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Islamic Economics
The economics of Islam, promoted as an alternative to neoclassical economics, Marxism, and other Western economic doctrines, is based on teachings of the Qur’an and Sunnah and aims to rediscover and revive the economic values, priorities, and mores of the early Muslim community. The movement to establish Islamic economic doctrine was born in India in the decades preceding partition (1947) as part of a plan to establish a full range of distinctly Islamic disciplines. Its most prominent promoter was Sayyid Abu al-Ala Mawdudi. Major emphases are economic justice, the failures of existing economic systems, and the need for an Islamic revival if Muslims are to recover the prosperity of the past. Theorists insist that true adherence to Islamic principles does not allow for selfishness, waste, extravagance, destructive competitive behavior, or immoral activities such as gambling, speculation, and hoarding. Interest is strictly prohibited. Profit sharing and investment based on risk taking are encouraged instead. A truly Islamic society will emphasize generosity toward the needy, hard work, fair prices, and protection of private property. Its four ethical bases are the unity of the Muslim community, equilibrium between supply and demand, free will of consumer and investor, and responsibility of the individual to the Muslim community.
Economic Theory
The mid-twentieth century saw the birth of Islamic economics, a doctrine billed as an alternative to neoclassical economics, Marxian economics, and other economic doctrines rooted in Western social thought. Within the span of a few decades, the exponents of Islamic economics, who call themselves Islamic economists, have founded several international institutes, most notably the International Center for Islamic Economics at King Abdulaziz University in Jiddah; launched numerous periodicals, including specialized ones, such as the Journal of Islamic Banking and Finance; and, published thousands of books in scores of languages.
In the eyes of Islamic economists, three characteristics make Islamic economics, Islamic.
- First, it draws inspiration and seeks guidance from the Qurʿān and the sunnah (received custom);
- Second, it considers Islamic civilization a fount of economic perspectives and insights that are lacking in secular philosophical traditions; and
- Third, it aims to rediscover and revive the economic values, priorities, and mores of the earliest Muslim community in seventh-century Arabia.
Islamic economists trace the origins of their doctrine to the beginnings of Islam. However, the notion of an economic doctrine that is distinctly and self-consciously Islamic is a modern development. The classical sources of Islam contain diverse prescriptions that bear on economics, and the religion’s early history provides valuable insights into economic behavior and institutions. Yet, not until modern times did Islam produce a separate and independent discipline of economics. Nor did the great philosophers of the premodern Islamic world consider themselves bound on economic matters by Islamic concepts and understandings. Such towering figures as Ibn Taymīyah (1263–1328) and Ibn Khaldūn (1332–1406) wandered freely beyond the confines of previously articulated Islamic thought, even as they tried to ground their novel discoveries, interpretations, and prescriptions in Islamic sources.
The movement to establish a distinctly Islamic economic doctrine was born in India in the decades preceding the country’s partition. This was a time when, in fields ranging from dress to economics, growing numbers of Muslims were falling into patterns set by the West. Many Muslim intellectuals saw in this loss of cultural identity a threat to the future of Islamic civilization. As part of a broader response to this threat, they sought to establish distinctly Islamic disciplines, including an economics discipline that Muslims could proudly call their own. The most forceful early promoter of Islamic economics was Sayyid Abū al-Aʿlā Mawdūdī (1903–1979), who sought to turn Islam into a “complete way of life.”
For Mawdūdī, Islamic economics was primarily a vehicle for reasserting the primacy of Islam in the lives of Muslims and only secondarily a vehicle for fundamental economic change. Accordingly, his books and pamphlets on economics are essentially descriptive and prescriptive, outlining, with references to early Muslim practices and to Qurʿānic verses, how a modern Islamic economy would differ from a contemporary capitalist or socialist one. An Islamic system, says Mawdūdī, would differ from socialism in the protection it gives to the market; from capitalism in its emphasis on inculcating market participants with norms of honesty, fairness, brotherhood, and altruism; and from both in its prohibition of interest and its insistence on enforcing Islam’s traditional redistribution schemes, most importantly zakāt (alms). But Mawdūdī makes no systematic attempt to explain how elements of the Islamic economy would interact with one another. Nor does he give serious thought to matters of feasibility.
