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Some Glimpses of Islam’s Economic System

Some Glimpses of Islam’s Economic System1

Islam guides its followers in all phases and activities of life, material as well as spiritual. Its basic teaching on economics is mentioned in several Qur’anic passages. We find it stated clearly in several verses, as in some of those mentioned above, that God created everything on Earth, in the seas, and the heavens for humanity’s benefit, meaning that everything submits to Him and can be used by humanity, who is tasked with knowing and profiting from the creation in a rational way and by paying due regard to the future.

Islam’s economic policy is explained in unequivocal terms: so that this (wealth) may not circulate solely among the rich from among you (59:7). Equality of all people in wealth and comfort – even if it is ideal – does not promise to be an unmixed blessing. For example, since people do not have equal natural talents, even if complete equality were achieved, spendthrifts would soon fall into difficulties and begin envying and coveting other people’s good fortune. Furthermore, on philosophic and psychological grounds, it seems to be in humanity’s interest that their be differences in wealth.

Human livelihood is in constant progress, for humanity continues to dominate and exploit one thing after the other in God’s creation, whereas animals have changed nothing in their livelihood since God created their species. One cause of this difference, as discovered by biologists, is the simultaneous existence of a society – a cooperation and a liberty of competition among the people who live in that society. Perhaps the most developed social cooperation is found among bees, ants, and termites, all of which live collectively and with complete equality in livelihood. But there is no competition among its members, and so any bee which is more intelligent or industrious cannot live more comfortably than others. Thus none of these species evolves, changes, or makes any progress in the human sense of those terms.

Human history shows that every advance and discovery of how to become more comfortable came into existence through competition and the desire for improvement, as well as through the existence of grades of wealth or poverty. Yet absolute liberty would lead devilish people to exploit the needy and gradually draw them out. So each progressive civilization and healthy culture had to impose certain duties (e.g., paying taxes, forbidding oppression and cheating), and to recommend certain supererogatory acts (e.g., charity and spending for God’s sake), while nevertheless allowing a great deal of liberty of thought and action to its members, so that each person benefits his or her self, family, friends, and society at large. This is the exigency of Islam.

Islam has based its economic system on this fundamental principle. If it tolerates richness, it imposes heavier obligations on the rich. For example, they have to pay taxes to help the poor, and cannot engage in immoral economic practices (e.g., exploitation, hoarding, and wealth accumulation). To achieve this goal, it makes various laws, as well as some recommendations (e.g., charity and sacrifice), with the promise of a spiritual (other-worldly) reward. Furthermore, it distinguishes between the necessary minimum and the desirable plenitude, and between those laws that are accompanied by material sanctions and those that are not by persuading and educating.

We shall describe this moral aspect first through several illustrations. Islam has used very emphatic terms to show that begging charity from others is abominable and a source of shame. Yet at the same time, it highly praises those who help others, calling the “best of people” those who sacrifice and prefer others to themselves. Similarly, avarice and waste are prohibited.

One day the Prophet needed considerable funds for a public cause. One of his friends offered a certain amount and, when asked by the Prophet, replied: “I have left nothing at home but the love of God and of His Messenger.” This person received the warmest praise from the Prophet. But on another occasion, another Companion who was seriously ill told him, when he came to inquire about his health: “O Messenger of God, I am a rich man and want to bequest all that I possess for the welfare of the poor.” The Prophet replied, “No, it is better to leave your relatives with an independent means of livelihood so that they will not be dependent upon others and have beg.” When the man decreased it to two-thirds and then one-half, the Prophet still refused, saying that it was too much. When the man finally proposed one-third of his property in charity, the Prophet said: “Well, even one-third is a large amount.” (cf. Abu Dawud, “Zakat,” 45).

One day the Prophet saw a Companion in miserable attire. When asked why, he replied: “O Messenger of God, I am not at all poor, but I prefer to spend my wealth on the poor rather than on myself.” The Prophet remarked: “No. God likes to see on His servant traces of the bounty that He has accorded him.” (cf. Abu Tirmidhi, “Birr,” 63).

There is no contradiction in these accounts, for each has its own context and relates to distinct individual cases. Muslims are allowed to determine how much charity they will give after their wealth has exceeded the obligatory minimum.

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Both the individual right of controlling one’s wealth and the right of the collectivity vis-à-vis each person’s wealth, inasmuch as one is a member of society, have to be satisfied simultaneously. Individual temperaments differ enormously, and sickness or other accidents may affect a person all out of proportion to the norm. Therefore, a certain discipline should be imposed upon the individual in the interest of the collectivity.

