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Islamic Economics And Finance System

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What is economics? Economics studies how individual and societies seek to satisfy needs and want through incentives, choices, and allocation of scarce resources. Nations use economic system to determine how to use their limited resources effectively. But what is an economic system? An economic system is generally defined as collection of institutions set up by society for the arrangement of economic activity; the allocation of resources, production and exchange of goods and services, and distribution of resulting to income and wealth. An economic system is not in itself complete; it is a part of the overall system of life which all its aspects (religious, ideological, social, political and ethical) are well synchronized. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life. The system is functioning to produce the outcome which is depending on the social priorities. These priorities would determine the goals in the effort, for example; what goods and services should be produced - nuclear guns or commodity goods? How this goods and services be produced? And what is more important - aggressive economic development or moral preservation?

Fundamental Characteristics

The objective of all economic systems is to achieve the well being of the society. The efficiency of a perfectly competitive capitalist: consumers maximize their total benefit and firms also maximize their total profits. . There are sufficient number of firms, consumers and owners of factor of production in each market. Individuals are price takers, rather than price setters.

Major economic systems besides Islamic economics system are capitalism and socialism. Capitalism is based on the individual right and requires a free market, competition, and the idea of private ownership of the means of production. Decisions are made according to law of supply and demand. Socialism views that the central government should own and control major industries, and they make decisions about the resources and productions. On the other hand, the basic characteristic of Islamic economic system is the whole of set of beliefs, values, procedures and rules should be made accordingly to the Qur'an and Sunnah. Sources of law of Islamic economy - Islamic economy is based on Shariah (Islamic law). While capitalism and socialism do inevitably relate to other aspects of life, Islamic economic system needs to be viewed systematically as a division of a bigger system which is the religion Islam itselt. The primary sources of Islamic economic system are Al-Qur'an and As-Sunnah (the authentic traditions of Muhammad, the Prophet of Islam), while the supplementary sources are Al-Ijtima (the consensus of opinion), Al-Qiyas (the judgement upon jurist analogy).

The simplest way to describe the relevance of Islamic economic system is by studying how its differences from Capitalism and Socialism surpassed the two and solve problem which arises from or left unsolved by capitalism and socialism. For example, in Capitalism government does not regulate anything for the benefit of the workers and there is no minimum or fair wage. Everything is left on the principle of supply and demand in the market. The rich get richer and the poor people get poorer. Socialism which is based on the idea of centralized government intervention, warrants the authority to determine the wages regardless of the effort made by workers. But Islam comes to solve this issue by ruling the equalization in the distribution of income and wealth.

The Concept of Private Property

Socialist thinkers of the West promoted the ideas of centralized public ownership of the means of production. They went to one extreme and completely denied the concept of private ownership. Land, labour, capital was all controlled by the state. The best resources were allocated to the armed forces, space program etc. Under this system, there was little incentive to produce better goods and services for the community, take an example as former Soviet Union saw a rapid decline in the production of agricultural goods. This system faces problem of poor quality goods, shortage of commodity, and diminishing production. While Capitalism practises most of the resources are owned by private ownership. They will make the decision on supply and demand and decide how to produce goods. In a Capitalist system unlimited liberty and right of ownership for private property is given which has resulted in the capitalist exploitation of workers.

In Islamic economics, it is literally owned by Allah; all property, wealth, resources are Allah's ownership. Islam do recognize the private ownership while ask the owner to spend the property in the way of Allah, and the use of wealth should not harm other individuals'. The sources of wealth should be Halal and not be realized from Riba, cheating or monopoly. The wealth should not be used against public interest, to corrupt the society or to exhort political power. While reaping the benefits of private ownership, Islamic economic system seamlessly subdue the negative effects or capitalism. Islam allows the right of private ownership and freedom of enterprise in limited capitalism. Islamic economic sees in wealth as means of human satisfaction, and an increase in the capacities of man for a better service and worship to Allah.

Consumption of Wealth

In Capitalism anything can be consumed especially when they create demands to profit-makers and the competition is always present in the production to have the best products and services. Unhealthy competition would lead to volatility in demand and supply and the price would fluctuate in the market. The rich people are freely to use the wealth but there is constraint to the poorer when it comes to interest in money lending. As for communist society, only consumer goods and services are allowed to be produced in the country. Capital goods (as the means of production) are directly allocated to meet economic demands so that production is oriented towards needs only.

