islamic economics

Islamic Economics

Islamic Economics

Dr. Abdul Majid Dar Principal

Govt. Model Women Degree College, Kupwara, Jammu and Kashmir

RIP RESEARCH INDIA PUBLICATIONS B-2/84, Ground Floor, Rohini Sector-16, Delhi-110089, INDIA

Published by Research India Publications Head Office: B-2/84, Ground Floor, Rohini Sector-16, Delhi-110089, INDIA Fax No.: +91-11-27297815 Email: [email protected] Website: www.ripublication.com © 2013 Research India Publications. Printing of books passes through many stages - writing, composing, proof reading, printing etc. We try our level best to make the book error free. If any mistake has inadvertently crept in, we regret it and would be deeply indebted to those who point it out. We do not take any legal responsibility. No part of this book may be reproduced, stored in any retrieval system or transmitted in any form by any means – electronic, mechanical photocopying, recording or otherwise without the prior written permission of the Author and Publishers. ISBN: 978-81-89476-09-2 Price: Within India: Rs. 500 Outside India: US$ 25 Typeset by RIP INFORMATION SERVICES B-2/84, Ground Floor, Rohini Sector-16, Delhi-110089 INDIA PRINTED IN INDIA

Preface

Islam was born in Arabia about fourteen hundred years before. Allah revealed his knowledge through his last and final his Messenger - Prophet MuhammadSAW .It brought revolution in the character and the mentality of the people there. Since it is a complete way of life, it touches every aspect of life. This book is resolutely woven around the economic behaviour of people of Arabia after the advent of Islam. The idea to write this book came from the discussion that was held in the Department of Economics at University of Kashmir, with my friends. Since financial crisis of 2008 happened, everyone started to criticise the current system. Our aim was to show that there still exists a system where the contradictions are not found. This book concentrates on the particular way of life of Muslims. Also the book makes it clear that Islamic system can exist if promoted. This book takes about the Islamic way of consumption, production, distribution etc which are essential in the Islamic economic system. Many people have contributed in this work. It makes me feel proud to thank my Dad Advocate Muhammad Yaqoob Shah, my mom who greeted my ways with smile and offered his critical perspicacious thoughts in this regard. Also a lot of discussions were held with my friends, Mr. Mudasir, Mr. Zahid and Mr. Rayees. I also thank my co authors Dr. S.M. Zubair and Mr. Bhat Sajjad without whom this work could not have been contemplated.

Syed Suhail Yaqoob

Foreword

The book entitled “Islamic Economics” co authored by Syed Suhail Yaqoob, Dr. S.M. Zubair and Mr. Bhat Sajjad I feel, will prove as milestone for the onward journey in the concerned field of research. The ubiquitous and uphill task undertaken by aforesaid authors will satiate the demands of the period of economic fiasco of the world in general and Muslim community in particular. There was an untold dearth of such a book and the authors have left no stone unturned in catering all the aspects of an ideal and successful economic system. Hope the book will prove as panacea for the present deficient economic system and it will act as its elixir and ultimate remedy. The book will serve as a source of inspiration for younger strengths and will be cordially received. The forte and dexterity shown by its creators will set-up a track for desirous learners of Islamic economy. I hope authors will continue their dedication to illuminate the world with the noble musings which they will receive timely from the world of ideas.

Dr. Abdul Majid Dar Principal,

Govt. Model Women Degree College Kupwara, Jammu and Kashmir.

Contents

Preface Foreword Title page Chapter 1: Introduction 1 Chapter 2: Consumption in Islam 5 Chapter 3: Production in Islam 20 Chapter 4: Distribution in Islam 31 Chapter 5: Islamic Banking 38 Chapter 6: Zakat 54 Chapter 7: Conclusions 61 GLOSSARY 63 BIBLOGRAPHY 64

Chapter 1: Introduction From the days of yore, Allah has been revealing his guidance unto humanity through his chosen prophets. Messengers came with the knowledge of lord and were sent to different nations with the sole aim of modifying their behaviour and making them conscious of their lord. Whenever any community or nation plunged into darkness, Allah sent messengers to them to help them to move out of the chaos and establish a system based on the knowledge revealed by our creator. Arabian nation as a whole had plunged into political, social and economic chaos, by the time divinity blessed this ignorant tribal class with HIS holy messenger. In this nation there was a lot of emphasis on polytheism besides constant tribal warfare that always resulted in bloodshed, infanticide, exploitation of poor and the slavery. The racial discrimination, distinction between rich and poor was clearly laid and people had deviated from the religion of their lord. Then a lamp was lit in the midst of jahiliyah period, which in future would change these savage, ignorant and blood thirsty humans into a pious, disciplined and lord conscious human beings. His name is Muhammad bin AbdullahSAW who graced his Ummah in around 570 A.D. His father and mother had died before he reached the age of six. Then it was his grandfather, Abdul-Mutalib, who took care of the prophet of Islam. After the death of his grandfather, the prophet of Islam came under the care of his uncle, Abu Talib. In addition to working as a shepherd for his uncle, he also joined him in the caravan trade between Arabia and Syria and the Mediterranean countries to north and west. Mecca was an important trading centre in the prophet’s time and commodities such as spices, incense and silk arrived in Mecca from Ethiopia, India and elsewhere, and carried overland from there to Egypt, Syria, Turkey and Greece. Later Abu Talib – uncle of Muhammad RasoolullahSAW, arranged for him to become an agent for a commercial firm in Mecca owned by a widow named Hazrat KhadijiaRA who was to become his future wife. She was extremely rich and was impressed by the honesty and piousness of our prophet. The prophet later married her when he was just 25 and Hazrat KhadijiaRA was 40 years of age. MuhammadSAW could have lived a happy life without any worries as his wife was known for her wealth, but he was not to fall in the trap of materialism. He followed the path of simple and pious life. He was always found meditating in the mountains. While meditating on Mount Hera, Muhammad SAW received the Angel Gabriel who convinced him that he was the messenger of lord. It was through this angel that lord revealed the holy Quran to Hazrat Muhammad SAW. It was mostly after this incident that tragedies of our prophet became manifold. He started openly preaching his revealed knowledge. This made the Quraish critical of him and started to create problems for him. Although he managed to convert some men and women to Islam, they were treated harshly by the polytheists. The new converts were put to all sort of oppression. Social and economic exclusion, torture and burning in hot sun were common punishments. But they stood their ground and managed to

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quell it by the power of their belief. The polytheists could not manage to convert them back. It was soly due to influence of attractive teachings of Islam. Its influence was so great that it made them to absorb any sort of oppression. Opposition to Islam came particularly from merchants of Mecca and this is not surprising since a good deal of prophets teachings were directed against their attitudes and behaviour. They believed that prophet’s teaching would result a set back to their economic and political power. Abu Jahal, a merchant, was one of the fiercest opponents of our prophet. He left no stone unturned to suppress the small community. However there were also few Meccans who responded positively to the call of prophet e.g. Hazrat Abu BakarRA, Hazrat UmerRA, Hazrat UsmanRA, Hazrat AliRA etc who became the successors of prophet. The constant friction among Muslims and polytheists became a routine. Oppression was at peak by the polytheists. Then the lord ordered them to leave Mecca and move to Medina. This migration by early Muslims is called Hijrat and it is from where the Muslim Calendar starts. In yatrib (Medina), prophet was given a rousing welcome. The natives of Medina opened their hearts for the migrants. They shared everything with them and lived like brothers. MuhammadSAW was made the political and religious head of Medina. The policy was of peace with other faiths. It was of live and let live. It is here that Muslims started to live in peace for some time. Away from the hostile Quaraish, the prophet gave them a constitution known as Constitution of Medina. Under the guidance of prophet in Medina, the community started practising the religion without fear. They developed a sense of common aim, unity in their thoughts and practices. They followed their own laws revealed by lord through Prophet MuhammadSAW. It was the first Islamic state created on the laws on ALLAHSW. It practised equality, democracy without the distinction of caste, creed and colour. Poor, orphans especially were taken care of. After some time, the Meccan polytheists began to fear the growth of Islam. They decided to attack the region and achieve their political and economic goals as Medina had a stragic position. The battle between Muslims and Kufars is known as Jang-e-Badr. Being a minority as compared to kufars, naturally Muslims had a disadvantage in numbers. The proud kufars thought that they could easily defeat Muslims, but Allah had some other plans. Kufars got defeated by a numerical minority of just around 300 and their confidence was shaken. They fled the battle ground and planned to avenge Muslims to regain their superiority and confidence. They decided to put Muslims to test again in the Battle of Uhud. This time the kufars managed to inflict costs on them but were not able to achieve political and economic goals. Kufars left the battle field thinking they defeated Islam. But later it was found by them that they have not defeated them. The Muslims showed tendencies of courage and confidence again. After the Battle of Uhud, they defended the city of Medina again, in the Battle of Khandaq. Muslims had used a new strategy to defend the city in the battle. They dug a trench around the city which was new to Arab world. With again having to face defeat, the Meccan kufars lost all their faith to

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conquer Islam. The following year Prophet of Islam MuhammadSAW and kufars signed the treaty of Hudaybiyah which called for cessation of all hostilities for ten years. Some suhabas criticised the treaty thinking that it put Muslims at disadvantage, but it was the decision of prophet that prevailed. History has shown that this proved a great advantage for Muslims. However the Meccans violated the treaty, which resulted in the conquest of Mecca. Mecca was conquered with no bloodshed and general amnesty was provided. All the idols at Kaba were removed; the offices and privileges were abolished. After spending some 20 months in the city, he left. He returned there again ahead of pilgrimage to Mecca in 632 A.D. this pilgrimage is known as the “Farewell Pilgrimage”. MuhammadSAW left for heavenly abode in the same year in which he made farewell pilgrimage. The death of the prophet of Islam came as a shock to Muslim community psychologically and it put the infant community at the risk. It was feared that the enemies of Islam will try to use the death of Prophet MuhammadSAW to their greatest advantage and will attack the institutions of Islam. But it was the pious suhabas of prophet that came to rescue the community from all risks and potential treats. They kept their minds cool and with infinite faith in Allah were able to avert a major tragedy that had engulfed the Muslims. Though the prophet had left no successor of his choice, it was Hazrat Abu BakarRA that was chosen as the successor of the prophet in suitable manner. His position as the successor was approved by all. Abu BakarRA was sixty years of age when he was elected to succeed the prophet. The manner in which he was appointed was an Arab old custom, in which the authority passed, after the death of chief, to a person who had greater influence or has done a commendable work for the progress of the tribe. History has recorded it that Abu BakarRA has given all his life in the service of Islam. He was always faithful to his prophet and that is because of his acute knowledge of his religion and dedication towards Islam that he was chosen for the job. His appointment came at a time when the community was going through crisis and he would have been the only one who would have sailed the boat through murky waters. He was mostly involved in suppressing the rebellious activities of many tribes and defeating the false prophets. In this period the enemies of Islam came to realise that the new religion still holds sway in the Arab world. After Hazrat Abu Bakar RA, the next one to be chosen for the top job was Hazrat UmerRA. His period was the most glorious of Caliphate. In his period, a wave of Islam reached far and wide which engulfed a large part of Middle East. After Hazrat Umer RA, the next chosen successors were Hazrat Ustman RA and Hazrat AliRA. These four pious Khalifa’s are called Khulfa’i-rashideen the right guided ones. It is the period of Prophet MuhammadSAW and the first four successors of prophet which is called the glorious phase of Islam. More reference is made to this phase to understand the real meaning of the religion. Islam is a compact religion and it has to be seen as whole not in parts. It encompasses the whole aspects of life. It establishes rules for all aspects of life. Having a look at our prophets life it can be clearly seen that

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he didn’t only stressed the spiritual or religious aspects of life but economic as well. In whole of his life, our prophet took care of orphans, advised his fellow men to engage in fair trade, interest was abolished and Zakat was made obligatory. The holy Quran and Sunnah devised rules for consumption, production and distribution. But all rules were made with the view that man is accountable to his lord and he has to live his life with the rules set by Quran and Sunnah of Prophet. This book covers the economic side of a Muslim. How he makes his consumption with given limitations set by Allah, his choice of production and how he behaves as an economic man in Islamic perspective.

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Chapter 2: Consumption in Islam Human wants are unlimited. He consumes innumerable amount of goods and services to satisfy them. The act of satisfying one’s want is called consumption. Humans are always found satisfying one want or the other at all times. It has been found that not only wants are diverse but these are recurring. Take the case of food. A person doesn’t consume millions and millions of kilograms of rice at a particular period of time but he stops somewhere, but after some time he feels the urge for it again. Given his unlimited desires and wants, he is able to satisfy only some portion of total wants as the resources at his disposal are scare. Take the case of poor; given a limited amount of resources he is able to satisfy only a small portion as compared to rich. Rich section of society consume more than the worse off. Economists have throughout the history tried to find out the factors that determine the consumption of an individual or society. The answers have been diverse. With the increase in knowledge it was found that consumption by society is a complex matter. Not only has it depended on income, but on culture, society and religion as well. The mental and psychological state of a society is to be taken into consideration before reaching a general conclusion about the forces that determine it. Take the case of a religious person, in spite of having resources at his disposal; his consumption is severely low than a person who has same income but without religious influence. The first concise attempt, probably, was made by the famous economist, John Keynes. He believed that consumption depends on the income level of the society after deducting the taxes and including transfer payments from gross national product. This is the precise amount of gross national product that remains available to people. The other factors were not given due consideration. It was also found that marginal propensity to consume is always less than one i.e. people like to save some portion of increase in income level. Some increase in income is consumed but not the full amount. Since saving represents a leakage, he then justified the importance given to investment. This was definitely a gross over-simplification. Later it was found that environment, in which a person lives also affects the ideas of a person regarding consumption in addition to future. This theory was developed by James Duesenberry. It was argued that consumption depends not only on income level but it has effect of the environment as well i.e. where a person lives. It is able to affect his consumption level. A person is assumed to compete with other humans. Secondly it hypothesizes that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in previous period. It is difficult for a family to reduce a level of consumption once attained. This is called ratchet effect. It means that the family or a group always strives to maintain a standard of consumption even after it witnesses decline in income levels. Another concept associated with this theory is demonstration effect. Duesenberry was of the view that people like to follow others in their

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consumption patterns and have tendency of imitation. When people are provided opportunity to come into contact with new life styles and manners, they are always ready to imitate the superior life styles. Duesenberry (1949) gave the name "demonstration effect" to this phenomenon, arguing that it promoted unhappiness with current levels of consumption, which impacted savings rates and consequently opportunities for macroeconomic growth. Through this view it can be explained how old customs and ways of life are replaced by new ones. Similarly, Ranger Nurkse argued that the exposure of a society to new goods or ways of living creates unhappiness with what had previously been acceptable consumption practices; he dubbed it the "international demonstration effect." He believed that in developing nations, pressure to increase access to material goods rapidly increases primarily because people "come into contact with superior goods or superior patterns of consumption, with new articles or new ways of meeting old wants." As a result, he argued, these people are "apt to feel after a while a certain restlessness and dissatisfaction. Their knowledge is extended, their imagination stimulated; new desires are aroused. The two above mentioned theories didn’t take seriously into consideration the attitudes of an individual or a society about future. It is not only that man likes to consume as much he can in present period. He is definitely conscious of his future and likes it to be better than the present. He wants at least to remain same not inferior than the present. Given that he is conscious about his future, he always makes plans so that he will have a stable consumption in future. It was Franco Modigliani who developed “life cycle theory of consumption” which is based on the observation that people make consumption decisions based both on the resources available to them over their lifetime and on which is their current stage of life. In simple way, the theory divides the life span of an individual into three parts. The period, when he is dependent and doesn’t work, when he works and third until he dies and survives on the saving which he made in his past days. Saving comes in the second period and dissaving in the third one. The theory implies that the individual is conscious about his present as well as future. He tries to achieve a balance between his present consumption and the future. He wants a stable present and future. Next in line is Friedman’s permanent income hypothesis. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are largely determined by a change in permanent income, rather than change in temporary income. The key conclusion of this theory is that transitory, temporary changes in income have little effect on consumer spending behaviour, whereas permanent changes can have large effects on consumer spending behaviour. Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to

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consume. In Friedman's permanent income hypothesis model, the key determinant of consumption is an individual's real wealth, not his current real disposable income. Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income. These are some theories regarding consumption of a human being. But it must be noted that these theories regard man as a complete free man. The individual has unlimited freedom. He is not responsible to any superior being/creator and is the best judge of his activities. He is guided by self interest and it regulates his behaviour. Whatever he does benefits him. Also it is based on the concept of satisfaction. If anything provides satisfaction to an individual it is considered worth consuming. It assumes animalistic desires in humans. They will consume whatever they like and that also in infinite numbers. Materialism and consumerism is the foundation of these theories. No moral and ethical side of their consumption is taken care of. It is Islam that covers all these issues. It considers humans to be responsible to Creator. He has to act within the rules prescribed by Him which were revealed through our Holy ProphetSAW. He is not to consume as animals without any distinction but maintain his dignity and respect as the superior being in the world. Human nature shows tendency towards freedom and dislikes total control. Total control will retard his initiative whereas total freedom will prove harmful to both individual and society. Our religion inspires humans to live a happy, pious and prosperous life. One of the best way through it is done is to maintain a fine balance between the total freedom provided to an individual and his total control. Western societies provide absolute freedom to an individual with regard to consumption, assuming that he is the best judge of himself while as in communism a kind of control is maintained. It is only in Islam that a middle path is maintained. It regards man conscious of intellectual capabilities but also regards that knowledge has to be provided to him to make correct decisions about his life. He is not supposed to be infallible. He does err. So a guide is revealed to him who provides him the necessary support in making decisions, The Quran and the Sunnah of Prophet. In the Holy Quran, Allah has made it clear which goods and services are prohibited and which are allowed e.g. swine flesh, alcohol, drugs etc falls in first category and mangoes, meat of lamb, grapes in second one. So it becomes clear that the set out of which an individual has to make choice is restricted. He cannot move out of this set as he is considered to be accountable to his Creator. Any deviation from prescribed rules will cost him dearly in the world as well as next. He has to uphold the laws of Allah and follow them in principle. Many has viewed this as undue restriction on humans and pessimism about his faculties, but it has been along proved that if allowed free, he is destined to make wrong decisions. One of the basic aims of the rules regarding consumption by Allah is to create a prosperous and happy society. It upholds the right of the people to enjoy the materialistic aspects of life

