General equilibrium model of Islamic macroeconomic framework tracing through zakat, profit share, and producers’ maslahah

Abstract

Purpose – This paper is trying to build an analysis framework that can work like IS-LM in Western economics. Regarding the methodology, the discussion is developed from the role of profit share rate and zakat of unemployed (uninvested) wealth. Methodology – The research method is the first step to build an equilibrium Islamic financial market. In the Islamic financial market, Islam has prohibited interest rates due to usury (riba) and, as a bride, uses the concept of profit and loss sharing. The second step is to establish a goods market equilibrium. The last step is to build an equilibrium financial and goods market in Islamic macroeconomics. Findings – The result of the vestige finds two curves: first, the one representing the equilibrium in the commodity market (IP). At the same time, the other shows the equilibrium in the financing (counterpart of credit) market (FF). Those curves can then do the traditional task of IS and LM. So, the found framework can comprehensively analyze an economy of the Islamic type. Implication – This research uses the basic intuition of Islamic teachings, such as the role of the zakat of uninvested funds. In this arrangement, the zakat of uninvested funds is a “penalty” for not investing in the fund. Originality – The study is original in build models general equilibrium model of Islamic macroeconomic framework tracing through zakat, profit share, and producers’ maslahah.