Future of Islamic Economics

(With special thanks to IEI, Jeddah for commissioning this paper)

Islamic Economics Institute, KAU Jeddah, November 2012



We need a re-statement/re-formulation of the Islamic economics project launched in early twentieth century. Rather than confronting rival ideologies as was done in the beginning, Islamic economics today should be responding to the challenge of living by Islamic teachings in economic life that are being actually faced by the people. In doing so we should be learning from our predecessors. experiences, their achievements as well as their failures. Among the cardinal weaknesses of Muslims are lack of self-criticism and the capacity to change and adapt to changing conditions. This must go. The current endeavors of other faith-based communities, also of non-religious but well intentioned people, to escape from tyranny of ideologies by making economics serve humane objectives, deserve our involvement at the local as well as the global level. This approach, applied to finance, calls for reducing the role of debt in the economy and freeing finance from gambling. At the social level it calls for empowering the poor by imparting skills that could increase the income-share of those at the bottom of the pyramid resulting in restoring dignity to hundreds of millions. For the Muslim peoples it calls for restructuring the administration of zakat-awqaf-Hajj and philanthropy sector by allowing goal oriented innovative practices.  Lack of openness and inclination towards autocracy, the other fatal flaws in the built up of the ummah, must be rectified by introducing transparency and democratic decision-making. Islam is accommodative enough to allow a variety of models in Islamic economic management. Even in theorizing there is wide scope for creative imagination. A tantalizing model of economic behavior could be built by making our starting point not the market.s self-advantage- focused individual economic agent  in a supposedly scarcity-constrained world but the human being raised in a family defined by caring and sharing, operating in an environment of expanding possibilities. The author emphasizes the need of empirical studies complementing textual ones that venerate logical and analogical reasoning and allow text and logic based methodologies to elbow out intuition and imagination.



Fadul Abdul Karim Bashir and Abderazzak  Said Belabes have done a wonderful job in their write-up: Islamic Economics at Cross Roads, issued as a call for discussion. However, no single paper can handle all the issues or answer all the questions raised by them. I try to pick up some priority ones, adding flavor based on personal observations. Section One highlights the chasm between the world then and now, contrasting the confrontational posture of the Islamists towards powers that be with the  humility now imposed on all concerned by the threats to humanity.s survival coming from within and outside, i.e. from the ecology and the environment. Section Two highlights the mind-set required for success in ensuring morally infused behavior and conducting policy serving social goals, in an environment where not everybody cares. Emphasis is laid in this connection on learning from past attempts at doing so. Section Three calls for teaming up with other faith groups and value oriented peoples in the efforts to usher in a world inviting greater cooperation and end of hegemonic machinations. Section Four focuses on the application of the new strategies in the light of new priorities. It is in the interest of humanity at large to reduce the role of debts and eliminate gambling from finance. Muslims must try to enlist the cooperation of the international community in doing so. Section Five urges upon Muslims fully to utilize the potentiality of zakat-Hajj-Awqaf and philanthropy in empowering those at the bottom of the income/wealth pyramid, reducing the rich-poor gap and restoring dignity to hundreds of millions by creating jobs. Researchers should study the evolution of these and other Islamic economic institutions from the days of the Prophet till the present and across all the regions with sizeable Muslim presence. This agenda calls for a strong empirical base for Islamic economics. The next section emphasizes the importance of economic history of Muslim peoples. We need a closer focus on the economic policies of the Prophet, peace upon him, leading his followers through Sha .b Abi Talib, emigrations to Ethiopia, Muwakhat in Madinah, organizing the market in Madinah, and managing the revenues generated by conquest of Khayber, followed by the triumphal entry of Muslims in  Makkah. Section Seven responds to one of the questions in Fadal-Belabes write up by affirming the possibility of alternative models of Islamic economy within the broad framework provided by maqasid al Shariah. We pick up one such model that may be built on the basis of the personality that family relationships build before an individual enters the .market. as an economic agent.


