Introduction to Islamic Economic System

The Islamic View of Economy is Fundamentally Different from Capitalism

The capitalist economic system, which is the current system in Bangladesh, measures the wealth of the nation on the basis of Gross Domestic Product (GDP) and Gross National Product (GNP), which only takes the overall national view rather than the satisfaction of each and every individual’s needs. As a result the only way to solve the country’s economic problems is enhancing production to provide for the people. When we cannot produce enough, our politicians and economists argue, we have no option but to take loans from foreign donors to fulfil the deficit.

This capitalist concept of just focusing on production is fundamentally flawed from a societal point of view. The reality of the economic problem facing any state is the satisfaction of the individual citizen’s needs. The economic problem is, therefore, focused on distributing the means of satisfaction for individuals. In other words, the problem is the poverty and deprivation of every individual in the nation, not the poverty and deprivation of the country measured as a whole. The poverty and deprivation for every individual is not treated by increasing national production, rather it is treated by the manner in which the wealth is distributed to the individuals in the country enabling complete satisfaction of their basic needs, and then enabling the individuals to satisfy their luxuries.

Economic Policy of Islam

The ultimate ownership of all that exists in the World belongs to Allah (SWT) because He (SWT) is the Creator of all things. Therefore, it is by the granting by Allah (SWT) that we are able to own things and it is by His (SWT)'s command that we are able to make use of those things. Therefore, it is Allah (SWT) who defines the rules of ownership, the rules of utilisation and the rules of distribution of the wealth. In this way economic activity is organised in the correct manner for man living in society. This is in contrast to the capitalist society where the rules are designed as such to allow the rich capitalists to maintain their hold on wealth at the expense of the rest of society leading to the oppression seen in the world today.

Allah (SWT) said: "It is He who created for you all that exists on earth." [Al-Baqarah:29]

Allah (SWT) said: "Don't commit Israaf (spending or going beyond the limits imposed by Islam); surely He does not like those who condone Israaf." [Al-A'raf:31]

The Islamic economic policy starts from the point of view of satisfying the individual’s basic needs first,then to provide luxuries as much possible. The Khilafat State is made responsible for maintaining the basic needs of each and every citizen, Muslim and Non - Muslim. In contrast, Islam leaves the science involved in the efficiency of production to society to utilise at their own accord.

The Prophet (SAW) said: “The Son of Adam has rights to food, clothing and shelter."

Allah (SWT) said: "O you who believe! Do not prohibit the good things which Allah made halal for you" [Al-Ma'idah:87]

Bukhari narrated from Ibn Umar: The Prophet (SAW) said: "The Imam is in charge (ra'i) and he is responsible for his citizens."

Sharia Defines the way to satisfy the needs of the people

a. Individual work and effort

The Khilafat State is an ideological state and not a priestly state. It is also not a state where people will be fed without working. Islam has made it obligatory on each capable person to work and earn his living thus contributing to productive economic activity within the State and society.

Allah (SWT) said: “So walk in the paths of the earth and eat of His sustenance which He provides." [Al-Mulk:15]

Many Ahadith came to encourage the earning of property. In one hadith, the Prophet (SAW) shook the hand of Sa'ad ibn Muadh (ra) and found his hands to be rough. When the Prophet (SAW) asked about it, Sa'ad said: " I dig with the shovel to maintain my family." The Prophet (SAW) kissed Sa'ad's hands and said: "(They are) two hands which Allah loves."

The Prophet (SAW) said: "Nobody would ever eat food that is better than to eat of his own hand's work.”

Furthermore Islam provided detailed rules and regulations, to be enforced by the State, regarding the contract between the employer and employee. For the contract of employment to be valid the work of the worker, period of the work, wage and effort all have to be defined. Exploiting the worker by burdening more work than what they can bear is absolutely forbidden. This is unlike the current status of the garment factories, where the rich entrepreneurs thrive on the blood of poor girls and children who are overburdened with work with humiliatingly low wages. Ibn Mas'oud said: the Prophet (SAW) said: "If any one of you employed a worker then he has to inform him of his wage".

b. Trade and Business

Islam encourages trade and clearly defined the rules of buying and selling as well as different types of business contracts. Also, with the help of the Bait-ul-Mal (State Treasury), Islam encourages entrepreneurship. Fraud and deceit in trade is absolutely forbidden by attaching severe punishment to it.

Islam defined comprehensive business contracts such as; Inan, Abdan, Mudharraba, Wujuh and Mufawwadah covering wide scenarios and circumstances thus encouraging trade and developing of industries within the state. Each one of these contracts clearly defines the company’s rules of formation,  its activity and it’s dissolving, along with the issue of its liability and obligations. Islam does not restrict the number of partners that can participate in the business or the amount of money they can invest. Rather, it encourages investment and the Bait-ul-Mal will provide funds for various development projects as well as business ventures. Abdurrazzaq narrated in Al-Jami', Ali (ra) said: " The loss (Al-Wadhi'a) is upon the capital and the profit is according to what they stipulated."

c. Obliging State Treasury (Bait-ul-Mal) To support those who are not capable of working if they do not have any children or heirs capable of supporting them

The Prophet (SAW) said: "The Imam is a caretaker (ra'i), and he is responsible for his subjects.” narrated by Bukhari from Ibn Umar.

