Articles on Islamic Economics

Balancing Market Mechanism and Divine Injunctions in Islamic Economic Framework

Salman Ahmed Shaikh

Neoclassical growth theories and models help us to explain the differences in per capita incomes across countries. The main conclusion of these theories is that countries with high savings and investment rates, countries having people spending more time in learning new skills and countries with better social infrastructure in the form of strong private property rights are able to have more per capita income than countries which lack in these characteristics.

Implicitly, these points argue for a market led economy with strong private property rights and which can provide the necessary incentive for potential innovators and entrepreneurs to gain the private benefits of specialized skills they possess and which they develop through education and skills enhancement.

Keeping aside the discussion of whether it is effective and efficient, Qur’an has following to say on voluntary economic exchange between counterparties:

O you who believe! Eat not up your property among yourselves unjustly except it be a trade among you, by mutual consent.

(An-Nisa: Verse 29)

In an Islamic economic framework, market mechanism is filtered by divine injunctions. The divine injunctions are binding, but they do not disallow market mechanism to work after following these injunctions.

All that these divine injunctions do is to regulate certain actions, provide broad guidelines and through which certain restrictions are imposed on humans for their own benefit. But beyond that, market mechanism is allowed to work and in fact regarded as a just way of organizing economic exchange in society as explained by the preceding verse.

The distinction in Islamic economic framework comes in guiding preferences through divine injunctions. Rather than complimenting humans in their animalistic instincts to keep having one-eyed focus on material well-being only, Islam inculcates piousness, kindness, cooperation and communal responsibility in humans. In some instances, Islam guides explicitly to avoid extravagance, lavishness and using certain products and services which harm a human’s ethical existence and well being either individually and/or harm the society in the process.

Islam does not deny private property rights, private rational choices and individual-specific preferences that do not contradict Islamic injunctions.  Islam suggests some institutional changes in economic environment that alter choices for more equitable social welfare. Islam has a very clear view on certain institutions like ‘interest based lending’ which has been partly responsible for rising concentration of wealth, inequality and even poverty. Islam by disallowing interest based earnings and exploitative forms of trade ensures individual freedom and welfare in a much more comprehensive manner.

6 replies »

  1. Wassalam

    Unfortunately, the answer is yes. Islamic banks being commercial institutions have started to push materialistic spirit by persuasive advertising for leasing cars, homes and expensive consumer appliances etc. If they were financing the small clients with as much zeal, it may have served some purpose, but usually they finance the rich and their expensive desires, like more expensive cars, more expensive consumer appliances and houses in urban localities rather than small apartments and cottages.


    • Asslam Alaikum,

      Does it imply that we need to have government regulated banking system ensuring credit access to poor and deserving?


      • Wassalam, I think that it is not just about government taking over these institutions. We need deep rooted reforms. We need to find an alternate to fiat currency, fractional reserve banking and this requires a complete paradigm shift.


  2. This is a brief summary of my understanding of Islamic economics. However, the list is neither exhaustive nor particularly restricted. Point 2 affects behavior in general and point 3 talks about specific principles of Islamic Economics that help compliment material rationality to achieve much better social outcome together with spiritual guidance, like the guidance of prohibition of interest.


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