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Economic Issues and How Islamic Economics Can Provide Solution to Income Inequality in Malaysia

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Malaysia was known as a multi-racial society when it gained its independence from the British in 1957. During these early years in the Malaysian economy, they had several economic issues like riots and unagreements between the Malays (Bumiputera) and non-Malay (non-Bumiputera) and also led to issues like perceived income inequality among the races and this made the government to introduce new economy policies in 1970s. Malaysia economy faces a serious problem of income inequality and injustice prevails as income and wealth are distributed in an uneven manner among the society. Ethnicity, as the foundation of the economic policy to solve the economic problem facing the Malay community, then became doubly attractive because it leads to the empowerment of the countryside and the creation of a domestic market for industrial products. When the new policies introduced successfully raised income of the Malays and substantially reduced poverty amongst them, the question of intra-Malay inequality come to the surface. It can no longer be ignored.

Introducing Islamic economics can help reduce the conflicts and riots from all races in several areas in the economy like financing. The main purpose of the economic is to study the economic issues and try to bring solutions that helps the most of people. The profit and loss sharing mechanisms that are introduced in Islamic banking and finance let people grow wealth safely as the banks bear the risk with their customers. This will help the society to have more funds, become more productive and reduce the income inequality problem.

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Islamic finance applies profit and loss sharing mechanisms as an alternative to loan and debt-based system in order to avoid charging and paying interest as it is strongly opposed in the teaching of Islam. Two known contracts that applies profit and loss sharing introduced in Islamic financial system are musyarakah and mudharabah. These equity-based contracts are form as partnership contracts between at least two or more parties known as financiers and entrepreneurs. Some economist argue that Islamic economics is not the best substitute in solving income inequality due to its failure to comply with the rules of Shari’ah. Regardless of defects in Islamic economy itself, it is important to note that the establishment and development of Islamic economy is still progressing and improving. Although some may strongly disagree, it is firmly believed that Islamic economics should give solution to income inequality because it improves income distribution by using profit and loss sharing mechanisms, reduce income inequality through zakat, and alleviate poverty by implementing waqf. Using Islamic economics approached the issue through some instruments such as Zakat. This problem can be solved or at least reduced and less people will be affected. Zakat plays an important role for the economy. First of all, it allows the wealth to circulate between all the classes in the society, the rich’s wealth surplus is given for the poor. Hence, Zakat ensures the circulation of the wealth, so the surplus capital will circulate among the poor people and this will be somehow enough for poor people to get basic needs and ensures distribution of wealth among races reducing the conflicts and riots between them.

On the other side, without Zakat the surplus capital will be considered as leakages and this is a negative point for the economy. It has a clear dampening effect on accumulation of assets/wealth or only those who can afford to do business can benefit from the interest and profits in the economy.

Zakat is not just a mechanism of taxing people in fact, it is more than that. According to S. Ghiasul Haq (2013). Zakat is an instrument that does not let rich people accumulate excessive wealth Zakat is a wealth based taxation system unlike the conventional tax system which is an income based taxation system. This difference is very important because people will be taxed on how much they own instead of how much they earn because people will earn differently every time. Thus, it is more relevant to tax the wealth rather than imposed tax on the income. This is a major failure of the modern capitalistic economic system. Therefore, by applying Zakat instead of the conventional tax system, the problem of income inequalities will eventually be reduced if not eradicated.

Secondly, Waqf. Waqf is not only for religious purposes such as building and refurbish mosques, graveyards, donating Qurans, etc. The implementation of waqf in the economic actually contributes in solving the problems of income inequality or equity in distribution of wealth. Instead of depending solely on government expenditures, waqf system can be used in financing activities and development of social welfare. Sectors like education, healthcare, and housing, that are built under waqf are made to help fulfill the basic needs. The establishment of education institutions like schools, universities and researches under waqf system empowering the society with education, health treatment and so on. Providing an easy access and low fees for the low income earners as assistance and allowing them to increase their level in education and therefore will increase their productive capacity. In addition, in the sector of housing, houses are built based on waqf financing with the purpose to provide an affordable and low cost rental for the low income earners and this is a way of assisting the economy in general not only by earning income but also in areas like owning and renting assets.

In conclusion, Islamic economics has a very efficient system to alleviate the problems of poverty and income inequalities through two built-in stabilizers that are derived from the Quran and Sunnah in which there are zakat and waqf. functions in redistributing the wealth between the rich and the poor to help in reducing the income gap and let the wealth circulate within the society.

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