A Vision for the Future of Islamic Economics
9th International Conference in Islamic Economics
9 September 2013
Future Islamic Economics will be calling for five strategic changes in approach: Family rather than the market as the starting point in economic analysis; Cooperation playing a greater role in the economy, complementing competition; Debts playing a subsidiary rather than the dominant role in financial markets; Interest and interest-bearing instruments playing no role in money creation and monetary management; and, lastly, Maqasid based thinking supplanting analogical reasoning in Islamic economic jurisprudence. In what follows I elaborate these points to facilitate your engagement with these challenging propositions.
Family in the Fore
The individual person is born in a family. His/her relationships with things as well as persons and other animate beings originate and flourish towards maturity in familial environment. This brings forth gift relationships and reciprocity before exchange relationships that characterize the market as conceived by economics. Economics as it developed in the Western milieu during the last three centuries lost much by ignoring this fact and focusing exclusively on exchange and market. It lost its humanity. It also lost in terms of realism. There is no reason the values nurtured in family entirely evaporate in the market. Insofar as these values are ineffective and dormant for now, can they be activated and energized? to what effect?
Early writings on the ‘ordinary business of life’ in eastern traditions---Hindu, Buddhist / Confucian and Islamic---suffer less on this count but they remain largely neglected. It is high time the economics profession rectifies this error.
What are the likely outcomes of this radical revision? It is difficult to predict before further research. But a demotion of self interest as the sole motive of economic action seems plausible, creating scope for helping and caring----the other-related motives of action.
Cooperation complementing Competition
This leads us to the next possibility: a restoration of mutual understanding and cooperation in economic activities. A realization by individual economic actors that they owe something to others, a sense of obligation, leading to benevolent /beneficial conduct and a regard for public as distinct from private good….are likely to inspire and motivate economic agents. I am aware of the information problems involved, yet it is hoped the state and other semi-public agencies can meet the information deficit by pooling available knowledge, to an extent sufficient enough to enable joint action.
We have a vast literature on both the above issues, familial ethics inspiring economic action and cooperative instinct in economic agents, produced by anthropologists and sociologists. But these trends of thought are not reflected in standard economic text books. The main reason is economics’ craving for quantification and its marriage with mathematics. The rethinking inspired by the recent crisis is expected to overcome this obduracy. Quantification is welcome, but not at the cost of realism and a human touch. Islamic economists can play a role in the search of a balanced approach. There exist advocates of ‘holistic’ approach similar to those emphasizing ‘communitarian’ ways in contrast to ‘individualism’. The real test lies in building models that not only inspire but work. The design of incentives is the decisive factor. Some Islamic economists try to bring in good in life after death as the chief motivating force. But history cautions against pinning too much hope on that factor. We also must guard against the possibility of those advocating such pious solutions switching over to dictatorial models in response to failures ascribed to human perfidy and short sightedness. Only a firm belief in the nature of life on earth as a test mandating freedom of choice can guard against such degeneration.
Decreasing the Role of Debt
Debt has penetrated all corners of financial relations and monetary management, and almost all debts carry interest. Islam’s prohibition of interest mandates the designing of financial and monetary arrangements that eschew interest. It is possible. Digging into our Islamic heritage Islamic economists have come up with a number of devices that can be integrated together to forge a viable alternative to conventional arrangements that is fairer, poor-friendly and efficient. The core idea is participation and risk sharing. This is hedged by Qard-Hasan with third party guarantee, service charges, and some kind of trade-based financing like Murabaha and Sukuk- Ijarah. The package is capable of handling all kinds of demands for finances, leaving a modest trail of debts that can be contained. With a ban on sale of debt instruments, Islamic sharing-centered arrangements will avoid the fate of conventional finance as exposed in the recent crisis (2007 - ?).
Conventional debt-ridden financial arrangements, with a speculative market for debt-instruments to boost, have played havoc with the economy of man. They are the primary cause of increasing levels of inequality within and between nations. By obliging borrowers to pay back what they borrowed with interest added in an environment characterized by uncertainty that does not guaranty additional wealth creation in all circumstances, the current system empowers capitalists at the cost of everybody else. The pressure for additional wealth creation pushes entrepreneurs to accelerate growth in utter disregard of the planet earth’s ecological health and sustainability of a pollution-free environment. History testifies that the greatest threat to world peace emanates from the unequal and unfair financial transactions between nations. Debt-centered financial system is inhuman, a threat to the planet earth and anti-peace.
