FOUNDATION OF ISLAMIC ECONOMICS

(ECON 1710)

ISLAMIC ECONOMIC SYSTEM VS

CONVENTIONAL ECONOMIC SYSTEM

SECTION: 06

LECTURER: ABDUL SALAM ABU BAKAR

STUDENTS NAME MATRICS NO.

(1) NURUL AFIFAH BINTI MD SAIRONI 1324286

(2) AFIFAH NABILAH BINTI MOHD SAFEI 1321976

(3) NUR HANIS AIDAH BINTI MOHD RAFI 1329426

(4) ASMA DIYANA BINTI AZMAN 1328376

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(5) SOUPHAPHONE CHUEANGMANIVONG 1119776

TABLE OF CONTENTS

NO CONTENTS PAGES

1 INTRODUCTION 3 - 4

2 ISLAMIC ECONOMY 4 - 5

3 CONVENTIONAL ECONOMY 5 - 7

4 DIFFERENCES BETWEEN ISLAMIC

ECONOMY SYSTEM AND CONVENTIONAL

ECONOMY SYSTEM

7 - 13

5 ISLAMIC ECONOMY SYSTEM VS

CONVENTIONAL ECONOMY SYSTEM

(QUESTION)

13 - 14

6 CONCLUSION 15

7 REFERENCES 16

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INTRODUCTION

Islamic world is a world or a place where the citizens are applying or practising the

islamic law. The Islamic Law or known as Shari’ah covers all aspects of life and not limit to

the worshipping activities only.

Religion and economics are attached to each other . They are related to each other. As

muslims, the statement is understandable and exactly the truth. However, what about to the

non – muslim? Do they accept this understanding? Actually in the early years before 1700,

the European economists were priests and theologians. The Scholastic economics, in the

middle ages of Europe, was presented and developed by the people of the Church such as

Thomas Aquinas, Augistine and others. The physiocrats also had a lots of religion in their

writings.

Meaning here, they also belief that religion is related to the Economics and other field

of life in this world.However, because of problems from church and Industrial Revolution,

there were Economist who tried to detach their realm of authority from religion.

Muslims must not be affected to the understanding. Effect in the next world acts as a

strong motivator for the muslim. “ As economist, there is always a religious, moral, and

humanistic frame of action to economics, which ought to be integrated back in the material

and objective study and that to deny the relationship between economics and moral values

was a failure or the mistake on the part of the older generations of economist.”

Islam is a way of life, and a very comprehensive religion. Thefore, it is cannot be

seperated between religious things and other daily activities such as economics.

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In the preeceding years, there are many Islamic Economist who involved in studying

economics such as Ibn Taymiyyah, Ibn Khaldun and many more. They actually had

contributed alot to the ummah.

One of the most important contributions of Islamic economics, is the adoption of

multidisciplinary dynamic approach. Muslim scholars did not focus their attention primarily

on economic variables. They considered overall human well – being to be the end product of

interaction over a long period of time between a number of economic, moral, social, political,

historical and demographic factors in such a way that none of them is able to make an

optimum contribution without support of others.

ISLAMIC ECONOMICS

What is Islamic economic?

As Islam is a perfect way of life, Islam is providing guideline and rule for every sphere

of life and society especially in economic. Economic in Islam or Islamic economic system is

based on the rule called shari’ah. And the fundamental of the shari’ah is Al-Quran and sunnah

of the prophet ( p.b.u.h) provide as guideline of economic and show how economic system

should be organized. Islam has set some standard based on justice and practicality for

economic system to be established, and this standard is to prevent the enmity which always

happens among different socioeconomic section.

In other economic system might consider money as the most powerful in the society.

They might run after money and forget everything, they forget about the real purpose of life

as the creation which is worshipping God. In the other hand, Islamic economic system is more

concern on justice. It prevent any kind of injustice such interest ( riba), uncertainty (gharar).

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Islamic economic is not always concern the precise amount of financial income and

expenditure, import and export even though it is important but Islamic economic is more

focus on the spirit of the economic system, which mean even though people have a lot of

money but if that money is not come from Halal way, that money is no longer valid in Islam1

CONVENTIONAL ECONOMICS

Economic system is an organized way in which a state or nationallocates its resources

and apportions goods and services in the national community.2 In other words, it is the

combination of entities that interact with one another according to a particular plan in order to

fulfill the economic objectives of a society. Conventional economic system is the economic

system that was derived from the theories developed by the western scholars such as Adam

Smith, Joseph Schumpeter, Jeremy Bentham and Max Weber. It is already been adopted and

applied in the society. It has been widely practiced in today’s societies all around the world.

