Hifz ur Rab

Allah (S.W.T.) and His prophet (P.B.U.H) had declared war against Riba. It is also agreed that war can be declared against those who refuse to pay Zakah. For example, the first caliph (Khalifah) Hazrat Abu Bakar Siddique declared war against those who tried to withhold Zakah. Allah (S.W.T.) has revealed:

‘Allah will deprive Riba of all blessings, but cause charities to grow.’ (Q II-276)

Charities cause our wealth to grow and on the other hand, Riba ruins wealth materially or through its broader effects on our moral, psychological and spiritual personality. Not only economic but also the roots of the basic cause of most of the social as well as political evils lie in the dominance of interest.

Entrepreneurs may have less or more capital than they plan to invest. Owners of surplus capital may withhold it or may make it available to investors. This may be based on profit sharing ratio or interest. In the Islamic system, charge of Zakah assisted by expected share in profit motivates the owners of capital to get it invested while in a capitalist system, interest motivates the capitalist creditors to lend capital for earning interest.

Islam stands for justice for all and has adopted the middle course. Accordingly, the last of the prophets, Mohammed (P.B.U.H.) acting under divine guidance held that 2.5% of the income of the rich (Rabb-al-Nisab) as well as 2.5% of their properties with potential for growth including gold, silver, cash as well as commodities held for sale but excluding the capital invested as means of production is the right of the poor called Zakah. It is to be collected from the rich every year (lunar) and distributed among the poor.

Having thus granted right to sustenance to the poor, Islam allows labour and employers to freely negotiate for wages and terms of employment. Zakah thus propels the Islamic system that ensures freedom with justice and both of these are essential conditions for sustained economic growth.

In Islamic system, the charge of Zakah assisted by expected gain as share in profit motivates the owners of capital to invest. Banning of interest, enforcement of Zakah and prohibition of socially harmful activities controls disparity and deprivation.

There is a strong motivation for charities and creation of Waqf. Along with that, estate of deceased gets distributed among heirs in the Islamic redistributive system. To ensure that wealth does not circulate among the rich only, there is a divine command (Q 59:7) and excessive concentration of wealth among the rich is restrained.

Zakah ensures satisfaction of necessities so that needs of the have-nots are met. It addresses the problem of shortage of purchasing power and influences multiplier effect in the economy.

People can be forced to carry out some assignments, but they perform best when they expect good reward.  Right to own resources ensures availability of sufficient motivating force to cause people to strive and excel. Availability of Qard-e-Hasan ensures cost free supply of capital in deserving cases.

In the capitalist system, the creditors withhold capital unless they are offered interest rate that pleases them. While labour is entitled to wage earned even in the case of loss, assigning similar claim for capital is unjust and inhuman. It leads to sovereignty of capital and slavery of man.

Right to life for poor is endangered as lack of investment keeps many unemployed and leave them without income. Entrepreneurs bear the risk and this introduces massive fragility in the system as entrepreneurs may not have capacity to bear risk. Entrepreneurs bear the risk and thus deserve higher share of profit while financing institutions try to keep highest rate of interest maximising their share. Islamic economics solves the tension by linking the returns to both the active and passive investment capital providers with single source, i.e. sharing profits equitably while sharing risk. 

On the other hand, entrepreneurs who are in a position to run highly profitable and low risk businesses, they will prefer interest based capital to capital on profit sharing basis given the tax advantage given to interest based financing. This tends to direct interest based finance to large corporations with low risk and high rate of return enterprises. Thus, the system will harm coexistence of Islamic/Interest free system forcing it to avoid financing to smaller, lower profit earning and riskier businesses.

Many competent entrepreneurs do not get finance due to their inability to provide collateral. Suppose average rate of return is 3.5% and interest rate is 3%. Clearly, entrepreneurs who do not expect more than 5% rate of return will not like to finance their enterprise considering that they alone have to bear the risk. While expecting net profit of less than 1.5% which they only expect to earn, it may not be enough to motivate them to bear the risk. Clearly, the system starves high risk and low rate of return enterprises.

Capitalist economy depends upon market for determination of just/efficient prices.  There is no other alternative for determination of efficient prices which gives consideration to social priorities, moral imperatives and intergenerational justice.

Market distributes surplus produced by the economic activities among economic agents/factors of production and maintains economic equilibria.  Failure of market to discover just and efficient prices leads to massive inefficiency, waste, economic imbalance and massive irreparable losses to the economy and human welfare as well as environment. 

Generally speaking, Shari’ah relies rather bases its Ahkam (laws) on prices determined/set by the market. For example, even when Prophet Muhammad (P.B.U.H) was requested to fix prices, He (P.B.U.H) refused to fix prices and let it be determined by the market. However, it was when the currency was stable.

Commodity money including gold and silver had intrinsic value with stability overtime. On the other hand, fiat based currency system creates systematic devaluation and depreciation instigating overspending and lack of perseverance. Economic justice depends on just determination of prices and that requires highest level of stability of purchasing power of common medium of exchange.