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Islamic economics refers to the body of Islamic studies literature that "identifies and promotes an economic order that conforms to Islamic scripture and traditions," and in the economic world an interest-free Islamic banking system, grounded in Sharia's condemnation of interest (riba). The literature has been developed "since the late 1940s, and especially since the mid-1960s."[1] The banking system developed during the 1970s.[2] The central features of Islamic economic literature have been summarized as the following: "behavioral norms" derived from the Quran and Sunna, zakat tax as the basis of Islamic fiscal policy, and prohibition of interest.[1]
In Shia Islam, some scholars--such as Mahmoud Taleghani and Mohammad Baqir al-Sadr--have developed an "Islamic economics" emphasizing the uplifting of the deprived masses, a major role for the state in matters such as circulation and equitable distribution of wealth, and a reward to participants in the marketplace for being exposed to risk and/or liability.
Islamist movements and authors generally describe an Islamic economic system as neither Socialist nor Capitalist, but as a "third way" with none of the drawbacks of the other two systems.[3][4]
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Traditional Islamic concepts having to do with economics included
These concepts, like others in Islamic law, came from the "prescriptions, anecdotes, examples, and words of Muhammad, all gathered together and systematized by commentators according to an inductive, casuistic method."[5] Sometimes other sources such as al-urf (custom), al-aql (reason), or al-ijma (consensus of the jurists) were employed.[6]
In addition, Islamic law has developed areas of law that correspond to secular laws of contracts and torts.
Some argue early Islamic theory and practice formed a "coherent" economic system with "a blueprint for a new order in society, in which all participants would be treated more fairly". Michael Bonner, for example, has written that an "economy of poverty" prevailed in Islam until 13th and 14th century. Under this system God's guidance made sure the flow of money and goods was "purified" by being channeled from those who had much of it to those who had little by encouraging zakat (tax) and discouraging riba (usury/interest) on loans. Bonner maintains Muhammad also helped poor traders by allowing only tents (not permanent buildings) in the market of Medina, and by not charging fees and rents there.[7]
To some degree, the early Muslims based their economic analyses on the Qur'an (such as opposition to riba, meaning usury/interest), and from sunnah, the sayings and doings of Muhammad.
Amongst the important early Muslim scholars who made valuable contributions to economic theory are Abu Yusuf (d. 798), Al-Mawardi (d. 1058), Ibn Hazm (d. 1064), Al-Sarakhsi (d. 1090), Al-Tusi (d. 1093), Al-Ghazali (d. 1111), Al-Dimashqi (d. after 1175), Ibn Rushd (d. 1187), Ibn Taymiyyah (d.1328), Ibn al-Ukhuwwah (d. 1329), Ibn al-Qayyim (d. 1350), Al-Shatibi (d. 1388), Ibn Khaldun (d. 1406), Al-Maqrizi (d. 1442), Al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762).[8]
Perhaps the most well known Islamic scholar who wrote about economics was Ibn Khaldun,[9] who is considered a father of modern economics.[10][11] Ibn Khaldun wrote on economic and political theory in the introduction, or Muqaddimah (Prolegomena), of his History of the World (Kitab al-Ibar). In the book, he discussed what he called asabiyya (social cohesion), which he sourced as the cause of some civilizations becoming great and others not. Ibn Khaldun felt that many social forces are cyclic, although there can be sudden sharp turns that break the pattern.[12]
His idea about the benefits of the division of labor also relate to asabiyya, the greater the social cohesion, the more complex the successful division may be, the greater the economic growth. He noted that growth and development positively stimulates both supply and demand, and that the forces of supply and demand are what determines the prices of goods.[13] He also noted macroeconomic forces of population growth, human capital development, and technological developments effects on development.[14] In fact, Ibn Khaldun thought that population growth was directly a function of wealth.[15]
During the medieval Arab Agricultural Revolution, a social transformation took place as a result of changing land ownership giving individuals of any gender,[16] ethnic or religious background the right to buy, sell, mortgage and inherit land. Based on the Quran, signatures were required on contracts for major financial transactions concerning agriculture, industry, commerce, and employment. Copies of the contract were usually kept by both parties involved.
