The Myth of Islamic Economic System

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During the glorious period of Islamic history, the economic system followed by Muslims was capitalistic.

The Myth of Islamic Economic System

By Shah N. Khan, Moderator, Pakistan Post - Internet Discussion Group

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The concept of Islamic economic system as some zealots of Islamization of economics talk about, appears to be more like Utopian philosophy inasmuch as they regard alleviation of poverty by fair and equitable distribution of wealth as an objective of Islamic system! Although there is great emphasis on charity and helping the needy and payment of Zakat and distribution of war booty, there are no specific provisions in Holy Scriptures for distribution of wealth on socialist or any other pattern.

Perhaps the most well–known Islamic scholar who wrote about economic issues in the year 1377AD besides other subjects was the Tunisian, Arabic , North African Muslim historian Ibn Khaldun,who has been called "the father of modern economics" by writer I.M. Oweiss.
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Islamic writer (Rasem N. Kayed) opines" 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."

In order to attract rich people from Muslim world,these days many financial institutions in the Western world owned by Non Muslims, offer financial services and products in accordance with Islamic finance.

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The objects mentioned in Holy Quran for taking care of poor and needy could be and often achieved by taxes like wealth tax, income tax import duty etc. over and above Zakat. Much better social security benefits are provided to people in the Western capitalistic countries than most of the Islamic or Socialist countries.

Capitalism Has Been a Dominant Feature of Islamic Economic System

The fact is that during the glorious period of Islamic history, the economic system followed by Muslims was capitalistic. Neither economic thinking nor historical experience suggest that any other social system could be as beneficial to the masses as capitalism, provided laws are enacted and enforced and ethical standards are followed to ensure fair trading practices to protect the interests of consumers as well as the labor and entrepreneurs.And Islamic jurists took lead in deriving the ethical values and principles to check exploitation by the rich. capitalism.

There is consensus amongst Islamic scholars that Islam recognizes and upholds the individual's right to private ownership. The Qur'an lays great emphais on charity and Zakat (a from of property tax), rights of inheritance, honest dealing in trade and contracts, protection of property of orphans and widows and prohibits profiteering, usury, fraudulent dealings besides other unethical business dealings and crimes.

Some scholar opine that Riba (usury), Gharar - "excessive uncertainty", and Qimar (Speculation, Wagering or risky chances akin to gambling) are strictly prohibited in Islamic economics. Lotteries where one loses ticket money is also prohibited. A few orthodox Ulema think Insurance is not permitted.

It is generally agreed by the Islamic scholars that State owns land, most natural resources, as well as other property that can't immediately be privatized. State can give ownership rights of land and natural resources to individuals or institutions by lease or contract.

Quran's Guidance for Economic Actitivities

The concept of Islamic economics evolved in the last century and prior to that ethical values and laws for financial affairs and economic activities were drawn in the light of verses of Quran and Hadiths by different Imams in 7th and 8th centuries (CE).

Shorly before the mid-twentieth century, Scholars began talking about Islamic Economics when interest based international banking became dominant medium of exchange of money in different curruencies and international trade. And they considered that employment of interest in business transaction is prohibited by Quran and Sunnah. Few scholars agree that what is prohibited in Quran like Bible is usury or excessive and wicked charge of increase in principal obtained on loan or credit and not bank interest as regulated by the government.

By the 1970s,"Islamic economics" was introduced as an academic discipline in a number of institutions of higher learning in most of the Muslim world and in the West. However modern Western economic theories and practices are also taught in most of the Muslim world.

Proponents of Islamic economics generally describe it as neither socialist nor capitalist, but as an ideal one with none of the drawbacks of the capitalism, socialism or communism.

Although it seems unlikely to most social scientists, the proponents of Islamic economic system think that by this system the gap between the rich and the poor will be reduced and prosperity enhanced by such means as the discouraging of the hoarding of wealth, taxing wealth (through zakat) and encouraging trade and industries by exposing lenders to risk through Profit sharing and venture capital,discouraging of hoarding of food for speculation,and curbing exploitation by monopolies and cartels, helping poor by interst free loans to start business.

Definitions

Different scholars define Islamic Economic differently. For instance: '"that branch of knowledge which helps to realize human well – being through an allocation and distribution of scarce resources that is in conformity with Islamic teachings without unduly curbing individual freedom or creating continued macroeconomic and ecological imbalances.” (Umar Chapra)[25]

Some authors define it simply as "the study of an economy which abides by the rules of the Shariah"

Classical Muslim scholars

Classical Muslim scholars did however, make valuable contributions to Islamic thought on issues involving production, consumption, income, wealth, property, taxation, land ownership, etc.

Perhaps the most well–known Islamic scholar who wrote about economic issues in the year 1377AD besides other subjects was the Tunisian, Arabic , North African Muslim historian Ibn Khaldun , who has been called "the father of modern economics" by writer I.M. Oweiss.

Prof. Hamed A. Ead of Cairo University, Giza, Egypt compared the theories of Adam Smith who is regarded father of modern economics with the contribution of Ibn Khaldun's and his theories production and other economic activities Both Ibn Khaldun and Adam Smith had stated in their books the importance of production, income and the surplus of it, and most importantly the role of governments and how the wealth and prosperity of nations are enhanced.

