Assignment on

Features of Islamic Economic System

And
A Comparison with Traditional Economic System

Submitted To: Muhammad Jahirul Islam (MJI)

Course Name: Introduction To Business
Course Code: Bus 111

Submitted By: Khondker Fahad Naser

ID Number: M21431111162
Batch: 35th
Section: D

Date Of submission: 22-12-2014

 Summary

In this paper we are going to make a critical review regarding to Islamic economic system and
the traditional economic system. First of all we have to know what the Islamic economic system
is and what the features are then we will discuss about the three traditional economic systems
which are Socialism, Communism and Capitalism. Then here discuss the comparison with a
briefly between the Islamic economic system and these three economic systems
are number of theories in concern with these theories, however, the source of these theories is
Quran ,and human knowledge respectively. In this case first at a glimpse review we tried to
explain each economic system, to abstain from ambiguity in concept and then try to find out the
similarity and drew a distinction between them.

Islamic Economic System

What is Islamic Economic System?

Islamic economics is economics in the political context of Islam. Islamic Economics

differs fundamentally from man-made laws and systems in defining economic problem. It
represents the only wholly independent, alternative economic paradigm in the world today. It is
based on principles revealed from Islamic sources as norms for human welfare that offer a
strikingly alternative set of parameters for economic activity. According to its proponents its
offers a comprehensive, coherent and better alternative to those currently in use in Western
economics.

So what is the best common term to describe Islamic economic system? Islam isnt communist
but it also doesnt advocate free market capitalism either.
There are tons of literature and debates about the topic of Islamic economics that we can discuss
all. Much of the discussion focuses on issues relating to political liberalism such as democracy
and freedom of thought. Another important dimension is its economic system. In this paper, we
will give a brief overview of what Islamic economic is, which we just did, and will compare
Islamic economics with conventional economic systems, namely capitalism and communism,
and try to explain how and why Islamic economics can present a third way.

What are the features of Islamic Economic System?

In Islamic System, the followers of Islam are required to lead a material life in such way that it
becomes a source of happiness and respect of others in this world for making secure himself for
next world.

Islamic Economic System consist of institutions, organizations and the social values by which
natural, human and man made resources are used to produce, exchange, distribute and consume
wealth? Goods and services under the guiding principles of Islam to achieve "FALAH" in this
world and also other it. Now the features of Islamic Economic system are given to below

1. The Concept of Private Property

Basic Principles in Islam for Consumption or investment of private property are:

Concept of "HALAL" and HARAM for earning or in production and consumption of

wealth.
A property cannot be used against public interest.
Show much as you have something.
Real/money Capital cannot be used for gain.
Payment of Zakat is compulsory.

2. Consumption of Wealth
In Islamic System uses of luxuries are not allowed because it against the concept of "TAQWA"
should have distinguished between "HALAL" and "HARAM"."BUKHAL" and "ISRAF" are to
be avoided.

3. Production of Wealth

Price mechanism plays a key role in carrying out the production process in an Islamic Society.
As Price system results in the expectations of workers and consumers the Govt. Interferences
with the price mechanism to overcome the problem. These things are not allowed in Islamic
System.

Production of drugs, gambling, lottery, music, dance etc.

Lending and borrowing on interest
Black marketing, Smuggling etc.

4. Distribution of Wealth
Islamic Economics System favor fair (not equal) distribution of wealth in the sence that it should
not be confined to any particular section of the society. For fair distribution of wealth Islam gives
following steps

"BUKHAL" and "ISRAF" are to be avoided.

Payment of Zakat
Interest not allowed
Monopoly of Private firm not allowed
Earning from Black Market.

5. The Concept of Zakat

Zakat is a major source of revenue the government in an Islamic state. It levy on all goods and
money or on wealth if have to pay yearly on the month of RAJAB or RAMADAN.

6. Interest free Economy

The whole financial system the bank structure in particular is run on the basis "SHARAKAT"
and "MUZARABAT" in Islamic state. Therefore, Islamic economics is an interest free economy.

7. Responsibility of the Government

Responsibilities of the Islamic Government are

Should check un-Islamic activity like gambling, smuggling, black marketing etc.
Should secure poor people by giving them necessity of life i.e. food, clothing, health etc.
Should provide equal employment opportunity.
 The Traditional Economic System

Basically in the Economic System there are three types of economic system which are Socialism,
Communism and Capitalism.