Thus Islam has taken two steps: distributing a deceased person’s goods among his or her close relatives according to a method that cannot be challenged, and restricting the freedom of bequest through wills and testaments. The legal heirs require no testamentary disposition and inherit the property in the proportions determined by law. A testament is required only for those who have no right to inherit.

Parents and grandparents inherit, and one cannot award to one son (elder or younger) more than to the other, regardless of age. Before the property is distributed, however, the burial expenses have to be paid first, and then the creditors, as paying debts has priority over the inheritors’ rights. After this, the will is executed in such a way that it does not exceed one-third of the remaining property. Only after satisfying these obligations are the heirs considered. The surviving spouse, parents, and descendants (sons and daughters) are the first-class heirs and inherit in all cases. Brothers, sisters, and more remote relatives (e.g., uncles, aunts, cousins, nephews, and others) only inherit if there are no nearer relatives.

Wills are operative only for one-third of property and favor persons other than creditors and heirs. The goal of this rule seems to be twofold: To permit a person to adjust things, in extraordinary cases, when the normal rule causes hardship (one-third of the property is enough for fulfilling such moral duties) and to prevent the accumulation of wealth among a few people. This could happen if one willed all of his or her property to only one person. Islam desires that wealth circulate as widely as possible, taking into account the family’s interest.

Public Goods
One also has obligations as a member of a larger family (i.e., society and the state of residence). In the economic sphere, one pays taxes that the government then redistributes in the collectivity’s interest. Tax rates differ according to the sources of income. Interestingly, the Qur’an, which gives precise directions about budgetary expenditure, contains no rules or rates of the income for the state. While scrupulously respecting the practice of the Prophet and his immediate successors, this silence may be interpreted as allowing the government to change the rules for income according to circumstances and in the people’s interest.

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Social Insurance
This consists of risks involving heavy charges from objects of insurance, and differs according to the times and social conditions. Among the Arabs of the Prophet’s time, daily ailments were unknown and the cost of medical care was practically nothing. The average man built his house and paid for almost none of the material. Thus it is easy to understand why one did not need fire, health, and other types of insurance. However, insurance against captivity and assassination was a real need. The Prophet’s contemporaries were aware of this and so desired certain flexible dispositions that could be modified and adapted to different circumstances when necessary.

For example, in the Constitution of Madina, which was formulated during the first year of the Islamic era, this insurance is called ma’aqil and worked as follows. If someone became a prisoner of war, paying a ransom could procure his freedom. Similarly, all bodily torts or culpable homicides required the payment of damages or blood money. The person concerned often could not afford the sum demanded. Thus, the Prophet organized an insurance system on the basis of mutuality. A tribe’s members could count on the tribe’s central treasury, to which everybody contributed according to his means. If the treasury proved inadequate, other related or neighboring tribes had to help. Thus a hierarchy was established for organizing the units into a complete whole. At Madina, the Ansar tribes were well known. The Prophet ordered the Makkan refugees in Madina to form their own “tribe,” even though they belonged to different Makkan or regional tribes, or were Abyssinians, in order to provide social insurance.

Under Caliph ‘Umar, the branches of insurance were organized according to which professional, civil, or military administration one belonged (or even of regions). Whenever needed, the central or provincial government helped those branches, as we described above when speaking of state expenditure.
Insurance signifies the spreading of one individual’s burden among as many people as possible in order to lighten each person’s burden. Unlike modern capitalistic insurance companies, Islam organized insurance on the basis of mutuality and cooperation, aided by a pyramidal gradation of the branches that culminated in the central government.

Such a branch could engage in commerce with the help of the unutilized funds at its disposal, so that the capital would be augmented. A time might come when a branch’s members could be exempted from paying further contributions or might even receive some of the profits of commerce. Such elements of mutual aid could insure against risk (e.g., traffic accidents, fire, and loss in transit). Also, the insurance industry can be nationalized in order to deal with certain risks (e.g., such temporary motives as dispatching parcels).
Without entering into technical details, Islam does not tolerate the capitalist version of insurance, for the insured person does not participate in the company’s benefits in proportion to his or her contributions, which makes it resemble a game of chance.

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Games of Chance
Qur’an 5:90 prohibits all games of chance and characterizes them as the “work of Satan” for cogent reasons. First, most social evils emanate from an inequitable distribution of the national wealth, which allows some to become too rich and others to become too poor. As a result, the rich can exploit the poor. In games of chance and lotteries, there is great temptation for quick and easy gain, although such easy gain is often bad for society. If people spent 3 million dollars every week on horse races, public or private lotteries, and other games of chance, as is the case in certain countries, over the course of only 10 years, 1.56 billion dollars would be collected from a large number of people and distributed among a ridiculously small number of people. Less than one percent of the people thrive at the expense of the remaining 99 percent. In other words, 99 percent of the people are impoverished in order to enrich 1 percent.

