Islamic Economic System - A Threat to Development?

Islamic Economic System - A Threat to Development?

Volker Nienhaus, Marburg

The economic backwardness of the Muslim world since the beginning of the industrial revolution in the West in the 18th/19th century can hardly be disputed. There basically two groups of explanations for this phenomenon:

The first group emphasizes mentality factors and a mindset originating from the Islamic worldview which induces behavioural patters impeding economic development.
The second group stresses institutional factors and deficits originating from a particular historic constellation responsible for the lack of institutions necessary for economic development.

Mentality and institutional deficits may explain the economic backwardness of the Muslim world, by neither mindsets nor institutions are immune to change, and the present shape of both cannot mainly be attributed to Islam. On the contrary, an economic policy based on Islamic principles may be more conducive to economic development than the socialist experiments, nepotism and state interventionism of past decades.

1. ‘Islamic mindset’ as an obstacle to economic development?
It is often argued that the Islamic worldview supports a mentality and value system which attributes little importance to individual performance and responsibility, effectiveness and efficiency or material wellbeing. Muslims are more concerned with the life in the hereafter. They belief in a kind of predetermination, and all these components lead, in total, to a fatalistic attitude which seriously obstructs economic development.

It is doubtful whether this is an accurate description of the value orientation and behaviour of the vast majority of Muslims. But even if it could be observed in today’s Muslim societies, it is very doubtful whether it can be ascribed to the teachings of Islam. An alternative explanation is that seclusive attitudes are a reflex and response to the experience of many generations that individual efforts and endeavours do not pay in repressive systems. Fatalism stands in a strange contrast to the economic teachings and ideology of Islam. The literature on Islamic economic teachings (ranging from business ethics to systemic issues) explicates and propagates attitudes and concepts which come close to what we would call a social market economy. Major elements are the following:

• Everybody is obliged to cater for subsistence by his/her own labour.
  
• The final owner of everything is Allah. Man has only the right of use but no right to waste or destroy it. Private property of means of production is permissible but must not be misused. Wealth can be acquired legitimately through work and inheritance. It should not be used for lavish or luxury consumption, and the use for social purposes is encouraged (and rewarded in the hereafter).
  
• The poor and needy have a claim to be sustained by the society. This claim is institutionalized in the system of zakat (sometimes translated as poor due or alms tax), a compulsory levy of 2.5% on assets and 5% or 10% on agricultural produce and earmarked for a list of purposes initially outlined by the Prophet Muhammad and further specified by the early caliphs.
  
• Prices should be just - which means that they should be formed on competitive markets. Monopolization and hoarding lead to exploitation and must be combated.


• The monetary policy must ensure the stability of the price level.
  The fiscal policy should balance tax income and public expenditures in such a way that the overall budget will be balanced (no deficit spending).


• The state shall provide a basic infrastructure (including a legal system) and specific public goods but must not intervene into competitive markets.

Islamic economic teachings imply or plead for a set of institutions (private property, enterprises, capital markets, anonymous markets, labour laws, competition, etc.) deemed crucial for the rapid economic development which took place in the West since the 18th century. However, such institutions either did not exist in the Muslim world until rather recently or were not effective. Their introduction was often initiated from outside, for example in the context of structural adjustment programmes and policy reform packages under the guidance of the International Monetary Fund. An explanation for this phenomenon is offered in the following section.

2. Institutional deficits in the ‘Islamic heartlands’
Islamic economics emerged only since the mid-1970s as a new academic discipline (a mixture of positive and normative economics with a strong ideological dimension), and seemingly teachings such as those quoted above do not adequately reflect the realities of the economic systems of Muslim countries. In particular, they cannot explain the institutional deficits. It is often assumed that the traditional Islamic law could neither provide an adequate protection of individual property rights nor could it accommodate to institutional innovations and structural changes in particular from the 18th century onwards when the industrial revolution changed the economic and social systems in Europe and initiated an unprecedented economic development there.

Obviously, the Ottoman Empire - which ruled most of the Islamic heartlands in the Middle East and North Africa (MENA) - did not create adequate institutions during this crucial historical period. But this failure must not be attributed to an alleged rigidity of the traditional Islamic law. There are other - probably much more important - explanatory factors:
When the territorial expansion of the Ottoman Empire came to a halt and the disintegration of the periphery began (in the 17th/18th century), the Ottoman rulers could no longer buy the loyalty of their governors and military leaders by the distribution of newly conquered land. Instead, they had to extract rewards from the own territory, and they adopted on a large scale a system of tax farming. In a period of retreat and decline, tax-farmers tried to maximize their income in the short term and often set tax rates to confiscatory levels. This undermined private property and made it irrational to build-up immobile real assets (including production facilities) exposed to the access of the tax-farmers. It was much better to keep capital as liquid and invisible as possible.

This explains a strong preference of the entrepreneurs of that period for trade ventures and a strong aversion against factories and industrial plants. The military and economic decay of the Ottoman Empire in the 19th century was in sharp contrast to the industrial revolution, which spread throughout Europe. It was driven by private entrepreneurship and private capital, and crucial institutions such as joint stock companies and capital markets developed during that period. Nothing comparable took place in the MENA region - neither in the Ottoman heartland nor in the Arab periphery which came under European colonial control in the 1800s. When countries in the MENA region gained independence in the 20th century, either nepotism in autocratic regimes or state bureaucracies in socialist systems dominated the economies and suppressed entrepreneurial potentials (outside established elites) and hindered the emergence of institutions essential for the functioning of competitive markets which, in turn, are the driving force behind economic development. This changed only in the last decade when the recognition of entrepreneurship and private property and the market paradigm became guiding principles for economic reforms all over the world, including the MENA region.

