Chapter 2: Fundamentals of Islamic Economic System by Dr. Muhammad Sharif Chaudhry



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Fundamentals of Islamic Economic System

By Dr. Muhammad Sharif Chaudhry



I- Objectives

  1. Achievement of Falah

  2. Fair and Equitable Distribution

  3. Provision of Basic Human Needs

  4. Establishment of Social Justice

  5. Promotion of Brotherhood and Unity

  6. Achievement of Moral and Material Development

  7. Circulation of Wealth

  8. Elimination of Exploitation

II- Principles

  1. Allah determines Right and Wrong

  2. Principle of Use

  3. Principle of Moderation

  4. Economic Freedom

  5. Principle of Justice

In this chapter we would focus on the objectives which the Islamic economic system aims to achieve and on the principles upon which it operates.

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I- Objectives

Following are some of the main objectives of the Islamic economic system which are being highlighted in this section:

1. Achievement of Falah: The first and the foremost aim and objective of Islam is falah or well-being of the mankind in this world and in the next world. That is why al-Qur’an, the revealed book of Islam, admires those who pray to God : “Our Lord ! Give unto us in the world that which is good and in the Hereafter that which is good, and guard us from the doom of fire……” (2 : 201)

The Islamic concept of falah is very comprehensive. It refers to spiritual, moral and socio-economic well-being in this world and success in the Hereafter. At micro level, falah refers to a situation where an individual is adequately provided for in respect of his basic needs, and enjoys necessary freedom and leisure to work for his spiritual and material advancement; whereas at macro level, it aims at establishment of an egalitarian and happy society with clean environment, with freedom from want and with opportunities to its members for progress in socio-political and religious affairs. Although welfare of the individual and the society does not necessarily lie only in economic prosperity because moral, cultural and socio-political advancement is equally important, but still Islam does not discourage achievement of material prosperity through fair means.

The concept of falah, in strictly economic field, refers to material well-being of the citizens of an Islamic state. The economic system of Islam, therefore, aims to achieve economic well-being and betterment of the people through equitable distribution of material resources and through establishment of social justice. Yet the basic objective of Islamic system remains the same which has been clearly laid down by the Qur’an thus : “But seek with (the wealth) which God has bestowed on thee, the home of the Hereafter, nor neglect thy portion in this world, but do thou good as God has been good to thee and seek not mischief in the land, for God loves not those who do mischief.”(28 : 77)

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2. Fair and Equitable Distribution: The second most important objective of the economic system of Islam is to make distribution of economic resources, wealth and income fair and equitable. Islam discourages concentration of wealth in few hands and ensures its circulation among all the sections of society. Al-Qur’an, the revealed book of Islam, 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 become not a commodity between the rich among you.” (Al-Hashr 59:7)

It means that, according to the Qur’an, the wealth should not be allowed to concentrate in few rich hands, rather it should freely circulate among all the people thus enabling the poor and destitute among the nation to also take benefit from it. Thus it is the primary objective of the Islamic economic system to bridge the gulf between the rich and the poor by modifying the distribution of wealth and economic resources in favour of the less-fortunate.

Islamic economic system ensures fair and equitable distribution of wealth through positive as well as negative measures, such as : institution of Zakat and Sadaqat, laws of inheritance and will, abolition of interest, prohibition of earning of wealth by Haram (unlawful) means, prohibition of hoarding, etc.

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3. Provision of Basic Human Needs: It is also an important purpose and objective of the Islamic economic system that basic necessities of life like food, clothing and shelter should be provided to all the citizens of the Islamic state. The Prophet of Islam has beautifully defined the barest necessities of life in his famous Hadith which says: “The son of Adam has no better right than that he would have a house wherein he may live, and a piece of cloth whereby he may hide his nakedness, and a piece of bread and some water.” (Tirmizi). Thus, in this Hadith the basic needs of an individual have been defined to include a house to live in, clothing to hide one’s body and food for survival and maintenance of health.

To get the basic minimum necessities of life is one of the fundamental rights of every human being. It is the obligation of the Islamic state to provide the basic needs of life to those of its citizens who are unable to earn due to physical disability, unemployment or any other reason. God guarantees the basic needs to every creature on earth as stated by the Qur’an : “And there is no animal in the earth but on God is the sustenance thereof.” (11.6). The Islamic state, being vicegerent of God, is duty-bound to fulfil this purpose of God and provide the basic needs to its poor citizens. The Islamic economic system ensures the provision of basic needs to every needy person through its comprehensive system of social security. This system of social security shall be elaborately discussed at proper place in this book.

