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Jamia Millia Islamia

New Delhi

Project Paper Title: Islamic Economic System: An Insight.

Submitted by: Tasaduq Suhail (LL.M. Ist Year)

Teacher Incharge: Prof. Kehkashan Danyal


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Islamic Economic System: An Insight.

Tasaduq Suhail - LL.M 1st Year

Abstract

Ownership, distribution of wealth, social justice, interest free banking, and a


regulated freedom of business forms crux of Islamic economics. Islam is a self-
sufficient entity, with clearly defined features- an arabesque wherein reside the
religious, economic and social dimensions, providentially equilibrated to form a
unity. It contains complete guidance for man in spiritual and mundane matters.
The main purpose of this paper is to highlight institutional arrangement of Islam
for distributive justice. The paper begins with a brief note on tracing the origin
of Islamic economics followed briefly by critical analysis of capitalism and
socialism which are dominant modes of economic system in the contemporary
world. The paper also attempts to provide a comprehensive list of fundamental
provisions of Islamic economics especially the fiscal policy of Islam in this
regard and the main objectives thereof. It concludes with a note that since the
primary concern of Indian planners and policy makers is to build a humane
prosperous country based on justice and equity, they may benefit from the
Islamic measures of distributive justice and can follow the broad outline given
by Islam to enhance the social justice.

Key words- Islam, Economy, Fundamentals, Socialism, Capitalism,


Distribution of Wealth, Justice.
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Introduction

According to Kahf,1 there seems to be no agreement among Islamic economists


about the definition of Islamic economics, its scope, and relation to
conventional economics, methods and instruments of analysis and even some of
its basics. He refers to different definitions of Islamic economics suggested by
Islamic economists. For example, according to Akram Khan2 ‗Islamic
economics aims at the study of human falah3 achieved by organizing the
resources of earth on the basis of cooperation and participation‘. S.M.
Hasanuzzaman‘s4 definition is ‗Islamic economics is the knowledge and
application of injunctions and rules of the Shariah that prevent injustice in the
acquisition and disposal of material resources in order to provide satisfaction to
human beings and enable them to perform their obligations to Allah and the
Society‘. For Muhammad Arif 5‗Islamic economics is the study of Muslim
behaviour which organizes the resources, which are a trust, to achieve falah‘.
After giving his criteria for a distinct scientific discipline, he concludes that
Islamic economics is certainly a science of its own and he gives it the name
‗science of economic justice‘.

In Islamic thought, justice is a moral value emphasized frequently in the Quran.


More than one hundred verses about justice are mentioned in the Quran. In the
holy Quran, there are also two hundred utterances warning to reject injustice.
This reflects that Islam is very overt and strict in relation to justice. The
messages about justice in the Quran are very obvious and understandable. One

1
Kahf, Monzer (2003). “Islamic Economics: Notes on Definition and Methodology’’- Review of Islamic
Economics, 13, pp. 23-47.
2
Akram Khan. (1404 AH) ‘Islamic Economics, Nature and Need’, Journal for Research in Islamic Economics, 1
(2), pp.55-61.
3
https://islamicmarkets.com/dictionary/a/al-falah Lit: To thrive, to become happy, to have luck or success.
Tech: It implies success in the ’Akhirah (hereafter).
4
S.M. Hasanuzzaman. (1404 AH) ‘Definition of Islamic Economics’, Journal for Research in Islamic Economics,
(1404 AH) 1 (2), pp.51-53.
5
Muhammad Arif, (1405 AH). ‘Toward a Definition of Islamic Economics’, Journal for Research in Islamic
Economics, 2 (2) pp.87-103.
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of Allah‘s names is the Supreme of Justice ( al„Adl ); He creates the universe


and all that exists within (macrocosmic) in justice;6 mankind (microcosmic) is
also created in justice;7 also, the Prophet and mankind duties such as the
Khalifah are to maintain justice in this world8 as well as in the field of economy.
The importance of maintaining justice in our lives is to ensure equality for all in
order to reach good achievement and economic welfare. To achieve this goal,
we can begin by applying and growing the aspects of aqidah and ethics for both
individuals and social dimensions.9 The Islamic system tries to realize the
principles of justice in economic activity by rejecting secular and sacred
compartmentalization. Spiritualization and moralization on both individual and
collective economic activity will promote the economic justice intended.

Of late, economic injustice has become a universal problem faced by all


contemporary systems. In almost all parts of the world and in all historical eras,
there exist materialistic economic systems that result in bearing injustice. These
systems usually come from extreme ideologies which have failed enough in
bringing a better economic system to all participants. In the global scale, many
people reject Capitalism that is without any regulations, Neo-liberalism which
has resulted in poverty and massive impoverishment, and extreme Socialism.

To keep the economic life of man on the lines of equity and truth Islam has
down certain rules and has prescribed certain bounds within which the entire
system of production, consumption and circulation of wealth must operate.
Islam doesn't concern itself with the modes of production and circulation of
wealth. Those modes change with the progress of civilisation from age to age
and evolve out of human circumstances and needs. Islam requires that in all
ages and under all circumstances, the economic order of society must conform

6
Al Quran- Al Rahman 55:7.
7
Al Quran- Al-Infitar 82: 7.
8
Al Quran- Sa’d 38: 26.
9
M. Quraish Shihab, Wawasan al-Qur’an: Tafsir Maudhu‘i atas Pelbagai Persoalan Umat , Bandung: Mizan,
1996, 129.
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to the principles and bounds prescribed by it. Islam holds that land and
everything in it has been created by God for the benefit of man. Hence it is the
birth right of every individual to secure his livelihood frim the land. In this right
a men are equal. No one can be deprived of this right, nor can anyone claim any
precedence over the other in this respect. The shariah excludes no individual,
race or class from availing of any means of livelihood or adapting any
profession. Similarly no distinctions calculated to reserve certain means of
livelihood or professions for some special class, race or family may be setup.
All men have an equal right and must be afforded an equal opportunity to share
in the produce of the God-made earth. The products of nature, in whose making
or finishing no man has expended his labour or skill are the property of all and
every individual has the right to avail of them according to his needs. Let‘s
trace, very briefly, emergence of this august economic system that has ‗social
justice‘ as its ultimate motive.

Emergence of Islamic economics- A brief insight

Knowledge of permanent and enduring value is that which permits us to realize


our potential as human beings. This is recorded in the Quran and translated into
human experience by the Prophet Muhammad, as captured in the Hadith
(records of the sayings and actions of the Prophet or his companions). Other
knowledge can be relevant and important in particular historical circumstances.
For example, knowledge of castle building, astrolabes and sailing ships was
important in an earlier era. In contemporary times, the development of Islamic
economics represents a Muslim response to the challenge created by the
ascendance of the West10. Increasing materialism, changing attitudes towards
poverty, and other effects of the development of capitalism are aptly
10
Asad Zaman, Islamic Economics: A Survey of the Literature, International Islamic University of Islamabad
(IIUI) June 2008
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summarized in the transition from the Biblical ‗love of money is the root of all
evil‘ to G.B.Shaw‘s ‗lack of money is the root of all evil‘. Since the economic
system (capitalism, communism and socialism) is a major feature of Western
identity, engagement requires a Muslim response in these terms. This is
complicated by the fact that economics is not a high priority in Islam. As put by
Mufti Shafi11

There is no doubt that Islam is opposed to monasticism and


considers economic activities to be permissible, desirable, and even
necessary and required at times. Economic progress is desirable for
men, and the earning of a Halal livelihood is required after the
religious requirements. At the same time, it is equally self-evident
that in Islam the fundamental problem of man is not economic, and
economic progress is not a goal or objective of life for humans.

