1. Brendan Riske
Question #3 Islamic Economics
Warning to reader. The following paper has absolutely no sources. Facts, dates, and definitions
of Arab words have been taken by Wikipedia, or looked up in Albert Hourani’s History of the
Arab Peoples. The rest is mere conjecture, written through inspiration from Allah. Help also
comes from class lectures and readings form Bryan Snyder’s Spring 2013 class “Modern
Economic Systems”. As a result, read at your own risk, you may be consuming information
which is misperceived or incorrect.
Section 1: How did being a merchant affect the prophet’s view of justice, fairness, and an
economic order of things as concretized in the Sharia’s?
Mohammed exposure to business through his time as a merchant influenced his life, his
writings, and his teachings. Through some Quranic verses, and particularly in the Hadiths,
Mohammed explains what he believes is Allah’s will in that realm. This is the justification
behind the economic system he presents. Of course, he does not specifically describe and
economic system, however he does create the rules and guidelines upon which a system can be
constructed. Being of divine nature, the values upon which the system is organized are the values
of Allah, justice, fairness, respect, trust and good will. This kind of economic system is designed
to produce and allocate resources in accordance to those principles.
It is important to note that Mohammed was a product of the Arab merchant class of
Mecca. Here he interacted with traders from various cultures, and saw how they exploited those
they traded with. He was also exposed to Jewish money lenders, who financed projects with high
interest rate loans. In contrast, he saw how the Bedouin traders acted, trading only to get what
they needed and not expecting to earn a profit. Other traders worked not to earn money but for
the sake of exchange. These influences may be noticed in the Quran, in how Mohammed
describes a just economic system. He values trading as a function which is necessary, and good
for allocating resources. The benefits of trading are maximized for the community when traders
act fairly. So the just economic system has a functioning trade class, but they do not seek to
maximize their economic gain. Islamic traders exist to fulfill a divine role, not pursue what will
make them the greatest profit.
Section 2: How do the following impose an Islamic order on economic life?
The Tawhid is the Islamic belief in one God. The Khalifah refers to the authorities God
places on Earth, who rule Islamic civilization in accordance with his will. Adalah is a term for
divine justice. These concepts are key in understanding how an Islamic economy works. The
pure Islamic economic model is similar to the new traditional economy. To function it requires a
record of and justification for traditional ways of producing and allocating resources. It also
needs a strong state to ensure that this system is put in place. The belief in one God, whose
authority on earth is directed centrally, and whose will is justice, is a strong ideology and
promotes acceptance of traditional rules and authority. This makes the continued use of

2. traditional methods of allocation effective, such as provisioning for the whole community or the
ways in which households provision family members. Living under one God gives unity to the
community, Khalifah provides respect and privilege to governors, and Adalah sanctifies the
entire system as just.
Islamic economic systems have shown these principles overtime. Islamic regimes, from
the Abbasid Caliphate to the Ottoman Sultan to Moghul India, and all the way into modern
systems present in Iran, Saudi Arabia, and other places, focus on a strong centralized authority.
Many scholars have noted that the Muslim world, the nations of the near east and North Africa,
was the least free region in the world. The recent Arab spring has injected some hope into the
beginning or organic Muslim democracy; however it seems likely that it is a replacement of
military dictators with religious ones. This is a common occur in Islamic systems, piety is
equated with living according to divine will, and thus the pious are considered judges of what is
just and unjust. Religious figures in the Islamic world are thus excellent at building centralized
political regimes because they are legitimized by religious practice. This tendency to create
centralized regimes has consequence sin the economic realm. These centralized states required
agricultural surpluses to maintain, which required mass collectivized agriculture. They also were
able to direct the capital raised in this manner into effective ways. Economic rules are
centralized, and followed because they are national and divine law. Also, these states create large
bureaucracies to collect and distribute the surplus. All of these can be seen overtime in different
major Islamic economic and political systems.
Section 3: What is the economic and institution impact of the following:
There are many aspects of Islam which cross over into the economic realm. One of the
five pillars upon which Islam is built is Zakat, the duty of charity. Muslims are required to
donate a portion of their income, usually about 10%. This was traditionally done give
contributing to the Mosque, but can including giving to any charitable organization. This charity
is given to help those who need assistance.
Islam also describes the just way of conducting business. This creates a system who
actors are motivated by custom rather than economic self-interest. Work is expected to be done
diligently and hard work is expected. In exchange, society returns to those who work the
resources they need. Individuals and their families must practice just consumption, consuming
only what they need, which by custom is as little as possible so that others may have enough.
When conducting business fair dealing is expect where one part does not exploit ignorance or
use coercion to get a higher than average profit. Deals are done for the sake of conducting
transactions, not for the profit they will produce.
The loaning of money is another economic topic covered under Islam. Muslims follow
several practices in this field in order to live a just life. Gharar is the prohibition of investing
where risk is too great, and also excludes speculation. Instead Islam encourages long term

