Lesson in Islamic Economics by Monzer Kahf V-1

Top 20 FREQUENT WORDS

islamic 1062 economics 482 shari 382 economic 351 economy 324 income 308 consumption 301 zakah 268 function 237 resources 218 investment 215 public 197 islam 190 allah 182 muslim 180 social 173 demand 160 qur 160 profit 154 consumer 151

DOCUMENT KEY POINTS

• functions the functions of the institute are a to organize and coordinate basic and applied research with a view to developing models and methods for the application of shari shin the field of economics finance and banking b to provide for the training and development of professional personnel in islamic economics to meet the needs of research and shari ah observing agencies c to train personnel engaged in development activities in the bank s member countries d to establish an information center to collect systematize and disseminate information in fields related to its activities and e to undertake any other activities which may advance its purpose
• islamic research and training institute irti establishment of irti the islamic research and training institute was established by the board of executive directors of the islamic development bank idb in h

• islamic research and training institute islamic development bank king fahd national library cataloging in publication data kahf monzer lessons in islamic economics pages x cm isbn islamic economics legal deposit no
• isbn the views expressed in this book are not necessarily those of the islamic research and training institute nor of the islamic development bank

• the implementation of this article culminated in the establishment of the islamic research and training institute which had played over the past years an important role in encouraging research in islamic economics and dissemination of these studies in the academic circles of the universities in the member countries
• however since the first international conference on islamic economics held in makkah al mukaramah in early research in islamic economics took a new important turn by becoming more specific and more identified as a separate branch of the islamic studies and mainly conducted by professional economists trained in western universities

• finally i pray to allah to make it a step in the way of the cause of understanding islamic economics as an integral part of the islamic studies and to make it an accepted effort that serves in promoting the application of shari ah in the fields of economics finance and banking
• two similar previous seminars were held in islamabad in and abu dhabi in in cooperation with the international islamic university in islamabad and the central bank of the united arab emirates respectively

• it includes five chapters that discuss the issues of importance and relevance of islamic economics its methodology the islamic economic system and the place of the state in that system and finally the principles of private and public ownership in islam
• part one deals with the shari ah foundation of islamic economics or the shari ah background out of which islamic economics emerges

• the seminar addressed university level teaching staff and aimed at familiarizing them with the islamic economics issues and literature in an effort of enhancing their willingness and abilities to take up teaching courses in islamic economics
• seminar was also enriched by more than forty university professors from bangladesh and several other idb member countries who were instrumental in providing intellectual insight through the discussion periods that followed each presentation

• prelalance the conduct of human life on earth and the organization of human association in groups and societies must thus be governed by the shari ah which is enacted by the lord for the purpose of promoting and protecting the basic five aspects of humans that are religion life mind prosperity and economic wealth
• the corpus of shari ah consists of norms of behavior at the level of worshipping almighty god ibadat laws and rules related to transactions and other contractual relationships between human beings mu amalat and points related to purification of faith and doctrine aqidah

• on the other hand the texts in the qur an and sunnah that belittle the dunia earthly life must be understood in the meaning to keep the hearts and human efforts exclusively purified to the lord the creature and having the whole dunia under their hand but not in their heart
• bay implies transfer of ownership of the object of the sale against a transfer in the opposite direction of the price of that object

• shirkat al anan where the shares of the partners may not be equal in both management and capital therefore their shares in profit and loss may not be the same as their shares in capital in order to accommodate differences in management

• this intermingling of positive observations with the norms and values of the researchers is not dealt with in a transparent manner by the conventional economics and very often value loaded positions are presented as being result of positive or natural observations of human behavior
• as muslims the very fact that god sent a shari ah and sets common norms for all men and women implies an essential fact that the behavior of all human beings generally speaking can be looked at as embodied in certain regularities and normalities

• on the basis of this basic principle the islamic economic system is essentially a market system that believes in the efficiency of the market in creating fair primary distribution of the benefits of the economic activities and the bounties of the lord while that very system is insufficient for a final distribution of the fruits of economic efforts simply because there are needs to be fulfilled for those who cannot work for them

• the basic economic objectives of the islamic state include utilization of the public resources for the peoples welfare enhancing and encouraging the economic capabilities of the society to reach a level of strength and excess production that can be devoted for the promotion of religion and for charity the fulfillment of basic needs of people and protecting the moral and legal norms called for by the religion on the basis of both justice and efficiency etc
• these objectives can be fulfilled by means of a c commitment to the implementation of shari ah a c working in accordance with the shari ah set priorities a c enriching available resources with planned activities a c adherence to and protection of the islamic economic system a c promotion of social justice and individuals well being a c providing training and guidance to mobilize the individual abilities and resources

• on the other hand it is also argued that since the claim that marginal utility of the money of the poor is higher than the marginal utility of the rich cannot be substantiated the direction of the effect of introduction of zakah on the macro consumption function is undetermined

• the main crux of this chapter is the proposition that the introduction of the principle of profit and loss sharing creates a demand function for investment that is determined and characterized with being actively related to profit sharing ratio specially with the desire to avoiding any loss resulting from keeping idle one s inevitable funds which is intensified by the zakatability of such idle funds
• furthermore the paper argues that the substitution of the prefixed interest rate by a variable expected rate of return will move potential investors closer to reality since the expected rate of return is what really matters in investment decisions rather than a pre fixed rate of interest which is only taken as a cost element for investment in interest ridden economy