Mawdūdī had little exposure to modern economic thought. The same goes for most other early contributors to Islamic economics, whose expertise usually lay in fiqh (jurisprudence). The contributors of seminal works include Sayyid Quṭb (1906–1966) of Egypt, who concentrated on matters of economic justice; Muḥammad Bāqir al-Ṣadr (1931–1980) of Iraq, who developed and extended Mawdūdī ’s contrast between the Islamic economy and the prevailing systems of the modern world; and Maḥmud Ṭāleqāni (1911–1979) of Iran, who produced a tome on ownership. Unlike Mawdūdī and Quṭb, Ṣadr and Ṭāleqāni were Shi’a. Probably as a consequence, Sunnī Islamic economists have tended to refrain from honoring and citing their works. Nonetheless, their diagnoses and prescriptions have had a discernible influence on later writings.
Whether by Sunnīs or Shi’a, contributions to the first phase of Islamic economics share four characteristics that have carried into the subsequent literature.
- First, they are all heavily judgmental and normative. They differentiate between right and wrong and between permissible and impermissible.
- Second, the early contributions reject the notion, which took hold in modern thought with the European Enlightenment, that personal actions motivated by selfishness can produce socially desirable outcomes. Where thinkers as different as Adam Smith and Karl Marx recognized that selfish actions can, and often do, end up serving the social good, Islamic economics has unvaryingly condemned actions taken for purely selfish reasons as morally unacceptable. Islamic economics can be viewed, then, as an attempt to counter a key element of modern social thought by reviving a very old belief pattern — one that is traceable to Aristotle’s teachings on the household.
- The third critical characteristic of the early writings in Islamic economics is a conviction that existing economic systems have failed dismally.
- And the fourth is an impression that Islamic civilization went into economic decline because Muslims stopped adhering to Islamic norms.
Beginning in the mid-1960s, Islamic economics started attracting researchers steeped in modern economics, including some educated at reputable universities in western Europe and North America. In the process, it came to feature writings that apply modern analytical techniques, especially the techniques of neoclassical economics, to its core issues. Islamic economics began showing sensitivity, moreover, to theoretical concepts and problems whose origins lie in secular economic philosophies.
The most prolific, wide-ranging, and influential contributors to the second phase of Islamic economics have been Muhammad Nejatullah Siddiqi (b. 1931), an Indian; Mohammad Abdul Mannan (b. 1938), a Bengal-born Pakistani; and Muhammad Umer Chapra (b. 1933), also of Pakistan. The emphasis in the writings of this trio is largely on identifying and promoting behavioral norms to guide Muslims in their economic activities. In keeping with the pattern set by their predecessors, they all reject the notion that individuals are incorrigibly selfish and pragmatic. They insist that, in a society imbued with Islamic teachings and governed by Islamic laws, people will not necessarily behave like the acquisitive Homo economicus of neoclassical economics. In a properly Islamic society, say Siddiqi, Mannan, and Chapra, people will be consistently altruistic and principled. They will avoid waste and extravagance, refrain from undertaking socially harmful activities, and be generous toward the needy. Moreover, they will work hard, abstain from destructive competitive behavior, charge fair prices, pay others their due, and avoid activities considered immoral, such as speculation, gambling, and hoarding.
Like most other Islamic economists, Siddiqi, Mannan, and Chapra are convinced that their favored norms provide perfectly clear guidance in every conceivable economic arena. They are convinced, too, that the norms would be equally effective in all Muslim societies, regardless of size, history, level of development, and institutional framework. The critics of Islamic economics have pointed out that the proposed norms leave abundant room for individual judgment and also that any given norm’s interpretation can vary systematically across cultures and contexts. They have noted, too, that in practice members of small networks abide more readily by norms of altruism and responsibility than do the members of societies running into the millions.
