Tuesday, October 14, 2008

The Islamic Economic System as an alternative

The following is the transcript of the speech delivered by a brother on Saturday 11th October 2008.

Allah (swt) says:

كُنْتُمْ خَيْرَ أُمَّةٍ أُخْرِجَتْ لِلنَّاسِ تَأْمُرُونَ بِالْمَعْرُوفِ وَتَنْهَوْنَ عَنِ الْمُنْكَرِ وَتُؤْمِنُونَ بِاللَّهِ

“You are the best of the nation raised up for mankind because you enjoin what is right and forbid the wrong and believe in Allah” [Ali-Imran 3:110]

Allah (swt) has blessed us as being the best nation raised up from humanity because we enjoin the good and forbid the evil – we need to realise our responsibility of speaking our against the evil and injustice that we see globally today. One of these great evils we see around us is the economic injustice and oppression caused the world over by the current capitalist world order

The current financial crisis has seriously eroded confidence in the Western world and has exposed the free market. However the Western world when looking at alternatives only see remnants of Socialism or some state intervention in economy as feasible and workable systems. It is also this reason that allows free market ideologues to continue citing more regulation, transparency i.e. more capitalism with some tinkering as solutions. I recall a discussion with my previous economic Professor where I put forward the ills of Capitalism, after debating the points exhaustively he said, ‘Capitalism is the best of the worst’. I then went on to explain the Islamic economic system as an alternative, it became obvious that he had never considered Islam as having any alternative nor had studied it.

This crisis represents an opportunity for all Muslims to present the Islamic economic system as an alternative. We have to realise to consider that when Marx wrote his theories of Communism in the 1800’s whilst sitting in Britain, his ideas although many people disagreed with them were seen as a viable alternative, this is why Lenin later took up these ideas, formed a party based upon them and they were eventually embodied in a state. This occurred even though these were new theories that had no history of implementation. We have to then consider that unlike Marx who denied the existence of Allah and whose ideas were disproved by the clear reality of the failure of Communism, we have the truth from Allah (swt) and also have a history of the implementation of Islam.

Therefore today it is vital for us to present Islam as an alternative. It is important to show Islamic economics as much more then Islamic finance and Banking. What is known as Islamic banking and Islamic finance is about individuals or groups attempting to generate profits in the current system without breaking the shariah rules such as the prohibition of Riba. However today I’m going to focus on the Islamic economic system as a whole which is much wider than this and is the true alternative to the Capitalist system

Although no Islamic state exists today, we have the economic system of Islam derived from the Quran and the Sunnah and over a thousand years of history of its implementation. Based upon this we must initiate thinking amongst the ‘left’ and the right’ and to demonstrate to them how Islam is not just a religion like the others but is a comprehensive ideology able to deal with the current crisis’s that humanity is faced with.

The Islamic economic system

Of course in a short talk such as this it is not possible to go through the entire Islamic economic system in detail, I aim to cover its key aspects especially in relation to how an Islamic system holds the key to solving the current financial crisis.

As any economic student would learn in their first economics lesson, we have to start with the definition of the economic problem which is the fundamental view of the economy. In Capitalism they believe that there is unlimited wants and limited resources therefore the focus of the economy should be production, so they believe in producing more and more for people to consume. This has also come be known as ‘trickle down economics’ where the focus is on increasing the size of the cake, believing that it will somehow trickle down into the bellies of the hungry.

This is why they have so much emphasis on the GDP (Gross Domestic Product) or GNP (Gross National Product). This is why we saw the BJP talking about ‘India shining’ when the GNP had increased, even if that increase was in the bank accounts of the corporate’s and not reaching the common man

1. Islam focuses on the distribution of wealth not just the production.

Islam views the economic problem in a radically different way than Capitalism and Socialism. Islam focuses on the distribution of wealth not just the production. The problem of poverty will not be solved by producing more and more for the rich to consume rather it will be solved by ensuring that basic needs of every individual are satisfied completely. There are enough resources in the world to satisfy the basic needs of everyone

Islam looks at every individual by himself rather than the total of individuals who live in the country. It looks at him as a human being first, who needs to satisfy all of his basic needs completely. Then it looks to him in his capacity as a particular individual, to enable him to satisfy his luxuries as much as possible.