The Prophet (SAW) gave Abu Bakr and 'Umar some land when he (SAW) emigrated to Madinah and Abu Bakr and Umar went with him leaving behind their wealth in Makkah.

d. Obliging the nation as a whole ( on the basis of darura, such famine, jihad etc ) to support those who are not capable of working, should the state treasury not have the necessary fund.

Imam Ahmad narrated that the Prophet (SAW) said: "Any community, whosoever they are, if a person among them became hungry, they will be removed from the protection of Allah the Blessed, the Supreme."

Al-Bazzar narrated from Anas that the Messenger of Allah (SAW) said: "The one who slept (satisfied) while his close neighbour was hungry, and he was aware of that, would not have believed in me truly."

Shariah makes it absolutely illegal for the state to levy taxes upon the public whenever she wishes other than those which the Shariah has clearly defined (Kharaj, Ushr, Zakat etc.), and in the case of absolute necessities such as famine and Jihad (only taken on the amount that exceeds the normal usage). This is unlike the current oppressive capitalist taxation policies that tax the income rather than the wealth, resulting in the suffering of the innocent working class. Taxes such as Income tax and VAT are cruel without limit that does not differentiate between rich and the poor. What is more ironic is that the government under the capitalist economic system can levy whatever taxes upon the public at whatever point in time.

Ownership in Islam is Clearly Defined

The greed driven capitalist system preaches that everything can be owned and sold, regardless of the impact on society – the so called ‘free market economy’ which states that as long there is a demand for something it can be sold and bought. The Shariah has clearly defined the means of ownership and its utilisation into the following categories:

Private Ownership – Islam since, it is a system from Allah (SWT) the Creator, recognises that the human being possesses the desire to own things and live a better life as part of its nature. Thus man can possess movable property such as cattle, cars, money, clothes and immovable property such as land, housing and factories. But Allah (SWT) has defined the means by which the person can possess and invest capital, as well as the ways to dispose of it.

Public Ownership – Islam recognises certain things to be the rights of the community to have share usage of and defined clear rules for it such as; Water, green pasture and energy (gas, electricity, oil, coal mines etc.). The mere ownership of which by an individual will bring hardship to the community as a whole. The management of these is left to the State but the returned benefit must be given back to the public.  Ibn 'Abbas narrated that the Prophet (SAW) said: "Muslims are partners (associates) in three things: in water, pastures and fire," reported by Abu Dawud. Anas narrated from Ibn 'Abbas adding, "and its price is Haram (forbidden)" The word 'fire' in the hadith is understood to mean energy and looking at the hadith in connection to other actions of the Prophet (SAW) reveals that anything by its nature such as; river, oceans, uncountable minerals are considered to be of the public property.

State Ownership – These are the properties which the people have a right, and its management is left to the Khalifah who may assign some of it to them according to what he deems as appropriate in order to strike the right balance in the society. These are the funds of the state such as; Jizya, ushr, kharaj, property of the deceased, lands, spoils of war etc. These are the properties whose expenditure is subject to the opinion and Ijtihad of the Khalifah.

The Shariah ensures that the property is not owned for the sake of owning it, for boasting, arrogance, oppression or to spend in sin, rather it is owned to fulfil a particular requirement. In this way wealth is not misused in society but is circulated within productive economic activities. Also, Islam clearly prohibits wrong means of earning causing oppression and chaos in society such as Usury (Interests), Gambling, Stealing, Monopoly, hoarding, curtailing etc.

The Bait Ul Mal (The State Treasury)

Revenues

The Bait ul Mal is the authority responsible for every revenue and expense, which the people are entitled to. The permanent revenues of the State Treasury are:

Land Tax – Kharaj and Ushr
Head Tax – the Jizya on the non – Muslim male
Different types of public property revenues
Revenues of the State properties
The fifth of the hidden treasures and minerals (Rikaz)
Properties of Zakat

The properties of Zakat are kept separate in the Bait ul Mal and are spent only on the eight categories mentioned in the Qur’an. The other properties are spent on the affairs of the State and the Ummah. If these properties meet the needs of the citizens then well and good; otherwise the Khalifah has the right to levy taxes in order to accomplish what is required in terms of looking after the affairs of the people.

Expenditures

The expenditures of the State are based around seven areas:

1. The Zakat funds - The State is responsible to distribute the zakat funds to the eight categories
mentioned in the Qur’an.
2. Spending money on the destitute and the poor to ensure their basic needs is a must on the State.
3. Spending on defence and security of the State as well as carrying the Islamic Message to other lands.
4. Allowances of State employees such as salaries of soldiers, civil servants, judges, teachers and the like.
5. Provide utilities to the people such as roads, water services, power services, mosques, schools and hospitals and any other utility considered as necessity for the people.
6. Emergency expenditures such as during famine, flood, earthquake or attack by enemy.
7. Spending on development projects – these would be undertaken when there are sufficient funds in the Treasury.