In countering such charges, Islamic economics appeals only partly to verifiable observations. It relies also on “revelational data,” which encompass Qurʿānic verses and, in some views, also the words and deeds of the Prophet and his companions. Even within Islamic circles, however, the lessons embodied in the Qurʿān are sources of disagreement. And renowned scholars question the authenticity of many of the statements and actions attributed to early Muslims. The admissibility of revelational data does not ensure agreement, then, on what is properly Islamic. Still, on issues where Islamic economists present a unified front, as on the feasibility of curbing selfishness, revelational data serve the purpose of shielding some key assertions of Islamic economics from outside criticism.
The priority Mawdūdī gave to the issues of interest and zakāt has proved highly durable. These two issues continue to be treated as critical, and every overview of the doctrine gives them both remarkably broad coverage. A striking difference between the early and late phases of Islamic economics lies in the mode of discourse. Especially on interest, expositions have become increasingly mathematical. In particular, a growing number of Islamic economists are using the neoclassical techniques of equilibrium analysis and optimization to demonstrate the practicality and usefulness of Islamic principles. A related development is the use of neoclassical tools to devise Islamic solutions to problems neoclassical economists generally consider unsolvable. Equilibrium models have been developed to show that a ban on interest would eliminate a potent source of capitalist exploitation. Other models demonstrate that, unlike secular redistribution mechanisms, zakāt does not have an adverse effect on work effort; the logic here is that zakāt is a religious obligation that is performed happily and voluntarily.
By no means is Islamic economics an internally coherent body of thought. Since it approaches issues in piecemeal fashion, some of its prescriptions conflict with one another. Consider profit-and-loss sharing, the favored alternative to interest, whereby borrower and lender divide, according to a pre-decided ratio, the profits from any investments financed by the loan. In principle, the agreement could give five percent of the profits to the borrower and the remaining 95 percent to the lender. Where the borrower is poor and the lender rich, this arrangement would counteract the purpose of zakāt, namely, the reduction of inequality. Another such tension is between the prohibition of interest and the commonly expressed view that wages must be pre-specified. If fairness requires risk sharing between borrower and lender, it is inconsistent to bar employees from sharing in the risks borne by their employer. Some Islamic economists recognize the existence of inconsistencies among their central prescriptions, but most do not. Consequently, Islamic economics still lacks a general methodology for resolving its inconsistencies.
In addition to inconsistencies, Islamic economics features internal disagreements. Most significantly, it is sharply divided on the limits of individual property rights. Some Islamic economists, including Ṣadr and Quṭb, favor sharp restrictions on the right to accumulate personal assets. They believe that the market process breeds persistent inequalities that are bound to overwhelm the capacity of Islam’s traditional redistribution mechanisms. Other thinkers, like Mawdūdī, Tāleqāni, Siddiqi, Mannan, and Chapra, display greater faith in the power of schemes like zakāt. They favor, moreover, a state that respects the right to own honestly acquired property and that interferes only minimally with market outcomes. At the root of the conflict over property rights are two principles that no Islamic economist rejects, each grounded in the Qurʿān. One is that ownership belongs to Allah, the other that perfect equality is neither desirable nor necessary. The former principle opens the door to large-scale redistribution, for if all property belongs to Allah, a state representing the divine will can regulate the distribution of assets however it sees fit. By contrast, the latter principle justifies restrictions on state activism.
The diversity of opinion within Islamic economics has been characterized as a source of convenient flexibility, a trait that permits theoreticians and policy makers to adapt to virtually any exigency without stepping outside Islamic discourse. It did indeed prove useful to the wider Islamic movement when, prior to the Iranian Revolution of 1979, doctrinal controversies on economic matters served the purpose of making Ayatollah Ruhollah Khomeini seem at once an egalitarian redistributionist to the poor and a defender of property rights to the rich.