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but within the purview of religion. Islam has never promoted only religion but other aspects of life as well. In Islamic terminology, goods and services are categorised into two parts. These are known as Halal (permitted) and Haram (prohibited). The Holy Qur’an says: “Eat of that which Allah hath bestowed on you as food lawful and good, and keep your duty to Allah in whom ye are believers” (5:88). In other verse, The Qur’an has mentioned prohibited or Haram items of food and has said: “Forbidden unto you (for food) are carrion and blood and swine-flesh, and that which hath been dedicated unto any other than Allah………” (5:3). A Muslim has been enjoined upon by Islam to eat only that food which is ‘Halal’ (lawful and permitted) and is strictly prohibited to consume that which is ‘Haram’ (unlawful and forbidden). The principle of Halal and Haram also applies to items of expenditure besides food. The Qur’an at other places enjoins upon mankind: “O mankind! Eat of that which is lawful and wholesome in the earth, and follow not the footsteps of devil. Lo! He is an open enemy for you” (2:168). At another place, the revealed book of Islam addresses its followers as: “O ye who believe! Eat of the good things wherewith We have provided you, and render thanks to Allah…….”(2:172). Again the Qur’an says: “So eat of the lawful and good food which Allah hath provided for you…….” (16:114). O ye who believe! Eat of the good things wherewith We have provided you, and render thanks to Allah if it is (indeed) He whom ye worship. He hath forbidden you only carrion, and blood, and swine flesh, and that which hath been immolated to (the name of) any other than Allah. But he who is driven by necessity, neither craving nor transgressing, it is no sin for him. Lo! Allah is Forgiving, Merciful.(2:172-173). “O ye who believe! Forbid not the good things which Allah hath made lawful for you, and transgress not, Lo! Allah loveth not transgressors. Eat of that which Allah hath bestowed on you as food lawful and good, and keep your duty to Allah in Whom ye are believers (5:87-88). “O ye who believe! Strong drinks and games of chance and idols and divining arrows are only an infamy of Satan’s handiwork. Leave it aside in order that ye may succeed. Satan seeketh only to cast among you enmity and hatred by means of strong drink and games of chance, and to turn you from remembrance of Allah and from (His) worship. Will ye then have done?(5:90-91) “ To hunt and to eat the fish of the sea is made lawful for you, a provision for you and for seafarers; but to hunt on land is forbidden you so long as ye are on the pilgrimage, Be mindful of your duty to Allah, unto Whom ye will be gathered.(5:96) “Say: The evil and the good are not alike even though the plenty of the evil attract thee. So be mindful of your duty to Allah. O men of understanding, that ye may succeed (5:100).“Eat of that over which the name of Allah hath been mentioned, if ye are believers in His revelations. How should ye not eat of that over which the name of Allah hath been mentioned, when He hath explained unto you that which is forbidden unto you, unless ye are compelled thereto? But Lo! Many are led astray by their own lusts through ignorance. Lo! thy Lord, He is best aware of the

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transgressors (6:118-119). “And eat not of that whereon Allah’s name hath not been mentioned, for Lo! it is abomination. Lo! The devils do inspire their minions to dispute with you. But if ye obey them, ye will be in truth as idolaters.(6:121) “Say: I find not in that which is revealed unto me aught prohibited to an eater that he eat thereof, except it be carrion, or blood poured forth, or swine-flesh-for that verily is foul – or the abomination which was immolated to the name of other than Allah. But whoso is compelled (thereto) neither craving nor transgressing, (for him) Lo! your Lord is Forgiving, Merciful (6:145). “O Children of Adam! Look to your adornment at every place of worship, and eat and drink, but be not prodigal. Lo! He loveth not the prodigals. Say: Who hath forbidden the adornment of Allah which He hath brought forth for His bondmen, and the good things of His providing? Say: Such, on the Day of Resurrection, will be only for those who believed during the life of the world. Thus do We detail Our revelations for people who have knowledge. Say My Lord forbiddeth only indecencies, such of them as are apparent and such as are within, and sin and wrongful oppression, and that ye associate with Allah that for which no warrant hath been revealed, and that ye tell concerning Allah that which ye know not (7:31-33). “ So eat of the lawful and good food which Allah hath provided for you, and thank the bounty of your Lord if it is Him ye serve. He hath forbidden for you only carrion and blood and swine-flesh and that which hath been immolated in the name of any other than Allah; but he who is driven thereto, neither craving no transgressing, Lo! Then Allah is Forgiving, Merciful. And speak not, concerning that which your own tongues qualify (as clean or unclean), the falsehood: “This is lawful, and this is forbidden, ” so that ye invent a lie against Allah. Lo! Those who invent a lie against Allah will not succeed (16:114-116). “That they may witness things that are of benefit to them, and mention the name of Allah on appointed days over the beast of cattle that He hath bestowed upon them. Then eat thereof and feed therewith the poor, unfortunate (22:28). “That (is the command). And whoso magnifieth the sacred things of Allah, it will be well for him in the sight of his Lord. The cattle are lawful unto you save that which hath been told you. So shun the filth of idols, and shun lying speech (22:30). “And for every nation have We appointed a ritual, that they may mention the name of Allah over the beast of cattle that He hath given them for food, and your God is one God, therefore, surrender unto Him. And give good tidings (O Muhammad) to the humble (22:34). A Hadith of Prophet MuhammadSAW: Jaber reported that the Messenger of Allah made unlawful (that is) on the day of Khaiber the domestic asses, meat of mules, every beast of prey having a fang and every bird having a talon(Tirmizi (Rare). Khalid-bin-WalidRA reported that the Messenger of Allah prohibited the eating of the meat of horses, mules and asses (Abu Daud). Abu Waqad LaisiRA reported that the ProphetSAW came to Madinah and they had liking for humps of camels and for cuttings of the tails of sheep. He said: What is taken off from animals while they are alive is a dead thing. It shall not be eaten (Tirmizi, Abu

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Daud). Ibn Omar reported that the Messenger of Allah said: Two dead things and two bloods have been made lawful for us: the dead things are fishes and locusts, and the blood is liver and spleen (Ahmad, Ibn Majah). Abu Zubair reported from Jaber who said that the Messenger of Allah said: Eat what the sea throws up (fish) and is left by the tide, and don’t eat what dies therein and floats (Abu Daud, Ibn Majah). Jaber reported that the Messenger of Allah said: There is no animal in sea which Allah has not but made pure for the children of Adam (Darqutni). Ibn Omar reported that the Messenger of Allah prohibited the eating of filthy animals and their milk (Tirmizi). Abdur Rahman-bin-ShiblRA reported that the Prophet prohibited the eating of the meat of lizards (Abu Daud). JaberRA reported that the Prophet prohibited the eating of cats and taking its price (Abu Daud, Tirmizi). Abu MusaRA reported: I saw the Messenger of Allah eating fowls (Bukhari, Muslim). Ibn Aufa reported: We fought along with the Messenger of Allah on seven expeditions and ate locusts with him (Bukhari, Muslim). Safinah reported : I ate with the Messenger of Allah the meat of a bustard (bird)(Abu Daud). Jaber reported that the Messenger of Allah said: There is no animal in sea which Allah has not but made pure for the children of Adam (Darqutni). Rules and Regulations: From the above verses of the Holy Qur’an and Traditions of Prophet Muhammad (PBUH) it is very clear that prohibited (Haram) items of food have been mentioned by Islam in unambiguous terms. Following eatables have been especially declared haram or unlawful by the Qur’an and the Sunnah:

1. All animals and birds which die of themselves without being slaughtered in the name of Allah. These include animals strangled to death, or beaten to death or killed by a fall or attacked by horns and killed, or torn to death by beasts.

2. Blood 3. Swine – flesh. 4. Food on which Allah’s name is not taken or meat of even lawful animal

which is not slaughtered in the name of Allah, or which is slaughtered in the name of other than Allah.

5. Everything which is offered to idols. 6. All beasts and birds of prey i.e. all quadrupeds that seize prey with teeth

such as lions, tigers, leopards, jackals, etc, and all birds such as hawks, kites, crows, raven, etc. which attack with claws.

7. All unclean things repugnant to health and morality. These include dogs, cats, mules, horses, asses, lizards.

8. Wine and all other intoxicants. 9. All the food items though lawful but acquired by unlawful means.

Islamic Economics 11

The followers of Islam are required to spend their earnings on Halal or permitted expenses and refrain from spending on Haram or prohibited things. There is clear division between two groups and one cannot have both characteristics and both sets are mutually exclusive. Given an ‘’N’’ group of commodities, hall group can be put into this form: H:-(X1, X2, X3, X4, X5,......., XR) WHERE AS HARAM GROUP AS HR:-(XR-1, XR-2,....., XN) ALSO, H U HR = Ø, ‘’H’’ SET REFERS TO HALAL AND ‘’HR’’ TO HARAM SET. It is the Halal set that is available to the consumer and his choice should be from it. Whatever he spends must be only on these commodities. It is beyond the authority of the individuals to choose from the second one, it only in extreme cases that he is allowed to choose from the second one e.g. the choice of meat of swine and pig is extremely prohibited in normal conditions where as in extreme environment it is permitted. But he has to make it sure that nothing from the Halal group is available and also to consume it only in limited way. The second group is considered to be harmful for the individual as well as the society. In the second group, it is swine and dead meat, alcohol, vulgar shows, porn DVD’s, fashion shows etc. Assuming that an individual is conscious of his services and responsibilities to his creator, his choice will definitely fall in first group. It provides him more satisfaction than the conventional theories predict. Reward in this world and the reward of Allah by following rules is definitely more as compared to simple material satisfaction. Conventional theories define utility depend on the number of commodities available for consumption irrespective of what these are. It reads as under: Uc = ∫(푥 , 푥 . . . 푥 ) and where as Ui = ∫(퐻) + (푃).These equations make it clear that in Islamic terminology, utility is the function of only the permitted goods and services that enter into utility equation. Also there is an addition to the satisfaction that occurs because individuals feel happy and satisfied when they follow religious rules and regulations. Now it to be argued how much the following rules and regulations of Islam an individual or a society fell satisfied. Since we cannot provide an upper limit in case of “P” but it is for sureity that it will be always positive. The value of “P” will attain a zero value when an individual only chooses his consumption from the set HR. For a purely Islamic state the choice of consumption set will be clearly the “H’’ set and in this case the ‘’HR’’ set will clearly be a null set, as the Muslim countries will not allow the production of prohibited goods and services. In this case, individuals have no opportunity to choose from prohibited goods. Not only, Islam has prohibited the consumption of some goods and services but it has preached moderation in consumption as well. It hates extragravence and show off probably with a view to encourage saving and investment. It is to be


seen that earlier theories of consumption considers man to be the slave of his wants. Islam has some other thoughts about the superior creature. It does not uphold this view. Whereas earlier theories preach competition, demonstration, imitation and excessive consumption, our religion preaches moderation. The principle of moderation in consumption means that one should take the food and drinks with moderation and avoid excess because excess of intake is harmful to health. The Qur’an says: “And eat and drink, but be not prodigal. Lo! He loveth not the prodigals (7:31). Again the Qur’an says: “O ye who believe! Forbid not the good things which Allah hath made lawful for you, and transgress not……..”(5:87). Thus overloading of stomach is prohibited. It is also prohibited that one should adopt self-denying practices followed by ascetics and monks and deprive himself of some foods which Allah has made lawful. The principle of moderation is also applicable to spending. One must not be miser in spending nor extravagant. The Qur’an says: “And those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two (25:67). It encourages humans to enjoy the bounties of nature, but in a limited way. It hates miser as well as spendthrift. Islam has chosen a middle path between the two. Many reasons can be provided why our religion has chosen the middle path. Take the case of miser. The Quran says “And let not those who hoard up that which Allah hath bestowed upon them of His bounty think that it is better for them. Nay, it is worse for them. That which they hoard will be their collar on the Day of Resurrection. Allah’s is the heritage of the heavens and the earth, and Allah is Informed of what ye do (3:180). Again, the holy book says” Who hoard their wealth and enjoin avarice on others, and hide that which Allah hath bestowed upon them of His bounty. For disbelievers we prepare a shameful doom (4:37). At other place, the Quran says “They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings (O Muhammad) of a painful doom. On the Day when it will (all) be heated in the fire of hell and their foreheads and their flanks and their backs will be branded therewith (and it will be said unto them): Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard!-(9:34-35). Further more “And let not thy hand be chained to thy neck nor open it with a complete opening, lest thou sit down rebuked, denuded (17:29). Another verse of holy Quran says “But as for him who hoardeth and deemeth ‘himself independent, and disbelieveth in goodness; Surely We will ease his way unto adversity. His riches will not save him when he perisheth (92:8-11). “Woe unto every slandering traducer, who hath gathered wealth (of this world), and arranged it. He thinketh that his wealth will render him immortal (104:1-3). Our prophet Muhammad has also severely criticised the miser. In a Hadith, our prophet says” Abu HurairahRA reported that the Messenger of Allah said: There is no day wherein a servant gets up at morn but two angels do not come down. One of them says: O Allah! Give the charitable man success. Another say: O Allah! Give the miser destruction (Bukhari and Muslim).


Asmma’a reported that the Messenger of Allah said: Spend and don’t count lest Allah counts for you, and don’t hoard up lest Allah withhold from you. Spend what you can (Bukhari and Muslim). Abu Omamah reported that the Messenger of Allah said: O son of Adam! That you spend wealth is good for you and that you withhold it is bad for you, and you should not be backbited for miserliness. Begin with those who are in your family (Muslim). Abu Hurairah reported that the Messenger of Allah said: The likeness of the miser and the charitable man is the likeness of two men upon whom there are two helmets of iron which their hands tied up to their chests and throats. Whenever the charitable man gives alms, it unloosens; and whenever the miser intends to give alms, it tightens up and overtakes every ring in its place (Bukhari and Muslim). Abu Hurairah RA

reported that the Messenger of Allah said: The generous man is near Allah, near Paradise, near the people and far off from Hell; and the miser is far off from Allah, far off from Paradise, far off from the people and near Hell; and the illiterate charitable man is dearer to Allah than the pious miser(Tirmizi). Abu Sayeed reported that the Messenger of Allah said; there are two habits which do not unite in a believer – miserliness and bad conduct (Tirmizi). Abu Bakar SiddiqRA reported that the Messenger of Allah said: Neither the diplomat, nor the miser, nor the hard-hearted shall enter Paradise (Tirmizi). His main motive is not to spend. This results in decline in the flow of money in the economy and is the main cause of the backwardness of the market. Decline in the flow of money is the main cause of unemployment and poverty. Lack of demand, because of the lack of flow of money, causes market to shrink which results in backwardness and poverty. It is these factors that are responsible for the lot of evils in the society. Poverty causes humans to degrade that causes crimes, divorce, drug addiction and what not. It is because of this that Islam prohibits misery. Similar case is with extravagance. The Qur’an, the revealed book of Islam, says: “O children of Adam! Look to your adornment at every place of worship and eat and drink, but be not prodigal (7:31). In this verse, the Holy Book has enjoined upon the people to wear good clothes, take good food and drinks but be not extravagant. In another verse, the Holy Qur’an disapproves those who discourage the people to enjoy good life, as follows: “Say: who hath forbidden the adornment of Allah which He hath brought forth for His bondmen, and the good things of His providing? (7:32). Islam rather wants that a person should lead a life according to economic resources which have been bestowed upon him by God so that people should know God’s bounty upon him. The Qur’an says: “Who hoard their wealth and enjoin niggardliness on others and hide that which Allah hath bestowed upon them of His bounty. For disbelievers we prepare a shameful doom;” (4:37). Thus concealment of bounties of Allah is in fact equivalent to their denial and is, therefore, liable for punishment of Allah. According to a Hadith reported in Abu Daud, once a wealthy person in dirty clothes came to the Prophet of Allah who was very displeased to see him in that condition and said: When God has bestowed His bounty upon you, He likes that the effect of His