2. All basic needs guaranteed

The Ahkam Shari'ah have secured the satisfaction of all of the basic needs (food, clothing and housing) completely, for every citizen of the Islamic State (Khilafah).

The Prophet (saw) said, "The Son of Adam has no better right than that he would have a house wherein he may live, a piece of clothing whereby he may hide his nakedness and a piece of bread and some water" [Tirmidhi]

The Islamic state has a duty to provide for those who cannot provide for themselves or whose families cannot provide for them

Umar ibn Abdul-Aziz, the famous Khalifah, wrote to his agent in Basra, Iraq, ‘Search for the people of the covenant in your area who may have grown old, and are unable to earn, and provide them with regular stipends from the treasury to take care of their needs.’ [Abu Ubayd, al-Amwaal, p. 805]

The Islamic state used to have public baths, Musafir Khana’s where travellers could stay for free and even open kitchens – e.g. in Bosnia during the Ottoman Khilafah period there were open kitchens where the poor could go and eat for free

The first organised hospital was built under Islamic rule in Cairo in 872CE. The Ahmad ibn Tûlûn Hospital treated and gave free medicine to all patients. It provided separate bath houses for men and women, a rich library and a section for the insane. Patients deposited their street clothes with the hospital authorities for safe keeping, before donning special ward clothes and being assigned to their beds. Each patient would also have his or her own medical record.

3. Circulation of wealth is a duty

Allah (swt) emphasizes that the wealth should not circulate amongst the few, He (swt) says referring to wealth:

كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاءِ مِنْكُمْ
“That it does not become a commodity between the rich among you.” [TMQ Al-Hashr: 7]

Islam has made the circulation of wealth between all citizens an obligation, and it has forbidden the restriction of such circulation to a certain group of people to the exclusion of others.

Hoarding/monopolizing goods is forbidden. Producers or retailers cannot hoard or monopolize goods in order to cause the price to rise. This is based on the ahadith: “The Messenger of Allah (saw) forbade that a foodstuff be monopolized.” [Athram] and “Whoever monopolized is a wrongdoer.” [Muslim].

4. Prohibition of Riba – encouragement of investment

The abolition of all interest based contracts, to be replaced by contracts which share returns and risks.

Allah (swt) says:

وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا
“Allah has permitted trade and forbidden (all) interest.” [TMQ Al-Baqarah: 275]

The prohibition of Riba (usury/interest) encourages people not to just save their money in a bank waiting for the interest – rather if there will be 2.5% Zakah charged on their unused wealth – this encourages people to spend and invest which generates economic activity and is healthy for the economy. The more spending and investment, the more jobs are created and more wealth is circulated.

I want to touch briefly here about the concept of loans and Riba – people don’t realise the exploitative nature of Riba. In Islam loans are given for ethical reasons with the intention of achieving a reward from Allah. The Prophet (saw) said: "Every loan is a sadaqah". In capitalism the one who gives the loan, shares the profit but not the loss, this is very unfair and unjust. In Islam if you want to share the profit then you must share the loss also – this is the model of Partnerships or company structures in Islam. Like Mudharabah - where someone invests and the other person works and they share the profit and loss. Islam has an equity based system when both sides share the risk and the reward is fair unlike the oppressive Riba based system

Today interest based debts are crippling people and entire nations. Ali (ra), the cousin of Allah's messenger, pointed out regarding the pre-Islamic age: "We withstood the weight of the Iron, the Stone and the Lash, but we could not endure the weight of debt."

5. The Islamic economy is real and Islam prohibits the current form of financial markets

The Islamic economy is based upon wealth generation where participants partake in investment, employment and trade in the real economy. Islam does not have a dual economy where the real economy operates alongside a financial sector. The Islamic economy focuses all participants on the real economy, through employment, company profits, utilisation of land (agriculture) and manufacturing, wealth is generated in only one sector. This brings the huge benefit of wealth only circulating in one sector - the real economy, where all can participate.

