In general, the Islamic economic system is a system in which economic activities pertaining to production, distribution and consumption of resources are governed by Islamic principles. These principles are derived from Al-Quran, the divine speech of God, and Sunnah or traditions of the Prophet.
The conventional economic system, on the other hand, is not guided by any religious or divinely inspired principles. Instead, this sytem was derived from theories that were developed by Western scholars such as Joseph Schumpeter, Max Weber and Adam Smith.
This represents an important foundational difference between the 2 systems that later on influences the modus operandi, objectives and economic goals, amongst other. Nevertheless as an economic system, both are concerned with how economic agents allocate resources and apportion goods and services in order to fulfill economic objectives of a society.
In this article, we attempt to provide a brief introduction on several other differences between conventional and Islamic economic system.
1. Underlying philosophy
Islam as a way of life provides guidance on how Muslims perform its daily activities, including transactions and other economic activities. Pertinent to this is the way society inteprets and solve man’s economic needs and problems. Islam has established some standards on how economic system should be organized, which are based on justice and equity.
Justice cannot be achieved without considering the effects of a particular action or actions towards society. Therefore Islam guides and encourages man to become non-self-centric wherein life’s goals is not only about personal gains. This is contrary to the conventional economic system that prioritises self-interest over public interest. In Adam Smith’s theory of “invisible hand”, the assumption is that a free market economy works well when everyone works for his/her own interest.
In an Islamic economic system, social and economic development are like 2 branches of the same tree that needs to grow on par. Whereas in the conventional economics theory, social development is secondary or accidental. This is exemplified by Adam Smith’s description of the invisible hand which is the unintended social benefits of individual self-interested actions.
2. Financing principles
Within the Islamic economic system exists the financial system that facilitates the allocation of resources such as physical goods and financial resources.
In allocating these resources, the Islamic system emphasises on the underlying activities that has to be real and productive. This is unlike the conventional financial system in which the price of financal resources or interest rates is the focus of any financing activities.
In an Islamic economic and financial system, the growth of wealth must be accompanied with increased economic and productive activities. It cannot be a growth of wealth per se, as how the conventional financial system is largely based on.
3. Economic freedom
In a conventional economic system, one has unrestricted economic freedom to initiate, organize and establish any type of enterprise, business or trade. A person has the right to earn income and spend it any way they like.
While Islam allows one to earn and spend at will, he/she is also limited on how that is done. This is because Islam distinguishes between what is permissible and non-permissible. Therefore to set up an enterprise or work in sectors dealing with alcohol, tobacco, and adult entertainment for instance is not permissible. In spending one’s wealth, Islam also discourages extravagant and decadent living as one should not be absorbed with material and wealth gains. In one’s wealth, Islam has mandated that a portion of it belongs to the poor and needy which a person needs to give away in the form of tithe or donations.
4. Operational supervision
The conventional economic system is supervised in accordance with government regulations and the national law. While the Islamic economic system is not only overseen by the government but also monitored by the board of Shariah scholars well versed in Islamic knowledge.