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Islamic Economics and Finance:

Islamic economics and finance has emerged as a discipline separate from the general science of economics and finance in the wake of islamisation of Islamic business industry. It is a system of finance that is bound by religious laws that prevent the taking of interest payments which in Arabic called Riba. Islamic economics and Finance is broader term which includes a banking system that isA based onA the principles of Shari'ah and guided by Islamic principles. Two basic principles behind Islamic bankingA are sharing of profit and loss and, significantly,A the prohibition of the collection and payment of interest. Collection and payment of interest is strictly prohibited in Islam. If it is prohibited to take, it is also prohibited to give. Islamic Economics and Finance has many operational areas like Islamic banking, Islamic Investment, Islamic real estate, Takaful/Insurance, Asset Management etc. The elimination of interest from the economic system is meant to "promote economically just, socially fair, and ethically correct dealings according to Islamic principles, foster the solidarity and cohesion of the Muslim ummah, harmonise trade, create powerful economic incentives, and bring about cooperation and co-participation in all walks of life." In formulating its fundamental principles, Islamic economics system seeks to fuse Islamic religion with economic science; that is, it tries to combine the study of economic phenomenon of ordinary business of life with religious beliefs, ethical norms, moral ideals, rules and laws, thus putatively believing that the social science of economics is a secular discipline which does not concern itself with value judgements, and that Islamic economics is a plausible alternative to modern economics since it is based on the values, norms and principles of Islam.


Islamic Economics and Finance:

Islamic economics and finance is as old as Islam itself. Throughout the fourteen centuries of Islamic history, we find a continuity of works in which economic issues are discussed in the light of the Shari'ah. Most of these discussions lay buried, however, in the vast literature on the exegesis of the Qur'an (that is, Tafsir), commentaries on Hadith, principles of jurisprudence (usul al-fiqh), and law (fiqh). No effort has been made to dig out this material and present it systematically. There is another genre of works devoted exclusively to statecraft and social organization. These and the works on moral philosophy and historiography received some attention when the new born social sciences entered the curricula of universities in the Muslim world and scholars started looking for the Islamic heritage in these fields. Some orientalists have also paid special attention to the political and economic thought of early Muslim thinkers. But we do not have, till date, a single comprehensive book on the history of economic and finance in Islam. We do have, however, a number of papers, mostly written after the middle of this century, on the economic thinking of some eminent Islamic scholars in the past. Let's discuss a little about its journey so far. Even before the invention of money, people used to deposit valuables such as grain, cattle and agricultural implements and, at a later stage, precious metals such as gold for safekeeping with religious temples. Around the 5th century BC, the ancient Greeks started to include investments in their banking operations. Temples still offered safe-keeping, but other entities started to offer financial transactions including loans, deposits, exchange of currency and validation of coins. Financial services were typically offered against the payment of a flat fee or, for investments, against a share of the profit. The views of philosophers and theologians on interest have always ranged from an absolute prohibition to the prohibition of usurious or excess interest only, with a bias towards the absolute prohibition of any form of interest. The first foreign exchange contract in 1156 AD was not just executed to facilitate the exchange of one currency for another at a forward date, but also because profits from time differences in a foreign exchange contract were not covered by canon laws against usury. In a time when financial contracts were largely governed by Christian beliefs prohibiting interest on the basis that it would be a sin to pay back more or less than what was lent, this was a major advantage.

Islamic Banking:

The first instance of Islamic banking came into the picture in Egypt in 1963. The pioneering efforts by Ahmad El Najjar brought this bank into existence, whose key principle was profit sharing (non-interest based philosophy of Shariah). By the end of 1976 there were 9 such banks in the country. These banks neither charged nor paid interest but their activities were mostly limited to trade and industries where these banks invested directly or as partners of depositors. Hence, functionally these banks were working more as financial institutions rather commercial banks. In 1971, Nazir Social Banks is known to be the first commercial bank in Egypt, though its charter never made references to Shariah. The first bank explicitly based on Shariah principles was established by the Organization of Islamic countries (OIC) in 1974, called Islamic Development Bank (IDB). This bank was primarily engaged in intergovernmental activities for providing funds for development projects running into member countries. Its business model involved fees for financial services and profit sharing financial assistance for projects. The practice of Islamic banking did not start at the national level. Instead, individual Islamic banks were established in a number of countries during the second half of the Seventies. These individual Islamic banks had to operate within the economic and legal framework of their respective countries. They had also to face competition from interest-based banks, which were well-entrenched in the system. This environment provided no effective protection against the moral hazards attending upon a sharing-based system of financial intermediation. The low levels of honesty and trustworthiness in the market, the poor system of audits and accounts, lack of means for monitoring a business and, last but not least; failure of the judiciary to help the financing agencies in case of default by fund-users, were some of the factors inhibiting the practice of profit-sharing by the newly established Islamic banks. We learned little about Islamic Economics and Finance and its history. We will discuss now about its relevance of Islamic Economics and Finance in today's life.

To know the relevance of Islamic Economics and Finance, we should know the important elements of it. These are the elements which make it more effective in compare to the current conventional system. Conventional system doesn't address the following requirement of their people. However, Islamic Economics and Finance does:

Disclosure of cost on transactions

Islamic Finance is based on a set of simple truth that all businesses must abide by. For example, under Islamic Finance all financial transactions must disclose the cost and the profit to the buyer. And the determination of cost must include all of your cost. You are prohibited from hiding some of your cost. Full disclosure of pricing is critical to Islamic Finance and what constitutes a good free market.

