Principles of Islamic banking and finance/PIBF201/Islamic economic environment/Distribution of Income

Distribution of Income: The main pillar of an Islamic economic system

In the context of an Islamic economy, the issue of distribution of income and wealth has particular importance. Both the Qur'an and the Sunnah of the Prophet (PBUH) give numerous instructions and principles that Muslims are supposed to follow in their individual and collective affairs.

Islamic economists emphasize that one of the basic principles of Islamic economics is to prevent concentration of wealth in few hands even if people acquire their income or wealth through proper means. This provides a clear justification for the government to use tax and transfer policies to impede concentration of wealth after the production process is complete. It is also important to note that individual Muslims are asked to willingly accept any government decision to take away some of their wealth that they might have earned lawfully. The following verse of the Qur’an is often mentioned in this regard:

"And what Allah restored to His Messenger from the people of the towns - it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveler - so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you - take; and what he has forbidden you - refrain from. And fear Allah ; indeed, Allah is severe in penalty." (59;7)

It is quite understandable that in any society, whether their inhabitants are Muslims or not, many people would be tempted to become richer even if it is only achievable at the expense of others or by exploiting others. On the other hand, relatively poor people may be jealous and envious of the rich. Such feelings are a matter of human instinct. The Creator asks Muslims to control these instincts:

"O you who have believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful. And whoever does that in aggression and injustice - then We will drive him into a Fire. And that, for Allah , is [always] easy. And whoever does that in aggression and injustice - then We will drive him into a Fire. And that, for Allah , is [always] easy. If you avoid the major sins, which you are forbidden, We will remove from you your lesser sins and admit you to a noble entrance [into Paradise]. And do not wish for that by which Allah has made some of you exceed others. For men is a share of what they have earned, and for women is a share of what they have earned. And ask Allah of his bounty. Indeed Allah is ever, of all things, Knowing." (4: 29-32)

These verses above are good examples of what is required by the governments and individuals of Muslim societies. Muslims are asked not to be jealous of others, not to do any harm to other parties in order to clinch a favorable business deal, and pay taxes willingly. We should admit that while many Muslims would adhere to these commandments of their Creator, many others would tend to neglect the teachings. It is, therefore, inappropriate to assume that because Muslims are asked by their Creator to behave in the above manner, they will actually do so. Nor should one claim that an Islamic system, through its educational and economic policies, would be able to obliterate the causes of these natural instincts completely. But a properly designed economic system with appropriate rules and regulation, which addresses the issue of income distribution, could provide a social environment that will help its people to restrain and inhibit these passions. Judicious government spending and redistribution schemes could provide such an environment that would create the desired results.

One way to thwart the concentration of wealth is to formulate appropriate tax and transfer policies. However, if this is the only formula, there is a danger that it may either impede economic activities and lead to inefficiency (if over utilized) or fail to achieve the objective satisfactorily (if underutilized). It then becomes clear that the greatest task of the political economy of Islam is to devise a production mechanism which is not only efficient and addresses the issues of unemployment and inflation, but intrinsically and endogenously tackles the problem of distribution, not leaving it as a residual issue.

One can argue that the neoclassical school does not throw away the question of distribution, it only at-tempts to separate this problem from that of efficiency i.e., the market is allowed to determine a major part of the production process and the resulting distribution of income pattern but any serious injustice is corrected through taxation and transfer policies. However, an advantage of tackling both the problems in a single and exclusive set up is that it may foster a production process that leads to a more desirable income distribution pattern intrinsically and abbreviate the extent of reliance on tax and transfer policies. Furthermore, there is a limit to which these transfer policies can be used.

This is why, under the neoclassical framework, the resolution of distributional question has manifested in accommodating the sentiments of the relatively low income groups of people against¬ the rich instead of containing the concerns of the rich by allocating them just enough so that they remain active in the production process.

There is a vast difference between these two approaches: in the former case a minimum possible part of income is allocated to low income groups of people to keep them from agitating. Whereas in the later approach the strategy is to allocate, through the production process, a minimum possible portion of income to the rich so that they remain in production. An important point worth noting in this context is that the neoclassical solution is a source of increasing or at least maintaining the gap between the rich and the poor that has been a continuous cause of resentment and indignation in many societies of the world.

In the methodology of the political economy of Islam, therefore, a central issue would be to devise a production process which, primarily through the market forces but under a different organizational set up with different rules of the game and the resulting power structure, allocates the minimum possible part of income (to the relatively rich class) to secure efficiency. This is in contrast to the neo¬classical solution of redistributing a minimal part of the income (after efficient production) to avoid serious injustice and discontent.

Among other things, Islamic economists have attempted to show that replacement of interest based transactions by those based on equity or profit and loss sharing arrangement, can (at least to some extent) move the economy towards a desirable income distribution path without any loss of efficiency. Establishing a profit and loss sharing Islamic banking, therefore, is a corner stone of an Islamic economy.