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Blueprint for the Islamic Economy and Finance
A set of values and guiding principles as moral and ethical guidelines is what differentiates the Islamic economy and finance from other economic systems. In the Islamic Economy and Finance Blueprint, Islamic economic values are translated into Ownership is Absolute, Justice, Cooperation in Righteousness and Balanced Growth as follows:
Ownership is Absolute
DIn Islam, absolute ownership of all things in essence belongs to Allah (QS Yunus: 55, 66; QS Ibrahim: 2). Mankind is merely the Khalifah, ordained and entrusted to manage (QS Al Baqarah: 30, 195; QS Ali Imran: 180). Despite absolute ownership of all things belonging to Allah, Islam respects the relative right of private ownership of assets, labour and ideas obtained through the transfer of ownership based on economic transactions, grants or inheritance. Islam respects the relative right of private ownership of assets, while maintaining balance between the relative rights of individuals, collectives and the state. Understanding that ownership is absolute is fundamental in Islam because Islam encourages philanthropic efforts.
In Islam, mankind is encouraged to try (QS Al Jumuah: 10; QS Al Isra: 12; QS An Nahl: 14) and utilise all abundant resources created by Allah for mankind (QS Al Baqarah: 29; QS Ibrahim: 34). In contrast, recognition of private ownership is not permitted for the excessive accumulation of wealth (QS Al Humazah: 1-3). Islam acknowledges mankind's inherent love of wealth (QS Ali Imron: 14; QS Al Fajr: 20; QS Asy Syura: 27; QS Al Fajr: 20). Therefore, mankind's tendency to hoard wealth must be managed and directed towards commerce and social participation (QS An Nisa: 29). Meanwhile, individual accumulation of wealth is restricted to avoid becoming excessive, and social participation involves providing a portion of wealth for the common interest through infaq, sadaqah and waqf (QS Hadid: 7; QS An Nur: 33; QS Al Baqarah: 267-268).
Cooperation in Righteousness
Individual and communal economic activities are permitted in Islam but communal economic activity based on cooperation and the spirit of kindness (QS Al Maidah: 2) and fairness (QS Shaad: 24) is preferred in line with Islamic values. Similarly, competition is encouraged but not in negative form. Competition in Islam is based on cooperative competition, namely competition for righteousness (QS Al Baqarah: 148; QS Al Maidah: 48).
In Islam, growth of the Islamic economy and finance aims to realise human existence in the world, namely in the worship of God and for the betterment of the universe (rahmatan lil ‘alamin) (QS Al Anbiya: 107; QS Al Ankabut: 51). Therefore, economic growth is important, namely growth that maintains a natural balance between spiritual well-being and the preservation of nature (QS Al Baqarah: 11-12).
Guiding Principles of the Islamic Economy and Finance
Regarding development of the Islamic economic and financial system, Islam adheres to several guiding principles. Those principles are implemented in zakat instruments, prohibit riba and maysir, include ISWAF development and muamulah as follows:
Zakat has a function in terms of two principles::
Compulsory assistance for disadvantaged individuals through a percentage (2.5%) of distributed zakat income to guarantee social inclusion.Zakat
Masyir (Gambling) is Forbidden
Financial transactions must be linked to the real sector, proscribing speculative and unproductive transactions
Riba is Forbidden
Riba impedes the flow of money. Businesses profiting from riba (interest) are difficult to develop and restrict job availability. Together with forbidding riba, Islam encourages business optimisation and the application of risk sharing principles.
Infak, Sedekah and Waqf (Iswaf)
Muamalah transactions are based on fairness, no dharar, no gharar, no dzalim, no muharramat, free from asymmetric information and moral hazard and not deviating from the Medina Market Rules.