The Islamic system does not recognise the financial markets in their current form. One is able to purchase shares and transfer them without actually partaking in the running of the underlying company that the shares are meant to represent. In Islam ownership is a direct role in a company and not just a share certificate which in effect the stock market allows to be traded and re-traded. It is this ability to not have a direct role in a company that allows excessive speculation. The financial markets are different to the real economy of goods and services. As the first speaker pointed out this is in fact one of the root problems of Capitalism, the size of the world’s stock markets are estimated at $51 trillion, the world derivative markets are valued at $480 trillion, 30 times the size of the US economy and 12 times the size of the world economy!

There are many reasons as to why Public Limited Companies (PLC’s) stock markets are haram in Islam. One of the key reasons being the issue of liability. The public limited company system gives the public company a distinct quality of limited liability, aimed at protecting major capitalists and businessmen in case the company fails and incurs losses, in which case, those who have claims against it would not be able to demand from its investors any compensation no matter how large the personal assets of the investors are. The financial claims are only confined to what is left in the company in terms of assets. This system is contradictory to Shari'ah in every aspect. The Shari'ah rule obliges all to repay debts in full to the rightful owners, and it is forbidden to cut anything from them.

Al-Bukhari reported on the authority of Abu Hurayrah that the Messenger of Allah (saw) said: "He who takes money from people with the intention of paying it back Allah will pay on his behalf, and he who takes it with the intention to waste it Allah will waste him."

Ahmed also reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw) said: "You shall return the rights to their rightful owners on the Day of Judgement, even the ewe with no horns will get even with the ewe with horns by butting it back."

Hence, the Messenger of Allah (saw) has confirmed the obligation of fulfiling one's rights in full in temporal life, and if one does not he will do so on the Day of Judgement. This serves as a warning for those who devour people's rights.

Islam has its own company structures, there are 5 types which are all related to real partnerships between body and capital. These are Al-'Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation)

Ad-Daraqutni narrated from Abu Hurairah that the Prophet (SAW) said: “The Supreme said I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them.”

Islam is against monopolies and encourages competition

PLC stock market companies are able to amass huge amounts of wealth today, to the extent that some companies have more wealth than some countries. In an Islamic system this could not happen due to the prohibition of PLC’s who are able to generate this wealth by issuing shares to the public. This has a positive impact on the economy, as huge companies are able to become monopolies, duopolies or oligopolies which are able to dominate the market place such as Microsoft, Coca-Cola and Pepsi. Even Capitalist agree that monopolies are negative externalities and Adam Smith, the founding father of Capitalism dreamed of an economy with perfect competition an ideal which they can never achieve due to the free market itself. However the Islamic economic system leads to this as by applying its rules it would lead to small to medium companies competing with each other in every market which is healthy for the economy as competition decreases the price and increases quality.

E.g. Why should 3 companies dominate the entire soft drinks market in the world as is today? They completely dominate the market, have enough wealth to buy out any competitors like Coke did with ‘Thumbs Up’ in India. Monopolies have the power to sell lower grade goods to the market without us having any choice, we all remember the Pesticide scandal that took place here.

6. It is prohibited to sell what you don’t have

Unlike today where we see short selling or forward selling, where people sell what they don’t yet own

Islam makes it a requirement for traders to own currencies, instruments and commodities before selling them. It is narrated from Hakeem bin Hazam (ra) who said: “I said: O Messenger of Allah, there comes to me a man asking me to sell what I do not have to sell then I buy if from the market. He said: Do not sell what you do not have” [Ahmad]

7. Islam neither believes in a free market nor a command economy

The Islamic economic system is neither Capitalist where the market is left free to lead to the disasters that we are seeing nor Communist where everything is owned and controlled by the state. Islam distinguishes between public property, state property and private property. Islam forbids the private ownership of the large resources such as the Oil and Gas that we see the Western companies fighting over in the Muslim world.

The Prophet (saw) said:

«الناس شركاء في ثلاث الماء والكلأ والنار»
"People share in three things, fire, water and the green pastures" reported by Abu Dawud. Anas reported from Ibn Abbas adding “and its price is forbidden”.

