Islamic Economic System
The economic system of Islam is the collection of rules, values and standards of conduct that organize economic life and establish relations of production in an Islamic society. These rules and standards are based on the Islamic order as recognized in the Koran and Sunna and the corpus of jurisprudence opus which was developed over the last 1400 years by thousands of jurist, responding to the changing circumstances and evolving life of Muslims all over the globe.
Today’s trade and commerce in the whole world is run on the basis of interest based debt. If we look at the money and capital markets in any country we find that they are basically markets for exchanging financial obligations and receivables.
It is no wonder that just the mere thought that interest rate may go up (or down) will bring havoc to all sectors of the economy. Standard economic analysis tells that interest rates play important roles in the economy.
Firstly, that it provides incentives for savings, and secondly that it performs an allocative function with regard to capital.
Usually, a main question is raised for discussion: Does the fact that Islam prohibits interest mean that there is no time value of money in the Islamic economic system?
The answer is negative. Shari’ah does recognize the time value of money.
There is ample evidence to show that monetary value in many Shari’ah prescribed transactions is attached to time.
Policies that are used to determine the extent of risk-taking of insurance operators against the payment of certain premiums are known as underwriting policies. The amount of liability to be accepted and the extent of coverage fall under the underwriting policies.
There must be adequate measures to ensure that the underwriting policies and investment strategies are Shari‘ah-compliant. Investment of insurance funds should be made in ethical businesses that do not cause harm to people or the environment.
In addition, ethical considerations in takaful extend to investment in businesses or products that do not contradict the Shari‘ah. Both the process and the end product must be Sharī‘ah-compliant.
For instance, investment in breweries and casinos are forbidden in Islam. In a similarity, insurance underwriting policies must not contradict the Shari‘ah. These can be realized through the setting-up of a functional Shari‘ah board to guide and approve underwriting policies, investment strategies, and the operators’ products.