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Islamic Economic System: A Critical Analysis
ABSTRACT
Islamic Economic System: A Critical Analysis
ABDUL WAHAB ARAIN
Research Scholar (Ph.D), Hamdard University, Karachi, Pakistan
The economic system operated according to the principles of The Holy Quran and
Sunnah, is called Islamic economic system. As per the guidelines provided in the Holy Quran
and Sunnah of the Holy Prophet (S.A.W.S), the Islamic principles of economics are based on
social and economic justice and equitable distribution of income and individual freedom related
to social welfare. As per majority of Muslim scholars, there is similarity between Capitalism and
Islamic economic system. According to Islamic economics, the private property is a trust
(Amanah), bestowed by Allah, the Almighty, as sovereignty belongs to Him, which they
(people) manage on behalf of Allah. On the other hand, Capitalism aims at providing the use of
resources to keep the output at minimum level of cost ensuring full utilization of the resources.
The equal distribution of wealth/ economic resources is based on the principles of Sharing of
financial resources by the rich people among the needy ones as directed by Allah, the Almighty.
The implementation of the principles of Islamic economy will lead to the economic
development in the society. Allah Subhanhu wa Taala, being the creator and protector of the
rights and needs, has been providing livelihood, food , water and other resources to all His
creatures, including Human beings since Life on the earth, no body lives without food.
However, the detailed analysis shows that neither the question of elimination of riba has been
addressed nor the payment or collection of Zakat has any impact on the economic
development due to mismanagement. Besides, the banks and financial institutions have failed
to abolish or minimize interest from the economy. It is suggested that the Islamic Scholars,
economists, legal experts and social scientists must play their role for Islamization of the
economy and establishment of a just society. Further, the principles of Islam may be
implemented in the economy in letter and spirit, all the evils in the society including riba will be
eliminated and justice, equality and welfare ensured.
Key Words: Economic System, Quran, Sunnah, Zakat, Riba
Introduction
Economics is generally defined as a social science, studying human behavior as a
relationship between ends and scare means which have alternate uses. The economic system of
Islam deals with the economic activities based on the principles of Islam which ensure social
and economic justice, human brotherhood, equitable distribution of income and welfare of the
society. Islam being a complete code of life has laid down principles of economics. According to
Islam, every thing created by Allah the Almighty, on the earth including human beings belongs
to Him. Every body is provided with food and livelihood, nobody lives without food. Islam
provides necessary framework which regulates the methods of earning money and spending
the same. The economic system of Islam allows free market economy, deciding demand and
supply accordingly. But at the same time Islam also imposes certain restrictions on the Muslims
as follows:
The Muslims who earn wealth upto certain limit, are required to pay Zakat at 2.5%, once a year
compulsorily, which is paid to the poor and needy people of the society and this way financially
weak people are supported, ensuring proper distribution of income. This also contributes to
promote social justice in the society.
It is also the responsibility of the Islamic State to manage the resources of the State in such way
that every citizen may get the benefits of the Government policy, protecting their rights and
basic needs.
Riba (Interest) is prohibited by Islamic Laws (Shariah), therefore no individual or business
concern is allowed to deal with the interest-based transactions, gambling of any kind(Qimar,
Maysir), which is based on uncertainty (Gharar) is also prohibited. Likewise, business involving
insurance is also not permissible.
LITERATURE REVIEW
Related literature was reviewed which shows that understanding of economic system of Islam
is very important and efforts have been made by the eminent religious scholars and economists
to study the economic system with reference to Quran and Sunnah, its difference from the
Conventional economics, prohibition of riba, earning and distribution of income.
Mohammad Nejatullah Siddiqi (2006) considering the role of Shariah experts played in the
progress of Islamic economics and finance, suggests that there has been some mal-functioning,
which needs to be looked into and corrected accordingly.
M. Akram Khan (1984) contended that Islamic economics aimed at the study of human falah
achieved by organizing the resources of earth on the basis of cooperation and participation.
According to Asad Zaman (2008) Islamic Law (Shariah) provides the framework for all activities
within an Islamic society. In Islamic domain, Islamic Law regulates both methods by which
money may be earned and also the ways it may be spent.
