An Introduction to Islamic Finance: Theory and Practice

29

CHAPTER

2

The Economic System

A

t the core of the Islamic economic system lies a body of immutable rules,
defi ned by the principles of Shari’ah, which affect economic behavior and
outcomes and which are both time-and-place-invariant. On the periphery of
the system, there are rules which have an impact on economic behavior, but
which are subject to change depending on the circumstances. These latter
are results of decisions taken by legitimate authorities in an Islamic society
in pursuit of policies—for example, deliberate interventions in economic
affairs—to further their aims. These policies and actions taken in pursuit of
specifi c objectives must, nonetheless, be Shari’ah-compatible. While Islamic
economic systems adopted in various localities may vary with respect to
these peripheral economic rules and institutions, they cannot differ with
respect to their core rules and institutions. For example, while one Islamic
country may differ from another with respect to its foreign trade policies,
there can be no such differences in, say, the institution of inheritance in
those countries.
To understand the economic system of Islam, we need to discuss some of
its key characteristics. Before that, however, a general statement regarding the
Islamic economy is necessary. It can be stated categorically that Islam requires,
as one of its specifi c objectives, a healthy, dynamic, and growth-oriented
economy, without which the higher aims of Islam cannot be accomplished.
A dynamic and growing economy is considered healthy only when its rules,
institutions, organizations and their operations, as well as the behavior of the
individual and the collectivity, are in conformity with the Shari’ah.
An economic system is a collection of institutions set up by society to
deal with the allocation of resources, production and goods and services,
and the distribution of the resulting income and wealth. This applies equally
to Islam, with a single, major, exception, which simply requires that the
word “society” is replaced by the words “the Law-Giver.” Thus, a defi nition
for an Islamic economic system would be along the following lines:

A collection of institutions (that is, formal and informal rules

of conduct and their enforcement characteristics) designed by

the Law-Giver (that is, Allah (swt) through the rules prescribed

An Introduction to Islamic Finance: Theory and Practice, Second Edition

by Zamir Iqbal and Abbas Mirakhor

Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.