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4. Establishment of Social Justice: One of the major objectives of the Islamic economic system is to establish socio-economic justice among all the members of the nation. Al-Quran says: “He (Allah) placed therein firm hills rising above it, and blessed it and measured therein its sustenance in four days, alike for (all) who ask” (41 : 10). Allah has placed in the earth sustenance and provisions for all to cater their needs. However, on account of various reasons, the distribution of these provisions does not remain fair among all the human beings, thus making some lucky ones very rich who possess wealth more than their needs and making many others very poor who possess nothing or too little to meet their very basic necessities of life. Islam meets this challenge of disproportionate division of wealth by making it obligatory on the rich to surrender a part of their wealth for helping the poor and unfortunate members of the community. Al-Quran says: “Establish worship, pay Zakat and bow your heads with those who bow (in worship)”- (2 : 43). The Holy Book again says “Ye will not attain unto piety until ye spend of that which ye love. And whatsoever ye spend, Allah is aware thereof.”(3:92). It further pronounces: “And in whose wealth there is a right acknowledged, for the beggar and the destitute” (70 : 24-25).

In order to make distribution of economic resources fair and just, the Islamic economic system has established an elaborate system of Zakat and Sadaqat. In addition to that, many restrictions have been placed barring an individual to earn wealth through unfair, illegal and unjust means. Besides that the Islamic state can also levy taxes. If all the economic teachings of Islamic are acted upon, the distribution of incomes and wealth properly based on the principles of socio-economic justice will be automatically achieved. The subject of social justice will be discussed in detail later on. For the purpose of the present discourse it is sufficient to say that the major objective of the economic system of Islam is to establish social or economic justice among its followers.

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5. Promotion of Brotherhood and Unity: Another objective of the Islamic economic system is to establish brotherhood and unity among the Muslims.

The Holy Quran says: “It is not righteousness that ye turn your faces to the East and the West; but righteous is he who believeth in Allah and the Last Day and the Angels and the Scripture and the Prophets; and giveth his wealth, for love of Him, to kinsfolk and to orphans and the needy and the wayfarer and to those who ask, and to set slaves free; and observeth proper worship and payeth Zakat” (2 : 177). Again the Holy Book enjoins upon its followers: “They ask thee, (O Muhammad), what they shall spend. Say : That which ye spend for good (must go) to parents and near kindred and orphans and the needy and the wayfarer. And whatsoever good ye do, Lo! Allah is aware of it” (2:215). Thus by enjoining upon the rich and wealthy to pay Zakat and spend for their poor parents, relatives, orphans and needy, Islam lays the foundations of fellow-feeling, brotherhood, friendship and love among all the members of Muslim Ummah. By helping the poor, the rich persons not only discharge their religious obligations but also earn their gratitude, love and affection. So the Zakat and alms pave the way for national solidarity and social cohesion by cementing the bonds of fraternity among the rich and the poor.

Dr. Khalifa Abdul Hakim writes: “Islam desires to mould the economic life of society in such a manner that antagonistic class divisions of millionaires and paupers shall not come into existence”. Shaikh Mahmud Ahmad in his book ‘Economics of Islam’, writes, after discussing the injunctions of the Quran regarding prayer and Zakat: “The brotherhood of man is not realized only by bowing together of the ruler and the subject, the lord and the peasant, the factory-owner and the wage-earner shoulder to shoulder before One God, but is established on a firm foundation even outside a mosque where the king and the lord and the factory-owner are made jointly responsible for the elementary necessities of life of the subject and the peasant and the wage-earner.” Mr. M. A. Mannan in his book ‘Islamic Economics: Theory and Practice,’ writes: “Salat (prayer) rouses the feeling of equality and brotherhood between the rich and the poor, the high and the low, and Zakat puts that feeling of brotherhood on a firm footing by making the rich and the capitalists responsible for the maintenance of the poor and the needy.”

