Citations & References:"Islam is a way of life and has influence on all aspects of a Muslim’s life. The Islamic law, Shariah, prohibits any dealing with interest and more than the last six decades the Muslims globally became interested in conducting their finance and banking in an interest-free manner," said the Moon when she came, after saying Basmalah and Salaam."According to Syeda Famida Hamid (2018)—who spent 22 years in her life worked towards playing a bigger role in the development of Islamic finance and banking—that before money was created, economic exchanges happened via the barter system. In the barter system, one person exchanged a good or service with another person’s good or service. This system had many inconveniences. Two people had to meet up where each owned something that the other wanted. The inconveniences of the barter system led to the emergence of money as a medium of exchange. Money separated buying and selling as two separate activities. Historically, many things have been used as mediums of exchange, like livestock (cows, camels, horses), grains (wheat, barley), precious metals (gold, silver) and finally coins and paper money.The creation of money led to the development of financial institutions whose main purpose was to bring together those with surplus money and those with a shortage of money. Financial institutions have played important roles in the economies of all societies over time, collecting money from customers, providing them with safekeeping services and lending or investing these funds. This process is called financial intermediation and it is the core business of banks.Western commercial banking started in around the 14th century in Florence and became more established in the 18th century with the advent of the Industrial Revolution. It was established by three groups of people and to this day conventional banking shows traces of its ancestors. These groups were: first, rich and reputable merchants. Like a merchant the bank finances foreign trade, issues bills of exchange and provides capital to new business ventures. Second, money lenders. Like money lenders the bank pools the savings of the masses and lends it out to those with a shortage of finances and makes a profit by charging higher interest to the borrowers and paying lower interest to the savers. Third, goldsmiths. Like a goldsmith the bank serves as a trustee of customers’ valuables.Economic systems in societies from ancient times have been based either on religion or on capitalism. Faith-based systems promoted justice and fairness in economic activities and encouraged the rich to share their wealth with the poor. In contrast, capitalistic economic systems operated on the concepts of survival of the fittest, competition and profit maximization. During ancient times, economic activities like business and trade were mainly controlled by the rulers or by the religious leaders, and some rich and powerful merchants. Hence the profits generated were mostly consumed by the ruling elite, priests and rich merchants, and only small portions trickled down to the public.Economic systems in societies from ancient times have been based either on religion or on capitalism. Faith-based systems promoted justice and fairness in economic activities and encouraged the rich to share their wealth with the poor. In contrast, capitalistic economic systems operated on the concepts of survival of the fittest [the term made famous in the fifth edition, published in 1869, of On the Origin of Species by British naturalist Charles Darwin, which suggested that organisms best adjusted to their environment are the most successful in surviving and reproducing], competition and profit maximization. During ancient times, economic activities like business and trade were mainly controlled by the rulers or by the religious leaders, and some rich and powerful merchants. Hence the profits generated were mostly consumed by the ruling elite, priests and rich merchants, and only small portions trickled down to the public.During the 13th century, there are three interlinked economic concepts began to appear and were the topic of significant discussions and debate. First, Justice in economic exchange. The ancient Greek philosopher Aristotle considered the price of any good to be its intrinsic value, while according to the Romans, the price of goods was decided by the factors of demand and supply and the contracting parties played a role in finalizing the price. On the other hand, Christian theologians believed that the intrinsic value meant the usefulness of the good and this would ultimately decide the price. Islam also recommends a just price for goods and services.Second, Private property. In their original form all three Abrahamic religions of Judaism, Christianity and Islam considered property to be ultimately owned by God with man serving only as its steward, and as such all property should benefit society. In Islam, the last of the Abrahamic religions, this view still holds and has a significant effect on Islamic economics and Islamic finance. The Church moved away from this view in around the 5th century and itself became the owner of substantial property and wealth. In the modern economy, property is privately owned and is one of the factors of production.Third, Money, usury and prohibition of interest. In the early 4th century Aristotle opined that money was only a medium of exchange, without any intrinsic value of its own; hence money cannot earn money by itself. A complete ban on usury and the prohibition of interest was common to all three of the Abrahamic religions and not unique to Islam only. According to the Judaic belief, interest could not be charged from one’s brother, and that was interpreted as another Jew, basically suggesting that interest could be charged from those of another faith. In the case of Christianity, ‘brother’ was considered as all human beings. Both the Old and the New Testament