Islamic Economics Principles:
The Islamic economic system is based on the principles of Shariah, which is derived from the teachings of Islam. It has a unique approach to economics that differs from conventional economic system in many ways. The fundamentals of Islamic economics start with the differences it has with the capitalistic, communistic, socialistic, and other mixed types of economic engines.Islamic Economic System consists of organizations, institutions, and social values. Those who follow Islam are encouraged to lead a life that shows respect for others. There are six characteristics of the Islamic economic economic system, that in some ways mirror their capitalistic and socialistic counterparts, but are still unique and vibrant only to the economic system of Islam.
Islamic economics essentially aims at equal distribution of income and socia; balance. Zakat, as a tax, is supported by altruistic feelings of man who seeks spiritual satisfaction as well as other worldly-promised rewards for its being a fundamental worship.
Islamic economics is a broad field, related to the more specific subset of Islamic commercial jurisprudence. It is also an ideology of economics similar to the labour theory of value, which is "labour -based exchange based labour".
Key Principles of Islamic Economic System:
1. The Superiority of God Made laws over Man made Laws:
Man made laws are influenced by law makers on social and racial biases. The United Nations organizations is the best example of how policies are enforced only when they suit the interests of the superpowers.
However the laws made by Allah are superior, because Allah is
- Above class status;
- Above racial prejudice
- Above gender rivalry.
2. Mission of Islam:
Islam creates a divine contract between the individual and the Islamic Economic system. It generates
the spiritual strength to achieve human well-being in all aspects of life, such as:
- Social
- Economic
- Political
Concept of Halal and Haram in Islamic economics:
Halal means "Lawful" and Haram means "Unlawful" In Islam certain means of earning livelihood and wealth have been declared as Haram.
- Interest, bribery, gambling, games of chance speculation, short weighting, short measuring, and business malpractices are Haram in Shariah.
- Even the use, expense on, or trading of certain items include Alcoholic drinks, narcotics, debauchery, obscenity, vulgarity lotteries and gambling.
Reference from the Holy Quran and Hadith:
" O mankind, eat from whatever is on earth lawful and good and do not follow the footsteps of Satan. Indeed, he is to you a clear enemy."
,
Islamic economics is based on
principles derived from the teachings of Islam, primarily the Quran and the
Hadith (sayings of Prophet Muhammad). These principles aim to create a just and
equitable economic system that promotes both material welfare and moral values.
The core principles of Islamic economics include the following:
1.
Tawhid (Monotheism)
- Tawhid, the belief in the oneness of God, underpins
Islamic economics. It suggests that all wealth is ultimately from God and
that individuals are merely stewards (khalifah) of the resources they
possess. Thus, economic activity must align with the ethical and moral
guidelines set by Islam, promoting the welfare of society and the
environment.
2.
Justice and Fairness
- Justice is a key value in Islamic economics. It
emphasizes the fair distribution of wealth and resources, and the
elimination of exploitation and economic inequality. Islam encourages
economic systems that ensure that the rich do not become excessively
wealthy at the expense of the poor.
3.
Prohibition of Riba (Usury)
- One of the foundational principles of Islamic economics
is the prohibition of riba, commonly understood as interest.
Charging interest on loans is seen as exploitative, as it leads to the
accumulation of wealth by lenders at the expense of borrowers. Instead,
Islamic finance encourages profit-sharing arrangements, where risks and
rewards are shared equally between the parties involved.
4.
Zakat (Charity)
- Zakat is an obligatory form of almsgiving or charity,
which aims to redistribute wealth and reduce poverty. Every year, Muslims
are required to give a portion of their wealth (usually 2.5% of savings)
to those in need. This ensures that wealth circulates within the community
and prevents the concentration of wealth in the hands of a few.
5.
Risk Sharing
- Islamic finance encourages risk-sharing over
risk-transfer. This means that contracts and investments should be based
on joint venture models, such as Mudarabah and Musharakah,
where both the investor and the entrepreneur share the profits and losses
based on their contribution. This contrasts with conventional systems
where risk is transferred to one party, especially in interest-based
loans.
6.
Prohibition of Gharar (Uncertainty) and Haram Activities
- Islamic economics discourages excessive uncertainty
(gharar) in transactions. This principle aims to prevent deceptive
practices and ensures that contracts are clear and transparent.
Additionally, activities that are considered harmful or unethical, such as
those involving alcohol, gambling, or any form of exploitation, are
prohibited in Islam.
7.
Economic Activity for the Common Good
- Economic activities are viewed as a means to promote
the common good (maslahah). Wealth should be used to improve the
well-being of society as a whole, ensuring that businesses and individuals
contribute positively to their communities. Investments should align with
Islamic ethical values and aim for sustainable growth.
