Monetary and Fiscal Policy in Islam

The role and realm of reign of each will be specified, in addition to the set of assumptions that is derived from the Islamic economic system, which include Zakah, prohibition of interest, moderation in consumption, the Islamic inheritance system, Hisbah, Qirad, and the co-existence of private and social ownership of the means of production. Zakah provides a major means of fiscal policy because it affects the allocation of resources, the level of aggregate demand and the distribution of income as well since the variations in the volume and the timing of collection and disbursement of Zakah creates variations in disposable income and fixed and circulating capital. The importance of this tool is enhanced by the relatively high ratio of Zakah to income, since it is levied also on wealth.

Additionally, the size of "waiting monetary assets" is influenced. The prohibition of interest, of course, reduces the degree of freedom of the government in using such tools of monetary policy as the rate of discount and the open market operations. But then, the Islamic approach to the issue of "waiting monetary assets" is different, in that these assets are dealt with through Zakah and a strict requirement of genuineness in business transactions. However, the central banking supervision and control over the money supply is not reduced but rather increased by the consideration of money as a "public utility", changes in which must not be left to the individual interests of monetary intermediaries (banks). The flexibility of Zakah allows for the intensification of the development efforts. This is always backed by ethics and values of "construction and improvement" in Islamic teachings. The last tool of economic policy has to do with the role of the government as an insider of the system rather than as an outsider. Such a government role is made available through its ownership of the major natural resources, and al-Hisbah. The distributive objective is built into the system by Zakah, the State insurance, and the inheritance system. Thus, over accumulation and excessive concentration of wealth is checked by forces that are working within the system itself.