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PART III: ISLAMIC INSTITUTION
LESSON 15
ECONOMIC AND FINANCE INSTITUTION
1.0 Introduction
In the name of Allah, Most Gracious, Most Merciful.
Most of our daily activities are related to economy. People say ‘everything is money’. Working is
about money because we strive to earn money for a living. When we go out from our house,
money will come to the picture at least to buy food, to pay taxi fare or bus and many others. In
fact, in our house, the issue of money exists. When we switch on the electricity, it involves money
right because we have to pay the bill. Money is the source of economy. Islam never stops
Muslims from earning money. In fact, Islam encourages Muslims to work hard to strengthen the
economy of family and the nation. However, how should the money be earned? Off course, in
Islam, it must be from the lawful (halal) source. To earn money from lawful source, the economic
system must be lawful in the first place. Therefore, Islam provides its own economic system to its
followers. Thus, in this topic, we will discuss Islamic economy and finance from various angles. It
includes the principles and philosophy, basic concept of economy and finance, economic
institution and financial product.
2.0 Learning Outcomes
By the end of lesson, the students should able to:
2.1 Define Islamic economy
2.2 Explain the philosophy of Islamic economy
2.3 Elaborate the basic concept of Islamic economy
2.4 Identify Islamic economic institutions and explain their functions
2.5 Explain some Islamic banking products
3.0 List of Topics
3.1 The Meaning and Concept of Economy and Finance
3.2 The Basic Concept of Economy and Finance
3.3 Economic Institution
3.4 Financial Products
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4.0 Terminologies
4.1 Exigencies
A pressing or urgent situation
4.2 Collectivism
The principles or system of ownership and control of the means of production
and distribution by the people collectively, usually under the supervision of a
government.
4.3 Individualism
A doctrine holding that the interests of the individual should take precedence
over the interests of the state or social group.
4.4 Vested interests
A special interest in protecting or promoting one's own personal advantage.
4.5 Social apathy
Absence or suppression of passion, emotion, or excitement among in society.
4.6 Head-Toll
Tax on each individual
5.0 Topics
5.1 The Meaning and Concept of Economy and Finance
5.1.1
Presentation
In Arabic language, the word iqtisad is used for economy. The word comes from
the root word qasad which means direction or sharp target. Iqtisad means managing and
organizing affairs by putting effort to achieve the target without wasting. In the West, the
word economy is used to describe about management of limited resources to fulfill
unlimited wants. It seems to be individualistic in nature. In Islamic economy, there is no
such notion of unlimited wants but what it has is the maximization of social benefit and
individual wisely. Islamic economy is not based on individual interest or a small group of
people like corporate, technocrats and aristocrat but instead, it is based on public interest
in which all members of society must be allowed to benefit from the abundant resources
bestowed by Allah SWT according to ability and capability of each member without being
oppressed or treated unjustly.
Philosophically, Islamic economy is the management of economic resources and
activities to meet the social needs based on tawheed or the obedience to Allah SWT.
Man as the vicegerent of Allah SWT on the earth is responsible to manage the economic
resources according to Allah’s SWT commandments and to ensure the social needs is
fulfilled. Fairness (al-‘adl) and charity (ihsan) to others become the two main aspects of
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Islamic economy. Therefore, the Islamic economy aims at performing Allah’s SWT
commandments, developing a society based on Shari’ah and attaining the blessings of
Allah SWT.
Islam has its own principles that guide the economic activity of man in economy
with the aim of ensuring the entire pattern of production, exchange and distribution of
wealth in economy are in conformity with the Islamic standard of justice and equity.
Those principles should always be the same regardless of time and place. Islamic
economy does not bind itself with time-bound methods and specific techniques of
economic production or with the issues of what kind of organizational patterns and
mechanisms should be established to manage the economy as such issues are
subjected to the age and evolved in accordance with the needs and requirements of the
community and the economic situation.
From the Islamic point of view, the earth and all that it contains were created by
Allah SWT for the use of mankind for the purpose of carrying out his duty as the
vicegerent of Allah SWT on the earth. Thus, the earth and all it contains are belonged to
Allah SWT. Based on that, Islam therefore, does not allow a particular person, class, race
or group of people to create a monopoly in certain economic activities: equal
opportunities for all are its watchword.
Apart from that, all activities in Islamic economy must be lawful (halal). Lawful
economics (based on shari’ah) aims at protecting and preserving the natural resources
from wrongful acquisition and consumption. Our material needs and our right of property
has to be satisfied in a lawful and just manner because everything we own is actually
only a trust (amanah) from Allah SWT. Acquiring and selling property is a legal way of
making profit but it shall not be done by neglecting our duty towards Allah and society.
