ECONOMIC SYSTEMS Human Thoughts vs. Sharia Law potx

ECONOMIC SYSTEMS
Human Thoughts vs. Sharia Law
Published by Maher D. Kababji at Smachwords
Copyright 2012 Maher D. Kababji
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Table of contents
Author’s Preface
Chapter 1: Productive Activities
Chapter 2: Financial Activities
Chapter 3: Redistribution System
Chapter 4: Financing System
Chapter 5: Monetary System
Conclusion
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Author’s Preface
Economics studies the many activities undertaken in relation to wealth. Economic
activity has its origin in the wants of a community. Its main purpose is the satisfaction
of those wants by producing, exchanging, and consuming goods and services.
Economic activities take place in the framework of an economic system. Economic
system organizes the ways by which a society utilizes available resources so as to
produce and accumulate wealth and the ways by which wealth is exchanged and
distributed. Material prosperity is the main objective of any sound economic system.
In order to realize prosperity, a society has to reach an optimal level of output growth
and to sustain all members of society at or above a specified material standard of

living.
Socialism denotes an economic system of state or worker ownership of the means of
production and distribution. Abolishment of the rights of private ownership and
economic freedom leads to management of means of production by bureaucracy.
Bureaucracy results into inefficiency and low production since the money incentive is
lost and the bureaucrats lack initiative and follow rigid rules. Bourgeois class is
liquidated and strong dictatorship of the proletariat class is established. Mainly, the
lack of motivation of profit is responsible for the failure of the socialist planned
economies.
In theory, capitalism is an economic system which is characterized by private
ownership of the means of production, and unrestricted economic freedom. In
practice, capitalism leads to concentration of wealth in few hands, earning of wealth
through foul means, and destruction of minor enterprises and firms. The institution of
interest has become the major part of capitalism. By the lapse of time, capitalism has
been transformed into the recent monopoly-finance capitalism leading to regional and
global financial crises.
Mixed economies refer to an economic system in which governments hold state
ownership of major and economically vital industries while permitting capitalism to
continue in the rest.
Some Islamic countries apply what is so called Islamic economic system. On the one
hand, interest rates and credits are replaced by profit rates and Islamic certificates. On
the other hand, these countries imitate present economic policies. They employ
traditional fiscal policies to control prices, wages and taxes, and apply traditional
monetary policies to control quantity of money through changing profit rates and
volume of Islamic certificates, and implement welfare systems for redistribution of
wealth.
In spite of the fact that each of present economic systems has its own features, they
share same common characters. They are inflationary systems. Financial activities
represent an integral part of economic activities. Availability of funds is subject to
international and national monetary controls. Growing public services reflects the

rapid growth of public expenditures and public debts. Growing inequality of income
and wealth causes a relatively small number of individuals and corporations control
huge pools of capital. The bursting of several financial bubbles in last four decades
points to the fact that present economic systems have failed to achieve the economic
goals.
In order that an organized body of knowledge might be classified as science, its
hypothetical law must be based on facts. Unlike any other social science, fallacies are
the root of the technique of thinking in economics. By the lapse of time theses
fallacies have been blindly accepted as if they represent a part of the natural life
which people have to live with. The outcome is that present economic systems failed
to realize prosperity. Economic Instability, growing inflation, and concentration of
wealth are the main features of present economies.
Failure of man-made systems to realize prosperity makes it necessary to review the
foundations on which present economic systems are based, and to look for an
alternative system based on principles set by the Creator of people.
In general, all religions handled economic issues, but Islam has set constant
comprehensive concepts and rules for establishment of a fair economic system which
suits all people in different times and places.
In the first chapter of the Holy Qur’an named Al-Fatihah, Muslims ask for guidance;
“Guide us to the straight way”. In reply to their request, the second chapter named Al-
Baqarah starts; “This is the book, where is no doubt, a guidance to those who are the
pious believers”.
The Holy Qur’an is in conformity with Judaism;”We did send down the Taurat
(Torah), therein was guidance and light … And whosoever does not judge by what
Allah (God) has revealed, such are the disbelievers.”(Al-Ma’adah 5:44).
The verses of the Holy Qur’an confirm Christianity “and We gave him the Injill
(Gospel), in which was guidance and light and confirmation of the Taurat …. Let the
people of the Injill judge by what Allah has revealed therein. And whosoever does not
judge by what Allah has revealed therein, such are the rebellious.” (Al-Ma’adah 5:46,
47).

The Holy Qur’an introduces a message for all people regardless of their beliefs. “We
have sent down to you the book (Qur’an) for mankind in truth” (Az-Zumar, 39: 41).
With regard to economy, the Holy Qur’an precisely states prohibited acts, permitted
acts, and sets rules to regulate legalized acts.
Taking into consideration the complexity of recent economies, different approach has
been taken to identify economic topics and to understand the verses of the Holy
Qur’an that controls present macroeconomic issues. This explains the different
presentation of Islamic economy in comparison with what was introduced by other
researchers.
The analysis proceeds in five chapters. Each chapter introduces a different economic
topic; productive activities, financial activities, redistribution system, financing
system, and monetary system. While the first two chapters are concerned with the
many activities undertaken in relation to wealth, the last three chapters are concerned
with the economic system that organizes the ways by which available resources are
utilized. Each chapter explains how present economic principles are implemented
with regard to the subject topic, highlights the pitfalls in economic thinking, and
illustrates the related ideological viewpoints of Islam supported by the verses of the
Holly Qur’an and the sayings of the Prophet (Pbuh). Each of the last three chapters
introduces an alternative system based on sharia law.
“And whatsoever you differ, the decision thereof is with Allah”
(Ash-Shura 42:10)
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Chapter 1: Productive Activities
Productive activities refer to the activities that add value to National Product. They
include planting, mining, providing services, transformation of raw material into
products, adding value to available products, and moving products to a different time
or place. Products take the form of goods, services, or assets.
Production is a process of converting inputs into outputs. A mine excavates raw
material, a factory transforms raw material into products, a labor provides physical or
mental efforts, a retailer adds marketing services to products, and a doctor offers

professional services.
Selling refers to the final stage of any productive activity in which a seller, or an
investor, hands over one or more of his property rights through cash sale, credit sale,
or rental sale, or by giving right to use in return for rent, toll, service fee, or any other
legal way of alienation. Wages are the return for sale of physical or mental efforts.
The market provides appropriate conditions within which selling prices are fixed.
Natural market system refers to the ability of the market to correct itself with no
external intervention. It controls reasonability and fairness of prices set by sellers
benefiting from the environment of free competition. Fair price of a product is
determined as a result of free interaction between the factors of demand and supply in
conjunction with the price set by the seller.
Adam Smith, in his book “The Wealth of Nation” (1776) refers to the natural market
system as “invisible hand”. He explains the mechanism of demand and supply to
control reasonability of prices set by sellers in environment of free competition. Smith
says, “If a product shortage were to occur, that product’s price in the market would
rise, creating incentive for its production and a reduction in its consumption,
eventually curing the shortage. The increased competition among manufacturers and
increased supply would also lower the price of the product to its production cost plus
a small profit, the “natural price.” Smith believed that while human motives are
ultimately out of self interest, the net effect in the free market would tend to benefit
society as a whole.
In practice, present markets are affected by different impediments to its freedom. A
government applies some policies such as price controls, minimum wage legislation,
and foreign trade restrictions. Freedom of markets is also affected by other factors
such as monopolistic competition, preferential treatment, discrimination, brand
loyalties, advertising, transparency and availability of money.
Output Growth
Output growth is the basic problem of less-developed countries with little output.
Optimal output growth is the objective of any sound economic system in order to
realize prosperity on the national level.

