Introduction to Islamic

Economics & Finance

Abdul Sattar Laghari

Class 03
After Completing this Module you will be able to:
1. Know Basics of Islamic Economics and Finance in detail Insha Allah Taala
with its Objectives.
2. Status of Economic Activities in Islam and Economic Prohibitions (7 ills).
3. Islamic Economic Guidelines & Differentiate between Islamic Economics and
Modern Economics.
4. Understand the difference between Islamic finance and conventional finance.
5. Basics of Capitalism and Socialism.
6. A historical perspective of Islamic Economics.
7. Possibility of Islamization of current financial system.
8. Current Issues and Islamic Perspective.
Introduction
Islam being a Very Comprehensive System Provides Guidelines for all activities of human being from birth to
.

death.

.Islam does it through a set of beliefs which create relation between man and Allah, man to man, man to
society and man to environment.

Further Islam does it through dos (awamir) and donts (manhyat).

.Economics is one of the Most important aspect of human life.

.Islam provides complete guidance towards economic behaviour:

Economic behaviour as is expressed in economics studies comprises Production Distribution

Consumption of goods and services.
The principles and fundamentals of Islamic economics are derived from two sources:

Quran & Sunnah.

Quran
It is a Book of Allah and His Holy Words.

Revealed on Prophet (Sallalahu Aliah Wassallam)

More than 80 Verses relate directly or indirectly to Economic activities of human

life.

One Ayat is the longest one in the last of surah al Baqarah.

Sunnah
The term Sunnah refers to the traditions of Our Holy Prophet ((Sallalahu Aliah
Wassallam) that include His Sayings, actions and Tacit approvals.

Sunnah is also known as Hadith.

The famous books are Sahah e Sitta.

Islamic Economics
Islamic economics is basically the knowledge and application of rules &
regulations of Shariah in the economics behaviour of a human i.e. Production,
consumption and distribution.
These rules provide justice in acquisition and disposal of material resources in
order to provide satisfaction to human being and enable them to perform their
obligations smoothly to Allah and towards the society. Allah Taala Says:

َ‫َوٱﺑۡ ﺗَﻎِ ﻓِﯾﻣَﺂ ءَاﺗَﯨٰ ك‬

‫ٱ‬
‫ض إِنﱠ ٱ ﱠ َ َﻻ ُﯾﺣِبﱡ ٱﻟۡ ﻣُﻔۡ ﺳِ دِﯾنَ ﻟ‬
ۖ ِ ‫ﻧَﺻِ ﯾﺑَكَ ﻣِنَ ٱﻟدﱡﻧۡ َﯾ ۖﺎ َوأ َۡﺣﺳِ ن َﻛﻣَﺂ أ َۡﺣﺳَ نَ ٱ ﱠ ُ إِﻟَﯾۡ كَۖ َو َﻻ ﺗَﺑۡ ﻎِ ٱﻟۡ ﻔَﺳَ ﺎدَ ﻓِﻲ ۡٱﻷ َۡر‬
Surah Al Qisas Ayat 77
Economic Principles (objectives): Derived from Quran & Sunnah

1. REAL OWNER - Allah Taala

Allah Taala is the real Owner of this world and owner of all its resources, wealth and factors of production.

al ٢٨٤ ‫ض ۗ َوإِن ُﺗ ْﺑدُوا۟ ﻣَﺎ ﻓِﻰٓ أَﻧﻔُﺳِ ُﻛ ْم أ َْو ﺗُﺧْ ﻔُوهُ ﯾُﺣَ ﺎﺳِ ْﺑﻛُم ِﺑ ِﮫ ٱ ﱠ ُ ۖ َﻓﯾَﻐْ ِﻔ ُر ﻟِﻣَن َﯾﺷَﺂ ُء َوﯾُﻌَ ذﱢبُ ﻣَن َﯾﺷَﺂ ُء ۗ َوٱ ﱠ ُ ﻋَ ﻠ َٰﻰ ُﻛ ﱢل ﺷَﻰْ ٍۢء َﻗدِﯾ ٌر‬
ِ ْ‫ت َوﻣَﺎ ﻓِﻰ ْٱﻷَر‬
ِ ‫ﱢ ﱠ ِ ﻣَﺎ ﻓِﻰ ٱﻟ ﱠﺳ َﻣـ َٰٰو‬
baqarah

Human is to acquire and utilise the property for his necessity, comfort and luxurious.

