Islamic economical jurisprudence
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Islamic economics is economics in accordance with Islamic law. Because the Qur'an spoke against usury in the context of early Muslim society, it generally entails trying to remove or redefine interest rates from financial institutions. In doing so, Islamic economists hope to produce a more 'Islamic society'. However, liberal movements within Islam may deny the need for this field, since they generally see Islam as compatible with modern secular institutions and law.
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[edit] History
For centuries Muslims have developed ways to integrate their religious beliefs with the external economic realities of the nations they live in. This has had varying degrees of compatibility with the empires and customs they encountered. Like most things in Islam, commerce adapts to al-urf, "the custom".
In the 1980s and 1990s Muslim bankers and religious leaders developed ways to integrate Islamic law on usage of money with modern concepts of ethical investing. Consequently, a sophisticated economic discipline has emerged with its own concepts, analytical tools and institutions. Some of these are revived traditional micro venture capital and ethical investing frameworks that thrived in medieval times. However, they incorporated many modern techniques and technologies. Some consider the emergence of these economic practices to be part of a revival of Islam and an Islamization of knowledge. Others see them as a practical response to problems of global debt and debt slavery. A number of researchers suggest, however, the underlying causes of the genesis of modern Islamic economics was based more on the desire to reflect beliefs about Islamic identity than to establish a more ethical or religiously sound banking system[1].
[edit] Reforms under Islam
Michael Bonner, Professor of Medieval Islamic History at the University of Michigan, writes on poverty and economics in the Qur'an that the Qur'an provided a blueprint for a new order in society, in which the poor would be treated more fairly than before. This "economy of poverty" prevailed in Islamic theory and practice until 13th and 14th century. At its heart was a notion of property circulated and purified, in part, through charity, which illustrates a distinctively Islamic way of conceptualizing charity, generosity, and poverty markedly different from "the Christian notion of perennial reciprocity between rich and poor and the ideal of charity as an expression of community love." The Qur'an prohibits bad kind of circulation (often understood interest or usury) and asks for good circulation (zakat [legal alms giving]). Some of the recipients of charity appear only once in the Qur'an, and others—such as orphans, parents, and beggars—reappear constantly. Most common is the triad of kinsfolk, poor, and travelers. Unlike pre-Islamic Arabian society, the Qur'anic idea of economic circulation as a return of goods and obligations was for everyone, whether donors and recipients know each other or not, in which goods move, and society does what it is supposed to do. The Qur'an's distinctive set of economic and social arrangements, in which poverty and the poor have important roles, show signs of newness. The Qur'an told that the guidance comes to a community that regulates its flow of money and goods in the right direction (from top down) and practices generosity as reciprocation for God's bounty. In a broad sense, the narrative underlying the Qur'an is that of a tribal society becoming urbanized. Many scholars have characterized both the Qur'an and Islam as highly favorable to commerce and to the highly mobile type of society that emerged in the medieval Near East. Muslim tradition (both hadith and historiography) maintains that Muhammad did not permit the construction of any buildings in the market of Medina other than mere tents; nor did he permit any tax or rent to be taken there. This expression of a "free market"—involving the circulation of goods within a single space without payment of fees, taxes, or rent, without the construction of permanent buildings, and without any profiting on the part of the caliphal authority (indeed, of the Caliph himself )—was rooted in the term sadaqa, "voluntary alms." This coherent and highly appealing view of the economic universe had much to do with Islam's early and lasting success. Since the poor were at the heart of this economic universe, the teachings of the Qur'an on poverty had a considerable, even a transforming effect in Arabia, the Near East, and beyond.[1]
[edit] Interest
Islamic economic institutions, not just the Islamic bank but all those connected with Islamic banking, claim to operate on the basis of "zero interest." Critics of Islamic economics argue, however, that the fundamental characteristic of charging interest (i.e. charging a premium, on the principal amount of a loan, for the time value of the loaned money) is not truly eliminated in Islamic banking, but rather the interest is merely hidden and relabeled.