Whether games of chance and lotteries are private or nationalized, the evil of a few people accumulating wealth at the expense of a the vast majority works with full force. This is why Islam prohibits such activities. As is the case with capitalistic insurance, games of chance bear one-sided risks.

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Interest on Money-Lending
Probably every religion has prohibited usury. However, only Islam provides remedies to undermine the causes leading to this evil institution: Nobody willingly pays interest on borrowed money. He or she pays interest because the money is needed and there is no other choice.

Islam has made a very clear distinction between commercial gain and interest on money-lending: God permits trading and forbids interest (2:275) and

If you do not give up (interest), be warned of war against God and His Messenger. If you repent, you shall have your principal, (without interest); neither you wrong nor be wronged. (2:279)

The basis of this prohibition is also unilateral risk, for one who borrows money on interest earns money for the rich. In games of chance and lotteries, where there is a great temptation for quick and easy gain, circumstances may not have been propitious enough for the borrower to earn enough money to pay back the promised interest, and the lender assumes none of the risk involved.

People do not deprive themselves of their money in order to make interestfree loans to others. Since Islam tells the state to help those who are in financial difficulty, the public treasury organized interestfree loans in addition to, and to supplement, the loans offered by charitable people or organizations to help the poor and the needy. The principle here is mutual aid and cooperation.

In the case of commercial loans, there is the system of mudaraba, in which one lends money and participates equally in any potential gain or risk. For example, if two people form a company, each one furnishing half of the capital and labor, the resulting profit distribution is quite easy. However, if the capital comes from one party and the labor from the other, if both furnish the capital though only one of them works, or their shares are not proportionally equal, in such cases a reasonable remuneration for labor, based upon previously agreed conditions, is taken into consideration before distributing any gains and profit. Although all precautions are taken to prevent risk, Islam demands that both contracting parties to any contractual negotiation must share the profit as well as the loss.

To sum up, the principle of mutual participation in profits and risks must be observed in all commercial contracts.

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When planning, one needs to have an idea about the available resources. The Messenger organized a census of the Muslim population, as al-Bukhari informs us. During ‘Umar’s caliphate, a census of animals, fruit trees, and other goods was organized, and cultivable lands were measured in the newly acquired provinces. With a large spirit and full of concern for the public’s wellbeing ‘Umar would invite representatives of the people of different provinces, after taxes were collected, to find out if they had any complaints about the collector’s behavior during the year.

Daily Life
We end this brief sketch by mentioning two important prohibitions that are characteristic of a Muslim’s daily life: games of chance and alcoholic drinks. Having already discussed the first one, which causes the vast majority of its participants to spend money for years without gaining anything in return, we now turn to a discussion of alcohol. Alcohol has a very interesting quality: drinking only a little of it makes one happy and weakens any resolution to stop drinking. While drunk, people lose control over their actions. For example, they may squander money without being aware of what they are doing. In addition, various unhygienic effects of alcohol are transmitted to their children and future generations. Qur’an 2:219 speaks about such matters in the following terms: They question you about wine and games of chance. Say: “In both is great sin and some profits for people, but the sin of them is greater than their usefulness.”

The Qur’an does not deny that alcohol has some benefits, but still declares it a sin against society, the individual, and the Legislator. In 5:90, alcohol is relegated to the same level as idolatry and declared to be the handiwork of Satan. It adds that if one wants to be happy in both worlds, one should avoid games of chance and alcohol.

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Fulfilling Agreements
All financial and other dealings are based on some expressed or implicit agreements. Honoring these agreements is the key to happy and smooth relationships among members of a community or a society. Therefore, the Qur’an stresses this principle and, in several places, actually lists it as being among a believer’s most important characteristics.

(Believers are those) who are faithful to their trusts and to their commitments. (23:8)

Those who fulfill their covenant when they have engaged in a covenant. (2:177)

O you who believe, fulfill the bonds (you have entered into with God and people). (5:1)

Fulfill the covenant. One is responsible for one’s covenant and will be called to account for it (on the Day of Judgment). (17:34)

The failure to honor agreements is a primary cause of difficulty in dealings among people, especially financial dealings. If we analyze broken business partnerships or other difficulties in financial dealings, we will always find their root in the failure of one or more parties to fulfill one or more of the implicit agreements related to those dealings.