Every human has equal right to acquire and utilize the resources Allah has created in the world.

Holding resources unutilised for long period is not allowed.

Distribution of wealth after death.

Al Nisa ayat 4 ‫ﺿﺎ‬ ًۭ ‫ﯾب ﱢﻣﻣﱠﺎ ﺗَرَ كَ ٱﻟ َْٰوﻟِدَ ا ِن َو ْٱﻷَﻗْرَ ﺑُونَ ِﻣﻣﱠﺎ َﻗ ﱠل ِﻣ ْﻧ ُﮫ أ َْو َﻛﺛُرَ ۚ ﻧَﺻِ ﯾ ۭ ًﺑﺎ ﱠﻣ ْﻔرُو‬
ٌ ۭ ِ‫ﯾب ﱢﻣﻣﱠﺎ ﺗَرَ كَ ٱﻟ َْٰوﻟِدَ ا ِن َو ْٱﻷَﻗْرَ ﺑُونَ َوﻟِﻠﻧﱢﺳَ ﺂ ِء ﻧَﺻ‬
ٌ ۭ ِ‫ﻟﱢﻠرﱢ ﺟَ ﺎلِ ﻧَﺻ‬
Economic Principles: Quran & Sunnah
1. Islam does not allow to acquire, distribute and utilize the wealth by illicit and
illegal means.
2. Illegal and illicit means may create monopoly and wealth is utilized in few
hands.
3. Haram activities or means not allowed.
4. The access wealth should be distributed among the society by means of
Zakat, sadaqat and charity to avoid accumulation of wealth in few hands.
2. Human is Khaleefa to Allah Taala
Islam has described the real position of man on the earth. Allah taala sayas:

َ‫ك ٱﻟ ﱢدﻣَﺂ َء َوﻧَﺣْ نُ ﻧُﺳَ ﱢﺑ ُﺢ ﺑِﺣَ ْﻣدِك‬

ُ ‫ض ﺧَ ﻠِﯾ َﻔ ۭ ًﺔ ۖ ﻗَﺎﻟ ُٓوا۟ أَﺗَﺟْ ﻌَ ُل ﻓِﯾﮭَﺎ ﻣَن ُﯾﻔْﺳِ ُد ﻓِﯾﮭَﺎ َوﯾَﺳْ ِﻔ‬
ِ ْ‫َوإِذْ ﻗَﺎ َل رَ ﺑﱡكَ ﻟِ ْﻠ َﻣ َﻠ ٰـٓ ِﺋ َﻛ ِﺔ إِﻧﱢﻰ ﺟَ ﺎﻋِ ۭ ٌل ﻓِﻰ ْٱﻷَر‬
٣٠ al baqrah َ‫َو ُﻧ َﻘدﱢسُ ﻟَكَ ۖ ﻗَﺎ َل إِﻧﱢﻰٓ أَﻋْ َﻠ ُم ﻣَﺎ َﻻ ﺗَﻌْ َﻠﻣُون‬

Further Allah has created man in its best creature. Surah Al Teen
Huaman as Khaleefa and his position
1. The man has inbuilt ability to choose right and wrong.
2. Knows by default the good and evil.
3. Man has rights and duties that he knows well.
4. Rights of Allah and rights of fellow man.
5. All these rights and duties may be known from Quran and Sunnah.
6. Man can be rewarded or punished by dos and donts.
7. Man has to keep in mind the sense of accountability to Allah.
8. Man should consider himself in the world as a traveller. Hadeeth
3. Wealth and Resources
Third principle of Islamic Economic is wealth and its resources.

Allah Taala has created abundant and plenty of wealth resources between sky and
earth for human to keep maintain his existence till the judgement day.

٧٠ ‫ِﯾر ﱢﻣﻣﱠنْ ﺧَ َﻠ ْﻘﻧَﺎ َﺗﻔْﺿِ ًۭﯾﻼ‬

ٍ ۢ ‫ﺿ ْﻠ َﻧ ٰـ ُﮭ ْم ﻋَ ﻠ َٰﻰ َﻛﺛ‬
‫ت َو َﻓ ﱠ‬
ِ ‫۞ َو َﻟﻘَدْ ﻛَرﱠ ْﻣﻧَﺎ َﺑﻧِﻰٓ ءَادَ َم َوﺣَ َﻣ ْﻠ َﻧ ٰـ ُﮭ ْم ﻓِﻰ ٱ ْﻟﺑَرﱢ َوٱ ْﻟﺑَﺣْ رِ َورَ زَ ْﻗ َﻧ ٰـﮭُم ﻣﱢنَ ٱﻟ ﱠط ﱢﯾ َﺑ ٰـ‬
Al Isra
And We have certainly honored the children of Adam and carried them on the land and sea and provided
for them of the good things and preferred them over much of what We have created, with [definite]
preference.
Types of Resources
Actual and Potential

The resources that directly support the human existence are potential.

