Public Finance In Islam

Fiscal Policy:
A government policy for dealing with the budget (especially with taxation and borrowing
The Fiscal Policy of the Islamic State basically has the same objectives as that
of the secular state. They are as follows:
(i)
(ii)
(iii)

Eradication of unemployment.
Equitable distribution of wealth.
Economic stability. Faster economic progress.

In an Islamic State Fiscal Policy holds greater importance because owing

to the illegality of interest, prohibition of accumulation of property and wealth and the ban of
speculative motive for demand of money, the monetary policy would not probably be very
effective. In the Islamic Economy the chief instrument of Fiscal Policy is Zakat . Next in
importance are the taxes. The objective of economic struggle is to maximize human welfare. In
secular economy human welfare means the achievement of worldly good. In Islamic terms the
aim of achieving welfare is not limited to the present world; it extends to the next world also.
Moreover, the Islamic Economy is organized on the basis of the economic values of Islam.
Hence the most important objectives of Fiscal Policy in the Economy of Islam are as follows:
(i)
(ii)

Efficient Allocation of Resources.

Equitable distribution of wealth for which the best instrument is Zakat. It has been

(iii)

aptly remarked that Zakat in Islam has built-in redistributive mechanism.

Attainment of the goal of full employment without inflation.

Abedeen Salama mentions the following four objectives of an Islamic fiscal and monetary
policy:
I.

Resources Allocation

1. Economic stability
2. Acceptable growth rate
3. Just distribution of income and wealth
F.R. Faridi identifies the Following four objectives of Fiscal Policy.
1. Fulfillment of the social and economic needs of the socie and achievement of social and
economic well-being.
2. Economic progress.
3. Evolution of the social structure
4. Justice and Equity.

Zakat As An Instrument Of Fiscal Policy

Elimination of interest is the cornerstone of the monetary policy of Islam.
The most important element of Islamic fiscal policy is Zakat (and Ushr) which as a form of
worship is one of the basic articles of faith in Islam. In this perspective Zakat cannot be regarded
as a tax, for its economic effects are different from those of the taxes.
As has been explained in the foregoing pages, Zakat has been made
obligatory by Allah Almighty. The Holy Quran contains several verses, which declare Zakat
obligatory upor the Muslims. However, its detailed rulers are given to us in the traditions of
Allahs Apostle (S.A.W). The Holy Quran does not mention the rate of Zakat and the amount on
which Zakat is to be levied. These details are to be found in traditions. The jurists hold that the
rates of Zakat given in the traditions are unalterable.
Zakat on agricultural produce is technically called Ushr. The rate of Ushr
has been fixed in the Shariat, which is ten per cent on Barani (rain-irrigated) land and five per
cent on land irrigated by artificial means.
The accounts of Zakat collection in the Bait-al-Mal (Public Exchequer)
shall be maintained separately. Zakat can be expended under eight heads only (as has been
explained in detail in a previous chapter). The government is not authorized to change these
heads at will. The most important head of expenditure of Zakat is the financial support of the

poor and the destitute. Zakat, therefore, cannot be freely expended as a matter of Policy Control
in order to achieve the objectives of Islamic Fiscal Policy.
Furthermore Zakat must be expended in the same area from which it is
collected. If, however, a surplus remains after supplying the wants of the deserving people of the
area, it can be transferred for expenditure in other areas.
Imam Abu Ubaid in Kitab-al Amwal narrates:
When the Apostle of Allah (S.A.W) sent Hazrat Muad (RA) to Yemen, he took up residence in
Jind. After the death of the Messenger of Allah (S.A.W) and Abu Bakr (RA), he.came to Hazrat
Umar (RA) who sent him back to Yemen. Hazrat Muad (RA) forwarded one-third of the Zakat
collection to Hazrat Umar (RA)

Monitory Policy:
Monetary policy has to be as important an instrument of public policy
in an Islamic economy as it is in its capitalist counterpart. The objectives and tools must,
however, be different because of the differences in the goals and the nature of the two systems
and because of the prohibition of interest in Islam while it is a key ingredient in the capitalist
system.

