In order to address the economic system in Islam, we first of all need to clarify the position of Islam in relation to the quest for material well being. This is because the word dunya, which is associated with material wealth or worldly matters has become a dirty word for many Muslims.
The separation of deen from dunya (secularism) is a Western-Christian concept that has recently become widely internalised amongst Muslims. Consequently, seeking to increase in economic or worldly matters is frowned upon, - while continuous engagement in prayer and other personal ibadat is regarded as meritorious. As such, many people get confused and conduct a double life. On the one hand, money talks, it gives status and makes life comfortable, so they seek it vigorously. On the other, they feel guilty, thinking that their effort should be spent on 'religious' duties.
This is due to a misunderstanding of the position of the economic question in Islam. There is no doubt that Islam is opposed to monasticism and views the economic activities of man as quite lawful and sometimes even obligatory and necessary. We find many injunctions in Islam that allude to this. For example, Allah (SWT) says in the Qur'an: 'Disperse through the land and seek the bounty of Allah' (TMQ-62:10), He also says, 'Allah has permitted trade'(TMQ-2:275), And even more directly, Allah(SWT) says: 'Seek the other world by means of that which Allah has bestowed upon you, and do not be negligent about your share in this world.' (TMQ-28:77) These are all in reference to economic activity.
In the sunnah, we find that one of the most commonly said du'as that the Prophet(SAW) taught us is: 'our lord give us the good in this life and the good in the hereafter'.
But despite this, we find expressions in the Qur'an which state: 'The life of this world is but a delusion' -3:185 ; 'The mutual rivalry for piling up the good things of this world diverts you from the more serious things. - 102:1; and many others, stating that man has lust and greed for wealth(89:20) and that he is violent at this greed (100:8) and that he becomes boastfull and proud (11:10) and so on.
This apparently sounds like a contradiction in terms. But actually, what we are taught by Islam is that the real objective of our existence is to worship Allah(SWT) through righteous conducts by living as humans in this world. So all those things that are necessary for this life become essential for man. It is one thing to say that material well being is important and even compulsory but it is quite another to say that it is the ultimate goal and centre of thought and action in life. This is where the confusion arises about the Islamic economic question. The fundamental difference between Islamic economics and all materialist ones is precisely this. The materialists view that economic well being is the ultimate end of human life, while Islam says that these things may be necessary and indispensable, but cannot be the true purpose of life. Economic endeavours only become an allurement or delusion if man loses sight of his real purpose in their pursuit.
The right path to follow therefore is to fully engage into worldly economic life in the manner prescribed by Allah(SWT) and His Prophet(SAW), both at societal and individual level. The prophet said: 'Work for your worldly life as you were going to live forever, but work for the life to come as if you were going to die tomorrow.'
The economic problem in Islam.
Unlike the current world view as pushed by the capitalist west, Islam considers that the main economic problem that mankind will ever have is that of distribution of wealth and not of production. In the eyes of the capitalist West, there is relative scarcity of resources available in the world, and peoples demands for these resources are endless. Hence each nation and in fact the world should concentrate on more and more production. The higher the amount of wealth produced, the higher the number of people that will satisfy their demands through the process of economic activity.
Islam distinguishes between basic needs which include food, clothing and shelter, and luxurious wants which includes all those things that are not necessities in life. It views that there are enough resources to satisfy the basic needs of all people all the time and to satisfy some of the luxurious wants of people and that economic problem is that of distribution and not production. There are enough resources to feed, clothe and house everybody in the world fully as can be seen by the food mountains of Europe and the excesses of the few rich in each country, including the 3rd world countries. In accordance with their capitalist philosophy of maximising profit, we find governments paying farmers to produce less as in the EC countries, or to destroy what has already been produced as happened in poor Latin America where a huge amount of coffee was burnt. Far more wealth leaves the poor countries of Africa for the rich West than vice versa due to unjust economic deals. Even at the height of the Ethiopean famine crises in the late eighties, the country was exporting millions of dollars worth of resources to the West.
