CHAPTER ONE:

INTRODUCTION TO ISLAMIC ECONOMICS

Learning Objectives:
At the end of this topic, students should be able to:
1. Know the importance of Aqidah, Akhlaq (Ethics) and Fiqh.
2. Learn between Islamic and Secular Economics.
3. Know the problem of scarcity and choice from perspective, secular and Islamic.
4. Learn some Quranic Versus related to Economics.

Learning Outcomes:
At the end of this topic, students should be able to:
1. Explain the importance of Aqidah, Akhlaq (Ethics) and Fiqh.
2. Differentiate between Islamic and Secular Economics.
3. Understand the problem of scarcity and choice from perspective, secular and Islamic.
4. Give some Quranic Versus related to Economics.

3.0 INTRODUCTION

3.1 DEFINITION OF ECONOMICS

3.11 What is economics?

Economics may define as social science concerned with efficient use of limited resources
or scarce resources to achieve maximum satisfaction of human material wants.

3.12 Relation between Islam and Economics

Islam covers all the aspects of human life including economics, politics, social and others.
Therefore, all the economic activities conducted by a Muslim, will also be governed by
shari‘ah law. Muslim Scholars divided the Shari‘ah into 3 categories. Aqidah, Akhlaq
(Ethics) and Fiqh.

8
Aqidah:
- it is refer to six articles of Iman. (ask student to mention all six articles of Iman and relate
these to economics)
- Is to believe that Allah is the only ONE to be depended upon and that He is the Creator
of all resources in the universe.
- This implies that all resources for economic use are trust (Amanah) to man, who must
utilize them according to the will of the Creator. Man will be held accountable for any
misuse of these resources. It thus, follows that these resources are means to attain falah
(al-Quran, 28:77)

―But seek, through that which Allah has given you, the home of the Hereafter; and [yet], do
not forget your share of the world. And do good as Allah has done good to you. And desire
not corruption in the land. Indeed, Allah does not like corrupters." ( Al-Qasas:77)

Akhlaq: Is a code of conduct spelling out the manner in which economic agents would
interact and deal with another in pursuit of economic gains. Good akhlaq includes honesty,
patience, unselfishness, trustworthiness, etc, while bad akhlaq, which should be avoided,
is manifest in cheating, hoarding, extravagance, etc.

Fiqh: Muslim scholars defined fiqh as a science that deals with practical shariah rulings
derived from the detailed sources (Al-Qur‟an and As-Sunnah). It provides the practical
guidelines and applications related to economic activities. For example the applications of
the different types of trading activities, leasing, modes of financing, deposits, loan facilities,
etc.

9
 From the above we realize that there is a link between Islam and Economics. Let us define
Economics from both perspectives?

3.13 Definition of Secular Economics

Secular Economics studies human behavior as a relationship between ends and scarce
means. It also studies mankind in the ordinary business of life only. Secular Economics
deals mainly with problems involving money .i.e. it studies the human behavior which is
concerned with money getting and money is spending without questioning how they get
this money and where they are going to spend it.

3.14 Definition of Islamic Economics

- The Islamic Economic System is guided by Islamic Shari‟ah.

- The rules which are contained in the Shari‟ah are both constitutive and regulative,
meaning that they either lay the rules for the creation of economic entities and
systems, as well the rules which regulate existing one.
- As an integral part of the revelation, the Shari‟ah is the guide for human action, which
encompasses every aspect of life-spiritual, individual, social, political, cultural, and
economic.
- It provides a scale by which all actions, whether on the part of the individual agents,
society, and the state, are classified in regards to their legality.
- Thus there are 5 types of actions recognized, namely: obligatory; recommended;
permissible; discouraged; and forbidden. This classification is also inclusive of
economic behavior.

The basic source of the Shari‟ah in Islam is the Quran, which include all the
necessary rules of the Shari‟ah as guidance for mankind. The Sunnah further
explains these rules by the practical application of Prophet Muhammad, may God
praise him. The expansion of the regulative rules of the Shari‟ah and their
extensions to new situations in later times was accomplished with the aid of
consensus of the community (Ijma‟). The analogical reasoning (Qiyas) which
derived rules by discerning an analogy between new problems and those existing
in the primary sources and finally, through textual reasoning of scholars (Ijtihad)
specialized in the Shari‟ah.