3. investments with a near guarantee of repayment and some profit overtime. Qirad is mentioned by
the Prophet, and is a financing tool. It describes a relationship in which an agent is invested with
capital from investors, and then trades it in the hopes of profit, which is then split between the
agent and the investors at a predetermined rate. The investor assumes all the risk, while the agent
assumes the professional responsibility. It allows for capital to be efficiency moved into the
consumer goods market when surpluses exist. It also can fund areas which need smaller, shorter
term investments. Mudarabah is a more general form of Qirad. It is an investing partnership,
where one party contributes the capital and another uses it for a business. This is a different
investing system than is typical under capitalist market economies. The investor has a large stake
in the success of the enterprise, because the capital comes all from them. In order to earn a
return, the enterprise must earn profits to pay back the investor. This often requires long periods
of time, so Mudarabah partnerships tend to be long term investments. They do provide a steady
stream of income overtime, which helps compensate for the risk. The managing partner thus can
run the business in order to function best, not earn the highest immediate profit, but the investor
wants a steady long return. These are a view of the major ways in which Islam creates financial
relationships, particular in lending and investing.
Section 4: What is the effect on capital formation of Riba? Is Islamic finance able to provide for
the capital needs of a growing capitalist economy?
Riba refers to the Islamic idea of interest. Riba is an interest rate which profits the lender
in excess of a just return. More crudely it can be defined as charging a loan with a high interest
rate. This concept does not allow for the formation of capital. Lender does not have any profits to
reinvest, because they are only making what is necessary to stay open and perform their function.
Thus there is no buildup of capital in the hands of lenders. This certainly influences how Islamic
economies have developed, as banks are not huge independent entities but a public service for
economic improvement. Islamic banks do not function for profit; they function to lend money in
ways which Allah has proclaimed are just. Riba is the word for the prohibited lending of interest
at a high rate, but it is a small part of the different manner in which Islam views finance.
Islamic economics is far more concerned with stability and harmony than accumulation
and competition. This is reflected in the Islamic methods of finance. The rules which are
followed are designed to satisfy financiers and those who receive benefits. This is unlike a
capitalist financial system, which puts the financiers and recipients in competition. In a
competitive relationship relative gains matter, and there will be a winner and a loser in the final
outcome. In the capitalist system financiers have the upper hand against those who need capital,
and so often the financiers win the battle and the recipient loses. In contrast, Islamic financiers
do not need to maximize profits, and thus can charge a lower rate to help the recipients of their
capital. This system focuses on cooperation, and thus seeks to maximize absolute gains. Its
timeframe is long term, and the desire is to grow the economy by lending to those who will us

4. capital for economic improvement, which then creates a larger economy, and more opportunities
to lend. It is an ever expanding pie. The growth of this pie is much slower, and more gradual.
The capitalist economic system tends to produce staggering growth, happening through cycles of
explosive growth, followed by downturn.
The Islamic financial system is geared for a different purpose than a capitalist financial
system. It is designed to be a community improve fund. It functions well in this role. It may not
be able to fully serve the needs of a modern capitalist economy. A capitalist economy requires a
constant and large source of capital to fund its high growth rate. The capital is at significant risk,
because investments often fail and economies can enter down cycles. Thus capitalist fiancé looks
to maximize returns in short amounts of time, and this is done largely by throwing capital into a
multitude of potentially explosive growth areas and getting high returns on the few that do wildly
succeed. Thus, growth is huge, but risk is also large. The Islamic system doesn’t have the ability
to fund explosive growth, but it does not have to. Islamic economic improvement happens by
gradual ascent overtime. Returns are lower, and risk is lower because the investments are long
term. While unable to succeed in a boom and bust cycle like capitalist financial firms do, Islamic
financier need to make stable smart investments that will pay over a long term. In general the
capitalist economy cannot function efficiently with Islamic style financing, because it lacks the
desire to fund the explosive growth areas which are the dynamic driver behind growth in the
system.
Section 5: Does Gharar improve long term economic stability and growth?
Gharar is an Islamic concept in finance, which largely prohibits risky investments.
Investments with less risk are given priority, and those with too much risk are not considered.
Gharar is a significant impediment to long term economic stability and growth, in relative terms
compared to a capitalist economy. An Islamic system will slowly grow by picking stable, less
risky investments. Capitalist systems in the long run outcompete, and thus are more stable, than a
system which limits investment based on Gharar. This is because of those risky investments,
many will be unsuccessful, but some will be impactful and a select few will be revolutionary.
This is dynamic growth, which allows capitalist economies to grow in leaps and bounds, rather
than in a stable, linear fashion. Taking a capitalist system and imposing Gharar will not make it
grow more or be more stable than it would be if it maintains its original character.