''And hold tight to the rope of Allah and divide not,'' [ Ale-Imran: 103],

Islamic Economy:The solution to current economic crises

Monday, May 25, 2009

Any observer of the state of the Capitalist economic system can see that the system is on the verge of collapse – if it has not collapsed already. Whatever efforts the Capitalists have planned to salvage the system can only at best provide temporary relief. This is because the causes of the problem lie within the foundations of Capitalism, and cannot be solved by mere patchwork on the surface. There are four factors at the heart of Capitalism's foundation that needs to be addressed:


1. Lack of the gold standard:
After World War II, the world adopted the US dollar as the reserve currency under the Bretton Woods' agreement (i.e. which ensures that nations could redeem US dollars for gold). However, the US broke this agreement in 1971 and did not allow countries to redeem their dollars for gold. This rendered the global economy susceptible to any economic shock in the United States, as most countries were tied to the dollar – a worthless piece of paper printed in the US – instead of gold. Even after the advent of the Euro in the economic arena, the dollar generally retained its position, as most currencies were tied to it.

It is for this reason that, unless gold returns as the monetary standard, such economic crises will certainly be repeated. The global system is effectively held hostage by the US dollar. Any dollar shock or US policy affecting the dollar will have effects outside of America.

2. Riba (Interest) based loans
Riba (Interest) based loans result in great economic difficulties. Inevitably, companies, individuals, and states face a situation where they are unable to pay the loans due to the nature of compound interest. This results in a loan repayment crisis. Economic activity and production slows down due to the inability to repay such loans.

3. Legality of stocks, derivatives, futures, and allowing the purchase of goods without taking possession of them
The system and practices in the financial markets and stock exchanges of buying and selling shares, financial instruments and commodities cause a separation between the physical economy and the financial (paper) economy. In the Capitalist system, it is allowed to exchange commodities, derivatives, and other financial instruments without taking physical possession of goods. Rather, pieces of paper representing the asset are bought and sold many times over, without actual goods being transferred between the seller and buyer. This practice causes wild swings in the prices of goods. These practices are only exposed when the economy is in a financial crisis – such as the one unfolding across the world today.

4. Free market dogma
Although most people recognize that the state-owned approach of Communism was a failure, there is a lack of awareness of how the economy needs to have a mixed approach to ownership, as prescribed by the shariah. The US government intervention into the system – back tracking on a US Senate law prohibiting any restriction upon the financial system – is a testament to the failure of the laissez-faire approach to economy.

Solution to the Current Crises: The Islamic Approach

Without doubt, it is the Islamic economic model alone that cures and prevents the occurrence of such economic crises. For it alone has prohibited the factors that lead to economic crises in the first place.

1. The silver-gold monetary standard
Islam mandates that only gold and silver can be the monetary standard. Any paper currency issued must be fully convertible to gold or silver on demand. Consequently, paper currency of one country cannot be tied to the currency of any other country. Rather each state's currency must be free of any other currency and have its own fixed, unalterable value.

2. Absolute prohibition on Riba (Interest)
Islam has prohibited interest in all its forms and mandated loans to the needy to assist them, without any interest or surcharge over their principal amount. Islam mandates that the treasury, the Bait ul-Maal, maintain a separate head to provide interest-free loans in order to assist those in need.

3. Specific regulation over the sale of goods
Islam prohibits the selling of goods before the buyer takes possession, thus preventing speculation in commodities. It also prohibits transactions in financial instruments, derivatives and shares resulting from batil (invalid) contracts, along with other speculative trading. These practices are specific to the Capitalist economy, which allows them in the name of freedom of ownership.

4. Using the shariah to determine ownership of goods:
Allah (swt) designated three types of ownership

Public Ownership
Consisting of solid, liquid and gaseous minerals including petrol, iron, copper, gold, natural gases etc. found in the depths of earth, all forms of energies and the energy-intensive, heavy industrial plants. Consequently, individuals/companies are prohibited from owning such items. Instead, these public properties are to be managed by the state and their benefits distributed amongst its people.
State Ownership
Includes taxes collected by the state and any revenues earned by the state from agricultural, trade and industrial activity, outside the range of public properties. The state spends these incomes on state expenses.
Private Ownership
Unlike the above two is held by individuals and disposed of in accordance with the Shariah rules.

By applying Islam and ensuring the above categories of ownership, the state will avoid the disastrous policies of Communism and Capitalism.

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