Conventional economic system has some features including the concept of absolute

scarcity, self-interest based, absolute freedom, materialism and utilitarianism, and positivism

versus norms. The concept of absolute scarcity stated that all resources are limited and human

wants are unlimited. Therefore, not all human wants can be fulfilled. Humans need to make a

choice on what they will have and what they must forgo. Since there is no free lunch in this

world, the choice that humans made will involve the opportunity costs of the other choices

that were forgo in the process of making the choice.

Conventional economic system focused the priority on gaining self-interest rather than

public interest. An economist should focused on making decision that will gain an individual

1http://www.islamreligion.com/articles/277/

2http://www.businessdictionary.com/definition/economic-system.html#ixzz3LyyFa8Uf

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self-interest first before thinking on public interest. This assumption was introduced by Adam

Smith in the theory of ‘invisible hand’ where it said the policies often were less effective in

advancing social welfare than were the self-interested acts of individuals.3 An individual

should act on his own in order to gain their own self-interest and does not need assistance

from the government to do that.

Absolute freedom in conventional economic system is reflected from the expression of

‘the survival of the fittest’ where only the strong one will survive in which, economists can do

anything that is possible in order to survive in the economic world. There is no restriction on

what they can and cannot do. In other words, absolute freedom does not involve any laws or

morality since people can do anything to achieve their individual goals including giving bribe

to expand their influences in economic world.

Conventional economic system also focused on materialism and utilitarianism.

Materialism can be defined as the desire to acquire and consume material goods. In economic

perspective, materialism is largely focused on maximizing the profits. In making an economic

decision, an economist should compare between marginal benefits and marginal costs of

choosing each options and choose the option which gives more marginal benefits and

consume less marginal costs.

While, utilitarianism is the ethical doctrine that virtue is based on utility, and that

conduct should be directed toward promoting the greatest happiness of the greatest number of

persons.4 Individuals look for and pursue the opportunities to increase their utility where they

allocate their time, energy and money to maximize their satisfaction. An economist should

makes a decision that will maximize the satisfaction of the greatest number of persons.

3http://global.britannica.com/EBchecked/topic/677258/invisible-hand 4http://dictionary.reference.com/browse/util itarianism

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In conclusion, conventional economic system has been practiced in the society since

long time ago until today. Even, the economic systems that are taught in schools and

universities are mainly come from conventional economic system. And we can see in the later

discussion that conventional economic system is clearly contrast to the Islamic economic

system. However, there are some part of the conventional economic system that are suitable

and tally to the Islamic economic system.

DIFFERENCES BETWEEN ISLAMIC ECONOMICS AND

CONVENTIONAL ECONOMICS

The Economics issues in our religion, Islam is not something alien to us because it

already been discussed and mentioned in Al-Quran. Allah has highlighted many issues which

cover many aspects of Economics in many chapters of Al-Quran. For example, in the chapter

59, Surah Al-Hashr verse seven,

“And what Allah restored to His Messenger from the people of the towns - it is for Allah and

for the Messenger and for [his] near relatives and orphans and the [stranded] traveler - so

that it will not be a perpetual distribution among the rich from among you. And whatever the

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Messenger has given you - take; and what he has forbidden you - refrain from. And fear

Allah; indeed, Allah is severe in penalty.”5

This ayah is discussed about the distribution of resources which it must be distributed

fairly among human being in this world, no matter from which part of social status the people

come from, whether from rich people or poor people they are still eligible to get their share of

the distribution of resources. Despite from that, there are many aspects in Economics that Al-

Quran has mentioned as well. Namely, in the chapter one, in surah Al-Baqarah verse 282, it

mentioned about the issue of debt which if we do not use cash as settlement we have to record

each of the transaction for our reference in the future. Hence, it easy for us to settle any

amount of debt recorded.

However, societies nowadays are only aware and concern about Economics theory

that comes from western country instead of Islamic Economics theory. As examples, theory of

Adam Smith, Joseph Schumpeter, Jeremy Bentham and Max Weber. In fact, the theories is

been used widely all over the world. Even the Islamic Economics has developed first before

the Western Economics, but due to the certain problems occurred, it made people only see the

development of Western Economics theory. In addition, there are many differences in the

concept, aspect, condition which can be seen between Islamic Economics and Western

Economics since the basis of these two types of Economics theories are different as well. The

difference between Islamic economic system and conventional economic system is by

comparing these both types of economics system in respect of their concepts. The

conventional Economics System is from capitalism and socialism Economics System.

