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: s
1) Bai Salam
2) Bai Muajjal
3) Bai Murabaha
4) Sharakat (Partnership)
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.