This article briefly analyzes the logical arguments that are usually presented in the defense of interest as a price of money capital in loans.
Islamic economics enables a Muslim society to achieve certain ends. It is not so difficult to understand that material resources are required in order to achieve the objectives or Maqasid of Shariah namely “preservation and protection” of Deen, Life, Family and Intellect. The purpose of Divine Law is to make mankind successful in Akhirah. Therefore protection of the religious and spiritual status of the mankind is the prime objective of Shariah. The remaining objectives are also meant to help toward achieving this bigger goal.
Allah asks people to use their intellect and exploit the nature’s blessings. Islamic principles neither stop one’s use of intellect in seeking material progress, nor the pursuit of success in life hereafter conflict in any way with success in this world provided that the ethical filters and Islamic injunctions are observed where they have been explicitly given.
Islam has given women a share in inheritance. Before Islam, women were not only deprived of that share, but were considered as property to be inherited by men. In Islam, whether a woman is a wife or a mother, a sister or a daughter, she receives a certain share from the wealth of the deceased close relative.
Interest based financial system discourages investment in socially optimal profitable projects, but which are not favored because of relative cost comparison from the market interest rate. If sales do not increase, it may lead to business cycle fluctuations with unplanned increase in inventories. With increased pressure to service debt, the environmental degradation and human resource exploitation may become common and secondary concerns.
It is an empirical observation that people desire to have smooth consumption throughout their lifetimes. Lifecycle consumption hypothesis (LCH) and permanent income hypothesis (PIH) try to explain that in micro-founded framework. Both negate the Keynes assertion that average propensity to consume (APC) falls as income rises. Some micro-economic evidence is also broadly consistent with LCH and PIH, at least in advanced economies.
This article takes a brief look at the theory of the firm in Islamic economics and how a firm’s objectives and governing framework is different in Islamic economic framework as compared to the neoclassical and value-neutral economic framework.
Islam allows wage differentials based on productivity differences, but does not allow discrimination. Furthermore, if wage differentials are because of characteristics that require equitable distribution and access to resources, then, Islam has unique mechanisms that ensure equitable distribution of resources and opportunities.
Islamic injunctions put huge emphasis on making best use of the resources provided by Allah. Cultivating barren land and dignity of labor is given significant value and regarded as virtues. In an Islamic economic framework, the demand for economic resources, i.e. land, labor and capital is driven by the interest free and productive asset/activity based voluntary exchanges in a market economy.
Scarcity of resources is the basic premise on which the theories of classical and neoclassical economics are based upon. It implies that resources are scarce relatively as compared to the wants that are unlimited. But, this premise uses the word ‘wants’ in a general sense which includes both necessities and luxuries that people desire to have.