The resources that become economically useful after adding utility to them.

Allah has bestowed ability in man to work hard to get these resources but by the
way He has permitted.
4.Economic Trust and Relation
The fourth principle relates to the concept of economic trust and relation. Allah
Taala has distributed resources of wealth on the earth in unequal manner.

َ‫ض دَ رَ ﺟَ ٰـ ٍۢت ﻟﱢ َﯾ ﱠﺗﺧِذ‬

ۢ ٍ ْ‫أَ ُھ ْم َﯾﻘْﺳِ ﻣُونَ رَ ﺣْ ﻣَتَ رَ ﺑﱢكَ ۚ ﻧَﺣْ نُ ﻗَﺳَ ْﻣﻧَﺎ َﺑ ْﯾ َﻧﮭُم ﱠﻣﻌِﯾ َﺷ َﺗ ُﮭ ْم ﻓِﻰ ٱﻟْﺣَ ﯾ َٰو ِة ٱﻟ ﱡد ْﻧﯾَﺎ ۚ َورَ ﻓَﻌْ ﻧَﺎ ﺑَﻌْ ﺿَ ُﮭ ْم ﻓ َْوقَ ﺑَﻌ‬
Al Zukhruf ٣٢ َ‫ﺿﺎ ﺳُﺧْ رِ ۭ ًّﯾﺎ ۗ َورَ ﺣْ ﻣَتُ رَ ﺑﱢكَ ﺧَ ْﯾ ٌۭر ﱢﻣﻣﱠﺎ ﯾَﺟْ َﻣﻌُون‬ ًۭ ْ‫ﺿﮭُم ﺑَﻌ‬
ُ ْ‫ﺑَﻌ‬
Is it they who distribute your Lord’s mercy? We ˹alone˺ have distributed their ˹very˺ livelihood among them
in this worldly life and raised some of them in rank above others so that some may employ others in
service. ˹But˺ your Lord’s mercy is far better than whatever ˹wealth˺ they amass.
Economic Trust and Relation
Due to this diversity we see that:
Every two pieces of land are not equally fertile or favourable for production.
Every two individuals are are not equally capable of same struggle.
Every two individuals are are not equally capable of same intelligent to utilize the opportunities.
Therefore Islam has kept the share in wealth for others when it becomes surplus after a certain
period. It is only de the mercy of Allah Taala upon His slaves.
5. Economic Activities
The fifth main principle is Economic Activities.

The economic activities are Production, Consumption and Distribution.

Islam has prescribed rules about these economic activities:

a. No Exploitation of weak and poor in the activity of production.

Holy Prophet Sallalahu aliah wassalam has said to pay the wages of a labour
before the sweat dries. Ibn Maja
Economic Activities
B. It is prohibited to produce goods and services that are harmful to human and
society.

The commodities and services to be produced are categorized into Necessities,

Comfort and Luxurious.

C. Whatever is produced should be distributed as per the share of the persons

involved in the process of production without any deception.

D. The surplus after distribution should be invested in the business for more
production.
Economic Activities
E. The wealth earned through production must be consumed in manner prescribed
by Shariah and not be accumulated in few hands through illicit means squander or
hoard.
6. Trade and Business
The sixth principle relates to Trade and Business which plays pivotal role in the
Islamic Economics. Allah Taala says: ‫ذَٰ ﻟِكَ ِﺑﺄ َ ﱠﻧ ُﮭ ْم ﻗَﺎﻟ ُٓوا۟ إِ ﱠﻧﻣَﺎ ٱ ْﻟ َﺑ ْﯾ ُﻊ ِﻣ ْﺛ ُل ٱﻟرﱢ ﺑ َٰوا۟ ۗ َوأَﺣَ ﱠل‬
۟‫ۚ ٱ ﱠ ُ ٱ ْﻟ َﺑﯾْﻊَ َوﺣَ رﱠ َم ٱﻟرﱢ ﺑ َٰوا‬
They say tradies like riba, whereas Allah has permitted trade and prohibited riba.
Al baqarah 275.
Holy Prophet Sallalahu alaih wassalam has always preferred and encouraged
trade. He says: A truthful businessman will be under the shadow of throne of Allah
on the day of judgment. Al Isbahani
He says: A truthful businessman will be with Anbiya, Siddiqeen, Shuhada and
Salheen. Tirmizi
Trade and Business
Islam Provides complete guidelines to prevent fromopperassion and agression in trade
and business such as:

