Chapter 14: Fundamentals of Islamic Economic System by Dr. Muhammad Sharif Chaudhry



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Fundamentals of Islamic Economic System

By Dr. Muhammad Sharif Chaudhry



  1. Types of Budget

  2. The System of Budgeting

  3. Classification of Expenditure

  4. Principles of Expenditure

  5. Bait-ul-Mal

In this chapter, if God will, we shall deal in detail with government budget and public expenditure.

I- Types of Budget

Budgets in modern secular states are generally of two types – current budget and capital budget. Current budget is prepared to meet current expenditure on civil administration, defence, debt servicing and other expenses of current nature; whereas capital budget is prepared to meet for capital expenditure of  enduring nature such as building of infrastructure, educational institutions and health facilities, tele-communications, defence projects, dams, canals, power stations, roads and railways.

However, budgeting in an Islamic state is a little different. All revenues from Zakat, Ushr and Sadaqat are transferred to BaitulMal (public treasury) for expenditure on welfare of the poor and needy; while other revenues from taxes and non-tax resources are allocated for expenditure on civil administration, defence, economic development projects, payment of state debt if any, and other items of revenue or capital nature.

It means that budget in the Islamic state is of two types: Welfare budget and general budget. Sources of welfare budget are Zakat and Sadaqat and it is expended on heads of expenditure mentioned in the Qur’n (9:60) which concern mainly the welfare and relief of the poor and have-nots. General budget is financed through taxes and non-tax revenues, while it is spent on all the current and capital expenditure of the state pertaining to its general and administrative activities. However, when funds from Zakat and Sadaqat fall short of meeting the needs of the poor, the state would transfer the funds from general budget to welfare budget. But it cannot be vice virsa i-e, revenues from welfare budget cannot be transferred to general budget because Allah Himself has prescribed the heads of expenditure on which Zakat and Sadaqat can be spent.

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II- The System of Budgeting

The system of budgeting followed in the Islamic state is that a fair estimate of revenues from all the resources of the state is carefully prepared and then distributed for various categories of expenditures. Thus, in the Islamic State the basis of budgeting is the revenue, which determines the amount available for expenditure. In simple words, the system of Islamic budgeting is based on the maxim: “cut your coat according to your cloth.” Expenditure is determined in accordance with the quantum of revenues available on account of taxes and other sources of income of the Islamic State. On the other hand, the budgeting system being followed these days in modern states of the world is just the opposite. According to the modern system of budgeting, an estimate of expenditure under various heads is prepared and then ways are found to raise the required finances by manipulating various taxes and sources of income of the state in order to balance revenue with the expenditure. Thus, the noticeable tendency on the part of a modern state is to incur expenditure beyond its means. Huge expenditures under various heads are undertaken despite scarcity of resources, which result in substantial deficits. These deficits are financed through internal and external borrowings, printing of currency notes, etc. which lead ultimately to inflation and sometimes to recession and economic depression.

On the contrary, the Islamic budgetary system is simple, convenient and logical. In this system we cut our coat according to the cloth available. Thus, we do not outstrip our means. Expenditure is according to the revenue available. The budget is normally a surplus or at least a balanced budget. There is no need of loans or printing of notes for deficit financing. Thus, the Islamic system provides safeguards against the dangerous tendencies inherent in the modern budgets such as heavy debts, inflation, and cyclic depressions and recessions.

Islam is religion of moderate or middle way. In spending, the Qur’an has condemned miserliness as well as extravagance, while moderation in expenditure has been recommended. Al-Qur’an says:

1.       And let not thy hand be chained to thy neck nor open it with a complete opening lest thou sit down rebuked, denuded.

-(17 : 29)

2.       An those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two.

-(25 : 67)

The principles laid down by the Qur’an regarding moderation in expenditure are observed while preparing estimates of public expenditure by the Islamic state at the time of budgeting.

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III- Classification of Expenditure

Since the Islamic Shariah has prescribed the items of expenditure in respect of certain categories of revenues, the classification of expenditure follows the lines of revenue. In the Islamic State, the revenue derived is either from Zakat and Sadaqat or from other sources like Jizyah, Kharaj, etc. Therefore, the broad classification of the revenues in the Islamic state is as follows:-

1.       Zakat and Sadaqat.

2.       Ghanaim or Spoils like Khums and Fai.

3.       Revenues from Jizyah, Kharaj, Import duties, and other financial imposts and extra-Sharaih taxes.

The heads of expenditure of Zakat and Sadaqat funds have been prescribed by the Qur’an in its verse No. 60 of Chapter 9 which reads as follows: “The alms are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled, and to free the captives and the debtors, and for the cause of Allah, and for the wayfarer; a duty imposed by Allah…………” An Islamic state is bound-as it is a duty imposed by Allah- to apply the Zakat funds on the categories of the beneficiaries enumerated in this verse. Thus, the revealed book of Islam prescribes eight heads of expenditure in respect of revenues from Zakat and Sadaqat namely: (1) The poor (2) The needy (3) The collectors of these revenues (4) Persons whose hearts are to be reconciled (5) Freeing of captives (6) Freeing of debtors (7) The cause of Allah and (8) The wayfarers. In the time of the Prophet of Islam and early Caliphate, Zakat revenues were applied in accordance with Qur’anic injunctions. Even the modern Islamic state has to apply these funds on all or any of the heads of expenses listed by the Qur’an.

