Over the last three decades, economics has received more attention
from Muslim scholars and intellectuals than any other discipline.
Islamic economics has matured as a discipline and "arrived."
.
It has its own journal (Journal of Research in Islamic Economics),
at least two research centers devoted to the subject and is now being
taught in economics departments of numerous universities both in the
Muslim world and in the West.
Prof. Muhammad Nejatullah Siddiqui's highly praised survey of contemporary
literature on the subject lists some 700 works in English, Arabic and
Urdu.
A more recent work by Muhammad Arram Khan contains over 1500 citations.
Islamic banks are mushrooming in almost every Muslim state, form Sudan
to Iran, Pakistan, Bangladesh, Egypt and Malaysia.
Many European cities have one or more Islamic banks.
There is thus good reason to believe that Islamic economics has not
only arrived, it is here to stay.
DEFINITION OF ISLAMIC ECONOMICS
But what is Islamic economics? How does it differ from the conventional
capitalist and socialist economic models? What are its axioms and principles?
How will Islamic economics replace the dominant economic orders in Muslim
societies? One of the first points emphasized by author after author
is that Islamic economics is not capitalism minus interest plus zakah
or socialism minus state control plus God.
It is something unique and different and exclusive to Islam.
How unique and how different is essentially the key issue.
S. M. Hasanuz Zaman offers the following definition: "Islamic
economics is the knowledge and application of injunctions and rules
of the Sharia (Islamic Jurisprudence) that prevent injustice in the
acquisition and disposal of material resources in order to provide satisfaction
to human beings and enable them to perform their obligations to Allah
(God) and society.
M. Akram Khan considered that "Islamic economics aims at the study
of human falah (Salvation) achieved by organizing the resources of earth
on the basis of cooperation and participation.
The role of the Sharia (Islamic Jurisprudence), the notion of adl (justice)
and falah (salvation), cooperation and sharing are central to Islamic
economic philosophy of the total system of Islam." Siddiqui(2)
sums up this philosophy as follows:
"The key to economic philosophy of Islam lies in man's relationship
with God, His universe and His people, i.e. other human beings, and
the nature and purpose of man's life on earth.
Man-God relationship is defined by Tawhid (Oneness of God).
The essence of Tawhid is a total commitment to the will of Allah (God),
involving both submission and mission to pattern human life in accordance
with His will.
The will of Allah (God) constitutes the source of value and becomes
the end of human endeavour.
Life on earth is a test, and its purpose should be to prove successful
in the test by doing Allah's (God's) will.
The entire universe with all the natural resources and powers is made
amenable to exploitation by man, though it is owned by Allah (God) alone.
Life on earth being a test and all the provisions available to man
being in the nature of trust, man is accountable to Allah (God) and
his success in the life hereafter depends on his performance in this
life on earth."
But how is this economic ibadah (worship) performed?
There are a host of Islamic concepts and values which define the extent
and nature of economic activity.
There are many positive values such as iqtisad(moderation), adl(justice),
ihsan (kindness par excellence), amanah (honesty), infaq (spending to
meet social obligations), sabr (patience) and istislah (public interest).
Similarly, there are a number of values which are negative: zulm (tyranny),
bukhl (miserliness), hirs (greed), iktinaz (hoarding of wealth) and
israf (extravagance).
Economic activity within the positive parameters is halal (allowed
and praiseworthy) and haram (prohibited and blameworthy) which has to
be moderated, production which is regulated by the halal-haram code,
and distribution which must adhere to the notion of adl (justice).
Collectively, these values and concepts, along with the main injunctions
of the Qur'an, provide a framework for a unique, just and contemporary
economic system.
THE CHALLENGE IS IN THE APPLICATION
Islamic concepts are almost always stated in theory.
When it comes to the question of "how it is to be done" and
"what exactly needs to be done" problems emerge and differences
arise.
How can Zakah (the ritual of alms giving) be made the cornerstone of
public finance in an Islamic society? How can brotherhood/sisterhood
be promoted; and what needs to be done to ensure equity? How can wealth
be redistributed? What needs to be done to ensure that wealth does not
accumulate in fewer and fewer hands.
What consumer goods constitute israf (extravagance)? What types of
industry would lead to economic zulm (tyranny)? What types of technologies
negate adl (justice) and promote Ihtikaar (hoarding) of wealth? How
can Islamic injunctions on the use of land be introduced without the
use of force? What needs to be done to break the feudal structure in
Muslim society?
