A Comparative Analysis of

Capitalist and Islamic Economic Systems

Clancy N. Childs
Final Paper
AAPTIS 331 – Section 3
April 22, 2002
 A nation’s policies and actions are shaped by the political system that exists

within the country. The political system, in turn, is little more than a reflection of the

economic system that lies within the country’s borders. The essential relationship

between economics and politics is evidenced by the types of nations that have existed

through history . There are capitalist economies governed by democratic governments

and socialist economies within socialist governments, but never any other permutation of

the two. A capitalist economy is essentially impossible under a socialist political system;

the inverse is true as well. To understand the motives of a nation and its citizenry, the

social science of economics provides a framework for study of a people and their

interactions with each other and the outside world.

The study of an individual economic system can provide a certain amount of

understanding about subscriber countries’ behaviors, but the comparative study of two or

more economies offers more depth of information. Furthermore, comparative analysis

allows for discussion of what occurs when the differing economies interact.

In the aftermath of the collapse of most Eastern European socialist economies,

capitalism has stepped forward as the favored economic system of the developed world.

Because the United States, the world’s remaining super power, advocates capitalism, the

adoption of the economic system becomes a priority for developing or nascent nations

who wish to garner support and/or aide from America. This impetus behind capitalism

and its position in the world economy allows for it to be a good touchstone in a

comparative analysis of economic systems.

Islam, the dominant religion of the Arab world, provides more than just spiritual

guidance for its followers. Among the revelations exposed by the Qu’ran, the holy book
of Islam, is the outline for a complete economic system. This system of Islamic

economics has been studied and debated for more than a millennium and has been

implemented, in varying degrees of adherence, by several nations throughout history. The

widespread religion of Islam, the devotion of its followers and the economic importance

of Islamic nations make Islamic economics and the comparative analysis between it and

capitalism a relevant economic study. The rise of Islamism and the re-Islamization of

some Arab economies make the analysis more than relevant, but a contemporary

necessity.

Discussion of Islamic economics must begin with discussion of Islam itself.

Originating in the seventh century, the teachings of the prophet Muhammad formed

Islam. The religion, as regarded by economic historian Louis Baeck, “was a religious and

social response to the crisis in clan society and to the primitive ethics of the desert people

in the Hijaz.” (Baeck 95) The rampant polytheism and an exclusionary social network

that had preceded Islam had caused strife among disparate tribes. Islam sought to unite its

followers with the umma, a bond between the believers in Allah, Islam’s monotheistic

god. (Baeck 95-96)

The strength of the umma provided a basis for an Islamic society. The Qu’ran, the

transcription of the teachings of Allah as revealed to the prophet Muhammad, instructs

believers of Islam on how to conduct their lives. The Qu’ran, while focusing on the

spiritual duties of Muslims, also gives instructions on how to construct an Islamic society

that is true to the will of Allah. The Shariah are the laws that Islamic societies must enact

and observe.
 The Shariah is composed of three major sources, the Qu’ran, the Sunnah and the

hadith, all with varying degrees of interpretation. The word of the Qu’ran is considered

the immutable word of god. Interpretation of the Qu’ran is strict and its teachings are to

be followed without pause. The Sunnah, which are the sayings and actions of the prophet

Muhammad during his lifetime, are considered supplemental to the Qu’ran, but are

slightly more open to interpretation. Jurisprudence, set by the prophet Muhammad states

that the instructions of the Sunnah are second in importance only to the word of the

Qu’ran.. The hadith are reports of the prophet’s actions, but must be authenticated before

being recognized as actual Sunnah. This matter of authentication leaves hadith open to

much interpretation and forking of Shariah. (Nomani 1-7)

Islamic economic systems directly imply Islamic religious thought. Two major

tenets of Islam form the basis of Islamic economics. The single most important tenet of

