An Introduction to Islamic Economics

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About the Book

The contemporary economic systems have failed to solve the economic problems of mankind. The failure of socialism is too obvious to need any documentation. The track record of capitalism is far from being promising. Although a small minority has achieved unprecedently high material standards of living, a vast majority lives under conditions of abject poverty. The problems of un-employment, inflation, poverty amidst affluence, unequal distribution of wealth, frequent bouts of business recession, environ-mental pollution, and ecological imbalance still bedevil man’s present life and threaten his future.

The present book contend that the Islamic economic order has the potential of ushering in an age of human bliss; and the resources to build a free, just and responsible world for everyone on the earth.

Foreword

Although Islamic Economics is still in its early stages of development as an academic discipline, there is a constant flow of useful and valuable literature on its different aspects and themes relating to Islam’s economic teachings. There is also a rich scholarly tradition from whose womb this nascent discipline has emerged. In all ages and times Muslim scholars have written on the economic teachings of Islam. The current century has, however, been particularly prolific. Theologians, legists, fuqaha, social thinkers and reformers have profusely written on economic themes and have tried to identify what guidance could be drawn from the Islamic sources-the Qur’an, Sunnah, Fiqh, social thought and historical experience. Lurid light has been thrown on certain aspects, like prohibition of riba, dynamic potential of zakat, concept of property and enterprise, role of state, etc. Reflection and discussion continue on many more aspects from the micro level to the global issues. It is in the context of this rich intellectual background that the Muslim economists are trying to develop what can be described as ‘Islamic Economics’ .

There is also an increasing realisation that Islamic economics cannot be studied in isolation-it can seek flowering only in the context of a whole social system. Contemporary Muslim economists have, on the one hand, gone deep into the original sources to understand the Islamic ideals and targets and, on the other; to realistically comprehend the process through which the Muslim society is passing i.e. a status quo that is a complex of vestiges of the great historic traditions, polluted and corrupted by a colonial past, during which a host of foreign values, laws, institutions and consequent distortions were imposed upon it. As such the problems of transition are beginning to attract more and more the attention of researchers and scholars.

More fundamental is the debate on the future of the very paradigm of economics. The economic paradigm, which has held the sway for the last two centuries. is not only showing cracks beyond repair; its very theoretical foundations, underlying assumptions and capacities to predict future modes of behaviour, are being challenged. Discussion is no longer confined to changes within the paradigm; the current debate is moving more and more towards the need for the change of the paradigm itself “Challenged”, writes Amitai Etzioni, “is the entrenched utilitarian, rationalistic, individualistic, neo-classical paradigm which is applied not merely to the economy but also, increasingly to the full array of social relations, from crion to family” (Amitai Etzioni, The Moral Dimension: Towards a New Economics. New York, Macmillan, 1988, p.ix).

The result of this approach would be that: “Technological options must be determined by an economic rationale subordinate to social objectives formulated by ethical values. The hierarchical order: technical values/economic rationale/social objectives/ethical values, would thus be reversed” (ibid. p)64).

Coming to the ground situation of the world economy it deserves to be noted that the socialist economic experiment has miserably failed, while the capitalist economies, despite long strides in the fields of economic growth and technological transformation, are in the throes of an ever-deepening crisis. Modern economy has failed to ensure distributive justice, sustained growth and social harmony for a vast majority of mankind and is confronted at home and abroad with the menaces of prolonged recession, persistent unemployment, stagflation, unrestrained monetary expansions, staggering mountains of domestic and foreign debts, and co-existence of extremes of affluence and stark poverty within as well as among the community of nations. The link between moral values and economic judgement and behaviour, both at individual as well as governmental levels which had sustained humanity through the millenna, had been torn as under during the age of secular capitalistic ascendance and the economists as well as the common man are now trying to re-discover that missing ethical link. ‘Islamic economics’ represents a systematic effort by Muslim economists to cast a fresh look on the entire economic problem and methodology and come up with fresh solutions to old and persisting problems. We are aware that the Muslim economists have a long way to go, but there is no doubt that a beginning has been made in this direction. This beginning bears great promise for the future.

Brother Mohammad Akram Khan is one of those scholars who have shown keen and persistent interest in Islamic economics. He has already produced an extremely useful annotated bibliography on Islamic economics. He has also written quite extensively on a number of substantive issues, particularly in the fields of banking, performance audit and rural finance’. His present study covers a rather vast area, from Islam’s world view and basic economic concepts to a number of policy prescriptions. The value of the book lies in its simplicity, directness of style, unapologetic approach and reliance on original sources to develop Islamic perspectives on a number of economic concepts, issues and problems. I am confident that An Introduction. to Islamic Economics will be of great assistance to the uninitiated reader, particularly for the students of economics. It will help the reader develop familiarity with a large number of issues that go to make up the current matrix of Islamic economics. I welcome the publication of this short but useful book and am also happy to record that its publication marks a new phase in the history of cooperation between the International Institute of Islamic Thought, Washington/Islamabad and the Institute of Policy Studies, Islamabad who have jointly sponsored its publication.

Preface

The achievements of the 20th century are too numerous to be counted. However, in the final analysis, the material advancements this century have concealed from our eyes the persistent despoiling of human qualities and the erosion of the moral bases of culture. The unprecedented material prosperity that came along with technological developments made available to an ordinary on a lifestyle which used to be the prerogative of kings alone and elite in the last century. This became possible only with the help of money that was made available to finance scientific research large development projects. But unfortunately the entire effort to ease the inventory of material possessions and comforts left out of focus the most important element - man himself.

The accumulated effort of all nations of the world during the le century contributed only to the growth and development of beings as mere cogs in a vast development machine. For was not conceived as the crown of all development efforts. At he was treated as ‘human capital’. As a result, very little was for the education and training of man to bring about his cultural advancement and to nurture fellow-feelings in him. Even today, disparities exist in the provision of basic services like potable r, sanitation, medical care, roads, fuel gas, electricity and telephones between rural and urban areas and between rich and poor countries, although a lot of lip service has been paid to the equality of human beings. The allocation of resources has been guided mostly economic and financial criteria and not by human needs similarly, the research programmes in science and technology are guided by potential pay-back for business firms or economic power for the state. Capital, wherever it is available, flows to the programmes where it has all the safeguards and an assured return. Financial considerations reign supreme. There are vast spans of undeveloped earth and oceans, and infinite potentialities of development, enough to enrich everyone on this earth provided finance is available to explore these possibilities. But unfortunately finance becomes available only at a certain rate of interest. Projects which do not assure the going rate of interest to the financier starve for funds. Millions of human beings are unemployed only because the money-lender insists on his pound of flesh. All programmes of human development, education, training, scientific research, and construction of infrastructure require finance which becomes available only at a cost.

The lesson of the 20th century appears to be that full employment is not possible until we can attain ‘euthanasia of the rentier’. Therefore, the challenge of the 21st century lies in inventing a mechanism for providing finance on an interest-free basis. If man is able to discover such a mechanism he would be able to unshackle himself from the bonds of money. It would usher in an era of human supremacy over money rather than money over human beings. Although interest on finance has been denounced by all religions and thinkers of various shades of thought throughout the ages, very little serious effort has been made to find out a practicable mechanism to provide institutional finance on an interest-free basis. The 21 st century should accept the challenge of liberating man from the bonds of finance.

In many ways, the stage is sec for such an endeavour. On the economic front, the debt trap, stagflation, unemployment, and growing disparity between the rich and the poor nations are some of the compulsions posed by the 20th century. The awareness of the atrocities of interest is increasing and the need for interest-free finance is being felt. On the political front, the dramatic changes in the communist countries and the long-range fears of internal contradictions leading to some identical blow-up in the capitalist world, compel us to evolve an un-exploitative framework so that the 21st century would become the century of hope for man.

There has been an increasing realization in the UN and various regional organizations to give greater importance to the development of man. But these programmes miss the essential point. Man shall never be able to develop if he remains subservient to finance. He must release himself from its clutches. The availability of interest-free finance would enable man to harness vast areas of land. It would eradicate unemployment and under-employment to an extent that could obliterate fiscal deficit and help in calling a halt to inflation. On the international front, the present outflow of resources from the poor to the rich nations in the form of interest would stop. The poor nations would toil for their own betterment and not for the betterment of their money-lenders. It would be, in Keynes’ words, a ‘sea-change’ for humanity.

We should enter the 21st century with the resolve to develop a practical mechanism to make finance available free of cost. All other strategies to promote world prosperity and peace are likely to fail if adequate finance ‘is not available. Therefore, we should try to overcome the most insurmountable of all obstacles first. It would lead to an era of prosperity for all.

The suggestion seems to be utopian. But history gives us hope and courage. There was a time when ideas like abolition of slavery, the introduction of adult suffrage, education-for-all, and equality between men and women were wild dreams of visionaries. A few decades back, let alone a few centuries, all these ideas were considered as impractical as is the vision of an interest-free world today. Given the ingenuity and will of man, however, this dream can also come true. It would make the 21st century worth living. It would virtually transform the whole earth into a heaven.

The present book aims at showing the contours of an Islamic economy. Its main theme is that the neo-classical economics which has fashioned the present-day world has outlived its utility. Its approach is narrow, its assumptions are unrealistic, and its strategies inhuman. It has landed humanity into an abyss of problems. If human thinking does not transcend the basic framework of neo- classical economics, the future of man on this globe is pretty bleak.

In this background, the Islamic economic precepts provide a ray of hope. The present book invites the reader to cast an objective look at the principles / of Islamic economics and perceive their potential. The book addresses both the common reader and the professional economist trained in the West. It is not, however, a detailed exposition of the subject. Instead; it attempts to give a bare introduction to the subject of Islamic economics.

Chapter one gives a broad overview of the subject. It is intended for those who cannot spare the time to go through the entire book. It is a quick run-through of the main themes of the subject.

Chapters two : and three are more in the nature• of an academic excursion into formalizing the basic precepts of Islamic economics. They define the subject and spell out its scope and methodology. They are meant for professional economists and students of Islamic economics at the university level.

Chapter four gives a brief resume of the practice of Islamic economics in the present day world. It shows the eagerness of the Muslim countries to put into practice, albeit inadequately, the basic principles of Islamic economics.

The last two chapters argue that Islamic economics is the economics of the future and that neo-classical economics can benefit from its principles and methodology.

Two appendices follow the main text. The first discusses the liability of the shareholders in a joint stock company. The second deals with discounting for project evaluation. We believe that as compared to capitalism, Islam has a distinctive position on these issues. But the main text could not afford their discussion as it would have disturbed the balance and continuity of the book. Therefore, we have made them into appendices. We have added a select bibliography of recent writings on Islamic economics to help a serious reader pursue the subject further. We believe that the book will be able to stimulate further thinking toward establishing an interest-free world economy imbued with the Islamic values and norms of behaviour. We fervently hope that the prejudice of the modern world against religion will not undermine the rationality and objectivity of the contemporary man. We hope that the people of our age, who are likely to close the present century in a state of despair, will see a ray of hope in the principles of the Islamic economic order.

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