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The Islamic Economic System

In the Name of Allah---the Most Beneficent, the Most Merciful.
The Islamic Economic System

The Islamic Economic System

The Islamic Economic System refers to an economic framework based on the principles and teachings of Islam. It is rooted in the moral and ethical values outlined in the Quran (the holy book of Islam) and the Hadith (the sayings and actions of the Prophet Muhammad, peace be upon him). Islamic economics seeks to create an economic system that aligns with the broader objectives of Islam, which include justice, equity, and social welfare.

Key features of the Islamic Economic System include:

Free Trade:

Islamic economics promotes investments in real assets and productive activities rather than speculative or non-productive ventures. It encourages entrepreneurship, investment in infrastructure, and productive sectors of the economy. Selling merchandise and services is generally allowed in this system without any restrictions, exempting a few illegal articles like wine, pigs, and poisons.

Prohibition of Interest (Riba):

Islamic economics prohibits the charging or payment of interest on loans. Instead, it encourages profit-sharing arrangements and risk-sharing partnerships, where lenders and borrowers share in the profits or losses of a venture.

Prohibition of Speculation (Gharar):

Islamic economics discourages transactions that involve excessive uncertainty or speculation. Contracts should be clear and transparent, and parties should have a genuine understanding of the terms and conditions.

Wealth Distribution:

Islamic economics advocates for equitable wealth distribution and aims to address income disparities and poverty. It encourages the provision of social safety nets, charitable giving (Zakat), and voluntary wealth redistribution to ensure the well-being of society's less fortunate members.

Emphasis on Real Assets:

Islamic economics promotes investments in real assets and productive activities rather than speculative or non-productive ventures. It encourages entrepreneurship, investment in infrastructure, and productive sectors of the economy.


Ethical Guidelines:

Islamic economics emphasizes ethical behavior in economic activities. It promotes honesty, fairness, and accountability in business transactions. Unethical practices such as fraud, exploitation, and deceit are strongly discouraged.


It is important to note that the implementation of an Islamic Economic System can vary across different countries and regions. While some countries may adopt a more comprehensive approach to Islamic economics, others may integrate certain principles within their existing economic systems.


The Quran Allows Free Trade

There are several verses in the Quran that highlight the importance of trade and commerce.

For example, in Surah Al-Baqarah (2:275), states, "Those who devour usury will not stand except as stands one whom the devil has driven to madness by [his] touch. That is because they say, 'Trade is [just] like usury.' But Allah has permitted trade and has forbidden usury." This verse makes a clear distinction between usury (riba) and trade, affirming that trade is permissible while usury is prohibited.

Additionally, the Quran encourages believers to engage in lawful and beneficial economic activities.

Surah Al-Baqarah (2:198) states, "There is no blame upon you for seeking bounty from your Lord [during Hajj]. But when you depart from 'Arafat, remember Allah at al- Mash'ar al-Haram. And remember Him, as He has guided you, for indeed, you were before that among those astray."

This verse refers to seeking provisions and sustenance during the pilgrimage (Hajj), indicating that economic activity, including trade, is a normal and permissible part of life.

It is important to note that while Islam supports free trade, it also emphasizes ethical conduct, fairness, and justice in economic transactions. Islamic principles prohibit fraud, exploitation, deceit, and any unfair practices in trade. Islam encourages mutual consent, transparency, and equitable dealings between buyers and sellers, ensuring that both parties benefit from the trade transaction.

Prohibition of Riba

Islamic economics rejects the concept of charging or paying interest, which is known as Riba. This prohibition is based on the belief that interest-based transactions lead to exploitation, inequality, and economic instability. Instead, Islamic economics promotes alternative modes of financing that are rooted in profit-sharing and risk-sharing principles.

There are two main types of Riba:

1. Riba al-Nasi'ah

2. Riba al-Fadl

Riba al-Nasi'ah

Riba al-Nasi'ah, also known as "Riba al-Jahiliyyah" or simply "Riba," refers to the concept of usury or interest charged on loans. It is one of the major prohibited forms of Riba in Islamic finance.

Riba al-Nasi'ah specifically refers to the increment or increase in the repayment amount that is charged by a lender to a borrower in exchange for a deferred payment period. It occurs when a lender imposes an additional amount or interest on top of the principal loan amount as compensation for the time value of money.

In Islamic finance, Riba is strictly prohibited based on the teachings of the Qur'an and the Sunnah (traditions) of Prophet Muhammad (peace be upon him). Riba is considered exploitative and unjust, as it allows one party to benefit at the expense of the other without engaging in any productive economic activity.

Islamic economics promotes alternative financing models that are based on profit-sharing and risk-sharing principles rather than charging or paying interest. These alternative modes, such as Musharakah (partnership), Mudarabah (profit-sharing), and Murabahah (cost-plus financing), aim to ensure fairness and equitable distribution of wealth while fostering economic growth and development within the boundaries of Islamic principles.

