The Islamic Economic

System: Overview

Prof Dato’ Dr. Mohd Azmi Omar

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 Worldview

Sub Systems For Various Aspects Of Human Life

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Political System Economic System Social System

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Philosophical Foundations Operational Principles Goals

Tawhid 'Adl/Ihsan Socio-Econ. Justice

Ibadah Takaful/Ta'awun Growth/Development
Khilafah Responsibility/Accountability Efficiency/Stability
Tadhkiyah Moderation Employment Generation

Plans, Strategies, Institutions

Gradual Change, Riba' - Free Economy, Zakah and

Baitulmal, Social Insurance, Fara'id, Market/state Role,
Al-Hisbah, Contract Based Economy, Determining
Priorities
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System

a set or assemblage of things connected or
interdependent, so as to form a complex unity; a
whole composed of parts in an orderly
arrangement according to some plan or scheme

3 components

entities or components (persons, state,
groups)

a relationship or mode of interaction
between components

a common objective that has been planned
or ordained

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Economic System
• any assemblage of entities that interact with
one another according to a particular plan in
order to fulfil the economic objectives of
society

• society organises itself according to its

values, culture, worldview and in accordance
to its sources of authority

• institutions, plans and meaning/priorities of

goals differ between societies

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Islamic Economic System
• components, relationship and
goals must be based on sources
of Islam

• possibility of different Islamic

economic systems

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Characteristics Of An
Islamic Economic System
– Ownership of resources,
– Disposal, and
– Distributive justice.

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 Ownership of Resources

Ownership of resources belong to almighty

Allah alone. Human only enters into
possession and thus accountable to Allah
for the utilization of such resources that
may come into his possession.

Such possession can be through: work,
inheritance, obtaining wealth for the sake
of Allah, a grant from the state, and wealth
and commodities acquired without
exchange e.g gifts, donations, etc.

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 Cont..

The maxim of ‘freedom of ownership of
resources’ and each according to his ability,
and each according to his needs’ under the
capitalists and socialists economic systems
are deemphasized in the Islamic paradigm.

Resources are abundantly provided by Allah
and as such the system while encouraging
‘work’ aims to avoid a situation whereby the
minority controls the majority of the resources
(Q59:7)

Both private and public property are
legitimate kinds of property in Islam
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 Balance and Moderation in economic
activities
 As a principle, Islamic economic system
encourages moderation, balance and non-
partisanship.
 Wasteful expenditure (Israf) is highly
condemned (Q 17:27, 7:31), even when
spending on lawful acts like charity.

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 Cont..
 Socially Responsible Investment (SRI) is also
emphasized. Personal interests must align
with societal interests. Hence resources are
not expended on unproductive or
counterproductive investments

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 Cont..
Hence, investment appraisal transcends
consideration of positive net present value
or high internal rate of return. Due
consideration must also be given to impact
of such investments on the societal
structure of mutual sharing and
responsibility.

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 Distributive Justice

Sequel to the first two principles,
distributive justice is well emphasized as a
principle of the Islamic economic system.

It is perhaps the third most mentioned
word in the Quran after Allah and
knowledge with over sixty verses of the
Quran emphasizing its relative relevance.

It is also the second most important
mentioned virtue in the Quran after
individual virtue of piety (Q 5:8)

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 Cont..

The principle holds that there is proper
evaluation of allocation and distribution
through prices, and redistribution of output
to provide a share to those who ordinarily
could not obtain it through market forces.

The institution of zakah is the pivot around
which this principle rotate (9:60).

A prophetic tradition says that a person
who spends the night with his stomach
filled while he is aware of a neighbour
going to bed in hunger is not a believer.

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 Cont..

Chapra (2000) explicated this point
further:
– Islam not only requires the fulfillment of
everyone’s needs, primarily through a
respectable source of earning, but also
emphasizes an equitable distribution of
income so that, in the words of the
Quran ‘wealth does not circulate only
among your rich’ (Q59:7).

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 Operational Rules of Islamic
Economics System
1.Zakah (Alms giving) :
ƉThe third pillar in Islam
ƉAn income redistribution mechanism,
not necessarily to provide revenue to
the state but to correct imbalances in
the social structure.
Ɖ (Q 9:60) specifies those entitled to get
zakah.

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ƉIt exerts great influence on
consumption behaviour as income is
distributed between investments and
savings.
ƉThough a ratio of 2.5 percent is
prescribed, income is raised through
zakah thus ensuring effective
redistribution. A very good example is
the Malaysian Zakah Organization.

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 Cont..

Literally, Zakat means to purify, to develop and cause to
grow

As Shariah terms it is an act of monetary worship
according to which every well to do Muslim who
possesses equal to or exceeding a laid down minimum,
has to give away, at the prescribed rate, a portion of it to
the deserving poor and needy people.

The payment of Zakat purifies and cleanses the
remaining wealth, which is blessed by Allah in this world
and made to grow manifold in terms of reward for the
prayer in the Hereafter

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 Merit and Significance of Zakat

Zakat it the third important pillar of Islam and is

placed just after Salat in the order of merit.