• the choice a muslim consumer makes depends on the relative strength of the incentives and inculcated values of a specific consumer with regard to strength of altruistic care for others depth of faith in the hereafter degree of reliance on the sustenance promise given by the creator and immediate need of the consumer and her his immediate members of the family

• the second redistribution scheme in the islamic framework is an intergenerational one with aims that provide for the offsprings and the close relatives of the deceased to benefit from the deceased s savings and estate in proportions that are given in detail in the divine revelation qur an in such a way that almost does not leave any room for personal or societal judgment ijtihad

• the second broad approach is based on the contribution of the financier with the investors entrepreneurs on the basis of sharing the profit that results from the deal

• in islamic banks deposits are received from savers on the basis of mudharabah in the case of investment deposits or simple loan goodly in the cases of the demand deposit in the current account

• however the most appropriate rate for discounting in the process of project evaluation is the expected rate of return of alternative uses of funds ie for private investors it may be an expected rate of return different from that of government alternative investments while for public investment it could be an alternative social rate of return to the whole society
• the first is the concept of islamic ummah and profound islamic brotherhood between the different muslim societies and the second concept is derived from verse that reads allah forbids not with regard to those who fight you not for your faith nor drive you out of your homes from dealing kindly and justly with them for allah loves those who are just

• part vi in its three chapters deals with the issues of teaching curriculum and empirical research in islamic economics chapter twenty four presents the experiences of three pioneering schools of teaching islamic economics namely faculty of islamic economics at imam muhammad bin saud university riyadh the school of economics of the international islamic university islamabad and the college of economics in the international islamic university of malaysia

• life in accordance with the islamic teaching and to equip the muslim intelligentsia throughout the muslim countries and societies with adequate knowledge and tools of analysis that enable them to achieve this ultimate goal
• the editor

• general objectives of islamic shari ah the reality of the divine muhammad ata al sid the most basic and fundamental idea or you can say the very essence of shari ah is tawhid to affirm action that allah is one absolute transcendent creator lord and master of all that is
• the shari ah recognizes that all humans are entitled to inquire to search to learn and to teach one another and prescribe the gain of knowledge as a universal duty from which no one is exempt particularly in regard to this basic reality

• all creation will cease to exist and will be followed by a day of judgment a day of absolute justice and mercy as a result of which the destinies of people are determined to an eternal joy in the gardens of eden or to an eternal misery in hell
• men are made capable of understanding the will of allah as expressed in words directly by god to man and as being deductible through observation of creation by pondering the whither and why of its realities and conclude with certainty that they must have a creator designer and sustainer who deserves to be fully heeded

• while the physical function of man is integral to nature and as such obeys the law pertinent to it with the same necessary obediences as all other creatures the spiritual functions namely understanding and moral action and consequently the psychological function fall outside the realm of determined nature
• all men are from adam pbuh and adam pbuh was from clay and the most honorable in the sight of allah and deserving of his support and dignifying is the most righteous

• life the shari ah maintains ought to be lived the world developed instincts satisfied talents faculties and potentialities ought to be realized and happiness sought and achieved every human is entitled to the vocation of his choice to partake of god s bounties on earth to marry and raise a family to acquire and enjoy wealth

• the ummah must have a government to direct the order of its affairs and must have a constitution to define the shape of the state the rights and obligations of its citizens and the functions of its officials
• if you differ in anything among yourselves refer it to allah and his messenger if you do believe in allah and the last day that is best and most suitable for final determination

• in addition to these legal boundaries and as discussed above the shari ah recommends the noble and most benevolent attitude ihsan in all dealings and as much as possible

• the most important point as you mentioned yourself is that there is a moral obligation that he accepted to take up this change this moral obligation to fulfill the commandments of allah ta ala is revealed to him
• i understand from these ayah that this is the narration explanation of the nature which was expanded in different ayah but the willful action of man or rational behavior of man is not properly established by these ayah

• not only have a lot of application of islamic shari ah but to apply any part of shari ah for any reason that is in my opinion a terrible dichotomy in the life of a muslim and this is the reason in the part of the paper i indicated the need that shari ah should be taken in totality
• the prophet pbuh and his companions themselves had to work to pray all night and to spend their time and effort in the way of allah ta ala

• question is creation simply a function of mere order from god without involving a process of transformation of matter from one form to another theory of evolution what is the role of man in the process of creation on earth is this role passive or active in the process of creation evolution or development

• an islamic life means sickness of one muslim is sickness to all other musli miss it is life of cooperation a life of real gain to others to the poor to the people who need help
• question by shamsul alam shell we understand by shari ah a legal system what would be the nearest equivalent term of shari ah in english and western system ata sid many people just understand the shari ah as a legal system

• question from shamsul alam when we say al qur an and sunnah we mean more or less specific ideas though there are questions about hadith but shari ah of various denominations sets to differ is it not better to speak of qur an and sunnah rather than shari ah of shia and sunni then again of various groups of sunni s the question is qur an and sunnah are specific but shari ah of various denominations differ is it not better to speak of qur an and sunnah rather than shari ah of shia of the hanafi of the hambali etc so many shari ahs are there but qur an is one far all hadith is one

• by the way if you are asking me about our life in the th th or th century it is a pity to know that while some muslims feel to be in an apologist position about their sticking to islam the events which took place in the last world war may indicate that we muslims were the secularists while other people for instance americans were more religious
• still they lost their political power and economic and military superiority for which kama ataturk and many others abandoned shari ah and many leaders in the governments cannot stand the so called fundamentalism even now

