By Yousuf Ibnul Hasan
What is Economics? Usually, it is defined as “a system or science that identifies limited resources which are allocated for unlimited human wants and desires”, or “a study of resource which is limited against the unlimited human wants.” While studying at the academic level, or working in the commercial or business environment, it is a common statement from all classes of people that resources are getting to an end and the world is moving towards starvation. When we look around ourself and see our lifestyle in our daily routine, we will feel that either we are confused or the economic activities just do not have a proper system to identify the system for production, distribution and consumption of resources. We might be using wrong methods and mean of economic activities that are creating a scarcity of resources against the human needs? Islamic economic emphasise direct on development of socioeconomics rather be only on economic system and disregard the concept of scarce resources by looking into the status of a human being, as a unique creation, created by Almighty Allah and it is beyond any doubt that Almighty Allah has allocated enough resources for the proclaimed unique creation.
The Holy Quran is a code of conduct, which identifies a system that confirms the available resources blessed by Almighty Allah to mankind. It ensures how these resources are sought, utilized and distributed by men, through social justice. This can be done by applying, knowledge, experience, ability and efforts through the power of the pen, granted by Almighty Allah and marked humans as custodian of all the resources, which is owned by Almighty Allah alone. This concept was put into a system known as Islamic economic, that leads not to economic development but to socioeconomic development. Socioeconomic gives a transparency to the economic system that the resources are blessed by Almighty Allah in unlimited quantity and in quality for the human beings. In return, human nature shows limited efforts to explore these unlimited resources, resulting in the scarcity of limited resources.
If we look at the definition of Islamic economics system as compared to the conventional economics system, we can find a difference which we might not consider important, but in reality, this difference is the root cause of all economic crises of the world. While working on the effects of modern economic principles, I found that the modern economy, which we consider as contemporary, is basically decreasing the importance of human and increasing the value and importance of money. Ultimately, the solution to economic crises is defined in Islamic economics as any activity for trade, commerce, economic and financial purpose with a priority of social benefit to mankind. The Islamic economics system describes the man’s relationship with Almighty Allah, on the basis of Tawheed, the Oneness of Almighty Allah. In short, it is man’s total commitment to Allah through submission with the mission to mould human life in accordance with Allah’s will”.
In-depth, one can find that the bases of Islamic economics are crystal clear. It is a system that enjoys a separate identity and it is a self-contained system with its own economic policy. It covers interests at private and public as well as material and spiritual levels. It has given a complete system of lifestyle, (earning, expenditure, businesses, and relationship) within a legal framework. It emphasizes social justice, equality, unity, love, cooperation and sharing at all cost. Moreover, it also emphasizes on transparencies in all affairs and respect. It guards the rights of minorities, non-Muslims, women, orphan, employees, lenders, borrowers and rights of everyone without discrimination.
Islamic economy is based on four principles, firstlly that all wealth belongs to Almighty Allah and Man is the trustee of this wealth. Secondly, on contrary to the present practice, it prohibits hoarding of wealth and guides that the wealth should remain in circulation at all times. Thirdly, it also differentiates between basic needs and luxuries and does not have the concept of inflation due to the use and consumption of resources within a specific time and period. Forthly it does not impose limits on the amount of wealth that an individual can acquire, provided the wealth is acquired thourgh right means, method and practices.
In contrary to the conventional economic system, Islamic economic recognizes three factors of production; man as the source, the money as a force and the commodity as the need. The three factors of productions are the wheels of Islamic finance that drive socioeconomic for a healthy and flourishing community. The three factors of production give birth to three basic usages of money and commodity under the guidance of Islamic economic principles which are, consumption, utilization and the exchange, in the understanding of permission, restriction and prohibition.
In Islamic Economics, man is described as the prime factor of production who drives the economic and financial system as a beneficiary, whereas money is not usable or consumable but exchangeable in volume which is the value of commodity and services and this money is used as a bridge between men, commodity and services. The role of the commodity is only to be consumed or used, but not exchanged, and to satisfy the need of the men in his daily life. Services are treated as a useable commodity only in exchange for money in volume, which is a fee, wages or commission.
The two factors of production, man and money define the two exchange system to obtain commodity or services. One of these two systems is identified as a loan, which is based on the principal amount in the transaction by pricing the money with time value, without the concept of utilization or its impact on economic activity. The loan has to be secured by payback guarantee, which confirms the future success of the transaction in the present time ie. Riba, as it is a way to speculate. The loan is usually given for stated or unstated purposes, on a fixed term, fixed period and fixed rate, which is applied to the principal loan amount. Socioeconomic treats the excess amount on the principal loan amount as a Price of Money, which is agreed without considering the profit or loss in the transaction of money and covered through a collateral as a guard against risk and a guarantee of success for the transaction. This guarantee is Shirk (entering in the jurisdiction of Almighty Allah) which identify the concept of Interest, known as one of the forms of Riba and known as Al Nassia (Riba of Money).
The second exchange system is known as Finance which is made available on the basis of man’s ability to use the money to multiplay, then divide the result, subtract from the result for use and what saved is then added to the amount realized through the exercise of money for further transactions. The difference between loan and financing are classified as financing is an equity and not the liability but loan is liable and not participation. Financing is made, the loan is given and loan is secure, whereas finance is supported. Financing is an investment and loan is a facility. The loan cannot be financed until it is agreed on the profit and loss sharing and financing cannot be a loan till return is guaranteed. Financing outcome to be a profit which is shared in an agreed ratio of participation in the form of money or ability. Finance has its own method of securing the transaction, either by acquiring the ownership in the form of equity participation and without having any maturity or in other cases, in which ownership is decreased or increased for the participators at a pre-agreed term.
It has been observed that loan leads to inflation and liquidation and increases the liability, cost and decrease the net worth, whereas, in case of financing, it increases the capital base as well as net-worth and ends at ownership. In short, financing is an act of money, which is classified as the opposite of loan. Whereas finance is made by way of equity participation in the new or in a running transaction, project, venture finance or acquiring the business operations by going into a proper appraisal of purpose and verification of valid data of purpose. This is submitted by the user of money to the financier, who becomes a direct or indirect partner in the venture with on profit and loss sharing in a ratio of participation.
Islam through its economic system has identified the concept of Riba and guided the means to keep the risk sharing as well in participation. The system treats money as potential capital till the money is merged with man’s ability to use it for commodity or services. The speculative behaviour is believed as crossing the jurisdiction of Almighty Allah. To guard against the involvement of Riba, Islam has guided the actions of human being in social, commercial or business income, earnings or profit only from the Shariah approved activities.
In today’s world, including in Muslim countries, the common system is the interest-based capitalist system. Whereas Islamic economics identify the distinction between conventional economics and guide to the perfect socioeconomic life of a society without any discrimination of colour, sect, race or religion is the distribution. Islamic economics system identifies the relationship on a humanitarian basis rather be on the basis of money and status in the society. The Islamic economics identify the right of Almighty Allah and right of humanity, which is the two basic responsibilities and duties of the human being for healthy communities and eligibility for the blessings of Almighty Allah in the form of unlimited resources in the life and on the day of judgment.
The views and opinions expressed in this research paper are solely those of the authors and do not represent the
official views of the International Shari’ah Research Academy for Islamic Finance.