Islamic Economics

Contrary to conventional economics, Islamic economics and finance must observe the teachings of the Shari'ah whose basic teachings cannot be violated at any point in time. These basic teachings constitute the core elements of the faith that are best described as maqasid al-shari'ah or the objectives of the Shari'ah. Hence, Islamic economics is guided by the objectives of the Shari'ah whose main goal is to promote maslahah, or public interest, and prevent harm (mafsadah). For example, while protecting each and every individual in the society and allowing private ownership, Islam also wants to ensure that this is not done at the expense of society. For further details see: ISRA, Islamic Financial System: Principles and Operations.



Production is the activity of combining goods and services called inputs, in technological processes which result in other goods and services called outputs. For further details see: Microeconomics by Hugh Gravelle and Ray Rees

Issues and Challenges

Exchange, which entails the process of give-and-take in the transfer of goods and services with others, has played a vital role in the history of mankind. It is in fact, as old as man himself. The reason for its importance is rather simple: self-sufficiency as a way of life is not really practical. Accordingly, the most important functions of money are to serve as a unit of account and a medium of exchange. However, depending on what is being used as money, it could also serve as a store of value and a standard of deferred payment. For further details see: ISRA, Islamic Financial System; Principles and Operations.


Time Value of Money is a basic concept in finance. It says that money today is worth more than money tomorrow. That is to say that a ringgit today has more value than a ringgit in the future. There are at least three main reasons why this is so, first, money loses its value over time; second, money has opportunity costs; third, uncertainty of future cash flows.

In theory, the Islamic financial system is inclined towards equity-based fi nancial instruments that are related to the real economy. In reality, however, the Islamic finance industry is dominated by debt-based financial instruments that, more often than not, mirror
conventional ones. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Efficiency: one of the main functions of a financial system is allocating financial resources (society’s savings, past and present) to productive uses. Bank loans go to the most creditworthy people; creditworthiness being measured in terms of money and marketable assets owned by the loan-seeking person or firm that can serve as collateral. Those with the best collateral are not necessarily the people with the most productive projects, productivity being measured in terms of expected profits. Debt finance fails to allocate financial resources efficiently; efficiency defined in terms of expected value-productivity. Stability: in circumstances where possible changes in tastes, technologies and international relations make a firm’s revenue receipts uncertain both in amounts and time of accrual, it is obliged to commit to payments of given amounts at given dates. The result is frequent bankruptcies, destruction of social capital and redistribution of assets in favour of financiers. The resulting instability has a contagion effect in the global economy as plants are closed and workers are thrown out of work. For further details see: ISRA, Islamic Financial System; Principles and Operations.

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