ISLAMIC ECONOMICS Articles by Akram Khan

Posted on: August 29, 2013

Prohibition of riba: Modernist vs. Orthodox and the ‘need’ for Islamic Financial Institutions – by Muhammad Akram Khan


The rationale for developing Islamic Financial Institutions (IFIs) parallel to Conventional Financial Institutions (CFIs) emanates from the Muslim orthodox interpretation that equates the Qur’anic prohibition of riba with all types of interest. Since the major business of CFIs involves dealing in interest, the orthodox interpretation concluded that the business of CFIs was prohibited in Islam. That led to the need for an alternative basis for banking business within the Islamic framework.

The rationale for establishing IFIs stems from two fundamental assertions:

All types of interest are riba and the business of CFIs is unlawful in Islam.
The IFIs should be able to do everything that the conventional banks do.
Both of these assertions require a closer review. We need to answer the following questions:

Once we treat interest on finance as prohibited, are we able to find an alternative that can handle all types of transactions efficiently and effectively?
If IFIs do everything that the conventional banks do—except by using different nomenclatures, terms and phrases—how effectively would it contribute to the welfare of humanity to establish IFIs as distinct institutions?
This article aims to address these questions.

The Prohibition of Riba

There are two schools of thought among Muslims about prohibition of riba: orthodox and modernist.

The orthodox school claims that all types of interest are riba and all types of banking transactions involving interest are illegal. This school of thought is the most influential. It has persuaded the majority of Muslim scholars around the world. The movement of Islamic finance is based on arguments presented by this school. The school claims that there is a consensus about treating all types of interest as riba among Muslims. However, that claim is not well-founded. Several serious and well-meaning Islamic scholars differ on this issue. Even among orthodox scholars, the prohibition is not categorical. They have provided space for dealing in interest in certain ways.

The modernist school says that only exorbitant and high rates of interest, along with that taken from needy persons, are riba. Interest on commercial bank loans is not riba. The weakness in this position is that there are no benchmarks to decide which rate is exorbitant and which borrower is poor and needy.

Problems with the orthodox interpretation of riba

The orthodox school is unable to answer several questions:

If all types of interest are riba, why are differences between the cash and credit prices of the same product allowed by orthodox scholars? The difference in these two prices is clearly interest although it is included in the credit price of the product.
Getting cash for bills receivable is a real-life business need and no business can be run without this facility. If we prohibit all types of interest, how do we arrange the discounting of bills receivable?
How do we deal with inflation which is eroding the value of money on a daily basis? If we disallow interest on deposits, how do we protect depositors from inflation?
The orthodox school does not have a solution for helping the vulnerable segments of society like widows and orphans who may not be in a position to carry out any business with their money, if they have it. How can we ensure that they do not expend all their principal sums and become destitute?
The orthodox school cannot find a solution to housing finance. How can we ensure that a person who requires funds to build a house gets the funds without interest? Schemes such as rent-sharing are only bad ruses to conceal interest; are they more exploitative and more risky for buyers of houses than the conventional finance?
How can we ensure that the microfinance required by poor people comes without a cost? The present day cost of microfinance ranges from 20-100 percent (the cost of Grameen Bank funds, the star of microfinance, is 86 percent). How should we handle that?
How can we develop a capital market for interbank financing deals for short periods like a day or so, if there is no interest to calculate the return on funds?
How should we appraise projects in the absence of discounted cash flow analysis that applies the cost-benefit technique for appraisal?
The orthodox school has not been able to find a viable and equally efficient and economical alternative to the conventional credit card facility.
These and several other questions remain unanswered. In their enthusiasm to implement the orthodox interpretation, a global movement of Islamic finance has developed. It is now 30 years old and has a volume of over a trillion dollars in terms of assets. The IFIs are growing at a rate of about 15 percent per annum. The orthodox school takes a lot of pride in this development. But what are the facts?

Have IFIs achieved their avowed objectives?

The IFIs started with an avowed objective of providing a different type of banking which should be more benevolent, egalitarian and just. But actually, the IFIs are now competing with each other to prove that they are the closest to CFIs in business terms. They have devised scores of ruses to hide interest behind Arabic terms. I have devoted over 40 pages in my book “What is wrong with Islamic economics?” (Edward Elgar, 2013) to listing these ruses. However, I must say, this chapter can never be complete as new ruses are being devised on a daily basis.

In terms of efficiency, several studies have shown that IFIs are equally or less efficient when compared with CFIs. Besides, they are more expensive and more risky. The question is: if IFIs had to do what CFIs are already doing – and furthermore to do it in a more expensive, more risky and less efficient manner – where was the need to establish these institutions in the first place? The other question is that if the orthodox interpretation of riba is correct then the alternative to conventional banking should be more benevolent, more just and more poor-friendly. There are no statistics to prove that. Finally, the IFIs should be able to demonstrate that they have achieved the objectives of the Islamic faith (maqasid al-shari’ah) more efficiently and effectively and that the CFIs were failing to achieve those objectives conclusively. In the absence of any such evidence, the mere establishment of IFIs may be a good business for bankers, but it is of less benefit to the common man.

Muhammad Akram KhanMuhammad Akram Khan (b.1945) is a professional auditor and served in senior positions in the Department of Auditor General of Pakistan and Office of Internal Oversight Services, UN. He has a life-time hobby of writing and research in Islamic economics and finance. He has written several books on the subject including What is wrong with Islamic economics?, A glossary of Islamic economics and finance, a 4-volume Annotated bibliography of Islamic economics and finance, Economic teachings of Prophet Muhammad, An introduction to Islamic economics, and Islamic banking in Pakistan. He has published over 40 research papers and about 100 book reviews on the subject.

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Book cover ‘What is wrong with Islamic Economics’
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During 23-25 August 2103, The International Islamic University Malaysia (IIUM) organized First World Congress on Integration and Islamicisation of Acquired Human Knowledge at Kaula Lumpur. They inivted me to deliver a Keynote Address on Islamic Economics. The congress was inaugurated by the Prime Minister of Malaysia . Over 300 scholars from all over the world attended the congress. It was a unique honor for me. I delivered my keynote speech on 24 August. I am attaching a typescript of my speech for those of our friends who would like to read it.

Taking the opportunity of my presence in KL, the Institute of Islamic Economics In IIUM asked me to deliver a one-day seminar on Islamic economics at 40 (i.e where we stand after 40 years) on 26 August. Over 60 professors and Ph.D students from all over Malaysia, Indonesia and Brunie attend the seminar. There was a long question answer session. I wrote my speaking notes for that seminar as well. I am attaching the speaking notes of the seminar for our friends in this group.

Muhammad Akram Khan


Reconstruction of Economics Based on the Paradigm of Tawhid: Present Challenges and Future Prospects
Muhammad Akram Khan





Keynote address for the First World Congress on Integration and Islamicisation of Acquired Human Knowledge
August 23-25, IIUM, Malaysia
1. Objective
The objective of this paper is to reflect on state-of-the-art of the nascent discipline of Islamic economics (IE) and offer some suggestions for its strategic direction and future development.
2. Emergence of interest in Islamization of knowledge
Interest in the economic teachings of Islam emerged with the general awakening about political independence and the right to self-determination of Muslim countries at the end of the nineteenth and beginning of the twentieth century. Muslim leaders like Jamaluddin Afghani (1839–97), Muhammad Abduh (1849–1905), Syed Ahmad Khan (1817–98) and Muhammad Iqbal (1876–1938), to name a few, were at the forefront of creating this awakening. However, we do not see the use of terms like ‘Islamic economics’ or ‘Islamic finance’ explicitly in their writings and speeches. It was with the work of Manazir Ahsan Gilani (1947), Haiderzaman Siddiqi (1950), Muhammad Yusufuddin (1950), Sheikh Mahmud Ahmad (1952), Muhammad Mazaharuddin Siddiqi (1955), Naeem Siddiqi (1958), Abu al-‘Ala Mawdudi (1969), Muhammad Nejatullah Siddiqi (1970) Baqir al-Sadr (1971), Ghulam Sarwar Qadri (1978)and a later generation of scholars like Khurshid Ahmad, Umer Chapra, Anas Zarqa and Monzer Kahf, again to name a few, that these terms became popular among Muslim scholars and economists.
We can see several under-currents in recent interest for developing IE as a distinct discipline.