Islam is tauheed, the oneness of Allah. Not only does tauheed espouse that there is no

other god than Allah, but it also holds that Allah’s plan for the universe is perfect. In

economic discussion, the importance of tauheed is extremely relevant in the discussion of

scarcity of resources, as will be explained later. (Chapra 5)

The second most important tenet of Islam, as applicable to economic discussion,

is adalah, the justice born from umma. Adalah commands fairness among the

brotherhood of Muslims and can be seen as the reasoning behind many aspects of Islamic

economics. (Chapra 6)

With the knowledge of Islamic jurisprudence and the underlying tenets of Islam,

as set forth above, explanation and comparison of Islamic economics and capitalism can

begin. At this point, it is important to note that the body of work done on both economic
systems is vast. The scope of this paper will only encapsulate a few aspects of economics

that highlight interesting similarities and differences between the two systems. First, it is

necessary to examine religion’s connection to the economic systems.

While Islamic economics’ ties to the religion are obvious, the consequences are

not. The practice of Islamic economics is heralded as the will of Allah, and therefore

offers little alternative to the devout Islamic state. Capitalism was born from the minds of

Western mortals. The position of God in capitalist economics is irrelevant and seldom

discussed by capitalist economists. Capitalism directs itself towards the wants of the

people, instead of God. Capitalism is a construct of man, and therefore reflects his flaws,

imperfections and self-importance. The non-divine origins of capitalism also allow for

rejection of capitalism among the religious. Adherence to Islamic economics is done so

by Muslims with the understanding that they are obeying Allah. For them, deviation from

the economic system set forth is not an option. (Ismail 317-319, 331)

Capitalism was brought forth by many economic principles, one of the most

important being the principle of the scarcity of resources. As set forth by Thomas

Malthus in 1798, scarcity of resources refers to the fact that there is a finite amount of

materials (resources) on Earth and an infinite amount of wants and needs by the

population. Values of the planet’s resources directly correlate to their relative scarcity.

(Malthus)

Muslim economists reject the theory of scarcity of resources, as it implies

imperfection of nature and Allah’s plan. The Qu’ran states that Allah has provided an

abundance of everything that humankind needs in order to subsist. Therefore, scholars of

Islamic economics contend that scarcity does not exist in nature. Instead, the limitations
of mankind’s productive capacity are what cause scarcity and, subsequently, value. The

outcome of what is dubbed “the economic problem” is the same when viewed by

capitalists and Islamic economists, though they arrive at the same point through different

arguments. (Nomani 83-84)

While capitalism and Islamic economics somewhat agree on scarcity, they differ

wildly on the topic of interest, or riba, as the Qu’ran labels it. Riba is strictly prohibited

under Shariah and therefore also prohibited in an Islamic economic system. The Arabic

root of the word riba is ‘to increase.’ In the economic sense, riba is the increase of value

of an item against and item of the same specie. (Ismail 356-358)

According to Islamic economics, the only correct way to trade similar products is

to do so on the spot, in equal quantities. Riba can be committed in two forms: riba-ul-fazl

and riba-un-nasiyah. Riba-ul-fazl is the act of exchanging something for like specie and

receiving a larger quantity. Gold must be sold for gold in equal quantities and wheat must

be sold for an equal quantity of wheat. The quality of the items is irrelevant, so inferior

quality wheat cannot be exchanged for a smaller amount of superior quality wheat.

(Ismail 373-376)

Riba-un-nasiyah is the exchange of a product for a time period that, when

elapsed, the lender receives a larger quantity of the product. This is, in effect, like the

interest charged by capitalist financial institutions. By lending money, a bank expects that

the borrower will pay back the lent amount, at a later date, plus interest. This system of

interest and credit, that is so intrinsic to capitalist economics as it is the basis for lending

money to individuals or firms, is forbidden in an Islamic economic system. (Ismail 376-

379)
 The forbidden nature of interest in Islamic economics and the necessity of interest

in capitalism is the greatest difference between the two economic systems. Further

differences between the two systems can be attributed to the different stances that they

take concerning interest or riba.

