ISLAMIC ECONOMIC SYSTEM PART 2

• Islamic economics aims at the study of human falah achieved by organizing the resources of earth on the basis of cooperation and participation.

• Knowledge and application of injunctions and rules of the shariah that prevent injustice, provide satisfactions to human beings and enable them to perform their obligations to Allah and the society.

• Islamic economics is the study of Muslim behavior who organizes the resources, which are trust, to achieve falah.

• Studies of the behavior of men and women, individually and their association and socialization, in order to understand the patterns and modes of this behavior, its motives and incentives, as well as goals and objectives and response and reactions.

• Factors that Influence Economic System

Economic system are different in term on these six criteria:

Property Ownership• Mal• Milkiyyah = to possess, control, have power/

authority over. Usually referring to God.• Islamic vision on property ownership:i. Absolute ownership belongs to Allahii. Man as trustee, relative and conditional

owner.iii.We are accountable for all our possession

iv. Labor and need are both legitimate bases of ownership.

v. Private and public property ownership are both allowed by Islam.

Three important element in the process of owning something:

a.Object – can be corporeal or incorporeal; something of value, permissible and capable of being possesed.

b.Subject – can be individual, state or society

c.Contract – rights to own, to possess, to use, to prioritize, to exclude, to derive income, to secure and to dispose.

• In capitalism, private ownership is emphasized while in socialism, public ownership is dominant.

• In Islamic economic system, both private and public ownerships are crucial to ensure just allocation or resources and just distribution of wealth and income.

Ownership

Private Public

Natural resources StateCommon

Both private and public ownership can be divided into complete and incomplete

ownership.

Public property a. access or control is determined by reference

to public interest.b.State has complete right and can decide the

use for the interest of the public i.e. privatization

c. Common property must be accessible to all equally i.e. public park, beach

Private property• There is no ruling in the Quran and hadith that

prohibit private property ownership. Therefore, this type of ownership is permissible.

• Condition to maintain ownership: permissibility, proper utilization, constant utilization, meet obligation.

Role of Government

• These are some verses that emphasize on the importance of leader (state) in Islamic system.

“O you who believe! Obey God and obey the Messenger and those from among you who are in charge of your affairs; and if your differ over any matter, refer it to God and the Messenger, if you do believe in God and the last day ” (4:59)

• “And consult them (o Prophet) in matters (of public concern) (3:159)

• “(Believers are those) who run their affairs by consultation among themselves” (42:38)

• “And let there among you be a group of people who invite to all is good, who enjoin what is right and forbid what is wrong” (3:104).

• In capitalism, government plays very minimal roles in the economy such as maintaining law and order, defense, general health and providing public goods.

• Government also intervenes in the case of market imperfection or instability.

• The decision making is very much decentralized.

• On the other hand, government plays the central role in socialism.

• The decision making process is very centralized.

• In Islamic economics system, government is part of the integrated economic system of Islam.

• Islam prefers market as a mean to allocate resources. However market alone is insufficient to achieve efficiently.

• Role of state in the form of shura and al-hisbah are therefore important to complement the market system.

Some essential economic functions of the Islamic state are:

i. To Eradicate povertyii. To ensure stabilityiii. To maintain law and orderiv. To ensure social and economic justicev. To ensure social securityvi. To foster equitable distribution of income and

wealthvii. To harmonize international relationviii. To safeguard national sovereignty

Incentive

• Incentive is anything that provides a motive for a particular course of action to be taken.

• Can be divided into three broad classes:a. Material/ remunerative - rewards in exchange

for acting in a certain particular way.b.Moral incentive – regarded the right thing to

do; or admirable, or the failure to act in a certain way is condemned as indecent.

• A sense on self esteem, and approval or admiration from the community.

c. Coercive incentive – exists when a person can expect failure to act in certain course of conducts will results in physical force being used against him/her e.g. imprisonment, confiscating property.

• Capitalism rewards on the basis of contributions in the economic activities (functional distribution). Material factor.

• In socialism, state ownership of all factors of production and equality in the distribution of wealth and income requires proper moral incentive towards desirable behavior by appealing to the people’s responsibility to the society. Coercive incentive was used.

• In Islam, the incentive mechanism among others are driven by these motives:

a. Heaven and hellb.Paradise is the ultimate successful

c. All good deeds in this world are considered as a form of worshipping if they are done correctly with sincere intention for Allah.

d.There are a lot of verses and hadith that encourage Muslim to strive for excellence (al-Mulk: 2; Ali-Imran: 110)

e. Islam never prohibits material pursuitf. Muslims also work to fulfill the obligation

which require health financial position (hajj and zakat)

Organization of Decision Making

• Capitalism = decentralized (lower level)• Socialism = centralized (upper level)• Islamic economic system = the best of

centralized + decentralized.

Activities• Consumption, production, distribution and

exchange• Market plays the primary role in addressing all

the above activities so that the allocation of resources is done efficiently.

• However, productive and allocative efficiencies only can be attained when perfectly competitive market which in real world case is not achievable.

• The central planning unit decides on how resources are allocated in socialism.

• In Islamic economic system, all the activities are guided by the shariah which outlines the limit of human activities.

Questions

1. Economic choice and freedom in Islam.2. Discuss briefly the four characteristics of an

Islamic economic system.3. In an Islamic economic system, the market

mechanism is sufficient in allocating resources efficiently.” Critically discuss.