• can you say that every daruri is obligatory or every obligatory is daruri also by the same way every haji among the hajiat is only desired and every desired is among the hajiat is there correspondence between the ahkam of shari ah and this concept of daruriyat hajiat and tahsiniat hijab for instance is known as obligatory

• consequently as we study ethics independently and economics independently as aspects of islam or as disciplines within the banner of islam similarly shari ah in that sense is one of the disciplines because it is the same thing put in the form of legality consisting of what is desired permissible undesired or obligatory
• the qur an calls for qard hawn that you should give a loan for those who are in need those who want to work but they don t have the means

• it was sometimes soft with acceptable practices in other instances the shari ah was strong and firm as i told you by don t kill way for the jahilliyah practices of having terrible war for very light criticism

• i would be interested in a more elaborate statements of the things and a more analytical statement for each of the sections particularly islamic shari ah should be distinguished from the statement relating to the institution of the islamic shari ah
• statements made but some of them have not been substantiated adequately where some of the ayahs of the qur an have been just mentioned and have not been adequately discussed

• i was in nigeria responsible of faculty of law and islamic shari ah and having that i would admit non muslim students because the state itself makes it necessary to admit muslims and non muslims in the programs of the university
• any violation against a non muslim is the violation against the religion and simply the word zimmis which is used for non muslim minorities in the islamic state come from zimmah which is pledge of honor

• ata sid i think it is an excellent insight from organizers of the seminar that this paper be included because it is essential that a discussion about the general objectives of the shari ah be part of a seminar on teaching of islamic economics just to have a very deep understanding of the shari ah
• ideas would come from the floor that would be helpful for framing the recommendations and if the foreign scholars who are associated with islamic economics departments in foreign universities can talk something during this course of the problems that may be faced

• another point also raised in the paper i would like to comment on is the concept of the artificial islamic economics and here brother ata sid mentioned that the requirement for an islamic economics is to be derived from shari ah
• all these things are very basic and can be directly related to qur an and sunnah and in fact this is a major difference between the islamic economic model and the mainstream economic model

• so far as the economics is concerned we cannot produce wine and production of wine is strictly prohibited and this is a part of islamic economics as well as part of shari ah and so is the riba
• yes why not allah says that until and unless you change your position that means the nation as a whole world or the human beings allah will not change their position

• ten years ago i remember some people like doctors engineers and economists if we tell them that there is a system of islamic medicine they will say what are we talking about if you tell them that there is an islamic engineering they will tell you what do you mean of course what is it alhamdulillah in our islamic education when we talk about islamic economics not many people will be surprised if you talk about islamic engineering not many people will be surprised and if you talk about islamic medicine not many will be surprised this is an important development in the field of islamic education
• question will you please explain the inability of the experts in shari ah in the muslim countries in developing baitulmal or any other alternative of modern banking and insurance how will you react when someone says that the shari ah is inadequate to provide for any alternative of modern banking system is not islamic banking being organized by people who are western and have very little knowledge of shari ah ata sid no i would say the answer is no

• what is the role of satan in the economic development of west and the backwardness of muslims is he alone responsible or to what extent the muslims themselves are responsible for their own backwardness ata sid well we don t deny in islam the existence of satan but one must be very sure that satan only operates through men and women
• and it has an access to them but allah ta ala promises us that if you are strong believers fully dedicated to allah ta ala satan would not have big effect

• does that not indicate that the conformity with the shari ah keep a community poor and economically backward ata sid well this may be an observation of many people but it is not at all those points of personal appearances that matter most
• chairman on behalf of all of you and on my own behalf i want to express my gratitude and thanks to our brother ata sid for his brilliant exposition and his passions

• the controversy originates in the interpretation of the quranic ayah which urge the muslims to make a struggle for his living to live a good life by acquiring the beautiful bounties of this world to eat of the good things that are provided to enjoy lawful and good sexual life and the other ayah which belittle the dunya lower life on earth and all its false glitter and adornments
• after relating the burden of long qiyam at night allah mentioned as one of the considerations for that the struggle to seek the bounties of allah on earth he knows that there may be some among you in ill health others struggling on earth seeking of allah s bounty yet others fighting in professor of islamic law in the school of law and shari ah at the international islamic university malayia

• and seek with the wealth which allah has bestowed on you the home of the hereafter nor forget your portion in this lower life and you do good as allah has been good to you and seek not mischief in the land allah has indicated the great value of mal property in life by commending us to be careful in spending and not to let our properties fall in the hands of the irresponsible
• it is out of his mercy that he has made for you night and day that you may rest therein and that you may seek of his bounty and in order that you may be grateful

• the prophet made a du a for his most beloved helper and companion anas saying allahumma multiply his mal and posterity and lengthen his life and bless what is given to him and forgive his sins

• they are those for whom there is nothing in the hereafter but the fire vain are the designs they frame therein and of no effect are the deeds that they do
• there reaches it our command by night or by day and we make it like a harvest clean mown as if it had not flourished only the day before thus do we explain the signs in detail for those who reflect

• when some of the spectators prayed for a boundless wealth as that of qar un the qur an reports the reply of the wise so he went forth among his people in the pride of his worldly glitter
• and keep your soul content with those who call on their lord morning and evening seeking his face and let not your eyes pass beyond them seeking the pomp and glitter of this life the glitter of this world is fleeting but it is ephemeral