There are similarities between Islamic economics and leftist or socialist economic policies. Islamic jurists have argued that privatization of resources of oil, gas, and other fire-producing fuels, agricultural land, and water is forbidden. The principle of public or joint ownership has been drawn by Muslim jurists from the following hadith of the Prophet of Islam:
Ibn Abbas reported that Muhammad said: "All Muslims are partners in three things--in water, herbage and fire." (Narrated in Abu Daud, & Ibn Majah) [4] Anas added to the above hadith, "Its price is Haram (forbidden)"[17] Jurists have argued by qiyas that the above restriction on privatization can be extended to all essential resources that benefit the community as a whole.[18]
Aside from similarities to socialism, early forms of proto-capitalism and free markets were present in the Caliphate.[19] An early market economy and early form of merchant capitalism developed between the 8th and 12th centuries.[20] A vigorous monetary economy developed based on the wide circulation of a common currency (the dinar) and the integration of previously independent monetary areas. Business techniques and forms of business organization employed during this time included early contracts, bills of exchange, long-distance international trade, early forms of partnership (mufawada) such as limited partnerships (mudaraba), and early forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal),[21] circulating capital, capital expenditure, revenue, cheques, promissory notes,[22] trusts (waqf), savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,[23] and lawsuits.[24] Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world.[25][26] Many of these concepts were adopted and further advanced in medieval Europe from the 13th century onwards.[21]
The concepts of welfare and pension were present in early Islamic law as forms of zakat one of the Five Pillars of Islam, since the time of the Rashidun caliph Umar in the 7th century. The taxes (including zakat and jizya) collected in the treasury (bayt al-mal) of an Islamic government were used to provide income for the needy, including the poor, the elderly, orphans, widows, and the disabled. According to the Islamic jurist Al-Ghazali (Algazel, 1058–1111), the government was also expected to stockpile food supplies in every region in case a disaster or famine occurred. The Caliphate was thus one of the earliest welfare states.[27][28]
During the modern post-colonial era, as Western ideas (including Western economics) began to influence the Muslim world, some Muslim writers sought to produce an Islamic discipline of economics. Because some Islamic scholars consider Islam to be more than a spiritual formula but rather a complete system of life in all its aspects,[29] these writers believed that it should logically follow that Islam also had its own economic system, unique from and superior to non-Islamic systems.[7] To date, however, there has been no agreement as to the methodological definition and scope of Islamic economics.
In the 1960s and 1970s Shia thinkers worked to develop a unique Islamic economic philosophy with "its own answers to contemporary economic problems." Several works were particularly influential:
Al-Sadr in particular has been described as having "almost single-handedly developed the notion of Islamic economics"[32]
In their writings Sadr and the other authors "sought to depict Islam as a religion committed to social justice, the equitable distribution of wealth, and the cause of the deprived classes," with doctrines "acceptable to Islamic jurists," while refuting existing non-Islamic theories of capitalism and Marxism. This version of Islamic economics, which influenced the Iranian Revolution, called for public ownership of land and of large "industrial enterprises," while private economic activity continued "within reasonable limits."[33] These ideas helped shape the large public sector and public subsidy policies of the Iranian Revolution.
In the 1980s and 1990s, as the Islamic revolution failed to reach the per capita income level achieved by the regime it overthrew, and Communist states and socialist parties in the non-Muslim world turned away from socialism, Muslim interest shifted away from government ownership and regulation. In Iran, it is reported that "eqtesad-e Eslami (meaning both Islamic economics and economy) ... once a revolutionary shibboleth, is indubitably absent in all official documents and the media. It disapperared from Iranian political discourse about 15 years ago [1990]."[31]
But in other parts of the Muslim world the term lived on, shifting form to the less ambitious goal of interest-free banking. 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 concerning interest. Many modern writers have strongly criticized this approach as a means of covering conventional banking with an Islamic facade.
