The Islamic Economic System: Bait-ul-mal & Islamic state treasury – Part III

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Last Updated on 29th April 2022

Click here for Part II

Fazal Masood Malik and Farhan Khokhar, Canada

The bait-ul-mal (Islamic state treasury) is possibly the most important financial institution in Islam. Instituted as a state treasury in 18 AH (639 CE) during the reign of Hazrat Umarra, its roots go back to the life of the Holy Prophetsa.

While Muslims’ lives in Mecca were tough and hardships were heaped on them, the change for the better started in Medina. Charity and donations were encouraged and mandated by the Holy Quran during Mecca; however, its distribution was left to the donor. In 2 AH (623 CE), after the establishment of Zakat as an institution, the Holy Prophetsa laid the foundation of the bait-ul-mal. A room in Masjid al-Nabawi was dedicated for this purpose which remained under lock and key under the leadership of Hazrat Bilalra. The condition of the Muslim community was so precarious that any funds that came for charitable purposes were immediately disposed of to the needy. The funds attained through land taxation were held for purposes of government expenses.  

As the first Khalifa of Islam, Hazrat Abu Bakrra faced a challenging situation. After the demise of the Holy Prophetsa, some tribes threatened to break allegiance with Medina and refused to pay Zakat.  Some tribes, such as Sajah (Tamim), Musaylima (Hanifa) and Tulayha (Asad) were claimants to false prophethood. They started conflicts with outlying Muslim tribes and rallied to fight against Medina.

In pre-Islamic tribal practice, after the death of a tribal leader, the alliance with the leader of the tribe would end. Islam, however, established a new unified Arabian state that contrasted with the tribal community code that existed before Islam.  Hazrat Abu Bakrra, citing the unity between Zakat and salat (Surah al-Baqarah, Ch.2: V.44), decided to fight the rebels. This was crucial for the existence of a new, fragile nation as well as ensuring the unity of Zakat and salat is well understood as an inseparable principle.

The uprising by insurgents had to be quashed, tyranny rewarded accordingly, and peace restored. It took two years to restore order, taxation and the formation of a central authority in Medina (Futuh al-Buldan, al-Baladhuri, Vol. I, pp. 143–62). Throughout this period, the bait-ul-mal continued operating similarly as during the life of the Holy Prophetra. It was, however, moved from Masjid al-Nabawi to a designated building. 

With state tax now a consistent revenue stream and fractured tribes standing as a unified force, Medina stood at a watershed moment. In the two decades that followed, mind-boggling development in administration, economy and finance was to reshape the future of humanity.  

When Hazrat Umarra became Khalifa, the dominion of Islam had spread beyond Arabia, having reached Iraq and Syria. With the rising number of people and expanding geography came tremendous responsibility.  Hazrat Umarra, whose character and sense of duty stood like a mountain towering over the immensity of a merciless desert, rose to meet the challenge.  

He had a remarkable ability to predict, analyse and foresee consequences, which very few possessed. An example from his early life would be from the time of the Battle of Badr. Hazrat Umarra opposed releasing of prisoners on grounds of security. This position, although not popular at the time, was supported by a revelation of the Holy Quran shortly after. (Friday Sermon of Hazrat Khalifatul Masih Vaa, 21 May 2021)

During his Khilafat, Hazrat Umarra oversaw incredible administrative and legislative developments, perhaps most notably being the institution of the diwan (commonly known as bait-ul-mal or “treasury”) to manage the revenues of the new polity. While the bait-ul-mal was established during the life of the Holy Prophetsa, it was formally established as an institution by Hazrat Umarra. In 639 CE, he formalised the Islamic Calendar in response to the growing complexities presented by economic and administrative growth. The suggestion of Hazrat Alira was that the new calendar should be based on hijra because that would distinguish between truth and falsehood.(Tarikh al-Tabari, p. 2481, p. 2749)

The new system of dating represented stability in the administration. It was indicative of an evolved governance structure, leaving the tribal affiliations of the pre-Islamic times behind. (Ibid., p. 1254) 

Before the Khilafat of Hazrat Umarra, part of the war spoils were distributed among the victors. With the victories of Iraq and Syria, ample land was acquired and the question of ownership arose. While his companions advocated distribution among the victors, he disagreed.  He thought that the state government should purchase the land and a bearable tax should be paid by the owner. The condition of bearable tax is of interest. As no two lands can produce the same profit, it would not be just to tax them equally. The clarity in understanding the dimensions of this problem requires an understanding of the spoils of war, a topic best discussed at a later time. 

