Chapter 2 : FOUNDATION OF

THE ISLAMIC ECONOMY

PARADIGM

SITI NUR FATIN ATIRAH BINTI ROSLI

DEFINITION OF ECONOMY
• Economics - Economics is the study the production and distribution of
goods and services, it is the study of human efforts to satisfy
unlimited wants (wants) with limited resources (scarcity)
 DEFINITION OF ECONOMY

• Adam Smith – The study of the natural world and the causes of the
wealth of nations.
• Lionel Robbins – The science that studies the behaviour of man as a
correlation between objectives and limited capacity of multiple uses  
• Alfred Marshall -  “Economics is a study of mankind in the ordinary
business of life. It examines that part of individual and social action
which is most closely connected with the attainment and use of
material requisites of well being”. 
• This definition of economics by Alfred Marshall neoclassical economist
clearly point out that economics is on the one side a study of wealth
and on the other and more important side a part of study of man. 
Definitions of Islamic Economy

Islamic economics is `the study of

economics in the light of Islamic
principles', or `bringing economics in
consonance with the Shari'ah'
 ISLAMIC ECONOMICS PARADIGM
• Islam is a rules- based system with a prescribed method for
humans and society to achieve material and non material
progress and development grounded in rule compliance and
effective institutions.
• The foundations of the Islamic Economic system were laid
down centuries ago in Quran and practiced by the Prophet
Muhammad in Medina during his brief time on this plane of
exixtence.
• The institutional scaffolding of the Islamic economic system
is thus formed by the rules of behavior defined by the
Quran .
• The content and blueprint of Islamic Economics is derived by:
1. Extracting the rules that define an ideal Islamic Economy and
their economic implications from the Quran and Sunnah (the
teachings and the practice of the prophet Muhammad

2. Studying these institutions in the contemporary economy and

determining the degree and extend of deviation between
institutional scaffolding and that of the ideal Islamic Economy.

3. Prescribing policy recommendations to bridge the gap

between the two.
Four fundamental concepts supports the rules-based religion that is
Islam :
1) Walayyah – the unconditional, dynamic, active, ever-present love of
the Supreme Creator for His Creation, which is manifested through
the act of creation and the provision of sustenance for all humans.
2) Karamah – Human dignity. The Quran considers humans to be
crowning achiewment of His Creation for whose personal and
collective development everything else has been created.
3) Meethaq- The covenant in which all humans were called before their
Supreme Creator and asked to testify that they recognize in Him and
Only Creator and Sustainer of the entire creation and all other
implication.
• Concepts unfolds into three basic principles :
Tawheed- The one-and –onlyness of the creator, which unfolds into
the one-only-onlyness of the created and its unity, including above all
the unity of humankind
Nubbowah- the continuos chain of humans (prophets)appointed by
the Creator to remind, warn, cleanse, teach and induce humans to
bring about and uphold justice within created order through their
position of agency-trustee assigned and empowered by the Supreme
Creator
4) Khilafa – agent trustee relationship. Khilafah is the empowerment of
human by the creator as agent trustee to extend His love and
compassion to one another, materially through the resources provided
to them by creator and non materially through the manifestation of
unconditional love of their own kind as well as for the rest of creation.
Meta-Framework and Archetype of Economic Rules
1) Al- Quran
• The fountainhead of all Islamic paradigm is the Quran. It provides the
framework within which all relevant envisioned conceptions of reality find
their sources.
• The eternal sources specifies rules of behavior (institutions) applicable to
all societies at all times.
• Through the words and actions of this perfect human, the metalwork
given by the Creator in the Quran was interpreted, articulated, and applied
to the immediate human community of his time.
• The meta framework specifies general universal law, rules of behavior.
• The archetype models provide universal-specific rules of behavior and the
institutional structure needed for organizing a human society based on the
immutable rules of meta-framework
2. Messenger
• No one understood al-quran better than the messenger appointed to
deliver it to humankind. During his blessed life on this plane of
existence he was both the spiritual and temporal authority for his
follower.
• In his capacity as the spiritual authority, he expounded , interpreted
and explained the content of the Quran.
• In his capacity as the temporal authority, he operationalized the rules
(institutions) specified in the Quran in the town of Medina.
• The economic system, which he established in Medina is the
archetype of Islamic Economic System.
• Four main discussion in Paradigm Islamic Economy

