ECONOMIC SYSTEM OF ISLAM

DEFINITION OF ECONOMICS

According to Adam Smith, Father of economics, “Economics is the science of wealth. According
to this definition, economics is a science of the study of wealth only its production, distribution,
and consumption.

2. According to ALFERD MARSHAL Economics is SCIENCE OF HUMAN BEHAVIOUR. He brought

the ideas of supply and demand, marginal utility, and costs of production into a coherent
whole.

3. Modern economist ROBBINSON took practical approach according to her EFFICIENT

MANAGEMENT OF LIMITED RESOURCES TO FULFIL UNLIMITED HUMAN WANTS is economics.

IMPORTANCE OF WORK / ECONOMIC ACTIVITIES IN THE

IN the LIGHT OF QURAN

 And that man has nothing but what he strives for.

 And We made the day a means of sustenance.

 And when the prayer has been concluded, disperse within the land and seek from the
bounty of Allah,

IN THE LIGHT OF SUNNAH

Prophet Muhammad P.B.U.H started working since he was 9 years old . He opted and promoted
Different professions. He himself was shepherd and trader.

In Madinah he motivated people to do agriculture by telling them it's their good luck that
people sustenance is linked with them, and if birds etc eat from their fields or garden it be
written as a charity from them.

In Makah he also promoted Traders aswell. “The honest, trustworthy merchant will be with
the Prophets, siddeeqs and martyrs.”

He also prmoted Labours and said for them

‫الله‬+‫حبيب‬+‫(لكاسب‬WRITTEN BACKWARDS)

One who earns his living is the friend of Allah.

It is narrated in a hadith that the Prophet (‫ )ﷺ‬said, “Give employee his/her wages before the
sweat is dry on him”

HAZRAT Muhammad once met Hazrat jabir who was a cobbler and enquired about his hard
hands, upon knowing the reason of his nature of work, he told him that Hell fire won't ever
touch these hands.

Condemned Monkhood : Rahbaniyat

Islam prohibited monkhood. In surah Hadeed , Allah prohibited monkhood. Prophet

Muhammad said, There is no Rahbaniyat is Islam. as it leads to kufar. (Hazrat Ayesha hadees
about three companions who took oath...)

Professions of Prophets:

 Adam (as) was a skilled farmer

 Dawood (as) was famous for his skill of making armour

 Prophet Isa (as) He was a hunter.

 Prophet Uzayr (as) He used to be a gardener.
 Prophet Muhammad (as)In childhood, he used to be a shepherd. Later, he became a
profitable trader and came to be known for his business acumen and trustworthiness

 COMPARISON OF CAPITALISM AND SOCILAISM WITH Islamic ECONOMIC SYSTEM.

Capitalism: Capitalism is an economic system where private individuals and corporations own
and control most of the resources and means of production. It relies on competitive markets to
determine prices and allocate resources, with a strong emphasis on profit maximization as the
primary incentive for economic activity. Capitalism is characterized by individual economic
freedom and limited government intervention in economic affairs.

Socialism: Socialism is an economic system where the means of production are owned and
controlled by the state or the community as a whole, with the goal of reducing wealth
inequality and promoting social welfare. Central planning and government intervention play a
significant role in resource allocation, and the emphasis is on achieving economic and social
equality through policies like wealth redistribution and the provision of essential services.

Islamic Economic System: Islam, being a practical Religion has evolved a complete code of life
which has successfully fulfilled the requirements of the changing times,
 Not only in the social but also in the economic field it has given an ideal lead to the people.The
Islamic economic system is guided by principles derived from Islamic law (Sharia). The Islamic
economic system is often seen as a middle ground between capitalism and socialism. It allows
for private ownership but emphasizes ethical and moral considerations in economic activities.
Profit and loss sharing, prohibition of interest (usury), and wealth redistribution through
mandatory almsgiving (Zakat) and voluntary charity (Sadaqah) are key features. It seeks to
strike a balance between individual economic freedom and social justice, incorporating
religious and ethical values into economic decision-making.

Allah says in SUrah Hashar;

so that it may not be a thing taken by turns among the rich from among you.