LARIBA ISLAMIC TERMINOLOGY, RIBA ANALYSIS
In the early sixties when Muslim economists were rediscovering the
principles of Islamic economics, their output was in many respects genuinely
original.
The major subject they have tried to discuss is bank interest.
They have played around bank interest, and have come sometimes very
close to thinking that if they could avoid dealing with bank interest
and introduce another modern means to provide the same motivation in
a different way that could solve the problem.
It was a huge attempt to cast Islamic institutions and dictates, like
zakah (the ritual of alms giving) and prohibition of interest, into
RIBA economic mould.
The dominant models guide the analysis and shape the inquiry: everything
is compared and contrasted with capitalism and socialism, highlighting
the fact that there is an underlying apologia at work
Once the objectives of the LARIBA Islamic economics have been stated
in terms of RIBA paradigm, it is a short step to accept the major institutions
of the RIBA system and try to mould them into LARIBA Islamic shapes.
The most obvious example of this is RIBA banking: the institution as
it has evolved into the world since the industrial revolution has been
accepted, without criticism and questions whether banks, as defined
and developed over time are really needed.
While the suggested alternative for interest, which is profit-sharing,
reflects the true ideals of LARIBA of Islam, it cannot fit in an institution
which has grown up solely on the basis of interest and RIBA.
Professor Siddiqui, describes the function of a banking system based
on "mudaraba" *** as follows:
"A large number of depositors enter into individual 'mudaraba'
contracts with a banking company, organized on the basis of share capital,
the contracts stipulating the sharing of the profits of the 'business
of banking'.
The bank undertakes two kinds of business.
Firstly, it offers banking services for which the bank earns fees and
commissions.
Secondly, it assumes the role of a financier-entrepreneur making judicious
selection of businessmen who seek capital from it, stipulating that
they share with the profits of their productive enterprise.
Liability to loss in a 'mudaraba' contract attaches to the financier
only, the working party i.e. the user of the capital bears no part of
the loss accruing the capital extended by the financier.
It follows that the loss incurred by an individual entrepreneur will
be borne by the bank.
Losses incurred on individual advances are likely to get absorbed by
some of the profits accruing to the bank from the successful entrepreneurs.
As long as the totality of profits accruing on banks' advances plus
the fees and commissions earned by the bank remain a positive quantity,
the depositors' capital and return on capital are safe.
But what if the total earnings of the bank is a negative quantity?
This will mean a loss, to be distributed equally on share capital and
'mudaraba' deposits."
The central question is, should the ordinary act of depositing money
become a risk-taking exercise.
How can one plan for the future if one is not sure what will happen
to one's money at the end of the financial year? And some of the Islamic
LARIBA banks as they are normally defined have no guarantee that they
will get a return on their investments.
Consider what will happen to a rural agricultural bank in a year of
bad harvest when it has invested all its capital in the labor of the
local farmers! If the financier is risking his/her capital, he/she is
likely to demand a hefty share of the profit; so the poor entrepreneur
ends up working for the bank instead of him/herself.
And if the bank does not ask for a lion's share of the profit, how
can it ensure that it covers for all those entrepreneurs who have lost
its money? Perhaps both the bank and the entrepreneur are getting a
bad deal.
Perhaps this is why many of the Islamic banks are losing their investments
so rapidly.
The point of this valid and justified criticism is not that the principles
of "mudaraba" do not work, but that the RIBA institution of
banking is the wrong place to put an Islamic injunction into practice.
Moreover, RIBA economic institutions do not come on their own: they
bring the entire system with them.
Banking, as Alvin Toffler points out so powerfully in his book "Third
Wave," is the central institution of the modern money system.
Accept the RIBA banks and you accept the entire RIBA economic monetary
and financial structure and theoretical framework that comes with it.
The two are integrated and cannot be decoupled.
The abolition of RIBA and the collection of Zakah are the corner-stones
of the LARIBA economic system.
But the natural emphasis of a system that outlaws RIBA interest would
be to play down the role of money not to raise it as the arch factor
of the economy.
THE ROLE OF MONEY IN RIBA BANKING SYSTEM
Many economists and individuals are hypnotised by money, and look only
at those sectors of production and consumption that are monetized and
involve cash transactions.
The emphasis on the monetized economy has meant that Islamic economics
has equated the monetized sectors of a country with the whole system
of production, consumption and maintenance.
