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Chapter 3: Review of Islamic Economics

By Dr. Yahia Abdul Rahman

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.

Chapter 4 Chapter 2