According to Abdullah ibn Abbas, when the
Holy Prophet dispatched Mu'adh ibn Jabal to
Yaman as governor, he instructed him:

"You are going to a people who were given a
Divine Book. You should first of all invite them
to the creed of Islam: 'There is no god but Allah,
and Muhammad is Apostle of Allah'.

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 Cont’d…

When they have affirmed this, tell them that
Allah has enjoined on them to offer Prayers five
times a day; when they have affirmed this too,
tell them that Allah has prescribed for them
charity (Zakat), which will be collected from their
rich people and distributed among needy and
indigent people; when they have affirmed this
too, you will take care not to extract from them
their choicest things in Zakat; and guard yourself
against the curse of the oppressed, for there is
no curtain between the oppressed and his God."
(Bukhari, Muslim)

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 Philosophy of the Institution of
Zakat

Brings about protection of property from
encroachment and grudge

A means to aid the poor and those in need

Cleanses one's heart from frugality and
parsimony

Gives support and dignity to needy Muslims

A means of expressing gratitude to Allah for all
His bounties

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 Significance of Zakah

For the individual, Zakat:

Purifies and promotes assets;

Develops gratitude for Allah's bounty;

Brings about a sense of peace and well-being.

For the society, Zakat:

Minimizes the feeling of envy among those who are less
well-to-do;

Provides a religiously-approved method of managing the
society's economy and finance;

Makes it possible for part of the wealth of the rich to be
distributed among the poor.

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 Cont..
2. Riba (Interest):

It is arguably the most discussed and
controversial issue in Islamic
economics, more often than not
subsuming the importance of other
Islamic economic issues.

Even when highly controversial among
scholars, Quran (2:278-279) explicitly
states the prohibition of riba in Islam,
and the attendant consequences of
acting otherwise.
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Such prohibition is in essence a
rejection of any transaction that
guarantees the gain of one party at the
expense of the other, who is made to
bear the risk of loss alone.

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– such rejection is absolute as it does not
matter whether the interest is long or short
term, high or low, on money or real goods.
– money is not considered a factor of
production and as such even the provider
of funds needs to have a stake in the
production process.
– together with the institution of zakah, the
prohibition of riba also influences the
consumption behaviour to distribute
income between savings and investments.

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 Definitions Of Riba

Riba literally means: excess, increase, expansion,
growth

Definition 1: Riba is every excess in return of which
no reward or equivalent counter value is paid

Definition 2: Riba is a predetermined excess or
surplus over and above the loan received by the
creditor conditionally in relation to a specified
period

Definition 3: The addition in the amount of principal
of a loan on the basis of time for which it is loaned
and of the amount of the loan.

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 Prohibition Of Riba In The Qur’an

44 STAGES
STAGES

First
FirstStage
Stage Second
SecondStage
Stage Third
ThirdStage
Stage Fourth
FourthStage
Stage
(30:39)
(30:39) (4:160-161)
(4:160-161) (3:130)
(3:130) (2:275-281)
(2:275-281)

• Compare riba • Attaching the • Prohibiting the • Conclusively

with zakat & practice of riba practice of prohibiting all
charity with the Jews charging double forms of riba
• Praising zakat & • Consider the and multiple riba • Any excess over
charity, not riba practice as an the capital is
iniquity (zulm) disallowed
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Types Of Riba

The jurists classified riba into two main
types:
– riba al nasi’ah: the excess in relation to
delay in time: in loan / exchange
– riba al fadl: the excess in relation to the
exchange of similar riba-bearing (ribawi)
items

In summary, riba occurs as a result of two
main factors: delay in time (riba al nasi`ah);
and difference in quantity of two exchanged
ribawi items (riba al fadl)

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 Riba Al Nasi`ah

Riba because of delay in time (al nasi`ah)
can occur in two main situations:
– In a loan transaction because of delay
in repayment also known as riba al
duyun;
– In the exchange of certain riba-bearing
(ribawi) items , whereby the exchange
is deferred or not spot/cash

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Cont’d…

The basis for the prohibition of riba in loan
transactions as a result of delay in time is the
Quranic verses, e.g. 2:275

In loan transactions, riba will occur if the
three conditions below are fulfilled:
– There is excess or surplus over and above
the loan capital;
– Determination of this surplus in relation to
time;
– Stipulation of this surplus in the loan
agreement

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Riba Al Fadl

The basis for the prohibition of riba in the
exchange of ribawi commodities (riba al buyu`)
is the famous hadith of the Prophet on six
commodities:
“Gold for gold, silver for silver, wheat for
wheat, barley for barley, dates for dates, salt
for salt - like for like, equal for equal, and
hand-to-hand (spot); if the commodities differ,
then you may sell as you wish, provided that
the exchange is hand-to-hand or spot
transaction.”