10
 These 5 sources which are the Quran, the Sunnah, and consensus of the
community, analogical reasoning, and textual reasoning that constitute the
components of the Shari‟ah, and these components are also used as a basis for
governing economic affairs.

Different definition of Islamic economics:

i) Akram Khan (1984:55) : Islamic economics is a research of attaining al falah of

human being through natural resources based on collaboration and
participation
ii) Hasanuz-Zaman (1984:55): Islamic economics is a knowledge and application of
shariah rules in order to protect injustice in using the natural resources to
achieve satisfaction and and responsibilities towards Allah swt.
iii) Masudul Alam Choudry (1986:4) : Islamic economics is a history, epic and theory
to analyze human wants based on Islamic values.
iv) There are other opinions on definition of Islamic economics.

3.15 Objectives of Islamic Economics

a) Personal freedom
The prime factor for Islam in respect of economy is to safeguard personal freedom
and impose a restriction if necessary for collective justice in the society.
Everybody is accountable to what his or her deeds in personal capacity. Therefore,
it is essential for each people to have avenue for the development of personality
and freedom to choose their desire in accordance to Islam

b) Harmony in moral and material progress

To guarantee the harmony of human growth morally and materially is also one of
objective in Islamic economic. Islam lays a special stress on growth and
development of man. For this, it is serving an individual with ample opportunities to
do the best good deeds in their life. In Islam, everybody having right to achieve

11
 their satisfaction in their life in term of moral and material as long as social values
are preserved.

c) Promotion of cooperation, harmony and justice

The third objective of Islamic economy is the promotion and sustainability of
society‟s unity. Islam discourages society to be divided according to classes, ethnic
or linguistic. But, it is encourage society to merge and live in an environment of
mutual cooperation, harmony, justice and without conflict.

3.16 The Importance of Islamic Economics

3.161 Why the Islamic Economics is necessary?

The Islamic Economics is necessary due to problem and incompatibility of contemporary
system/modern economics.

Islamic Economics Contemporary/Modern Economics

1) Not only study social individual but also 1) Primarily interested in people living in a
man with religious. society only. Economics problem arise
because of scarcity. Basically same to
Islamic economics, but the difference is
that in term of choice.

2) Islamic economics is guided by basic 2) Modern economics based on capitalist

values of Islam. socio-economic framework which greatly
controlled by the whims of the individual.

3) Not concern with the value of

3) Concern with the value of judgments. judgments.
Example: - Alcohol is haram. Example: Manufacture/sales of alcohol
- Prohibition of Riba - Good economics activities.

4) Maximize social welfare. 4) Maximize individual welfare.

12
3.162 Why not Conventional/Western Economics?

1) No human endeavor is value-free.

2) Differences in vision leads to difference behavior in the market place.
3) The inability of conventional economics to cater the economics needs of Muslim.
4) Since alternative worldview/ideologies exist, different economics are not possible but,
one can argue, natural and legitimate as well.

3.2 Scarcity and Problem of Choice

- The fundamental economic problem of mankind owes its origin to the fact that we
have multiplicity of wants and limited resources of human energy and material
equipments.

- The eternal conflict between multiplicity of wants and scarcity of means forces
people to make a choice between their wants, to fix up a list of priorities and to
distribute their resources in such manner as be able to secure maximum
satisfaction of wants.

- The difference between Secular Economics, the problem of choice is greatly

dependent on the whims of individuals. They may or may not take into account the
requirements of society.

- But in Islamic Economics, we are not in a position to distribute the resources in any
way we like.

