Islamic Finance and The Circular Economy

Islamic Finance is a holistic finance system that aims to also generate social and environmental value for all stakeholders. Islamic finance and the circular economy present a powerful combination, with a shared focus on resource efficiency, ethical investment, and social responsibility.

Islamic Finance and The Circular Economy
Photo by Sigmund / Unsplash

The economic model, which is in use, is known as the linear economy: resource extraction, production, usage, and wastage. This paradigm only concentrates on abstraction, construction, and consumption. The externalities of waste production are ignored and considered someone else’s obligation (Tahir, 2019). Wealth maximization is the key focus of the current economic system.

Source: Zero Waste Yukon

The convenience as well as increases in the living standards of humans are the result of a combination of industrial and technological improvement and facilitating global trade. But the unrestrained usage of resources is questioning the underlying conjunctions of the linear model. And several key facts of this model are endangering the sustainability and welfare of both humans and the environment. Therefore, there is an urgency to develop an alternative economic model.

In order to replace the current linear economic paradigm, the concept of a circular economy is getting attention. China and the European Union, as a resolution to reduce the harmful impact of consumers and firms on the environment, popularized this concept (Prieto-Sandoval et al., 2018). The circular economy concept is presented as a cycle of extraction, usage, and transformation of resources and then circulation, use, and repossession of goods and materials in order to reuse and lessen the pressure on scarce resources (Stahel, 2016). An elaborated definition of the concept is presented by Kirchherr et al. (2017) which is:

“A circular economy describes an economic system that is based on business models which replace the ‘end-of-life’ concept with reducing, alternatively reusing, recycling and recovering materials in production/distribution and consumption processes, thus operating at the micro-level (products, companies, consumers), meso level (eco-industrial parks) and macro-level (city, region, nation and beyond), with the aim to accomplish sustainable development, which implies creating environmental quality, economic prosperity and social equity, to the benefit of current and future generations.”

It can be seen that first firms extract resources for the environment in order to convert them into services and products. After that, the products or services are distributed in order to consume by customers or other firms. Then when the life cycle of the product is ended, rather than dumping the whole product, the circular economy reuses the materials to reproduce. Through the process, a circular economy closes the loop by recovering goods. Therefore, innovation is important in order to make sure the recovery and reuse of the used materials either through the environment or industrial process instead of wasting them entirely (Stahel, 2016).

Source: Prieto-Sandoval et al. (2018)

The implementation of the circular economy is based on three levels. The first one is micro or enterprise-level where companies focus more on their process improvement and economic development through innovation. Moreover, because of implementation planning firms get a positive impression from customers and investors which also helps them to reduce costs. Then the meso level consists of those organization which is included in the industry which gets benefited from both regional economies as well as the environment. Lastly, the macro-level put emphasis more on developing infrastructures like economic friendly cities or provinces based on introducing environmental policies and institutional influence.

The paradigm of circular economy resemblance with the Islamic ideology of human need and environmental safety. The objectives of shariah ensure the sustainability of society as well as social welfare by providing guidance and a roadmap to mankind (Chapra, 2008).  Al-Ghazali, a renowned scholar of Islam, categorized the objectives of shariah into five based on human needs. However, these objectives are only foundational as more other objectives can be derived from these.

Source: Tahir (2019)

1.     Religion (Din): The religion of Islam is completed by sending final revelation through Prophet Muhammad (Peace Be Upon Him). And the guidance and order provided are necessary to flourish in this world and in the hereafter. The state is responsible for implementation and fulfills this objective. It can be achieved by ensuring the Islamic principles are followed as well as no defilement of the Islamic creed is done by the people (Chapra, 2008).

2.     Self (Nafs): This objective clarifies the role of the human as the Khalifah of Allah. Human is obliged to take care of the resources of the earth which includes physical, intellectual, and technological capabilities. And these are necessary for the sustainability of society as well as human well-being. The objective makes sure humans realize self-esteem, social equivalence, dignity, and brotherhood (Chapra, 2008).

3.     Intellect (Aql): Humans are extricated from other creations because of the intellect given by Allah. It is improved through knowledge and understanding. This objective is fulfilled by studying, understanding, and interpreting religious texts and the works of scholars. It also requires humans to gain knowledge in science education in order to make reasonable and good decisions based on the reason and revelation (Chapra, 2008)

4.     Posterity (Nasl): This objective ensures ethical development, sound nurture, the fulfillment of intellectual needs, health and ecosystem, protection, and concord. It is necessary for civilization to flourish because the future progeny doesn’t have sound mental, physical, and spiritual development (Chapra, 2008).

5.     Wealth (Mal): This objective has more significance in order to make sure the sustainable development and well-being of society. The regulation of Zakah helps reduce income inequalities in society. Acquiring wealth also helps to get the best education, efficient research, etc. (Chapra, 2008)

From the above discussion, it can be seen that shariah's objectives endorse the social wellbeing of individuals, the environment, and society as a whole in the short run as well as in the long run. When the above objectives are ensured, the society embellishes and thrives as well as human welfare is also made sure.

The main goals of the current linear economic system are wealth maximization which is followed by economic growth. Therefore, it ignores the aspects which are necessary for sustainability like environmental protection and social development, etc. As a result, the objectives of shariah are hard to achieve in this paradigm. Consequently, the circular economy takes into consideration the points which are parallel with the Islamic Ideology (Tahir, 2019).

If you find this post helpful or interesting, please share it.

Don't forget to follow our @Facebook and @Twitter  

Trash-Free Waters | Archie Creek, Hillsborough County | Photographer: Joe Whalen
Photo by The Tampa Bay Estuary Program / Unsplash


CHAPRA, M. U. 2008. The Islamic Vision of Development in the Light of Maqāṣid al-Sharī‘ah. In: INSTITUTE, I. R. A. T. (ed.). Islamic Research and Training Institute, Islamic Development Bank.

KIRCHHERR, J., REIKE, D. & HEKKERT, M. 2017. Conceptualizing the circular economy: An analysis of 114 definitions. Resources, conservation and recycling, 127,221-232.

PRIETO-SANDOVAL, V., JACA, C. & ORMAZABAL, M. 2018. Towards a consensus on the circular economy. Journal of Cleaner Production,179, 605-615.

STAHEL, W. R. 2016. The circular economy. Nature,531, 435-438.

TAHIR, M. 2019. Transforming Qatar into a Circular Economy: Challenges and Opportunities and the Role of Islamic Finance. Hamad Bin Khalifa University (Qatar).

Don’t be left behind! Sign up for FinFormed and start growing!