SO ECONOMIC SYSTEM IS BASED ON THE CIRCULATION OF WEALTH

 BASIC THEME OF ECONOMIC SYTEM OF ISLAM…

MEASURES FOR CIRCULATION OF WEALTH/ Economic sources of the state

• Zakat

Zakāt (‫ )زكاة‬Zakat is like a luxury tax in Islam. Muslims who have wealth over a certain
level (nisab) must give 2.5% of their dormant wealth (unused for a year) to help the poor. It's
one of the Five Pillars of Islam and a duty for those who can afford it. Zakāt is one of the Five
Pillars of Islam and it is obligation on all Muslims who qualify as wealthy enough.

• Jizya

Jizya or jizyah (‫ ;جْز ية‬Jizya was a tax on non-Muslim men of military age. It wasn't
imposed on certain groups like women, children, monks, and the poor. Some exempt non-
Muslims received stipends when in need.

Fay

Fay was the income from State land, whether an agricultural land or a meadow, or a
land with any natural mineral reserves.

• Khums

Ghanimah or Khums was the booty captured on the occasion of war with the enemy.
Khums is a tax on war booty. Four-fifths go to the soldiers, and one-fifth to the state.
Kharaj

Kharaj was a tax on agricultural land. It was initially a lump-sum tax on conquered
provinces but later became a poll tax for non-Muslims.

• Ushr

Ushr: Ushr is a 10% tax on agricultural land and imported goods from countries that
taxed Muslims. Umar was the first Muslim ruler to levy ushr.

When the Muslim traders went to foreign lands for the purposes of trade they had to
pay a 10% tax to the foreign states. Ushrwas levied on reciprocal basis on the goods of
the traders of other countries who chose to trade in the Muslim dominions.

Concept of Baitul Mal

Baitul Mal: Baitul Mal was a public treasury used to support the needy, orphans, and
charitable institutions. It played a crucial role in the early Muslim economy

It was due to this Baitul Mal that there could hardly be found any needy person among
the Arabs, who before constituted one of the poorest nations in the world. The faithful
adherence to payment of Zakat Tax and the strict maintenance of Baitul Mal during the
time of the Holy Prophet of Islam and his four companions led to the prosperity and the
raising of the standard of living in Muslim countries. Thus the saying of 'the Prophet of
Islam came to be true, "Give Sadaqat freely, as a time is to come when people will offer
ISadaqat and there would be none (needy person) to receive them" (Mishkat).

Other measures for circulation of wealth.

2. FITR (Zakat al-Fitr): Zakat al-Fitr is an Islamic form of charity given at the end of
Ramadan. It ensures that even the less fortunate can join in the joy of Eid, promoting
social cohesion and alleviating the financial burdens of the needy.

3. CHARITY (Sadaqah): Sadaqah is encouraged in Islam as a way to share wealth and help
those in need. It fosters empathy and solidarity within the community, promoting
economic equity and social well-being.

4. RANSOM (‫)فديه‬: In Islamic tradition, paying ransom (‫ )فديه‬can secure the release of
captives. This practice underscores the value of human life and promotes the idea that
wealth can be used for humanitarian purposes.
 5. DIYAT/BLOOD MONEY (Diyya): Diyya, or blood money, is a means of compensation in
cases of unintentional harm or manslaughter. It ensures financial support for victims'
families, promoting justice and financial stability.

6. INHERITANCE (‫)وارثت‬: Islamic inheritance laws ensure fair distribution of wealth

among family members, discouraging wealth concentration and promoting economic
stability within the family unit.

7. SPOILS (‫)مال غنيمت‬: The distribution of spoils from legitimate sources ensures that
the benefits of wealth are shared within the community, preventing hoarding and
promoting economic prosperity.

8. WILL (Wasiyyah - 1/3): Islamic law allows individuals to bequeath up to one-third of

their wealth through a will, promoting their autonomy in wealth distribution and
ensuring support for specific causes or individuals.

9. TAX (‫ ضرائب‬- Zaraib): Islamic taxation (Zakat and other forms) is a way to redistribute
wealth systematically, addressing societal needs such as poverty alleviation and
infrastructure development while promoting economic equity.

ISLAM PROHIBITS CONCENTRATION OF WEATLH… ‫دولت ارتكاز‬

1. GAMBLING (Game of Chance): Gambling is considered haram (forbidden) in

Islam as it involves uncertainty and relies on chance rather than productive work.
The Quran identifies gambling as a harmful activity that can lead to societal
discord and financial ruin.