A small minority within Islamic economics reject the notion that the diversity of Islamic opinion is a sign of strength. The present diversity, they say, is an embarrassing manifestation of intellectual sloppiness and confusion. The leading exponent of the opposing view is the Pakistani economist Syed Nawab Haider Naqvi (b. 1935). To make Islamic economics internally consistent, proposes Naqvi, it should be based on four ethical axioms: unity, equilibrium, free will, and responsibility. The axiomatic approach has the advantage, he maintains, of allowing the derivation of economic prescriptions from fundamental Islamic principles, as opposed to ad hoc reasoning or selective quotes from scripture. Yet Naqvi’s axioms do not eliminate the possibility of conflict. An expression of personal free will might violate any number of definitions of social responsibility. Nor are the four axioms free of ambiguity. Even within the confines of Islamic discourse, the notion of responsibility has always admitted widely different interpretations.
Neither individually nor collectively have the works composed under the rubric of Islamic economics laid the foundations of a new general theory, if by this one means a relatively verifiable conception of integrated relationships. It is not a comprehensive formulation of economics, in that it engages only a share of the issues that economists have traditionally worried about. Efforts are under way, though, to introduce Islamic arguments into a widening array of subjects. To this end, various Islamic foundations have invited research proposals in fields not yet touched by Islamic economists, and books have begun to appear in a variety of new fields. The problem is not only one of scope, however. Islamic economics has not developed distinct and coherent methodologies for studying the past, for forming and testing hypotheses, for understanding market dynamics, for exploring how morality changes across time and space, or for linking economics with the rest of human learning. On the whole, Islamic economics has been more successful at explaining what it is not than at specifying what makes it radically different. And it has done better disclosing the flaws of other systems than in demonstrating rigorously that it can do substantially better.
The practical impact of Islamic economics has been limited to banking, redistribution, and moral education, although a few countries, including Iran and Pakistan, have committed themselves to broad Islamic reforms. Even in the countries where Islamic economics is most influential, Muslims who concern themselves with it are outnumbered by those who look for guidance and understanding to secular economic doctrines, approaches, and ideas. Most of the economics departments in the universities of the Muslim world remain under the control of economists who do not characterize their professional identities, research, or courses as distinctly Islamic. Likewise, within government departments, planning agencies, and private organizations, Islamic economics has had little impact on either the language of economic discourse or the choice of economic policies.
Economic Institutions
The last two centuries have seen the emergence of modern government in the Islamic world. An important part of this process has involved the creation of institutions for macroeconomics management. The role of the state in the economy has been formalized, with the introduction of ministries of finance, planning, industry, agriculture, and commerce. At the same time central banks have been created, and a large number of organizations which play some role in the regulation of economic activity, from chambers of commerce to syndicates of workers and trade unions, have emerged. Some of these are mere agents of government, but others enjoy considerable autonomy.
Have the new institutional structures superseded traditional Islamic organizations? Are they mere replicas of Western institutions or have adaptations been made to serve the particular needs of Islamic societies? Do the practices of the new institutions conform with sharī ʿah (the divine law), and are their methods of operation acceptable to the ʿulamāʿ (religious scholars) and the ummah (the wider Muslim community)?
Western economics often purports to be universally applicable, reflecting the assumed value-free and culturally independent nature of its methodology. At the policy level, however, experience from many parts of the world indicates that such assumptions are simplistic, if not completely misleading. Yet the universality of economic epistemology is seldom questioned in the West, but it is in the Islamic world, where the subject has its own axioms. The school of Western thought known as institutional economics has perhaps a more relevant approach for dealing with Islamic societies. Its leading advocates, Thorstein Veblen, Wesley Mitchell, and Gunnar Myrdal, did not concern themselves with Islamic societies, though Myrdal, in his classic study, Asian Drama: An Inquiry into the Poverty of Nations (London, 1968), demonstrated an awareness of the issues.
Institutionalists believe that the political and social structures of a country influence how its economy works and that other disciplines, including law, sociology, and anthropology, are relevant to economic problems. A neoclassical approach which tries to isolate demand and supply from the market environment in which they operate is not very instructive in Islamic societies. Indeed, excessive abstraction may not be very fruitful in any social context. The institutions involved in economic policy formation or its execution are staffed by people with beliefs and values. Simplistic economic models which assume so-called rational maximizing behavior fail to explain much of what is actually taking place in particular economies, where after all it is social beings who are the economic agents, not impersonal mechanistic forces.