• to any that desires the filth of the hereafter we give increase in his tilt and to any that desires the filth of this world we grant somewhat thereof but he has no share or lot in the hereafter
• good is the reward for those who do good in this world spacious is allah s earth those who patiently persevere will truly receive a reward without measure my people this life of the present is nothing but temporary convenience

• but if one intends to provide for one and one s family to guard against the vicissitudes of days and to provide for one s needy relatives and destitute muslims or to spend in the ways of charity then one will be rewarded for such a gain and struggle and this can be better than many of other acts of worship
• he gathered as much as he could and when he was asked are you not satisfied he continued to collect and said lord a poor like me can never be satisfied from your grace

• it is the duty of the ulama scholars of islam and the state to inculcate the muslims in the right intentions and goals behind material wealth and to be very mindful of their duties towards the state and other musli miss this in my opinion is of great economical importance which will affect the infrastructure of all economic policies and plans both on the individual levels and the social level
• doing all that individuals and the state are to be mindful that material wealth and material power should be gained in a halal permissible way and that all are ephemeral and should not fill us with pride or to veil our understanding from the resounding and living message of allah

• the rich should be paying zakah with full pleasure that he is actually sanctifying and purifying himself in the due course of his duty to allah and his fellow muslims and the diligence of his state to redress his proble miss of their properties take a zakah that you may purify and sanctify them and pray for them verily your prayers are a source of security for them and allah hears and knows

• from an economic point of view the ayah indicates the right of the islamic state to take from citizens more than the zakah in way of taxes in order to protect the ummah and to maintain a high standard of living for all citizens in terms of utilities education transportation hospitals etc

• c references or reminders to the act of charity still less should any annoyance or injury be caused to the recipient such as boasting or disregarding the gestures of sweetness expected from a muslim to the other

• the ulema and the legislators in the islamic state are under a binding duty to keep a constant watch against any creeping usurious practices in the economic system of the islamic state
• another important component of the obligations on wealth is what is called al yard al hasan good loan which is free from any interest or reward

• if this attitude prevails in an islamic state it will make a real difference between it and the ruthless suppression of the poor by the rich or of the weak by the powerful as in the contemporary materialistic syste miss
• the divine commandment not to have any gain of property bial batil falsehood ie by false means pretences or in false or vain things whether that property is held in trust or whether it in one s name or belongs to the community at large

• on the individual and the state levels spending should not be so lavish as to weaken our economy which can lead to many vexing problems nor it is becoming to keep back our resources from meeting the legitimate demands of others and the well being of the ummah
• verily your lord does provide sustenance in abundance for whom he pleases and to others in just measures for he knows and he is mindful of all his creatures

• owners of property are not absolutely free to do what they like their rights are limited by the good of the community of which they are members and if they are incapable of respecting such a right their control should be removed
• as all property belongs to allah and is intended for the support of the community it is only held in trust by the individuals who have it in their hands

• this may prove that the basic principles of shari ah enshrined in the qur an and the sunnah of the prophet peace be upon him embrace the past the present and the future of musli miss professor of shari ah at kuliyyah dar al ulum cairo university egypt

• basic elements i transfer of ownership ii on the will of the two parties of the contract iii the object matter of the contract must be known for purpose of eliminating the possibility of disputes at the time of delivery
• the power of the will of the parties to the contract has recognition in shari ah also in all the principles and maxims of interpretation and in the principle of contracting ie the transaction can not be separate or disintegrated

• f bai al w a f a a i i i i i Ri i a means the transfer of the property with the condition that the purchaser s right of reselling it is restricted and the seller preserves the right to get it back if he pays back the price
• this type of transaction is badly needed in an economy free of interest for the producers to meet at least part of their current budget

• iii in the speech of farewell made by the prophet pbuh during hajj of the year of hijrah he put the injunctions of the qur an in practice and expressed that all kinds and practices of riba are eliminated including the riba of his uncle al abbas which he declared null and void
• in the third place the qur an elucidated emphatically that muslims should not indulge themselves in this type of transactions in which the creditor used to get twice as much as his capital for the postponement of the payment surah al imran

• categories i riba al nasi ah which is based on the delay of debt with the agreement of the two parties to increase in the amount of debt due to be paid to the creditor later on
• there is a need for cooperation among muslim states to get rid of the foreign debts and to create our own plan for developing our countries

• involvement was legislated for in shari ah to transfer the authority of the creditor from the body of the debtor as it used to be in ancient legal systems to his property only the case of mu adh bin jabal
• a Yae ci ae i i i R C i i i i R C Yi i i i i i R C i i i i R Ca this reflects the nature of this contract on one hand and the supremacy of shari ah over these systems which do not have any soft corner for the debtor

• muslims had mastered and controlled the world trade in the past due to the techniques introduced by islamic law which enabled the muslim traders to finance their activity and to transfer the money from one country to another through the very advanced mechanism of a i i i i i a or bill of exchange

• some authorities in the west holdsworth a history of english law considered to commend the institution which paved the way for the emergence of the concept of company

• administration in case of musharakah every partner is entitled to participate in the running of the affairs of the musharakah by way of taking decisions or by any other way agreed by the partners
• nature of musharakah contract it is not a binding contract and any partner is allowed to quit or sell his share to others unless this harms any partner or customer

