Fie chapter5

CHAPTER 5

DISTRIBUTION IN AN

ISLAMIC ECONOMIC SYSTEM

CHAPTER OUTLINE

1. Principles of Distribution in Islamic Economics

2. Goals of Distribution in Islamic Economics

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Topic 1

Principles of Distribution in Islamic Economics

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Distribution•Importance of issue of distribution in economics

•Deals with “for whom to produce”•Important - due to scarcity: wants>what is available•Depends on worldview

•Conventional economics•Distribution limited to functional distribution

•Returns to factors of production•Does not involve value judgments

• Islamic economics•Derived from Islamic worldview

•Reflect values inherent in Islam•Strive to achieve distributive justice•Value loaded

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Distribution: Islamic Economic Vision• Study relevant Quranic versus and sunnah to extract Islamic economic vision on issue of distribution

•Quranic sources•Root word “qasama”, “qismat” meaning “he divided, distributed”•Appeared 33 times in Quran•Related concepts include: Khilafah, Amanah, Amal, Adl, Maqasid al-shariah, Needs,Distributive schemes and instruments (zakah, sadaqah, faraid, waqaf)•“…to men is allotted what they earn, and to women what they earn: but ask God of His bounty, for God has full knowledge of all things” (4:32)•“To benefit everyone, We have appointed shares and heirs to property left by parents and relatives. To those also, to whom your right hand was pledged, give their due portion. For truly God is witness to all things” (4:33) 5

Distribution: Islamic Economics Vision1. Role of Man: Man is created as the best mould and as Khalifah on earth

2. Differences in skills and ability: Man is endowed with different skills and abilities, therefore differences are natural and acceptable

3. Equitable distribution: Islam supports equitable distribution, therefore one should receive reward based on their effort

4. Fulfillment of basic needs: Islam ensures basic needs of everyone are met, therefore those who are unable to fulfill their basic needs should be provided with basic sustenance

5. No concentration of wealth and ‘excessive inequalities’ are encouraged

6. In one’s wealth there is a share of others

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1. Distribution: Islamic Economic Vision1. Vicegerency of man and his relationship with resources in form of amanah/trust

•God is absolute owner, he has distributed according to his will, man remains his slave and should spend whatever has been given to him according to god’s will•Resources are amanah (trust): Rights and responsibilities of ownership

2. Man endowed with different skills and abilities•Result in inequality in return•Inequality as a test

•Rich: grateful to Allah; spend according to acceptable way, fulfill responsibility•Poor: be patient (sabr), not to develop envy, keep faith and work hard to improve

•Some people given more power; power means greater responsibility7

1. Distribution: Islamic Economic Vision3. Return is based on one’s effort

•Supportive of functional distribution• Those who worked harder should be rewarded more•An-nisa: “to men a share of what they have earned and to women a share of what they have earned..”•To each his due (2:279, 11:85, 26:183, 45:22)

•Equal opportunity, but not equal outcome

4. Everyone is entitled to a basic standard of living•Maqasid al shariah•If one does not have means to fulfill his basic needs, responsibilities be taken by others to provide for him-his family or state

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1. Distribution: Islamic Economic Vision

5. Income and wealth should not be concentrated in the hands of the few

•‘…in one’s wealth there is a share of others” (70: 24)•Others: poor and needy•Islam supports equitable distribution of income and wealth, entitlement to basic standard of living•Excessive inequalities are not acceptable

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Topic 2Goals of Distribution in IE

G1: Guarantee of Fulfillment of Basic NeedsG2: Equitable Distribution of Income and WealthG3: Elimination of Extreme Inequalities

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G1: Guarantee of Fulfillment of Basic Needs

• Based on maqasid al-shariah• Islam expects all Muslim to protect his own life• Life on earth is a test

