Achieving Market-Led Growth in Islamic Economic Framework


Salman Ahmed Shaikh

Islmic economic framework does not argue for a state-led or state-run economy. In fact, Islamic economic principles are very much open and favorable towards market based economy. By enabling market economy to run competitively, an Islamic economy provides market based solutions to employment creation and improvement in living standards through effective and efficient utilization of resources.

The market competitiveness is achieved by removing from the economy those factors which lead to concentration of wealth and under utilization of given labor and non-labor resources in the economy. Specifically, this is achieved through two key institutions:

  1. Removal of interest based financial intermediation.
  2. Introducing lenient fixed rate non-discretionary wealth and income (ushr and khamsa) based direct taxation.

In an Islamic economic framework, private investment is incentivized by the institution of Zakat which favors private investment/spending than hoarding wealth. Secondly, the Zakat rates are low and hence, it encourages the private investment in productive enterprise. Economic theory suggests that higher tax rates discourage entrepreneurship as they decrease the incentive to produce. Lower tax rates encourage entrepreneurship and hence increase the size of producing sector and hence production. With the increase in production, tax revenue in value terms increases. Lower tax rates can still ensure high tax to GDP ratio if the tax base is wide.

In an Islamic framework, if interest-based financial products are absent, people with surplus income (savers) are left with two choices, i.e. either to keep idle wealth and then pay Zakat on it or to avoid decrease in wealth by choosing productive investments with the start of one’s own business or by participating in the business of others through equity investments. In this way, the whole economy could gradually transform from debt-based financing to equity-based financing. In an economy where firms are predominately financed with equity, the fruits of greater profitability are shared more equitably as well as the losses are shared more widely for lessening their impacts. This could also help in stabilizing business cycles.

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About Salman Ahmed Shaikh

PhD Economics, National University of Malaysia. Assistant Professor of Economics and Finance. Author, Researcher, Teacher and Consultant. He can be contacted at: salman@siswa.ukm.edu.my
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11 Responses to Achieving Market-Led Growth in Islamic Economic Framework

  1. muqtada says:

    Great article. Even the economists are all in agreement that interest based economy is one of the reason for cyclic downturns. Interest encourages holding of wealth and thus eventually inflation increases with decrease in trading quantity. Demand lags and depression takes over. Since the recent alternates to money are so effective that by managing the printing of money, it can not be handled as the economy moves to the next best substitute. Never could the economists get the economy out by their contemporary economic devices, rather it was World Wars that bailed them out at the expense of millions of human life. Islamic economic system encourages balance. I consider multinationals as one of the reason of a week economy. I think a decentralized small entrepreneurial economic base is more productive and sustainable in the long run. The answer to the problem really is to avoid debt based financing. Anyways great work brother and thank you for your enlightening ideas!

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    • IbnSaad says:

      After reading these paragraphs, it should be noted briefly that:

      1 – The concept of the parameters of Islam is not governing financing and investment as (PLS).

      2 – The terms of Islamic financing- investment not included.

      3 – The market in Islam must be regulated and equitable.

      4 – The Islamic economy must be based on the public sector and private sector who must complete the first.

      5 – “Awqafs” were not mentioned.

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      • islamiceconomicsproject says:

        Jazak Allah Ibn Saad for your comments and feedback. Since it was a brief article, it could not have dealt with so many issues you mentioned.

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    • islamiceconomicsproject says:

      Jazak Allah Khair for feedback and encouragement Muqtada.

      Like

  2. islamiceconomicsproject says:

    Islam has a distinctive value system. It has positive features of both Capitalism and Socialism and yet it does not have limitations of Capitalism and Socialism. Regarding Romer model, please note that his argument was only to have imperfect competition in the research sector and not in the intermediate goods sector and final goods producing sector. The latter two sectors make up most part of the economy. Thirdly, lenient and non-discretionary taxes are always useful and recommended. Islamic Zakat law leaves no ambiguity and it is lenient as well with minimum distortions due to broad base application.

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  3. Good. But, nowadays we need what type of application? It is correct that theoretically we suggest on the subject, but practically nothing is seen? Effective system is required to be established through the fruits of the economic activities and benefits should reach up-to the very low level i.e poor and needy community. Jazakllah

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  4. Shakeel says:

    Masha Allah. Yet an other nice article by you!

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  5. We are so blessed to have people like Salman keeping their eye on Halal Investing practices.

    This is a timely contribution. I appreciate reading this piece so much.

    Jazak Allah Khair.

    Mohammad Saeed Rahman

    Like

    • thabet says:

      Islamic economics is based on both the public sector guarantor of the general interest and the private sector should promote growth and not a mercantile sector as it is currently in the Muslim world. Moreover, the economy must be regulated by the standards of the “Sharia”.

      Like

  6. Omar says:

    I see some conceptual flaws. You are trying to evaluate Islam from a capitalistic standard, which doesn’t make any sense because of stark contradiction between the metaphysical, epistemological and ontological foundation of both ideologies.

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    • Brother Omar,

      Your feedback is welcome and much appreciated. The point of these writings is to tell the distinctive features of Islamic system and contrast it with the other ideologies. I would appreciate if you can tell which phrase, sentence or article made you think that perhaps, there is a loss of Islamic ideology. Indeed, I agree that the basic philosophy of Islam and other ideologies is different with respect to goals and even worldview. But, how have I missed that in these writings would be really useful to know if you can provide specific examples.

      Jazak Allah

      Like

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