It is important to note that the prohibition of Riba is a central tenet of Islamic finance, and adhering to this principle is a fundamental aspect of conducting financial transactions in accordance with Islamic law.

Riba al-Fadl

Riba al-Fadl, also known as "Riba al-Buyu," is another form of prohibited Riba (usury) in Islamic finance. It refers to the excess or surplus gained in an exchange of similar commodities of the same type, quantity, and immediate delivery.

Narrated Abu Bakra (may Allah be pleased with him):

Allah's Messenger (ﷺ) said, "Don't sell gold for gold unless equal in weight, nor silver for silver unless equal in weight, but you could sell gold for silver or silver for gold as you like."

[Sahih al-Bukhari: H#2175]

Abu Sa'id al-Khudri (Allah be pleased with him) reported Allah's Messenger (ﷺ) as saying:

Do not sell gold for gold and silver for silver weight for weight or of the same quality.

Riba al-Fadl occurs when a transaction involves an exchange of goods, and one party receives an additional quantity or quality of the goods in return for delaying the delivery or payment. This additional benefit or surplus gained is considered exploitative and unjust according to Islamic principles.

To understand Riba al-Fadl, consider an example: A person wants to exchange 1 kg of gold for 1 kg of gold but insists on receiving an additional 100 grams of gold as part of the transaction. This additional amount is considered Riba al-Fadl, as it goes beyond the equal exchange of the same commodity and quantity.

Islamic finance emphasizes the principle of equal exchange and fairness in transactions. Riba al-Fadl violates this principle by creating an imbalance and granting an undue advantage to one party. Therefore, it is strictly prohibited in Islamic finance and is considered a form of usury.

In order to comply with Islamic principles, transactions should be conducted on the basis of fair exchange, where the goods are exchanged in equal amounts and without any additional benefits or surplus that could be perceived as Riba al-Fadl.

By avoiding Riba al-Fadl and adhering to the principles of fairness and equity, Islamic finance aims to foster an ethical and just economic system that respects the rights and well-being of all parties involved in transactions.

Profit-sharing arrangements, such as Mudarabah and Musharakah, are commonly used in Islamic finance. In a Mudarabah contract, one party provides the capital (the investor or "rabb al-mal"), while the other party contributes labor and expertise (the entrepreneur or "mudarib"). The profits generated from the venture are shared between the parties based on a pre-agreed ratio, while the losses are borne primarily by the investor. However, an entrepreneur gets loss in the form of useless efforts.

Musharakah, on the other hand, is a partnership arrangement where all parties contribute capital and expertise to a project. Profits are distributed among the partners based on an agreed-upon ratio, while losses are shared according to the ratio of their contributions. This system promotes a fair sharing of risks and rewards between the parties involved.

Islamic economics also encourages other financing models, such as Ijarah (leasing), Murabaha (cost-plus financing), and Istisna (contract-based manufacturing). These models provide alternative mechanisms for acquiring assets or financing transactions without the use of interest.

By emphasizing profit-sharing and risk-sharing arrangements, Islamic economics aims to promote fairness, equity, and a sense of shared responsibility between the lender and borrower. It aligns with the principles of cooperation, trust, and mutual benefit while discouraging exploitative practices that may arise from a purely interest-based system.

It's important to note that Islamic finance institutions and scholars have developed specific mechanisms and guidelines to structure transactions in accordance with these principles. These institutions have created a range of financial products and services, such as Islamic banking, Islamic bonds (Sukuk), and Islamic insurance (Takaful), to cater to individuals and businesses seeking Sharia-compliant financial solutions.

Prohibition of Speculation

Islamic economics promotes clarity, transparency, and avoiding excessive uncertainty or speculation in economic transactions. This principle is known as Gharar, which refers to ambiguity or uncertainty in contractual terms that may lead to unfairness or exploitation.

Islamic economics emphasizes the importance of clear and transparent contracts where the terms and conditions are explicitly stated and easily understood by all parties involved. Contracts should be based on mutual consent and understanding to ensure fairness and prevent any potential exploitation or misunderstanding.

The concept of Gharar discourages transactions that involve excessive uncertainty, ambiguity, or speculation. This includes transactions where the subject matter, price, or key details are unclear or subject to chance. Examples of transactions that fall into the realm of excessive uncertainty or speculation include gambling, games of chance, speculative derivatives, and contracts with unclear or unknown outcomes.

Instead, Islamic economics encourages contracts that are based on tangible assets and known variables, ensuring that parties have a genuine understanding of the terms and conditions. This promotes economic stability, reduces risk, and prevents unjust enrichment.

