Articles on Islamic Economics

Achieving Market-Led Growth in Islamic Economic Framework

Salman Ahmed Shaikh

Islmic economic framework does not argue for a state-led or state-run economy. In fact, Islamic economic principles are very much open and favorable towards market based economy. By enabling market economy to run competitively, an Islamic economy provides market based solutions to employment creation and improvement in living standards through effective and efficient utilization of resources.

The market competitiveness is achieved by removing from the economy those factors which lead to concentration of wealth and under utilization of given labor and non-labor resources in the economy. Specifically, this is achieved through two key institutions:

  1. Removal of interest based financial intermediation.
  2. Introducing lenient fixed rate non-discretionary wealth and income (khums, ushr and khamsa) based direct taxation.

In an Islamic economic framework, private investment is incentivized by the institution of Zakat which favors private investment/spending than hoarding wealth. Secondly, the Zakat rates are low and hence, it encourages the private investment in productive enterprise. Economic theory suggests that higher tax rates discourage entrepreneurship as they decrease the incentive to produce. Lower tax rates encourage entrepreneurship and hence increase the size of producing sector and hence production. With the increase in production, tax revenue in value terms increases. Lower tax rates can still ensure high tax to GDP ratio if the tax base is wide.

In an Islamic framework, if interest-based financial products are absent, people with surplus income (savers) are left with two choices, i.e. either to keep idle wealth and then pay Zakat on it or to avoid decrease in wealth by choosing productive investments with the start of one’s own business or by participating in the business of others through equity investments. In this way, the whole economy could gradually transform from debt-based financing to equity-based financing. In an economy where firms are predominately financed with equity, the fruits of greater profitability are shared more equitably as well as the losses are shared more widely for lessening their impacts. This could also help in stabilizing business cycles.

9 replies »

  1. We are so blessed to have people like Salman keeping their eye on Halal Investing practices.

    This is a timely contribution. I appreciate reading this piece so much.

    Jazak Allah Khair.

    Mohammad Saeed Rahman


    • Islamic economics is based on both the public sector guarantor of the general interest and the private sector should promote growth and not a mercantile sector as it is currently in the Muslim world. Moreover, the economy must be regulated by the standards of the “Sharia”.


  2. Good. But, nowadays we need what type of application? It is correct that theoretically we suggest on the subject, but practically nothing is seen? Effective system is required to be established through the fruits of the economic activities and benefits should reach up-to the very low level i.e poor and needy community. Jazakllah


  3. Islam has a distinctive value system. It has positive features of both Capitalism and Socialism and yet it does not have limitations of Capitalism and Socialism. Regarding Romer model, please note that his argument was only to have imperfect competition in the research sector and not in the intermediate goods sector and final goods producing sector. The latter two sectors make up major part of the economy. Thirdly, lenient and non-discretionary taxes are always useful and recommended. Islamic Zakat law leaves no ambiguity and it is lenient as well with minimum distortions due to broad application.


  4. Great article. Even the economists are all in agreement that interest based economy is one of the reasons for cyclic downturns. Interest encourages holding of wealth and thus eventually inflation increases with decrease in trading quantity. Demand lags and depression takes over. The recent alternates to money are effective. By managing the printing of money, it can not be handled as the economy moves to the next best substitute. Never could the economists get the economy out by their contemporary economic devices, rather it was World Wars that bailed them out at the expense of millions of human lives. Islamic economic system encourages balance. I consider multinationals as one of the reasons of a weak economy. I think a decentralized small entrepreneurial economic base is more productive and sustainable in the long run. The answer to the problem really is to avoid debt based financing. Anyways great work brother and thank you for your enlightening ideas!


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