What is Socialism?
According to the Collins Dictionary, Socialism is an economic theory or
system in which the means of production, distribution and exchange are owned by the
community collectively through the state. It is a transitional stage in the development of
a society from capitalism to communism, and is characterised by the distribution of
income according to work rather than need. Advanced Learners Dictionary explains
socialism as a political and economic theory advocating that a countrys land,
transport, natural resources and chief industries should be owned and controlled by the
whole community or by the state and that wealth should be equally distributed.

Encyclopedia Britannica writes : Socialism is essentially a doctrine and a movement aiming

at the collective organization of the community in the interests of the mass of the people by
means of the common ownership and collective control of the means of production and
exchange. Encyclopedia Americana, in its article on socialism, states : Socialism is a
doctrine that espouses public ownership or control of the major means of production. It aims
to achieve a more equitable and efficient distribution of social goods and greater economic
planning than exist under capitalism. Although the central concerns of socialism appear to be
economic, its ramifications extend to the moral, social and political realms.

Political scientists and scholars do not agree on a uniform definition of socialism. It has been
aptly remarked that there are as many types of socialism as there are socialists. Socialism is
therefore compared to a hat which has lost its shape because everybody wears it.

Socialism has drawn its strength from the desire of conscientious men is all ages from Plato
to Ruskin for a more equitable and fair distribution of the income and wealth. However, the
word socialism came into general use around 1830. But it was Karl Marx who founded it
on scientific lines. Marx is known as father of socialism. He developed the principle of
scientific socialism which came to be known later on as communism. Along with his friend
Frederick Engels, he wrote and issued the famous communist Manifesto in 1848 calling upon
the labour of the world to unite as they were nothing to lose but their chains. He wrote his
 famous book Das Capital in 1867 which is considered to be the Bible of socialism.
Philosophy of Marx is mainly based upon the following two principles :

1. Dialectic materialism or materialistic interpretation of history is the most important

feature of Marxism. Marx seeks to explain every event in history on economic grounds. All
wars, riots and political movements, according to him, have their origin in economic factors.
He views history as a class struggle i.e. struggle between the oppressor and the oppressed.
Present struggle between the capitalist class and the workers or proletariat class would result
into victory of proletariat who would establish their dictatorship, and thus with the
liquidation of capitalist class, a classless society shall come into being and state would wither
away.

2. Theory of surplus value is another feature of Marxian teachings. According to Marx,

the capitalist gets for his commodity more than he has spent on labour and other costs. The
excess of market value over the costs is surplus value. This surplus value, which according to
him, is created by labor, is usurped by the capitalist as profit.

Comparison with Islam:

Socialism and Islam are compared in respect of their basic economic perceptions as
under:

1. Ownership: State ownership of all property and means of production, as stated

earlier, is the most distinctive feature of socialist economy. Private ownership of
property and of all the means of production, distribution and exchange is totally
abolished. Land, factories, transport, communications, mines, etc are all placed under
state control. This leads to management of these means of production by the
bureaucracy. Bureaucratic running of economic machinery results into inefficiency,
low production and collapse since the bureaucrats lack initiative, follow rigid rules and
are not trained to run business.

Islam does not abolish private ownership of property and does not place all the means
of production, distribution and exchange in the hands of the state. Although Islam
upholds public ownership of some means of production which are the common utility
to the people, but it concedes the rights of private ownership of majority of the means
of production and distribution. Unlike socialism, Islam gives economic freedom to an
individual who can earn wealth, own it and enjoy it within certain limits provided he
does not infringe teachings of Islam in the process of earning, owning and consuming
it.

2. Materialism: Socialism, especially scientific socialism or communism rests on a

purely materialistic basis. Dialectic materialism or materialistic interpretation of history
is the most vital element of Marxism. Marx has sought to explain every event in history
on economic grounds. According to him, origin of every activity of man lies in
economic factors. Marx does not believe in religion which, in his view, is a bourgeois
invention to keep the proletariat under their perpetual control. Engels said : Matter is
the only real thing in the world. The communists believe that human reason is just a
manifestation of matter and soul has no independent existence of its own but is a
product of matter. They hold that all the different stages of human progress are
determined by the interplay of conflicting economic forces alone, thus leaving no place
for Gods will. So communism is a purely materialistic ideology which ridicules
religion, concept of God and all forms of spiritualism dubbing them as unscientific.

