Basics of Islamic Economy

As the prosperity and moral and material well-being of the community is not possible without a rich and healthy economy, Islam, as a progressive religious system, has included this question in its program.
Zakat
Islam, in order to narrow the gap between the rich and the poor, has legislated the law of zakat, and ordered the rich to pay a just share of their money and individual income as zakat to the public treasury .The money, so collected, constitutes a very large amount which can play an important role in combating poverty, narrowing class gap and ensuring an over-all development. The leaders of Islam have said that the amount of zakat has been so precisely determined that if all those on whom zakat is due, pay it honestly, poverty can be totally uprooted. Poverty exists only because a large number of people evade the obligation of this vital duty of theirs. The eight categories prescribed for the expenditure of the zakat money fully illustrate the aim and importance of this Islamic Law and throw light on its role in the formation of a healthy society.
The details of these eight categories have been given in the Holy Quran. “Zakat is only for the poor, the needy and the officials appointed over them, those whose hearts are made to include (to truth) and the ransoming of the captives and those in debt and in the way of Allah, and the way farers; an ordinance from Allah and Allah is All knowing and All wise.”
It is to be noted that the term, in the way of Allah is very wide and covers all development projects as well as such items as education, health and construction of bridges, roads, hospitals and schools.
Khums
“Khums” means payment of 20 percent of surplus income in a year, i.e. 20 per cent of what is left of the total annual income after meeting all expenses of that year. It is an Islamic tax which is levied to meet the requirements of collective life such as help to the needy, eradication of poverty, propagation of Islam and all other material and moral needs of the Muslim society. Khums is due only on the surplus and not the entire income. Hence, those whose expenditure is more than or equal to their income do not have to pay anything on this account. Only those whose income exceeds their expenditure should pay 20 per cent of the surplus to the public treasury .The money so realized comes to a considerable amount and enables the Muslims to solve many of their religious, social and material problems.
Khums is not confined to the earned income only. It is also levied on what is obtained from mines, what is extracted from the sea by means of diving and on buried treasure dug out of the earth and not owned by anybody. It is also due on spoils of war . In all these cases it is levied on the total income. Only production expenses are deducted. The details of the way how income derived from khums is to be distributed and the categories of its expenditure are given in the Islamic jurisprudence and are beyond the scope of this book.
Charity
Spending in the way of Allah is not obligatory , but Islam has attached much importance to it. There are many verses in the Holy Quran on this subject.
Charity is one of the factors which help in the equitable distribution of wealth and eradication of poverty. Alms may be given for individuals or charitable objects. Distribution of alms through charitable institutions according to a well-laid out program and under the supervision of God-fearing people is an effective way of helping the poor .
Wakf (Endowment)
Creation of endowments helps in the equitable distribution of wealth and prevents its concentration in the hands of a few. There are two kinds of endowments:
1. Public
2. Private
In the case of private endowments the beneficiaries are only a few individuals or a limited class such as the children or descendants of the grantor .
In the case of public endowments, which are far more common, the corpus of the donated property is transferred to the public or a large class of society and becomes a part of public property. Islam has encouraged the creation of endowments and the Imams themselves have set an example in this respect. Through endowments a large portion of Private property is turned into public property and thus it becomes available for the service of the masses. This in itself is a big step towards just and even distribution of wealth.
How Wealth is Created?
From the Islamic point of view the true and absolute ownership of all things belongs to Allah alone.
He owns everything that exists in the universe. His ownership is real and has creative aspect, because He is the Creator and Sustainer of everything. “Whatever exists in the heavens and the earth belongs to Him.”
Hence others can become owners only with His permission and in accordance with His laws and commands.
Private Ownership
Islam respects private ownership and considers that everybody is the owner of the fruits of his own labor. It recognizes labor as the basis of ownership This is a natural law which has been endorsed by Islam. Everybody is the natural owner of his self and his mental and physical faculties. As his products are in reality only a crystallization of his existing faculties, he is the owner of the products of his labor.
Rehabilitation and Acquisition
“He, who brings barren land under cultivation, is the owner of it.” This is a saying of the Holy Prophet.
Acquiring minerals and other natural resources before anybody else discovers them is another cause of ownership. According to Islamic law, he who acquires it, is the owner. As bringing barren land under cultivation and acquiring natural resources involve labor, it is clear that labor is the main factor in creating wealth.
Of course, the Islamic government has a right to arrange the cultivation of barren land and the excavation of mineral resources on its own and to utilize the return for the benefit of the general public.
Islam attaches great importance to the right of the workers. According to Islamic traditions, ignoring the rights of a worker is an unpardonable sin. A well-known tradition says that the Holy Prophet raised a worker's hand which had swollen as the result of hard work and said: “This is the hand which is liked by Allah and His Prophet.”
Circulation of Wealth
Islam has imposed special taxes on the stagnant wealth, which is not in circulation (such as Zakat on coined gold and silver after the completion of one year), and thus has taken a practical step to encourage circulation of wealth. The Holy Quran has condemned the hoarders and those who keep their wealth stagnant and do not utilize it for the benefit of the people.
Further, the Islamic traditions much encourage commerce, agriculture, cattle breeding and setting up of industries. In authentic books of Hadith, many traditions are found which clearly show that Islam aims at the maximum mobilization of all human and financial resources for the benefit of the people on the whole.
Usury and Interest- Free Loan
To stimulate productivity, Islam strictly forbids usury so that no body may live on interest without doing any productive work.
Usury upsets the balance of wealth and widens the gap between the haves and have-nots. It makes the rich richer and the poor poorer . lam says that usury is a mortal sin, and nobody an become the owner of the money earned through practicing it. The money thus earned must be returned to its rightful owner .
There are two kinds of usury and both of them are forbidden.
1. Loan Usury
2. Trade Usury
Lending money on the condition that it will be aid back with something added to it, is called usury. It is immaterial whether the rate of Interest is large or small, or whether it is paid in cash or in kind. Anyhow, there is no harm if the debtor willingly pays anything out of goodwill without any prior condition.
Trade means selling of a thing in exchange for another of the same kind, but with a difference in quantity. For example to sell 10 kilograms of good quality wheat in exchange for 12 kilograms of medium quality wheat will constitute usury .Detailed conditions of such forbidden deals are given in books of Islamic law.
Interest -Free Loan
Islam exhorts people to give as much interest free Loan as is possible. According to certain traditions, this is such an act of virtue that its reward will be more than that of alms (free aid in the way of Allah). Probably the reason is that many of those who seek loans are respectable people who. Even when they are badly in need of money, do not condescend to accept free aid or alm, because they consider doing that, below their dignity and position, whereas the persons who accept do not have such scruples. For this reason, giving interest-free loan is considered more rewarding. At the same time, Islam allows the creditors to require the deposit of adequate security with them up to the full value of the loan. In case a debtor fails to pay up the loan, the creditor is allowed to deduct an equal amount from the security and return the remainder to its owner. Giving interest-free loans is effective in the cultivation of friendship and love and in removing complexes which often exist between high income and low-income individuals. This is the simplest form of service which the well- off people can render to the les fortunate.
Ref: ImamReza.net