Islamic Economic System and Poverty Reduction

Dr. Saif Siddiqui

Assistant Professor of Centre for Management Studies

Jamia Millia Islamia  (A Central University)

Abstract

Poverty is an economic condition of lacking basic neccessites needed to live a resonable life. This include need for money, food, water, education, and shelter. Poverty reduction is a process, aiming to reduce the level of poverty in a group of people or countries. World Bank suggests that poverty can be reduced by various means and methods, which includes economic growth (increase in income and living standard ) and direct aid / private charity.

World so far has followed two economic systems, communiism and capitalism.The communism was based on an emotional reaction against evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth. But capitalism prevails, which still suffer from inequities in the distribution of wealth. The world needs a Third Economic System. Elements of Islamic Economic System involve: financing /trading, Zakat and Interest free loans. Even poor persons, with some credibility, can survive in this economic system. Islamic economics prefers co-operation to competition. This aspect of co-operation is a key to poverty reduction. It is possible to reduce poverty by following Islamic economic system because it takes care of society and social justice.

Islamic Economic System and Poverty Reduction

Poverty is an economic condition of lacking basic neccessites needed to live a resonable life. Basic neccessities include money, food, water, education, and shelter. Poverty reduction (or poverty alleviation) may also be describe as a process which aims to reduce the level of poverty in a group of people or countries. The World Bank defines extreme poverty as living on less than US$ 1 per day, and moderate poverty as less than $2 a day. It has been estimated that in 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day. The proportion of the developing world's population living in extreme economic poverty has fallen from 28 percent in 1990 to 21 percent in 2001.

Some of the popular methods for poverty reduction as suggested by World Bank are :

•      economic growth (increase in income and living standard )

•      direct aid / private charity,and

Poverty is prevalent in all types of economic systems (capitalism and communism) due to their inherent shortcomings.

Is it possible to reduce poverty by following the islamic economic system ?

Islamic And  Other Economic Systems

Mufti Taqi Usmani once opined at the International Conference of the World Muslim Congress that:

“The twentieth century has witnessed the rise of communism and the conflict between capitalist and communist countries and lastly the fall of communism. The communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and the have-nots and 'poverty in the midst of plenty' is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism.

The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms”

J.R. Presley wrote in his book, directory of Islamic financial institutions, that, western financing (with interest) have allowed individual enterprises, countries and even part of the world to rise to a debt level which are beyond their capacity to repay. H.I. Leibling in his book, U.S. Corporate profitability and capital formation, also says that,’’ in US the main reasons of secular decline in the growth of capital stock has not been the lack of aggregate demand but higher interest’’

The third economic system is a system as taught by the The Holy Qur’an and Sunnah of the Prophet (PBUH), which is capable of solving the economic problems being faced by the world today. Benefits of this system, which combine the benefits of both communism and capitalism, are:

•      Private ownership and market economy,

•      Profit motive

•        Justice in distribution, and

•      Elimination of inequities

These benefits are related to the methods of poverty reduction as stated earlier. Economic growth is possible with private ownership; aid or charity can be a symbol of justice in distribution, which may eliminate inequities also.

Islamic economic system not only allows the market forces of demand and supply but also provides mechanism to keep them operative with their natural momentum without creating monopolies and concentration of wealth.

It is known that production; consumption and distribution are three basic functions of economics. Islam, which teaches justice and equality, clearly puts these functions as follows:

Production function:

•      Demand/ supply of prohibited goods should fall to zero

•      Production of luxury goods be checked

•      Producers should not maximize profits

•      Competition among producers should be healthy  

Consumption function:

•      Prohibited goods cannot be consumed.

•      Consumption can not be extravagant

•      Consumption should lead to an efficient and pure life

•      Every individual should consume enough goods to lead a reasonable life

Distribution function:

•      Prices should be reasonable, neither too high nor too low

•      Interest must not be paid

•      Wealth concentration should be avoided

These basic functions also provide a socialistic approach of Islamic economics, which help in reducing poverty. This system gives an opportunity to persons with lesser income to live a reasonably dignified life. As a matter of morality , Islamic economics prohibits speculative transaction and forward trading to avoid circumstances of instability. S.J. Phansalkar in his book, how not to ruin your small industry, also concluded that.’’ speculative transaction are not in favour of entrepreneurs’’

ELEMENTS OF ISLAMIC ECONOMICS

Elements of Islamic economics involve:

1. Islamic mode of financing /trading
2. Zakat
3. Interest free loans

1.  ISLAMIC MODE OF FINANCING /TRADING

 

Mudarabah (capital trust)

Mudarabah is a special kind of partnership in which one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib. Mudarabah may take two different forms:

 

  Al-mudarabah al-muqayyadah (restricted mudarabah)

The rabb-ul-mal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only.

 

  'Al-mudarabah al-mutlaqah" (unrestricted mudarabah)

The mudarib shall be authorized to invest the money in any business he deems fit.

 

It is necessary for the validity of mudarabah that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled.

 

Musharaka (Islamic partnership)

Musharaka can be defined as a “form of partnership where two or more persons combine their capital or labour together, to share the profits, enjoying similar rights and liabilities” It is a limited period contractual agreement between the partners, to use both human and financial resources and distribute whatever profit and loss they make in accordance with capital and human resources invested.