Thus the Islamic economic system through Zakat, Sadaqat and other means of helping the poor, achieves social harmony and promotes brotherhood between different sections of society. In an Islamic society there exist no antagonist classes of haves and have-nots which are set against each other. Despite existence of inequalities of wealth, the Islamic society is not divided into conflicting classes because the difference between the rich and the poor is not too wide to provoke bloody revolution. Rather the rich and the poor are brothers of each other. Full cooperation and unity exists between them and it is all due to Islam’s economic system.

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6. Achievement of Moral and Material Development: The economic system of Islam aims at material as well as moral development of the Muslim community. It achieves this objective through its system of taxation and fiscal management particularly through Zakat.

Zakat discourages hoarding of wealth and encourages its circulation. Those persons who possess hoarded wealth know that if they keep it like that, it would be consumed by Zakat. So they would not keep it lying idle, rather they would per force bring it into circulation by investing or spending it. Thus the consumption and investment would have multiplier effect on the growth of the national income. Moreover, taxes like Zakat are collected from the rich and returned to the poor and thus the purchasing power of the poor is strengthened. The poor people now having purchasing power in their hands will demand more goods. The industrialists would produce more in order to meet the increasing demand. Thus the increase in demand and supply will encourage industrialization and thereby expand the scope of employment in the country. In this way, the human and material resources of the country would be fully exploited and national income would grow rapidly. The Quran perhaps refers to this situation when it compares usury and Zakat and pronounces: “That which ye give in usury in order that it may increase on (other) people’s property hath no increase with Allah; but that which ye give in charity, seeking Allah’s countenance, hath increase manifold” (30 : 39)

Zakat and system of voluntary alms also helps in moral and spiritual development of the Muslim Ummah. Payment of Zakat and alms not only purifies wealth but also human soul. Wealth is dear to everybody and everyone loves to acquire and possess it. By encouraging a person to voluntarily pay Zakat and part with his wealth, Islam promotes sentiments of sacrifice, love, goodness of heart, mutual cooperation. The Quran says: “And likeness of those who spend their wealth, seeking to please Allah and to strengthen their souls, is as a garden, high and fertile………” (2 : 265). Payment of Zakat and voluntary alms purifies the human soul of vices like greed, miserliness, selfishness, etc.

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7. Circulation of Wealth: Another important objective of economic system of Islam is to discourage hoarding and ensure the constant circulation of wealth. About hoarding of wealth the Quran says: “They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings of a painful doom. On the day when it will (all) be heated in the fire of hell and their foreheads and their flanks and their backs will be branded therewith (and it will be said unto them). Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard:” (At-Taubah-9 : 34-35). So the Quran not only discourages hoarding of wealth but also threatens persons responsible for this heinous crime with the dire consequences.

The economic system of Islam achieves this objective through Zakat. Zakat is a great enemy of hoarding. If it is paid regularly on the hoarded wealth, it would eat away the whole or main portion of such wealth in a few years time. Thus a person possessing such hoarded wealth is forced to bring it into circulation by investing it or spending it. The Prophet of Islam (PBUH) is reported to have said: “Beware! Whoever is the guardian of an orphan who has property, should trade with it and should not have it (hoarded), lest the Zakat should consume it. (Tirmizi)

The objective of circulation of wealth is also achieved through other compulsory and voluntary Sadaqat, through laws of inheritance and will and through monetary atonements.

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8. Elimination of Exploitation: The last, but the most important, objective of Islamic economic system is elimination of exploitation of one human by another. To achieve this end Islam has taken many effective measures. First such measure is the abolition of interest or usury which is and has been perhaps the worst instrument of human exploitation. The Qur’an calls it riba and declares it a heinous crime which amounts to war against God and God’s messenger.  The Qur’an says : “O ye who believe ! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent then ye have your principal (without interest). Wrong not and ye shall not be wronged. -(2 : 278-279)

Another measure taken by Islam  for putting an end to human exploitation is regarding slavery. The slaves have been the most exploited class in human history. Islam declared the emancipation of slaves as the most pious at and enjoined upon its followers to earn God’s pleasure by setting free as many slaves as they could. The Qur’an has made emancipation of slaves an expiation of some types of sins and criminal acts committed by the believers.