bounty should appear on you.” According to another Hadith in Bukhari, the Prophet of Allah is reported to have said: “Eat and wear to your full satisfaction and give charity without being extravagant and proud.” It puts an undue stress on the society. People living in these conditions are more prone to psychological and mental diseases e.g. proudness, hatred for poor. Jealousy and hatred creeps in. Islam has condemned extravagance, as it has miserliness, because both these extremes are harmful to Islamic economy. Miserliness withholds community’s resources from being properly utilised; whereas extravagance wastes them on unnecessary and superfluous wants Extravagance gives rise to inflationary conditions in a society. Savings come down so does the investment. Man, in Islam, is supposed to be the superior being who is not under the control of his desires and wants. It is not these desires and wants that direct him but it is he who directs them. Being a responsible member of the society he has to look for the betterment of his social environment. He is not to be selfish and individualistic, only caring for himself. Now an example of extravagance in the society is the expenditure on marriages. No doubt rich section will be able to afford it. But for the poor it becomes an uneasy situation. They are not able to afford it. This extravagance is responsible for many crimes against poor women. Still the most worrying cause of this evil is that it results in allocation of resources towards unimportant things. More and more consumption by rich people reallocates the resources towards the production of these commodities and less remains for the poor section. It is only our religion that teaches a middle path between two extremes so that ill effects of these extreme cases will be eliminated. Extravagance, according to a Muslim scholar, means firstly spending wealth on unlawful things, such as gambling, drinking, prostitution etc., even if the amount involved is insignificant; secondly excessive expenditure on lawful things, whether within or beyond one’s means; thirdly expenditure for good and charitable purposes merely for show. The Holy Qur’an and the Prophet of Islam have condemned extravagance as follows: “O Children of Adam! Look to your adornment at every place of worship and eat and drink, but be not prodigal. Lo! He loveth not the prodigals (7:31) at other place it says “Give the kinsman his due, and the needy, and the wayfarer, and squander not (thy wealth) in wantonness. Lo! The squanderers were ever brothers of the devil, and the devil was ever an ingrate to his Lord (17:26-27).And let not thy hand be chained to thy neck nor open it with a complete opening, lest thou sit down rebuked, denuded.(17:29). And those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two (25:67). It is reported by Abu HurairahRA that the Apostle of Allah once remarked that one thing at which God is most displeased with you is extravagance (Muatta Imam Malik). Moderation, in case of consumption is, promoted by Islam. Moderation between two extremes of miserliness and extravagance has been recommended by Islam as golden mean. Following are the relevant verses of the Qur’an and A hadith of Muhammad (PBUH): the holy Quran says “O children of Adam! Look


to your adornment at every place of worship and eat and drink, but be not prodigal. Lo! He loveth not the prodigals (7:31). “And let not thy hand be chained to thy neck nor open it with a complete opening, lest thou sit down rebuked, denuded (17:29). “And those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two (25:67). “Let the man of means spend according to his means; and the man whose resources are straitened, let him spend according to what God has given him’’(65:7). A Hadith of Muhammad (PBUH): Moderation is half of the success in economic life (Kanz-ul-Ammal). Moderation is the best course in everything (Kanz-ul-Ammal). It is a part of intelligence and wisdom of a man that he should adopt moderation in his economy (Ahmad). Abdullah-bin-AmrRA reported that the Messenger of Allah said: When four things are in you, there is nothing against you in the world which may cause your loss; guarding of trust, truthfulness in speech and beauty in conduct, and moderation in food (Ahmad, Baihaqi).It helps a man to take control of his wants and subdue them. Now it is to be seen that period of consumption is not same throughout the year in our religion. Throughout the year, an individual can consume in day as well as night except in the month of Ramadhan. Here also limitations are on the physical intake of goods. He cannot have tea, juice, bread etc in day. The pattern changes completely for this month. But most of the services are allowed that does not result in the intake of foreign material into our bodies e.g. services of teachers, health checkups are allowed etc. given these theoretical considerations, it is to be seen that substitution effect will clearly work in Islamic consumption as well. But it is allowed only in permitted goods e.g. if the price of lamb meat is more as compared to beef, it is no irreligious activity to choose the good that is cheaper. Also a case of substitute doctors is there. A person can have his health check up from a private doctor or government doctor. If the person has to find the substitute of some good or services, his choice in this case is also restricted to Halal set. He can’t substitute pork meat for lamb. In case of substitution between Halal and its Haram substitute, substitution is clearly zero in case of normal conditions even if the price of the prohibited good is far below than its Halal substitute. Substitution effect between two permitted goods and services is clearly negative implying a decrease in the price of a substitute will cause decline in the demand for the other or to put in other words the cross elascity of demand between two permitted goods and services is negative. Similarly in case of complementary goods, the cross elascity of demand is positive. In also complementary goods, it is to be seen that an individual only uses permitted goods and not the prohibited ones. Since these things work, so whether the income effect will work in Islamic case. No doubt with the decrease in prices of goods the real income of the individual increase and vice versa. It simply depends on his relative situation i.e. where he is. Suppose an individual has some amount of his income which he spends on his cloth and food. Now with the decrease in price of cloth, real balance will increase. The new increment will


have to be spent or saved. If he has no sufficient cloths available as per Islamic standards, keeping in view the moderation concept, income effect will be positive. But if he has enough clothes at his home, the income effect will become zero at that time because more clothes will be considered as extravagance and wastage against religious values. After some consumption, the income effect will be zero; there will be either saving of the money or will be given to poor for their life maintenance. Islam has not fixed any standard of life. It is left to the conscience of the individual. However, it is the basic principle of the economic system of Islam that every citizen of an Islamic state should have at least basic necessaries of life. So in a society where poverty, misery and want is prevailing, no individual can be permitted to enjoy comforts of life although he is very rich, until and unless every other individual is provided with basic human needs. But with the rise of general level of prosperity in the society, those who can afford are permitted to enjoy comfortable life. In any case Islam does not permit life of luxury to any Muslim even though he is very rich. Moderation in life is the general Islamic principle which should not be lost sight of in adopting a lifestyle. Teachings of Islam generally recommend that one should lead a life of simplicity and austerity. For a Muslim the Prophet of Islam and his companions are role model. Let us quote some Hadiths and traditions to see how the Prophet and his successors, named in history as Righteous caliphs, lived. The Holy Prophet once remarked: “Successful is the man who has acted on the principles of Islam and lived on simple necessaries of life” (Ahmad, Tirmizi). Jabir bin ‘Abdullah reported that Allah’s Messenger ( peace be upon him) said: “There should be a bedding for a man, bedding for his wife and the third one for the guest, and the fourth one is for the Satan” (Bukhari, Daud). ‘Ubaidullah bin Muhdin al-Khutami reported on the authority of his father with whom he had cordial relations that the Messenger of Allah (may peace be upon him) said: “If anyone among you is secure in mind in the morning, healthy in body, possessed of food for the day, it is as if the whole world had been brought into his possession” (Tirmizi, Ahmad). ‘Uthman bin ‘Affan reported that the Apostle of Allah (peace be upon him) said: “The son of Adam has no right except to the following: a house in which he lives, a garment with which he conceals his private parts, dry bread and water” (Tirmizi). Abu Umamah reported the Apostle of Allah (may peace be upon him) as saying: “The most enviable of my friends in my estimation is a believer with little property who finds pleasure in prayer, who performs the worship of his Lord well, who obeys Him in secret who is obscure among them, who is not pointed out by people, and whose sustenance is bare sufficiency, with which he is content.” Then he snapped his fingers and said: “His death will come up speedily, the women who mourn over him will be few and what he leaves will be little.” And with this chain of transmitters, it has been reported from the Apostle of Allah (peace be upon him): My Lord offered to turn the valley of Mecca into gold for me but I said: “No, my Lord, but let me have enough to eat a day and be hungry on the other.” He said this thrice or so when I am hungry I shall make


supplication to Thee and make mention of Thee and when I have enough shall thank Thee and praise Thee. And he (the narrator) said: “This is a hasan hadit ”(Tirmizi). Hazrat A’ishaRA reported: We the family of Muhammad (peace be upon him) used to spend (the whole) month in which we (did not need to) kindle the fire as (we had nothing to cook); we had only dates and water (to fill our bellies) (Bukhari, Muslim). Hazrat A’ishaRA reported: Never had the family of Muhammad (may peace be upon him) eaten to the fill since their arrival in Madinah with the bread of wheat for three successive nights until his (Holy Prophet’s) death (Bukhari, Muslim). It is reported about UmarRA, the second Caliph, that Utbah-bin-Farqad, a governor of some province, once visited the Caliph while he was taking his meals. The governor seeing his coarse food, remarked, “Why don’t you take food made of fine flour”? UmarRA replied, “Ibn Farqad! Is there anyone with greater resources than myself in the land of Arabia at present? Utbah said that there was none with greater resources than you. Then UmarRA enquired from him saying, “Ibn Farqad! Do all the Muslims get fine flour (to eat)?” He replied in negative. Then Umar said, “I would be a bad ruler if I were to take nice (and good) things for myself and leave the bad ones for the people”. Given this stress on moderation it is seen that Islam allows a person to enjoy the materialistic aspect of his life but in certain limits. Similarly, there are also rules for the enjoyment of different commodities in the world. Some are termed as necessaries, comforts and luxuries.. Necessaries: Necessaries are those wants whose satisfaction is absolutely essential as without these, man cannot survive e.g. food, clothing and shelter, etc. are necessaries of life because without satisfaction of them human existence is not possible. The Prophet of Islam has beautifully summed up these necessities of life in his following saying: “That is enough for you of this world if it meets your hunger and covers your body and along with these, you get some (house) to live in………” According to a Hadith reported in Tirmizi, Prophet Muhammad (PBUH) mentioned bare necessaries of life to comprise a house wherein to live, necessary clothing wherewith to hide nakedness, bread and water to satisfy hunger and thirst. Islam not only recognises one’s right to satisfy basic necessaries of life but also it encourages one to make struggle and earn them. If one is unable to earn them because of some disability or some other reason, Islam places responsibility on Muslim community and state to provide for basic needs of such a person. Comforts: Comforts, as term of economics, stand for those wants which provide comfort and convenience to man and whose utility in general is greater than their cost. Comforts are above necessaries of life and satisfaction of them makes life easy and comfortable. A man’s ordinary food, clothing and shelter are bare necessaries for his survival, but good food, good clothes and a good house are his comforts. Enjoyment of comforts is permissible in Islam.


The Qur’an, the revealed book of Islam, says: “O children of Adam ! Look to your adornment at every place of worship and eat and drink, but be not prodigal…….” (7:31). In this verse, the Holy Book has enjoined upon the people to wear good clothes, take good food and drinks but be not extravagant. In another verse, the Holy Qur’an disapproves those who discourage the people to enjoy good life, as follows: “Say: who hath forbidden the adornment of Allah which He hath brought forth for His bondmen, and the good things of His providing? (7:32). Islam rather wants that a person should lead a life according to economic resources which have been bestowed upon him by God so that people should know God’s bounty upon him. The Qur’an says: “Who hoard their wealth and enjoin niggardliness on others and hide that which Allah hath bestowed upon them of His bounty. For disbelievers we prepare a shameful doom” (4:37). Thus concealment of bounties of Allah is in fact equivalent to their denial and is, therefore, liable for punishment of Allah. According to a Hadith reported in Abu Daud, once a wealthy person in dirty clothes came to the Prophet of Allah who was very displeased to see him in that condition and said: When God has bestowed His bounty upon you, He likes that the effect of His bounty should appear on you.” According to another Hadith in Bukhari, the Prophet of Allah is reported to have said: “Eat and wear to your full satisfaction and give charity without being extravagant and proud.” Luxuries: Excessive expenditure on unnecessary and superfluous wants is called luxury; e.g., very expensive dress, use of wine, use of gold and silver utensils, lavish expenditure on marriage functions and other festivities, and above all wastage of wealth on gambling, on prostitutes and singers and dancers, etc. Wastage of wealth on luxuries, by those in whose hands wealth is concentrated due to unfair distribution, leads to deprivation of majority of the nation from bare necessaries of life and thus causes disunity and dissension in society. To this fact the Qur’an has thus drawn the attention of its followers: “Satan seeketh only to cast among you enmity and hatred by means of strong drinks and games of chance……..” (5:91). It has thus warned its followers: “……Eat of that which is lawful and wholesome in the earth, and follow not the footsteps of the devil…….”(2:168).The Prophet of Islam prohibited the use of expensive silk clothes and utensils of gold and silver which were considered luxuries in those days. According to Umm SalamaRA, the Holy Prophet said, “Anyone who eats or drinks in vessels of gold or silver pours fire into his belly’ (Muatta). Anas-bin-MalikRA reported that the Holy Prophet said, “Anyone (man) who wears silken clothes in this world, will not wear them in the Hereafter (Muatta). According to Abu HurairahRA, the Holy Prophet had forbidden the wearing of a golden ring (for men) (Bukhari). So it becomes clear that from the Islamic angle, an individual is free to enjoy the bounties of life, but only in a limited way. He has to uphold the rules of his creator and live life within his rules established by him. Since Halal and Haram concept is there, choice is restricted. It does not at all go


against the notions of rationality. Consumer maximises his satisfaction both material as well as spiritual but in a restricted way. Here it is to be seen that consumption function of a Muslim depends on so many factors. As against the conventional theories, where consumption depends on interest rates, income, relative consumption of his community, Islamic consumption function has to eliminate all anti_ shariah forces that go into the consumption function. E.g. C=∫(푋1,푋2,푋3 … .푋푁)푋 This conventional function is without regard to the resources where they are coming from. Interest is Haram and cannot be included; completion among people for more and more lavish expenditure is also excluded etc. it is to be seen that in Islamic terminology, consumption must depend on only the Halal earned income with due regard to his religion. Also it can be easily inferred that it is positively related to the income. That is it is an increasing function of income after deducting the Zakat from it, in addition to adding the transfer payments that are made by some individuals. C=FUNCTION (INCOME, ZAKAT, TANSFER PAYMENTS AND RELIGIOUS OBLIGATION) Not only these equations differ with respect to religious obligation, but it differs from the taxes as well. A government can change the amount of the tax whenever it likes, but in an Islamic state the Zakat is fixed and the sadaqat is entirely in the hands of individuals. So it is seen that Islamic consumption thought is more complex and in better shape that the conventional ones. Also it is often argued that so much stress on materialism by the western societies, it has taken a tool on our environment as well. Islam has restricted the consumption also with the aim to have good quality environment. Higher consumption leads to more ecological foot print and more degradation. It is simple way that is promoted by Islam that has the tendency to change the life. It will make an individual a superior being, protect him from haram full effects of his irrational choice of consumption and as well as promote his spiritual life.


Chapter 3: Production in Islam Humans require different types of goods and services to satisfy their wants and desires. These goods come through using combination of various types of inputs e.g. land, capital, and labour etc. There is now another input of production that has turned to be most important for the production. It is known as technology. Technology has helped man to progress at a very high speed and has made his life easy and comfortable. New inventions and discoveries have resulted in new types of products and services. Life has become easy and prosperous. But it is to be seen that only a section of world population is enjoying better lives in developed nations where as in underdeveloped countries people still have low literacy, poverty, disease, sickness and what not. Some economists have suggested that it is the difference between the patterns of production that is the basic cause of this asymmetry. Developed nations are engaged in producing high quality industrial products where as poor nations are still engaged in agriculture. Also poor nations lack physical and social capital which is an important input of production. In spite of these unequal standards of life, the capabilities of humans to produce diversified goods and services, has no doubt increased. We find now more and more new products replacing the old ones in the market. History is witness to the fact that humans have produced two types of goods and services. One that benefits the humanity and other that harms it. Producers have produced cars, railways, space-crafts that definitely benefit the society whereas on the other hand we have produced drugs, alcohol, vulgar shows, services of prostitution centres etc. These producers have, according to the conventional theory, one aim and that is to have more and more profits. Selfishness and greed is the order of the day. It is this greed for more wealth that is dictating their decisions. Rationality is seen as getting more and more profits for shareholders, irrespective of what the production is. He is supposed to be a free man. No responsibility to his creator. Simply maximization of profit is his aim. Man has devised some mathematical equations to make him affect his decision making. No responsibility towards society is the basis of profit maximization. Islam has a different ideology about human being and what they produce. Our religion views him as a responsible human being, always in control of his lord. He has to uphold his religious values more than anything. As in consumption, production also has the concept of Halal and Haram goods and services. People are supposed to produce only permitted goods and refrain from producing prohibited ones. In the former case we have mangoes, apple, cherry etc and in later we have production of drugs, fashion shows, pig production etc. Not only it is seen that what type of production is there but also how it is produced. Given a conventional equation about production it reads as: Production=function (labour, capital, land, technology)


In this equation, production implies anything as the producer likes. Also there are no qualifications for inputs. How these are used? Whether they are exploited or not? What will be the choice of techniques of production on the society? These questions are not answered by the conventional production function. Similarly no care is given to religious effect on production. It is only the Islam that takes care of these things. The function here rests simply on some basic assumptions. First there is a creator of the universe in whose control all every object is. Second, the producer has knowledge about the goods and services permitted and prohibited in Islam. Third that inputs have to be Halal E.G producers must not use interest as an input as it is Haram. So it can be argued that in Islam categorised the goods and services in Halal and Haram. In set form we can have Halal set:-(x1, x2, x3,...., xn) and haram set(z1, z2, z3,...zn) And Halal set and haram set are mutually exclusive. Islam is not simply a religious faith but is also a political, social and economic system for a society. That is what is intended by the phrases that describe Islam as a religion, as a code of life, as faith and as shariah. Islam was not revealed to man for spiritual guidance only, it was for social and economic guidance as well. Instead, Islam comes in order to organise man’s life in all its aspects. The producer has to remain committed to the first set and the choice for the second is not there. The aim of the production in Islam is establish a moral and ethical society. It aims at upholding the religious values and lessens the stress on materialistic society. The earning of the profit is seen to be in relation with its effect on society and its effect on moral and ethics. That is why it has prohibited certain goods and services. To ensure that the activity is conducted properly, Islam sets the principle of production as:

1. Never producing the haram product or forbidden from viewpoint of Islam, e.g. foods.

The unlawful or haram foods are: a. Pork and its by-products. b. Alcohol. c. Meat of dead animals. d. Animals

slaughtered in a name other than Allah (SWT). e. Blood. f. Intoxicating drugs. In this respect Allah says in surah al-Baqarah verse 173. “He has forbidden you only the dead animals, and blood, and the flesh of swine, and that which is slaughtered as a sacrifice for other Allah (or has been slaughtered for idols, on which Allah’s Name has not been mentioned while slaughtering). But if one is forced by necessity without wilful disobedience or transgressing due limits, then there is no sin on him. Truly, Allah is Oft-Forgiving, Most Merciful’’. In spite of these limitations Allah has provided man freedom required to use his intellect and create different products. These goods can be divided into three categories: agriculture products, industrial and service industries. In case of necessities, food occupies a first place.