1. Trade is allowed by mutual consent without harming each other:

ۚ ‫اض ﻣﱢﻧ ُﻛ ْم‬

ۢ ٍ َ‫َﯾ ٰـٓﺄ َ ﱡﯾﮭَﺎ ٱﻟﱠذِﯾنَ ءَا َﻣﻧُوا۟ َﻻ َﺗﺄْ ُﻛﻠ ُٓوا۟ أَﻣ َْٰو َﻟﻛُم َﺑ ْﯾ َﻧﻛُم ﺑِﭑ ْﻟ َﺑـٰطِ لِ إ ﱠِﻵ أَن َﺗﻛُونَ ﺗِﺟَ ـٰرَ ًة ﻋَ ن ﺗَر‬

2. Transparency in Trade is mandatory. Avoid Gharar & Uncertainty

Prophrt Sallalahu alaih wassalam says: Do not sell what you do not have. Tirmizi.

3. Cannot trade commodities prohibited in Islam like wine, pork etc

7. Role and Nature of Money
Know about the Role and Nature of Money is seventh principle.

Islam views money as “Medium of Exchange & Measure of Value (price)”.

Normally it has become almost immposible for human to meet their necesities
through the exchange of commodities so there arisen need for medium of
exchange and that is money. Hence money has become medium to measure all
commodities, services, assets and wealth as a whole.

Islam never sees money as an asset.

Role and Nature of Money
Money is mere a tool to measure commodoties and not an asset in itself.
Money has no intrensic value in comparision to commodities nd services,
Money can never be utilized directly in fullfilment of human needs.
Money is only utilized to acquire goods and services.
Commodities have different qualities while money has no quality except it is a
measuring tool.
Therefore all denominations of same currency are cent percent equal to each
other.
8. Debt in Islam
The debt is generally created by two means:

1. When a commodity or asset is sold on deferred payment basis.

2. When someone seeks funds through financial loan.

Both types are onsidered in in Islam as an obligation.

The word “Dayn” is used in arabic in term of Debt.

Normally Islam discourages the debt base economy untill and unless there
becoes sever necesity.
9. Zakat and Charity
The ninth main principle of Islamic economics is Zakat. The word zakat means
growth in goodness or increase, purifying or making pure. Therefore, the act of
giving zakat is basically purifying one’s wealth to gain Allah Taala’s blessing to
make it grow in goodness.

As we have learned that Islam encourages to earn wealth as much as one can but
in a righteous way. There is no restriction or limit on the value of wealth one can
own. But the basic principle is that from the surplus of the wealth one owns, there
is need to spend some portion or part in the way of Allah Taala for the benefit of
the individuals who are indeed of that in the society.
Zakat and Charity
Allah Taala says:

Al Hadeed ٧ ‫ءَا ِﻣﻧُوا۟ ﺑِﭑ ﱠ ِ َورَ ﺳُوﻟِﮫِۦ َوأَﻧ ِﻔﻘُوا۟ ِﻣﻣﱠﺎ ﺟَ ﻌَ َﻠﻛُم ﻣﱡﺳْ ﺗَﺧْ َﻠﻔِﯾنَ ﻓِﯾ ِﮫ ۖ ﻓَﭑﻟﱠذِﯾنَ ءَا َﻣﻧُوا۟ ﻣِﻧ ُﻛ ْم َوأَﻧ َﻔﻘُوا۟ َﻟ ُﮭ ْم أَﺟْ ٌۭر َﻛﺑِﯾ ٌۭر‬
Believe in Allah and His Messenger, and donate from what He has entrusted you with. So those of you
who believe and donate will have a mighty reward.