Hazrat Umarra attached great importance to natural resources as a means of production. He clarified that while private ownership in Islam is encouraged, the state has the right to step in and rectify the situation if the ownership is not utilised in the community’s best interest. The reader will recall that God is the owner of all resources, be they land, labour or capital as a means of production. An interesting example illustrating this principle is cited in Kitab al-Kharaj, whereby the Holy Prophetsa had granted the valley of Aqiq to Hazrat Bilalra, but he could not cultivate a significant part of it. Hazrat Umarra confiscated the unutilised portion of the land, stating that the Holy Prophetsa had not granted this land to keep it fallow and withhold it from use by others.  The land was then distributed to other Muslims.

During the early phase of Islam, the primary source of income was voluntary donations and Zakat. Over time, as the economy grew diverse, many different forms of taxes were levied. Custom duties, agricultural levies, land tax and eventually property taxes and brokerage tax came into play.

The distribution of wealth was consistent, for a better part, during the first half-century of Islam. There were two primary means of distribution. Zakat was already well established, and the second was the system of stipends. The Holy Quran (Surah al-Taubah, Ch.9: V.60) stipulates how Zakat is to be distributed, the beneficiaries being “[…] the poor and the needy, and for those employed in connection therewith, and for those whose hearts are to be reconciled, and for the [freeing of]slaves, and for those in debt, and for the cause of Allah, and for the wayfarer – an ordinance from Allah.  And Allah is All-Knowing, Wise.” The source of Zakat also included war-booty, also known as khums in Arabic for 1/5 (Surah al-Anfal, Ch.8: V.42), which in the modern-day period comes from mining resources.

The second means of wealth distribution was the stipend system.  During the life of Hazrat Abu Bakrra, equal stipend was distributed among all Muslims. However, due to various reasons, Hazrat Umarra decided to pay a stipend depending on various factors that took into consideration factors such as lineage, when a person joined Islam and their status in terms of knowledge and closeness to the Holy Prophetsa. This distribution system was revoked during the reign of Hazrat Alira, the Fourth Khalifa of Islam.

To ensure that every member of the Muslim dominion had a roof over their head, food to eat and clothes to wear, Hazrat Umarra initiated the first known census of the Muslim world. In addition, a minimum income was also set for all citizens. The source for this funding was a complex mixture of Khums, Zakat and Kharaj (land tax).

Child benefits from birth, old-age benefits and disability benefits were all introduced during the time of Hazrat Umarra.

Hazrat Uthmanra did not modify the structure set up by his predecessor, except for land ownership. The land ownership rules were modified in favour of privatisation. Being an excellent administrator, he focused his attention on the efficient management of the bait-ul-mal.  The infrastructure under Muslim dominion made great leaps. Roads and bridges were constructed throughout the land, in addition to the building of various canals such as Abi Musa, Ma‘al and Saad.  These canals streamlined various services for citizens, such as the supply of fresh water and food transportation. 

The rapid expansion of Islam brought with it challenges. One major challenge that Hazrat Uthmanra, and in particular Hazrat Alira faced was that of moral and ethical education of new Muslims. Over time, the number of companions of the Holy Prophetsa passed. The grounding of Islamic values in the new converts started to diminish. The uprisings during the khilafat of Hazrat Alira are a testament to such dwindling values. It was a short-lived khilafat, but one where Hazrat Alira constantly reminded the Muslims of their core values. He would walk about in public places, especially markets and remind the people to be honest, truthful and conduct their business with integrity. 

Taxpayers and collectors were constantly reminded to be humble and mindful of their duties. A well-defined social welfare function and the duties of the administration in this regard emerged as a critical product during this time. 

Upon appointment as governor of Egypt, the advice given by Hazrat Alira to al-Ashlar included a key reminder that the current world economy lacks sorely. The newly appointed governor was reminded that “he should give greater attention to the development of the land than to the collection of the kharaj (land tax) because the latter depended upon the former. Whoever demanded kharaj without developing the land, destroyed the country and the people. If the people complained of the heaviness of taxation, or some natural calamity, the interruption of irrigation, misfortune, or that the land had become waterlogged or parched, their burden was to be lightened so that their affairs might recover.”

With the martyrdom of Hazrat Alira in 661 CE, the period of Rashidun Khilafat ended, and the reign of Umayyad started. The following article briefly covers the development of economic thought from the Umayyad Khilafat onward.

Bibliography

The Economic System of Islam by Hazrat Mirza Bashiruddin Mahmud Ahmadra  

The History of al-Tabari by William Montgomery Watt and Michael V McDonald

The Encyclopaedia of Islam, Vol. 2, Koninklijke Brill, 2002

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