Islam is the perfect and final religion revealed by Lord of the universe for the guidance
of mankind. Its foremost aim is to ensure falah or well-being of humanity in this
world and in the Hereafter. It does not give importance to matter only at the cost of
spirit as does a secular ideology like socialism. Islam believes in the material as well as
moral and spiritual welfare of its followers at micro and macro level. Followers of
Islam believe in one God, in all the Prophets and Holy Scriptures, in the Hereafter, in
the moral code and in the universal brotherhood of mankind. In an Islamic state there
exist no antagonistic classes conflicting with each other, neither all the events in history
are determined by interplay of economic forces. Although, in the sight of Islam, welfare
of society does not lie in economic prosperity only as moral and spiritual advancement
is equally important, yet it does not discourage pursuit of material prosperity through
fair means.
3. Regimentation and Totalitarianism: Communism sets up a totalitarian state in
which bourgeois class is liquidated and strong dictatorship of the proletariat class is
established. Fundamental rights and civil liberties are crushed and man is rendered
merely to the status of an economic animal. In the name of bread he is deprived of
freedom of conscience, freedom to think, freedom to speak and freedom to act. In order
to achieve economic objectives and in order to work the huge productive machine
efficiently, the state becomes all powerful and establishes complete regimentation.
Thus the state under communism does not wither away, as predicted by Marx, rather it
turns out to be a worst type of totalitarian state.

Islam, on the contrary, believes in democratic form of government as the Quran, its
revealed book, enjoins upon Prophet Muhammad (PBUH) to conduct public affairs in
consultation with his followers. Islam gives all the fundamental rights and civil liberties
to the people living in the Islamic state. All the citizens have freedom of person,
freedom of religion and conscience, freedom of expression, right to own and alienate
property, right to protection of honor, right to criticize the government, right to equality
before the law, right to education, right to medical care and above all right to basic
human needs such as food, clothing and shelter. Islamic state does not establish
dictatorship of any class, neither it is a totalitarian state. The state under Islam does not
wither away, rather it becomes indispensible as it discharges all the functions of a
traditional state and modern welfare state.

4.Economic Equality: Economic equality is another claim of communism although it

has never been realized so far. In theory at least it is claimed that the rights of the
individuals in the economic sphere are governed by the principles of equality. Every
individual is provided with the necessaries of life according to his needs.

Islam, unlike communism, recognizes that there is no equality among human beings as
regards the economic means and possession of worldly wealth. The Quran considers
these inequalities and disparities in the distribution of wealth as part of Divine
economic order and, therefore, does not try to eliminate them by unnatural and artificial
means. The existence of economic disparities, in fact, is a test by which Allah tries the
 human beings how they behave in good and bad circumstances. However, Islam does
not permit the differences in possession of wealth to assume such proportions that
concentration of wealth takes place in few hands who live in luxury while vast majority
of people lead a life of abject poverty, misery and deprivation. Islam does not tolerate
the existence of unbridgeable gulf between the rich and the poor, but unlike socialism it
does not believe in equal distribution of wealth. Actually Islam believes in fair, just and
equitable distribution of wealth and in social justice. For ensuring equitable
distribution, Islam has taken many steps such as institution of Zakat and Sadaqat, laws
of inheritance and bequest, voluntary alms and levy of compulsory contributions in the
form of taxes and duties. In addition to this it has abolished interest, prohibited unfair
and unlawful means of earning wealth and banned hoarding of wealth so that wealth
should not concentrate in few hands.

What is Communism?

Developed by German philosopher Karl Marx, communism is a political system that

comes from the Latin meaning common. Based on the collective ownership of the
production of goods, communism rejects individual ownership of industry, and promotes the
manufacture of goods in order to satisfy the basic needs of the economy and the people.
Production for individual profit or gain does not exist in communist societies, and the absence
of social class exists to prevent worker exploitation by the upper ruling class.

Marxs initial drive to create the basic tenets of communism began in the middle of the
19th century as he observed the existing capitalist system being used as a tool by the
bourgeoisie to enslave the working class or proletariat. He believed that capitalism was an
antiquated system that fed on the working class and increased the gap between rich and poor.
Capitalism, in Marxs eyes contributed to the degradation of society and needed to be replaced.
His well-known tome, The Communist Manifesto, published in 1848 and written with Friedrich
Engels sought to outline the basic faults of capitalism and educate readers on the principles of
communism, Marxs solution to the perceived problem of a free market society. The manifesto
contained ten steps, known as the Ten Planks were intended as a test to determine if a society
had successfully become a communist state. The manuscript led to the banishment of Marx, his
wife, and children from both Germany and France, and he lived the remainder of his years in
London beginning in 1849.

Comparison with islam

Communist government and society share one thing in common. That is the
threat to individuality, freedom of speech and thought. This oppression is almost always
maintained by means of physical arms and government-controlled media. Communism
generally considers the behavior and tastes and preferences of individuals as given, Islamic
economics does not do so. It places great emphasis on individual and social reform through
moral uplift.