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Cont’d…

Because the hadith on the six
commodities is quite complex,
simplified rules are deduced to
facilitate understanding and
application of the hadith, i.e,:

In trading commodities of the same
group and kind, e.g.: gold for gold or
dates for dates, 2 conditions must be
fulfilled:
– Both commodities must be exactly
equivalent;
– There must be prompt delivery
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 Cont’d…

In trading commodities of the same group but
of different kinds, e.g.: gold for silver, or
wheat for barley, 1 condition must be fulfilled:
– Promptness of delivery – equality is not a condition;

In trading commodities of different groups
and kinds, e.g.: gold for wheat, or silver for
barley, no condition is imposed and free
trading can exist: whether equal/unequal; or,
prompt/delayed

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Cont’d…

Thus, Riba may only occur in the exchange of
two similar ribawi commodities; or in the
deferred exchange of two different ribawi
commodities of the same group

Riba will not occur in the exchange of two
non-ribawi commodities; or in the exchange of
a ribawi commodity with a non-ribawi
commodity, or in the exchange of two totally
different ribawi commodities, e.g.:
- the exchange of money with goods or
services

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Observations

In modern banking, riba may occur as a result
of many factors, such as: delay in time and
excess in quantity.
– Example 1: interest charges for bank loans
are riba al nasi`ah because they were
charged in relation to the time given to
repay the loans;

– Example 2: the delay in the exchange of

currencies may amount to riba al nasi`ah –
currency exchange must be cash/spot
because currencies are riba-bearing (ribawi)
items

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Cont’d…

The application of the hadith on six
commodities is extended to other
commodities if they share the same effective
cause (`illah) with the commodities
mentioned in the hadith, by way of analogy
(qiyas)

For example, effective cause for gold and
silver is their being money or currency; and
the effective cause of wheat, barley, dates
and salt is their being staple food

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Cont’d…

Hence, any other currency/money and
staple food are also considered as
ribawi items

The jurists also consider debts as
similar to money and therefore ribawi

Thus, in the exchange of debt for debt
(bay` al kali bi al kali), the transaction
should be spot and at par.

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3. Qirad (partnership).
– This is a partnership between the
entrepreneur who provides the requisite
manpower and labour requirements, and the
businessman or financial institution who
provides the monetary assets.
– The owner of the monetary assets is not
viewed as a lender but as a partner.

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He is thus entitled to share in the
economic fortune of the business just as
he is estopped from not sharing in the loss
in case the business suffers a misfortune

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– Parties to a transaction therefore all carry the
risks inherent in that transaction.
– Together with the rules of zakah and
prohibition or riba, qirad influences the
redistribution of income between savings and
investments.
– Thus, the dichotomy between savings and
investments, which is a major flaw in the non-
Islamic economic system is removed.

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 Cont..
4. Social Insurance:
– Although this is quite common in non-
Islamic economies like the United States
of America, it has its basis in the Islamic
economic system.
– This rule provides that a minimum level
of economic wellbeing is achieved in the
society.

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– Based on the level of economic
development and efficiency of the zakah
system, the indigents in the society are
provided this social insurance.
– where zakah proceeds appear
insufficient, the state either levy
additional zakah on the rich or it
augments the deficits.

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5. Distribution of inheritance:

Inheritance is one of the ways of possessing
economic resources in Islam

Although different traditions and cultures of
the world have different methods of
distributing the deceased’s wealth, the
inheritance process in Islam is well
established in the Quran. See Quran (4: 1-
13).

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The divine nature of this provision
makes it superior to any manmade
inheritance laws. Thus, it is not
negotiable in an Islamic economic
system.

Gender, age, etc are not barriers to
inheritance in Islam. Even the
deceased’s relatives are entitled to a
share in the inheritance thus preventing
misdistribution of wealth in the society.
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6. The role of the state:
– The state is expected to ensure the
implementation and compliance of the
citizenry with the rules stated above.
– zakah collected are redistributed to
those entitled to collect (Q5:9)

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– Acts that are prohibited, e.g., hoarding,
gambling, prostitution, bribery and
collection, interests bearing transactions
etc.
– In order to finance public goods and
social projects, the state can levy taxes
above the zakah rate. This should be
done in a way that ensures redistribution
of wealth.

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– Nationalization of key industries for
societal and security reasons is also
permissible. This requires that prior
announcement is made and adequate
compensation provided to previous
owners of nationalized industries.

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A sacred function of the state in the
Islamic economic system is the provision
of the basic amenities that will enhance
the quality of lives of the entire citizenry.
This is done in a way that the racial,
religious, social, ethnic and other socio-
demographic divides are deemphasized in
the distribution and allocation of economic
resources.
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Positive and Complementary
Role of State
• to ensure ‘Islamic rules of the game’
• to create environment for ‘Islamic
man’ (political, economic, social,
religious, moral, legal)
• regulator (planner and supervisor
also)
• ensure ‘adl and ihsan’ (justice and
compassion)

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 Institution of Al-Hisbah
– ‘Amr Ma’ruf Nahi Munkar
– fard kifayah
– Muhtasib and qualifications of Muhtasib
– Economic functions
– right weights and measures
– checking business frauds
– correcting market imperfections
– hoarding
– unfair monopolies
– information monopoly
– essential goods supply and price
– ownership rights
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