SUGGESTED SOLUTIONS TOWARDS
A LARIBA SYSTEM
A study by Umar Chapra on Islamic banking and monetary system, suggests
a package of reforms which includes moderation in spending, elimination
of hoarding, efficient use of savings, responsible government spending,
increase in equity financing, reducing the powers of banks, and establishment
of "sane" stock markets.
In addition, the following institutions were suggested:
A central bank,
Commercial banks,
Non-bank financial institutions,
Specialized credit institutions,
Deposit insurance corporations and
Investment audit corporation.
Once this institutional set-up has emerged, a step-by-step transition
can be undertaken to an interest-free economy.
The transition involves the declaration of interest as illegal, substantial
increases in equity/loan ratio of Muslim countries and communities,
reform of the tax system, mobilization of idle funds, and the gradual
conversion of interest RIBA-oriented financial institutions into profit-sharing
ones.
Chapra(7) clearly believes that an important step towards a just society
can be produced simply by modifying the monetary system.
Additional emphasis should be directed to the relationship between
production and consumption, the role or mode of production in shaping
a society, the psychological impact of the divorce-- in time, space
and social distance --between a producer and a consumer and the illusionary
nature of paper money." What is the role of theory of profit in
Islam?" "What function does macro consumption perform in Islamic
economics?"
Many Muslim economists have based their analysis on a number of metaphysical
assumptions: first, that money is to be studied like a physical commodity;
second, what needs to be done is to analyze how the money system of
today actually works; third, that monetary problems can be solved by
modifying the dominant institutions of RIBA; fourth, that the tools
of modern economics, whose cultural impact needs to be appreciated by
Muslim economists, can solve the problem of Islamic LARIBA economics;
fifth, that the economic environment is never depleted; and sixth that
the goals of the Islamic LARIBA economic system can be achieved without
changing the energy base of Muslim countries.
Many Muslim economists need to focus on working on research directed
toward producing policies that are different from the capitalist and
socialist alternatives.
If this is not done, Muslim countries will end up with the same crisis
that confronts industrialized societies.
THE AXIOMATIC ANALYSIS
If Islamic LARIBA economics, just like Islamic science, has any meaning
it is purely in the context of Islamic society and Muslim civilization.
In this context, Islamic LARIBA economics has to rely not just on Islamic
principles and injunctions, but must develop its own tools of thought
and analysis and its unique institutions and apply such on Muslim communities.
Islamic LARIBA economic institutions have to be rediscovered, evolved
and invented on the basis of the needs of Muslim societies and the principles
of Islam, not taken or adopted from what already exists in the market-place.
This means that Islamic LARIBA economics must construct a living dynamic
Islamic economic system, concept by concept, institution by institution
applying Islamic junctions such as the prohibition of RIBA and introduction
of zakah in a truly authentic manner.
More recently, however, Syed Nawab Haider Naqvi in his "Ethics
and Economics: An Islamic Synthesis" argues that any set of axioms
to be meaningful must satisfy four criteria: they must be adequate and
legitimate representations of Islam's ethical views; they must form
the smallest possible set; the elements of the set must be internally
consistent; and the axioms must have predictive powers.
Four axioms: unity, equilibrium, free will and responsibility were
recommended.
Unity, or Tawhid, refers not only to the unity of God, but also the
unity of human life and the healing of the "current schism between
ethics and economics." Social justice is only one component of
equilibrium which is derived from adl (justice).
Free will refers to human freedom in the realm on worldly affairs;
but free will can also lead to the denial of unity and upset nature's
equilibrium unless man is made responsible for his/her actions.
All four concepts are interlinked and interrelated, and cannot be isolated
from each other.
Naqvi uses his four axioms to develop the basic policy objectives of
the Islamic LARIBA economic system.
He isolates social justice, universal education, economic growth and
employment generation as the key policy objectives of Islamic LARIBA
economics.
Language and concepts have a profound impact on our thinking.
Tawhid (unity), adl (justice), istislah (public interest) and khilafah
(leadership as a vicegerent of God on earth), are all examples of the
rich reservoir of concepts to be found in the Qur'an and Sunnah (the
traditions and teachings of Prophet Muhammad (S)). It is believed that
they are not there to be ignored.
How does one, for example, on the basis of linear logic, reconcile
the idea that zakah, which involves subtracting from one's income, can
actually lead to increase of wealth? Growth by subtraction is an idea
that RIBA economics has no understanding of.
The linear logic of RIBA economics is reflected in the present structure
of the world.
Economically and technologically, the globe is structured as though
developing countries, including all Muslim countries, were colonies
of the industrialized states.
