Consistency and Viability of Islamic Economic Systems and the Transition Process

J. Marangos

• Editorial: Palgrave Macmillan
• Año: 2013
• ISBN:
  9781137327260
• Categoría: Economics
• Categoría: Econometrics

Consistency and Viability of Islamic Economics Systems and the Transition Process outlines the transition problem for non-market economies and creates an analytic framework for understanding the cause and effect of these economies.

PART I

ISLAMIC ECONOMIES

CHAPTER 1

INTRODUCTION TO THE ISLAMIC ECONOMIES

The term Islamic economics, and thus Islamic economies, was coined by Pakistani social thinker Sayyid Abul A’la Maududi in the late 1940s, and it originates from the teachings of the Koran. Maududi popularized the term through voluminous writings and inspired later contributions to the literature on Islamic economies. This alternative approach to economics was meant to act as a vehicle for regenerating Islamic authority in a domain where followers were increasingly falling under the influence of Western ideas and patterns of behavior. By replacing Western economic approaches with an Islamic economic paradigm, Maududi hoped to restore the Islamic community’s self-respect and improve cohesion (Kuran 1995, p. 156).

Islamic economics is dedicated to restructuring economic thought and practice on the basis of fundamental Islamic teachings (Kuran 1996, p. 438). Its emphasis has been on establishing a distinctly and self-consciously Islamic approach to economics. The goal of Islamic economists is to differentiate Islamic economics from conventional economics using traditional Islamic sources. Islamic economics puts itself forward as a complete system embedded within a fully developed religious framework. The Islamic economic arrangements initially arose from the Prophet Muhammad, who, having himself been a practicing merchant, was more knowledgeable about economic affairs, unlike the founders of other religions (Rosser et al. 1999, pp. 8–9). Nevertheless, Islamic economics is not actually a “new” paradigm. While there has been an increased interest in studying Islamic economies in recent years, Islam has possessed a codified, integrated doctrine directing economic arrangements since the publication of the Koran. Consequently, the paradigm is much older than the theoretical foundations of most Western economics.

In traditional Islamic economies, economic decision making was embedded in Islam, the religion that dominated society. In modern Islamic economies, there is still an effort to center economic decision making within the context of religion, but modern technology is also factored in. The modern Islamic society pursues an amalgamation of tradition and modernity, individualism and collectivism, and the moral world and the real world. Islamic economies strive to function in the modern world with modern technology by utilizing it to promote the spread of Islam in the search for a benevolent socioeconomic order. The harmony within the Islamic society is promoted, instead of contemporary tendencies toward social disintegration (Rosser and Rosser 2004, pp. 86–87).

Islam comprises a set of principles and doctrines that guide and regulate an Islamic follower’s relationship with God and society. In this respect, not only is Islam a divine service, but it provides its followers a code of conduct that regulates and organizes members of society in both spiritual and material life. Islam is an integrated economic system in which the spiritual and material welfare of the individual and society are interlocked. The Islamic economic system is based on a series of regulations and laws known as Sharia that are derived from the Koran and that ensure a minimum level of economic justice in society. For example, it has important restrictions and guidelines to protect the role(s) and rights of entrepreneurs. The ethical and moral rules set by Sharia, Islamic followers believe, lead to a balance between economic and social justice and thus are more inclined to maintain stability within the economic system. The dependency of Islamic economies on the Koran and the sacred laws helps to maintain the consistency and viability of the economic system.

There are a number of substantial differences between the Islamic alternative economic paradigm and the capitalist and centrally administered socialist economies that have been examined in my book Consistency and Viability of Socialist Economic Systems. The alternative paradigm affirms that an Islamic economy would unite the positives of capitalism and centrally administered socialism, while eliminating the negatives (Kuran 1995, p. 155). Although the Koran approves of both markets and private property, Islam lays emphasis on radical income redistribution and severe limits on private property, proposing a “Third Way” between capitalism and centrally administered socialism (Rosser and Rosser 2004, p. 109). Along these lines, Islamic economics ostensibly represents a “Third Way” superior to the self-declared “Third Way” economic systems that we have examined in my book Consistency and Viability of Socialist Economic Systems. These differences arise from the application of the basic principles of Islam to economic life.

