Chapter 1 :

INTRODUCTION TO
ISLAMIC ECONOMICS

1
01 INTRODUCTION

02 NATURE OF THE ISLAMIC ECONOMIC SYSTEM

03 THE HISTORY AND THE THOUGHT OF ISLAMIC ECONOMICS

04 PHILOSOPHY OF ISLAMIC ECONOMICS

05 PRINCIPLES OF ISLAMIC ECONOMICS

06 THE CHARACTERISTICS OF ISLAMIC ECONOMICS

07 THE IMPORTANCE OF ISLAMIC ECONOMICS

08 ECONOMICS AND ETHICS IN ISLAM

2
 01 INTRODUCTION

 Islam is not just a religion of worship; but Islam is a way of life, or

Ad-Deen.
 It is a complete and comprehensive way of living.
 Islam is based on the belief of One God (Allah) and the Prophet
Muhammad (SAW) as Allah’s messenger, and the Quran as Allah’s
revelation to guide man on earth.

3
02 NATURE OF THE ISLAMIC ECONOMIC SYSTEM

 A fair starting point to understand the role that Islam plays in

economics is to analyse the word ‘Islamic’ in the phrase
‘Islamic economics’, as it implies that the economic system is
a derivative of Islamic norms and values.
 The word Islam is derived from the Arabic root words silm or
salam. The former means to surrender or submit, while the
latter means peace.
 Islam means submission to the will of Allah and obedience to
His law.
4
02 …cont’

 Main components of Islam :

‘Aqidah
Shari’ah
Akhlaq

5
02 …cont’

‘Aqidah :
 ‘Aqīdah literally means a knot.
 ‘Aqīdah generally refers to a firm belief in the fundamental of
Islam which primarily centered at the pillars of Iman.
 Pillars of Iman > the belief of the Oneness of Allah SWT, His
angels, His Messengers, His Books, Hereafter and His Devine
decree.

6
02 …cont’

Shari’ah :
 Shari’ah literally means ‘the road to watering place’ or ‘the
path to be followed’.
 Shari’ah is a branch of Islam which relates to the practical
aspects (al-aḥkam al-‘amaliyyah).
 Sharī’ah within this understanding is everything attributable
to human conduct whether between himself, his fellow
creatures and the Creator.

7
02 …cont’

Akhlaq :
 Akhlāq is derived from the root word khulq which means to
create, to shape and to give form.
 The term khulq is used in the Qur’ān and Prophetic tradition
that denotes good behaviour or a standard of conduct to
be observed, or the set of moral principles.

8
 02 …cont’

ISLAM

‘AQIDAH SHARI’AH AKHLAQ

‘IBADAH MUAMALAH

POLITICAL ACTIVITIES ECONOMIC ACTIVITIES SOCIAL ACTIVITIES

BANKING & FINANCIAL

ACTIVITIES
9
02 …cont’

Definitions of Economics :

 Economics is the social science that studies the allocation of

scarce resources to satisfy unlimited wants.
 The social science concerned with the efficient use of limited or
scarce resources to achieve maximum satisfaction of human
materials wants.
 Economics is the study of choice and decision-making in a world
with limited resources.

10
 02 …cont’

Definitions of Islamic Economics :

 Islamic economics is a social science which studies the economic

problems of people imbued with the values of Islam.
 It is a study of social science which enables people to perform
their obligations to Allah SWT and to the society.

11
 02 …cont’

Definitions of Islamic Economics….cont’

 Islamic economic is a study of an individual not only as an isolated

individual but also a social individual having;
 Faith
 Ethics (believing in the six articles, his deeds is accountable to
Allah SWT as it is guided by Shari’ah)
 Responsibility (propagating in good doing and prohibiting bad
doing (Al-’Amr bi al-Ma‘rūf wa al-Nahy ‘an al-Munkar) in the
society 12
 02 …cont’

Goals of the Islamic Economics

 The ultimate goal in an Islamic economic system is Al-Falah, which

is a balance between material and spiritual well being.
 Hence, the goals of the Islamic economic system are the
maximization of human well-being within the framework of the
Shari’ah and moral norms of Islam.

13
02 …cont’

Views of Islam on the Economic Problems :

1. Abundant versus Scarcity of Resources

These Qur’anic verses stipulates that Allah SWT has created

resources in abundant, and there are enough resources for all,
implying that there is no absolute scarcity of resources. However
resources in the eyes of man are scarce and limited because there is
a lack of means to reach them for examples - lack of knowledge,
skills, etc.

