An Introduction To Islamic Economics
IIIJoint PublishersTHE INTERNATIONAL INSTITUTEOF ISLAMIC THOUGHTThe International Institute of Islamic Thought was founded in 1401AH/1981 AC to revive and promote lslam:k thought and strive forIslamization of knowledge in the contemporary disciplines. It alsoexplores the potential to package knowledge in specifically Islamicdisciplines derived from Tawf!zd and the Sharf'ah.The Institute publishes scholarly works from its own programmes aswell as contributions from scholars around the world. It also makesimportant Islamic scholarly works available in Arabic, English and othermajor languages of the world. The Institute welcomes all kinds ofacademic cooperation and contributions from all sources concerned withthe progress of Islamic thought and knowledge.INSTITUTE OF POLICY STUDIESEstablished in 1979, the Institute of Policy Studies represents aneffort to promote discussion and research on critical national andinternational issues. Besides several periodical reports - Kashmir Watch,Pakistan Political Perspective, 'Alam-i Islam awr 'lsa 'iyat, Was(f Asia keMusa/man and Dfnf af!afat ka Ja 'izah - the Institute has produced over100 publications.Islamic economics has been one of the major areas of its concern.Some of the recent publications on Islamic Economics by the Instituteinclude: Elimination of Riba from the Economy, Ecunomic Teachingsof Prophet Muf!ammad: A Select Anthology of lf.adfth Literature onEconomics Money and Banking in Islam Fiscal Policy andResource Allocation in Islam Islamic Banking: Conceptual Frameworkand Practical Operations.IIi.
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And hold fast, all together, unto the bond with God, and do not drawapart from one another. And remember the blessings which God hasbestowed upon you: how, when you were enemies, He brought your heartstogether, so that through His blessing, you became brethren; and how,when you were on the brink of a fiery abyss, He saved you from it. In - this way, God makes clear His messages unto you, that you find guidance.(Qur'an 3: 103).,,,, . ,,,., [./-: , , ,.fo -;,. , -:,,1,,,,./.,. . iw\ . 1: . ;. r./:. , . , .-:- ,- · · 1 1J " v " & . '. I .J .r' . u ct/ (\O'\ :l'W'il)/,/;/ ·"'J:.1'li'/. -"" -;;'{-;10 b ( ,.u\Verily, as for those who have broken the unity of their faith and havebecome sects-you have nothing to do with them. Their case rests withGod and in time He will make them understand what they were doing.(Qur'an 6: 159) @J/iJ.
AN INTRODUCTIONTOISLAMIC ECONOMICS
ISLAMIZA TION OF KNOWLEDGE - 15Series Editor (in Pakistan): Zafar Ishaq Ansari
ANINTRODUCTION TOISLAMIC ECONOMICSMuhammad Akram KhanInternational Institute of Islamic ThoughtandInstitute of Policy Studies
First published in Pakistan in 1994by the International Institute of Islamic Thought,and Institute of Policy Studies, Islamabad 1994 All rights reservedThe International Institute of Islamic Thought(Pakistan), Islamabad.Cataloguing inPubli ationDataKhan, Muhanunad Akram, 1945An Introduction to Islamic Economics.(lslamization of Knowledge - 15)Bibliography: pp. I 35-44Includes indexISBN 1-56564-079-9 HCISBN 1-56564-080-2 PBI. Economics - Religious aspects - Islam.I. International Institute of Islamic Thought (Pakistan).II. Title. III. Series.First Edition 1994330. ldc20Second Print in Malaysiaby;PERCETAKAN ZAFAR SON BHDKuala LumpurTel: 03-6875725 Fax: 03-6875823
CONTENTSForewordPrefaceIXAcknowledgementOneIslamic Economics : An Overview1.2.3.4.vIslamic WorldviewBasic Assumptions2. 1 Human nature2.2 Materialism2. 3 Ownership2.4 UniversalismEconomic Organization3. 1 Economic Power3.2 Equilibrium at Less than Full Employment3. 3 Islamic Economic OrganizationRole of Money4.1 Interest and Public Debt4.2 Interest and Foreign Exchange Instability4.3 Interest and Environment4 .4 Interest and Inflation4. 5 Islamic Concept of Money4. 6 Banking in Islamic Economyxiii1344566778811111212121313
iiISLAMIC ECONOMICS5.6.7.8.9.TwoI.2.3.4.ThreeI.2.Consumer Behaviour5.1 Consumerism5.2 Simple Living and Intensive Use of Resources5.3 Islamic Values and Consumer Behaviour5.4 Conservation of ResourcesPoverty6.1 Contemporary Economic Order6.2 Social and Political Underdevelopment6.3 Over-population- 6.4 Urbanization6.5 Technology6.6 Social Security System6. 7 Fighting Poverty in an Islamic FrameworkFiscal Management7.1 Islamic Principles of Taxation7 .2 Deficit FinancingDiffusion of KnowledgeConcluding Remarks141415161617171718191919202222232425The Nature of Islamic Economics29The Recent UpsurgeDefinition of Islamic Economics2.1 Falah2.2 Resources2.3 Cooperation and ParticipationSources of Islamic EconomicsThe Approach of Islamic Economics29333444454952The Methodology of Islamic Economics57Introduction1.1 Why Methodology at all?1.2 Need for Defining the Methodology of IslamicEconomicsMethodology of Islamic Economics2.1 The Hard Core2.2 The Role of Reason575858606063
