Dr Waseem Khan
The concept of Islamic Economics stems from the Holy Quran and Sunnah. Over time, it has been tweaked by Muslim scholars to adjust for changes in the socio-political and economic circumstances without sacrificing the basic principles laid out in the Holy Quran and reinforced by the Holy Prophet, peace and blessings of Allah be upon him.
The Holy Quran provides a framework for mankind, teaches man his obligations towards Allah and serves as the guiding light by which human beings should conduct their social and economic affairs. Islamic economics is a complete system that defines the rules of engagement for the social and economic behavior of individuals.
Among the several principles, which the Divine revelation sets out for this purpose, the following constitute the basic building blocks of Islamic Economics:
1. Equity & Justice
Islam provides every individual with some basic socio-economic rights, such as the right to access factors of production – land, labour and capital (economic justice), the right to be heard and redress of grievances (legal justice), and the right to safety, education, satisfaction of basic needs, access to public property, etc. (social justice). It is incumbent upon the rulers of the time to ensure that the socio-economic rights of individuals are respected and fulfilled.
Following in the tradition of the Holy Prophetsa, the Promised Messiahas and his Khulafa have constantly reminded us that equity, justice and fair play are the foundations of the Islamic economic system, or for that matter, any socio-economic system, and must remain in place for that system to be feasible and sustainable in the long run. Hazrat Khalifatul Masih Vaa has reminded world leaders on several occasions that unless economic, legal and social justice is restored and maintained within and among countries, the world will never be at peace. Economic injustice and social injustice have always been the root cause of wars and human destruction. Greed and fear make the powerful uncomfortable, who in turn suppress the basic rights of the weak to remain in control.
Furthermore, God Almighty states very clearly in the Holy Quran that He may forgive individuals for the unfulfillment of their obligations to Him (huququllah), but He will not forgive them for the unfulfillment of their obligations to their fellow beings (huququl-ibad), which can only be forgiven by the aggrieved person/s.
2. Property Rights & Concept of Ownership
As Muslims, we firmly believe that God Almighty is the real and ultimate owner of all property on this planet and man as His vicegerent is entrusted with this property, which man must use according to His instructions. Thus, ownership of private property (land, commodities and capital) by man is subject to the sovereignty of God Almighty, and man will be accountable for its use on the day of judgement. This belief sets us apart from the other two common economic systems, where individuals are considered either directly as owners of all private property (capitalism), or collectively as owners of all property (socialism).
3. Prohibition of Interest
Interest, or riba, is defined as the excess over and above the principal amount lent or borrowed. Riba al-nasiah is the excess, which is given/taken by the borrower/lender when the principal amount is returned with a delay (term to maturity. Term to maturity of a loan refers to the time period for which the money has been lent. In conventional economic systems, lenders get paid interest for providing the loan facility for a specified period of time.)
Islam prohibits riba in all of its forms as it amounts to exploitation of the weak, usury and allows wealth to accumulate in the hands of a few, thereby increasing the gap between the rich and the poor.
The Holy Quran strictly prohibits the use of riba in commercial transactions. (Riba has been prohibited in all revealed religions for being exploitative and the prime cause for injustice in economic distribution, leading to grave effects on human societies.) This prohibition is clearly stated in numerous places. For example:
“Allah deprives riba of all blessing but blesses charity. He loves not the ungrateful sinner.” (Surah al-Baqarah, Ch.2: V.277)
“O believers, fear Allah, and give up what is still due to you from riba if you are true believers.
“If you do not do so, then take notice of war from Allah and His Messenger. But if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it.” (Surah al-Baqarah, Ch.2: V.279-280)
“That which you give as riba to increase people’s wealth increases not with Allah; but that which you give in charity, seeking the goodwill of Allah, multiplies manifold.” (Surah al-Rum, Ch.30: V.40)
On the occasion of his last Hajj, the Holy Prophetsa declared all outstanding riba among Muslims to be cancelled. On behalf of his uncle Abbasra, he cancelled all riba owed to him by his borrowers.
While prohibiting riba, which gives rise to some sort of risk-free capital, Islam provides believers an alternative mode of finance, the profit and loss sharing agreement, to conduct their economic transactions. The concept of profit and loss sharing, which gives rise to risk-based capital, was first practiced in Medina after the Holy Prophetsa and his companions migrated from Mecca. At that time, the economy of Mecca was dominated by the Jews and was predominantly riba-based. After reaching Medina, the Holy Prophetsa instructed the migrating Muslims to indulge in agriculture and trade on a profit and loss sharing basis.