The World Bank, World Development Indicators updated Jul 28,2011show world
output growth in comparison to world population growth for the years 1985, 1990,
1995, 2000, and 2005. While the growth rates of world population were 1.7%, 1.7%,
1.5%, 1.3%, 1.2% respectively, the growth rates of world gross product were 3.9%,
3.0%, 2.9%, 4.3%, 3.6% respectively.
The excess of the world output growth over the world population growth provides
evidence that scarcity of resources is not exist on the global level, and raises an issue
of over utilization of global resources. Over utilization of resources is made on
account of increased pollution and represents a waste of resources encouraging
recycling activities. On the national level, economic possibilities of the society restrict
its growth.
Limitations to output growth
A society must be able to utilize its resources in order to produce at least a certain
minimum amount of all goods required for attaining at least a minimum level of
prosperity. Prosperity is a relative term. Its level is dependent upon the economic
possibilities of the society, the ways by which resources are utilized, and the
availability of funds.
Availability of economic possibilities
Economic possibilities of a society refer to the available resources which include
capital goods, raw materials, knowledge, and skills in addition to natural and human
resources. Resources that can possibly be imported from abroad to compensate the
shortage in raw material, technology, products and labor force are considered as part
of national economic possibilities.
Utilization of economic possibilities
A society may succeed to attain even higher level of growth needed for realization of
prosperity, but the collection of goods produced by using available resources may
differ from the collection needed for prosperity. If the difference between the two
collections can be counterbalanced through international trade, the goal of prosperity
will be attainable; otherwise a problem of product mix will come up as a result of
giving priorities on account of consumables. Relatively more resources are devoted to

produce capital goods (such as factories, machineries, railroads, and dams),
emergency goods (such a goods necessary for war or natural disasters), luxury goods
(such as pyramids and fancy squares), or goods of higher profits (such as weapons in
time of peace).
An economy may be growing in the wrong direction. Growth may be achieved on
account of increased pollution or depletion of available stock of natural resources.
A society may fail to attain the level of growth needed for realization of prosperity
because resources are inefficiently employed. Inefficient utilization of resources may
be a result of low productivity, scarcity of skilled labors or lack of technology
necessary for production.
A society may fail to achieve its goal of prosperity because resources are not fully
employed. Unemployment of resources may be a result of lack of technology
necessary for discovery or extraction of materials. Resources which can be utilized
may not be employed because the decision of utilization is still not yet taken for
political reasons. A political decision may be taken to increase reserves even on
account of reasonable consumption.
Availability of money
A society may fail to attain higher level of growth due to lack of funds needed for
utilization of available resources. Politicians and economists claim that scarcity of
money restricts output growth. Their claim is based on their classification of the
factors of production.
Most economists classify the factors of production under four headings; Land, Labor,
Enterprise, and Capital, giving to each heading a special meaning that do not
correspond with ordinary usage of the word. Land is used in a special sense which
includes all natural resources such as minerals and climate. Labor refers to physical or
mental effort directed at production. Enterprise or organization refers to some
functions such as planning, management, and the bearing of investment risk. The term
capital refers, in general, to wealth used to produce further wealth such as machines
and premises. According to their classification, money, which is not wealth, is
included in capital. The factors of production are rewarded. Rent is the return to land,

wages are the return to labor, profit is the return to enterprise, and interest is the return
to capital. Giving such extraordinary meanings initiates a lot of controversy about the
concept of money and its value.
Including money in capital, as a factor of production, destroys the concept of money
as just a medium of exchange. Present economic systems use money to restrict output
growth. Development and output growth become dependent upon availability of
money. Seeking money becomes on the top of all priorities of governments as well as
most individuals.
Assigning interest as the return to capital entitles owners of businesses to generate
more profits. Money is not a real factor of production. People were producing
different goods and products were bartered. Money is just a social invention
introduced to facilitate output exchange. It was not invented to restrict output growth.
“ “
Islamic rules with regard to productive activities
Legality of production
“Eat not up your property among yourselves unjustly except it be a trade amongst
you” (An-Nisa’. 4:29).
In general, the word “Trade or Trading” in the Holly Qur’an refers to all types of
productive activities such as agriculture, industry, tourism, telecommunication,
transportation, and software programming.
Islam legalizes producing consumer goods
“O mankind! Eat of that which is lawful and good on the earth” (Al-Baqarah. 2:168).
Shari’a precepts legalize producing capital goods
“And remember when He made you successors after ‘Ad people and gave you
habitations in the land, you build for yourselves places in plains, and crave out homes
in the mountains.”(Al-A’raf.7:74).
Legality of sale
“except it be a trade” (An-Nisa 4:29).
Selling process derives its legality from the legality of trade. Trade involves sale of
products.

Islam legalizes sales on credit
“whereas Allah has permitted selling and forbidden Riba” (Al-Baqarah. 2:275). The
verse differentiates between the value of time on lending and the value time on credit
sales.
Factors of production
Human and natural resources represent the primitive factors of production. Only labor
force out of human resources may be employed for production. Out of natural
resources, only discovered, dominated, and extracted materials may be exploited in
production. The production process requires the combination of labor and materials.
The combination cannot be achieved unless an investor is willing to bear investment
risk. Accordingly, the real factors of production include material, labor, and
investment risk.
Material
Material refers to all productive items that add value to national product. It includes
all capital goods that contribute in production process, such as machines, roads,
equipments, buildings, and energy. Rent (or depreciation cost) is the return to capital
goods.
The Holly Qur’an legalizes the use of material which comes out of natural resources
“And We have given you (mankind) power in the earth, and appointed for you therein
livelihood. Little give ye thanks!”(Al-Araf 7:10).
Labor
Labor refers to all types of physical and mental efforts directed at production. It
includes planning, management, and decision-making. Wages are the return to labor.
The verses of the Holly Qur’an legalize manual labor
“And he was building the ship” (Hud 11:38).
Islam legalizes intellectual labor
“He said: Set me over the storehouses of the land. Lo! I am a skilled custodian.” (Ysuf
12:55).
Investment risk
Investment risk is an intangible asset which causes hardship for investors. Profit is

regarded as reward given to investors for bearing investment risk and for their
contribution to the production process. In the absence of profit, there will be no
incentive for investors to take investment risk.
The Holy Qur’an legalizes profit
“Eat not up your property among yourselves unjustly except it be a trade amongst
you” (An-Nisa’. 4:29).
Eating propriety results in an increase of one’s wealth on account of a decrease in
another’s wealth. Trade is introduced as an exception to the rule of respecting private
properties because it involves profit or loss. Profit or loss represents the difference
between the selling price and the total cost of material and labor. Selling a product
costs $4 for $5 increases the wealth of the seller by $1 on account of a decrease in the
wealth of the buyer by $1.
Regulations of Productive activities
Regulations of productive activities may be classified as follows:
Principle of mutual consent
Mutual consent refers to the approval of all parties to the terms and conditions of any
contract related to productive activities such as employment contracts, company
contracts, selling contracts.
“except it be a trade amongst you, by mutual consent” (An-Nisa’. 4:29).
Principle of justice
Principle of justice refers to the fair valuation of rights of others. It includes;
Fair compensation to labors
“The way is only against those who oppress men” (Ash-Shura, 42:42.
Fair valuation of properties
“and reduce not the things that are due to the people” (Hud, 11:85).
Fair measurement of goods
“Give full measure and weight in justice” (Hud, 11:85).
Fair profit shares to partners
“And, verily, many partners oppress one another, except those who believe and do
righteous good deeds, and they are few” (Sad. 38: 24).

