Sources of the Islamic Economic System

The Islamic Economic System is based on both divine guidance and scholarly interpretations. It ensures that financial transactions and economic activities follow ethical and fair practices while aligning with Islamic principles. The system is derived from primary sources, which include the Qur’an and Sunnah, and secondary sources, which consist of scholarly methods such as consensus (Ijma), analogy (Qiyas), independent reasoning (Ijtihad), and customs (Urf).

2.1. Primary Sources

The primary sources of the Islamic economic system are the Qur’an and Sunnah, which provide clear instructions on financial matters and ethical business practices.

✅ Qur’an

The Qur’an is the foundational source of all Islamic laws, including economic principles. It lays down the basic guidelines for conducting trade, business, and financial transactions. One of the key instructions in the Qur’an is the prohibition of interest (Riba), which means that money should not be loaned with an added fixed profit (interest), as this leads to exploitation. The Qur’an also forbids uncertain and deceptive transactions (Gharar) and businesses that involve prohibited (Haram) activities, such as alcohol, gambling, and unethical trade.

For example, in Surah Al-Baqarah (2:275), the Qur’an states:
“Allah has permitted trade and has forbidden interest.”
This means that while Islam encourages fair business and trade, it strictly prohibits profiting from loans through interest.

✅ Sunnah (Teachings of Prophet Muhammad ﷺ)

The Sunnah, which consists of the sayings, actions, and approvals of Prophet Muhammad ﷺ, provides practical guidance on business ethics, trade regulations, and financial dealings. The Prophet ﷺ emphasized honesty in trade, fair pricing, and consumer protection. He also prohibited fraud, hoarding, and deceitful transactions, ensuring that economic activities promote fairness and social justice.

For example, the Prophet ﷺ once said:
“Whoever cheats is not one of us.” (Sahih Muslim)
This Hadith emphasizes the importance of honesty in business transactions, discouraging deception and unfair trade practices.

2.2. Secondary Sources

When new financial situations arise that are not explicitly mentioned in the Qur’an and Sunnah, Islamic scholars rely on secondary sources to interpret and apply Islamic principles to modern economic issues. These sources help ensure that the economic system remains practical and adaptable to changing times.

✅ Ijma (Consensus of Scholars)

Ijma refers to the agreement of Islamic scholars on a particular issue. When scholars collectively decide on an economic ruling based on Islamic teachings, it becomes a guiding principle for financial matters.

For example, Islamic banking and Takaful (Islamic insurance) were established through Ijma. Since conventional banks operate on interest, scholars agreed that interest-free banking based on profit-sharing and ethical finance was necessary for Muslims to conduct financial transactions without violating Islamic principles.

✅ Qiyas (Analogy & Reasoning)

Qiyas is a method where scholars compare new financial situations with existing Islamic rulings to derive appropriate laws. It is used when the Qur’an and Sunnah do not directly mention a specific economic issue. Scholars look at similar cases in Islamic history and apply the same principles to modern financial matters.

For example, cryptocurrency is a new financial instrument not mentioned in Islamic texts. Scholars use Qiyas by comparing cryptocurrency to gold and money, which are subject to certain Islamic financial rules. This helps determine whether cryptocurrency is permissible (Halal) or forbidden (Haram) in Islamic finance.

✅ Ijtihad (Independent Juristic Reasoning)

Ijtihad is the process where qualified Islamic scholars analyze new financial and economic challenges and provide solutions based on Islamic teachings. This is especially important for addressing modern financial instruments and contracts.

For example, modern Islamic banking contracts like Murabaha (cost-plus financing) and Sukuk (Islamic bonds) were developed through Ijtihad. Since conventional loans involve interest, scholars created Islamic alternatives that allow people to finance their needs without violating Islamic principles.

✅ Urf (Customs and Traditions)

Urf refers to local customs and traditions that are widely accepted in society. If a business practice is not against Islamic teachings, it may be considered valid under Islamic law. This allows Islamic economics to adapt to different regions and cultures while maintaining its core principles.

For example, stock markets are a modern financial system that did not exist during the time of the Prophet ﷺ. However, since trading and investment are permitted in Islam, scholars analyzed stock market practices and developed Islamic stock market regulations to ensure they remain ethical and Halal.

Shariah Objectives (Maqasid al-Shariah)

Shariah, the Islamic legal system, is designed to ensure justice, fairness, and the well-being of individuals and society. The objectives of Shariah (Maqasid al-Shariah) refer to the fundamental goals and principles that Islamic law seeks to achieve. These objectives provide a framework for ethical, social, and economic policies that promote human welfare and prevent harm.

