CONCEPT OF ECONOMYCONCEPT OF ECONOMYIslamic vs. SecularIslamic vs. Secular

By Mila Fadilla, SP, M.Si, CIFPBy Mila Fadilla, SP, M.Si, CIFP

Islamic Banking and Finance Institute (IBFI)Islamic Banking and Finance Institute (IBFI)Trisakti UniversityTrisakti University

Islamic Economic and Finance (IEF)

Methodology of EconomicsMethodology of Economics

The word methodology comes from method The word methodology comes from method that means a manner or a procedure, a regular that means a manner or a procedure, a regular and systematic way of accomplishing and systematic way of accomplishing something. something.

Methodology of economics means the process Methodology of economics means the process of building models, developing theories, testing of building models, developing theories, testing hypothesis, establishing and using criteria to hypothesis, establishing and using criteria to evaluate certain process in order to know that evaluate certain process in order to know that our model is correct or not.our model is correct or not.

Methodology of Islamic Methodology of Islamic EconomicsEconomics

Methodology of studying the Islamic Methodology of studying the Islamic Economics system through the primary Economics system through the primary sources which are the Qur’an and the sources which are the Qur’an and the SunnahSunnah/Prophetic tradition /Prophetic tradition

How To Develop Islamic How To Develop Islamic Economics?Economics?

Most economic applications have to be derived Most economic applications have to be derived from the main sources of Knowledge in Islam i.e. from the main sources of Knowledge in Islam i.e. Quran and Quran and SunnahSunnah..

Have better understanding of the Islamic Have better understanding of the Islamic Worldview especially on the Islamic vision of Worldview especially on the Islamic vision of Economics.Economics.

Islamic / Islamic / Shariah Shariah boundaries of economics must boundaries of economics must be determined.be determined.

Shariah Shariah must be interpreted and appliesmust be interpreted and applies..

The word economics have many definitions, some of these definitions are:

• Economics is the social science that studies the allocation of scarce resources to satisfy unlimited wants. This involves analyzing the production, distribution, trade and consumption of goods and services.

• Economics is the study of choice and decision-

making in a world with limited resources.

What is Economics?What is Economics?

Secular Economics studies human behavior as a relationship between ends and scarce means and which have alternative uses.

Secular Economics deals mainly with problems involving money i.e. it study the human behavior which is concerned with money getting and money spending without questioning how they get this money and where they are going to spend it.

Definition of Secular EconomicsDefinition of Secular Economics

The Key Problems The Key Problems for Secular Economic for Secular Economic

1.1. Unlimited Wants Scarcity of Resources Unlimited Wants Scarcity of Resources andand

2.2. How to get the Money?How to get the Money?

Islamic View on these problemsIslamic View on these problems

1.1. Unlimited Wants Scarcity of ResourcesUnlimited Wants Scarcity of Resources

2.2. Money getting?Money getting?

ي� و�اس� ر� ف�يه�ا �ا ن ق�ي �ل و�أ �اه�ا م�د�د ن ر ض�� ي� و�األ و�اس� ر� ف�يه�ا �ا ن ق�ي �ل و�أ �اه�ا م�د�د ن ر ض�� و�األ

ون� م�و ز� ي ء� ش� �ل� ك م�ن ف�يه�ا �ا ن �ت ب �ن ون� و�أ م�و ز� ي ء� ش� �ل� ك م�ن ف�يه�ا �ا ن �ت ب �ن و�أ

And the earth We have spread out (like a And the earth We have spread out (like a carpet); set thereon mountains firm and carpet); set thereon mountains firm and

immovable; and produced therein all kinds immovable; and produced therein all kinds of things in due balanceof things in due balance

QuranAl-Hijr (15:19)

و�م�ا �ه� �ن ائ خ�ز� �ا د�ن ن ع� * �ال إ ء� ي ش� م�ن �ن و�م�ا و�إ �ه� �ن ائ خ�ز� �ا د�ن ن ع� * �ال إ ء� ي ش� م�ن �ن و�إ � �وم م�ع ل �ق�د�ر� ب * �ال إ �ه� ل �ز� �ن � ن �وم م�ع ل �ق�د�ر� ب * �ال إ �ه� ل �ز� �ن ن

And there is not a thing but its (sources And there is not a thing but its (sources and) treasures (inexhaustible) are with Us; and) treasures (inexhaustible) are with Us; but We only send down thereof in due and but We only send down thereof in due and

ascertainable measures. ascertainable measures.

