Salman Ahmed Shaikh
In an interest based financial system, wealth inequality automatically results in income inequality with legal permissibility of risk-less earnings for the lender. Hence, wealth inequality perpetuates and concentration of wealth increases in the society with the passage of time. More sophisticated the interest based financial system, more is the expected income inequality and empirical evidence also suggests that.
Wealth and income inequality has increased in almost all countries that have higher penetration of interest based financial system. Even in developed OECD countries and consistently growing emerging economies like China and India, income inequality has steadily gone up. Income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.
Besides the system of Zakat and prohibition of interest in an Islamic economic framework to check inequality, we also have Islamic inheritance laws which ensure that the wealth of the deceased is distributed widely among the members of the family of the deceased. In Islamic inheritance laws, there is no gender bias, plus the inheritance is distributed in diverse set of relations. The inheritance is shared between the parents of the deceased, spouse of the deceased, the children of the deceased (male and female included), and in some cases, it could also include other relatives including the siblings.
Islamic inheritance laws in Islamic economic framework have the potential to permanently and systematically reduce the concentration of wealth in every generation at the most micro level possible. Hence, when the wealth distribution gets equitable, the income distribution too is expected to become more equitable. In an Islamic economic framework, the wealth can only be invested in productive enterprise after the prohibition of interest based earnings. What expedites this investment is the fact that if wealth is not invested in a productive enterprise, wealth Zakat would automatically take the part of idle wealth from the wealth owner and distribute it in society among the people who need it and who can make effective use of it. Thus, not only the income and wealth distribution become more equitable, the efficiency in the use of productive resources could also increase in an Islamic economic framework.