For second category of revenues, that is the Ghanaim, the Qur’an has recommended the items upon which they can be spent by the Islamic state. In its verse 41 of chapter 8, al-Qur’an prescribes the one-fifth share of spoils of war for the Islamic state and also mentions the categories of its beneficiaries. The verse reads: “And know that whatever ye take as spoils of war, Lo ! a fifth thereof is for Allah, and for the messenger and for the kinsman (who hath need) and orphans and the needy and the wayfarer………..” Regarding the expenditure of revenue from Fai, the Holy Qur’an says: “That which Allah giveth as spoil unto His messenger from the people of the townships, it is for Allah and His messenger and for the near of kin and the orphans and the needy and the wayfarer, that it becomes not commodity between the rich among you…….” (59 : 7). In the next verses numbering 8, 9 and 10 of this Surah, mention has also been made of the poor fugitives (Muhajirin) and the needy among Ansar of Madinah and also of those who came after them. Thus, according to the Qur’an, heads of expenditure of Khums and al-Fai revenues are almost the same, namely: (1) Allah and his messenger (2) Near of kin (3) The orphans (4) The needy (5) The wayfarers. The Prophet (PBUH) used to spend his share on his own needs and on the needs of his family. The share of kinsmen was disbursed by him among the descendants of Hashim and Abdul Muttalib. In the times of Hadrat Abu Bakr and Hadrat Umar, the shares of the Prophet and his kinsmen were spent on the purchase of weapons for the Muslim armies.

The third group of revenues i.e. Kharaj, Jizyah, tolls and other financial imposts which formed major source of governmental income, were spent by the Islamic state for the expenses of defence, general administration, public works and all other expenses which cannot be allowed out of Zakat funds.

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IV- Principles of Expenditure

The following principles of public expenditure have been laid down by Majallah, the Ottomon Civil Code, which is based on Sunni Fiqh:[1]

1.       The principal criterion for all expenditure allocations should be the well-being of the people;

2.       The larger interest of the majority should take precedence over the narrower interest of a minority;

3.       The removal of hardship and injury must take priority over the provision of comfort.

4.       A private sacrifice or loss may be inflicted to save a public sacrifice or loss and a greater sacrifice or loss may be averted by imposing a smaller sacrifice or loss.

5.       Whoever receives the benefit must bear the cost.

All the above mentioned five principles should be strictly observed while making expenditure allocations to various sectors and heads of expenses. Rule 2, 3, 4 and 5 can also be applied to taxation.

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V- Bait-ul-Mal

Bait-ul-Mal or public treasury, according to some view, was founded by Prophet of Islam himself when he established Islamic state at Al-Madinah. But this view is not supported by majority of the scholars of Islamic history for the reason that in the reign of the Prophet the income of the state was meagre which never exceeded its expenses and hence the need of Bait-ul-Mal was never felt. According to more current and dominant view, Bait-ul-Mal was first established during the reign of Abu Bakr who succeeded the Prophet in the year 632, A.D. as First caliph of the Islamic state. With the conquests of Iraq, Syria and other countries there was considerable increase in the revenues of the Islamic state which necessitated the establishment of public treasury. However, Bait-ul-Mal took its real shape on permanent footing during the rule of Umar Farooq, the second caliph of Islam. It is during his time that the treasures of countries conquered from former Iranian and Roman empires started pouring into Muslim capital which made the institution of Bait-ul-Mal a powerful and very important department of the Islamic state.

It is better to explain the concept of Bait-ul-Mal, as envisaged by early Muslims who founded it, before we proceed to dilate upon sources of its income and heads of its expenses. “Every property which belongs to Muslims in general and not to any Muslim in particular constitutes a part of the assets of the public treasury (Bait-ul-Mal). It is not necessary that the property should be actually in the vaults (hirz) of the treasury for it to be considered an asset of the treasury, because the conception of Bait-ul-Mal refers to the destination of the property, not to its actual location. Therefore, every expenditure which must be incurred in the interests of the Muslims in general is a liability of Bait-ul-Mal and when it is made, it is considered to have been made by it, whether or not it has actually been paid out of the vaults of Bait-ul-Mal; this is for the reason that a revenue which has gone into the hands of the public collectors or has been directly spent by them is really a part of the income and expenditure of the Bait-ul-Mal itself, and therefore, subject to the regulations governing the same”.[2]

The revenues which accrue to the Bait-ul-Mal of the Islamic state have been placed by the classical jurists of Islam under three categories. They are :

(1) the ‘Zakat’ and ‘Sadaqah’ revenues; (2) the ‘ganimah’ revenue or spoils of war; (3) the ‘fai’ revenues such as Jizyah and Kharaj. These revenues have already been discussed in detail in the previous chapter. Since the revenues falling under the second and third category are no longer available to a modern Islamic state, the same would be substituted by the modern taxes.

The above mentioned classes of revenue are maintained distinctly under separate heads or titles by the Bait-ul-Mal as the items of expenditure to which they can be allocated are different in Shariah. The Zakat and Sadaqat revenues can be applied to the heads of expenditure as prescribed by the Qur’an (in its verse 60 of chapter 9) which relate mainly to the welfare of the poor; whereas other revenues are spended by the Islamic state at its discretion to fulfil its multifarious responsibilities such as establishment of law and justice, defence, civil administration, transport and communication, economic development, education and health and social action programme.

A full-fledged proper organisation of Bait-ul-Mal existed during the Muslim rule right from the time of Umar Farooq, the second caliph of Islam. Central Bait-ul-Mal existed at the capital of the empire under the direct control of the caliph, whereas at provincial level the Bait-ul-Mal was controlled by the governor of the province. There were no commercial banks or central bank during those times. It appears that all the requirements and needs of the government and the society used to be met by Bait-ul-Mal which supervised public revenues and public expenditure, helped the poor and performed almost similar functions which the ministry of finance performs today. In addition to that, it also performed the functions of a central bank except issue of currency, and control of credit and interest rates which are modern devices.

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[1].  Quoted by M. Umer Chapra: Islam and the Economic Challenge.

[2].  Nicolos P. Aghnides: Muhammadan Theories of Finance.

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