To ensure compliance with the principle of Gharar, Islamic finance institutions have developed specific guidelines and criteria for structuring contracts. These guidelines aim to eliminate ambiguity, provide clarity, and minimize uncertainty in financial and commercial transactions. The contracts and financial products offered by Islamic finance institutions often undergo a thorough review by Sharia scholars to ensure they adhere to the principles of Gharar and other Islamic ethical guidelines.

By emphasizing clarity, transparency, and the avoidance of excessive uncertainty, Islamic economics seeks to create an economic environment that promotes fairness, integrity, and mutual understanding between parties. This principle aims to protect individuals and society from potential exploitation and ensure that economic transactions are conducted in a just and ethical manner.


Wealth Distribution

Islamic economics places a strong emphasis on equitable wealth distribution and addressing income disparities and poverty. It recognizes that wealth and resources are not meant to be concentrated in the hands of a few individuals but should be shared to ensure the well-being and welfare of the entire society.

One of the key mechanisms through which Islamic economics promotes equitable wealth distribution is the concept of Zakat. Zakat is an obligatory form of charitable giving in Islam, whereby eligible individuals and businesses are required to donate a portion of their wealth to those in need. It is considered one of the five pillars of Islam and is seen as a means of purifying one's wealth and fulfilling a social obligation.

Zakat is typically calculated as a percentage of one's accumulated wealth, including cash, savings, investments, and business assets. The collected funds are then distributed to specific categories of beneficiaries, such as the poor, the needy, debtors, those working in the Zakat administration, and others outlined in Islamic jurisprudence. This practice serves to alleviate poverty, provide social welfare, and bridge the wealth gap in society.

In addition to Zakat, Islamic economics encourages voluntary acts of charity and wealth redistribution. Muslims are encouraged to engage in Sadaqah, which refers to voluntary acts of giving that can be in the form of monetary contributions, assistance, or any form of assistance to those in need. Sadaqah can be given to individuals, charities, or used for community development projects. These voluntary acts of charity further contribute to the objective of equitable wealth distribution and addressing social inequalities.

Furthermore, Islamic economics promotes the provision of social safety nets and welfare systems to ensure the well-being of society's less fortunate members. This can include programs such as healthcare, education, unemployment benefits, and support for vulnerable groups. Islamic teachings emphasize the importance of caring for the needy and vulnerable members of society, and it is considered a collective responsibility of the community to provide for their welfare.

By advocating for equitable wealth distribution, encouraging Zakat and voluntary acts of charity, and promoting social safety nets, Islamic economics aims to address income disparities, reduce poverty, and foster a more just and compassionate society. These principles align with the broader Islamic values of compassion, solidarity, and social justice.


Emphasis on Real Assets

Islamic economics places a strong emphasis on productive and real asset-based investments rather than speculative or non-productive ventures. The underlying principle is to promote economic growth, job creation, and the development of tangible assets that contribute to the overall well-being of society.

One of the key concepts in Islamic economics that support this principle is known as Halal (permissible) and Haram (prohibited). Investments and economic activities are evaluated based on their ethical and productive nature. Islamic economics encourages individuals and businesses to engage in Halal investments, which include activities that are lawful, beneficial, and contribute positively to the economy.

Entrepreneurship is highly encouraged in Islamic economics. Islam recognizes the importance of innovation, enterprise, and wealth creation through productive economic activities. Individuals are encouraged to start businesses, generate employment opportunities, and contribute to the growth and development of the economy. Entrepreneurship is seen as a means of utilizing one's talents, skills, and resources to create value, stimulate economic activity, and foster economic prosperity.

Islamic economics also promotes investment in infrastructure and productive sectors of the economy. Investing in projects that enhance the productivity and capacity of an economy is encouraged. This can include investments in sectors such as agriculture, manufacturing, technology, education, healthcare, and infrastructure development. By investing in these sectors, Islamic economics seeks to generate sustainable economic growth, improve living standards, and create a solid foundation for the long-term prosperity of society.

Furthermore, Islamic economics discourages speculative and non-productive activities that do not contribute to real economic growth. Speculation, excessive risk-taking, and gambling-like practices are considered detrimental to the stability and fairness of the economy. Instead, Islamic economics encourages investments that involve tangible assets, promote value creation, and generate real economic benefits.

Overall, Islamic economics promotes investments in real assets, productive activities, entrepreneurship, and the development of infrastructure. These principles aim to foster economic growth, job creation, and sustainable development while discouraging activities that do not contribute to productive outcomes. By focusing on tangible and beneficial investments, Islamic economics seeks to build a robust and prosperous economy that benefits individuals, businesses, and society as a whole.