In the profit & loss sharing mode of finance, the profit is shared on a pre-agreed ratio – 50:50, 40:60 or 30:70, etc. (Profit must be shared on a pre-agreed ratio, not as a percentage of profits nor as a fixed amount) – while the loss is shared on the basis of capital contributed. For example, in a business transaction where the financier provides all capital while the worker/agent manages the business, profit is shared on a pre-agreed ratio, but in case of a loss, the financier will bear the entire capital loss while the worker/agent will lose all his hard work and time spent on the business. There is no pre-determined fixed guaranteed return on capital. Thus, profit taking must be legitimised by sharing the risk of loss. While the Islamic mode of finance does not eliminate the risk of loss, it reduces the incidence of business failures as economic agents undertake proper due diligence before embarking on a business venture.
4. Prohibition of Gharar
The literal meaning of gharar is fraud but in terms of economic contracts, gharar refers to risk and uncertainty in an economic contract arising from the lack of proper information or one of the parties deliberately withholding relevant information, which would affect the final result of the contract (M Hashim Kamali, Islamic Commercial Law, pp. 84 85); for example, withholding information on the price, quality, quantity and other specifications of the subject matter or the rights and obligations of the contracting parties.
The trading of futures, options and many other derivatives in modern-day finance carries elements of gharar and, therefore, is considered un-Islamic. Similarly, short-selling of securities and trading in speculative and unidentified items is prohibited in Islam. (M Ayub, Understanding Islamic Finance, pp. 58-59)
5. Prohibition of Maisir/Qimar
Maisir and qimar refer respectively to the acquisition of wealth by chance or game of chance. Islam strictly prohibits indulgence in gambling and speculative activity, where one spends little in the hope of earning significantly more. For example, playing the lottery, betting, purchasing items unnecessarily in the hope of winning a big prize (some airport duty-free shops offer this) and indulgence in any other game of chance is all prohibited. The money spent on such activity is a loss to the better and loss to the society as it could have been donated for charitable purposes.
The following is among several references from Holy Quran prohibiting maisir/qimar:
“Satan intends to excite enmity and hatred among you with intoxicants and gambling, and hinder you from the remembrance of Allah, and from prayer; will ye not then abstain?” (Surah al-Maidah, Ch.5: V.92)
6. The Sanctity of Promises and Trust
The cornerstone of success of any relationship is the timely fulfillment of promise/s, which then creates trust in that relationship. A socio-economic relationship is a contract, and contracts in Islam are legally binding on all parties to the contract. If promises made by all parties in a contract are fulfilled in letter and spirit in a timely manner, the contract becomes trustworthy and the relationship flourishes. If promises and obligations go unfulfilled, trust and confidence are dented and the socio-economic relationship flounders. In its true sense, this concept underlies the fulfillment of our spiritual obligations – taqwa and belief in Allah (huququllah) – and fulfillment of our social obligations – equity and justice (huququl-ibad).
In current times, for example, when corporate management fails to perform, investors lose confidence and trust in the company and sell their shares. When transport companies, such as airlines and railways, fail to provide the promised service, they lose customers and ultimately go bankrupt. When governments fail to fulfill their promises to the public (failure to provide legal, economic and social justice) strife and civil unrest ensue leading to poverty and loss of life.
If a bank is unable to satisfy the terms and conditions as agreed, customers will take their business elsewhere causing the bank to fail and ultimately result in immense loss to society in the shape of financial loss (customer deposits) and social loss (lost jobs).
Extrapolate this to the current interest-based global financial system, which is frequently beset by crises of one type or another resulting in trillions of dollars of financial loss to society, trust and confidence has eroded forcing governments and financial institutions around the world to explore an alternative economic and financial system, which is comparatively more stable and inherently sustainable. The Islamic financial system is that alternative, which is more stable and sustainable as it is based on the guidance of Allah.
7. Economic Activity to Create Incremental Wealth for Oneself and Society at Large
Islam discourages financial transactions which do not generate economic activity. Every financial transaction must be based on a gainful and halal underlying economic activity, which is capable of creating incremental wealth for oneself (self-enrichment) and benefiting the society at large (generating jobs, improving the environment).
Islam prohibits hoarding of all commodities, including capital, as it creates poverty and deprives society of its basic rights (clear violation of huququl-ibad). Money is potential capital and lifeblood of the economy; therefore, it must remain in circulation for the economy to grow and remain vibrant. Hence, Islam discourages idle balances and encourages capital deployment in halal businesses.