• But if someone is in need and not having sufficient means to fulfill it, his basic needs should be fulfilled by others through direct and indirect means• Example: orphans, very old people, handicapped, very sick• State of depravity (ascetism) is not encouraged• Fard kifayah: responsibility of every individual in society, but

ultimately responsibility lies with state• Zakah and brotherhood• Individual, relatives, neighbors, society, state

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G1: Guarantee of Fulfillment of Basic Needs

• What are basic needs?• Food, shelter, clothing for bare survival• Depends on time, place, level of development, socio-cultural factors

• To what extent these needs should be fulfilled?• Depends on economic condition and average standard of living

• How to fulfill?• Income of individual• Near relatives• Private charity• State: ensure general welfare of citizens

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G2: Equitable Distribution of Income and Wealth

• Equitable distribution, not equal distribution• Depending on one’s effort• Those who are unabled should be helped

• Distribution factors/basis for distribution1. Exchange: One is entitled to take from income in proportion to

what one has contributed2. Need: One takes from income in proportion to one’s need

irrespective of what one has contributed3. Power: one who has more power, gets more: not accepted

openly, but in practice4. Social value: distribution based on social system: money given to

mosque/philantrophic organization

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• How to distribute: Stages of distribution

1. Pre-distribution2. Post-distribution3. Re-distribution

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Stage 1: Pre-distribution• Takes into account condition of economy before it

engages itself in production process

• Considers who owns the resources• Two types: public utilities (streams, streets, bridges) and

natural resources (water etc)• Anything that do not involve much human effort/cost to

make it useful to the society• Should be publicly owned, shared equally or equitably • Ownership of the ummah in general• All people participate in the utilization of these benefits-

one way to reduce disparity of income

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• Some exception to the public resources that cannot be individually owned• Mawat (waste land): land that has no owner and not in use,

permissible to own this land by ihya – reviving it either through cultivation or construction. To encourage people to be more productive and hard working

• Maadin (minerals, extracted from land): some individual ownership is allowed, zakah will have to be paid

• Other issues: bias to the poor and equal opportunity:• Reduction of disparity allows for mechanisms to ensure equal

opportunities for less privileged

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Stage 2: Post-Production Distribution• Functional distribution: allocating the product among

factors of production

• Production is result of cooperation among factors of production - each factor has a share in the product

• Mechanisms (market and state intervention) in product and factor markets to determine share of factor and to whom should this be paid

• Al-Hisbah can play a role in manipulation of free markets• Has a role to play to ensure fair compensation

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Stage 2. Post-production distribution• Payment to three main factors of production

• 1. Land:• Can take a number of forms, including receiving rent or some profit

sharing arrangement such as Mudarabah and Musharakah

• A pre fixed return ratio to avoid gharar, which is prohibited in Islam

• Process of production is marked with uncertainty: whoever takes risk of being involved in the process should get a return

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Stage 2. Post-production distribution• 2. Labor: wages paid to workers• To each, his due; according to what he contributes to total

output

• Issue: Is Islam supportive of a minimum wage policy?• Although Islam stresses on fulfilling basic needs, guarantee however is

not the responsibility of employer

• He may be paying according to worker’s contribution to output• Therefore, as reflected by market-determined wages he has

fulfilled his responsibility.

• Market forces should determine all factor returns including wages. If this compensation is not enough, Islam has other institutions such as Zakah etc. that can be used

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Stage 2. Post-production distribution3. Capital: Money

• Islam does not prohibit a return on capital but a fixed amount of return on money capital is not allowed

• This is because actual outcome is not known but if a return is still received, it will result in exploitation of one party by the other

• Must be based on profit-loss sharing basis

• Justification of return to owner of capital: assumption of risk, foregone current consumption and opportunity to invest elsewhere

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Stage 3. Re-distribution• Various kinds of mechanisms to redistribute income and

wealth

• Objective: to eliminate extreme inequalities

1. Positive measures (zakat, faraid)2. Voluntary measures (sadaqah, awqaf)3. Prohibitive measures (riba, ihtikar)

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G3: Elimination of Extreme Inequalities