3.4.5.Four1.2.3.4.5.FiveCONTENTSiii2.3 Inductive or Deductive Reasoning2.4 Assumptions and Method2.5 Problem-Solving2.6 Process of TheorizingComparison qf the two MethodologiesSome Related Issues4.1 Role of Revelation4.2 The Assumption of an Ideal Islamic Society4.3 General Theory of Islamic EconomyConcluding Remarks64666768707172737377Islamic Economics in Practice79Islamic BanksZakahInsuranceWaqfAl-Hisbah7981828283Hope for the Future85l.IntroductionIslamic Approach to Contemporary EconomicProblems2.1 Unemployment and Inflation2.2 Economic Development2.3 Technology2.4 Economic Power2.5 Consumer Sovereignty2.6 Role of Public Policy3. Concluding Remarks852.Sixl.2.8686899698101103104Direction of Future Research107Holistic ApproachSearch for an Interest-free International EconomicOrder108109
ivISLAMIC ECONOMICS3.4.TechnologyEconomic PowerAppendix-IAppendix-II110111Liability of the ShareholdersDiscounting for Project Subject Index145General of ST OF FIGURESFig.IFig.2Fig.3Holistic Vision of Human BehaviourGeneral Theory of Islamic EconomyInitial Resource Endowment537591LIST OF TABLESTable 1 Capitalism and IslamTable 2 Falah2635
FOREWORDAlthough Islamic Economics is still in its early stages ofdevelopment as an academic discipline, there is a constant flow of usefuland valuable literature on its different aspects and themes relating toIslam's economic teachings. There is also a rich scholarly tradition fromwhose womb this nascent discipline has emerged. In all ages and timesMuslim scholars have written on the economic teachings of Islam. Thecurrent century has, however, been particularly prolific. Theologians,legists, fuqahti ', social thinkers and reformers have profusely written oneconomi9 themes and have tried to identify what guidance could bedrawn from the Islamic sources-the Qur'an, Sunnah, Fiqh, socialthought and historical experience. Lurid light has been thrown on certainaspects, likelprohibition of ribti, dynamic potential of zaktit, concept ofproperty and enterprise, role of state, etc. Reflection and discussioncontinue on many more aspects from the micro level to the global issues.It is in the context of this rich intellectual background that the Muslimeconomists are trying to develop what can be described as 'IslamicEconomics'.There is also an increasing realisation that Islamic economicscannot be studied in isolation-it can seek flowering only in the contextof a whole social system. Co11temporary Muslim economists have, on theone hand, gone deep into the original sources to understand the Islamicideals and targets and, on the other, to realistically comprehend theprocess through which the Muslim society is passing i.e. a status quo thatis a complex of vestiges of the great historic traditions, polluted and
viISLAMIC ECONOMICScorrupted by a colonial past, during which a host of foreign values, laws,institutions and consequent distortions were imposed upon it. As such theproblems of transition are beginning to attract more and more theattention of researchers and scholars.More fundamental is the debate on the future of the veryparadigm of economics. The economic paradigm, which has held thesway for the last two centuries, is not only showing cracks beyondrepair; its very theoretical foundations, underlying assumptions andcapacities to predict future modes of behaviour, are being challenged.Discussion is no longer confined to changes within the paradigm; thecurrent debate is moving more and more towards the need for the changeof the paradigm itself. "Challenged'', writes Amitai Etzioni, "is theentrenched utilitarian, rationalistic, individualistic, neo-classical paradigmwhich is applied not merely to the economy but also, increasingly to thefull array of social relations, from crion to family" (Amitai Etzioni, The·Moral Dimension: Towards a New Economics, New York, Macmillan,1988, p.ix).The economic paradigm is being challenged at its very core: theneo-classical paradigm does not merely ignore the moral dimension, butactually opposes its inclusion. The new emerging paradigm, on the