- There is a serious moral limitation imposed by the Holy Quran and the Sunnah on
the powers of the individuals in this respect as can be realize from the following
Quranic verses:

‗But waste not by excess, for God Loveth not the wasters‘ (Al-An‟am 6:141)

‗Verily spendthrifts are brothers of the Evil Ones: and the Evil One is to his Lord
(Himself) Ungrateful‘ (Al-Isra‟ 17:27)

13
 ―O ye people! Eat of what is on earth, lawful and good; and do not follow the footsteps
of the evil one, for he is to you and avowed enemy “(Al-Baqarah 2:168)

3.3 Economic Activity from Islamic and Secular Perspectives

- Thus to sum up, the difference between Islamic and Secular Economics can be
summarized as follows:

- In Islamic Economics we study not only the social individual but also man with religious,
whereas in secular economics we are primarily interested in people living in a society.

- Regarding scarcity; Islamic Economics view that we only face relative scarcity because
we believe that Allah swt has created everything in abundant and it will be a matter of how
to arrange the priorities. Whereas according to Secular Economics resources are limited
and they face absolute scarcity.

―It is Allah who has created the heavens and earth and send down rain from the skies and
with it bring on fruits where with to feed you: I is He who has made ship subject to you, that
they may sail through the sea by His command, and the rivers has He made subject to
you. And He has made subject to you the sun and moon both diligently pursuing their
course and the night and day has He made subject to you. And He gave you all that you
ask for but if you could count the favors of Allah, never could you be able to count them
(Al-Baqarah :164)

- Regarding the problem of choice, Islamic Economics is guided by the basic values of
Islam, whereas for Secular Economic it is guided by the whims of the individual.

- The purpose of the study of Islamic Economics is to promote the welfare of individuals as
well as the welfare of society.

14
Exercises

Question 1.
In your own words, what is the relation between Islam and Economics?

Question 2.
How Islam view the problem of scarcity?

Question 3
Why do we need Islamic economic in modern/contemporary system?

15
 CHAPTER TWO
KNOWLEDGE IN ISLAM

Learning objectives:
After learning this chapter the students should be able to:
1. Know the types of knowledge
2. Know the sources of knowledge
3. Understand the methodology of studying Islamic Economics
4. State the Western sources and methodology of knowledge.

Learning outcomes:
After learning this chapter the students will be able to:
1. List and describe the types of knowledge.
2. Describe the sources of knowledge.
3. Distinguish and explain the methodology of studying Islamic Economics.
4. Explain the sources and methodology of knowledge in Western perspective.

2.0 Introduction

Human beings are distinguished from their fellow creatures primarily by their
intellectual faculty; by their sophisticated ability to acquire, comprehend, evaluate and
utilize knowledge and further to ponder, to imagine and to formulate theories, opening, the
way to further expansion of knowledge. Since knowledge plays an important role in our
lives, it is imperative that we have a clear view of what “knowledge” really comprises, and
of how we should seek it and subsequently put it to use.

An important category of knowledge concern the identity and purpose of our

common home, the universe, which shapes and influence us in so many ways, both
obvious and subtle (slight) and the nature of human being themselves. If our conception or
understanding of them is wrong or confused, this will seriously endanger the unity and
harmony of our lives, including the development of our souls. For this reason, Islam
includes in its teachings clear and plenty guidance regarding their real identity.

16
 The very first verses of the Quran revealed to Prophet Muhammad (phub)
concerned knowledge and importance of seeking it continually:

―Read! In the name of your Lord who created,

Created the human being from a mere clot of blood.
Read! And your Lord is Most Bountiful
He who taught the use of the pen
Taught the human being that which he knew notǁ (Al-A‟laq 96: 1-5)

2.10The purpose of knowledge

1. The role of knowledge in our lives is to help fulfill the purpose of our creation: to
worship Allah and therefore the best sort of knowledge is knowledge of Allah.
Whilst knowledge which is directly and exclusively about Allah- His attributes, and
His relationship to us is the most useful, many other fields of knowledge can
enhance our understanding of Allah. For example, study of Allah‟s creation- which
encompasses the fields of physics, chemistry, biology, astronomy, geography and
so on can provide us with a certain degree of understanding about its Creator.

2. Knowledge as well is a reasonable level of comfort in this life which is important to

enable us to fully develop mentally and spiritually and Allah given us many sorts of
knowledge or the intelligence to seek them which can improve the quality of life on
this earth. The Quran itself mentions how knowledge of astronomy helps travelers
to find their way at night, whilst knowledge of the seasons is essential for
successful farming and so on.

