Economic System

Islamic economics is a broad field, related to the more specific subset of Islamic commercial
jurisprudence (Arabic: ‫فقه المعامالت‬, fiqh al-mu'āmalāt). It is also an ideology of economics similar to
the labour theory of value, which is "labour-based exchange and exchange-based labour".[3][4] While
there are differences between the two, Islamic economics still tends to be closer to labor theory
( exchange value of a good or service is determined by the total amount of "socially necessary labor"
required to produce it) rather than subjective theory ( value of goods and services are not only set but
also how they can fluctuate over time).

"Islamic economics" "emerged" in the 1940s according to the Encyclopedia of Islam and the Muslim
World.[88] Maulana ala Maududi's 1941 address "The economic problem of man and its Islamic
solution" (Insaan ka Maashi Maslah aur aus ka Islami Hul) is "generally considered to be one of the
founding documents of modern Islamic economics"

Basic Economic Concepts:

Fiqh (religious law) has developed several traditional concepts having to do with economics. These
included:
 Zakat – the "charitable taxing of certain assets, such as currency, gold, or harvest, with an eye to
allocating these taxes to eight expenditures that are also explicitly defined in the Quran, such as
aid to those in need."
 Gharar—"uncertainty". The presence of any element of excessive uncertainty, in a contract is
[Link] Arabic word Gharar is a fairly broad concept that literally means deceit, risk,
fraud, uncertainty or hazard that might lead to destruction or loss. Hanafi scholars have defined
Gharar as “something which its consequence is undetermined.” While Shafi’I scholars have
described it as “something which in its manner and its consequence is hidden. According to Al-
Sarakshi, “anything that the end result is hidden or the risk is equally uncommon, whether it
exists or not.” Therefore, Gharar in Islam refers to any transaction of probable objects whose
existence or description are not certain, due to lack of information and knowledge of the
ultimate outcome of the contract or the nature and quality of the subject matter of it.
Gharar is divided into two types: Gharar fahish (excess Gharar) and Gharar yasir (light Gharar).
Examples of Gharar fahish in contracts are plenty as shown by the AlHadith and normally is associated
with the reasons why Gharar sales are prohibited. On the other hand, Gharar yasir, which means
small in amount or trivial is the uncertainty that is always present in all contracts and conducts, thus
its existence is tolerated.
Prophet (s.a.w.) on many occasions forbade many transactions which included Gharar. For example,
the Prophet (s.a.w.) has forbidden the purchase of the unborn animal in the mother’s womb, the sale
of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the
purchase of charities prior to their receipt, and the purchase of the catch of a diver.
 Riba—"referred to as usury (modern Islamic economists reached consensus that Riba is any kind
of interest, rather than just usury)" is prohibited. Riba is derived from the derivative word “raba-
wa” it has certain meanings as “to increase; to grow; to grow up, to exceed, be more than. In the
specific sense, Riba is generally translated into English as usury or interest but in fact it has a
much broader sense under Shari’ah (Haqqi, 2009; p.123-124).
Usurious transactions were classified into two categories: a) Riba al-fadl, the excess over and above
the loan paid in kind. It lies in the payment of an addition by the debtor to the creditor in exchange of
commodities of the same kind and b) Riba alnasi’ah, refers to the interest on loans; its prohibition
essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is
not permitted in Islam. Haqqi(2009) states that some scholars added a third category of Riba named
Riba aljahiliyah or pre-islamic Riba, often manifested by the lender asking the borrower at maturity
date if he will settle the debt or increase it.
On Riba, the direct Quranic references are to be found in four surahs or chapters. These verse are an
ascending scale which starts with a mere judgment of value, followed by an implicit prohibition, then
a limited one and finally, a total and conclusive prohibition (Al-Rum, 30:39; Al-Nisa, 4:161; Ali-Imran,
3:130 and Al-Bakarah, 2:275-9). The Quran (3: 130) condemns riba (which is usually translated as
"interest"): "O, you who believe! Devour not riba, doubled and redoubled, and be careful of Allah; but
fear Allah that you may be successful."
Moreover, the detailed varieties of usurious transactions as well as such prohibition have explained
and elaborated by the Sunnah. For example, the Messenger of Allah (s.a.w.) has cursed the one who
accepted Riba, the one who paid it, the one who recorded it, and the two witness of it, saying they
were all alike.2 It is also reported that the Prophet (s.a.w.) has said to the effect:
“(Exchange) gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for
salt, measure for measure and hand to hand. If the (exchanged) articles belong to different genera,
the exchange is without restraint provided it takes place in a hand to hand transaction.”3
Riba arises with loan: car loan, home loan, term loan or overdraft, hire purchase loan and personal
loan; Riba in savings and fixed deposit account; Riba in credit card. More often than not Riba is
intertwined with modern banking and finance.