The Role
There can be no question that monetary policy in an
Islamic economy should not only be in conformity with the ethos of Islam but should also help
realise the socio-economic goals that Islam emphasises. Some of the most important goals may
be briefly stated as:
1. 1 .Economic well-being with full employment and optimum rate of economic growth;
2. Socio-economic justice and equitable distribution of income and wealth; and
3. Stability in the value of money to enable the medium of exchange to be a reliable unit
of account, a just standard of deferred payments and a stable store of value.

It may be argued that the goals of monetary policy in the Islamic economic system, as
stated above, are the same as those of capitalism. Such a statement would not be correct because
even though there is an apparent similarity; there is in fact a significant difference in emphasis
arising from the divergence in the commitment of the two systems to spiritual values, socioeconomic justice and human brotherhood. The ensuing discussion should make this point clear.

1. Economic Well-being with Full Employment and High Rate of Growth

Muslim jurists have unanimously held the view that welfare of the people
and relief of their hardships is the basic objective of the Sharah. This view would, in the
economic field, necessitate economic well-being through satisfaction of all basic human needs,
removal of all major sources of hardship and discomfort, and improvement in the quality of life,
morally as well as materially. Hence full and efficient employment of human resources would be
an indispensable goal of the Islamic system, because it would help realise not only the objective
of broad-based economic well-being but also impart to human beings the dignity demanded by
their status as God's vicegerents. Full and efficient employment of material resources would also
be an essential goal because, according to Islam, all resources in the heavens and the earth are
meant for human welfare and need to be exploited adequately, without excess or wastefulness,
for the purpose for which they have been created.
While a reasonably high rate of economic growth should be the natural
outcome of policies leading to full and efficient employment of human and material resources
and to broad based economic well-being, the high rate of growth is by itself not of prime
importance. This is because the requirement to attain material prosperity within the framework of
Islamic values requires that it should not be attained through the production of inessential or
morally questionable goods and services, should not lead to an excessive and overly rapid use of
God given resources at the expense of future generations who are equal owners of these
resources, and should not harm present or future generations by degenerating their moral or
physical environment.

2. Socio-economic Justice and Equitable Distribution of Income and Wealth

The goals of socio-economic justice and equitable distribution of income and wealth
are an integral part of the moral philosophy of Islam and are based on its unflinching
commitment to human brotherhood. The capitalist system's conversion to socio-economic justice
and equitable distribution of income is, on the contrary, not based on a spiritual commitment to
human brotherhood; it is rather the outcome of group pressures. Accordingly, the system as a
whole, particularly its money and banking arrangement, is not geared to these goals and glaring
disparities of income and wealth continue to be generated. Nevertheless, because of the influence
of socialism and political pressures, some of these inequalities are being partly reduced by
taxation and transfer payments. In contrast to this, Islam tries to uproot the causes of gross
inequalities at their source and also uses Zakah, taxation, and transfer payments as additional
measures to reduce inequalities even further to bring about a distribution of income which is in
conformity with its concept of human brotherhood. Hence it is essential that even the money and
banking system and monetary policy are so designed that they are finely interwoven into the
fabric of Islamic values and contribute positively to the reduction of inequalities.

3. Stability in the Value of Money

Stability in the value of money should be accorded high priority in the
Islamic frame of reference because of the unequivocal stress of Islam on honesty and fairness in
all human dealings and because of the negative impact of inflation on socio-economic justice and
general welfare. It has been suggested that in the current world-wide inflationary climate, the
Islamic imperative of socio-economic justice could be satisfied by indexation of all incomes and
monetary assets including quarter extended without interest or profit sharing.

Zakat :
Zakat is the only tax an Islamic government can impose upon its Muslim
citizens. It is not merely a charity fund but can be spent on the collective needs of the people as
well.

Purpose Of Zakat:
The zakat money can be used to pay the salaries of all government
officials including that of the head of state, to build all works of public interest, to cater for
defense requirements and to establish an Islamic system of Insurance. In short, the system of
zakat envisaged by the Quran and Sunnah totally meets the requirements of running a welfare
state.