3. The riba problem
Even if the Islamic mentality and the basic institutional setup of an Islamic economy is supportive to development, one must not ignore one distinctive element in the Islamic economic teachings with institutional implications which may turn out as a fundamental obstacle for development, namely the prohibition of riba - which means all kinds of interest (and not just usury) related to a loan. It must be noted that riba is prohibited for loan transactions only, i.e. it is limited to purely financial transactions. A trade transaction, where one party transfers an asset (good or non-financial service) and the other party transfers money, does not create interest but profit. This is true even if the financial transfer happens at a later date and the seller adds a mark-up on the spot price for the deferred payment. In this respect rent is similar to trade. Interest is created only if both transactions are financial in nature. While interest is prohibited, profit from trade is allowed, and even in an interest-free economy capital has a price.

The sector which needed - for centuries in Islamic history - the most sophisticated forms of finance was trade. Islamic jurists developed a comprehensive and sophisticated corpus of contracts for the financing of various types of trade transactions. All these contracts avoided interest. The more entrepreneurial and venturous transactions (such as long distance trade expeditions) were financed on the basis of profit and loss sharing. In more standard transactions (especially local trade) financing was not done by interest-bearing loans but by mark-ups on the spot price for the deferred payment of the purchased items.

When trade ventures and their financial needs became more complex, double trade techniques were introduced. In its extreme form, two reverse trade contracts are combined in such a way that they made interest-bearing loans commercially possible without recourse to the legally prohibited loan contracts. In principle, in the first contract party A sells to party B an object at a price P, and B pays the price on spot to A. In the second contract, party A immediately (re-) purchases the same object from party B at a price of P + X, payable after a certain period of time. Factually, party A never gave up the possession of the traded object, and party A received a loan from B amounting to P at a fixed cost X which is interest in economic terms (but profit from trade and deferred payment in legal terms). Seemingly such financing techniques facilitated flourishing trade, crafts and agriculture in the ‘Golden Age’ of Islam - even without banks in the modern sense. However, sceptical observers fear that a more complex modern economy without interest would be an economy without financial intermediation and without capital markets. This, in turn, would seriously jeopardize an economic system based on private property, entrepreneurship, and competition. The emergence of Islamic banks and interest-free financial markets over the last 30 years cannot dispel the reservations in total, but there are clearly recent trends towards a more sophisticated and efficient Islamic financial system with links to conventional national and global financial markets.

When Islamic banking emerged in the 1970s/1980s, its proponents strongly emphasized the profit and loss sharing techniques and portrayed an ideal economy based on equity and partnership. This economy was deemed more efficient, just and stable than the conventional capitalist and interest-based system, and it was expected that it would boost the economic development of the Muslim world after its introduction and spreading. The reality of Islamic banking did not meet the high expectations: Instead of providing capital on the basis of profit and loss sharing, Islamic banks acted as traders on behalf of their clients and bought and sold objects with mark-ups and mark-downs and rented or leased objects against fixed rental charges or leasing rates. It is debatable whether and to what extent Islamic banks applied double trade techniques. Profit and loss sharing was only applied in relation to depositors:
Money paid into so-called savings or investment accounts does not receive a fixed interest but a share of the profit (or loss) of the bank. Although Islamic banks were able to meet the basic financial needs of their customers, the early system as such was incomplete, more complicated, less efficient and inferior to conventional banks due to high transaction costs. But the number of Islamic financial institutions and their funds under management increased rapidly since the 1990s, and more and more conventional global players such as HSBC or Citibank and recently even Deutsche Bank joined the Islamic segment with new financial products, separate departments (’windows’) or subsidiaries. The new actors no longer restrict themselves to the traditional financing techniques of previous centuries but have engaged massively in financial engineering. They developed not only new interest-free banking techniques but also instruments for interest-free capital markets (such as sukuks as alternative to conventional bonds).

Today’s Islamic bankers are not worried about systemic superiority (as were the Islamic economists in the 1970s/1980s) but are content with the legal Shariah compliance of their new techniques and products. Their prime objective is no longer ideology but market performance. New interest-free tools as such hardly promote development, but efficient techniques are by all means a necessary precondition. The replacement of outdated techniques removes some impediments to the progress of Islamic finance and thus enhances he chances for an integration of an Islamic economic subsystem into secular market oriented economic systems in Muslim countries. This tendency is supported by authorities for supervision and regulation of financial institutions and markets (= central banks, monetary authorities, etc.) in many Muslim countries: They observe with great interest the formulation of accounting and auditing standards issued by organizations of the Islamic finance industry (such as the Accounting and Auditing Organization for Islamic Financial Institutions), and many of them actively participate in the design of regulatory standards (primarily in the framework of Islamic Financial Services Board). Both types of standards have only the legal quality of recommendations, but these recommendations are translated into authoritative standards by governments and central banks of an increasing number of Muslim countries.

The improvement of techniques, the refinement of accounting standards, and the regulatory integration into existing financial systems clearly remove possible obstacles which might originate from the prohibition of interest. It remains to be seen whether the modernized Shariah compliant financial toolbox will be used by ideologically motivated bankers in order to address the financial needs of new entrepreneurs, self-employed people, local communities etc. who so far are widely neglected by conventional banks. If this happens, Islamic finance could make a distinctive contribution towards the development of a Muslim country - even if the overall economic system remains mainly secular.

2006-10-02

Source : http://shaukani.wordpress.com/2007/05/25/islamic-economic-system-%e2%80%93-a-threat-to-development/#more-428

Economic Doctrines of Islam

Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their Implicationsfor Poverty, Employment, and Economic Growth

By Irfan Ul Haq. Herndon Introduction:

Dr. Haq's book belongs to the same group of issue-oriented studies in Islamic economics that Umar Chapra's 1 books do.

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However, unlike Chapra, who first provides a critical evaluation of the failed modern economic systems and then establishes the supremacy of Islam's economic development strategy, Irfan Ul Haq starts out with a comprehensive expository analysis of Islamic economic doctrines. He then relies on extensive personal interpretation to derive and then justify various policy prescriptions for the promotion of economic growth in an Islamic economy.

