Social and Economic Justice

Justice—social and economic—is at the foundation of the Islamic economic system. The Quran uses two words for justice: qist and ádl. The first is the chief characteristic of appropriate human relations and of human relations toward the rest of creation. It is a human phenomenon; it is not a divine trait. Ádl, however, is a feature of the Creator's actions that manifests itself in the perfect balance of the cosmos; it characterizes His action to place everything in its rightful place. Any injustice perpetrated by the individual against other humans and against the rest of creation is ultimately an injustice to the self. Allah (swt) loves justice; it is a central part of His universal love. The response of creation to universal love must mirror the justice of Allah (swt).

A just economy is part of a just, healthy, and moral society, which is the central objective of Islam. What underpins all the rules of behavior prescribed by Islam is its conception of justice, which maintains that all behavior, irrespective of its content and context, must, in its conception and commission, be based on just standards as defined by Shariah. An Islamic economy is an enterprising, purposeful, prosperous, and sharing economy in which all members of society receive their just rewards. Such an economy is envisioned as one in which economic disparities that lead to social segmentation and divisiveness are conspicuously absent. Another important rule is the prohibition against taking (i.e., receiving) interest. This issue is covered in some detail later in this chapter.

The three components of economic justice in an Islamic society are:

1. Equality of liberty and opportunity for all members of society with respect to the utilization of natural resources;
2. Justice in exchange; and
3. Distributive justice.

All these components are accomplished within the framework of Shariah.

Prohibition of Interest (Al-Riba)

Al-riba technically refers to the “premium” that must be paid by the borrower to the lender along with the principal amount as a condition of the loan or for an extension in the duration of loan. At least four characteristics define the prohibited interest rate:

1. It is positive and fixed ex ante.
2. It is tied to the time period and the amount of the loan.
3. Its payment is guaranteed regardless of the outcome or the purposes for which the principal was borrowed.
4. The state apparatus sanctions and enforces its collection.

It is a common misunderstanding and a myth that Islam, by prohibiting interest on loans, denies the concept of the time value of money. Islamic scholars have always recognized the time value of money but maintain that the compensation for such value has its limitations. Recognition of an indirect economic value of time does not necessarily mean acknowledging any right of equivalent material compensation for this value in all cases. According to Shariah, compensation for the value of time in sales contracts is acknowledged, but in the case of lending, increase (interest) is prohibited as a means of material compensation for time.

The Islamic notion of the opportunity cost of capital and the time value of money can be clearly understood by reviewing the distinction between investment and lending. Time by itself does not give a yield; it can contribute to the creation of value only when an economic activity is undertaken. A sum of money can be invested in a business venture or it can be lent for a given period of time. In case of investment, the investor will be compensated for any profit and loss earned during that time. Islam fully recognizes this return on the investment as a result of an economic activity. If money is in the form of a loan, however, it is an act of charity where surplus funds are effectively being utilized to promote economic development and social well-being.

In response to the contemporary understanding that interest on a loan is a reward for the opportunity cost of the lender, Islamic scholars maintain that interest fixed ex ante is certain while profits or losses are not. To demand a certain fixed compensation for an uncertain return that is actually earned is indulging in al-riba and is, therefore, unlawful. The element of uncertainty diminishes with time as the resultant return on the investment is realized, rather than the accruing of return simply from the passage of time. In short, Islam's stand on the time value of money is simple and clear: Money is a medium of exchange; time facilitates completion of economic activity, and the owner of capital is to be compensated for any return resulting from economic activity. Lending should be a charitable act without any expectation of certain monetary benefit at the expense of another.