Food production may consist of the process of land cultivation or agricultural activities consisting of rearing livestock (cattle, sheep, goat, chicken etc), fishing and cultivating food crops. These activities are primary production. Humans may practice such activities on land, provided by Almighty Allah subhanahu wata’ala that has created the earth from the initiation (very hot and uncultivable globe) to the cultivable land as described in the Qur’anic verse 25 of chapter al-Abasa. Al-Qur’an, the revealed book of Islam, say’s: And the cattle hath He created, whence ye have warm clothing and uses,

and whereof ye eat…….. And they bear your loads for you unto a land ye could not reach save with great trouble to yourselves……… And horses and mules and asses that ye may ride them……….-(16:5-8)

And Lo! In the cattle there is a lesson for you. We give you to drink of that which is in their bellies…….. Pure milk palatable to the drinkers (16:66).

And Allah hath given you in your houses an abode, and hath given (also), of the hides of cattle, tent-houses which ye find light (to carry) on the day of migration and on the day of pitching camp; and of their wool and their fur and their heir, caparison and comfort for a while(16:80).

Next comes the industrial goods, most of the goods are allowed, but there are limitations as well. It has to be only those goods that are permitted. Alcohol, sausages’ from pork, materials containing harmful materials e.g. soft drinks contain caffeine which is prohibited, cigrerates, and fat of some prohibited, also indecent clothes etc. any industrial product containing prohibited things cannot be consumed in different forms, as basics are same. Since the industrial goods are composed of different types of basic ingredients, it is religious obligation for the producer to provide information about its ingredients. There must be perfect information about the products. Cheating is condemned in Islam. Producers cannot keep their customers in dark about the products. The holy Quran says” Give full measure and do not be of those who cause loss [to others]. And weigh with an even [honest] balance} (Ash-Shu'ara' 26: 181-82) {And give full measure when you measure, and weigh with an even [honest] balance. That is good and the better at the end} (Al-Isra' 17: 35). At another place the Quran says “The Quran warns those who violate honesty: {Woe to those who give less [than due]. Who, when they take a measure from people [as buyers], they take in full. But if they give by measure or by weight [as sellers], they cause loss [to others by giving less than due]. Do they not think that they will be resurrected? For a momentous Day [the Day of Judgment], The Day when mankind will stand before the Lord of the worlds?} (Al-Mutaffifin 83: 1-6) The Prophet addressed the problem of cheating in more than one Hadith. Following is an example: Anyone who cheats is not of us. (Al-Bukhari)


So it is clear that producers are morally and ethically bound to give perfect information to their consumers. As against the industrial production, it is service sector that is easily identifiable whether these are prohibited or not. Production of fashion shows, prostitution centres, services of banking operating under interest, services of killers etc. Not only is it to be seen whether the production is prohibited or not, care must be taken to avoid excessive wastage and unnecessary production. The method of production should not cause an undue and excessive harm to Allah-given resources and bounties for the benefit of all mankind. The Quran speaks repeatedly against spreading mischief or corruption in the land (2:60, 2:205, 5:46, 7:56). Prophet Muhammad spoke of the punishment of anyone who kills a sparrow without a legitimate reason [e.g. for food], or one who cuts a tree for no good reason. That is wastage is clearly prohibited in our religion. Productive resources are not to be left idle in the name of private ownership, especially resources that are crucial to the lives of people. The following Hadith provides an illustration of this concept: If one of you possesses a piece of [cultivable] land, let him cultivate it. And if he is not able to cultivate by himself, let him give it to his brother (Al-Albani). Whatever arrangement made with one's "brother", the message of this Hadith is clear; do not leave productive assets idle. This makes ownership of resources a social function, rather than an absolute right. The production process should not cause harm to others [e.g. building a noisy factory in the middle of a residential area] as restricted currently by zoning regulations. This is based on the instruction of the Prophet: One should not harm himself or others (Ibn Majah). In situations where some harm is inevitable, a careful weighting of relative harms and benefits should be made. Furthermore, a party that may be harmed must be compensated, based on the cardinal rule in Islamic Law that harm must be removed [or compensated if inevitable]. Given this idea about production process, so what kind of production technique a producer has to use. It is left to the discretion of the producer. But being a responsible person he should choose the techniques that will benefit the society. It is a known fact that that same production can be produced either using more labour and less capital or less labour and more capital. It depends on the scarcity of these factors of production. Take the first case, when more labour is used. Whenever it seen that there is more labours available, producers must go for more labour intensive technique. It will remove poverty, lawlessness, crimes and social tensions which will not only benefit society, but producers as well as low level of poverty will generate more demand which will help producers to earn more in long-run. Furthermore, unemployment results in wastage of resources which is totally unacceptable in Islam. Since labour is an important factor of production, Islam has devised policies related to him. The economic life of Islam is also based upon solid


foundations and Divine instructions. Earning one's living through decent labour is not only a duty but a great virtue as well. Dependence of any able effortless person on somebody else for a livelihood is a religious sin, a social stigma and disgraceful humility. He has to live a life of dignity and respect and producers have to give him due wages. Narrated on Authority of: Abu HurairaRA The Prophet said, "Allah said, 'I will be an opponent to three types of people on the Day of Resurrection: 1. One who makes a covenant in My Name, but proves treacherous; 2. One who sells a free person and eats his price; and 3. One who employs a labourer and takes full work from him but does not pay him for his labour.' Narrated / Authority of: Abu MusaRA the Prophet said, "The example of Muslims, Jews and Christians is like the example of a man who employed labourers to work for him from morning till night for specific wages. They worked till midday and then said, 'we do not need your money which you have fixed for us and let whatever we have done be annulled.' The man said to them, 'Don't quit the work, but complete the rest of it and take your full wages.' But they refused and went away (like the Jews who refused to believe in Jesus [Isa] (AS). The man employed another batch after them and said to them, 'Complete the rest of the day and yours will be the wages I had fixed for the first batch.' So, they worked till the time of Asr prayer. Then they said, "Let what we have done be annulled and keep the wages you have promised us for yourself.' The man said to them, 'Complete the rest of the work, as only a little of the day remains, ' but they refused (like the Christians who refused to believe in the Message of Muhammad (SAW). Thereafter he employed another batch to work for the rest of the day and they worked for the rest of the day till the sunset, and they received the wages of the two former batches. So, that was the example of those people (Muslims) and the example of this light (guidance) which they have accepted willingly. Narrated on Authority of Abdullah bin UmerRA I heard Allah's Apostle saying, "Three men from among those who were before you, set out together till they reached a cave at night and entered it. A big rock rolled down the mountain and closed the mouth of the cave. They said (to each other), Nothing could save you Tom this rock but to invoke Allah by giving referenda to the righteous deed which you have done (for Allah's sake only).' So, one of them said, 'O Allah! I had old parents and I never provided my family (wife, children etc.) with milk before them. One day, by chance I was delayed, and I came late (at night) while they had slept. I milked the sheep for them and took the milk to them, but I found them sleeping. I disliked to provide my family with the milk before them. I waited for them and the bowl of milk was in my hand and I kept on waiting for them to get up till the day dawned. Then they got up and drank the milk. O Allah! If I did that for Your Sake only, please relieve us from our critical situation caused by this rock.' So, the rock shifted a little but they could not get out." The Prophet added, "The second man said, 'O Allah! I had a cousin who was the dearest of all people to me and I wanted to have sexual relations with her but she refused. Later she had a hard time in a famine year and she came to me


and I gave her one-hundred-and-twenty Dinars on the condition that she would not resist my desire, and she agreed. When I was about to fulfil my desire, she said: It is illegal for you to outrage my chastity except by legitimate marriage. So, I thought it a sin to have sexual intercourse with her and left her though she was the dearest of all the people to me, and also I left the gold I had given her. O Allah! If I did that for Your Sake only, please relieve us from the present calamity.' So, the rock shifted a little more but still they could not get out from there." The Prophet added, "Then the third man said, 'O Allah! I employed few labourers and I paid them their wages with the exception of one man who did not take his wages and went away. I invested his wages and I got much property thereby. (Then after some time) he came and said to me: O Allah's slave! Pay me my wages. I said to him: All the camels, cows, sheep and slaves you see, are yours. He said: O Allah's slave! Don't mock at me. I said: I am not mocking at you. So, he took all herd and drove them away and left nothing. O Allah! If I did that for Your Sake only, please relieve us from the present suffering.' So, that rock shifted completely and they got out walking. A Muslim is enjoined by God to be self-supporting and to stay away from being a liability on anybody. Islam respects all kinds of work for earning one’s livelihood so long as there is no indecency or wrong involved. With a clear conscience and due respect from society the Muslim can roll up his sleeves and undertake any kind of work available to provide for himself and his dependents. Prophet Muhammad is reported as having said that it is far better for one even to take his rope, cut wood, pile it up and sell it in order to eat and give charity than to beg others whether they give him or not. According to Islam, the status of honest working men cannot be lowered on account of the kind of work they are doing for a living. Yet the labouring workers have no limited scope for improving their lots and raising their standards as high as possible. They have equal opportunities at their disposal and enjoy freedom of enterprise. Similarly the case of capital is given due consideration in Islam. Capital plays a vital role in production as production without capital would be very hard to achieve. If man does not use tools and machines in farming, mining and manufacturing sectors and works with his own hands, productivity would be very low. So man has been using some sort of tools and equipment’s to assist him in his work of production. Even primitive man made use of bow and arrow for hunting and fishing-net for catching fish. With the growth of science and technology, man has invented heavy and complex machines to assist him in every field of production such as agriculture, mining, manufacturing, transportation, communication, etc. In the modern age production without aid of capital can hardly be achieved. Economic development of the countries like USA, Japan, Germany, France, UK, is largely due to extensive use of capital. Capital occupies a pivotal position in the process of economic development as well as in creation of employment opportunities. Besides escalating production, employment is also enhanced when capital goods like plant and


machinery are produced and when these goods are used for further production. Thus capital is indeed like blood in human body which runs into the veins of industry and keeps it going. Because of vital role of capital in production, Islam has given much importance to capital. Al-Qur’an, the revealed book of Islam, in the following verses talks of the use of cattle wealth as capital goods of production: And the cattle hath He created, whence ye have warm clothing and uses, and whereof ye eat…….. And they bear your loads for you unto a land ye could not reach save with great trouble to yourselves…. And horses and mules and asses that ye may ride them (16:5-8) And Lo! in the cattle there is a lesson for you. We give you to drink of that which is in their bellies…….. pure milk palatable to the drinkers (16:66). And Allah hath given you in your houses an abode, and hath given (also), of the hides of cattle, tent-houses which ye find light (to carry) on the day of migration and on the day of pitching camp; and of their wool and their fur and their heir, caparison and comfort for a while.(16:80).Thus in the above mentioned verses, the Holy Qur’an has referred to various uses of cattle and horses as factors of production such as in transportation, in production of milk, wool, fur, hides for tent-houses, and so on. “And the Firmament has He raised high, and He has set up the Balance (of Justice) in order that you may not transgress (due) balance. So establish weight with justice and fall not short in the balance (55:7-9). This is to guide man to resort to justice and straightforwardness in all his dealings and transactions. The future of cheaters is grim and their doom is awful. Here is how the Qur’an looks into the matter: Woe to those who deal in fraud, those who, when they have to receive by measure from men, exact full measure, but when they have to give by measure or weight to men give less than due. Do they not think that they will be called to account on a Mighty Day, a Day when (all) mankind will stand before the Lord of the Worlds? (83:1-6). Hazrat UmarRA, a great companion of the Prophet and second right guided caliph of Islam used to impress upon some of the recipients of state allowances and stipends that they should purchase goats or other cattle so that they could increase their capital and leave after them for their children something to fall back upon. Capital formation means increasing the stock of real capital in the country. It involves production of more capital goods, encouraging savings and investments, etc. In modern economics, capital formation is encouraged through many fiscal and financial measures such as rebates and exemptions from taxes, high dividends on investments, attractive rates of interest and above all protection of capital. Islam believes in all such measures except interest on investments as interest is prohibited. Islam in fact, took measures for capital formation in Islamic state much earlier such as condemnation of hoarding of wealth, tax exemption on productive goods and avoidance of extravagant spending. Some of the steps taken by Islam in ensuring capital formation are that :


1. Zakat has been imposed on hoarded wealth in the form of gold and silver, bank deposits, cash, etc. If this wealth is put into productive channels, its Zakat would be paid out of its income and thus the wealth would grow despite Zakat. But if the wealth is kept hoarded and idle, the regular payment of Zakat out of it every year would reduce it and ultimately diminish it. That is why Prophet Muhammad asked the guardian of the wealth of orphans to put their wealth in business that Zakat should not consume it. Thus Zakat forces a hoarder of wealth to bring it out of idle channels and to invest it in production. This helps in capital formation.

2. Wealth employed in production has been exempted from Zakat. For example agricultural land is exempt from Zakat; cattle employed in farming are exempt; horses used for riding, transport and jihad are exempt; plant and machinery used in factories and farms for production of goods are exempt; tools and instruments used by a professional or an artisan are exempt, and so on. Thus exemption of capital goods from Zakat Tax is a great fiscal measure which helps capital formation in an Islamic society. And don’t forget that this measure was taken by Islam some fourteen centuries ago when there was no concept of fiscal incentives for capital formation.

3. Those who dispose of their capital assets like house or land have been enjoined upon by the Prophet (PBUH) to re-invest the cash in the purchase of some other land or house. The Prophet is reported to have said: “God may not bless the price of that land and that house which is not again re-invested in land or a house”.

4. Squandering of wealth on extravagant spending has been strictly prohibited. Spending on luxuries is strongly forbidden and ostentatious living has been discouraged. The Qur’an says:

“Eat and drink, but be not prodigal. Lo! He (Allah) loveth not the prodigals (7:31) “And squander not (thy wealth) in wantonness. Lo! The squanderers were ever brothers of the devil (17:26-27). Since moderation in expenditure and simple living is the golden rule of Islam, so wastage of wealth stops and wealth starts flowing into productive channels. This also helps in capital formation. Another factor that is used is land. The factors of production have been classified as land, labour, capital and organisation or enterprise. In this chapter, we shall discuss land while in following chapters we shall discuss labour, capital and enterprise. The term land has been given a special meaning in Economics. It does not mean soil only, as understood in ordinary speech, but it is synonymous with all the natural resources available from air and water, from above the land surface ad below it, which yield income or useful produce. In the words of Marshall, land


means “the materials and the forces which nature gives freely for man’s aid, in land and water, in air and light and heat.” Most of the economic activities of man depend directly on land even today, as in the past, such as hunting, fishing, breeding of cattle and sheep, agricultural produce, gardens, minerals, metals, industrial raw material, electric power, water and other natural resources. Islam has recognised land as one of the most important factor of production. But in this chapter, we will discuss Islamic view-point regarding agricultural use of land. Since most of the matters pertaining to agriculture are of temporal character, Islam has not laid down any hard and fast rules to govern each and every affair so as to restrict the freedom of action of the people. Rather most of these matters have been left to the discretion of the people of each age and each place to decide the same according to their ever changing socio-economic situations. Only a few general instructions have been issued by al-Qur’an, the revealed book of Islam and Muhammad (PBUH), the Prophet of Islam, in the fields of land-ownership, land cultivation, reclamation of dead lands, peasant-landlord relationship, irrigation, etc. A tradition is reported in Sahih Bukhari on the authority of Abu Umamah that when the Prophet saw a plough and some other agricultural implements, he said: “This does not enter the house of a people but it brings inglory with it”. From this Hadith, some critics have tried to deduce that the Prophet of Islam discouraged rather condemned agriculture. But this is a misconceived impression. In fact, the Hadith implies that people who give itself up entirely to agriculture to the neglect of other sectors like trade and industry cannot rise to the position of glory among the comity of nations. Subsequent history has proved this fact right as the nations who have concentrated only on agriculture have been left much behind in the race of economic development in comparison to the nations who have paid attention to trade and industry and have followed policy of balanced sectoral growth. Some people, especially those having inclination towards socialism, believe that the concept of ownership of land is alien to Islam. However, this view does not have any locus standi when we look at the teachings of Islam. The institution of ownership of land, which exists among the humankind since time immemorial, has not been abolished either by the Qur’an or by the Sunnah of the Prophet of Islam. No doubt according to the Qur’an overall concept of absolute ownership over everything including earth and heavens belongs to Allah, but the man has been vested with proprietary rights over land as Allah’s trustee or vicegerent. Institution of individual or private ownership of land has thus been recognised by Islam. Land is needed by man either for habitation or for the purpose of earning livelihood through its cultivation. For both these purposes the Holy Qur’an concedes individual’s right of ownership and possession of land. For the purpose of habitation, the Qur’an says: O ye who believe! Enter not houses other than your own without first announcing your presence and invoking peace upon the folk thereof (24:27).


