Islamic Economic and Finance (IEF)

CONCEPT OF ECONOMY Islamic vs. Secular

By Mila Fadilla, SP, M.Si, CIFP

Islamic Banking and Finance Institute (IBFI) Trisakti University

Methodology of Economics
The word methodology comes from method that means a manner or a procedure, a regular and systematic way of accomplishing something.
Methodology of economics means the process of building models, developing theories, testing hypothesis, establishing and using criteria to evaluate certain process in order to know that our model is correct or not.

Methodology of Islamic Economics

Methodology of studying the Islamic Economics system through the primary sources which are the Quran and the Sunnah/Prophetic tradition

How To Develop Islamic Economics?

Most economic applications have to be derived from the main sources of Knowledge in Islam i.e. Quran and Sunnah.

Have better understanding of the Islamic Worldview especially on the Islamic vision of Economics. Islamic / Shariah boundaries of economics must be determined.
Shariah must be interpreted and applies.

What is Economics?
The word economics have many definitions, some of these definitions are: Economics is the social science that studies the allocation of scarce resources to satisfy unlimited wants. This involves analyzing the production, distribution, trade and consumption of goods and services. Economics is the study of choice and decisionmaking in a world with limited resources.

Definition of Secular Economics

Secular Economics studies human behavior as a relationship between ends and scarce means and which have alternative uses.
Secular Economics deals mainly with problems involving money i.e. it study the human behavior which is concerned with money getting and money spending without questioning how they get this money and where they are going to spend it.

The Key Problems for Secular Economic

1.

2.

Unlimited Wants Scarcity of Resources and How to get the Money?

Islamic View on these problems

1. 2.

Unlimited Wants Scarcity of Resources Money getting?

Quran Al-Hijr (15:19)

And the earth We have spread out (like a carpet); set thereon mountains firm and immovable; and produced therein all kinds of things in due balance

Quran Al-Hijr (15:21)

And there is not a thing but its (sources and) treasures (inexhaustible) are with Us; but We only send down thereof in due and ascertainable measures.

Quran Ibrahim(14:32)

It is Allah Who hath created the heavens and the earth and sendeth down rain from the skies, and with it bringeth out fruits wherewith to feed you; it is He Who hath made the ships subject to you, that they may sail through the sea by His command; and the rivers (also) hath He made subject to you.

Quran Ibrahim(14:33)

And He hath made subject to you the sun and the moon, both diligently pursuing their courses; and the night and the day hath He (also) made subject to you.

Quran Ibrahim(14:34)

And He giveth you of all that ye ask for. But if ye count the favors of Allah, never will ye be able to count them. Verily, man is given up to injustice and ingratitude.

Resources in Islam

Abundant of resources

Acquiring Money

Through halal / permissible means

Hadith

:When a man dies he will be asked on four .1- His youth how he spend it 2- His age how he spend it 3. His wealth how he acquires it 4. His wealth how he spend it

Definition of Islamic Economics

Islamic Economics is a social science which studies the economic problems of people imbued with the values of Islam.

Definition of Islamic Economics

It studies man not only as an isolated individual but of a social individual having faith, ethics i.e. believing in the six articles (Rukun Iman), his deeds is accountable to Allah as it is guided by Shariah, and he is also required to propagate good doing and prohibit bad doing (al-Amr bil Maruf wa al-Nahy anil Munkar) in the society (i.e. watch his business ethics)

Difference between Islamic and Secular Economics Islamic Economics

Man - (Social but Religious)

Secular Economics
Man (Social)

Unlimited Wants

Scarcity of Means

Unlimited Wants / Scarcity of Resources

Economic Problems

Economic Problems

Choice (Guided by Economic

Choice

(Guided by whims of the individual)

Values of Islam)

Activities

Know the main sources of knowledge in Islam.

Differentiate between Revealed Knowledge and Acquired Knowledge?

Understand what is meant by Methodology of Islamic Economics. Understand the meaning of doctrines Link the main sources of knowledge in Islam to Islamic Economics

Cont. Activities

Appreciate the role of Islamic knowledge in solving current economic problems Familiarize with doctrines relating to Islamic banking and finance, as quoted in the Quran Understand doctrines from the Hadith relevant to Islamic banking and finance Apply the relevant fatwas to the current economic and social scenarios.

Economic System

An economic system is a mechanism which deals with the production, distribution and consumption of goods and services in a particular society. It is composed of people, institutions and their relationships. It addresses the problems of economics like the allocation and scarcity of the resources.