otherhand, visualises assigning "a key role for moral values." Then alone mayit be possible, underscores Etzioni, to "seek both what is right and whatis pleasurable" (ibid., pp.ix, x). Cristovam Buarque, a well-knownBrazilian economist and a former Rector of the University of Barasilia,makes a more dispassionate plea for this new approach to economics inhis latest work: The End of Economics: Ethics and the Disorder ofProgress, trans'1ated by Mark Ridd, (London, Zed Books, 1993). Thefailure of economics lies in ignoring social and ethical values. "Socialobjectives", he asserts, "have been subordinated and viewed as aconsequence of technical progress rather than as the purpose ofcivilization. Ethical values, meanwhile, have been discarded" (p.xi}.What is needed is a fundamental change of approach and· a total reordering of the priorities. He comes to the conclusion:Just as physics stumbled upon the need for regulatoryethics the moment it became aware of its catastrophicpotential, so Economics sorely needs to rediscoverEthics. The present dilemma will not be dispelled merelyby re-evaluating the means and totting up new costs-as
FOREWORDVIIone does in project assessment. Rather it is a matter ofchanging the core objectives of the social process,delivering it from economistic strait-jacket of the lasttwo centuries.Without subverting the traditional notion of progress, itwill be impossible to grapple with the problem ofgrowing poverty and inequality, and impossible toincorporate ecological balance, into social purposes. Theissue of ,economic development thus demands a freshtheoretical approach founded on three pillars: an ethicsfor redefining the very objectives of civilization; a newdefinition of the object and field of study, capable oftaking in the ecological dimension; and a new rationalefor Economics as a discipline (ibid., p.xii).The result of this approach would be that: "Technological optionsmust be determined by an economic rationale subordinate to social·objectives formulated by ethical values. The hierarchical order: technicalvalues/economic rationale/social objectives/ethical values, would thus bereversed" (ibid., p. 164).Coming to the ground situation of the world economy it deservesto be noted that the socialist economic experiment has miserably failed,while the capitalist economies, despite long strides in the fields ofeconomic growth and technological transformation, are in the throes ofan ever-deepening crisis. Modern economy has failed to ensuredistributive justice, sustained growth and social harmony for a vastmajority of mankind and is confronted at home and abroad with themenaces of prolonged recession, persistent unemployment, stagflation,unrestrained monetary expansions, staggering mountains of domestic andforeign debts, and co-existence of extremes of affluence and starkpoverty within as well as among the community of nations. The linkbetween moral values and economic judgement and behaviour, both atindividual as well as &overnmental levels which had sustained humanitythrough the millenna, had been torn as under during the age of secularcapitalistic ascendance and the economists as welt as the common manare now trying to re-discover that missing ethical link.'Islamic economics' represents a systematic effort by Muslimeconomists to cast a fresh look on the entire economic problem and
viiiISLAMIC ECONOMICSmethodology and come up with fresh solutions to old and persistingproblems. We are aware that the Muslim economists have a long way togo, but there is no doubt that a beginning has been made in thisdirection. This beginning bears great promise for the future.Brother Mohammad Akram Khan is one of those scholars whohave shown keen and persistent interest in Islamic economics. He hasalready produced an extremely useful annotated bibliography on Islamiceconomics. He has also written quite extensively on a number ofsubstantive issues, particularly in the fields of banking, performanceaudit and rural finance. His present study covers a rather vast area, from .Islam's world view and basic economic concepts to a number of policyprescriptions. The value of the book lies in its simplicity, directness ofstyle, unapologetic approach and reliance on original sources to developIslamic perspectives on a number of economic concepts, issues andproblems. I am confident that An Introduction to Islamic Economics willbe of great assistance to the uninitiated reader, particularly for thestudents of economics. It will help the reader develop familiarity with alarge number of issues that go to make up the current matrix of Islamiceconomics. I welcome the publication of this short but useful book andam also happy to record that its publication marks a new phase in thehistory of cooperation between the International Institute of IslamicThought, Washington/Islamabad and the Institute of Policy Studies,Islamabad who have jointly sponsored its publication.IslamabadOctober , 1994KHURSHID AHMAD
