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How Does An Interest-Free Economy Operate?

Questioner

A. B. M. Ferdaus

Reply Date

Aug 14, 2018

Question

As-salamu alaikum. May Allah bless you people for the great effort you are making to enlighten us. My question is concerning Islamic economy. How does an interest-free Islamic economy operate? In a conventional interest-based economy, the central bank conducts monetary policy (controls the supply of money in the economy) through raising or lowering the interest rate. In an Islamic economy how will the central bank conduct such monetary policy? How will the bond market and short-term securities market operate without interest? How will people be motivated or unmotivated to save or invest in absence of interest? In fact, if possible, give me a comprehensive picture of an interest-free economy that may include interest-free monetary and fiscal policy implementation, and the rate-of-return/cost-of-capital at the firm (micro) or economy (macro) level (in absence of interest) so that investments can be compared for efficient allocation of capital, etc.

Consultant

Answer


Short Answer: Islam is a way of life that is concerned with the economy (in its micro- and macro-levels, as we say in today’s language). However, Islam is not meant to devise specific systems for economy in the sense of a certain system for fiscal policies, risk, banking, and so on. Islam is NOT meant to define and precisely prescribe each and every detail of this life. Human empirical experience is the final judging factor for these kinds of tools and means.

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Asalamu Alaikum,

Thank you for contacting About Islam with your question.

Please find part one of the answer to your question below. Find the second and final part at the link here.

A classic answer to your question would go along the lines that what is called interest in modern economics is synonymous to what is called riba in the Quran.

And that the Islamic system of economics is an interest-free system that avoids riba in financial dealings on all levels, and thus guarantees prosperity and growth because it avoids sin and injustice, and so on.

Quite frankly, I think that the above typical answer to your question is too vague and full of inaccuracies. So allow me to answer your question in a different way.

Divine vs. Human

The very fact that you are asking for a detailed and “comprehensive” picture of “the Islamic theory of economy” reveals, with all due respect, a common confusion between what is divine and what is human, between what should be according to the scripture and what should be left to our human free thinking, and between what is constant and what is variable in the Islamic way of life.

Although Islam is a comprehensive way of life, it is NOT meant to define and precisely prescribe each and every detail of this life. Thus, Islam has rulings and guidelines that are concerned with politics, courts, family, health, the economy, and so on.

However, talking about “Islamic” politics, for example, does not mean that Islam has a cut-and-dry (let alone “divine”) detailed system of governance (such as a monarchy with a consultation council, a democratic republic in a multi-party style, a federal government with a constitution, a simple direct democracy, or any other specific system of governance).

Nor does “Islamic politics” mean that you must or must not have a constitution, you must or must not have a supreme court, or you must wage war or call for peace with certain countries or groups.

Islamic Values

The Islamic system of politics is a system of values. We humans should decide the exact details of the best political system. Examples of these Islamic political values, as mentioned in the Quran, are justice, consultation, and unity.

Consultation (Arabic shura) could take a public and direct form (as the Prophet [peace be upon him] did in various occasions), or could take a form in which only a specific group of people are consulted (as the Prophet also did on various occasions).

This specific group could be chosen according to a leader’s personal choice in a certain environment, according to elections in a parliamentary system or a council-based system, or even according to the tribal structure in a certain society.

None of the above ways is morally wrong and all of the above ways are valid as long as we observe the values of justice, unity, consultation, etc. Any system, from the above list or otherwise, that violates these values is not an Islamic system, whether you call it a democracy, a caliphate, a kingdom, or a sultanate.

More Examples

Similarly, Islam is a way of life that is concerned with health. The values that form the “Islamic” guidance in this area, according to the Quran and Sunnah (Prophetic example), are cleanliness, seeking medication, moderation in consumption, high morale, and so on.

However, it is not part of the Islamic teaching to prescribe a certain technical method of cleaning one’s home or environment, for example.

Likewise, it is not part of the mission of Muhammad to teach us certain medication or medical procedures (even though it was indeed part of his mission to teach us certain related prayers, or ruqiyah, and to teach us how moral behavior is good for health, etc.).

I find the hadith (prophetic saying or teaching) of pollinating the palm trees to be of specific significance in this regard. Talha narrates:

I was walking with the Prophet when he passed by some people at the tops of their palm trees. He asked: “What are they doing?” They answered: “Pollinating the male into the female.” He replied: “I do not think that this will be of benefit.”When they were told about what the Prophet said, they stopped what they were doing. Later, when the trees shed down their fruits prematurely, the Prophet was told about that. He said: “If it is good for them they should do it. I was just speculating. So pardon me. But if I tell you something about God, then take it because I would never lie about God.” Another narrator said that the Prophet added, “You know your worldly affairs better than I.” (Muslim)

A Way of Life

This hadith shows a matter that the Prophet (peace be upon him) is instructing us to deal with according to human experience rather than revelation. Thus, human empirical experience is to be the final judging factor for these kinds of tools and means.

Similarly, Islam is a way of life that is concerned with the economy (in its micro- and macro-levels, as we say in today’s language).

However, Islam is not meant to devise specific systems for economy in the sense of a certain system for fiscal policies, risk, banking, and so on.

Please continue reading at part two here

Walaikum Asalam.

(From Ask About Islam archives)

Please continue feeding your curiosity, and find more info in the following links:

How Does An Interest-Free Economy Operate? Part 2

What Are the Distinctive Principles of the Islamic Economy?

What Are the Challenges of the Islamic Finance Industry?

 

 

 




About Dr. Jasser Auda

Jasser Auda is a Professor and Al-Shatibi Chair of Maqasid Studies at the International Peace College South Africa, the Executive Director of the Maqasid Institute, a global think tank based in London, and a Visiting Professor of Islamic Law at Carleton University in Canada. He is a Founding and Board Member of the International Union of Muslim Scholars, Member of the European Council for Fatwa and Research, Fellow of the Islamic Fiqh Academy of India, and General Secretary of Yaqazat Feker, a popular youth organization in Egypt. He has a PhD in the philosophy of Islamic law from University of Wales in the UK, and a PhD in systems analysis from University of Waterloo in Canada. Early in his life, he memorized the Quran and studied Fiqh, Usul and Hadith in the halaqas of Al-Azhar Mosque in Cairo. He previously worked as: Founding Director of the Maqasid Center in the Philosophy of Islamic Law in London; Founding Deputy Director of the Center for Islamic Ethics in Doha; professor at the University of Waterloo in Canada, Alexandria University in Egypt, Islamic University of Novi Pazar in Sanjaq, Qatar Faculty of Islamic Studies, and the American University of Sharjah. He lectured and trained on Islam, its law, spirituality and ethics in dozens of other universities and organizations around the world. He wrote 25 books in Arabic and English, some of which were translated to 25 languages.

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