ISLAMIC ECONOMIC SYSTEM

TOPIC 2
 ECONOMIC SYSTEM
 a system of production and exchange of goods and
services as well as allocation of resources in a society.

Islamic Economic System

Islamic economics (Arabic: ‫اإلسالمي‬ ‫) االقتصاد‬,
also Islamic commercial jurisprudence or fiqh al-
mu'āmalāt (Arabic:‫المعامالت‬ ‫) فقه‬, refers to the rules
of transacting finance or other economic activity in a
Shari'a compliant manner, i.e., a manner conforming
to Islamic scripture (Quran and Sunnah).
 Islamic Economic System
Definition by Umar Chapra,1996
 A branch of knowledge which helps to realize human
well – being through an allocation and distribution of
scarce resources that is in conformity with Islamic
teachings without unduly curbing individual freedom
or creating continued macroeconomic and ecological
imbalances

Definition by Abdel Rahman Yousrie Ahmed,2002

 Is a science that studies the best possible use of the
available economic resources endowed by Allah for the
production of maximum output of Halal goods and services
that are needed by the community now and in future and
the just distribution of this output within the framework of
Shariah and it’s intent
Islamic Economics Principles

1. Philosophical foundations
2. Property ownership
3. Operational principles
 1. Philosophical Foundations
• Believe in oneness of God (112,1-4)
• Complete submission to the creator,sustainer,owner of
a.Tauhid everything,all wise, all knowing & the most powerful.

• Channel of communication between Allah and mankind

b.Risalah • Angel,Prophet and al quran

• Success/self improvement/happiness
• Spiritual,moral and socio-economic well being in this world
c. Falah and success in the hereafter
 1. Philosophical Foundations

• Trustee as Abd (servant & master) and khalifah (leader)

d.Amanah (33:72-738)

• A bond or relationship
• Brotherhood relationship base on Islamic law for the sake of
e.Ukhuwah Allah

• Vicegerant on earth & abd (servant) of god (2:30)

• Responsibility & accountability to god
f.Khilafah • Worship & submission to god
 1. Philosophical Foundations

• Justice
g. Adalah • To put thing in a rightful place
 2. Property ownership
Theory of Milkiyyah (ownership)
Literally ownership is the connection between a
person and a property recognised by the shariah
making it reserved for him to dispose of anyway he
likes as long as there is no prohibition from the
shariah.
According to shariah, ownership is the reservation of
a property preventing another from benefiting from it
and permiting its owner to dispose of it in any manner
he likes except which is prohibited by the shariah.
Classification of ownership based on property
right and extent of use right granted
1) Full ownership
2) Part ownership

1) Full ownership
 Absolute ownership of a property physically
together with its benefit (usufruct).
Acquired through 4 ways according to the shariah
(i) Acquisition
(ii) Contracts or transfer of ownership
(iii) Inheritance
(iv) Breeding
 1) Full ownership
• Acquisition of land that is not owned by
(i) Acquisition any body
• Catching of fish or birds

(ii) Transfer of • Trading contracts

ownership • Hibah (present)

(iii) • An heir gets a property from a

Inheritance deceased’s estate
 1) Full ownership

• The owner of an animal owns an

(iv) Breeding offspring reproduced by the animal
 2) Part/impartial ownership

(i) Ownership • The lessor of a property in ijarah

of property cannot use his property.
only

(ii) Ownership • The lessee of a property in ijarah

does not own the property but has
of benefit a right to use the property owned
only by another for payment of a rental
 Impartial Ownership
1. An Easement Right
(Huquq al-Irtifaq) – Right associated with an
immovable property and assigned to another
immoveable property belonging to different owner

Right which limit the enjoyment of an

associated with an immovable property
belonging to another owner eg. Rights on
irrigation/canals/sewer lines

It is permanent right as long as both

immovable properties exist regardless of
multiplicity or succession of owners

FAR 618 DR HAMIDAH BANI UiTM MELAKA

 Impartial Ownership on property only

2. Ownership over thing only

Ownership owned by one

person but the usufruct is
owned by another person

Example : Rent a house to a

tenant

FAR 618 DR HAMIDAH BANI UiTM MELAKA

 Impartial Ownership on benefit
3. Ownership over usufruct
only

Right to use the asset without

having any proprietary right over the
entire property eg. Right to passage

Property acquired through : borrowing

(I’arah), leasing (I’jarah), endowment
(waqf) bequest (wassiyyah) and
permission (ibabah)

FAR 618 DR HAMIDAH BANI UiTM MELAKA

 General principles
ULTIMATE OWNERSHIP
 To Allah does belong the dominion of the heaven and
the earth and All that is there in (Quran 5: 20)
 “Urwah ( a companion of the prophet) said “ I bear
witness that I heard that the Messenger of Allah (pbuh)
saying that all land belongs to Allah and all human are
slaves to Allah and that whoever, reclaims wasteland is
most worthy of owing it”.
 Man must obey the order of Allah (SWT) in all
dealing related to his property since Allah is the
Ultimate owner of all property that is made available
for human utilization
 Types of ownership
1. Private • Owner can exploit it without legal impediment
• Sole ownership (1 person)
ownership • Joint ownership (> 1)

• Shared by entire community eg. Grass, inland water

resources, fresh air
• Residents in the territory have equal right unless
2. Community converted to private ownership legally
• Prophet (pbuh) said: people are partners in 3 things:
ownership water, grazing grass and fire. (Al-Kasani, Bada’I al
Sana’l V.6, P.193 onwards)

3. State • Resources that cannot be immediately privatised,

uncultivated land, unclaimed property and heirless.
ownership • Wll be monitored & organised by the state.
 Ownership constraint
CONSTRAINTS RELATED TO MEANS OF
PROPERTY
 Permissible and legal acquisition