QuranAl-Hijr (15:21)

ل� �ن�ز� أ و� ض� ر�� و�األ� او�ات� م� الس� ل�ق� خ� ال�ذ�ي ل� الل�ه� �ن�ز� أ و� ض� ر�� و�األ� او�ات� م� الس� ل�ق� خ� ال�ذ�ي الل�ه�

ات� ر� الث�م� م�ن� ب�ه� ج� ر� أ�خ� ف� اء" م� اء� م� الس� ات� م�ن� ر� الث�م� م�ن� ب�ه� ج� ر� أ�خ� ف� اء" م� اء� م� الس� م�ن�ف�ي ر�ي� ل�ت�ج� ل�ك� ال�ف� ل�ك�م� ر� خ� و�س� ل�ك�م� ا ق" ف�ي ر�ز� ر�ي� ل�ت�ج� ل�ك� ال�ف� ل�ك�م� ر� خ� و�س� ل�ك�م� ا ق" ر�ز�

ار� �ن�ه� األ� ل�ك�م� ر� خ� و�س� ر�ه� م�ب�أ� ر� ار� ال�ب�ح� �ن�ه� األ� ل�ك�م� ر� خ� و�س� ر�ه� م�ب�أ� ر� ال�ب�ح�

It is Allah Who hath created the heavens and the It is Allah Who hath created the heavens and the earth and sendeth down rain from the skies, and earth and sendeth down rain from the skies, and

with it bringeth out fruits wherewith to feed you; it is with it bringeth out fruits wherewith to feed you; it is He Who hath made the ships subject to you, that He Who hath made the ships subject to you, that

they may sail through the sea by His command; and they may sail through the sea by His command; and the rivers (also) hath He made subject to you.the rivers (also) hath He made subject to you.

QuranIbrahim(14:32)

ن� �ي �ب د�ائ ق�م�ر� و�ال م س� الش* �م� �ك ل خ*ر� ن� و�س� �ي �ب د�ائ ق�م�ر� و�ال م س� الش* �م� �ك ل خ*ر� و�س�*ه�ار� و�الن ل� *ي الل �م� �ك ل خ*ر� *ه�ار� و�س� و�الن ل� *ي الل �م� �ك ل خ*ر� و�س�

And He hath made subject to you the sun And He hath made subject to you the sun and the moon, both diligently pursuing their and the moon, both diligently pursuing their courses; and the night and the day hath He courses; and the night and the day hath He (also) made subject to you.(also) made subject to you.

QuranIbrahim(14:33)

�ن و�إ �م�وه� ت ل� أ س� م�ا �ل� ك م�ن �م �اك �ت �ن و�آ و�إ �م�وه� ت ل� أ س� م�ا �ل� ك م�ن �م �اك �ت و�آ

�ن* إ �ح ص�وه�ا ت ال� *ه� الل �ع م�ة� ن �ع�د?وا �ن* ت إ �ح ص�وه�ا ت ال� *ه� الل �ع م�ة� ن �ع�د?وا ت�ف*ار@ ك �وم@ �ظ�ل ل ان� س� �ن �ف*ار@ اإل ك �وم@ �ظ�ل ل ان� س� �ن اإل

And He giveth you of all that ye ask for. But if ye And He giveth you of all that ye ask for. But if ye count the favors of Allah, never will ye be able to count the favors of Allah, never will ye be able to count them. Verily, man is given up to injustice and count them. Verily, man is given up to injustice and ingratitude.ingratitude.

QuranIbrahim(14:34)

Resources in IslamResources in Islam

Abundant of resources Abundant of resources

Acquiring MoneyAcquiring Money

Through Through halalhalal / permissible means / permissible means

When a man dies he will be asked on four: When a man dies he will be asked on four: 1- His youth how he spend it.1- His youth how he spend it.

2- His age how he spend it2- His age how he spend it3. His wealth how he acquires it3. His wealth how he acquires it4. His wealth how he spend it4. His wealth how he spend it

عليه الله صلى الله رسول قال قال الدرداء ابي عليه عن الله صلى الله رسول قال قال الدرداء ابي عنيوم عبد قدما يزول لن يوم وسلم عبد قدما يزول لن يسأل وسلم حتى يسأل القيامة حتى القيامة

فيما عمره وعن اباله فيما شبابه عن أربع فيما عن عمره وعن اباله فيما شبابه عن أربع عنأنفقه وفيما اكتسبه اين من ماله وعن أنفقه افناه وفيما اكتسبه اين من ماله وعن افناه

Hadith

Islamic Economics is a social science which studies the economic problems of people imbued with the values of Islam.