1. Impact of scarcity
2. Rationality and Freedom of Choice
3. Individual Obligations, Rights, And Self Interest
4. Central Notion of Justice
Scarcity In Islamic Economic View

• Capitalism doctrines focused on scarcity and unlimited wants as the

central reason for the study of economics. Economic growth is
presumed to create wealth and thus relax the scarcity constraints.
While scarcity is a serious constraint in a world of unlimited wants it is
not in Islamic vision.
• The creator provided humankind with sufficient resources at the
globals level to satisfy all human needs if human follow His rules.
• The creation of the earth was not a random event. Allah (swt) created
the earth by incorporating human needs and creating conditions (as a
test) that require humans to share.
In Islam, scarcity take on three different aspect.
1. Al- Quran repeatedly asserts that from a macro- global standpoint,
Allah (swt) has created all things in “exact measure” (Quran
49:52),indicating that the Lord Cherisher sustainer of all creation,
provide sufficient sustenance for all in His creation including
humankind.
2. Acknowledge a micro-actual scarcity stemming from misdistribution
of resources and from greed and gluttony. One encounter in the
Quran the overwhelming emphasis on social justice and rules
against waste, accumulation of wealth and extravagance.
3. The real scarcity arising from the fact of finite conditions of man on
this plane of existence. ‘Man is finite, moral and aging, limited in
time and space.
Rationality and Freedom Of Choice

• In recognition and acknowledgment of their dignity, the Supreme Creator

has endowed humans with freedom of choice.
• This gift is so important that the prophets and messengers and all of
revelations sent to humanity can be undertood as attempts by Allah to
persuade humans to choose - through the activation of their faculties of
spirit, consciousness and intelligence (aql)- to freely recognize and
acknowledge the Love of the One and Only and to them return that Love
through actie love (Love service) to the Creation of Allah.
• Even the prophets was instructed that He was appointed to remind and to
warn but not to compel humans. This freedom of choice clearly extends
to economic decisions and is again a test in which humans must
encounter and overcome the temptations that they face.
• Consciences and awareness of their Creator and the prescribed rules
render human rational decision makers.
• Rational meaning reasoned, action in a human who is aware follow
reasoning by a faculty with which the Creator endows every human. This is
intelligence (a’ql) which initiates a process of cognition by the heart.
• A’ql is defined as the instrument by which the All-merciful Creator is
adored and through which final felicity ( al-Jannah or paradise) is achieved.
• A’ql is distinguished from intellect which is a process of cognition by the
mind. The ultimate operating ruled a’ql is for its possessor to cognate the
truth that the criterion for reason basedaction is achieving the satisfaction
of Allah (swt)
• This faculty is dormant in bashar (humankind). It is activated when
man embarks on the path of becoming human (insan).
• Reading the revelation to humans, cleansing them, and teaching them
how to internalize the Revelation by the messengers activate the a’ql.
• Without a’ql, the decision making process takes place through
reasoning via the intellect alone.
• The process is faulty because without cognition by the heart,
reasoning is activated and governed by character traits unworthy of
the human state.
Individual Obligations, Rights, And Self Interest