2. HOARDING (‫)ذخيره اندوزي‬: Hoarding wealth without putting it to productive

use is discouraged in Islam. The Quran mentions that those who hoard wealth
are cursed. The faith encourages the circulation of wealth and charity to ensure
that resources are actively benefiting society.

3. SPECULATION: Excessive speculation in financial markets, which can lead to

unjust enrichment at the expense of others, is discouraged in Islam. It is believed
to create instability and inequalities in the economy, going against the principles
of fairness and justice.

4. PROFITEERING: Profiteering, or seeking excessive profits by exploiting market

imbalances or shortages, is considered unethical in Islam. Fair pricing and
equitable distribution of resources are encouraged to prevent exploitation of the
vulnerable and ensure economic justice
 5. RIBA (Interest - ‫ ربو‬،‫)سود‬: Islam prohibits the practice of charging or paying
interest on loans. This prohibition is rooted in the belief that it leads to unjust
enrichment and exploitation. The Quran equates riba to an act of injustice and
highlights the importance of fair and equitable economic transactions.

Hazrat mualana Abdul bari in his book tajdeed--e- ma'ashiyat give Islamic economic principles
which are based on several core principles and values that guide economic activities within an
Islamic framework. These principles include:

1. Sharia Compliance: All economic activities must adhere to the principles and guidelines
outlined in Islamic law (Sharia). This includes the prohibition of usury (riba), gambling
(maysir), and other activities deemed haram (forbidden).

2. Justice and Equity: Islamic economics places a strong emphasis on social justice and
economic equity. Wealth should be distributed fairly, and economic systems should aim
to reduce income inequality.

3. Property Rights: Islam recognizes private property rights but emphasizes responsible
stewardship (amanah). Owners are expected to use their wealth and resources in ways
that benefit society and are not harmful.

4. Risk-Sharing: Islamic finance encourages risk-sharing between parties in economic

transactions. Profit and loss are shared, promoting a more equitable distribution of both
gains and losses.

5. Prohibition of Interest (Riba): Usury, or the charging of interest on loans, is strictly

prohibited in Islamic finance. This prohibition is rooted in the belief that it leads to
unjust enrichment and exploitation.

6. Prohibition of Gambling (Maysir): All forms of gambling and games of chance are
forbidden in Islam. This prohibition is based on the idea that such activities promote
unearned income and harm individuals and society.

7. Real Economic Activity: Islamic economics encourages investments in tangible,

productive assets and businesses that contribute to the real economy rather than
speculative or non-productive ventures.

8. Zakat and Charity: The practice of giving a portion of one's wealth to those in need
(Zakat) and voluntary charity (Sadaqah) are fundamental principles of Islamic
economics. These practices help redistribute wealth and alleviate poverty.
9. Contractual Clarity: Contracts in Islamic finance and economic transactions should be
clear, transparent, and mutually agreed upon by all parties involved to avoid ambiguity
and exploitation.

10. Ethical and Social Responsibility: Islamic economics places a strong emphasis on ethical
behavior and social responsibility in business and economic activities. Activities that
harm society or the environment are discouraged.

11. Prohibition of Unlawful Activities: Islamic economics prohibits involvement in activities

that are haram or unlawful, such as producing or trading in alcohol, pork, or other
prohibited items.

12. Can an Islamic State Levy Modern Taxes?

In a modern Islamic state, there's a debate about whether the government can impose
taxes other than Zakat on its Muslim citizens. Some say only Zakat is allowed, while
others argue that the state can levy additional taxes when needed. This debate uses
arguments from the Quran, Sunnah, and early Islamic jurists.

However, because there are no direct Quranic or Sunnah instructions either authorizing
or prohibiting these taxes, we won't delve into these arguments.

Now, modern Islamic states have expanded their functions due to industrialization and
technological progress. They must provide infrastructure, education, healthcare,
employment, and more. The problem is that traditional sources of revenue like Khums,
Fai, Kharaj, and Jizyah are no longer available.

So, modern Islamic states often have to impose taxes like income tax, wealth tax,
property tax, customs, excise, and sales tax, in addition to Zakat, to meet their growing
expenses.