14
02 …cont’

“And He has granted you all that you asked Him for. If you tried to
count Allah’s blessings, you would never be able to number them.
Indeed humankind is truly unfair, ˹totally˺ ungrateful.” (Ibrahim 14:34)

15
02 …cont’

2. Unlimited Wants

Islam recognizes that human desires are unlimited. This is explained

in the Qur’an and Ḥadith.

and love wealth fervently.

(Al-Fajr 89 : 20)

16
02 …cont’

 These resources are to be wisely treated, not abused, destroyed,

wasted or left to idle. Hence, when a man dies, one of the major
questions which will be asked is regarding the acquisition and
spending of his wealth.

 Based on these entire observations, Islam does not restricted

human being to make choices as long as it is in line with
Sharī’ah principles .

17
03 THE HISTORY AND THE THOUGHT OF ISLAMIC ECONOMICS

 Islamic economic thought is the Muslim thinkers’ response to the

economic challenges of their times.
 This response is naturally inspired by the teachings of Qur’an
and Sunnah as well as rooted in them.
 The thought and action of the four rightly guided Caliphs is
rightly regarded as an extension of the Sunnah.
 The development of Islamic economic thought, in its long history,
has not followed a smooth path. Thus, one has to be aware of the
various phases it has passed.

18
 03 …cont’

 Phases in development of Islamic Economic Thought

1st Phase 3rd Phase
Foundation phase. It began when stagnation
In this period – jurists, Sufis took the Muslim mind in its
and philosophers grip. This phase came to an
contributed to economic • 450 – 850H / end when fresh stirring • 1350H – now /
thought. • 1058 – 1446M started. • 1932M – now

• Early period of • 850 – 1350H /

Islam – 450H / 2nd Phase • 1446 – 1932M 4th Phase
• 632 – 1058M In this phase the scholars The current situation which
drew upon the rich starts from 1350H/1932M
intellectual heritage of and continues.
Islam in addition to the
Qur’an and Sunnah
*Note: Date are rounded and roughly corresponding, not exactly
19
 03 …cont’

 1st Phase – Foundation phase

1st Phase
Foundation phase. • 11 – 100H / 632 – 718M
In this period – jurists, • The formation period – this covered the period just after
Sufis and philosophers cessation of the revelation to the end of the Companions’ era,
contributed to
economic thought. when economic ideas were fully based on Islam’s internal
sources.

• 2nd – 5th H centuries / 8th – 11th M centuries

• Early period of • The translation period when foreign ideas were translated into
Islam – 450H /
• 632 – 1058M Arabic language and Muslim scholars got an opportunity to
benefit from the intellectual and practical works of other
nations.

• Scholars in this era – Abu Yusuf, Muhammad bin Al-Hasan,

Abu ‘Ubaid, Mawardi
20
 03 …cont’

 2nd Phase

• 6th – 9th H centuries / 12th – 15th M centuries

• The re-translation and transmission period, when Greco-Arab
Islamic ideas reached Europe through translation and other
• 450 – 850H /
• 1058 – 1446M contacts

• Scholars in this era – Al-Ghazali, Ibn Taimiyah, Ibn Khaldun

2nd Phase
In this phase the
scholars drew upon
the rich intellectual
heritage of Islam in
addition to the Qur’an
and Sunnah

21
 03 …cont’

 3rd Phase
3rd Phase
It began when
stagnation took the • 10th – 11th H centuries / 16th – 17th M centuries
Muslim mind in its
grip. This phase came
• Imitation and stagnation period, when formation of new ideas
to an end when fresh almost stopped.
stirring started.

• 850 – 1350H / • 12th – 13th H centuries / 18th – 19th M centuries

• 1446 – 1932M • Awakening and stirring phase, when voices for renovation and
fresh thinking were raised from various corners of Muslim
world.

• Scholars in this era – Shah Wali Allah, Muhammad Iqbal

22
 03 …cont’

 4th Phase • 14th H century / 20th M century.

• The period of modern Islamic economic thought
• Divided into 4 sub-phases
a. 1st quarter – “pre-take off” period – establishment of
modern institutions progressed, attention was paid to
edit and publish classical Islamic literature on socio-
• 1350H – now / economic issues and many leaders were born who called
• 1932M – now
for reform and revival.
b. 2nd quarter – “take-off” period – writing on economic
thought of Islam and economic problems with Islamic
perspective started mainly as a result of interaction with
4th Phase the west.
The current situation c. 3rd quarter – this period generally private individuals led
which starts from the movement of Islamic economics to forward. It may be
1350H/1932M and
continues. called big-push.
d. Last quarter – institutions also joined hands to develop
it. It is reconstruction and recognition period.
• Scholars in this era – M. N. Siddiqi, M. Umer Chapra
23
03 …cont’