Existence of subject matter

Another important principle of Islamic Finance is that all transactions must be supported by the physical existence of the subject of the trade. Contrast this to Wall Street which trades in commodities with no real existence of the commodity. It is now estimated that paper trading in gold is leveraged by more than 30 to 1 in terms of the actual physical gold that exists to support the trades.

Constructive Possession

Another important rule of Islamic Finance is "constructive possession" for every financial transaction. What this means is that you must have some ownership stake in what it is you are selling. You cannot sell something that you do not own. If you do, then you have introduced enormous risk and speculation into the marketplace. Under Islamic Economics and Finance this is disallowed and termed as Gharar.

Existence of Value

Islamic Finance also prohibits the selling of something that has no assigned value. For example, you cannot enter into a business transaction that someone can readily obtain for free or no-one in the marketplace has a use for. All objects of a transaction shall have some perceived value by someone within the marketplace. Things that have no use to anyone are not allowed under Islamic Finance.


The idea of trusteeship has been central to all religious views of the economy. Islam reinforced the view that man's ownership of resources is held as a trust, the real owner being God, the Creator, to whom the trustee is accountable. The idea of trusteeship distinguishes the religious/Islamic approach to economics from materialistic approaches like capitalism and socialism. It effectively rules out both extremes -laisses faire and collectivisation-while introducing a moral-spiritual element into the 'ordinary business of life'. The idea is made practical by rules governing individual behaviour and public policy.

Helping Behaviour

"Mankind are God's dependants, so the most beloved of people in the Sight of Allah are those who do good to His dependants." (Mishkat, Bab al-Shafqah wa'l-Rahmah 'ala'l-Khalq). Helping behaviour is required because of the interdependent nature of man's life. There is no fulfilment in life without interaction with others; individual felicity requires socialization. The exclusive pursuit of self-interest in social relations is counterproductive; it defeats its own purpose. Men serve their individual and collective interests best when each individual cares for the welfare of others while striving to protect and promote his own interest. This is what religion teaches. We gain through giving; when everyone is keen only to acquire and unwilling to give, no one acquires anything. So the wealth increasing through interest and decreasing through charitable giving is an illusion. The reality is different. Social wealth increases when the rich give away part of their wealth to the needy - seeking no return save the Pleasure of Allah. An individual may not realise this, as he does not experience it directly and instantaneously. This is why the motivation for charitable giving is weak. Nevertheless, faith does what personal experience might have done, moving men to charity. Those who lack faith and a vision of the Hereafter behave otherwise, as noted in 107:1-3.


Moderation in consumption is another feature of Islamic economics. Islam discourages ostentatious living and indulgence in luxuries. There are no specific quantitative limits to the consumption of what is permissible, but one should take into consideration what is available to others before one avails oneself of the good things of life. This also refers till some extent to all measures that improve the social order of the community. These include welfare policies, comfortable transportation, the provision of free and accessible healthcare etc.

Decision by Consultation

Men are free to make private economic decisions individually, but public choice and collective decisions must be based on consultation. This is implied in the Qur'an's characterization of Muslims as a people "whose rule (in all matters of common concern) is consultation among themselves" (42:39). But the community has been especially cautioned regarding the allocation of offices and the dispensation of justice: "Behold, God bids you to deliver all that you have been entrusted with unto those who are entitled thereto, and whenever you judge between people, to judge with justice. Verily, most excellent is what God exhorts you to do, for God is all-hearing, all-seeing!" (4:58) The subject of ensuring an adequate supply of public goods has been approached by modern economics within the framework of selfish behaviour, focusing on the free-rider problem. The Islamic doctrine of al-fard al-kifa'i, or socially obligatory duties, seeks to take care of the matter through voluntary action complemented by state action. One significant expression of this tendency in Islamic history has been the proliferation of charitable endowments (waqf) devoted to education, health care and providing for the needy, etc. In general, the doctrine of socially obligatory duties has boosted the role of the voluntary sector in Islamic economies. Coupled with Islam's strong condemnation of hoarding and of all collusion between sellers to the detriment of customers, socially obligatory duties build those bridges between self-interest and public interest that are so vital for peace and prosperity in human society. The doctrine implies the valuable insight that the only durable basis for the protection and promotion of the public interest is orienting Individuals towards doing their duty.

Treating Wealth as Means

Islam looks at economic well-being as a means to peace, freedom from hunger-and freedom from fear of, or domination by, any being other than Allah. Beyond the satisfaction of basic needs, the ultimate objectives of earning and spending money are moral and spiritual. This rule out the seeking of economic gains at the cost of moral and spiritual values, both at the individual and at the national level. It is against 'Islamic rationality' to hoard money. It follows that savings, i.e., what is left after Consumption and charitable giving, must be put to good use. One who cannot undertake productive enterprise himself can do so in partnership with others, or he can supply funds on a profit-sharing basis. Men can also borrow and lend, but the lender cannot claim an increment on the principal, since interest is prohibited. Also prohibited is gambling. Men should seek to avoid these and other prohibited means, such as cheating, exploitation, coercion, etc., when making money. Their freedom to make monetary and financial arrangements is constrained only by these prohibitions and by the general Islamic tendency to treat money as a means to the good life.
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Looking At Islamic Economics And Finance Finance Essay. (2017, Jun 26). Retrieved June 25, 2024 , from

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