Islamic Financial Administration
There have of course been institutions concerned with the collection of taxation and the disbursement of the proceeds since the time of the Prophet. The Bayt al-Māl is the institution with traditional responsibility for the administration of taxes. Its role and responsibilities with respect to the Muslim community are broadly defined, and there is no exact equivalence in modern societies. One function was that of Bayt al-Māl al-Khāṣṣ, literally, the royal treasury or privy purse. This was concerned with the management of the finances of the caliph (Ar., khalīfah), or ruler, including the disbursement of funds to cover his personal expenses. The Bayt al-Māl al-Khāṣṣ was also responsible for the upkeep of palaces, the salaries of the royal guards, gifts to foreign rulers, and the maintenance of the ḥarīm (harem, the royal ladies- in-waiting).
The finances of the Muslim community were administered separately from those of the royal household through the Bayt al-Māl al-Muslim, which was often administered from buildings adjacent to the chief national or provincial mosque, and the work was supervised by the religious authorities. Responsibilities were wide-ranging, from public works such as the construction and maintenance of roads and bridges to social expenditures which were designed to help the poor and needy. The latter was financed with revenue from the zakāt (the Islamic taxation on wealth). The ruler could not profit from this, as the proceeds were earmarked for socially worthwhile purposes.
The Bayt al-Māl performed some of the functions of a modern central bank, as it acted as government financier, but it was not concerned with the management of financial intermediation or currency issue. It could undertake most of the essential public financing required in societies where exchange was based either on barter or the use of precious metals, such as silver and gold, as mediums of exchange. The Bayt al-Māl, however, was not involved in deficit financing, which would have been questionable from the shari’a point of view, as it usually involves the issue of bills bearing ribā (interest), which is unacceptable under Islamic law. Such limitations were not a constraint in preindustrial economies, but clearly it meant that the ruler and the ruled had fewer economic options than in Western societies. Modern Islamic economists argue that the constraints imposed by the Bayt al-Māl practices and procedures were both desirable and justified. The institutional framework was appropriate for an Islamic society, and its workings reflected Muslim values and aspirations.
Management Of Shared Productive Resources
Islam recognizes the private ownership of property; indeed, there are well-defined laws governing the inheritance of property which are clearly set out in the Qurʿān itself. However, there has always been provision for the voluntary transfer of land and other privately owned assets to a waqf (charitable trust), and such transfers have been actively encouraged throughout Islamic history. The assets transferred are administered by the waqf on behalf of the Muslim community as a whole residing in a particular area or state.
Typically the land transferred was used for the construction of mosques, schools, health facilities, or other buildings which served the local community. Waqf land could also be rented out and the income used for the payment of teachers salaries and religious scholars. Rental income could be used directly for socially beneficial purposes, including helping the poor and needy. Sharecropping arrangements sometimes stipulated that a proportion of the crop would accrue to the tenant and his family, but the rest might go to support sick and disabled Muslims who were unable to work. Hence there was basic social-security provision for the Islamic faithful, independent of family and kinship connections.
In Islam, land and other resources represent the bounty of Allāh. They are to be used and not squandered. The emphasis is on the productive use of what Allah has provided. Those concerned with the administration of a waqf have a duty to see that waqf property is put to good use, and tenants on the property are expected to work effectively. In many contemporary Islamic states responsibility for waqf property has been taken over by a government ministry. In Saudi Arabia, for example, there is a Ministry of Pilgrimage and Endowments, which has a deputy minister responsible for waqf. In some states this responsibility resides with the Ministry of Religious Affairs, and in others with the Ministry of Justice, where there are specialists in shari’a. Occasionally, as in Iran under the shah, responsibility for the management of waqf lands and property remained with the religious authorities in control of the mosques. This gave the religious leaders considerable economic power, which they resisted giving up even when the Islamic republic was established.