Causes Behind Zakat Implementation:

Tax
A compulsory contribution to state revenue, levied by the government on workers'
income and business profits, or added to the cost of some goods, services, and transactions.
The historians pen bears witness that man has continued to stumble over the
issue of the relationship between a state and its subjects ever since the creation of the first polity
at the dawn of civilized history. In this regard, the right of a state to levy taxes on its public, in
particular, has created an unending rift between the rulers and the ruled.

History Of Tax:
Taxes were, probably, first imposed in ancient Palestine. The secession of the ten
tribes of Israel as recorded in the Biblical Book of the Kings was to an important extent a
response to punitive taxation. The ancient empires of Egypt and Babylon obtained revenues from

public lands and extracted levies in kind, in the form of forced labour and personal servitude or
as a share in the produce of private lands. In Athens, at the time of Pericles, taxes were imposed
largely on foreigners and slaves. One who was taxed but failed to pay was guilty of a capital
offense. In Rome, along with custom taxes and custom duties, there were certain direct taxes.
The principal of these was the tributum paid by the citizens and usually levied on as a head tax;
later when additional revenue was required the base of this tax was extended to real estate
holdings. In the reign of the emperor Augustus (27 BC--14 AD) land and inheritance taxes
became a familiar aspect of Roman economic life. Subsequent emperors raised rates and
included more and more objects in taxable items: wheat, barley, oil, meat, wood, salt, sales,
bachelors and even urinals.
As the Western civilization moved into agrarian feudalism, the principal
source of revenue of the governing feudal lord became the rents paid by his vassals in exchange
for Military protection he gave them. The Normans brought this system to England in 1066.
When King John (1167-1216) tried to enlarge royal power and income with new levies, the
feudal nobility rose against him. In 1215, when the barons imposed the Magna Carta on the king,
the first principle of modern taxation arose: taxes are to be imposed only by the consent of the
governed. It was, however, centuries later before this right came to be formally established---and
that too to no avail.
Middle ages
During the middle ages, kings derived most of their income from their feudal holdings, and
generally needed to levy taxes only to pay for their extensive wars. Because, ordinarily, such
taxes could be collected only with the consent and aid of the nobles and other large landholders,
monarchs found it necessary to call these landholders into session to approve such taxation.
These sessions of landlords subsequently evolved into parliaments and other legislative bodies.
In 1628, the petition of rights deprived the crown of Britain to levy taxes without the consent of
the parliament. However, this right, though contributed to a marginal development for the
citizens of Britain, subsequently started a bloody struggle elsewhere: The American Revolution
was triggered by public resentment over the Stamp Act imposed by the British Parliament in
1765, after the Seven Years War. Requiring the colonists to pay fees to Britain, this act called
forth protests against taxation without representation and was subsequently revoked by the
British Parliament. However, tariff duties imposed thereafter on tea and other articles rekindled
the protest. The ensuing Boston Tea Party hastened the advent of the American Revolution. A
similar story may be told about France. Taxation during the years preceding the French
Revolution had become exceedingly heavy with burdensome levies collected by both the king
and the church. The Taile, initially a broad based tax on the value of income from land, had
come to be primarily a tax on the poor farmers, with the nobility, the clergy and the wealthy
largely exempted. A regressive system of customs and excise duties also imposed a heavy
burden falling primarily on the poor. The taxes were used for financing lavish court
expenditures. It is not surprising, therefore, that taxes became a major dissatisfaction with the old
regime that culminated in the French Revolution of 1789.

