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Islamic Economic System

Islamic Economic System

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Published by Hasan Hemani
Islamic Economic System brings the solution to the economic crises. How and Why?
Islamic Economic System brings the solution to the economic crises. How and Why?

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Categories:Types, Business/Law
Published by: Hasan Hemani on Dec 23, 2011
Copyright:Attribution Non-commercial


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Islamic Economic System brings thesolution to the economic crises.How and Why?
The fundamental objective of this report is to carefully analyze the system through which Islamiceconomic system results in the development and prosperity of the society by bring solutions toall kinds of economic problems. The differences and policies of both, the conventional and theIslamic economic system will be examined to comment by drawing up a valid conclusion.Islamic economics is a financial system which functions under Islamic law (
) principles.The basic sources of 
are the Holy Quran and the Sunna of the Prophet (P.B.U.H), whichare followed by the consensus of the Ulmas/Muftis and interpreters of Islamic law.The central feature of the Islamic financial system is the prohibition of the payment and receiptof interest (
) as clearly ordered in the Holy Quran.The foremost belief around which all the Islamic concepts revolve is that the whole universe iscreated and controlled by Almighty Allah only. He has created man and appointed him as Hisvicegerent on the earth to fulfill certain objectives through obeying His commands. Thesecommands are not restricted to some modes of worship or religious rituals. They, on thecontrary, cover a every aspect of our life. Islam is not only a religion but a complete system formankind through which they can earn success in this life and thereafter. The Islamic economicsystem lies on the fundamental Islamic policy of the socio-economic development of the society.Islam uniquely considers distribution as the economic problem, and Muslims do not share theobsession of capitalists and communists with production. Because Islam differentiates betweenthe basic needs and luxuries, there exists no concept of scarcity of resources in Islam. Theresources available on earth are sufficient to secure the basic needs (food, clothing, and shelter)of more sixty billion human beings at a time. Under the Islamic system, Nigeria alone couldsupport the whole of Africa, as occurred in the past when, under the system of Islam, Africa sentfood to relieve the famine in Madina during the rule of Omar bin al-Khattab.
 Essentials of Islamic Finance
Main Principles of Islamic Economic System:
The main principles of Islamic financial system include:1.
The prohibition of taking or receiving interest.2.
Capital must have a social and ethical purpose rather than merely maximizing profit.3.
Investments in businesses dealing with alcohol, gambling, drugs or anything else that theShariah
considers unlawful are deemed undesirable and prohibited.4.
A prohibition on transactions involving speculation or high degree of risk.5.
A prohibition on gharar, the uncertainty about the subject-matter and terms of contracts
this includes a prohibition on selling something that one does not own.6.
Zakat as an essential part of the Islamic economic system.7.
Only financing through participation. No concept of lending money/resources on fixedmarkup or return.8.
Money in itself doesn‟t have any value but is backed by an asset such as Gold, Silver etc.
Money can‟t be traded like a commodity. It can only be used as a medium of exchange.
Highly emphasis on socio-economic development rather than merely economicdevelopment.11.
Needs and wants do not affect the supply of the resources.12.
Islamic economic system regards man, money and commodity as factor of production.13.
It permits 3 types of ownership i.e. individual, state and public ownership.14.
Circulation of Wealth.
Fundamental Differences between the Conventional andEconomic System:
While conventional economists are now in the process of understanding the failure of evil basedsystem, Islamic economics never got entangled in a secular and materialist worldview. It is basedon religious foundations which strike at the very basics of secularism. To ensure the true well-being of all individuals, irrespective of their sex, age, race, religion or wealth, Islamic economicsdoes not seek to abolish private property, as was done by communism, nor does it preventindividuals from serving their self-interest. It recognizes the role of the market in the efficientallocation of resources, but does not find competition to be sufficient to safeguard social interest.It aims to promote human brotherhood, socio-economic justice and the well-being of all throughan integrated role of moral values, market mechanism, families, society, and good governance.This is because of the great emphasis in Islam on human brotherhood and socio-economic justice.
On the basic policy differences of both the systems, the following differences have beenhighlighted.
 Essentials of Islamic Finance
The synchronized Role of the Market, Families, Society, andGovernment.
The market is not the only institution where people interact in human society. They also interactin the family, the society and the government and their interaction in all these institutions isclosely interrelated. There is no doubt that the serving of self-interest does help raise efficiencyin the market place. However, if self-interest is overemphasized and there are no moral straintson individual behavior, other institutions may not work effectively - families may disintegrate,the society may be uncaring, and the government may be corrupt and self-centered. Mutualsacrifice is necessary for keeping the families glued together.. Lack of willingness to make suchsacrifice can lead to a decline in the quality of the human input to all other institutions, includingthe market, the society and the government. It may also lead to a fall in fertility rates below thereplacement level, making it difficult for society not only to sustain its development but also itssocial security system. Therefore Islam puts high value on participation and societaldevelopment through the attainment of Halal earnings. Contradictory to other systems, it regardshigh value on the human talent and treats it as a factor of production.
High importance to Moral Values
While conventional economics generally considers the behavior, tastes and preferences of individuals as given, Islamic economics does not do so. It places great emphasis on individualand social reform through moral uplift. This is the purpose for which al
l Allah‟s messengers,
including Hazrat Abrahim, Moosa, Issa, and Prophet Muhammad (P.B.U.H), came to this world.Moral uplift aims at the change in human behavior, tastes and preferences and, thereby, itcomplements the price mechanism in promoting general well-being. Before even entering themarket place and being exposed to the price filter, consumers are expected to pass their claimsthrough the moral filter. This will help filter out striking consumption and all wasteful andunnecessary claims on resources. The price mechanism can then takes over and reduce theclaims on resources even further to lead to the market equilibrium. The two filters can togethermake it possible to have optimum economy in the use of resources, which is necessary to satisfythe material as well as spiritual needs of all human beings. It is also necessary to reduce theconcentration of wealth in a few hands, and to raise savings, which are needed to promote greaterinvestment and employment. Islamic system strictly prohibits monopoly as regard resources asthe property of Almighty Allah only and men as the custodian of His wealth. However it has notrestrictions on the amount of wealth a person can earn but it will be subject to Zakat.While the subject matter of both is the allocation and distribution of resources and bothemphasize the fulfillment of material needs, there is an equal emphasis in Islamic economics onthe fulfillment of spiritual needs. While both recognize the important role of market mechanismin the allocation and distribution of resources, Islamic economics argues that the market may notby itself be able to fulfill even the material needs of all human beings. This is because it canpromote excessive use of scarce resources by the rich at the expense of the poor if there is undueemphasis on the serving of self-interest. Sacrifice is involved in fulfilling our obligations towards

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