Definition of Islamic EconomicsDefinition of Islamic Economics

It studies man not only as an isolated individual but of a social individual having faith, ethics i.e. believing in the six articles (Rukun Iman), his deeds is accountable to Allah as it is guided by Shariah, and he is also required to propagate good doing and prohibit bad doing (al-Amr bil Maruf wa al-Nahy anil Munkar) in the society (i.e. watch his business ethics)

Definition of Islamic EconomicsDefinition of Islamic Economics

Difference between Islamic and Secular Difference between Islamic and Secular EconomicsEconomics

Islamic EconomicsIslamic Economics Secular Economics Secular Economics

Man - (Social but Religious)Man - (Social but Religious) Man – (Social)Man – (Social)

Unlimited WantsUnlimited Wants Scarcity of Means Scarcity of Means Unlimited Wants / Scarcity of ResourcesUnlimited Wants / Scarcity of Resources

Economic ProblemsEconomic Problems Economic ProblemsEconomic Problems

Choice Choice

(Guided by Economic (Guided by Economic

Values of IslamValues of Islam))

ChoiceChoice

(Guided by (Guided by whimswhims of the individual) of the individual)

ActivitiesActivities Know the main sources of knowledge in Islam. Know the main sources of knowledge in Islam.

Differentiate between Revealed Knowledge and Differentiate between Revealed Knowledge and Acquired Knowledge?Acquired Knowledge?

Understand what is meant by Methodology of Understand what is meant by Methodology of Islamic Economics.Islamic Economics.

Understand the meaning of doctrinesUnderstand the meaning of doctrines

Link the main sources of knowledge in Islam to Link the main sources of knowledge in Islam to Islamic EconomicsIslamic Economics

Cont. Activities Cont. Activities

Appreciate the role of Islamic knowledge in Appreciate the role of Islamic knowledge in solving current economic problemssolving current economic problems

Familiarize with doctrines relating to Islamic Familiarize with doctrines relating to Islamic banking and finance, as quoted in the Quranbanking and finance, as quoted in the Quran

Understand doctrines from the Understand doctrines from the HadithHadith relevant to relevant to Islamic banking and financeIslamic banking and finance

Apply the relevant Apply the relevant fatwasfatwas to the current to the current economic and social scenarios. economic and social scenarios.

Economic SystemEconomic System An economic system is a mechanism which deals with the An economic system is a mechanism which deals with the

production, distribution and consumption of goods and services in a production, distribution and consumption of goods and services in a particular society. particular society.

It is composed of people, institutions and their relationships.It is composed of people, institutions and their relationships. It addresses the problems of economics like the allocation and It addresses the problems of economics like the allocation and

scarcity of the resources. scarcity of the resources. There are several basic and unfinished questions that must be There are several basic and unfinished questions that must be

answered in order to resolve the problems of economics answered in order to resolve the problems of economics satisfactorily. satisfactorily.

The scarcity problem, for example, requires answers to basic The scarcity problem, for example, requires answers to basic questions, such as: questions, such as: whatwhat to produce, to produce, howhow to produce it, and to produce it, and whowho gets what is produced.gets what is produced.

An economic system is a way of answering these basic questions.An economic system is a way of answering these basic questions. Different economic systems answer them differently.Different economic systems answer them differently.

Types of Economic SystemTypes of Economic System

Command System Command System Market SystemMarket System Mixed SystemMixed System Traditional SystemTraditional System Islamic Economic SystemIslamic Economic System

Types of Economic SystemTypes of Economic System

Command SystemCommand System

Known as Marxism or Communism. Known as Marxism or Communism. Ownership - Public/government of all property Ownership - Public/government of all property

and resources.and resources. Decision making – central economic planning Decision making – central economic planning

by board.by board. Business firms are owned by government.Business firms are owned by government. E.g. Soviet Union, ChinaE.g. Soviet Union, China

Market SystemMarket System Known as Capitalism or sometimes as private Known as Capitalism or sometimes as private

enterprise system.enterprise system.

Motivation – Each participants act in their own self-Motivation – Each participants act in their own self-interest. Sellers are to attain profit maximization and interest. Sellers are to attain profit maximization and profits whereas buyers are to seek satisfaction.profits whereas buyers are to seek satisfaction.