• definition a contract in which a party provides capital to the other party who offers his labor with the hope of getting profits which will be distributed among the parties according to the ratio agreed on between them in the contract
• if certain return has a fixed amount to any of the two parties the mudharabah will be rendered void according to ahnaf and null according to the majority

• a c certain ijtihad must evolve to make it possible for the banks to check dishonesty of some entrepreneur a i i i a it could be said the burden of proof may be assigned to the entrepreneur if he claims unjustifiable loss or less profits as it appears from the circumstantial evidences

• ijarah in the islamic banks there is a wide scope for using ijarah in these banks to purchase expensive equipments and rent it for those who need them and can not afford purchasing them or not willing to extract their value from its budget
• a i i i i i i a Oa i i i ci ae i i Ri C i i i i i i C i i i i i Oi i i i i i i i Oi ca Oa i i Oi i i c i i i i i i i i oi ca Oa Yi i R i i oi c i i Ri i oi ca

• d if the harm inflicted by a person can not be compensated by the injurer and is proven to be harmful to transfer it to him her then the muslim society in part or in general should accept the distribution of the burden of compensation among them
• basic principles a every one is responsible for one s acts and no one is made liable for the acts of others

• islamic law has been able to cater for the needs of the muslim societies through ages and ages until it was removed from the scene by the military western forces
• while shari ah represents the permanent and eternal principles and concepts enshrined in the qur an and sunnah fiqh is merely an interpretation of these principles

• such an exercise should help us not only to understand the subject better and to know where it stands at present but also to provide a correct perspective to the development of the subject in the future

• the emphasis on neutrality in the inner core of mainstream economics has remained unchanged since the seventeenth century despite the neoclassical and the keynesian revolutions
• every now and then there has been a change in decor a new coat of paint sometimes new wallpaper to hide the cracks but the beams bricks and mortar are conceptually what were laid down by william petty and completed by locke and north three centuries ago

• but is it possible for prices and costs by themselves to help allocate resources in conformity with the needs of goal realization this would happen only if incomes and wealth were equally distributed so that all consumers whether rich or poor had an equal number of votes to influence the decision making in the market and if consumer preferences always reflected social priorities in resource use

• can domestic absorption be reduced in this manner by recourse to the strategy of liberalization which is the main plank of neoclassical economics and which the developing countries are now being almost forced by the imf and the world bank to adopt
• such a classification would make it possible for us to cut down unnecessary and wasteful spending and to promote saving productive investment and need fulfillment simultaneously

• it is this longer term perspective of self interest along with the individual s accountability before the supreme being which has the prospect of motivating him to hold his claims on resources within the limits of general wellbeing
• while the pursuit of this worldly self interest by an individual does serve social interest as adam smith argued it does so only where self interest and social interest are in harmony

• he will discuss the values that would serve as a filter for the allocation and distribution of resources in a way that would lead to needfulfillment full employment equitable distribution of income and wealth and greater economic stability
• the wider scope if we involve islamic economics in the realization of an allocation and distribution of scare resources that is in conformity with the maqasid we will undoubtedly expand its scope beyond that of conventional economics

• total output will therefore always be equal to total input in physical ter miss the correct definition of efficiency would hence be the ratio not between total output and total input but rather between useful output and total input

• this will take him into an examination of that behavior of the state and the present generation that affects the health and well being of the future generation through its impact on saving and investment borrowing and debt servicing depletion of nonrenewable natural resources and environmental pollution

• it has thus been unable to suggest a balanced package of policy proposals in the light of islamic teachings to enable muslim countries to perform the difficult task of simultaneously reducing their imbalances and actualizing the maqasid
• its theoretical core has been unable to come out of the straitjacket of mainstream economics particularly in the fields of microand macro economics monetary and fiscal policies economic development and international economics and finance

• boulding kenneth economics of knowledge and the knowledge of economics american economic review may
• hollis martin and nell edward rational economic man philosophical critique of neo classical economics cambridge university press

• there have been critics of the world system like samir amin and many others who have been criticized invariantly by the traditional western economists and now there is a tendency to suggest that since the socialist system has failed to survive the system based on capitalism and economic imperialism that is prevailing in these days is going to survive
• this is something about anachronism we notice that this idea of positive economics that economics can be a positive science void of any acceptance of

• it seems that you have tried to criticize self interest but my understanding is that this self interest is very much necessary for the functioning of the market system and from our experience of last two decades we know that the functioning of this market system is very much necessary

• then the question of resources how to allocate them in mainstream economics as we know it do we call primary resources natural resources would you call them natural resources because this seems to be also the way on the mainstream economics
• abdur raheem al sa ati center for islamic economics research king abdul aziz university jeddah my question is about the new economic order which everybody is looking for in this universe by trial and error which human beings go through and finally they realize that they are in fact one society

• second thing is you have said that in case of islamic economics we have a new paradigm and you said that we should have conviction in what you have said and you have also added that although all things between the earth and the sky belong to god but still men as khalifah of god has the right to use them to fulfill their worldly and after worldly needs

• my third point is in clarifying the maqasid al shari ah he has pointed out that imam ghazali suggested human betterment that is human welfare as the basis of maqasid al shari ah my point is what are the basic entitlement of human being or other beings in the society or in the universe and what are the relationship between the two my last point is in theorizing an islamic framework whether the basic maqasid counts upon the level of entrepreneurship as well as technology thank you
• according to adam smith that individuals are the best judges for their own activities and according to islam individuals are not to be judged on the basis of the teachings of islam until and unless the need arises

