Interest-free Islamic economic system is partially followed and partially not followed in Muslim countries around the world. The only country, which has followed this system completely in every minute detail is Malaysia. So the application methods in this post are mostly those implemented in Malaysia following the Interest-free Islamic Economic system.
The main feature of the Islamic economic system is that it is Interest-Free. As the Qur’an says in Sura al-Baqara Chapter 2 Verses 278 & 279, “O ye who believe! fear Allah and give up what remains of your demand for usury if ye are indeed believers. If ye do it not take notice of war from Allah and his Apostle: but if ye turn back ye shall have your capital sums; do not deal unjustly and ye shall not be dealt with unjustly.”
Qur’an condemn all evil deeds, but never has the Qur’an warned of a war against God Almighty and His Messenger except in the case of taking Interest and Usury.
There are several evils of the interest based economy, the reason why Islam has prohibited it.
For example, if a person takes a loan from a bank and says the cost price of a certain article is 10 dollars and he wants to a profit of one dollar. So the selling price would include the 10 dollars cost price one dollar profit and one dollar interest and the selling price would be 12 dollars. The selling price would go up because of interest and when the selling price goes up the demand comes down and when the demand comes down the supply comes down and as supply comes down production comes down causing labour problem and unemployment.
There is Social Injustice.
For example, if a person takes a loan from the bank and no matter if he earns a profit or goes in loss he has to pay that fixed amount of interest. Even if some natural calamity befalls his family, such as flooding or earthquake, the person still has to pay the loan with the interest and a delay would only increase the amount of interest. It is social injustice.
There is no social consideration.
Suppose, if two businessmen come to ask for a loan from a modern bank and one businessman wants to start a social or hospital while the other businessman wants to start an alcohol factory or a gambling den. But natural the businessman, who wants to start an alcohol factory or a gambling den would have better returns and the loan given to him would be more secure and he would give a higher rate of interest as compared to the business, who wants to open a school or hospital. Modern banks are only interested in getting better and higher returns. That’s why they finance gambling dens rather than schools or hospitals. That is why in the 80s thousands of gambling dens were financed by modern banks worldwide. For name sake only a few social projects are financed by modern banks and the majority of their loans are based on better interest.
Modern banks encourage people to store money and keep the money idle for small fixed return on it every year. In the end, power is concentrated in a few hands, the bankers.
In the same way there are several benefits of Islamic banking.
As there is no interest involved, there is profit and loss sharing. So if a person wants to sell his goods, it would only have the cost price and profit in the selling price and instead of 12 dollars, his selling price would be only 11 dollars. If the selling price comes down, the demand increases and if the demand increases the supply increases and as supply increases the production increases resulting in more labour for the people and higher employment. As a result encourages people to work and earn their living.
There is Social Justice in Islamic banking.
If a business takes a loan and goes in loss, the loss is shared by the bank and if he earns a profit, the profit is shared by the bank. If in case any natural calamities befalls him, the Islamic bank gives him more time to repay, unlike the modern bank, where the more time you take to pay the more interest you would have to pay. Many a times if the Islamic bank finds the situation very bad, they even let go off that loan.
There is Social Consideration in Islamic banking.
Islamic bank can not give a loan to any businessman, who is doing any activity, which is causing harm to the society. For example, if a businessman wants to start an alcohol factory and approaches an Islamic bank for a loan, the Islamic bank will not lend him a single penny, not even if he promises to give 100% profit to the Islamic bank. In Islamic banking there is social consideration and they encourage projects beneficial for the society, such as building schools, hospitals and nurseries. In short, the Islamic bank encourages the society to improve.
In the Islamic bank, you are not encouraged to keep your money idle. You are encouraged to invest your money and be a partner in the business and in the end, power is not concentrated in the hands of a few individuals. Because in the Islamic banking the profit and loss are shared by the business, the banker as well as the depositor. The power is equally shared among all the people.
The great philosopher, Aristotle has beautifully defined Interest as “An earning based on the use of money and not on labour, and all such earnings(interests) are against nature.”
Lets quickly analyze the objectives of the Islamic economic order before we analyze the theory and practical application of the Islamic economic system.
The Objectives of the Islamic Economic Order
1- Economic well-being
Islam encourages a person to enjoy the bounties of God Almighty, to work for his living and refrain from begging.
2- Universal Brotherhood and Justice
Qur’an says in Sura al-Hujurat Chapter 49 Verse 13, “O mankind! We created you from a single (pair) of a male and a female and made you into nations and tribes that ye may know each other (not that ye may despise each other). Verily the most honored of you in the sight of Allah is (he who is) the most righteous of you.”
From this we come to know the criteria that the criteria of judgement in the sight of God is not wealth, not sex, not color, not Caste, but it is “Taqwa” God consciousness, piety and righteousness.
Qur’an says in Sura an-Nisa Chapter 4 Verse 135, “O ye who believe! stand out firmly for justice as witnesses to Allah even as against yourselves or your parents or your kin and whether it be (against) rich or poor: for Allah can best protects all.”
According to this we have to stand for truth and justice be it against anybody even against our own selves and sacrifice your own interests.
3- Equitable Distribution of Wealth
Islam is against the philosophy that the wealth should be concentrated in a few hands. The difference between the rich and the poor should be reduced. Otherwise they would become enemies unto each other. For this, Islam has devised a system of “Zakat” that every Muslim, who has excess wealth exceeding the amount equal to or more than 85 grams of Gold. This amount is spent on the poor, orphans, needy and so on. If every individual in the world practices this system of “Zakat”, not a single person in the whole world would die of hunger. Islam teaches to find lawful employment for the unemployed and to pay him a good remuneration.
According to Islam if a person dies his wealth should be distributed among his heirs according to the guidelines laid down in Qur’an and Ahadith and it should not go to just one or two individuals in the society as it is done today.
4- Individual Freedom within the Context of Social Well-fare
According to Islam man is born free and nobody not even the state can abrogate his freedom nor subject his life to strict regimentation. Every individual is free as long as he does not harm the society because in Islam the larger welfare of the society takes precedence over the individual freedom.