Difference between Islamic Economic System and Conventional Economy
If judging from the basic principles and understanding, there are definitely fundamental differences between the Islamic and conventional economic systems. But unfortunately, often the definition of Islamic economics is now experiencing a narrowing of meaning where the discussion revolves only on the terms interest, usury, profit sharing or contracts such as mudaraba and murabaha.
Yet when we talk about the economy, the discussion covers the whole economic system whether it’s about market mechanisms, the concept of supply and demand as well as global economic problems. Likewise with Islamic economics, Islamic economics does not only talk about interest, usury or other popular terms.
Adam Smith through his book The Wealth of Nations proposes a classical / conventional economic system that limits the political role and gives more space to individuals. According to him, every individual has full power over his property and is free to use economic resources in the ways he wants.
In principle, there is nothing wrong with the definition expressed by Adam Smith above. The Islamic Economic System also recognizes individual freedom in obtaining and allocating his property. However, the difference is that in the Islamic Economic system, how the acquisition and allocation of assets is also discussed and regulated to achieve the desired economic goals.
Speaking more about the Islamic economic system and conventional economy , here are some of the most fundamental differences between the two:
If you are an audio visual type, you can also listen to YouTube videos that discuss it.
Difference in Principle
Conventional economics adheres to the concept of scarcity which states that the available resources are limited in number so the purpose of this discipline itself is to study human behavior in the face of scarcity.
Therefore, economics only learns how to allocate limited resources optimally and gives freedom to individuals to determine the ends (ends) of the use of these limited resources.
While Islamic economics is goal oriented discipline which means that Islamic economics not only learns how to allocate limited resources efficiently but also learns the ends of the use of these resources.
Also Read: What are the different sharia and conventional banks?
Differences in Market Mechanisms
Conventional economics adheres to a free market mechanism in which every individual is allowed to enter and enter the market without any prohibition or intervention.
According to Adam Smith, the market has the potential to create its own balance. This balance which he later called “invisible hands” which if the market mechanism is left free without rules (without any restrictions on production or consumption) then the consumer demand for goods / services becomes balanced with supply from the side of the producer so that it will create prosperity in society.
This mechanism will ultimately maximize profitability, increase innovation, create division of labor and encourage price balance.
While the Islamic economy does not believe in an “invisible hand” that makes the market efficient. Government involvement in the Islamic economic system is highly considered to support the process of production and distribution of goods / services.
The Islamic economic system sees the government as one of the economic units that is side by side with the other economic units permanently and stably.
Even in the history of the Islamic economy, the role of the government in overseeing the market is carried out by an institution called Al-Hisbah which has the function to oversee the adequacy of goods and services in the market, supervise industry, services, and trade and oversee the entire market.
Difference in Wealth Distribution
Rationalism in the conventional economic system is oriented to get the maximum profit. This benefit can be obtained from how much capital is prepared / issued by each economic unit.
So it can be concluded that the distribution of wealth depends on the amount of capital owned. In a capitalist system, the distribution of wealth will never be equitable because capital is a private good that cannot be regulated.
While in Islamic economics, one of the goals to be achieved is justice. This has the effect that every outcome of development must be distributed fairly to the community fairly and evenly. Justice in the distribution of wealth and assets is realized through the mechanism of zakat, infaq, alms and waqf.
For example, the principle of the zakat mechanism helps the process of distribution of assets by taking from the rich to be given to the poor or the poor so that assets are not only circulated among the rich.
Also Read: 6 Types of Anti Ribet Sharia Online Investment
Difference in Profitability
In conventional economics, there are no rules that limit how an individual can benefit. This implies that any capital owned by an economic unit in the form of money or otherwise can be used to maximize profits.
The conventional economic system also recognizes the principle of time value of money which means that the current value of money is higher than the value of money in the future. With this principle, there is a “price” that must be paid by economic actors when borrowing / using capital from other economic actors known as interest.
While in the Islamic economic system, the acquisition of profits can only be recognized from transactions that are business in nature and not from transactions that are of a helping nature. In business transactions, the distribution of profits is done by a profit sharing system, the amount of which is determined by a percentage.
With this percentage, the profit will be divided according to the proportion of each, even if it turns out the loss will be borne together in accordance with the contract / agreement.
Also Read: Getting to Know the Mudharabah Covenant in Islam
Islamic economic systems and conventional economics have some pretty basic differences. Hopefully the above knowledge can add to your insight about the difference between the Islamic economic system and the conventional economic system.
One way that can be done to encourage the development of the Islamic economic system in Indonesia is to use financial instruments that incorporate Islamic principles, one of which is through a financing scheme in Qazwa. Qazwa has a mission to build a usury-free Islamic finance ecosystem for both donors and entrepreneurs you can learn more on the Qazwa Website
On the qazwa blog we talk about the Islamic economy, personal finance and business. You can find other Islamic economic discussion topics in the category of Islamic economics.