Primary among these principles is the concept that God (Allah) is the creator and owner of wealth and people are the representatives of God. However, people can pursue and use wealth in the form of a trusteeship with God. Humans are the associates of Allah in managing the world and its resources, which implies universal brotherhood. Within the basic principles of Islam, there is divine unity, the idea that all economic activity must be in accord with divine commands, and there is justice, which implies welfare and cooperation as the basic principles of economic organization. Justice and equality within Islam implies equal opportunity, income, and wealth.

A central issue present in all economic systems is the role of government in the economy. Essential questions include how much it should be involved, and in what ways. The role of government and the state within a traditional Islamic economy is largely based on Sharia, as well as certain duties assigned to the state. The Islamic economic system establishes itself only if a government enacts laws obligating the economy to follow Islamic principles. The basic demand of Islamic economies is the implementation of the Islamic law code, Sharia. The Islamic state must guarantee a subsistence level to its citizens, one that promises a minimum level of food, clothing, shelter, medical care, and education. The major purpose of the state’s responsibility is to moderate social inequities and to enable the poor to live a normal spiritual and material life with dignity and satisfaction. It is a divine duty to work, as social justice is the result of productive labor and equal opportunity. Every person should be able to use their abilities in work and gain a fair reward from that work effort.

The duties assigned to the state under Islam primarily consist of commanding, counseling, controlling, and protecting. State intervention can take many forms including general guidance and regulation, and even direct state ownership and direction. An Islamic economic system operates on the fundamental principle that the forces of supply and demand should work freely in the determination of prices in all markets. Only in exceptional circumstances is there a need for state intervention, more or less in the provision of information regarding economic choices and safeguarding economic freedom (Presley and Sessions 1994, p. 585).

Two modern nations, Iran and Pakistan, have legislated in their constitutions that their economies should be run according to the Islamic principles of Sharia. The list of countries that have adopted a Sharia code (in addition to the aforementioned) includes Sudan, Saudi Arabia, Qatar, and Afghanistan under the fundamentalist Taliban (Rosser and Rosser 2004, p. 98). The following are some of the fundamental precepts of modern Islamic economies: prohibition of the use of interest; adoption of the zakat (almsgiving), an ancient practice of voluntary redistribution of income to the poor; approval of hard work and fair dealing; prohibition of the consumption of pork and alcohol; and forbidding gharar (excessive risk). In addition to these are protection from unfair income, protection from price manipulation, the right of fair dealing, the right to fair and accurate information, the approval of profit-sharing, the promotion of cooperation and mutual solidarity, and the filtering of all economic decisions through Islamic moral norms.

Perhaps the most far-reaching and controversial aspect of Islamic economics, in terms of its implications from a conventional economic perspective, is its prohibition of interest. The blanket prohibition of interest found in the Koran quickly became the flagship of Islamic economies precisely because interest plays an important role in capitalism and centrally administered socialism. By favoring a ban on all interest, regardless of form and level, Islamic economics can claim that the deposit-taking and lending operations of “Islamic banks” differ fundamentally from those of conventional banks (Kuran 1996, pp. 438–439). The elimination of interest payments, if adopted throughout the world, would clearly involve the restructuring of capitalist economics and would produce a major change in the functioning of both domestic and international financial systems (Presley and Sessions 1994, p. 586).