In addition to this the Prophet (saw) used to take back lands from people if he found they contained vast resources such as a salt mine.

The huge revenue generated by public resources such as Oil and Gas in an Islamic state be utilised for the benefit of the public and not for the personal interests of the rulers who siphon off the money into their swiss bank accounts and spend it for their own pleasure as we see the rulers of the Gulf doing today. The Prophet (saw) said:

«…الإمام راع وهو مسؤول عن رعيته »
“The Imam is a shepard and he is responsible.” [Bukhari, Ahmad, Bayhaqi]

8. The Gold & Silver standard for currency

As the brother has explained in the first talk, today’s currency is fiat currency backed by no real assets, only backed by confidence. This is the reason we have increasing inflation the world over. Islam solves this problem as the basis of the currency in Islam is Gold & Silver, the currency is backed by and is interchangeable with it.

The Prophet (saw) established the basis of the Islamic currency, the Dirham and the Dinar upon these tangible things which hold real value and retain value. The Islamic rules have been set in the Quran and Sunnah in terms of Gold and Silver such as the Nisab of Zakah.

It is allowed to have paper notes as long as they are backed by Gold and Silver. So in the Islamic state you can go to the Bayt al-Mal and exchange the paper notes. Therefore inflation is eliminated as the value of gold and silver are stable. The Islamic state cannot just simply print money as they do today without any asset backing, or create money out of thin air! In fact due to the current inflation and financial crisis we can see people are turning to buying gold instead of putting their money in stocks as they know it has a real value.

Conclusion

As you would have realised the key aspects of the economic system I highlighted are much more than the current Islamic banking or Islamic finance and it should be clear that this system cannot be implemented without a true Islamic state which rules by the Shariah and unlike the Muslim world today is a truly independent state and not an agent of the West.

Instead of turning to billions of dollars of bailouts where the US and UK are spending tax payers money in order to save their collapsing financial system, people should realise that Islam offers the world a practical alternative. The next speaker will elaborate on the importance of taking the Islamic system as a whole and not separating the economic system of Islam from the other systems such as ruling or punishment.

Even many non-Muslim thinkers have recognised the progress and development that was achieved under Islamic rule in history in all fields of science and technology.

Phillip Hitti in 'Short History of the Arabs' says, "During all the first part of the Middle Ages, no other people made as important a contribution to human progress as did the Arabs, if we take this term to mean all those whose mother-tongue was Arabic, and not merely those living in the Arabian peninsula. For centuries, Arabic was the language of learning, culture and intellectual progress for the whole of the civilized world with the exception of the Far East. From the 9th to the 12th century there were more philosophical, medical, historical, religious, astronomical and geographical works written in Arabic than in any other human tongue."

The Islamic system has come for the whole of humanity

وَمَا أَرْسَلْنَاكَ إِلَّا رَحْمَةً لِلْعَالَمِينَ
“And We have sent you (O Muhammad SAW) not but as a mercy for the 'Alamîn.” [TMQ 21:107]

It is a system not thought up by the minds of men, rather it is from the creator of humankind Allah (swt) and it is the perfect system for humanity. Let us all work to re-establish this system once again.

Hasan al Basri narrated that Allah's Messenger (saw) said: "He whom death overtakes while he is engaged in acquiring knowledge with a view to reviving Islam with the help of it, there will be one degree between him and the Prophets in Paradise." [Al-Tirmidhi]

Saturday 11th October 2008

9 comments:

Editor @ Ijtema said...

Assalamu 'alaykum wa rahmatullah

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Mark Herpel said...

"There are enough resources in the world to satisfy the basic needs of everyone"

This is very true and it is wonderful information you have posted here.

Gold and silver, are true money not paper credit.

Mark
editor@dgcmagazine.com

Anonymous said...

"Based upon this we must initiate thinking amongst the ‘left’ and the right’ and to demonstrate to them how Islam is not just a religion like the others but is a comprehensive ideology....."