First, the emergence of interest in IE is expression of historical nostalgia of the Muslims to re-live the times of the Prophet and early caliphs when pristine Islam was actually a dominant force. The Muslims perceive a direct correlation between the glorious period of Islamic history that followed and remained dominant for more than seven centuries thereafter and practice of Islamic teachings. Since the fall of Baghdad in 1258, the subconscious mind of the Muslim ummah has yearned to recapture the past glory. The Muslims have a realization that they are torch-bearers of the last message of Allah and it is their innate responsibility to spread that message and persuade the humanity about its truth. IE could be a modern vehicle to realize that dream.
Second, political emancipation from the colonial rule by most of the present day Muslim states gave them a sense of identity-assertiveness. It gave them a feeling that “We are free in all respects; we do not have to depend on the West for anything; we have our own systems; we have an Islamic economic system, etc.” The assertiveness created a longing for developing a knowledge-base in economics as well as in other subjects that springs from the teachings of Islam.
Third, some Muslim scholars analyzed that the Western education system is based on godless rationality and tends to influence the minds of Muslim youth in a manner that detaches them from Tawhid and pristine sources of Islam. The Muslim leadership educated and trained in the West-dominated institutions is alienated from Islam. The Muslim scholars felt that a storm was brewing up in the form of emerging leadership that will steer the society away from our culture, history and religion. No amount of preaching would be of any consequence so far the Muslim youth is exposed to the godless secular educational system. To bring back the Muslim youth to the fold of Islamic teachings, the knowledge should be ‘Islamized’ so that the Muslim youth learns modern knowledge from a perspective that gives a deeper understanding of Tawhid and Islam’s basic teachings. The project of ‘Islamization of knowledge’, started under the able leadership of Ismail Faruqi al-Raji (1921-1986) in 1980s, has done valuable work. IE can be treated as an element of this project.
Fourth, the Muslim leadership has realized that the contemporary dominance of the West has its roots in the power of knowledge. They think that as trustees of the last message of Allah the Muslims have better sources of knowledge than the West. Only that they are unable to present this knowledge in a format and language that is comprehensible to the knowledge community across the globe. The realization has given impetus to Muslim scholars for re-stating the basic teachings of Islam in modern language and format. IE is one such example of this effort.
Fifth, overwhelming underdevelopment and poverty of the Muslim people creates an urge among Muslim scholars to find ‘local’, indigenous and ‘culture-bound’ solutions for development. They believe that Islam presents a far more superior solution to ‘all problems of humanity’. They thought of going back to the Islamic sources to find solutions for these problems. That encouraged them to think more deeply about economic problems from Islamic perspective.
Sixth, Tawhid refers to Allah’s role as Sustainer and Provider of sustenance to all creatures. Simultaneously, it defines the role of man as vicegerent of Allah on this earth. As vicegerent of Allah, man has to create, nourish and preserve resources for well-being of all creatures, play a positive role in environmental protection and fight corruption and destruction in all forms. Developing IE as a social science is a step in understanding and realizing this role in the world.