In Iran and Pakistan, the state constitution requires banking systems to be fully compatible with Islamic law. However, in Egypt, Indonesia, Malaysia, Sudan, Kuwait, and Saudi Arabia, Islamic banking co-exists with conventional banking. Since there is no interest, the reward to loaning funds relies on the sharing of risk through equity. According to this system, it is immoral and unjust to earn income from capital without assuming risk. In this sense, it is immoral and unjust for a bank to earn interest on a loan as it places the risk of the financed venture entirely on the borrower, allowing the bank to earn a return even if the venture fails. It is equally immoral and unjust for a saver to earn interest on their savings deposits irrespective of the result of the invested funds. It is permissible, of course, for an individual to put money in a bank for safekeeping, provided no interest payments are involved (Kuran 1995, p. 157). Profit is legitimated only as a reward for risk, and thus banking must be based on the sharing of both risk and profit, which rules out interest. Therefore, instead of the use of loans, business finance must exist exclusively on the basis of shares or equity participation.

Consequently, the supplier of capital has a right to a share in profits which is in accordance with the risk and work effort supplied. Profits should not be determined by the current market rate of interest, but by the rate of return on the individual project for which the capital is supplied. Only time will dictate whether this exceeds or falls short of the current market rate of interest (Presley and Sessions 1994, p. 586). Nevertheless, the relative popularity of profit- and loss-sharing arrangements depends on factors such as informational asymmetries between the parties involved, the costs of managing variable-commitments contracts, the efficiency of the legal system, and the pattern of risk preferences (Kuran 1995, p. 158). As an example, the Islamic Development Bank, founded in 1974 to promote Koran principles in the finances of member states, gives no loans but finances development projects in return for a share in profits, or for a “commission rate.” It is worth noting that equity participation is not unknown in capitalist economies. Indeed, the venture capital industry in capitalism relies on equity participation, rather than loans.

Banks based on Islamic principles exist in more than 60 countries. All claim that their operations are free of interest, and that their business decisions are based on Islamic principles and thus morally superior compared to conventional banking institutions. Several countries, notably Pakistan, have gone so far as to outlaw every form of interest, thus forcing all banks including foreign subsidiaries to adopt Islamic methods of deposit and loan management. Many Islamic banks have proven profitable, and some are expanding rapidly (Kuran 1995, p. 155). During the 1980s, the assets of Islamic banks grew by 18.8 percent a year and by the late 1980s, banks based in the Arab world were capitalized at around US $2.6 billion and held assets worth US $22.9 billion (Kuran 1995, p. 160). Illustrating the growing popularity of this institution, Iran has managed to maintain a noticeably higher percentage of loans in its Islamic banks, which follow the more traditional Islamic profit-sharing form, than other countries with extensive Islamic banking systems have been able to achieve (Rosser and Rosser 2004, p. 109).

Another significant feature of Islamic economies is the zakat system of redistributing wealth from the rich to the poor. In most cases, the zakat is voluntary. However, countries such as Yemen, Saudi Arabia, Malaysia, Pakistan, and Sudan have instituted official redistribution systems to collect the ancient religious tax and distribute the proceeds to causes endorsed by religious councils. The zakat system accumulates funds from wealthy donors, or taxpayers if the system is obligatory, and distributes these funds to religious or educational institutions. Further, zakat obligations can apply both to individuals and to businesses. Interestingly, a study of whether Pakistan’s state-run zakat system in 1980 was able to eradicate poverty found it ineffective in achieving the desired results. In Pakistan, for example, just 10 percent of the individuals below the country’s poverty line receive between the equivalent of US $4 and $8 a month by the state-run zakat system, which is well under the US $22 equivalent needed for subsistence (Kuran 1995, p. 165). In Sudan, zakat distribution to the poor is perceived politically as having a positive impact (Rosser and Rosser 2004, p. 101).