The Quran clearly and strongly condemns acquisition by individuals of each other's property through wrongful means (see 2:188; 4:29, 161; 9:34). Islam recognizes two types of individual claims to property: (1) property rights that are a result of the combination of an individual's labor and natural resources; and (2) rights or claims to the property that are obtained through exchange, remittances of what Islam recognizes as the rights of those less able to utilize the resources to which they are entitled, outright grants, and inheritance. Money represents the monetized claim of its owner to the property rights created by assets that were obtained or received through (1) and/or (2). Lending money is, in effect, a transfer of these rights from the lender to the borrower. All that can be claimed in return for the loan is its equivalent and no more. Interest on money loaned represents an unjustifiable and instantaneous property rights claim. It is unjustifiable because interest is a property right claimed outside the legitimate framework of individual property rights recognized by Islam and instantaneous because as soon as the contract for lending upon interest is concluded, a right to the borrower's property is created for the lender, regardless of the outcome of the enterprise for which the money is used.

Money lent on interest is used either productively, in the sense that it creates additional wealth, or unproductively, in the sense that it does not lead to incremental wealth produced by the borrower. In the former case—that is, when the funds are used in combination with the labor of the entrepreneur to produce additional wealth—the money lent cannot have any property rights claim to the incremental wealth because the lender, when lending money, does not bargain for a proportion of the additional wealth but for a fixed return, irrespective of the outcome of the enterprise. The lender, in effect, transfers the right to his property to the borrower. In the latter case, since no additional wealth, property, or assets are created by the borrower, the money lent—even if legitimately acquired—cannot be used to claim any additional property rights since none is created.

Islamic scholars advocating the elimination of interest from the economy highlight the fact that there is no satisfactory theory of interest in the conventional economic theory. This criticism is levied especially on fixed rates of interest. Muslim writers see the theories of interest as attempts to rationalize the existence of an institution that has become deeply entrenched in modern economies and not as attempts to justify, based on modern economic analysis, why moneylenders are entitled to a reward on the money they lend. Typical justifications for interest in any economy include the arguments that interest is a reward for saving, a marginal productivity of capital, and an inevitable consequence of the difference between the value of capital goods today and their value after some time.

When it is argued that interest is a reward for saving, Muslim scholars respond that such payments can be rationalized only if savings are used for investment to create additional capital and wealth. According to the scholars, the mere act of abstention from consumption should not entitle anybody to a return. When argued that interest is justified as marginal productivity of capital, Muslim scholars respond that although the marginal productivity of capital may be one factor in the determination of the rate of interest, interest per se has no necessary relation with the productivity of capital. Interest is paid on money, not on capital, and has to be paid irrespective of capital productivity. In distinguishing between interest as a charge for the use of money and a yield from the investment of capital, Muslim scholars argue that it is an error of modern theory to treat interest as the price of, or return on, capital. Money, they argue, is not capital; it is only “potential capital,” and it requires the service of the entrepreneur to transform the potentiality into actuality. The lender has nothing to do with the conversion of money into capital or with using it productively. When argued that interest arises as the time value of money, Muslim scholars respond that this only explains its inevitability, not its “rightness.” Even if the basis for time preference is the difference between the value of commodities this year and the next, Muslim scholars argue, it seems more reasonable to allow next year's economic conditions to determine the extent of the reward.

It is argued that when a person lends financial resources, these funds are used to create either a debt or an asset (i.e., through investment). In the first case, Islam considers that there is no justifiable reason why the lender should receive a return simply through the act of lending per se. Nor is there a justification, either from the point of view of the smooth functioning of the economy or that of any tenable scheme of social justice, for the state to attempt to enforce an unconditional promise of interest payment regardless of the use of borrowed money. If, however, the money is used to create additional capital wealth, the question is raised as to why the lender should be entitled to only a small fraction (represented by the interest rate) of the exchange value of the utility created from the use made of the funds; the lender should be remunerated to the extent of the involvement of his financial capital in creating the incremental wealth.

Risk-Sharing Economic System

Islam endorses risk sharing as the preferred organizational structure for all economic activities, and in fact it endorses the most comprehensive application of risk sharing that goes beyond anything put forward by modern economic theories. Islam prohibits, without any exceptions, explicit and implicit interest-based contracts of any kind and requires mandatory risk sharing with the poor, the deprived, and the handicapped based on its principles of property rights. Moreover, even after these rights are redeemed, the remaining wealth is not to be accumulated. Wealth is considered the strength of the economy and a means of support for society.