Alternatives to interest: Profit-and-loss sharing models (Mudarabah, Musharakah).

 Maysir, literally means gambling. Islam has also categorically prohibited all forms of gambling.
Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s
right. Hameed (2009, p.44) defines Maysir as gambling, also, any form of business activity where
monetary gains are derived from mere chance, speculation or conjecture. As noted earlier in the
Quran, Allah (s.w.t) clearly prohibit gambling (AlBakarah, 2:219 and Al-Maidah, 5:93). For
example, uncertainty of the timing of benefits of a pure life insurance contract creates an
element of Maysir. Casinos are also common example of Maysir, where simply transfer of wealth
take place from losers to winner without creating a new stock of wealth. In brief, contracts
involving pure speculation, conventional insurance and derivatives are examples of Maysir.

Another source lists "general rules" include prohibition of Riba, Gharar, and also Qimar (gambling)
and the encouragement of Taa’won (mutual cooperation),"the overriding doctrine of fairness in
commercial dealings is established.

Central Features:
The central features of an Islamic economy are often summarized as (1) the "behavioral norms and
moral foundations" derived from the Quran and Sunnah; (2) collection of zakat and other Islamic
taxes; and (3) prohibition of interest (riba) charged on loans.

Property:
Qur'an states that God is the sole owner of all matter in the heavens and the earth, but man is God's
viceregent on earth and holds God's possessions in trust (amanat). Islamic jurists divide properties
into public, state, private categories.
Some Muslims believe that the Shariah provides "specific laws and standards regarding the use and
allocation of resources including land, water, animals, minerals, and manpower."

 Public Property: Scholars F. Nomani and A. Rahnema state that public property in Islam refers to
natural resources (forests, pastures, uncultivated land, water, mines, oceanic resources etc.) to
which all humans have equal right. Such resources are considered the common property of the
community. Such property is placed under the guardianship and control of the Islamic state, and
can be used by any citizen, as long as that use does not undermine the rights of other
[Link] owner of previously public property that is privatized pays zakat and, according to
Shi'ite scholars, khums as well. In general, the privatization and nationalization of public property
is subject to debate amongst Islamic scholars. According to an analysis by Walid El-Malik in 1993,
only the Maliki school took the position that all kinds of natural resources are state-owned; the
Hanafi school took the opposite view and held that mineral ownership followed surface
ownership, while the other two schools, Shafi'i and Hanbali, drew a distinction between
"hidden" and "unhidden" minerals.
 State property: It includes certain natural resources, as well as other property that cannot
immediately be privatized. Islamic state property can be movable, or immovable, and can be
acquired through conquest or peaceful means. Unclaimed, unoccupied and heir-less properties,
including uncultivated land (mawat), can be considered state property. During the life of
Muhammad, one fifth of military equipment captured from the enemy in the battlefield was
considered state property. During his reign, Umar (on the recommendation of Ali) considered
 conquered land to be state rather than private property (as was usual practice). The purported
reason for this was that privatizing this property would concentrate resources in the hands of a
few, and prevent it from being used for the general good. The property remained under the
occupation of the cultivators, but taxes were collected on it for the state treasury. Muhammad
said "Old and fallow lands are for God and His Messenger (i.e. state property), then they are for
you". Jurists draw from this the conclusion that, ultimately, private ownership takes over state
property.
 Private Property: There is consensus amongst Islamic jurists and social scientists that Islam
recognizes and upholds the individual's right to private ownership. The Qur'an extensively
discusses taxation, inheritance, prohibition against stealing, legality of ownership,
recommendation to give charity and other topics related to private property. Islam also
guarantees the protection of private property by imposing stringent punishments on thieves.
Muhammad said that he who dies defending his property was like a [Link] economists
classify the acquisition of private property into involuntary, contractual and non-contractual
categories. Involuntary means are inheritances, bequests, and gifts. Non-contractual acquisition
involves the collection and exploitation of natural resources that have not previously been
claimed as private property. Contractual acquisition includes activities such as trading, buying,
renting, hiring labor etc.
Market:
According to M. S. Naz, regulation of markets is among the main functions of hisbah,[142][143] the
"semi-judicial institution" operational from the "earliest days of Islam". It was "charged with
responsibility of carrying out the spirit of the system, setting conditions that preserve and enhance
the public health and interests, protect the consumers, solve business and labor disputes, promote
good market behavior, and ensure their observance."[144]
M. A. Khan states, institution of Hisbah as established to "supervise markets, to provide municipal
services, and to settle petty disputes".[145][146] In the contemporary era, Pakistan has attempted to
re-create this institution, although it has jurisdiction only over the administrative excesses of the
federal government departments and agencies, not provincial ones or private companies.
N. According to Nomani and Rahnema, Islam accepts markets as the basic coordinating mechanism of
the economic system. Islamic teaching holds that the market, given perfect competition, allows
consumers to obtain desired goods and producers to sell their goods at a mutually acceptable price.