For example, consider the practical reality of purchasing a vehicle from an Islamic bank under an allegedly "zero interest" loan. The procedure, generally, is that the client tells the Islamic bank which vehicle he or she would like to own. The Islamic bank then purchases that vehicle in its name, and sells it to the client at a marked-up price, under an agreement that the new marked-up price of the vehicle must be paid in a certain number of installments of a certain time period. Thus a $20,000 car might cost $35,000 if purchased from an Islamic bank at "zero interest," 5 year loan. Of course, the bank charges the extra $15,000 on top of the $20,000 cost of the car because money has a time value (that is to say, a payment of $20,000 5 years from now is worth less than a payment of $20,000 today). This is also why a $20,000 car could cost $35,000 if the purchase were financed by an interest bearing loan issued by a non-Islamic financial institution.
Usually, time value of money is compensated to the lender by the lender charging the borrower interest on the principal amount of the loan. In the case of Islamic banking, the lost time value is compensated by charging a mark-up on the home or vehicle that the client might be seeking to purchase by way of a loan. The vehicle or mortgage usually remains in the name of the bank, until the principal loan including the mark-up has been paid. In the case of a business loan, instead of charging interest over the time that the principal amount is loaned out, an Islamic bank will demand a certain percentage of the borrower's business profits for an indefinite period of time. So it is the principle of sharing and the bank is a partner who obtains loses as profits. This is because of a law in the islamic finanical theory that you are not allowed to enjoy the profits if you did not take its risk.
Under a conventional interest based loan it is possible to "call" the loan if the interest rate drops and the borrower finds that he can find cheaper financing (i.e. pays off the entire loan before the end of its term, thus paying less interest). However, there is no way to call a loan issued by an Islamic bank. Thus, while the borrower from an Islamic bank is protected against interest rate increases, the borrower cannot benefit from interest rate drops.
In theory, Islamic banking should be synonymous with full-reserve banking, with banks achieving a 100% reserve ratio [2]. However in practice this is rarely the case.
[edit] Debt arrangements
Most Islamic economic institutions advise participatory arrangements between capital and labor. The latter rule reflects the Islamic norm that the borrower must not bear all the cost of a failure, as "it is God who determines that failure, and intends that it fall on all those involved."
Conventional debt arrangements are thus usually unacceptable - but conventional venture investment structures are applied even on very small scales. However, not every debt arrangement can be seen in terms of venture investment structures. For example, when a family buys a home it is not investing in a business venture - a person's shelter is not a business venture. Similarly, purchasing other commodities for personal use, such as cars, furniture, and so on, cannot realistically be considered as a venture investment in which the Islamic bank shares risks and profits for the profits of the venture.
[edit] Natural capital
Perhaps due to resource scarcity in most Islamic nations, this form of economics also emphasizes limited (and some claim also sustainable) use of natural capital, i.e. producing land. These latter revive traditions of haram and hima that were prevalent in early Muslim civilization.
[edit] Welfare
Social welfare, unemployment, public debt and globalization have been re-examined from the perspective of Islamic norms and values. Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. It remains to be seen if they will find niches - although hybrid approaches, e.g. Grameen Bank which applies classical Islamic values but uses conventional lending practices, are much lauded by some proponents of modern human development theory.
[edit] Islamic stocks
In June 2005 Dow Jones Indexes, New York, and RHB Securities, Kuala Lumpur, teamed up to launch a new "Islamic Malaysia Index" —a collection of 45 stocks representing Malaysian companies that comply with a variety of Shariah-based criteria. Three variables (the total debt of an indexed company, its total cash plus interest-bearing securities and its accounts receivables) must each be less than 33% of the trailing 12-month average capitalization, for example.