• how can we bridge the gap between the rich and poor we have seen the rate of growth of exploitation at which the world resources are exhausted for the benefits of the rich at the expense of the poor this is vital

• if we go on a country bycountry basis and do business with them having another system which we call as value dependent and based on our faith as it is already defined by brother chapra ie values to be judged by our faith as ordered by allah soubhanahu wa ta ala

• moreover as brother monzer has already said this is the first lecture in the whole series and the issues which are raised are going to come up again and again in other lectures
• what we are talking about today was primarily economics and there is a substantial difference between economics and islamic economics and islamic economic system and we have written more about this

• and you know imbalances are reflected in the society in many ways we have higher rate of inflation greater currency depreciation we have larger current account imbalances for which we have to borrow more and you are in debt servicing proble miss now if you abide by the teachings of islam you will be able to say that islam is not only able to compete you will be able to compete more because it reduces our imbalances through reduction of excessive absorption increase of investment and reduction of consumption you will be able to work miraculously really
• but if we want to present our case to them so far until we write more and more and you brothers now are the only enlightened part of the muslim world and if we make it an effort to present our system to the west they will certainly appreciate it

• he was worried about the question which i have said we should try to realize the maqasid al shari ah if we do not want to increase the imbalances
• the prohibition of interest is common among islam christianity and judaism but they somehow changed their religion and removed the prohibition of interest from their value system

• in other words if you want to fulfill the needs of the poor you have to bring resources from somewhere and here is a difference between islam and other economic syste miss that we try to reduce them in a just manner by reducing the wasteful use of resources ie reducing the resources consumed by the rich on fulfilling their unnecessary desires
• suppose we want to reduce poverty and we decide we will create money for this purpose and try to give loans for developing and establishing small industries and so on

• is it logical to talk about economics as universal and at the same time attach to it the adjective islamic if it is islamic does it mean that it belongs to muslim societies only or only operates in muslim societies how can we describe economics as islamic or non islamic if we usually do not like to talk about islamic physics or islamic geology in what sense are we permitted to talk about islamic economics and to add the adjective islamic to a social science this is a question we must think about and answer very clearly and honestly
• as muslims we believe that there are regularities in all human societies and the existence and universality of these regularities are the basic logic behind allah subhanahu wa professor of economics school of economics and management king abdulaziz university jeddah saudi arabia

• the starting point in this whole discussion is to realize that there are sometimes values that are easily identified and sometimes those that are very hard to identify but these values do operate within the so called science of economics
• the fact that he has chosen to guide all human beings at least since sayidana muhammad pbuh and to send one universal message for all human beings clearly means that there are certain types of regularities among and across human societies which permit unified guidance

• with this in mind we come to the second point which is that any science even a physical science has to depend to a greater or lesser extent on two basic foundations first some prescriptions or philosophical stands some normative assumptions that one would have to hold before undertaking any actual work in this particular science and second the descriptive content of the science
• essentially most of the time you can identify a statement as being either a description of reality which may be true or false or it is an expression of preference of one situation over another which is what we call a normative statement or a value judgment

• how about statement number one utility to the individual is a function of the quantity of goods and services that the individual consumes how many will put a check mark on this indicating that they believe that this is a rather objective statement how many would mark this as an objective statement with no value judgment involved we have one brother who did not think that there is a value judgment involved
• what about statement number two when population grows faster than gnp then people in terms of real per capita income will become poor how many think this is an objective statement and how many think it is value loaded i think most of us would say it is an objective statement but there are those who feel that it may have a value judgment in it it is arithmetic

• let us put it on other way are there those who think that there is a value judgment involved in this comparison are there those who believe there are value judgments involved so can we assume that we unanimously agree that this has no value judgment what about number five statistical measurement of gnp for a given country one brother feels that the statistical measurement is objective

• the point i want to raise by this assertion is that if you hold all factors of production constant and let one factor increased by equal increments will the output eventually increase by diminishing amounts is this statement a positive statement or does it contain a value judgment how many of you would say that it is a positive statement i think probably most of us would think that this is a positive statement

• some economists have proposed that as a criterion for observing and measuring the growth of gnp you should take the per capita income of the poor at one quarter of the population make this your yardstick and you look at each country to see what happened to the per capita income of the poorest percent

• so clearly if people somewhere have one method of production where they rest half of the day and work hard the other half their meaning of the day is not that of another group that works hard all the day

• i would say that the greatest avenue for the entry of prior values in economics is in the choice of topics to be researched and the variables to be studied
• i never feel it because i am at all times under it but if you do some careful experiments you can see how it affects the human body and that it does have some effect

• so you come to see that perhaps the best way is to use a mechanism to increase the price of this particular resource to make it more expensive to people and in this way to cut consumption
• when all of the economic models of the consumer behavior of a firm or government are based on the analysis of the selfish motive as a decision maker you have a major problem

• it is a part of reality and some other parts are ignored not because they are not there but because for various reasons they were not drawn to the attention of economics
• there are some statements in the shari ah the qur an and the hadith which are basically positive economic statements about economic behavior or economic life

• conventional economics has value judgments some of them conform to the shari ah and some of them are in opposition to shari ah
• reality is taken from any other source of human knowledge and observations whatever we can gain from the efforts of others or from our own efforts