Ownership – Private enterprises own all property and Ownership – Private enterprises own all property and resources.resources.

Decision making – every decision is made by buyers Decision making – every decision is made by buyers and sellers through market.and sellers through market.

Role of government is to protect private property and Role of government is to protect private property and enhance the environment for market system.enhance the environment for market system.

E.g. US, European nationsE.g. US, European nations

Mixed SystemMixed System

In between the command and market In between the command and market system.system.

Government actively participate but Government actively participate but promote private ownership and decision promote private ownership and decision making.making.

E.g. Sweden, JapanE.g. Sweden, Japan

Traditional SystemTraditional System

Production methods, exchange of goods, Production methods, exchange of goods, distributions of income are sanctioned by distributions of income are sanctioned by custom, heredity and caste.custom, heredity and caste.

Others factors that may affect are religion, Others factors that may affect are religion, cultural values, historical background, customs cultural values, historical background, customs etc.etc.

E.g. Developing countriesE.g. Developing countries

Four Characteristics of Economic Four Characteristics of Economic SystemSystem

MotivationMotivation OwnershipOwnership Decision makingDecision making ImplementationImplementation

MotivationMotivation

In Islam, man is motivated to work (ie : to pursue In Islam, man is motivated to work (ie : to pursue economic activities) because he is entrusted by economic activities) because he is entrusted by God as the God as the khalifahkhalifah/vicegerent on this earth and /vicegerent on this earth and to obey Allah’s will.to obey Allah’s will.

The primary motivating factor is man’s desire to The primary motivating factor is man’s desire to return to his-self by holding to the convenient return to his-self by holding to the convenient //mithaqmithaq in order to attain the ultimate in order to attain the ultimate Happiness/Happiness/Sa’addaSa’adda HaqiqiyaHaqiqiya..

Unlike the capitalism, the primary motivating Unlike the capitalism, the primary motivating factor is more materialistic in nature.factor is more materialistic in nature.

OwnershipOwnership

Private property does not include ownership of Private property does not include ownership of wealth belonging to the public in 3 things as in wealth belonging to the public in 3 things as in HadithHadith:- :- ““Men are partners in 3 things namely water, fire Men are partners in 3 things namely water, fire and pastures/forests”.and pastures/forests”.

Private ownership is allowed in Islam Private ownership is allowed in Islam ““To man is allocated what they earn, and to To man is allocated what they earn, and to woman what they earn.” woman what they earn.” ( 4:32)( 4:32)م�م*ا �ص�يب@ ن اء� �س� �لن و�ل �وا ب �س� ت اك م�م*ا �ص�يب@ ن ج�ال� �لر� م�م*ا ل �ص�يب@ ن اء� �س� �لن و�ل �وا ب �س� ت اك م�م*ا �ص�يب@ ن ج�ال� �لر� ل

ن� ب �س� ت ن�اك ب �س� ت اك Allowing private ownership is important in Islam as Allowing private ownership is important in Islam as

this allow Islamic contract like trading (this allow Islamic contract like trading (al ‘bayal ‘bay) ) activities.activities.

Ownership (cont.)Ownership (cont.)

Three main attributes of property (Three main attributes of property (malmal) in Islam) in Islam :- :-

It must have some value people makes choices of what It must have some value people makes choices of what goods to buy and how to produce them, thus goods must goods to buy and how to produce them, thus goods must have some value.have some value.

It must be a thing that yield benefits/It must be a thing that yield benefits/manfaahmanfaah..

It must be possessed. Eg: fishes in sea and birds at sky (not It must be possessed. Eg: fishes in sea and birds at sky (not mal, not property).mal, not property).

Ownership/Ownership/MilkiyahMilkiyah Rights Rights :- :-

Physical ownership allow to right to dispose eg : selling.Physical ownership allow to right to dispose eg : selling.

Right to utilize without legal ownership eg : rental, Right to utilize without legal ownership eg : rental, waqfwaqf

Right to used loaned property Right to used loaned property

Decision MakingDecision Making

Islam gives priority to the role of individual decision Islam gives priority to the role of individual decision making, which is also tied to the concept of making, which is also tied to the concept of accountability.accountability.