METHODOLOGY
After careful review, the qualitative research methodology has been selected for defining the
actuality of in growing research in the market from theoretical point of view. This study relating
to Islamic economic system from the pioneers of the modern era, as cited above in the
literature review, have been taken being the engrained principle for understanding, collecting,
analyzing and applying data to prove central idea of implementation and proposal for
executable usage of the Islamic economic principles, even for the guidance of economic
institutions and novice.
According to the Holy Quran and Sunnah, all aspects of economic, political and social legislation
have been fully explained. It has also been explained that Allah, the Almighty has directed to
follow all the Islamic laws without choosing some and leaving others on self-desires. Due to
non-following the Islamic principles, most of the Muslim countries are facing high
unemployment rates, hampering economic growth. Many Muslim countries, particularly African
and Asian countries are facing poverty, despite the fact that the Muslim countries own major
share of Oil and Gas reserves and very rich agricultural lands of the world. On the other hand,
the developed countries have made progress in industry and all other fields that are applying
advanced technologies. Majority of Muslim countries depend on borrowing from the World
Bank and developed countries. Under the circumstances, the Islamic economic system is a ray
of hope and an alternative for achieving economic growth, reducing poverty, unemployment
and dependence on external financing.
Main features of Islamic Economic System and its Comparison with other
Economic Systems.
The Economic Systems such as; Capitalism, Communism, Socialism and Mixed Economy are
based on materialistic concept, these systems do not consider for human social life. Whereas,
under the Islamic system, the Muslims are required to live material life but having
consideration for happiness and respect for others to succeed in this world and for hereafter.
In Islamic Economic System, Institutions, Organizations and social values are taken into
consideration for producing, exchanging distribution and consumption of wealth. Further,
goods and services are utilized, observing the basic principles of Islam so that welfare(FALAH)
may be achieved for the society. There are the following features of Islamic Economic System:
1) Private Property.
2) Consumption, Production and Distribution of wealth.
3) The Concept of Zakat
4) Interest-free Economy.
5) Economic Growth
6) Role of the Government.
1) Private Property
In Islam, the basic principles for having private property is based on the concept of “Halal” and
“Haram” for earning money and in production and consumption of wealth. The property can
not be used against the public interest and payment of Zakat is compulsory for wealthy
Muslims.
2) Consumption, Production and Distribution of Wealth.
In Islamic way of life, the fear of Allah, helps in differentiating between Halal and Haram, Bukhal
and Israf, hence; hence luxurious way of life is not adopted. Similarly, Islam prohibits
production and distribution of drugs, gambling lottery, lending and borrowing on interest, black
marketing and smuggling etc.In Islamic economic system distribution of wealth is also free of
Bukhal and Israf. Besides, Zakat is mandatory for rich Muslims, fair distribution of wealth is
ensured.
3) The Concept of Zakat
Payment of Zakat is mandatory for Wealthy Muslims on goods and money every year, which is
a source of revenue for the Islamic State. This amount is paid to the poor and needy people of
the society.
4) Interest-free Economy
The financial system run on Sharakat and Mudarabat in an Isslamic State is called interest-free
economy.
5) Role of the Government
It is the responsibility of the Islamic Government to check and stop the un-Islamic activities like
smuggling, gambling, sale of alcohol and hoarding etc. The poors be provided social and
economic security and equal job opportunities.
Comparison of Islamic Economic System with Other Economic Systems
In fact the characteristics of Capitalism and Socialism are available in Economic System of Islam
but the difference is that the Islamic system is free from the evils of other economic systems;
which is discussed below:
Capitalism
1) There is economic freedom to producers and consumers.
2) Unlimited liberty and right of ownership for private property to everybody, which results
in capitalization and exploitation of workers.
3) The Capitalists allows everything to be consumed.
4) Due to free competition and right of ownership, wealth is accumulated in few hands.
5) Under Capitalism, main purpose is profit maximizing on producing goods.
Socialism
Economic equality is achieved through State ownership
Communism
Only consumer goods and services are allowed to be produced.