8.
Property Rights
- Islam recognizes the right to private property, but it
is subject to ethical guidelines. Ownership is not absolute; it is held in
trust for the benefit of society. Property should be used responsibly and
not hoarded, and individuals are encouraged to use their wealth to benefit
the community.
9.
Work and Productivity
- In Islamic economics, work and effort are highly
valued. Islam encourages productive work, honesty in business dealings,
and ethical labor practices. It emphasizes the importance of individual
initiative, while also recognizing the value of collective efforts for the
common good.
10.
Balance Between Material and Spiritual Goals
- Islamic economics stresses a balance between the
pursuit of material wealth and spiritual well-being. Muslims are
encouraged to seek prosperity but not at the cost of moral and ethical
values. The ultimate goal is to lead a balanced life, where material
success is achieved while maintaining spiritual integrity and social
responsibility.
Islamic economic principle:
Islamic economics essentially aims at equal distribution of income and social balance. Zakat, as a tax, i supported by altruistic feelings of man who seeks spiritual satisfaction as well a otherwordly-promised rewards for its being a fundamental worship.
Goals of Islamic economics:
Islamic economics aim for moral development, promoting unity, social justice, fair and equitable distribution, circulation of wealth and providing basic human needs.
First Islamic economist:
As far as the earlier history of Islamic economic thought concerned, we have several works starting from the first century Hijrah to the 9th century to 15th century Christian era) the age of Ibn Khaldun and al-Maqrizi.
Father of economics:
Adam Smith was an 18th century Scottish philosopher; he is considered the father of modern economics. Smith is most famous for his 1776 book, "the wealth of Nations."
Nature of Islamic economics:
In formulating its fundamental principles, Islamic economics seeks to fuse Islamic religion with economics science; that is, it tries to combine the study of economic phenomenon of ordinary business of life with religious beliefs, ethical norms moral ideas, rules and laws, thus putatively believing that the social..
Sources of Islamic economics:
The fundamental sources of Islam- the Quran and the Sunnah of the Prophet provide guidelines for economic behavior and a blueprint of how the economic system of a society should be organized.
Laws of economics:
Adam Smith's 3 laws of economics are law of demand and Supply, Law of Self Interest and Law of Competition.
Principles are
grounded in the ethical framework of Islam, which is derived from the Quran and
Hadith (sayings and actions of Prophet Muhammad, PBUH). These principles aim to
create a just, equitable, and socially responsible economic system. Here’s a
detailed explanation of the key economic principles in Islam:
1.
Tawhid (Monotheism) and Unity of Economic Life
- Tawhid
emphasizes the oneness of God, and in economic terms, this means that all
economic activity is directed by God’s will. There is no separation
between the spiritual and material life. Muslims are encouraged to view
economic activities as acts of worship when they are aligned with Islamic
ethics.
- Every transaction, from business dealings to individual
spending, should reflect ethical values and should not harm society or
individuals.
2.
Prohibition of Riba (Usury or Interest)
- Riba is explicitly prohibited in Islam, as it is
considered exploitative. The practice of charging interest on loans leads
to inequality and unfair distribution of wealth. Instead, Islamic finance
promotes profit-sharing, equity partnerships, and interest-free transactions.
In Islamic finance, banks and financial institutions engage in activities
like Murabaha (cost-plus financing), Mudarabah
(profit-sharing), and Musharakah (joint venture).
- The prohibition of riba is meant to ensure that wealth
is generated through productive activities and mutual cooperation, rather
than through the exploitation of debtors.
3.
Zakat (Charity and Wealth Distribution)
- Zakat is one of the Five Pillars of Islam and an
obligatory form of wealth redistribution. Muslims are required to give 2.5%
of their savings and investments annually to help the poor and needy.
Zakat helps reduce economic inequality and supports social justice by
ensuring that wealth does not concentrate in the hands of a few
individuals.
- Zakat serves both as a form of purification for the
wealth of the giver and as a social safety net for the community.
4.
Profit and Fairness
- Islam encourages profit-making, but it must occur
within ethical boundaries. Islam does not oppose wealth creation or
entrepreneurship, as long as the means are lawful (halal) and the process
is fair.
- Profit should come from value-added activities, and
businesses are encouraged to provide products or services that benefit
society. Unjust practices like fraud, deception, and monopolies are
forbidden in Islam.
- Islam mandates transparency, honesty, and fairness in
all transactions, whether in trade or employment.
5.
