This chapter discusses the Islamic economic system, including its philosophical background, principles, and rules. It describes the three sectors in the Islamic economy and compares Islamic economics with capitalism and socialism. The chapter also explains the characteristics of a welfare state system.

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2. Assessment type:
 1) Final Exam- 50% MCQ
 2) Quiz-10%(tutorial)
 3) BMC(Business Model Canvas)-20%
 4) Industrial Visit-20%
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CHAPTER 1
ISLAMIC ECONOMIC
SYSTEM

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LEARNING OBJECTIVES
1. Understand the philosophy,
principles and rules of Islamic
Economic System.
2. Explain the three sectors in
Islamic economic.
3. Differentiate between Islamic
economic system and capitalism
and socialism.
4. Understand about a welfare
state.

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INTRODUCTION
THE ECONOMIC SYSTEM
 An economic system is usually
defined as a set of principles that
constitutes the framework of the
organization of the economic
activity.

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INTRODUCTION
 There are three parts of an
economic system:
 Economic philosophy
 Set of principles
 The analytical functioning that
determines the economic
variables.
In Islamic economic system, it has all
these parts but with different
theories and explanations.

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THE ISLAMIC ECONOMIC
SYSTEM
 Islam established from the very
beginning, true equality and
guaranteed the limit of wealth to every
citizen.
 It determined an economic balance
among members of society and
confirmed principle of dual ownership.

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THE ISLAMIC ECONOMIC
SYSTEM
Philosophical Background
 Ownership (the concept of Tawhid)
 Allah is One and every other thing is
created and subservient to Him
 Belief in the Day of Judgment

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THE ISLAMIC ECONOMIC
SYSTEM
Principles of Islamic Economic
 Individual Liberty
 Right to Property (Ownership)
 Balance or non-partisanship
 Justice

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THE ISLAMIC ECONOMIC
SYSTEM
Rules of Functioning
The role of the rules of the functioning is to operationalize the
principles of Islamic economics.
 Zakah
 Prohibition of Riba
 Qirad
 Social Insurance
 Debts and loans insurance
 Inheritance System
 Role of the government of the economy

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THREE SECTORS IN ISLAMIC
ECONOMIC SYSTEM
 Siasi sector (public sector)
 Tijari sector (private sector)
 Ijtima’i sector (social welfare sector)
Please refer Table 1.1

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DIFFERENCES BETWEEN ISLAMIC
ECONOMIC SYSTEM WITH CAPITALISM
AND SOCIALISM
By understanding the differences, scholars will
better understand the advantages and
benefits lies upon the Islamic economic
system in achieving its motive to
guarantee harmony for an individual and
society.
 Objective of System
 Fundamental Principles
 Ownership
 Distributions

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DIFFERENCES BETWEEN ISLAMIC
ECONOMIC SYSTEM WITH CAPITALISM
AND SOCIALISM
Two elements in particular distinguish an
Islamic economy.
 Firstly, although considerable
freedom of economic activity is
allowed, the Islamic economy has a
built-in mechanism to encourage
the fruits of economic activity to be
shared with the less privileged
members of the society as well.

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DIFFERENCES BETWEEN ISLAMIC
ECONOMIC SYSTEM WITH CAPITALISM
AND SOCIALISM
 Secondly, despite allowing, indeed
promoting, competitive markets,
there is an equal strong motivation
to ensure that dealings are just fair,
that no one systematically exploits
others because of any special
privilege that he might have
obtained in the market while some
others is in a less advantageous
position to bargain.

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WELFARE STATE SYSTEM
 It is an economic system that
combined the systems of
capitalism and socialism.
 The primary objective of this
system is to control the
excessive practice of capitalism
and to reduce the heave of
socialism.

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WELFARE STATE SYSTEM
There are four characteristic of a welfare
system as explained below:
 A welfare state will ensure that the
societies get the protection from
social risks for example industrial
injuries, disabilities and non-
employment.
 Social services such as education,
healthcare, housing and public
transports are provided in ensuring
the public is functional effectively in
the modern societies.

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WELFARE STATE SYSTEM
 The value of welfare state is it
recognizes the objective full
employment and fair distribution of
wealth. Thus, intervention of the
government is essential to reduce
the power of free market in
capitalism.
 There are six main devices in the
welfare state that are: rules and
regulations, a strong workers union,
fiscal policy, high growth rate, high
demand of employment and
government possession of certain
main industries.

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 Critical Thinking Questions
1. Elaborate the principles of Islamic economic
system.
2. Explain the roles of zakah and prohibition of
riba’ in the Islamic economic system.
3. Who is the main centre of economic
activities and the engine of economic
production and growth? Explain its
activities.
4. Explain the different between Islamic with
capitalism and socialism in terms of
distribution.
5. Elaborate the characteristics of a welfare
state.

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SUMMARY
 In this chapter we have:
 Islamic economic system is a system
that is based on the Islamic law and
emphasis on the right of all people.
 One must understand the philosophy,
principles and rule of governing in the
Islamic economy system.
 There are three sectors in Islamic
economy system that are siasi sector
(public sector), tijari sector (private
sector), and ijtima’i sector (social
welfare sector).

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SUMMARY
 There are four major factors in
differentiating the Islamic economic
system with capitalism and socialism.
 Some countries adopt the welfare state
system that is combining the principles
of capitalism and socialism in ensuring
the societies right are protected.