Classical Economics Tax

Near the end of the eighteenth century, when the Scottish economist Adam
Smith set forth his famous four canons1 about taxation in his celebrated treatise The Wealth of
Nations, mankind thought that it had finally found the solution to the whole problem. Later
Ricardo in his Principles of Political Economy and Taxation, and Mill in his Principles of
Political Economy further developed the thought of Smith in an effort to formulate an ultimate
taxation structure acceptable both to the tax imposer and the tax payer alike. The leading writer
in the field around the turn of the century was E.R.A. Seligman. In his major work The Shifting
and Incidence of Taxation (1892), and Progressive Taxation in Theory and Practice (1894),
he developed the ability-to-pay criterion and developed a persuasive theoretical justification for
progressive income taxes. Seligman, however, admitted that the ability-to-pay doctrine cannot
specify a definite rate of progression as the ideally just rate. In recent years, Richard Musgrave of
the Princeton University stands out prominently among those who have worked on this
problematic issue.
1) One should be taxed according to the ability to pay.
2) The tax should be certain and not arbitrary.
3) The tax should be levied at a time and in a manner most convenient for the tax payer.
4) The tax should be devised so that costs of collection are minimal.
However, all this intellectual effort, which though formally bagan with Adam Smith in 1776 and
was actually initiated as early as in 1470 by an Italian Diomede has repeatedly failed to settle this
conflict between the state and its citizens. The taxpayers revolt in I979 in the USA is a recent
example of this rivalry which continues unabated to this day.

Islam Policy About Tax

Fourteen hundred years ago Islam had solved this problem once and for
all. While acknowledging the institution of taxation as the most natural agency to run a
state, it took away the right to impose taxes from man and divinely ordained the statutes
of this institution. It laid down in bold the principles of taxation because they were
actually beyond the reach of human intellect: the above mentioned history of taxation
clearly testifies to this fact. Furthermore, Islam declared zakat, its institution of taxation,
an obligatory act of worship, thereby completely transforming the attitude of the people
towards it. Instead of being considered as a burden it became a wholeheartedly
acknowledged religious obligation.

Principals Of Zakat:
. We shall discuss the principles of this institution set forth by the Qurn and
Sunnah in three sections:
(1) The Nature of Zakat.
(2) The Heads of Zakat.
(3) The Rates of Zakat.

(1) The Nature of Zakat

According to the Qurn, zakat has a dual nature:
(a) intrinsic (b) extrinsic.

The Intrinsic Nature

Zakat is an act of worship. This is evident from a number of Quranic verses in which it is
mentioned adjacent to salat (prayer), the most important form of worship. The word zakat
means both to purify and to grow: paying zakat purifys ones wealth and soul, and it actually
increases ones wealth in his afterlife. The Qurn stresses both these aspects of zakat:
[O Prophet!] Take zakat out of their wealth---thou would cleanse them and purify them
thereby. (9:103)
and
That which ye give in riba in order that it many increase on [other] peoples wealth has no
increase with Allah; but that which you give as zakat, seeking Allahs countenance, it is these
people who will get manifold [in the Hereafter] of what they gave. (30:39)

The Extrinsic Nature:

It is the only tax an Islamic State can impose on its Muslim subjects. While declaring the
requisites of citizenship of an Islamic State, the Qurn says:
And if they repent [from all un-Islamic beliefs], establish salat and pay zakat, leave them
alone. (9:5)
The above verse clearly points out that salat and zakat are part of the public law of an Islamic
State, and the only two things which an Islamic government can positively demand from its
Muslim citizens. As far as zakat is concerned, after a Muslim has paid it to the government, not a

single penny can be further exacted from him. This is further illustrated by the following two
traditions
There is no [legal] share [for the society] in the wealth [of people] except zakat. (Ibni Maajah:
Kitab-uz-Zakat)
and
After you have paid the zakat of your wealth you have paid [all] that was [legally] required of
you. (Ibni Maajah: Kitab-uz-Zakat)
In this regard, the severe warning sounded by the Prophet (saws) to those who impose taxes
other than those ordained by the Almighty must also be kept in mind:
No tax-imposer shall enter paradise. (Abu-Daud: Kitab-ul-Khiraj)

