Islam provides many institutions within the structure of Islamic economic system which if studied carefully can be put into practice in order to solve the current global economic and financial crisis. DR MAGDA ISMAIL A MOHSIN tells us how.
The current global economic and financial crises, together with the Arab Spring and the Arab Awakening in the 21st century, offers a good opportinity for Muslims to revive their current economic system according to the guidance from the Quran and the Sunnah: not only to solve the current crises but to revive the perfect system that Allah sent to serve all mankind in the best way as mentioned in the Quran (Surat al-Maidah 5:3). In view of that, Islam is not just a religion of worship; it is a comprehensive discipline that includes all aspect of sciences including economics. It provides many institutions that have to function in parallel in order to meet a just and a welfare society for all mankind. The main objective of this research is to locate these institutions within the Islamic economic structure, present their roles as alternative to Riba and highlight their objectives in redistributing the wealth for an equitable and a just system.
Overview of the current economic and financial crises
The early 20th century witnessed the adoption of the capitalist system in almost all countries, which led to its failure in the 21st century. Recent statistics from the World Bank show that 20% of the world’s population accounts for 76.6% of the total wealth of the world, while 60% of the world’s middle class population constitutes 21.9% of its wealth and 20% of world’s poorest constitute only 1.5% of its wealth, as seen in Chart 1.
Moreover, the statistic also shows an unfair distribution of wealth in terms of consumption. As seen from Table 1, more consumption has been directed for unnecessary products while less has been directed to necessities. For example US$50 billion was directed towards th consumption of unhealthy products such as cigarettes, while only US$13 billion was directed towards basic health and nutrition. US$11 billion was directed towards the consumption of ice cream in Europe while only US$6 billion was used for basic education.
In addition, the current financial crises affected developed countries badly. The total debt of USA, UK, Canada, Japan, France, Italy, France, China, Russia, Brazil and India reached US$40.83 trillion as seen in Chart 2.
This situation has urged economists to search for alternative systems to solve the current economic and financial crises. Hence this has raised the question of whether the Islamic economic system is capable of solving such crises; ignoring that Islam is suitable for all mankind and for all centuries. Nevertheless, in my opinion, this doubt has been raised since the revival of the Islamic economic system at the present time has focused mainly on one institution: the institution of Islamic banking. We cannot deny the importance of this institution in the past and for our modern society. However, focusing only on one Islamic institution to solve the current economic and financial crises is unjust for that institution and will not meet the main objective of a perfect and a just system for all. Because Islam provides many alternative institutions each has its own objective and its own role to play in solving the current economic and financial crises. This is comparable to man: Allah created man’s body with different parts and different organs each to carry out different jobs and different functions in order to form a healthy body. If any organ fails to function properly then the whole body will suffer the pain, as mentioned by the Prophet. Similarly, to tackle the current economic and financial crises we need to revive all Islamic institutions in order to function in parallel with the current Islamic banking system to create a perfect and a just society.
Overview of the structure of the Islamic economic system
To understand the structure of Islamic economic system it is recommended to explain it within the context of Islamic worldview. In Islam man has been created for two purposes, to worship Allah as mentioned in Surat al-Zariyat (51:56), and to develop this earth I‘mar Al-ard/ with economic development as mentioned in Surat Hud (11:61). To achieve that, man has to strive in this world for gaining his lawful earning and fulfilling his responsibilities towards his society according to his nature as mentioned in Surrat al-Balad (90:4). This struggle will be successful if achieved through revealed knowledge as came in Surat Al-‘Alaq (96:1) and perfecting ones’ Khuluq/ethics as mentioned in Surat al-Qalam (68:4). Hence, this will form the pillars for human capital development (HCD) in Islam from which the whole process of economic activity must begin, as seen in Chart 3.
As realized from Chart 3, to guarantee economic development according to the will of the Creator, Islam gives the state a great responsibility in facilitating the whole process of economic activities in meeting a healthy and a just society besides close monitoring the market through the institution of Al-Hisbah in carry out the responsibility of enjoining what is right whenever people start to neglect it, and forbidding what is wrong whenever people start to engage in it as mentioned in Surat al-i-’Imran (3:104). In addition self-monitoring through practicing Ihsan is much recommended since man will convert his daily activities into worshiping his Creator with such a presence and concentration as if one can see his Creator and if being unable to see Him, our Creator nevertheless sees man.
Furthermore, man is the vicegerent of Allah on earth and all resources are at his disposal. So he must utilize them according to the command of the Creator as he will be accountable in the hereafter on two questions: how he acquired his wealth and how he spent it.
Regarding acquiring his wealth, man has to avoid dealing with Riba and has to apply any of the alternative institutions to riba that Allah provided to man such as private enterprise, trade and business, compulsory and voluntary institutions and Riba-free institutions, as explained in Chart 4.
As shown in Chart 4, Islam accepts five ways to finance economic development as well as gaining a living. For example, through the private enterprise institution any individual who owns his capital can run his own business, such as opening his own grocery shop, bakery, barber, restaurant, school or hospital etc. and he alone will gain the profit or face the risk of any loss.
In the case of having little capital and yet needing to be engaged in the process of economic activity man can choose any of the four alternative financial institutions to Riba. The first one, as mentioned in Surat al-Baqarah (2: 276), is the trade institution which is widely practiced at the present time in the Islamic banking system. This is followed by the Zakah institution which is mentioned in Surat al-Rum (30:39) in which eight financial institutions will be established under this institution as mentioned in Surat al-Tauba (9:60) in order to eliminate borrowing through Riba. The third alternative financial institution to Riba is the voluntary institution as mentioned in Surat al-Baqarah (2: 276). These institutions include Sadaqah, Takaful and Waqf as explained below. The last alternative institution to Riba is the Qard al-Hassan institution as mentioned in Surat al-Baqarah (2:245). Once income is gained through rent, wages, salaries, profit etc. part of it has to be spent to fulfill man’s needs while the other part has to be redistributed again.
Dr Magda Ismail A Mohsin is a lecturer on Islamic Economics and Finance at the International Center for Education in Islamic Finance (INCEIF) The Global University of Islamic Finance. She can be contacted at
[email protected]
.