Communism does not respect private property, in a communist society, you may
get rich through your entire lifes efforts and all of sudden you may become a beggar
overnight if corrupted city government officials want you to be finished . Their education
about the communist society is totally the opposite of what is true. While Islamic
economics does not try to abandon private property, nor does it try to stop individuals
from seeking their self-interest.
Both start to respect the important role of market for the prosperity of economics, but
communist countries such as China seem to have done a better job than most Islamic
countries these days.
Both try to promote human brotherhood, justice and the well-being of people but
in different ways. Islamic economics do that via moral and religion while communism via
force such as government-controlled media.

What is Capitalism?

Capitalism, as defined by the Collins Dictionary, is an economic system based on

the private ownership of the means of production, distribution and exchange. Broadly
speaking, capitalism is the name given to the economic system in which the principal means of
production, distribution and exchange are in private (individual or corporate) hands. The profit
motive constitutes the prime stimulus to productive exertion and the price mechanism
determines what things shall be made in what quantities and what conditions.

It is a type of economy in which capital is privately owned and may be freely used by the
owners as they wish in attempting to make profits from their economic enterprises.

Thus in this system of economy production and trade are organized on individualistic basis.
Private individuals or private firms and corporations with the help of previously accumulated
capital, but more often utilizing money borrowed on interest, earn profits and build up
business or industrial empires for themselves by employing the mass of human labor for
wages.

Comparison with Islam:

Capitalism and Islam are compared in respect of their basic economic concepts as under:

1. Right to ownership: The existence of right of private ownership of property is the

hallmark of capitalism. It gives unrestricted and unencumbered full rights of ownership
to the individual. The individual may acquire, own or alienate his property in whatever
manner he likes. The system believes in the private ownership of the means of
production, distribution and exchange which are managed and controlled by individuals
or groups of individuals for private profit. The unrestricted right to own property and
earn profits leads to concentration of wealth in few hands. This necessarily disturbs the
balance of distribution of wealth and income in society. The economic disparities and
the ever-increasing gulf between the rich and the poor sows the seeds of discord and
destruction in the capitalist society.

Islamic concept of ownership is unique one. Ownership, in reality, belongs to God

while some rights only vest in man so that he may fulfill the purpose of God, that is the
purpose of community by acting as a trustee for those in need. In other words, what
Allah has created for benefit of and service to man belongs collectively to the whole
humanity. Legal ownership by the individual is recognized in Islam but it is subject to
the moral obligation that in all wealth all sections of society have the right to share.
Thus private or individual ownership in Islam is not unlimited or unrestricted. All the
means of production are not placed under private ownership as public ownership of
certain things of common utility exists side by side with it in an Islamic state. Islamic
state has also the right to nationalize certain things which are under private ownership
for the benefit of the community. In this way the limited right of private ownership with
law of inheritance which distributes the estate of the deceased among fairly large
number of heirs averts concentration of wealth in few hands and thus prevents class-
conflict.

2. Economic Freedom: Unrestricted economic freedom and non-interference of the

state in such freedom is another feature of capitalist economy. Every individual is at
liberty to initiate, organize and establish any enterprise, business, trade, profession, etc.
He has full freedom to earn as much income as he can and spend his wealth in whatever
manner he likes. This unrestricted economic freedom generally leads to earning of
wealth through foul means such as gambling and prostitution. It also encourages
business malpractices such as smuggling, black marketing, profiteering, hoarding,
speculation, forward transactions, fraud, exploitation, adulteration, etc. Thus a mad-
race for earning wealth becomes order of the day and high social and moral values such
as fraternity, brotherhood, mutual help, love, benevolence, truthfulness give place to
selfishness, callousness, hatred, falsehood and mistrust. Capitalism, in fact, has come to
signify a religion of money or dollar dictatorship.

Islam also allows economic freedom to an individual who is at liberty to earn wealth,
own it and spend his wealth at his discretion. But the freedom given by Islam in
economic sphere is not unlimited. Islam makes distinction between halal (permitted
being lawful) and haram (forbidden being unlawful) in every economic activity
embracing vast fields of production, exchange and consumption. Certain means of
earning wealth such as interest, bribery, embezzlement, gambling, games of chance,
speculation, monopoly, usurpation of wealth of orphans and other weaker persons,
prostitution, singing and dancing, sale of wine and narcotics, short weighing and short
measuring, trade in haram things, immoral and exploitive methods, etc. are prohibited
to a Muslim. Similarly consumption of wealth on luxurious living, haram things and
extravagant spending is also forbidden. A Muslim is required to pay Zakat and spend
whatever he can for the cause of the poor and the destitute. All these regulations
promote moral values in Islamic society and eliminate mad-race for wealth and material
gains.

