COLLEGE OF BUSINESS

BWBS 1013
FOUNDATION OF ISLAMIC ECONOMIC

CHAPTER 1
AN OVERVIEW OF CONTEMPORARY AND ISLAMIC
ECONOMIC SYSTEM

Prepared by:
Mohd Farihal bin Osman
Contents
Bism il-Lah ir-Rahman ir-Rahim
This chapter discusses:

 The meaning and the concept of theory

 The development of theory

 The distinction between conventional and

islamictheory

 Definition of islamic economic

 Introduction

 Objective in islamic economic is to identify and promote an economic

order that conforms with islamic scriptures and tradition.
 Contribution to islamic economics typically begins with identifying
the distinguished characteristics of an islamic economy.
 Economi behaviour, as expressed by Muslim, refer to the
production,distribution and consumtion of good and service.
1.The meaning and the concept of theory

 Islamic economics is based on maral values and it is analytically

less rigorous. Islamic economics is something unique,different and
exclusive to islam.
 Islamic economic is the knowladge and application of injunction
and rules of shariah( islamic Jurisprudence). Economic activity is
categorised within these parameter as halal and haram.
 The key to the economic theory of islam lies in man’s relationship
with God,His universe and his people.
1.1 Source of islamic economic

 The source of islamic economic consist of mixture of

quran verses,quotations from traditions an classical
theological interpretation ( the hadith)
 Economic is only one dimension of the composite
philosophy of human life. The philosophy of islamic
economics is based on several fundamental as list below:-
i. Tawhid
ii. Risalah
iii. Akhirah
1.2 Theory of Islamic Economic

The basic objectives are to ensure general human well-being and

socio-economic juctice. Presented below are the concept that are to
be followed to be achieve equilibrium within a socio-economic
framework:-
i. Economic will- being and the moral Norm of islam
ii. Universal brotherhood
iii. Justice
iv. Prohibition on taking interest( riba )
v. Zakat
vi. Ownership
vii. Economic freedom within reason
i. Economic well-Being and the moral norm of islam

 Islam prohibits begging and curges Muslims to earn their livehood.

Emphasis of islam on economic well-being springs from the very
nature of its overall message.
 Islam is designed to be a ‘blessing’ for mankind and aims at
making life richer and worth living –not poorer,with full of hardships.
 islam creates harmony between the material and the moral.
Therefore, Muslims are urged to strive for material welfare but they
are stressed, simultaneously, to place this material- seeking effort on a
moral platform.
 Islam aims at establishing a social order where all individual are
united by bond of brotherhood and affection and at the same time
contribute to real human life welfare.
ii ) Universal brotherhood

 The concept universal brotherhood is mutual co-

operation and help, particularly among Muslims who,
besides being united to each other as well as to the rest
of mankind by a common origin, are further united by
bonds of common ideology and have been
characterised by the Quran as ‘brother-in-faith’ and
‘merciful amongst themselves’
iii) Justice

 Two elements are deemed to be the basic

characteristics of Muslim:-
 Social justice
There is no difference between the rich and poor, between the
high and the low or between the black and white. There is no
discrimination based on race,color,creed or position.
 Economics justice
The most significant of economic relationship is that which binds the
employer and employee. An employee is entitle to a ‘just’ wage for his
constribution to output and it is unlawful for a Muslim employee to
exploit his employee. Minimising the inequality of income and
bridging the gap between the rich and poor.
iv) Prohibition on taking interest (Riba)

 The most important of islamic economic is prohibiton on the

payment of and the acceptance of, interest,on any moneytary
transactions.
 Related to the abolition of interest are the prohibition on
speculation and wasteful consumption- both belived to be
associated with the unchecked materialism of wastern capitalism.
 Riba can be responsible for unemployment, inflation, recession,
stagflation and concentration of wealth, which are strictly against
the shariah.
v) Zakat
 Zakat is a voluntary tax on wealth( i.e, productive assets)
administered through mosque,which accumulate a welfare fund
to pay for various charitable and social project.
 Zakat is the system of islamic inheritance laws. Since,these laws
enjoin property owners to treat their son equally, with each
daughter receiving half the share of son, property is less likely to
be concentrade in the hands of small number of people.
 Islamic economic thinkers, they do belive that the problem of
severe inequality in income distribution will be obviated by the
combination of this system of inheritance with zakat.
vi ) Ownership

