Financial Management refers to the efficient and effective management of funds in such a manner as to accomplish the objectives of the organisation. It is the specialised function directly associated with the top management. It includes how to raise the capital and how to allocate it. It not only addresses on long term budgeting but also how to allocate the short term resources like current assets. Financial Management is an area of financial decision making, harmonising individual motives and enterprise goals. Financial management is the application of the planning and control function to the finance function.
There are two main aspects in financial management: earning and spending. And Islam has laid down certain dos and don’ts with respect to various financial aspects, they are as follows:
DOS
i. Priorities while Spending: Prophet Muhammad (peace and blessings of Allah be to him) said, “The most excellent dinar is one that a person spends on his family, and the dinar which he spends on his riding-animal in the way of Allah (in Jihad), and the dinar he spends on his companions in the way of Allah.” (Muslim)
The hadith stresses that men of small means should first of all spend on their own families and children. It is in fact an act of great merit. After fulfilling their needs, if he still has something left with him then he can spend it on other items in the order of precedence mentioned in the hadīth.
ii. Being Truthful and Trustworthy: Prophet Muhammad (peace and blessings of Allah be to him) said, “The truthful and trustworthy businessman will be in the company of Prophets, saints and martyrs on the Day of Judgment.” (Darimi and Tirmidhi) The hadīth is a motivating statement for the people to be just during their financial transactions.
iii. Payment of Debts: Prophet Muhammad (peace and blessings of Allah be to him) said, “After the major sins which must be avoided, the greatest sin is that someone dies in a state of debt and leaves behind no asset to pay it off.” (Darimi) Indebtedness has been discouraged by Islam as it ruins the individuals as well as nations. This can be easily known from the severe warnings that have been given in case of debts left unsatisfied. All the sins of a martyr are forgiven except debt. The Prophet did not offer the funeral prayer of a debtor who did not leave behind provision for payment of his debts. The greatest of sins with which a man shall meet Allah on the Day of Judgment is his debt outstanding at death for payment of which he leaves nothing. Keeping in view these warnings, great precaution should be taken in contracting debt.
iv. Giving More Time to a Debtor: Allah says in the Qur’ān, “And if someone is in hardship, then (let there be) postponement until (a time of) ease. But if you give (from your right as) charity, then it is better for you, if you only knew.” (Qur’ān 2:280)
Prophet Muhammad (peace and blessings of Allah be to him) has also said, “If anyone would like Allah to save him from the hardships of the Day of Resurrection, he should give more time to his debtor who is short of money, or remit his debt altogether.” (Muslim)
If a debtor is in straitened circumstances and is not in a financial position of repaying his debt, then the creditor should postpone his demand to the time when the financial position of the debtor improves and he is able to repay it. However, if the creditor remits the debt as charity, it would earn him high rewards from Allah.
v. Moderation in Giving: Allah says in the Qur’ān, “And do not make your hand (as) chained to your neck or extend it completely and (thereby) become blamed and insolvent.” (Qur’ān 17:29)
Prophet Muhammad (peace and blessings of Allah be to him) has also said, “Moderation in expenditure is half of livelihood, and love for people is half of wisdom, and good questioning is half of learning.” (Bukhari)
Islam prescribes policy of moderation to its followers in every walk of life and enjoins upon them to avoid extremes. In an economic system believers are recommended the principle of moderation in earning of wealth as well as in expenditure of money. The believers should be neither too greedy for wealth so as to spend all their time and energy for acquiring it through all legal or illegal means nor should they be too lazy and lethargic to earn wealth through lawful means for their lawful needs. Similarly, they should be neither too miserly in spending wealth for their needs and the needs of the poor around them nor should they be too extravagant to squander wealth on luxuries and illegal and immoral acts. Rather they should follow a middle course in spending wealth as moderation is the best policy in the sight of Islam.
vi. Payment of Charity and Zakat: Allah says in the Qur’ān, “And spend in the way of Allah and do not throw (yourselves) with your (own) hands into destruction (by refraining). And do good, indeed Allah loves the doers of good” (Qur’ān 2:195).