Secular Economic Influences
During the nineteenth century the influence of Western ideas steadily increased throughout the Islamic world, and commercial laws modeled for the most part on the British, French, and Dutch equivalents were introduced in many countries. Government ministries were modernized and restructured, but usually this was associated with an increasing role for the state, as it took on new economic functions. The changes in the organization of government were not challenged by the local Muslim populations on religious grounds. The changes were seen as part of the modernization process and not as secularist trends. The new commercial codes existed in parallel with the shari’a, and they did not replace them. Often the new laws applied to trade with foreigners as the economies were opened up, and frequently even local business was conducted by foreigners. As far as the mass of the Muslim population was concerned, the new laws were irrelevant; they governed the dealings of the infidel, not their own lives.
The organization of government economic ministries became more formalized as contacts with the industrial powers increased, and many Muslim states became European colonies. State expenditure increased substantially in the nineteenth century, usually outstripping tax revenues, and as a consequence debt finance became a major preoccupation of treasury officials. The Ottoman government in particular incurred substantial debt, not just to European governments but also to private foreign financiers. In some respects its situation was similar to that of contemporary Third World debtor nations, with Ottoman bonds and bills trading far below their face values in international financial markets. This of course raised questions with implications for Islam, as borrowing by issuing interest-bearing bills and bonds means in practice dealing in ribā, and profiting from bond-price movements may amount to speculation or even gambling. Under Islamic law gharar (speculation) is ḥarām (forbidden). This government borrowing problem has been solved today by the development of sovereign sukпk securities which serve the same purpose as bonds but pay non-interest returns based on rents or profit sharing, and are asset-backed.
The Ottoman authorities were under severe pressures from their European creditors and as a consequence were driven to compromise on matters of principle. Under a law passed in 1887 interest was permitted, as long as it did not exceed the principal of the loan. This was a highly dubious interpretation of sūrah3:130 of the Qurʿān, which states, “O ye who believe, devour not usury doubled and multiplied.” This verse makes no mention of the principle. Some jurists have interpreted it to mean that compound rather than simple interest is ḥarām, but both were permitted in the Ottoman Empire by the nineteenth century, although under the 1887 act domestic interest was subject to a ceiling of nine percent. It is not clear how this figure was arrived at. Modern fuqahāʿ (Islamic jurists) generally regard all interest as ribā.
The extent of Western secular influence was most strongly manifest in Egypt, where there were separate courts established for non-Muslim foreigners resident in the country. These courts dealt with both civil and criminal cases and were called to make judgments in commercial cases involving payments, defaults, and false disclosures by parties involved in trade. The shari’a law is very clear on such matters, but Islamic fiqh (jurisprudence) was ignored when foreigners were involved. With the 1952 revolution these separate courts were finally abolished as an unacceptable inheritance from the Ottoman “capitulations” that permitted European officials to protect and impose legal sanctions on their own nationals. Egyptian President Gamal Abdel Nasser saw this as an infringement of national sovereignty. Modern Muslims view such practices as a violation of the sovereignty of Islam.
Institutional Development
The expanding role of the state in Islamic economies necessitated the enlargement of government ministries of finance and agriculture and led to the creation of new ministries dealing with planning, industry, petroleum, tourism, and other economically important activities. Modern economies are quite different in their scope and nature from the type of agricultural and trading activity that prevailed at the time of the Prophet more than fourteen hundred years ago. It is only in the past fifty years that Islamic economists have sought to discover how the principles of shari’a could be applied in such fields as macroeconomic policy, project appraisal, accounting, and national planning.
The introduction of fiqh into these new areas has raised many questions. The debate is ongoing, and many issues remain to be resolved. Shūrā (consultation) between government and Muslim populations is needed to determine how policy should evolve, and the ʿulamāʿ and increasingly educated Muslim professionals are involved in this process in most Islamic states. Exactly what is ḥarām and what is ḥalāl (permitted) in modern economies with increasingly sophisticated financial and commercial systems is often far from straightforward.
Macroeconomics policy has Islamic implications, for example, as excessive demand can result in inflationary conditions that can destroy a financial system based on murābaḥah (funded trade) and muḍārabah (equity participation). It also raises the issue of interest to compensate for inflation that most fuqahāʿ would still regard as ribā. Nevertheless excessive constraints on demand can result in an underutilization of capacity, a waste of resources, and unemployment. This can result in ẓulm, a term which refers to inequity, injustice, exploitation, oppression, and wrongdoing. In a recession induced by government in the interests of the control of inflation, it is usually the weak and marginal employees who are the first to be dismissed. If the Islamic community or ummah suffer from such policies, this is intolerable.