2) The Central authority decides what to produce and how much to produce.
3) No liberty to workers, they are treated as machines.
4) No role of interest for saving and investment.
Islamic Economic System
Economic and Social justice for all citizens, private ownership and freedom is allowed but
for the short period. In Islam only Halal commodities are allowed,
and Haram goods like; alcohol and drugs are prohibited.
According to Islamic economic model, free competition, investment in human capital and
economic and social infrastructure, long-term planning for water supply, electricity generation,
road infrastructure, hospitals and airports etc are important elements. Every economic model
needs certain laws for implementation and reinforcement of contracts. The Islamic economic
system is regulated under the supremacy of Allah the Almighty. Islamic laws prohibit riba
(interest), alcoholic drugs, gambling and every kind of unlawful business.
However, it is a sad fact that the abovementioned important elements of Islamic economic
model have been left behind by the Muslim world and the element prohibited by Shariah, have
been adopted in its place, which has pushed them far behind the industrial countries in
economic development; although the Muslim countries are rich in natural resource, speciallyil
and Gas. If the Muslim countries adopt the Islamic principles of economy in letter and spirit,
they would succeed in achieving economic development.
According to Islamic teachings, economic policy of Islam has been explained in the following
Verses of the Holy Quran: “So that this (wealth) may not circulate among the rich from among
you” (59:7). It shows the difference between commercial gains and interest on money lending.
In another Verse, Quran says, “If you do not give up (interest), then be Warned of war against
God and His Messenger and if ye repent, then ye shall have your principal amount, without
interest, neither ye wrong nor be wronged” (2:279).
A renown Scholar Shah Nawaz Khan says, “The problem is that despite efforts for developing
a separate discipline of Islamic economics, there is not much that can be genuinely called
`economics`. Most of Islamic economics consists of theology on economic matters."
He further says that Criticizing the importance of the approval by Islamic scholars for Islamic
banking transactions (or "fatwa shopping"), journalist John Foster, quotes an "investment
banker based in Dubai" as saying,
“We create the same type of products that we do for the conventional markets. We then
phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah
compliant]. If he doesn't give it to us, we phone up another scholar, offer him a sum of
money for his services and ask him for a Fatwa. We do this until we get Sharia compliance.
Then we are free to distribute the product as Islamic.” (Source wikipedia)
Foster explains that the fee for services provided by "top" schors is "often" in six-figures, i.e.
over US $ 100,000/-
Islamic Banks in the Western World
In order to attract rich people from Muslim world, these days many financial institutions in the
Western world, offer financial services and products in accordance with Islamic finance. For
example, Chancellor Gordon Brown in 2003 introduced legal changes that enabled British banks
and building societies to offer so-called Muslim mortgages for house purchase.
CONCLUSION
According to Islam, not only the market forces function but a mechanism is also devised, which
keeps them operative with their natural force without their being affected by monopolies.
There are two types of controlling the economic activities as follows:
Firstly, as per divine injunctions, the limits of halal and haram are clearly defined. These Islamic
laws prevent monopolies and curb the unjust and immoral earnings and commercial activities
detrimental to the collective interest of the society. As a result, the savings of the common
people are activated to achieve economic development and the Islamic instruments like
musharakah and mudarabah, will be used, instead of interest and the common people directly
share the fruits of development which will bring prosperity in the society which will reduce the
gap
between
the
rich
and
the
poor.
Secondly, the payment and distribution of zakat and sadaqat and certain other financial
obligations, provide income to the poor and needy people who could not earn enough, due to
insufficient market opportunities. This ensures proper control over the wealth, by keeping it
under constant circulation and at the same time, eliminating the chances of accumulation in
few
hands.
But the sad fact is that the principles of Islamic economy are not being followed in letter and
spirit, the Muslim countries are not making streneous efforts to structure their economy
according to the Islamic principles. It is hoped that the Muslim countries will reconsider the
importance of the matter and restructure their economy according to the devine guidance
provided by the Qur'an and Sunnah, we will Succeed in achieving economic growth and
prosperity.
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