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Writing and Witnessing the Deal
To avoid such problems due to forgetfulness or other reasons, and to reduce any chance of misunderstanding and bad faith, the Qur’an orders that all financial deals be committed to paper and witnessed, as we read in the following passage:

O you who believe, when you contract a debt between you for a fixed term, record it in writing. Let a scribe write it down between you justly, and let no scribe refuse to write it down as God has taught him (via the Qur’an and His Messenger). So let him write. Let the debtor dictate, and let him avoid disobeying God, his Lord, (Who has created him and brought him up with mercy and grace,) and curtail no part of it. If the debtor be weak of mind or body, or incapable of dictating, let his guardian dictate justly. And call upon two (Muslim) men among you as witnesses. If two men cannot be found, let one man and two women from among those of whom you approve as witnesses, so that if either woman errs (through forgetfulness), the other may remind her. Let the witnesses not refuse when they are summoned (to give evidence). (And you, O scribes,) be not loath to write down (the contract), whether it be small or great, with the date of its payment. Your doing so, (O you who believe,) is more equitable in God’s sight, more upright for testimony, and more likely that you will not be in doubt. If it be a matter of buying and selling concluded on the spot, there shall be blame upon you if you do not write it down. But take witnesses when you settle commercial transactions with one another, and let no harm be done to either scribe or witness, (nor let either of them act in a way to injure the sides). If you act (in a way to harm either side or the scribe and witnesses,) indeed it will be transgression in you. (Always) act in reverence for God and try to attain piety. God teaches you (whatever you need in life and the way you must follow in every matter); God has full knowledge of everything. If you are (in circumstances like being) on a journey and cannot find a scribe, a pledge in hand shall suffice. But if you trust one another, let him (the debtor) who is trusted fulfill his trust, and let him act in piety and keep from disobedience to God, his Lord (by not fulfilling the contract’s conditions). Do not conceal the testimony, (for) he who conceals it, surely his heart (which is the center of faith) is wholly contaminated with sin. God has full knowledge of what you do. (2:282-83)

In these verses, the Qur’an distinguishes between financial transactions that involve credit for a definite period and those that are carried out on the spot. Examples of the first type include loans for a definite period and the purchase or sale of goods with either the payment or delivery promised for some fixed future date. An example of the second type include buying something in a shop on a cash-and-carry basis.

Some people might be surprised that the holy Qur’an recommends that even on-the-spot transactions (e.g., sale of goods on cash-and-carry basis) should have some proof in writing or through witnesses. Perhaps because at first sight it looks unnecessary, this recommendation has been almost completely ignored in the Muslim world. However, as business became more organized, the wisdom behind this recommendation has been independently discovered in modern times. These days, whenever we make any purchase, no matter how small, we receive a receipt. This receipt serves many purposes, such as enabling the customer to return defective items with little or no argument, prosecuting merchants who overcharge or cheat the customer in some way, catching and prosecuting shoplifters, and making it easier for buyers and sellers to keep ac-counts.

After briefly discussing the usefulness and relevance of the Qur’anic orders to write and/or witness financial deals, we now consider just how obligatory they are.

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Avoiding Bad Faith
Writing a clear, detailed agreement and having it duly signed and/or witnessed can prevent two problems: forgetfulness and misunderstanding. In addition, it can reduce the chance of any involved party being tempted to take advantage of the other parties by lying, cheating, or other crooked ways resulting from bad faith. But to avoid bad faith, more than just recording the deal in writing is needed. What is needed here is piety, on which Islam lays such emphasis, defined as the respect for moral values that comes through fear and consciousness of God and belief in the Hereafter.

Enforcing Agreements
However, there will always be people who do not give too much importance to piety and thus will break an agreement whenever it suits them. To counter such people, there must be a legal apparatus to enforce any deals that they may willingly sign.

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Justice as the Basis of Economic Life
Justice (‘adl) means to divide two things equally or keep the balance. The Qur’an uses it for justice in all matters, and Islam teaches the believers to be fair in their dealings, as we read in:

God commands you to deliver trusts (all public affairs, duties and posts and positions) to those entitled to them. And, when you judge between people, judge with justice. How excellent is what God exhorts you to do. Assuredly, God is All-Hearing, All-Seeing. (4:58)

Islam commands the believers to be just among themselves and exhorts them to be fully just even to their enemies:

O you who believe, be upholders and standard-bearers of right for God’s sake, being witnesses for establishing absolute justice, and never let your hatred for a people move you to deviate from justice. Be just, (for) this is nearer and more suited to piety. Try to attain piety and always act in reverence for God. Assuredly, God is fully aware of whatever you do. (5:8)

Justice and righteousness are the cornerstone of the Islamic way of life. God’s Messenger was known for this justice even before he declared his Prophethood. Throughout his life, he exhorted his followers to be truthful and just. Moreover, he set a perfect example of justice even to the followers of other religions and his enemies.