Economic planning is much less in vogue since the collapse of the centrally planned economies of Eastern Europe, but in most Muslim countries there are planning ministries, and national plans are produced to cover each five-year period. In many Muslim countries the plans are a legacy of the nationalistic, and in some cases socialistic, post-independence period. The ʿulamāʿ have often been unhappy with the plans, as there has been little shūrā outside government circles. Infrastructure and industrial projects have frequently involved the employment of large numbers of infidels from outside the Islamic world, and there has been unease concerning the social and cultural impact of these employees.
The new industries have often been a threat to the traditional craft and trading activities which are highly regarded in Islamic societies. The Qurʿān itself has much to say on fair-trading practice. Dealing in commodities, as opposed to mere monetary transactions, is regarded as a productive activity, according to sūrah2:275: “Allah hath permitted trade and forbidden usury.” The bazaar and souk trading economies have been undermined by the growth of employment in the modern sector, which has benefited from government subsidies, protectionism, and artificial pricing policies. Finance has been made available on generous terms to the modern sector, while the traditional sectors have been starved of funds. This has raised the price of bazaar finance, opening up the whole issue of usury. In such circumstances it is hardly surprising that the bazaar merchants in Iran were among the most fervent supporters of the Islamic revolution. Some Islamic economists are critical of free trade, however, because of the unfair practices often used, and would like to see the institution of the ḥisbah (consideration) revived, an institution that traditionally regulated markets to ensure transactions complied with shari’a.
The Example Of Insurance In Islamic Business Institutions
Islamic economic axioms may have had their origins over fourteen hundred years ago, but it would be incorrect to conclude that they are frozen in history and cannot be adapted to changing circumstances. Modern Muslim economists recognize that the needs of business have become more specialized and sophisticated, and such services as insurance coverage are quite reasonably demanded. As the morality and legality of insurance has been a matter for shari’a scholars, it is interesting to consider how ideas on this type of institution have developed in recent years.
There are several reasons for the shari’a prohibition regarding conventional insurance. The first relates to the operational practices of the institutions providing insurance, as the money received in premiums is often held in interest-bearing bonds, the maturity of which is designed to match the anticipated liabilities of the insurance company. This applies particularly in the case of endowment policies on a fixed-term basis although the holding of sukпk could be an acceptable alternative. The second reason is based on a fundamental objection to all forms of life insurance. Life is the gift of Allah, not of man, and insurance policies which pay out on death amount to gambling with life. Relatives may benefit, but such a lottery only tempts salary earners to avoid making proper provision for their families in life. It also undermines the ummah. Fellow Muslims have a duty to take care of those in need through almsgiving and zakāt. As life insurance eliminates the need for this, it is morally and socially corrupting.
A third objection to insurance contracts is that they involve gharar, a wager on risk or a form of speculation or gambling. If insurance is taken out against theft, for example, the payment is made only if the crime actually occurs. This could encourage fraud. Furthermore, there is an element of jahālah or uncertainty inherent in the contract. If the good is recovered, then the payment may be less or not made at all. Much will depend on the state of the recovered good, in particular the degree of damage. As this cannot be known in advance at the time of the initial contract, then that contract must be void. The Qurʿān (2:282) stipulates that all contracts should be written down: “O ye who believe, when ye deal with each other in transactions involving future obligations in a fixed period of time, reduce them to writing.” Exact terms should be agreed in advance otherwise one party may be defrauded by the other.