Here are the conditions for levying such taxes in an Islamic state:

1. Taxes should be imposed for emergencies or the genuine needs of the state, not for the
benefit of the ruling class.

2. Tax revenue must be spent wisely and honestly for the welfare of all citizens, without
discrimination.

3. Taxation should follow principles of fairness and justice.

4. When the tax's purpose is achieved, it should be removed.

5. Tax laws and procedures should not conflict with Islamic teachings.
 If these conditions are met, an Islamic state can impose various taxes to cover its
expenses.

Islamic prohbition of riba'

Interest is biggest tool to exploit people

Haram in every shape (personal loan, corporate loan, )

War against Allah

3:130 - ‫َيا َأُّيَها اَّلِذيَن آَمُنوا اَل َت ْأ ُك ُلوا الِّر َبا َأْضَعاًفا ُّم َضا َع َف ًة ۖ َوا َّت ُقوا الَّلَه َلَعَّلُكْم ُت ْف ِل ُحو َن‬

O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that
you may be successful.

Haids: Prophet cursed the people

• The reason given in the Qur’an for the prohibition of riba is that,

he Quran prohibits riba (interest or usury) because it leads to unfairness in

financial transactions in several ways:

1. Uneven Risk and Reward: When there's a fixed rate of return on money
lent, it means one party takes all the risk, while the other gets a reward no
matter what. This imbalance is considered unjust.
2. Concentration of by Wealth Transfer to rich : Riba can transfer wealth
from the poor to the rich. This happens because those who have to borrow
money end up paying more, and this money goes to the lenders who are
often wealthier. This worsens the wealth gap.
3. Trade Cycle Instability: High interest rates can make borrowing money
expensive. This discourages people from investing in businesses and
projects. When fewer investments happen, it can lead to economic instability
with big ups and downs.

So, the Quran prohibits riba to promote fairness, prevent wealth

concentration, and stabilize the economy.

ISLAMIC MODES OF FINANCING / modes Through which we can be riba free.

1MURABAHA ‫مرابحه‬
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which
the seller declares his cost and profit. Islamic banks have adopted this as a mode of financing.
As a financing technique, it involves a request by the client to the bank to purchase certain
goods for him. The bank does that for a definite profit over the cost, which is stipulated in
advance

MUDARABAH ‫مضاربه‬
A form of partnership where one party provides the funds while the other provides expertise
and management. The latter is referred to as the Mudarib. Any profits accrued are shared
between the two parties on a pre-agreed basis, while loss is borne only by the provider of the
capital.

MUSHARAKAH ‫مشاركه‬....
Musharakah means a relationship established under a contract by the mutual consent of the
parties for sharing of profits and losses in the joint business. It is an agreement under which the
Islamic bank provides funds, which are mixed with the funds of the business enterprise and
others. All providers of capital are entitled to participate in management, but not necessarily
required to do so. The profit is distributed among the partners in pre-agreed ratios, while the
loss is borne by each partner strictly in proportion to respective capital contributions.

Diminishing Musharakah (DM) is a form of joint ownership in asset or property in which any of
the joint owners undertakes/promises to buy the ownership share of the other joint owner(s)
gradually until the ownership of the joint asset or property is completely transferred to the
purchasing joint owner.

Difference between Musharakah and Diminishing Musharakah

Musharakah: There is no specific end date and this agreement will continue until the partners
decide to discontinue the partnership. This is often used for long-term financing.

Diminishing Musharakah: One partner's share is drawn down. This is while it is transferred to
another partner

IJARAH ‫ اجارة‬....
Ijarah is a contract of a known and proposed usufruct against a specified and lawful return or
consideration for the service or return for the benefit proposed to be taken, or for the effort or
work proposed to be expended. In other words, Ijarah or leasing is the transfer of usufruct for a
consideration which is rent in case of hiring of assets or things and wage in case of hiring of
persons.
SALAM ‫سلم‬
Salam means a contract in which advance payment is made for goods to be delivered later on.
The seller undertakes to supply some specific goods to the buyer at a future date in exchange of
an advance price fully paid at the time of contract. It is necessary that the quality of the
commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute.
The objects of this sale are goods and cannot be gold, silver or currencies. Barring this, Bai?
Salam covers almost everything, which is capable of being definitely described as to quantity,
quality and workmanship.

TAKAFUL ‫مشاركه‬....

Its alternate of issurance based on two agreements wafq and Mudarba.

Enforcement of Islamic principles in modern era and conclusion

JWT PG 310