Institutional Islamic Economics and Finance

Ahsan Shafiq, Ahsan Shafiq

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000567441
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

Institutional economics claims that institutions and policies rather than the size of labour force, technology or capital investment are pivotal for growth or under-development. In this regard there are two kinds of institutions: external institutions expressed in the form of laws, organisations, regulations, companies, banks and the like and internal institutions, which are found in the hearts and consciences of individuals.

Against this backdrop, this book acquaints readers with the basic concepts related to institutional economics. It then brings to light the theoretical concepts related to the institutional perspectives on Islamic economics, particularly highlighting areas where Islamic economic institutions lay at the crossroads with conventional ones. The book also ref lects upon the organisational arrangements that comply with the basic tenets of Islamic institutional economics. Further, it brings a collection of real-world case studies into discussion to show the models of Islamic institutions that are pragmatic in today's business environment. The book contains novel dimensions on the subject, includes conceptual debates as well as practical examples and explores hot topics such as waqf and fintech from an Islamic perspective. This is the first book to exclusively cover this topic and is written by well-known and respected international economists from the field.

Since the book is written in an accessible style and the concepts are expressed in plain language, it will find an audience among academics, researchers and students in economics and Islamic economic studies, as well as policymakers and professionals engaged in the Islamic finance industry, seeking to make their services and products conform to an Islamic institutional perspective.

1Institutional Structure of the Islamic Economic System

Monzer Kahf

DOI: 10.4324/9781003000914-1

Every economic system has its own institutional structure that is built in a way to serve its objectives. Objectives of the economy are common across all economic systems. However, the varying emphasis on the two objectives of efficiency in creating wealth, and justice in the distribution of wealth and income across different systems is what makes these systems distinct from one another. The Islamic economic system further adds to the aforementioned two objectives the aspect of dignity of human beings, men and women. Hence, Islamic economic system does not accept the production or creation of wealth at the expense of justice or at the expense of dignity of the human being. Rather, the Islamic economic system considers promoting the dignity of human beings as a positive objective for which economic resources are used and well expended. This issue is not taken seriously in both capitalism and socialism. In both systems human dignity is left to social development only. Although the dynamism of both systems is gradually driving them towards recognising the issue of human dignity as an economic problem that deserves resource allocation, theoretically, the Islamic economic system has preceded them in allocating resources to maintain and promote human dignity and life. This is, clearly, evident in the institutional structure itself. The institutional structure is created by the Islamic system to achieve these three objectives. In order to comprehend the way of the Islamic economic system in working towards these objectives we need to go through detailed dimensions of this system that are explained below.

Property Rights

Property right is the cornerstone of the Islamic economic system. Property right means that there is respect for private ownership, and it has its structure, existence, promotion and protection in the system. In addition, we also have public property, social property and waqf property, so we have four kinds of property in the system. It is important to emphasise the idea that the respect and the protection of property rights is extremely important for any system. In the Islamic system, we do have private property that is the cornerstone of production and exchange. In a similar way we also have public property that is extremely important for the system and has its own objectives and boundaries. Therefore, it does exist side by side with the private ownership, although the main drive for production, exchange and development in the Islamic system comes from the private property.

The most important institution that makes the cornerstone of the Islamic economic system is private ownership. Public ownership is also important and has its own domain, on which private ownership is not allowed to transgress. We also have a concept of a societal ownership where even the public ownership should not transgress because these are the right of the local community itself. In the past, these rights of communities were expressed in pasture land, forests and land that gives ventilation to the population to local people, e.g., recreation and common interest areas. Their roles and boundaries as well as the need for their protection have been specified in the Islamic system. It is essential to protect them against public authority, in as much as it is essential to save them from private aggression. This is what used to be called the community property and is referred to in the Hadith of the Prophet sallallahu alayhi wasallam, which mentions three things for which the community shares their ownership. The fourth kind of ownership is waqf. Waqf, definitely, is not the main tool of development. Waqf is one of the concepts that are very important in the Islamic economic system. However, the institution of waqf is not the institution that is in charge of development and growth. Instead, it has its own role and functions as a major component of the third sector, the non-profit sector which always helps smooth any bumps and inequality in the process of production and exchange. Unlike what many people think Waqf and Zakah are not the most important institutions of an Islamic economic system. They are important, but they are definitely not the drivers of the system, nor the driver of production or development activities in this system.

The Holy Quran tells us that all property belongs to God, but at the same time, at many instances it refers to the property as ‘your properties,’ ‘their properties’ or ‘our properties,’ hence pointing to the fact that it is the property that God assigns to the individuals, and therefore both private and public ownerships are important. The market functions essentially through the concept of private ownership or private property.