(2) Heads of Zakat

The following Qurnic verse spells out the heads under which the zakat fund can be expended:
Zakat is only for the poor and the needy, and for those who are aamils over it, and for those
whose hearts are to be reconciled [to the truth], and for the emancipation of the slaves and for
those who have been inflicted with losses and for the way of Allah and for the wayfarers. (9:60)
We take up these heads in order:
1) The Poor and Needy (Fuqaraa and Masaaqeen): The poor and the needy are the foremost
recipients of zakat because they are the primary responsibility of the state. It must cater for their
basic needs like food, clothing, shelter, health and education. In this regard, the Prophet (sws) is
said to have said:
It [ie zakat] should be taken from their rich and returned to their poor. (Bukhari, Kitab-uzZakat)
2) The Aamils over Zakat (aamileen-a-alaihaa): Under this head, the salaries of all employees
of the government including the head of the state can be paid.
3) Those whose hearts are to be reconciled (Muallafatul Quloob): Under this head come all
forms of political expenditure in the interest of Islam. There may be many instances, when the
affection of certain influential people must be obtained, particularly in border areas where their
role can be decisive in the safety of a country. During the time of the Prophet (sws) many tribes
were given money under this head to deter them from harming the newly founded Islamic State.
4) Slaves (riqaab): The institution of slavery was totally eliminated by Islam fourteen centuries
ago. From this particular head money was given to free slaves. Today, by analogy, this head can

be extended to include other recipients. For example, prisoners of war and other prisoners who
are unable to pay the fine imposed by the courts can be freed by giving money through this head.
5) Those inflicted with losses (Ghaarimeen): Under this head, an Islamic system of Insurance can
be established and all those who are inflicted with economic losses can be compensated.
Whether rich or poor the real criterion is that their means of living and its role in the national
economy have been destroyed. People who have acquired a loan and are unable to pay it back
may also be helped from this money so that they may start afresh and the society can benefit
from their abilities.
6) In the Way of Allah (Fee Sabeelillaah): Under this head defence expenditures of a state can be
met and institutions for religious propagation as well as all works of public interest like roads,
bridges, mosques, hospitals, educational institutions and libraries can be built.
7) The Wayfarer (Ibnussabeel): This implies the welfare of the wayfarer. Circumstances often
make a traveller a needy person, in which case, his needs can be fulfilled from this head.

(3) Rates of Zakat

Before we mention the rates of zakat, a mention seems necessary of the items which are exempt
from zakat. Nothing except the following three are exempt:
(i) Means of production: eg. tools, machinery etc.
(ii) Personal items of daily use: eg. personal belongings like, house, car etc.
(iii) A fixed quantity called nisaab.
However, an Islamic government can give ralaxation on any item in the interest of the public or
because of any constraint in the collection of zakat on a particular item.
As far as the various rates of zakat are concerned, three distinct categories can be classified:
1. Wealth: After deducting the nisaab and taking into consideration other exemptions mentioned
above, the wealth of a person, shall be taxed annually at the rate of 2%. Tax on trade capital shall
also be levied at the same rate by considering this capital to be the sum of cash in hand and cash
in trade.
2. Produce: Zakat on produce is deducted at the time of produce and depending upon the various
items has three rates: 5%; 10%; 20%
i) 5%: On items which are produced by the interaction of both labour and capital: eg. produce
from irrigated lands and industrial produce from factories7.

ii) 10%: On items which are produced such that the major factor in producing them is either
labour or capital, but not both. Examples of the former include an artists creation like paintings
and the works of scholars and intellectuals, while examples of the latter include rented houses,
and produce from rainy lands.
iii) 20%: On items which are produced neither as a result of labour nor capital but are actually a
gift of God, eg treasure etc.
3. Animals: Only those animals which are bred and reared for the purpose of trade and business
are subject to zakat. The details of the rates of zakat on animals can be consulted from any book
of fiqh.
This is the concept of zakat envisaged by the Qurn and Sunnah. From the above
details it is clear that zakat is the only tax which an Islamic government can impose on its
Muslim subjects and that it is not merely a fund for the destitute. Moreover, since there is
no basis for necessarily giving it in the possession of an individual. it can be spent on the
collective needs of the people as well.