The Islamic Business Models

There are six major business models:

1.       Selling Goods

2.       Selling Services

3.       Musharakah

4.       Mudarabah

5.       Murabahah

6.       Ijarah

7.       Investment in Agriculture


Selling Goods

Islamic economics promotes the trade of merchandise as an essential component of economic activity and wealth creation. It recognizes the importance of legitimate and ethical trade in goods (merchandise) as a means to meet the needs of individuals and society while adhering to Islamic principles.

In Islamic economics, the selling of merchandise is encouraged within the framework of fairness, transparency, and mutual benefit. The principles of Halal (lawfulness) and ethical conduct govern the exchange of goods, ensuring that trade is conducted in a manner that upholds moral values and avoids prohibited transactions.

Some key principles and practices within Islamic economics that promote selling merchandise include:

Fair Pricing:

Islamic economics encourages fair pricing practices in the sale of merchandise. Sellers are urged to set reasonable and just prices that reflect the value of the goods being traded. Unfair practices such as price manipulation, price gouging, or monopolistic behaviors are discouraged.

Quality and Integrity:

 Islamic economics emphasizes the importance of providing high-quality merchandise to customers. Sellers are encouraged to maintain the integrity of the goods being sold, ensuring they meet the specified standards and conform to the expectations of buyers. This fosters trust between buyers and sellers and supports sustainable trade relationships.

Ethical Sourcing:

Islamic economics promotes ethical sourcing practices in the acquisition of merchandise. It encourages sellers to ensure that the goods they trade are obtained through lawful means, respecting the rights of producers, workers, and the environment. Unethical practices such as exploitation, forced labor, or environmental harm are strictly prohibited.

Fair Competition:

 Islamic economics advocates for fair competition in the marketplace. Monopolistic practices, price fixing, or unfair market domination are discouraged. Fair competition ensures a level playing field for sellers, stimulates innovation, and benefits consumers.

Islamic economics recognizes the role of merchandise trade in economic development, wealth creation, and meeting the needs of individuals and society. By adhering to principles of fairness, transparency, and ethical conduct, it seeks to promote a just and sustainable trade environment that benefits all stakeholders involved in the selling and buying of merchandise.


Selling Services

Islamic economics recognizes the importance of providing services as a key component of economic activity and societal well-being. While Islamic economics places emphasis on the trade of tangible goods, it also promotes the exchange of services in a manner that aligns with the principles of fairness, transparency, and mutual benefit.

Islamic economics encourages the provision of services that are lawful (Halal) and beneficial to individuals and society. Services that comply with ethical and moral standards are considered integral to a thriving economy. This includes services in sectors such as healthcare, education, finance, transportation, communication, technology, and more.

In Islamic economics, the exchange of services is governed by the principles of fairness, equity, and transparency. Transactions involving services should be clear, well-defined, and agreed upon by all parties involved. Contracts or agreements should outline the scope of services, duration, compensation, and any other relevant terms and conditions.

Islamic economics also emphasizes the concept of value creation in the exchange of services. Service providers are encouraged to deliver high-quality services that add value to individuals and society. By offering valuable services, service providers can contribute to economic growth, job creation, and the overall well-being of communities.

In the realm of Islamic finance, services play a crucial role. Islamic financial institutions offer a wide range of services, such as banking, investment, insurance, wealth management, and advisory services. These services are designed to comply with Sharia principles, avoiding interest-based transactions and adhering to ethical guidelines.

Furthermore, Islamic economics promotes the fair compensation of service providers. In accordance with the principles of justice and fairness, individuals or entities providing services should be compensated appropriately for their efforts, skills, and expertise. Fair wages and equitable compensation ensure the sustainability of service provision and support the well-being of service providers.

Overall, Islamic economics recognizes the significance of services in economic activity and societal development. It promotes the exchange of Halal and beneficial services in a manner that upholds principles of fairness, transparency, and mutual benefit. By emphasizing value creation, fair compensation, and adherence to ethical guidelines, Islamic economics aims to foster a thriving service sector that contributes to the overall prosperity of individuals and society.


Musharakah is an important concept in Islamic finance and economics. It refers to a form of partnership where two or more parties pool their capital and resources to undertake a business venture or investment. In Musharakah, partners share in the profits, losses, and risks of the enterprise based on an agreed-upon ratio.

The primary characteristic of Musharakah is the sharing of both capital and expertise among partners. Each partner contributes capital to the venture, and they may also contribute skills, knowledge, or labor, depending on their agreement. This joint contribution fosters a sense of shared responsibility and cooperation, aligning with the principles of fairness and mutual benefit in Islamic economics.

The profits generated from the Musharakah venture are distributed among the partners based on the pre-determined ratio agreed upon at the outset. This ratio can be equal or proportionate to the respective contributions of each partner. It is worth noting that partners may agree to allocate a portion of the profits for reinvestment in the business or for charitable purposes.

