06 Jul 2022


Muhammad Umar Kamal Ahmdani




Islamic Economic and Monetary System


Islamic Economic and Monetary System is basically set of principles highlighting and prohibiting practices involving any commercial activity. Islamic economic system is unique in its approach as it stresses on individual honesty, morality and kindness and place human dignity higher than sheer cost benefit analysis and profit maximization approach because we witness multiple cruel practices in our society everyday aimed only at profit maximization principle like Hoarding.

Technically Islamic economic system is in between the capitalism and Communism as Islamic system offer the solution for shortcomings of both systems. Capitalism is propagated as the ultimate system by its proponents and after fall of Soviet Union it enjoys unchallenged supremacy in global economy. Despite its successes the system entails major flaws. First of all cost benefit analysis and profit maximization based economy is insensitive towards less fortunate people and considers every practice to maximize profit weather ethical or unethical legitimate. Secondly capitalism and free market economy proposes no governmental intervention in market regulation which causes drastic imbalance and monopolistic trends in market. Islamic system allows state to intervene in certain predefined situations to thwart any market manipulation effort.

Communism on the other hand presents a model where means of production belongs to state and right of ownership is not available to common people. State takes care of needs of people in terms of food, housing and other basic necessities. The communist system deprived human beings of their basic right of ownership and freedoms. Islamic Economic System is based upon freedom and places human dignity on top of everything. There are certain practices prohibited to maintain a balanced and pluralistic economic environment but other than that Islam does not deprive anyone of any basic rights and freedoms.

Islamic Economic System describes laws to cater all major domains of an economy which are as follows,

  1. Public/Private Property
  2. Tax
  3. Market
  4. Monetary and financial System
  5. State’s Role


Public/Private Property:

Islam is the religion with comprehensive framework regarding all social institutions and provides clear directions regarding all matters related to ownership. Quran states that everything in universe belongs to God and granted to man by God. Islam classified property into three domains Public, State, Private. Public property includes natural resources, water streams, mines, forests etc. state function as regulating the resources but all the resources belong to public. There is no restriction or discrimination on anyone for utilizing the public property.

Islam Fully acknowledges and upholds the individual rights of ownership. Islamic economy is based upon equality and justice so there are taxes imposed by states and regulations applicable but state cannot take away anyone’s right to private ownership whatsoever. Islamic jurisprudence extensively discusses mater related to ownership and property like inheritance, taxation and protection against stealing.

Prophet Muhammad (SAW) said he who dies defending his property was like a martyr.


Islamic commercial jurisprudence requires every Muslim with certain amount of wealth or money to pay Zakat which is 2.5% of net value while the criteria and recipients for zakat are predefined.

If a person hold less than the criteria defined in jurisprudence than he is not bound to pay zakat. The idea behind zakat is to circulate money and manage cash flow towards less fortunate segments of society. The major flaw we witness in capitalist economy is accumulation of wealth in few hands. Islam discourages the accumulation or stagnation of wealth rather encourages investments and charity to keep the wealth in circulation.

There are other taxes too like Jizya is imposed on non-Muslim segments of society and after paying that tax state is responsible for ensuring heir rights and safety.


Market is backbone in every economy and place where exchange of goods, services and capital actually takes place. In modern economics or capitalist economy market manages itself on demand and supply and the value is determined by balance of demand and supply. Capitalism strongly discourages any external intervention to manage market forces rather proposes concept of invisible hand market management. This concept states that market manages itself based on supply and demand and prices vary with increase and decrease in both supply and demand. This concept sounds good but there is one practical problem that with no external regulator its prone to manipulation as any big fish can create artificial shortage or someone can create monopoly over certain product or service and manipulate market to discourage new entrants.

Islamic system is based upon morality and justice so every practice which meets the general principles set by Islamic commercial jurisprudence is fair and allowed. Islam set no limit to profit but generally directs that profit should be reasonable for both buyer and seller. Markets are competition based and all parties get equal chance. Prices are semi regulated which means few commodities like food items and basic necessities are sometimes regulated by state to make sure no one can manipulate and disturb the market equilibrium.

The necessary conditions for a market in Islamic system are freedom of trade which means everyone gets a level playing field and no one can create a monopoly over market and market forces. Secondly security of contract as commercial contracts are sensitive in nature due to the capital involved so Islamic jurisprudence encourages the security of contracts through state regulators and personal credibility. Third necessary condition is private ownership as Islam allows everyone to trade independently and autonomously. Everyone has right of ownership and property.

There are certain practices forbidden in Islamic markets, first is Ihtekar (Hoarding) which is creating an artificial shortage to inflate prices. Second is Najash (Price Fixing) where stake holders over bid to drive prices up. Third is Ghish (Concealment of vital information) where vital information regarding the product s not shared to get higher value.

Fourth is Maysir (Unearned income) is money earned by practices which did not involved someone’s own effort. Fifth is Riba (Interest) which is charging a mark up over a loan as Islam discourages any investment without profit loss sharing and lastly Qimar which is gambling and type of unearned money.

State Intervention:

State intervention is allowed to regulate and keep a check on activities deemed immoral and illegal in Islamic jurisprudence. The primary focus of Islamic state and Islamic commercial jurisprudence is to ensure fair play and wellbeing of every citizen of state.

All above mentioned practices which are proscribed as illegal and prohibited result in damages to society and people in one way or another. State plays a crucial role to inhibit any market manipulation, monopoly or artificial shortages but state cannot confiscate anyone’s property or wealth without any judicial proceedings and cause. State is bound to defend and secure the properties of its citizens.


Islamic Monetary System:

Money is defined as medium of exchange and measure of value. in ancient times barter system was used for exchange of commodities but it entails some serious flaws for example if I have wheat and other person have wood, I need wood but the other person does not need wheat so in that situation exchange would not be possible. To deal with such problems money was introduced. Paper currency is actually value fixed against a real wealth like gold or silver. That paper does not hold any value but the wealth behind it does. Islam discourages the paper currency as the real value is not certain and there is a fair chance of manipulation by financial institutions and banking sector. Islamic suggest six major items to be used as currency as these items doesn’t represent value of something else rather it hold value itself.

  1. Dates
  2. Gold
  3. Silver
  4. Salt
  5. Wheat
  6. Barley



One thing which is evident through all discussion is that Islam is being a religion aim higher than just cost benefit analysis or rational choice instead directs towards greater good and collective benefit of mankind. Islam proves to be a natural religion and provides general directions to deal with the economy as every situation differs from last. The basic idea of Islamic system is to provide security, equality and fairness in each and every aspect of commercial matters and life at large.



Islamic Financial System | islamic-banking.com (islamic-banking.com)