Mufti Shafi goes on to explain that in Islam, economic activity is a means to an


end, and not an end in itself. This difference in purpose is fundamental, and is
the basis for all other differences between Islamic and Western views on
economic affairs.. There is no doubt that many Islamic teachings relate to
economic affairs, and there exists a vast literature on many aspects of economic
affairs, starting from the earliest periods of Islamic history. A survey and
summary of the economic thought of early Muslims is given in Sadeq and
Ghazali 12 and Islahi13 provides an excellent literature survey of Muslim
economic thought in general. Nonetheless, economics was never considered in

11
Shafi Mufti Mohammad, Ma’s ala-e-Sud (The problem of Interest). Karachi). Karachi: Dar al- Asha’at, 1979.
(U).
12
Sadeq, A.H.M. and Ghazali, Aidit (Eds) (1992) Readings in Islamic Economic Thought, Kuala Lumpur: Longman
Malaysia.
Schumpeter (1974) suggests that economic thoughts did not occur to mankind during the five hundred years
between the Greeks and the Renaissance – the so-called ‘great gap’. Mirakhor (1983) fills this gap with the
economic thought of Muslims; see also Ahghari (1991) and Ghazanfar (2003). Khan (1983, 1991, 1998)
provides many more references in his annotated bibliographies.
13
Islahi, Abdul Azim (2008) Thirty Years of Research on History of Islamic Economic Thought: Assessment and
Future Directions, Conference Papers, The 7th International Conference in Islamic Economics: Thirty Years of
Research in Islamic Economics, Jeddah: 1-3 April 2008, pp. 123-134
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isolation, as a separate subject, since it is always a means to an end, and never


an end in itself. Numerous specific goals or ends for economic activity will be
discussed in what follows. As a broad general principle, Islamic systems in all
spheres are built with the goal of promoting community feeling and cooperation
among all members of society:

And hold fast, all together, by the rope which Allah (stretches out
for you), and be not divided among yourselves; and remember
with gratitude Allah's favour on you; for ye were enemies and He
joined your hearts in love, so that by His Grace, ye became
brethren;14

Other verses15 state that all the treasure in the world cannot purchase love
between hearts. This prioritization of community feeling over material wealth
differentiates Islamic systems from the competitive self-interest based
individualistic systems at the heart of modern economic theory.

Islamic economics originated during the Golden Age of Islam, 622-661 CE,
when the Prophet Muhammad and the Rashidun16 practiced ‗brotherly
cooperation17‘ in economics. The ummah operated under the same codes of
conduct, and resources were allocated efficiently to ensure a high standard of
living18. It is believed that as ties to Islam weakened, so did global economic
growth in Islamic institutions19. Islamic social thinkers Sayyid Abdul-Ala
Maududi, as well as Sayyed Qutb and Muhammad Baqir al-Sadr, popularized

14
Al-Quran: Chapter 3 verse 103.
15
Al Quran: Chapter 8 verse 62, 63
16
Meaning “Rightly guided”.
17
Timur Kuran. 2004. Islam & Mammon: The Economic Predicaments of Islamism. Third printing, and first
paperback printing ed. Princeton: Princeton University Press, 89.
18
Ibid, 3.
19
Ibid.
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the concepts behind Islamic economics in modern times based on their own
experiences and explained the civilization clash between Islamists and
perceived Westernization. It is seen as a practical counteroffensive against
Western aggression20. A few decades passed before the current form of Islamic
economics was brought to Muslim society, starting with Egypt.

The birth of Islamic economics as we know it today can be dated to the early
twentieth century. The needs of liberation movements gave a distinct shape to
Islamic thought all over the Islamic world. It was necessary to argue that Islam
required Muslims to struggle for freedom, and that it offered a better way of life
than the dominant Western systems of capitalism and communism. This forced
Muslim thinkers to delineate and distinguish Islamic socio-political and
economic systems21. Although these issues have been discussed by many
Muslim thinkers, two major figures devoted substantial energy and time to
developing the basis and defending the need for a distinct Islamic economic
system: Mohammad Baqir Al-Sadr22 in his book ‗Our Economy‟, and Sayyid
Abul A'la Maududi in numerous books and articles23, Chapra 24 summarises this
historical background and the views of Maududi, and gives citations to the
latter‘s numerous works. Chapra also remarks on the courage it took to
formulate an Islamic system and defend it against the dominant and apparently
tremendously successful Western systems in the early twentieth century. The
founders of Islamic economics (Al-Sadr25 , Maududi26) agree that the focus of

20
Supra 17.
21
There is no doubt that historical circumstances have strongly impacted on modern formulations of Islamic
economics, as well as political theories. This has led some observers to the mistaken belief that these theories
are additions to the corpus of Islamic beliefs – for example, Kuran (1997, p. 306) writes that “Bringing
economics within the purview of religion was, then, central to Mawdudi’s broader goal”. In fact, economics
has always been within the purview of Islam, but has never been separated out as a distinct subdomain or
isolated from spiritual and social concerns.
22
Al-Sadr, Muhammad Baqir (1961) Iqtisaduna translated as Our Economy, London: Bookextra, 2000.
23
Maududi, Sayyid Abul A'la (1970) Ma’ashiyat-e Islam [Economic System of Islam], Lahore: Islamic
Publications.
24
Chapra, M. Umer (2000) The Future Of Economics: An Islamic Perspective, Leicester : The Islamic Foundation.
25
Al-Sadr, Muhammad Baqir (1961) Iqtisaduna translated as Our Economy, London: Bookextra, 2000.
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Islam is on human and spiritual development, and the purpose of an economic


system is to promote justice and equity. Both believed that applications of
Islamic laws and guiding principles in the economic sphere would bring
advances in human welfare and be superior to Western systems for handling
economic affairs, which promote only material welfare.

To summarise, it is worth putting the development of Islamic economics into a


broader perspective. During the eighteenth and nineteenth centuries, European
colonization of Muslim lands had destroyed functioning political, social, health
and educational structures27. This was considered necessary for progress since,
as Lord Cromer, the British counsel in Cairo from 1883-1907, said “…as a
social system, Islam has been a complete failure. Islam keeps women in a
position of inferiority…it permits slavery…its general tendency is intolerance
towards other faiths…” said (1978, Introduction, part III) provides a penetrating
analysis of the effects of European colonisation on the production of Western
knowledge about the Orient; he writes that ―All academic knowledge about
India and Egypt is somehow tinged and impressed with, violated by, the gross
political fact (of imperialism).”