Allah (SWT) says in the Quran, 'It is Allah who created the heavens and the earth, and sent down from heaven water wherewith He brought forth fruits to be your sustenance. And He subjected to you the sea at His commandment; and He subjected to you the rivers and He subjected to you the sun and the moon constant upon their courses, and He subjected to you the night and the day, and gave you of all that you asked Him. If you count Allah's blessing, you will never number it; surely man is sinful, unthankful. (4:32-34). In another verse He says: 'Verily, thy lord doth provide sustenance in abundance for whom He pleases and He straiten it, for He doth know and regard all his creatures.' (17:30). These verses among many others show that Allah(SWT) has pooled in this universe all the needs and beneficial things for man, and has provided sufficient resources to satisfy material need of man.
In Islam, a distinction is made between economic science, which is to do with the means of production and economic system is concerned with the problem of distribution of wealth, namely the rules by which wealth can be acquired, used and disposed of. It is through the economic system that is specific to Islam that wealth is distributed equitably, while economic science is not particularly specific to Islam as such but can be acquired from any other people or developed as seen fit.
Objectives of the Islamic economic system
The objectives of the Islamic economic system can be classified as follows:
1) To satisfy the basic needs of each and every individual in the Islamic state completely
2) To provide the citizens of the Islamic state with the means to satisfy their luxurious needs
3) To achieve 1) and 2) through a naturally workable system with due incentives for economic activity and an equitable system of distribution.
Principles and policies to achieve the objectives
Ownership constitutes one of the important incentives for engaging into economic activity as the owner of wealth has the right to use or dispose of it. The means of acquiring such rights is one of the fundamental principles through which the objectives of the Islamic economic system are achieved.
In the Islamic economic system, it is understood that the real owner(Creator) of all wealth is Allah(SWT). We only 'own' wealth by proxy as guardians. Some of us acquire wealth by engaging in the production process and hence have a direct access to wealth. These include the factors of production as defined by Islam. Others have an indirect access to wealth simply because Allah(SWT) as the real owner of wealth has stipulated that those with direct access to wealth through engagement in the production process must pass some of it on to them as He made clear in the Qur'an: 'Give to them from the property of Allah(SWT) which He has bestowed upon you.' 24:33. This usually takes the form of Zakat, kaffarat, sadaqat-ul-fitr, inheritance, etc. which are given to the poor, the needy and later generations. It is the duty of the government to ensure that such wealth is duly transferred by law.
Notwithstanding this, Islam does not impose a limit on the amount of wealth that one can own. Rather, it controls the means of ownership such that people acquire the right to wealth in a just manner. This excludes speculation, forward transactions, lottery, and dealing with interest among other things.
Additionally, Islam also stipulates in accordance to the ahadith of the prophet(SAW) that certain properties are to be collectively owned for the use of all citizens. These include sources of energy, pastures and natural resources including water.
Through these ownership principles, Islam ensures that everyone gets what is rightfully due to him from his creator, unlike the capitalist system where only those who take part in the production process have the right to wealth. At the same time, it gives full incentives to individuals to fully participate in the economy by not imposing a limit on how much they can own.
2) Economic enterprises and the prohibition of interest and hoarding
Interest rates form the backbone of the capitalist system in many ways. It is used as a tool to regulate economic growth and monetary supply by acting as an 'incentive' for those who have surplus money to save/hoard. In Islam both interest and hoarding are prohibited. Allah(SWT) says in the Qur'an: 'And those who hoard up gold and silver and do not spend in the way of Allah, announce to them a painful chastisement. (9:34). He also says: 'Allah has permitted trade and forbidden interest.' (2:275). Owners of capital therefore have to invest it either in the form of private business or partnership.