Wealth must not be withheld from circulation through accumulation. Noncirculation of wealth among the members of the society creates a sclerosis in the society's body economic, restricting the flow of resources needed for the growth of the economy. To allow a healthy circulation of wealth, the Islamic paradigm envisions a financial system based on risk and return sharing. Within the Islamic framework, the central proposition of Islamic finance is the prohibition of interest-based transactions in which a rent is collected as a percentage of an amount of the principle loaned for a specific time period without the full transfer of the property rights over the money loaned to the borrower. One result of this type of transaction is that the entire risk of the transaction is shifted to the borrower. Instead, Islam proposes a mutual exchange in which one bundle of property rights is exchanged for another, thus allowing both parties in the exchange to share the risks of the transaction.

The ideal Islamic finance system points to a full-spectrum menu of instruments serving a financial sector embedded in an Islamic economy in which the institutional scaffolding (rules of behavior as prescribed by Allah [swt] and operationalized by the Noble Messenger, including rules of market behavior prescribed by Islam) is fully operational.⁴ The essential function of that spectrum would be spreading and allocating risk among market participants rather than allowing it to concentrate among the borrowing class. Islam proposes three sets of risk-sharing instruments:

1. Risk-sharing instruments in the financial sector;
2. Redistributive risk-sharing instruments through which the economically more able segments of society share the risks facing the less able segment of the population; and
3. The inheritance rules specified in the Quran through which the wealth of a person at the time of passing is distributed among present and future generations of inheritors.

As will be argued here, the second set of instruments is used to redeem the rights of the less able in the income and wealth of the more able. These are not instruments of charity, altruism, or beneficence. They are instruments of redemption of rights and repayment of obligations.

The starting point of this discussion is verse 275 of Chapter 2 of the Quran, particularly the part of the verse that declares contract of al-bay' (exchange) permissible and that of al-riba (interest) nonpermissible. Arguably, these few words can be considered as constituting the organizing principle—the fundamental theorem, as it were—of the Islamic economy. Most translations of the Quran render al-bay' as “commerce” or “trade.” They also translate al-tijarah as “commerce” or “trade.” Consulting major Arabic lexicons⁵ reveals that there is substantive difference between al-bay' and al-tijarah. Relying on various verses of the Quran (e.g., 10–13:61; 29–30:35; 111:2; 254:2), these sources suggest that trade contracts (al-tijarah) are entered into in the expectation of profit (ribh). Al-bay' contracts are defined as mubadilah al-maal bi al-maal: exchange of property with property. In contemporary economics, it would be rendered as “exchange of property rights claim.” These sources also suggest a further difference in the meaning of the terms: Those who enter into a contract of exchange expect gains but are cognizant of probability of loss (khisarah).

First, it is worth noting also that all Islamic contractual forms, except spot exchanges, involve time. From an economic point of view, time transactions involve a commitment to do something today in exchange for a promise of a commitment to do something in the future. All transactions involving time are subject to uncertainty, and uncertainty involves risk. Risk exists whenever more than one outcome is possible. Consider, for example, a contract in which a seller commits to deliver a product in the future against payments today. There are a number of risks involved. There is a price risk for both sides of the exchange; the price may be higher or lower in the future. In that case, the two sides are at risk, which they share once they enter into the contract agreement. If the price in the future is higher, the buyer would be better off, and the price risk has been shed to the seller. The converse is true if the price is lower. Under uncertainty, the buyer and seller have, through the contract, shared the price risk. There are other risks that the buyer takes, including the risks of nondelivery and quality. The seller also faces additional risks, including the risk that the price of raw material may be higher in the future, and transportation and delivery cost risks. Again, these risks have been shared through the contract. The same argument applies to deferred payment contracts.