While many Muslims believe Islamic law is perfect by virtue of its being revealed by God, Islamic law on economic issues was/is not "economics" in the sense of a systematic study of production, distribution, and consumption of goods and services. An example of the traditionalist ulama approach to economic issues is Imam Khomeini's work Tawzih al-masa'il where the term `economy` does not appear and where the chapter on selling and buying (Kharid o forush) comes after the one on pilgrimage. As Olivier Roy puts it, the work "presents economic questions as individual acts open to moral analysis: `To lend [without interest, on a note from the lender] is among the good works that are particularly recommended in the verses of the Quran and the in the Traditions.`"[34]
The Qur'an states that God is the sole owner of all matter in the heavens and the earth.[35] Man, however, is God's viceregent on earth and holds God's possessions in trust (amanat). Islamic jurists have divided properties into three categories:[36]
Public property in Islam refers to natural resources (forests, pastures, uncultivated land, water, mines, oceanic resources etc.) over which all humans have equal right. Such resources are considered the common property of the community. Such property is placed under the guardianship and control of the Islamic state, and can be utilized by any citizen, as long as it does not undermine the right of other citizens over it.[36]
Some types of public property can not be privatized under Islamic law. Muhammad's saying that "people are partners in three things: water, fire and pastures", has led some scholars to believe that the privatization of water, energy and agricultural land is not permissible. Other types of public property, such as gold mines, were allowed by Muhammad to be privatized, in return for taxes to the Islamic state. The owner of the previously public property that was privatized has to pay zakat and, according Shiite scholars, khums as well. In general the privatization and nationalization of public property is subject to debate amongst Islamic scholars. Public property thus, eventually, becomes state or private property.[36]
State property includes certain natural resources, as well as other property that can't immediately be privatized. Islamic state property can be movable, or immovable, can be acquired through conquest, or peaceful means. Unclaimed, unoccupied and heir less properties, including uncultivated land (mawat), can be considered state property.[36]
During the life of Muhammad, one fifth of military equipment captured from the enemy in the battlefield was considered state property. During his reign, Umar (on the recommendation of Ali) considered conquered land to be state property, instead of private property (as was usual practice). The reason for this was that privatizing this property would concentrate resources in the hands of a few, and prevent this property from being used for the general good of the community. The property remained under the occupation of the cultivators, but the taxes collected on it went to the state treasury.[36]
Muhammad said "Old and fallow lands are for God and His Messenger (i.e. state property), then they are for you". Jurists draw from this the conclusion that, ultimately, private ownership takes over state property.[36]
There is consensus amongst Islamic jurists and social scientists that Islam recognizes and upholds the individual's right to private ownership. The Qur'an extensively discusses taxation, inheritance, prohibition against stealing, legality of ownership, recommendation to give charity and other topics related to private property. Islam also guarantees the protection of private property by imposing stringent punishments on thieves. Muhammad said that he who dies defending his property was like a martyr.[37]
Islamic economists have classified the acquisition of private property into three categories: involuntary, contractual and non-contractual. Involuntary means are inheritance, bequests, and gifts. Non-contractual is acquisition involves the collection and exploitation of natural resources that have not previously been claimed as private property. Contractual acquisition includes activities such as trading, buying, renting, hiring labor etc.[37]
A tradition attributed to Muhammad, with which both Sunni and Shi'ite jurists agree, in cases where the right to private ownership causes harm to others, then Islam is in favor of curtailing the right in those cases. Maliki and Hanbali jurists argue that if private ownership endangers public interest, then the state can limit the amount an individual is allowed to own. This view, however, is debated by others.[37]
Islam accepts markets as the basic co-ordinating mechanism of the economic system. Islamic teaching holds that the market, through perfect competition, allows consumers to obtain desired goods, producers to sell their goods, at a mutually acceptable price.[38]
The three necessary conditions for an operational market are said to be upheld in Islamic primary sources:[38]
Islam promotes a market free from interferences such as price fixing and hoarding. Government intervention, however, is tolerated under specific circumstances.[38]
Islam prohibits the fixation of a price by a handful of buyers or sellers who have become dominant in the market. During the days of Muhammad, a small group of merchants used to meet agricultural producers outside the city and bought the entire crop, thereby gaining monopoly over the market. The produce was later sold at a higher price within the city. Muhammad condemned this practice since it caused injury both to the producers (who in the absence of numerous customers were forced to sell goods at a lower price) and the inhabitants of Medina.[38]
The above mentioned reports are also used to justify the argument that the Islamic market is characterized by free information. Producers and consumers should not be denied information on demand and supply conditions. Producers are expected to inform consumers of the quality and quantity of goods they claim to sell. Some scholars hold that if an inexperienced buyer is swayed by the seller, the consumer may nullify the transaction upon realizing the seller's unfair treatment. The Qur'an also forbids discriminatory means of transaction.[38][42]
Government interference in the market is justified in exceptional circumstances, such as the protection of public interest. Under normal circumstances, government non-interference should be upheld. When Muhammad was asked to set the price of goods in a market he responded, "I will not set such a precedent, let the people carry on on with their activities and benefit mutually."[38]
Monetary and fiscal policy can include developments both for a state in transition to an Islamic model as well as when it reaches equilibrium.[43]
Monetary policy emphasizes keeping inflation towards a theoretical zero percent. The value of the currency being maintained according to a basket of goods and services that is reflective of the economy as well as the value of a basket of currencies that would be represented by their level of trade with the Islamic state. The proportion of the two being weighted to the proportion of foreign trade to domestic consumption. This parallels classical and neo-classical ideals.