In Islam, there are certain principles and concepts that must be applied to all
economic activities in general. The entire pattern of production, acquisition, distribution of
wealth should conform to sound standards of justice and equality. Among the basic
conditions for lawful economics in Islam are:
a) Lawfulness of products (halal)
b) No element of doubt (shubhah) and uncertainty (gharar)
c) Absence of unlawful interest (riba)
d) Responsibility and liability of each member of society
e) Cooperation for the common good (healthy competition)
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f)
5.1.2
No unlawful practices in marketing (misinformation of customers, etc)
Activities
From the discussion above, can you list down five features of Islamic economy?
5.2. The Basic Concept of Economy and Finance
5.2.1
Presentation
Let us look in detail about the basic concept of economy in Islam. In this subtopic, we will look at the issue of right of ownership on property, the problem of equality,
social justice as well as obligations and restrictions as being discussed by Abu Alaa alMawdudi. Thus, the contents of the discussion are mainly taken from his ideas.
Right of Ownership on Property
As the vicegerent of Allah SWT, man can freely utilize the resources bestowed
by Allah SWT on the earth and everyone is entitled to benefit from them according to
his needs. Therefore, the resources such as water in the rivers and springs, timber in
the forests, fruits of wild plants, wild grass and fodder, air, animals of the jungle,
minerals under the surface of the earth and others cannot be monopolized by
anyone, also no restrictions shall be imposed on anyone to use them. However, in
the context of a state, the government is allowed to put certain restrictions on the use
of the resources. For example, people who want to use any of those resources for
commercial purposes can be required to pay taxes to the state. Likewise, in the case
misuse of the resources, the government may intervene but in principle, no one can
be prevented from availing themselves of Allah’s earth as long as they do not
transgress or interfere with the rights of others or of the state.
In Islamic economy, it is not permissible for individuals to take possession of
resources, and then kept them idle and useless. They should either benefit from the
resources or make them available to others. Based on this principle, Islam rules that
no one can keep his land unused for more than three years. According to AlMawdudi, if during this period, he does not use the land for cultivation or for
construction of buildings or for some other purpose, such lands shall be treated as
‘vacated’. Then, anyone else can make use or take possession of that land and he is
not guilty in the eyes of law, nor the government has no authority to hand it over to
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someone else (including the previous owner). This is because Islam recognizes the
rightful title of those who take over the possession of the earth’s natural resources
and puts them to good use. For instance, if somebody takes possession of an
uncultivated piece of land, on which nobody has a prior right of ownership, and
makes productive use of it, he cannot be arbitrarily dispossessed of that piece of
land.
This is how every right of ownership originated in the world according to alMawdudi. When man first appeared, everything was available to everyone, and
whoever took possession of anything and made it useful in any manner became its
owner. It means, he acquired the right to use it specifically for his own purpose and to
obtain compensation from others if they wanted to use it. This is the natural basis of
all the economic activity of mankind.
Islam orders mankind to honour the rights of ownership even though it is always
open to ascertain whether a particular ownership is legally valid or not. Islam does
not acknowledge any economic policies which destroy the rights conferred by the
Shari‘ah. Social justice and collective good are very dear to Islam, but the rights
given by the Shari‘ah cannot be taken away by anyone, even the government. It is
unjust to reduce or remove the restrictions placed by the Shari‘ah on the rights of
individual ownership for the sake of the good of the community as a whole because
this type of action as does not in line with the Shari‘ah. An Islamic state is responsible
to protect the legal rights of individuals and, at the same time to compel them to fulfill
their obligations to the community as enjoined by law. That is how Islam strikes a
balance between individualism and collectivism.
The Problem of Equality
It is a fact that Allah SWT does not distribute His gifts and favour equally
among mankind but, in His infinite wisdom, has given some individuals more than
others. It seems to be natural in human existence of having that divergence, variety
and inequality among them in their life. In that divergence and variety itself, we can
find wisdom behind it that it will be the driving spirit behind human endeavour and
excellence.
It is impossible in human life to have absolute equality as promoted by some
ideologies in this world such as socialism and communism. All those ideologies which
want to force an absolute equality in economy are actually wrong, unrealistic and
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impossible to achieve and those ideologies are artificial in nature. Islam on the other
hand, at all times and places is realistic and practical. In economy, Islam believes in
equality of opportunity to secure a livelihood and to climb the ladder of success and
prosperity. Therefore, Islam stresses that there should be no obstacles in society that
prevent person from striving for a living according to his capacity and talents; nor
should any social distinctions exist with the object of safeguarding the privileges of a
certain class, race, dynasty or group of people.