• In Islam, human freedom envisaged as a personal surrender to the Divine

Will rather than as an innate personal right.
• The human being is ontologically dependent on Allah (swt) and can only
receive what is given to him by the Source of his being.
• Human rights are a consequences of human obligations, not their
antecedent.
• Man is charged with certain obligations toward his Creator, nature,
himself, and other human; all of these obligations are outlines by the rules
on the rights and freedom are gained.
• Limitations that are imposed by the rules on the rights and freedom of the
individual are directed at removing negative possibilities from human life.
• The obligations, rights and limitations defined by Islam must be observed
if the individual and the system are to have an Islamic identity .
Central Notion of Justice
• Justice is at the left, the right and the center of Islamic economic teachings.
• The economic justice that is envisaged in Islam is not equal incomes and
wealth. The focus of economic justice is not solely placed the outcome.
• Again if Allah had wanted this, He would have so designed His creation. The
focus of justice is on the available means and opportunities to all humankind.
• In Islam, economic justice is centered on affording all humans an equitable
chance (the means) to flourish while affording the disabled a dignified life
and erasing poverty everywhere.
• All humans should have the same (similar) opportunity and freedom to
achieve their economic goals (a level playing field in education, healthcare,
and basic nutrition through hardwork while preserving the rights (not to be
confused with charity of the disabled.
• After humans have worked and received their just rewards, then they
must help the less fortunate to eradicate poverty and avoid great
disparities in wealth; this is a test for humans to show their love for
their Creator and His creation as contrasted with a love of fleeting
wealth.
• Any injustice perpetrated by individuals against other humans and
against the rest of creation is ultimately an injustice to the self.
• Allah loves justice ; it is a central part of His universal love.
• Human must live a life that is just and must stand up to and eradicate
injustice whatever they find it.
Shariah: The Law
• Islam legislates for humans according to their real nature and the
possibilities inherent in the human states.
• To order human life into a pattern intended for it by its creator,
humans are provided with a network of injunction and rules that
represent the concrete embodiment of the Divine Will.
• By virtue of accepting specific codes of behavior – through the
exercise of free choice- a person becomes a Muslim and then lives
both his private and his social life according to these rules.
• This network of rules – called Shariah, a word that is etymologically
derived from a root meaning “ the road” – leads human to a
harmonious life here and felicity hereafter.
• The rules of Shariah holds sway over economic life no less than over social,
political and cultural life; they persuade, determine and order the whole of life.
• It is through the acceptance of and compliance with the rules of Shariah that
individuals integrate themselves not only into the community but also into a
higher order of reality and the spiritual center.
• Violations of these rules have a disintegrative effect on the life of the individuals
and on the community.
• The overall aim or objective of Islamic law – that is the concept of Maqasid al-
Shariah – is to promote the welfare of humankind and prevent harm by
preserving the faith, lives, intellect, prosperity, wealth and interest for future
generations.
• The preservation of these promote society and its interest. The achievement of
society’s interests (maslahah) is essentially the same as maqasid; they are one
and the same.
Factors of Production in Islam
The Capitalist View
• In order to understand the Islamic point of view fully, it would be
better to have a look at the system of the distribution of wealth that is
obtained under the capitalist economy.

• Distribution of wealth theory : wealth should be distributed only over

those who have taken a part in producing it, and who are described in
the terminology of economics as the factor of production.
• These Factors are four (Capitalist View) :
1. Capital : Which has been defined as ‘the produced means of production’ –
that is to say a commodity which has already undergone one process of
human production, and it again being used as a means of another process
of production
2. Labour : this is to say, any exertion on the part on man
3. Land : defined as ‘natural resources’ (that is to say those things which are
being used as means of production without having previously undergone
any process of human production)
4. Entrepreneur or organization : Exploits them and bears the risk of profit
and loss in production
Conclusions : One share is given to capital in the shape of interest, Second
share to labor in the shape of wages, Third share to land in the shape of rent (or
revenue) and Forth share ( or the residue) is reserved for the entrepreneur in
the shape of profit.
Socialist View
• Capital and land instead of being private property are considered to
be national or collective property. Thus, the questions of interest or
rent (or revenue) does not arise at all under the philosophy of this
system.
• The entrepreneur too is not an individual but the state itself.
• So profit as well is out of the questions here – at least in theory
• There remains only one factors namely labor.
• Labor alone is considered to have a right to wealth under the Socialist
system which it gets in the shapes of wages.
Islamic View
• From the Islamic point of view, there are two kinds of people who
have right to wealth :

1. Those who have primary right that is to say, those who have a right
to wealth directly in consequence of participation in the process of
production. In other words, it is those very ‘ factors of production’
which have taken a part in the process of producing some kind of
wealth.
2. Those who have secondary that is to say, those who have not taken
a direct part in the process of production, but it has been enjoined
upon the producers to make them co-shares in their wealth
Islamic Theory
Three Factors of Production

1. Capital – Means of production which cannot be used in the process of production until
and unless during the process they are either wholly consumed or completely altered in
form and which, therefore cannot be let or leased (Example : Liquid money or food stuff)
2. Land : Means of production which are used in the process of production that their original
and external form remains unaltered and which can hence be let or leased ( for example :
lands, houses, machines etc)
3. Labor : Human exertion, whether of the bodily organs or of the mind or of the heart. This
exertion thus includes organization and planning too.

Conclusion : Whatever wealth is produced by the combined actions of these factors would be
primarily distributed over these three in this manner :
First, share of it would go to capital in the form of profit (and not in the form of interest) ;
Second, share would go to land in the form of rent ;
Third, share would be given to labor in the