 Legally can be acquired through hunting,

putting into use a neglected land, illegally

acquired an unjust means
 And do not eat up your property among

yourselves for vanities, nor use it as bait for

the judges, with intent that you may eat up
wrongly and knowingly a little of (other)
people’s property”(Quran :188)
Implications for the economic system

Socialist and Capitalist view

• Acknowledge private property
right on consumer goods and
Socialist productive properties
• Give the state or community
view association’s ownership

• Individual freedom at highest level

• Inequality between rich and poor
Capitalis • Concentrate wealth in few hands
• Monopoly byfinancially powerful
t view group
Implications for the economic system

Islamic socio economic system

Divinely Recognised
ordained – Strikes a individual
Forbids riba,
balance property’s
flawless monopoly
between rights,
socio and
individual freedom to
economy exploitation
rights use in a
system proper way
 OPERATIONAL PRINCIPLES IN ISLAMIC
ECONOMIC

PRODUCTION

ALLOCATION

DISTRIBUTION

CONSUMPTION

FAR 618 DR HAMIDAH BANI UiTM MELAKA

Allah determines right and wrong
 Permitted being lawful (Halal) and what is
forbidden being unlawful (Haram)
 “O ye who believe! Forbid not the good things
which Allah hath made lawful for you , and
transgress not. Lo! Allah loveth not the
transgressors. Eat that which Allah hath
bestowed on you as food lawful and good and
keep your duty to Allah in Whom ye are
believers
 Principle of uses
 The man are allowed to make full enjoyment
of God’s gifts bestowed on him within the
bounds of Halal and Haram
“O mankind !Eat of that which is lawful and wholesome in the earth,
and follow not the footsteps of the devil. Lo! He is open enemy for
you.”(Al Quran 2: 168)
 However not excessive use (extravagance and
wastage)
“O Children of Adam! Look to your adornment at every place of
worship and eat and drink, but be not prodigal. Lo! He (Allah) loveth
not the prodigals” (Al Quran 7: 31)
FAR 618 DR HAMIDAH BANI UiTM MELAKA
 Principle of moderation
 Islam discourage extreme / cross the limits
 The Muslim are middle nation
“Ummatun wasaton (Al Quran: 2: 143) i.e. moderate
 Not to be greedy / materialist
 Extra wealth – spent in the path of Allah on charity
and relief of poor
 Consumption and spending – avoid miserliness and
extravagance
“And those who, when they spend, are neither prodigal nor grudging, and
there is ever a firm station between the two” (Al Quran 25: 67)

FAR 618 DR HAMIDAH BANI UiTM MELAKA

 Economic freedom

 Every individual is accountable for his action done in this

world.
 Rewarded / punished (in hereafter)
 Accountability is meaningful as they are provided with a
reasonable freedom to act independently
 Can earn wealth, own, enjoy and spend them
 Islam recognizes free enterprise, human initiative and
individual potential, role of organization, capital, labor
and market forces
 Freedom is limited by Halal Haram, price limit, no
monopolies
FAR 618 DR HAMIDAH BANI UiTM MELAKA
 Principle of justice
 Nobody is exploited by the other and that nobody
acquires wealth by unjust, unfair, unlawful and
fraudulent means- gambling, drugs, fraud, interest,
corruption, embezzlement etc.
 Equitable distribution (community, rich and poor,
moral education, training and legal measures)

FAR 618 DR HAMIDAH BANI UiTM MELAKA

 Production

 Ensures that nobody is exploited by the other and

that nobody acquires wealth by unjust, unfair,
unlawful and fraudulent means
 Should not acquire wealth through bribery,
corruption, embezzlement, stealing, robbery,
gambling, trade in narcotics, exploitation, gambling,
interest, fraud, hoarding, black marketing,
prostitution, malpractices in business, immoral
professions or through other unjust methods
 Halal product/services
 Production….cont
 Production of daily needs and requirements
benificial to Muslim and Muslim society
 Right to work, product of the work and right
to benefit from the rewards
 Must have ethical moral in the
production/work
 Work a form of piety
 Allocation (investment)
 Partnership (shirkah)
 Trading and commerce
 Profit sharing risk (mudharabah/musharakah)
 Islamic banking – prohibition of riba
 Transaction assign investors clearly identifiable rights
and obligation commensurate return
 Distribution
 Islam disclaim poverty – man viceroy of Allah
 Demands that economic resources and wealth
should be so distributed among the members of the
community that on the one hand the gulf between
the rich and the poor should be bridged and on the
other hand everyone should be provided with basic
necessities of life.
 “They asked thee, what should they spend?” “Say,
whatever is left after your (genuine) expenditure,
Spend them on your other brethren)”
 discourages concentration of wealth in few
hands and ensures its circulation in the
community not only through moral education
and training but also through effective legal
measures.
 Sadaqat, Zakat and voluntary alms along with
laws of inheritance helps distribution of wealth
among the larger sections of society
 Non Muslim ordered to pay Kharaj, Jizia and
Oshoor on their merchandise
 Consumption- Life Cycle Model

 Al Quran :Yusuf 42-48

 Inter-temporal allocation of time, effort and
money (as capital)
 Infinite horizon model(including life
hereafter) and the finite horizon model
 Consumption smoothing strategy – storing
the grain ( a form of domestic investment
yielding a rate of return zero before
depreciation)
 Consumption -continued

 Saving for later consumption – an effective

strategy
 Agent make sequential decision to achieve a
coherent( and stable) goal using currently
available information the best possible
 Consumption may change overtime