Prophet Muhammad (peace and blessings of Allah be to him) has also said, “Surely the shade of the believer on the Resurrection Day will be his charity.” (Ahmad)
Voluntary charities to earn the pleasure of Allah are rewarded in this world as well as in the next one. Islam also does not prescribe any limit for charity. Charity helps in the flow of wealth from the rich of the community to the poor and the needy. Thus the cause of distributive and social justice is achieved through this voluntary measure.
In Islam, it is obligatory for the people who are financially rich to pay Zakat. Allah says in the Qur’ān, “…My mercy encompasses all things. So I will decree it (especially) for those who fear Me and give zakat and those who believe in Our verses.” (Qur’ān 7:156) The position of the poor classes is sought to be strengthened through the payment of Zakat. Zakat is the first such measure which helps the state in fair distribution of wealth. It is collected from the rich and spent on the poor and the needy.
vii. Inheritance and Will: Allah says in the Qur’ān, “And for all, We have made heirs to what is left by parents and relatives. And to those who your oaths have bound (to you) – give them their share. Indeed Allah is ever, over all things, a Witness.” (Qur’ān 4:33)
Prophet Muhammad (peace and blessings of Allah be to him) said, “If anyone deprives an heir of his inheritance, Allah will deprive him of his inheritance in Paradise on the Day of Resurrection.” (Ibn Maja) Law of inheritance followed by a community plays a vital role in setting the pattern of distribution of wealth among its members. Islamic law of inheritance is the only such law in the world which conceives a very broad-based distribution pattern. This law not only makes the male and female children of the deceased his legal heirs but also includes among his legal heirs his spouse or spouses and his parents.
DON’TS
i. Hoarding of Wealth: Allah says in the Qur’ān, “O you who have believed, indeed many of the scholars and the monks devour the wealth of people unjustly and avert (them) from the way of Allah. And those who hoard gold and silver and spend it not in the way of Allah – give them tidings of a painful punishment.” (Qur’ān 9:34).
Allah has also encouraged distribution of wealth. Allah says in the Qur’ān, “Whatever Allah may restore to His messengers from the people of the towns is for Allah and the Messenger and the near of kin and the poor and the orphans and the wayfarers that it may not rotate among your rich…” (Qur’ān 59:7).
Hoarding of wealth has been condemned by Islam with threats of severe punishment whereas circulation of wealth has been encouraged.
ii. No Extravagance: Allah says in the Qur’ān, “And give the relative his right, and (also) the poor and the traveller, and do not spend wastefully. Indeed, the wasteful are brothers of the devils, and ever has Satan been to his Lord ungrateful.” (Qur’ān 17:26-27) Prophet Muhammad (peace and blessings of Allah be to him) has also said, “When you eat, drink, give charity and wear clothes, let no extravagance or pride be mixed up with what you do.” (Ibn Maja and Nasai) These verses and the hadith strongly prohibit people from indulging in extravagance.
iii. Being a Miser: Prophet Muhammad (peace and blessings of Allah be to him) said, “Every day two angels come down from Heaven and one of them says, ‘O Allah, compensate every person who spends in your cause’, and the other (angel) says, ‘O Allah, destroy every miser’.” (Bukhari) Prophet Muhammad (peace and blessings of Allah be to him) has also said, “There are two habits which are never present together in a believer, miserliness and bad manners.” (Tirmidhi) The hadīth guides the person not to be miser in spending money but one needs to spend based on the need and requirement.
iv. Receiving and Paying of Interest: Allah says in the Qur’ān, “Those who consume interest cannot stand (on the Day of Resurrection) except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is (just) like interest”, but Allah has permitted trade and has forbidden interest.” (Qur’ān 2:275) Jabir ibn Abdullah narrated that, Allah’s Messenger cursed the accepter of interest and its payer, and one who records it, and the two witnesses; and he said, they are all equal (in sin). (Muslim) From the verse and the hadith we learn that, Islam strongly discourages the people to deal with interest. Thus, it is not permissible to raise or borrow money on the basis of interest.