This principle is derived from the fact that all wealth belongs to Allah, and people are only trustee to
Allah’s wealth. It is Allah’s invisible hand that turns and rotate the wheel of economic life. Hence
Allah has made it obligatory to pay a small portion (2.5%) of surplus wealth to the needy and
eligible people as zakat to purify wealth.
10. Savings in Islam
Islam is in fact religion of mercy so it encourages the concept of savings for future
human needs. Quran says:

َ‫ﻗَﺎ َل ﺗَزْ رَ ﻋُونَ ﺳَ ﺑْﻊَ ﺳِ ﻧِﯾنَ دَ أَ ۭ ًﺑﺎ َﻓﻣَﺎ ﺣَ ﺻَ د ﱡﺗ ْم ﻓَذَ رُوهُ ﻓِﻰ ﺳُﻧۢ ُﺑﻠِ ِﮫۦٓ إ ﱠِﻻ َﻗﻠ ًِۭﯾﻼ ﱢﻣﻣﱠﺎ َﺗﺄْ ُﻛﻠُون‬

َ‫ُﺛ ﱠم َﯾﺄْﺗِﻰ ﻣ ِۢن ﺑَﻌْ ِد ذَٰ ﻟِكَ ﺳَ ْﺑ ٌۭﻊ ﺷِ دَ ا ٌۭد َﯾﺄْ ُﻛﻠْنَ ﻣَﺎ َﻗدﱠﻣْ ُﺗ ْم َﻟﮭُنﱠ إ ﱠِﻻ َﻗﻠ ًِۭﯾﻼ ﱢﻣﻣﱠﺎ ﺗُﺣْ ﺻِ ﻧُون‬

٤٩ َ‫ُﺛ ﱠم َﯾﺄْﺗِﻰ ﻣ ِۢن ﺑَﻌْ ِد ذَٰ ﻟِكَ ﻋَ ﺎ ٌۭم ﻓِﯾ ِﮫ ﯾُﻐَ ﺎثُ ٱﻟﻧﱠﺎسُ َوﻓِﯾ ِﮫ ﯾَﻌْ ﺻِ رُون‬
Joseph replied, “You will plant ˹grain˺ for seven consecutive years, leaving in the ear whatever you will
harvest, except for the little you will eat. Then after that will come seven years of great hardship which will
consume whatever you have saved, except the little you will store ˹for seed˺. Then after that will come a
year in which people will receive abundant rain and they will press ˹oil and wine˺.”
Savings in Islam
We also find from the ahadees of our beloved Prophet Salllalhu alaih wassalam
motivation on savings, and he has advised not leave the children and family
members begging infront of others after one’s death.

A famous hadees about Saad bin Abi Waqqas who wanted to give away his all
wealth as charity but Prophet Sallaluh alaih wassalam advised him that it is better
to leave your heirs wealthy behind you rather than leaving them depedant and
begging from others. Nasai ibn Maja
11. Reward
The 10th principle of Islamic relates to the concept of Reward. Islam states that
self satisfaction, profit and self development do matter, but not to the extent that
Islam accords to the life here after. There is much beyond these materialistic
rewards, in the form of heaven and true success in the eternal life.

In the Quran Allah Taala Says:

al ٢٧٢ َ‫َوﻣَﺎ ﺗُﻧ ِﻔﻘُوا۟ ﻣِنْ ﺧَ ﯾ ۢ ٍْر ﻓ َِﻸَﻧﻔُﺳِ ُﻛ ْم ۚ َوﻣَﺎ ﺗُﻧ ِﻔﻘُونَ إ ﱠِﻻ ٱ ْﺑﺗِﻐَ ﺂ َء َوﺟْ ِﮫ ٱ ﱠ ِ ۚ َوﻣَﺎ ﺗُﻧ ِﻔﻘُوا۟ ﻣِنْ ﺧَ ﯾ ۢ ٍْر ﯾ َُوفﱠ إِ َﻟ ْﯾ ُﻛ ْم َوأَﻧ ُﺗ ْم َﻻ ﺗُظْ َﻠﻣُون‬
baqarah
In fact, by following the divine principles in acquisition, utilization and distribution of
wealth, both the individuals and the society enjoy the fruits of prosperity,
development and success in the life here and that of here after.
Having outline the Islamic Economic principles we can conclude that Islamic
Economics in simple terms, is the subject or science that studies and guides the
economic behaviour of man in light of Divine guidance. The fundamental principles
of Islamic Economic rest on and are grounded in sense of accountability,
responsibility, mutual trust, equity, justice and equal opportunity.
If viewed from practical aspect, it is evident that all principles of Islamic economics
are designed for the betterment of mankind in both worlds.