In Islamic system only "HALAL" goods and services are allowed to be produced and consumed. "HARAM" goods and services are not allowed to be produced and consumed. Islam teaches the principle of balance e.g. moderation and avoiding extravagance. Even though spending is lawful, it must be moderate and not overspending. In today's scenario, this may alleviate the household debt problem while maintaining the drive for excellence in production of wealth. The balance is maintained between the interest of the society and the interests of the individuals.

[4:29] O you who believe, do not consume each others' properties illicitly - only mutually acceptable transactions are permitted. You shall not kill yourselves. GOD is Merciful towards you.

Production of Wealth

Capitalism motive is profit-oriented as they aim to produce goods for only profit. People have freedom to produce anything. It has huge gap between the wealthy and the poor. The wealthy tend to overlook the needs of very needy people as they only focus to production to maximize the profit. For example, the production of drugs, gambling, lottery, music and etc. Government has no roles in controlling the production. In communist society on the contrary, central authority make decision what to produce and how much to produce. They failed to meet consumer needs and wants. There is little room for innovation or change. They also tend to lack of modern technologies and have low standard of living comparing to free market society. The impact to society as people will be likely to smuggle the goods and the existence of black market.

But in Islamic System only have to produce "HALAL" goods and "HARAM" goods like alcohol drink, drug etc are not allowed. In production, Islam recommends the efficiency, proper evaluation of factors of production and proper pricing of output. Islamic economy enforces better utilization of natural resources and fixed assets for the benefit (maslahah) of public interest.

Distribution of Wealth

In Capitalism concentration of wealth goes to few hands due to unlimited right of ownership and free competition. Thus there is big gap between rich and poor. In communism system the authority act as a dictator created due to concept of public property. It will sacrifice of individual freedoms to pursue public goals.

Islamic economic system favour fair (not equal) distribution of wealth in the sense that it should not be restricted to any particular segment of the society. For fair distribution of wealth Islam reduce the disparity of individual income. Zakat is introduced in Islamic system as a major source of revenue the government in an Islamic state. It is a "transfer payment" which is payable to the needy at given rate. Zakat eliminates conflict between different classes and promotes the economic stability and social security to the unemployed. Hospitals, schools and the community centre can be constructed for the poor by using the Zakat fund.

Interest free Economy

The interest made brings unequal between saving and investment borrowing to promote capital structure in a capitalist society. The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back with the compounded interest on money lent. In history 1997 Asian financial crisis because of huge increase in interest rate which extremely damaged the economy causing more bankruptcies for the societies. In communism, interest does not pay any role for saving and investment.

In the Islamic system interest based economic activities are strictly banned. Hence interest is not a source of capital formation in an Islamic. Islamic economic is free from this injustice and imbalance in the distribution of wealth. The Qur'an counters this rule in Al-Baqarah, 2:275

"And Allâh has permitted trade, and forbidden interest." (2:275)

In the conflict between Capitalism and Socialism, only that way of life can be assured of a secure and bright future which not only prohibits interest but also makes people abide by this prohibition. In such cases, those who have money should practice and provide interest-free loans to those who are in need of money for coping with the hardships of their life.

Therefore, efforts for the development of Islamic economics and financial engineering should be based on the objectives (maqasid) of Shariah. The challenge is to present new products that would meet current and future needs, the regulatory body, besides to set out a new strategy for Islamic economics that would involve the whole society. Islamic economics is a relatively new discipline that requires more study. And knowledge of fiqh (jurisprudence) is essential for researchers in the field.

It can be concluded that Capitalism and Socialism are materialistic in nature and they only look to satisfy the material wants of the people. Capitalism had failed to address major international economic issues including poverty, inflation and unemployment. But Islamic economic system provides a fine blend of materialism and spiritualism. Islamic economics must be presented to the world as the best solution to all economics problems in a convincing manner. Islamic economic system satisfies the needs of all creatures and promotes the positive effects in the inner self to the person, and the purification of individual's wealth and soul.


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