1. Right to ownership:

5http://quran.com/

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The existence of right of private ownership of property is the point of capitalism. The

system believes in the private ownership of the means of production, distribution and

exchange which are managed and controlled by individuals or groups of individuals for

private profit. People cannot own the right to own a property without their profits earned or

wealth in hand. This necessarily disturbs the balance of distribution of wealth and income in

society. Where the rich become richer with ever- increasing gulf but the poor become poorer

as they just live without a property in hand which this could lead to human discrimination.6

While, Islamic concept of ownership is unique. Ownership, in reality, belongs to God

while some rights only given in man so that he may fulfill the purpose of God, which is by

acting as a trustee for those in need. Legal ownership by the individual is recognized in Islam

but given people need to subject to the moral obligation that in all wealth all sections of

society have the right to share. Thus any private or individual ownership in Islam is not

unlimited or unrestricted. It means that all the production is not under private ownership but

it is under public ownership of certain things of common utility. Everyone has the right to use

it as it is public ownership. For instance, Allah has mentioned about it in Al-Quran chapter six

in Surah Al-‘An’am verse 11 and 12:

“Say , “Travel throygh the land; then observe how was the end of deniers”7

6http://www.academia.edu/ 7http://quran.com/

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“Say, “To whom belongs whatever is in the heavens and earth?” say, “To Allah” He has

decreed upon himself mercy. He would surely assemble you for the day of Resurrection, about

which there is no doubt. Those who will lose themselves [that day] do not believe”8

2. Economic Freedom:

Unrestricted economic freedom and non-interference of the state in such freedom is

another feature of capitalist economy. Every individual is at permission to initiate, organize

and establish any enterprise, business, trade, profession, etc. People has right to earn income

and spend their wealth as much as they can in every ways they likes. This unrestricted

economic freedom will leads to earning of wealth through bad ways or foul ways such as

gambling, prostitution and illegal trafficking. It also encourages business malpractices such as

smuggling, black marketing, speculation, fraud, exploitation, adulteration, etc. Thus a mad-

race for earning more wealth becomes war between people in order to become wealthier by

ignoring the moral value such as fraternity, brotherhood, mutual help, love, benevolence,

truthfulness. The values give it place to selfishness, callousness, hatred, falsehood and

mistrust. Capitalism, in fact, has come to signify a religion of money or dollar dictatorship. 9

8http://quran.com/ 9www.uvu.edu/woodbury/docs/workingpaper2-13.

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In other hand, Islam also allows economic freedom to an individual who is at right to

earn wealth, own it and spend his wealth at his will. But the freedom given by Islam in

economic range is limited. Islam makes distinction between halal (permitted being lawful)

and haram (forbidden being unlawful) in every economic activity that embracing various

fields of production, exchange and consumption. Similarly, consumption of wealth on

luxurious living, haram things and extravagant spending is also forbidden. A Muslim man is

obligate to pay Zakat and give Sadaqah which is spend whatever he can for the cause of the

poor and the needy. All these regulations are to promote moral values in Islamic society,

foster the brotherhood spirit, implementing socio-economic justice and well-being which

eliminate racing for wealth and material gains. As mentioned in chapter 5, Surah Al-Ma’idah

verse two which human being have two care about others as well “O you who have believed,

do not violate the rites of Allah or [the sanctity of] the sacred month or [neglect the marking

of] the sacrificial animals and garlanding [them] or [violate the safety of] those coming to

the Sacred House seeking bounty from their Lord and [His] approval. But when you come out

of ihram, then [you may] hunt. And do not let the hatred of a people for having obstructed you

from al-Masjid al-Haram lead you to transgress. And cooperate in righteousness and piety,

but do not cooperate in sin and aggression. And fear Allah ; indeed, Allah is severe in

penalty.”10 In return everybody in a society could live peacefully.

3. Monopoly:

Competition, which is another feature of capitalism, leads to the destruction of minor

enterprises and firms. This problem encourages merger of smaller business into major

organizations and thus monopolies are established in the economy. Monopolies will kill free

competition, which cause inflation in prices and ultimately result into increasing

10http://quran.com/

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unemployment rate in the economy. Moreover, trade-cycles, unplanned production, over-

competition, increasing accumulation of capital upset the balance between production and

consumption which sometimes leads to economic depressions that will make the economy in

that country become worse.

While in Islam, Syariah law forbids unhealthy competition and bans all the ways

which lead to it. Islam also prohibits establishment of monopolies. The Prophet Muhammad

(PBUH) is reported to have said that whoever monopolies is a sinner. Especially monopolies

over food-stuffs or articles of daily use such as groceries and daily necessities are forbidden

by Islam. Commodities and services which are of the common interest of the community are

never allowed to be monopolized.

4. Institutions of Interest:

The Institution of banking and interest is the importance aspect of capitalistic form

of economy. For business or industry to have a big project the need of huge fund is a must.

This leads to establishment of banks who borrow capital from depositors and investors on

lower rate of interest and lend it to business enterprises on higher rate of interest. Thus the

institution of interest has become part and piece of capitalism.

But in Islam, interest is the most exploitive institution for humanity and has eliminated

it root and branch in its every form and manifestation. It is call Riba in Syariah law.