SECTION ONE : Us and Them; Then and Now

Islamic economics grew in an environment characterized by tension between the world as we would like it to be and the world as we find it in reality. For us reviewing matters after about a century to its recent origin, there is an added tension between the ideal as conceived at the origin and the reality as perceived in this first quarter of the twenty-first century. Are we any closer to our goals? Have we deviated from the path blazed open by the founders? Has the world grown more insensitive to the Call? We feel betrayed by a world that won.t listen and disappointed from ourselves on not living up to our professions. Before we proceed to examine aspects of this tension relevant for the day.s discussion, let us find the way to relax so that we are able to think properly. The way to relax is always to remember the nature of our existence. Life on earth is a test to which our Lord has put us :

For He it is Who has appointed you vicegerent over the earth, and has exalted some of you over others in rank that He may try you in what He has bestowed upon you. Indeed your Lord is swift in retribution and He is certainly All-Forgiving, All-Compassionate.[6:165]

Blessed is He in Whose Hand is the dominion of the Universe, and Who has power over everything, Who created earth and life that He might try you as to which of you is better in deed.[67:1-2]

The way to success is to try our best. Actual transformation of the ground reality into the desired state of the world depends on factors Allah knows best. To be realistic, .transformation. is never complete   or perfect. As we gain some ground, the world moves on, creating new challenges.

It was a very tense situation in the second quarter of the twentieth century. It was an age of confrontation: Asia and Africa in confrontation with their colonial masters from Europe and America, Islam in confrontation with Christianity as well as with Capitalism and Socialism/Communism. Then there was the confrontation between Muslim populations and their rulers who inherited political power from the departing colonial masters. The desire to see newly independent Muslim peoples live by Islamic values was often thwarted, not only by Muslims. own weaknesses in belief and practice as is often the case, but by Muslim rulers and leaders who saw success in emulating the Western Capitalist or Eastern Socialist block. The threats to human felicity were all perceived to be internal__ from humans themselves. The way to deliverance was felt to either reach the top, as the West already had done (though challenged by the USSR and its friends) or to gang up into a rival block in order to confront the dominant block. Islamic economics emerged as a call to forge and solidify a new identity, different from the two warring blocks , by adopting Islamic economic values and institutions.

This has changed. Western hegemony is visibly weakened. The rise of China, soon to be rivaled by India, has made irreparable dents in Western monopoly on power. Meanwhile, Muslim presence is no longer confined to the East (www.pewforum.org). Their presence in Europe and the Americas is acquiring weight that democracies cannot ignore. Over the last seventy-five years Islam.s social teachings have gained prominence along with its spiritual appeal. This characteristic of modern Islam is universally shared. There is no other identity distinguishing 1600 million Muslims from the rest of the 7000 million human beings inhabiting the planet earth. But the reassertion of that identity in the second decade of the twenty-first century need not be confrontational. Now that Muslims are masters of their own destiny in their traditional abodes, and the bipolar world of the twentieth century has gone, and the confrontation between rulers and the Muslim masses is yielding to democratic arrangements, we need a new language, a different style of engagement. Environmental pollution, ecological imbalances,                                                               Jobless  growth and increasing disparities in the distribution of income and wealth...are not specific to any ideological group ,region or race. Even the Frankenstein phenomenon of modern finance defies identification with a particular ideology. Rather than fighting each other seeking supremacy, it will be prudent to join hands for solving the problems that supremacy or hegemony cannot solve even for the winners. The ideological battles raging during the second-third quarters of the last century have been replaced by the struggle to ensure smooth and anxiety free continuation of .civilized. living for human beings on planet earth. The alleged   .clash of civilizations. proved to be a mere flash in the pan. The superfast changes in technology, the wild bursts in human creativity, the tantalizing promises of the coming age of abundance..are making people averse to strife and conflict. While there are still some who want to fight anyone and everyone for their cause, the majority of human beings have started hating war fought in whatever name. The 50 million human lives wasted in senseless wars during the twentieth century, the colossal amounts of resources currently spent on defense-preparedness are warnings enough to all concerned never to revert back to the  age of mutual suspicion and confrontation again. True, the hegemons are still out there. They will continue big power games, wasting precious resources in their efforts to perpetuate a situation whose days are over. Meanwhile the wiser among men should go ahead with their humane projects.                `              

We Muslims should rather be the harbingers of a new age of mutual understanding and cooperation. Fortunately for us, we are not alone in this endeavor. As we explain in a subsequent section, faith-based communities, and other well-intentioned groups are trying to escape the tyranny of ideologies by focusing on reforms conducive to human felicity on a universal scale.

Muslims have been trying to live by Islam.s economic teachings since early on. We should be studying their endeavors, learning from their successes as well as their failures. Even contemporaneously there have been several attempts to revive Islamic institutions like zakat and awqaf and to mobilize the immense resources of the voluntary sector for eradication of poverty and deprivation. The various recent attempts at eliminating riba and gambling deserve closer scrutiny as to why they failed to deliver. It is a fact that the launching of Islamic financial institutions in the early seventies of the twentieth century and their expansion since then has made no dent in Muslim poverty. It is also a fact that Muslims turned their attention to riba-free microfinance rather late in the day, after everybody was in. As a matter of fact poverty removal and reduction in the distribution of income and wealth in the society were not top priority with those who initiated the Islamic economics project. The common perception has been that it requires political power to do so. The lesson of history that a bid for political power could become the biggest hurdle in achieving social goals escapes attention of most people.