Public Expenditure:
1:The theory of public expenditure in Islam is related to the notion of maslahah
(public interest). It is the maslahah of Islam and of God's creatures that governs all decisions
regarding expenditure. The general principles of public expenditure in an Islamic economy can
be summed up as follows:
2: All expenditure should follow the criteria of the maslahah of the ummah.
Removal of hardship should take precedence over provision of ease. The interest of the majority
should take precedence over the interest of the minority. If there is a conflict between a private
interest and public interest, public interest should prevail. If there is a^ option, greater loss or
sacrifice should be avoided by preferring a smaller loss or sacrifice. Whoever receives a benefit
should also pay for the costs. Something without which an obligation cannot be fulfilled is itself
on obligation. To these general principles we shall add the following: Public expenditure will
follow the hierarchy of needs, giving top priority to daruriyydt (essentials), followed by hdjiyydt
(complementaries) and tahslniyydt.
3: This is based on the Islamic concept of maslahah. The concept of maslahah
remained in its rudimentary form in the writings of early jurists until Abu Hamid al-Ghazali
developed it into a mature concept. Al-Ghazali stated that the ultimate purpose of the SharVah
was to further the maslahah of the ummah. In-its most basic form it meant protection of five
things: life (nafs), religion (din), progeny (nasl), reason ('aql), and property (mat). Since his time
it is generally agreed that the protection of these five things is the major purpose of the SharVah.
The concept of maslahah was further developed by Abu Ishaq al-Shatibi Both Ghazali and
Shatibi divided the masdlih into three categories of essentials (daruriyyat), complementaries

(hajiyydt) and desirables (tahsiniyyat). There should be no waste or extravagance in the public
expenditure.
4 The public expenditure should not lead to the creation of assets and facilities which
remain un-utilised or under-utilised for long periods.
5 The government should avoid all unnecessary expenditure, especially expenditure
on display of grandeur and pageantry. Conspicuous consumption is not only deplorable for an
individual but is also undesirable for the government.
6 The government should not indulge in nepotism, favouritism and discrimination on
grounds of ethnicity, sex, caste or creed in matters relating to public expenditure.
7 The government should show due regard for inter-regional
8 inter generational
9 equity in its public expenditure. In matters of income transfers, the government
should act speedily and avoid red tape.
10 The government should remain accountable to the people and to God for each
penny spent or withheld by it. which must be safeguarded at every cost; they are life, religion,
progeny, intellect and property. It is the primary duty of the government to do so. The
complementaries and desirables vary with social and economic conditions. They are to be
protected after the primary duty of protecting the essentials has been accomplished. In case of
trade-off, the three categories of interests will be fulfilled in the order mentioned above. All the
three categories of maslahah pertain to human needs and the jurists are generally agreed that the
government should strive to protect them. These categories are interrelated and complement each
other. Therefore, all the three categories should be protected. For the purpose of maslahah of the
Hereafter, we must take into account the masdlih of this world.

The Rationale of Public Expenditure:

The rationale of public expenditure in an Islamic economy arises when the
an expenditure is found to be required on either of the following grounds:
(i) being mandatory
(ii) being fard kifayah
(iii) being a specifically assigned task
(iv) being necessary for the stabilization of economy.
Mandatory Expenditure

A present-day Islamic state will have to perform certain mandatory functions such as
the following: Defence; Maintenance of law and order; Dispensation of Justice; Need
fulfilment;11 Communicating the message of God; Enjoining right and forbidding wrong (al-amr
WlmaWuf wa al-nahy 'an al munkar); and Civil administration.
Furud kifayah
(singular fard kifayah) are the duties that are mandatory upon the Muslim
community as a whole so that if some individuals perform them, the rest are exempt. But the
point is that the task must somehow be carried out, irrespective of the fact who carries it out.
There is no final list of such tasks but the jurists have been defining them from time to time
according to their perceptions of the social needs. The examples of furud kifayah are: building
mosques, setting up schools, providing food and clothing to the poor, establishing industries, etc.
Furid kifayah can be carried out by individuals as well as groups of individuals and
organisations. In the present age, non-government organisation (NGOs) can also carry out those
tasks. Examples of the NGOs operating schools, hospitals, orphanages are too common to need
any detailed mention. Government should engage in certain activities to fulfill fard kifayah when
it is found that individuals and voluntary organisation have failed to perform tasks of vital
significance from the vantage point of collective interest. One such case can be to set up certain
industries which are critically important, but which people 11 It is important to note that the
state's responsibility towards need fulfillment is only of a residual nature. The primary
responsibility in this regard lies on a person himself, then on his family and relatives, and only if
there is no one to look after that person that the state will be required to play its role. have failed
to establish. It could also be to meet a social need such as setting up orphanages or hospitals. It
could also be to provide the services when people are not forthcoming due to the potential free
rider effect, such as environmental protection or provision of roads or other utilities. The
government initiative could embrace such praiseworthy works of religious and moral merit as
building mosques, providing grants for marriage, or arranging the burial of those who have no
legal heirs
Specifically Assigned Tasks
It is possible that some specific tasks may be assigned to the government. The
government, in such cases, would receive the mandate to collect taxes for such an expenditure
and with the help of these taxes it is supposed to carry out these tasks. This is an open-ended
category and depends on the larger concept of the maslahah of the ummah.
Stabilisation Programme
Some public expenditure may also be necessary for stabilizing the economy. In
times of low effective demand, the government may undertake an expansionary fiscal policy in
order to stimulate demand. Criteria for Public Expenditure One of the important questions about
public expenditure is: how do we decide about the expenditure that should be undertaken in

