Question – It is very important in Islam not to hoard money but to keep it working. How does Islam view placing money on the capitalist stock market system?

Answer – The Islamic economic system runs on a different principle and you have to understand that system before you can get an answer to the question which you have specifically asked. There are two possible ways of drawing capital into the working machinery of the economy – to circulate capital so that it can turn the wheels of the economy and keep it going.

One way to do this is to reward capital with profits so that you can draw capital and utilise it as you please. That means, there are two tools created in society – one is the smaller pull of capital magnates and the other much larger and diffused pull of the society as a whole. To draw money from the profits of a society and direct it to economic channels requires the banking magnates and these banking magnates work on people’s greed for profit on their capital. The fundamental principle that can be understood to apply in this capitalist system, is that money gives birth to children, that is, it creates money directly. In itself it is believed to have that quality.

Islam refuses to accept this notion. The Holy Prophet of Islam, (sa) once asked the question of someone who had enquired about interest: “does your money give birth to children”, i.e. if you keep it idle will it reproduce by itself?” Of course, the answer was, “No.” From this we see that Islam considers money to be an inert factor in an economy. A factor indeed, but an inert factor which can play both positive and negative roles depending on who is utilising that money. So human values must be wedded to money before it produces any results. If those human values are negative values and if irresponsible people get hold of money, that money would be wasted and the whole capital would be sunk into nothingness. In other cases, if the users or usurpers of that money are clever enough to put it some advantage in the economy, then they will gain from it, but the gain of the person who channels this money into the banks, etc. will be a limited gain and a fixed gain. It will be unrelated to the results. If someone who gets your money on the condition of interest, loses it all, then either he has to pay through his nose for the rest of his life or he would have to declare himself bankrupt. Thus this system also invites all kinds of cheats and that is what you come across in everyday life in Europe. In England, particularly these days, many fraudsters use this system to their advantage eat up the money as best they can and then declare themselves bankrupt. With them sink the economies of millions of people.

Islam does not believe in the principle of money reproducing by itself. So, Islam promotes share-holding – a contract where the lender of money will share in the outcome. If it results in a loss, he would suffer the loss and if it turns a profit, he will share in the profit. Now, that requires very cautious decisions on the part of the lender and a higher standard of honesty and integrity in the economy – otherwise the system cannot work. So this is a resultant benefit for the society – only those stay afloat in the market who are honest and have earned the reputation of integrity. The rest are just wiped out. This is the Islamic attitude.

But still, the second part of the question is to be answered: “How would Islam force capital to be pushed into economic channels?”

Islam uses the approach of exacting a progressive fine on idle capital. Thus, according to Islam, capital is created to run the wheels of the economy and nobody has the right to hoard capital. In this aspect, capital is the common property of the nation. It can be individual property only as long as it is serves some purpose. When it becomes idle, then it is to be fined. The Islamic system of Zakat is exactly that fine imposed on idle capital. In Islam, if the capital owned by individuals is not employed in some economic projects, it decreases in value for that individual, that is, the cost of hoarding is paid to the nation by those who hoard money. So they are compelled to push it into the economy and there, as already explained, it requires better people, more honest people, more capable and competent people to utilise that capital.

Now, if you go back into the history of Islam, you will begin to understand that the most honest and the most pious people were the greatest “capitalists”, if you want to call them that, who put capital to good use for the economy. Hadhrat Imam Abu Hanifa (rh), one of the most highly revered jurists in Islam, whose system of jurisprudence is followed by the largest number of Muslims today, was also an astute businessman. People used to throw money at him. Some would leave pouches full of money at his doorstep with the message, “For God’s sake employ it and let us share the profit.” So, if he could employ that money he would share equally in the profit. Mostly, people benefited from his intellect and his experience and this also happened in many other cases. Integrity was supported by the economic system of Islam while on the other hand, dishonesty and the capacity to cheat come to the fore and are supported by the system of usury.

However, I think the question requires a little more exploration in one particular area. The comparative advantage or disadvantage of the two systems comes into the limelight during economic crises such as we have seen recently in England. Those complaints that run on money borrowed against interest, during the idle days of the economy, must collapse. There is no chance of survival for them because they must pay through the nose, although they are not earning anything and not benefiting from the money they had borrowed. In Islam, it is the other way around. If the money becomes idle in the hands of the one who had borrowed it, and production has to be lowered, due to a crisis, then the lender will also have to share the burden with the borrower. The lender will not be paid anything. Such companies will be given much greater breathing periods like those animals who hibernate during winter periods. So, the Islamic system provides the possibility of hibernation, while the western capitalist system has no provision for this.

Source: http://www.alislam.org/library/links/00000059.html