• it is generally agreed that if the available resources are used efficiently and equitably it should be possible to realize the material goals and to minimize the instability and the imbalances
• these include elimination of poverty fulfillment of the basic needs of all individuals full employment equitable distribution of income and wealth and growth with stability

• the worldview the development of an effective strategy based on these three ingredients is however not possible without an underlying worldview weltanschauung which controls in the words of arthur lovejoy the nature of man s reflection on almost any subject differences in worldview lead to differences in conclusions about the meaning and purpose of human life the ultimate ownership and objective of resources at the disposal of human beings the relationship of human beings towards each other their rights anq d responsibilities and their environment and the criteria for efficiency and equity
• the motivating system must be able to induce all individuals to put in their best performance and to use resources in accordance with the dictates of the filter mechanism not only when this is in their own interest but also when it is in the interest of social wellbeing

• hence the existing systems which themselves need in the words of bunt to rethink a correct philosophy of man cannot provide a model which may be emulated by muslims or other developing countries who wish to realize their goals with resources that are relatively much smaller and would take decades to reach anywhere near those of the countries following these syste miss
• within the perspective of the prevailing zeitgeist the market system may be distinguished by its emphasis on i unhindered individual freedom to pursue pecuniary self interest and to own and manage private property ii accelerated wealth expansion and maximum production and want satisfaction in accordance with individual preferences and edwin a

• he showed that if everyone pursued his self interest the invisible hand of market forces would through the restraint imposed by competition promote the interest of the whole society thus bringing about a harmony between private interests and public good

• these prices and costs which are also prices serve as an impartial value neutral filter mechanism and lead to the production of that configuration of goods a c and services which is in maximum harmony with consumer preferences
• there is no point in raising questions about whether this configuration satisfies basic human needs and whether the distribution is equitable because these questions cannot be answered without collective value judgments which unlike market clearing prices cannot be established impartially

• by providing sanctity of self interest adam smith turned the eyes away from moral intentions and social obligations of individuals to the unintended consequences of the final social outcome of their actions which would always necessarily serve the social interest

• it was not realistic to assume that even without any moral constraint the sovereign consumer desires it may not be possible for him to differentiate between need and want or necessary and unnecessary without socially agreed criteria and without a complementary role of the state to determine what the society can or cannot afford within the framework of its resources and the goal of universal need fulfillment
• even though the urgency for milk is the same for children irrespective of whether they are poor or rich the amount of dollar votes that a poor family is able to cast for milk is not the same as those which a rich family is able to cast for status symbols

• the result is as tawny has rightly indicated a part of the goods which are annually produced and which are called wealth is strictly speaking waste because it consists of articles which though reckoned as part of the income of the nation either should not have been produced until other articles had been produced in sufficient abundance or should not have been produced at all market imperfections fourthly it was assumed that the market operates under conditions of perfect competition which is said to prevail if there are many buyers many sellers no barriers to entry and perfect information about the present and the future
• given the absence of a filter mechanism and the indiscriminate pursuit of want satisfaction only an equal distribution of income and wealth would give everyone an equal weight in influencing the decision making process of the market

• mills indicated the prevalence of the same state of affairs in the us by saying the corporation is the source of wealth and the basis of the continued power and privilege of wealth
• they account for about per cent of all economic activity in the united states though they comprise only per cent of all business fir miss however even the activity of the remaining per cent of business firms is determined in various ways by these large corporations

• it was unrealistic to assume that in an individualistic society where most operators in the market are economic men whose only motivating force is self interest whose time horizon is short and whose social perspective is generally narrow and limited long run as well as social costs and benefits would not be disregarded by them in their accounting even though these costs or benefits are extremely important from the point of view of continued social well being
• social costs and benefits fifthly it was assumed that the profit maximizing producers would not disregard social costs and benefits in their accounting and that prices would not therefore reflect just private costs and benefits but rather total costs and benefits to society

• if the filtering and motivating role of moral value sin molding consumer preferences is ruled out then the welfare state is not left with any effective mechanism that could help prevent the use of scarce resources for purposes that obstruct the realization of its egalitarian goals

• the greater the income and wealth disparity the greater the power of the rich to divert resources away from the need fulfillment of the poor if reliance is placed merely on the price mechanism to allocate resources and to remove the imbalances
• why would the rich agree to be worse off in a secularist value free society committed to the principle of pareto optimality to motivate them to be worse off in the interest of the well being of others it would be necessary not only to have socially agreed values to which everyone stands committed but also a motivating system

• firstly while its analysis of the human condition implied a total distrust in the ability of human beings to mange private property within the constraints of social wellbeing it was tacitly assumed that after the introduction of socialism the same human beings in their capacity as consumers workers managers and government officials will always be motivated to do their best for the social good without caring for their self interest
• if human beings cannot be trusted with private property for fear that they will exploit their position of strength to serve their vested interests how can they be trusted with the responsibility to manage a whole economy and to determine the socially desired configuration of goods and services hence the question posed by karl mannheim who plans the planners becomes pertinent

• hence hayek had very rightly predicted that a socialist solution to the problem of resource allocation was impracticable simply because complete knowledge of all the relevant data would not be available to the authorities but even if the information were available the task of making decisions about the allocation of resources among thousands of consumer and capital goods and services is too cumbersome and time consuming