There are several basic and unfinished questions that must be answered in order to resolve the problems of economics satisfactorily.
The scarcity problem, for example, requires answers to basic questions, such as: what to produce, how to produce it, and who gets what is produced. An economic system is a way of answering these basic questions. Different economic systems answer them differently.

Types of Economic System

Command System Market System Mixed System Traditional System Islamic Economic System

Command System

Known as Marxism or Communism. Ownership - Public/government of all property and resources. Decision making central economic planning by board. Business firms are owned by government. E.g. Soviet Union, China

Market System

Known as Capitalism or sometimes as private enterprise system.

Motivation Each participants act in their own selfinterest. Sellers are to attain profit maximization and profits whereas buyers are to seek satisfaction.
Ownership Private enterprises own all property and resources. Decision making every decision is made by buyers and sellers through market. Role of government is to protect private property and enhance the environment for market system. E.g. US, European nations

Mixed System

In between the command and market system. Government actively participate but promote private ownership and decision making. E.g. Sweden, Japan

Traditional System

Production methods, exchange of goods, distributions of income are sanctioned by custom, heredity and caste. Others factors that may affect are religion, cultural values, historical background, customs etc. E.g. Developing countries

Four Characteristics of Economic System

Motivation Ownership Decision making Implementation

Motivation

In Islam, man is motivated to work (ie : to pursue economic activities) because he is entrusted by God as the khalifah/vicegerent on this earth and to obey Allahs will.

The primary motivating factor is mans desire to return to his-self by holding to the convenient /mithaq in order to attain the ultimate Happiness/Saadda Haqiqiya.
Unlike the capitalism, the primary motivating factor is more materialistic in nature.

Ownership

Private property does not include ownership of wealth belonging to the public in 3 things as in Hadith:Men are partners in 3 things namely water, fire and pastures/forests. Private ownership is allowed in Islam To man is allocated what they earn, and to woman what they earn. ( 4:32)

Allowing private ownership is important in Islam as this allow Islamic contract like trading (al bay) activities.

Ownership (cont.)
Three main attributes of property (mal) in Islam :

It must have some value people makes choices of what goods to buy and how to produce them, thus goods must have some value. It must be a thing that yield benefits/manfaah. It must be possessed. Eg: fishes in sea and birds at sky (not mal, not property). Ownership/Milkiyah Rights :Physical ownership allow to right to dispose eg : selling.

Right to utilize without legal ownership eg : rental, waqf

Right to used loaned property

Decision Making

Islam gives priority to the role of individual decision making, which is also tied to the concept of accountability. On that Day, will men proceed in companies sorted out to be shown the Deeds that they had done, then shall anyone who has done as atoms weight of good, see it and anyone who has done an atoms weight of evil, shall see it. (99 : 6-8)

Decision Making (Cont.)

The above ayah show that man is responsible for what he has done. Thus, individual are free to choose what they desire since Allah has given them the intellect (aql) to discern the good (maaruf) from the evil (mungkar). However, these individuals are to make a SHURA (a collective of individuals making decisions) on important issues that affected larger number of people. The governments role is to establish the good society with peace, justice and security.

Implementation

Men are the highest creation of Allah with intellect (aql) and are able to differentiate between right and wrong. Based on convenient /mithaq with Allah that the purpose of life is TRULY SUBMIT TO ALLAH. At the same time, man is composed of forgetfulness. Thus, despite the above, man has forgotten his duty and purpose. Thus, inclined towards injustice and ignorance.

Implementation (Cont.)

Man economic existence is to achieve Ultimate Happiness (Saadda Haqiqiya). How can man achieve Saadda Haqiqiya?

Excellence of Soul (knowledge and faith) Excellence ingrained in human nature (guidance, direction, setting aright, confirmation) Excellence born of environment (wealth, position, family, pedigree)

Thus in Islam, the pursuit of self-interest is constructive to individual and society. Man has knowledge about creator and rules ordained by Him.

Implementation (Cont.)

In short, the implementation in Islamic Economic System is through marketdriven with the intervention from government Shariah-linked.

Summary Islamic Economic System

Motivation Fulfilling the Al-mithaq Achieve the Ultimate Happiness Individual through work & effort Inheritance Multiplication Collective of individual through Shura Market driven with Shariahlinked government intervention.

Ownership

Decision Making
Implementation

Activities

State the difference between Capitalism, Socialism and Islam in explaining Ownership, Role of Government, Motivation, DecisionMaking and Activities. OR

Highlight the Islamic Business Ethics with regards to Private Ownership, Motivation, Decision-Making and Activities.

Thank You