Money Supply expansion is indexed directly to the population rather than through banking, to avoid an unfair benefit to banking at the cost of the populace. Regulatory creep, conflict of interest and political interference is avoided by a proposed independence of banking and the statistical authority.[43]
Gradual transition is preferred over drastic change, calling for a transitional state similar to Communism's transitional state of Socialism. Impairment of banking, staggered increases in reserve ratios and a gradual approach in the general regulatory framework is considered preferable.[43]
A Keynesian fiscal policy is called for to counteract the fall in the money supply caused by the transitionary policies. Timing and proportion is seen as critical to the success of such a transition.[43]
The Quran (3: 130) clearly condemns what it calls by the Arabic term "riba," usually translated "interest": "O, you who believe! Devour not riba, doubled and redoubled, and be careful of Allah; but fear Allah that you may be successful."
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.
An alternative Islamic savings-investment model can be built around: 1. Venture capital firms; 2. Investment banks; 3. Restructured corporations; and 4. Restructured stock market.[43] This model looks at removing the interest-based banking and in replacing market inefficiencies such as subsidization of loans over profit-sharing investments due to double taxation and restrictions on investment in private equity.
Due to religious sanctions against odious debt, Tamil Muslims have historically been money changers (not money lenders) throughout South and South East Asia.[44]
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.
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.
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 Sharia-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. Islamic bonds, or sukuk, use asset returns to pay investors to comply with the religion’s ban on interest and are currently traded privately on the over-the-counter market. In late December 2009 Bursa Malaysia announced it was considering enabling individuals to trade Shariah- compliant debt on its exchange as part of a plan to attract new investors to the securities.[45]
Economic modeling in an Islamic context looks to find alternative variables and parameters. For instance, many of the key models in modern economic theory have interest (riba) as a key element. According to one author, Tobin's q could be a replacement for interest. Islamic economics still needs pioneers to create the building blocks of Islamic econometrics.</ref>[43]
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. Several banks 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. In 2008, at least $500 billion in assets around the world were managed in accordance with Sharia, or Islamic law, and the sector was growing at more than 10% per year. Islamic finance seeks to promote social justice by banning exploitative practices. In reality, this boils down to a set of prohibitions—on paying interest, on gambling with derivatives and options, and on investing in firms that make pornography or pork.[46]
With the recent ability to patent new methods of doing business in the United States, a small number of patent applications have been filed on methods for providing Sharia compliant financial services. These pending patent applications include:
Sohrab Behada's study argued that the economic system proposed by Islam is essentially a capitalist one.[47]
Its popularity notwithstanding, critics of Islamic economics have not been sparing. It has been attacked for its alleged "incoherence, incompleteness, impracticality, and irrelevance;"[48] driven by "cultural identity" rather than problem solving.[49] Others have dismissed it as "a hodgepodge of populist and socialist ideas," in theory and "nothing more than inefficient state control of the economy and some almost equally ineffective redistribution policies," in practice.[50]
In a political and regional context where Islamist and ulema claim to have an opinion about everything, it is striking how little they have to say about this most central of human activities, beyond repetitious pieties about how their model is neither capitalist nor socialist.[50]
Interest-bearing (Riba) and speculation-involving (Gharar) trading are clearly prohibited by explicit canonical texts. Based on this prohibition, presumably financial structures of all the Islamic products should be interest and speculation free. Nevertheless, some new empirical studies hypothesize that “Islamic finance products’ structure is based on the Islamic prohibitions; however, these products’ risk management is still based on revoking the underlying prohibitions”. The most prominent case here is Islamic financial market products such as, inter alia, Salam and Istisna’ these products are used are hedging methods for the Islamic bonds known as Sukuk. If Sukuk’s originator or investors wish to hedge against interest rate or exchange rate risks, then they have to use one of the former methods. These methods as they originally mimic the conventional risk management practice, should involve either interest-bearing or speculation-bearing trading or even both. There have been some innovations that try to avoid falling in interest-based and/or speculation based transactions. Parallel Salam and synthetics are some of the more recent.
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