 Islamic Economics Scholars & Their Contributions

24
 04 PHILOSOPHY OF ISLAMIC ECONOMICS

 The philosophical foundation of the Islamic economic system is

derived from the Qur’an and Sunnah.
 Human beings as servants of Allah SWT are expected to
optimize the use of resources to produce goods and services in
order to achieve material and non-material well-being with the
ultimate aim of Al-Falah in this world and the hereafter.
 In aiming for Al-Falah, the Islamic economic system is guided
and defined by the ideal philosophical foundations which include
the following key concepts :
a) Tawhid
b) ‘Ibadah
c) Khilafah
d) Amanah
e) Tazkiyah (purification) 25
 04 …cont’

a) Tawhid
 The essence of tawhid is total commitment to the will of Allah
SWT and to Him as the only sovereign power.
 This involves both submission and mission to pattern human life
in accordance to His will which is the source of value and is the
objective of all human endeavours.
 Hence, individually and collectively, Muslims shall not imitate or
emulate any other system if it differs from the principles of Islam.

26
 04 …cont’

 Tawheed can be divided into three categories :

Tawhid-al-Rububiyyah (Oneness of Allah's Lordship) is the ascription of all Acts

of Allah (Glorified and Exalted be He) to none but Him Alone, such as: creation,
bringing into being, providing sustenance, giving life, and causing death.

Tawhid-al-Uluhiyyah (Oneness of Worship) is the dedication of all acts of the

servants to none but Allah Alone, such as: Du`a' (supplication), asking help,
seeking refuge, fear, hope, reliance and all other forms of `Ibadah (worship).

Tawhid-al-Asma' wal-Sifat (Unification of Allah’s names and attributes) means

the firm conviction that Allah, the Glorious and Mighty, is characterised by all the
attributes of perfection.

27
 04 …cont’

b) ‘Ibadah
 Refers to an act or activity to seek the pleasure of Allah, whether
it be economic or non-economic and is within the boundary of
the Shari’ah.
 With the axiom of ‘ibadah, economic agents will implement
Allah’s commands, abstaining from His prohibitions, applying
everything that He has legislated.

28
 04 …cont’

 Since all blessings are from Allah, economic agents have to

demonstrate :
i. Shukr - gratitude for Allah’s bounties & efficient use of
resources
ii. Amanah – understand that the resources are trust from Allah
iii. ‘Itqan – precision of action
iv. ‘Adl – justice
v. Ihsan – proficiency and conscientiousness
vi. Qana’ah - contentment

29
 04 …cont’

c) Khilafah
 Human beings are created with the role of khilafah, that is, to be
the vicegerent of Allah SWT.
 This role outlines the responsibilities and provide the reasons for
the existence of human beings.
 Human beings are also endowed with the free will to make
decisions.

30
 04 …cont’

d) Amanah
 Allah has created man as His vicegerent and has created
everything else in the universe for the service of man.
 Every creation is an amanah from Allah to human beings, hence,
human beings as economic agents are responsible to society and
environment and ultimately to Allah.
 Resources are amanah whose actual owner is Allah and human
beings are accountable to Allah and will be questioned on the
Judgment Day.

31
 04 …cont’

e) Tazkiyah (purification)
 Refers to purifying one’s negative desire.
 It is also explained by scholars as ‘purification plus growth’ that a
human being shall undertake in all his or her relationships with
Allah, other humans, environment, society and state.
 As economic agent, tazkiyah refers to purification of wealth,
attitudes and relationships.
 For example : zakat, donation

32
 05 PRINCIPLES OF ISLAMIC ECONOMICS

 Three basic principles of Islamic economy are :

Multi-faceted Ownership

Economic Freedom within a Certain Limit

Social Justice

33
 05 …cont’

Multi-faceted Ownership

 Islamic economic acknowledges different forms of ownership at

the same time – private ownership, public ownership, state
ownership – differs from capitalist and socialist.
 The Qur’an makes clear that everything in the universe belongs
to Allah and He is the real owner of everything.
 Man holds property in trust for which he is accountable to him,
in accordance with Shari’ah.