Three necessary conditions for an operational market are said (by Nomani and Rahnema) to be
upheld in Islamic primary sources:
1. Freedom of exchange: the Qur'an calls on believers to engage in trade, and rejects the contention
that trade is forbidden.[148]
2. 2. Private ownership (see above).
3. 3. Security of contract: the Qur'an calls for the fulfillment and observation of contracts.
The longest verse of the Qur'an deals with commercial contracts involving immediate and future
payments.[150]Another author (Nima Mersadi Tabari) claims that the general doctrine of fairness in
sharia law creates "an ethical economic model" and forbids market manipulation such as "inflating
the price of commodities by creating artificial shortages (Ihtekar), overbidding for the sole purpose of
driving the prices up (Najash) and concealment of vital information in a transaction from the other
party (Ghish)".[56] Further, "uninformed speculation" not based on a proper analysis of available
information is forbidden because it is a form of Qimar, or gambling, and results in accumulating
Maysir (unearned income).[56] Commercial contracting under conditions of "excessive uncertainty"
(however that is defined) is a form of Gharar and so also forbidden.

Interference:

Proponents such as M. A. Khan,[151] Nomani and Rahnema also contend that the "Islamic economy"
forbids or at least discourages market manipulation such as price fixing, hoarding and bribery.
Government intervention in the economy is tolerated under specific circumstances.
During the days of Muhammad, a small group of merchants met agricultural producers outside the
city and bought the entire crop, thereby gaining a monopoly over the market. The produce was later
sold at a higher price within the city. Muhammad condemned this practice since it caused injury both
to the producers (who in the absence of numerous customers were forced to sell goods at a lower
price) and the inhabitants.
The above-mentioned reports are also used to justify the argument that the Islamic market is
characterized by free information. Producers and consumers should not be denied information on
demand and supply conditions. Producers are expected to inform consumers of the quality and
quantity of goods they claim to sell. Some scholars hold that if an inexperienced buyer is swayed by
the seller, the consumer may nullify the transaction upon realizing the seller's unfair treatment. The
Qur'an also forbids discriminatory transactions. Bribery is also forbidden in Islam and can therefore
not be used to secure a deal or gain favor in a transaction, it was narrated that Muhammad cursed
the one who offers the bribe, the one who receives it, and the one who arranges it. Government
interference in the market is justified in exceptional circumstances, such as the protection of public
interest. Under normal circumstances, governmental non-interference should be upheld.
When Muhammad was asked to set the price of goods in a market he responded, "I will not set such a
precedent, let the people carry on with their activities and benefit mutually."

Islamic public finance (Bayt-al-Mal):

The only financial institution under Islamic Governance (Prophethood and Caliph Period) was
Baitulmaal (public treasury) wherein the wealths were distributed instantly on the basis of need.
During Prophethood the last receipt was tribute from Bahrain amounting eight hundred thousands
dirham which was distributed in just one sitting. Though the first Caliph earmarked a house for
Baitulmaal where all money was kept on receipt. As all money was distributed immediately the
treasury generally remained locked up. At the time of his death there was only one dirham in the
Baitulmaal. The second caliph besides developing the Central Baitulmaal also opened Baitulmaal at
state and headquarters levels. He also carried census during his caliphate; and provisioned salaries to
Government employees, stipend to poor and needy people along with social security to unemployed
and retirement pensions.