 “ Whatever is in the heavens and whatever is on the earth belong

to Allah”(Al-Baqarah,2:284).
 “And Allah is the kingdom of the heavens and the earth, and
Allah has power over everything.”( Al-Imran,3:189).
 Real ownership is belong to Allah. Man hold property in trust
and he is accountable to Him, in accordance with the rules which
have been clearly laid down in the Shariah Islami’iah.
vii. Economic freedom with reason

 Islamic economy allows individuals freedom within the boundary

of spiritual and moral value. The execution of this ‘freedom’ is
undertaken as follow:
i. There is textual stipulation that forbids activities such as
usury, monopoly or hoarding

ii. Islamic laws allow for the supervision of the ruler over
general activities and the intervention of the state to protect
and safeguard public interest through the limitation of
freedom of individual in the actions they perform.
1.3 The Development of thoery

 Developed classical economist- 18th and 19th centuries (Malthus 1778,

Ricardo 1817)

 Neoclassical economists in the and late 19th century (Mill 1848,Walras

and Marshall 1890)

 Kynes-20th (1936)

 Other economists including the rational expectations and the post-

Kynes schools.

 All these are in the tradition of mainstream conventional economics.

 1.4 The significance of economic & finance theories

 “Economy” and “economics” originated from the Greek word oikos

for “house” or “settlement” and nomos for “law” or “norms”.
 Economic divided into three phases:
i. Pre-modern(Greek,Roman,Arab)
ii. Early modern(mercantilist,physiocrats)
iii. Modern(since Adam Smith in the late 18th century)
 Economic is a social science that typically studies the production,
distribution, trade and consumption of goods and services.
i. Moderm ‘mainstream’ Economic
 Opportunity cost creates an implicit price ralationship
between competing alternatives. In addition, in both
market-oriented and planned economies,scarcity is
often explicitly quantified by price relationship.

ii. Neoclassical Economic

 Economicsts who believe that models based on utility
maximisation are applicable to a wide range of
activities, including the very long term and non-
economic.
iii. Post-Keynesian Economic
 Kynes focus on macroeconomics rigidities and
adjustment processes and research micro
foundations for their models based on real-life
practices rather than simple optimising models.

iv. New-Keynesian Economic

 The emphasis on models based on micro
foundantions and optimising behavior,but they focus
more narrowly on standard Kynes theme such as
price and wage rigidity.
1.4 The distinction between conventional and islamic theories

 The value of islamic economics lie in the principle that it is an

economic strategy that can achieve unity nad harmony between the
material and the spritual life of people.

i. Moral value
moral uplift aims at changing the bahaviour, tastes and
preference of the individuals,and thereby it compliments the
price mechanisme in promoting general well-being
ii. The importance of the hereafter

The hereafter is a concept which is completely ignore by conventional

economics,but is greatly emphasized by islam and other major
religion.whilst conventional economics also seek optimal allocation of
resources, the fact that is unable to offer rewards for benevolent acts means
that the humane side of the economy is neglected.
iii. Rational economic man

Rationality is defined in term of overall individual as well as social

well-being, then the rational behavior can help us to realise this
particular goal. Conventional economic is not define rationality.
Rationality wuth the serving of self-interest through wealth
maximisation. Rationality in islamic economic is not confined to the
serving of one’s self-interest in this world.
iv. Positivism
Positivism in the conventional economics sence of being “ entirely
neutral between ends”(Robbin) or “independent of any particular
ethical position or normative judgment”(Friedman) cannot find a
place in Muslim intellectual thinking.

Conventional economics, which keeps it away from characteristics

such as benevolence and equality; these two being ideals greatly
encouraged in islamic economics.
v. Pareto optimum
The concept of Pareto optimum does not, therefore, fit into the
paradigm of islamic economics. This because Pareto optimality does
not recognise any solution as optimum,if it requires a sacrifice on the
part of a few(rich) to raise the well-being of many(poor).
END OF CHAPTER 1
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