It is now widely agreed that good institutions and public participation in and
ownership of socio-political processes are crucial to progress and development
(broadly defined). Indigenous institutions, created and adapted to perceived
public needs, had been replaced during the colonial era by alien and exploitative
governance structures designed solely for the efficient extraction of revenues.
Replacing these relics of the colonial era and adapting them for use in states

26
Maududi, Sayyid Abul A'la (1947 [1041]) Insan ka Ma’ashi Mas’alah aur us ka Islami Hal, [Economic Problem
of Man and its Islamic Solution], Lahore: Islamic Publications.
Maududi, Sayyid Abul A'la (1970) Ma’ashiyat-e Islam [Economic System of Islam], Lahore: Islamic Publications.
27
This runs counter to the belief that European colonization brought civilization to primitive cultures. The
facile assumption that conquest proves superiority runs counter to historical evidence that savage tribes have
often over-run more advanced civilizations. Evidence for this point of view is provided in Marglin (2007) and
Mitchell (2002). Syed Hussain Ahmed Madani (1953) documents the destruction of numerous welfare and
educational institutions in India and the spreading of corrupt practices among the populace due to British rule.
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based on Islamic principles, as well as creating new institutions in line with


Islamic ideals, is a huge task, requiring both vision and the political power and
energy to implement the vision. The task is further complicated by powerful
vested interests, as well as European interests and fears of Islam. The failure of
alien, authoritarian, and exploitative Western institutions to take root in Muslim
societies has been attributed to Islam and characterised by some as
backwardness e.g., Lewis28, but see also rebuttals by Alam29, Dalrymple30 and
Hirsh31. Concerted efforts are being made to co-opt and coerce Muslims into
following Western agendas, with explicit encouragement to creating versions of
Islam amenable to Western interests and fomenting divisions among Muslims –
see, for example, Benard32.The struggle to find a suitable compromise between
the demands of modernity and the demands of Islam is under way throughout
the Islamic world, with a wide spectrum of positions being adopted by different
groups. Maulana Syed Abul Hasan Ali Nadvi33 gives a Muslim point of view
regarding this struggle, which will shape the future of the Muslim world and of
which the development of Islamic economics is part.

An overview of the contemporary economic systems

Recently economic injustice has become a universal problem faced by all


contemporary systems. In almost all parts of the world and in all historical eras,
there exists materialistic economic systems that result in bearing injustice.
These systems usually come from extreme ideologies which have failed enough
28
Lewis, B. (2003) The Crisis of Islam: Holy War and Unholy Terror, New York: Modern Library.
Lewis, B. (2003) What Went Wrong? The Clash Between Islam and Modernity in the Middle East, London:
Harper Perennial.
29
Alam, M. S. (Spring 2002) Bernard Lewis: scholarship or sophistry? Studies in Contemporary Islam, 4(1) pp.
53-80.
30
Dalrymple, William (2004), The hidden truths about Muslims, New York Review of Books, November 4, pp.
31-34.
31
Hirsh, Michael (2004) Bernard Lewis revisited: what if Islam isn't an obstacle to democracy in the Middle East
but the secret to achieving it? Washington Monthly, Nov.
32
Benard, Cheryl (2004), Civil Democratic Islam: Partners, Resources, and Strategies, Washington D.C.:RAND
report MR-1716-CMEPP
33
Nadvi, Maulana Syed Abul Hassan Ali (1986) Tahzeeb aur Tamaddun par Islam kay Ihsanat aur Asarat. [The
Gifts and Effects of Islam on World Culture and Civilization], Karachi: Majlis-e-Nashriat-e-Islam.
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in bringing a better economic system to all participants. In the global scale,


many people reject Capitalism that is without any regulations, Neo-liberalism
which has resulted in poverty and massive impoverishment, and extreme
Socialism. The philosophical powers which have driven Capitalism34,
Socialism35, Welfare State36, and Neo-liberalism37 are still problematic
especially in relation to economic justice – in ownership, production,
consumption, and especially distribution – and we need direct solution. It is
important to solve the source of these problems rather than its artificial impacts.

Capitalism

Capitalism, unlike Islamic economic system and Socialism regards capital as an


individual factor of production creditable of distinct factor payment i.e. interest.
It supports the capitalists to benefit from wealth accumulation without having to
put factor i.e. capital at similar risks that an entrepreneur faces. It shifts the
34
Capitalism, which is in classic form said as laissez fair, has come down and the retention form is the modified
Capitalism. It has 5 main characteristics 1) it views that wealth expansion can be accelerated, maximum
production and need satisfaction as the preference is very important for human welfare; 2) it views that
everyone is free to have their own private property; 3) it assumes that individual initiation and their
decentralized decision making in a free market is the efficient requirement in allocating resources; 4) it
disbelieves in the government role and collective values consideration in allocation efficiency and distributive
justice; and 5) it claims that the fulfilment of private needs will automatically fulfil collective one. See: M. Umer
Chapra, Islam and the Economic Challenge, Herndon: IIIT, 1992, chapter 1. In this case, Capitalism is considered
as a sophisticated ideology as it’s responsive in repairing the errors assumed. Even there are some contra
responses from the place where it was born and even bearing another antithesis namely Socialism, Capitalism
still has a very great power and it survives. Thus, Fukuyama called it as the end of history. See Francis
Fukuyama, The End of History and the Last Man, New York: Avon Books, 1992.
35
Socialism and Marxism as antithesis of Capitalism are also incapable. Even, these ideologies experienced
faster decline than predicted. This is due to the major inherent weaknesses appeared. First, this ideology
implies disbelief on human capability to operate their private ownership in the barriers of social welfare. Every
people having similar capacity as the consumers, workers, company managers, and civil servants will always be
supported to reach their best for the social welfare without regarding to their private necessity. Second,
government power holder will be in the hands of those having necessity, which is in line with social necessity.
However, the reality is contrary to the fact where a group people controlling the government power will utilize
the state’s income and wealth for their own sake. Third, the great amount of public subsidy will be profitable
to the haves and certain community only than to the poor having limited purchasing power. Norman Furniss
and Timothy Tilton, The Case of Welfare State: From Social Security to Social Equality, Bloomington, Indiana:
International Union Press, 1977, 42.
36
There are two momentum in Welfare state:: After the Great Depression and the Second World War as the
responses of challenging caused by Socialism and problems of the two momentums. To see the history of
Welfare State, see Maurice Bruce, The Coming of the Welfare State. London: Batsford, 1968.
37
The rising of economic Liberalism is primarily to struggle for leissez faire; it is a belief in maintaining private
rights and ownership, and believing more towards market than state role in solving the social problems. See
Mansour Fakih, Bebas dari Neo-liberalisme, Yogyakarta: Insist Press, 2003, 54-58.
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break even line further away from the entrepreneur and crowds out
entrepreneurs who cannot afford to keep feeding capitalists. In this regard,
interest has a huge influence on allocation of resources. It influences the basic
economic decisions like what and for whom to produce.

