course of action open to them within the given institutional constraint. This philosophy of the ‘right’ is best spelt out by four ethical axioms include Tawheed (Unity), Al’ adl wal ihsan (Equilibrium), Ikhtiar (Free Will) and Fardh (Social Responsibility).

According to the Unity axiom, an individual’s economic activity must be guided by an ethical vision. In a broader sense, it acts as a unifier of all aspects of human life into a consistent and mutually supportive totality. Divine Law of al’adl wal ihsan which is the horizontal dimension of Islam requires promoting social harmony and maintaining a just balance in the balance in the basic structure of the society. Interpreted broadly as an economic principle, the Divine Law of al’adl wal ihsan defines the first-best configuration of consumption, production and distribution relation.

According to Wan, 2008, the policy introduced by the government, Islam Hadhari (IH) or Towards a Progressive Islamic Civilization is an approach that uses Islam as a positive ingredient in the development of the nation and its people. Late 1981, the government announced its policy of Assimilation of Islamic Value (AIV) in Malaysia’s administration to instill the Islamic value in the government so that it would be effective, strong, just and progressive. This was to create a dynamic ethic which would increase productivity.

In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. From our perspective, an economic system is said to be more efficient if it can provide more goods and services for society without using more resources. If everything is balanced and being at the most optimum level, productivity can greatly increase in term of efficiency because of minimizing production and consumption of wasteful luxuries. We also view that basic social welfare of individuals must need to be satisfied in order to increase productivity.

The standard of living of the poor can be increased if social welfare is balanced throughout the economy. If social welfare is ignored and self-interest is overemphasized and there are no moral restraints on individual behavior, other institutions may not work effectively. There are few institutions in the Islamic economy, which are families, societies, companies and lastly government. These institutions play important roles in the economy. If one of these institutions fails, other institution will have problems because these institutions are depending on each other to function the economy cycles.

The concept of distributing and channeling wealth to poor is used in zakat. Zakat is compulsory for all the Muslim. Also called as “alms giving”, one of the five pillars of Islam is the giving of one’s possessions (surplus wealth) to charity, generally to the poor and needy. If the social welfare of the poor and needy has been fulfilled, they will have the chances and opportunity to contribute and participate in the economic activities, such as buy goods and services or vice versa. More people will have money, facilitates many trading activities and therefore encourages increase in income which is important in economic growth.

The economic growth will increase and hence it will also increase productivity. This is how the Islamic economic increases the productivity in terms of growth and efficiency. In a nutshell, through emphasizing moral values and ethics, governance plays the roles to increase productivity in providing rules and regulations for player to follows hence better performances which is improvement in efficiency and effectiveness therefore increase in growth and profitability consequently increase in productivity as well as stability of economic ensured. 1. 3. Diversification of Players and Comprehensive Human Capital Right through our research on the issue, we found out that some of the experts were having the idea that Islamic economic model increase productivity through the diversification of its players and its comprehensive human capital. Diversification of Islamic economic players here refers to the banking, takaful, and fund management. Moreover, this diversification has become even wider due to the liberalization of Islamic financial system whereby the foreign players are allowed to enter the Islamic market and authorization of Islamic subsidiaries.

Increase in the presence of foreign players strengthens the international dimension of the Islamic economic system thus increase the linkages of its local players with others internationally. For example, issuance of three new full-fledged Islamic banks licenses to foreign banks from Middle East namely Kuwait Finance House, Al-Rajhi Banking and Investment Corporation and Al-Baraka Islamic Bank (Sufian, 2006). He further stated that the level of productivity is influenced by the technological changes and efficiency changes made by the players.

He concluded his journal by emphasized that the empirical works on Islamic banks’ productivity particularly in Malaysia is still in infancy during the year 2001 until 2005 and the main source of efficiency changes is either improvement in management practice or improvement towards optimal size. Table 2: Performance of Malaysian Islamic Banking System from 2000 until 2005 Table 2 shows that there is an increase approximately 18. 9% in total asset, 18. 5% in total deposits and 26. 4% in total financing for the year 2000 until 2005. This can be interpreted as an increase in the needs and interest of people toward Islamic economic system.

