The Beauty of the Islamic Economic System

Islamic Economic System (IES)

** Mr. Muhammad Rizwan-ul-Haque





Currencies in Islamic Economic System (IES):

In the effective design of ‘IES’, there are basic two concepts; (i) Self-discipline in societies and (ii) Checks & controls by the State as per Shariah laws.

The self-discipline is based on the belief that everything belongs to Allah SWT and humans only hold some of these assets/provisions in trust. Similarly, the belief needs to be developed that one doesn’t earn a reward; instead, it is Allah SWT’s grace/blessings which reward us in this world. Therefore, the rules & regulations of the supreme owner must be implemented and adhered to by all members living in a society.


Our elders have done some work with good intent in the field of ‘Islamic Banking & Finance’ (IB&F) during the last 50 years. But unfortunately ‘IB&F’ has not been able to achieve the real goals of Islamic economics, because we are merely trying to adopt theories, models, and practices of capitalism. To counter the above woes; the time has come to first work on a roadmap of ‘IES’ to ensure that it appropriately covers all aspects of ‘IES’ for its immaculate implementation & execution in a society. Therefore, religious scholars & professionals must come close in humility to make an endeavor for the sake of faith overlooking worldly attractions and taking guidance from the divine source. It is pertinent to mention that after the four rightly guided Caliphs; Islam had a monarchy and the monarchs for their power & support influenced many Fatwas; which is called Fiqh. In view of the above, we have to once again go back to the message of the Quran & Sunnah alone, and completely eradicate what has been declared forbidden by Shariah laws. Whereas Ijtihad can be employed; either where Shariah is silent or where there has been a change in this world due to evolution.


Just like theories & models of ‘IB&F’ have become redundant with trial & error over time, because they continue to make use of forbidden factor Riba/interest (Libor, Kibor, etc) to benchmark Islamic deals and that forfeits the purpose of this sacrosanct initiative. Similarly, so far neither the Islamic State nor any religious school of thought has declared fiat currencies as forbidden. In today’s world, one of the biggest economic issues is fiat currencies. In light of the divine guidance, we can infer that in case of scarcity of precious material; the currencies can be backed by commodities like; wheat, barley, dates, and salt, but they cannot be fiat in nature.


Islamic Economic System

The Beauty of the Islamic Economic System:: The Beauty of the Islamic Economic System


The above commodities have been included because they were readily available in the Arabian peninsula. But the use of other commodities can also be brought into use, instead of fiat currency e.g. coffee, sugar, rice, etc. in other places to issue currencies and/or transact foreign trade deals against it. An Ijtihad in this case is definitely a better option in comparison to paper money. Post Bretton Woods agreement (1944 – 1971); all countries/governments issued currencies as per their free will in the name of; deficit financing, loans, and/or the balancing act. But it is developed and economically strong countries, whose currencies are acceptable in the international market. Since there is an automatic demand for hard currencies to execute foreign trade and to maintain reserves by all countries. Therefore, if we follow the divine source in letter and in spirit to establish a fair economic system (IES), then a balancing act can be done through the issuance of commodity backed-currencies, as it will increase productivity, reduce dependence on foreign borrowings and strengthen the currencies of developing countries as well. As opposed to the artificial creation of fiat currency which is ruining economies.


Land, Ownership, Produce & Levies:

Hazrat Omar RAA faced a challenge during his Caliphate when Muslim conquests successfully reached upto Egypt, Syria, Iraq, etc. A few thousand Sahabas (Companions of Prophet SAW) took part in these battles and thought that they have actually become owners of the conquered land, as they were equating it to ‘Maal-e-Ghanimat’ (war spoils). When the news reached Hazrat Omar RAA, He pondered upon the situation, otherwise, it would have led to injustice. Therefore, HE gave the verdict in light of verses of Surah Al-Hashr from verse nos. 07 to 10.

It was further elaborated that ‘Maal-e-Ghanimat’ (MeG) is only on the battlefield. The rest of the land will remain with local people, but half of the agri-produce will be deposited with ‘Bait-ul Maal’ (State Treasury). If it was not for the wisdom and foresight of Hazrat Omar RAA. Then we would have seen the worst picture of landlordism during the early days of Islam. The fifty percent submission of produce to the State is called Khawrj. Whereas, the funds of Bait-ul Maal are for the welfare of needy people and for the country’s Defense, etc.

The land of an independent Islamic country is Khawrji in nature on the basis of the above meaning, hence half of the agricultural produce should go to State Treasury or Baitul Maal.


While, the owner of ‘Ushri land’ only pay ‘Ushr’ (agri-tax in Islam) at the rate of 10% on naturally irrigated land (i.e. through; rain, river, stream, etc) and 5% on man-made irrigation system like; wells, canals, tube-wells, etc. Ushr is levied if the total produce is in excess of 948 kgs (or Sahib-e-Nisab). ‘Ushr’ (5% or 10%) is to be given out-rightly on the entire produce i.e. without deducting any expenses e.g. seed labor, fertilizers etc, and/or accounting for any other ancillary expenses. Further unlike Zakat, which is applicable once a year and on wealth that remains over a year; Ushr is levied on all agri-produces during a year i.e. whether there are; one, two, or three.


Since all belong to Allah SWT, therefore landlords and peasants are equal in a land equation; meaning they both will actively take part in cultivation and will deposit half of the product with the State treasury. But owners cannot remain absent from the land and exploit peasants to only unjustly work for them, and later walk away with a major portion of the produce without fairly rewarding the peasants.


