Topic 7: Islamic economics approach to economic functions

1. Topic 7: Islamic economics approach to economic functions

2. IE approach to economic functions

3. Distribution

4. Learning outcomes At the end of the lessons, students should be able: • To analyze concepts of distribution in Islamic economics. • To derive goals of distributive justice in Islamic economics. • To explain mechanisms of Islamic schemes for distribution and redistribution.

5. Distribution • Distributive justice has always been extremely important in all human societies.

6. IE’s distribution concept

7. IE’s distribution concept • Concepts of distribution in Islamic economics are as follows:- • Functional distribution of income • A distribution of income according to the productive agent who receives the income. • For instance, rent, wages, profit etc. • Personal distribution of income • The distribution of income among the society. • E.g. zakat, waqaf, and faraid.

8. IE’s distribution concept • Distribution:- “Income allocation through mutually agreed transactions among individuals in the market” • Redistribution:- “Other process i.e. extra market and non-market processes to modify the distribution”

9. Goals of distribution justice • The major Islamic goals of distributive justice may be described as follows:- • Guarantee of fulfillment of basic needs for all. • Reduction of inequalities in income and wealth. • Purification of the donor’s inner self and his wealth. • Generation of goodwill among people.

10. Islamic schemes for distribution and redistribution • Amongst Islamic schemes for distribution and redistribution are as follows:- • Prohibition of interest and promotion of profit sharing. • Prohibition of monopoly. • Measuring for distributing natural wealth/resources. • Inheritance. • Zakat.

11. Islamic schemes for distribution and redistribution • Amongst Islamic schemes for distribution and redistribution are as follows:- • Waqaf. • System of ‘aqilah. • Obligation maintenance by relatives. • Guarantee by the public treasury of a minimum level of living for each citizen. • Right to acquire the necessities of life.

12. Islamic schemes for distribution and redistribution Prohibition of interest and promotion of profit sharing • The interest based system mainly aims to get back the principal plus interest. • The creditworthiness of customer is very much depend on their wealth or ability to provide security/collateral to the bank. • As such, the very nature of loan financing on the basis of interest allocates more resources to the rich and deprives the poor of financing. • In addition, the bank does not assume business risk which justify the profits made.

13. Islamic schemes for distribution and redistribution Prohibition of interest and promotion of profit sharing • Where else, in profit sharing the main concern is the successful of the project. • In fact, the bank jointly bear business risk faced by the customer that justify profit distribution among the two. • This is much more efficient system as distribution of honesty and good projects is not confined to the rich alone. • In fact, the system allows the poor to have much better access to the financing.

14. Islamic schemes for distribution and redistribution Prohibition of monopoly • Monopoly is prohibited as it entails negative impact such as creating disparities in income and wealth and enlarging the gap between the rich and the poor. • Nonetheless, the monopoly in some industry is inevitable. • For instance, in utility industry i.e. electricity, and water. • As it is not economical for country like Malaysia to have more than one company for its utilities industry.

15. Islamic schemes for distribution and redistribution Measuring for distributing natural wealth/resources • The concept of ownership in Islam. • The owner only have the first right to use it and the extra must be given free to the public.

16. Islamic schemes for distribution and redistribution Inheritance • The inheritance system lead to the redistribution of the total wealth of the deceased – split of ownership. • The system of marriage have a direct interaction with the system of inheritance. • The system of inheritance in Islam gives rise to a number of heirs – it does not concede a bequest (wasiyah) in excess of one-third.

17. Islamic schemes for distribution and redistribution Zakat • Zakat is the third pillars of Islam. • It is a long term measure with widespread effects. • It is a compulsory duty to all Muslims that transfers some income and wealth from the rich to the poor. • Zakat as a tool in distribution:- • Share of fakir miskin (the poor) • Share of al-gharimin (a person who incurred debt which he cannot pay back, but the debt must be made for good reasons and free from cheating • Share of wayfarers or Ibn Sabil (a traveler who gets stranded)

18. Islamic schemes for distribution and redistribution Zakat (ctd) • Types of zakat:- • Zakat al-fitr. • Obligatory on each Muslim for himself and all his dependents as long as he has more than one day’s food for himself and his dependents on the night of aidilfitri • Zakat on property

19. Islamic schemes for distribution and redistribution Waqaf • Also known as charitable trust. • It is not an obligatory but voluntary for Muslims. • A way transferring income from one generation to another for welfare purpose. • As compared to the inheritance system, waqaf can be given to the public (not limited to the heirs only) and can be given while the owner is still alive. • Waqaf has to be charitable for the deserving people. • Waqaf usually is something durable that can goes on giving benefits to the needy or the poor over several years.

20. Islamic schemes for distribution and redistribution System of ‘aqilah • Diyah or blood money for accidental homicide is to be shared by the relatives of the killer. • The system distributes the blood money over the whole tribe of the offender, over several years, so they collaborate in paying it. • This system ensures the survival of the family of the deceased person without over burdening the offender.

21. Islamic schemes for distribution and redistribution Obligation maintenance by relatives • Rich relatives have to provide sufficient customary maintenance for his poor relatives who are unable to work or have many dependants. Guarantee by the public treasury of a minimum level of living for each citizen • The public authority should lay down the poverty limit so that only the poor can get aid.

22. Islamic schemes for distribution and redistribution Right to acquire the necessities of life • A person, in a situation in which he fears losing his life due to hunger or thirst, is allows to take whatever will sustain him irrespective of whether it is the property of an individual or of the state. • Jurists have applied the preceding rules to cases of desperate need for other necessities such as clothing and shelter.

23. References • Distributive Justice in Islam, Mohammad AnasZarqa.

24. Recap At the end of the lessons, students should be able: • To analyze concepts of distribution in Islamic economics. • To derive goals of distributive justice in Islamic economics. • To explain mechanisms of Islamic schemes for distribution and redistribution.