Islamic economic jurisprudence

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This is a sub-article of fiqh and Law and economics.

Islamic economics is economics in accordance with Islamic law. There are two paradigms for understanding Islamic Economics - one assuming the political framework is Islamic (i.e., Khilafah) and the other assuming the political framework is non-Islamic, resulting in a paradigm that seeks to integrate some prominent Islamic tenets into a secular economic framework.

The former paradigm seeks to restate the economic problem as being a problem of distribution of resources in order to meet the basic and luxurious needs of individuals in society, building an ethical marketplace where there is co-operative competition, participants are rewarded by being exposed to risk and/or liability, property is equitably divided between public and private use and the state has a clear role in policing, taxation, managing public assets and ensuring the circulation of wealth. Islamic movements calling for political reformation will generally propose this paradigm to explain how they will introduce economic reform.

The latter paradigm however simply proposes two main tenets: 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. In trying to prevent interest, 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 integrated their religious beliefs with the external economic realities of the nations they live in. Like most things in Islam, commerce adapts to al-urf, "the custom". At times there is tension where customs are in conflict with Islamic texts, such as banks, which institutionalise the notion of interest, a guaranteed return on capital. Banks have not existed throughout Islamic history and appeared for the first time in the Ottoman empire, in the late 18th century.

In the 1980s and 1990s some Muslim bankers and religious leaders suggested ways to integrate Islamic law on usage of money with modern concepts of ethical investing. In banking this was done through the use of sales transactions (focusing on the fixed rate return modes) to achieve similar results to interest. This has been heavily criticised by many modern writers as nothing more than a sham.

Some modern writers accepted the premises and principles used in the Western Political Economy and sought to fuse morality and some tenets of Islamic law to produce an Islamic discipline, namely Islamic Economics. Others sought to present a new philosophy and paradigm for what constitutes Islamic Economics. To date, there is no agreement as to the methodological definition and scope of Islamic Economics due to this fundamental debate and tension in the Muslim world.


[edit] Reforms under Islam

Main article: Reforms under Islam (610-661)

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 all participants 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

Main article: Islamic banking

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. This transaction utilises valid sales transactions called murabaha, but violates Islamic law by the bank usually not taking delivery or connecting two independent contracts or taking of legally enforable guarantees from the buyer.

Usually, time value of money is compensated to the lender by the lender charging the borrower interest on the principal amount of the loan. Islam prohibits time value of money in itself as producing no value - in conjunction with other value driven agreements the idea is entertained.

In the case of Islamic banking, the lost time value is compensated by utilising a sales contract, 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 losses 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 based on the famous tradition, al-kharaj bi damaan - return is determined by exposure to risk/liability.

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 [1]. However in practice this is rarely the case, another point of strong criticism of "Islamic Banking".

[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] Popularity and availability

Main article: Islamic economics in the world

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 compliant 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. [2]

[edit] See also

[edit] References

  1. ^ Michael Bonner, "Poverty and Economics in the Qur’an", Journal of Interdisciplinary History, xxxv:3 (Winter, 2005), 391–406

[edit] See also

[edit] External links

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