The most fundamental criteria that must be met by all companies of partnership are that there must be offer and acceptance between two or more parties, and that once they become partners they have equal say in the running of the company. In addition to these criteria, the manner of sharing profit and loss is dependent on the type of company. In the Company of Equals (Anan) where partnership is formed by the wealth of two or more parties, any loss suffered by the company would be shared among the partners in proportion to the capital they put. In the Company of Persons (Abdan) where partnership is based on services provided by the partners, loss is shared according to the salaries/wages of the partners. In the company of Mudharaba where partnership is based on capital from one party and labour from another, loss is incurred by the owner of capital while the provider of labour loses their wage/salary. From these elementary rules and structures, many other forms of companies can be formed. In all cases, profit is shared according to mutual agreement independent of the amount of capital or service/labour provided.
Through this arrangement, continuous business investment keeps employment level high and both the rich and the poor get richer.
The role of the state
The government plays an important role in the economic system of Islam.
Islam makes it the responsibility of the state to provide food, clothing, shelter,education, health and security to every individual. It is also the responsibility of the state to enable citizens with the means of getting luxurious needs in addition to these basic needs by themselves. The state achieves this through the management of public property , through the use of income from other sources and through provision of good economic environment so that people satisfy their needs due to their involvement in economic activity.
Sources of revenue for the state
Fai - Property captured from the enemy without fighting
Ghanima - Booty
Ushr - Land Tax on unconquered land
Kharaj - Land Tax on conquered land
Jizya - Head-tax on non-Muslims
- Revenues from natural resources
- Fines levied
3) Facilitating luxurious needs
It is also the responsibility of the state to provide adequate infrastructure for the supply of such commodities to the people.
The most fundamental aims of the economy of any nation is to provide adequate supply of goods and services for its citizens and to enable each citizen to acquire and use them to raise their standard of living. This requires that wealth be created in the form of usable goods and services and that people get the means of owning and/or using these goods or services.
The degree to which these aims and objectives are met and the efficiency with which the citizens of the state participate depends on the specific rules of engagement, namely the economic system which the nation implements.
Apart from the general ideological framework upon which the economic system is based, the key ingredients for the economic success of any nation include:
1) Confidence in and stability of the system
2) Workability of the system by providing appropriate economic incentives for wealth creation and distribution
3) A just method of distribution.
Although only the capitalist economic system is practised in the world today, the Islamic economic system gives the best rules of engagement in economic activity and would be the most successful towards raising the standard of living of any nation.
a) On confidence and stability
Economic activity by its very nature is risky as those who partake in it directly can gain or lose wealth. Hence in all economic systems, there is always an understanding by those who participate that they may lose their capital or effort . However, there other phenomena that adversely affect the economic life of a nation by artificially creating an atmosphere of insecurity, and thereby reduce the level of economic activity. These arise because of the specific economic system implemented and include the followings:
i) Booms and Busts: In the capitalist system, periods of good and bad trade have become evident from the records. Although opinions differ widely among economists on the conditions responsible for trade fluctuations, a common feature is that root cause of these conditions stems from the foundations of the capitalist economic system.
ii) Runaway inflation: The fact that money continually loses its value has become an intrinsic part of capitalist economies. Here again there are quite a few opinions from economists as to what causes runaway inflation. But the recipe for runaway inflation lies at the heart of established financial controls in the capitalist system.
iii) Money market crashes: These occur irregularly in the form of sudden exaggerated changes in foreign exchange rates and sudden fall in share prices.
The most fundamental characteristics of the capitalist economic system which form the root of these phenomena are speculation and false representation. These are manifested in :
The artificial creation of money: There is nothing to prevent governments from literally creating money at will. Excessive creation of paper money which cannot be represented by real wealth is the root cause of inflation.
In addition, high street banks can lend money that is not existent by crediting peoples accounts on paper. This is false representation that is meant to keep the system going actually creates more artificial money.
In conclusion, the above points clearly outline certain fundamental differences between the capitalist economic system and the Islamic economic system. The inherent failing of capitalist economies can be seen today throughout the world, even in the Muslim countries, where it has been forcibly applied by corrupt rulers. The details of Islamic economics should fill us with confidence that Islam provides solutions to the ‘economic’ problem’, which the world around us currently faces.