preference to others, since the resources are never going to be enough to satisfy all demands? A
capitalist economy is guided in its decision-making by the cost-benefit analysis. This analysis is
based on the concept of time value of money. The government ranks different projects according
to their net present values by discounting their costs and benefits over the estimated lives of the
projects. The projects with higher net present values or higher internal rates of return (IRR) are
selected in preference to others. The cash flows are discounted at a certain rate of interest. In
view of the above, the question arises: how will an Islamic government rank its capital projects
since it does not accept interest as a valid tool for analysis? Some Muslim economists have
argued that discounting is an analytical tool, which uses interest as a measuring rod. Using it to
analyse projects should be acceptable, bearing in mind that this is simply a technical, evaluative
exercise which does not entail, in actual practice.

Principal Of Public Expenditure:

Just as there are well-Known canons of taxation.Similarly it is possible to formulate
some principals to which prudent public expenditure should conform.

1 .Maximum Social Benefits:

It is necessary that all public expenditure should satisfy one fundamental test
.That of maximum social advantage .Every rupee spent by a government must have as its aim the
promotion of the maximum welfare of the society as a whole .Care has to be taken that public
funds are not utilized for the benefit of a particular group or section of society .The Aim is the
general welfare . Government exists for the benefits of the governed and the justification of the
government is therefore to be sought in the benefits of a country as a whole.

2.Economy:
Although the aim of public expenditure is to maximize the social benefit, yet it does
not exonerate government from exercising utmost economy in the expenditure. Economy does
not mean niggardliness. It only means that over-spending and misuse of all kinds must be
evaded.

3. Canon of Sanction.
An added significant principle of expenditure is that prior to it is in reality
sustained, it must be authorized by a expert power. Unofficial spending is bound to lead to
profligacy and misuse

4 Canon Of Elasticity
Another sensible principle of public expenditure is that it must be reasonable flexible
.It Ought be achievable for public establishment to fluctuate the expenditure as per requirement.

5 Balanced Budget
Ever-recurring deficits in the budget should be avoided .Every effort should be made
to balanced a budget .A sensible state is expected to cut its coat according to its cloth.

6. Beneficial result on Production as well as Distribution.

It is in addition essential to observe that public expenditure must work out a fit
control on both production as well as distribution of wealth in the society. It must kindle
productive activity so that the amount of production in the nation amplifies, and it might be
doable to elevate the living standards.