forbade earning from usury. Initially, Christian theologians applied a total ban on usury, which over time changed to the prohibition of excessive interest only. The ban on interest was repealed in France in 1789 and in the Vatican in 1838. Islam is the only religion in which a total ban on any form of usury or interest continues to date. Some of the factors that contributed to Western societies’ gradual acceptance of interest in their economic life included the replacement of agriculture by the Industrial Revolution, the role of demand and supply in determining price, the acceptance of money as a factor of production and the separation of the Church from the State.The modern economic system is described as a network of relationships between households, businesses and governments involved in the economic activities of production, distribution and consumption of goods and services in a manner that protects the rights of future generations and of the environment. Globally there are different economic models operating, and these differences are derived from the role of markets and governments and of morality and justice in these models.Market economy. These economies are self-regulating, with no government intervention. Demand and supply determine prices. The disadvantages are that this system can cause polarization of wealth and can be detrimental to society – for example, the USA.Mixed market economy. In these economies markets operate under the demand and supply mechanism but governments ensure that market rules beneficial to the country are not broken. Important economic sectors like public services, defence, infrastructure, etc. may be under governmental control – for example, Sweden, the UK, France.Mixed socialist economy. In some market economies, to deal with income inequality, poverty and other social issues, some vital sectors are under governmental control, like banking, healthcare, education, energy, transportation, etc. – for example, China.Command or planned economy. These economies are the opposite of the market economy. Government decides about production, distribution and consumption. Communist countries usually have this kind of economy – for example, Cuba, North Korea and the former Soviet Union.The last, Islamic economics, as a term, was first coined by Abul Ala Al Mawdudi, who sought to develop Islamic social science. Since Islam is a way of life, it provides guidance for its followers in the material as well as the non-material aspects of their lives. According to Askari, Iqbal & Mirakhor (2015), Islamic economics involves studying rules provided in the Islamic holy book, the Quran, and the Sunnah, pertaining to the economic concepts, comparing and contrasting these with contemporary economics, identifying the gaps and finding ways to bridge these gaps. Askari, Iqbal & Mirakhor (2015) further emphasized that social and economic justice is at the basis of Islamic economics, providing equal opportunity in the utilization of natural resources for all in society. It encourages cooperation and collaboration between individuals and society.Islamic economics assists in the allocation and distribution of scarce resources, without curbing individual freedom, causing macroeconomic and ecological imbalances, or weakening family and social solidarity; it aims to find a balance between individual and social benefits related to private or public property ownership. Islamic economics encourages productive activities and the creation of wealth, considering it as an act of worship provided that these activities are compliant with Shariah rulings. Though on the flip side, Islam does not agree that material gain is the main reason for existence. Islamic economics discourages the hoarding of wealth.Mohammad Nejatullah Siddiqu (2010), divided the development of Islamic economics into three periods. The first period began from the Hijra to AH 450, corresponding to 1058 CE. During this period, the Prophet (ﷺ), his companions and other Islamic scholars, concentrated on Shariah rulings relating to economic issues. The second period, spreading from AH 450 to AH 850, corresponding to 1058 to 1446 CE, was a glorious period in the development of Islamic economics. This period focused on the following issues: individuals should satisfy their basic needs only and consider the needs of society; rulers must preserve justice and introduce accounting and fair pricing. The third period was from AH 850 to AH 1350, corresponding to 1446 to 1932 CE, and it was a period of stagnation in intellectual and individual thinking. The economic concepts that were discussed and developed during the initial period of Islam included money as a medium of exchange, usury, taxation, market regulations, permissible economic behaviour, labour, wages, prices and ethical commercial behaviour.Some of the most important principles that guide the discipline of Islamic economics are : first, Religion and economics are interrelated in Islam; Second, Economic and social fairness and justice is not forced on individuals, but they are encouraged to implement it; Third, Property and wealth is ultimately owned by the Creator, though man has control over it as trustee; Fourth, People are expected to be moderate in their expenses and avoid wastage and luxury. Fifth, Productive activities are encouraged, and all can pursue personal economic gain as long as they are Shariah-compliant and do not harm society or the environment. Sixth, All Halal trade and business, legitimate and permissible in Islam, is encouraged while all Haram trade and business, unlawful and prohibited in Islam, is to be avoided. Seventh, All human beings have the right to equal opportunity, and those who own wealth are responsible for sharing it with the community. To achieve this, Islamic economics dictates compulsory charity Zakat, which is a religious tax, designed to reduce the gap between the rich and the poor, as well as encouraging