Thus ownership of land for the purpose of houses has been recognised by the Holy Book in this verse. In another verse the Qur’an affirms the right of ownership of land for the purposes of cultivation and earning sustenance. The verse states: “ Eat ye of the fruit thereof when it fruiteth, and pay the due thereof upon the harvest day, and be not prodigal (6:141). From the above verse it is clear that one has to pay Zakat on his fruits and agricultural produce if one owns and cultivates land. This verse thus concedes the individual or private ownership of land for the purpose of agriculture. Initially private ownership of land is acquired through colonisation of land or through allotment or grant of land by the state. These two methods of acquisition of ownership rights over land have been recognised by society since ancient times. Although land is also acquired by an individual through purchase from another person, through inheritance, through gift, through bequest, etc. but these are the subsequent transfers with which we are not concerned. In this section we would, therefore, discuss initial two methods of acquisition of ownership rights over land and see what is the view-point of Islam about them. Discussion would be restricted to agricultural land only. When man settled on earth, the rule of ownership of land which emerged in due course of time was: The land which one occupies and develops for cultivation is his and he has better right to use it. This ancient rule was maintained by the Prophet of Islam with certain useful conditions. Some of his traditions are reproduced below:

1. AishaRA (Allah be pleased with her) reported that the Holy Prophet (peace be on him) said: “Whoever colonizes a land which does not belong to another, has the better right to keep it. Urwa bin Zubair states that Hadrat Umar (Allah be pleased with him) acted upon the same rule during his reign” (Bukhari, Ahmad, Nisai)

2. Jabir bin AbdullahRA (Allah be pleased with him) related the tradition that whoever reclaims dead land (i.e. colonizes wasteland), acquired proprietary right over it (Ahmad, Tirmidhi, Nisai, Ibn-e-Haban)

3. Tawus (Tabii) RA reported that the Holy Prophet (peace be on him) had said: “Ownerless land which has no trustee or heir belongs to God and His Apostle and then it is open to use by you. Hence anyone who reclaims dead land shall keep it; and he who occupies it without using it shall lose his ownership right over it at the expiry of three years.”(Abu Yusuf : Kitab-ul-Kharaj)

4. Saeed bin Zaid RAreported that the Holy Prophet (peace be on him) had said: “Anyone who reclaims some wasteland shall keep it. But he who colonizes another person’s land illegally has no right over it (Ahmad, Abu Dawud, Tirmidhi).

From the above traditions of the Prophet, two principles emerge which regulate the rights of ownership arising out of colonisation of land:

i. Whoever colonizes a land which does not belong to other acquires


proprietary right over it. But he who colonises another person’s land illegally has no right over it.

ii. He who reclaims dead land shall keep it; and he who occupies it without using it, shall lose his ownership over it at the expiry of three years.

Also, the fourth factor of production is technology. Technology improves productivity and allows man to produce beyond his physical capabilities. It has proved beneficial for the humanity as it has improved production in agriculture, industry and service. Islam does not now oppose any modern inventions that are beneficial to mankind. It is sufficient that they be used in the name of God and for His cause. In reality, machines, instruments and devices have no religion or homeland. They can be used for either good or bad objectives, and the way they are used can affect much of the earth's population. Even something as simple as a glass can be filled either with a nourishing drink or with a poison. Television can provide education or immorality. It is up to the user to decide, and a Muslim is commanded to make good use of all the means at his disposal while being prohibited from causing harm to himself or others. Failure to use the proper means toward benefit is, in effect, a deprecation of Islamic teachings. In western societies, technology is seen without any effects on the humanity whereas in Islam technology is seen in religious view. It only encourages those ideas and innovation only in those areas that will not cause any damage to society. so it is seen that Islam has different thoughts about the production functions and the factors that are used in the production.


Chapter 4: Distribution in Islam Human society has progressed on an enormous scale. It has grown more rich and prosperous as compared to middle ages. We see now more goods and services enjoyed by people. We see them enjoying the comforts of life ranging from good food to industrial goods. People have become rich and prosperous. The prosperity is mostly seen in developed nations where there is good quality infrastructure, more consumption reflecting their standards of life, high quality health care services and better government facilities. The population in these countries enjoy recreation, holidays, services and what not. They have nice homes and all conveniences of life. In short they have access to all facilities of life. But it is only a one sided story. There are also millions and millions of people living in the underdeveloped nations where these facilities of life are not available. They live a life of abject poverty. Their access to facilities is quite low. Since people are poor they are not able to afford the basic necessities of life like food, clothes and shelter. It is a proven fact that most of these unlucky people live in developing and underdeveloped world. It has been found that around 1 billion people live in extreme poverty. Not only these people are poor but it is found that there is a huge concentration of income in few people around the world. More money is found in developed world and the gini_ coefficient has been rising throughout the century. There is now concentration of wealth in few hands and it is continuously rising whereas on the other hand people live in extremely difficult situations. The world’s richest 300 people control more wealth than the poorest three billion, and the gap continues to grow, according to the latest report issued by the Capgemini wealth consultancy and the Royal Bank of Canada. “The richest 1 percent has increased its income by 60 percent in the last 20 years, with the financial crisis accelerating rather than slowing the process, ” researchers found. According a 2013 Pew Research Center analysis of Census data, the mean net worth of households in the upper 7 percent of the wealth distribution rose by an estimated 28 percent from 2009-2011 while the mean net worth of households in the lower 93 percent actually dropped by 4 percent over the same. Free market competition and communism has not been able to rectify this problem. They have failed to create an equitable society over the years. The problem has now become manifold and is increasing its tentacles’ day by day. On one hand we have prosperity and all luxuries of life while on the other we have destitution, sickness and poverty. These people don’t have access to even basic necessecities of life like food, water, clothes and homes. Income inequality in the world is now glaring. Not only one billion continues to live under one dollar a day, but if this line is increased to ten dollars, it is found that 80% of population live under this line. This is a case of glaring inequality. This problem has aroused because of the secular nature of two systems working in this world One being capitalist economy and the other socialist one. Take the case of free market economy first. It is a known fact that this system puts an undue stress


on competition. Due to this the unfortunate ones are left out of the equation and have to live on meagre incomes. Also it provides an advantage to the people having good initial wealth to become more rich and prosperous. Competition eradicates the competitors and finally leads to monopoly which is a case of exploitation. This is how income gets concentrated into few hands. Also it puts stronger individuals into an advantage position as these people have more resources to finance their plans. Eradication of competitors is the basic theme of free competition. This is what exactly happened in USA the prime supporter of capitalism. For every dollar the richest 0.1% earned in 1980, the poorest 90% earned only one cent in this period. Also it is found that now only one percent in America controls the whole economy there. Not only there is inequality in general but also between the different sections of the society i.e. between blacks and whites. It has been mostly said that free market rewards hard work and nothing else, but data around the world suggests that this discrimination is held in different forms. The wealth gap between blacks and whites has nearly tripled over the past 25 years, due largely to inequality in home ownership, income, education and inheritances, according to a new study by Brandeis University. The difference in wealth between typical households in each racial group ballooned to $236, 500 in 2009, up from $85, 000 in 1984, according to the study, released Wednesday. By 2009, the median net worth of white families was $265, 000, while blacks had only $28, 500. How it can be explained given that free competition calls for more opportunities irrespective of caste, creed and colour. The answer lies that capitalist economy is individualistic without any regard to higher authority i.e. God. The system considers itself free to do anything without any accountability. It considers itself free to use money in the manner it likes, so it considers itself free in case of its distribution as well. Without any accountability to higher power, they are likely to concentrate the incomes in their families and will not like to distribute it. Same is the case of socialism. Here the story is not different. The richest slice of Russian society has doubled its wealth in the past 20 years, while almost two-thirds of the population is no better off and the poor are barely half as wealthy as they were when the Soviet Union fell, according to researchers. Experts at Moscow's Higher School of Economics (HSE) found that the purchasing power of the average Russian has grown by 45% since the early 1990s, but income disparity is widening by the year. But most Russians can only stare in envy at the super-wealthy with their Bentleys and dachas. According to the report, income inequality between the mid-1980s and the mid-2000s has increased eight times more than in Hungary, and five times more than in the Czech Republic. Ispite of making claims of equality, the so called socialism have followed the same path as capitalism. Income distribution worsened in both systems despite the claims of equality and prosperity for all. This inequality in distribution has lead to crisis around the world resulting in bloodshed and crimes against society. Also it leads to unequal access to resources and goods and services. As against these systems, Islam has a


unique model of income distribution which is 100% effective in creation of equal and prosperous society irrespective of caste, creed and colour. It aims at creation of happy and equitable society. Islam desires creation of a religious society where instead of competition, there is cooperation between humans. Humans will take care of each other and help one another in case of distress and crisis. Instead of eliminating one other, as is the case of competition, people will generate love and affection towards each other and create a clean and dynamic society. It aims at a system where all people will have access to goods and services and nobody lives in poverty and destitution. The ultimate aim of Islam is to create a society that is based on the rules and regulation of Creator. As in case of consumption and production, rules and regulations have to followed, in case of distribution as well. There are clear guidelines in the holy Quran and the Sunnah of our beloved prophet (SAW) about the distribution of income and wealth in the society. The present study is an effort to show that how an Islamic Economic System, if fully implemented, could deter excessive accumulation of wealth and also ensure an equitable distribution of income. The key variables of the system are Islamic Laws of Inherence, Ushr/Zakat and Elimination of Interest. There is visible dampening effect of Zakat on accumulation of wealth besides reducing income inequalities. Elimination of interest is crucial to further reduce the inequality in distribution of income. Finally the elaborate Inheritance Laws of Islam distribute the accumulated wealth of a person and ensure that wealth is not concentrated in few hands. Unless all these three elements are put together and implemented in totality the expected impact on distribution of income and wealth would not be realised. Let us take their discussion separately. First the law of inheritance. Islam not only requires the fulfillment of everyone’s basic needs, primarily through a respectable source of earning, but also emphasizes an equitable distribution of income and wealth so that, in the words of the Holy Qur’an, “Wealth does not circulate only among your rich.” (59:7) Inequalities are permitted in a Muslim society only in proportion to the distribution of skill, initiative, effort, and risk. Extreme or highly skewed inequalities are incompatible with Islamic teachings, which emphasize that resources are not only a gift of God to all human beings (Qur’an 2:29), but also a trust (Qur’an 57:7). Inheritance is an important aspect of Islam, in line with the Islamic vision of creating dignity and brotherhood throughout humankind, not only in Muslim societies. Shariah, or Islamic Law, provides specific guidance on inheritance for both men and women, and these laws are to be followed with the goal of establishing socio-economic balance through more equitable distribution. Under Islamic inheritance law, no one can make a will for more than one third of their estate (property). Further, that third has to be given toward charitable objectives or for persons not already entitled to a share in the estate. Both the living parents of the deceased are assured a share. This not only ensures their welfare, but also enables the distribution of the parents’ shares to the brothers and sisters of the deceased after the parents pass on. Spouses are also given a share. The balance of


the remainder goes to the children of the deceased, and it is impermissible to pass the entirety of the remaining amount to a single child if there are other siblings. All of these rules are intended to generate a wider span of wealth distribution. The holy Quran says "Allah enjoins you about [the share of inheritance of] your children: A male's share shall equal that of two females--in case there are only daughters, more than two shall have two-thirds of what has been left behind. And if there be only one daughter, her share shall be half--and if the deceased has children, the parents shall inherit a sixth each, and if he has no children and the parents are his heirs then his mother shall receive a third, and if he has brothers and sisters then the mother's share is the same one-sixth. [These shares shall be distributed] after carrying out any will made by the deceased or payment of any debt owed by him (the deceased). You know not who among your children and your parents are nearest to you in benefit. This is the law of Allah. Indeed Allah is wise, all knowing."4:11. At other place it says "You shall get half of what your wives leave, if they die childless. But if they do have children, your share shall then be a quarter of what they leave after carrying out any will made by the deceased or payment of any debt owed by her. And they (your wives) shall have a quarter of what you leave, if you die childless. But in case you have children, they shall then get one-eighth of what you leave, after carrying out any will made by you or payment of any debt owed by you (the deceased). And if a man or a woman is made an heir on account of his [or her] kalalah relationship [with the deceased] and he [or she] has one brother or sister, the brother and sister shall each receive a sixth and if they be more than two, they shall then share in one-third, after carrying out any will that had been made by the deceased or payment of any debt owed by him--without harming anyone. This is a command from Allah and Allah is all-knowing, most forbearing."4:12: At other place the verse says" They ask you. Say: Allah enjoins you about your kalalah heirs that if a man dies childless and he has only a sister, she shall inherit half of what he leaves; and if she dies childless, then her brother shall be her heir; and if there are two sisters, they shall inherit two-thirds of what he [or she] leaves. If there are many brothers and sisters, the share of each male should be that of two females. Allah makes [His commands] clear to you, so that you do not err. Allah has knowledge of all things." 4:176. In Hadith of prophet Muhammad(SAW) said” Narrated Abdullah ibn AbbasRA: The Prophet (PBUH) said: Divide the property among those whose share have been prescribed in the Book of Allah, and what remains from the prescribed shares goes to the nearest male heirs. Narrated Jabir ibn AbdullahRA: We went out with the Apostle of Allah (PBUH) and came to a woman of the Ansar in al-Aswaf. The woman brought her two daughters, and said: Apostle of Allah, these are the daughters of Thabit ibn Qays who was killed as a martyr when he was with you at the battle of Uhud, their paternal uncle has taken all their property and inheritance, and he has not left anything for them. What do you think, Apostle of Allah? They cannot be married unless they have some property. The Apostle of Allah (PBUH) said: Allah will decide regarding


the matter. Then the verse of Surat an-Nisa was revealed: "Allah (thus) directs you as regards your children's (inheritance)." Apostle of Allah (PBUH) said: Call to me the woman and her husband's brother. He then said to their paternal uncle: Give them two-thirds and their mother an eighth, and what remains is yours’’. Narrated AishaRA, Ummul Mu'minin: A client of the Prophet (PBUH) died and left some property, but he left no child or relative. The Apostle of Allah (PBUH) said: Give what he has left to a man belonging to his village’’. Narrated Sa'd bin Abi WaqqasRA: I was stricken by an ailment that led me to the verge of death. The Prophet came to pay me a visit. I said, "O Allah's Apostle! I have much property and no heir except my single daughter. Shall I give two-thirds of my property in charity?" He said, "No." I said, "Half of it?" He said, "No." I said, "One-third of it?" He said, "You may do so) though one-third is also to a much, for it is better for you to leave your off-spring wealthy than to leave them poor, asking others for help. And whatever you spend (for Allah's sake) you will be rewarded for it, even for a morsel of food which you may put in the mouth of your wife." I said, "O Allah's Apostle! Will I remain behind and fail to complete my emigration?" The Prophet said, "If you are left behind after me, whatever good deeds you will do for Allah's sake, that will upgrade you and raise you high. May be you will have long life so that some people may benefit by you and others (the enemies) be harmed by you." But Allah's Apostle felt sorry for Sa'd bin Khaula as he died in Mecca (Sufyan, a sub-narrator said that Sa'd bin Khaula was a man from the tribe of Bani 'Amir bin Lu'ai). Narrated Abu HurairaRA: Allah's Apostle said, "My heirs will not inherit a Dinar or a Dirham (i.e. money), for whatever I leave (excluding the adequate support of my wives and the wages of my employees) is given in charity." Sahi Bukhari, Volume 3, Book 51, Number 37. The Qur'an introduced a number of different rights and restrictions on matters of inheritance, including general improvements to the treatment of women and family life. The Qur'an also presented efforts to fix the laws of inheritance, and thus forming a complete legal system. This development was in contrast to pre-Islamic societies where rules of inheritance varied considerably. Furthermore, the Qur'an introduced additional heirs that were not entitled inheritance in pre-Islamic times, mentioning nine relatives specifically of which six were female and three were male. The laws of inheritance in the Qur'an also included other male relatives, like the husband and half-brothers from the mother’s side, which were excluded from inheritance in old customs. The heirs mentioned in the Qur'an are the mother, father, husband, wife, daughter, uterine brother, full sister, uterine sister, and consanguine sister. In Islam, women are entitled the right of inheritance in general circumstances, though not all, Islam allots women half the share of inheritance available to men who have the same degree of relation to the decedent. For example, where the decedent has both male and female children, a son's share is double that of a daughter's. Additionally, the sister of a childless man inherits half of his property upon his death, while a brother of a childless woman inherits all of her property. Given


these laws Islam improved the situation of the women who were subjugated to exploitation and crimes. It sought to make them independent in economic terms. They were now allowed to make decisions regarding their inherited property but within the confines of Shariah. With the introduction of new inheritors, the wealth will never get concentrated into few hands and it only has the potential to change the course of society i.e. from being unequal to egalitarian society. It is the irony of the time that some have criticised Islam for being oppressive towards the women. It is simply the ignorance of theirs. The next tool of creating an equal and egalitarian society is usher. Usher is a land tax. The word (akhrajna) in (What We have brought forth for you from the earth) hints that 'ushr is obligatory on 'ushri lands. Based on the generality of this verse, Imam Abu Hanifah has deduced that 'ushr is wajib or obligatory on every produce, big or small, yielded by 'ushri land. The verse “And pay the due thereof on the day of its harvest( 6:141) in Surah Al-An'am is open and clear in support of the obligatory nature of 'ushr. 'Ushr (the tenth or twentieth part) and Kharaj (land tax) are two technical terms used in Islamic Shariah. There is a common factor between these two. Both have an aspect of tax in them when levied on lands by an Islamic state. However, there is a difference. 'Ushr is not just a tax. On the contrary, its real nature is more of an act of monetary 'Ibadah (worship) than tax. This is similar to Zakah, for which reason, it is also called (zakah al-ard: the zakah of the land). Kharaj is straight tax which carries no aspect of 'Ibadah. Since Muslims are capable of 'ibadah and are obligated to do that, the part of land-produce taken from them is known as 'Ushr. Since non-Muslims are not obligated with 'Ibadah, that which is levied on their lands is named Kharaj. There is another practical difference between Zakah and 'Ushr--Zakah becomes due on gold, silver and goods of commercial value after the passage of one year while 'Ushr becomes obligatory immediately after the produce is harvested from the land. There is yet another difference-'Ushr is dropped if the land produces nothing, but Zakah remains obligatory at the end of the year on gold, silver and goods of commercial value even if there is no profit at all. Given these tools, there are also clear instructions about Zakat and interest free economy which shall be discussed in next chapters elaborately. But here role of state in promoting distribution of income has to be discussed. Islam has provided the state to promote the welfare of the Muslims. It has to take care of the needy, orphans, destitutes and those in need. Payment of money will be through the revenues of the state. Particularly the most famous institutions in the state for promoting the welfare and distribution is through the institution of Bayt al-Māl. The Bayt al-Māl (literally meaning the House for Money, is used as an equivalent for the Treasury House where public fund is kept) is an Islamic concept built upon three main factors: wealth, trust and socio-economic justice. It is clear that attainment of socio-economic justice is an immediate objective of the Bayt al-Māl. The Bayt al-Māl bears the responsibility of the undertaking of the society's fiscal system and welfare provisions. Accordingly, the Bayt al-Māl acts as a treasury complemented with the task of


