Saturday, July 09, 2005

Economics from an Islamic perspective


Looking at economics from an Islamic perpsective requires some degree of trustworthiness. Many people want to profit from the excercise only to find cut and paste most convinient. A`lot is lost on fiqh and fiqh dependent content. And new breakthrough is hard to find.

Many have jumped into the Islamic banking bandwagon. But it's the right thing to do. Banking and economics are not like law and medicine. Unlike banking and economics, the latter has less is common. To give an extra attention to banking is only a matter of strategic mportance. By doing so, in no way Islamic economics is put to death.

But examining Islamic banking closer must require greater economic analysis. One concerns the theory of capital. Murabahah financing has somewhat profited by way of time i.e. waiting. What the fuqaha has to say about making money on time?

The fuqaha may not have anything to say about time value. Don't blame them. They are more concern with Shariah value of actions. This is where Shariah and economics or simply law and economics becomes an important ingredient in the study of Islamic economics.

Islamic economics seeks to examine the behaviour of man in the market place, his likes and dislikes and how these tendencies have impacted his way of conducting economic activities.

The problem at hand is how is Islamic economics defined? Or how to best understand Islamic economics as field of study. Or a school of economics? One way is to take a look at the concept of scarcity. This is where the study of economics begins. This is also where Islamic economics can virtually benefit from neoclassical economics. It's like the pre-Islamic Shura system that the Prophet Muhammad (pbuh) recognizes and absorbed into the Islamic Shariah.

Islam has no objection to the concept of scarcity because scarcity is a fact of life. It exists when the necessary resources for producing things are not enough to satisfy all wants. Scarcity to an economist is like gravity to a physicist. It is a fundamental principle in the study of economics. Economists say that scarcity arises when available resources are not sufficient to fullfill human wants. In other words, economists have made two general assumptions about the universe and mankind, namely:

a) Assumption about the universe – Limited resources
b) Assumption about man – Unlimited human wants

Islam does not see the above assumptions are false and evil. In fact Islam recognizes scarcity as nature’s way arising from the two inherent conflict between wants and ability. The limited resources assumption is made to show that man’s ability to exploit resources is limited by his knowledge. In this manner economics looks at relative scarcity and not absolute scarcity. The same applies to Islamic economics. There is no absolute scarcity in Islam because the Quran says:

“It is Allah Who hath created the heavens and the earth and sends down rain from the skies, and with it bringth our fruits wherewith to feed you; it is He who hath made the ships subject to you, that they may sail through the sea by His Command; and the rivers (also) hath He made subject to you. And He hath made subject to you the sun and the moon, both diligently pursuing their courses; and the Night and the Day hath He (also) made subject to you. And He giveth you of all that ye ask for but if ye count the favors of Allah, never will ye be able to number them”.

Islam also recognizes that human desires are not limited. This is further attested by the Quran and Traditions that:

“Surely man is created greedy and impatient” (70:19)“Fair-seeming to men is made the love of desires, of women and sons and hoarded treasures of gold and silver and well-bred horses and cattle and tilth: (3:13)“And you love wealth with exceeding love” (89:20)“He thinks that his wealth will make him abide” (104:3)“If man is given a valley of gold, certainly, he wants the second and third one” (Sahih Hadiths)

Scarcity in Islam is through and through, a tabi’ phenomenon. Therefore, when scarcity exists, nature empowers people to make choices (ikhtiyar) as nothing is available for free anymore. Let’s look at the problem of choice in economics and how they affect our lives.

Economists usually say that with scarcity, nothing can be obtained without costs. Hence economics is a science or art of making choices dealing with the following questions:

· What goods and services people want and how much? This is the problem of the consumer.
· What is the most efficient method to produce goods and services that people want? This is the problem of the firm
· How to reward factor inputs such as labour, land and capital taking part in the production of goods and services that people want?
· How to reduce unemployment and inflation? This is the problem of the government.
· How to promote economic growth given the available supply of labor and capital resources. This is the problem of the market and government.

Making these difficult choices definitely requires knowledge. Making correct decisions based on knowledge defines what the study of economics is all about. The main focus of economic study is man himself. The knowledge he uses to make correct decisions is expected to help him find ways to overcome the problem he encountered in allocating scarce resources. The knowledge sought must give him a sense of certainty since any form of "knowledge" that bound to create uncertainty and doubts would be of no use for him in making the right decision.