3. Main achievements
During the first half of the twentieth century whatever appeared in the name of Islamic economics was part of the writings of Muslim religious scholars. In those days there was no exclusive platform or journals for publishing contributions on Islamic economics. Sporadic writings appeared in various types of scholarly and general-purpose magazines. The turning point came with the establishment of the Centre for Research in Islamic Economics (CRIE) in 1976 (now re-named as Islamic Economic Institute) in King Abdulaziz University, Jeddah. Within a short span of a few years several financial institutions also came into being, with the avowed purpose of doing business on the basis of Islamic principles. For the last three decades now, there have been significant developments in the production and circulation of research documents, books and journal articles on Islamic economics and finance. For example, Harvard Islamic Finance Project databank had by June 2013 more than 9000 records available for free access. A number of websites which host research material on Islamic economics have come up . Several magazine and research journals exclusively devoted to Islamic economics and finance have started publication . Some universities in Muslim and Western countries have completed or registered Ph.D. dissertations on Islamic economics and finance . A number of bibliographies of books, journal articles and dissertations have also come out pertaining to literature published in English, Arabic, Urdu, Bhasa Malaysia, Turkish and other regional languages. The Islamic Foundation (UK) and Centre for Maghreb and Islamic Studies are preparing a five-volume encyclopaedia of Islamic economics and finance. Islamic Economics and Finance Pedia has also started online publications on the pattern of Wikipedia where members are allowed to upload their writings for free access by others. During the two decades (1990–2010) literally thousands of publications, hundreds of seminars, conferences and symposia, and scores of websites hosting literature on Islamic economics and finance have appeared. Eight international conferences under the auspices of International Association of Islamic Economics have been held. Ninth conference is due to be held in Istanbul in Sept 2013. There are now several research and training institutions exclusively devoted to Islamic economics and finance. A number of institutions are now offering courses and degrees in Islamic finance . A large number of consultancy services and other educational organizations offer courses on Islamic finance beyond their other business.
Significant developments have taken place in the field of Islamic finance (IF). By end 2012, the size of IF industry had crossed $ 1.5 trillion; its annual growth rate was about 15 percent. Institutional infrastructure to sustain the Islamic financial institutions (IFIs) is coming up. Examples are international Islamic financial market, Islamic interbank money market, Islamic financial services board, liquidity management centre, International Islamic liquidity management corporation, Islamic international rating agency, Islamic indices, Islamic interbank benchmark rate, establishment of shari’ah supervisory boards, and accounting and auditing organization for Islamic financial institutions, etc.
4. A brief assessment
(a) Presenting legal content in the jargon of economics
The earlier writings on Islamic economics by such religious scholars as Manazir Ahsan Gilani, Haiderzaman Siddiqi, Muhammad Yusufuddin, Sheikh Mahmud Ahmad, Muhammad Mazaharuddin Siddiqi, Naeem Siddiqi, Abu Al’ala Mawdudi, Hifzur Rehman Seoharvi, Muhammad Nejatullah Siddiqi, Baqir al­Sadr and so on, mainly discussed principles of Islamic economics as derived from the primary sources of Islam. These principles dealt with such subjects as the Islamic worldview, property and inheritance law, consumer behaviour, finance and interest, and zakah law. Soon these writings caught the imagination of Muslim economists who were educated in modern universities and trained as professional economists. They started questioning the methodology, assumptions and scope of conventional economics and expressed dissatisfaction with it. They tried to build a case for developing Islamic economics as a social science that is based on the worldview of Islam with an entirely different set of assumptions and analytical approach. The objective was to use the economic teachings of Islam as stated in its primary sources and the historical records of Muslim thinking during the last 14 centuries as the raw material for developing a new academic discipline parallel to conventional economics. Muslim economists started writing on such subjects as microeconomics and macroeconomics and the methodology and scope of the new discipline in light of Islamic teachings.
There was a lot of discussion and ambiguity about the exact method for developing the new discipline. Without arriving at a conscious consensus on this question, some research institutions, exclusively devoted to Islamic economics and finance, took the lead. They employed Western trained professional economists with some background in Islamic studies. Unwittingly, the development of Islamic economics at the hands of these economists adopted a path that did not take them to the original goal of developing a distinct discipline. Muslim economists, the majority of whom had an education and training in conventional economics, took up the task of developing a separate branch of knowledge under the rubric of Islamic economics. However, their limitation and challenge were to develop a social science about a model economy that did not exist in the real world. They could not test and establish the veracity of their postulates. In the absence of such an opportunity, they engaged themselves in elaborating various concepts of Islamic economics as found in the primary texts of Islam, in particular Islamic jurisprudence. They tried to present the legal content of Islam in the language of conventional economics to make it intelligible for modern economists. By itself it was a commendable effort. Islamic economic teachings were lying buried in pithy and difficult Arabic texts, most of which would not be intelligible even to Muslims, not to talk of non-­Muslims. The Muslim economists did a yeoman’s job in presenting these teachings in modern jargon that made sense to Muslims and non­-Muslims. However, the original objective of developing a social science parallel to conventional economics escaped their achievements.
(b) What exactly is IE?
There cannot be a dispute on the assertion that if IE has to be a social science distinct from conventional economics, it should have a clear and unambiguous definition. Unfortunately, the Muslim economists have not been able to present a generally accepted definition of IE. Several writers have presented their definitions, though. Some examples of the definitions presented are as follows:
• IE studies the Islamic injunctions within the framework of conventional economics by using the same methodology but incorporating different behavioral variables. [Laliwala, 1989; Haque, 1992]
• [Islamic economics is a] Social science which studies the economic problems of people imbued with the values of Islam. [Mannan 1992, 18]
• Islamic economics is the knowledge and application of its functions and rules of Shari’ah that prevent injustice in the acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their obligations to God and the society. [Hasanuzzaman, 1984, 85]
• Islamic economics may be defined as that branch of knowledge which helps realize human well-being through an allocation and distribution of resources that is in conformity with Islamic teachings without unduly curbing individual freedom or creating continued macroeconomic and ecological imbalances. [Chapra, 2001,33]
• To formalize matters, we may define Islamic economics as that part of Islam’s social doctrine that deals with the problems of choice in the face of uncertainty and resource scarcity so as to promote falah in a holistic framework. [Hasan 1998]
• Islamic economics is a systematic effort to study the economic problem and man’s behavior in relation to it from an Islamic perspective. It is also an effort to develop a scientific framework for theoretical understanding, as well as design appropriate institutions and policies pertaining to the processes of production, distribution and consumption, that will enable optimal satisfaction of human needs, enabling man to serve higher ideals in life. [Zaim 1989]
• Islamic economics is the science that studies the best possible use of all available economic resources, endowed by God, for the production of maximum possible output of Halal goods and services that are needed by the community now and in future and just distribution of the output within the framework of the Shari’ah and its intents. [Yusri 2002, 28]
It seems that Muslim economists are unable to agree on a general wording of the definition, although most of them want to say that Islamic economics studies the economic problem from an Islamic perspective. If this understanding is correct, it would raise a further question as to whether such a social science can be made universally acceptable. Will it be possible to present Islamic economic analysis in such persuasive terms that even non-Muslims would like to consider its conclusions? If Islamic economics has to grow further, it is time that Muslim economists joined forces to develop a generally acceptable definition of the subject which would mean the same thing to everyone. The definition should also remain attractive for everyone, non­Muslims included. A social science which requires belief in Islam or focuses on problems of Muslims only simply locks out the majority of the scholarly community. Will not such an effort defeat the very purpose for which Islamic economics is being developed as a social science?
(c) What is an Islamic economy?
Muslim economists have not so far tackled the basic question: what are the minimum and sufficient conditions for an economy to be called ‘Islamic’? Are there any degrees of ‘Islamicity’ when it comes to defining an economy in these terms? Shall we say that prohibition of commercial interest will make an economy Islamic or that implementation of zakah will do so? What will transform the present-day Muslim economies into ‘Islamic economies’? Taking the present-day Muslim economies, why are they not treated as ‘Islamic’? In the absence of such a basic definition it becomes difficult to place the economic analysis in any perspective.
(d) Relationship with conventional economics
Literature on IE presents a confused picture about relationship of IE with conventional economics. One approach is to reject everything that conventional economics offers, since its basic assumptions and worldview are not compatible with the Shari’ah [Yusri 2002]. The idea is to develop a social science solely based on the primary sources of Islam. Another response is to develop IE on a similar basis to conventional economics by using tools of the latter. Still another approach to modify conventional economics by incorporating ‘Islamic’ assumptions but using the same analytical tools as conventional economics does. Some Muslim economists have also argued for replacing conventional economics by IE (Addas 2008, 5). The issue is still far from settled. Whether we should teach IE along with conventional economics and if yes, how to relate the both? Or, should we teach only IE? If yes, then how to fill the gaps in the content of IE that the conventional economics addresses? Should we try to find an Islamic alternative in all our lessons of conventional economics? If so, where is that alternative in the literature that the teachers can use for their lessons? These questions are far from settled. The real problem is that, despite efforts for developing a separate discipline of Islamic economics, there is not much that can be genuinely called ‘economics’. Most of Islamic economics consists of theology on economic matters. Islamic economics requires distinct textbooks and teaching material which neither exist nor are easy to create. As a proxy for the whole concept they have started teaching ‘conventional economics from an Islamic perspective’. The Islamic economic courses are taught as an adjunct to conventional economic courses. As of June 2013 no standard textbook of Islamic economics was available.