v. Embezzlement: Allah says in the Qur’ān, “O you who have believed, do not betray Allah and the Messenger or betray your trusts while you know (the consequence).” (Qur’ān 8:27). Embezzlement means betraying of trust and unlawfully appropriating property belonging to others. Acquisition of wealth through embezzlement of public money or an individual’s property has been strictly forbidden to a believer in Islam.
vi. Earning through Immoral Professions: Allah says in the Qur’ān, “And do not approach unlawful sexual intercourse. Indeed, it is ever an immorality and is evil as a way.” (Qur’ān 17:32). Abu Masud al Ansari reported that Prophet Muhammad (peace and blessings of Allah be to him) forbade the price of dogs, earning of prostitutes and fore-telling of a soothsayer. (Bukhari and Muslim) Thus, it is very clear from the verse and the hadith that Islam is strictly against earning money through sale of products and services which are immoral.
vii. Earning through Alcohol and Gambling: Allah says in the Qur’ān, “O you who have believed, intoxicants, gambling (sacrificing on) stone alters (to other than Allah), and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful.” (Qur’ān 5:90). Alcohol has been prohibited and denounced as a great sin. According to the Prophet, every intoxicant is unlawful and thus, by implication, consumption of and trade in narcotics, wine, opium, heroin, etc. is illegal. Therefore, income generated through transactions connected with narcotics is forbidden.
Earning through gambling and games of chance is also prohibited by Islam. The word used by the Qur’ān for gambling is maisir which literally means ‘getting something too easily’ or getting a profit without working for it’. Gambling can briefly be defined as wagering money or other valuable things upon the outcome of an event or making money upon some chance. Thus it is a game of chance by which you either win or lose. Gambling and all games of chance have been strictly prohibited by the Qur’ān.
viii. Bribery: Allah says in the Qur’ān, “And do not consume one another’s wealth unjustly or send it (in bribery) to the rulers in order that (they might aid) you (to) consume a portion of the wealth of the people in sin, while you know (it is unlawful).” (Quran 2:188) Prophet Muhammad (peace and blessings of Allah be to him) has also cursed the bribe-taker and bribe-giver. (Abu Dawood & Ibn Majah) Bribery eats justice and gives birth to many socio-economic evils. Islam has not only prohibited bribery but has also condemned both the parties to its transaction to Hell in the next world. Bribery is a major sin and a culpable crime in an Islamic state. Therefore, earning wealth through bribery is absolutely illegal.
ix. Devouring the Wealth of Orphans: Allah says in the Qur’ān, “And give to the orphans their properties and do not substitute the defective (of your own) for the good (of theirs). And do not consume their properties into your own. Indeed, that is ever a great sin.” (Qur’ān 4:2) Allah also says in the Qur’ān, “Indeed, those who devour the property of orphans unjustly are only consuming into their bellies fire. And they will be burned in a Blaze (i.e., Hellfire).” (Qur’ān 4:10)
The orphans are the weakest and the most exploited class in human society. They are generally the easiest targets of those near relatives and guardians to whose care they are left. Unscrupulous persons do not feel any moral compunction and devour the property of the orphans with impunity. Such persons have been warned by the Qur’ān.
x. Unjustly Consumption of Wealth: Allah says in the Qur’ān, “O you who have believed, do not consume one another’s wealth unjustly but only (in lawful) business by mutual consent…” (Qur’ān 4:29). Allah commands in this verse that a man should not take anybody’s wealth unjustly. Thus, Islam establishes equity, fairness and justice in the production and distribution of wealth.
Islam has introduced the concept of lawful and unlawful in the financial aspect. In fact, the foundations of the Islamic financial management have been laid on this concept. This concept reigns supreme in the realm of production as well as consumption. Thus, a person strictly following and abiding by these principles of financial management will have a very successful financial life.