Second, it may appear that spot exchange or cash sale involves no risk. But price changes postcompletion of spot exchanges are not unknown. The two sides of a spot exchange share this risk. Moreover, from the time of the classical economists, it has been known that specialization through comparative advantage provides the basis for gains from trade. But in specializing, a producer takes a risk of becoming dependent on other producers specializing in the production of what the producer needs. Again, through exchange, the two sides to a transaction share the risk of specialization. Additionally, there are pre-exchange risks of production and transportation that are shared through the exchange. It is clear that the other contracts at the other end of the spectrum of Islamic contracts—that is, mudharabah (a contract between a capital provider and an investment manager with the profits and losses shared according to the contractual agreement) and musharakah (a partnership as in the previous case, but both partners participate in the management)—are risk-sharing transactions. Therefore, it can be inferred that by mandating al-bay', Allah (swt) ordained risk sharing in all exchange activities.

Third, it appears that the contract of al-riba is prohibited because opportunities for risk sharing are nonexistent in such a contract. It may be argued that the creditor does take risks—the risk of default. But it is not risk taking per se that makes a transaction permissible. A gambler takes risks as well, but gambling is forbidden (haram). Instead, what seems to matter is the opportunity for risk sharing. Al-riba is a contract of risk transfer. As Keynes emphasized in his writing, if interest rates did not exist, financiers would have to share in all the risks that entrepreneurs face in producing, marketing, and selling a product.⁶ But by decoupling future gains, by lending money today for more money in the future, financiers transfer all risks to entrepreneurs.

Fourth, it is clear that by declaring the contract of al-riba nonpermissible, the Quran intends for humans to shift their focus to risk-sharing contracts of exchange.

The emphasis on risk sharing is evident from one of the most important verses in the Quran (2:275) with respect to economic relations. “They say that indeed an exchange transaction (al-bay') is like a al-riba [interest-based] transaction. But Allah has permitted exchange transactions and forbidden interest-based transactions.” The nature of property rights inherent in these two transactions hints at one of their crucial differences. Al-bay' is a contract of exchange of one commodity for another where the property rights over one commodity are exchanged for those over the other. In the case of an al-riba transaction, a sum of money is loaned today for a larger sum in the future without the transfer of the property rights over the principal from the lender to the borrower. Not only does the lender retain property rights over the sum lent, but property rights over the additional sum to be paid as interest are transferred from the borrower to the lender at the time the contract of al-riba is entered into.

Arguably, the verse makes exchange and trade of commodities and/or assets the foundation of economic activity in the Islamic paradigm. From this, important implications follow: Exchange requires freedom of parties to contract. This in turn implies freedom to produce, which calls for clear and well-protected property rights to permit production to proceed. To freely and conveniently exchange, the parties need markets. To operate successfully, the market needs rules of behavior, along with enforcement mechanisms to reduce uncertainty in transactions and increase the free flow of information. The market also needs:

• Trust to be established among participants
• Competition among sellers, on one hand, and buyers, on the other
• Reduced transaction costs
• Risks mitigated to third parties in terms of having to bear externalized costs of two-party transactions

To reduce the incidence of informational problems that plague the conventional interest-based economic system, these additional requirements are necessary:

• Rules that ordain trust
• Faithfulness to the terms and conditions of contracts
• Rule compliance and prohibition of rule violations
• Transparency and truthfulness in transactions
• Prohibition of interference with market forces, hoarding of commodities to force increases in their price, and coalitions
• Market supervision to ensure rule compliance⁷

A further implication is that finance based on risk-return sharing means that the rate of return to finance is determined ex post facto, by the rate of return on real activity rather than the reverse, which is the case when interest-based debt contracts finance production. This has a further economic implication in that risk-return-sharing finance removes interest payments from the preproduction phase of an enterprise and places it in the postproduction and after-sale distributional phase. In turn, this has price-quantity consequences. It should be clear that compliance with the behavioral rules prescribed by Islam reduces risk and uncertainty, both of which are facts of human existence. When risks to income materialize, they play havoc with people's livelihood. It is, therefore, welfare enhancing to reduce risks to income and lower the chances of income volatility in order to allow consumption smoothing. By focusing on trade and exchange in commodities and assets, Islam promotes risk sharing.