Similarly, losses incurred in the Musharakah are shared among the partners based on their respective ratios. This risk-sharing feature reflects the idea that partners bear the consequences of the venture collectively, thereby mitigating individual financial burdens. This aspect promotes fair distribution of risks and encourages partners to work together in managing and addressing challenges.

Musharakah partnerships can be utilized in various sectors and industries, including trade, agriculture, real estate, and manufacturing. It can also be employed for financing large projects or joint ventures where multiple parties bring together their resources and expertise.

Islamic financial institutions often offer Musharakah-based products and services, such as Musharakah Mutanaqisah (Diminishing Musharakah) and Musharakah-based investment funds. In the context of Diminishing Musharakah, the financial institution enters into a partnership with the customer, where the institution gradually transfers its ownership share to the customer over time, eventually making the customer the sole owner.

Musharakah embodies the principles of cooperation, risk-sharing, and shared prosperity in Islamic economics. It encourages partnerships that combine financial resources, skills, and efforts to engage in productive economic activities. Through Musharakah, Islamic economics promotes equity, entrepreneurship, and the responsible utilization of resources, fostering a participatory and socially responsible economic system.



Mudarabah is an important concept in Islamic finance and economics. It refers to a partnership arrangement between two parties: the capital provider (Rabb al-Mal) and the entrepreneur or manager (Mudarib). In a Mudarabah contract, the capital provider contributes the capital, while the entrepreneur provides expertise, labor, and management skills.

The Mudarabah partnership operates on the principle of profit-sharing, where the profits generated from the business venture are distributed between the capital provider and the entrepreneur based on a pre-agreed ratio. This ratio is typically determined before the partnership begins and can be based on mutual consent or standard practices.

The capital provider, as the investor, bears the financial risk in the Mudarabah partnership. If the venture incurs losses, the capital provider will bear the losses, while the entrepreneur will not be held liable for more than their initial contribution. This feature aligns with the concept of risk-sharing in Islamic finance, where risks and rewards are shared between the parties involved.

The entrepreneur or manager, on the other hand, is responsible for the day-to-day operations, decision-making, and management of the business venture. They utilize their skills, knowledge, and expertise to ensure the success and profitability of the venture. The entrepreneur's effort and contribution are crucial for the Mudarabah partnership to flourish.

In addition to the profit-sharing arrangement, Mudarabah contracts may also include certain conditions or restrictions agreed upon by both parties. These conditions can outline the scope of the partnership, the duration of the contract, permissible activities, and other relevant terms and conditions.

Mudarabah contracts are commonly used in various sectors, including trade, investment projects, and entrepreneurial ventures. Islamic financial institutions often offer Mudarabah-based products, such as investment accounts or funds, where individuals or businesses can invest their capital and share in the profits generated by the institution's investments.

It's important to note that in Mudarabah, the capital provider assumes the majority of the financial risk, while the entrepreneur bears the operational risk. This encourages a fair sharing of risks and rewards, aligning with the principles of fairness, cooperation, and shared prosperity in Islamic economics.

Mudarabah plays a significant role in promoting entrepreneurship, encouraging investment, and fostering economic growth while adhering to the principles of Islamic finance. It provides a mechanism for capital providers to invest their funds in ventures while relying on the expertise and efforts of capable entrepreneurs.



Murabahah is a widely used concept in Islamic finance, particularly in the area of trade and financing. It is a contract-based transaction that allows for the sale of goods with a transparent profit margin agreed upon by the buyer and seller.

The Murabahah transaction involves three parties: the buyer, the seller, and a financial institution. The buyer expresses their intention to purchase a specific item from the seller, who then procures the item or acquires it from a third party. The financial institution acts as a facilitator by providing the necessary funds to the seller for the purchase of the item.

The seller discloses the cost of the item to the buyer, including any additional expenses incurred during the procurement process. The seller also discloses the agreed-upon profit margin, which is typically expressed as a percentage or a specific amount. This profit margin serves as the financial institution's earnings for providing the funds.

The buyer and seller enter into a contract specifying the cost and the profit margin, along with any other relevant terms and conditions. The buyer agrees to purchase the item from the seller at the total cost, including the profit margin, in deferred payment terms. The payment can be made in installments or as a lump sum at a future date.

It's important to note that Murabahah is a fixed-price transaction, meaning the buyer knows the total cost of the item from the outset. The profit margin is agreed upon upfront and is not dependent on interest or fluctuating market rates.

From an Islamic finance perspective, Murabahah is considered a valid mode of financing, as it complies with the principles of Sharia law. It allows for the facilitation of trade and financing without resorting to interest-based transactions, which are prohibited in Islamic finance.

Murabahah is commonly used in various sectors, including consumer goods, vehicles, real estate, and project financing. Islamic banks and financial institutions offer Murabahah-based products and services to meet the financing needs of individuals and businesses.