planning and distributing society's wealth in the whole socio-economic and political set-up of the nation. Hence, it is the financial pulse to the development process of the nation. Most of the revenue of this institution is from Zakat revenue. The expenditure of this institution goes like this. There are eight categories of the recipients of the Zakat funds: Poor: Those who do not have enough for their basic needs, Destitute: Those who become weaker or who are under hardship of insolvency and are keeping their conditions hidden from others. The people who fall under this category are those who have no control over changing their financial conditions and are victims of circumstances, Zakat collectors: They are to be paid only according to the prevailing wages, that is, commensurate with other jobs which require a similar amount of time and energy, Those who need special attention and kind treatment in order to win their hearts: There are three main categories: a) Muslims who are wavering, including the newly-converted Muslim, b) Muslims living in border areas who need stronger support for defence, and c) Non-Muslims who agree not to fight against Muslims and/or otherwise become helpful to the Muslims and/or the Islamic state, Freeing human beings from bondage, Those unable to pay their debts., Spending in the cause of Allah, Travellers who run out of money and the handicapped. However, there is a different opinion regarding disbursement of Zakat revenue among the various groups of the beneficiaries listed in the Qur'an. According to M. N. Siddiq some ‘ulama insist on direct transfer payments to the beneficiaries. Some permit the Zakat benefits to flow to the beneficiaries indirectly through institutions providing needed services. Some scholars believe that if the beneficiaries are the deprived, the officers in Zakat administration and those whose hearts are to be won over Zakat revenue must be transferred directly and the rest can receive the benefits indirectly. With the above-mentioned categories, Islam maintains that the application of the Zakat institution will minimize the unfairness between the "haves" and the "have-nots". Hence, it leads to a more equal situation for society as a whole. However it is the role of the Bayt al-Māl to help Zakat recipients to become Zakat payers. This need not necessarily be in monetary forms. Ghazali writes: Disbursement of Zakat in monetary form is only a short-term solution to the poverty question unless the Zakat recipients themselves have the initiative to invest their Zakat money into enterprising ventures. Therefore, to ensure that the Zakat funds of the Bayt al-Māl attain the desired long-run benefits for the recipients, Zakat funds should be utilized with the main aim of establishing, for example, employment-creation projects. Thus Islamic state helps in the distribution of income from rich to poor. Thus, in Islam, it is the obligation of the state to improve the conditions of its citizens to promote equal and egalitarian society. The next chapters will deal with Zakat and interest free economy, in length, that are important ideas in Islam to improve income distribution in society.


Chapter 5: Islamic Banking In modern secular economic systems interest plays a very important role. In fact, in the Western world people cannot think of any economic system without interest. But as against this type of economy there is way to manage the economy of the country. It is the way Islam has given to world. It is known as Islamic banking. Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shariah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasise moral and ethical values in all dealings have wide universal appeal. Shariah prohibits the payment or acceptance of interest charges (Riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). Islamic banking activities must be practiced consistent with the Shari’ah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries. The principle source of the Shariah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate from the fundamental teachings in The Qur’an. It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisation of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam. Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values


in their financial dealings and in the West some financial organisations have opted for ethical operations. Origin: The origin of the modern Islamic bank can be traced back to the very birth of Islam when the Prophet himself acted as an agent for his wife's trading operations. Islamic partnerships (mudarabah) dominated the business world for centuries and the concept of interest found very little application in day-to-day transactions. Such partnerships performed an important economic function. They combined the three most important factors of production, namely: capital, labour and entrepreneurship, the latter two functions usually combined in one person. The capital-owner contributed the money and the partner managed the business. Each shared in a pre-determined share of the profits. If there was a loss, the capital-provider lost his money and the manager lost his time and labour. The most important aspect of Islamic baking is prohibition of Riba. The literal meaning of interest or Al-RIBA as it is used in the Arabic language means to excess or increase. In the Islamic terminology interest means effortless profit or that profit which comes free from compensation or that extra earning obtained that is free of exchange. Hazrat Shah Waliullah Dehlvi a great scholar and leader have given a very concise and precise definition of interest. He says, "Riba` is a loan with the condition that the borrower will return to the lender more than any better than the quantity borrowed. The holy Quran has used the word Riba to denote interest. It is a well known fact that interest is prohibited in Islam. It considers it as an evil which has disastrous huge consequences on the society and devalues humanity. Also Islam considers no rational basis for charging of interest rates on the money lend. In a conventional borrower and lender relationships, it is the lender that charges interest on the money he lends with the condition that he will return more than the borrowed money. In this kind of relationship, it is actually the borrower that is at the receiving end and has to accept all the conditions laid by the lender. When the borrower has no voice in it, he is likely to be exploited which is prohibited in our religion. Similarly, it puts the borrower at the great risk. Since he is the one who uses this borrowed money he is more prone to suffer losses. This leads to poverty and corruption in land. Furthermore the idea of interest in based on exploitation which is against the basics of humanity. It is earning the money or wealth by taking advantage of the others need. By taking advantage of the others need, the morals of the humanity gets severely affected and leads animalism in the land. It results in the class of people that lives on the hard earned wealth of the others which is against the basis of humanity and morals. One of the basics of living in the society is that everyone must earn his livelihood and must not be dependent on others. It is also a known fact that that interest leads to inequality in the society and is a basic cause of inflation. Since it is included in costs, it is able to generate inflation. Also interest rates have lead to huge inequality and concentration of financial resources in few hands, which results in controlling the lives of huge majority and curtailment in


freedom. Freedom is the basic fundamental of human life and many have fought for it. With concentration of wealth in few hands freedom is removed from the lives of majority people. Thus it turns out that interest rates are against basic fundamentals of humanity. Islam is a religion of peace and regulates the whole conduct of life the humans. It directs his life according to teachings of Allah and the prophet (SAW). It has not left any aspects of the life of an individual untouched. It regulates his political, social and economic life. It is a known truth that prophets of all times have tried to establish a society that is based on trust, cooperation and equality. To achieve these goals they all have condemned charging interest rates which is based on exploitation. Islam has also condemned charging of interest rates even if it small or negligible. It has made it an evil and has warned Muslims about its dangerous consequences. To ward off people from charging interest rates, it has also given a detailed punishment in the hereafter. There are a number of verses in the Holy Quran and the Sunnah of prophet where interest rates. The holy Quran says: ‘’Allah hath blighted usury and made alms giving fruitful. Allah loveth not the impious and guilty” (Baqarah: 275-276). Before the advent of Islam it was customary in Arabia to charge compound interest on all debts. Arabia was in an era of ignorance and corruption. The holy Quran prohibited this practice in clear and lucid words. The holy Quran says: “O ye who believe! Devour not usury, doubling and quadrupling (the sum lent): observe your duty to Allah, that ye may successful (AL IMRAN:130). Later the holy Quran has warned the swallowers of usury with such a force and rigour that it is not to be found in case of other sins and faults. The words of holy Quran in this connection are: “O ye who believe! Observe your duty to Allah and give up what remainth (due to you) from usury, if you are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and his messenger. And if ye repent, then ye have your principal (without interest). Wrong not and ye shall not be wronged. “And if the debtor is in strained circumstances then (let there be) postponement to (the time of) ease: and ye remit the debt as almsgiving would be better for you if ye did but know” (Bakarah:.............). These verses are testimony to the fact how much cursed is the charging of interest in Islam. Allah has declared war on these people. It is considered as a sin and evil. At other places the holy Quran says: “And of taking usury, when they were forbidden it, and of their devouring people’s wealth by false pretences. We have prepared for those who disbelieve a painful doom (Nisa: 160-161). In surah Roam:39, the Quran says “that which ye give in usury in order that it may increase on (other) people’s property has no increase with Allah: but that ye may give in charity, seeking Allah’s countenance, hath increase manifold.’’ In addition to this there are several Hadith that makes taking of interest haram or prohibited. In his farewell sermon, the Prophet taught the rituals of performing Hajj and gave a sermon to the vast


gathering of the Muslims from the top of Jabal-ul-Arafat. This Sermon was delivered on the Ninth Day of Dhul Hijjah 10 A.H in the Uranah Valley of mount Arafat. "O People, lend me an attentive ear, for I don't know whether, after this year, I shall ever be amongst you again. Therefore listen to what I am saying to you carefully and take these words to those who could not be present here today. O People, just as you regard this month, this day, this city as Sacred, so regard the life and property of every Muslim as a sacred trust. Return the goods entrusted to you to their rightful owners. Hurt no one so that no one may hurt you. Remember that you will indeed meet your Lord, and that He will indeed reckon your deeds. Allah has forbidden you to take usury (Interest), therefore all interest obligation shall henceforth be waived... Beware of Satan, for your safety of your religion. He has lost all hope that he will ever be able to lead you astray in big things, so beware of following him in small things. O People, it is true that you have certain rights with regard to your women, but they also have right over you. If they abide by your right then to them belongs the right to be fed and clothed in kindness. Do treat your women well and be kind to them for they are your partners and committed helpers. And it is your right that they do not make friends with any one of whom you do not approve, as well as never to commit adultery. O People, listen to me in earnest, worship Allah, say your five daily prayers (Salah), fast during the month of Ramadhan, and give your wealth in Zakat”. There are several Hadith as well that reflect how strongly this activity is condemned in Islam. Narrated by Abu JuhaifaRA: The Prophet forbade the use of the price of blood and the price of a dog, the one who takes (eats) usury the one who gives usury, the woman who practises tattooing and the woman who gets herself tattooed (Sahih Al-Bukhari Hadith 7.829). Narrated by Abu HurayrahRA: Allah's Messenger (peace be upon him) said, "On the night when I was taken up to Heaven I came upon people whose bellies were like houses and contained snakes which could be seen from outside their bellies. I asked Gabriel who they were and he told me that they were people who had practised usury." Ahmad and Ibn Majah transmitted it ( Al-Tirmidhi Hadith 2828 ). Narrated by Abu HurayrahRA: Allah's Messenger (peace be upon him) said, "Usury has seventy parts, the least important being that a man should marry his mother." Ibn Majah and Bayhaqi, transmitted it in Shu'ab al-Iman (Al-Tirmidhi Hadith 2826). Narrated by Abdullah ibn HanzalahRA: Abdullah ibn Abbas Allah's Messenger (peace be upon him) said, "A dirham


which a man knowingly receives in usury is more serious than thirty-six acts of fornication." Ibn Abbas's version adds that he said, "Hell is more fitting for him whose flesh is nourished by what is unlawful." Ahmad and Daraqutni transmitted it. Bayhaqi transmitted in Shu'ab al-Iman on the authority of Ibn Abbas (Al-Tirmidhi Hadith 2825). What Is Not Permitted of Free Loans Malik related to me that he had heard that Abdullah ibn Masud used to say, "If someone makes a loan, they should not stipulate better than it. Even if it is a handful of grass, it is usury." Malik said, "The generally agreed on way of doing things among us is that there is no harm in borrowing any animals with a set description and itemisation, and one must return the like of them. This is not done in the case of female slaves. It is feared about that that it will lead to making halal what is not halal, so it is not good. The explanation of what is disapproved of in that, is that a man borrow a slave-girl and have intercourse with her as seems proper to him. Then he returns her to her owner. That is not good and it is not halal. The people of knowledge still forbid it and do not give an indulgence to any one in it."( Al-Muwatta Hadith 31.95) Narrated by Abu Juhaifa: The Prophet cursed the lady who practices tattooing and the one who gets herself tattooed, and one who eats (takes) Riba' (usury) and the one who gives it. And he prohibited taking the price of a dog, and the money earned by prostitution, and cursed the makers of pictures. (Sahih Al-Bukhari Hadith 7.259 ) Narrated by Ibn AbbasRA: The last Verse (in the Qur'an) revealed to the Prophet was the Verse dealing with usury (i.e. Riba) ( Sahih Al-Bukhari Hadith 6.67). Narrated by Abu HurairaRA: The Prophet said, "Avoid the seven great destructive sins." They (the people) asked, "O Allah's Apostle! What are they?" He said, "To join partners in worship with Allah; to practice sorcery; to kill the life which Allah has forbidden except for a just cause (according to Islamic law); to eat up usury (Riba), to eat up the property of an orphan; to give one's back to the enemy and fleeing from the battlefield at the time of fighting and to accuse chaste women who never even think of anything touching chastity and are good believers ( Sahih Al-Bukhari Hadith 8.840). Narrated by Sa'id ibn ZaydRA: The Prophet (peace be upon him) said: The most prevalent kind of usury is going to lengths in talking unjustly against a Muslim's honour ( Sunnah of Abu-Dawood Hadith 4858).


Narrated by Abu Burda: When I came to Medina, I met Abdullah bin Salam. He said, "Will you come to me so that I may serve you with Sawiq (i.e. powdered barley) and dates, and let you enter a (blessed) house that in which the Prophet entered?" Then he added, "You are in a country where the practice of Riba (i.e. usury) is prevalent; so if somebody owes you something and he sends you a present of a load of chopped straw or a load of barley or a load of provender then do not take it, as it is Riba (Sahih Al-Bukhari Hadith 5.159). Narrated by Abdullah ibn Mas'udRA: The Apostle of Allah (peace be upon him) cursed the one who accepted usury, the one who paid it, the witness to it, and the one who recorded it ( Sunan of Abu-Dawood Hadith 3327). Narrated by Abu Umamah: The Prophet (peace be upon him) said: If anyone intercedes for his brother and he presents a gift to him for it and he accepts it, he approaches a great door of the doors of usury (Sunnah of Abu-Dawood Hadith 3534) Narrated by Abu HurayrahRA: The Prophet (peace be upon him) said: A time is certainly coming to mankind when only the receiver of usury will remain, and if he does not receive it, some of its vapour will reach him. Ibn Isa said: Some of its dust will reach him ( Sunan of Abu-Dawood Hadith 3325). Narrated by Ali ibn Abu TalibRA: Ali heard Allah's Messenger (peace be upon him) curse those who took usury, those who paid it, those who recorded it, and those who refused to give sadaqah. And he used to prohibit wailing. Nasa'i transmitted it ( Al-Tirmidhi Hadith 2829). Thus from the above Qur’anic verses as well as Hadith of prophet it becomes clear how forcefully the interest has been banned from economic life of the society. Since now it is known that the interest is banned in Islam, now the next question is how to implement the interest free economy practically in society. Western economists have used various reasons for the justification of this type of economy based on interest. They regard it essential for saving, allocation of resources and investment. They believe that without this economy cannot run. Interest is considered to be the backbone of capitalist economy. Since Islam condemns it, Muslims have found various ways to allow economy to work without it. Thankfully, now Muslims have found ways to manage their economy within the rules of shariah. Islamic banking is no longer a novel experiment. When the concept of Islamic banking with its ethical values was propagated, financial circles the world over treated it as a utopian dream. Having lived for centuries under the ‘valueless’ capitalist economic system, they asked what


ethics had to do with finance? The world has now seen that ethics and banking can be combined and found these banks more resilient than the conventional banking system and has achieved tremendous growth. A new IMF study compares the performance of Islamic banks and conventional banks during the recent financial crisis, and finds that Islamic banks, on average, showed stronger resilience during the global financial crisis. But the study also finds that Islamic banks faced larger losses than their conventional peers when the crisis hit the real economy. In “The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study, ” economists Jemma Dridi of the IMF’s Middle East and Central Asia Department and Maher Hasan of the IMF’s Monetary and Capital Market Department look at the effects of the crisis on bank profitability, credit, and asset growth in countries where both types of banks have a significant market share. The new working paper adds an empirical dimension to the debate on the relationship between Islamic banking and financial stability, a topic that has generated renewed interest since the global crisis. TOO BIG TO IGNORE Islamic finance is one of the fastest growing segments of the global financial industry. In some countries, it has become systemically important and, in many others, it is too big to be ignored. It is estimated that the size of the Islamic banking industry at the global level was close to $820 billion at end-2008. The largest Islamic banks are located in the countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products. While Islamic banks play roles similar to conventional banks, fundamental differences exist between the two models. The main difference between Islamic and conventional banks is that the former operate in accordance with the rules of Shariah, the legal code of Islam. The central concept in Islamic banking and finance is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses, and charging interest is prohibited. There are also differences in terms of financial intermediation, the paper notes. While conventional intermediation is largely debt based, and allows for risk transfer, Islamic intermediation, by contrast, is asset based, and centers on risk sharing. One key difference between conventional banks and Islamic banks is that the latter’s model does not allow investing in or financing the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. These include toxic assets, derivatives, and conventional financial institution securities.