3. Some areas of knowledge are also necessary to carry out Allah‟s Law. For
examples, Muslims must know some astronomy to help them calculate the prayer
times and also the beginning and end of Ramadan. Payment of zakah entails
knowledge of mathematics and accounting in order to calculate the total value of a
person‟s wealth and how much he or she has to pay. Besides, parents must know
something about children care and development and must have a good store of at
least basic all round knowledge since they are their children‟s first and most

17
 important teachers. With worldly matters and responsibilities well taken care of,
people have more opportunity to develop their soul.

4.1 Types of Knowledge

4.11 Revealed Knowledge (Revelation)

- It is a given knowledge from Allah through His Messenger which is the highest form of
knowledge.
- This is the knowledge of basic essentials of Islam, Iman and Ihsan.
- Cannot be obtained by human senses and perception
- Sources of this knowledge is derived from al-Quran and Al-Sunnah
- This knowledge is obligatory to all Muslim and regarded as Fard „ayn (religious
Sciences).

- The knowledge of fard „ayn:

i) Al-Tawhid
ii) The Holy Quran
iii) The Sunnah
iv) Shari‟ah
v) Islamic metaphysics
vi) Linguistics sciences

4.12 Acquired Knowledge (Reason and Sense)

- This knowledge can be acquired through various methods (observation, scientific

research, experiments, etc).
- Not obligation to all Muslim.
- This knowledge is fard kifayah which include all the natural and social sciences.
- E.g. physic, chemistry, biology, economics and accounting.

18
4.2 Sources of Knowledge

a) Primary sources: Al-Quran and Al - Sunnah

- The most important sources of knowledge for humanity are the Quran and Sunnah
(pactices and saying of the Holy Prophets (pbuh) or action of His Companions
which received his approval)
- The Quran is a complete guide for life and the Sunnah explicate its contents in
grater detail. Both Quran and the Sunnah are fully reliable , being sources of
revelation that is from Allah , although the hadith are dependent on and therefore
on a lower run the Quran itself.
- There is mention of phenomena from many major fields of natural sciences for
example, astronomy, botany where the vital roles played by water and wind in our
world, about the way baby develops in its mother‟s womb and many more.

i) Al-Quran
- It is the words of Allah revealed to the Prophet Muhammad SAW in Arabic
conveyed by the Angel Jibrail.

- The authenticity of the Quran as revelation: Surah al-Najm (53):3 and 4.

- ―Nor does he speak out of caprice. It is nothing but a Revelation revealed (Quran).ǁ

- It represented the blueprint for the Islamic way of life.

- It consists of 114 Chapters (surahs) and about 6235 verses
- It is a miracle in the following aspects:

a. Its language is in clear and pure Arabic of the highest standard. No one can
surpass its linguistic excellence.
b. It contains information and stories about peoples of the past
c. It foretells future events which really took place afterwards as foretold
d. It tells about realities of nature: the creation of life and the universe, the
orbits of the earth, the sun, the moon and the stars; and the formation of
clouds and rains

19
 e. It contains laws and rules on how to regulate political, legal, economic,
social and moral matters in society
f. There are 350 legal verses (ayat ahkam) in the Qur‘an:
140 verses concern ibadat
70 verses concern munakahat
70 verses concern muamalat

Examples of Quranic Verses Related to Economics, Finance, Business and

Trade
•Surah Ali Imran 3:180
•Surah Al Baqarah 2:177
•Surah Al Baqarah 2:29
•Surah At Taubah 9:60
•Surah An Nisa‟4:58
•Surah Al A‟raf 7:29
•Surah Al A‟raf 7:85
•Surah At Taubah 9:34
•Surah Al Maidah 5:90

ii) Sunnah

Definition : Sunnah literally means a clear path or a beaten track.

•It also means normative practice or an established course of conduct.
•Technically, it refers to all that narrated from the Prophet Muhammad SAW , his act, his
saying and his tacit approval.