This also symbolize the diversification of players include the consumer and Islamic banks. On the other hand, table 3 shows that the highest mean scores of total productivity change were contributed by the domestic Islamic bank with 1. 101 (2004-2005) whereas the lowest was contributed by foreign Islamic bank with 0. 762 (2004-2005). Table 3: Decomposition of Total Productivity Change Table 4 provides that the highest number of Malaysian Islamic Banks with productivity progress was 12 banks (2002-2003) whereas the highest number of Malaysian Islamic Banks with productivity regress was 9 banks (2002-2003).

Table 5 shows that the highest progress due to efficiency increase was 5 (2002-2003) whereas the highest progress due to technological progress was 9 (2002-2003). Hence, it can be assumed that productivity increase during 2000 until 2005 was driven by the Islamic banks with high efficiency and technology advances. Overall, table 2 until table 5 tries to tell us that Islamic banking which represents Islamic economic system increase productivity slowly. Table 4: Developments in the Number of Malaysian Islamic Banks with Productivity Progress (Regress) and Efficiency Increase (Decrease)

Table 5: Major Source of Productivity Progress (Regress) and Efficiency Increase (Decrease) in Malaysian Islamic Banking Industry Figure 3: Islamic Banking System’s Total Assets: Market Share We agree with the idea given by Sufian, 2006 whereby during those years the empirical works on Islamic banks’ productivity particularly in Malaysia is still in infancy. However, for the present time, we disagree with the idea because Islamic finance had grew wider and strongly throughout the world. It can be evidenced by increase in Islamic banking system’s total assets or market share (Based on figure 3).

Table 6: Malaysia: International Islamic Banks (as at end-April 2010) It is also evidenced that Islamic finance in Malaysia currently is growing whereby more International Islamic Banks were given ownership (based on table 6). Bank Islam Malaysia Berhad (BIMB) and International Islamic University Malaysia (IIUM), both institution were establish in 1983, can be regarded as the two main pillars in developing Islamic economics, banking and finance. It is to achieve the Shariah principle in daily life activities of Muslim Ummah, particularly in Malaysia.

Bank Islam emerged as Malaysia’s maiden Shariah-based financial institution since its establishment in July 1983. Bank Islam has become the symbol of Islamic banking in Malaysia since then and its vision to be “The Global Leader in Islamic Banking” illustrates its status as the flag bearer of the country’s Islamic financial services industry. International Islamic University Malaysia is a private university and operates under the direction of Board of Governors with representative of the Organization of Islamic Conference (OIC) as well as other sponsoring countries.

As such, IIUM is recognized by OIC countries as an institution that produces local graduates and many international graduates at least with the competent of Islamic principles or Islamization of knowledge. Table 7: Malaysia: Islamic Banks (as at end-April 2010) In banking sector, there are 17 Islamic banks (Based on table 7), 16 Islamic windows, 3 international Islamic Banks and 14 International currency business units. We view that these diversification of players does contribute to productivity increase.

The Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Malaysia as a major hub for international Islamic finance. The MIFC initiative aims to position Malaysia as the Islamic finance hub through the following focus areas including Sukuk Origination, Islamic Fund and Wealth Management, International Islamic Financing, International Takaful and Human Capital Development. Progressive efforts are to be maintained to improve and develop the Islamic Finance industry. There are six higher learning that will aid hence develop a comprehensive human capital.

It consists:- 1. Securities Industry Development Corporation (SIDC) – Training and information resources provider for capital market industry – local and foreign regulators, company directors and market professionals. 2. Islamic Banking and Finance Institute Malaysia (IBFIM) – Industry-owned Islamic finance training and consultancy provider and it focuses on Islamic banking, takaful and Islamic capital market program. 3. International Centre for Leadership in Finance (ICLIF) – Leadership development program for financial institutions and business corporations. . International Centre for Education in Islamic Finance (INCEIF) – Global university in Islamic finance offering certification and post graduate studies in Islamic finance 5. Financial Sector Talent Enrichment Program (FSTEP) – Centre for foundation training in investment, conventional and Islamic banking, insurance and takaful. 6. International Shariah Research Academy for Islamic Finance (ISRA) – Centre in Shariah and Fiqh muamalat research and platform for discourse among scholars, academicians, regulators and practitioners.

