Presentation of an alternative economic system based on Islamic rules

By Maher D. Kababji *

Unlike any other social science, fallacies are the root of the technique of thinking in economics. The failure to realize prosperity, accompanied by the rise in poverty and decline in median income necessitate getting rid of present economic systems and embracing an alternative system that would reflect a fair economy.  The following Paper, by Maher D. Kababji *, introduces an alternative economic system based on Islamic rules and rooted in productive activities.

Alternative Economic System, by Maher D. Kababji


In general, all religions handled economic issues, but Islam provides comprehensive concepts and rules as guidelines for the establishment of a fair economic system. The Holy Qur’an precisely stated prohibited acts and permitted acts in addition to the rules which regulate the permitted acts.

Taking into consideration the complexity of recent economy, different approach has been taken to identify economic topics and to understand verses of the Holy Qur’an. As a result, expressed views are drastically different from the views of other researchers in Islamic economy.

Mainly, Islam presents productive economy. Productive activities are based on principles of justice, mutual consent, prohibition of environmental mischief, and illegality of harmful products. God is the only Creator and Owner of factors of production. Material, labor, and investment risk are the factors of production. People are authorized to utilize resources. They are paid for their efforts in term of wages, and they are entitled to gain profits as reward for bearing investment risk. Accumulation of capital is the result of generating profits.

God creates the natural market system to be the framework within which productive activities should take place. It provides appropriate conditions within which appropriate prices and terms are determined as a result of free interaction of demand and supply. Humanity disruption into the natural market price system is prohibited. Taxes, inflation tax, financing charges, monopolistic profits, and cost of financial corruption are some sorts of intervention into the natural price system because they represent the main cause of inflation.

Money is a man-made social convention. Its role should not expand beyond its function as a medium of exchange. Islamic economic system is a self-correcting system in which production naturally controls money supply. Currency backing is inherently ridiculous tradition. Hoarding gold and money of other currencies as currency backing are prohibited. Money is regarded as legal rights guaranteed by the government and backed by the national product. As a measure of value of products, money should reflect the general price level. Protection of the right of legal private property requires that money should have stable value so that present value of products in exchange of a currency unit equals its future value.  Stability of the value of the currency unit requires that government should withdraw issued money in favor of deletion of related public debt, all money should be circulated through the monetary authority, and quantity of money supply should be changed in response to the change in production.

Prohibition of usury and speculative activities is one of the main features of Islamic economy. The historical review of financial crises explains the destructive role of financial activities on societies and the failure of monetary remedies to prevent the ghastly impacts on economic growth. Capital finance based on sharing profit and loss is the foundation of Islamic finance. This requires that financial institutions should be transformed into investment banks. In addition to the capital paid by the shareholders, resources of banks shall include funds invested by the monetary authority and private investors. Monetary authority shall control performance of banks. Unlike present Islamic banks where distribution of profit and loss is based on contracted capital shares, consideration is given to the variable invested capital. Activities of private and banking sector shall expand to include public services, while government will be responsible for defense and internal security.

The Holy Qur’an recognizes the differential in wealth and respects the right of financial security. Islamic rules of distribution require that every person has the right of living means. In return, every person must pay for his needs (Nothing for free) and must spend for the society within the excess of his wealth over his needs. Wealth tax is an Islamic duty imposed on wealth of rich individuals and used as wealth recovery paid to poor. Wealth tax does not cause inflation because it is not a component of the cost of products. To avoid dependency on wealth recovery, working is introduced as a duty of every individual within his capacity.

Fallacies in Economics

In order that an organized body of knowledge might be classified as science, its hypothetical laws must be based on facts. Unlike any other social science, fallacies are the root of the technique of thinking in economics. By the lapse of time, theses fallacies have been accepted as if they represent a part of the natural life which people have to live with. Over and above, they are utilized to help concentration of wealth.

Viewing money as the heart of economy. Money was introduced to facilitate exchange transactions. Nowadays, the role of money is broadened out of its scope. Money becomes profit generator and its quantity controls economic activities.

Viewing financial activities as economic activities. Economic activities have its origin in the wants of a community. Its main purpose is the satisfaction of those wants. Production is meant the activities which result in the creation of utilities. In present economic systems, huge amount of resources are directed toward financial activities.

Believing in the tradition of the currency backing. Currency backing was introduced to give value to the currency as a replacement for the real commodity money. Money is no longer a real product or a substitute of a product. Credit money represents most of the money in circulation.

Viewing inflation as natural phenomenon. Economists recognize the harmful effects of inflation on societies. Present economic systems are designed to produce inflation. Inflation arises, mainly, because of the additional costs which do not represent a direct cost of factors of production such as taxes and financial charges.

Believing that free market does not exist. Market is free by its nature, but free market does not exist because of the impediments to its freedom as a result of governmental or any other type of intervention.

* Mr. Maher D. Kababji is the former President of an Islamic bank, and the author of several books related to Islamic Economy & Finance, among which :

  • « Toward Islamic Banking » published in Arabic in 2004 explains in details Islamic banking and its conformity to Islamic rules, and introduces new banking products.

Back to basics. The American Recovery and Reinvestment Act, designed in 2009 to answer the US economic crisis, focuses clearly on productive activities like Industry and Agriculture. [RIBH]

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