Social goals require organizations different in structure, spirit and style than the tight, often non-democratic, organizations going after political power. The huge potential of Islam.s voluntary sector, comprising charity, philanthropy and pilgrimage remained unrealized in the twentieth century.s tense atmosphere, to the great loss of Muslim masses. It is high time due attention is paid to this front. Top priority in this regard attaches to restoring trust in non- governmental social-service institutions. We Muslims have yet to recognize the crucial importance of openness, transparency and accountability in managing our institutions, especially those involving money. There are few, if any, economic and analytical studies on management of Awqaf ,  collection and disbursement of zakat and administration of Muslim- managed educational institutions. Apart from looking into financial irregularities these institutions need to be evaluated on the criterion of serving their stated goals in the changed circumstances. Gone are the days when a debater could congratulate himself or herself by contrasting the corrupt ways of modern capitalist or socialist regimes with the pure and perfect Islamic ways as described in time-honored books. The comparison now is to be made on the basis of the ground reality. How just and equitable is the administration under your charge, and to what effect? That is what influences the hearts and minds in the global race for winning friends and influencing people. Add to this the new concerns raised about ecological balance and environmental safety. The measuring rods have changed. Not accelerated growth but sustainable development, not material production but psychological satisfaction, ... are the new criteria.


SECTION TWO: The Moral Economy of Islam

The essence of Prophetic Messages has always been moral values. Islam is no exception. The big problem is how to translate moral values into socially beneficial individual behavior and public policies that complement the market in securing the desired state of the world. Islamic economics has shed some light on this issue but not enough to impress the profession. There are two main issues involved from the viewpoint of economic analysis: Impact of insufficient information and (non)alignment of incentives.

The individual decision maker does not have sufficient information about the effects of the possible decisions on other individuals, or on the society in general. Where the decision maker is a corporation  and some if not all the relevant information can be obtained at a cost ,the problem involves cost-benefit analysis and such tricky questions as sacrificing part of the corporate profits in order to avoid harming others or enhancing the social good. There is a possibility of the state collecting and disseminating whatever information can be collected, treating information as a public good. This paper is not the occasion to go into details. The point to emphasize is: few, if any, of the Islamic economists have discussed the issue.

Economics is all about incentives. It is incentives that move individuals. What incentives are there to make one care for others? Or serve the social good? The problem becomes still more difficult in the context of Principal-Agent relationship. Does Islam.s moral economy rely exclusively on reward and punishment in the afterlife, insofar as socially beneficial behavior is concerned? Can the state play any role in aligning incentives without affecting freedoms? How far the nature of the state, i.e., its being democratic or autocratic, affects its capability to achieve social goals? .These questions have received little attention from Islamic economists even though economic literature on these issues has been growing in recent years.

Research on the two topics mentioned above would not be complete without some empirical work. Field work in carefully selected areas/institutions can be very useful. A similar claim can be made about historical research focused on the above issues. Currently some anecdotal evidence is cited without proper referencing in many general works on Islamic economics. It fails to convince, for obvious reasons. Also, anecdotal .evidence. tends to follow sectarian lines. The need for hard proof  tacitly disregarded, imagination has a free run in harnessing individual reports(Ahadith Aahad ) to buttress each sects own views about the idealized periods and personalities of early Islamic history. This further compounds the uphill task any Islamic reformer must face. Partial achievements are generally pooh-poohed, judged as they are on the criteria of super-human feats. The subject of Islam.s economic history needs professional handling with a view to distill from it the normative content Islamic economists need. This has been lacking so far.

 We need to look into the causes of this glaring deficiency, to be able to fill the gap in the future. Three points come to mind. Firstly, the supply of proficiency in economic analysis has been in decline for quite some time after the nineteen-seventies, insofar as Islamic economics is concerned. Secondly, whatever economic talent was forthcoming during the last thirty years was absorbed, largely, into the Islamic finance industry which had little time for theoretical niceties. Thirdly, the problem of information deficit merges, ultimately, into the problem of uncertainty of future values for which there is hardly any .solution.. All that remains to be debated is whether cooperation has a better chance of serving mankind than competition. We take up this point in another context below. With reference to the incentives issue, the growing literature on limitations of rationality, role of traditions and culture, and the significance of .identity. economics (Akerlof &Rachel,2010 ) offers vast scope for contributions by Islamic economists. But where are they? We need Seminars especially focused on these analytical issues, preferably organized by Universities or research institutions. Since the problems of information and incentives concern all humans, a wider participation should be welcome.

A wider participation in the deliberations on information and incentives issues in the perspective of an economy where morality plays a significant role will bring in a number of advantages. Man has tried to keep his animal instincts in check by listening to his conscience and paying heed to great moral teachers of humanity since time immemorial. All known human civilizations have been founded on the basis of such teachings whose remnants still inform their members. It will be good, in this age of globalization, for all of them to share their philosophies, historical experiences and current strategies. Secondly, societies have always tried to rectify the damages done by market failures by regulations enforced by the state. But, as the recent crisis also demonstrated, the damages caused by moral failures on part of some individual players are not confined to the markets , they infest the government and bureaucracy too. Moral failures call for a moral/spiritual response,  a new wave of regulations may not be the solution.

For Muslim participants in these deliberations, important lessons may be waiting in the annals of economic history of Muslim peoples in various regions. Islamic economics is a work in progress. Muslims at various times and places tried to build  just and humane societies within the constraints imposed by resources, power relations and weaknesses in faith and morality. Today it is our turn to be trying to build just and efficient economies. There are lessons to be learnt from our past. Special attention is needed towards periods of Islamic history for which detailed economic data is available, like the Mughals in India and the Ottomans in Turkey, greater Syria and Egypt.

In a similar vein there may be lessons to be learnt from the present. The episodes of politically motivated .Islamization. of economy in Pakistan, Iran and Sudan during the eighties may have important lessons to teach. Lessons can also be drawn from the efforts in some Muslim minority countries to activate awqaf and zakat in the service of the community.

 Some Muslims try to build institutions de novo, without reference to what is going on, with the texts of Quran and Sunnah treated as guides and operating manuals. They want gold back as money. Some others would vest all executive power in one individual, supposedly emulating the caliphate. The Prophet, peace upon him, based the quest for fairness in economic transactions on modifying rather than replacing existing arrangements like money. He made governance a matter of consultations. A common feature of Islamic strategy in all the above situations was absence of violence or coercion and efforts at building a consensus. Even the all- important step of launching the Constitution of Madinah, knitting together all the faith communities inhabiting the city to face foreign aggression, was the result of convincing arguments presented by the Prophet himself to gatherings comprising Jews, Christians, Muslim residents of the city and the emigrants from Mecca( Hamidullah, 2004). The importance attaches to realizing the ends Islam seeks, not the forms of arrangements Muslims made for realizing these ends at different times and places.

As we show in a subsequent section, practical policies are responses to real life situations with certain goals in mind. There are no recipes valid for all times and places. The way Muslims conducted themselves in Sha .b Abi Talib , in Abyssinia    ( modern Ethiopia) to where some headed to escape persecution in Mecca, and during the early days in Madinah, or after the conquests of Khayber and the triumphal entry into Mecca were different from one another. The one size fits all approach to Islamic economics needs re-thinking, to say the least. A sense of history and appreciation of context in interpreting divine guidance will be crucial in the days to come when the newly democratizing countries of North Africa settle down and start launching long term projects, economic, social and political. Those who stick to the old mind set may be disappointed, feel angry even and dissipate their energies in venting frustration. What will be helpful is a new mind set able to adapt to the realities of an interconnected global village.


SECTION THREE: Sailing in the same boat with the rest of humanity

In economic life we face the same problems as the rest of humanity. There is no reason we cannot work together to solve our problems. That adherence to moral values can go a long way in solving the problems is an idea widely shared. The important thing is to build on that consensus and create a universal inclination towards operationalizing moral values. Success requires mobilizing creativity and innovativeness to be harnessed in service of moral behavior and socially beneficial public policies. Role models rather than rule books are the keys to high degrees of achievement.

Socially responsible investment(SRI),ethical investment, green policies,.are only some of the recent movements towards infusing business with morality that attract men and women of different faiths and those with no faith. But even well-intentioned people are often swept off their feet if and when they run counter to nationalistic sentiments or hegemonic designs. That is where rooting moral values in spirituality matters. The idea of the universal human brotherhood under one Lord has the potential to free human beings from narrower bonds. A commitment to justice and equity that is strong enough to suppress narrower loyalties can go a long way to eliminate or, at the least, to mitigate the effects of the lack of trust that goes with tribal, national or imperial groupings. The sooner humanity switches over to a single over-riding  universal loyalty the better its future will be.