Capital is needed for technological advancements. It is needed for production


and consumption and for governments to expend on development. It is even
needed to influence policies by winning elections after expensive election
campaigns. There would not have been many complexities if markets were
efficient and income and wealth distribution fair. But, the world we live in has
never and perhaps never will have perfect equality and perfect competition.

Interest serves capitalists and allows them to accumulate wealth. This is evident
from the empirical statistics on inequality in income and wealth in second half
of the 20th century when monetary capitalism with institutional support
expanded in an increasingly integrated and global economy.

Interest is prohibited in all monotheist religions.38 However, interest is


pervasive in capitalism. Even among secular literature, one finds criticism on
interest. Aristotle in his book ―Politics‖ criticized interest in following words
―Of all modes of getting wealth, this is the most unnatural". In value neutral
economics too, we find criticism on interest. Keynes in his monumental work
―General Theory of Income, Employment, Interest and Money‖39 reasoned in
following words:

―Interest to-day rewards no genuine sacrifice, any more than does the
rent of land. The owner of capital can obtain interest because capital is
scarce, just as the owner of land can obtain rent because land is scarce.
But whilst there may be intrinsic reasons for the scarcity of land, there

38
See Exodus 22:25, Leviticus 25:35-36, Deuteronomy 23:20, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and
Ezekiel 18:8,13,17 & 22:12).
39
(1936, p. 377).
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are no intrinsic reasons for the scarcity of capital. An intrinsic reason


for such scarcity, in the sense of a genuine sacrifice which could only
be called forth by the offer of a reward in the shape of interest, would
not exist, in the long run, except in the event of the individual
propensity to consume proving to be of such a character that net saving
in conditions of full employment comes to an end before capital has
become sufficiently abundant. But even so, it will still be possible for
communal saving through the agency of the State to be maintained at a
level which will allow the growth of capital up to the point where it
ceases to be scarce‖.

In one of his famous essay, Keynes40 reasoned as follows:

When the accumulation of wealth is no longer of high social


importance, there will be great changes in the code of morals. We shall
be able to rid ourselves of many of the pseudo-moral principles which
have hag-ridden us for two hundred years, by which we have exalted
some of the most distasteful of human qualities into the position of the
highest virtues. We shall be able to afford to dare to assess the money-
motive at its true value. The love of money as a possession — as
distinguished from the love of money as a means to the enjoyments and
realities of life — will be recognized for what it is, a somewhat
disgusting morbidity, one of those semi-criminal, semi-pathological
propensities which one hands over with a shudder to the specialists in
mental disease ... But beware! The time for all this is not yet. For at
least another hundred years we must pretend to ourselves and to
everyone that fair is foul and foul is fair; for foul is useful and fair is
not. Avarice and usury and precaution must be our gods for a little

40
(1932, p.358)
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longer still. For only they can lead us out of the tunnel of economic
necessity into daylight‖

Milton Friedman, one of the most distinguished monetary economists argued


that nominal interest rate be kept at zero. He reasoned that the marginal cost of
creating additional money is zero. Therefore, nominal rates of interest should be
zero. It implies that the central bank should keep rate of deflation equal to the
real interest rate on treasury bonds so that the nominal interest rate are kept at
zero. This also obviates the need for indexation and it also helps in increasing
output and employment.

Among most recent economists, Krugman in his New York Times article titled
―How Did Economists Get It So Wrong?‖41 analysed the current financial crisis
in following words:

―Until the Great Depression, most economists clung to a vision of


capitalism as a perfect or nearly perfect system. That vision wasn‘t
sustainable in the face of mass unemployment, but as memories of the
Depression faded, economists fell back in love with the old, idealized
vision of an economy in which rational individuals interact in perfect
markets, this time gussied up with fancy equations… Unfortunately, this
romanticized and sanitized vision of the economy led most economists to
ignore all the things that can go wrong. They turned a blind eye to the
limitations of human rationality that often lead to bubbles and busts; to
the problems of institutions that run amok; to the imperfections of
markets — especially financial markets — that can cause the economy‘s
operating system to undergo sudden, unpredictable crashes; and to the
dangers created when regulators don‘t believe in regulation.

41
[September 02, 2009]
15

… So here‘s what I think economists have to do. First, they have to face
up to the inconvenient reality that financial markets fall far short of
perfection that they are subject to extraordinary delusions and the
madness of crowds.‖

Sameulson42 in his criticism on extra reliance on market forces stated that


market forces will only lead to ‗starving couples‘ to malnourished children who
grow up to produce malnourished children, to perpetuation of Lorenz curves of
great inequality of income and wealth for generations or forever.

Among Muslim Economists, Siddiqui43 criticized interest stating that even in


commercial loans, the borrower may suffer a loss, yet interest based lending
obliges him/her to repay the principal plus compound interest. Conversely, the
borrower may reap huge profits, yet the lender gets only the stipulated rate of
interest which may likely turn out to be small part of the actual profits. It results
in inefficient allocation of society‘s resources and increases the inequality in the
distribution of income and wealth as it guarantees a continuous increase in the
monies lent out, mostly by the wealthy, and puts the burden of bearing the
losses on entrepreneurs and through loss of jobs on the workers.

Chapra44 viewed secular societies continuing to belittle the need for moral
development; though all of them now profess commitment to development with
justice. He emphasized that even material development with justice is not
possible without moral development. The rationale for this contention is that
development with justice requires an ‗efficient‘ and equitable use of all
resources and both ‗efficiency‘ and ‗equity‘ can neither be defined nor
actualized without the injection of a moral dimension into economic pursuits.

42
Samuelson, Paul (1948). “Economics”. New York: Harcourt and Brace.
43
Siddiqui, Muhammad N. (2002). “The Wisdom of Prohibition of Interest”. La Riba Annual Conference. Los
Angeles, C.A. March 30, 2002.
44
Chapra, Umer (1993). “Islam and Economic Development.” Islamabad. Islamic Research Institute.
16

He outlined unrealistic assumptions in capitalism which will not make invisible


hand alone to address the issues of equity:

1. Harmony between individual and social interest e.g. unscrupulous


consumption and imposing externalities on society.

2. Individual preferences reflect social priorities e.g. precedence of self-interest


over social priorities.

3. Equal distribution i.e. unequal distribution of income gives more weight to


resourceful class to influence allocation of resources to their desired use.

4. Prices reflect urgency of wants i.e. no mechanism to differentiate between


necessities and not so necessities, e.g. want satisfaction of few does not mean
need satisfaction of all especially when resources are scarce and can only be
used for alternative uses.

5. Perfect Market i.e. price mechanism can have a minimum impact on socially
desirable allocation of resources; it works when there is perfect competition.
But, market imperfections even dilute this little influence that price mechanism
could have on socially desirable resource allocation when prices are completely
out of line of real out-of-pocket costs.

6. Social Darwinism i.e. richest are the fittest to survive by the sheer weight of
their purchasing power to influence the resource allocation.