Types of Al-Sunnah :

i.Qaul or „saying‟ of the prophet PBUH or al-hadith which has a bearing on a religious
question.
ii.Fi‟l represent „action‟ or „practice‟ of the prophet SAW.
iii.Taqrir or a „silent approval‟ of the prophet SAW of the action or practice of another.

20
b) secondary sources: Ijma‟, Qiyas, Istihsan,istishab and urf

i) Ijma‟
Means is consensus, unanimous and agreed upon opinion of the Companions or of the
Muslims scholars (Mujtahid) on any point of law not specified in the Quran and the
Sunnah.

The Hadith which says:

―My community will never agree upon an errorǁ

The authorisation of Ijma‟ is based on the Surah Al-Baqarah:110 which means:

―And We have appointed you as a just an distinguished nation, to be a witness over all
people and the Messenger is a witness over youǁ.

ii) Qiyas

Definition: means „measuring by‟ or „comparing with‟ or judging by comparisons.

The authorisation of Qiyas is based on Surah an Nisa‘ :59 which means:

―But if there arises any dispute about anything, refer it to God and the Messenger..ǁ

Example of Qiyas:
The hukm of producing, marketing, selling and consuming alcoholic products is unlawful
(haram) based on the hukm on khamr , because the Prophet SAW says;

―Every intoxicant is khamr an every form of khamr is haramǁ

iii) istihsan
It involved the preference of an opinion over another opinion because it appear more
suitable to the situation and circumstances.

21
 Authorisation based on al-Zumar: 18:
“And give good tidings to those of my servants who listen to the word and follow
the best of it, those are the ones God has guided and endowed with
understanding”.

Examples of istihsan regarding the economics, banking, finance and business;

i. The right of the government to collect taxes from the rich other than zakat. The
government is allowed to collect taxes other than zakat from the rich if the interest of the
state demands it although in Shari‘ah only zakat has been specified.
ii. The validity of Istisna‘ sale or sale of goods to be manufactured in the future

iv)istishab

Literally
Istishab means escorting or companionship.

Technically
Istishab denotes the facts, or rules of law, or attributes whose existence or non-existence
had been proven in the past are presumed to remain so for lack of evidence to establish
any change.

Process of deducing fiqh law by linking a later set of circumstance with an earlier set.
Based on the assumptions that the fiqh laws applicable to certain condition remain valid as
long as it is not certain that these condition have altered.

v) urf
The various customs and social habits of people throughout the Muslim world were
accepted as a secondary source of the Islamic law as long as they did not contradict with
the Shari‘ah.

Custom which does not contravene the principles of Shari‘ah is valid and authoritative; it
must be observed and upheld by the court of law.

22
Example:
i- In rental customs. The shari‘ah does not require the payment of the price until the thing
sold has been delivered completely being.
ii- Offer and acceptance in buying and selling.

c) Senses And Other Human Sources.

I)The senses
This includes all human perception of this world, gained through all our physical senses.
This is tangible information which human experiences for themselves.
Types of senses : Sight, taste, hear ,smell, and touch

ii) From other people sources:

This includes any knowledge which has been gathered , deduced, analysed or explained
by people, whether muslim or non muslim. It can be consist of information about this world
and so on.

4.3 Methodology of Islamic Economics

Islamic economic system is referring to the primary sources which is the Quran and the
Prophetic tradition. The Islamic economic system has its own philosophy and principle and
the only way to understand them is refer to the primary sources of learning about Islam
and its principles. The mainly is Al-Quran which is viewed by Muslims as the words of
Allah, and the Prophetic tradition is the explanation and elaboration on how to apply those
principles.

4.4 Comparison with Western sources of Knowledge and Methodology

- Islamic economic is based on revealed and religious belief.
- Western Economics is not based on revealed knowledge but acquired knowledge.
Certainly the acquired knowledge is limited because it is based on their intellectual reason
and thinking.

23
 Exercises

Question 1
List five quranic verses that showing the creation of this universe.

Question 2
Explain why knowledge must be utilized?

Question 3

List the sources of knowledge in Islam.