Arguably, it can be claimed that through its rules (institutions) governing resource allocation, property rights, production, exchange, distribution and redistribution, financial transactions, and market behavior, the Islamic paradigm orients all economic relations toward risk-reward sharing. This can be said to be a logical consequence of insistence on the unity of humankind since through risk sharing, Islamic finance promotes social solidarity. “Massive risk can carry with it benefits far beyond that of reducing poverty and diminishing income inequality. The reduction of risk on risk on a greater scale would provide substantial impetus to human and economic progress.”⁸ The most meaningful human progress is achieved when all distinctions on the basis of race, color, income and wealth, and social-political status are obliterated to the point where humanity, in convergence with the Quranic declaration (31:28), truly views itself as one and united. It can be argued that implementation of Islamic finance will promote maximum risk sharing, thus creating the potential for enhanced social solidarity.⁹

In addition to its risk-sharing characteristics, an Islamic economic system has the potential of greater stability than its conventional counterpart. The main reason for this is the fact that when production is financed entirely by risk-return sharing or equity finance, in the case of rapid changes in the price, assets and liabilities both move in the same direction simultaneously—thus the financial structure adjusts in tandem on both sides of the ledger. A number of analytic models have investigated the adjustment process and have demonstrated the stability of Islamic finance in response to shocks as well as the growth implications of such a system in closed and open economy situations.¹⁰ An important feature of these models was the assumption of 100% reserve banking based on the understanding of bank deposits as a safekeeping operation firewalled from the risks involved in investment operations (i.e., the so-called two-windows model).¹¹ This feature of requiring banking depository institutions to hold 100% reserves against demand deposits removes two sources of instability associated with conventional interest-based, fractional reserve banking. Nonavailability of interest-based financial transactions and 100% reserve banking eliminate the ability of the financial system to create money out of thin air and impair its ability to leverage an asset base into much larger liabilities.¹² Moreover, when risk-return sharing replaces an interest-based debt system, a much closer relationship is forged between the financial and the real sectors of the economy. As early as the 1930s, economists discussed the negative consequences of interest-based debt financing for real activities in terms of income and employment.¹³ The world has witnessed repeated periodic episodes of financial crises originating in systems with interest-based debt financing at their core in the last two centuries. The frequency of these crises increased in the last decades of the twentieth century and culminated in the devastating global crisis of 2007–2008. As unfortunate as these crises have been, they have held lessons for Islamic finance, which still is in its nascent stage of development, especially since Islamic finance is now operating in an institutional framework that is basically that of the conventional debt-driven system.

In the area of finance, prohibiting debt-based contracts and endorsing exchange have four significant economic implications.

1. Before parties can enter into a contract of exchange, they must have the property rights in what they are going to exchange.
2. The parties need a place or a forum to consummate the exchange: a market.
3. The market needs rules for its efficient operation.
4. Market rules need enforcement.

Exchange facilitates specialization and allows the parties to share production, transportation, marketing, sales, and price risk. Therefore, exchange is above all a means of risk sharing. From an economic standpoint, therefore, by prohibiting interest rate–based contracts and ordaining exchange contracts, the Quran encourages risk sharing and prohibits risk transfer, risk shedding, and risk shifting. Islamic finance is basically a financial system structured on risk sharing and the prohibition of debt financing (leveraging).¹⁴ The central proposition of Islamic finance is the prohibition of transactions that embody rent for a specific period of time as a percentage of the loaned principle without the transfer of the property rights claims, thus shifting the entire risk of the transaction to the borrower. The alternative to debt-based contracts—namely mutual exchange, where one bundle of property rights is exchanged for another—allows both parties to share production, transportation, and marketing risks. In order to fit into this framework, financial intermediation and banking in the Islamic financial system (and more generally in a risk-sharing system) have been proposed as having two tiers. The first tier is a banking system that accepts deposits for safekeeping without accruing any return and requiring 100% reserves. This protects the payment system of the economy while concurrently limiting the credit-creating ability of the banking system. Thus it obviates the need for a deposit guarantee, as in the conventional fractional reserve system. The second tier is an investment component that functions as a classical financial intermediary, channeling savings to investment projects, and where deposits in investment banks are considered as equity investments with no guarantees for their face value at maturity and subject to the sharing of profits and losses. Depositors are investors in the pool of assets maintained by the bank on the assets side of its balance sheet.