PREFACEThe achievements of the 20th century are too numerous to becounted. However, in the final analysis, the material advancementsof this century ha:ve concealed from our eyes the persistentdespoiling of human qualities and the erosion of the moral bases ofhuman culture. The unprecedented material prosperity that camealong with technological developments made available to an ordinaryperson a lifestyle which used to be the prerogative of kings alone andthe elite in the last century. This became possible only with the helpthe of money that was made available to finance scientific researchand large development projects. But unfortunately the entire effort toincrease the inventory of material possessions and comforts left outof its focus the most important element - man himself.The accumulated effort of all nations of the world during thewhole century contributed only to the growth and development ofhuman beings as mere cogs in a vast development machine. Forman was not conceived as the crown of all development efforts. Atbest he was treated as 'human capital'. As a result, very little wasdone for the education and training of man to bring about his culturaladvancement and to nurture fellow-feelings in him. Even today,gross disparities exist in the provision of basic services like potablewater, sanitation, medical care, roads, fuel gas, electricity andtelephones between rural and urban areas and between rich and poorcountries, although a lot of lip service has been paid to the equalityof human beings. The allocation of resources has been guided mostlyby economic and financial criteria and not by human needs.Similarly, the research programmes in science and technology are
xISLAMIC ECONOMICSgui ded by potential pay-back for business firms/ or economic powerfor the state. Capital, wherever it is available, flows to theprogrammes where it bas all the safeguards and an assured return.Financial considerations reign supreme. There are vast spans ofundeveloped earth and oceans, and infinite potentialities ofdevelopment, enough to enrich everyone on this earth providedfinance is available to explore these possibilities. But unfortunatelyfinance becomes available only at a certain rate of interest. Projectswhich do not assure the going rate of interest to the financier starvefor funds. Millions of human beings are unemployed only becausethe money-lender insists on hi pound of flesh. All programmes ofhuman development, education, training, scientific research, andconstruction of infrastructure require . finance which becomesavailable only at a cost.The lesson of the 20th century appears to be that fullemployment is not possible until we can attain 'euthanasia of therentier'. Therefore, the challenge of the 21st century lies in inventinga mechanism for providing finance on an interest-free basis. If manis able to discover such a mechanism he would be able to unshacklehimself from the bonds of money. It would usher in an era of humansupremacy over money rather than money over human beings.Although interest on finance has been denounced by all religions andthink rs of various shades of thought throughout : he ages, very littleserfous effort has been made to find out a practk11ble mechanism toprovide institutional finance on an. interest-free basis. The 21stcentury should accept the challenge of liberating rrian from the bondsof finance.In many ways, the stage is set for Such an endeavour. On theeconomic front, the debt trap, stagflation, unemployment, andgrowing disparity between the rich and the poor nations are some ofthe compulsions posed by the 20th century. The awareness of theatrocities of interest is increasing and the need for interest-freefinance is being felt. On the political front, the dramatic changes inthe communist countries and the long-range fears of internalcontradictions leading to some identical blow-up in the capitalistworld, compel us to evolve an un-exploitative framework so that the21st century would become the century of hope for man.