In mainstream economic textbooks, the term “economic principle” is often used to mean the fundamental law of economics, which is knowledge itself. In fact, these principles are the well-established economic theories that have passed through numerous tests. They have become economic laws that serve to guide the decision-making of consumers, producers, capitalists, workers, investors and government alike.

However, these economic laws (i.e. economic knowledge) are the product of the intellect (‘aql) alone with the scientific method to dictate what truth is. Although Islam acknowledges the role of the intellect (‘aql) and sense experience as a source of value and knowledge, ultimately revelation i.e. Divine guidance (wahy) is put above them both.

In this regard revelation in Islam, becomes the primary source of economic principles with reason and experience playing the supportive role. The latter is popularly known as economic theory while the former is embodied in the economic system. This means that fundamental laws and regulations governing resource allocation fall under the realm of divine guidance. These fundamental laws are manifested in the Islamic economic system.

In view of the positive attitude of the Quran towards scarcity and resource allocation, it must also be positive about wealth and property (al-mal). Early economists J.S. Mills sometimes defined as a study of wealth. That is people make choices about what goods and services they wanted. People work to earn income and business are run to make profits. In layman perspective, commodities, money and profits constitute wealth of the nation.

But one may now ask - is there a limit to wealth creation? How is wealth creation connected to man’s objective in life, say happiness? Does owning millions of dollars guarantee happiness? According to al-Ghazali, the famous 11th century Islamic philosopher, man can attain ultimate happiness (sa’ada haqiqiya) by attaining excellences (fada’il) in many areas. One is through knowledge (‘ilm).

By ultimate happiness, al-Ghazali does not mean gratification of desires for food and sex, possession of enormous wealth, widespread fame and influence. He does not agree to the general hedonistic view that the aim of human life is to enjoy the pleasure (ladhdha) and delight (na’im) of this world. It is worthy to note that it is not wealth that becomes unacceptable in al-Ghazali’s theory of ethics. It is the love of wealth and acquisition for its own sake (hubb al-mal) that he disagrees with.

In Islam wealth is not seen as the only means leading to happiness; Beside knowledge (‘ilm), al-Ghazali has placed wealth (al-mal) alongside with influence, family and noble birth (i.e. in a religious family) as one of the external goods (al-fada’il al-kharijiyya) leading to ultimate happiness (sa’adat haqiqiya).

To acquire faith through the acquisition of knowledge and building good character, one must posess health, strength, long life and beauty (i.e an attribute that creates a good impression on others). Wealth, according to al-Ghazali is not essential to happiness but only useful to it. In other words, an individual who posses ample wealth should be able to devote more time to knowledge (‘ilm) and action (amal), for he is free from the care of the necessities of life.

In this sense, Islam enjoins wealth creation not for its own sake but as a means to attain peace and transquility from knowledge (‘ilm) and action (‘amal). As such the primodial Covenant (Al-Mithaq) requires him to acquire and dispose of wealth in accordance to the law of God. This law is none others than the economic system. It (i.e. the economic system) spells out the principles of motivation, ownership, decision-making and the mechanisms for implementation that all economic system must addressed in resource allocation.


It means that in Islam, the question of right and wrong in resource allocation and the pursuance of economic stability and growth cannot be settled by a mere appeal reason and empirical observations. Man’s indebtedness to God for creating him out of nothing is symbolised by his total submission and surrender to His Will i.e. al-Shariah Islamiyah by the way on which the economic system is built.

It follows that the meaning of man’s economic existence in Islam is no longer related to scarcity and the problem of resource allocation alone. These are the by-products of hypothetical guesswork without which economists will be left short-handed. As mentioned earlier, Islam does not deny scarcity and the subsequent problem of choice as fundamental characteristics in economic studies. However, it dismisses them as the sole purpose of man’s economic existence.

The next question is why does man in Islam submitted to the rules and regulation sanctioned by God? That is, why must he obey God in conducting economic activities? Why can’t he resort to reason and facts in making resource allocation choices?


The answer lies in the conception of Islam as al-Din. Islam in general means submission. Islam as al-din is also understood as a way of life. Interestingly, one of the meanings of din is indebtedness, i.e. man indebtedness to his Creator. The term din is extracted from the root word dyn. It is this notion of indebtedness that gives deeper meaning to the reason for human economic existence in Islam.

But what is the story behind man indebtedness to God? And what is he supposed to do under such a situation of indebtedness? When a reasonably good man owes someone money, he will not plan to default the loan but to repay it in full. The same applies to a true believer (mukminum), who will definitely pay his debt to God with a true sense of God-consciousness (taqwa)..

