Islamic Financial

Instruments
Dr. Shakir Ullah
Lecture 2
Capitalism, Socialism and Islamic
Economic System

Factors of Production

Land
Labor
Capital
Enterprise

CAPITALISM
Capitalism is an economic system based on
PRIVATE OWNERSHIP and the use of
CAPITAL

CAPITALISM

1. Private Ownership
2. Profit motive
3. Market Economy

 Countries/companies want access and control over

RAW MATERIALS and MARKETS
raw materials:
Markets:

What might happen when industrial nations want

what NON-industrial nations have?

Laissez fair economy and

the market forces
What are the market forces?
the invisible hand (Adam Smith)
Individuals unconsciously achieve
social objectives by working hard for
their self-interest (Adam Smith)
What about drugs, kidnapping,
robberies, corruption?
What about market for human body
parts?
How about needs and wants?

Socialism
Society owns and controls the factors
of production

Pros and Cons of Capitalism

Pros
Competition to provide
goods and services
keeps prices low
Rewards hard work
Provides choice
Allows for the building
up of wealth and
possessions
Consumers regulate
the market

Cons
Exploits people who
cannot compete
Uneven distribution of
wealth
Creates a moneyoriented society
Constant economic
growth may deplete
the earths resources

Pros and Cons of Socialism

Cons

Pros

All members share benefits

Those who cannot
contribute may still
participate (disabled,
elderly)
Each members survival
needs are met
Equal distribution of wealth
No socioeconomic classes

No incentive to work
harder
No competition means
no reward to be
innovative
New members to the
community
(immigrants) are seen
as competition for
limited goods and
services
Higher taxes

Islamic Economic System

It is in-between capitalism and socialism
A moderate approach to the control and
ownership of factors of production
Right of ownership:

Resources belong to almighty Allah alone

Humans only possess their usufruct
Possessor is accountable for the usufruct of
his/her resources

Islamic Economic System

Economic freedom:

One is allowed to accumulate capital

The freedom is not unlimited
Limits

Halal (permitted being lawful)

Haram (forbidden being unlawful)
Banning of interest, bribery, gambling,
monopoly, prostitution, narcotics etc

speculation,

 Distributive of Wealth:
distributive justice
Share of those who are unable to
make it through the market forces
The institution of zakat
Emphasis on charity

Institution of Interest:
Vital to capitalism
Strictly prohibited in Islam

 Inheritance:
Prescribed in the Quran
The rich always stay rich
The poor always stay poor

Social Insurance:
Wellbeing of the society.

 The role of the state:

The state has to ensure compliance with
the principles laid down by Quran and
Sunnah
Collection and distribution of zakah
Banning Haram activities
Encouraging Halal Activities
Taxes
Insurance of social wellbeing