3. Monopoly: Competition, which is another feature of capitalism, leads to the

destruction of minor enterprises and firms. This encourages merger of smaller business
organizations into major ones and thus monopolies or cartels are established.
Monopolies kill free competition, cause inflation in prices and ultimately result into
unemployment. Thus labor and consumer are both exploited in such a situation.
Moreover, trade-cycles, unplanned production, over-competition, increasing
accumulation of capital upsets the balance between production and consumption which
sometimes leads to economic depressions.

Islam forbids unhealthy competition and bans all the ways which lead to it. Islam also
disallows establishment of monopolies. The Prophet of Islam is reported to have said :
Whoever monopolies is a sinner. Especially monopolies over food-stuffs or articles of
daily use are forbidden by Islam. Commodities and services which are of the common
interest of the community are never allowed to be monopolized. Those essential things
which are required by everyone are generally maintained under joint ownership of the
community. Thus interests of the consumers and labor are protected and balance
between production and consumption is never allowed to be disturbed.

4. Institutions of Interest: The Institution of banking and interest is the life-blood of

capitalistic form of economy. For business, trade and industry especially for big
projects and economic ventures, huge funds are required which no individual or firm
can arrange. This leads to establishment of banks who borrow capital from depositors
and investors on lower rate of interest and lend it to business enterprises on higher rate
of interest. Thus the institution of interest has become part and parcel of capitalism.

Islam considers interest as the most exploitive institution for humanity and has
abolished it root and branch in its every form and manifestation. According to al-
Quran taking of interest tantamount to war against God and His Apostle, while
according to Prophet Muhammad (PBUH) interest is worse than adultery. Islam builds
its economy on interest free basis and promotes profit and partnership as incentive for
saving and investment

5. Exploitation: Unrestricted right of economic freedom and uncontrolled right of

private ownership has practically resulted into exploitation. Economic exploitation of
the weak by the strong is an order of the day in a capitalist society. Labor is exploited
by the capitalist, farm worker is exploited by the landlord, poor is exploited by the rich,
servant is exploited by the master, people are exploited by the rulers and above all
national treasury is exploited and looted by the persons in power. Wealth is the religion
of every person (but a few honorable exceptions) and earning of it through fair or foul
means is his creed. Consequently, everyone exploits the other economically with a view
to gather as much fortune as possible.

Islamic economic system, on the other hand, ensures elimination of exploitation of one
man by the other. Many effective measures have been taken by Islam to do so. Riba or
usury is one of the worst instruments of human exploitation and this has been abolished
in all forms by Islam. Other means of exploitation such as bribery, gambling,
speculative transactions, embezzlement, prostitution have also been prohibited.
Interests of the weaker classes of the society like women, orphans, slaves, laborers,
tenants, consumers, etc. have been protected against their exploiters through legislation
by Islam. Islam has given these weaker sections of society many rights which were
hitherto unknown in the history of humankind.

6. Distribution of Wealth: Capitalism does not believe in fair and just distribution of
wealth. Since it believers in full economic freedom and private ownership of means of
production, wide economic disparities exist in capitalistic economy. Concentration of
wealth in few hands takes place while huge majority of the populace is deprived of the
very basic necessities of life. The privileged few live in luxury while poverty,
ignorance, disease and unemployment is the lot of the multitude. This disturbed balance
 of distribution of economic resources and unbridgeable gulf between the haves and
have-nots ultimately leads to class struggle and ultimate overthrow of the very system.

Furthermore, Islamic economic system is doing a good job in appropriately define the
economic problem and in satisfying every individuals basic needs. And the Islamic economic
structure is good for prevent economic bad behavior such fund-misuse, and by effectively
supplying momentum to the foreign policy, the Islamic economic structure and system make it
possible for Khilafah promote Islam worldwide.

Islam has steered midway between Capitalism and Communisma mean between two extremes.
Capitalism thrives at the cost of society and aims at building up private property. Communism
has no place for private enterprise and economy. It has eliminated the defects of both Capitalism
and Communism while retaining most of their virtues. Ensuring equitable and fair distribution of
wealth, the Islamic economical system discourages the hoarding of wealth as idle wealth is also
taxed 2.5% a year. It thus provides an incentive to the investment of capital in commerce and
industry which means wider circulation of money, more employment and greater prosperity