What does the Quran say about Economic System

islam economy

Author: Zaydiah Blogger
Source: The Revivers

He says, “Islam means peace or “shanti”. Don’t bother with worldly wealth and Economics. Its bad for your soul. Prepare to live like a Fokir, Darbesh, Beggar, as if your real home is in the graves”.

Hang on, not so fast brother. The Holy Quran is here to show us the correct way to God. Divine rules in our Deen are from evidences. Islamic Economic System is based on four principles:

1. All the wealth belongs to Allah (swt):

“And give them of the wealth of Allah which He has given you.” [An-Nur: 33]

2. The community is the trustee of the wealth:

“Believe in Allah and His Messenger, and spend whereof He has made you heirs.”[Al-Hadid: 7]

3. Hoarding of wealth is prohibited: “And those who hoard up gold and silver and spend not in the way of Allah; announce to them a painful chastisement.” [At-Tauba: 34]

4. Circulation of wealth is a duty:

“Whatsoever Allah may restore unto His Messenger – is due unto Allah and unto His Messenger – the orphans and the needy …so that it may not be confined to the rich amongst you.” [Al-Hashr:7]

Based on these principles and evidences, Islam differs fundamentally from man-made systems (such as communism/socialism and capitalism) in defining the economic problem.

Let us start with the definition of the economic problem which is the fundamental view of the economy. In Capitalism they believe that there is unlimited wants and limited resources therefore the focus of the economy should be production, so they believe in producing more and more for people to consume. This has also come be known as ‘trickle down economics’ where the focus is on increasing the size of the cake, believing that it will somehow trickle down into the bellies of the hungry. This is why they have so much emphasis on the GDP (Gross Domestic Product).

1. Islam focuses on the distribution of wealth not just the production.

Islam views the economic problem in a radically different way than Capitalism and Socialism. Islam focuses on the distribution of wealth not just the production. The problem of poverty will not be solved by producing more and more for the rich to consume rather it will be solved by ensuring that basic needs of every individual are satisfied completely. There are enough resources in the world to satisfy the basic needs of everyone. Islam looks at every individual by himself rather than the total of individuals who live in the country. It looks at him as a human being first, who needs to satisfy all of his basic needs completely. Then it looks to him in his capacity as a particular individual, to enable him to satisfy his luxuries as much as possible.

2. All basic needs guaranteed

The Ahkam Shari’ah have secured the satisfaction of all of the basic needs (food, clothing and housing) completely, for every citizen of the Islamic State. The Prophet (saw) said, “The Son of Adam has no better right than that he would have a house wherein he may live, a piece of clothing whereby he may hide his nakedness and a piece of bread and some water” [Tirmidhi] The state has a duty to provide for those who cannot provide for themselves or whose families cannot provide for them Umar ibn Abdul-Aziz, the famous Khalifah, wrote to his agent in Basra, Iraq, ‘Search for the people of the covenant in your area who may have grown old, and are unable to earn, and provide them with regular stipends from the treasury to take care of their needs.’ [Abu Ubayd, al-Amwaal, p. 805] The khilafah used to have public baths, Musafir Khana’s where travellers could stay for free and even open kitchens – e.g. in Bosnia during the Ottoman Khilafah period there were open kitchens where the poor could go and eat for free The first organised hospital was built under Islamic rule in Cairo in 872CE. The Ahmad ibn Tûlûn Hospital treated and gave free medicine to all patients. It provided separate bath houses for men and women, a rich library and a section for the insane. Patients deposited their street clothes with the hospital authorities for safe keeping, before donning special ward clothes and being assigned to their beds. Each patient would also have his or her own medical record.

3. Circulation of wealth is a duty

Allah (swt) emphasizes that the wealth should not circulate amongst the few, He (swt) says referring to wealth: “That it does not become a commodity between the rich among you.” [TMQ Al-Hashr: 7] Islam has made the circulation of wealth between all citizens an obligation, and it has forbidden the restriction of such circulation to a certain group of people to the exclusion of others. Hoarding/monopolizing goods is forbidden. Producers or retailers cannot hoard or monopolize goods in order to cause the price to rise. This is based on the ahadith: “The Messenger of Allah (saw) forbade that a foodstuff be monopolized.” [Athram] and “Whoever monopolized is a wrongdoer.” [Muslim].

4. Prohibition of Riba – encouragement of investment

The abolition of all interest based contracts, to be replaced by contracts which share returns and risks. Allah (swt) says: “Allah has permitted trade and forbidden (all) interest.” [TMQ Al-Baqarah: 275] The prohibition of Riba (usury/interest) encourages people not to just save their money in a bank waiting for the interest – rather if there will be 2.5% Zakah charged on their unused wealth – this encourages people to spend and invest which generates economic activity and is healthy for the economy. The more spending and investment, the more jobs are created and more wealth is circulated. Today interest based debts are crippling people and entire nations. Ali (ra), the cousin of Allah’s messenger, pointed out regarding the pre-Islamic age: “We withstood the weight of the Iron, the Stone and the Lash, but we could not endure the weight of debt.”