To cut a long story short, we do agree that the diversification of players and comprehensive human capital lead to an increase in productivity. From our point of view, it is important to have many diversify players to drive the Islamic economic and to have inclusive human capital to develop, enlarge and innovate the Islamic economic. This is because they are the main reasons why Islamic economic exists as they are the people who began to introduce Islamic economic system, developing it, innovating it and further to strengthening it. 1. 3. Attractiveness of Islamic Economic Products and Services Another main point that we examine is the increase of productivity by Islamic economic system using the attractiveness of its products and services. According to Islamic Finance Expert, 2010, Islamic finance already has around 30 different types of products and instruments giving it a large degree of flexibility to meet investors’ demand and continue to expand rapidly. This leads to the increase in Islamic financial institutions assets from five-fold to around one trillion dollars between 2003 and 2009.

Islamic Finance Expert, 2010 also mentioned that based on the data taken from Moody’s Investors Service, it shows that the combined use of securitization and derivatives offers considerable scope for reducing the risk exposures of Islamic financial institutions and thus improving their overall creditworthiness. The Economist, 2009 emphasized in an economist conference some positive views toward Islamc economic system. It mentioned that a robust framework, awareness among the public, and product innovatio helped to create a positive customer experience and attract business thus increase in productivity.

Besides that, Islamic financial institutions have largely performed well both in terms of their ability to attract customers and manage risk and capital effectively also boost productivity. Islamic Finance Expert, 2010 also stated that the out-performance of Islamic products against conventional markets during the financial crash has generated more interest. We agree to most of the ideas that Islamic economic products and services lead to an increase in its productivity. This is because the uniqueness and attractiveness features of the products and services.

The upgrading and innovation made to these products and services such as islamic financing, taxation and insurance conducting the rise in productivity. According to Shahrim, 2011, Islamic economic activity is real whereas conventional is not. Real economic activity here refers to the use of contracts which provides a counter value to the parties involved such as the user of fund and the provider of fund. He further explained that this real economic contribute toward positive implication to a nation such as increase in real economic assets hence economic growth and rise in human apital whereby more job opportunities thus lower the unemployement rate, stabilize the wealth distribution and improve standard of living. Overall, in crease in productivity. We agree with his explanation toward the issue. We also view that the existence of financial market which are the money market and capital market does contribute a lot to the mount in productivity. In Islamic finance, money market is called Islamic interbank money market which provide with diverse short-term Islamic money market instruments.

On the other hand, Islamic capital market provide include Islamic sukuk market, Islamic equity market, Shariah compliant derivatives, Islamic stockbroking and Islamic structured products. In our opinion, these halal instruments does contribute to productivity increase. This is because people around the world mostly Muslim needs and demand these halal instruments as it is free from what they are strictly prohibited to involved with which is the prohibited elements. Figure 4: Malaysia’s Islamic Banking System: Key Financials

Figure 4 shows that Islamic banking system had increase its total assets, total financing and total deposits from year 2001 until the first quarter of 2010 whereby it indicates that the products and services provided by Islamic economic system are attractive thus many players want to involve in the market. Figure 5: Sukuk Issuance Growth Trend Figure 5 shows the most popular product of Islamic finance which is the sukuk. The figure indicates that the highest sukuk issuance was in 2007. Malaysia is the leader in global sukuk issuance.

Sukuk is an example of a unique Islamic economic product which attracts many players to deal with it (provider of fund and user of fund). Hence, increase in productivity. Figure 6 show that Islamic banking controls 79. 9% of Shariah-compliant assets worldwide. This interpret that Islamic banking may reflects Islamic economic system as a whole. Figure 6: Shariah-Compliant Assets Worldwide Figure 8: Islamic Banking System Figure 9: Islamic Banking System Financing by Concept,

Financing by Concept, as at end- As at end-1Q 2010 November 2009 Figure 8 and figure 9 shows the Islamic banking system financing by concept, as at end-November 2009 and as at end-1Q 2010. Musharakah (1. 7% to 2. 1%), Istisna’ (1. 0% to 1. 1%), BBA (31. 9% to 33. 0%), Ijarah (2. 7% to 2. 9%) and others (14. 9% to 15. 1%) increased from late 2009 to early 2010. Only few decreasing include Ijarah Thumma Al-Bai (30. 0% to 28. 9%) and Murabahah (17. 6% to 16. 8%).