(e) Methodology and scope of IE
Muslim economists are not comfortable with the generally accepted methodology of conventional economics where the economic postulate become hypothesis, theories and laws after a rigorous process of examination through verification or falsification. They are afraid that this methodology would question the sacred texts of the Qur’an or Sunnah which are immutable by definition. Literature on IE is replete with inconclusive debates on methodology and scope of the subject. Some of the unsettled issues are:
• Is IE a positive or a normative social science or both?
• Should we borrow the tools of analysis from conventional economics or not? If yes, to what extent and with what caveats and how do we do that?
• What are basic assumptions of Islam about human beings? Are they selfish or altruistic or both? How does our position differ from the conventional economics?
• How to develop a social science without existence of an Islamic society? How to test the postulates and hypothesis of IE in absence of empirical evidence?
• If we have to rely on divine teachings of Islam, how do we accommodate the concepts of verification and falsification prevalent in the methodology of economics?
• What is the scope of IE? At present IE deals with all sorts of subjects relating to philosophy, history, sociology, finance, law and ethics. Do we draw a line somewhere to demarcate IE from other sciences?
5. Gaps in the Existing Debate
(a) Case for IE as a social science did not attract the attention of wider intellectual community.
The Muslim economists have not made a compelling case for developing IE as a distinct social science. They have tried to make a case for Islamic economics as a social science on the basis of certain assertions about conventional economics and assumptions about the Islamic worldview (e.g. Siddiqi 2004). On both counts they have made an unconvincing case. The assertion that conventional economics does not integrate ethical considerations in economic modelling is by and large not attested by facts. There is a lot of emphasis even in conventional economic analysis on ethical considerations. The welfare of society at large is one of the primary concerns of conventional economists as well. Analysis and cure of poverty, income distribution, environmental protection, debt relief to the least developed countries, and progressive taxation are some of the prime examples of the accommodation of ethical values in economic analysis. Of course, one can always say that economic theory does not integrate Islamic ethical values, which may be an overstated case if we note that Islamic ethical values are universal values and are generally accepted. However, if Muslim economists still feel that Islamic ethical values are not adequately integrated in economic analysis, they can do that in the analytical framework of conventional economics and enrich human understanding of economic reality. There are hardly any grounds for conceiving a new social science on the basis of this criticism of conventional economics.
The other reason offered by Muslim economists is that conventional economics assumes selfishness as the primary trait of the human character, while Islam teaches altruism and sacrifice. The fact is that even the Qur’an certifies that human beings are selfish, narrow-­minded and maximizers of material gains unless they follow the divine guidance. There is no doubt that the Qur’an wants human beings to change this behaviour, but this is a subject of theology and not of economics.
Another reason for developing Islamic economics as a social science is couched in a romantic view of Islamic society based on the mental construct of historical society in the early days of Islam. Creating a new branch of knowledge to study such a society, which does not exist anywhere and which is only part of the wish list of Muslims, is not a realistic goal to pursue.
Has Islamic economics enhanced understanding of human economic problems such as poverty, underdevelopment, distribution of income and wealth, unemployment, inflation, environmental balance and so on? Muslim economists have discussed these issues and have cited various primary sources of Islam to highlight solutions to these problems. If we go deeply into the suggested solutions, besides references to the primary sources of Islam there is hardly anything that is different from mainstream economics. The suggested Islamic solutions do not stray significantly from what humanity already knows. In sum, Islamic economics has not enhanced human understanding of economic problems and has not led to any innovative solutions. The question arises, if Islamic economics is unable to break new ground, then why do we have a new discipline to begin with?
A far more persuasive and convincing approach could have been to demonstrate that by developing IE as a social science distinct from conventional economics economic problems of humanity at large would be solved or at least addressed in a more robust manner. Had Muslim economists adopted this approach, IE would have attracted the attention of the wider intellectual community.
(b) Qur’anic statements relating to economics
Primary reason for developing IE as a separate branch of knowledge emanated from the Muslim claim that the conventional economics depends solely on human rationality and does not benefit from the divine sources of knowledge. After making this highly persuasive assertion, the Muslim economists got engaged in creating a discipline of economics quite similar and almost mimicry of the conventional economics with sporadic pasting of verses of the Qur’an and quotations from the hadith literature. The Qur’an and hadith literature contains a wealth of material on various Islamic economic concepts such as distribution income and wealth (rizq), corruption on earth (fasad fil ard), infaq, bukhl, israf, tabdhir, al-afw, shukr, taqwa, tauba, baraka, hasanaat, etc. The Muslim economists have not paid due attention to the Qur’anic verses relating to economic prosperity and misery in human societies. The Qur’an deals with this subject extensively. There are at least 24 places where the Qur’an mentions divine laws of prosperity and misery. The message of these verses, in brief, is that there are deeper, imperceptible and long-term currents of events taking place in the universe as a result of human actions and under the divine will of God. These currents affect the process of wealth creation in ways that cannot be explained easily in a simple cause–effect framework. The Qur’an points toward ethical behaviour, which gets translated into prosperity and misery. The divine will of God operates through and in response to human actions. The precise mechanism through which it operates is as yet not fully known. The meanings and interpretations of the Qur’anic texts on the subject require further thinking and deeper understanding. The absence of any research by Muslim economists in this field gives an impression that they have never noticed these verses of the Qur’an.
A deeper understanding of these invisible divine laws and a detailed investigation into meanings and application of various Qur’anic terms would have opened up new vistas of knowledge and enquiry for the humanity at large. The literature on IE does mention these concepts but skips from their elaboration and development with reference to human economic problems. I think this is one big gap in the present literature on IE.
(c) Audience of IE
Although all Muslim scholars assert that Islam is a divine message for the whole of humanity, yet the way IE has developed, it restricts its audience to Muslims only as is evident from the following:
• Some definitions of IE explicitly mention the study and application of the shari’ah as the main field of IE. Others refer it to the study of Muslims only. Still others require some sort of faith in Islam before a person contributes to IE. Somehow, in the back of mind of Muslim economists, IE revolves around study of Islamic economic teachings, Islamic law, public financial management of early Islamic days, well-being of Muslims, etc. There cannot be any objection to all this if the Muslims unanimously decide to restrict IE to Muslims only. However, it will put off the wider community of scholars. It would not be able to benefit from the collective knowledge of scholars around the globe and will be reduced to a branch of knowledge where Muslims are talking to Muslims.
• Another evidence of restricting IE to Muslims only can be seen from the style of writings on IE. The literature on IE addresses Muslim audience only. It uses the idioms and jargon, the terms and phrases and the legal dicta that can be understood easily by the Muslim audience only. Non­-Muslims are effectively barred. Muslim economists have successfully locked out the non­-Muslims, and non­-Arabic audience from the content of Islamic economics. The larger academic readership does not find IE an easy discipline to follow and pursue. Trying to ‘show off’ as torch-­bearers of an independent discipline, Muslim economists have ended up talking to one another to the exclusion of ‘others’. Unwittingly, they have made Islamic economics a closed discipline which no one but hard­boiled Muslims should study. Even ordinary Muslims should not try to dabble in it.
(d) Islamic theory of income and wealth distribution
The literature on Islamic economics is replete with what the Qur’an has enjoined with reference to the equitable distribution of wealth so that it does not circulate among the rich only (Q. 41:7). Beyond this reference Muslim economists have not ventured to develop a theory of income and wealth distribution. The Qur’an mentions God’s scheme of distribution of sustenance (rizq) in numerous places. However, the Muslim economists did not pay much heed to these verses of the Qur’an, as is evident from their neglect to develop a theory of income distribution in Islam, although the content of these verses suggests a great potential for doing so. The global community is ambitiously searching for a solution to disparities in income and wealth within an economy and among economies of the world. A valid theory that explains these differences would be more than welcome everywhere. IE could make a contribution in this field in light of divine guidance. It would have added a clear dimension to human understanding of this problem.
(e) Economic development
Muslim economists have been trying to fine-tune or ‘Islamize’ theories of development economics in their zeal for proving the superiority of the Islamic economic system over capitalism (e.g. Khurshid Ahmad, 1980). Some of them have written on the concept of Islamic economic development. The concept propounded in these writings generally matches closely with the concept of development in capitalist economies. Both concepts deal with such economic variables as savings, investment, employment, the competitive market, the oversight role of governments, and a private property regime protected by the rule of law. If we take out references to the divine texts and the assumption of an ideal Islamic economy, the Islamic concept turns out to be so close to the capitalist concept of development that it becomes difficult to tell one from the other. Muslim writers on economic development did not develop the concept of man’s vicegerency and his role in development. If man is God’s vicegerent, what is his role on the earth? Most probably, he is charged with the task of developing resources of the earth. The activities that promote development of the resources match well with the role of man as God’s vicegerent. The activities which lead to destruction of resources, such as burning of crops, killing of human beings, pollution of the environment, destroying of buildings and infrastructure in physical sense, cutting asunder of kinship ties, internecine wars, mutual exploitation, and fraud and cheating in dealings in an economic and social sense, defeat the primary role of man. The Qur’an terms such activities corruption on earth (fasad fil ard). An Islamic theory of development could be developed on the concepts of vicegerency of man and fasad fil ard. Muslim economists have not paid much attention to this potential area of contribution.
(f) Islamic finance on driver’s seat
Islamic finance (IF) is a branch of IE. However, it has stolen the show from IE, which has been pushed to back burners. With establishment of hundreds of IFIs most of the intellectual activity and research is also focused on IF. The work is more of an effort to provide workable solutions to Islamic financial institutions (IFIs) without attracting objections from shari’ah scholars. With their work these institutions have added a new dimension to the global finance industry. However, most of the intellectual work done so far consists of stratagems and ruses for hiding interest in the rigmarole of legal and financial terms. Whatever IFIs are doing is quite similar to the conventional financial institutions. The whole pride of IFIs is in showing that they are not ‘far behind’ the conventional finance. The earlier claims to founding an innovative banking system that contributes to welfare of the poor and promotes development has dwindled down to what it aimed at replacing in the first place. (See e.g. Boudjellal 2006; El-Gamal 2007; Taqi Uthmani 2008)
(g) Role of government
The literature on Islamic economics does not clearly define the role of government in the economy. Most of the Muslim economists consider that the government would do everything to undo injustice and smooth out inequalities from the economy. The discussion is based on a romantic view of early day Islamic society and ignores the ground reality of Muslim economies in the present age. It seems that Muslim economists who delve into the romantic view of Islamic government do not have any perception of the capacity and will of government functionaries in present-day Muslim societies. They have not realized properly that the economies of poor countries are steeped in corruption and fraud. Empowering government functionaries with resources and authorizing them to play an extended role may play havoc with whatever is still being performed by secular institutions for the welfare of the poor and delivery of public goods and services.
(h) Assessment in brief
• No agreed definition of IE
• No agreement on methodology, scope and objectives of IE
• No contribution to the human welfare through problem solving
• Muslims talking to one another without involving wider community of economists and scholars around the globe
• Basic concepts and terminology of the Qur’an and Sunnah relating to economic concepts not yet developed.
• Invisible laws of God referred to in the Qur’an or Sunnah have not been explored.
• IF has dwindled down to the task of re-engineering conventional finance concepts and tools to avoid objections from shari’ah scholars without making any substantial contribution to human welfare
In brief, IE is still searching for its identity, strategic vision and final destination. It has yet to gear up for adding value to the human understanding of economic problems.
6. Future Strategic Direction
I would now like to reflect on possible future course of action if we have to develop IE as a distinct discipline. My ideas consist of three parts: (a) Defining the basic framework; (b) Defining IE; (c) Research agenda for the future
(a) Defining the basic framework
We need to define basic framework for developing IE as a distinct social science. It will help dispel confusion about scope, methodology and objectives of IE and enable future development of the subject on robust footings:
• Most of what has been presented in the name of IE so far consists of Islamic teachings and can be legitimately termed as theology. However, from these theological roots a distinct discipline of IE can be developed. For transmuting from theology to a social science, IE needs to adopt a methodology that makes it a genuine social science. As a social science, IE should adopt the same methodology as that of the conventional economics. However, it needs to adopt a new perspective for thinking over the Qur’an and Sunnah teachings. The basic injunctions of Islam as derived from the Qur’an and the Sunnah are divine and immutable, but that is the domain of theology. When it comes to developing a social science like Islamic economics these very injunctions have to be reformulated into verifiable or falsifiable postulates. For example, the law of zakah presents various limits and rates. Once the law is enforced, economists can come forward and frame postulates in the following manner: (a) the enforcement of zakah has led to a more (or less) equitable distribution of wealth in the economy; (b) enforcement of the zakah law has reduced (increased) the incidence of poverty; (c) zakah has encouraged (discouraged) investment in the economy; and so on. Such postulates can be tested and verified by empirical evidence. It would not require an ideal Islamic society. Once they are verified by empirical evidence or cannot be falsified in any manner they will become theories of Islamic economics. The process of postulate-making is a human endeavor and is subject to examination and correction. When Muslim economists are able to translate Islamic economic teachings into economic postulates they will take the first step toward creating a social science in the name of ‘Islamic economics’
• IE has no dispute with conventional economics. It does not replace, modify or supplement conventional economics. The two disciplines have their own subject matters and can develop side by side. If we have to develop Islamic economics as a social science, and we think it is a potentially feasible enterprise, we should not attempt to modify conventional economics from an Islamic perspective. Instead, we should study conventional economics as it is but develop Islamic economics as a social science from its theological foundations. It should not be an attempt to transform conventional economics into Islamic economics. While studying conventional economics we can make a contribution by using its standard and generally accepted methodology.
• IE addresses whole of humanity. It is not a science that deals with the problems of Muslims. Its study does not require faith in Islam nor does it require an Islamic society for developing its knowledge-base. Its postulates, hypotheses, theories and laws are valid for all societies and for all people. IE should come out of the problem of conceiving its postulates in the context of Islamic economy since it does not exist anywhere in the real world. Instead, IE should deal with problems of the economies that exist in the real world.
• IE should present its postulates, hypotheses, theories and laws on rational grounds and not on the force of their divine origin. Even when an idea has been derived from divine sources, it should be argued out on rational basis. Only in that case IE would attract the attention of the wider intellectual community.
• IE should not feel shy of adopting and using tools of analysis used by conventional economics or other contemporary social sciences. These tools are available in the present form after centuries of thinking and experimentation and are a common heritage of the humanity. IE can borrow from that heritage freely.
(b) Defining IE
The above discussion has set stage for venturing into a new definition of IE. I would suggest following definition of IE:
Islamic economics is a social science that integrates human understanding of divine sources of knowledge into the study of economic problem.
The definition has certain implications:
• It clearly delineates IE from other Islamic disciplines such as theology, law, history, etc. By making IE a social science, it agrees to accept and use the methodology and tools of analysis of other social sciences.
• The definition does not link IE with Islamic economy or Islamic economic system which does not exist in real world.
• The definition does not consist of an inventory of Islamic economic teachings. Instead, it focuses on human understanding of these teachings. The human understanding is subject to examination, verification and falsification. It segregates the divine and the mundane and focuses on the mundane.
• As a social science, IE aims to study the economic problem that emerges from unlimited wants and scarcity of resources that have multiple uses. In other words, IE does study the economic problem. However, while doing so, it integrates human understanding of the divine sources into the study of the economic problem.
• The definition closes the debate about normative or positive character of IE. It clearly asserts that it is a study of the economic problem and thus a positive science like conventional economics. However, its findings may be used by policy makers to address various problems.
• The definition takes out the confusion in some of the existing definitions which mix-up definition with objectives of IE. Trying to embed objectives of IE into definition itself overburdens the definition. It puts off non-Muslim social scientists that are not interested in any of these objectives but would like to broaden their understanding of economic problems from a different perspective.
• By using the phrase ‘divine sources of knowledge’ it keeps the window open for borrowing from earlier scriptures. It can attract attention of the wider knowledge community, which is unbiased about borrowing from any source of knowledge that can help enhance our understanding of the problems.
In brief, we should develop IE from the perspective of social science that studies the economic problems. It should aim to enhance human understanding of the economic problems by integrating guidance obtained from divine sources of knowledge into humanly acquired knowledge.
(c) Research agenda
The future research agenda of IE should be guided by the gaps that have remained unaddressed so far. Some of the areas for further research are as follows:
• Understanding economic concepts and statements of the Qur’an and Sunnah
The Qur’an makes several statements about the economic aspect of life. These statements are nothing short of divine laws stated by God. Muslims believe that these laws in fact operate in this life through the divine will of God. But how these laws actually take effect is not evident from the Qur’an directly.
Some examples of these divine laws are as follows:
Q. 2:155 says: ‘And most certainly shall We try you by means of danger, and hunger, and loss of worldly goods, of lives and of fruits. . . .’ Q. 7:130 says: ‘And indeed We punished the people of Pharaoh with years of drought and shortness of fruits (crop, etc.) that they might remember (take heed).’ There are other verses in the Qur’an that have a similar message (e.g. Q. 7:168, Q. 9:26). These verses indicate that poverty and misery could be either a trial to judge human conduct at times of adversity or a form of divine punishment for past human sins.
Q. 2:276 says that God diminishes riba and increases charity (yamhaqu Allah al­-riba wa yurbi al-sadaqaat). The verse mentions the decrease (mahq) caused by riba.
Q. 3:178 says: ‘And they should not think – they who are bent on denying the truth – that Our giving them rein is good for them: We give them rein only to let them grow in sinfulness; and shameful suffering awaits them.’
Q. 5:66 says: ‘and if they (followers of the Bible) would but truly observe the Torah and Gospel and all [the revelation] that has been bestowed from on high upon them by their Sustainer, they would indeed partake of all the blessings of heaven and earth. . . .’
Q. 11:3 says: ‘Ask your Sustainer to forgive your sins, and then turn towards Him in repentance – [whereupon] He will grant you a goodly enjoyment of life [in this world] until a term set [by Him is fulfilled]; and [in the life to come] He will bestow upon everyone possessed of merit [a reward for] his merit. But if you turn away, then, verily, I dread for you the suffering [which is bound to befall you] on that awesome Day.’ Q. 11:52 says: ‘Ask your Sustainer to forgive your sins, and then turn towards Him in repentance – [whereupon] He will shower upon you heavenly blessings abundant, and will add strength to your strength: only do not turn away [from Me] as lost in sin.
I can cite more examples from the Qur’an which refer to such laws of material prosperity and misery, distribution of income and wealth (rizq), the effects of charitable spending (infaq), and so on. The moot point is that these ethical laws are statements of facts, but we do not understand exactly how these laws operate in physical terms.
The moral laws influence the nature of the economic problem faced by man. Without studying the influence of these laws, the study of the economic problem remains partial and incomplete. It does not provide a comprehensive explanation of the differences between material possessions and the causes of prosperity and misery. Conventional economics does not recognize the operation of any moral laws that influence the economic problem of man. The methodology cannot help in understanding the moral laws, because they are invisible and not measurable and operate in a complicated manner. They are not amenable to economic analysis in the usual manner. Mere human thinking cannot make them explicit. It requires divine guidance to understand the existence and operation of these laws.
The human understanding does not take into account invisible factors that influence the process of generation and distribution of wealth. Our present knowledge does not go much beyond what the text of the Qur’an says about certain moral laws that affect the distribution of resources on earth. Although the moral laws influence the material conditions significantly, man has not as yet discovered these laws. An illustration from the field of physical sciences will explain the point. The law of gravity was operational in the universe even before Isaac Newton (1642–1727) discovered it. Bacteria caused infection even before Louis Pasteur (1822–95) discovered their existence and the treatment of certain diseases caused by the bacteria. Similarly all developments in physical sciences explain various natural phenomena which existed even before they were discovered. Human beings struggled hard to unfold the mysteries of nature and understand the physical laws. In the process various physical sciences have also developed methodologies to confirm or refute hypotheses propounded by scientists. In the field of moral laws, this work is yet to be done. Firstly, human beings are not quite aware of the moral laws that are operating in the universe. These laws are difficult to discern by the physical senses and material experimentation. They require divine guidance to begin with. Secondly, they are extremely complicated and have backward and forward linkages with the physical world. The moral laws deal with human behaviour, but changes in human behaviour can also influence the operation of these laws. Thus it is a two­-way relationship. The moral laws influence and are in turn influenced by changes in human behaviour. That complicates the situation further. Thirdly, the divine time scale is much longer than the usual human time scale. The Qur’an mentions the length of one divine day as equal to one thousand years by our reckoning (Q. 22:47). The moral laws may have linkages with human behaviour at points of time which are not discernible easily at the present moment.
Since it is not possible for human beings to discover these moral laws by direct sensory perceptions, God has pointed to these laws in the Qur’an. Some of these laws have also been hinted at by the Prophet Muhammad (PBUH). The two primary sources of Islamic economics refer to certain moral laws that affect our material well-­being. However, the exact functioning of these laws is not yet known. We need to discover it by introspection, experimentation and dialogue. For example, the Qur’an points to the moral law of prosperity and misery but does not explain its exact operation in a cause–effect framework. Human beings have to discover that relationship as they discovered the relationship of various facts in the physical sciences. The task in the social sciences has yet to start. This should be the main task before Muslim economists if they are to develop Islamic economics as a distinct social science. Instead of trying to prepare an ‘Islamic’ copy of conventional economics they should take up the task of expanding the frontiers of economics by discovering the moral economic laws and enriching the pool of knowledge for the benefit of humanity. This can be done in the following manner:
i. Prepare a list of moral laws as discerned from the Qur’an and authentic Traditions of the Prophet relating to economics.
ii. Try to understand and interpret the moral laws in a cause–effect framework and present them in the format of postulates that can be tested and verified.
iii. Publish the results of postulate testing and invite the community of economists to examine the results.
iv. Engage the economists of the world in understanding, interpreting and undertaking further research into these laws.
Over a long period of time and after years of research and introspection some of these moral laws would be discovered in a format that can be used in economic analysis. The whole idea may look like a wild-­goose chase at this stage. But the statements of the Qur’an are immutable and true. They have direct relevance to the life of contemporary man as they have throughout the ages. It should be possible to interpret the moral laws mentioned in these statements. The above-­mentioned course of action will enable Islamic economics to extend the frontiers of conventional economics. It will have a distinct research agenda for itself and have no dispute with conventional economics. Both social sciences can complement the findings of the other and live side by side. One of the contributions of Islamic economics to human knowledge could be to develop a methodology for making the Qur’anic economic laws manifest in human situations. Since the Qur’anic economic laws operate in human situations, the effects of these laws are measurable. Only the process is not visible. We need to ‘discover’ that process. We need to define the variables in measurable terms so that our understanding of the laws is confirmed or falsified by empirical evidence.
We think that the method will be a breakthrough in the development of IE as a social science. Instead of trying to copy the postulates of conventional economics and presenting them as ‘Islamic’ versions, it will be better to present the laws of the Qur’an as given statements, with a challenge for economists to discover the cause–effect mechanism for these laws. It will generate a lot of intellectual activity, and the result will be beneficial for humanity at large. It will give us a clue to the behaviour pattern that leads to prosperity and blessings and also indicate the behaviour pattern that leads to misery. One can say that these behaviour patterns are already well known to Muslims. What is the use of getting into the process of postulate testing? It is true that humanity is aware of good and bad behaviour in ethical terms, but humanity cannot see the linkages of this behaviour with the creation and destruction of wealth as stated in the Qur’an. One of the strong points of this methodology is that it does not require an Islamic society to be in existence. These postulates can be tested in any society.
• Defining economic concepts and terms of the Qur’an
We come across several concepts and terms that have some relationship with economic problem of man. Examples are riba, zakah, infaq, israf, tabdhir, bukhl, sadaqa, baraka, fasad fil ard, shukr, taqwa, tauba, rizq, hatyat tayyeba, hasanaat, etc. The literature on IE mentions these concepts in very general terms that do not allow precise and measurable definitions. For example, when do we say a certain expenditure is israf? When does it become tabdhir? What are minimum conditions for hayat tayyeba? Until such idioms and phrases are defined in measurable terms, IE will not come out of the fold of theology. For arriving at measurable definitions of these concepts, the above methodology should be used. It means, while interpreting these phrases, various postulates based on human understanding of these concepts should be formulated in a format which can be verified or falsified. In a long drawn process of thinking and testing of the postulates in real life terms, we shall arrive at defensible definitions of these concepts.
(c) Focus on economic problems
IE should focus on economic problems that are plaguing the world economies. Conventional economics also addresses these problems. The source of knowledge for conventional economics is human thinking and empirical data. IE has another source of knowledge that is based on human understanding of divine sources of knowledge. It means IE addresses the human economic problem equipped with two sources of knowledge: (a) humanly acquired knowledge through rational thinking and experimentation; (b) human understanding of the divine sources of knowledge. Using these two sources, IE would present understanding of the economic problem. Only if the IE is able to explain the economic problem in a more convincing manner on rational grounds it would be able to attract the attention of the wider intellectual community. It means IE cannot expect to make a plausible case for acceptance of its interpretations merely by asserting that it is based divine sources. The IE presentation should be reasonable on rational terms. If IE is able to do so, it would enhance the human understanding of the economic problems and would be a welcome addition to human knowledge.
Concluding remarks
Most of the literature on IE consists of explanations and interpretations of the Qur’anic verses, Traditions of the Prophet, Islamic law, Islamic history and Islamic public policy during the last 14 centuries or so. There is no argument about the value of this literature, but most of it falls in the domain of theology and not economics. It is time that Islamic economics comes out of the cocoon of theology and develops into a social science. The methodology suggested in this paper is a way forward. The future of Islamic economics lies in this methodology.
In the final analysis, IE must be able to enhance our understanding of the economic reality and provide more robust and sustainable solutions to the global economic problems. Therein lays the secret of success for the new discipline. It would attract the attention of world intellectual community. The ultimate objective of making the world aware of a divine source of knowledge that would help them lead a more prosperous life would be achieved. If IE does not achieve its final objective, it would be only a pastime of Muslim intellectuals, talking to one another and basking in the sun of bygone glory. It would be a fun, though.