One key benefit of Murabahah is its transparency and simplicity. The buyer knows the cost and profit margin upfront, eliminating uncertainty and promoting trust between the parties. It also provides an avenue for individuals and businesses to acquire assets and finance their needs in a Sharia-compliant manner.

It's worth mentioning that while Murabahah is widely used, it is considered a cost-plus financing arrangement and does not involve the same level of risk-sharing as other Islamic finance concepts like Musharakah or Mudarabah. Nonetheless, it continues to play a significant role in Islamic finance by providing a practical and viable alternative to interest-based transactions.

In summary, Murabahah is an Islamic finance concept that facilitates trade and financing through a transparent sale of goods with an agreed-upon profit margin. It allows individuals and businesses to acquire assets and finance their needs in a Sharia-compliant manner while promoting transparency and trust between the parties involved.



Ijarah, also known as Islamic leasing, is a concept in Islamic finance that allows for the leasing or rental of assets or services. It is a contract-based arrangement where the owner of an asset (lessor) transfers the right to use the asset to another party (lessee) in exchange for periodic payments.

The fundamental principle of Ijarah is that ownership of the asset remains with the lessor while the lessee gains the right to utilize and benefit from the asset for a specific period and purpose. The lessor retains responsibility for maintaining the asset and bears the risks associated with ownership.

Ijarah contracts can apply to various types of assets, including real estate, vehicles, equipment, machinery, and even services. The terms and conditions of the lease, such as the duration, rental amount, and other specific terms, are agreed upon by both parties before the contract is established.

The rental payments in Ijarah are considered the consideration for the utilization of the asset or service. The amount and frequency of the payments are determined in advance and agreed upon by both parties. The lessor may also include additional terms, such as conditions for early termination of the lease.

One distinguishing feature of Ijarah is that the lessor retains the ownership and risks associated with the leased asset. This aligns with the prohibition of Riba (interest) in Islamic finance, as Ijarah does not involve the charging of interest on the capital or the appreciation of the asset's value over time.

Ijarah contracts can be structured in different ways to suit the specific needs and preferences of the parties involved. For example, in Ijarah wa Iqtina, there may be an option for the lessee to purchase the asset at the end of the lease period. This arrangement allows for gradual ownership transfer, giving the lessee an opportunity to acquire the asset.

Ijarah is widely used in various sectors, including real estate, vehicle financing, equipment leasing, and project financing. Islamic banks and financial institutions often offer Ijarah-based products and services to cater to individuals and businesses seeking Sharia-compliant financing options.

From an economic perspective, Ijarah provides a mechanism for individuals and businesses to access and utilize assets without taking on the full ownership burden. It facilitates the efficient allocation of resources and promotes economic activity by enabling businesses to acquire necessary assets and individuals to access housing or transportation without resorting to interest-based financing.

Overall, Ijarah is a fundamental concept in Islamic finance that promotes the utilization of assets through leasing arrangements while adhering to the principles of Islamic law. It offers an alternative to conventional interest-based financing and encourages fair and transparent transactions in the realm of asset usage and rental.


Investment in Agriculture

Islamic economics encourages investment in agriculture, recognizing it as a vital sector that contributes to food security, economic development, and sustainable livelihoods. Agriculture holds a significant place in Islamic teachings, which emphasize the importance of nurturing the earth, utilizing its resources responsibly, and providing for the well-being of communities.

Islamic economics places emphasis on social justice and equitable development. Investment in agriculture can be directed towards rural areas, aiming to improve the socio-economic conditions of farmers and rural communities. This can include infrastructure development, access to markets, irrigation systems, training programs, and capacity building to enhance agricultural productivity and alleviate rural poverty.

Islamic economics encourages cooperative farming models where individuals or communities pool their resources and skills to collectively invest in agriculture. This fosters collaboration, risk-sharing, and the equitable distribution of profits. Cooperative farming can enable small-scale farmers to access resources, technology, and markets that would otherwise be challenging to attain individually.


Muzara'ah can be seen as a form of cooperative farming. Muzara'ah is an Islamic concept that involves a partnership between a landowner (Muzarib) and a farmer (Amil). In this arrangement, the landowner provides the land, while the farmer contributes labor, expertise, and other necessary resources for cultivation.

Under the Muzara'ah agreement, the farmer (Amil) cultivates the land and shares the crop yield with the landowner (Muzarib) based on a pre-determined ratio or percentage. The division of the yield is agreed upon before the farming activity commences.

The Muzara'ah partnership can be considered a form of cooperative farming because it involves the collaboration and shared participation of both the landowner and the farmer. It allows individuals with different resources and skills to come together to collectively engage in agricultural production.

The Muzara'ah arrangement promotes risk-sharing, as both the landowner and the farmer share in the risks and uncertainties associated with agricultural activities. They also share in the potential profits or losses resulting from the crop yield.