Principle of avoidance of forbidden acts
Verses of the Holy Qur’an forbid some acts such as;
Environmental mischief and pollution
“And when he turns away, his effort in the land is to make mischief therein and to
destroy the crops and the cattle, and Allah likes not mischief” (Al-Baqarah 2:205).
Mischief on natural systems
“And do not mischief on earth, after it has been set in order” (Al-A’raf 7:56).
All acts of corruption
and do not commit mischief in the land causing corruption.” (Hud. 11:85).
Also, the Holy Qur’an prohibits some products such as;
Intoxicants
“Intoxicants and… , So avoid that”. (Al-Ma’idah. 5:90).
Specific kinds of meat
“Forbidden to you are: the dead animals, blood, the flesh of swine, and that on which
Allah’s name has not been mentioned while slaughtering, and that which has been
killed by strangling, or by violent blow, or by headlong fall, or by the goring of horns,
and that which has been partly eaten by a wild animal unless you are able to slaughter
it before its death, and that which is slaughtered on stone-alters.”(Al-Ma’idah, 5:3).
In conformity with regulations of productive activities, The Prophet (Pbuh) prohibits
some methods of sales such as;
Sale of products whose existence or characteristics are not certain
“On the authority of Abu-Hurayra (mAbwh) that: The prophet (Pbuh) prohibited the
pebble sale and the Gharar sale” (Muslim, Abu Dawud).
Sale of what is not in possession
“Hakim-bin-Hezam reported: The Messenger of Allah prohibited me to sell what is
not in my possession.”(Tirmizi).
Forced sale
“Ali reported that the Messenger of Allah forbade the (forced) purchase from a needy
person, and purchase from the inconsiderate and purchase of fruit before it reaches
maturity.” (Abu Daud).

Deceiving sale
“Waselah-bin-Asqa’a reported: I heard the Messenger of Allah say: Whoso sells a
defective thing without disclosing it continues to be in the wrath of Allah or angels
continue to curse him.” (Ibn Majah).
Principle of obedience
Obedience refers to the compliance with the rules set in the Holy Qur’an. People are
not authorized to restrict lawful acts or permit prohibited acts. Giving money a new
function to restrict economic growth transgresses the limits stated in the Holy Qur’an.
“And whoever transgresses the limits ordained by Allah, then such are the
wrongdoers” (Al-Baqarah, 2:229).
Rules of Pricing
Natural price system is one of many natural systems created by Allah to organize
movement of creatures and to facilitate life on earth. In Islam, natural price system is
the conceptual framework of pricing.
Prohibition of Humanity disruption into the natural price system
“And do not do mischief on the earth after it has been set in order …” (Al-A’araf,
7:56)
Islam promotes a market free from interferences. The verse prohibits all types of
humanity interventions that may result in a fall or a rise in prices or may affect real
demand or supply. Intentional inflation allows intentional increase in prices. Supply is
affected by monopolistic acts. Advertising has impact on demand.
Prohibition of fixing prices
“Anas reported that the current price once became dear at the time of the Messenger
of Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet
replied: Verily Allah is One who controls price, curtails, gives amply and provides
sustenance; and certainly I hope that I should meet my Lord while there will be none
amongst you who will hold me responsible either for blood or for property.”(Tirmizi,
Abu Daud, Ibn Majah).
“ “
Conclusion

Including money in capital as a factor of production is a pitfall in economic thinking.
This fallacy makes output growth dependent upon availability of money. Output
growth is dependent upon availability and utilization of the economic possibilities of
the society.
It is the responsibility of a government to plan for efficient utilization of available
resources in order to realize full employment and best product mix, and to avoid
pollution and faster exhaustion of resources. Money should be available for
exchanging of products.
A government hast to set controls to ensure freedom of the market. Prices may not be
fixed. Greed may be avoided by encouragement of clean competition through banking
or public sector.
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Chapter 2: Financial activities
Financial activities refer to monetary transactions that are undertaken to help
fulfillment of economic or social goals. Unlike productive activities, financial
activities do not add value to National Output. They may be classified into four
categories;
Exchange activities
Exchange activities refer to transactions in which money is exchanged for material
wants. Money is used to pay for the real value of goods, services, or other currencies.
Exchange activities satisfy real economic goals.
Lending activities
Lending activities refer to transactions in which money is exchanged for debts.
Money is lent and is used to settle principal of debts. Lending activities satisfy
deferment of payments.
Charitable activities
Charitable activities refer to transactions in which money is exchanged for
nonmaterial wants. Money is disposed as alms, grants, or financial assistance.
Charitable activities satisfy social or spiritual goals.
Inflationary activities

Inflationary activities refer to transactions in which money is exchanged for nothing.
They represent compulsory transfers of incomes. Money of consumers is used to pay
for the increase in prices of products over its real values. Inflationary activities satisfy
inflationary goals.
Inflation is defined as a rise in the general level of prices of goods and services.
Keynesians believe that inflation is a pricing phenomenon. They propose that inflation
is the result of pressures in the economy; an increase in aggregate demand, a drop in
aggregate supply, or a rise in labor cost. From the viewpoint of the Monetarists,
inflation is regarded as erosion in the purchasing power of money. They assert that
inflation has always been a monetary phenomenon. When the price level rises, each
unit of currency buys fewer products. Inflation rate at end of a certain period is
viewed by economists as the rate of the increase of the general level of prices during
that period.
Inflation as a pricing phenomenon
Market prices are initially set by sellers and are finally determined as a result of the
interaction between the factors of demand and supply in conjunction with the price.
A distinction between the real market price and the current market price introduces a
different approach for understanding the phenomenon of inflation from the pricing
aspect.
Real market price
The real market price of a product refers to the real value of the product as determined
in a natural market system which is free of humanity interventions. It equals the total
sum of the real cost of production in addition to reasonable profit.
A natural rise in prices may occur as a result of an increase in cost of material, wages
paid to labors, supplier’s profit margin, or volume of demand relatively to the volume
of supply.
A natural rise in the price of a product reflects an increase in its real value. The
additional storage cost of summer plants, reflects an increase in its real value in
winter. The rise in the price of steel, because of the shortage of supply, reflects an
increase in its real value as well as in the real wealth of the owners of steel structures.

