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<aside> 💡 Source: An Introduction To Islamic Banking, Shaykh Dr Mohamed Ali Elgari. https://iq.islamicmarkets.com
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The Islamic economic system is the collection of rules, values and standards of conduct that organize economic life and establish relations of production in an Islamic society. These rules and standards are based on the Islamic order as recognized in the Koran and Sunna and the corpus of jurisprudence opus which was developed over the last 1400 years by thousands of jurist, responding to the changing circumstances and evolving life of Muslims all over the globe.
Three aspects of the economic system are usually referred to as the major distinguishing elements of any economic system.
1.1 Property
In the Islamic system, property is a trust. The real owner is Allah (Subhanahu Wa Ta’ala). Man’s disposal of worldly goods is in the capacity of a viceroy and a trustee. His rights are, therefore, circumscribed by the limits Allah has prescribed, and should be exercised toward the ends Allah has defined. Unlike the capitalist system, the right to property is not absolute but has limitations and qualifications enforced not by the power of the government but by the power of one's faith and desire to be a pious Muslim. Hence, the common-good and the welfare of fellow Muslims are internalized in the decision making process of every Muslim. It is Socialism with at the state.
In view of the purposive nature of man's life in the Islamic world view, even these limited rights of ownership are not devoid of purpose. Wealth is an instrument in the effective discharge of man responsibilities as the viceroy of Allah, and the achievement of well-being in the life for himself, his fellow Muslims and fellow human beings. No where this viceroyship is displayed like in the Shari’ah laws of inheritance. These laws clearly assume that once the individual is dead, his wealth goes back to the original owner, who specifies to whom the wealth should go. The laws of inheritance specify where exactly this wealth should go, regardless of the approve or the consent of the deceased owner. He is permitted to endow only 1/3 of his legacy. Even then, such endowment should not go to a beneficiary (one also is included in the inheritors) not to uses that are not considered is Shari’ah a charity.
1.2 Distribution
Because al-adl (justice and fairness) is a basic value of the Islamic economic order, distributive justice is a major concern of the system. Equitable distribution of income and wealth is therefore an objective by itself. Operationally, this is accomplished through certain institutions which form the backbone of the social security in Islam. Examples are a bound:
1.2.1 Zakah
Zakah is the third pillar of the Islamic faith. It is a unique system of social security. Zakah is not a hand-out from the rich to the poor. It is a right of the have nots in the wealth of the haves. It is a measure designed to directly transfer part of the wealth from the well-to-do to the poor and not to the government. Because the purpose is redistribution of income and wealth, without creating a class society zakah is levied on almost every one. Even the not very well to do, pay zakah. He may then receive the zakat of others at the same time. Zakah is levied annually on the wealth itself and not on the individual or income, at a general rate of 2½ % per annum. This is not all. Zakah is a requirement. However, a Muslim is always engaged not to confine his charity to that requirement by giving alms (sadaqat).
1.2.2 Laws of Inheritance
It would not be possible to guarantee the functioning of the system free from injustices without a built-in-mechanism to prevent injustice reproducing itself generation after generation. Studies show that one of the major causes of inequality in income distribution, is the distribution of wealth. One major outcome of the Islamic laws of inheritance, is to prevent concentration of wealth. This is because legacy is distributed in a pre-set ratios which take into consideration need and closeness to the deceased. Yet giving the deceased the right to assign part of his wealth (not exceeding 1/3) to charitable uses.
1.3 Economic Freedom
Freedom is a cornerstone in the Islamic economic system. In fact, it is so basic that the whole message of Islam came to free man from all kind of slavery. Freewill is a necessary condition for the validity of all contracts. The basic human rights which are now included in the laws of civilized countries has been a part of legal system of Islam since the Prophet (P.B.U.H ) . In fact, all the so called Magna Charta has been enjoyed as the basic individual rights in Islam for centuries. Furthermore, to guarantee competition in the marketplace and freedom of transaction, many measures were adopted by the Prophet (P.B.U.H). Prohibition of monopoly, manipulation of prices and restricting entry to the market are but a few of these measures.
1.4 The Islamic Economy is Interest-Free
Today’s trade and commerce in the whole world is run on the basis of interest based debt. If we look at the money and capital markets in any country we find that they are basically markets for exchanging financial obligations and receivables. It is no wonder that just the mere thought that interest rate may go up (or down) will bring havoc to all sectors of the economy. Standard economic analysis tells that interest rates play important roles in the economy. Firstly, that it provides incentives for savings, and secondly that it performs an allocative function with regard to capital. The argument goes as follows: