Definitions

Economic Philosophy

Islamic economic jurisprudence

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

Islamic economics is economics in accordance with Islamic law. Islamic economics can refer to the application of Islamic law to economic activity either where Islamic rule is in force or where it is not; i.e. it can refer to the creation of an Islamic economic system, or to simply following Islamic law in regards to spending, saving, investing, giving, etc. where the state does not follow Islamic law.

The former paradigm, particularly as developed by modern Shia scholars such as Mahmud Taleqani, and Mohammad Baqir al-Sadr, seeks not only to enforce Islamic regulations on issues such as Zakat, Jizya, Nisab, Khums, Riba, insurance and inheritance, but to implement broader economic goals and policies of an Islamic society. It seeks an economic system based on uplifting the deprived masses, a major role for the state in matters such as circulation and equitable distribution of wealth and ensuring participants in the marketplace are rewarded for being exposed to risk and/or liability. Islamists movements and authors will generally describe this system as being neither Socialist nor Capitalist, but a third way with none of the drawbacks of the other two systems. However, a lot of Islamic economics tend to have similar traits with a command economy.

The latter paradigm is of necessity more limited, revolving around a few main tenets of Islam: the payment of zakat charity by believers, borrowing and lending without payment of fixed interest (riba), and socially responsible investing. The key difference from a financial perspective is the no-interest rule since most other religions favor charitable giving and socially responsible investing. The belief that the prohibition of investment with interest charges is essential for an Islamic society is widespread, though liberal movements within Islam may deny the need for this prohibition, since they see Islam as generally compatible with modern secular institutions and law.

History

Traditional Islamic concepts having to do with economics included

  • zakat - the "taxing of certain goods, such as harvest, with an eye to allocating these taxes to expenditures that are also explicitly defined, such as aid to the needy."
  • Gharar - "the interdiction of chance ... that is, of the presence of any element of uncertainty, in a contract (which excludes not only insurance but also the lending of money without participation in the risks)"
  • Riba - "referred to as usury"

These concepts, like others in Islamic law, came from the "prescriptions, anecdotes, examples, and words of the Prophet, all gathered together and systematized by commentators according to an inductive, casuistic method." Sometimes other sources such as al-urf, (the custom), al-aql (reason) or al-ijma (consensus of the jurists) were employed.

In addition, Islamic law has developed areas of law that correspond to secular laws of contracts and torts.

Early reforms under Islam

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 (charity) and discouraging riba (usury/interest) on loans. Bonner maintains the prophet also helped poor traders by allowing only tents, not permanent buildings in the market of Medina, and not charging fees and rents there.

Capitalist market economy

The origins of capitalism and free markets can be traced back to the Islamic Golden Age and Muslim Agricultural Revolution, where the first market economy and earliest forms of merchant capitalism took root between the 8th–12th centuries, which some refer to as "Islamic capitalism". A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organisation were introduced by economists, merchants and traders during this time. Such innovations included the earliest trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal), circulating capital, capital expenditure, revenue, cheques, promissory notes, trusts (see Waqf), startup companies, savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system, and lawsuits. Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.

The systems of contract relied upon by merchants was very effective. Merchants would buy and sell on commission, with money loaned to them by wealthy investors, or a joint investment of several merchants, who were often Muslim, Christian and Jewish. Recently, a collection of documents was found in an Egyptian synagogue shedding a very detailed and human light on the life of medieval Middle Eastern merchants. Business partnerships would be made for many commercial ventures, and bonds of kinship enabled trade networks to form over huge distances. Networks developed during this time enabled a world in which money could be promised by a bank in Baghdad and cashed in Spain, creating the cheque system of today. Each time items passed through the cities along this extraordinary network, the city imposed a tax, resulting in high prices once reaching the final destination. These innovations made by Muslims and Jews laid the foundations for the modern economic system.

Classical Muslim economic thought

To some degree, the early Muslims based their economic analyses on the Qu'ran (such as opposition to riba, meaning usury or interest), and from sunnah, the sayings and doings of Muhammad.

Perhaps the most well known Islamic scholar who wrote about economics was Ibn Khaldun (13321406), who is considered a father of modern economics. 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. 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. He also noted macroeconomic forces of population growth, human capital development, and technological developments effects on development. In fact, Ibn Khaldun thought that population growth was directly a function of wealth.

Other important early Muslim scholars who wrote about economics include Abu Hanifah, Abu Yusuf (731-798), Ishaq bin Ali al-Rahwi (854–931), al-Farabi (873–950), Qabus (d. 1012), Ibn Sina (Avicenna) (980–1037), Ibn Miskawayh (b. 1030), al-Ghazali (1058–1111), al-Mawardi (1075–1158), Nasīr al-Dīn al-Tūsī (1201-1274), Ibn Taimiyah (1263–1328) and al-Maqrizi.