Natural increase in prices of some products has negligible impact on the general level
of prices. Natural free interaction of demand and supply returns the market price to an
equilibrium point because higher price encourages investors to increase supply and
lower price encourages consumers to increase demand. The huge variety of products
makes the increase in prices of some products are compensated by the fall in prices of
some other products. Mass production, continuous discoveries and technological
developments help price reduction because they provide competitive products,
cheaper substitutes, and economical methods of production. For example; prices of
electronic equipments are continuously declining.
Current market price
The current market price of a product refers to the amount paid by a consumer to
acquire the product. In present economies, current market prices are much higher than
real market prices. The current market price of a product includes some additional
charges that are not related to production. Current market prices include payments in
form of taxes or fees, illegal earnings, interests, and hidden inflation tax which
reduces the value of the currency unit.
Unlike the natural increase in prices, the additional charges cause an intentional
increase in the general level of prices. If National Product at real market prices equals
$1 billion, while National Product at current market prices equals $5 billion; the
general level of current market prices will be 5 times the general level of real market
prices. The difference is an intentional inflation.
Inflation as a monetary phenomenon
National accounts translate an equilibrium situation which is based on the balance
between National Product, National Expenditure and National Income, where;
National Product represents the sum of value added over whole economy in form of
final sales, National Expenditure represents the total of purchases of final goods, and
National Income refers to the sum of all types of incomes received by all members of
the society. Income forms the link between output and expenditures and explains the
equilibrium situation. The sale of output is paid out as incomes used to buy the inputs.
Members of the equation are expressed in term of currency units.

A distinction between productive income and national income introduces a different
approach for understanding the phenomenon of inflation from the monetary aspect.
Productive income
Productive income refers to the total of incomes received as returns to the real factors
of production. Labors receive wages in return for their physical or mental efforts.
Property owners receive rent, toll fees or depreciation as return for the use of capital
goods. Business owners receive profit in return for bearing investment risk.
National income
In spite that economic activities aim to satisfy the wants of a community by producing
goods and services, financial activities constitute an integral part of economic
activities. This explains the excess of National income over Productive income.
National income refers to the total of incomes received by all members of the society
as returns from all economic activities. It includes some additional incomes that are
not related to production. The additional incomes include taxes received by
government over the real net cost of public products and services, interests or
financing charges received by lenders, speculative gains received by speculators, and
illegal earnings received by corruptors.
For government, lenders, speculators, corruptors to receive the additional incomes,
new funds are raised or new money is issued. The excessive expansion of money
supply is in return for zero increase of National Output. Therefore, it causes an
intentional fall in the value of the currency unit which is translated into an equal
intentional increase in the general level of prices.
The equation of the National accounts makes National Output is overvalued by the
amount of the additional incomes. If National Income equals $5 billion while
Productive Income equals $1 billion; the value of the currency unit will decrease, and
the general level of current market prices will be 5 times the general level of real
market prices. The difference is an intentional inflation.
Definition of inflation
Having both pricing and monetary aspects into consideration, inflation can be defined
as an intentional rise in the general level of prices as a result of the excess of National

Product valued at current market prices over National Product valued at real market
prices, or as an intentional decline in the value of the monetary unit as a result of the
excess of National Income over Productive Income.
This definition points out some facts. Inflation is an intentional phenomenon. The
natural rise in prices of some products does not cause inflation. The actual rate of
inflation at end of a certain period is the rate of the increase in the general level of the
current market prices over the general level of the real market prices at end of that
period.
Factors of inflation
Interest
The word “interest” refers to the return for lending or providing credits. Return for
lending may take some other names such as profit or commission. Present economic
systems are characterized by excessive expansion of credit and progressive shift from
productive activities to lending activities seeking for easy and quick profit with
relatively low risk.
Financial institutions and financial markets are responsible for the excessive
expansion of credits. They introduce great number of financing and refinancing tools.
Financial instruments are used to provide credits including treasury bills that are
issued to finance public expenditures, and bonds that are issued to finance operations
of corporations. Refinancing products, such as discounting of commercial bills and
resale of mortgage securities, help banks to liquidate their credits in order to expand
more credits.
The banking system practices what is so called “Money Creation Process”. The
process enables the banking system to issue money, or raise funds, in form of
deposits. Assume that a central bank sets the obligatory reserve to be retained by
banks to 10% of deposits. This allows banks to loan 90% of total deposits. Suppose
someone deposits $1000 in high-powered cash money, the bank can lend $900.
Assuming that the seller from whom the borrower bought the merchandise re-deposits
the $900 into a bank, this raises total deposits in the banking system to $1900 and
additional $810 can be loaned out by the banks. The bank can continue retaining 10%

of total deposits in reserves form and loaning the rest of it. This process can continue
until total deposits equal $10000. Money creation process, as an advantage
exclusively given to the banking sector, may explain why banks represent the
wealthiest economic sector. Assume 5% is the interest rate on deposits, and 8% is the
interest rate on credits, the banking sector will pay $500 to depositors and gain $720
from borrowers. As a result of the money creation process, profits of the banking
sector increase from $22 ($72 - $50) up to $220 ($720 - $500). However, three
conditions must hold for banks to turn $1000 of high-powered money into a money
supply of $10000. First, money must be circulated into the banking system. Second,
banks must lend 90% of deposits. Third, borrowers must be willing to borrow
whatever amount the banks want to lend. In practice, these conditions are partially
met. Over and above, calculating interest on a compound base increases banking
deposits, credits and profits.
Interest-based lending is presented as a necessary process of money injection to
finance productive activities. But, in return for its financing role, interest-based
lending inflicts greatest harm to the society because of its inflationary role;
Giant lenders steal private and public properties. In his article “The biggest financial
crime in the history of the United States” addressed to the US citizen via Internet, Dr.
Don J. Grundmann, D.C., M.H. says: “Since in 1996 approximately 40% of the
United States budget went to the payment of interest on the national debt”.
Interest-based lending helps growing government spending and financial corruption.
World Bank report “The Many Faces of Corruption” underlines, “the nature and
quality of a country’s PFM (Public Financial Management) system to a large extent
determine the ease with which public corruption can occur”.
An integral part of interest-based lending is used to finance speculators encouraging
the shift from productive activities to financial activities.
Speculative earnings
Speculation refers to the trade (buying, holding, and selling) of assets in attempt to
profit from fluctuations in its price irrespective of its underlying value. Speculators
pay little regard to the real value of the assets; instead they focus purely on price

movements. Speculation term differs from the term investment which refers to buying
of assets in order to profit from its use or from its income. The difference in the
degree of risk separates the act of speculation from investing as well as from
gambling.
Speculative activities take place in different local and international financial markets;
Stocks are traded in stock markets. Prices of stocks do not reflect the fair value
disclosed in the financial reports of the issuers. Fluctuations in prices of stocks are
subject to number of factors such as historical data of price movement, economical
conditions, and political stability. Stock speculators often take higher risk by entering
long or short positions.
Commodity futures contracts, short selling of commodities and options contracts are
traded in commodities markets. The trading process reflects the volume of demand
and supply on the contracts instead of the real demand and supply on the underlying
commodity.
Spot exchange rates in foreign exchange markets are mainly determined by the
international banks that are called the “Market Makers” in light of economical
fundamentals. Forward deals reflect inequality of demand and supply on a certain
currency and result in overbought or oversold risky positions.
Lending securities, such as interbank transfers, treasury bills and corporate bonds are
traded in money markets.
Many types of derivatives are traded in financial markets. All of them are based on
speculation.
In case of instable financial markets, speculators invest in real assets, mainly real
estate.
Some schools of thought argue that speculative activities create an efficient market by
enlarging the number of competitors in the market, but speculative prices, in most
cases, reflect interests of large capitalists and giant speculators who dominate the
markets.
It is true that speculative activities provide liquidity to market economy; but they
have detrimental impacts on society because of its inflationary role;