Achievement & Failure

The first Islamic state established in the world is a country that built the Prophet in Medina
which we know as the Islamic State of Madina. This country was built based on Islamic spirit
that is reflected from the Qur'an and the Prophet's leadership. The main capital used to build this
country is not money but the spirit is instilled ketauhidan community Rusulullah Medina. At that
time the muhajirin who fled from Mecca to Medina and came without bringing sufficient
supplies. While in Medina, there is no rule that well-organized.
Some policies have been taken by the Prophet to strengthen the existing government. In the
economic field, in order to encourage the growth of existing economic activities, then the policy
steps taken by the Prophet are:
1. Building a mosque as an Islamic center that is used in addition to worship as well as for other
activities such as a meeting place of parliament, secretariat, Supreme Court, the headquarters of
the army, foreign affairs offices, education center, a training ground for the wide spread of
religion, dorm, Baitul Maal, where the council and the delegates.
2. In order to spur economic activity will bring together between the Prophet mujahirin with the
Ansar. Ansar group gave some of their wealth to the muhajirin to be used in production activities
until the muhajirin can carry out his life.
In terms of Islamic economic analysis, policy muhajirin unite people with the Ansar was giving
economic impact is very large. The brotherhood had been made Affairs Medina as a prosperous
country in the future.

In the early days of the Government of the Islamic State, Islamic public finance and fiscal policy
has not much role in economic activity .. not run fiscal policy as carried out in the analysis of
fiscal policy today, because I have found no state income at the time. Prophet Muhammad and
his staff did not receive the usual salary of a government. Government revenue derived only
from public donations. Zakat not required at the beginning of the Islamic government. If the
Prophet need of funds to help the poor and needy, then the usual Bilal borrowed from the Jews.
Another source of revenue for the government at the beginning of the year was property derived
from the spoils of war, and this was allowed to become one of the government's financial
resources after the decline in surah al-Anfal (Sura 8:41) in the second year Hijri. Furthermore in
the second year Hijri Zakat Al-Fitr is a duty that must be paid by every Muslim, and this later
became one of the government's financial resources.
Other financial resources derived from the poll tax paid by non-Muslim groups, especially the
scribes, which guarantee the protection of life in the Islamic government. Other sources are
kharaj (land tax levied on non-Muslims), ushr (import) charged to each merchant and is paid
only once a year and is valid only if the value exceeds 200 dirhams trade.
With time and began gathering the financial resources, the government began to finance various
expenditure is mainly used to maintain the existence of the state. For example to finance defense
expenditures, debt payments, aid to travelers, salary payments to guardians, teachers, and other
state officials.
Only then, down the provisions of paragraph concerning zakat fund expenditures to the eight
groups, as stated in the letter at-Tauba Sura 60 verse. With this revelation the fiscal policy was
clearly specifying the types of expenditure that can be used on existing charity funds. The use of
zakat funds outside the provisions set by the verse is not in accordance with the provisions of the
Koran. There was clear how Islamic economics is very concerned at the poor, the degree of life
needs help and was appointed to a decent level.
Reviewed the public finance side of the collecting and spending zakat funds can be viewed as
activities for the distribution of income more equitable. Islam does not want the rest of the
property in the hands of someone. If the property has enough nisabnya, then Zakah must be
issued. Thus here there was no effort to encourage people to rotate into the system property
economy, which can generate growth.
With the rise of Islam, which is reflected by the extent of the Islamic government territory, the
role of public finance activities increasingly important. Through the institution of zakat
collection Amil is a charity fund-raising model that is at that time. Institution Baitul Maal is

'finance department' Islamic government.

In addition to these institutions institution, the Islamic government there are also other
institutions that play a role in improving a social welfare institution that is associated with
charitable activities. In Islamic history, noted that this charitable institution so large role in the
economic system.

Suggestions
Abolition of interest has become the hallmark of Islamic Economics in modern times. Here lies
the greatest challenge for Islamic economists: to justify it by a fresh analysis of money and its
role in the economy, and present an operational model of interest-free banking which may
convince modern man that Islam's economic system based largely on the twin principles of
Zakah and abolition of Riba is more just and more efficient than any other alternative. They have
been quite aware of this challenge and their response has been vigorous. The idea of interest-free
banking has already entered the stage of experimentation after a quarter of a century devoted to
model building. It is now receiving attention not only from trained economists but also from
professional bankers and from governments. It is advisable that the existing interest-free
institutions provide relevant data and report their problems for analysis and careful consideration
by economists. In money and banking, more than in any other area in economics, practice leads
theory.
Meanwhile, the entire area of non-bank financial intermediaries, of near-money, of transactions
in foreign currencies and the vital subject of international monetary organisation awaits the
attention of Islamic economists.