Structuring the Economic System in Islam

The strength and well-being of a state cannot be separated from the arrangement of an economic system for the welfare of all citizens. As usual a newly established country, the state of Medina also did not escape economic problems. On the other hand, the population of Medina is increasing because of the increasing number of Muhajirin who come to Medina. While the economy of Medina is controlled by Jews who are famously adept at economic activity.


As for the economic policies of Muhammad ﷺ  described succinctly. First, the economic system. In building an economy in accordance with Islamic sharia, the Prophet ﷺ  prohibited some improper business practices, namely riba, gharar, ihtikar, tadlis and market inefficiency.




There are several opinions in explaining riba, simply interpreted as additional taking, either in buying and borrowing transactions or borrowing bathil or contrary to the principle of muamalah in Islam.



There is an uncertainty in an economic transaction due to incomplete information. Whether it concerns quality, quantity, price or time of delivery. 



Ihtikar may include all actions that may affect the supply of goods unnaturally. For example hoarding and monopoly. Both types of economic behavior can harm the economy of Medina at that time and were prohibited by Muhammadﷺ  .


Market Inefficiency

It occurs when some market participants do not have the same information so some of them are harmed because of that ignorance.


Second, the wage system.

The next step that the Prophet Muhammad (peace be upon him) took was to pay attention to the wage system. One of his messages about this wage system is to pay workers wages as soon as possible before their sweat dries up.


Third, public finance policy.

Fiscal policy is the policy taken by the government in managing state revenue and expenditure. Historically, fiscal policy in the early days of Islam could be divided into two periods, namely:


  1. The period before expansion

An important element of fiscal policy in the first period was the contribution of fay’ and shodaqoh. The implementation of fiscal policy during the time of the Prophet and Abu Bakr was almost the same because there were not many problems that arose along with the need for the territory of the Islamic caliphate. In this initial period, the country’s financial system is still going on simply because it concerns a not-so-large area. Nevertheless, in that first period the Muslims had thoughts about their own currency. Arab transactions before Islam were conducted using the currencies of other nations, namely the eastern Roman dinar and the Persian dirham. 


  1. Period after expansion


In the second period that began during the caliphate of Umar ibn Khattab, the Islamic state of Medina had begun to be established. This is why Umar ibn Khattab is often referred to as the founder of both Islamic countries. At first, Umar sought to continue the tradition of government that had been practiced before. However, the need for caliphate territory and rapid population growth requires a systematic system of government operations so that it can be qualified to control such widespread power.

At the time Umar formed an institution that manages the administration of state wealth. One of the institutions established by Umar was diwan adopted from the practice of Persian rule. In addition, the bayt al-mal or public treasury office, provides a general framework on fiscal policy for the citizens of Medina.

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