In such a kind of Islamic partnership, partners need not have equal shares, or equitable responsibility for the management. Losses would be shared in accordance with capital contribution. It is not only the contribution of capital that governs Musharaka in Islam. In practice labour, skills, management, goodwill, credit-worthiness and contacts can also form the partners’ contribution.

Murabahah (mark up sale)

Murabahah is a kind of sale where the seller mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price.

The Murabahah may involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah.

A simple sale in Arabic is called Musawamah - a bargaining sale without disclosing or referring to what the cost price is. However when the cost price is disclosed to the client it is called Murabahah. A simple Murabahah is one where there is cash payment and Murabahah Muajjal is one on deferred payment basis.

Ijara (Islamic leasing)

Ijara is an Islamic form of leasing. Here the bank buys capital equipment or property and leases it out under installment plans to end-users. As in conventional leasing there may be an option to buy the goods at the end of the Ijara built into the contracts .The installments consist of rental for use and part-payment.

The customer selects the asset to be financed and the bank then purchases it from the supplier and leases it to the customer for an agreed period. Refinancing of assets owned by the client in a sale and leaseback arrangement is allowed under certain circumstances.

2. INTEREST FREE LOANS (Al-Qard al-Hasan)

Islam prefers a loan as a form of social service by the rich to help the poor. Islam does not recognize any loan with interest for the benefit of the debtor. M. Umer Chapra, an authority on Islamic economics, has given the definition of qard al hasan as: "Qard al-hasan is a loan which is returned at the end of the agreed period without any interest or share in the profit or loss of the business." The receiver of qard al-hasan is only required to repay the original amount of the loan.

Economic objectives of qard al-hasan are:

•      The mobilization of wealth among all people in the society.

•      To strengthen the national economy.

•      To facilitate the poor to create new jobs market and business ventures by using their merits, skills and expertise.

•      It can remove social and economical discrimination from the society, and

Social objectives of qard al- hasan are:

•        To help needy peoples.

•      To establish better relationship among poor and the rich.

•      Non-Muslims, who might be attracted by knowing the beauty of Islam.

•      There is a great reward in the Hereafter for giving qard al- hasan

Some verses in favour of interest free loan are mentioned as under:

He who will give Allah qard al hasan, which Allah will double into his credit and multiply many times. [Surah-Baqarah (2): 245]

Establish regular prayer and give regular charity and give Allah qard al hasan. [Surah-Muzzammil (73): 20]

[God says] "If you lend money to any of my people with you who is poor, you shall not be to him as a creditor, and you shall not exact interest from him. [Exodus (22:25)]

You shall not lend upon interest to your brother, interest on money, interest on victuals, interest on  anything  that  is  lent  for  interest.  To  a  foreigner  you  may  lend  upon  interest,  but  to  your brother you shall not lend upon interest; that the Lord your God may bless you in all that you undertake in the land which you are entering to take possession it. [Deuteronomy (23:19-20)]

In Vedic literature too condemnatory remarks on interest can be traced. Rig Veda says, ‘’ save us from usurers’’. Atharva Veda prays.’’ Let us die with debt so that our children do not carry our burden’’.

3. ZAKAT

The word Zakat means 'purification. It is the amount of money that every mentally and financially able, free adult, Muslim, male and female, has to pay to support specific categories of needy people. Islam believes that all things belong to God, and that wealth that is held by human beings is a mere trust. It can be purified by distributing a prescribed proportion for those in need.

"The alms are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled, and to free the captives and the debtors, and for the cause of Allah, and (for) the wayfarers; a duty imposed by Allah. Allah is knower, Wise." [Surah - Tauba (9): 60]

The prophet (pbuh) said: "Any owner of gold and silver who does not deliver from them their right, on the Day of Quiyamah (Day of Judgment), (the gold and silver) will be shaped as foils of fire. Then it will be heated in the fire of Hell; (and) then with it he will be ironed on his side, his forehead, and his back" (Muslim)

Zakat is obligatory after a time span of one lunar year (approximately 355 days) passes with the money in the control of its owner. Then the owner needs to pay 2.5% (or 1/40) of the money as Zakat. The owner should deduct any amount of money he or she borrowed from others

Poverty reduction through Islamic economics

Islam hates state of poverty due to accompanying one hundred and one evils with such a person. Dr. M. Nijatullah Siddiqui has written clearly in his book, economic enterprise in Islam,that “poverty is not a desirable state in the eyes of Islam but love of worldly wealth is also a source of evil.” It shows that a person should rise from the level of poverty but must keep only that much wealth that is sufficient to carry him and his dependents. The surplus or a predetermined share should be distributed among poor.

The Prophet (PBUH) once said that “when Allah gives you in plenty be liberal in your livings”. These words can be analyzed with a simple principle of economics that rise in expenditure can boost the economy. In simple words, demand for a new dress by a richer person provides work for weaver, tailor and cobbler. Demand for good food by him may provide employment to a cook.

The Prophet (PBUH) also said that” your faith is not complete till you like the same for your brother as you like for yourselves”. He also mentioned that “I testify that all Muslims are brethren” It can be concluded that Islam prefers co-operation over competition among Muslims. This aspect of co-operation is a key to poverty reduction. Islamic trading, qard- al hasan and zakat, all are based on the co-operation theory. Even poor persons, with some credibility, can opt Islamic form of financing/ trading.

Conclusion

Two methods suggested by World Bank to reduce poverty, are integral part of Islamic economics. But it is largely in theoretical form for which no consistent example is available.