We interpret this comparison as an increase in needs and interest of consumer toward diversify types of financing. To be brief, we have the same opinion that the attractiveness of Islamic economic products and services does contribute to productivity increase. The attractiveness of this products and services is mainly due to the upgrading and innovation of a product which make it even more interesting and unique. Thus, Muslims and non-Muslims increase their demand for these halal products and aid to productivity increase. ———————————————— 1. 3 ————————————————- Conclusion To come to the point, we see eye to eye with most of the ideas given by many Islamic economic experts and we view that four of the main points are related to each other. The absence of prohibited elements in Islamic economic system as in line with the Shariah principles caught the interest of people all over the world to do financing and banking with institution and country which are using the Islamic economic system.

This in turn provides an increase in Islamic institution or country assets and profitability. Thus, Islamic economic system increases productivity of an institution or a country by the absence of prohibited elements. Through emphasizing moral values and ethics, governance plays the roles to increase productivity in providing rules and regulations for players to comply hence better performances which is improvement in efficiency and effectiveness therefore increase in growth and profitability consequently increase in roductivity as well as stability of economic ensured. The diversification of players and comprehensive human capital does lead to an increase in productivity. From our point of view, it is important to have many diversify players to drive the Islamic economic and to have inclusive human capital to develop, enlarge and innovate the Islamic economic. This is because they are the main reasons why Islamic economic exists as they are the people who began to introduce Islamic economic system, developing it, innovating it and further to strengthening it.

The attractiveness of Islamic economic products and services does contribute to productivity increase. The attractiveness of this products and services is mainly due to the upgrading and innovation of a product which make it even more interesting and unique. We criticized positively most of the arguments and thoughts given by the Islamic economic experts. We believe that Islamic economic system is a wise system that should be used and implemented in any country for the sake of Muslims and also beneficial to the non-Muslims. We view that the future of Islamic finance will be bright and promising.

Overall, absence of prohibited elements, governance to ensures moral values and ethics, diversification of players and comprehensive human capital as well as attractiveness of Islamic economic products and services contributes to productivity increase. These factors must be taken seriously in order to maintain and improve the Islamic economic system in the future. ————————————————- References Bank Negara Malaysia. (2010). Monthly Statistical Bulletin. Malaysia: BNM. Erusan, d. d. , & Ibrahim, H. (2007).

Analysis of The Islamic Banking Profit Rate and Conventional Banking Interest Rate in Malaysia for The Period of Four Years (2002-2006). Islamic Finance Expert. (2010, September 19). Islamic Finance to Double in Size in Five Years. Retrieved February 2, 2011, from Islamic Finance Expert: http://www. islamicfinanceexpert. com Islamic Finance Expert. (2010, September 27). Safe Islamic Finance Stuck at Hurdle. Retrieved February 5, 2011, from Islamic Finance Expert: http://www. islamicfinancceexpert. com Kadir, M. R. (2009). Islamic Finance in Malaysia – Evolution & Current Development.

Malaysia: Bank Negara Malaysia. KFH Research Ltd. (2010). Islamic Home Financing. Islamic Finance Research . KFH Research Ltd. (2010). Malaysia Islamic Banking. Islamic Finance Research . Krugman, P. (1994). Defining and Measuring Productivity. The Age of Diminishing Expectations Malaysia Productivity Corporation. (2008). Measuring Up Productivity Performance of Malaysia. Malaysia. Naqvi, S. N. (May 1997). The Dimensions of an Islamic Economic Model. Islamic Economic Studies Vol. 4, No. 2 , 1-18. Productivity Report. (2009). Economic and Productivity Development. Malaysia. Routledge. (n. d. ).

An Islamic Model For Economic Development. 99-121. Shahrim, Z. (2011, February 25). How Islamic Economic Model Contribute to Productivity Increase? (N. Fridrict, Interviewer) Sufian, F. (2006). Total Productivity Change of the Malaysian Islamic Banking Sector: An Empirical Study. Journal of Islamic Economics, Banking and Finance Vol. 5 No. 1 , 73-86. The Economist. (2009). Islamic Finance: What Role In The New World Order? Economist Conference. London: The Economist Intelligence Unit Limited. Wan, S. B. (2008). Malaysian Experiences on The Development of Islamic Economics, Banking and Finance. 405-417. Appendix