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The book contains four parts, which are divided into fourteen chapters. The first five chapters in the first two parts discuss Islamic methodology and Islam's social and political order. The book's major theme is included in the third and fourth parts where the author discusses most of the economic issues and policies. Since the controversial policy-oriented economic subjects are covered in these parts, I will concentrate on the evaluation of these major economic subjects. These subjects include the proper role of the public sector, fard al-kifayah and its implications, interest free financing, land ownership and tenure, taxation, poverty, employment, and the policies to provide economic essentials.

Fard al-kifayah and Its Implications for Economic Policy
Land Ownership and Tenure
Interest Free Financing and Banking
Taxation in Islamic Economy
Poverty Employment and Economic Growth
Footnotes

Fard al-kifayah and Its Implications for Economic Policy

In discussing the principle of fard al-kifayah and the role of the Islamic state in providing public goods, Dr. Haq advocates a policy of nationalization of resources as an appropriate policy for an Islamic state to follow. The same policy is extended elsewhere to include price fixing and direct control of the grain trade, and by implication, of all other commercial activity.

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Rather than providing a justification for such a policy on economic and Islamic grounds, he carries out his entire discussion on the assumption that big government has the capacity and the means to solve all economic problems. This thesis, in my view, contradicts the basic economic philosophy of Islam, which incorporates private initiative and free enterprise with a primary focus on the individual as a decision maker and khalifah of God on earth.

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The author continues to overlook the fact that equity and efficiency are not complementary, but often competitive. An over-emphasis on the distributional justice of Islam creates an erroneous impression that in the Islamic worldview, economic growth and development are relegated to a secondary role. This is not only incorrect, but it also contradicts the very thesis of his book. Elsewhere I have elaborated on the Qur'anic view of man and its implications for his economic role.2

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Land Ownership and Tenure

In the beginning of chapter 10, the author correctly notes that Islam allows land accumulation without any restrictions and recommends a balanced economic life for a Muslim without indulgence in opulence, luxury, and expensive pleasures. A Muslim is portrayed as a person who works hard, is productive, saves his money, invests it profitably, and assists the needy.

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However, I find the author's discussion of land ownership and land policy unacceptable both on rational economic as well as on Islamic grounds. The author's assertion that the Qur'an does not mention anywhere man's ownership of land as being a part of his wealth, in itself, does not make land a public property. If it were so, the Prophet would have declared all land to be publicly owned. He not only refused to interfere with the existing land holding structure, but he left the tenure system alone without imposing even the slightest restriction on the size of land ownership.

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It should be recognized that private land ownership without any limit or restriction is allowed and encouraged in Islam. The author's single citation about the expropriation of Bilal Ibn al-Harith's land by Caliph 'Umar is a description of a very special case. It refers only to that portion of land which he failed to cultivate. Islamic law imposes only three specific obligations on the landlord: (a) to pay all taxes, (b) to engage in a sharecropping rather than in a fixed-rent arrangement, and (c) to make certain that the land is acquired, accumulated, and maintained in ownership within the bounds of Islamic moral and legal law.

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As for the newly developed or reclaimed lands, the Islamic government has every right to allocate these to the general public within the framework of the prevailing time and space environment. However, when the land is sold to an individual, it becomes a part of his wealth.

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It cannot be expropriated without a just and fair compensation. In order to justify his position, the author also cites another hadith attributed to the Prophet: "If anyone has land, he should cultivate it himself, or lend it to his brother for cultivation or otherwise release it from his ownership" (p. 63). Interpreting the release from ownership to mean giving it to the state for free or even to agree to the state's expropriation is too far-fetched. Also, in recommending small land holdings, the author is endorsing the failed strategy of reliance on small subsistence farming, which should be tolerated only temporarily.

Interest Free Financing and Banking

In this section, there are two instances where the author creates confusion. The first instance is when he uses inaccurate definitions, and the second instance occurs when he draws a wrong policy conclusion. He uses the expressions "unearned income" and "fixed rent" in an incorrect context (p. 119). His discussion leaves one with the impression that these two sources of income are completely forbidden in Islam, which is far from the truth.

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Another instance where he draws a judgmental policy conclusion is when he recommends nationalization of banks on the basis of an undefined, theoretical concept of "social profitability." We find no support from economic theory or the experience of the developing or socialist world to indicate that nationalized banks contribute to social profitability. Instead, banks in the public sector are often found to be economically inefficient, bureaucratic, unresponsive to public needs, and an embodiment of waste and misallocation of economic resources.

Footnotes:
1 - Umar Chapra, Islam and the Economic Challenge (Leicester, UK: IIIT, 1992).
2 - "The Role of Public and Private Sector in an Islamic Perspective," in Proceedings of the Fifth International Islamic Economic Seminar (Herndon, Va: IIIT Publications, 1993).

Source: http://www.islamonline.net/iol-english/qadaya/economy5/economy-1.asp

The Economic Life of Islam

The Economic Life of Islam

by Hamudah Abdel-Ati (From Islam in Focus)

The economic life of Islam is also based upon solid foundations and Divine instructions. Earning one's living through decent labor is not only a duty but a great virtue as well. Dependence of any able effortless person on somebody else for a livelihood is a religious sin, a social stigma and disgraceful humility.

A Muslim is enjoined by God to be self-supporting and to stay away from being a liability on anybody. Islam respects all kinds of work for earning one’s livelihood so long as there is no indecency or wrong involved. With a clear conscience and due respect from society the Muslim can roll up his sleeves and undertake any kind of work available to provide for himself and his dependents.

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Prophet Muhammad is reported as having said that it is far better for one even to take his rope, cut wood, pile it up and sell it in order to eat and give charity than to beg others whether they give him or not. According to Islam, the status of honest working men cannot be lowered on account of the kind of work they are doing for a living. Yet the laboring workers have no limited scope for improving their lots and raising their standards as high as possible. They have equal opportunities at their disposal and enjoy freedom of enterprise.