Besides their range of equity, trade-financing and lending operations, Islamic banks also offer a full spectrum of fee-paid retail services that do not involve interest payments, including checking accounts, spot foreign exchange transactions, fund transfers, letters of credit, travellers' checks, safe-deposit boxes, securities safekeeping investment management and advice, and other normal services of modern banking. Islamic banking because of its value-orientated ethos enables it to draw finances from both Muslims and non-Muslims alike. Islamic banks are evolving financial and investment instruments that are not only profitable but are also ethically motivated. The ever-increasing application and innovation of the methodologies associated with derivative instruments that revolutionised the global financial industry have also led to a global financial crisis because of the excess greed for profit and the immense uncertainty and risk associated with these types of transactions. There are doubts associated with the permissibility of derivative instruments unislamic finance generally. Addressing issues to resolve the global financial crisis world leaders called for a set up on the basis of capitalism of entrepreneurship where banks finance economic development in the real economy, as opposed to the set up on the basis of capitalism of speculation whereby banks derive excessive profit from speculative transactions that do not make any contribution to the real economy. Now since it becomes clear that there is a kind of risk sharing in the Islamic banking system. The various instruments used in case of risk sharing include: Mudarabah: This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called "Rab-ul-maal" while the management and work is an exclusive responsibility of the other, who is called "Mudarib" and the profits generated are shared in a predetermined ratio. Types of Mudarabah: There are two types of Mudarabah namely:

a. Al Mudarabah Al Muqayyadah: Rab-ul-maal may specify a particular business or a particular place for the Mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).

b. Al Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah). However Mudarib cannot, without the consent of Rab-ul-maal, lend money to anyone. Mudarib is authorized to do anything, which is normally done in the course of business. However if they want to have an extraordinary work, which is beyond the normal routine of the traders, he cannot do so without express permission from Rab-ul-maal. He is also not authorized to:

a. Keep another Mudarib or a partner


b. mix his own investment in that particular Modarabah without the consent of Rab-ul Maal.

Conditions of Offer & Acceptance are applicable to both. A Rab-ul-maal can contract Mudarabah with more than one person through a single transaction. It means that he can offer his money to 'A' and 'B' both so that each one of them can act for him as Mudarib and the capital of the Mudarabah shall be utilized by both of them jointly, and the share of the Mudarib. In Mudarabah, Rab-ul-maal provides the investment and Mudarib the management therefore the Rab-ul-maal should hand over the agreed investment to Mudarib and leaves everything to Mudarib with no interference from his side but he has the authority to:

a. Overse the Mudarib's activities and b. Work with Mudarib if the Mudarib consents.

In what form should the capital be? Should it be liquid or non-liquid assets like equipment, land etc. can these form a capital? The basic principle is that the capital in Mudarabah is valid just the way as it is in Shirkah which according to Hanafi fiqh should be in liquid form but according to other scholars equipment, land etc can also be included as capital. However all agree on the following: Assets other than cash can be used as an intermediate step. However this is subject to the determination of exact amount of the assets before it is used for Mudarabah. If the assets are not correctly evaluated, the Mudarabah is not valid. Mudarabah Expenses: The Mudarib shares profit of the Mudarabah as per agreed rate with the investor but his expenses like meals, clothing, conveyance and medical are not borne by Mudarabah. However, if he is travelling on business and is overstaying the night, then the above expenses shall be covered from capital. If Mudarib goes for a journey which constitutes Safar-e-Sharai (more than 48 miles) but does not overstay the night, his expenses will not be borne by Mudarabah. All expenses which are incidental to the Mudarabah's function like wages of employees/workers or Commission in buying/selling or stitching, dyeing expenses etc have to be paid by the Mudarabah. However all expenses will be included in the cost of commodities which Mudarib is selling for eg. if he is selling readymade garments then the stitching, dyeing, washing expenses etc. can be included by the Mudarib in the total cost of the garments. If the Mudarib manages the Mudarabah within his city, he will not be allowed any expenses, only his profit share. Similarly, if he keeps an employee, this employee will not be allowed any expenses, just his salary. If the Mudarabah agreement becomes Fasid due to any reason, the Mudarib's status will be like an employee, meaning:

a. Whether he is travelling or doing business in his city, will not be entitled to any expense such as meals, conveyance, clothing, medicine etc.


b. He will not be sharing any profit and will just get Ujrat-e-Misl (ordinary pay) for his job.

Distribution of Profit & Loss: It is necessary for the validity of Mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled. The Shariah has prescribed no particular proportion; rather it has been left to their mutual consent. They can share the profit in equal proportions and they can also allocate different proportions for Rab-ul-Maal and Mudarib. However in extreme case where the parties have not predetermined the ratio of profit, the profit will be calculated at 50:50. The Mudarib & Rab-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital. For example, if the capital is Rs.100, 000/-, they cannot agree on a condition that Rs.10, 000 out of the profit shall be the share of the Mudarib nor can they say that 20% of the capital shall be given to Rab-ul-Maal. However they can agree that 40% of the actual profit shall go to the Mudarib and 60% to the Rab-ul-Maal or vice versa. It is also allowed that different proportions are agreed in different situations. For example, the Rab-ul-Maal can say to Mudarib "If you trade in wheat, you will get 50% of the profit and if you trade in flour, you will have 33% of the profit". Similarly, he can say "If you do the business in your town, you will be entitled to 30% of the profit and if you do it in another town, your share will be 50% of the profit". Apart from the agreed proportion of the profit, as determined in the above manner, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah. All schools of Islamic Fiqh are unanimous on this point. However, Imam Ahmad has allowed for the Mudarib to draw his daily expenses of food only from the Mudarabah Account. The Hanafi jurists restrict this right of the Mudarib only to a situation when he is on a business trip outside his own city. In this case he can claim his personal expenses, accommodation, food, etc. but he is not entitled to get anything as daily allowances when he is in his own city. If the business has incurred loss in some transactions and has gained profit in some others, the profit shall be used to offset the loss at the first instance, then the remainder, if any, shall be distributed between the parties according to the agreed ratio. The Mudarabah becomes void (Fasid) if the profit is fixed in any way. In this case, the entire amount (Profit + Capital) will be the Rab-ul-Maal's. The Mudarib will just be an employee earning Ujrat-e-Misl. The remaining amount will be called (Profit). This profit will be shared in the agreed (pre-agreed) ratio.


Roles of the Mudarib: Ameen (Trustee): To look after the investment responsibly, except in case of natural calamities. Wakeel (Agent): To purchase from the funds provided by Rab-ul-Maal Shareek (Partner): Sharing in any profit. Zamin (Liable): To provide for the loss suffered by the Mudarabah due to any act on his part. Ajeer (Employee): When the Mudarabah gets Fasid due to any reason; the Mudarib is entitled to only the salary, Ujrat-e-Misl. In case there is a loss, the Mudarib will not even get the Ujrat-e-Misl. Termination of Mudarabah: The Mudarabah will stand terminated when the period specified in the contract expires. It can also be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maal has terminated services of Mudarib, he will continue to act as Mudarib until he is informed of the same and all his acts will form part of Mudarabah. If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio. However, if the assets of Mudarabah are not in cash form, it will be sold and liquidated so that the actual profit may be determined. All loans and payables of Mudarabah will be recovered. The provisional profit earned by Mudarib and Rab-ul-Maal will also be taken into account and when total capital is drawn, the principal amount invested by Rab-ul-Maal will be given to him, balance will be called profit which will be distributed between Mudarib and Rab-ul-Maal at the agreed ratio. If no balance is left, Mudarib will not get anything. If the principal amount is not recovered fully, then the profit shared by Mudarib and Rab-ul-Maal during the term of Mudarabah will be withdrawn to pay the principal amount to Rab-ul-Maal. The balance will be profit, which will be distributed between Mudarib and Rab-ul-Maal. In this case too if no balance is left, Mudarib will not get anything. MUSHARIKAH: The term refers to a financing technique adopted by Islamic banks. It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. All providers of capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his contribution. Musharikah is another popular technique of financing used by Islamic banks. It could roughly


be translated as partnership. In this technique two or more financiers provide finance for a project. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. However, the losses, if any, are to be shared exactly in the proportion of capital proportion. All partners have a right to participate in the management of the project. However, the partners also have a rig ht to waive the right of participation in favour of any specific partner or person. Permanent Musharikah: In this form of Musharikah an Islamic bank participates in the equity of a project and receives a share of profit on a pro rata basis. The period of contract is not specified. So it can continue so long as the parties concerned wish it to continue. This technique is suitable for financing projects of a longer life where funds are committed over a long period and gestation period of the project may also be long. Diminishing Musharikah: Diminishing Musharikah allows equity participation and sharing of profit on a pro rata basis but also provides a method through which the equity of the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset on of the participants. The contract provides for a payment over and above the bank share in the profit for the equity of the project held by the bank. That is the bank gets a dividend on its equity. At the same time the entrepreneur purchases some of its equity. Thus, the equity held by the bank is progressively reduced. After a certain time the equity held by the bank shall come to zero and it shall cease to be a partner. Musharikah form of financing is being increasingly used by the Islamic banks to finance domestic trade, imports and to issue letters of credit. It could also be applied in agriculture and Industry. Ijirah in Islam Ijirah is a term of Islamic fiqh. Lexically, it means 'to give something on rent'. In the Islamic jurisprudence, the term 'Ijirah' is used for two different situations. In the first place, it means 'to employ the services of a person on wages given to him as a consideration for his hired services." The employer is called 'musta’jir' while the employee is called 'ajir'. Therefore, if A has employed B in his office as a manager or as a clerk on a monthly salary, A is musta’jir, and B is an ajir. Similarly, if A has hired the services of a porter to carry his baggage to the airport, A is a musta’jir while the porter is an ajir, and in both cases the transaction between the parties is termed as Ijirah. This type of Ijarah includes every transaction where the services of a person are hired by someone else. He may be a doctor, a lawyer, a teacher, a laborer or any other person who can render some valuable services. Each one of them may be called an 'ajir' according to the terminology of Islamic law, and the person who hires their services is


called a 'musta’jir', while the wages paid to the ajir are called their 'ujrah'. Labor The second type of Ijarah relates to the usufructs of assets and properties, and not to the services of human beings. 'Ijarah' in this sense means 'to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.' In this case, the term 'Ijarah' is analogous to the English term 'leasing'. Here the lessor is called 'Mu’jir', the lessee is called 'musta’jir' and the rent payable to the lessor is called 'ujrah'. The rule of Ijarah in the sense of leasing is very much analogous to the rules of sale, because in both cases something is transferred to another person for a valuable consideration. The only difference between Ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of Ijarah, the corpus of the property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee. Therefore, it can easily be seen that 'Ijarah' is not a mode of financing in its origin. It is a normal business activity like sale. However, due to certain reasons, and in particular, due to some tax concessions it may carry, this transaction is being used in the Western countries for the purpose of financing also. Instead of giving a simple interest-bearing loan, some financial institutions started leasing some equipment’s to their customers. While fixing the rent of these equipment, they calculate the total cost they have incurred in the purchase of these assets and add the stipulated interest they could have claimed on such an amount during the lease period. The aggregate amount so calculated is divided on the total months of the lease period, and the monthly rent is fixed on that basis. The question whether or not the transaction of leasing can be used as a mode of financing in Shari‘ah depends on the terms and conditions of the contract. As mentioned earlier, leasing is a normal business transaction and not a mode of financing. Therefore, the lease transaction is always governed by the rules of Shari‘ah prescribed for Ijarah. Let us, therefore, discuss the basic rules governing the lease transactions, as enumerated in the Islamic Fiqh. After the study of these rules, we will be able to understand under what conditions the Ijarah may be used for the purpose of financing. Although the principles of Ijarah are so numerous that a separate volume is required for their full discussion, we will attempt in this chapter to summarize those basic principles only which are necessary for the proper understanding of the nature of the transaction and are generally needed in the context of modern economic practice. These principles are recorded here in the form of brief notes, so that the readers may use them for quick reference. Basic Rules of Leasing: Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration. The subject of lease must have a valuable use. Therefore, things having no usufruct at all cannot be leased.


It is necessary for a valid contract of lease that the corpus of the leased property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything which cannot be used without consuming cannot be leased out. Therefore, the lease cannot be effected in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed. If anything of this nature is leased out, it will be deemed to be a loan and all the rules concerning the transaction of loan shall accordingly apply. Any rent charged on this invalid lease shall be an interest charged on a loan. As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor, but the liabilities referable to the use of the property shall be borne by the lessee. Qard Hassan (good loan/benevolent loan) This loan is given without charging extra commission; the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. The bank (lender/creditor) is expected to extend repayment time or even to voluntarily waive repayment of the whole or a part of the loan amount Salam Bai Salam describes a forward sale contract where the advance full price of the goods is paid for goods to be delivered later on at a specified time in the future. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. Hibah (gift) This is a token given voluntarily by a debtor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities. It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed'(akin to Dividends earned by Shares, however it is not time bound but is at the bank's discretion). However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah. It is important to note that although this indeed again, no matter how many different


ways we re-word this, does in fact, sound like interest, it is not, because it is Hibah. Tawarruq Tawarruq is Shariah compliant cash based financing mechanism which some Islamic banks provide personal financing to facilitate the supply of cash to their customers. As used in personal financing a customer purchases a commodity from the bank on deferred payment basis; the customer then sells the commodity in the market to a third party for cash. Islamic banks also use Tawarruq to guarantee a predetermined percentage rate of return to on investment deposits, buying a commodity from the customer on deferred payment basis then immediately selling the commodity for cash, the deferred payment price paid to the customer being higher than the cash price received by the bank – this is referred to as organized Tawarruq as the purchase and sale transactions are carried out simultaneously and there is no risk for the bank. Reverse Tawarruq is also practiced by some Islamic banks to manage their liquidity, it is similar to organized Tawarruq, but in this case, the banks act as the customer. Sukuk The official definition provided by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Bahrain based Islamic financial standard setter, is ‘certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.’ Sukuk is about the finance provider having ownership of real assets and earning a return sourced from those assets. This contrasts with conventional bonds where the investor has a debt instrument earning the return predominately via the payment of interest (Riba). Riba or excess is not allowed under Sharia law. As part of the 2011 World Bank-IMF Annual Meetings, the World Bank organized a Seminar entitled, The Role of Sukuk (Islamic Bonds) in Development. The Seminar brought together policy-makers, standard-setters, market practitioners, and the World Bank and IMF senior officials to discuss how best to unlock the potential of sukuk markets in support of growth and development. In recent years, the Islamic finance industry has grown rapidly, at more than 15% per annum. Despite its remarkable growth, Islamic finance is still largely concentrated in the banking business. In many countries with a significant Islamic finance industry, markets for Islamic bonds (Sukuk) are still relatively small and underdeveloped. Well-developed Sukuk markets would help enhance access to financial services, deepen capital markets and create alternative investment instruments for Islamic populations. In spite of growth in Islamic banking and creation of several instruments for financing, this particular banking system faces certain challenges as well. it has to be well developed to compete with the conventional banks. Despite its


considerable achievements over the last twenty years, Islamic banking faces a number of serious Challenges to its viability and growth in the 21st century. In order to meet the challenge of conventional Western banks entrance into the industry, incumbent Islamic banks will have to build strategic alliances and consolidate into larger institutions. The Islamic banking industry as a whole also needs to engineer new and more sophisticated financial products and diversify from just fixed-return to variable-return modes of Islamic financing. It must also determine Shari‘ah compliance more efficiently and support R&D and the training of new talent. The success of Islamic finance further depends on the establishment of equity institutions to provide equity capital and the development of secondary and inter-bank markets. Finally, a strong legal and institutional framework is necessary for accounting, supervision, and to provide a lender of last resort.