Theory of Comparative Advantage states that resources should be allocated to


the efficient sectors of the economy. If U.S.A has a comparative advantage in
producing cars and if India has a comparative advantage in producing wheat;
then, India should allocate its resources on producing wheat and U.S.A should
allocate its resources to produce cars. Both India and U.S.A can gain from
exchange and specialization. But this will only work when the trade is fair and
when both countries do actually allocate their resources to their efficient sectors.
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Instead what happens is that developed countries have absolute advantage in


producing most goods over developing countries. Developed countries allocate
their resources in producing goods that they can produce most efficiently and
use the proceeds from sale to provide subsidies to their inefficient sectors and
virtually paralyze the developing economies by depriving them of their chance
of gaining through exchange and specialization.

The export subsidies provided by developed countries to their inefficient sectors


enable the inefficient sector to become efficient artificially and crowd out the
developing countries by overproducing and then dumping these goods in the
third world countries. If the supply exceeds demand, developed countries have
not been reluctant to dump their production in sea if they can‘t do it in the
developing countries!

By providing export subsidies to their inefficient sectors, developed countries


create distortions in trade and misappropriations in resource allocation. The
export subsidies paid by the developed countries to their inefficient agriculture
sector are funded through the proceeds of exports. Therefore, effectively these
subsidies are paid by the developing countries. Developed countries charge
huge premium for value addition that is not in line with their out-of-pocket
costs. The difference is especially huge in information technology products,
software and pharmaceuticals. Once software or medicine is made, the capacity
is virtually unlimited. Unlimited copies can be sold provided there is enough
demand. Cost per unit is spread over larger output. At higher levels of output,
marginal cost is negligible in these products.

Therefore, developing countries are denied gains from comparative advantage


in agriculture through export subsidies provided by developed countries to their
comparatively inefficient agriculture sector. Subsidies of $350 billion a year to
agricultural producers in OECD countries are a barrier to developing country
18

exports (Source: World Development Indicators 2005). This creates


unemployment and poverty in the developing economy. Eventually, a
developing country will have to submit itself before the international financial
institutions that are able to exert extraordinary influence -not limited to
economic but also political- in the developing country. Therefore, the role of
IMF, World Bank, WTO and the adaptation of Structural Adjustment Program
and Free-Float exchange rate systems are all interrelated in their objectives to
maintain the status quo of supremacy of developed world over developing
countries.

Socialism

Some of the pioneer and well known social thinkers include Robert Owen,
Charles Fourier, Pierre-Joseph Proudhon, Louis Blanc, Charles Hall and Saint
Simon. Socialism was to act as a pre-cursor to Communism. Karl Marx
described socialism as a specific historical phase that will displace capitalism as
a precursor to communism. Socialism does not promise to make everyone equal
and pay everyone the same wages and replace market economy in a complete
sense. However, communism does promise income and social equality. Some of
the well known social leaders include Vladimir Lenin and Joseph Stalin. Some
of the important countries that tried Socialism include Russia, Hungary, Poland,
Romania, Vietnam, Yugoslavia etc. Just before Great Depression, the socialist
movement was at its peak. Most socialist countries fared very well in Great
Depression and only Capitalist countries suffered in Great Depression. This also
caused appreciation for Socialism at the point in history.

On the economic criticism of Socialism among Muslim economists, Maududi45


analysed that socialism in its quest to tame capitalists brought one big capitalist
in the form of government i.e. communist party accredited with the
45
Maududi, Sayyid Abul A'la (1970) Ma’ashiyat-e Islam [Economic System of Islam], Lahore: Islamic
Publications.
19

responsibility to operate, manage and administer the overall economy without


giving society and individuals any recourse to challenge the government. In
such a case, no government, consisting of humans after all can keep itself
judiciously pursuing common goals than individual goals. Usmani46 reasoned
that socialism kills the self motive which drives individuals to excel and be
efficient.

The predictions of Marx about Capitalism also did not materialize and his
Theory of Surplus Value was also criticized later on. The problem in
distribution of income in Capitalism from an Islamic perspective was only with
interest. Land has an intrinsic value and its owners receive rent on land. Labor
also earns wages even when the entrepreneur suffers loss. Value of production
i.e., prices of goods is not always sufficient to create surplus after paying wages,
rent and interest. While labourer earns wages for work it renders and the land
owner earns rent for the use of land, money cannot have a separate
compensation of its own until it transforms itself as capital and take the risk of
entrepreneurship along with an entrepreneur.

On the political criticism of communism, Fukuyama47 argued that following the


collapse of the Soviet Union, liberal democracy no longer faced any serious
ideological challenges and thus had proved itself to be the only sustainable and
successful form of government. Marx used the phrase 'the end of pre-history' to
symbolize the victory of communism over capitalism. Fukuyama claimed that
capitalist liberal democracy would ultimately extend to all nations and this
would be 'the end of history'.

Though Mixed economy has solved some of the problems in laissez-faire and
Anarcho-Capitalism, but it still lacks an ethical foundation to foster social

46
Usmani, Muhammad Taqi (2003). “Islam Aur Jadid Maeeshat-o-Tijaraht” [Islam and Contemporary Economy
and Trade] . Karachi: Maktaba ma’ariful Quran.
47
Fukuyama, Francis (1992). The End of History and the Last Man. London: Penguin.
20

optimization and development at a grand scale i.e. to influence social and


human development. Secondly, it has retained interest free financial system
which has created at least two havocs i.e. one in East Asia in 1990s and the
Great Recession since 200748 in the short two decade long post-soviet union
era. Therefore, much of the criticism that is made on Capitalism holds true for
Mixed economy as well.

Fundamentals of Islamic Economics.

Islam espouses a capitalistic economic philosophy that encourages adherents to


work hard for economic gain, compete in business, own private property and
take risk in investment49. Individuals may earn a return on their investments and
are encouraged to work productively in their own self-interest. Islam
recognizes, however, that the economic and emotional strains of poverty may
compel an individual to resort to unhealthy or unethical means of earning an
income. The essential components of the Islamic economic system were
therefore formulated to ensure the availability of education and employment,
poverty reduction and prevention, and continuous social and intellectual
development for all individuals. This viewpoint is affirmed by the Sunnah,
which stress that economic prosperity and social stability are essential for
continued adherence to moral-ethical behaviour and the maintenance of faith50.
Islam holds that the community's physiological, safety, security and social needs
must first be satisfied for positive intellectual and economic growth to take
place. Basic physiological needs for food, shelter, clothing and rest must be
assured; safety, security and social cohesion should be maintained; public
freedom of speech and religion must be guaranteed. Islam has deemed the
fulfilment of these essential needs, along with free and easy access to education,