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Jointly organized by the Centre for Islamic Economics (CIE), IIUM and IIIT East Asia
Ibnu Taymiyyah Conference Room, Kulliyyah of Economics and Management Sciences, IIUM
27-28 August 2013
Islamic Economics at 40: A Critical Assessment
Speaking Notes
1. Salutation. Thanks for inviting me to this august assembly where a galaxy of scholars on Islamic economics and related disciplines are present. It is an honor for me.
2. Thanks to leadership of IIUM and IIIT and management of Kulliyah of Economics, in particular Prof. Dr. Mohamed Aslam Hanif and Dr. Sayyid Tahir who established initial contacts with me for giving me this honor.
3. I am conscious of the fact that some of the remarks that I shall be making today would be a repetition of my keynote address which I delivered on 24 August on the 1ST WORLD CONGRESS ON INTEGRATION AND ISLAMICISATION OF ACQUIRED HUMAN KNOWLEDGE (FWCII-2013)
4. I shall try to raise some further issues in this forum
5. Most of the present day participants of the seminar would be aware of what has been achieved so far in IE and F. I need not repeat that in this forum. However, just to provide a perspective, I should mention that during last four decades or so (if we take 1976 as starting point when the 1st international conference on IE took place in Makkah), a lot of valuable work has been done on IE and F. Sizeable amount of literature, publication of journals, bibliographies, encyclopedias, emergence of several website, introduction of under and post graduate courses, establishment of large number of IFIs and production of relevant literature on their operation and management, emergence of several institutions which provide a robust infrastructure to IFI provide a strong evidence of what has been achieved.
6. However, most of us realize that the original objective of developing IE as a distinct branch of knowledge has yet been realized. I shall reflect on this issue in today’s talk. I shall try to raise pertinent issues on the subject for further deliberation and thinking by this august assembly.
Issue 1: Islamic economics vs Islamic economic teachings
7. During the last four decades or so, we have produced a lot of literature that consists of economic teachings of Islam. By its own right, it is a valuable attempt. However, the literature does not take us any closer to the development of IE as a social science. Islamic economic teachings provide information on legal and ethical aspects of economic transactions and dealings. Since the bulk of the literature is re-statement of the Islamic law (fiqh), it is useful for disseminating knowledge on Islamic economic teachings. However, it is a field of Islamic da’wah. By comparison, a social science, which IE was supposed to be in the first instance, studies and analyzes the economic problem in a real life context. To the extent we keep studying the law we remain busy in elaborating various legal issues and do not address the economic problem in the real-life society.
8. It will not be fair to say that the Muslim economists were not aware of this problem. They were quite aware of the problem. A faithful adherence to the Islamic economic teachings created a blockage before the Muslim economists. The general train of thought proceeded as follows:
9. Here is an ordinary person –homo economicus – the subject of conventional economics. Since we are focusing on the Islamic economic teachings, our immediate concern is about its implementation in real life. For that purpose, we assumed, and rightly so, that after implementation of the Islamic economic teachings, the homo economicus would be replaced by homo Islamicus who is living in an Islamic society. Once the Muslim economists entered this scenario, they faced a blind alley with a stone-wall. How could they postulate anything about homo Islamicus, who did not exist or about Islamic economy which was nowhere in sight? Perforce, they got into the luxury of refining the Islamic economic teachings, presenting them in modern jargon and persuading the audience to believe in the superiority of these teachings over conventional economics.
10. Our failure was that we did not try to detach IE from its legal roots and integrate the divine guidance into the study of real-life economic problem. For this purpose we should have adopted the familiar path of a social scientist that would hypothesize about a phenomenon and then test its validity in empirical terms. So far you are dealing with legal content and treating the divine knowledge itself as subject matter of IE you will feel restrained from testing it in real-life. It may lead you to thinking that you are trying to test the validity of the divine knowledge itself. However, if the Muslim economists had detached themselves from the legal content, they could enter into the domain of social sciences. Unfortunately, most of us have been struggling with the statement and re-statement of the legal content and did not think of entering in to the domain of social sciences. It is time that we detach ourselves from the legal content.
11. Some of the useful work has been done in translating and editing earlier books on public finance. However, these books were written by scholars in specific contexts and were in the nature of manuals for Muslim rulers for collecting and spending state revenues. Our hope was that since these works were produced in the golden era of Islamic history, we may be able to learn something from them. The fact is that the whole literature is so much embedded in the temporal context that there was hardly anything that we were able to learn from the perspective of a social science.
12. Yet another strand of literature on IE spans the familiar fields of conventional economics. In this area, the Muslim economists tried to create an Islamic copy of the conventional economics. Their question on every subject of conventional economics was: if this is what the position of conventional economics is, what will be our position if we conceive it in an Islamic perspective? Soon we found that we did not have much to say on all subjects with which the conventional economics dealt with. In fact, we found this in most of the cases. However, in their zeal to create IE somehow and to prove that we have enough of basis for developing this subject we tried to teach conventional economics from Islamic perspective. It means while teaching any subject of conventional economics, we would interject here and there a remark or a discussion on some Islamic economic teachings to make the students aware of what could be an Islamic position on this issue. However, this approach only created more over-awing image of conventional economics than before. The glory of IE faded further as we tried to instill Islamic economic teachings as an addendum to conventional economics.
Issue 2: Response to Conventional Economics
13. An important issue in development of IE has been formulation of our response toward conventional economics (CE). Frankly, most of us have been confused about it. There is no one response. Several responses emerged over years. One response is: IE is a distinct academic discipline and has nothing to do with CE. We need to discard CE and focus only on IE. This response though idealistic and romantic in nature could not get much support as there was not much by way of a social science in IE that could be presented instead of CE.
14. Another response was that we teach CE as it is but replace its basic assumptions about human beings and economic system. We bring in Islamic economics and Islamic economy instead of homo economicus and capitalism. But, as I said earlier, this response also met with difficulties when the economists could not find either homo Islamicus or Islamic economy anywhere to test their hypotheses.
15. Still another response was that we teach CE but interject Islamic economic teaching at appropriate places to highlight inadequacies of the capitalist economics and to show superiority of the IE ideas. It is doubtful whether this objective was ever achieved.
16. There are modified versions of these responses. But in summary we were not able to make up our mind about relationship of IE with CE.
17. My suggestion is that we need not have a dispute with CE as a social science. It has developed with the collective efforts of thousands of scholars over centuries. We should study it as it is and make a contribution if we like to do so. However, we should define and demarcate the subject matter of IE which should be distinct from CE. As I shall argue later in this talk we have a lot of work to do on this aspect. Once we demarcate the boundaries and subject matter of IE which is distinct from CE we will have no problem with it.
Issue 3: IE for whom?
18. Who are the audience of IE? Are we trying to create a branch of knowledge which is meant for Muslims only? Do we aim to study the economic problems of Muslims in wider sense? Or do we aim at creating a branch of knowledge which can be studied by anyone in the world? Actually, the perspective of the Muslim economists has been confused in this respect. Some of us wanted to develop this subject so that the shari’ah can be implemented in the present day. Some thought we need to develop this subject to study the economic problems of the Muslim world which is mired in poverty and underdevelopment. Some thought we need to show if people adopt Islamic economic teachings, it would lead the world to a state of eternal bliss.
19. The fact is that even those of us who thought we should create IE as open knowledge were not free from the bias of creating something so much Islamic in nature that non-Muslims were deterred to benefit from it effectively. It is obvious from the unbridled use of Arabic words and phrases even for those concepts which can be expressed in a more general and commonplace language, keeping them accessible to the wider knowledge community. Not only this, we have not been able to produce a standard dictionary of IE which could provide standard meanings to most of our terms. Most of the books and documents on IE have to attach a glossary of terms used in that document. Sometime the meanings in these glossaries are at variance with others and confuse the unwary reader.
20. I would suggest that we should have a clear objective of creating a knowledge which addresses the whole humanity as Islam was revealed for the entire humanity. We should present our subject in general and rational terms and should not try to argue on the force of divine roots. Our ideas should make sense to everyone – Muslims and non-Muslims – whether they agree or disagree is a different point. Our subject should not require anyone to have faith in Islam and practice Islam. Let it be an open store of knowledge for everyone to study and everyone to contribute.
Issue 4: Methodology of Islamic economics
21. The conventional economics studies human behavior or constructs its mental image through abstract thinking. In either case, the thought is presented as a postulate in a language which is either verifiable or falsifiable. If it is verified by empirical evidence or if it is not falsified by any method the postulate becomes economic theorem and remains available for further examination. Over a prolonged period the economists make repeated attempts to verify or falsify it. It is either verified or at least cannot be falsified. At that stage, it becomes an economic law. The Muslim economists faced this methodology with a certain degree of suspicion. They thought that verification or falsification of Islamic postulates would expose the divine ordinances to human verification or falsification, which would be committing a sacrilege. Therefore, the methodology is not suitable for Islamic economics.
22. The idea has been perplexing the Muslim economists. They did not think of developing a social science from Islamic economic teachings. Instead of verifying or falsifying the divine tenets, they could move toward developing human understanding of these tenets and then transform that understanding into economic postulates and theories by familiar method of verification and falsification.
Issue 5: Economic statements of the Qur’an
23. The Qur’an states at several places (e.g. 62;2) that it consists of al-kitab and al-hikma. If we analyze various verses of the Qur’an relating to economic issues we come across three main categories. First, legal statements about permission and prohibition (al-halal wal haram). For example, Allah has made trade lawful and riba unlawful. Second, moral injunctions such as exhortation to give respite to the debtor if he or she is in financial distress. These two categories can be termed as al-kitab. Third, positive statements that point to some economic phenomenon through operation of the Invisible Hand of God. These statements consist of al-hikma. For example: Verse 2:276 says: Allah diminishes riba and increases sadaqaat. A similar set of statements are available in the hadith literature as well. The Muslim economists have not paid adequate attention to this last category of economic statements of the Qur’an or ahadith. We have been pre-occupied with the first two categories but that required existence of an Islamic society and finding it nowhere we were confused about our way forward.
24. To my mind, these positive statements are nothing short of divine economic laws stated by God. The Muslims believe that these laws in fact operate in this life through Divine Will of God. But how actually these laws take effect is not evident from the Qur’an directly. For example, we do not exactly know, in a cause-efect framework, how infaq (charity) leads to increase in income and wealth of the giver.
25. We are unable to find explanations for these statements in the familiar cause-effect format. The text of the Qur’an uses such words and phrases which can have multiple meanings. The mufassiruns (exegetes) of the Qur’an have been interpreting these verses over centuries in different manners. But a conclusive interpretation which can be tested empirically is not available in most of the cases. We need to determine the meanings of the Qur’anic economic statements in a manner that allows verification of our understanding in the light of real-life data.
26. My main point is that IE should focus on the economic statements of the Qur’an and ahadith. The methodology to be followed for this is as follows:
(a) The Muslim economists should take the verses of the Qur’an relating to economic issues as immutable and unchangeable. The objective should be to understand the cause-effect mechanism for the operation of these verses and not to test the truth of these verses.
(b) Since each of the verse dealing with divine economic laws can be interpreted in more than one ways the challenge is to arrive at an interpretation which can be tested and verified empirically. It is not that we need to test the Qur’anic or ahadith statements. It is the human interpretation and explanation of these statements that we need to test empirically for understanding these statements. The second step in the methodology, therefore, is to identify the key terms in each statement.
(c) By a process of research, discussion, brainstorming and intensive thinking we can list down all possible meanings that come our mind at this stage of our understanding of the key terms in these statements. The meanings of the terms would remain subject to revision as more people think around them.
(d) It would be possible to have numerous combinations and permutations of meanings of the key terms. Based on these combinations we can develop postulates relating to each economic statement of the Qur’an or hadith. There could be several postulates for each statement and these could increase or decrease with the passage of time.
(e) We should prepare a short-list of these postulates based on the criteria of verifiability and falsifiability. It means the postulate on which data cannot be collected should be eliminated from the list at this stage.
27. We should collect empirical data on each postulate for certain geographical areas and for specified periods. The objective should be to verify or falsify each postulate. The postulate is verified or cannot be falsified would stand as the proven understanding of the statement under study. The truth established in this manner will be the true understanding of the verse or set of verses on which the particular postulate was based.
28. For example, we can study verse 2:276 which says that Allah deprives riba of all blessings and formulate our understanding of the term yamhaqu Allah al-riba in the following statements:
 Interest on all types of loans ultimately leads to reduction in the social wealth of a country.
 The interest on consumption loans ultimately leads to reduction in the wealth of the lender.
 The interest on deferred payment in a sales contract leads to reduction in the wealth of the seller over long-term.
 Interest on international loans leads to increased poverty of the borrowing country.
29. The above list of postulates is only for sake of illustration. Many more postulates can be short-listed in a similar manner.
30. We can now proceed to test these postulates in the familiar method of testing and arrive at a theory that cannot be falsified or which can be verified with empirical evidence. The postulate that cannot be falsified would give us the conclusive meanings of the Qur’anic statement and also inform us about the true meanings of the terms ‘riba’ and ‘mahq’. The usual procedure to draw policy implications from this understanding can then take place.
Issue 6: Subject matter of IE
31. From the above discussion we can now say that the subject matter of IE is to study the economic statements in the Qur’an and ahadith. The study of these statements will take us to the domain of discovering the moral economic laws which are operational in the universe. These operational moral laws operate through human behavior. They are functional in a cause-effect framework. However, so far we have not been able to discover these laws in the cause-effect format. For example: Allah says that infaq fi sabil Allah leads to increase in a person’s income and wealth. How actually this happens in a cause-effect framework is yet not known. These moral laws have been in operation in the world since the creation of the universe. However, we have not paid attention to these laws to discover their meaning in the cause-effect framework. It is like the laws of physical sciences which have been in operation since the creation of the universe. But discoveries and research in various sciences are unfolding these physical laws now. So far the moral laws of economic prosperity and misery have been subject of theology. With our focus to develop IE as a social science, we need to discover the mechanics of these moral laws and present them to the world for verification or falsification. It would be a welcome contribution toward human welfare.
32. The subject of IE should be to discover these laws. For this purpose, the Muslim economists would focus on various economic statements of the Qur’an and hadith and develop human understanding of these statements. The objective would be to discover the moral laws of Allah dealing economic aspects of life: creation and distribution of income and wealth and economic problem arising due to scarcity of resources.
33. Another important area for further enquiry is to determine in a measurable form the meanings of various terms and concepts of the Qur’an and hadith. For example: what exactly is meant by israf, tabdhir, bukhl, al-afw, shukr, tauba, hayat tayyaba, fasad fil ard, etc. This would lead to development of a standard dictionary of IE and F.
34. Once the Muslim economists opt to adopt this as the subject matter of IE, they would have no conflict with CE. Both the social sciences can co-exist. The subject matter of IE would be wide and open for anyone to study and contribute. It does not require faith in Islam.
Issue 7: definition of IE
35. It is now time that we attempt a definition of IE that can fit into the above framework. I would submit the following definition as a suggestion:
Islamic economics is a social science that integrates human understanding of divine sources of knowledge into the study of economic problem.
 IE is a social science and not theology.
 IE does not have a mandatory link with Islamic economy: It does not say that IE would require an IE to test its hypotheses and theories.
 Human understanding of divine texts: It focuses on human understanding of divine texts which is an open field for all times and is ever expanding. IE comes out of the fear of tress-passing any divine order by indulging into testing and verification methods of social sciences.
 Human economic problem: scarce means and multiple ends. It takes care of the economic problem of man that arises from scarcity of means and multiplicity of ends.
 Positive science: The definition ends the confusion about IE being a normative or a positive science. It is a positive science. Its findings can be used by policy makers as in case of conventional economics.
36. No mixing up of definition and objectives: The definition avoids mixing up of definition and objectives of IE, which most of the existing definitions fail to do.
Concluding remarks:
37. In brief:
 We need to detach ourselves from the legal content and move toward developing a social science.
 We should focus on the economic statements of the Qur’an and ahadith and try to develop our understanding of the moral laws of economic prosperity and misery in a cause-effect framework.
 We should adopt the usual methodology of converting our understanding of the divine knowledge into postulates, hypotheses, theories and laws.
 We should have not dispute with CE. IE has a distinct field of study. Both sciences co-exist.