Speculative activities in commodities markets are behind the very rapid increase in
prices of oil in previous years and in prices of gold and some foods in recent year.
Speculation causes prices of underlying products to deviate from their intrinsic value.
Prices of stocks are far from their true value. Dramatic rise in prices causes economic
bubble and significant fall in prices leads to crashes.
Speculative investments are very unstable. Reliance on speculative investments as a
source of liquidity can cause a breakdown of the market economy. In 1992, currency
speculation forced the central bank of Sweden to raise interest rates for a few days to
500% per annum, and later to devalue the Swedish currency. Soviet economy had a
period of hyperinflation from 1921 to 1924 due to the sudden removal of speculative
capital.
Taxes
A tax may be defined as a financial burden levied upon individuals or businesses to
support the government. From the view of economists, a tax is a compulsory transfer
of resources from the private to the public sector. Governments use different kinds of
taxes and vary the tax rates.
Regardless on whom the tax is levied, consumers are the real payer of all taxes;
Taxes paid by business owners include before-sale taxes such as goods and services
tax and import or export tariff (also called customs duty or impost), Business or
Corporate income tax, License fees, taxes on rent, social security contributions,
stamps and fees on commercial transactions. Business owners care about their net
after-tax profit. All types of taxes paid by them are charged to consumers in form of
price increase.
Taxes paid by labors include pay-roll tax and social security contributions. From one
side, labor tax reduces labor’s disposable income. From the other side, it increases
cost of production. Labors pay their taxes twice; once as taxpayers, and another time
as consumers.
Taxes paid by property owners include wealth taxes such as real estate tax, capital
gains tax, vehicle’s license, interest tax, and inheritance tax. Property tax represents
an indirect increase in cost of assets owned by consumers.

Taxes directly paid by consumers include after-sale taxes such as value added tax and
sales taxes.
Hidden inflation tax refers to the financial burden levied upon consumers as a result
of a fall in the value of the currency unit. A fall in the value of the currency unit is
translated into an equal rise in the general level of price. If the inflation rate
accelerates by 3.5% annually, a consumer, after 10 years, will pay $30,000 to acquire
products of present value equals $16,650.
Most economists and politicians believe that taxes help fair redistribution of wealth
and claim that taxes are justified as they fund activities that are necessary and
beneficial to society; but taxes play an inflationary role;
Taxes are actually charged to consumers. Tax reduces the disposable income of labors
and those of fixed income, while owners of businesses gain more profits to keep up
with target profit margin and rich generate profits out of the appreciation of their
assets. Walter E. Williams, professor of economics at George Mason University,
stated “Government income redistribution programs produce the same result as theft.
In fact, that’s what a thief does; he redistributes income. The difference between
government and thievery is mostly a matter of legality.” Libertarian opponents of
taxation claim that governmental protection might be replaced by market alternatives.
Public expenditures increase because of the inflationary role of taxation.
Corruption
In general, corruption refers to wrongdoings in order to realize private interest on
account of interests of others. Corruption in public and private sector takes many
forms such as bribery, embezzlement, robbery, deceiving, monopoly, greed, and
misuse of authority.
Normally, corruption is regarded as just personal illegal behaviors, but present living
systems and policies legalize illegal acts. Democracy allows a tiny group of people to
direct political, economic and social policies in their favors through their participation
in the ruling system or by supporting the election campaigns of candidates. The
separation between the authorities of legislation, execution, and judgment is not fully
respected. Lack of transparency and effective controls encourage corruption. While

socialism denies right of private property, capitalism favors rich on account of poor.
Economic policies, in many cases, take private interest into consideration.
Corruption plays an inflationary role. Consumers pay the cost of corruption in form of
increase in prices or a fall in quality of goods and services relatively to prices.
Effects of inflation
Inflation represents the main cause of concentration of wealth. Poor becomes poorer.
Living standard of middle class declines. Those living on fixed incomes suffer a
severe decline in their living standard. Living standard of rich rises. Rich generate
profits from appreciation of their assets, and business owners stand to gain from
increased profits. Alcoholism, families breaking up and increased criminal rate, public
demonstrations, political instability and revolutions represent additional costs of
concentration of wealth.
Inflation is behind economic instability. Prices soar. Workers have less money to
consume. Demand falls because each monetary unit buys fewer goods and services.
Exports become more expensive to sell. Imports increase because they are relatively
cheaper than locally produced products. Middle class savings are discouraged because
consumers have to spend more. Pressure for increased wages mounts to keep up with
consumer prices. Unemployment rate rises as a result of the decline in output growth
rate. As an intentional decline in the value of the monetary unit, inflation is
responsible for the deterioration of the confidence in the currency. Inflation rate may
rise at very high levels destroying the confidence in the currency and leading to
currency devaluation and even total monetary collapse.
Inflation makes money of innocent people to be at risk. Most of money invested in
financial markets is borrowed money or money of others than the owners of the
businesses. Banks and financial institutions borrow money from depositors. They lend
depositors’ money to investors and speculators. Most of payments made by people to
social security, retirement entities, and insurance companies are deposited in banks or
invested in speculative activities and financial markets. Protection of the money of
innocent people is introduced to justify supporting the financial system in case of
crisis, but the process involves social oppression as governments use money owned

by innocent people to reward financial institutions for their reckless excessive
expansion of credits.
Most financial markets all over the world are, directly or indirectly, linked together
due to technological developments. Globalization makes economic performance of
other country or countries affects domestic economy.
The excessive expansion of credit is responsible for the Wall Street Crash of 1929, the
2008 US Mortgage Crisis, the 1997 Asian Financial Crisis, 1998 Russian Financial
crisis, and the Latin American Debt crisis.
Control of inflation
Control of inflation is one of the most intractable economic problems facing
governments. In its effort to control inflation, authorities apply monetary controls
over interest rate, bank discount rate, expansion of money, and currency exchange and
employ fiscal controls over prices, wages, government expenditure, and taxes.
The common effect of all these remedy tools is that they control, directly or indirectly,
the expansion of credit. Credit squeeze may discourage investment in financial
economy, but it causes economic slump, reduces national product, and raises
unemployment rate. Expansion of credit may stimulate investment in financial
economy, but it has bad impact on productive economy because it raises the inflation
rate and develops the destructive consequences of inflation.
Monetary authority tries to balance between positive and negative results of the
controlling process, but in all cases they cannot prevent economic instability. Markets
may not respond in the way expected by the authority. A failed monetary policy can
have significant detrimental effects on the society. These include hyperinflation,
stagflation, recession, high unemployment, and even total monetary collapse.
In spite of its ghastly impacts on societies, most economists recommend living with
moderate inflation. They claim that moderate inflation helps realization of optimal
growth in addition to full employment with more income for everyone because it
provides an incentive for investment as long as prices are rising and are expected to
continue rising. Some economists claim that there is no way to cure inflation without
moving the economy into recession.