According to al-Attas, in Islam man is indebted to God, his Creator and Provider, for bringing him into existence and maintaining him in his existence. Man who once did not exist is given life and existence by God.

On this point, the Quran states, “Man, We did create from a quintessence of clay. Then We placed him as a drop of sperm in a place of rest, firmly fixed. Then We made the sperm into a clot of congealed blood; then out of that clot We made a lump; then We made out of that lump bones and clothed the bones with fresh; then We developed out of it another creature. So blessed be God, the Best to create”. (Al-Mu’minun {23}:12-14).

When man is indebted to God for giving him life, in what way can he repay the debt? As God is in no dire need of anything since He is the Creator and Sustainer, it quite difficult to gauge how can man give his life back to God? Does it mean that man have to commit suicide to pay off his debt?

In Islam, al-Attas says that paying or returning the debt to God means to give himself up in service, or khidmah to Him, to abase himself before Him, to consciously enslaves himself to His Commands, Prohibitions and Ordinances and thus to live out the dictates of His Law.

It is clearly seen now that man’s existence is explained by the debt he owes God and his subsequent enslavement to His law as a means of repayment. Man himself is the object of the debt. In fact the Covenant (Al-Mithaq) that man sealed with God, when He says, ‘Am I not your Lord”, (alastuburabbikum) and man’s true self testifying, answered: Yea!” We do testify (balashahidna), requires man to manifest the Covenant (Al-Mithaq) by way of submitting his desires to His Will (i.e. the Shariah) in absolute true willingness.

The question now - is how this meaning of indebtedness and the concept of Al-Mithaq become significant in explaining the meaning of human economic existence?
Recalling the four basic economic problems of mainstream economics namely, resource allocation, distribution, economic stability and growth, we see the issue is not only about what rules and techniques one can use to solve problems, but most importantly who determines these rules in the first place?

That is, to help solve the pressing problem of poverty, unemployment, inflation, environmental degradation, etc, one’s belief must be based on a strong value system whose basis is divine. In this respect, the mainstream economics did not recognize the role of revelation in determining economic values. It identifies reason and sense experience as the determinant of right and wrong. Economists called these right and wrong as utility and disutility.

It can be seen now that Islamic economics remains the study of choice. Due to scarcity, man has to make choices as he cannot have everything he desires. To make the correct choice, man must driven by knowledge. There are two types of knowledge one can use in making economic choices. The first type is knowledge derived from the Quran and Tradition. This is Divine knowledge and embodied in the economic system. The second type of knowledge is that derived from reason and sense experience known as economic theory. In a sense, economic theory explains and predict but only possible when an economic system is in place.

Islamic banking and financial markets is a specialization in Islamic economics. It deals with the problem of choice dealing with the demand and supply of capital as a factor of production. For example, in sourcing deposits, an Islamic bank cannot use interest (riba) to pay depositors. This is a Divine requirement as Islam prohibits the payment and receipts of interest. However, by using reason and facts, one can further understand and measure demand and supply behaviour of Muslims investors. The demand and supply determinants help explain the factors affecting behaviour of depositors and fund users. These factors can be divinely inspired or simply mundane in nature. For example, zuhd (moderation) tendencies (i.e divine) can increase the supply of capital but an increase in corporate earnings (i.e. mundane) can also increase the supply of capital.

But currently, Islamic banking is driven by credit financing contracted under the buy and sale label. In the buy and sale model, payments are not settled in cash but by deferment with a premium or margin stipulated onto the cash price. One may wonder whether the margin is created by virtue of waiting(i.e. time value) or risk-return and value-added factor. If the former is true, then Islamic banking is a loser. If not, there must be a explanation that makes sense to all.

Source: Saiful Azhar Rosly, Critical Issues on Islamic Banking and Financial Markets, Authorhouse, Bloomington, Indiana February 2005.

3 Comments:

Blogger iryani said...

