Fiscal and Monetary Policy in Islam

Abstract

The role of the state in an Islamic economy is to ensure that everyone has equal access to resources and means of livelihood, that there are rewarding employment opportunities for all those who can work, that market rules, regulations, and supervision minimize business uncertainties so that justice is attained and transfers takes place from the more able to the less able, and that distributive justice is ensured for the next generation. As Islam is a rulebased system, the state regulates, supervises, and provides an incentive structure for rule compliance, all within the framework of the rules prescribed by the Qur’an and Sunnah. The role of the government is broadly divided into two functions: first, a policy function that ensures that private interest does not diverge too far from public interest; and second, to design and implement an incentive structure to encourage rule-compliance, coordination, and cooperation.