Moderate steady inflation is a hypothetical target; instead, economic instability is the
common feature of present economies.
Economic growth is just a temporary reaction. It will not last too long as supply will
be reduced to balance with the fall in demand which is the result of inflation.
Labors are in worst shape because the rate of the increase in wages is normally less
than the rate of the rise in cost of living.
Spending in more productive activities cures recession without creating inflation.
“ “
Islamic rules with regard to financial activities
Legality of exchange activities
The verses of the Holy Qur’an do not forbid the use of money as a medium of
exchange for material wants; instead they recognize gold and silver as money at the
time when the Holy Qur’an was revealed to the Prophet (Pbuh)
“And those who hoard up gold and silver and spend them not in the way of Allah,
announce unto them a painful torment” (Al-Taubah. 9:34).
Legality of interest-free lending
In Islam, interest-free lending is regarded as a social financial aid. It does not cause
inflation. A transaction of riba-free lending represents a money transfer from one
party to another party.
“O you who believe! When you contract a debt” (Al-Baqarah, 2:282).
The verses in Surat Al-Baqarah set rules to regulate riba-free lending;
Lending term must be specified
“O you who believe! When you contract a debt for a fixed period”.
A contract must be written
“O you who believe! When you contract a debt for a fixed period, write it down. Let a
scribe write it down in justice between you”.
Witnesses are required
“And get two witnesses out of your own men”.
Collaterals may be acquired
“then let there be a pledge taken, then if one of you entrusts the other, let the one who

is entrusted discharge his trust”.
Return is not permitted
“you shall have your principal sums”.
In case of default, Postponement or forgiveness is encouraged
“And if the debtor is in a hard time, then grant him time till it is easy for him to repay;
but if you remit it by way of charity, that is better for you if you did but know.”.
Legality of charitable activities
Islam encourages all types of social cooperation (Takaful)
“They ask you what they should spend. Say: “Whatever you spend of good must be
for parents and kindred and orphans and poor and the wayfarer, and whatever you do
of good deeds, truly, Allah knows it well” (Al-Baqarah 2:215).
Prohibition of inflationary activities
Islam forbids all inflationary activities. Islamic economy should be regarded as an
inflation-free economy, rather than just an interest-free economy. In addition to
prohibition of inflation, Islam explicitly forbids all factors of inflation.
Prohibition of Inflation
Inflation causes an intentional price increase
“Anas reported that the current price once became dear at the time of the Messenger
of Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet
replied: Verily Allah is One who controls price, curtails, gives amply and provides
sustenance; and certainly I hope that I should meet my Lord while there will be none
amongst you who will hold me responsible either for blood or for property.”(Tirmizi,
Abu Daud, Ibn Majah).
Inflation involves steeling properties of others
“And eat up not one another’s property unjustly” (Al-Baqarah. 2:188).
Inflation involves intentional decline in the value of the monetary unit
“and reduce not the things that are due to the people…” (Hud. 11:85).
Inflation is the main cause of concentration of wealth in few hands
“in order that it may not become a fortune used by the rich among you” (Al-Hashr.
59:7).

Prohibition of Riba
The word “Riba” in Arabic refers to interest or any other type of return to lending.
“Those who eat Riba will not stand except like the standing of a person beaten by
Satan leading him to insanity. That is because they say: “Selling is only like Riba,”
whereas Allah has permitted selling and forbidden Riba” (Al-Baqarah. 2:275).
Islam prohibits riba of any rate above zero
“But if you repent, you shall have your capital sums” (Al-Baqarah. 2:279).
Islam forbids doubling and multiplying of riba as result of the money creation
process, the process of calculating interest in compound base, or the process of
rescheduling debts
“O you who have believed, do not consume usury, doubled and multiplied, but fear
Allah that you may be successful.” (Ali-Imran, 3:130).
The Holy Qur’an draws the attention to the importance of understanding the
difference between interest-based lending and selling
“Those who eat riba they say: Selling is only like riba” (Al-Baqarah. 2:275).
The logic behind the argument is that the increase in profit from credit sale over cash
sale is considered as time value of money. Similarly, riba is the time value of money.
This type of similarity may be true to an extent, but the discrepancies should be
considered;
Interest-based lending represents a transaction of exchanging money for debt, while
credit sale refers to a transaction of exchanging real product for debt.
Riba may be considered as the time value of money, while profit, from sale,
represents the return to the increase in the investment risk in case of credit sale.
Profit is the investor’s reward for his contribution in increasing national product and
national supply and therefore helps price reduction, while riba is added to cost of
products and hence causes inflation.
Selling is the base of the real productive economy which is behind realization of
prosperity, while interest-based lending is the base of the financial system which is
behind the havoc in society.
Prohibition of speculative gains

Speculative activities involve unlawful eating property through inflation
“And eat up not one another’s property unjustly” (Al-Baqarah. 2:188).
Speculative prices do not reflect fair value of underlying assets
“And O my people! Give full measure and weight in justice” (Hud. 11:85).
Speculative activities represent a sort of gambling
“Intoxicants and maisir (gambling), and animals that are slaughtered as a sacrifice for
idols, and arrows for seeking luck are an abomination of Satan’s handiwork, So avoid
that”. (Al-Ma’idah. 5:90).
Speculative activities involve unlawful bargain sale
“Ibn ‘Umar (Allah be pleased with them) reported Allah’s Messenger (peace be upon
him) as having said this: One amongst you should not enter into a transaction when
another is bargaining” (Sahih Muslim).
Speculative activities in commodities markets involve riba
“Yahya related to me from Malik that he had heard that receipts were given to people
in the time of Marwan ibn al-Hakam for the produce of the market at al-Jar. People
bought and sold the receipts among themselves before they took delivery of the
goods. Zayd ibn Thabit and one of the Companions of the Messenger of Allah, may
Allah bless him and grant him peace, went to Marwan ibn al-Hakam and said,
“Marwan! Do you make usury halal?” He said, “I seek refuge with Allah! What do
you mean?” He said, “These receipts which people buy and sell before they take
delivery of the goods.” Marwan therefore sent a guard to follow them and to take
them from people’s hands and return them to their owners.” (The Muwatta of Imam
Malik).
Speculative activities in commodities markets involve unlawful sale before taking
possession
“Ibn Abbas (Allah be pleased with them) reported Allah’s Messenger (peace be upon
him) as saying: He who buys food grain should not sell it until he has taken
possession of it” (Sahih Muslim).
Speculative activities in money markets involve unlawful forward sale of currencies
“The prophet (Pbuh) prohibited the sale of silver for gold on credit.”(Muslim).