There is another important institution of the Islamic economic structure which is also related to private ownership and derived from its definition as an exclusive right and authority over a thing to do whatever you like to do with it. This second major institution of the Islamic economic structure is economic freedom; it is, in reality, with no limit albeit we frequently hear that there are restrictions on this freedom in the Islamic economic system. No, there are none, even when one uses own property in violation of the moral norms of the Islamic religion.¹

In reality, you can do whatever you like with your property, including destroying – destroying one’s property is wrong but one can should he wants. There are legal means through which the stakeholders, e.g., community and family, can limit the ability to destroy one’s own property, but let us put it this way, as long as you don’t do a wrong thing, there is no limit to your economic freedom. Therefore, on the disposition of your property, you can do whatever you like to do with it, including make it to grow or keep it also idle. This is one’s right irrespective of the fact that one is discouraged from keeping it idle in any system. Some detailed ideas are mentioned in the fiqh on matters like incomplete ownership or a property that is lost, etc. These can be explained at length at a different opportunity in the future.

The Shari’ah strictly and clearly defines the ways of acquiring a property. It can be acquired through an exchange contract, and the exchange contracts are open and completely free for all persons. It can also be acquired through gifts and charity or through inheritance. Inheritance represents a unique expression of the combination between the idea and the principle which is fundamental in our religion and which states that we all belong to God, so do all our properties one the one hand and private ownership on the other hand. Yet, this is reconciled with private ownership and its strong protection of private ownership. The Islamic inheritance system really tells us the secret of reconciling these two concepts and putting them together. It is God who is the True Owner of us and what we own, and it is also God who assigns this property to us, individuals, as long as we are alive, this ownership is limited by the life span only. Although He gave it to us by His grace, it becomes our property. However, the moment one of us expires, the property goes back to the True Owner, God. This was explained by Abu Bakr, the first companion of the Holy Prophet sallallahu alayhi wasallam, who is mentioned in the Quran itself in the words لِصَاحِبِهِ‎ يَقُول ُ إِذْ “when he said to his companion” (Al Quran, 9:40). Abu Bakr explains that the property returns to God upon the death of the person and He distributes it as He pleases but has also given us an opportunity to distribute, the one third of it, maximum, to be distributed even after we die, as a charity from God. Abu Bakr said that this opportunity to dispose of one third of our estate after death is not one of our rights at all because our authority over the property ends at the incidence of death. God gave us this one third and allowed us to dispose of it, our way, only as a charity. He made a sadaqah to us to be able to dispose of up to one third of the property that we owned when we were alive, dispose of it after death. In other words, without this exceptional Sadaqah we have no right to make Wassiyyah because by the incidence of death our rights and authority over the property expires too. This is quite different from the basic Western laws’ philosophy of private ownership which is absolute and extended to after death whereby an owner can determine how his\her property is to be used while she\he is underground.

The entitlement right is the fourth way of acquisition of a property. The entitlement right means that if you own a property, any growth or increase in that property also belongs to you and cannot be claimed by anyone else.

The acquisition from free property is the fifth cause of property acquisition, and it has certain conditions and whatnot but definitely you can go to a river and take a pitcher-full of water from the river, an acquisition from the free property that is permissible and that is one of the ways of acquiring a property.

Compensation of injury in the tort system, the Islamic tort system, is also detailed in the Qur’an and by the Prophet sallallahu alayhi wasallam. The tort system is the last mean of acquiring a property. The tort, here, is not in exchange of a property, it is in exchange of a bodily injury, whatever the kind of bodily injury which is known in the Sunnah of the Prophet sallallahu, alayhi wasallam under the title of civil liability.

The important thing however is that none of these is an added condition in a contract, since it has no reality like increments as in a debt, because increment in a debt does not exist and this is why it is not a way of acquiring a property. Accordingly, even if one puts in a contract a condition that a debtor, who has borrowed a thousand, has to pay back a thousand and one hundred, such a condition is annulled and not acceptable. This condition is null and void completely and is not recognised at all. Any such conditions that give a property that is not in fact generated or really created are neither acceptable nor permissible, and they are not recognised as a way of acquiring property.

Exchange and Contracts

The second institution of the Islamic economic system is the exchange and contracts. The Qur’an emphasises contracts and the Prophet sallallahu alayhi wasallam has also repeatedly emphasised contracts. At several instances he resolved the disputes between people based on the contracts that existed between them. So, contracts need to be implemented, fulfilled and respected, and they are the main way of acquiring property. As a matter of fact, about four fifths of the fiqh is Fiqh al Mu’amalat, the fiqh of exchange contracts between people. Of course, the exchange contract requires aptitude. The exchange contracts are contracts that require two wills, unlike gifts or charity that requires one will. When two free wills meet together that means there is an added value created. Exchange contracts create value, whereas coercive contracts do not create value because a free will does not accept to make the exchange unless it benefits from it. If it doesn’t benefit from it, why would it take the effort and spending the calories of signing a contract. Therefore, exchange contracts are the major means of acquisition and they create added value.

