Principles of Islamic Economic System

Islamic economics is governed by Islamic beliefs. The sources of beliefs include, in order, Quran (revealed scripture), Hadith (traditions of the Prophet (pbuh)), Ijma (consensus of scholars), and Qiyas (logical reasoning). These beliefs create the foundation of a just society (al-adl) where everyone has a fair chance to earn a living. Islam also promotes al-ihsan which asks people to make the extra effort beyond the minimum to not only excel in their performance but also benefit the society. These two beliefs then emanate certain principles which guide the functioning of the economy.

The foremost principle among these is the promotion of trade and complete rejection of riba (interest or usury). In ancient times and in the modern world those who favor interest based economy have argued that riba is similar to trade because it also involves certain element of risk. Quran specifically forbade riba in Chapter 2, Verse 275 and declared it a war against Allah SWT [2:279]. This implies that money should be used only as a means for facilitating trade and not to earn more money. Even in trade, Islam prohibits excessive speculation and deceit. Risk itself, however, is not prohibited as it is an inherent characteristic of all transactions. What is not allowed are speculative transaction where goods do not exist or will exist in the future with unknown outcome. This includes options, futures, gambling, and lotteries as such activities are generally harmful to the society. These may help certain people earn tremendous profits and become enormously rich at the expense of general population.

The wealth is referred to as “al-khair” (good) in Quran (100:8). Its purpose is not for individual comfort only but to service the society as well. Wealth is a trust of Allah bestowed on individuals in varying degrees so they can use it for themselves and also spend it on others. Love of collecting and hoarding of wealth is natural in human beings and thus its pursuit is allowed. But with the injunction of zakat and repeated reminders in the Quran about voluntary charity, utilization of wealth for caring of the needy is highly emphasized.

The modern society encourages conspicuous consumption as a means of stimulating the economy. The Islamic belief system suggests balance and moderation in consumption so there is more available for the poor and needy. Meanwhile, the faith abhors idleness and dependence on others by urging each capable individual to earn a living in a Halal (lawful) manner. This creates a functioning economy where all capable people produce economic goods and services while making sure that those in real need are cared for.