It is important to recognize—though it may be difficult, given our mind-sets—that there is nothing magical about the recent historical prominence of debt financing. Before the rise of debt financing, equity financing was preeminent, but a host of factors and developments catapulted debt financing to the forefront. Risk-sharing finance is trust intensive, and trade financing during the Middle Ages was based on risk sharing, which, in turn, was based on mutual trust. Upheavals of the late Middle Ages, in the fourteenth and fifteenth centuries, including the Black Death, strife within the church and between the church and hereditary rulers, and general economic decline, contributed to the breakdown of trust in communities and among their members. While risk-sharing techniques continued to prevail in Europe until the mid-seventeenth century, beginning in the mid-sixteenth century, the institution of interest-based debt financing also began to be used more widely and extensively. The catalyst for debt financing was primarily the breakdown of trust in Europe and elsewhere and the adoption of securitization in finance. Over time, government deposit insurance schemes, tax treatments, rules, and regulations have all heavily favored debt-based contracts over risk-sharing contracts. Thus, risk sharing is still at an early stage of development in all countries, to say nothing of its even more modest international practice. These developments have helped perpetuate a system that a number of renowned economists, such as Keynes, have deemed detrimental to growth, development, and equitable income and wealth distribution. More recently, a growing literature and proposed reforms have argued that the stability of a financial system can be assured only by limiting credit expansion and leveraging; this, in turn, requires the elimination of implicit and explicit subsidies that fuel moral hazard, such as subsidized deposit insurance schemes and guarantees that support institutions that are deemed too large to fail, and policies that afford legal protection to those who manipulate the financial system for their own personal advantage and gains.

Role of the State

Since Islam considers economic relations and behavior as the means of social and spiritual integration, economic attainments are not to be viewed as ends in themselves. All the rules of behavior regarding economic matters are addressed to individuals and their collectivity, which is represented by the state. The state is regarded as being indispensable for the orderly organization of social life, the achievement of legitimate objectives, the creation of material and spiritual prosperity, and the defense and propagation of faith. The state is primarily a vehicle for implementing Shariah and derives its legitimacy from its enforcement of Shariah rules. It is assumed to be empowered to use, within the limits of the law, all available means at its disposal to achieve the objectives and duties prescribed for the collectivity, including the synchronization of individual and public interests.

Foremost among the collective duties is ensuring that justice prevails in all walks of social life. Thus, the establishment of a judiciary or judicial system, with all the apparatus necessary for carrying out the verdicts of the courts, free of any charges and available to all, is regarded as an indispensable duty of the state. Another of the state's duties is to guarantee equal liberty and opportunity in access to and use of resources identified by Shariah for the use of individuals. This covers the provision of education, skills, and technology, available to all. When both equal liberty and equal opportunity are provided, then the production of wealth and its possession and exchange become matters of equity. All infrastructures necessary for markets to exist and operate have also traditionally been the responsibility of the state. The first market for the Muslim community was built in Medina at the direction of the Prophet (sawa) who required that trade be allowed to take place in that market freely, without any charges or fees imposed on market participants. On this basis, jurists have recognized market supervision, and its control only when necessary, as a duty of the state.

As we have seen, Islam recognizes as inviolable the right of those unable to actualize their potential to have equal liberties and opportunities in the wealth of those more able. Thus, Islam establishes a practice that is a balance between libertarian and egalitarian values, whereby when the payment of the obligatory levies mandated under Shariah rules is shirked, the state has a responsibility to correct the resulting misdistribution.

