Islamic Economics Explained

Riba is a fundamental concept in Islamic economics. Riba is explicitly prohibited by the Qur'an and by Islamic law. This goes contrary to many capitalist practices in modern economics. The word Riba can be literally translated as “increase”. However, it is usually understood as usury, or interest. That is, it is an increase that has nothing to do with an item's true value. In other words, an increase that is not due to simple supply and demand or to an improvement in a particular item. Riba is considered a major sin against God. Specifically, Riba is used to refer to the case in which a lender or a creditor demands a price that is above the amount that is lent out. Riba can also refer to an increase that is gained through a manipulation of prices, corrupt practices, or fraudulent circumstances.

Islamic law considers two different forms of Riba: unfair or uneven trades and an increase in earnings without providing any services. The Qur'an defines Riba as an increase over the principal, which in today's modern economic system is defined as interest. Muslims consider that Riba is among the Seven Heinous Sins, which include blasphemy, magic, murder, stealing from orphans, falsely accusing pious women, and fleeing from the battlefield. The Qur'an states several times that Riba is to be prohibited. In his last sermon, the prophet Muhammad spoke specifically against Riba and revoked all Riba obligations. Because of these circumstances, the prohibition on Riba is not a point of discussion or difference between different Muslim schools of thought. The prophet Muhammad cursed not only those that deal in Riba, but those who receive it and those that witness it. It is, however, important to understand that Islam does not condemn trade. Riba and trade are not the same, and the Qur'an specifically makes the difference between the two.

Islam considers that Riba is a way to oppress others. It is a way for people to exploit the needs of others in order to make money. Islam promotes charity instead of Riba. In fact, the prophet Muhammad declared that Riba is a greater sin than drinking alcohol or eating wine. When asked whether Riba was worse than being an adulterer, the prophet Muhammad replied that Riba is worse than commiting adultery with one's own mother. Non-Muslims often fail to understand the problem Muslims have with Riba. However, with these kinds of pronouncements by the Qur'an and the prophet Muhammad, there is absolutely no doubt that lending with interest is completely contrary to the Islamic faith and what Muslims believe at a fundamental level. Modern economics deal largely with interest, which is why Muslims use an Islamic economics system that avoids breaking the prohibitions against Riba.

Some people wonder as to why the religion Islam has its own economic system. What the uninitiated do not realize is that Islam is not like many other religions limited only to focusing on the aspects of Man’s relationship with God, rather Islam is a complete system of life – guiding mankind in every sphere of life.

Islamic economics is a much read and much researched topic these days. As the conventional banking is at loggerheads with Islamic values, scholars try to lay the foundation of such banking that will work on the principle of Shariah.

Islamic economics has a firm foundation in the Holy Quran and the Sunnah of the Prophet. Unlike various other economy models, Islamic economics is not existent only in theory; in fact the Prophet himself established it in the Medina. So, in Islam there is theory of the Quran and the practical demonstration of the Prophet to establish a just economic system. The corner stone of Islamic economics is a system of usury free business interactions. To deal with usury (or commercial interest) is a mighty sin in Islam. Allah says:

“O you who believe! Fear Allah, and give up what remains of your demand for usury, if you are indeed believers. If you do it not, Take notice of war from Allah and His Messenger: But if you turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly.” [Sura Baqara 2:278, 279]

Those unaware often question the concept of no usury in Islamic economic dealings. The explanation is such: Usury or Riba mars the very purpose of Islamic economics. Islamic economics aim for moral development, promoting unity, social justice, fair and equitable distribution, circulation of wealth and providing basic human needs. In an interest based economy, there is no share kept aside for the poor. The rich amass all the wealth while the poor are left with nothing. Since the aim of Islamic economics is to promote economic prosperity for one and all, there can be no system of charging interest. For the Muslims who ignore this code and continue to deal in interest-based economics, there exists a Hadith to shake their very soul of and intimate them to their grave fallacy:

“Riba is of seventy different kinds, the least grave being equivalent to a man marrying (i.e. having sexual intercourse with) his own mother.” (Ibn Majah, Baihaqi).

What is pivotal to Islamic economics is the economic justice – to beidge the gap between different economic classes of a society – and to lay a foundation of a better world. To ensure the same, Islam has made it obligatory upon every Muslim (whose annual income is more than the amount of 85 grams of gold) to give 2.5% of his or her wealth in charity. This is called Zakat in Islam. The Zakat system is the best option not only for the Muslims, in fact for the whole humanity to solve the problem of economic imbalance. What many people don’t realize is that they can easily do away with 2.5% of their earnings and probably will not notice it as such, but it could mean all the difference between life and death to a poorer man. It is heart-warming to note that even in a “cold business matter” such as economics, the religion’s primary aim is to make life better for its people.

Coming to the technical part of Islamic economics, there are different types of financial dealings in Islamic economics. The only difference between these enterprises and conventional ones is that Islam never recognizes any business if it involves interest at any point of dealing.

Here is a list of different financial dealings in Islam:

1) Bai Salam 2) Bai Muajjal 3) Bai Murabaha 4) Sharakat (Partnership) 5) Modarbah 6) Ijara

Let us understand what these terms mean.

1) Bai Salam: Bai in Arabic means business. Bai salam is a spot payment of the price before the goods are delivered. In simple terms, here the buyer pays the price of the goods before goods are handed over to him. However, the quality of the product is to be fully specified before the payment. Also, the payment in this dealing has to be in toto.

2) Bai Muajjal: In Bai Muajjal dealing, the price of an item is payable on a deferred basis either in lump sum or in instalments. It is necessary, however, in this dealing that the price and date of payment must be fixed.

3) Bai Murabaha: This is a financial dealing in which a person purchases a commodity at a certain price, adds to it a sum with determined rate and then sells it to another person. The critical difference between this dealing and riba is that the product must not be currency.

4) Sharakat (Partnership): Here, a fixed amount of capital is set between two or more persons, sharing equally both the loss and profit in the business according to a fixed ratio. The critical point in this type of dealing is that the business must be lawful. However, there are also other conditions like: partners must be sound and mature, mutual agreement between the partners and the rate of profit and loss has to be predetermined.

5) Modarabah: In this type of dealing, one person provides money or capital (known as rabb ul maal) to another person as an investment in a commercial project. The condition in this type of financial dealing is that the rate of profit sharing has to be set beforehand.

6) Ijara: Ijara is an Arabic word which means “wages”. It is to gain profits from a thing. This is the very purpose of Ijara. The thing, in this regard, may be a physical commodity or the service of an individual.