This was not exactly the stance of twentieth century Islamic initiatives, especially in the field of economics. Nationalism lurked behind many talks of Islamic solidarity, with many Muslims envying the hegemons of the day as they nostalgically recalled their own empires. That stance has become outdated, to say the least. Not only that stance is out of sync with the contemporary reality of Muslim dependence and powerlessness, it has the dangerous potentiality of eroding the credibility of Islamic economics. And, what is more important, it is not what we have been taught. Allah says in the Quran:

Human beings, We created you all from a male and a female, and made you into nations and tribes so that you may know one another. Verily the noblest of you in the sight of Allah is the most God-fearing of you. Surely Allah is All-knowing, All-aware.[49:13]

Indeed , We honoured the progeny of Adam, and bore them across land and sea and provided them with good things for their sustenance, and exalted them above many of Our creatures.[17:70]

Implied in the above texts is the golden principle: compete in virtue. That obviously entails cooperation in mundane affairs.

I hasten to add we are not supposed to forget our Muslim identity, or stop working for Muslim solidarity. It is quite natural for us to work for the wellbeing of our own on the basis of religion, region, race, or language. That is how one contributes to universal ideals, working through one.s own people. As we elaborate in the next section, we Muslims are mandated to undertake many welfare and developmental activities. It belongs to Islamic economics to focus on that vocation. What is to be avoided is the hostility to other groupings similar to our own, the attitude that emerged largely during the heyday of nationalism in Europe. It was born out of a perception of scarcity that implied one losing what the other got. Economists now envisage a future of expanding opportunities (Kotler & Diamondes, 2012). Many of the new forms of wealth that have made life today richer than life in the past, are non-exclusive: My share does not dwindle by your drawing upon it from the same source.

While the old hegemons born out of the era of aggressive nationalism may continue in their machinations, leaders of faith-based movements would know better. Faith-based alliances cut across national boundaries. They need to be mobilized to counter anti-felicity activities of nation states, like producing and amassing weapons of mass destruction. Faith-based alliances should promote cooperative agendas of the philanthropic sector active in the areas of health care and education. They could serve as watch dogs against greedy corporate culture polluting the environment and destroying the ecological balance. Islamic economics in the past either neglected these vital areas of activity or tried to do it alone. That is no longer acceptable. Islamic economics must come out loud and clear for cooperation with anyone and everyone for the sake of the common weal. In the next section we pick up a vital financial sector reform by way of example. It is something that must be done /can be done only in collaboration with others, and fits the priorities of Islamic economics.


SECTION FOUR: Against debt-financing and gambling

Nothing hurts the common man more than happenings in which he had had no hand at all. Apart from natural calamities, wars have been the most striking examples of such occurrences since times immemorial. But financial crises have recently become disasters to reckon with. There is a vast and growing literature on the causes and consequences of the recent financial crisis; we need not go into them here. What stands out is the role debt-financing and gambling- like speculation have played in this regard. Reducing the role of debt and eliminating gambling from financial markets should, therefore, be on top of the agenda for Islamic economics. Fortunately for us, Islamic financial institutions have, by and large, escaped the consequences of the recent crisis as their practice of debt-financing was constrained by certain conditions and they were not allowed to bet in the financial markets. This makes Islamic economics eminently qualified to raise the banner of reform. Success ultimately will depend on creating a healthy financial market in which debt is marginalized and bulk of financing takes place through sharing modes of financing. But before it takes root into practice, the idea has to be made acceptable to the practitioners. Earlier, the sponsors of Islamic economics waited for some Muslim country to make a demonstration. But that was not to be, for reasons we cannot discuss in this paper. We have to target the main players whose choices lay down the frame within which minor actors must operate. These players themselves cannot determine choices for the hundreds of millions of men and women whose monies they handle or whose finances they manage. Hence we must reach the ultimate decision makers themselves. We need a multi-front campaign, addressing economists, financial experts, political leaders, religious mentors and, above all, the common man as saver, investor and user of finance.