The five core objectives of Shariah are followings:

1. Protection of Religion (Hifz al-Deen)

Islam places great emphasis on preserving faith and allowing individuals to practice their beliefs freely. This objective ensures that people have the right to follow their religion without oppression. It also prohibits actions that weaken faith, such as engaging in unethical financial practices like Riba (interest) or investing in prohibited industries like gambling and alcohol. In an economic context, it ensures that businesses and financial transactions align with Islamic values, promoting ethical trade, fair transactions, and interest-free banking.

2. Protection of Life (Hifz al-Nafs)

Shariah aims to protect human life by ensuring safety, security, and access to necessities such as food, shelter, and healthcare. In an economic sense, this means creating policies that reduce poverty, inequality, and economic exploitation. For example, Islam encourages wealth distribution through Zakat (charitable giving) and Sadaqah (voluntary charity) to help those in need. It also prohibits business practices that can harm people, such as selling hazardous products or manipulating markets.

3. Protection of Intellect (Hifz al-Aql)

The preservation of intellect means ensuring that people have access to education and knowledge while protecting them from harmful substances that impair reasoning, such as alcohol and drugs. In economics, this principle supports financial literacy, ethical advertising, and transparent business practices so that individuals can make informed decisions. It also discourages deceptive marketing, fraud, and excessive consumerism, ensuring that people engage in responsible financial activities.

4. Protection of Wealth (Hifz al-Maal)

Wealth is a blessing in Islam, and its protection ensures economic stability and prosperity. Islam encourages lawful earning, fair trade, and wealth circulation while prohibiting financial exploitation through interest (Riba), fraud, and gambling (Maisir). The Islamic economic system supports risk-sharing financial models, such as Mudarabah (profit-sharing investment) and Musharakah (joint partnership), which allow businesses and individuals to prosper without unfair financial burdens. This objective also emphasizes protecting people from economic oppression and ensuring that wealth is distributed fairly in society.

5. Protection of Lineage and Family (Hifz al-Nasl)

Islam emphasizes the stability of families and communities. This means protecting family values, promoting ethical behavior, and preventing exploitation. In an economic context, this includes ensuring fair wages, ethical employment policies, and financial support for families. It also discourages industries that exploit individuals, such as prostitution, pornography, and interest-based debt cycles, which can harm family structures.

Basic Elements of a Contract

A contract in both Islamic and general law requires certain fundamental elements to be considered valid. In Islamic law (known as Fiqh), the contract is based on mutual consent, fairness, and justice, with the following key elements:

✅ Offer (Ijab)

An offer is the initial proposal made by one party to another, outlining the terms and conditions of the contract. The offeror expresses their willingness to be bound by the terms upon acceptance.

Conditions in Islamic Law:
  1. The offer must be clear and specific.
  2. The terms of the offer should not be ambiguous or uncertain (to avoid gharar, excessive uncertainty).
  3. The offer should reflect a legitimate intention, not based on coercion or deceit.
Example:
  • A seller offers to sell a product for a fixed price to a buyer, stating, “I am offering this car for $10,000.”
  • In Islamic law, the offer should be made in good faith and not involve any deceptive terms.
✅ Acceptance (Qabul)

Acceptance is the agreement by the other party to the terms of the offer. It must be clear and unambiguous, without any changes to the original terms. Acceptance can be verbal or in writing, and it signifies the intent to be legally bound by the terms of the offer.

Conditions in Islamic Law:
  1. The acceptance must be made promptly, without delay, to avoid any confusion.
  2. The person accepting the offer must have the legal capacity to accept (i.e., must be of sound mind and legal age).
  3. The acceptance must not involve coercion or undue influence (to avoid duress).
Example:
  • The buyer responds to the seller’s offer by saying, “I accept your offer of $10,000 for the car.”
  • In Islamic law, both parties must agree to the terms in a clear and voluntary manner, ensuring that neither side is forced into the contract.
✅ Consideration (Mabda’ or Ma’qool)

Consideration refers to something of value that is exchanged between the parties. It could be money, goods, services, or anything else of agreed value. The consideration must be lawful (i.e., permissible in Islam) and tangible.

Conditions in Islamic Law:
  1. The consideration must be lawful (halal) and should not involve anything prohibited, such as riba (interest), maysir (gambling), or unlawful goods.
  2. The exchange must be fair and just, ensuring that no party is exploited or deceived.
Example:
  • A buyer gives $10,000 in exchange for a car. The consideration here is the agreed amount of money for the car.
  • In Islamic contracts, the exchange should be equal, with no hidden or excessive terms (to avoid gharar or fraud).
✅ Intention (Niyyah or Mutaba’ah)

Definition: Both parties must have a genuine intention to enter into the contract and fulfill their obligations. This is often referred to as the intention to contract. In Islamic law, intention is considered essential for the validity of any contract.

