The Islamic Economic System: Development of Islamic Economics from late 7th to early 19th century – Part IV


Last Updated on 6th May 2022

Click here for Part III

Fazal Masood Malik and Farhan Khokhar, Canada

The people of Arabia loved their freedom. Before Islam, they had never submitted to any authoritative system. With Islam, they became united, one nation under One God. When the Holy Prophetsa migrated to Medina, he set up two fundamental institutions: The mosque and the market. The ethical basis of a market establishment and a mosque demonstrated the cohesion between the two institutions. They also indicate the importance of economic reforms in his mission. Each period that followed over the next millennia is associated with a major innovation that developed Islamic economic thought while promoting regulated capitalism in an interest-free, sustainably ethical manner.

The Rashidun Khilafat (632–661) under Hazrat Abu Bakrra, Hazrat Umarra, Hazrat Uthmanra and Hazrat Alira, oversaw a rapid expansion of the Islamic dominion. They developed important military, legal and economic structures and established an administrative governance structure that helped ensure the success of the Islamic Dominion. The Rashidun Khilafat is often considered a golden age where religion and politics thrived side-by-side. 

The Umayyad Khilafat (661–750) was established by Hazrat Muawiyah ibn Abi Sufyanra and marked the beginning of the Islamic dynasty. With their capital in Damascus, they ruled an empire stretching from Spain to the frontiers of China and India. 

The Umayyad period is associated with the introduction of a single currency throughout the Muslim dominion. This allowed the government to manage the monetary system independent of external resources and influences, which, in turn, gave birth to a rudimentary form of banking (Goitein, 1967). The basis for banking during this period led to the formation of more complex lending systems during the Abbasid Khilafat.  Instruments such as cheques (which come from the Arabic term sakk) and letters of credit (known as hawala) began to emerge in the late 9th century. 

During the Abbasid Caliphate (750-1258), the expansion of the Muslim empire came to a halt, and focus was increased on developing the disciplines of Islamic philosophy, theology, law and mysticism. The fiscal administration inherited by the Abbasid followed the same structure as that from the time of Hazrat Muawiyahra. Perhaps the most significant Economic achievement during this period was the birth of a banking system based on commissions instead of interest.  With Germany and China as the main partners, banking and global trade gave the Abbasid Khilafat an unparalleled economic position in world trade.

Muslim scholars of the Abbasid period, such as Abu Yusuf, Ibn Taimiya and Ibn Khaldun, wrote extensively on economics. However, they were not concerned with the access of different groups to economic sources, but rather the use of wealth to serve the community as a whole.  Abu-Yusuf’s (731-798) main areas of interest were economic development, taxation and the state’s responsibility. He authored Kitab-al-Kharaj (Book of Land Taxation) to clarify Islamic taxation laws in response to questions posed by the Abbasid Khalifa, Harun al-Rashid. He writes that all economic activities and facilities that benefit the community become a responsibility of the government. The government cannot favour a specific segment of the community, ignoring the rest. Therefore, to achieve society’s well-being, the government has the right to impose taxes that will benefit society as a whole.  

lbn Taimiya (1262-1328) emphasised the role of the government while rejecting the state of laissez-faire. He advocated that it was the duty of the state to intervene in the market to control prices to guard against monopoly, monopsony, hoarding and speculation. He argued in favour of the government legislating to organise trade and professional occupations. 

Ibn Khaldun (1332-1406) lived at the time when the Middle East was being devastated by the Black Plague. His profound observance of human behaviour and study of world history is a thoughtful reflection of human nature. Al-Muqaddimah, which is the prolegomena to the encyclopedic thirteen-volume world history, briefly touches on crucial subjects about humans. Perhaps the wisdom reflected in his words is why he is generally accepted as the father of modern social sciences. His definition of economics stresses the maintenance and development of humans as a society. In his own words, “[…] economics means the desire for food and other requirements and efforts to obtain them” (al-Muqaddimah, Vol. 1). It is essential to note the word used in Arabic for “other requirements” is rizq, which holds a very vast meaning. The requirements of humans vary with time and depend on the progress of society and the social conditions of an individual, among other factors. A study of al-Ghazali’s definition of requirements is suggested for anyone wishing to pursue this definition further. 

No discussion on Islamic economics can be complete without mentioning al-Ghazali (1058–1111), who was named “The proof of Islam” for his reformative services to Islam. His views on economic activities emphasise the ethical aspects. He considers wealth as a mere means to achieve ends, emphasising the need to earn a legitimate income. The core reminder of his writing is that a person’s behaviour should remain consistent in a mosque, home or the market.  In other words, to lead a pious life, a person must be a living example of their belief. Another ethical teaching of al-Ghazali is to trade with honest merchants (Muslims and non-Muslims).  He forbids doing business with anyone who is a cruel oppressor or possesses stolen property.  Thoughtful consideration of al-Ghazali’s writing on the economy is necessary today to highlight the role of ethics in economics, as the ethical component of commerce is either ignored or downplayed in the world today. A case and point are that vaccinating the emerging world against COVID-19 is a crucial topic that lacks action. In contrast, the developed world sits on abundant vaccines that will expire before ever being used.  

The decline of the Abbasid Khilafat coincides with the awakening in other parts of the world. The Indian Empire, Chinese Empire and European Empires grew with their economic might and structures. Knowledge from the Islamic world was carried to these empires through translations of Greek thought and Islamic research in all aspects of life, including commerce.

With the might of other empires growing and the decimation of Muslims by the Mongols, the era of the economic dominance of Muslims came to an end. This decline in intellectual thought was a mark of internal disputes amongst Muslims. When the time of the advent of the Promised Messiahas came, the entire Muslim community was divided, many at war with each other. The level of religious and commercial discourse was at an all-time low. The mosque and the market established by the Holy Prophetsa appeared on the brink of destruction.

Economic thought and commercial innovation moved from the former Muslim empires to Europe. Writers such as Adam Smith, Benjamin Franklin and others posted economic theories that were followed by emerging nations, such as the United Kingdom. Trade was moved to another level by the formation of Limited Corporations. The international trade and application of laws of the seas helped commerce grow immensely. Regretfully, much of this exponential growth was based on slave labour and exploitation of colonies, against the core Islamic principles espoused by the Holy Prophet Muhammadsa and the Islamic scriptures.

Circling back to the origins of the Islamic economy, we find many financial innovations in the market originating from pre-Islamic practices and customs of trade in Arabia. The Holy Prophetsa established market ethics and his successors always circled back to the original teachings of Islam. He founded a free-market system and strongly supported free trade, proclaiming that “Prices are in the hand of God.” His stand was directly in contradiction to the market economy, be they Greek, Romans or Bedouin. It clearly emphasised his non-interventionist policy favouring an “invisible hand” (as termed by Adam Smith in planting the seeds for secular economics). 


The Will (Al-Wasiyyat) by Hazrat Mirza Ghulam Ahmad, the Promised Messiahas 

Inqilab-e-Haqiqi by Hazrat Mirza Bashiruddin Mahmud Ahmadra  

Politics of Humanitarianism: The Ahmadiyya and the Provision of Social Welfare. In Muslim Faith-Based Organizations and Social Welfare in Africa, pp. 247-272

Economic Thought of al-Ghazali by Islahi, Abdul Azim and Shaikh Mohammad Ghazanfar

Early Islam and the birth of capitalism by Benedikt Koehler

Notes on taxation in Early IslamJournal of the Economic and Social History of the Orient 17, no. 1 (1974), pp. 136-144

The First Crisis in the Life of AlghazaliIslamic Studies, 11, no. 2 (1972), pp. 113-123

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