Speculative activities in forward deals and in most derivatives involve riba
“whereas Allah has permitted selling and forbidden Riba” (Al-Baqarah. 2:275).
Prohibition of taxes
Taxation is explicitly forbidden by the Prophet (Pbuh)
“Even if a wrongful Tax-collector were to repent, he would have been
forgiven. (Sahih Muslim, Book 017, Hadith 4206).
Present direct and indirect taxes involve unjustly eating of others’ properties
“And eat up not one another’s property unjustly nor give it to the rulers that you may
knowingly eat up a part of the property of others sinfully ….” (Al-Baqarah. 2:188).
According to the Interpretations of the holy Qur’an, the verse refers to briberies given
to rulers, but the word “rulers” is not limited to bad rulers.
Hidden inflation tax reduces the value of the currency unit
“and reduce not the things that are due to the people…” (Hud. 11:85).
Prohibition of illegal earnings
All types of financial corruption are forbidden
“and do not commit mischief in the land causing corruption.” (Hud. 11:85).
Following are some examples;
Deceiving
“And give full measure when you measure, and weigh with balance that is straight”
(Al-Isra’, 17:35).
Bribery
“Abdullah-b-Amr reported that the Messenger of Allah cursed the bribe-taker and the
bride-giver.”(Abu Daud, Ibn Majah).
Theft
“And, the male thief and the female thief, cut off their hands” (Al- Ma’idah 5:38).
Embezzlement
“Verily, Allah commands that you should render back the trusts to those, to whom
they are due” (An-Nisa, 4: 58).
Greed
“And O my people! Give full measure and weight in justice” (Hud. 11:85).

Monopoly
“Ma’mar reported that the Messenger said: Whoever monopolizes is a sinner”
(Muslim).
“ “
Conclusion
Viewing inflation as an unavoidable phenomenon is a major pitfall in economic
thinking. Inflation is the root of all evils. It is the result of regarding financial
activities as economic activities.
Getting rid of inflation requires that money should not be used to pay for inflationary
activities (interest, taxes, speculative gains, or illegal earnings). Discarding inflation
will result in realization of optimal economic growth, full employment, and economic
stability, in addition to avoidance of intentional concentration of wealth.
“* * * * * * * * * *”
Chapter 3: Redistribution System
For households and individuals, income refers to the sum of earnings received in a
given period of time. Accumulated saved income in form of assets and goods
constitutes individual’s wealth which is referred to as private property. Inequality
refers to the income gap, or the wealth gap, amongst people. Keeping up all members
of society at or above a specified material standard of living is the objective of any
sound economic system in order to realize prosperity on the individual level.
Inequality is the main problem of developed countries that may be growing richer in
the sense of growth in total output without their inhabitances growing any richer as
individuals.
Economic inequality has existed in a wide range of societies and historical periods; its
nature, cause and importance are open to broad debate. Marxists believe that
economic equality is necessary for political freedom. They favor distribution process
based on an individual’s needs. Libertarians argue that it is natural to reward some
vastly more than others because men are born unequal. The Capabilities Approach
looks at income inequality and poverty as form of “capability deprivation”. When a
person’s capabilities are lowered, they are in some way deprived of earning as much

income as they would otherwise. From a Meritocratic point of view, economic
inequality is beneficial inasmuch as it reflects individual skills and effort, and
detrimental inasmuch as it represents inherited or unjustified wealth or opportunities.
Present economies are characterized by rapid growth in the rate of poverty and
enlargement of the income gap amongst people. A study by the World Institute for
Development Economics Research at United Nations University reports that the
richest 1% of adults alone owned 40% of global assets in the year 2000, and that the
richest 10% of adults accounted for 85% of the world total assets. The bottom half of
the world adults owned 1% of global wealth.
Present redistribution policies are based on extensive growth in the function of
government. Policies used by governments to narrow the income gap differ according
to its economic system. Socialism failed to realize its objective of equality.
Distributable National Output declines. Strong dictatorship of the proletariat class is
established. Capitalists adopt some welfare systems including several forms of public
assistance, such as unemployment compensation, housing, food stamps, free services,
subsidies and cash aid in addition to social security and retirement systems. Welfare
systems failed to ensure financial security to populace.
Causes of inequality
There are many reasons for economic inequality within societies. The factors affect
individuals’ capabilities to accumulate wealth, no matter his work ethic, include
natural differential in personal capacities and intentional inflation.
Natural differential in personal capacities
People are naturally born unequal with different innate ability, such as intelligence,
motivation, strength, or charisma. Some has disability as a result of a birth defect.
Others are orphans. People grow in different living conditions. A child may grow in a
poor, dangerous neighborhood with poor schools and little access to healthcare. Some
has disability as a result of an accident or disease. Rich tend to provide their offspring
with a better education, healthcare, and safe neighborhood. Unlike poor, those who
already hold wealth have the means to invest in new sources and create more wealth.
Neither a child nor an old can earn income from work. Cultures, customs, genders,

races, religion and diversity of preferences within a society affect wealth-acquiring
behavior.
The different wealth-acquiring behaviors due to natural differential in personal
capacities have its justification because of its role in building civilization. Every
individual has different role in building the society. Should people are identical
having same personal capacities, every one of them will have equal role in the society.
Different roles are necessary for people to live in the way they are living. Engineers
cannot build a dam in the absence of labors. Doctors are not needed unless there are
patients. Sellers cannot sell unless there are buyers. The different roles of individuals
bring up the differentiation in individuals’ contributions in building the society and
explain the different wealth-acquiring behaviors which are behind the existence of
poor and rich.
Intentional inflation
Inflation intentionally helps concentration of wealth and widens the income gap. It
allows an oppressive operation to legalize making private gains on account of public
losses. Poor become poorer, living standard of middle class declines, and rich become
wealthier.
Inequality, as a result of intentional inflation, is against values of all religions,
constitutional rights, traditional values and human rights.
“ “
Islamic rules with regard to inequality
According to Islam, an individual has to work to generate income, and he is liable to
pay for products and services he receives (Nothing for free)
“There is nothing for man but what he strives for” (An-Najm, 53:39).
But the liability of work is limited to his capacity
“Allah burdens not a person beyond his scope” (Al-Baqarah. 2:286).
In return Islam highly respects legal private property
“Eat not up your property among yourselves unjustly” (An-Nisa’. 4:29).
The Holy Qur’an sets rules regarding the legal sources of income, how income is
distributed, and how it is spent and redistributed.