Cooperative farming models like Muzara'ah enable landowners to utilize their land resources effectively by engaging experienced farmers, while farmers gain access to land for cultivation without the need for large capital investments.

It's important to note that the specific details and terms of Muzara'ah partnerships can vary, as they are based on mutual agreement between the parties involved. The arrangement can be adapted to suit the needs and preferences of the landowner and farmer, provided it adheres to the principles of Islamic economics and Islamic law.

Overall, Muzara'ah represents a cooperative farming model within the framework of Islamic economics, where landowners and farmers collaborate to utilize land resources and share in agricultural production and outcomes.


Musaqat is an agricultural contract in Islamic finance that involves the leasing of an orchard or garden for the purpose of cultivation and harvesting of fruits or produce. It is a specific type of partnership in which one party provides the land (owner) while the other party (cultivator) contributes labor, expertise, and other necessary resources for the maintenance and cultivation of the orchard.

Under the Musaqat agreement, the cultivator undertakes the responsibility of nurturing and taking care of the trees or plants, including watering, fertilizing, pruning, and protecting them from pests or diseases. The cultivator is entitled to a portion of the harvested fruits or produce as agreed upon in the contract, while the landowner receives a share for providing the land.

Musaqat is an example of a risk-sharing arrangement, as both parties share in the risks and rewards of agricultural activity. If the harvest is abundant, both the cultivator and the landowner benefit. Conversely, if there is a poor harvest or loss, both parties share in the downside.

This contract aligns with the principles of Islamic finance, as it promotes equitable participation and fair distribution of resources and rewards. It encourages cooperation and collaboration between landowners and cultivators, providing an opportunity for individuals with land resources but limited agricultural expertise to benefit from the productivity of their land through the skills and efforts of cultivators.

Musaqat also encourages the efficient use of land resources by allowing landowners to lease their orchards or gardens to experienced cultivators who can maximize the yield and maintain the quality of the produce. It provides an avenue for cultivators to access land without the burden of land ownership or high capital requirements.

The terms and conditions of a Musaqat contract, including the sharing ratio, responsibilities, duration, and other relevant terms, are mutually agreed upon by the parties involved. It is important for the contract to be clear, transparent, and compliant with Islamic principles.

In summary, Musaqat is an agricultural contract in Islamic finance that facilitates the partnership between a landowner and a cultivator for the cultivation and sharing of fruits or produce. It promotes risk-sharing, efficient utilization of land resources, and equitable participation in agricultural activities, aligning with the principles of Islamic economics.

Islamic Banking

Wadi'ah, also known as safekeeping or custody, is a concept in Islamic finance and banking that refers to the act of depositing money or valuable assets with a trusted custodian for safekeeping. It is a form of arrangement where the depositor entrusts their funds or assets to the custodian, who is responsible for their protection and return upon request.

In the context of Islamic banking, Wadi'ah serves as an alternative to conventional interest-based deposit-taking. It provides a means for individuals and businesses to safeguard their assets in a Sharia-compliant manner. The custodian, often a financial institution, acts as a caretaker of the deposited funds or assets and is expected to exercise due diligence and fulfill their fiduciary responsibilities.

Key features and principles of Wadi'ah include:


The primary objective of Wadi'ah is to ensure the safekeeping of the deposited funds or assets. The custodian is entrusted with the responsibility of protecting the deposit and returning it intact to the depositor when requested.

No Guaranteed Return:

Unlike conventional interest-bearing deposits, Wadi'ah does not involve the payment or receipt of any predetermined or guaranteed return. The custodian does not provide any profit or interest on the deposit, as it is merely acting as a custodian and not using the funds for investment purposes.

Fiduciary Duty:

The custodian is considered a trustee or agent of the depositor and is bound by a fiduciary duty to exercise reasonable care and diligence in safeguarding the deposited funds or assets. The custodian should not use the deposit for its own benefit or engage in any unauthorized transactions.


The ownership of the deposited funds or assets remains with the depositor throughout the Wadi'ah arrangement. The custodian has a contractual obligation to return the deposit upon request, without commingling it with its own funds or using it for its own purposes.


The custodian bears the liability for any loss or damage to the deposited funds or assets resulting from negligence or breach of its obligations. However, the custodian may be exempted from liability in cases of force majeure or circumstances beyond its control.

Wadi'ah is commonly used in Islamic banks for various types of deposit accounts, such as current accounts, savings accounts, or demand deposit accounts. While the depositor does not receive any guaranteed return on their deposit, they benefit from the assurance of the safety and security of their funds.

It's important to note that Wadi'ah should be distinguished from investment-based accounts or products that offer profit-sharing or investment returns, as those involve different contractual arrangements and risk-sharing mechanisms.