48
https://en.wikipedia.org/wiki/Great_Recession_in_the_United_States
49
The principle foundations of an Islamic economy by Hossein Askari and Roshanak Taghavi.
50
The Prophet is reported to have said that "poverty may sometimes lead to Kufr [a denial of God's
teachings]". Sottrce: Ul·Haq (1995, p. 86).
21

to be a prerequisite for the promotion of economic growth and social


development51. Poverty is considered by Islam to be a threat to the very
existence of the faith. Thus specific capitalistic strategies looking to 'maximize
efficiency and productivity' must be modified if they leave the basic
physiological and educational needs of a significant part of the populace
unfulfilled, and hinder public access to equitable economic opportunities. Thus
the Islamic system can be summarized as a capitalistic system with essential
safeguards to insure social and economic justice. Progressive human
development is considered by Islam to be the foremost guarantor of an
economically just and socially stable society. The pursuit of knowledge and the
practice of innovation are thus activities of supreme importance, and must be
consistently encouraged by all members of the Ummah52. Human beings,
according to Islam, have the intellectual capacity and necessary resolve to
develop intellectually, spiritually and physically. Islam insists that its adherents
cultivate their potential by ridding themselves of ignorance through study and
spiritual growth. It not only views education as the requisite mode of attaining
personal and earthly prosperity, but also considers it to be the primary means of
resisting tyrannical manipulation53. Muslims are therefore required to obtain an
education, and must enhance and incorporate what they learn into their personal
and public policy decisions54. Islam's goal is to fashion an economic system in
which each member of the ummah can produce enough income to satisfy his or
her individual and familial consumption needs55. Islam pushes for the maximum

51
UL HAQ, I. (1995), Economic Doctrines of Islam, The International Institute of Islamic Thought, Islamabad.
52
The word knowledge, including its derivatives, is the second most repeated word in the Quran alter Allah
(God), and the Prophet is reported to have said that "striving alter knowledge is a sacred obligation/religious
duty for every Muslim" (see VI Haq 1995, pp. 207-08 and 222-23).
53
SACHEDINA, A.A. (1988), The Just Ruler in Shi’ite Islam, Oxford University Press, New York.
54
Ul Haq (1995, pp. 96-97). Note: Education and literacy-training for children and adults were (primarily)
provided by the state for free alter the Prophet immigrated to Medina. Source: Ul Haq (1995, pp. 100-01.
55
All men, according to the Quran, are obligated to financially support and care for their families. Source: Ul
Haq (1995, p. 93). The Quran does not require women to generate an income and financially support their
families. However, no Quranic verses speak against women working, earning a living, becoming financially
independent, and/or financially supporting their families. All citizens are consistently urged to work and
contribute to the economic and social development of society.
22

exploitation of the earth's natural resources, and has made the utilization of
these resources through hard work a religious obligation second only to
prayer56. Work is considered by Islam to be the most crucial aspect of economic
success, and hard work on the part of any individual - regardless of his or her
religious convictions - is the best guarantee for economic and social progress
Islamic law permits all forms of labor, production and economic commerce,
except for routine beggary and freeloading, and any vocations that may promote
social instability or political, economic or social oppression57.Recognizing that
an individual's capacity to produce may vary according to his or her talent and
ability, Islam does not call for perfect income equality and does not stipulate a
limit on the amount of income an individual may earn. It strives to reduce and
prevent exceptionally large inequalities in wealth and income, and thus requires
that employees receive no less than a living wage that can sufficiently cover
basic expenses58. Islam has left it up to the ummah to determine what minimum
or living wage value can adequately cover a worker's basic living expenses at a
specific point in time59.

According to Islam, work and investment are the only legitimate means of
acquiring property right so Islamic law maintains that all individuals have the
right to keep what they earn, and acquire a right of priority in the use of any
goods they produce. Property may also be transferred by means of an exchange,

56
See Quran 9:105: "And say [unto them, O Prophet]: Act! And God will behold your deeds". Source: Ul Haq
(1995, p. 93). The Prophet is reported to have said that "to strive to earn a livelihood through the right means
is an obligation after the duty of prayer" and "bread earned by one's own labor [or effort] is the best of all
earnings". Source: Ibid. (p. 154). Quran 4:95: "Such of the believers as remain passive [Literally, 'who sit at
home'] - other than the disabled - cannot be deemed equal to those who strive hard in God's cause with their
possessions and their lives: God has exalted those who strive hard with their possessions and their lives far
above those who remain passive". Source: Ibid
57
See Quran 2:11: "they are told, 'Do not spread corruption on earth" Quran 2: 205: "*…] and God does not
love corruption” Quran 7:56: "do not spread corruption on earth after it has been so well ordered" Quran 7:
85: "*…] do not deprive people of what is rightfully theirs" Quran 11:111: "And, verily, unto each and all will thy
Sustainer give their full due”. UL HAQ, I. (1995), Economic Doctrines of Islam, The International Institute of
Islamic Thought, Islamabad.p.109.
58
See Quran 4:33: "And unto everyone have We appointed heirs to what he may leave behind [000] give them,
therefore, their share".
59
UL HAQ, I. (1995).
23

contract, grant or inheritance. Ownership rights are held inviolable and private
property cannot be forcefully appropriated or confiscated. The violation of
legitimate property rights is considered by Islam to be oppressive and
exploitative60. Thus Islam recognizes the importance of institutions, the
guarantee of property rights and the enforcement of contracts to economic
growth and development. However, in Islam because natural resources (such as
raw land, water and mineral deposits) are considered to be a gift bestowed to
humanity by God, absolute ownership can only be claimed by God61. Because
humans did not actually create any of the world's natural resources, they cannot
exert unequivocal ownership over them. They may only privately own anything
they produce with their work or gain through legitimate investment and
inheritance.

An individual who earns more than what he or she consumes must pay a charity
tax, called zakah, which is calculated according to his or her leve1 of net worth.
Business capital and housing are exempt from zakah taxation in order to
promote investment in capital and construction and encourage home
ownership62. It is important to note that zakah is not a substitute for taxation by
the state, which may institute other forms of taxation to finance additional
social, economic, infrastructural and re1ated programs63. While Islam
encourages people to save their earnings after consumption, it denounces the
hoarding of wealth and views taxation as a mode of social investment64. It
reasons that because God bestowed natural resources to the entire human
population, all people are entitled to a share of world production. Thus those
60
MlRAKHOR, A. (2003), "General characteristics of an Islamic economic system", Global Scholarly Publication,
New York.
61
CUMMINGS, J.T. and H. ASKARI and A. MUSTAFA (1980), "Islam and modern economic change", in J.L.
Esposito ed., Islam and Development, Syracuse University Press, Syracuse, pp. 25-47.
62
Source: Ul Haq (1995).
63
ASKARI, H., J. CUMMINGS and M. GLOVER (1982), Taxation and Tax Policies in the Middle East, Butterworth
Publishers, London.
64
The terms 'taxes' and 'social spending' are used interchangeably throughout the Quran. See also Quran 59:7,
which says that "it [wealth] may not be [a benefit] going round and round among such as you may [already] be
rich". Source: DI Haq (1995, p. 140).
24

who are impoverished, unemployed, under-employed, or lack the ability to


work are the primary beneficiaries of zakah payments65. Individuals who are
employed but underpaid may receive zakah payments so that they can earn a
living wage, and those with refugee status may receive zakah as well. Surplus
zakah funds may be saved, invested in infrastructure and deve1opment, or
donated to impoverished countries66. Islam holds that the payment and
distribution of zakah promotes a more equitable income distribution that
ultimately enables those on a lower income scale to begin saving as their
standard of living improves67. Evading this obligation, according to Islam, will
promote an inequitable distribution of income and encourage an increase in
poverty68. Abbas Mirakhor, an eminent economist and past winner of the Prize
in Islamic Economics awarded by the Islamic Development Bank, summarizes
these assertions succinctly69:

