The Outcome

Islamic financial system aims for social justice and redistribution the money from wealthy to poor people. A set of financial roles (conditions) was designed and is believed if, implemented will help social justice.

First, Risk Sharing: which means that any party engaged in a business transaction should both share the profit and loss of the outcome and that no individual party bear the loss or even gain the whole profit (sharing principle and social justice).

Second, the availability of financial resources: it is emphasised by both no interest on loans and zakat money which eventually reduces poverty, creates employment opportunities, self-employment, increase both demand and production. This is mainly based on the idea of redistribution of wealth.

And it all came from the basic principle, that the money does not have a value but it is a medium of exchange which goes back retrospectively to Say’s theory.

However, the ultimate thing which this system aims to is dignity, which is an essential human need.

 The Islamic system claims in its teaching that the full or semi application of the Islamic finance system reduces poverty and inequality. But surprisingly rare or sometimes no evidence provided by Muslim countries which evaluate it effectiveness on poverty and social justice.

 Hence, it raises the point that what prevents Islamic countries from the full application of zakat? 

• Is it the influence and power of rich people?
•  Or the hole in the faith of Islam!

I hope that John Bird , Founder and Editor-in-Chief, The Big Issue is wrong on that: "Humans love to take rather than to give”. And that is the power is the reason. 

Zakat Vs. Tax

The main difference between tax and zakat is that the latter is mainly imposed on accumulated savings (wealth) and not on the daily or monthly income of the individual. 

As illustrated in the figure below, zakat is paid on the accumulation of wealth and the reason is that Islamic system does not want the individuals to be obliged for tax payments and not buying the essential living needs. But it wait tell the individual accumulates savings and then charge the individual 2.5% on savings which will be then a small amount of the total savings taken to zakat beneficiaries.

The other difference between zakat and tax, that the earlier has its own eight defined beneficiaries which is clear in the Quran as stated by Behdad and Nomani (2009).In contrast, tax money usage varies from country to another and changes over time. For zakat beneficiaries categories please refer to the following link

 Surprisingly, the government is not one of the beneficiaries. So how the government will generate income?

Al-Atawi (2010) claims that the state does not need tax money because it will use it self-generated income by employing it money in different projects e.g. infrastructure which others such as the private sector are not interested to do it. Hence, profit generating projects such as sea ports and airports will be the government main focus. And he adds that why to charge taxes in something the government did not contributed in its creation!

Zakat is also applied on corporate as well as individuals. In addition, it is imposed on other form of income with different charge rates. For further zakat categories (Payers) please refer to the following link

 

Sharing in Islamic Business

According to Wilson (2006), 'Business structures in the Muslim world are determined by both economic conditions and opportunities, as well as by the values and beliefs of those involved in managing enterprises.'

Usmani (2010) claims that, 'Islam has termed interest as an unjust instrument…' and he asked the following questions: why the borrower should still pay an interest while his business making a loss and why a lender e.g. a bank should accept a fixed interest rate while the borrower made a massive income and the bank money was the main contributor in the business?

Here Islamic teaching defines and recommends business in the form of partnership which is called "Musharakah" to reduce this unjust. It is a form partnership of those partners in the business shares the profits and loss. It emphasizes the cooperative between partners and not  in favor of a particle party.

 If "Musharakah principle" was applied to a bank which holds a huge amount of depositors’ money and no interest rates permitted to earn income, banks will be forced to invest in different projects whether it is new or current. But the bank here is exposed to a risk of loss!

It encourages a bank to diversify its investments since interest is prohibited and that leads to a growth in the economy since money is injected in several business and projects. If the economy grows on average, the investment pool will make profit. Banks here make income from investment not form interest by lending money. No interest rates for the depositors but their income increase in line with the growth in the economy. Thus, Islamic system based in “cooperative” (Sharing) and does not favor rich people. But it works on the principle of sharing which in a way or another leads to justice. 

Zakat effect on demand,supply and re-distribution of wealth

According to Choudhury, Islamic economic system is a resources economy and that the currency does not have a value but it is a medium of exchange.

 This agrees with ‘Jean Baptiste Say’ an economist who states that, effort and work placed in something to change it form will create an added value for the good and will be sold for a higher value which in turn increases the wealth of both the seller and the buyer. This will result  in that people will not save money as it does not have value according to Say’s theory and Islam, and a creation of demand on other goods in line with the amount earned.

However, to apply Say’s law and ensure the money cycle continues, the inflation and interest was created by current economic systems. But inflation will reduce both the wealth of both seller and buyer since the value of money reduces by time. In contrast, Islamic system imposed ‘Zakat’ which is 2.5 % (1/40) of the wealth taken from the zakat payer every year as per Qur’an. Hence, it encourages people to spend money and look for increasing wealth rather not seeing  money reducing and it keeps the economy moving. The difference here is that zakat reduces the amount of money held not the value of money. It encourages consumer to consume more and supplier (Inevestor) to produce more since the value of money does not change but the money amount reduces.

The above graph illustrates that increasing both the consumption and the supply will eventually increase supply and demand of goods but not the price because it will move to a new balanced level which supply equals demand.

 Hassouna, claims that the increase in production level needs workers, which automatically will create working opportunities for people. With-out inflation and interest the production will increase with no change in prices level. Hence, Zakat transfers and re-distributes the wealth between people.   

Islamic financial principles

Most Muslims around the world practise the Islamic teachings delivered by the Qur’an and Sunn’ah (Shari’ah). These teaching almost cover all aspects of their daily lives. And financing was approached by the Shari’ah clearly centuries ago.

According to Khan and Mirakhor (1989), Islam as a religion prohibits interest paid or received on money borrowed or lending. In addition, Islam teachings prohibit taking money in the form of tax on the income. Thus it means that the financial institutions and banking will work as charities i.e. giving money to individuals and corporate with getting an interest argued by Usmani (2002). 

However, Usmani (2002), claims that this should not be understood wrongly. And he argues that there are other ways for making profit. Investing with the borrower rather than lending him and here the lender is in the form of investor who shares profit or losses of the investment (Sharing principle).The other form is to provide finance to others without claiming any interest as a profit but the lender has the right to claim his principle amount. Hence Usmani (2002) says, “Interest free loans are meant for cooperative and charitable activities”. 


Another form of Islamic finance principles is Zakat, which is a specified percentage of money is taken from Zakat payers on their money or holdings is taken by the state and given to defined categories of community according to Qur’an. Taheri (2000) claims that zakat importance is emphasised by Islam which is the third pillar of Islam. 

Islamic teaching claims to provide equability and social justice threw these principles, but how it is done?