The Islamic Economic System as an alternative

The following is the transcript of the speech delivered by a brother on Saturday 11th October
2008.

Allah (swt) says:

ِّ‫ن ِبال‬
َ ‫ن اْلُمْنَكِر َوُتْؤِمُنو‬
ِ‫ع‬َ ‫ن‬
َ ‫ف َوَتْنَهْو‬
ِ ‫ن ِباْلَمْعُرو‬
َ ‫س َتْأُمُرو‬
ِ ‫ت ِللّنا‬
ْ ‫ج‬
َ ‫خِر‬
ْ ‫خْيَر ُأّمٍة ُأ‬
َ ‫ُكْنُتْم‬

“You are the best of the nation raised up for mankind because you enjoin what is right and
forbid the wrong and believe in Allah” [Ali-Imran 3:110]

Allah (swt) has blessed us as being the best nation raised up from humanity because we enjoin
the good and forbid the evil – we need to realise our responsibility of speaking our against the
evil and injustice that we see globally today. One of these great evils we see around us is the
economic injustice and oppression caused the world over by the current capitalist world order

The current financial crisis has seriously eroded confidence in the Western world and has
exposed the free market. However the Western world when looking at alternatives only see
remnants of Socialism or some state intervention in economy as feasible and workable systems.
It is also this reason that allows free market ideologues to continue citing more regulation,
transparency i.e. more capitalism with some tinkering as solutions. I recall a discussion with my
previous economic Professor where I put forward the ills of Capitalism, after debating the points
exhaustively he said, ‘Capitalism is the best of the worst’. I then went on to explain the Islamic
economic system as an alternative, it became obvious that he had never considered Islam as
having any alternative nor had studied it.

This crisis represents an opportunity for all Muslims to present the Islamic economic system as
an alternative. We have to realise to consider that when Marx wrote his theories of Communism
in the 1800’s whilst sitting in Britain, his ideas although many people disagreed with them were
seen as a viable alternative, this is why Lenin later took up these ideas, formed a party based
upon them and they were eventually embodied in a state. This occurred even though these were
new theories that had no history of implementation. We have to then consider that unlike Marx
who denied the existence of Allah and whose ideas were disproved by the clear reality of the
failure of Communism, we have the truth from Allah (swt) and also have a history of the
implementation of Islam.

Therefore today it is vital for us to present Islam as an alternative. It is important to show Islamic
economics as much more then Islamic finance and Banking. What is known as Islamic banking
and Islamic finance is about individuals or groups attempting to generate profits in the current
system without breaking the shariah rules such as the prohibition of Riba. However today I’m
going to focus on the Islamic economic system as a whole which is much wider than this and is
the true alternative to the Capitalist system

Although no Islamic state exists today, we have the economic system of Islam derived from the
Quran and the Sunnah and over a thousand years of history of its implementation. Based upon
this we must initiate thinking amongst the ‘left’ and the right’ and to demonstrate to them how
Islam is not just a religion like the others but is a comprehensive ideology able to deal with the
current crisis’s that humanity is faced with.

The Islamic economic system

Of course in a short talk such as this it is not possible to go through the entire Islamic economic
system in detail, I aim to cover its key aspects especially in relation to how an Islamic system
holds the key to solving the current financial crisis.

As any economic student would learn in their first economics lesson, we have to 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) or GNP (Gross
National Product). This is why we saw the BJP talking about ‘India shining’ when the GNP had
increased, even if that increase was in the bank accounts of the corporate’s and not reaching the
common man

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 (Khilafah).

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 Islamic 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 Islamic state 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:

‫غِنَياِء ِمْنُكْم‬
ْ ‫ن ُدوَلًة َبْينَ اَْل‬
َ ‫ي َل َيُكو‬
ْ ‫َك‬
“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:

‫حّرَم الّرَبا‬
َ ‫ل اْلَبْيَع َو‬
ُّ ‫حّل ا‬
َ ‫َوَأ‬
“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.

I want to touch briefly here about the concept of loans and Riba – people don’t realise the
exploitative nature of Riba. In Islam loans are given for ethical reasons with the intention of
achieving a reward from Allah. The Prophet (saw) said: "Every loan is a sadaqah". In capitalism
the one who gives the loan, shares the profit but not the loss, this is very unfair and unjust. In
Islam if you want to share the profit then you must share the loss also – this is the model of
Partnerships or company structures in Islam. Like Mudharabah - where someone invests and the
other person works and they share the profit and loss. Islam has an equity based system when
both sides share the risk and the reward is fair unlike the oppressive Riba based system

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, utilisation 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 recognise 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. As the first speaker
pointed out this is in fact one of the root problems of Capitalism, 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!

There are many reasons as to why Public Limited Companies (PLC’s) stock markets are haram
in Islam. One of the key reasons being the issue of liability. The public limited company system
gives the public company a distinct quality of limited liability, aimed at protecting major
capitalists and businessmen in case the company fails and incurs losses, in which case, those who
have claims against it would not be able to demand from its investors any compensation no
matter how large the personal assets of the investors are. The financial claims are only confined
to what is left in the company in terms of assets. This system is contradictory to Shari'ah in every
aspect. The Shari'ah rule obliges all to repay debts in full to the rightful owners, and it is
forbidden to cut anything from them.

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."

Ahmed also reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw)
said: "You shall return the rights to their rightful owners on the Day of Judgement, even the ewe
with no horns will get even with the ewe with horns by butting it back."

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 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.

E.g. Why should 3 companies dominate the entire soft drinks market in the world as is today?
They completely dominate the market, have enough wealth to buy out any competitors like Coke
did with ‘Thumbs Up’ in India. Monopolies have the power to sell lower grade goods to the
market without us having any choice, we all remember the Pesticide scandal that took place here.

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:

«‫»الناس شركاء في ثلث الماء والكل والنار‬

"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 the rulers
of the Gulf doing today. The Prophet (saw) said:

«…‫» المام راع وهو مسؤول عن رعيته‬

“The Imam is a shepard and he is responsible.” [Bukhari, Ahmad, Bayhaqi]

8. The Gold & Silver standard for currency

As the brother has explained in the first talk, 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. The Islamic state cannot just simply print
money as they do today without any asset backing, or create money out of thin air! In fact 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.

Conclusion

As you would have realised the key aspects of the economic system I highlighted are much more
than the current Islamic banking or Islamic finance and it should be clear that this system cannot
be implemented without a true Islamic state which rules by the Shariah and unlike the Muslim
world today is a truly independent state and not an agent of the West.

Instead of turning to billions of dollars of bailouts where the US and UK are spending tax payers
money in order to save their collapsing financial system, people should realise that Islam offers
the world a practical alternative. The next speaker will elaborate on the importance of taking the
Islamic system as a whole and not separating the economic system of Islam from the other
systems such as ruling or punishment.
Even many non-Muslim thinkers have recognised the progress and development that was
achieved under Islamic rule in history in all fields of science and technology.

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."

The Islamic system has come for the whole of humanity

َ‫حَمًة ِلْلَعاَلِمين‬
ْ ‫ك ِإّل َر‬
َ ‫سْلَنا‬
َ ‫َوَما َأْر‬
“And We have sent you (O Muhammad SAW) not but as a mercy for the 'Alamîn.” [TMQ
21:107]

It is a system not thought up by the minds of men, rather it is from the creator of humankind
Allah (swt) and it is the perfect system for humanity. Let us all work to re-establish this system
once again.

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]