Avoidance of Gharar (Uncertainty or Ambiguity)
- Gharar refers to excessive uncertainty or ambiguity in
transactions. In Islamic economics, contracts that are based on
speculative risk or that involve uncertainty are considered unethical.
- For example, gambling (maysir) is prohibited because it
is based on uncertain outcomes and unfair advantage. Similarly,
speculative transactions, such as short selling in the stock market or
derivatives trading, may fall under the category of gharar and are
considered unethical.
6.
Halal and Haram (Permissible and Impermissible)
- In Islamic economics, activities and products are
categorized as either halal (permissible) or haram
(forbidden). Economic activities must comply with Islamic principles and
should not involve prohibited actions like the production or trade of
alcohol, gambling, pork, or anything that promotes harm to individuals or
society.
- Businesses and individuals are encouraged to engage in
activities that are morally sound and beneficial to society, while
avoiding activities that exploit or harm others.
7.
Social Justice and Equity
- Islam emphasizes social justice, economic equality, and
fairness in distribution. It mandates that wealth should not accumulate
only in the hands of a few people, and it encourages responsible wealth
distribution through charity, fair wages, and social welfare systems.
- Islamic economics seeks to reduce poverty, prevent
oppression, and promote the well-being of all members of society.
8.
Work Ethics and the Dignity of Labor
- Islam encourages hard work, productivity, and the
ethical pursuit of livelihood. The Prophet Muhammad (PBUH) said that
"no one eats better food than that which he eats from the work of his
own hand."
- Economic activity should not just be seen as a means of
acquiring wealth, but as an opportunity to serve society and contribute to
the well-being of others. Moreover, individuals are entitled to fair wages
for their labor, and exploitation of workers is prohibited.
9.
Entrepreneurship and Innovation
- Islam encourages individuals to innovate, create
businesses, and contribute to society. Wealth creation through
entrepreneurship is not only permissible but recommended, provided it
follows the ethical guidelines set forth in the Quran and Hadith.
- Islam promotes creativity and enterprise that brings
positive change to society. Innovation in services, technology, and
industry that benefits humanity is highly valued.
10.
Environmental Stewardship
- Islam teaches the importance of caring for the
environment and conserving resources. Humans are considered stewards
(khalifah) of the Earth, responsible for protecting the natural world and
its resources.
- Wastefulness (Israf) is discouraged, and the Quran
repeatedly encourages sustainability. As a result, Islamic economics
promotes the responsible use of natural resources, the reduction of waste,
and the protection of the environment.
11.
Cooperation and Solidarity (Takaful)
- Islam promotes cooperation among individuals and
communities for mutual benefit. One way this is implemented is through takaful,
an Islamic form of mutual insurance in which participants contribute to a
common pool to protect each other from financial loss.
- Takaful is based on principles of mutual aid,
solidarity, and shared responsibility, rather than profit-making motives,
which contrasts with conventional insurance models.
12.
The Role of the State in the Economy
- In Islamic economic principles, the state has a role in
ensuring that the market operates according to Islamic principles. This
includes enforcing laws to prevent exploitation, ensuring the fair
distribution of wealth, providing social services, and protecting the
rights of the vulnerable.
- The state can intervene in the economy to correct
injustices or inequalities, but it should not engage in activities that
lead to oppression or excessive control over individual freedoms.
Characteristics of the Islamic Economy:
The proposed Islamic economic framework emphasizes distributive justice, inclusive economic participation, and responsible resource management. The research highlights how these principles can be applied in modern contexts, addressing challenges and ensuring alignment with sharia principles.
Current issue in Islamic economics:
The macroeconomic issues facing the Islamic economy and financial system include social justice and equal wealth and taxartion, monopoly, illicit property, and the complete abolition of interest.
Islamic economics is not merely a
set of financial or business rules; it is a comprehensive system that
integrates moral, social, and economic values to create a fair and just
society. The principles aim to achieve the balance between the individual’s
right to wealth creation and the community's well-being. By following these
principles, Islamic economics seeks to promote both material prosperity and
spiritual fulfillment, ensuring that economic activities are conducted in ways
that serve the greater good.
Importance about principles of Islamic
economics:
Islamic economics is based on
principles derived from Islamic teachings, primarily the Qur'an and the Hadith
(the sayings and actions of the Prophet Muhammad, peace be upon him). These
principles not only guide economic behavior but also ensure that economic
activities contribute to justice, fairness, and the welfare of society. Below
are some key reasons why the principles of Islamic economics are important:
1.