5. The Islamic economy is real and Islam prohibits the current form of financial markets

 The Islamic economy is based upon wealth generation where participants partake in investment, employment and trade in the real economy. Islam does not have a dual economy where the real economy operates alongside a financial sector. The Islamic economy focuses all participants on the real economy, through employment, company profits, utilization of land (agriculture) and manufacturing, wealth is generated in only one sector. This brings the huge benefit of wealth only circulating in one sector – the real economy, where all can participate. The Islamic system does not recognize the financial markets in their current form. One is able to purchase shares and transfer them without actually partaking in the running of the underlying company that the shares are meant to represent. In Islam ownership is a direct role in a company and not just a share certificate which in effect the stock market allows to be traded and re-traded. It is this ability to not have a direct role in a company that allows excessive speculation. The financial markets are different to the real economy of goods and services.The size of the world’s stock markets are estimated at $51 trillion, the world derivative markets are valued at $480 trillion, 30 times the size of the US economy and 12 times the size of the world economy!

Al-Bukhari reported on the authority of Abu Hurayrah that the Messenger of Allah (saw) said: “He who takes money from people with the intention of paying it back Allah will pay on his behalf, and he who takes it with the intention to waste it Allah will waste him.” Hence, the Messenger of Allah (saw) has confirmed the obligation of fulfiling one’s rights in full in temporal life, and if one does not he will do so on the Day of Judgement. This serves as a warning for those who devour people’s rights.

Islam has its own company structures, there are 5 types which are all related to real partnerships between body and capital. These are Al-‘Inan (equal), Al-Abdan (bodies), Al-Mudharaba (two or more), Al-Wujooh (faces) and Al-Mufawadha (negotiation) Ad-Daraqutni narrated from Abu Hurairah that the Prophet (SAW) said: “The Supreme said I am the third of the two partners as long as one of them does not betray his companion. If he betrayed, I would withdraw from them.”

Islam is against monopolies and encourages competition

PLC (Profit, Loss, Capitalization) stock market companies are able to amass huge amounts of wealth today, to the extent that some companies have more wealth than some countries. In an Islamic system this could not happen due to the prohibition of PLC’s who are able to generate this wealth by issuing shares to the public. This has a positive impact on the economy, as huge companies are able to become monopolies, duopolies or oligopolies which are able to dominate the market place such as Microsoft, Coca-Cola and Pepsi. Even Capitalist agree that monopolies are negative externalities and Adam Smith, the founding father of Capitalism dreamed of an economy with perfect competition an ideal which they can never achieve due to the free market itself. However the Islamic economic system leads to this as by applying its rules it would lead to small to medium companies competing with each other in every market which is healthy for the economy as competition decreases the price and increases quality.

6. It is prohibited to sell what you don’t have

Unlike today where we see short selling or forward selling, where people sell what they don’t yet own Islam makes it a requirement for traders to own currencies, instruments and commodities before selling them. It is narrated from Hakeem bin Hazam (ra) who said: “I said: O Messenger of Allah, there comes to me a man asking me to sell what I do not have to sell then I buy if from the market. He said: Do not sell what you do not have” [Ahmad]

7. Islam neither believes in a free market nor a command economy

The Islamic economic system is neither Capitalist where the market is left free to lead to the disasters that we are seeing nor Communist where everything is owned and controlled by the state. Islam distinguishes between public property, state property and private property. Islam forbids the private ownership of the large resources such as the Oil and Gas that we see the Western companies fighting over in the Muslim world. The Prophet (saw) said: “People share in three things, fire, water and the green pastures” reported by Abu Dawud. Anas reported from Ibn Abbas adding “and its price is forbidden”. In addition to this the Prophet (saw) used to take back lands from people if he found they contained vast resources such as a salt mine. The huge revenue generated by public resources such as Oil and Gas in an Islamic state be utilised for the benefit of the public and not for the personal interests of the rulers who siphon off the money into their swiss bank accounts and spend it for their own pleasure as we see today. The Prophet (saw) said: “The Imam is a shepard and he is responsible.” [Bukhari, Ahmad, Bayhaqi]

8. The Gold & Silver standard for currency

Today’s currency is fiat currency backed by no real assets, only backed by confidence. This is the reason we have increasing inflation the world over. Islam solves this problem as the basis of the currency in Islam is Gold & Silver, the currency is backed by and is interchangeable with it. The Prophet (saw) established the basis of the Islamic currency, the Dirham and the Dinar upon these tangible things which hold real value and retain value. The Islamic rules have been set in the Quran and Sunnah in terms of Gold and Silver such as the Nisab of Zakah. It is allowed to have paper notes as long as they are backed by Gold and Silver. So in the Islamic state you can go to the Bayt al-Mal and exchange the paper notes. Therefore inflation is eliminated as the value of gold and silver are stable. Due to the current inflation and financial crisis we can see people are turning to buying gold instead of putting their money in stocks as they know it has a real value.


Phillip Hitti in ‘Short History of the Arabs’ says, “During all the first part of the Middle Ages, no other people made as important a contribution to human progress as did the Arabs, if we take this term to mean all those whose mother-tongue was Arabic, and not merely those living in the Arabian peninsula. For centuries, Arabic was the language of learning, culture and intellectual progress for the whole of the civilized world with the exception of the Far East. From the 9th to the 12th century there were more philosophical, medical, historical, religious, astronomical and geographical works written in Arabic than in any other human tongue.” Hasan al Basri narrated that Allah’s Messenger (saw) said: “He whom death overtakes while he is engaged in acquiring knowledge with a view to reviving Islam with the help of it, there will be one degree between him and the Prophets in Paradise.” [Al-Tirmidhi]

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