All those artificial ideologies are actually serve the vested interests, or which
seek to perpetuate the power of a certain group. Islam therefore rejects those things.
Such ideologies in the real sense seek to establish, through force if necessary, an
unnatural inequality as to replace the natural limited inequality that provides incentive
and reward to the endeavour accomplished by individuals in society. According to alMawdudi again, Islam does not agree with those who want to enforce complete
equality in respect of the means of production and the fruits of economic endeavour,
as they aim at replacing limited natural inequality by an artificial equality.
Everyone must be given equal opportunity to join the economic struggle at his
own level and in their ability and capacity. Al-Mawdudi then made this very interesting
illustration to explain the issue of limited natural inequality and artificial equality in
Islamic economy:
“He who has inherited an aeroplane should make use of it; while he who has only
a pair of legs should stand on his feet and try to improve his lot. The laws of
society should neither be such as would establish a permanent monopoly for the
aeroplane-owner (over his aeroplane) and make it impossible for the bare-footed
to acquire an aeroplane nor such that the race for everyone should compulsorily
begin from the same point and under the same conditions so that they would all
be tied to each other right till the end of the race. On the contrary, economic laws
should be such as to make it possible for the bare-footed, who started his race
under adverse conditions, to possess an aeroplane, if he can do so by dint of his
effort and ability, and for he who inherited the aeroplane to be left behind in the
race and to lose it, if he does not have the ability or efficiency to keep it. Effort
should be rewarded and laziness penalized”
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Social Justice
Another importance basic principle in Islam is social justice in all aspects
of life including economy. In economy, Islam does not want the economic
activities to take place in an atmosphere of moral neutrality and social apathy.
Everyone who involve in economic activities must be fair, just and kind to one
another. Meaning to say, the element of akhlaq must be there. Through akhlaq in
economy, a feeling of mutual love and affection among people can be developed.
Consequently, the weak, the needy and unable are helped. Thus, a permanent
institution such as Baitul Mal and Zakat Board that guarantee assistance to
those who are in need or lack of the necessary means and abilities are relevant
to exist in a society. Therefore, the amount of Zakat collected is to be spent on
the poor and the needy. Thus, stressed al-Mawdudi, people who are unable to
take part in the economic activities and anyone who need assistance to get
started in the economic race, should receive their share of the blessings of life
from this social institution..
The institution of Zakah in Islamic economy actually provides a mean of
social insurance whereby all members of the society are provided with at least
the necessities of life. That is why Islam emphasizes on a balance between the
individual and the community because it promotes individual freedom and at the
same time ensure that such freedom is positively conducive to the growth and
tranquillity of the community as a whole. Therefore, political or economic
organisation which aims at hiding the identity of the individual who is in need and
and unable is not allowed to exist in Islamic economy because such organization
will deprive the freedom of the individual to develop his personality and talent.
Obligations and Restrictions
Islam is the only system of life in the world that gives a great care
between right and wrong in respect of the means of earning wealth. It never
acknowledged and in fact condemns any illegal earning of wealth and livelihood
that morally or materially injure the interests of another individual or of society as
a whole. Therefore, the manufacture and sale of liquor and other intoxicants,
adultery, professional dancing, gambling, transactions of a speculative or
fraudulent nature, transactions in which the gain of one party is absolutely
guaranteed while that of the other part is left uncertain and doubtful, and price
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manipulation by withholding the sale of the necessities of life are rejected and
illegal (haram) in Islam.
Islam acknowledges the right of ownership of an individual over the
wealth or property earned by him by legitimate means but some restrictions are
imposed on the right. For example, a Muslim can only spend his legitimate wealth
in certain specified ways. It means, the wealth cannot be spent something which
is prohibited by Islam such as investing in non-halal investment, going to night
club and so forth. He also cannot waste his riches on idle luxury, nor may he use
his wealth to behave arrogantly towards his fellows. Certain forms of wasteful
expenditure have been unequivocally prohibited at the discretion of an Islamic
Government.
In Islam, a Muslim is allowed to accumulate wealth that is left over after
meeting his legitimate and reasonable commitments and the wealth can also be
used to produce more wealth. However, Islam imposes restrictions on both
activities. For example, he is a rich man, he must pay zakah, at the rate of two
and a half percent a year on the accumulation exceeding the specified minimum.
He can only invest it in a business which halal and legitimate. In this connection,
he may own the legitimate business himself or he may make his capital available
to others on a profit-loss sharing basis, stressed al-Mawdudi.
Working within those limits, he may become a millionaire and at the
same time he will receive reward and the divine favour of Allah SWT. These are
the benefits that he gains in the world and in the Hereafter. At the same time,
from those activities, the interests of the community as a whole also are taken
after through the imposition of Zakah on his commercial goods and ‘Ushr (one
tenth) on the value of agricultural produce as well as he should deal fairly and
honestly with those he does business with in trade, industry or agriculture, also
with his subordinates, the Government and the community at large. If he does not
voluntarily act justly to others, particularly his employees, the Islamic state will
compel him to do so.
Al-Mawdudi also stated that, even though the wealth has been
accumulated within these legal limits, still it is not allowed to be concentrated at
one point or in one place for a long time. It must be distributed among a large
number of people from generation to generation such as through the law of
inheritance. Through this law, the wealth accumulated by a person in his lifetime
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is distributed among all of his near relatives soon after his death. If there are no
near relatives, distant relatives benefit from it in the proportions laid down by the
law for each one of them and if no distant relative is forthcoming, then the entire
Muslim society is entitled to share in the inheritance. Under this law the creation
or continuance of any big family of capitalists or landlords becomes impossible.
In this respect the Islamic law is different from that of other inheritance laws in
which most of them attempt to keep the wealth once accumulated by a person
concentrated in the hands of one main beneficiary from generation to generation.
5.2.2
Activities
Choose an economic system such as capitalist or socialist, then compare them with the
Islamic economy. Discuss with your colleagues.
5.3 Economic Institution
5.3.1
Presentation
Economic institution refers to institutions that are responsible to generate economy for
Muslims as well as non-Muslims who live in an Islamic society or country. In general, the
functions of the economic institutions should encompass the following scopes:
a) Research and development
b) Social welfare revenue
c) As a fund for Muslims to perform the five pillars of Islam such as pilgrimage
(hajj) like the Pilgrimage Fund Board of Malaysia
d) Protection of Muslims’ properties from being wrongly used
e) Generate waqf money to be more productive to Muslims
f)
Trainings on skills to young Muslims
g) Investment inside or outside the country to create Islamic economy
atmosphere
Among the economic institutions that had been established in the history and some are
remained until today are Bayt al-Mal and Waqf
Bayt al-mal
Bayt al-mal means “house of money, property” or “public treasury”. In Islamic
history, a room in a mosque or house of a Governor-General was used to keep the
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money and other valuables (silver, gold) of a Muslim town. The money collected in
the bayt al-mal was regarded as ‘common property’ of the community and was used
for road construction, public buildings, and to assist needy and the poor. The money
was collected from:
a)
zakah
b) jizyah (the head-toll of every non-Muslim member of the community for not
being able to join the Muslim army)
c) land tax
d) one fifth of the war spoils (property confiscated during war); property whose
owners had died without leaving heirs to claim it
e) a certain share of the yield of mines
f) trade taxes, and customs duties
g) fines
h) ransoms for prisoners paid to the Muslims
i)
Revenues from all waqf properties (properties for public use, endowments)
j) All accidental revenues and property that could not be made private property.
Nowadays, Muslim governments do not make the institution of bayt al-mal as the
main economic institution anymore due to the modernized administration influenced
by the Western model. Yet, in principle, the state treasury (tax money from the
citizens, state revenues from industry, etc) is used to finance public institutions
(schools, hospitals, roads, etc) as well. Unfortunately, the state treasuries in some
Muslim countries often include taxes from unlawful sources, such as casinos
(gambling), alcohol licenses, etc). The actual bayt al-mal that exists today collects
only zakat-payments and private donations (sadaqah). It is no longer treasury of the
whole country but a small and rather insignificant in economy.
Endowments (awqaf ; from sg. waqf)
As waqf is considered a property whose ownership is limited by the will of the
settler of the endowment (known as the waqif). Someone who turns his property
into waqf renders it to someone who takes care of its administration (a school, a
mosque, a piece of land, a plantation), for use only (total or partial). The property
that has been is declared as waqf will not be regarded at the property of the donor
nor becomes property of someone else The ownership is effectively suspended.
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Any concrete object (‘ayn, plural ‘aynan) can be declared as waqf if it cannot be
destroyed by usage and cannot lose its value with time.
Such object is considered to be property of Allah, while the recipient of waqf
(person or institution) has the rights to use only. The waqf contract is terminated
when the waqf property is destroyed or loses the qualities that are required for the
use of it for its intended purpose, like a plantation that no longer yield and produce,
or a building that crumbles down. The remainder of the waqf property must then be
returned to its former owner or his heirs.