To eliminate exploitation of labour by the employer or the capitalist, the Prophet of Islam has laid down that the workers would be paid their wages promptly. On the authority of Abdullah-bin-Omar, it is reported that the Messenger of Allah said : “Pay the labourer his wages before his sweat dries up.” (Ibn Majah).

The tenants and the farm workers are another most exploited class of humans which has been subjected to the worst type of tyranny by the feudal lords. To eliminate exploitation of this class, Islam almost abolished jagirdari or feudal system by repealing the system of absentee landlordism and by confiscating the lands of those who did not cultivate them for three continuous years. The Prophet of Islam also discouraged giving of land to others for cultivation on cash rent or for share in produce.

The debtors have been another exploited class. Islam has not only abolished interest, but to help this class, the Qur’an has laid down that the creditor should give as much time as possible to the debtor for repayment of debt and if the creditor remits the debt it shall be treated as almsgiving.

The orphans have always been an exploited class in every society as their property is generally devoured by their near relatives and their guardians. In the sight of Islam, devouring the property of the orphans is a major sin. The Qur’an warns such persons in these words: “Lo ! Those who devour the wealth of orphans wrongfully, they do but swallow fire into their bellies, and they will be exposed to burning flame.” (4 : 10)

The women have been exploited by men throughout the history of humankind. They were denied in the past even the status of a human being and were treated as chattel. Islam restored their status of human beings and gave them rights equal to men in every sphere. In the economic field, Islam has given them rights to acquire property, own it, enjoy it and alienate it as the men do. The women have also been given rights of inheritance like men, they can inherit property from their parents, from their spouses, from their children and from their other near kindred. Thus Muslim women are no longer economically exploited by the men.

Supra are some of the steps, which have been taken by Islam to end economic exploitation of the weak by the strong.

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2- Principles

Some of the principles of the Islamic economic system, as laid down by the Qur’an and the Sunnah, are discussed as follows:

1. Allah determines Right and Wrong: We have already discussed in the first chapter that Islamic economic system makes distinction between what is permitted being lawful (Halal) and what is forbidden being unlawful (Haram). To determine what is permitted or lawful (Halal) and what is forbidden or unlawful (haram) is the soul prerogative of God. None but God is empowered to pronounce what is right and what is wrong. Allah has made demarcation between lawful and unlawful in the economic sphere and has allowed man to enjoy those food items and other articles of use which are lawful and avoid those things which are unlawful.

The Qur’an says: “O ye who believe ! Forbid not the good things which Allah hath made lawful for you, and transgress not, Lo! Allah loveth not the transgressors. Eat of that which Allah hath bestowed on you as food lawful and good and keep your duty to Allah in Whom ye are believers.” (5 : 87-88)

No human being has power to say what is right (Halal) and what is wrong (Haram). The Qur’an clarifies this principle in unambiguous terms when it commands: “And speak not concerning that which your own tongues qualify (as clean or unclean), the falsehood: “This is lawful, and this is forbidden”, so that ye invent a lie against Allah…” (16:116)

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2. Principle of Use: Within the bounds of lawful (Halal) and unlawful (Haram) prescribed by Allah and also keeping in view the rules of moderation and prudence, the man has been allowed to make full enjoyment of God’s gifts bestowed on him. The Qur’an says: “O mankind ! Eat of that which is lawful and wholesome in the earth, and follow not the footsteps of the devil. Lo! he is an open enemy for you.” (2:168). At another place, the revealed book of Islam states: “So eat of the lawful and good food, which Allah hath provided for you, and thank the bounty of your Lord if it is Him ye serve……..” (16:114). However, the principle of use should not be over stretched so as to indulge in extravagance and wastage of economic resources. The Qur’an brings home this point when it addresses mankind: “O children of Adam ! Look to your adornment at every place of worship, and eat and drink, but be not prodigal Lo! He (Allah) loveth not the prodigals.”(7:31)

All things have been created by Allah for man’s use and service. To restrain oneself or forbid others from the enjoyment of lawful items of food and other articles of use tantamounts to renouncing the blessings and favours of Allah which has been strongly condemned. The Qur’an prohibits it in very clear words when it says : “O ye who believe ! Forbid not the good things, which Allah hath made lawful for you, and transgress not, Lo! Allah loveth not transgressors.”(5:87). In another verse, the Holy Qur’an questions those who put restrictions on the use of certain things without divine sanction: “Say! Who hath forbidden the adornment of Allah which He hath brought forth for His bondmen, and the good things of His providing?…..”(7:32). Thus the Qur’an has disapproved the ways of monks and ascetics who consider the satisfaction of physical urges an obstacle in spiritual development.