―Islam asserts unambiguously that poverty is neither caused by


scarcity and paucity of natural resources, nor is due to the lack of
proper synchronization between the mode of production and the
relation of distribution, but as a result of waste, opulence,
extravagance, and non-payment of what rightfully belongs to the less
able segments of the society. This position is illustrated by the

65
See Quran 9:60: "The offerings given for the sake of God (zakah) are [meant] only for the poor and the
needy, and those who are in charge thereof (who collect the tax), and those whose hearts are to be won over,
and for the freeing of human beings from bondage, and [for] those who are overburdened with debts, and [for
every struggle] in God's cause, and [for] the wayfarer: [this is] an ordinance from God - and God is All-Knowing,
Wise". Quran 70:24·25: "*…] in whose (the faithfuls’) possessions there is a due share, acknowledged [by
them], for such as ask [for help] and such as are deprived [of what is good in life]". Quran 51:19: "[But,]
behold, the God-conscious *… would assign+ in all that they possessed a due share unto such as might ask [for
help] and such as might suffer privation". The Prophet is also reported to have said that "charity is halal
(permitted) neither for the rich nor the able-bodied".
66
Ul Haq (1995, p. 200).
67
ZAMAN, S.M.H. (1999), Economic Guidelines in the Quran, The Islamic Institute of Islamic Thought,
Islamabad.
68
MlRAKHOR, A. (2003), "General characteristics of an Islamic economic system", Global Scholarly Publication,
New York.
69
Id., (1989, p. 25)
25

Prophetic saying that: "Nothing makes a poor man starve except that
with which a rich person avails in luxury‖.

Compulsory zakah payments were instituted by Islam because every capable


member of the ummah is required to somehow contribute to the development of
a learned and economically prosperous social order. Zakah is a major
component of infaq and sadaqah, compulsory and voluntary social expenditures
made for the creation of non-profit and non-governmental institutions such as
schools, health clinics, hospitals and libraries70. Poverty exists, Islam reasons,
not because natural resources are scarce, but because they are misallocated,
inefficiently managed, unproductively hoarded and unevenly distributed71.
Independent social spending, according to Islam, is the best possible way for
members of the Islamic social order to promote a more equitable distribution of
wealth and resources. Muslims with the financial capacity to donate beyond
their zakah requirements are therefore strongly encouraged to further invest in
infaq and sadaqah72.

Islam does not require social institutions built through infaq and sadaqah to
register with or be approved by a central political authority73. Thus by
advocating extensive popular participation in the development of society, Islam

70
Ul Haq (1995).
71
In Quran 20:118-119, Adam is told: "Behold, it is provided for thee that thou shah not hunger here nor feel
naked, and that thou shah not thirst here or suffer from the heat of the sun. The Prophet is reported to have
said: "He is not a faithful who eats his fill while his neighbour [or fellowman] remains hungry by his side".
72
See Quran 30:39: "And [remember]: whatever you may give out in usury so that it might increase through
[other] people's possessions will bring [you] no increase in the sight of God - whereas all that you give out in
charity, seeking God's countenance, [will be blessed by Him:] for it is they, they [who thus seek His
countenance] that shall have their recompense multiplied! Quran 3:92: "[But as for you, O believers,] never
shall you attain true piety unless you spend on others out of what you cherish yourselves; and whatever you
spend - verily, God has full knowledge thereof". Quran 2:276: "Allah [...] will give increase for goods of charity".
Quran 2:177: "True piety does not consist in turning your faces towards the east or the west - but truly pious is
he who believes in God, and the Last Day, and the angels, and revelation, and the prophets, and spends his
substance - however much he himself may cherish it - upon his near of kin, and the orphans, and the needy,
and the wayfarer, and the beggars, and for the freeing of human beings from bondage; and is constant in
prayer, and renders their purifying dues (zakah) *…] it is they that have proved themselves true, and it is they,
they who are conscious of God”.
73
IQBAL, M. ed. (1986), Distributive Justice and Need Fulfillment in an Islamic Economy, International lnstitute
of Islamic Economics, International Islamic University, Islamabad.
26

reduces the need for an authority to intervene on behalf of the socio-economic


interests of the community74.

The role of the Islamic state

Islam holds that state authority is needed for the preservation, cohesion and
general welfare of society. It must be an elected body (although exact
procedures for elections are not stipulated) that maintains fiscal stability and
transparency, social cohesion and an adequate national standard of living. The
state's most fundamental duties are the alleviation of poverty and the prevention
of extreme income inequality (social and economic justice). Although Islam
ultimately holds the ummah responsible for the creation and administration of
public development institutions, it authorizes the state to intervene on the
community's behalf if an adequate living standard, referred to as fard kifaya, has
not been established and if members of the ummah stop making their zakah
payments75. The state authority, with the approval of the shura, may institute
any new policies it cansiders necessary for the restoration or attainrnent of an
equitable income distribution76. The state may therefore formulate its own
additional tax policies, borrow money and increase spending, if doing so will
result in economic growth77. Islam encourages state authorities to avoid
accumulating significant debt, however, and strongly discourages deficit
spending78.

74
Supra at 63.
75
The Prophet (Peace be upon him) is reported to have said: "The leader [or government] who has authority
over people is a guardian and responsible for them".
76
When asked about azm - taking a particular course of action - the Prophet is reported to have defined it in
this way: "It means taking counsel with the knowledgeahle people (ahl al ra'y) and thereupon following them
[therein]".
77
MlRAKHOR, A. (2003), "General characteristics of an Islamic economic system", Global Scholarly Publication,
New York.
78
UL HAQ, I. (1995), Economic Doctrines of Islam, The International Institute of Islamic Thought, Islamabad.
27

While the Islamic social order is not supposed to function as a welfare state, the
primary national authority must make sure that all citizens have a reasonable
standard of living. Thus if any members of the community cannot afford food,
shelter or healthcare and do not have easy access to education, the state is
obligated to provide it for them. The state must ensure the proper collection and
distribution of zakah funds, and may collect and administer zakah
disbursements if the ummah lacks the capacity to do so. It is also allowed to
provide non-profit and non-governmental organizations with zakah funds if they
need it. The state must stabilize and maintain the value of the national currency.
Because Islam prohibits the excessive accumulation and hoarding of wealth, the
state should not permit the presence of monopolies, and should formulate
economic policies encouraging investment and competition79. In cases where
the ummah is suffering from extreme income inequality and mass poverty -
putting its survival at stake -, the state is authorized to impose substantial taxes
on the wealthy to collect money for basic living expenses, and may restrict and
redistribute property rights80. Feudalism and absentee landlordism, for example,
are considered to be socially detrimental and un-Islamic, and would thus
warrant land confiscation and redistribution81.