Main sources of income
Income from trade
“except it be a trade” (An-Nisa 4:29).
Legal income can be earned through rendering personal services or property services
or bearing investment risk. Wages is the return to personal services. Rent is the return
to property services. Profit is the reward to investment risk. Personal and property
services are classified by old Islamic Fiqh as sales.
Income from inheritance and bequest
“There is a share for men and a share for women from what is left by parents and
those nearest related, whether the property be small or large – a legal share”(An-Nisa,
4:7).
Several verses in Surat An-Nisa show the distribution rules of an estate among
different heirs.
Distribution of income
While the Holy Qura’n recognizes the natural differential in wealth, Islam forbids the
intentional differential.
Recognition of natural differential in wealth
“Say (O Muhammad): Verily, my Lord enlarges the provision to whom He wills and
restricts” (Saba 34: 36).
Prohibition of intentional differential in wealth
“And eat up not one another’s property unjustly” (Al-Baqarah. 2:188).
Inflation causes intentional differential in wealth.
Spending of income for living
Responsibility of a household to spend for living includes;
P ersonal living
“And surely, We gave you authority on the earth and appointed for you therein
provisions” (Al-A’raf, 7:10).
L iving of family
“They ask you what they should spend Say: Whatever you spend of good must be for
parents and kindred and orphans and the poor and the wayfarer” (Al-Baqarah, 2: 215).

L iving of wife
“Men are the protectors and maintainers of women … because they spend from their
means” (An-Nisa, 4: 34). A man is also responsible to give his wife a bridal upon
marriage “And give the women [upon marriage] their [bridal] gifts graciously. But if
they give up willingly to you anything of it, then take it in satisfaction and ease.” (An-
Nisa 4:4).
According to the Holy Qur’an spending for living is regulated to be moderate;
Spending w ithout miserliness
“Those who are miserly and enjoin miserliness on other men and hide what Allah has
bestowed upon them of his Bounties. And We have prepared for the disbelievers a
disgraceful torment.” (An-Nisa’. 4:37).
Spending w ithout extravagance
“and waste not by extravagance“(Al-An’am. 6:141). In all cases spending for living
must be within the financial capacity “There is no blame on those who are weak or ill
or who find no resources to spend” (Al-Taubah, 9:91).
Spending the surplus of income
Unlike spending for living which is subject to moderation, spending the surplus of
income is up to full financial capacity
“And they ask you what they ought to spend. Say: that which is beyond your needs”
(Al-Baqarah, 2:219).
Spending the surplus of income includes spending for living of others and for the
cause of Allah.
Spending by rich for living of poor
Payment by rich to others is made in form of obligatory sadaqah which is known in
Islamic Fiqh as Zakat. Zakat is a duty imposed on wealthy people only. It is regarded
as wealth protection duty. It protects rich from the reactions of envy and hate. It also
purifies the human soul of vices like greed and selfishness
“Take Sadaqah from their wealth in order to purify them and sanctify them with it”
(Al-Taubah. 9:103).
Zakat is an obligatory tax allocated for distribution amongst poor

“As-Sadaqat are only for the poor and the needy, and those who collect them, and
those whose hearts are to be reconciled, and to free the captives and the debtors, and
for the cause of Allah, and (for) the wayfarer; a duty imposed by Allah.”(Al-Tawba 9:
6).
Zakat is based on recognition of the human right of living means
“Verily, you have that you will never be hungry therein nor naked. And you will
suffer not from thirst therein nor from the sun’s heat” (Taha, 20: 118-119).
Zakat is levied in order to eliminate concentration of wealth
“in order that it may not become a fortune used by the rich among you” (Al-Hashr.
59:7).
Spending for fighting in the way of Allah
“Go forth, light-armed and heavy-armed, and strive with your wealth and your lives in
the way of Allah” (Al-Taubah, 9:4).
Voluntary spending for social purposes
Alms are encouraged
“If ye publish your almsgiving, it is well, but if ye hide it and give it to the poor, it
will be better for you” (Al-Baqara 2: 271).
Gifts are permitted, but it is subject to making return for it
“Narrated ‘Aishah: That the Prophet (saws) used to accept a gift and make return for
it.” (Sunan Abi Dawud – Kitab Al-Ijarah).
Legality of redistribution
“And in their properties there was the right of the beggars and the poor” (Adh-
Dhariyat, 51: 19).
Redistribution of wealth has its justification. Rich benefit from inequality. They have
the need and interest to continuously acquire contributions of others in building the
society, and to maintain social stability in order to encourage others to provide their
contributions in building the society.
Redistribution of wealth is not a matter of applying welfare policies, social security
systems, or giving alms to poor or even looking for absolute equality. It is a matter of
recognition of the right of others to be compensated by rich for the natural differential

in personal capacities, and for stealing their properties by inflation.
The compensation should be quite enough to realize the interest of rich. The
compensation process should be based on giving the right of every individual, old or
young, disabled or healthy, male or female, to live at or above an acceptable living
standard. While individual’s income is the return for his contribution in the
production process, the compensation should recover the shortage of his income to
pay for the cost of an acceptable living standard.
“ “
Presentation of Financial Security System
In light of the verses of the Holy Qur’an, a sound redistribution policy must be based
on recognition of the right of everyone to live at or above specified standard of living.
In return, a sound public finance system must be based on recognition of the duty of
everyone to pay for his needs of goods and services (Nothing for free). An alternative
financial security system is introduced to replace present public finance system and
redistribution policies.
Public services
Public services refer to goods and services provided by public agencies in order to
realize security and justice. Some goods and services cannot be provided by others
due to security reasons or because they are not profitable. They include all public
services such as defense, internal security, judicial services, protection of
environment, scientific researches for development, and national planning, in addition
to controlling services to combat corruption, protect market freedom, and ensure
transparency.
According to the financial security system, cost of public services will be charged to
all members of the society and will be distributed evenly among individuals. The
government will determine the individual’s share in public expenditures.
Public investments
Public investments refer to utilization of public properties by public sector. Public
sector consists of fully or partially owned independent for-profit establishments.
Public sector may be involved in other productive activities to prevent greed by

private sector through free competition. Members of the society are the real owner of
public property.
Profits from public investments may not be regarded as a source of public revenue.
Profits generated from public investments in addition to the surplus of public revenue
shall be used to finance additional public investments.
Standard cost of living
In general cost of living includes cost of consumables and cost of general services;
First: Cost of consumables
Cost of consumables refers to the cost of living necessities and cost of utilities that
can be billed on consumption base. Living necessities include housing, food, drink,
clothing, marriage, and death. Utilities include all services, such as electricity, water,
communication, transportation, property insurance, and accident insurance.
Second: Cost of general services
Cost of general services refers to the total cost of services provided by a society to
individuals regardless of the volume of consumption. It includes cost of private
services, common services, and public services.
Private services include all services that are directly provided to individuals, such as
health care, medication, obligatory education and emergency services.
Common services include all services that are not directed to specific person, such as
roads, dams, and bridges.
Public services include all services provided by public agencies such as defense,
internal security and judicial services. Cost of public services includes liabilities of
public debt (if any).
Unlike public services, private and common services are provided by private or public
for-profit establishments.
Family standard cost of living
A government will estimate an individual’s standard cost of consumables with
consideration given to age, gender, and living standard in the community. Cost of
general services will be distributed evenly among individuals. A government will
determine an individual’s share in the cost of general services. Shares will be paid by

individuals to be distributed among the providers of services. An individual may
enjoy personal services of higher standard provided that he/she pays the difference in
cost.
An individual’s standard cost of living represents the total of an individual’s standard
cost of consumables in addition to his/her share in the cost of general services.