Managing Money without Interest
Recently when the Federal Reserve in the US wanted to increase the supply of money, it printed currency notes worth billions of dollars and purchased debt instruments promising repayment with interest. When the new supply of money originating from the central bank ultimately finds its way into commercial banks, they are able to finance business by creating more money---essentially entries in their ledger books enabling the borrower to write checks against them. These days (August 2013) it decided to end its policy of ‘Quantitative Easing’ and started selling those assets (bonds) at attractive prices causing a withdrawal of dollars from all over the world.
Baring differences in some details, monetary management works that way all over the world. Interest is involved in creation of money as well as in its extinction. Almost all money in circulation is interest bearing debt transferring wealth from fund users to the owners of capital. It is not technically necessary for society’s means of payment to play this role.
This is a special gift of capitalism to human society unknown in earlier centuries of human existence. Islamic economists, working under Islam’s mandate to shun interest, have devised instruments that replace interest by sharing in the kit of tools needed for expanding or shrinking the supply of money. Details are available in policy recommendations to the Islamizing regime in Sudan by competent scholars. In nutshell, the central bank will buy financial papers from the state that promise a rate of return linked to the growth of national economy, paying it with newly created money. The central bank will also have the power to supply new money to the private sector against ‘sukuk’ promising a share in profit, and buy shares in commercial banks paying them in newly printed currency. When policy requires withdrawing liquidity from the market, the central bank can sell sukuk/bonds at attractive terms.
Issues in Maqasid-based economic management
It will be appreciated that reliance on analogical reasoning in deciding about novel financial transaction sometime leads to perverse results. Tawarruq, which leads Islamic finance to an undesirable situation in which debts dominate the market, is one such example. An enquiry into consequences (ma‘alat) and a recourse to what Hanafis call istihsan and Malikis characterize as istislah is needed to preserve the capability of Law to serve the objectives ( maqasid ) it is meant to serve. But maqasid based rule making has its own problems that need attention.
Who makes the rules? Since issues relating to financial transactions and the microeconomic and macroeconomic analyses called for, go far beyond the competence of the Shariah advisors of Islamic financial institutions, a much wider participation in the decision making process is needed. Unanimity may still elude us necessitating toleration of dissent and diversity—qualities in short supply amongst us.
Muslim masses feel Islamic banking and finance has not served such goals as poverty alleviation and reduction of inequality in the distribution of income and wealth. Many accuse that instead of setting priorities in the light of Islamic teachings that make wealth a means to universal need fulfillment, Islamic finance too is lead by the greedy whims of the free market, like its conventional counterpart. If these deficiencies are not met, Islamic banking and finance runs the risk of alienation and loss of credibility in its home base. The high hopes raised by the pioneers of Islamic economics like the poet-philosopher Mohammad Iqbal who projected Islamic economics as capable of delivering humanity from the excesses of Capitalism and Socialism by charting a unique middle course , seem doomed in view of the race for emulating conventional modes of finance currently observed in Islamic financial markets.
Call for fundamental research
By fundamental, I mean, in this paper, what is needed to support the five trend setting propositions presented above. I call for research---a fresh attempt to gather data and a re-interpretation of data commensurate with our current needs. Three dimensions of the needed research deserve special attention: historical, empirical and textual. I urge a fresh look at the texts of Quran and Sunnah, seen in their time-and-place context and interpreted in the light of our own time-and-place. All the texts relating to norms of behavior, guidelines for public policy, rules of engagement in market, family and in the committee of nations----in short all the do’s and do-not’ s, acceptable, commendable and disapproved…should be put under microscope afresh, the goal being to envisage a model of economy in twenty-first century that would please the Lord. I also urge my colleagues to have a fresh look at the ground reality----the economic scenario as it obtains today. Do not rely on old descriptions. Have a feel of how people think, gauge their aspirations, be fully cognizant of what ‘is’ before you launch a drive to transform it into what it should be. Last but not the least turn the pages of history, especially Islamic history and examine man’s quest for fairness and Muslims’ efforts to live by Islamic teachings. There are lessons to be learnt, do not miss them.
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