Overall, Wadi'ah serves as a mechanism for safekeeping funds or assets in accordance with Islamic principles. It provides individuals and businesses with a Sharia-compliant alternative for depositing their assets while ensuring their protection and accessibility.

However, the concept of Islamic banking goes beyond Wadi'ah. Islamic banking institutions offer a range of financial products and services that comply with Islamic principles, including profit-sharing contracts such as Mudarabah (partnership) and Musharakah (joint venture), as well as leasing contracts such as Ijarah. These contracts facilitate investment, financing, and economic activities without involving interest (Riba) or prohibited elements.

Islamic banking aims to provide an alternative financial system that aligns with the principles of justice, risk-sharing, and ethical conduct. It seeks to foster economic growth while upholding the values and principles of Islamic law.




According to mainstream scholarship in Islamic finance, it is generally permissible to purchase shares of companies in the stock exchange under certain conditions and within specific guidelines. However, it is important to note that there may be differences of opinion among scholars regarding specific practices and circumstances, and individual rulings may vary.

The permissibility of investing in stocks is based on the following considerations:

Business Activities:

The underlying business activities of the company in which the shares are being purchased should be permissible according to Islamic principles. This means that the company should not be involved in activities that are explicitly prohibited in Islam, such as gambling, alcohol, pork, or interest-based financial transactions.

Debt Ratio:

The company's debt ratio should be within acceptable limits. Excessive levels of debt may raise concerns of excessive financial risk or involvement in interest-based borrowing, which would be contrary to Islamic principles.

Profit and Loss Sharing:

The investment in shares should entitle the investor to a proportionate share of profits and losses generated by the company. This aligns with the principle of equity and risk-sharing in Islamic finance.

Transparency and Disclosure:

The company should provide sufficient and transparent information about its financial position, activities, and corporate governance practices. Investors should have access to accurate and timely information to make informed investment decisions.

Unlawful Income:

If the company derives a significant portion of its income from prohibited activities, such as interest or non-compliant sources, one should avoid investing in that company.

It is important for individuals to consult with qualified scholars or experts in Islamic finance to obtain specific guidance and rulings based on their individual circumstances and the practices of the companies in question. Different scholars may have varying interpretations and opinions on specific aspects of investing in stocks.

Furthermore, it is worth noting that the permissibility of investing in stocks does not imply that all stocks or investment opportunities in the stock market are automatically permissible. Each investment opportunity should be evaluated on its own merits and investors should exercise due diligence to ensure compliance with Islamic principles.

Overall, while investing in stocks is generally considered permissible within the framework of Islamic finance, it is advised to seek guidance from qualified scholars or experts in the field to ensure compliance with Islamic principles and to navigate any specific concerns or issues that may arise.


Ethical Guidelines

Islamic economics places a significant emphasis on ethical behavior in economic activities. It seeks to establish a moral framework that guides individuals and societies in their economic interactions. The principles of honesty, fairness, and accountability are central to the ethical foundation of Islamic economics.


Islamic economics stresses the importance of honesty and truthfulness in all economic transactions. Individuals are expected to provide accurate information and disclose any relevant details to ensure transparency and fairness. Engaging in dishonest practices, such as misrepresentation, false advertising, or deceitful behavior, is considered unethical and goes against the principles of Islamic economics.

Fairness and Justice:

Islamic economics promotes fairness and justice in economic dealings. It advocates for the equitable distribution of resources and opportunities, ensuring that individuals are treated fairly in their economic transactions. Unfair practices, such as price manipulation, price gouging, or monopolistic behavior that exploits others, are discouraged. Islamic economics encourages market competition within a framework of fairness and justice, where all participants have equal opportunities.


Islamic economics emphasizes the concept of accountability in economic activities. Individuals and organizations are expected to be accountable for their actions and decisions, particularly in matters related to financial transactions. This includes fulfilling contractual obligations, honoring agreements, and taking responsibility for any harm caused due to negligence or wrongdoing. Accountability helps maintain trust and integrity in economic relationships.

Prohibition of Exploitation:

Islamic economics strongly discourages any form of exploitation in economic transactions. Exploitative practices, such as usury (Riba) and excessive profiteering, are strictly prohibited. The focus is on promoting mutually beneficial transactions where both parties derive fair value from their exchange.

Social Responsibility:

Islamic economics recognizes the social dimension of economic activities. It emphasizes the importance of considering the welfare and well-being of society as a whole. This includes promoting social justice, addressing income disparities, and actively participating in initiatives that alleviate poverty and improve the quality of life for all members of society.

By promoting ethical behavior in economic activities, Islamic economics aims to create an environment of trust, fairness, and social harmony. It recognizes that economic transactions should not be detached from ethical considerations but rather be guided by principles that promote the overall well-being and moral development of individuals and society as a whole.


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Sajid Mahmood Ansari
Research Scholar, Writer, Blogger

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