PIF1023-NOV'20 34
 05 …cont’

Economic Freedom within a Certain Limit

 Allow individuals, at the economic level a certain freedom, within

the limits of the spiritual and moral value of Islam.
 The implementation of this principle in Islam is performed as
follows:
a) Islamic law provides the textual stipulation to forbid a group
of social and economic activities such as usury, monopoly.
b) Islamic law in principle lays down the supervision of the ruler
over general activities and the intervention of the state to
protect and safeguard public interest.
PIF1023-NOV'20 35
 05 …cont’

Social Justice

 Social justice is embodied in Islam by the elements and

guarantee, which Islam provided for the system of distribution of
wealth in the society.
 The image of social justice contains two general principles:
a. General mutual responsibility
b. Social balance
 Islam permits divergence in wealth within a reasonable limit but
does not tolerate this divergence growing so wide.

PIF1023-NOV'20 36
36
 05 …cont’

Social Justice…cont’

 Three elements necessary for the execution of social justice are:

a. Tawhid
b. Ijtihad – independent legal judgement, if there are no clear
injunction in Qur’an and Sunnah
c. Ethics – akhlaq or moral value

 Social justice can only be achieved through the establishment of

two institutional reforms namely – zakat and prohibition of
interest.
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06 THE CHARACTERISTICS OF ISLAMIC ECONOMICS

Rabbaniyyah Insaniyyah Akhlaqiyyah

(Divine Origin) (Humanness) (Ethicality)

Wasatiyyah Waqi’iyyah ‘Alamiyyah

(Moderation) (Practicality) (Universality)

38
 06 …cont’

 Islamic economics has a divine origin.

 Human beings became the khalifah (vicegerent) of Allah and
Rabbaniyyah this is how economic life emerged on earth.
(Divine Origin)  As such, Shari’ah rules that are derived from the Qur’an and
Sunnah, shall be applied in all aspects of economics,
business and financial delibrations taking place in society.

 Islamic economics is also concerned with the role of insan

Insaniyyah (human being) who possesses both physical and spiritual
(Humanness)
attributes to attend to the problems of resource allocation,
distribution and growth.

39
 06 …cont’

 The role of humankind as Allah’s vicegerent, are constantly

attacked by Satanic forces. This requires an individual to
Akhlaqiyyah
(Ethicality) exercise the power of intellect in dealing with economic
problems and choices where the likelihood of falling into
error cannot be overlooked.

 The need for balance and wasatiyyah is fundamental in any

form of conduct.
Wasatiyyah
(Moderation)  The fact that Islam upholds moderation as a principle of good
conduct implies that the benefits arising from such behaviour
are manifested in all livelihood including economics.
40
 06 …cont’

 Practicality – this includes considering the realities of life and

Waqi’iyyah
(Practicality) the importance of being efficient in using and handling of the
resources entrusted to humankind by Allah.

‘Alamiyyah  Islamic economics is not only for Muslim, it is for the entire
(Universality)
humanity.

41
07 THE IMPORTANCE OF ISLAMIC ECONOMICS

1. Prospering nature
 The role of humankind as Allah’s vicegerent.

2. Economic balance is maintained

 Shari’ah law really condemn the accretion of capital even
lawfully earned.
 Two major tools of balancing the economic well-being of
common people are zakat and sadaqah (donation).
 This plays an important role in shrinking the inequality in the
society.

3. The medium to promote Islam as the way of life

 Islam is a complete and comprehensive way of living
42
07 …cont’

4. Lucidity/transparency and clarity are promoted

 The rules related to the Islamic economy such as Islamic
financial products are very much related to nature, they are
easy and simple for comprehension.

5. Effect of damaging goods and practices is decreased

 Speculation, interest, cloning, gambling and weapons causing
mass destruction are forbidden in Islam.
 In this way, there is a decrease in the effect of damaging
goods and practices.

43
07 …cont’

6. Clear direction of Islamic trade and economics

 The Qur’an and Sunnah have provided clear direction
according to which commodities are benefiting and
damaging, also lawful and unlawful.

7. Need for Islamic economics

 The behavior of people, society and companies under
capitalism has the roots of injustice and selfishness.
 In Islam the equal distribution of money is very important.
 Therefore, the economic activities of people in Islam is not
only to fulfill their wants, but the welfare of people is given
more importance.

44
 08 ECONOMICS AND ETHICS IS ISLAM

Based on the Islamic world view, five fundamental pillars of the

ethics for Islamic economics are identified, namely:

 Oneness of God – Allah is the only Supreme Being and no other

being can ever have the same supremacy

 Accountability on the Day of Judgement – everything one

does is recorded and calculated, will be questioned on the
Judgement Day

 The divine message – is a divine guidance by Allah which sent

down by Prophet SAW to be followed by human beings

45
 08 …cont’

 Worship of God – the human race is created by Allah for the

purpose of worshipping Him

 Human beings are vicegerents of God – to worship Allah and

to manage/govern the world

46