The eradication of poverty is undoubtedly one of the most important of all duties made incumbent upon the state, second only to the preservation and propagation of faith, whose very existence is considered to be threatened by poverty. Islam regards poverty primarily as a failure on the part of the more able and wealthy members of society to perform their prescribed duties. Hence, the commitment to distributive justice, which normally constitutes a large portion of government budgets in other systems, is placed squarely on the shoulders of the individuals with the financial and economic capability to meet it. Not only does Shariah specify who must pay, but it also designates explicit categories of recipients.

To summarize, in an Islamic economy, the role of the state is to ensure five goals:

1. Everyone has equal access to natural resources and means of livelihood.
2. Each individual has equal opportunity—including education, skills, and technology—to utilize these resources.
3. Markets are supervised in such a manner that justice in exchange can be attained.
4. Transfer takes place from those more able to those less able in accordance to the rules of Shariah.
5. Distributive justice is done to the next generation through the implementation of the laws of inheritance.

The state is empowered to design any specific economic policy that is required in order to guarantee the attainment of these objectives. To meet the necessary expenditures associated with the performance of its duties, Shariah has given the control, utilization, and management of a portion of a society's natural resource endowment (e.g., mineral resources) to the state. The consensus of opinion among jurists is that the state is also empowered to impose taxes whenever there is a gap between the resources it can command and its expenditures. Borrowing by the state, when it does not involve paying interest, is permitted when and if necessary.

The state (as further elaborated in Chapter 9) is seen as indispensable for the orderly organization of social life, the achievement of legitimate objectives, and the creation of material and spiritual prosperity. The state is assumed empowered to use, within the limits of the law, all available means at its disposal to achieve the objectives and duties prescribed for the collectivity, including the synchronization of individual and public interests and especially ensuring that justice prevails in all facets of social life. Thus, existence of a judiciary system, with all apparatus necessary to carry out the verdict of the courts free of charges and available to all, is regarded as an indispensable duty of the state. Similarly, the guarantee of equal liberty and opportunity in terms of access to and use of resources is another duty specified for the state and requires provision of education, skills, and technology available to all. Once both equal liberty and equal opportunity are provided, then production of wealth and its possession and exchange become matters of equity.

Summary

The Quran and the life of the Prophet (sawa) provide both the immutable and adjustable (as required by the prevailing circumstances and times) rules to develop a vibrant economic system that is based on justice. Economic justice embodies the equality of liberty and opportunity for all humans to pursue their dreams, having equal access for all generations to gifted resources of Allah (swt), justice in exchange (in all economic transactions), and distributive justice. A just economy is part and parcel of a just, healthy, and moral society.

Divine rules that were implemented by the Prophet (sawa) frame the scaffolding of the Islamic economic system. Humans are to be guided by material and spiritual incentives. They are trustees on this plane of existence and must preserve the rights of all humans and other living creatures. They must work hard (almost at the level of duty) and receive remuneration according to their level of productivity.

Humans must limit their wants, live modestly, refrain from hoarding wealth, and share with the less fortunate and the disabled. Allah (swt) has provided sufficient resources to satisfy the needs of all humans as long as they share. Wealth is the lifeblood of the economy and must be invested and circulated as opposed to hoarded.

Key Terms

1. Work ethic
2. Equal opportunities
3. Modest living
4. Limiting wants
5. Sharing with the less fortunate
6. Interest (al-riba)
7. Risk-sharing finance
8. Distributive and redistributive justice
9. Role of the state

Questions

1. What is the importance of work in Islam?
2. What does distributive and redistributive justice in Islam mean?
3. Is Islam close to a socialist system?
4. What is the role of markets in Islam, and how does that role differ from the role of markets in a capitalist system?
5. How is the role of the state in Islam different from that in the capitalist system?
6. What is the essence of justice in Islam?
7. How do the building blocks of the Islamic financial system differ from the building blocks of the conventional system?
8. What are the benefits and costs of a risk-sharing financial system?