24
 CHAPTER THREE:
ECONOMICS SYSTEM

Learning Objectives:
At the end of this topic, students should be able to:
1. Understand what are Economic System and Islamic Economic System.
2. Know the Characteristic for the Different Economic Systems.
3. Highlight Islamic Business Ethics in terms of Private Ownership.

Learning Outcomes:
At the end of this topic, students should be able to:
1. Explain what is Economic System and Islamic Economic System.
2. Describe the characteristic for the Different Economic Systems.
3. Describe Islamic Business Ethics in terms of Private Ownership.

3.0 Introduction

3.1 Definition

- An economic system is a mechanism (also defined as system or social institution),

which deals with the production, distribution and consumption of goods and
services in a particular society.
- It is composed of people, institutions and their relationships. It addresses the
problems of economics like the allocation and scarcity of the resources.
- There are several basic and unfinished questions that must be answered in order
to resolve the problems of economics satisfactorily.
- The scarcity problem, for example, requires answers to basic questions such as:
what to produce, how to produce it, and who gets what is produced.
- An economic system is a way of answering these basic questions. Different
economic systems answer them differently.
- This approach rejects the notion that economic system is either capitalism or
socialism.

25
 3.1.3 Definition of Economic System
An economic system is generally defined as a set of rules and regulations devised to help
man overcome the problem of resource allocation, distribution, stability and growth.
Despite the differing value orientation in each respective economic system may it be, there
are 4 common characteristics in any economic system. These are ownership,
motivation, decision-making and implementation. The following sections will explain them.

3.2 Characteristics of Economic System

3.21 Ownership

i) The capitalist system is characterized by the private ownership of the means of

production.
ii) The socialist system adopts the public ownership of the means of production.
iii) The Islamic economic system adopts mixed ownership (private and public) without
opposing the Islamic Business Ethics. Ownership in the Islamic economic system is
classified as follow:

Ownership

Private Public

Natural Common State

a) Public ownership

It includes common properties, state properties and natural resources.

i) Common properties: mostly public utilities such as bridges, highways, etc.

26
ii) State properties: such as ministries, zakah institutions, waqf, etc.
iii) Natural resources: such as water, fire (source of energy), pasture (land) and salt
(minerals on the surface of the earth) are also regarded as public properties, where all
individuals should share as partners. As stated in Hadith:

― men are partners in 3 things namely water, fire and pastures/ forestsǁ

b) Private ownership

It is allowed in Islam as stated in the Al-Quran:

― to man is allocated what they earn and to woman what they earnǁ

Allowing private ownership is important in Islam as this will allow Islamic contract like
trading (al-Bay‘) activities.

In private ownership, Islam recommends that the owner should:

i) acquire from halal sources
ii) avoid any form of riba
iii) avoid harm to individuals and society in the use of his property
iv) avoid hoarding, monopoly and corruption.

Ownership, whether private or public, is of 2 kinds: complete and incomplete. Complete

ownership means owning both the object and its usufruct/services, e.g. one‟s own house.
Incomplete means owing either the object or its usufruct, e.g. renting one‟s house.
Governments can use complete and incomplete ownership as policy tools. For example
increasing and decreasing complete ownership of vehicles.

Ownership (Milkiyah) Rights in Islam:

a) Right to dispose the physical ownership (milkul ‗ain)
Eg: throw away, selling, dispose
b) Right to utilize without legal ownership (milkul ful)

27
 Eg: rental, waqaf
c) Right to used loaned property (milkuddin)
Eg: car, money (borrowed property)

In Islam, absolute ownership belongs to Allah. Man owns resources as a Khalifah, i.e.
a trustee on the property he owns. As such he is required to use the properties he
owns in accordance to the will of the Creator.

By owning and utilizing the property he owns in line with the shari‟ah, man is
deemed as performing an act of worship obedience. Hence so long as man is able
to derive usufruct or services from the property he is allowed to own it. But if he
holds such property idle or misuses it, then the Muslim state or society has the right
to take it away from him and reallocate it to an individual who can put the property
to good use.