additional non-compulsory charity Sadaqah. Zakat serves as the backbone of the Islamic economic system and encourages the rich to support the poor in the community. It was the first formal form of quantified taxation known to civilization, and is a form of social insurance. In Islamic countries it could be a source of income for the government treasury (which in Arabic is called the Bait-al-Maal) and used for public service expenses. Zakat is also a very important tool acting against the hoarding of wealth, since money utilized in productive endeavour is taxed only on its income while idle, unproductive money is taxed on the principal amount.Islamic economics has a two pronged solution to the classic economic problem, the scarcity, since wants can be unlimited while resources are limited. On the demand side, man should not have unlimited wants. They should concentrate on basic needs only, avoiding unnecessary luxury and wastage. As such, each would consume less of the available resources.On the supply side, man should increase the resources Allah has provided by productive activity. Productive effort is a way of serving the Creator and thus increasing the available resources. Every capable individual should work for a living and the wealth they earn is not only to benefit them, but should also benefit society and the environment.Islam says that human beings are trustees only of the wealth they own, while the real owner is Allah. All Muslims are brothers and sisters and are responsible for each other’s wellbeing. This establishes the welfare economy in Islam. Two important concepts encouraged by Islam and working towards the common good are Al-Adl, which means to be just and fair in dealings with others; and Al-Ihsan, which encourages Muslims to go beyond the minimum obligation towards others and to show kindness. Other concepts in Islam that aim to achieve social welfare are Islam’s special dictate related to property ownership and the charitable endeavours of Zakat and Sadaqah.In all practical senses, property ownership is allowed in Islam. The ultimate ownership of everything though vests in the Creator, and humans are only trustees of the property. As such, property should also be available for the benefit of the public and the environment. This identifies elements of both the capitalistic and the social systems. Islamic economics is not in conflict with the market economy. Demand and supply, competition, rights of contracting parties to determine price and earning profit from productive endeavours are all accepted concepts, provided fairness and justice are maintained.In Islamic economics, the ownership rights of property are dealt with based on follows: first, Allah is the ultimate owner of all property and He has allowed people to possess and use the property in trust, in such a manner that it is available to benefit society and future generations and causes no harm to the environment. Second, All human beings should have access to the natural resources bestowed by Allah. Third, property can be acquired by people through their own productive activities or by diverse types of transfers like exchanges, contracts, gifts, donations or inheritance. Fourth, Islam limits the accumulation of wealth (thus socially harmful hoarding, which is prohibited) and dictates that all Muslims have a duty to share their income and wealth with the less fortunate, via Zakat, which is compulsory or Sadaqah, which is voluntary. Fifth, Islam recommends taking care of our property and discourages waste or destruction.Islamic economics recognizes capital as one of the factors of production, and as such there is a cost to this capital. On the other hand, Islam considers money only as a medium of exchange and does not agree with money being treated as a commodity or having an intrinsic value (thus earning money from money). This is considered as Riba or interest, which is basically income against the time value of money or via exchange of goods in unequal quality or quantity. Islamic economics does not accept interest as the measure of investment efficiency, rather it believes that yields are determined by sharing in both profit and loss or by the negotiated prices of sales or lease transactions. All Islamic financial transactions need to be linked to an underlying real asset, or there should be an investment in a business and this investment of capital will earn a profit or make a loss as is the case with the underlying asset or business. To conclude, Islam allows for the cost of capital by allowing capital to share in the surplus but not without being part of the deficit also in any investment.As a closing, the Moon said, "Modern economic thought, as laid out by Adam Smith, considered money or capital as part of the factor of production. A key issue in modern economics was the classic economic problem – unlimited wants and limited resources. Islamic economics is rooted in the Quran and Sunnah, and dictates that wants should be limited, production encouraged, waste and luxury discouraged. Thus solving the classic economic problem.Islamic economics is closely tied to social welfare. The Islamic doctrine of property ownership dictates Allah as the ultimate owner and humans as the trustee, and as such the benefits of assets need to be shared via the modes of compulsory Zakat and voluntary Sadaqah. Islam totally bans interest, although it permits the cost of capital in the form of sharing in the profit, provided the losses are shared too. There are clear distinctions between conventional and Islamic economics related to ownership and accumulation of wealth, wants and resources, role of the State, economic cycles and market economy, rewards of capital, social welfare and inheritance law. And Allah knows best."
- Syeda Fahmida Habib, Fundamentals of Islamic Finance and Banking, 2018, Wiley
- Mohd Azmi Omar, Muhamad Abduh, Raditya Sukmana, Fundamentals of Islamic Money and Capital Markets, 2013, Wiley
