FROM VIRTUOUS CITY TO VIRTUOUS MARKETS: AL- FĀRĀBĪ’S LEGACY IN ISLAMIC ECONOMICS AND FINANCE

Abstract

This study examines al-Fārābī’s ethical and political philosophy and its relevance to contemporary Islamic economics and finance. It argues that Islamic finance must move beyond a narrow focus on Sharīʿah-compliant contractual forms and be grounded instead in a comprehensive ethical framework that promotes justice, virtue, and collective well-being. Drawing upon al-Fārābī’s concept of the virtuous city (al-Madīnah al-Fāḍilah), the study highlights the centrality of moral education and the role of the state in cultivating ethical economic behaviour. A comparative analysis with modern capitalist and neoliberal paradigms reveals fundamental differences: whereas the latter prioritise market efficiency and profit maximisation, al-Fārābī’s framework foregrounds spiritual development, distributive justice, and morally guided governance. The study also examines contemporary challenges in Islamic finance—particularly the predominance of debt-based instruments—and argues that these shortcomings may be addressed through a renewed emphasis on risk-sharing and moral values. It concludes that integrating al-Fārābī’s ethical-political insights can contribute to the development of a more just, value-oriented Islamic financial system and offer a meaningful alternative to prevailing economic paradigms.