The last important principle of Islamic economies is the substitution of Islamic motivational relationships for capitalist and socialist norms. Islam provides a readily available, widely meaningful, and historically important source of moral justification (Kuran 1995, p. 170). Meanwhile, a long list of influential thinkers considered religion a manifestation of ignorance or weakness and undoubtedly would have greeted Islamic economic norms with contempt. Nonetheless, religion remains a force capable of shaping motivational relations for a large number of intelligent, educated people. Defining the difference between right and wrong has been imperative in nurturing the moral sense of nonmaterial incentives within the traditional functions of religion. It follows that independently of whether or not Islamic economics is suited to modern economic conditions, the motivational relations, norms and morality of Islamic economics remain a source of influence for a large number of people (Kuran 1996, p. 451).

The Islamic economy presents itself as an ideal that combines the efficiency of markets with humaneness. The feeling of alienation by certain people will be eliminated as economic motives are subordinated to religious nonmaterial incentives associated with rewards in the afterlife. As a result, it is assumed that all people will live in harmony with each other and with nature within an Islamic economy (Rosser and Rosser 2004, p. 108). Businesses would observe Islamic morality, thus charging fair prices, providing accurate information, and not engaging in fraud or deceit (Gregory and Stuart 2004, pp. 32–34). Sharia forbids any unjustified enrichment arising out of uncertainty in the name of fair and transparent dealings. Gharar deception through ignorance by one or more parties to a contract is also prohibited. Gambling is also a form of gharar because the gambler is ignorant of the result. The prohibition of maysir arises from contracts as a result of immoral inducement providing false hopes that a party will profit unduly by the contract. In sum, in order to avoid excessive risks, the contracting parties must determine that both the subjects and the prices of the sale exist, that the subjects are able to be delivered, that the characteristics and amounts of values to be exchanged are specified, and finally, that the quantity, quality and date of future delivery have been defined (Sarker 1999, pp. 2–3).

In conclusion, the essence of the Islamic business contracts is to ensure the benefit of both partners in the contract. The goal of an Islamic mode of contract is to minimize the costs associated with information asymmetry and moral hazard. Another goal of the Islamic firm is to maximize social welfare so that producers will behave as efficient entrepreneurs as well as honor the goals of Islamic Sharia. Producers should be compensated in line with their honesty and capabilities. Therefore, it may be said that in an Islamic economy, if the Islamic firm implements the business contracts as designed and approved by Sharia, then principal-agent problems will be minimized and social welfare maximized from the welfare motive of the producer.

Iran is the leading exemplar of an Islamic revolution and an Islamic transformation of the economic system. The economic system in Iran is based on “theocracy,” which comes from the Greek word for God (theos) and power (kratos). It means a state that is governed by the leaders of the dominant religion and is considered to be divinely guided and the policies are strongly influenced by that religion. The Koran orders society to obey God, His Prophet, and their rulers. The Iranian Constitution of 1979, adopted after the Islamic Revolution, placed ultimate power into the hands of the Supreme Leader, a religious leader and the clergy above all other institutions of economic, political, and civil society, even though these institutions are democratically elected. In the Islamic Republic of Iran there is a functioning, but very limited, parliamentary democracy because individual rights and freedoms are subordinated to religious authorities, thus giving rise effectively to a non-pluralistic political structure. In Iran, the official view on economic law is stated by Ayatollah Ruhollah Khomeini (1984), the leader of the Islamic revolution in Iran. He agreed with forbidding interest and supporting zakat, although the latter is voluntary and distributed by the ulama (legal scholars). Khomeini also supported the contribution of one-fifth of certain income to charity (khums) for the ulama. He accepted land rent, sharecropping and insurance, which makes him more moderate than some Islamic economists. In general, he also accepted private property (Rosser and Rosser 2004, p. 109). However, the rate of economic growth in Iran in recent years has been modest at best, and persistent inflation and unemployment have been the norm (Tabatabai 2011, p. 3).

The emergence of Islamic economics as an alternative paradigm in economics has been met with widespread apathy among West...

Índice

• Cover
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• Abbreviations
• Part I: Islamic Economies
• Part II: The Transition Process
• Index