Whatever the individual makes or earns through lawful means is his private possession, which neither the State nor anybody else can justifiably claim. In return for this right of private possession he has only to fulfill certain obligations to the society and pay certain taxes to the State. When this is done, he has full rights to protection by the State, and his freedom of enterprise is secure and guaranteed.

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Under the Islamic system the menace of greedy capitalism and destructive communism never arises. The enterprising individual is responsible for the prosperity of the State, and the State in turn is responsible for the security of the individual. Class conflicts are replaced by cooperation and harmony; fear and suspicion are remedied by mutual security and confidence.

The economic system of Islam is not drawn in the light of arithmetical calculations and capacities of production alone. Rather, it is drawn and conceived in the light of a comprehensive system of morals and principles. The person who is working for another person or for a firm or an institution is ordained by God to do his work with efficiency and honesty.

The Prophet said that if any of you undertakes to do any work, God loves to see him do it well and with efficiency. Once the work is done, the worker is entitled to a fair wage for his services. Failure by the employer to pay the just wage, or attempts to cut it down and waver on it is a punishable act, according to the Law of God.

Business transactions enjoy a great deal of attention from Islam. Honest trade is permitted and blessed by God. This may be carried out through individuals, companies, agencies and the like. But all business deals should be concluded with frankness and honesty. Cheating, biding defects of merchandise from the dealers, exploiting the needs of customers, monopoly of stocks to force one’s own prices are all sinful acts and punishable by the Islamic Law.

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If one is to make a decent living, it has to be made through honest ways and hard endeavor. Otherwise, easy come, easy go, and it is not only that, but anybody that is bred with unlawful provisions will be, according to the Prophet, a burning fuel to the Hell Fire on the Day of Judgment.

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To combat cheating and exploitation, Islam demands honesty in business, warns the cheaters, encourages decent work and forbids usury or the taking of interest just in return for lending money to the needy. This is to show man that he rightfully owns only what he works for, and that exploitation of other people’s pressing needs is irreligious, inhuman and immoral. In the Qur’an God says:

Those who devour usury will not stand except as stands one whom the Evil One by his touch has driven to madness. That is because they say: ‘trade is like usury’. But God has permitted trade and forbidden usury. Those who, after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God (to judge). But those who repeat (the offense) are Companions of the Fire; they will abide therein (for ever). God will deprive usury of all blessing, but will give increase for deeds of charity; for He loves not creatures ungrateful and wicked (2:274-276).

And the Firmament has He raised high, and He has set up the Balance (of Justice) in order that you may not transgress (due) balance. So establish weight with justice and fall not short in the balance (55:7-9). This is to guide man to resort to justice and straightforwardness in all his dealings and transactions. The future of cheaters is grim and their doom is awful. Here is how the Qur’an looks into the matter:

Woe to those who deal in fraud, those who, when they have to receive by measure from men, exact full measure, but when they have to give by measure or weight to men give less than due. Do they not think that they will be called to account on a Mighty Day, a Day when (all) mankind will stand before the Lord of the Worlds (83:1-6)?

Besides that, there are numerous Traditions of Prophet Muhammad excluding the cheaters, exploiters, monopolizers and dishonest business people from the band of the true Muslims. Any business deal that involves injustice or cheating or exploitation is strictly inhibited and cancelable by the Law even after it is concluded.

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The main purpose of the Islamic legislation’s on economics and commerce is to secure the rights of the individual and maintain the solidarity of society, to introduce high morality to the world of business and enforce the Law of God in that sphere of enterprise. It is logical and consistent that Islam should be concerned with such aspects as these, because it is not merely a spiritual formula but a complete system of life in all its walks.

Proprietors are constantly reminded of the fact that they are in reality mere agents appointed by God to administer their holdings. There is nothing in Islam to stop the Muslim from attaining wealth and endeavoring for material improvements through lawful means and decent channels. Yet the fact remains that man comes to this world empty-handed and departs from it likewise. The actual and real owner of things is God alone of Whom any proprietor is simply an appointed agent, a mere trustee.

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This is not only a fact of life but also has a significant bearing on human behavior. It makes the proprietor always ready to spend in the way of God and to contribute to worthy causes. It makes him responsive to the needs of his society and gives him an important role to play, a sacred mission to fulfill. It saves him from the pit of selfishness, greed and injustice. This is the true conception of property in Islam, and that is the actual status of proprietors. The Qur’an considers possession of wealth a trying test, and not a token of virtuous excellence or privileged nobility or a means of exploitation. God says:

It is He Who has made you (His) agents, inheritors of the earth: He has raised you in ranks, some above others; that He may try you in the gifts He has given you. Verily, your Lord is quick in punishment, yet He is indeed Oft-Forgiving, Most Merciful (6:165).

Moreover, the Qur’an reports to mankind an interesting discourse between Moses and his people. It runs as follows:

Said Moses to his people, ‘pray for help front God, and wait in patience and constancy; for the earth is God’s. He gives it as a heritage to such of His servants as He pleases; and the end is best for the righteous.’

They said, ‘We have had nothing but trouble, both before and after you came to us.’ He said: ‘It may be that your Lord will destroy your enemies and make you inheritors in the earth; that so He may try you by your deeds’ (7:128-129).

This discourse between Moses and his people does not imply in any sense a recognition of any privileged genus of mankind on account of racial origin or ethnic identity. Nor does it mean that the Qur’an approves completely of the conduct and conceptions of the followers of Moses in later centuries. The tone of the text is rather reproachful and critical of the doubters; and reassuring of the fact that everything in the earth belongs to God, Who distributes it among His servants in the form of inherits trusts and objects of trial. The point is brought home time and-.again throughout the Qur’an. For example, it says:

To Him belongs the dominion of the heavens and the earth, and all affairs are referred back to God ... Believe in God and His Messenger, and spend (in charity) out of the (substance) whereof He has made you heirs. For, those of you who believe and spend (in charity)-for them there is a great reward. And what cause have you why you should not spend in the cause of God? For to God belongs the heritage of the heavens and the earth (57:5,7,l 0).