The case against using debts as a financial instrument cannot be appreciated without bringing in the role of debt in monetary management. Modern money is all debt. Money is created (printed) at the central bank level and injected into the economy in exchange for bonds issued by corporations ( or in exchange for bonds earlier issued by the state and held by banks, corporations, and individuals). This .high-powered. money enables the commercial banks to issue more money (demand deposits) as debts owed to them (supplementing money deposited earlier by the public as debts the banks owe to the public,  the only .debts. that do not carry interest.) All money in circulation or in deposit is debt owed to some institution. Excepting the demand deposits made by the public, characterized as debt banks owe to the public, all debts carry interest. Over time money must grow in order to pay the interest carried by the monies floating as debts. Since passage of time is no guaranty for growth to take place, and also since not all money is used for productive purposes, default is built into the system. The situation has been resolved, over time in three ways, often combined together. Firstly, a certain category of debt is based on the condition that the principal is never to be repaid, the holder of debt instrument being entitled only to interest. Secondly, a creeping inflation lightens the burden on debtors enabling them to pay back in terms of money weaker in purchasing power than the money they borrowed. Thirdly, bankruptcy laws are designed with the purpose of writing off some outstanding debts to enable the borrower to make a fresh start. These solutions fail, however, to resolve the difficulties for the state itself. Firstly, as the states borrow from the public by selling bonds to fill the budgetary gaps their indebtedness goes on increasing. Secondly, there are no bankruptcy laws to relieve indebted states which are often obliged to borrow in foreign currency to pay for essential supplies. And lastly, inflation which works to the advantage of private debtors, works to the disadvantage of indebted states whose currency falls in the foreign exchange market damaging their stature. The end result is a tension that cannot be resolved. Historically speaking, only wars or revolutions have been able to resolve the tension by destroying the old order and replacing it with a new one in which most of the old obligations are rescinded. But the option of going to war is a luxury only major powers can afford. Poor countries fighting each other, is an invitation to foreign intervention with dire consequences. A just and equitable world society cannot be conceived while this situation continues.

.What is wrong with gambling? Firstly, gambling does not create additional wealth. Games of chance only transfer wealth from its (losing) owners to new (winning) ones. Considering the human resources consumed in the process, wealth transfers through games of chance cannot be considered to be efficient. They do not serve any social purpose. The satisfaction and thrill they provide to the players do not justify the opportunity cost involved. Other exonerating circumstances like the revenue to state in form of taxes or employment  generated by casinos, lotteries, etc. cannot be considered as .advantages. until the acceptability of gambling itself is established.. http://www.siddiqi.com/mns/CurrentFinancialCrisisAndIslamicEconomics.htm

Gambling is an unmixed evil, diverting precious human resources to unproductive pleasure seeking. It is bad enough done with one.s own money. Gambling with other people.s money is worse still. That is what was happening in the US financial markets when disaster struck. The story of CDOs (Collateralized Debt Obligations) and CDSs (Credit Default Swaps) have been well publicized along with the causes of the collapse of the American Investment Group (AIG).It is hard to believe it plays any positive role in risk management.

.I argue that risk shifting is gambling. One who buys risk exchanges a definite amount of money (the price) for an uncertain amount of money, whose delivery itself is not certain. Credit Default Swaps are an appropriate example. The millions of loans made by a bank are each subject to the risk of default (credit risk) in various degrees. As Joseph Stiglitz and Bruce Greenwald have rightly pointed out credit is not homogenous like money [Towards a New Paradigm in Monetary Economics (2003), page 271]. The risks attached to each loan are unique. The institution undertaking to pay for all defaulters among, say a million borrowers has no scientific basis for measuring the risk it is taking. There is no long history to fall back on. The law of large numbers does not apply. It is just taking chances, gambling. The banks that so protect themselves against credit risks are emboldened to give more and more loans. That is how aggressive lending policy gained an impetus. The sub-prime mortgage crisis would not have occurred without the speculative deals like CDS. Aggressive lenders offered to refinance mortgages on the basis of rising home prices, virtually converting owned homes into ATM machines, sending people on a buying spree, some of it on installment purchase basis, encouraging an expansion that had little basis in the fundamentals: earning powers, disposable incomes and savings and investments.. http://www.siddiqi.com/mns/CurrentFinancialCrisisAndIslamicEconomics.htm

The current crisis has yet to play itself out, as the travails of the euro area demonstrate. Can Islamic economics draw attention to the role of debt-financing and gambling in financial markets in a way effective enough to make a difference? It is a tough proposition, difficult to answer in view of multi-nationals. grip on international finance. The redeeming feature is: Financial markets of China, India, and other countries in Asia and Africa, though debt-infested are not deep into the gambling business. Should the Islamic finance industry, which has been gambling-free so far, muster the courage of ditching debt-financing in favor of sharing based financing we can make substantial progress towards our target: reducing the role of debt in the economy. Proposals on how to replace interest bearing instruments by sharing-based instruments in the management of money are available ( Sundrarajan  & Shabsig 1998  ), what we miss is a serious attempt.


SECTION FIVE: The third sector in Muslim economies

Muslim economies have always had a thriving third sector, functioning independently of the state and under motivations different from the profit-seeking private enterprises. Zakat, other charitable funds, charitable trusts and endowments, and savings destined for financing the pilgrimage to Mecca all together made a substantial pool of resources in the service of the common good. This sector has also enabled Muslim communities to maintain their independence in face of tyrannical regimes and foreign occupations. Another role of the Muslim voluntary sector has been to extend welfare services, like education and healthcare, to the poorest sections of the society. Very often these services included interest-free loans to tide over emergencies.  For various reasons the sector became wobbly in the post-independent era in the Muslim countries, but its importance increased for the Muslim communities in the Americas, Europe and other countries where Muslims live as minorities. The vast potentials of the sector is only now being realized by mainstream Islamic economics which had left the issues related to the sector largely to Shariah scholars giving fatwas. The affinity of the Muslim third sector with the conventional microfinance and cooperative sectors, which have recently received a big boost, may have something to do with this revival.

At the theoretical level the third sector has always provided a counterweight to the capitalist economy, giving a lie to the dogma that nothing moves without profit motive. But as in the earlier periods of Islamic history, its functioning has always invited the watchful eyes of the supervisor/regulator ___the Muhatasib. For us who complain that Islamic economics proper has been submerged under the stormy waters of Islamic finance endangering its distinct identity, economics of the Muslim third sector provides a way out. As the Muslim third sector is alive and kicking in all countries with a Muslim presence, it is a good vehicle through which to integrate with the economy of man in general. That the sector operates more to the advantage of those at the bottom than those at the top of the income and wealth pyramid, is a significant plus point. Here is an opportunity for Islam as a mission of Mercy for mankind to prove its mettle.

The analytical work still pending is how to make more efficient use of the resources of this sector. Next in importance is the work of providing the sector with an administrative framework that protects it from corruption and sloth, with minimum involvement of the state machinery. This task in itself requires a huge amount of data, not yet available, relating to the assets, liabilities and past performance of the Muslim voluntary sector in various regions at different times. Since a third sector is a reality in almost every economy the world over, we need comparative studies to be able to learn lessons and make amends. Lastly, in most poor countries there exists a thriving .informal. economy, operating largely outside the formally regulated economy, by-passing the banking system, and governed by trust, tradition and custom. The sociology of these economies makes for close relations between the voluntary third sectors and the informal economies. We ignore this symbiotic relationship at our own peril.

While the kings thrived on conquests and the poor subsisted thanks to the bazar and the voluntary sector, the backbone of the Muslim economic strength was the merchant class often carrying on trade in the Mediterranean and the Indian oceans, the straits of Malacca, around the cape of good hope and along the silk road to China and other overland routes. Merchant-friendliness of Islam in practice is no less prominent than poor-friendliness of Islam in theory and philosophy. Unfortunately Islamic economics literature has paid little attention to these features, structured as it became along neoclassical lines which feels more comfortable with an undifferentiated mass of  .individuals.. We need to return back to sociological studies along Khaldunian lines to rediscover the secrets of Muslim economic strength in our glorious past.


SECTION SIX : Economic history of the Muslim peoples

Historical studies have three kinds of lessons to teach. First and foremost they help us understand the texts that should be guiding us. Secondly, history records Muslim efforts to live by divine guidance in changing conditions, technological and sociological, at different locations and different points of time. There are lessons to learn from their successes as well as failures. Thirdly, history exposes the limits of human endeavors, underlining the ambiguities inherent in the human situation. As an antidote to human arrogance, and to the hubris generated by the enlightenment in Europe, then spread all over the world, history may teach humility. It records man.s utter helplessness in face of the unknowable and the undeterminable. For a generation of human beings with memories of .planned development. still fresh, history may serve as a reminder of the .known unknowns. embedded in the human situation. To the extent Islamic economics failed to focus on Muslim economic history it is vulnerable to imbalance. Methodologically, imbalance results from exaggerated reliance on one of the three main strands of Islamic thought that surfaced in the Muslim society after the Prophet: juridical (i.e. fiqh), philosophical      ( falsafah and kalam) and spiritual( tasawwuf).This imbalance must be rectified by extensive probing into  falsafah/kalam and tasawwuf literature for ideas relevant for the contemporary situation. It is difficult to say what would be the outcome. But the lesson in moderation modern man must learn, and the caution he must exercise in interacting with the natural environment does not seem to be coming from the juridical source in a convincing way. Could the Sufis help?

As regards the history of the Prophetic era, we have yet to complete its study, about a century after the advent of modern Islamic economics. The biggest existential challenge was posed for the nascent Islamic community when the Quraish confined them to a barren valley (Sha.b Abi Talib ), refusing trade and interactions with the clan. Clan solidarity sustained Muslims as human rights or citizenship prerogatives would come to the rescue of a persecuted minority in a modern state. How Muslims conducted themselves in those circumstances deserved to be studied with a view of learning lessons. Who knows when and where such lessons become relevant? We ignored the event as we ignored the two subsequent migrations of Muslims to the neighboring Abyssinia (modern Ethiopia), then called Habasah. It is strange as that was a unique experiment, worthy of detailed study. A Muslim minority of over a hundred persons, living for ten to fifteen years amongst a Christian majority, surviving not on charity but on their own skills and earning powers, would certainly have lessons for many modern day Muslim communities in the West and else-where. There must be something wrong with a mind-set that ignores such opportunities of learning. In a similar vein, the muwakhat (brotherhood) that the Prophet instituted in order to meet the extra ordinary situation created by his migration to Madinah followed by hundreds of Muslims, merits detailed study. Most of us never considered the need for deep research into the episode. The muwakhat arrangement lasted till the Muslim victory in the battle of Badr ,about two years after their arrival in Madinah. Meanwhile many .brothers. had already made their way to financial independence through the market economy. The organization of a market had been a priority task for the Prophet, peace be upon him. How far this strategic step contributed to the successful winding-up of muwakhat deserves special attention. Is anybody listening?


SECTION EIGHT : Alternative models of the Islamic economy ;From the family to the market

The current model of the Islamic economy revolves around property rights (as trust accountable to God), freedom of enterprise and, fulfillment of contracts and virtues like honesty and sincerity. The individual finds himself or herself in a market selling what he has and buying what he needs. It is acceptable for him to focus on his own interest provided he does nothing to harm others. Markets function by equilibrating demand and supply. Life goes on to everybody.s advantage.

It was a leaf taken from the conventional textbooks, adding some moral caveats. No harm doing so. But there is an alternative route more congenial for Islamic society and rooted in Islamic scholarship. The individual who is found selling and buying in the market was born and raised in a family. Long before he was able to function as a decision maker in matters economic he was nurtured by a mother who cared, and loved by family members who showered him with gifts. Altruistic giving and gift relationship precede reciprocity, exchange and contracts as the bedrock of economic relationships. The market the Prophet organized and supervised in Madinah offers a rich subject for research. There is a sizeable material on its supervision by the Prophet himself, his appointees, and his successors like Syedna Umar farooq and Syedna Ali bin Abi Talib. Hadith reports abound on behavior of individual traders ,big as Syedna Usman and Abdur Rahman bin Auf as well as small( too many to name). It will be interesting to focus  on the interface between the family and the market in this period and during the 150 years that follow, after which point of time Greek influence  makes itself felt to an extent strong enough to evoke a vehement rebuttal by Ghazali (d.1111/505).

Under the Greek influence, Muslim intellectuals developed a tradition of writings on  Tadbir al- Manzil( Family management). Here is a possibility of building a model in which altruism, gift relationships and custom and traditions also play a role along with self-interest-focused contractual relationships. Such a model could find a greater scope for cooperative behavior that scarcity- of- resources driven competitive models failed to rationalize.

A model plays a dual role. Primarily it is supposed to describe the ground reality in its essentials .But it also prescribes, telling us how things should be. A model of Islamic economy that builds on the family as its origin, its launching pad, would depict a state of the world in which economic choices are based on a multiplicity of factors. It will be interesting to do this exercise at a time when the neoclassical model has led us to an unpalatable situation. In building on the caring and sharing features of the family Islamic economists will be building on universal truths that may open up a new vision of the market hitherto ignored. It will also prevent the horrific possibility of turning the human family into a market in which self-centered spouses trade their .comparative advantages..


This paper calls for a reformulation of Islamic economics harmonious with the new ethos bringing former ideological rivals together to face the challenges facing the planet earth and jeopardizing the felicity of mankind. It makes a plea for theoretical, historical and empirical studies that could help operationalize the moral vision at the base of the Islamic economics. It suggests focusing on institutions more likely to serve the weaker sections of humanity.

Theorizing often follows the dominant methodology. But methodology is not something engraved in stone. It undergoes constant renewal. Historically speaking, practice precedes theorization. Let there be more of historical and empirical studies, more cooperative ventures involving other communities, courageous efforts at managing money without creating debts and gambling-free ways of risk management that are acceptable to wealth owners. Simultaneously, let there be launched a new kind of financial institution located in the voluntary sector and encompassing the informal economy housing the bottom third of our populations, especially designed to serve the poor and the property-less.


*Insightful comments by Dr. Frank Vogel are gratefully acknowledged.





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