[edit] References
- Muhammad Nijatullah Siddiqui, Muslim Economic Thinking, (Islamic Foundation, Leicester, UK)
- Syed Nawab Haider Naqi, Ethics and Economics: An Islamic Synthesis, (Islamic Foundation, Leicester, UK)
- M. Umar Chapra, Islam and the Economic Challenge, (Islamic Foundation, Leicester, UK)
- Angelo M. Venardos, Islamic Banking & Finance in South-East Asia: Its Development & Future, (World Scientific Publishing, Singapore)
- Abbas Mirakhor, Theoretical Studies in Islamic Banking and Finance, (Islamic Publications International)
- Fatwa Dewan Syariah Nasional - Majelis Ulama Indonesia Fatwa about many issues in Islamic Economics
- Islamic Economics book list
- Islamic Banking references
- Islamic Banking references (GDRC)
[edit] Dump merge
Islamic Finance is based on interpretations from the Qur'an. Its two central tenets are no interest can be earned on loans and socially responsible investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different from what other religions do.
Quran, the holy book of Islam, forbids Riba (or interest). The book has the 4 key verses upon which the no-interest principle is based. Many of the differences in Islamic finance (especially Islamic banking) revolve around this no interest principle.
For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include essentially profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.
The second difference between Islamic finance and traditional finance is the emphasis on socially responsible investing. While in the Western financial tradition there are many investors who invest in "socially responsible" means, socially responsible investing is not as wide spread as it is within the Islamic tradition.
Islam takes a holistic view of the person. Thus someone who is good does good things. This includes investing responsibly to assure that the money does not go for "bad" purposes. These "bad" purposes include the usual subjects such as drugs, weapons, alcohol, pornography, and terrorism. Again this is really no different from traditional socially responsible investing.
[edit] Popularity and availability
Today there are many financial institutions, even in the Western world, offering financial services and products in accordance with the rules of the Islamic finance. For example, legal changes introduced by Chancellor Gordon Brown in 2003, have enabled British banks and building societies to offer so-called Muslim mortgages for house purchase.
In 2004 the UK's first stand alone Sharia'a complaint bank was launched, the Islamic Bank of Britain. They offer products and services to its UK customers that utilise the Islamic financial principles; such as Mudaraba, Murabaha, Musharaka and Qard.
The Islamic finance sector was worth between 300 and 500 billion dollars (237 and 394 billion euros) as of September 2006, compared with 200 billion dollars in 2004. The number of Islamic retail banks and investment funds number in their hundreds and many Western financial institutions offer products that comply with Sharia law, including Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS. [3]
[edit] In practice
[edit] See also
- Islamic banking
- Murabaha
- Musharakah
- Mudarabah
- Ijara
- Qard-Hasan
- Istisna
- Bai'salam
- Tawaruk
- Modern Islamic philosophy
- Islamic bank
- Islamic finance
- Islamization of knowledge
- Green economics
- Creditary economics
- Islamic science
- Ibn Khaldun
[edit] References
- ^ Michael Bonner, "Poverty and Economics in the Qur’an", Journal of Interdisciplinary History, xxxv:3 (Winter, 2005), 391–406
[edit] External links
- Riba, Interest and Six Hadiths: Do We Have a Definition or a Conundrum? by Dr. Mohammad Omar Farooq
- Corporate Islamic Finance - An Assessment by Dinar Standard
- The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments by Dr. Mohammad Omar Farooq
- Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link by Dr. Mohammad Omar Farooq
- Muslim mortgages in Britain
- Information on Islamic Finance
- Alternative energy for funds Extract from Jane's Transport Finance about Islamic finance, 29 August 2006
http://sukkook.googlepages.com/
- The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments by Dr. Mohammad Omar Farooq
- The Riba-Interest Equivalence: Is there an Ijma (consensus)? by Dr. Mohammad Omar Farooq
- Training,seminars and information on Islamic banking and finance
- Liberal and progressive Islam from Alan Godlas' Islamic resources page at the University of Georgia
- [4], Mahmoud el-Gamal, Rice University, Houston, Texas, "An Economic Explanation of the Prohibition of Riba in Classical Islamic Jurisprudence."
- Study Islamic Business in Indonesia
- muslim-investor.com Principles about Muslim Financial
- Dow Jones Islamic Market indexes
- Shouldn’t there be a war on poverty? - An Islamic perspective
- Islam & the Economic Question