Unlike Communism, Islam replaces the totalitarian artificial supremacy of the Communist State by the beneficial supremacy of God; and the Communist theory of class warfare by sound morals, mutual responsibilities and cooperation. On the other hand, it gives utmost assurances against greedy capitalism and ruthless exploitation by proprietors. The economic system of Islam grants full recognition of the "independent" entity of the individual and his natural aspirations to work and possessions.

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Yet it does not conceive of him as absolutely independent of God or the universe. It does not deify man or his capital, nor does it deify the proletariat and abolish free enterprise. It accepts man the way he is created and deals with him accordingly, making allowances for his instinctive aspirations and limited power.

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Man is a man, and he should be accepted and dealt with as such. He is not a god or a semi-god to arrogate to himself absolute powers and unquestionable infallibility. Nor is he a countless or insignificant entity. He is someone to be recognized but in his real status and non- exaggerated or belittled nature. He is not above or out of the rest of the universe but a part of a whole system, an element in the total foundation of the universe.

Although man is encouraged to work, is free to enterprise, is entitled to earn and possess, the fact that he is a mere trustee provides the necessary measure to insure proper handling of his possessions, his trusts. He has authority to earn, to invest and to spend. Yet in so doing he is guided by high principles to save him from going astray.

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An example may be sufficient to illustrate the point. Proprietors are not unreservedly free to spend their money or handle their properties the way they please. There are certain rules of expenditure to be followed. In the words of the Qur’an, God enjoins upon the proprietor to fulfill his financial obligations towards his fellow men, and to be moderate in his private spending. He is always reminded of the fact that God is the Real Provider and Actual Possessor. Here is the declaration of the Qur’an:

And render to the kindred their due rights, as (also) to those in want, and to the wayfarer. But squander not (your wealth) in the manner of a spendthrift. Verily, spendthrifts are brothers of the Evil Ones, and the Evil One is to his Lord (Himself) ungrateful.

Make not your hand tied (like a niggard’s) to your neck, nor stretch it north to its utmost reach (like a foolish spendthrift); lest you become rebuked and destitute. Verily your Lord does provide sustenance in abundance for whom He pleases, and He provides in a just measure. For He does know and regard all His servants (1 7:26-27, 29-30).

The Economic Challenge for the Ummah

The Economic Challenge for the Ummah

- Self-Imposed Dependence
- Restructuring our Economic Systems

[Condensed from a talk by Justice Mufti Taqi Usmani, delivered at the International Conference of the World Muslim Congress.]

The nineteenth century was a century of political oppression whereby the powerful Western nations enslaved most of the Asian and African nations including a large number of Muslim countries.

The present century, which is nearing its end, has witnessed the gradual independence of these countries from Western imperialism. However, despite our apparent success in achieving the goal of political liberty, we could not succeed in acquiring independence on intellectual, economic and strategic levels. That is why Muslim Ummah could not yet reap the fruits of its political freedom.

Now the Muslim world is looking toward the coming century with hope that it will bring for it total independence in the real sense so the Muslims may find their due place among the nations of the world and may be free to live according to the Quran and the Sunnah of the Prophet, Sall-Allahu alayhi wa sallam.

However, this hope cannot be realized through wishful dreams. We will have to work hard for our total freedom even more than we did for our political freedom. We need a total revision of our strategy, a well-considered plan, a collective resolution, and a revolutionary approach.In this paper, I would like to confine myself to two major issues.

Self-Imposed Dependence.

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It is common knowledge that Ummah's basic economic problem is the dependence of the Muslim countries on others. Most of the them are borrowing huge amounts from the rich Western countries. Some countries are incurring these heavy interest-bearing loans not only for the development projects, but also for their day-to-day expenses, and what is more serious, for the payment of interest accrued on their previous loans which keeps the size of their indebtedness ever-increasing through a vicious circle.

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Dependency on foreign loans is the basic disease of our economy that has not only shattered our economic life, but has also devastated our self-determination and has forced us to submit to the demands of our creditors, sometimes, at the price of our collective interests. It is no secret that the creditors impose their own conditions before they advance a loan. These conditions keep us under a constant foreign pressure, often stop us from pursuing our own objectives and force us to follow the policies dictated by others.

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The evil consequences of dependence on foreign loans are too obvious to need any further elaboration.Islamic teachings consider "Indebtedness" as a detestable phenomenon, which should not be resorted to except in cases of extreme necessity.

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The Prophet, Salla-Allahu alayhi wa sallam, even refused to offer the funeral prayer for a person who died before paying back his loan.Moreover, the Muslim jurists have discussed whether it is lawful for the ruler of a Muslim State to accept the gifts offered by a non-Muslim. The answer: It is lawful only where the acceptance of gifts does not result in any kind of pressure against the interest of the Ummah.Islamic principles require that the Muslims should avoid incurring foreign debts, even if they face some hardships.

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But our present indebtedness was not created by lack of resources. In fact, the Muslims have never been so resource-rich. They own enormous natural resources. They occupy important strategic positions on the globe. They are joined together by a geographical chain from Morocco to Indonesia, broken only by India and Israel.

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They produce nearly 50% of the oil of the world. They are said to account for more than one third of the world's export of raw material. What is more, the cash they have invested in the western countries alone may be more than sufficient to set off their total liabilities.According to a recent report of Islamic Development Bank, the total external debt of the IDB member countries in 1996 amounted to 618.8 billion dollars.

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The deposits and assets kept by the Muslims in the Western countries are said to be much more than this amount. Obviously, there is no authentic record of such deposits, because their owners do not disclose them. However, the economic experts have estimated them to be between 800 and 1000 billion dollars, out of which 250 billions are said to be taken back by the Arabs to their own countries after the Gulf War. Practically it means that we are borrowing a part of our own money at a high rate of interest.