Of direct concern to the differing of opinion on interest are the monetary systems.

In most capitalist economies, money is created through the dispensing of credit. When a

depositor puts his or her money into a bank, the bank will lend a certain amount of that

money to a party that requires a loan with the expectation that interest will be paid on the

loan. The depositor still retains ownership of the money that was deposited and the

borrower is lent money on credit that is then his or hers. This mechanism for the creation

of money drives capitalist economies and provides monetary support for an ever-growing

gross domestic product.

Because this method of money creation involves credit and interest, Islamic

economic systems cannot allow it. Islamic economics calls for a single, central bank to be

in charge of a nation’s monetary supply and its minting. Furthermore, adherence to a gold

and silver standard is required. All money in a pure Islamic state must be backed by an

amount of gold or silver, or must be made out of one of the two precious metals. This is

to provide stability of the currency and to avoid committing riba in everyday exchange of

goods. (Ismail 338-346)

The accumulation of capital is another of the aspects of economics that differs

between the two systems because of the differing views on interest. Capital is what is

owned that can be used to produce more wealth. The accumulation of capital is extremely
important for success in a capitalist society, as further wealth, in the form of productive

output or interest, can be derived from the capital.

Under Islamic economics, accumulation of capital is seen as a reflection of greed.

Fifty-seven hadith pertain to the ownership of agricultural land, the most basic piece of

capital in agrarian society. These hadith illustrate Muhammad’s displeasure with crop-

sharing and taking rent (in the form of agricultural output) for agricultural land. Instead,

land is to be cultivated by the owner and excess land is to be given free of charge to other

Muslims or rented for a gold or silver value. (There exists some debate about engaging in

crop-sharing contracts with non-Muslims.) Accumulation of capital beyond one’s own

needs is against Islamic ideals. The rent of surplus wealth and the hoarding of capital are

contrary to the premises of adalah and umma. (Ismail 400-418)

In much the same vein as accumulation of capital, the attitudes of each system’s

consumers differ. The capitalist consumer is driven by utility functions, which dictate that

the more of something he or she has, the better. This behavior is referred to as the

“maximization of pleasure” and is looked down upon by Islamic economics. Instead, the

Islamic consumer is expected to make purchasing decisions by the maximization of the

pleasure of Allah. Islam categorically condemns miserliness and profligacy. All Islamic

consumers are compelled to purchase in moderation, though what level of consumerism

is considered moderate is debated among different schools of Islamic economic thought.

(Nomani 84-91) This muted attitude towards purchasing theoretically does away with the

need for advertising and luxury items, which exist as responses to consumerism.

This analysis of Islamic economics and capitalism has been, in actuality, a

comparative analysis between a pure Islamic economic system and pure capitalism.
However, no pure capitalist economy exists in the world (though the economy of the

United States is as close as it gets) and no ideal Islamic economy exists either. There are

nations that profess to be Islamic states, but their economic systems (as well as political

systems) do not strictly adhere to the Shariah set forth in the Qu’ran, the Sunnah and

hadith. Inspection of two of these countries allows for better understanding of the current

state of Islamic economics, and moves discussion from the theoretical to the real.

Of the Arab countries, the Kingdom of Saudi Arabia has the most direct economic

ties with the United States. Saudi Arabia is the oldest fundamentalist Islamic nation in the

world and is the home to the Islamic holy cities of Mecca and Medina. The country sits

on oil deposits that are estimated to be 25% of the world’s oil supply. Oil accounts for

90% of the country’s exports. 18% of its exports and 25% of its imports involve the

United States. (CIA Factbook) One would expect that such close trade relations would

affect the economics of Saudi Arabia.

The law of Saudi Arabia is the Shariah with further edict from the ruling family.