There's talk of a 'right' and 'left'. What's the meaning of that...?

Islamic Revival said...

It means the right and left of the political spectrum i.e. the conservatives and the leftist socialists alike.

Maher Kababji said...

Your No.7
God (SWT) has created the frame work of the economic system which is the natural market system within which both demand and supply are freely interact to determine prices.

Humanity disruption into the natural market price system is prohibited.
“And do not do mischief on the earth after it has been set in order …” (Al-A’araf, 7:56)
• Should provisions are supplied in abundance; people would rebel in the earth.
“And if Allah were to enlarge the provision for His slaves they would surely rebel in the earth, but He sendeth down by measure as He willeth. Lo! He is Aware, a Seer of His bondmen.” (As-Shura 42 : 27).
The Holly Quran sets the regulations that people must follow to ensure freedom of the market. The regulations require the avoidance of all types of intervention into the natural price system;
1- Prohibition of fixing prices
“Anas reported that the current price once became dear at the time of the Messenger of Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet replied: Verily Allah is One who controls price, curtails, gives amply and provides sustenance; and certainly I hope that I should meet my Lord while there will be none amongst you who will hold me responsible either for blood or for property.”(Tirmizi, Abu Daud, Ibn Majah)
2- Prohibition of monopoly
Ma’mar reported that the Messenger said: Whoever monopolizes is a sinner. (Muslim)
3- Prohibition of greed
“And O my people! Give full measure and weight in justice and reduce not the things that are due to the people”(Hud. 11:85)
4- Prohibition of present taxes
Ordinary tax
“And eat up not one another’s property unjustly nor give it to the rulers that you may knowingly eat up a part of the property of others sinfully ….” (Al-Baqarah. 2:188)
5- Prohibition of speculative activities
Speculation in assets
“and maisir, and …, and arrows for seeking luck are an abomination of Satan’s handiwork, So avoid that”. (Al-Ma’idah. 5:90)
6- Prohibition of financial corruption
“and Allah likes not mischief”(Al-Baqarah, 2:205)
7- Prohibition of Riba
“Allah has permitted selling and forbidden Riba” (Al-Baqarah. 2:275)

Your No. 8
In present economies, money is no longer a product. It is just a medium of exchange. Neither returning back to money made in gold is impractical solution. Backing currency with gold or with other currency raises an issue of hoarding gold or money
“Woe to every slanderer and backbiter. Who has gathered wealth and counted it. He think that his wealth will make him last forever. Nay! Verily, he will be thrown into the crushing Fire.” (Al-Humazah.104: 1-4)
“And those who hoard up gold and silver and spend them not in the way of Allah, announce unto them a painful torment” (Al-Taubah. 9:34)
Money is just a social convention required to facilitate exchange transactions. It should not affect prices.

The Holly Qur’an clearly sets the guidelines for the establishment of Islamic Economic system. The verses of the Holly Qur’an not only explicitly introduce prohibited acts, and permitted acts, but also they regulate permitted acts.

Upon your request, I shall be glad to email you my proposed alternative economic system which is based on the Holly Qur’an and Sunnah. The system illustrates the ideological views of Production, Market and prices, Money, Financial activities and Distribution. It also introduces practical implementation methods. It is NOT in compliance with Islamic Fiqh, because the Fiqh regulates transactions occur in a completely different economic environment.
Your comment will be highly appreciated.
Maher Kababji

islamic banking courses said...

The Islamic economy is based on wealth creation, where participants share investment, employment and trade in the real economy. Islam is not a dual economy in the real economy operates alongside a financial sector.

santia said...

I like Dinar.and its revaluation of currency.
Dinar

Polistra said...

Excellent explanation. For several years I've been trying to think about better ways to run an economy, and it turns out that most of "my" ideas were invented 1400 years ago!

The Islamic system (at least in ideal form) is clearly based on a sympathetic and ACCURATE assessment of human nature. Capitalism and communism are based on arbitrary and idealistic assumptions.

Jenniffer said...

Hi..you have written very well about the debt settlement in islam..It is no doubt a very good way of keeping the islam and debt.