PREFACExiThere has been an increasing realization in the UN andvarious regional organizations to give greater importance to thedevelopment of man. But these programmes miss the essential point.Man shall never be able to develop if he remains subservient tofinance. He must release himself from its clutches. The availabilityof interest-free finance would enable man to harness vast areas ofland. It would eradicate unemployment and under-employment to anextent that could obliterate fiscal deficit and help in calling a halt toinflation. On the international front, the present outflqw of resourcesfrom the poor to the rich nations in the form of interest would stop.The poor nations would toil for their own betterment and not for thebetterment of their money-lenders. It would be, in Keynes' words,a 'sea-change' for humanity.We should enter the 2lst century with the resolve to developa practical mechanism to make finance available free of cost. Allother strategies to promote world prosperity and peace are likely tofail if adequate finance is not available. Therefore, we should try toovercome the most insurmountable of all obstacles first. It wouldlead to an era of prosperity for all.The suggestion seems to be utopian. But history gives ushope and courage. There was a time when ideas like abolition ·ofslavery, the introduction of adult suffrage, education-for-all, andequality between men and women were wild dreams of visionaries.A few decades back, let alone a few centuries, all these ideas wereconsidered as impractical as is the vision of an interest-free worldtoday. Given the ingenuity and will of man, however, this dream canalso come true. It would m
4. Some Related Issues 71 4.1 Role of Revelation 72 4.2 The Assumption of an Ideal Islamic Society 73 4.3 General Theory of Islamic Economy 73 5. Concluding Remarks 77 Four Islamic Economics in Practice 79 1. Islamic Banks 79 2. Zak ah 81 3. Insurance 82 4. Waqf 82 5. Al-Hisbah 83 Five Hope for the Future 85 l. Introduction 85 2.
Behavioral Economics Experimental Economics Macroeconomics and Public Sector Economics Monetary Policy Fiscal Policy Cost-Benefit Analysis Economics of Regulations and Competitive Economy Labour and Population Labour Economics Population Economics Human Resource Development Islamic Economics Islamic Banking: Theory and Practice
Islamic Grave Voodoo 57 Allah Will Grow Humans from their Graves 57 Islamic Interrogation in Graves 58 Islamic Torment in Graves 59 Islamic Rewards in Graves 61 CHAPTER 8 63 Islamic Medicine Voodoo 63 Islamic Cauterizing and Cupping 63 The Qur'an and Honey are Cures for All Illness 65
The Evolution of Islamic Banking System in Muslim countries: Before describing the evolution of the Islamic banking it is important to understand what Islamic banking is and what are its principles or features. 1.1) What is Islamic Banking? Islamic Banking is banking or financing activity that is based on Shariah (Islamic Law) and all
Director of the Center for Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Doha, Qatar Keywords Islamic Finance Community-Based Devel-opment Islamic Moral Economy Blended Finance Received: 15December2016 Accepted: 05 February 2017 Abstract. Contemporary Islamic Finance is seen by many as
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International Finance 14. Development Policy 15. Institutional Economics 16. Financial Markets 17. Managerial Economics. 13 18. Political Economy 19. Industrial Economics 20. Transport Economics 21. Health Economics 22. Experimental and Behavioral Economics 23. Urban Economics 24. Regional Economics 25. Poverty and Income Distribution
ECONOMICS 40 Chapter 1: The Principles and Practica of Economics 40 1.1 The Scope of Economics 41 Economic Agents and Economic Resources 41 Definition of Economics 42 Positive Economics and Normative Economics 43 Microeconomics and Macroeconomics 44 1.2 Three Principles of Economics
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