Islamic Economic System

Topics: Islamic banking, Islam, Riba Pages: 63 (23340 words) Published: April 20, 2013
Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life. History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most significant characteristics for the social, political, and economic as well as all realms of human interaction. Exploitation and any source of unjustified enrichment in Islam are prohibited. The Holy Qur’an has emphatically instructed Muslims not to acquire each other’s property wrongfully. Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah (Swt). The conditions for interest/riba has been laid down as increase in principal amount and increase with respect to payment period, the more period causes more increase. Interest/riba has been categorized into two types. After describing interest/riba and its types, reasons have been sought for prohibition of interest/riba from Quran referring to Surah Al-Rum-39, Surah Al-Nisa-161, Surah Al-Imran 130-2 and Surah Al-Baqrah 275-281. Help from Hadith (Muslim, Ahmed, Tirmidhi and Ibn-e-Majah) has also been sought. Interest/riba generates various evils like moral evils, social evils and economic evils. The goals of socio-economic justice and equitable distribution of income and wealth are integral parts of the moral philosophy of Islam. However, one of the socio-economic reforms made by Islam was the prohibition of riba (interest). About the efficacy and usefulness of the prohibition of interest in Islam, Muslim economists have tried to provide the juridical clarity and support based on reason, as opposed to mere belief. The purpose of this paper is to spell out the meaning of riba or interest, its different kinds, and the social, moral, as well as economic rationale of its prohibition. The central feature of an Islamic financial system is the absolute prohibition of the payment and receipt of interest. Thus, countries that have chosen to bring their economic systems into closer accordance with the rules prescribed by Islamic law have had to restructure their banking Systems to conform to the restriction on interest based financial transactions. One of the main subjects in Islamic economy is study on ration of usury to currency devaluation compensation. In Iran which average inflation rate has been 20% during the last 30 years (that is prices have been averagely multiplied by 240 in the last 30 years) on the one hand and currency devaluation compensation is regarded usury on the basis of traditional definition of usury on the other hand, the fact that devaluation compensation is considered as usury causes the holders of interest free deposit to face continual and evident devaluation and then cause the holders of fixed salary and cash asset to have zero purchasing power over time and some will benefit (including government and then owners of estates) and some will lose. The incurred loss will be the same as the benefit of some beneficiaries leading to poverty of the poor and wealth of the rich and violation of rule of dominance in private ownership. On the basis of traditional jurisprudence, compensation for currency devaluation is regarded the same as inflation rate and non compensation will lead to undesirable consequences. In this article, this traditional attitude has been challenged and we can say that compensation for decrease of purchasing power which is the same as inflation rate is not only usury but also necessary with regard to economic changes in the current era and this is closer to justice recommended in religious law. With regard to the mentioned material, importance of currency devaluation compensation is made evident. In fact, this article seeks to answer this...
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