Chapter 6: Zakat Islam is a religion of justice and peace. It envisages a pious, prosperous and equitable society. It has laid down the basic fundamentals how to achieve these goals. It has always been against concentration of resources in few hands as it may lead to corruption and loss of freedom. Equitable distribution of incomes is a important step to improve many freedoms of the society. Many other models (capitalist, communism) have tried to achieve the goal of equitable distribution, but failed miserably. These models have been here for many decades but inequality kept on rising and rising again. Ispite of the progress the humanity has achieved, there are many dark spots on the face of it. Still we have hunger, famines, poverty, diseases and shelter less people. It is a known fact that there are billions of people around the globe who do not have access to even basic food, clothing and shelter. One estimate is about 0ne billion people. Not only there is extreme poverty, there is also the concentration of income in few hands around the world. Humanity is divided into poor and rich. The consequences have been alarming. It leads to class tensions, terrorism, hatred and oppression which are against the basic fundamentals of Islam. It is because of these factors that Islam promotes the cause of equality and justice. To achieve it, it has made the provision of Zakat. Zakat (alms) is one of the five pillars of Islam. Its importance can be realized from the fact that in 82 verses of the holy Qur’an, Zakat is associated with prayer (Salah), such as: “Establish regular prayer and give Zakat; and obey Allah and His Messenger (Qur’an, 33:33).If social justice and compassion to fellow humans who are disadvantaged is one of the central themes in the message of Allah to humanity, then it is no wonder that Zakat, like prayer and fasting, was also enjoined upon the people of the past messengers: “And We made them (descendants of Abraham) leaders, guiding by Our command, and We sent them inspiration to do good deeds, to establish regular Prayers and to practice Zakat; and they constantly served Us (Qur’an, 21:73). There is wisdom in giving Zakat.It purifies your wealth as Allah Almighty says in the Qur’an: “Take alms from their wealth in order to purify them and sanctify them with it and pray for them (Qur’an, 9:103). It reminds Muslims of the fact that whatever wealth they may possess is due to the blessings of Allah and as such it is to be spent according to the His commands. Zakat functions as a social security for all. Those who have enough money today pay for what they have. If they need money tomorrow they will get what is necessary to help them live decently. It acts like insurance. Zakat payer pays his dues to Allah as an act of worship, a token of submission and an acknowledgment of gratitude. The receiver of Zakat receives it as a grant from Allah out of His bounty, a favor for which he is thankful to Allah. Economically, Zakat is the best check against hoarding. Those who do not invest their wealth but prefer to save or hoard it would see their wealth dwindling year after year due to inflation etc. Zakat helps increase production and stimulates supply because it


is a redistribution of income that enhances the demand by putting more real purchasing power in the hands of poor. It keeps one away from sin and saves the giver from the moral ill arising from the love and greed of wealth. Through Zakat, the poor are cared for, these include widows, orphans, the disabled, the needy and the destitute. Zakat is the right of the poor. Zakat is not considered a favor that is given to the poor by the rich. It is the right of the poor on the wealth of the rich. Allah says: “(In their) wealth there is a known share for the beggars and the destitute” (Qur’an, 70:24-25). Zakat, therefore, is unlike charity that is given to the needy voluntarily. Withholding Zakat is considered depriving the poor of their due share. Thus one who pays Zakat actually “purifies” his wealth by separating from it the portion that belongs to the poor. Virtue of Zakat Allah says in the Qur’an: “The parable of those who spend their wealth in the way of Allah is that of a grain of corn. It grows seven ears and each ear has hundred grains. Allah increases manifold to whom He pleases (Qur’an, 2:261). The beloved Messenger of Allah (peace be upon him) is reported to have said about Zakat:

a. Zakat is a (great and strong) bridge of Islam. b. If a man pays the Zakat due on his property, it causes its evil influence to

vanish. c. Gains the pleasure of Allah. d. Increases wealth and protects from losses. e. Causes Allah’s forgiveness and blessings. f. Protection from the wrath of Allah and from a bad death. g. A shelter on the Day of Judgment. h. Security from seventy misfortunes.

Alqamah (may Allah be pleased with him) says that when a group of people visited the Prophet (peace be upon him) he said to them, “Verily you can make your Islam perfect by your payment of the Zakat due on your property.” The Prophet (peace be upon him) said, “He who observes three things will taste the sweetness of Iman (faith): One who worships Allah alone and believes (from his heart) that there is no one to be worshipped but Allah and one who pays the Zakat on his property, willingly, every year. In Zakat on the animals, one should not give an aged animal or one suffering from itch or any other ailment, or an inferior one, but should give animals of average quality. Allah Almighty does not demand from you the best of your animals, nor does He command you to give animals of the worst quality. This is narrated by: Jarir bin 'AbdullahRA: I gave the pledge of allegiance to the Prophet for offering prayer perfectly giving Zakat and giving good advice to every Muslim.


Abu HurairaRA: The Prophet said, "(On the Day of Resurrection) camels will come to their owner in the best state of health they have ever had (in the world), and if he had not paid their Zakat (in the world) then they would tread him with their feet; and similarly, sheep will come to their owner in the best state of health they have ever had in the world, and if he had not paid their Zakat, then they would tread him with their hooves and would butt him with their horns." The Prophet added, "One of their rights is that they should be milked while water is kept in front of them." The Prophet added, "I do not want anyone of you to come to me on the Day of Resurrection, carrying over his neck a sheep that will be bleating. Such a person will (then) say, 'O Muhammad! (please intercede for me, ) I will say to him. 'I can't help you, for I conveyed Allah's Message to you.' Similarly, I do not want anyone of you to come to me carrying over his neck a camel that will be grunting. Such a person (then) will say "O Muhammad! (please intercede for me)." I will say to him, "I can't help you for I conveyed Allah's message to you." Abu HurairaRA: Allah's Apostle said, "Whoever is made wealthy by Allah and does not pay the Zakat of his wealth, then on the Day of Resurrection his wealth will be made like a bald-headed poisonous male snake with two black spots over the eyes. The snake will encircle his neck and bite his cheeks and say, 'I am your wealth, I am your treasure.' " Then the Prophet recited the holy verses:--'Let not those who withhold...' (to the end of the verse) (3.180). Al-Ahnaf bin QaisRA: While I was sitting with some people from Quraish, a man with very rough hair, clothes, and appearance came and stood in front of us, greeted us and said, "Inform those who hoard wealth, that a stone will be heated in the Hell-fire and will be put on the nipples of their breasts till it comes out from the bones of their shoulders and then put on the bones of their shoulders till it comes through the nipples of their breasts the stone will be moving and hitting." After saying that, the person retreated and sat by the side of the pillar, I followed him and sat beside him, and I did not know who he was. I said to him, "I think the people disliked what you had said." He said, "These people do not understand anything, although my friend told me." I asked, "Who is your friend?" He said, "The Prophet said (to me), 'O Abu Dhar! Do you see the mountain of Uhud?' And on that I (Abu Dhar) started looking towards the sun to judge how much remained of the day as I thought that Allah's Apostle wanted to send me to do something for him and I said, 'Yes!' He said, 'I do not love to have gold equal to the mountain of Uhud unless I spend it all (in Allah's cause) except three Dinars (pounds). These people do not understand and collect worldly wealth. No, by Allah, Neither I ask them for worldly benefits nor am I in need of their religious advice till I meet Allah, The Honourable, The Majestic." '


Ibn MasudRA: I heard the Prophet saying, "There is no envy except in two: a person whom Allah has given wealth and he spends it in the right way, and a person whom Allah has given wisdom (i.e. religious knowledge) and he gives his decisions accordingly and teaches it to the others." Abu HurairaRA: Allah's Apostle said, "If one give in charity what equals one date-fruit from the honestly-earned money and Allah accepts only the honestly earned money--Allah takes it in His right (hand) ar then enlarges its reward for that person (who has given it), as anyone of you brings up his baby horse, so much s that it becomes as big as a mountain Haritha bin WahabRA: I heard the Prophet saying, "O people! Give in charity as a time will come upon you when a person will wander about with his object of charity and will not find anybody to accept it, and one (who will be requested to take it) will say, "If you had brought it yesterday, would have taken it, but to-day I am not in need of it." It is now clear how much Zakat is emphasised in our religion. In fact the first Khalifah of Islam, Hazrat Abu Bakr, waged war against tribes not paying Zakat. Briefly speaking, following rules and regulations govern the system of Zakat:

1. According to jurists and scholars, Zakat is imposed on the wealth of a person who is (a) Muslim (b) adult (c) sane (d) free and (e) solvent. However, Zakat is payable on the wealth of a minor as well as on the wealth of an insane person and that is paid by the guardian. As it is a religious duty, it is obligatory on a Muslims only and no non-Muslim is obliged to pay it. A slave and insolvent debtor is also not liable to its payment.

2. Nisab of Zakat or the minimum limit of wealth which attracts liability of Zakat has also been fixed at various levels in case of different categories of wealth. Nisab in case of gold is 20 Misqal or 7.5 tolas or 3 ounces. In case of silver, it is 200 Dirhams or 52.5 tolas or 21 ounces. In case of camels, it is 5 in numbers. In case of cows, it is 30 and in case of goats and sheep, it is 40 in numbers. Articles of trade and general merchandise qualify for Zakat when their value is equal to Nisab of silver.

3. Rate of Zakat in case of gold and silver is 2.5%, in case of cattle wealth it varies between 1% to 2.5%, while in case of articles of trade it has been fixed at 2.5%. Assets of modern times like shares and stocks, cash and coins, investments and debentures, etc. are also charged to Zakat at the rate of 2.5%.

4. No Zakat is due on property before a year elapses. Ibn Umar reported that the Messenger of Allah said; ‘Whoever acquires wealth, there is no Zakat therein till a year passed over it” (Tirmizi). For the purpose of Zakat, the Muslim financial year begins with the month of Ramadan. Advance payment of Zakat is also permitted like the advance payment of


Income Tax these days. 5. Deduction of Zakat at source is also reported to have been initiated by

the early Muslims as Muawiyah introduced the system of deduction of Zakat from pensions.

6. For the purpose of levy of Zakat, properties or goods are divided into two categories; goods of increase and goods of no increase. Goods of increase are real and capable of measurement such as animals, gold and silver, articles of trade, etc. Goods of no increase are buildings and personal effects. On the principle of productivity, Zakat is levied on the former but not on the latter.

Another classification for the purpose of charging Zakat is that of Amwal-e-Zahirah (visible or apparent wealth) and Amwal-e-Batinah (invisible or non-apparent wealth). Example of the former is farm produce, sheep, cattle, etc., while example of the latter is gold, silver, cash, etc.

7. Properties which were subjected to Zakat in the early Islamic State included gold and silver, animal wealth, articles of trade, etc. During the reign of Hadrat Umar, horses were also subjected to Zakat where they were bred and traded on a larger scale.

Industrial revolution and technological development have brought in their wake certain properties and assets which were not known in the early days of Islam such as; industrial machinery, bank or currency notes, bank deposits, bonds, securities, shares, stocks, debentures, certificates of credit, bills of exchange, insurance policies, provident funds, certificates of investment etc. Modern jurists and scholars of Islam are almost unanimously agreed that these assets are chargeable to Zakat in an Islamic State.

8. The following properties and assets have been exempted from the levy of Zakat:-

a. Personal effects like clothes, articles of furniture, household goods except ornaments and utensils of gold and silver.

b. Horses and asses for conveyance or Jihad. c. Arms or weapons for personal use. d. Cattle employed in farming or transportation of goods. e. Tools of a professional for his personal use. f. Residential house. g. Slaves and servants. h. Books. i. Food for the owner and his family. j. Agricultural land and factory building and machinery etc.

9. Zakat cannot be lawfully paid to members of the tribe of Hashim who

was the great grand-father of the prophet of Islam. It cannot be paid to


Non-Muslims. Servants and slaves are also not eligible for Zakat when it is paid to them in consideration of their services. A person possessing Nisab property is also not eligible for it. One’s ascendants and descendants are also not eligible for Zakat. Wife and husband cannot pay Zakat to each other. Similarly, according to some jurists Zakat cannot be spent on the construction of a Mosque.

10. Zakat is levied only on what remains after satisfaction of one’s basic necessities. Wealth for Zakat is computed after deducting the amount of debt which the assessee owes to the others. All the wealth and assets owned by an assessee are not clubbed together for the purpose of Zakat because every category of wealth has its own Nisab and its own rate. In case of joint ownership of wealth, the share of each partner is considered separately. Zakat can be collected or paid in kind or cash, whichever method is convenient. Zakat on visible or apparent wealth is assessed and collected by the Islamic State but in case of invisible or non-apparent wealth Zakat can be assessed and determined by the Zakat payer himself. However, in this case also Zakat should be paid to the State.

Distribution of the Zakāt by the Bayt al-Māl The Bayt al-Māl (literally meaning the House for Money, is used as an equivalent for the Treasury House where public fund is kept) is an Islamic concept built upon three main factors: wealth, trust and socio-economic justice. It is clear that attainment of socio-economic justice is an immediate objective of the Bayt al-Māl. The Bayt al-Māl bears the responsibility of the undertaking of the society's fiscal system and welfare provisions. Accordingly, the Bayt al-Māl acts as a treasury complemented with the task of planning and distributing society's wealth in the whole socio-economic and political set-up of the nation. Hence, it is the financial pulse to the development process of the nation. According to A. Ghazali, the philosophy of the Bayt al-Māl is to form the basis of public financing. The final aim is to mould a society committed to balancing material and spiritual values by ensuring that wealth obtained by individuals is distributed from the "haves" to the "have-nots". The Bayt al-Māl can also manage national trading activities, coordination of foreign exchange and international trade transactions. In the modern-day context, this role is held by the banking system which need not necessarily be a separate entity of the financial system. Finally, everyone in the Islamic state is entitled to a reasonable standard of living and the Islamic state should guarantee its citizens' clothing, housing, health facilities, educational opportunities, and access to food at reasonable prices. A. Ghazali states that “although the Bayt al-Māl may not be directly involved in the administration of these welfare provisions, its funds may contribute towards the provisions of such matters. There are eight categories of the recipients of the Zakāt funds:

1. Poor: Those who do not have enough for their basic needs.


2. Destitute: Those who become weaker or who are under hardship of insolvency and are keeping their conditions hidden from others. The people who fall under this category are those who have no control over changing their financial conditions and are victims of circumstances.

3. Zakāt collectors: They are to be paid only according to the prevailing wages, that is, commensurate with other jobs which require a similar amount of time and energy.

4. Those who need special attention and kind treatment in order to win their hearts: There are three main categories: a) Muslims who are wavering, including the newly-converted Muslim, b) Muslims living in border areas who need stronger support for defence, and c) Non-Muslims who agree not to fight against Muslims and/or otherwise become helpful to the Muslims and/or the Islamic state.

5. Freeing human beings from bondage. 6. Those unable to pay their debts. 7. Spending in the cause of Allah. 8. Travellers who run out of money and the handicapped.

There is a different opinion regarding disbursement of zakāt revenue among the various groups of the beneficiaries listed in the Qur'an. According to M. N. Siddiq some ‘ulama insist on direct transfer payments to the beneficiaries. Some permit the Zakat benefits to flow to the beneficiaries indirectly through institutions providing needed services. Some scholars believe that if the beneficiaries are the deprived, the officers in Zakat administration and those whose hearts are to be won over zakāt revenue must be transferred directly and the rest can receive the benefits indirectly. Thus from the above discussion is becomes clear that the concept of Zakat is Islam is to mend the wrongs in the society due to inequality in the system and promote the progressive and peaceful society. Zakat can be seen as a welfare attitude of Islam towards down trodden society. it is to create the human development and promote progress without the disease of interest rate. It is a well established fact that after some time in the early years of Islam, there was such a progress in human society that people had to wander to find some Zakat taker and they could not find any one. This was soly due to wonderful ideas of Islam and miracle of Zakat that poverty was eliminated from that section of world.


Chapter 7: Conclusions The twentieth century has seen many evils of modern economic system in terms of frequent depressions and recessions, stagflation and inflationary conditions in several markets all around the world. The causes of these phenomena have been many. Some believe excessive greed of humans, some put finger towards interest rates, and some internal mal functioning of the system. The system has ended in a failure. Extreme inequality still persists; hunger and disease still put humanity in shame. The optimistic pledges the system has made are nowhere to be seen. It has simply unleashed the animalistic behaviour of individuals. The financial crisis of 2008 was seen as an internal defect in the system. Many economists are now in favour of the other systems. Also these systems have led to many evils in the society. Now society is in need of other and more dynamic system and that is available with Islam. The economic system of Islam offers a unique opportunity to humanity to progress and develop without any contradictions. The need of the hour is to do that. Frequent recessions and depressions have led to infinite costs on society. More over the Muslims world have now done several efforts to move to shariah based economy. Over the past quarter of the century, the interest in Islamic economics has become too well known particularly in view of worldwide publications of books and experiments in some countries especially Islamic republic of Iran, Pakistan, Sudan and Saudi Arabia. Especially in Pakistan, the experiments have been encouraging as any success with the new approach will motivate other countries to follow the new path. The Pakistan given its historical back ground, announced in 1948, to reform its banking practices along the Islamic principles. In next year, it established research facility in the state bank to promote Islamic banking. The constitution was framed with the view to promote this type of economy. It also established Baitul Mal in 1992. In Saudi Arabia, the system is observed strictly as compared to other nations. In India, there is a lot of support found to implement the economic principles of Islam. No doubt there are hindrances in the way. But it can be over come through stragic educational programmes and removing of confusions. More research is needed in this field to promote the cause of Islam. Also there are various legal and constitutional hindrances that can be removed through motivating the policy makers of the country, particularly in Muslim world. Islamic banking has shown much more resilience in the recessionary conditions as well, so it becomes necessary to go into new fields and diversify their portfolio. More amalgation and inter banking trading should be promoted to help these banks to compete with the conventional banking system. Muslim constitutes more than 20% of population of the world. It provides a unique opportunity for the banking system to tap the market and create more Islamic instruments so than reliance on interest based system is lessened. Though it seems to be difficult task as competition is very huge, but it is not impossible. Slowly and steadily the race can be won. Policy makers, particularly at the helm of Muslim affairs should promote the cause of this type


of economics and through it, world can see how sustainable and dynamic the world of Islamic economic system is. There is a lack of research in this field which can be corrected through establishment of various institutions. Lastly Muslims must themselves try to rise to occasion to promote the cause of Islamic economic system. it is very important to give Islamic principles a chance to operate in the world so that humanity can see how dramatically it will eliminate the evils in the society and promote socio economic justice.


GLOSSARY ALLAH The name used by Muslims for the supreme creator/God. Caliph (Khalifa) The successor of Prophet Muhammad as the spiritual,

temporal head. Hadith The authentic saying of Prophet Muhammad (SAW). Zakat Necessary alms giving and a pillar of Islam Riba Interest charging on money Mudarabah It is a profit loss sharing agreement nor based on interest. Musharikah It is like mudarabah, but here, capital holders can participate

in management. Shariah It is a complete way of life based on teachings of Islam Bayt ul Maal It is an institution in islam through which public funds are

distributed. Sunnah It is the related to the prophet of Islam, whatever he has done

in his life Nisab It is minimum level of resources below which a person is

exempted from paying zakat


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