Islamic Economics: A Short History

72 chapter two

Further characteristics of Zakàh will be considered later in the exam-
ination of income distribution and economic justice.
By the nature of Zakàh (as above) accumulated wealth would be
subject to a continuous decline unless it was invested at a rate of
return at least equal to:
(Rate of Zakàh)/(1-the rate of Zakàh).
For example if the Zakàh rate is 2.5%, wealth will have to be
invested at 2.5641% to maintain its value (assuming no inflation). The
terminal value of wealth if it is not invested is calculated as follows:

NTV = W (1–Z)t

Where: NTV = net terminal value

W = accumulated wealth

Z = Zakàh rate

T = number of years

Hoarding is not regarded, therefore, as a rational policy in consumer
behaviour, which helps bring saving and investment together and
assists in reducing idle capital in the society. Even if Zakàh encour-
aged consumption for some consumers, to avoid the payment of it,
it would still bring that portion of income into economic activities
and would thus discourage hoarding. The effect on consumption
would have to be looked at, however, in light of what has been said
about the purpose of saving and the concept of moderation.

(iii) The attitude of Islam towards profit and interest
As discussed earlier, while profit is recognised in Islamic teachings,
interest is prohibited. Gains and risks should be shared by both
parties: the provider and the user of capital. Fixed interest, which does
not imply risk sharing as such, does not qualify as a means of yield-
ing income. By contrast, profit does qualify. Thus saving would
have to be invested on a profit-loss-sharing basis, not a fixed inter-
est basis.
Looking at equation (4) in light of the above, it would become as
follows:

(maximise) V = U(C,T,H,Sa,Sb,Z,R), F(P) .......... (5)

s.t. Y

T

tz^1