3.211 Role of Government

i) The capitalist economic system advocates against government intervention in

the market. The system assumes that the market is perfect and everybody can
compete freely and fairly in the market. The government should intervene minimally
only in cases of market failure such as monopoly, etc.

ii) On the other hand, the role of government is very important the socialist system,
as the parent safeguarding the interest of working class.

iii) Meanwhile in the Islamic economic system, the government as a guardian is part
of the integrated system of Islam.

In principle, Islam is against administrative pricing in the form of price control. It recognizes
the free interplay of the market forces so long as the economic agents behave according
to the shari‟ah. But Islam is also aware that man is not infallible and as such market failure
is bound to occur. In such an instance, government intervention is inevitable to harmonize
between private and societal goals.

28
3.22 Motivation

i) Capitalist system: To motivate individuals towards productivity the capitalist system

provides material rewards such as bonus, promotion, etc.
ii) Socialist system gives moral incentives in the form of slogans, medals, etc.
iii) Islamic economic system incentives are both moral and material. The moral
incentives are derived from the various shari‟ah injunctions. These include:

i) Productivity is regarded as noble means to attain success in this world and in the
Hereafter if done in accordance to the will of the Creator.
ii) Earnings for the sake of one‟s family members, parents, family savings and
payment of zakah, among others, and considered wajib (obligatory).
iii) The best of a Muslim is one who benefits the society with his services/work and
wealth.(Hadith).
iv) It is recommended for a Muslim to earn enough to help near relatives, friends and
visitors.
v) A Muslim should also earn enough to perform Hajj and to contribute to charitable
activities.

vi) At the same time Islam also acknowledges man‟s love for material rewards. Hence
the hadith says:

―One who does not appreciate people, does not Appreciate Allahǁ.

Therefore, a Muslim must show his/her appreciation to work well done, as incentives for
higher productivity.

3.23 Decision Making

i) In the capitalist-system, decision-making is decentralized. That is what to produce, how

to produce and for whom to produce are decided by the firms and the households.

ii) The decision is centralized (government) in the socialist system.

29
 iii) In Islam, it is basically the Shura (consultation) or negotiations at every level of decision
making that prevail. Shura takes into considerations both the centralized and decentralized
approaches. Hence the economic system recommends continuous consultations between
the private and the public sector at the various levels of decision making (al-Quran 42:38).

3.24 Implementation

This is basically the institutional arrangements and operational principles that organize
consumption, production, distribution and exchange.

i) The capitalist system: such organizational arrangements are provided primarily by the
market structure and its operation. The government helps to provide and facilitate the
climate under which such arrangements operate.

Ii) The socialist system: the government is fully responsible for all the institutional
arrangements and operational principles (including policies).

iii) The Islamic system: the operational principles are derived from revealed sources.
Some principles have permanent feature, such as exchange of counter values (spot or
deferred sales), ruling against trade involving Riba, Gharar (uncertainty), fraud, Maisir
(gambling) or probabilities as in the case of conventional insurance, etc. whereas other
operational principles are derived from revealed sources through ijtihad, as dictated by
circumstance. For example, principles related to Islamic bonds, etc. Similarly, some of the
institutions have permanent features, such as zakah, waqf, etc. They have existed in all
Islamic economic systems through the entire history of Islam. Even though other
institutions have evolved with the need of time, but are still based on the permanent
features of Islamic principles. The typical examples are the modern Islamic banks and
financial institutions.

30
 Comparison
Characteristics/Elements of Economic Systems:

No. Element Economic Systems

Capitalist Socialist Islamic
1 Normative Man-made Man-made Revealed sources
2 Ownership Private Public Mixed
3 Role of government Minimum maximum Part & partial of the System
4 Motivation Material Moral Mixed
5 Decision-making Decentralized Centralized Shura
6 Activities/Implementation Market-Based Directive Derived from Revealed Sources

Exercises

Question 1
Give the definition of Economic System from different perspectives.

Question 2:
State the difference between Capitalism, Socialism and Islam in explaining Ownership,
Role of Government, Motivation, Decision-Making and Activities

Question 3
What does Islam said about private ownership?

31