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Even if these estimated figures are taken to be exaggerated, one can hardly deny the fact that had these huge amounts been kept and properly used within the Muslim world, the Ummah would have never resorted to incur the debt of more than six hundred billion dollars.Our dependence on foreign loans is self-imposed for which we cannot blame anyone but ourselves. We did never probe in to the factors underlying the flight of our capital. We did never try to remove those factors and instill confidence in our own people.

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We could not deliver ourselves from the corrupt and oppressive system of taxation. We were not able to create a peaceful atmosphere for investment. We could not provide our countries with stable political system. We did not bother to create opportunities for the sound utilization of capital and, above all, we failed to mobilize the spirit of Islamic unity and to activate the strength of the Muslim Ummah as a whole.The tragic situation cannot be corrected by expensive celebrations at the advent of the new century. We will have to take the challenge of time seriously. Our economic and political leadership will have to find ways and means to free ourselves from dependence on foreign countries.

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We already have the basic resources for that. All we need is to design new policies to utilize the wealth of the Ummah within the Muslim world, and to develop the concept of Islamic brotherhood and mutual understanding and cooperation.The Quran says: "All the Muslims are brothers." Quranic injunctions and the Prophetic teachings require that the Muslim Ummah should act as a single body. The geographical barriers should not divide them into different nations with conflicting objectives.

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The political boundaries may only be tolerated for the internal administrative affairs of each country, but all the Muslim countries must have a united face at least with reference to the common objectives of the Muslim Ummah vis-à-vis the rest of the world.Gone are the days when technical know-how was the monopoly of a few Western countries. Now, the Muslim talent is capable of at least handling the immediate requirements of the Ummah.

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What we need is to seek this talent, and to put it to the service of this Ummah with a missionary zeal.But all this requires the unified efforts from the leadership of our countries. This is the biggest challenge faced by them. They must meet it, not only for the betterment of the Ummah, but for their own survival. A great responsibility, in this respect, lies on the shoulders of OIC, which should take the initiative and create a Muslim talent pool to design new policies for the Ummah as a joint body.

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Restructing our Economic Systems

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The twentieth century has witnessed the rise of communism, the conflict between capitalist and communist countries and lastly the fall of communism. The capitalist Western countries are celebrating the fall of communism as if it was an empirical evidence of their own victory, not only on a political front but also on ideological plane. The fact is, however, that communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries.

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The failure of communism was not due to its justified criticism of the evils of capitalism. Rather it was caused by the inherent defects of the alternative system suggested by it. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and the have-nots and 'poverty in the midst of plenty' is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism.

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The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms. The economic principles taught by the Quran and Sunnah of the Prophet (Sall-Allahu alayhi wa sallam) are quite capable of solving the major economic problems faced by the world today. While they allow private ownership and market economy, they also provide a well considered system of distributive justice, which may eliminate the inequities and bring about a system in which profit motive works with the collective interest of the society.

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The basic fault of communism was that, frustrated with the inequity of capitalism, it assailed the very institutions of private ownership and market forces and developed a utopian idea of planned economy which was unnatural, artificial and oppressive. The denial of individual liberty curtailed the zeal for production and the wide powers of the state left the destiny of the people in the hands of the ruling class.

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It was neither private ownership nor the institution of market forces that was the basic cause of injustice in the capitalist system. The basic factor for creating inequities in the capitalist countries was the absence of a criterion to differentiate between just and unjust earnings. The instruments of interest, gambling, speculative transactions and the tools of exploiting immoral desires of the consumers to secure huge profits were allowed, which tend to create monopolies and in turn paralyze the forces of demand and supply or at least obstruct their operation.

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It is thus ironical that the capitalist theory on the one hand asserts the principles of lassiez-faire but, on the other, by allowing the aforesaid instruments, interferes with their natural function and stops the market forces from playing their due role by creating monopolies that impose their arbitrary decisions on the bulk of the common people.

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The system of interest favors the rich industrialists who benefit from the wealth of the common people who deposit their savings in the bank, and after making huge profits do not allow the common people to share these profits except to the extent of a fixed rate of interest that is again taken back by them as it is charged to the cost of production. At macro level, it means that these rich people always use the money of depositors for their own benefit and in reality pay nothing to them because the interest payments are always added to the cost of production.

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Similarly, gambling is a major instrument for concentrating the wealth of thousands of men in a few hands and for promoting the disastrous motive of greed for the unearned income. The speculative transactions are also a major source of disturbing the natural market operations and contribute to the inequities in the distribution of wealth. Islam not only allows the market forces but also provides mechanism to keep them operative with their natural force without their being hindered by monopolies.

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It applies two types of controls on the economic activities.

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First, it subjects the process of earning to certain divine injunctions, which clearly define the limits of halal and haram. These injunctions tend to prevent monopolies and curb the unjust and immoral earnings and commercial activities detrimental to the collective interest of the society. In the context of modern economic needs where the savings of the common people are activated to boost development, the use of the Islamic instruments like musharakah and mudarabah, instead of interest, may make the common people directly share the fruits of development which may bring prosperity in a balanced manner reducing the gap between the rich and the poor.

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Second, the institution of zakat, sadaqat, and certain other financial obligations provide that even the halal income is again distributed to the persons who could not earn enough due to insufficient market opportunities. Through the twin controls, the wealth is kept under constant circulation and the chances of its concentration are almost eliminated.But our main tragedy is that the principles of Islamic economy are still in theoretical form for which no living example is available.

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The Muslim countries have not tried to structure their economy on Islamic basis. Most of them are still following the capitalist system and that too in a half-baked manner, which has made the economic atmosphere much worse than that of the developed capitalist countries. Unfortunately, despite having the clear cut Islamic injunctions, the inequities existing in Muslim countries are far more severe than in the Western world.

This tragic situation cannot last forever. If we are not prepared to mend our ways, some natural process of revolution is bound to find its way. If we want to avoid disastrous consequences of such revolution, we'll have to restructure our economic system on the basis of clear guidance provided by the Qur'an and Sunnah.