Some other scholars attempted to depict Islam as a religion committed to social justice, the equitable distribution of wealth, and the way to uplift the deprived classes, according to Quran and Sunnah. They did not approve existing non-Islamic theories of capitalism and Marxism and described them as cause for economic disparities. This version of Islamic economics influenced the Iranian Revolution and called for public ownership of land and of large "industrial enterprises,while private economic activity continued "within reasonable limits. These ideas paved the way forthe large public sector establishments.

The Arab Scholar Taqiuddin al-Nabhani proposed economic system (Nidham ul-Iqtisad fil Islam (The Economic System of Islam) (1953)) combined public ownership of large chunks of the economy (utilities, public transport, health care, energy resources such as oil, and unused farm land), with use of the Gold Standard for currencies in Islamic world and specific instructions for the gold and silver weights of coins. This he opined would "demolish American control and the control of the dollar as an international currency."

International Conferences on Islamic Economics

The first international conference on Islamic economics was held at the King Abdulaziz University in Jeddah in 1976. (Since then there have been conferences hosted by the Islamic Development Bank in Islamabad (1983), Kuala Lumpur (1992), Loughborough (2000), Bahrain (2003), Jakarta (2005), Jeddah (2008), Doha, Istanbul in 2011, Istanbul(2013) and Doha (2015).

The contribution of such conferences does not seem to be fruitful and no real economic development is seen in most of the Islamic world except those endowed with wealth of Oil. But their wealth is being spent on ventures which do not help in development of commerce and industries.

Islamic Banking

During the era of Zia-ul-Haq, several Islamic economic concepts and practices were introduced into Pakistan's economy, as part of Zia's Islamisation reforms. But they did not prove efficacious.

Since last few decades Islamic banks have grown recently in the Muslim world, but constitute a very small share of the global economy compared to the Coventional banking. They do not employ interest in their operations but may grant loans or invest in different ethical projects on profit and loss sharing basis.

Muhammad Akram Khan notes that many universities in Muslim countries offer courses on conventional economics and finance but very little on Islamic economics and finance. He quotes an Islamist writer (Rasem N. Kayed) outraged by this "negligence" but notes that:
"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."

Criticizing the importance of the approval by Islamic scholars for Islamic banking transactions (or "fatwa shopping"), journalist John Foster, quotes an "investment banker based in Dubai" as saying,
“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah compliant]. If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”(Source wikipedia)
Foster explains that the fee for services provided by "top" scholars is "often" in six- figures, i.e. over US$100,000.[85]

Islamic Banks in the Western World

In order to attract rich people from Muslim world,these days many financial institutions in the Western world owned by Non Muslims, offer financial services and products in accordance with Islamic finance. For example, Chancellor Gordon Brown in 2003 introduced legal changes that enabled British banks and building societies to offer so-called Muslim mortgages for house purchase.

In 2001, the US's first Sharia-compliant home financing institution, Guidance Residential, was launched based on the concept of diminishing musharaka, growing to the largest Islamic home financing company in the US. During Gen Zia' regime House Building Finance Corporation also abandoned interest operation. Under these Sharia compliant housing scheme the lender becomes co-owner of house entitled to rent that keeps on reducing as instalment of purchase price are paid. The rent varies according to location and the borrower together with instalment of purchase price ends up paying much higher amount then say interest of 9% to 12% on the amount of loan.

In 2004 the UK's first standalone Sharia- compliant bank was launched, the Islamic Bank of Britain. In 2006, the Bank of London and the Middle East (BLME) was founded, and as of July 2013 is the largest Islamic bank in Europe.[76] Several banks offer products and services to UK customers that adopt the Islamic financial principles; such as Mudaraba, Murabaha, Musharaka and Qard.

In the Islamic finance sector over 300–500 billion dollars were invested by the year 2006, compared with 200 billion dollars in 2004. Islamic commercial banks and investment funds number in the hundreds. And because it it provides great profit margin than conventional bank interest, many Western financial institutions offer Shariah compliant products, including Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS. In 2008, at least $500 billion in assets around the world were managed in accordance with Sharia laws and the sector was growing at more than 10% per year.

Criticism

Islamic economics has been criticized for its alleged "incoherence, incompleteness, impracticality, and irrelevance;" driven by "cultural identity" rather than problem solving. Some Non Muslim economists have dismissed it as "a hodgepodge of populist and socialist ideas"

Critics say that it is little more than a mimicry of conventional economics embellished with verses of the Quran and sunnah, that its prescriptions are an "invented tradition" that has "been spared critical scrutiny out of ignorance and blind faith. Many economists consider it as "too unrealistic to threaten prevailing economic structures".

According to leading economists of the world, it is an economic axiom that the conflict between the principle of capitalism and socialism is irreconcilable, because of opposing approaches to ownership and control. Either the consumers' demand as manifested on the market decides for what purposes and how the factors of production should be employed or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other.

>At best the Islamic economic system can be considered as application of moral standards of Islam for trade and industry mainly to capitalism, while government owns most natural resources and large industrial projects such hydro eletric dams, railways, airlines etc. and establishes government controlled monopolies in public sector for the prescribed means of production and services.

This article is based on information gathered from various sites on Internet.


Shah Nawaz Khan retired as Executive Director of State Life Insurance Corporation. He is now editing the weekly ezines that go to thousands of people around the world. You can post your views in Pakistan Post the leading discussion group of Pakistan.