1

2

CHAPTER 1

ISLAMIC ECONOMIC SYSTEM

3

LEARNING OBJECTIVES

1. Understand the philosophy, principles and rules of Islamic Economic System.

2. Explain the three sectors in Islamic economic.

3. Differentiate between Islamic economic system and capitalism and socialism.

4. Understand about a welfare state.

4

INTRODUCTION

THE ECONOMIC SYSTEM An economic system is usually

defined as a set of principles that constitutes the framework of the organization of the economic activity.

5

INTRODUCTION

There are three parts of an economic system:

Economic philosophy Set of principles The analytical functioning that

determines the economic variables.

In Islamic economic system, it has all these parts but with different theories and explanations.

6

THE ISLAMIC ECONOMIC SYSTEM

Islam established from the very beginning, true equality and guaranteed the limit of wealth to every citizen.

It determined an economic balance among members of society and confirmed principle of dual ownership.

7

THE ISLAMIC ECONOMIC SYSTEM

Philosophical Background

Ownership (the concept of Tawhid) Allah is One and every other thing is

created and subservient to Him Belief in the Day of Judgment

8

THE ISLAMIC ECONOMIC SYSTEM

Principles of Islamic Economic

Individual Liberty Right to Property (Ownership) Balance or non-partisanship Justice

9

THE ISLAMIC ECONOMIC SYSTEM

Rules of FunctioningThe role of the rules of the functioning is to operationalize the

principles of Islamic economics.

Zakah Prohibition of Riba Qirad Social Insurance Debts and loans insurance Inheritance System Role of the government of the economy

10

THREE SECTORS IN ISLAMIC ECONOMIC SYSTEM

Siasi sector (public sector) Tijari sector (private sector) Ijtima’i sector (social welfare sector)

Please refer Table 1.1

11

DIFFERENCES BETWEEN ISLAMIC ECONOMIC SYSTEM WITH

CAPITALISM AND SOCIALISM

By understanding the differences, scholars will better understand the advantages and benefits lies upon the Islamic economic

system in achieving its motive to guarantee harmony for an individual and

society.

Objective of System Fundamental Principles Ownership Distributions

12

DIFFERENCES BETWEEN ISLAMIC ECONOMIC SYSTEM WITH

CAPITALISM AND SOCIALISM

Two elements in particular distinguish an Islamic economy.

Firstly, although considerable freedom of economic activity is allowed, the Islamic economy has a built-in mechanism to encourage the fruits of economic activity to be shared with the less privileged members of the society as well.

13

DIFFERENCES BETWEEN ISLAMIC ECONOMIC SYSTEM WITH

CAPITALISM AND SOCIALISM

Secondly, despite allowing, indeed promoting, competitive markets, there is an equal strong motivation to ensure that dealings are just fair, that no one systematically exploits others because of any special privilege that he might have obtained in the market while some others is in a less advantageous position to bargain.

14

WELFARE STATE SYSTEM

It is an economic system that combined the systems of capitalism and socialism.

The primary objective of this system is to control the excessive practice of capitalism and to reduce the heave of socialism.

15

WELFARE STATE SYSTEMThere are four characteristic of a welfare

system as explained below: A welfare state will ensure that the

societies get the protection from social risks for example industrial injuries, disabilities and non-employment.

Social services such as education, healthcare, housing and public transports are provided in ensuring the public is functional effectively in the modern societies.

16

WELFARE STATE SYSTEM The value of welfare state is it

recognizes the objective full employment and fair distribution of wealth. Thus, intervention of the government is essential to reduce the power of free market in capitalism.

There are six main devices in the welfare state that are: rules and regulations, a strong workers union, fiscal policy, high growth rate, high demand of employment and government possession of certain main industries.

17

Critical Thinking Questions

1. Elaborate the principles of Islamic economic system.

2. Explain the roles of zakah and prohibition of riba’ in the Islamic economic system.

3. Who is the main centre of economic activities and the engine of economic production and growth? Explain its activities.

4. Explain the different between Islamic with capitalism and socialism in terms of distribution.

5. Elaborate the characteristics of a welfare state.

18

SUMMARY

In this chapter we have: Islamic economic system is a system

that is based on the Islamic law and emphasis on the right of all people.

One must understand the philosophy, principles and rule of governing in the Islamic economy system.

There are three sectors in Islamic economy system that are siasi sector (public sector), tijari sector (private sector), and ijtima’i sector (social welfare sector).

19

SUMMARY

There are four major factors in differentiating the Islamic economic system with capitalism and socialism.

Some countries adopt the welfare state system that is combining the principles of capitalism and socialism in ensuring the societies right are protected.