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Our success in setting an example for implementing the Islamic principles will be our best gift to the human fraternity at the advent of the new century. I hope that if the principles of Islamic economy are implemented sincerely, we'll find the world more receptive to them today than we experienced it in the past.

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Source:http://www.albalagh.net/Islamic_economics/economy.shtml#Restructing%20our%20Economic%20Systems

An Introduction to Islamic Economics

An Introduction to Islamic Economics

Book Review of Muhammad Akram Khan.

By Zubair Hassan Introduction:

It is perhaps desirable to preface the review of a book with a brief description of its form and content, more so in the area of Islamic economics, where formal writing structures have yet to evolve and much diverse material tends to be treated under similar, even misleading, titles. Akram's book opens with an erudite foreword by Khurshid Ahmad. The text contains six chapters of uneven length spread over 111 pages.

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Two appendices, notes and references, a select bibliography to help further research, and a couple of indexes constitute its remaining portion. The Introduction is a neat, petite work. Simple language, a lucid style, an uncompromising stance, and reliance on original sources are some of its notable features. It has not a few seminal ideas and some outlandish ones as well. The vast coverage inevitably is at some expense of depth and detail.

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Chapter 1 provides a broad picture of Islamic economics for those who may not have the time to read the entire book (p. xii). It is a potpourri of ideas concerning such varied topics as the Islamic worldview, basic assumptions of the discipline, economic organization, the role of money, the problem of poverty, fiscal management, and the sharing of knowledge. Understandably, positions are taken without much argument to support them.Chapter 4, on Islamic economics in practice, disposes of such vast areas as Islamic banking, zakah, insurance, awqaf, and hisbah in just five pages! Chapter 6 deals, in an even smaller space, with the "directions of future research," selecting a holistic approach, the search for interest-free international economic order, technology, and economic power structures as priority areas. The remaining three chapters make some real contribution to the literature and provide justification for reviewing the book.

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Chapter 2, on the nature of Islamic economics, traces the recent upsurge in writings on inadequacy of mainstream economics to resolve the perplexing problems of inequity, unemployment, and poverty faced by the majority of the people in the world today. According to Akram, the failure is due to the discipline having a narrow materialistic base, unrealistic assumptions, and a colonial legacy of exploitation that is still operative against the weak.

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The nonperformance of mainstream economics on crucial fronts, plus the recent collapse of the socialist alternative in the former Soviet Union and Eastern Europe, leaves a vacuum that many Muslim scholars, including Akram, think Islamic economics, bestowed with divine wisdom, alone is qualified to fill. But what is Islamic economics and what makes it superior to its mainstream counterpart?Not many have attempted to provide a precise definition of Islamic economics. Those who have, seldom depart from the mainstream scarcity orientation, beyond linking their formulations to the notion of falah, an epitome of the Islamic view of welfare.

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Akram ventures a break when he says that "Islamic economics aims at the study of human falah achieved by organizing the resources of the earth on the basis of cooperation and participation" (p. 33). The statement does not take note of scarcity, even implicitly, for reasons we shall see later. The definition is followed by an insightful explanation of its key elements: falah, resources, cooperation, and participation.Following Raghib al-Isfahani, Akram treats falah as a unitary concept stating its main elements in the life here and in the hereafter, as also the linkage between the two.

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He presents these elements in Table 2, both for the micro and macro levels and then classifies them broadly into those that are needed, respectively, for survival, freedom from impoverishment, and for ensuring a dignified existence. Thus, fulfillment of the basic needs, investment to accelerate growth, and enhancement of power-economic and military-lie, inter alia, at the heart of the concept.But falah cannot be achieved unless certain conditions-spiritual, cultural, political, and economic-are met.

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The cultural requirements include establishment of a system for prayers, pursuit of knowledge, avoidance of gambling and intoxicants, supporting "right" and opposing "wrong," and proper use of resources. Among the economic conditions are infaq (spending in the way of God), the prohibition of interest (riba), the fulfillment of covenants and trusts, the enforcement of justice, the encouragement of enterprise, and the concern for the environment. Of course, paramount is the political commitment to enforce the various requirements of the Shari'ah, including readiness for jihad (striving in the cause of God).

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"In brief," Akram concludes, "falah is a multi-dimensional concept. It covers the whole life of an individual and all aspects of a society. Its different conditions reinforce and supplement each other. Establishing a socio-economic institutional framework facilitates its achievement. The role of the government can also be very important in promoting falah of the people" (p. 43). Perhaps one has yet to come across a better description of this important concept in Islamic economics.

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However, in his discussion of resources, Akram's position on the issue of their scarcity seems a little puzzling. Since some other writers also share this position, a hurried look at it may not be out of place. The Qur'an informs us that God has stocked the Earth (and heavens) with inexhaustible treasures to provide sustenance for all His creatures. But to draw from this, as Akram and others do, the inference that scarcity becomes nonexistent for economics, whether secular or Islamic, is rather eristic, to put it mildly.

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The catch is in the failure to realize that the fact of the existence of ample resources for human beings and others at all points in time and space is one thing, while their availability to individual or groups at a given hour and location and in the required quantities is quite another. It is not the existence of resources per se, but the state of their availability that lends meaning to the idea of scarcity as a cornerstone of economics.

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The availability of resources is an increasing function of knowledge-knowledge of their existence, of the ways to extract or obtain them, of their uses, and of their costs. The history of the march of human civilization is the history of human conquest of nature. It is the history, in essence, of pushing outward relentlessly the frontiers of scarcity through unceasing inventions and innovations in science, technology, and societal management.

Scarcity, as explained above, is a part of the divine scheme to spur humanity into action and to test people thereby, for the Qur'an not only talks of God's bountiful resources but also informs us that He alone is the source of knowledge and that He gives it to those who seek only bit by bit, lest they become proud and arrogant. The proposition that scarcity of resources is just a human-made phenomenon must be taken with a grain of salt.