Of the Islamic states, the kingdom is generally considered to be the most adherent of

Qu’ranic law. However, it is also the most laissez-faire in terms of economics. Interest is

forbidden, as it is considered riba. However many independent financial institutions

resort to charging a “commission” on borrowing which, much to the chagrin of Islamic

purists, is effectively interest. (Nomani 153-154)

The Saudi Arabian Monetary Agency, the semi-independent central bank,

behaves like most central banks, except that because of Islamic constraints it cannot use

open market operations to control money supply. Instead, government spending regulates

the money supply. (Nomani 157) There is no adherence to the gold standard and the
exchange rate of the Saudi riyal is pegged to the U.S. dollar. (CIA Factbook) The

economy, despite its lack of a gold backing and open market monetary operations, has

held stable with a low inflation rate of 0.87% (Index of Economic Freedom)

The economy of Saudi Arabia attempts to hold fast to the ideal of Islamic

economics. However, Saudi Arabia’s dependence on its rigorous trade with capitalist

economies like the United States forces it to adopt some capitalist influences. Saudi

Arabia’s struggle with adhering to traditional Islamic economics while allowing in-roads

to its economy for capitalism is one observed by many economists and countries who are

faced with a similar choice between economic and religious adherence.

A country with much less cordial relations with the United States is Iran. Iran

maintains no diplomatic or trade relations with the U.S. The Islamic Revolution of 1979

was a backlash against the Shah’s economic modernization attempts (that were heavily

dependent on the West,), which left the poor of Iran more destitute. Currently, Iran is an

Islamic state with an economic system that, like Saudi Arabia’s, falls short of being a true

Islamic economy. (CIA Factbook)

Following the 1979 revolution, numerous private businesses, including all of the

country’s banks, were nationalized. Only in the past year was a law passed that allowed

for the reinstitution of independent banks. The government sets prices and subsidizes

most industries. High tariffs provide protectionism against imports. (Index of Economic

Freedom)

The Law of Usury-Free Banking, enacted in 1983, ensures that the country’s

financial institutions do not commit riba. Instead, the banks offer interest-free deposits

and profit sharing, which is a grey area in Islamic economics. A further evasion of
Islamic economics in Iran concerns discounting, which is the purchase of debt.

Discounting is legal under Iranian banking laws, however the difference between the

purchase price of a debt and the redemption value represents a form of interest payment.

(Nomani 177-180)

The Central Bank controls monetary policy in Iran by using reserve requirements,

direct credit control (which would be forbidden in a pure Islamic economy,) and limited

buying and selling of government bonds (also not a true Islamic monetary policy

instrument.) (Nomani 181) The Iranian riyal is not backed by any gold or silver, but

instead is a floating currency with an imposed “export” exchange rate of 3,000 riyal to

the U.S. dollar. (CIA Factbook)

In conclusion, there exist many differences between capitalism and Islamic

economics. Charging interest and the prohibition of riba being the most defining

difference between the two economic systems. Furthermore, Islamic economics are not

fully implemented currently in any nation. Instead, Islamic nations attempt to maintain

economic systems that are as Islamic as possible, while fulfilling the needs of the nation’s

trade industry.
 Works Cited
Baeck, Louis. The Mediterranean Tradition in Economic Thought. London: Routledge,
1994.
Chapra, M. Umer. Islam and Economic Development. Islamabad: International Institute
of Islamic Thought, 1993.
CIA World Factbook. Central Intelligence Agency. 19 Apr. 2002
<http://www.cia.gov/cia/publications/factbook/index.html>.
Index of Economic Freedom. Heritage Foundation. 19 Apr. 2002

<http://www.heritage.org/index/>.
Ismail, Sayed M. Critical Analysis of Capitalism Socialism and Islamic Economic Order.
Lahore: Oriental Publications, 1989.
Malthus, Thomas. An Essay on the Principle of Population. 18 Apr. 2002
<http://www.ac.wwu.edu/~stephan/malthus/malthus.0.html>.
Nomani, Farhad, and Ali Rahnema. Islamic Economic Systems. London: Zed Books Ltd.,
1994.