THE PRINCIPLES OF ISLAMIC ECONOMICS
DAPHNE BUCKMASTER
Islamic economics differs from that of the West rather in its philosophy than in its implementation or instruments. Although its attitude to interest is the most well-known difference, Islamic economics is based on a whole philosophy of wealth and how it should be managed in regard to human needs. Islam seeks to establish on earth a just and human socio-economic order and sets out clear guidelines for achieving this.
The basic concept of wealth in Islam is that man was created as a vicegerent of God in this world, holding all its wealth in trust, and is therefore required to keep to a certain set of rules in dealing with it. As a trustee, he has a duty to optimise his use of God’s gifts for the good of society and this means that ownership, as known in the West, does not exist.
This concept has a very important effect on Islamic business. In the West, banking has been defined very narrowly and amounts mostly to lending on interest without any consideration being given to justice. One has only to think of the thousands of people made homeless in the West in recent years by the relentless rise of interest rates on mortgages, resulting in building societies repossessing the houses of people who could no longer afford the repayments. Such people lost their savings which they had used as a deposit on the house, as well as the house itself.
The role and functions of the Islamic state are delineated in both the Qur’an and the Sunna (life records) of the Prophet. They include defence, the maintenance of law and order, the dispensation of justice, rule by consultation, civil administration, assurance of a basic standard of living for all and the balancing of wealth among the different sections of the community.
It is generally agreed among religious scholars that, as conditions change over time, an Islamic state may assume any other functions necessary to promote Islamic objectives.
One of these new duties is to promote economic development and the better use of resources by providing social infrastructure and public services. Another is maintaining monetary stability by controlling tendencies to inflation or deflation. The Islamic state is a collective which must obey the moral injunctions of Islam just as an individual Muslim must. Among its moral duties, the most important economic one is to distribute wealth fairly so that at least the basic needs of every member of the community are met.
To do this, the state uses legal measures to support the moral teaching about wealth, as it is seen that individuals do not behave uniformly in obeying moral principles. The levy of a percentage tax (zakat) on wealth provides funds for relieving the poor, the unemployed, invalids and orphans.
The state may also engage in productive activity, though it is expected that this will be mainly undertaken by private enterprise. It can also intervene in property matters where individuals do not observe their duties. Islam is against too many social levels and supports equal opportunity.
In Islam, a bank is more than an organisation for lending money. It has been called a funnel of monetary resources between the people who have the money and the people who use it for productive purposes. Neither party is allowed to suffer injustice in this transaction.
It must not be thought, as many Muslims seem to, that because Islamic banking is now becoming established, we have done all that needs doing. Banking is only one small part of an Islamic economy, which is a system with an underlying philosophy having moral, legal and financial implications all over the world.
In the modern world, Islam has come to be seen as an obscure, historical curiosity which, it is thought, can have no practical application today. Even Muslims have come to believe that civilisation means technology, but we must remember that essentially, civilisation has always meant a set of values or beliefs. Technology is simply a service to civilisation and, great as has been its contribution in physical benefits, many people, even in the West, have begun to think that more attention to human values is needed to restore a balance. It is here that Islam can step in and offer a total system, tried and tested over centuries, providing the social justice that the West is desperately looking for and with a sophisticated legal framework second to none.
Islamic banking is essentially concerned with the redistribution of money, but any charges on loans are forbidden in conformity with the Quranic injunction against riba (2:275)
The literal translation of the Arabic word riba is ‘increase’ or ‘growth’. The Quran forbids any increase being made in the practice of lending money. Yet this increase, which we call ‘interest’ is now the basis of all conventional banking. Muslim countries, as well as the West, have fallen into this practice, having taken it over unthinkingly from their erstwhile colonial masters.
The Qur’an emphasises that man’s ultimate goal is salvation and it follows that the purpose of creating wealth, as of doing anything else in life, is to achieve that goal. Thus, the best way of spending surplus wealth is as charity, either as an outright gift or as a loan or, at worst, as a debt to be returned on a fixed date. Grants, loans and debts are seen as acts of charity, the purpose of which is for the lender to gain salvation, not commercial reward. This is why loans for commercial gain are forbidden by the Sharia.
When loans are given for business purposes, the lender, if he wants to make a legitimate gain in accordance with the Sharia, should take part in the risk. If a lender does not participate in the risk, his receipt of any gain over the amount loaned is classed as interest.
There have been demands for a reinterpretation of the Sharia to permit interest, but these result from a misunderstanding of the word ‘usury’, which was the original word for loaning on interest, and which is often taken to mean not just charging interest but demanding an excessive rate of interest. However, this was a later modification of the meaning of usury and, under Islamic law, usury has always meant charging any increment beyond the amount of the principal. There is also a widespread belief that the Sharia forbids only interest on consumer loans, and not those on productive or commercial loans. But history does not bear this out. The loans made during the Prophet’s period were made for productive purposes.
The rule remains that however socially advantageous a loan may be, the Sharia does not permit the charging of interest, whether moderate or excessive.
We have had to find new mechanisms and instruments which can satisfy both Muslim beliefs and modern business. In the late 1960s, those who foresaw this situation started developing new concepts and techniques which would meet the requirements of Muslim society by channelling efforts towards productive endeavour.
One result of this has been the Islamic banking system, which is still in the process of developing. Even today, there are hardly any books on the subject. We need to promote research and development in order to create the infrastructure needed for Islamic banking to be part of a whole Islamic economic system. For the last fifteen years. Islamic banking has been in what we may call the laboratory stage and we are only just beginning to see some working models.
As for it being possible to marry finance and religion, we must remember that the Prophet himself was a successful trader and it is a misunderstanding of the West that the two do not mix. This is because the Bible deals mainly with the spiritual side of life, while the Qur’an deals with both the spiritual and the practical aspects of life, including basic principles which can be used for a legal framework for business based on moral attitudes. The Qur’an is regarded as a religious book, but its juridical side does not differ from any other legal system in that it tries to set parameters for the interaction of people with themselves and their environment for the good of the whole of society. The only difference is that Muslims recognise that the source of a true and just legal system can only be God.
It is necessary to understand these principles before we can understand the various kinds of Islamic contract. The Qur’an provides the principles, but leaves man to work out the practical details. Much thought and debate has already been devoted to it by the religious scholars and jurists of previous centuries and although conditions then were far simpler than they are today, the human relationships between the rich, the merchants and the consumers were the same and always will be and our task is to build on this basic structure by elaborating techniques and instruments to serve the needs of modern business in a way such that both East and West can work in harmony.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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