Therefore, a simple Mudaraba transaction cannot be executed between landlords & peasants, because there is no risk to the land. While the peasant undertakes all the risk and makes efforts; then shares with the owner in case of profits. Mudaraba arrangement is only forbidden on land because Sahib Maal cannot suffer a loss (as he will continue to hold the same land, in case of a bad crop).  Though, Prophet SAW permitted Mudaraba in the case of a garden because fruit-bearing trees cannot all go bad. 


The Beauty of the Islamic Economic System

The Beauty of the Islamic Economic System


Leaders & Laws:

It was easier to select leaders during the earlier age of Islam because a categorization was readily available. For example, the first tier included; Ashar-e-Mubashara, then came participants of the Battle of Badr, Uhad, Khandaq, and then Bait-ul Ridhwan followed by the Companions RAA, Who embraced Islam prior to the conquest of Makkah, and then came rest of the Companions (Sahabas RAA). Since the above sort of categorization does not exist today, therefore it is one of the greatest issues faced by mankind in general and by the Islamic world in particular. However, we are fortunate that the guidance of Allah SWT in the Al-Quran and that of Prophet Muhammad SAW in HIS Sunnah is close to our hands.


Surah Ale-Imran, verse no.18: “Allah bore witness that none is to be worshiped except He, and the angels and the men of learning (too) standing with justice; none is to be worshiped except He, the Most Reverend, Wise” (03/18).

The above verse highlights two qualities of men i.e. learned and who do justice. These two criteria must represent a leader and/or an administrator i.e. they should be competent & honest, as only such leaders can ensure harmony in a society.


Greeks were the first to introduce laws. These laws were formulated by aristocrats primarily to control the masses. If laws are only to be made by humans, then they will often ignore the principles of equality & justice and the laws will be tilted towards the powerful & authoritative and/or the people, who are writing it (their associates). The laws can easily be made by humans, but they would not always be fair to the general public. It is only the message of the Quran & Sunnah, which will offer balanced laws by keeping the interests of the oppressed supreme and without diluting the authority of a leader.


As per Surah An-Nisa, verse no.59; men are bound to obey man-made law, but if there is something contradictory to Shariah principles, then we must refer to Quran & Sunnah. This process is called ‘Ijm’a’.


A Glimpse of the Islamic Economic System (IES):

Clear thinking of ‘ISE’ will begin, when we visualize a zero-interest scenario based on the fundamentals of Islam i.e. equality & justice. Since there is no ambiguity that Riba/interest / Libor etc. is forbidden, therefore neither a fatwa can be sought nor any fatwa can permit the use of interest in the Islamic scheme of things.


The first revelation declaring Riba as forbidden was made in Surah-e-Rum, verse no.39; even loans called by any Islamic names (e.g. Murabaha, Sukuk, Ijara, Diminishing Muskarika, etc.) cannot be accepted as a money-making option for rich entrepreneur, companies and government. Loans in Islam (reference; Surah Al-Baqara, verse nos.280-283) are only ‘Qarz-e-Hasna’ (a beautiful loan). Surah Al-Baqara, verse no.245; “Is there any who should give a goodly loan to Allah so that Allah may increase many times for him. And Allah scants and amplifies, and you are to return unto Him”. ‘Qarz-e-Hasna’ is for financially weak persons like; orphans, widows, travelers, the disabled, etc.

The Beauty of the Islamic Economic System

The Beauty of the Islamic Economic System:: The Beauty of the Islamic Economic System


Likewise, the concept of leveraging, whereby the rich contribute less and wrongfully control more of other peoples’ wealth (Surah An-Nisa, verse no.161), and the prevailing system of banking i.e. both conventional & Islamic are also barred as per Surah Al-Baqara, verse no.275, which restrict money to be traded like commodities. Now let’s try to fit the above true Shariah concepts into an economic equation. There will be no concept of the prevailing style of banking in the Islamic economy, where all the funds held by the general public are swept away from society to be handed over to rich entrepreneurs to become richer. Islam can never allow this sort of unjust practice. Since both types of bank cannot survive without spread, therefore in a zero-interest scenario; there will be no incentive for an individual/group to set up banks for two reasons;


  • it is against human nature to make money for a third party, where his own share is diluting
  • it is also against human nature to enter into a perpetual and unlimited number of independent contracts with both suppliers and users of funds; when it is the responsibility of the person/group/bank to be accountable.


In light of the above, in the Islamic economy the banks will only have two functions;
(i)      custodian of funds and

(ii)     facilitator of transfer of funds from one place to another, including settlement of foreign trade deals.

But the banks will not be permitted to use depositors’ money. Thus, the ownership of funds will always remain with savers. Depositors/owners of funds will either invest directly in a private or a public venture. Or they will invest through Modarabas / ‘Mutual Funds’ (MFs will fill in the void created by banks). Since the majority ownership in a project will remain with depositors, therefore they will have a greater representation on the board of directors. This will offer desired justice to the masses. The projects will be managed by people who are experienced in the field, but they will be in the minority with one or two seats. Thus, they will never be able to exploit the interests of the general public. While MFs will only charge management fees (and not spread), but the investments will not be in interest-bearing or speculative ventures, as it is being done today.


The Beauty of the Islamic Economic System:: The Beauty of the Islamic Economic System


** Mr. Haque is a Renowned Banker & Islamic Economic System Specialist From Pakistan. He is making a humble endeavor to present a new economic model by primarily taking guidance from Quran & Sunnah. Islamic economy is neither inspired by the injustice of capitalism nor does it supports socialism which is against human nature. He also gives a five-tier plan that how capitalism can be converted into an Islamic economic system.


The Beauty of the Islamic Economic System:: The Beauty of the Islamic Economic System

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