The concept of a public financial institution played a historic role in the Islamic economy. The idea of
state collected wealth being made available to the needy general public was relatively new. The
resources in the Bayt-al-Mal were considered God's resources and a trust, money paid into the shared
bank was common property of all the Muslims and the ruler was just the trustee.[citation needed]

The shared bank was treated as a financial institution and therefore subjected to the same
prohibitions regarding interest.[159] Caliph Umar spoke on the shared bank saying: "I did not find the
betterment of this wealth except in three ways: (i) it is received by right, (ii) it is given by right, and (iii)
it is stopped from wrong. As regards my own position vis-a-vis this wealth of yours; it is like that of a
guardian of an orphan. If I am well-off, I shall leave it, but if I am hard-pressed I shall take from it as is
genuinely permissible."

Reasons of being Ideal:

Advocates of Islamic economics generally describe it as neither socialist nor capitalist but as a "third
way", an ideal mean with none of the drawbacks of the other two systems.[26][27][28] Among the
assertions made for an Islamic economic system by Islamic activists and revivalists are that the gap
between the rich and the poor will be reduced and prosperity enhanced,[29][30] by such means as
the discouraging of the hoarding of wealth,[31][32] taxing wealth (through zakat) but not trade,
exposing lenders to risk through profit sharing and venture capital,[33][34][35] discouraging of
hoarding of food for speculation,[36][37][38] and other activities that Islam regards as sinful such as
unlawful confiscation of land.

Comparison:
basic principles of economics of liberalism:
- Private Property Rights,
- Individual Sovereignty,
- Self-interest,
- Rationality,
- Self- Regulating Market.
 Basic Principles of Islamic economic:
The Islamic economy is composed of three basic components, according to which its theoretical
content is defined:
- The principle of multi-faceted ownership(private ownership, public ownership and state ownership)
- The principle of economic freedom within a defined limit (People are left free to transact and
exchange goods and services and the state can only intervene if a Dhulm is unlawfully committed
against one party)
- The principle of social justice (Zakat, prohibition of riba)

The Islamic solution:

 Among the rules is to retain those principles that are natural and, in case of deviation, turn a
person back to the natural course. The second rule is to place a heavy emphasis on the
reformation of conduct and mentality in order to strike at the root of what is wrong in the
human psyche, instead of remaining content with the external precautions of introducing a few
rules and regulations into society’s social set up. The third basic rule is that the state’s coercive
power and the force of the law should only be used as and when it is deemed essential.
 Earning: Islam acknowledges a man’s right to earn a living in this world, according to his
aptitude, qualifications, and capabilities. It does not, however, permit him to use anti-social or
corrupt means to earn a living. It makes a distinction between the Harām (forbidden) and Halāl
(lawful) means of earning money and declares every anti-social means to be Harām.
 Islam also acknowledges an individual’s right to own whatever he may have obtained through
lawful means. It does not leave him free to use it as he will, however, but imposes certain
restrictions on this.
 It is unlawful in Islam to spend one’s income in a manner that may be ethically damaging or
socially injurious.
 Islam imposes legal restrictions on the use of the wealth that is saved after spending on one’s
lawful needs. It prohibits interest-based transactions; consequently, breaking the backbone of
the oppressive capitalist system.
 Circulation of wealth and social security: Islam does not approve of people amassing their
surplus wealth. By demanding its followers to spend whatever they earn in satisfying their
needs, investing in business or lending to others to help them satisfy their needs, it keeps the
capital in circulation. However, if one manages to save and pool a surplus out of his earnings,
then two and a half percent of the total amount saved will be compulsorily deducted annually as
mandatory charity or Zakāh to be used according to a well- devised plan of social welfare. The
funds so generated will be deposited in the public treasury (Bayt al-Māl). The Bayt al-Māl will
thus be a guaranteed source of help for all those in need of support. The Islamic system of Zakāh
is actually the best-known institution of social insurance in human society to date. Another
measure is law of inheritance. Islam does not permit wealth to be hoarded. Once the owner dies,
his assets are divided and distributed according to predetermined shares.

Application of system:
German newspaper "Suddeutsche" prepared a report on the ranking of countries that "respect Islamic
values". Ireland, Luxembourg and Denmark are at the top of the said ranking table in relation to
"Islamic economy in non-Islamic countries". No Muslim-majority country is among the top 25
countries in this ranking. Israel is in 27th place and thus much higher than Saudi Arabia which is in
91st place. Germany is in 26th place in this table.