Post-colonial era

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 Islam is "not merely a spiritual formula but a complete system of life in all its walks", these writers believed that it should logically follow that Islam also had its own economic system unique from and superior to non-Islamic systems. To date, however, there have been no agreement as to the methodological definition and scope of Islamic Economics.

In the 1960s and 70s Shia Islamic thinkers worked to develop a unique Islamic economic philosophy with "its own answers to contemporary economic problems." Several works were particularly influential,

  • Eslam va Malekiyyat (Islam and Property) by Mahmud Taleqani (1951),
  • Iqtisaduna (Our Economics) by Mohammad Baqir al-Sadr (1961) and
  • Eqtesad-e Towhidi (The Economics of Divine Harmony) by Abolhassan Banisadr (1978)
  • Some Interpretations of Property Rights, Capital and Labor from Islamic Perspective by Habibullah Peyman (1979).

Al-Sadr in particular has been described as having "almost single-handedly developed the notion of Islamic economics"

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." These ideas helped shape the large public sector and public subsidy policies of the Iranian Islamic 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]."

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 to interest. This has been heavily criticised by many modern writers as a means of covering conventional banking with an Islamic facade.

Traditional approach

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.`"

Property

The Qur'an states that God is the sole owner of all matter in the heavens and the earth. Man, however, is God's viceregent on earth and holds God's possessions in trust (amanat). Islamic jurists have divided properties into three categories:

  • Public property
  • State property
  • Private property

Public property

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.

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.

State property

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.

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.

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.

Private property

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.

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.

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.

Market

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.

The three necessary conditions for an operational markets are said to be upheld in Islamic primary sources:

  • Freedom of exchange: the Qur'an calls on believers to engage in trade, and rejects the contention that trade is forbidden.
  • Private ownership (see above).
  • Security of contract: the Qur'an calls for the fulfillment and observation of contracts. The longest verse of the Qur'an deals with commercial contracts involving immediate and future payments.

Interference

Islam promotes a market free from interferences such as price fixing and hoarding. Government intervention, however, is tolerated under specific circumstances.

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.

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.

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."

Banking

Interest

Islamic economic institutions, not just the Islamic bank but all those connected with Islamic banking operates 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. However, where interest paid at the end of the time period depend on how long one took to make the repayments, the total Islamic mark-up is fixed regardless of how long one took to repay his dues. I.e, it is a profit margin on a sale, and not a time value of money.

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. One may reason that the Islamic 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. However, where under an Islamic bank one would end up paying the extra $15,000 no matter how quickly he pays his 'loan', under non-Islamic banking one can end up paying less if he repays his loans quicker. The aforementioned transaction utilizes 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 enforceable 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 utilizing 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 financial 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.

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.

Money changers

Due to religious sanctions against odious debt, Tamil Muslims have historically been money changers (not money lenders) throughout South and South East Asia.

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.

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.

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 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.

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 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.

Business Method Patents

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:

  • Declining balance co-ownership financing arrangement. This discloses an allegedly Sharia compliant financing arrangement for home purchases and refinances that does not involve the payment of interest.
  • Controlling a Computer System Enabling Sharia-Compliant Financing. This discloses an improved computer system for carrying out Sharia compliant financial transactions.

Views

Sohrab Behada's study argued that the economic system proposed by Islam is essentially a capitalist one.

Criticism

Its popularity notwithstanding, critics of Islamic economics have not been sparing. It has been attacked for its alleged "incoherence, incompleteness, impracticality, and irrelevance;" driven by "cultural identity" rather than problem solving. 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.
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.

See also

References

Bibliography

Torts

  • A. Basir Bin Mohamad. "The Islamic Law of Tort: A Study of the Owner and Possessor of Animals with Special Reference to the Civil Codes of the United Arab Emirates, Lebanon, Tunisia, Morocco, Sudan and Iraq" in Arab Law Quarterly V.16, N.4 2001
  • __________. "Vicarious Liability: A Study of the Liability of the Guardian and his Ward in the Islamic Law of Tort" Arab Law Quarterly V. 17, N.1 2002
  • Immanuel Naveh. "The Tort of Injury and Dissolution of Marriage at the Wife's Initiative in Egyptian Mahkamat al-Naqd Rulings" in Islamic Law and Society Volume 9, Number 1, 2002
  • Islamic law of tort Liaquat Ali Khan Niazi, 1988
  • An outline of Islamic law of tort Abdul-Qadir Zubair, 1990

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