5 Responses to "ISLAMIC ECONOMICS Articles by Akram Khan"

An excellent article written by a scholar who understands modern Banking and also the real concept of RIBA.
Mr. Jeddy knows about my views on Riba. My views are identical to Mr. Akram`s. All of us know that all European and American Banks have opened counters for Sharia Compliant Banking only to fool semi literate Muslim Merchants, shop-keepers and conservative households. It is the classic fraud in the name of Islam

A banker friend of mine had commented upon introduction of Profit & Loss Sharing Account in General Zia regime (claimed to be islamic or sharia compliant banking) that instead of one tap outlet, now there are two taps in the samawaar (in Peshawar, they use the metal pot samawaar for keeping hot water for preparing tea and upon receipt of order for tea, required quantity of water is put into the tea pot for further boiling). One tap was labeled ‘interest’ and the other ‘PLS’. So it was left to the choice of customeres from which tap they wanted the product, interest or PLS income.

Jeddy Sahib would be remembering the performance evaluation in 1984 of Small Business Finance Corporation which claimed to be the first islamic banking institution. Performance evaluation report summarized, by quoting facts and figures that actual conduct of business was quite contradictory to the claim of there being any islamic financing, as interest, and compounding of interest was exactly the same as pre-islamic banking.

It was an essential condition of that islamic financing that loans were given on the basic understanding of there being a certain minimum earning rate on investmment with the Corporation loan, which was to be shared between the Corporation and the loanee. And the Corporation share of that basic profit rate was not to be less than a certain percentage of the principal amount outstanding. If that is not interest, what is ? In Panjaabi they say often “goon naheen, chi chi ay”. It is not dung but shit.

I had even included in the draft report that such a claim was in fact a disgrace to islaam, but Jeddy Sahib then excluded those remarks.

Hats off to the very learned way in which the author of so many books has explained what is happening in IFIs in the name of sharia compliant banking.

I personally am of the belief that fixed monetary return on monetary investment is riba. Yet the ulema have not sar been able to answer all those questions which arise out of excluding interest from our daily national and international financial practices. Some of those questions have been mentioned in the above article by the author.

My personal recommendation would be to revive the cooperative movement in its true spirit. The managing company must however fulfill certain basic conditions :-

The entire management team must be true muslims and believe that a single paisa would be haraam upon them if taken without the express knowledge and permission of the investors.

The management must run the project (housing, or trading whatever) in a sincere way, and keep the costs to the minimum, and earn profit (one time or regular rental income etc) in the most efficient manner.

At suitable intervals (annually ?) the profit earned by the project be measured, and distributed amongst all the coop memberes, after meeting out the salaries of management, and keeping certain reservices. Of course, the profit would be distributed in the ratio of investments made by coop members, weighted by the period (months or days) for which the funds were invested. The task is no problem in view of computerization of accounts.

Assets to be used by the management teams must be kept as low in cost as possible. Yes,, air conditioned buildings and plazas could be built for customers to earn rental income. But no luxury cars or fat salaries for the managers at any level.

This is just loud thinking. There are brilliant brains who can appraise the economy of such coop movements and its being run on no interest basis. It will be presumed all along that the managers are acting in true spirit of islam and helping the small investors.

For international conventional banking, I am sorry I dont have any suggestion. That banking is essentially based on interest, and the bankers are eager to keep as wide a margin between the interest received and paid as possible.

Dear Agha saheb,

These are bright ideas but cannot be practised. Conventional banking has evolved after centuries of experience and its regulatory framework is very strong. It does not mean that it does not weak areas. It has. however, Islamic financial institutions have found a far inerior solution to these weaknesses.

Dear Akram sb,

In my opinion you did the same mistake that of the traditionalists by considering “riba” as a “term” with the result that the whole edifice on which you built your argument is faulty. Quraan is very explicit and itself points out terms used by explaining them further. Ribaa was a well concept and its translation required similar treatment like any other words used in Quraan. I have given my preliminary arguments at the Shariat Court on the subject and delve on further on this subject in the hearings to come. Similarly, there is a basic difference in the concepts of “qarz” and “dain”, and also “between “Bai’un'” “tijaratan”. Like most exegeses, these words have been used through examples and should have been relied on.


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