In the conventional economic system, investors are rewarded by a fixed return on capital, which in most instances is guaranteed. In the Islamic economic and financial system, reward is tied to the performance of the underlying assets and to the risk that the entrepreneur takes in the investment.
Islam prohibits paper-based transactions as they do not generate incremental wealth and are rather a detriment to the society at large. For example, investment and trading in derivatives like mortgage backed securities, collateralised loan and debt obligations, credit default swaps, etc., which form a significant part of the conventional economic system’s activity, have on several occasions caused this system to fail.
8. Lawful Wealth Accumulation
Wealth can be acquired in two ways: it may be earned through the use of land, labour and capital or it may be acquired through legal modes of transfer, such as inheritance, gift or bequest. The laws of inheritance have been discussed in detail in the Holy Quran (Ch.4: V.12, Ch.2: V.19 and Ch.5: V.107).
Islam prohibits wealth accumulation through illegal means, such as corruption in the public and private sectors, violating the rights of widows and orphans and exploiting the weak and the poor.
9. Zakat and the Concept of Qarz al-Hasan
In the context of fulfillment of their social obligations, Muslims are strongly encouraged to participate in charitable giving and philanthropic acts aimed at reducing the gap between the “haves” and the “have-nots”. Hence, the notion of Zakat was introduced whereby every Muslim must allocate 2.5% of their net wealth (wealth in excess of their consumption needs) to be distributed among the poor and needy (Surah al-Taubah, Ch.9: V.60).
But the Islamic concept of charitable giving goes beyond Zakat where Muslims are encouraged to help the poor through Qarz al-Hasan: easy term loans converted into grants. For example, financing low-cost housing for the homeless and providing funds to the cottage industry and start-up companies. While these are not profit-making activities, they tend to serve a higher-end moral obligation within the realm of the fulfillment of huququl-ibad. This also falls within the context of ownership of factors of production, as discussed earlier, the ultimate owner of which is Allah, and man as His vicegerent is obliged to discharge his responsibility in the utilisation of these facilities in a mode that is determined by Him.
The practice of Islamic economics was observed in its true form in Medina after the Holy Prophetsa and his Companionsra migrated from Mecca. The Muslim residents of Mecca were engaged in trade and were well off; but when they decided to migrate to Medina, the Jews of Mecca who controlled the economy of Mecca forced the Muslims to leave behind their wealth. The residents of Medina (the Ansars) were largely engaged in agriculture. Upon arrival, the migrating companions of the Holy Prophetsa were encouraged to take up trade as the Medina oasis lay close to the bustling trade route between Syria and Yemen. Those who did not like trading as a source of income, or were not successful in conducting a trading business, were then asked to join their local brethren in agriculture on a profit and loss sharing basis (Musharikah). Each individual was encouraged to seek work, as work was considered a form of worship (ibada), that would make them self-sufficient and contribute to society in a positive and productive manner.
The Holy Prophetsa set down rules for the management and distribution of water for agricultural needs making the Medina economy more productive and sustainable. While in Islam items that do not exist cannot be sold, the Holy Prophetsa made an exception to this rule and allowed forward sales of agricultural produce in return for seed money at the time of sowing crops (Bai‘ Salam).
(In Islam, the item for sale must exist, must be in good form, and must be available for inspection by the buyer. For example, fish that is not caught cannot be sold, or an unborn calf cannot be sold. Bai‘ Salam – forward sale – was the exception and was allowed to help farmers to sell forward their crop – crop yet to be sowed and harvested – for money that would be used to buy seed and fertiliser. Fast forward thirteen hundred and some years and the farmers of Illinois in the USA used the same exception as the basis to create the Chicago Board of Trade, established 3 April 1848, as a forum for the forward sale of crops, and which has now transformed into one of the largest options and futures exchanges. Similar to that, the Muslims of Medina were allowed to finance small projects where the financing facility was released piecemeal over time until the project was finished. This financing facility is called Bai‘ Istisna, which is the basis for project finance in today’s economy.)
Several economic concepts that were adopted in Medina during the Holy Prophet’s time became the basis for not only Islamic economics but have been used by modern day economists to reshape and improve the global economy. Unfortunately, the menace of riba has not been eliminated, and, therefore, the global economy has frequently suffered economic shocks resulting in the significant loss of wealth and human welfare.