The state is additionally required to preserve the ummah‟s internal and external
security, and must maintain amicable relations with other Muslim and non-
Muslim countries. Islam requires the state to maintain social stability by
promoting tolerance and opposing all forms of extremism, particularly religious
79
Verses reproving hoarding and the non-investment: Quran 102:1-6: "You are obsessed by greed for more
and more [comforts, material goods, greater power over fellow men and nature] until you go down to your
graves [...]. Nay, if you could but understand [it] with an understanding [born of certainty, you would indeed,
most surely, behold the blazing fire [of hell]!". Quran 104:1-9: "[Woe unto him] who amasses wealth and
counts it a safeguard, thinking that his wealth will make him live forever! Nay, but [in the life to come such as]
he shall indeed be abandoned to [...]. A fire kindled by God, which will [...] dose in upon them in endless
columns [overwhelming with despair as they belatedly realize their guilt]". Quran 107:1-7: "Hast thou ever
considered [the kind of man] who gives the lie to all moral law? Behold, it is this [kind of man] that thrusts the
orphan away, and feels no urge to feed the needy [ ... ] those who want only to be seen and praised, and,
withal, deny all assistance [to their fellowmen]!".
80
The Prophet is reported to have carried out such policies out for housing and cultivation.
81
Supra at 78.
28

fanaticism82. National authorities are further required to uphold justice by


establishing and presiding over a reputable judicial system. They must ensure
organizational transparency and ethical business and social practices by
instituting a hisbah, a judicial organization that monitors and ensures the fair
treatment of labourers and consumers83. If the state fails to uphold basic human
rights to sustenance, protection, education, healthcare and social and religious
freedom, the ummah is entitled to either take the state to court or, via shura,
choose a new authority84. Irfan ul Haq, a specialist in Islamic economics,
provides an excellent summary in this regard:

"The limits of allegiance to a government have also been given by


the Prophet. He [the Prophet] states: 'No obedience is due in sinful
matters; behold obedience is due only in the way of righteousness'
and 'No obedience is due to him who does not obey God.' For such
situations as outright immoral and illegal behaviour or unjust
policies on the part of government, the Prophet has made it virtually
obligatory for Muslims to speak up and stand up for justice: 'The
highest kind of self-exertion Jihad) is to speak the truth in the face
of a government that deviates from the right path''.85

Conclusion

Islamic teachings on governance, economics and social liberty are designed to


promote the formation of a democratic polity that is willing and able to limit the
power of rulers. As times change, policy makers may change social and

82
The Prophet strongly condemned religious extremism, and actively struggled against pseudo-pietism and
zealotry. Whenever he encountered religious fanatics during his lifetime, he would warn them three times that
"the zealots will perish".
83
Ul Haq (1995, p. 107).
84
Ibid
85
UL HAQ, I. (1995), Economic Doctrines of Islam, The International Institute of Islamic Thought, Islamabad.
29

economic policies that are rooted in Islamic values, in order to meet a society's
shifting socio-economic needs. The few basic principles outlined in this paper
are the foundation upon which all policies must be based. All forms of
discrimination and zealotry are strongly condemned by Islam, which also
prohibits underdevelopment and significant income inequality. But Islam does
not require income equality, nor does it limit the level of income that an
individual may earn. Freely elected leaders are expected to work with society at
large to formulate policies supporting economic prosperity, public education,
healthcare and economic equity. All physically and mentally competent
Muslims are required to work for their livelihoods, and those with a sufficient
level of assets are obliged to pay taxes that help the state fund welfare and other
social programs. The ruling authority in an Islamic state must maintain social
and economic stability and ensure a fair distribution of income. Islam, however,
prescribes that it is up to the Muslim community itself to determine its specific
socio-economic needs and work to fulfill them. Fiscal efficiency, social
investment, achieving rapid economic growth and the dispersion of executive
power are thus intrinsic aspects of Islamic economic teachings. Freedom of
expression and belief, along with equal access for all citizens to education and
healthcare, are crucial elements of Islamic law. Fluidity is a fundamental aspect
of the Muslim economic and political systems, which may be modified as fiscal
priorities shift and social settings change. A Muslim is therefore obliged to
voice concern when he or she observes an unelected executive authority
institute rigid and harmful national policies. He or she is religiously obligated to
contest the rulings of that authority if they generate low or negative economic
growth, stifle social liberties, and do nothing to combat unemployment and
sexual or racial discrimination.

Islamic finance is now a material segment of the global finance scene. Whether
its emergence as a significant and competing force in the provisions of financial
30

services lives up to the Islamic economics paradigm and its world view remains
to be seen. There are some promising theoretical and empirical findings
pointing to positive contributions of Islamic finance to financial inclusion,
financial stability or even better economic development. Still, doubts remain
over whether Islamic finance can distinguish itself from its conventional
counterpart. Or, eventually, there will be convergence between the two, with
Islamic finance to be similar to conventional finance. At the same time, Islamic
finance is still besieged with its own issues, which include lack of
standardisation and harmonisation, insufficient human capital and talent, and
inadequate framework to address risks unique to Islamic finance. These issues
add to the need to have concrete demonstrable real effects of Islamic finance
which are in line with its Sharia objectives.

Indian policy makers have adopted different measures such as progressive


taxation, transfer payments, limited free health and education schemes, grants
and awards, cooperatives, donations, relief schemes, reservations and different
employment schemes, etc. But these measures do not prove to be sufficient and
fail to show desirable effect to combat poverty and achieve social justice. One
of the important aspects neglected by the Indian system is the serious effort and
due emphasis to generate among its people the qualities of self-purification,
content, sacrifice, love and simplicity. These values were deep rooted in Indian
society of the past and still appreciated by people. They should be inculcated
among them. Desire for high standard of living luxurious life, lust for power,
position and prestige, dishonesty, selfishness, jealousy, cut throat competition
and monopolization of resources by few are some of the root causes behind
Bofors scandal, security scam, custom officials' acceptance of bribery and
negligence from their duties and restlessness in different part of the country.
Continuation of smuggling, kickbacks, development of lottery business, 'sutta'
etc. are resultant of greed and materialistic bend of mind.
31

There is need to critically examine India's existing distributive scheme


which is beyond the scope of this paper. There are a number of compulsory and
voluntary measures in use here but some of them are self-defeating. For
example, too much reliance on indirect taxes is regressive in nature.
Voluntarism has not been given its due place in this scheme. Gift tax and heavy
registration and transfer fees even on endowments curb the voluntarism. Tax
concession for joint family of the majority community increases concentration
of wealth and reduces its availability for removal of poverty. Deprivation of
daughters from inheritance of real estates has also similar effect.

The Islamic distributive scheme is based on sound foundations. On the


pattern of Islamic distributive scheme, India can adopt three types of measures,
compulsory, voluntary and preventive, to eliminate poverty, correct the mal-
distribution and achieve social justice. Especially, voluntarism has played an
important role in the past and it has capability to do still a lot. For this purpose
people have to be convinced and educated.

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