An Islamically acceptable alternative is available, however, as modern Muslim economists have recognized that there is a need for some types of insurance provision, and only life insurance is completely inadmissible under the shari’a. This alternative is referred to as takāful, which can be used for commercial insurance, or indeed even the type of insurance that life policies provide for, as this is referred to as “family takāful,” the emphasis being on the protection of dependents. There are several fatwās in Islamic jurisprudence that state that insurance conducted through takāful structures is permissible providing the following conditions are adhered to:
- First, companies offering insurance must be organized so that the premiums paid by the policyholders are separated from investments by shareholders to ensure that the latter do not profit at the expense of the former. This can be achieved by having the insurance company organized on a mutual or cooperative basis, although it is now permissible for takāful operators to organize as companies provided there is no co-mingling of investors’ funds with the premiums paid. The mutual insurance company becomes a type of solidarity fund for the Muslim ummah, the participants in which are basically helping each other.
- Second, risks are shared and thereby reduced for each participant, not actively sought.
- Third, the obligations and liabilities of policyholders should be fixed and written down at the outset. There can be no unlimited liability as with the underwriting syndicates in London which are composed of the Lloyds “names.” The implication is that there is a ceiling on what can be covered, and this should be closely related to the value of the goods being insured.
International Islamic Institutions
The Organization of the Islamic Conference is the major intergovernmental institution in which all the Muslim states are represented. Although primarily a political forum, it also serves as an important body for the exchange of economic ideas. The institution became increasingly active in the late 1960s, and it was responsible for the founding of the Islamic Development Bank in 1974. International humanitarian issues affecting Muslims are discussed, and representatives from the Red Crescent, the Islamic equivalent of the Red Cross, have attended some of the meetings. There is a solidarity fund, which disburses grants rather than advancing funds through murābaḥah and muḍārabah, as is the practice of the Islamic Development Bank. The poorest Muslim countries, such as Bangladesh, Afghanistan, and Somalia, have all been beneficiaries of these grants.
At the meetings of the Islamic Conference international issues are discussed at heads-of-state level, but it is the sessions involving finance ministers that are primarily concerned with economic matters. The conference has a distinctive contribution to make on questions, such as Third World debt, which have deeply worried many Muslim states. The cause of the payments difficulties is seen as the ribā-based nature of the international financial system, which imposes unfair interest burdens on many developing countries. Swapping debt for equity appears at first sight to be an acceptable solution, as muḍārabah funding can replace ribā finance. There is some caution over this, however, if it means the transfer of ownership of assets in Muslim debtor nations to the control of infidels.
An Islamic worldview is emerging on the problems facing the international economy, and although there is no definitive agreement on solutions, there is a growing consensus among Muslim economists on the way forward. There are several basic principles in Islam which indicate the type of approach to be taken as far as the Muslim world is concerned. The first is the principle of tawḥīd (divine unity). This recognizes the continuing involvement of Allāh in all affairs, and it means that Muslims should follow carefully the holy texts. The ultimate aim of development is not material but spiritual, the attainment of maqāṣid al-shari’a, the goals of Islamic teaching and the law of Allah. Without this, sociopolitical discontent will intensify. Material prosperity can increase discontent, not reduce it. The real challenge is to create conditions where all members of the ummah can realize their human potential by serving Allāh.
The second concept is that of the khalīfah (successor), that the human being is the vice-regent of Allah on earth. Humans are responsible for the efficient and equitable management of the resources with which Allah has endowed the world. The believer has a duty to ensure falāḥ, the well-being attained by the satisfaction of both the material and spiritual needs of the human personality. This goes beyond the basic-needs approach increasingly stressed by such Western development institutions as the World Bank. The emphasis is on the responsibility of individuals and not merely their requirements in terms of money and possessions. The important matter is to ensure that the members of the ummah are in a position to exercise their responsibilities; in other words, the stress is on the need to facilitate, not mere provision.
The third principle is that of justice, ʿadālah. Socioeconomic justice does not mean equality of material consumption, as this would at best constitute a mere earthly goal. Rather it means the elimination of exploitation and oppression which prevents the believer from exercising his responsibilities in fulfillment of the will of Allah. Oppression of the ummah in any part of the world is intolerable, whether in Palestine, Iraq, Chechnya, southern Thailand, or the Philippines. The strength of feeling on such matters at meetings of the Islamic Conference should not be underestimated.
Islamic Economics
703 – 001
Last Updated: 12/2021
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