According to al-Quran taking of interest is biggest sin while according to Prophet

Muhammad (PBUH) interest is equivalent to committing incest with the man’s mother. Islam

builds its economy on interest free basis and promotes profit/ lost- sharing and partnership as

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incentive for saving and investment.11 The interest matters or known as riba’ has been

prohibited in Al-Quran which mentioned in many chapters. Namely in Surah Al-‘Imran

chapter three verse 130

“O you who believed do not consume usury , doubled and multiplied but fear Allah that you

may be successful”.12

Therefore, we can see there are many differences between Islamic Economics and

Conventional Economics which can be found in many aspects and concepts. Nevertheless, of

course Islamic Economics theory is better than Conventional Economics theory since Islamic

Economics is covered all aspects including world and hereafter. Though, Conventional

Economics only covered about world matters which would be destroyed one day because this

world is not permanent. However, there are still a few aspects of Conventional Economics can

be made as reference as long as there are not contradict with law of Sharia’.

Why should the Islamic world embrace the Islamic Economic system over

the Conventional Economic system?

Why do the Islamic world should embrace the Islamic economy instead of

Conventional economy?. This is because, as can be seen previously, the Islamic economy

works differently from Conventional Economy which Islamic economy does not separated or

11http://en.wikipedia.org/ 12http://quran.com/

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splited the economy matters and religion matters. In fact, economy and religion are

complemented each other which aligned with the responsibility of human being as khalifah in

this world. Thus that is why all things happened in this world will give impact to us in the

hereafter. Meanwhile, Conventional economy is separated the economy matters and religion

matters since they believed, religion has nothing to do with economy. This ideology is based

on the secularism ideology which they are seperating the world matters and religion matters,

so religion cannot interfere in any world affairs.

Besides that, Islamic economy is promoting the good values in economy which all the

principal economy strategies should achieve unity as well as harmony between the material

and also the spritual of life of the people. For example, if someone is doing business he would

not only aimed for profit but also he aimed for the bless from Allah S.W.T, so his business

could be ran smoothly. Hence for getting the bless of Allah, he would probably doing some

charity and paying for zakat in order to purify his wealth. Thus the business that he did in this

world would be granted reward by Allah because he helped others as well. However,

Conventional economy does not apply this concept in its system because they do not believe

something that they cannot see through their eyes like spiritual things. Therefore, they would

do everything in economy. Although the things that they doing might hurt others, but as long

as they can make higher profit, they would probably doing it. For example imposing the

higher interest to the debtors which could make the debtors suffer with his debts.

In conclusion, it shows that Islamic economy is better to be applied in the Islamic

world rather than Conventional economy. This is because Islamic economy system is based

on the Al-Quran and sunnah which these two references are the best guidance ever until the

end of this world. Hence, by following the Islamic system , all problems occurred in economy

like discrimination toward human being, fraud, riba, gharar, maysir, black market and etc can

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be avoided. Lastly, it is truly Islamic economy system is the best from other economy system

such as, conventional economy system which are capaitalist and socialist.

CONCLUSION

As a whole, Islamic law or known as shari’ah is created based on human nature. If we

do not follow, it means that we are against the “fitrah”. The shari’ah is benefited us a lot. The

islamic economic system actually is the best system to be followed but it needs the

cooperations frm everybody in that place or country. It will not work, if only the minister

impose the concept of Islamic law. It must be from the collaboration of the government and

the citizens.

As we can see in the conventional economics, there a lot of inequalities, injustice and

many of the concepts that are against the Islamic law, For example in riba. In the Quran,

Allah SWT already mentioned clearly that riba is prohibited. This is because riba can lead to

many bad things. First, it is injustice because the the rich become richer and poor become

poorer. The rich people who lend the money will get back the money + interest from the

borrower. While, the borrower have to work harder than before in order to pay the interest. It

proved that riba give a bad effect to society. There are many other bad effects of riba that are

provided in some of the islamic economic articles. Islam actually encourage the borrower to

pay back the money with some gift for the appreciation to the lender.

In the islamic economic concept, we follow the law that coming or originated from the

revealed knowledge and not the man made like the conventional economics. Islamic

economics always relate the concept with the maqasid shari’ah. We do the transaction or any

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economic activities as an act of ibadah. We want to seek the pleasure of Allah SWT. We want

our activities get blessing from Allah. Therefore, by following the Islamic guideline, we

actually want a blessed life.

REFERENCES

http://www.islamreligion.com/articles/277/

http://www.businessdictionary.com/definition/economic-system.html#ixzz3LyyFa8Uf

http://global.britannica.com/EBchecked/topic/677258/invisible-hand

http://dictionary.reference.com/browse/utilitarianism

http://quran.com/

http://www.academia.edu/

www.uvu.edu/woodbury/docs/workingpaper2-13.

http://en.wikipedia.org/

McConnell, C. Brue, S.L. & Flynn, S.M. (2015). Economics (20th edition). New York:

McGraw Hill