Interest Free Economy

The western capitalist system believes that the people only work for material incentive. Therefore, any economic activity must reflect some kind of material incentives. This means that in order to encourage lending or saving of money it can only be carried out if there exists a material compensation. This material compensation appears in the form of Interest, which the Shariah absolutely prohibits. Such interest-based economy takes peoples concentration away from the real economy into an artificial one.

People store their money in the banks that provides high interest without looking to invest it in the  real productive sector. This normally has a negative impact in the industrialisation of the nation, due to the fact that priorities are given to the rich when the banks lends money with the argument that they can afford to return the money back, thereby preventing the poor to rise up. The money is lent risk free whereby, should the venture fail the burden had to borne by the borrower with his personal wealth, where the bank can be extremely vicious against such a person who cannot pay by taking all their personal belonging and throwing them and their family onto the street.

Islam on the other hand has only one bank the Baitu-ul-Mal, which lends money on the interest free basis to develop the national economy. Also, Bait-ul-Mal can fund various projects and business ventures sharing the profit and risks.

Through the employment of the above policies the State ensures that the basic necessities and as much of the luxuries as possible is being met for each and every citizen. The fundamental philosophy of the Islamic Economic System is the prevention of wealth circulation within a small section of the society. This is precisely what the Capitalist System ensures through its system of usurious banking, limited liability, hoarding, and privatisation and paper currency.

“Lest it (wealth) circulates solely among the wealthy amongst you” [Al Hashr: 7]

Monetary Policy

Islam does not determine any specific item with which the exchange of goods, services and benefits had to be compulsorily conducted. Rather, Islam has given the human being a choice to use any medium that is mutually accepted in the society. However, when it comes to exchange of a commodity or services to a monetary unit then this monetary unit has to be based on the bi-metallic Gold or Silver standard.

Islam has linked gold and silver to a set of fixed rules such as; blood money, penalty for cutting the hand of the thief, payment of Zakat etc. thereby making gold and silver to be the currency of the state. Islam prohibits the hoarding of gold and silver, due to the fact that hoarding of such will have a negative impact on its circulation, which is an absolute necessary due to the fact that it is used as a medium of exchange.

Islam prohibits the charging of interest or giving of interest. It defines, interests to be money on money. Which means exchange of 100g of gold for 110g will be considered earning of 10% interests, which is absolutely forbidden.

Since the state’s currency is based on gold and silver, if the value of gold rose in comparison with other commodities, the value of the currency in comparison with other commodities would rise as well. If the value of gold decreased in comparison with commodities, the value of the currency would also decrease. The state will use gold currency in its foreign and domestic transactions, or it will use it used a paper money which can be exchanged for gold. This paper money could either be for domestic use and for making payments abroad or solely for making payments abroad, on condition that this exchange for has a fixed price. In other words, it would still be following the gold standard on condition that the paper unit can be exchanged for a specific quantity of gold, at a fixed price and vice-versa.

Throughout the history of money and up until the First World War, the whole world operated the gold and silver standards. No other standards were known to the world until then. However, when the colonialists mastered the various styles of economic and financial imperialism, and began using currency as a means of colonialism, they established different monetary standards. They considered bank deposits and nonexchangeable banknotes, which had no reserve of gold or silver as money. This has pushed countries like Bangladesh to recently adopt the free-floating exchange rate mechanism. Via this mechanism the world slowly moves to the indirect pegging of its currency to the dollar. This in turn gives control to America to influence other countries economies and currencies with a slight change of policy from its Federal Reserve.

The benefit of using gold standard and silver standard:
·
The gold standards rids the central banks and governments from printing ample amount of paper money as and when they like, due to the fact that issuance of banknotes over the limit will not be able withstand the demand for gold which will also increase. Therefore, they will always tend to maintain a reasonable ratio between what they issue in terms of banknotes and gold reserves. Due to the stability of the gold prices the rate of inflation will be much more stable. This will benefit the poor
·
Having the gold standard necessitates its free circulation, thereby encouraging import and export of gold, which leads to monetary, financial and economic stability.
·
Uncertainty of exchange rate usually discourages international trade and creates instability. Gold standard on the other hand, ensures the stability of exchange rates between countries and the stability of the exchange rates in turn leads to a boom in international trade, as it gets rid of the uncertain fear of exchange rate.
·
Since, the state will encourage other currencies in the world to move to the gold standard this will result in the movements of commodities, money and people form one country to another would be easier and the problem of hard currency will disappear.
·
The gold standard would help each country to preserve her gold, for there would be no gold smuggling form one country to another, and countries would not need to exercise control in order to protect their wealth, for gold would only leave the country for legitimate reasons as price for commodities or salaries for workers.