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Improper use of resources or their maldistribution may be aggravating factors, but they are not the essence of scarcity. To regard scarcity as a mere disturbance factor in the "natural state of adequacy" of resources (p. 45) is neither correct nor necessary. In any case, to define such a state precisely is very difficult, if not impossible. Thus, resources remain limited because of the inadequacy of human knowledge despite God's benevolence. Presum-ably, one may visualize Islamic economics as a study of human behavior concerning the use of scarce resources for satisfying multifarious wants in such a way as would maximize falah.

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In the closing part, the chapter enumerates the "sources of Islamic economics" and shows that it is superior to mainstream economics in its approach, which is interdisciplinary, has both normative and positive aspects, and can use tools for analysis developed by the latter. But Akram seems unreceptive to the idea of indulging in a critical evaluation of mainstream economics with a view to integrating its unobjectionable and useful propositions with revealed knowledge in a quest for Islamization of the discipline (pp. 54-55). This provides a linkage with chapter 3, which deals with the methodology of Islamic economics and where Akram seems to relax his stance on the point (p. 63).

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In that chapter, Akram discusses, in broad and general terms, the methodology of Islamic economics and seeks to show how it differs from that of mainstream economics. Some related issues, such as the Islamic approach to mainstream economics, the roles of revelation and reason, and the assumption of an ideal Islamic society are also touched upon (p. 57).Unlike secular economics, reason cannot be independent of faith and morality in an Islamic dispensation.

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Since the core of Islamic economics-the Qur'an and the Sunnah-provides guidance, says Akram, on a small number of questions, a dominant part of economic reality requires the application of human reason and intellect, but within the divine framework (p. 63). No Islamic economist will dispute this position, but some of Akram's observations, such as on the role of assumptions and model construction, may attract attention.Akram states that the Shari'ah supports the use of inductive reasoning in the field of Islamic economics.

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Indeed, he endorses the view that Muslims have made significant contributions to the development of the method (p. 64). But building a model on the basis of deductive logic is not acceptable to him, as "model-building involves a series of deductions from initial premises which assume perfect knowledge of the future-an assumption which the Islamic economist tends to reject" (p. 65). One may find it difficult to accept this view both as a point of fact and logic.

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The fact is that the bulk of argumentation in writings on Islamic economics continues to rely on a priori reasoning, if only because we do not yet have any model of an economy operating according to Islamic norms to provide the needed data for constructing or testing our theories. The use of real-life data from current Muslim economies to erect and verify Islamic postulates, as Akram seems to suggest (p. 106), may prove more perilous than rewarding.

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Furthermore, it is difficult to read a religious import into an assumption, as the latter is hardly a matter of faith or fact. Assumptions should be seen as no more than devices to simplify complex situations in order to isolate relevant variables to study relationships for, unlike in natural sciences, the facility of controlled experimentation is not available in social disciplines. It is interesting that, only a few pages later, one finds Akram diluting his position, stating: "Islamic economics treats the future outcome as known" (p. 69).

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He adds further, "Its future outcome is the objective of achieving falah." But the objective and the outcome of an effort, whether economic or non-economic, can be identical without fail only in the absence of uncertainty, i.e., with perfect knowledge about the future!Methodological issues are difficult terrain. There has been a notable resurgence of writings in the area during the past two decades, characterized with a distinct trend of philosophy and economics getting closer. Methodology is a much wider subject than the discussion on methods.

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Furthermore, in a scientific research program, the issue is no longer the preference of one method over the others. Rather, the problem is of their judicious use in support of one another depending on the nature and the stage of inquiry. Islamic economics still awaits a scholarly discussion on methodological questions. Akram is realistic when he says that "most of the literature on Islamic economics assumes an ideal Islamic society which does not exist anywhere and the possibility of its coming into being in the near future is also remote" (p. 73).

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But ironically, his own Introduction seems oblivious to this fact. All through his work, he juxtaposes the realities of the existent capitalist societies with the ideals of a nonoperating Islamic model to claim superiority for the latter without the slightest realization that he is comparing, unwittingly, apples with oranges. The lapse detracts seriously from the academic value of his work. Nevertheless, Akram's advice that to present an analysis of the application of the Islamic principles in present-day society should be the main occupation of Muslim economists is quite expedient.

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It would generate, as he believes, a theory of transition that is missing in the literature and may make others interested in taking a closer look at the Islamic economic system (p. 77).Chapter 5 sees "hope for the future" in the potential of Islamic economics to relieve the world of its many intractable problems, such as the coexistence of unemployment and inflation, poverty amid plenty, increasing income disparities within and among nations, and reckless spending by the state that conventional economics has failed to resolve.

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Islamic economics is expected to do so through a new development concept and strategies, including a fresh approach to the issues of investment criteria, planning strategy, foreign aid, choice of technology, economic power, consumers' sovereignty, and the role of public policy. The primary source of elation here or elsewhere in the Introduction essentially is the faith in the magic wand of the abolition of interest, the institution to which the book attributes almost any and every ill of the capitalist economy, including environmental degradation!Clearly, this brief review cannot do justice to all the ideas that Akram presents.

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Still, it is efficacious to point out that eyebrows may be rasied on not a few of them, like treating zakah as a tax (p. 23), the inadmissibility of limited liability for shareholders in modern corporations (Appendix 1), the abolition of interest implying the availability of funds "free of cost" in an Islamic system (p. xi), the raising of interest rates during inflation only fuelling inflation (p. 13), and deficit financing being invariably undesirable (p. 23).

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Presumably, to clinch such issues required more explanation and argument than the Introduction provides.Taken as a whole, An Introduction to Islamic Economics is an interesting general reading. Parts of it can also be of value to students. However, professional economists might see the work more as a horizontal collection of ideas than a vertical movement of thought. And evidently, Akram's borrowings are too many for a fuller referencing.

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Source: http://www.islamonline.net/iol-english/qadaya/economy4/economy-1.asp