In the article of “Economics from an Islamic Perspective” you had discussed how to determine the economic system from the Islamic eyes. The writing focused on the scarcity problem as the stepping stone in understanding the beginning of the Islamic economics. Overall, the scarcity in allocating the resources is not newly heard. Even in the background of neoclassical economics recognized the scarcity as one of the main situation that economists needs to dealt with.
Nevertheless, I do believe that before we can talk or discuss about the scarcity, maybe we can begin with the Islamic worldview as the framework of building the economics itself. Neglecting this framework can lead to confusion and eventually driven in the wrong courses or purposes. Many writings in Islamic economics today lack of discussion in the world view of Islamic economics vision. I’m not saying that there are none authors contribute in this area but only few have concerns the urgency of this agenda. Therefore, if you could elaborate deeply on this matter can illustrate a vital point since someone may think that Islamic economics is the best alternative system. Hence, it can help to make the argument in the Islamic economics look more robust and convincing to ponder on.
On the other hand, before going to discuss about the problem of scarcity, it would be useful if the introduction of the philosophical foundations of Islamic economics is extended to synthesize the ideas and needs of the development as to come up with a clearer picture of the system. According to Timur Kuran in his article “The Economic System in Contemporary Islamic Thought” saying that there are three pillars of economics system that required supporting the economy. The three pillars consist the behavior norms which individuals are guided in their economic decisions by a set of behavior patterns derived from Quran and sunnah, second is the zakat which is the tax system forming the basis of the fiscal policy and finally the prohibition of interest which is concerning the basis of the Islamic monetary system. Succinctly, the author in his article focuses in the idea of altruism in which he then tend to incorporated it with the inconsistency of the procedural aspects of the Islamic economy as a whole. Altruism as what he presented is an idea of putting society’s interest before the individual’s interests.
Thus, by briefly discussing about the matters above can help to clarify and wound up the readers about the economics from the Islamic perspective views. This can help to bringing on new ideas as well as generates other positive perception towards Islamic economics.

A’ina Iryani Dol Razlan
G 0333098
MEC.

7:58 PM  
Blogger noor anum sarah bt johar ariffin said...

Islamic Economics differs fundamentally from man-made laws and systems in defining economic problem. It represents the only wholly independent, alternative economic paradigm in the world today. It is based on principles revealed from Islamic sources as norms for human welfare that offer a strikingly alternative set of parameters for economic activity. According to its proponents its offers a comprehensive, coherent and better alternative to those currently in use in Western economics. The Shariah defines certain rules that regulate company structure, effectively preventing abuse and corruption. For instance, Islam forbids monopolies by outlawing the hoarding of wealth (Al-Ihtikar), and eliminates copyright or potency laws that would open the avenue for potential monopolies to develop. Also, Islam protects the ownership of businesses and companies by restricting ownership of companies only to those who contribute both capital and effort to the company or business, thus effectively putting the seal on such concepts as "corporate takeover" from ever becoming a reality. During the height of the great Islamic civilization, trade was among the most important activity in wealth creation. Today in a world that is being rapidly globalized, trade has become even more important, facilitated by the advancements in information and communication technology and the greater capacity and speed of transportation. Whereas in the past trade could be carried out through the barter of goods, the Muslim world would still have to trade with the rest of the world as individual countries or as a regional group or as an Islamic Financial Community.

10:55 PM  
Blogger siti rubiah said...

Islam is a way of life. It covers everything from politics, sociology, philosophy, medicine, and history to economics (you name it!). The author prudently starts of the discussion on “Economics from Islamic Perspective” by addressing the problem of scarcity, that led man to make choices in which issues on knowledge and worldview been incorporated with, and also the question of indebtedness to God. It is interesting to note that even with the existence of main distinction between Islamic and that of conventional economics for instance with regards to the source of knowledge i.e. the former includes Revelation while the later rejects it, as well as the issue of indebtedness to God, both agreed that scarcity is where the study of the discipline begins. As referring to one quotable quote from the article “scarcity to an economist is like gravity to a physicist”. It is indeed a fact of life.

On the concept of worldview, the same thing applies to the conventional where according to Lakatos, they have the hardcore and the protective belt. The hardcore here from Islamic worldview is the Revelation while the protective belt is the reasons and senses. What differentiates Islamic from conventional is that our hardcore is not subject to any changes while theirs did. Theirs can be altered at any time. Our rigidity on the hardcore should not be viewed as the hindrance to the advancement of the discipline rather providing sound foundation to the studies. By right our ‘protective belt’ or reasoning should be designed in reference to the hardcore i.e. Revelation, but sadly to note that some of the current practices today put reasoning on top of Revelation. For example in order to earn more profits, many of the Islamic banks today charging BBA customers with burdensome higher profit rates than interest-rates. And yet claim them promoting justice and providing alternative financing to the public. Perhaps one of the reasons for this malpractice is the lack of understanding on the philosophy and straightly jumped into the practice side (for e.g. banking). The Islamic economics is indeed in dire need of reviews and ideas so that it will not be viewed as merely a patchwork from that of conventional.

4:07 PM  

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