Colonialism is alive and well, and many industrialized countries are
reaping its benefits.
It is believed that Islamic LARIBA economics is not going to break
this structure if it freely borrows from this paradigm.
On the contrary, it may become part of the structure.
Thus, all those Muslim economists who argue that we should not hesitate
to borrow the "good " and "neutral" bits of the
RIBA economic theory may be asking to be absorbed into the dominant
paradigm.
The fact is that RIBA economics, is one vast, interlinked, value-laden,
self-perpetuating system that is taking linear logic to its ultimate
conclusion.
If Islamic LARIBA economics is to move toward the ideals, then it must
develop not just its own body of theories and models, but also its own
tools and modes of logic, thought and actual physical operation.
It must assume a civilizational role and work towards laying the foundations
and building the structures of a muslim civilization of the future.
It has to break the shell of an atomized discipline and become a multi-disciplinary
mode of inquiry, taking into consideration the social organizations,
the political ideals, the environmental imperatives, and scientific
and technological needs of Muslim underdeveloped societies.
Economics has to draw not just form Muslim history, and contemporary
muslim societies, but also from a clear vision about the future.
Islamic economics has to develop a future consciousness for the Muslims
and the society at large.
The following are global trends that spell danger for Muslim countries
and the world and should be taken in consideration:
1. The world is shrinking and becoming more and more economically interlinked
and interdependent.
The only winners are the RIBA banking systems.
How to co-exist with and/or delink from the world's economic and monetary
systems must, therefore, become a major theme of Islamic economics.
2. Electronic banking and funds transfer systems are giving money an
unparalleled and dangerous importance.
Because of the speed of electronic systems, the same amount of money
now supports five times as many transactions as before.
Thus the speeding up of money handling also increases its velocity
of circulation.
At a point not too distant in the future, when the speed of transaction
reaches "real time," money will acquire a strange new status.
The velocity of the information about money flows would lose all relationship
with thermodynamic realities of the actual system (subject to natural
cycles of crops, weather, friction, inertia, and human frailties), and
the amount of money and capital available at any point in the banking
system would tend towards infinity.
As information about the money system become delinked from actual events,
all manner of new ventures and schemes might be initiated by false promissory
notes signaling capital availability with nothing more than an electronic
impulse over a computer terminal.
Moreover, computerization of stock markets throughout the world has
blurred the distinction between investment and speculation.
The entire system is moving towards becoming a huge worldwide gambling
casino with no pretension to serving social needs.
Muslim economists must be aware of the changing role of money and its
implications for Muslim societies.
They must work to diversify the basis of Islamic LARIBA economic thought
towards non-monetarist and non-fiscal areas.
3. Information itself is becoming a key commodity.
Economic power in the future will be determined by the ability to generate
and having access to information.
It will play the same role as energy is playing now.
Thus, Islamic LARIBA economic theory must be developed to cope with
non-material commodities like information.
4. The use of energy and other natural resources (especially water)
of a society is intrinsically tied with economics.
The globe's energy and natural resources are depleting at a rapid rate.
Both inflation and employment are tied to the rate of depletion of
energy and natural resources.
As it becomes more costly to extract energy and other natural resources,
they become more and more scarce, so the cost of transforming them into
usable commodities increases.
Throughout the world, the price of basic goods and services is tied
to the costs associated with the exchange and transformation of energy.
Unemployment is the other side of the equation: the faster conventional
sources of energy run out, more and more people become unemployed and
underemployed.
Thus transformation to a renewable energy base is essential for the
future survival of the world.
5. At present, Muslim countries are essentially consumer states relying
exclusively on imported goods.
This situation is likely to get worse and the associated ill-effects
of the ever-increasing social, psychological and intellectual distance
between producers and consumers will multiply at greater speeds.
A major task of Islamic economics is to change the patterns of consumption
in Muslim societies as well as to direct production towards directions
which are more suitable to the needs of Muslim consumer.
The formidable task is to transform these ethics into a dynamic economic
system that has its individual identity with its own institutions and
methodological tools.
This system will provide a viable, kinder and gentler alternative to
the dominant systems of RIBA economies.
6. Muslim economists, social scientists and leaders living outside
the Muslim countries in many of the developed countries of world must
carve a role for themselves to implement the theory of Islamic LARIBA
financing in their communities in the world and try to branch out into
the Muslim countries world-wide in order to facilitate the bringing
about of the dream of a world-wide community based LARIBA financing
system.
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