5.3.2
Activities
a) Discuss how Bayt al- Mal and Waqf can play a role in developing the economy of
Muslims.
b) List down as many as Islamic financial institutions in your country and Malaysia.
5.4 Financial Product
5.4.1
Presentation
Let us look at some products which are offered in Islamic financial activities of Islamic
economy.
a) Al-Musharakah (partnership)
It is a partnership or participation contract. In banking, a special agreement made
between the bank and the customer on a musharakah basis means that any profit is
shared between the two parties as specified in the agreement. Losses are also
shared in proportion to each party’s participation in the investment capital.
b) Al-Murabahah (sale at mark-up price)
It is a form of down-payment. A contract of sale (of something) at a price agreed
upon by the seller and the buyer with a profit margin. The seller (for instance, a bank)
buys commodities or equipment (a car, for example) on behalf of the buyer
(customer), and then resells it to him at a mark-up price. The difference in price must
be agreed in advance. The buyer pays the required amount either in a lump sum or in
installments. The seller bears any costs related to the sale of the goods and any risks
until the goods are delivered to the buyer.
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c) Al-Mudharabah (profit sharing)
It is a contract in which the owner of surplus capital (rabb al-mal) entrusts his
property to another party who acts as investor. The owner has no operational control
over the project. The profit earned is then shared between owner of the property
(rabb al-mal) and the investor (mudharib). In case of financial loss, the investor gets
nothing and does not bear the lost. The is borne by the owner of the property.
d) Al-Ijarah (lease)
In Islamic banking practice ijarah is similar to a leasing transaction. Under the
terms of a contract made between the bank and a client, the bank purchases at the
client’s request equipment (like a car, a house) which the customer leases. The term
of lease and the fee are agreed in advance. The equipment remains in the ownership
of the bank.
e) Al-Rahn (mortgage)
Property (movable or immovable) pledged as a guarantee of repayment of a debt
by the debtor. Such property can be sold by the pledgee (bank) if the pledger (client)
defaults on its obligations. In the past rahn represented a kind of deposit, in cash or
in kind, provided by one the buyer as a guarantee and a sign for his serious intention
to purchase the goods in question. The Islamic law doctrine reserved for rahn only
the function of pledge (collateral security).
f) Takaful
Takaful means “mutual provision of guarantees” and is today’s Islamic system of
insurance. Two parties form a contract to support each other in case of a loss (which
means primarily a monetary compensation). Both parties can be individuals, or one of
the two parties can be a financial institution, such as a bank. Unlike normal insurance
policies, takaful does not contain elements of uncertainty (gharar) or interest (riba).
A valid takaful contract must include:

a special mechanism of mutual risk sharing and provision of mutual
guarantees;

policy holders act as co-owners of takaful funds

policy holders participate in the operations and control the accounts

premiums paid by the participants used only in halal operations
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
5.4.2
terms of sharing the financial results between the participants.
Activities
Find out Islamic financial products offered by the following institutions in Malaysia:
a) YAPEIM
b) Bank Islam (BIMB)
c) Bank Muamalat
d) Bank Rakyat
6.0 Lesson Summary
The administration of economy and finance in Islam is explained in Al-Quran and
al-Sunnah and then interpreted and elaborated by Muslim scholars. Its administration is
not an imitation from other system. It has its own system which has been discussed and
debated by Islam since Islam was revealed and then elaborated by Muslim scholars.
Thus, all new transactions that emerge today must be compared with the transactions in
Islamic economy. The legality of each transaction in Islamic economy cannot be
tolerated.
7.0 Self Assessment
7.1 Which of the following is wrong about Islamic economy?
A. It is not based on individual interest
B. The economic resources are limited
C. No concept of unlimited wants
D. Emphasis on public interest
Answer: B
7.2 Islamic economy aims at ________
A. Fulfilling the needs of the Islamic country
B. Fulfilling the needs of the Muslim society
C. Meeting Allah’s Wills
D. Meeting the needs of poor people
Answer: C
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7.3 Which of the following is true about resources in Islamic economy?
A. It belongs to one who is the first possess it
B. It belongs to the owner forever even though the resources is not used for more than three
years
C. The Islamic government has the right to take over the resource from the owner does not
use it for more than three years
D. It is permissible for individuals to take possession of resources, and then kept them idle
and useless
Answer: C
7.4 On the issue of equality in economy, Islam recognizes ___________
A. the absolute equality
B. the opportunity to secure a livelihood
C. the government’s authority to determine the equality
D. the absolute equality but with the supervision of the government
Answer: B
7.5 The owner of waqf property is _________
A. the owner himself
B. Allah SWT
C. the one who manages the property
D. Muslim community
Answer: B
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