““On that Day, will men proceed in companies sorted On that Day, will men proceed in companies sorted out to be shown the Deeds that they had done, then out to be shown the Deeds that they had done, then shall anyone who has done as atom’s weight of good, shall anyone who has done as atom’s weight of good, see it and anyone who has done an atom’s weight of see it and anyone who has done an atom’s weight of evil, shall see it”. evil, shall see it”. (99 : 6-8)(99 : 6-8)

ه� �ر� ي ا Uر ي خ� ة� ذ�ر* ق�ال� م�ث �ع م�ل ي ه� ف�م�ن �ر� ي ا Uر ي خ� ة� ذ�ر* ق�ال� م�ث �ع م�ل ي ف�م�نه� �ر� ي ا Yر ش� ة� ذ�ر* ق�ال� م�ث �ع م�ل ي ه� و�م�ن �ر� ي ا Yر ش� ة� ذ�ر* ق�ال� م�ث �ع م�ل ي و�م�ن

Decision Making (Cont.)Decision Making (Cont.)

The above The above ayahayah show that man is responsible show that man is responsible for what he has done. Thus, individual are free for what he has done. Thus, individual are free to choose what they desire since Allah has to choose what they desire since Allah has given them the intellect (given them the intellect ( ‘aql‘aql) to discern the ) to discern the good (good (ma’arufma’aruf) from the evil () from the evil (mungkarmungkar).).

However, these individuals are to make a However, these individuals are to make a ‘‘SHURASHURA’ (a collective of individuals making ’ (a collective of individuals making decisions) on important issues that affected decisions) on important issues that affected larger number of people.larger number of people.

The government’s role is to establish the good The government’s role is to establish the good society with peace, justice and security.society with peace, justice and security.

ImplementationImplementation

Men are the highest creation of Allah with Men are the highest creation of Allah with intellect (intellect (‘aql‘aql) and are able to differentiate ) and are able to differentiate between right and wrong. Based on between right and wrong. Based on convenient /convenient /mithaqmithaq with Allah that the with Allah that the purpose of life is ‘TRULY SUBMIT TO purpose of life is ‘TRULY SUBMIT TO ALLAH’.ALLAH’.

At the same time, man is composed of At the same time, man is composed of forgetfulness. Thus, despite the above, man forgetfulness. Thus, despite the above, man has forgotten his duty and purpose. Thus, has forgotten his duty and purpose. Thus, inclined towards injustice and ignorance.inclined towards injustice and ignorance.

Implementation (Cont.)Implementation (Cont.)

Man economic existence is to achieve Ultimate Man economic existence is to achieve Ultimate Happiness (Happiness (Sa’adda HaqiqiyaSa’adda Haqiqiya).).

How can man achieve How can man achieve Sa’adda HaqiqiyaSa’adda Haqiqiya??

Excellence of Soul (knowledge and faith)Excellence of Soul (knowledge and faith) Excellence ingrained in human nature (guidance, direction, Excellence ingrained in human nature (guidance, direction,

setting aright, confirmation)setting aright, confirmation) Excellence born of environment (wealth, position, family, Excellence born of environment (wealth, position, family,

pedigree)pedigree)

Thus in Islam, the pursuit of self-interest is constructive Thus in Islam, the pursuit of self-interest is constructive

to individual and society. Man has knowledge about to individual and society. Man has knowledge about creator and rules ordained by Him.creator and rules ordained by Him.

Implementation (Cont.)Implementation (Cont.)

In short, the implementation in Islamic In short, the implementation in Islamic Economic System is through market-Economic System is through market-driven with the intervention from driven with the intervention from government government ShariahShariah-linked. -linked.

Summary – Islamic Economic Summary – Islamic Economic SystemSystem

MotivationMotivation Fulfilling the Fulfilling the Al-mithaqAl-mithaq

Achieve the Ultimate HappinessAchieve the Ultimate Happiness

OwnershipOwnership

Individual through work & effortIndividual through work & effort

InheritanceInheritance

MultiplicationMultiplication

Decision Decision MakingMaking

Collective of individual through Collective of individual through ShuraShura

ImplementationImplementation Market driven with Market driven with ShariahShariah--linked government intervention.linked government intervention.

ActivitiesActivities State the difference between Capitalism, State the difference between Capitalism,

Socialism and Islam in explaining Ownership, Socialism and Islam in explaining Ownership, Role of Government, Motivation, Decision-Role of Government, Motivation, Decision-Making and Activities.Making and Activities.

OROR

Highlight the Islamic Business Ethics with Highlight the Islamic Business Ethics with regards to Private Ownership, Motivation, regards to Private Ownership, Motivation, Decision-Making and Activities.Decision-Making and Activities.

Thank You