Islamic Fiscal Policy

The fiscal policy in Islamic economics may be defined as: “The usage of the revenue collected by the Islamic government and expenses made to monitor and influence economy of the Islamic state, is Islamic Fiscal Policy”. Objectives of Fiscal Policy in Islamic economics would be different from those of the secular economy. The objective of economic struggle is to maximize human welfare. In secular economy human welfare means the achievement of worldly good. In Islamic terms the aim of achieving welfare is not limited to the present world; it extends to the next world also. Moreover, the Islamic Economy is organized on the basis of the economic values of Islam.

 

Islamic fiscal policy

 

IMPORTANCE OF ISLAMIC FISCAL POLICY

In an Islamic Government, Islamic Fiscal Policy holds greater importance because owing to the illegality of interest, prohibition of accumulation of property and wealth and the ban of speculative motive for demand of money, the monetary policy would not probably be very effective. In the Islamic Economy the chief instrument of Fiscal Policy is Zakat. Next in importance are the taxes.

The objectives of the Islamic Government will be derived from the character and role of the state established under the Illustrious Caliphs of Islam. These objectives are as follows:

  • Safeguard of religion, defence of the Islamic Government and its citizens, struggle for the dominance of Allah’s Decree.
  • Establishment of a state administrative machinery, maintenance of law and order and setting up of courts.
  • To provide suitable employment opportunities for the people; to work for public welfare, to take steps for the general prosperity of the citizens of the state. To maintain economic balance and stability and resolve the problem of the distribution of wealth.
  • To administer state property in the collective interest of the society.
  • Carrying out the task of bidding good and forbidding evil at the individual and collective level.

Objectives of Fiscal Policy in Islamic Economics

Fiscal policy in Islamic economics basically has the same objectives as that of the secular state. They are as follows:

  • Eradication of unemployment.
  • Equitable distribution of wealth.
  • Economic stability.
  • Faster economic progress.

Hence the most important objectives of Islamic fiscal policy are as follows:

  • Efficient Allocation of Resources.
  • Equitable distribution of wealth for which the by instrument is Zakat. It has been aptly remarked that “Zakat” in Islam has built-in redistributive mechanism.”
  • Attainment of the goal of full employment without inflation.

Abedeen Salama mentions the following four objectives of an Islamic fiscal policy and Islamic monetary policy:

  • Resources Allocation.
  • Economic stability.
  • Acceptable growth rate.
  • Just distribution of income and wealth.

Umar Chhappra, with reference to the Islamic monetary policy, there are two more objectives to the above list. They are:

  • Full Employment.
  • Broad-based Economic Well-being.

F.R. Faridi identifies the following four objectives of fiscal policy in Islamic economics:

  • Justice and Equity.
  • Fulfilment of the social and economic needs of the society: and achievement of social and economic well-being.
  • Economic progress.
  • Evolution of the social structure.

Zakat as an Instrument of Islamic Fiscal Policy

Elimination of interest is the cornerstone of the monetary policy of Islam. The most important element of Islamic fiscal policy is Zakat (and Ushr) which as a form of worship is one of the basic articles of faith in Islam. In this perspective Zakat cannot be regarded as a tax, for its economic effects are different from those of the taxes.

Zakat has been made obligatory by Allah Almighty. The Holy Quran contains several verses, which declare Zakat obligatory upon the Muslims. However, its detailed rulers are given to us in the traditions of Allah’s Apostle (SAW). The Holy Quran does not mention the rate of Zakat and the amount on which Zakat is to be levied. These details are to be found in traditions. The jurists hold that the rates of Zakat given in the traditions are unalterable. The Islamic fiscal policy is discussed in more details in the Islamic finance certification and diploma in Islamic finance programs offered by AIMS.

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