1. Zakat Instruments
Zakat is a religious obligation for all Muslims who meet the necessary criteria. The etymology of the word zakat is derived from zaka, which means growing, clean and good (Qaradawi, 1999). According to fiqh, zakat refers to the portion of wealth determined by God for distribution amongst certain groups, namely the compulsory spending of wealth above a minimum amount (nisab) to certain parties using specific means. This academic paper does not comprehensively or explicitly explain the fiqh aspects of zakat, instead providing an explanation in the macroeconomic context. Zakat instruments have two main functions as the first and second guiding principles as follows:
Principle 1: Individual Wealth Management
Relative ownership of wealth must be managed towards productive purposes. This guiding principle as a function of zakat it is not often explicitly found in other discussions or studies. Nevertheless, this principle is the most important economic function of zakat instruments. Zakat facilitates the flow of excessive and idle wealth towards productive economic activities in the form of productive investment in the real sector or as infaq, sadaqah and waqf (ISWAF). Through productive wealth flows, economic activity will continue to prosper.
Principle 2: Inclusive Income Distribution
Riba is Forbidden
Principle 3: Productive Transactions and Profit Sharing
The Islamic economy upholds justice and emphasises profit sharing and risk sharing. Forbidding riba negates the predetermined additional capital as interest, with the investor therefore bearing some of the risks associated with the business activity. Proscribing riba also expands feasible investment regions. Figure 1 shows that forbidding riba, in this case interest (%), would expand feasible investment regions and, thus, stimulate economic activity and absorb more labour. The application of this principle would catalyse creativity and productivity, thus competing to offer investment opportunities in the real sector.
3. Maysir is forbidden
Based on that description, instruments that forbid maysir, or gambling, also relate to the fourth guiding principle as follows:
Principle 4: Financial Transactions relating to the Real Sector
Islamic economics require that all financial transactions must be based on real sector transactions. Therefore, financial transactions can only occur if a real sector transaction needs to be facilitated by a financial transaction. The financial sector serves to facilitate the real sector because money follows trade, not vice versa. This principle seeks to avoid financial bubbles that often occur in the conventional economy. In fact, the financial sector can crowd out the real sector in line with the findings of a BIS paper authored by Cecchetti and Kharroubi (2015).
4. Infaq, Sadaqah and Waqf (ISWAF) Instruments
Principle 5: Social Participation in the Public Interest
SIn accordance with Islamic economic values, the pursuit of social goals is maximised through utilisation of wealth towards a common interest (QS Al Hadid: 7; QS An Nur: 33; QS Al Baqarah: 267-268). Implementation of this principle, if managed optimally and productively, will increase public resources in economic activity. Figure 3 shows how optimal zakat, infaq, sadaqah and waqf (ZISWAF) management and implementation can be used to achieve the Sustainable Development Goals (SDGs) issued by the United Nations in order to end poverty and set the world on a path of peace, prosperity and opportunity for all on a healthy planet.
ZISWAF Optimisation in line with Sustainable Development Goals (SDGs)
Muamalah Transactions Based on Cooperation and Fairness
Consistent with Islamic economic values that uphold the general doctrine of fairness, cooperation and balance, each muamalah transaction, particularly for economic trade and exchange, must comply with prevailing rules. More specific rules to regulate trade transactions were determined by Muhammed at Medina Market, which remain effective and applicable in essence to the present day. The Medina Market Rules set by Muhammed are as follows (Iqbal and Mirakhor, 2013):
Freedom of exchange; freedom of economic agents to choose trade and partners in accordance with Islamic principles without subjugation;
Markets are places of exchange; market infrastructure and exchange facilities are complemented with transparent information concerning quantity, quality and prices. Avoid ambiguity (gharar) and minimise asymmetric information;
Interference in the pre-market supply process was abolished because it could hamper the original interests of the seller or buyer (no middlemen);
Free market; unrestricted trade areas (interregional, cross-border) without tariffs/taxes or price controls;Comprehensive transaction contracts; each contract must contain the rights and responsibilities, transfer of ownership and other rules in full. Observing the contract and submitting correct and accurate information are considered sacred.
The jurisdiction of the relevant authorities and law enforcers seeks to maintain compliance to the rules and contracts.
Description: Circled numbers correspond to the guiding principles.
Conceptual Islamic Methods to Stimulate the Economy