Economic Freedom

The economic freedom is wide open in the Islamic economic system. It is a complete authority over one’s property, i.e., one can do anything they want with their property. Freedom to roam on earth and seek sustenance from God is a fundamental freedom we all have. We are rather required to enjoy this freedom of roaming on the earth, to acquire sustenance or rizq. A lot of emphasis has been laid on this concept of avoiding and disliking any restrictions on the transactions or on the market in the Islamic system and will be discussed in the next institution. The Prophet sallallahu alayhi wasallam, when he established the market in Madinah, said that there will be no restrictions or any other limitation on suppliers and demander, buyers and sellers in this market. He also said that there will be no taxes on entrance or exit, and people could do whatever they liked in it, as long as they observed the moral and legal norms of transactions. Observing morality is not a restriction but a fundamental reason to make the exchange successful and to make the freedom really meaningful and works for everybody. All people are free under the law, regardless of color or gender, or religion also, unlike what some people may think. People are required and encouraged to provide for themselves as well as their families using their economic freedom and by putting in efforts to produce for themselves. People also have social financial and economic responsibilities that they are called on to fulfill using economic freedom and exchanges in addition to their own resources to generate and increase their income and wealth. Islam also urges people to contribute to the society. As it is generally known that the Prophet sallallahu alayhi wasallam mentioned about the upper hand and the lower hand, the upper hand is the giver and the lower hand is the taker. Hence being a giver is always encouraged in the Islamic economic system and cherished by its values.

Market and Its Functions

One of the early things the Prophet sallallahu alayhi wasallam did after coming to the Medina and establishing his new state and government was creating a market. There was a market in the Medina before he came, but that market had restrictions on it, i.e., there were taxes imposed on it and there were owners of the market who did not allow whoever they do not please, something that is not acceptable in the Islamic economic system. When the Prophet, sallallahu alayhi wasallam, designated physically a piece of land as a market, he also announced that the market is to be free, i.e., people were free to enter the market as well as quit it, and no taxes were imposed on this market. This was later discussed in detail by fuqaha since fiqh by definition is a study of details and there’s no society or law that doesn’t have details, a point that doesn’t warrant explanation here.

Hence the basic structure for the economy in the Islamic system is a market, a free market that neither puts conditions on exit or entrance nor imposes taxes. If we need some fees for cleaning the market place and some other similar services, fees however can be imposed on such services, in as much as they are needed, but not to a level where it enters the concept of imposing taxes. There are several ahadith which tell us that taxes are undesirable, no doubt about that, especially when it comes to the market functions, a thing that is part of the main objectives of the Islamic economic system.

The issue of pricing is also linked to the freedom of market. The Prophet sallallahu alayhi wasallam did not like pricing and considered pricing as something aloof to the Islamic economic system and hence refused to price and said that prices are in the hands of God who is the real Pricer and I don’t want to meet Him while I made zulm (injustice), as if he was saying that pricing is zulm. The details however were later discussed by several ulema who mentioned the exceptional circumstances of natural or man-made monopoly where pricing may be required; hence the Islamic government may impose pricing when it is needed. Scholars later tried to determine these exceptional cases like presence of monopoly, a situation where a firm dominates the market hence pricing becomes a need. The essential thing however is that pricing should not be there as part of the structure of the market. Prices should be reached when the wills of demanders and the wills of the suppliers meet together; of course, each one of them is presumed to promote and maximise his own interest, and this is the main function...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Foreword
• 1 Institutional Structure of the Islamic Economic System
• 2 Islamic Economics and Institutional Economics: A Methodological Discussion
• 3 General Principles of Business Contracts in Islamic Law
• 4 Repositioning Waqfs in the New Economic Order
• 5 Conceptualising the Islamic Social Finance into a Three-sector Economic Model
• 6 Islamic Social Bank: A Sustainable Banking Approach
• 7 Can Microfinance Be a Solution for the Social Failure of Islamic Banks? A Linkage Model Proposal
• 8 The Justification Process of the Joint-Stock Company as a New Partnership Model in the Islamic World
• 9 Conscious Technology and Technological Change: Artificial Intelligence, Fintech and Others
• 10 Islamic Multifinance Companies: Disbursement towards Sustainable Financial System for Low-Income Groups in Indonesia
• 11 A New Industry—Academic Partnership Model for Community Entrepreneurship Development: The Case of i-Taajir
• Index