In accordance with the Divine law, the concept of social justice lays down certain conditions to treat people as individuals having liberty and equality as their birthright. This concept provides them with equal opportunities for personal development so that they are better able to fill the position to which they are entitled, to give each person his or her due, and to regulate his or her relations with society in terms of value and welfare.

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Duties to Society
This concept of social justice is achieved by giving people a better understanding of their individual duties in society and the reward thereof, as provided by Islam. The Messenger made education, being the measure and touchstone in this context, obligatory upon every Muslim, both men and women. More specifically, he said and knew that knowledge enabled one to distinguish right from wrong.

A society’s progress depends upon the interaction between the individual and society, for this establishes and maintains a balance in human affairs. Humanity should always keep in mind that God created the universe for a particular purpose and that humanity has been asked to strive for its fulfillment.

Equality and Freedom
Broadly speaking, human rights center on equality and freedom. Caliph ‘Umar reprimanded the governor of Egypt, whose son had struck a Copt (an Egyptian Christian), with the following instructive words: “Why have you enslaved men who were born free by their mothers?” Again, his instructions to establish equality among people demonstrate the best egalitarian features: highly placed people cannot take advantage of their position, and the weak are not made to despair of their condition.

All people are God’s servants. The only permissible characteristic by which one can claim superiority, distinction, and preeminence over others is the virtue of piety. All people are equal in social status. This is fully manifested in the congregational prayers, where there is no room for rank and special privilege. All are equal in God’s sight, whether one happens to be a caliph or a slave. The Messenger declared that all people were equal, like the teeth of a comb.

The Qur’an says:

O humanity, We created you from a single (pair) of a male and female, and made you into nations and tribes that you may know each other. Verily, the most honored of you in God’s sight is (the one who is) the most righteous of you. (49:13)

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Balance in Society
Islam avoids extremes in order to maintain social balance and order. Therefore, monopoly and cut-throat competition are disapproved. Islam’s essence is justice for all, which enables people to lead a good and happy life while, at the same time, strengthens the bonds of human brotherhood and the social fabric.

The social framework prevalent today in most Muslim countries is not Islamic. Many places are characterized by monstrous and oppressive conditions for the poor, rampant corruption, poverty, and need. A few people have acquired substantial wealth and thus enjoy the numerous amenities and luxuries of life, whereas the majority do not even receive two square meals a day. An Islamic social order stresses simple and austere efforts that are free from ostentation. The Messenger strove to bridge the gap between the rich and the poor, the high and the low. He advocated a society in which one sector would not exploit another, for Islam seeks a balanced life that represents the equilibrium of social forces.

The fullest development of humanity’s potential can be achieved through the implementation of Islamic principles. The optimum level of civilization, which embodies the maximum well-being, can never be possible without spiritual and moral development. All Islamic principles, which descend from Divinity, are perfect and absolute. The Islamic approach is therefore just, natural, humane, and perfectly balanced and rational.
Abu’l-Fazl Ezzati outlines the Islamic economic system as follows:

  • Islam represents a complete way of life. There is no compartmentalization of human activity is Islam. Its economic policy is, therefore, an integral part of the religion of Islam.
  • Islamic economic system is based on equality, justice, moderation, and collective self-sufficiency.
  • Man’s piritual development is fundamental but his physical welfare is instrumental.
  • Islam is based on faith in God, Who has given man the capability to choose between good and evil, and assume full responsibility for his conduct. “Man has only that for which he makes effort, and and this effort will be seen.” (53:39-40)
  • Islam is a universal system embodying eternal values which safeguard man’s rights while constantly reminding him of his obligation to himself and society.
  • Islam forbids exploitation and monopoly in all forms and strictly prohibits unearned interest such as usury, gambling, betting, etc.
  • Islam honors labor and contracts, enjoins work and toil, encourages man to earn his own living by honest means and to spread his earnings.
  • Islam encourages mutual helping and never likes “wealth to circulate among the rich only” (59:7). Every member of the Muslim community feels obliged to help his poor brother while he is equally entitled to live a private life and to own property.36

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1. This section is taken (edited and summarized) from Muhammad Hamidullah, Introduction to Islam and from Ahmad Shafaat and Asghar Qureshi, Hamdard Islamicus 20, no. 3 [Jul-Sept 1997]).

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Last Updated on December 15, 2004
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