Promotes Justice and Equity
- Fair Distribution of Wealth: Islamic economics emphasizes the fair distribution of
wealth to prevent the concentration of wealth in the hands of a few. It
stresses the importance of sharing resources, such as through the Zakat
(almsgiving) and Waqf (charitable endowments), which help support
the disadvantaged in society.
- Elimination of Exploitation: The system discourages practices like usury (Riba),
which exploit the poor and needy. By promoting profit-sharing arrangements
(Mudarabah, Musharakah), it fosters fairness in financial transactions and
ensures that both parties benefit equitably.
2.
Ethical Conduct in Business
- Honesty and Transparency: Islam encourages honesty, integrity, and transparency
in all economic transactions. Deceptive practices such as fraud, cheating,
and dishonesty are prohibited.
- Halal and Haram:
Islamic economics is built on the concept of lawful (halal) and unlawful
(haram). Economic activities should comply with ethical and religious
standards, avoiding harmful products like alcohol, gambling, and
pornography.
3.
Sustainable Economic Development
- Resource Stewardship:
Islam stresses the importance of being responsible stewards of natural
resources. Humans are considered custodians of the earth, and sustainable
development is encouraged to ensure that resources are used wisely for the
benefit of current and future generations.
- Avoiding Waste:
Islamic economics encourages moderation in consumption and discourages
wastefulness. This principle promotes a balanced lifestyle, aligning
consumption with actual needs and discouraging extravagance.
4.
Social Welfare and Community Support
- Role of Zakat and Charity: One of the pillars of Islam is Zakat, the obligation
to give a portion of one's wealth to the poor and needy. This ensures the
reduction of poverty and promotes social justice by redistributing wealth
to those who are less fortunate.
- Financial Inclusion:
Islamic economic principles aim to ensure that all members of society have
access to financial services, which are structured in a way that avoids
exploitation, such as interest-free loans and profit-sharing partnerships.
5.
Balanced Economic System
- Combining Material and Spiritual Needs: Islamic economics balances material and spiritual
needs. It does not see wealth as an end in itself but as a means to
achieve a balanced life that satisfies both worldly and spiritual goals.
- Work as Worship:
Islam regards work as an important activity that should be done with
sincerity, responsibility, and for the benefit of society. Economic
activities, when carried out in an ethical manner, are considered acts of
worship, thus elevating the dignity of work.
6.
Prohibition of Riba (Usury) and Gharar (Uncertainty)
- Interest-Free Transactions: The prohibition of Riba promotes fairness in lending
and borrowing by avoiding exploitative practices. Instead of charging
interest, profit-sharing and equity-based financing models are encouraged.
- Avoiding Uncertainty:
Islam also discourages excessive uncertainty (Gharar) in business
dealings. Contracts and agreements should be clear and transparent to
avoid disputes and ensure that all parties understand the terms and
conditions.
7.
Encouragement of Entrepreneurship and Risk Sharing
- Risk Sharing:
Islamic economics promotes the idea of risk-sharing in business rather
than risk transfer. This is evident in profit-and-loss sharing
arrangements like Mudarabah (profit-sharing) and Musharakah (joint
venture), where both the investor and the entrepreneur share the risks and
rewards of the business.
- Encouraging Productive Investment: Islam encourages investments that contribute to the
welfare of society, such as those in healthcare, education, and
infrastructure, rather than speculative or harmful investments like those
in gambling or alcohol production.
8.
Promotion of Economic Stability
- Stability through Ethical Investment: Islamic principles discourage speculative financial
practices and promote investments in productive ventures. This helps to
stabilize the economy by reducing the potential for financial crises
caused by unethical or unsustainable financial practices.
- Wealth Circulation:
Through instruments like Zakat and trade, wealth is circulated within
society, ensuring that all individuals, not just the wealthy, have access
to necessary resources for a decent standard of living.
9.
Long-Term Welfare
- Comprehensive Welfare Approach: Islamic economics aims for the long-term welfare of
individuals and communities, taking into account both economic, social,
and moral factors. The principles of Islamic economics seek to create a
society where individuals are responsible for one another's well-being,
both materially and spiritually.
- Personal and Collective Accountability: There is an emphasis on the individual's
responsibility to society and vice versa. The well-being of the collective
is considered just as important as individual prosperity, ensuring a
balanced, cohesive society.
Conclusion:
In conclusion, the principles of
Islamic economics are important because they advocate for a balanced, fair, and
ethical economic system. They emphasize justice, fairness, sustainability, and
social welfare, and aim to create a harmonious society where wealth is
distributed equitably and all individuals are treated with dignity and respect.
By aligning economic activities with moral and ethical values, Islamic
economics seeks to ensure long-term prosperity that benefits both individuals
and society as a whole.