• Positive Measure 1: Zakah• Literal meaning: purity, growth and increase (religious merit,

property grows by giving, purifying soul and cleanse property)

• Surah Al- Taubah 9:103, “take from your property alms (sadaqah) in order to purify/cleanse them (from their sins)”

• Technical meaning: giving of the legally stated portion of one’s property to a poor Muslim

• It is given by certain qualified categories according to certain rules and rates to qualifying categories

• These rates are fixed and they cover a very wide range of mal

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• Conditions of zakah

• Paid by Muslim (non-Muslim pays jizyah or poll tax)

• Pay according to the fixed Nisab- minimum amount of property zakatable over and above necessities and debts

• Haul- usually one lunar year (or according to harvest or when treasure is found)

• Items zakatable must be having ‘lasting value’

• Payer must be free from debt

• Payer must have free accessibility to property23


Zakah can only be received by 8 asnaf mentioned in Quran1. al-fuqara – poor among muslims2. al-masakin – poor among non-muslims3. al muallaf – those whose hearts are to be reconciled or

revertee4. al gharimin – those who are heavily indebted; due to

calamities such as floods, earthquake; option for qardul hasan for consumption

5. al amil – salaries functionaries: collectors, accountants6. ibn al sabil – travelers because of Allah7. fi sabil Allah – charitable work; aids, construction of mosque8. al-riqab – liberation of slaves

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Issues in Zakah1. Contemporary issues: calculation, management and definitions of these

categories to suit present times

2. While rates, general scope and asnaf may be fixed as they are from primary sources of Islam, through use of qualified ijtihad, maybe in the form of collective ijtihad, the zakah institution can play a more important role in the socio-economic well-being of societies

3. Zakah must be seen primarily as a pillar of the religion, with primarily spiritual implications for the individual

4. Even though there may be positive socio-economic implications through proper understanding and management of zakah, it should not be ‘over-burdened’ with solving all the ills of society such as poverty

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b. Faraid

• Allah has made obligatory certain provisions regarding one’s wealth once he dies as to how to distribute it

• Principle of inheritance leads to redistribution on total wealth of

deceased according to Will of God

• This again reaffirms absolute ownership of God even if one has legitimately earned property

• Deceased can distribute up to 1/3rd of his wealth according to his will and rest has to be distributed according to the law of inheritance

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Voluntary Actionsc. Sadaqah: voluntary charity and appears in the Quran synonymously with zakat; a

strongly recommended act.

d. Al Awqaf: refers to charitable endowments; transfers wealth changing property rights from private to public. It has been a very important institution in history of Muslims. Important social and economic functions e.g. education (eg. Al-Azhar, IIUM), health and social security and construction of mosques. Uses of waqf can be specified and it can act as a profit generating mechanisms resulting in perpetual fund, including income for family members (as part of profits). Waqf can be in form of property and also cash endowments

e. Al Manihah: refers to particular kinds of gifts in which the ownership is retained by the giver thus only usufructory rights are given. Similar to sadaqah but ownership is retained. Example: a man can give his companion his goat so that he benefits from its milk and wool for a period and then returns it back to him 27


PROHIBITIVE MEASURES1. Prohibition of Riba’‘money lending’ and those who gain by this are removed. Generally, Islam

promotes return to an individual only if they work for it, i.e. they are productive. Money lending (and charging interest) is considered as unproductive. Hence, alternative economic activities such as trading and going into partnerships will help redistribute income and wealth.

2. Prohibition of al-Ihtikar (exploitative monopoly): In order for al-

ihtikar to exist, elements of monopoly power, manipulation and exploitation (some would add gharar or uncertainty) must be present-Role of the state to ensure that no individual or group of individuals or companies are given the ability to ‘corner the market’ to make unfair gains. -Other forms of business structures and even market structures are available to ensure that returns are not unfairly distributed. 28

Technology

Fie chapter5