Conditions in Islamic Law:
  1. Both parties must be acting in good faith and with the intention of fulfilling the terms of the contract.
  2. The intention should not be based on deceit, fraud, or duress.
  3. The intention to fulfill the contract must be clear and sincere, with no hidden agenda or deceit.
Example:
  • A buyer and seller both agree on a fair price and terms for a sale, intending to carry out the contract in good faith.
  • In Islam, any contract entered into under duress or fraud is not valid. Both parties must genuinely agree to the contract.
✅ Legal Capacity (Ahliyah)

Legal capacity refers to the ability of a person to enter into a contract, meaning they must have the legal rights and mental capacity to understand the contract’s implications.

Conditions in Islamic Law:
  1. Both parties must be of sound mind and capable of understanding the terms of the contract.
  2. The individual must be legally competent (e.g., not a minor or someone under legal guardianship).
Example:
  • A person who is mentally unstable or underage (below the legal age of maturity in the respective jurisdiction) cannot enter into a valid contract.
  • In Islamic law, contracts made by minors or people with mental disabilities are generally not enforceable, unless the contract benefits them or is ratified by their guardian.
✅ Subject Matter (Mahl al-Aqd)

The subject matter refers to the object or goods involved in the contract. The subject must be clear, identifiable, and lawful. In Islam, it is crucial that the subject matter is halal and that the terms are fully defined.

Conditions in Islamic Law:
  1. The subject matter must exist and be tangible (or clearly defined in terms of service).
  2. The subject matter must be lawful (halal) and must not be harmful or prohibited in Islam (e.g., alcohol, pork, or interest-based transactions).
  3. The terms regarding delivery, price, and any conditions attached must be clear to both parties.
Example:
  • In a sale contract, the subject matter might be a piece of land, a car, or a service. The terms of the sale, such as the price, delivery date, and condition of the goods, must be clear and agreed upon by both parties.
  • In Islamic law, if the goods being sold are unlawful (e.g., stolen items), the contract is invalid.
✅ Formalities and Writing (if applicable)

In some cases, Islamic contracts may require formal documentation or writing, especially for larger transactions or where evidence is needed to avoid disputes. This is not always a requirement, but it can help clarify the terms and conditions.

Conditions in Islamic Law:
  1. Writing or documentation: While verbal agreements are acceptable in Islamic law, it is encouraged to document contracts, especially in commercial transactions, to avoid misunderstandings or disputes.
  2. Witnesses: In some cases, witnesses are recommended or required, particularly for marriage contracts, large financial transactions, and some commercial contracts.
Example:
  • For large transactions, such as property sales, it is advisable to have the terms written down, signed, and possibly witnessed to ensure the contract’s clarity and enforceability.
  • In Islam, it is encouraged to have contracts documented to avoid potential conflicts, especially when significant sums of money are involved.

Islamic Economic System

The Islamic Economic System is based on divine guidance from Islamic teachings. It is different from capitalism and socialism, as it promotes wealth distribution, ethical business practices, and social justice while ensuring that economic activities align with Shariah (Islamic law).                            

Distinctive Features of the Islamic Economic System are following:

1.1. Prohibition of Riba (Interest)

Islam strictly forbids any form of interest-based transactions, as they lead to economic injustice and exploitation. Instead of interest-based lending, Islamic finance promotes profit-sharing (Mudarabah & Musharakah) and cost-plus financing (Murabaha), ensuring that financial activities remain just and mutually beneficial.

1.2. Risk-Sharing and Profit-Loss Sharing

The Islamic financial system is based on shared risk rather than fixed interest returns. Investments must involve real economic activity and genuine business risk, where financial transactions are structured so that both parties share in the risks and rewards, unlike conventional loans that offer fixed interest returns regardless of the business outcome.

1.3. Prohibition of Speculation (Gharar) & Gambling (Maisir)

Transactions with excessive uncertainty (Gharar) and gambling (Maisir) are not allowed, such as derivatives and speculative trading, are not allowed, ensuring transparency and fairness in financial dealings.

1.4. Ethical and Halal Business Practices

Investments must be in Halal (permissible) industries. Businesses related to alcohol, pork, gambling, weapons, and unethical services are prohibited.

1.5. Zakat and Wealth Redistribution

Islam mandates Zakat (2.5% annual wealth tax) to help the poor and needy. Voluntary charity (Sadaqah) and Waqf (endowments) are encouraged to ensure social welfare.

1.6. Protection of Property Rights with Social Responsibility

Islam recognizes private property ownership but emphasizes that wealth is a trust from Allah. Hoarding (Iktinaz) is discouraged; circulation of wealth is encouraged.

1.7. Market Regulation and Fair-Trade Practices

The state ensures fair market practices and prevents monopolies, fraud, and hoarding. The Hisbah system (market regulation) ensures ethical business and consumer protection.

1.8. Government’s Role in Economic Justice

The state ensures economic justice by regulating pricing, wages, and business ethics. The government intervenes when public welfare is at risk but allows free trade under Shariah principles.