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3. Principle of Moderation: Islam unequivocally discourages its followers to cross the limits and follow extremes. The Muslims have been called by the Qur’an a middle nation (2:143). Therefore, the principle of moderation carries paramount importance especially in the economic field. This principle is followed by the true believers in the production of wealth as well as in the consumption and spending of wealth. Although earning of wealth through permitted (Halal) means is allowed, yet the piety demands that a Muslim should not become mad after amassing wealth like a greedy materialist. He should exercise restraint and earn wealth to meet his lawful needs. Extra wealth, if at all is earned by him somehow, may be spent in the path of Allah on charity and relief of the poor. Similarly, in the consumption and spending of wealth, the believer is recommended to strike balance avoiding miserliness and extravagance. Miser is he who does not even provide for the legitimate needs of himself and his family let alone spending on charitable and noble causes. Extravagant or spend thrift is a person who squanders his wealth in luxury, gambling, drinking, and on lavish expenditure on festivities, weddings, day to day living. Islam condemns both miserliness and extravagance and enjoins upon a believer to exercise moderation. The Qur’an appreciates those who exercise moderation in spending when it says: “And those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two.”(25:67)

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4. Economic Freedom: Every individual, according to Islam, is accountable for his actions done in this world. He would be rewarded for his good actions and punished for his evil actions in the hereafter. Accountability for individual’s actions is meaningless if the individual is not provided reasonable freedom to act independently. Therefore, Islam puts highest value on individual’s freedom of action in every field of human activity such as social, political, economic religious, moral, etc.

Islamic principle of economic freedom means that an individual has been allowed liberty by God to earn wealth, own it, enjoy it and spend it as he likes. It also entails freedom to adopt any profession, business or vocation to earn livelihood. But Islam has not allowed unlimited freedom in the economic sphere. As we have already discussed, Islam makes distinction between Halal (lawful) and Haram (unlawful). In the field of production, distribution, exchange and consumption, only Halal (lawful) means are permitted. Remaining within the restrictions of Halal and Haram, an individual enjoys full freedom to earn and spend wealth as he likes. Thus Islam recognises free enterprise, human initiative, and individuals potential. It also recognises role of organisation, capital, labour and market forces in economic field. No unnecessary curbs are placed on the individual or the organisation regarding earning or owning of wealth. No upper limit or ceiling is imposed on properties or holdings. Besides restrictions of Halal and Haram, other restrictions are rarely placed on economic activities, prices of goods, ownership or on monopolies unless the same are really necessary for safeguarding the common interest of Muslim community.

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5. Principle of Justice: Islamic principle of justice operates in every sphere of human activity, may it be legal, social, political or economic. Islamic economic system, in fact is based upon  the principle of justice which governs all the basic aspects of economy like production, distribution, consumption and exchange.

In the sphere of production, Islamic principle of justice ensures that nobody is exploited by the other and that nobody acquires wealth by unjust, unfair, unlawful and fraudulent means. The followers of Islam have been allowed to acquire wealth through just and fair means. Islam admits the right of every individual to earn his livelihood, to acquire wealth, to own property and live a comfortable life. But it does not allow that people should amass wealth through bribery, corruption, embezzlement, stealing, robbery, gambling, trade in narcotics, exploitation, gambling, interest, fraud, hoarding, black marketing, prostitution, malpractices in business, immoral professions or through other unjust methods.

In the field of distribution, the Islamic principle of justice plays the most vital role. One of the greatest contribution of Islam to humanity is that Islam ensures just and equitable distribution of wealth among the people. Justice in distribution, which is called by various names like economic justice or social justice or distributive justice, demands that economic resources and wealth should be so distributed among the members of the community that on the one hand the gulf between the rich and the poor should be bridged and on the other hand everyone should be provided with basic necessities of life. Islam discourages concentration of wealth in few hands and ensures its circulation in the community not only through moral education and training but also through effective legal measures. System of Sadaqat, Zakat and voluntary alms along with laws of inheritance helps distribution of wealth among the larger sections of society,

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