• even if the management of a state owned enterprise was anxious to be efficient it could not do so without having the ability to make prompt decisions independently and being able to acquire the best and the cheapest inputs and to hire the most competent and efficient workers and technocrats from wherever they were available
• soviet rents have not changed since utility rates for electricity and gas since patrick cockburn doubts over prices soviet prices chief calls for overhaul financial times july p

• the continuation of the class system is bound to continue in a more intensified form in a centralized system the underlying philosophy of which is not based on any concept of human brotherhood and accountability before the supreme being but rather on
• if his immediate boss is benevolent the worker may be well off may be because if he is more competent works harder and performs his duties conscientiously he may not necessarily get a higher quid pro quo reward

• yanowitch has observed that the more promising the future occupational status associated with completion of any given type of schooling the lower is the share of manual workers children and the higher the proportion of non manual strata in the student body
• are however able to have a privileged access to everything through lavish perquisites not only free cars and country houses but also secret additional salaries and special shops with reduced prices and in the case of top people with goods completely

• if the bourgeoisie is not willing to yield power will the proletariat do so after getting into positions of power more powerful than those of the bourgeoisie the fact is that the state far from withering away became ever more powerful and an instrument of oppression in socialist countries the society in balance with nature could not come into being

• the glaring question hence remains whether the patching to socialism certain elements of capitalism which has itself failed can bring about the kind of revolutionary restructuring that is necessary to overcome the prevailing economic problems and social unrest and to realize the professed goals of socialism

• the introduction of realistic prices and exchange rates and the reduction of subsidies to lower the high budgetary deficits will mean the dismantling of the existing paternalistic system where retail prices bear no relationship with production or import costs where cheap food clothing and housing are at least theoretically assured and where employment is supposed to be guaranteed
• thus the socialist countries have an impossible task before themselves that of restructuring their economies to fulfill needs without a filter mechanism of socially agreed values that of reducing budgetary deficits without generating unemployment and further reducing the rate of growth and that of containing inflation in spite of introducing realistic prices in economies plagued by suppressed inflation

• moreover the demand for increased efficiency cannot be meaningful unless the enterprises are also free to select the quality quantity and sources of their inputs and also to hire and fire employees on the basis of their performance
• in a market system where such changes occur in small doses every year they may not be noticed as much as they will be in a system where the errors of decades are designed to be rectified in a few years

• however if the property rights are to be passed on equitably to the people then the perplexing question is about how this should be done who gets a share in what and to what extent if the workers are to be given shares in farms and enterprises in which they work how about those who are either not working or working in less fertile areas or enterprises that are or will soon become bankrupt

• activity including the decisions taken in the market place and corporate boardrooms or the politburo and the gosplan and until the economy is restructured in accordance with the dictates of goal realization and moral values
• the islamic foundation islamic economics research bureau thoughts on islamic economics dhaka islamic economics research bureau m

• these are a a morally based filter mechanism b a strong motivating system to induce the individual to render his best in his own interest as well as in the interest of society c socioeconomic and financial restructuring with the objective of realizing the desired goals in spite of scarce resources and d a positive and strong goal oriented role for the government
• it is important to see how these four elements of the islamic strategy can help bring about the kind of allocation and distribution that goal actualization demands

• the only criterion it has for allocation of resources is its own personal judgment which without the help of both socially agreed values and market signals cannot ensure an allocation of resources that takes into account the relative scarcity of resources or the relative urgency of need satisfaction
• if it does succeed it does so primarily at the expense of the poor who are unable to fulfill their needs at the resulting higher prices from the limited means they have at their disposal

• secondly who among human beings could be absolutely impartial and totally committed to the well being of all if human beings were to try to develop these norms themselves there would be a natural tendency on their part to frame norms that are skewed in favor of the powerful and the vested interests and not capable of serving the well being of all
• one of the basic issues of every society however is who is capable of providing such a filter mechanism must a moral code have a divine origin and must it be backed by belief in accountability before god the islamic view as that of other major religions is that divine sanction and belief in life after death are both necessary

• however while a rational individual would in any society be normally willing to render his best in his selfinterest if he is able to get an adequate reward for his contribution the question is what would motivate him to work in the interest of society why should a consumer hold his claims on resources within

• hence if he is rational and aspires to serve his self interest he will not act merely for his short run this worldly well being but will also try to ensure his long run well being by working for the welfare of others through a reduction in his schools brief the economist december p

• while in both the capitalist and the socialist systems the powerful and vested interests have no mechanism instilled in their inner consciousness to prevent them from manipulating policies and resources to their undue advantage or to regulate their spending in accordance with the dictates of social well being
• state regulation although necessary cannot by itself perform this function because the chances of being detected by the state are not fool proof and there are possibilities of escaping the adverse consequences of official prosecution through bribing or the use of one s political leverage

• it would rather be necessary to take effective measures addressed to a invigorating the human factor by motivating and enabling him to perform consciously the tasks needed to be performed not only in the interest of his own well being but also that of his society b reducing the existing concentration of wealth and ownership of means of production and c reforming all social economic and political institutions particularly public finances and financial intermediation in the light of islamic teachings to help minimize wasteful and unnecessary consumption and to promote investment for need fulfillment exports and increased employment and self employment
• moral reform must be reinforced by socioeconomic justice which it is not possible to actualize without enabling the poor to be more productive and to get a just reward for their contribution to output

• government taxation and expenditure policies should also be streamlined to promote saving and investment to realize socioeconomic justice and to reduce unhealthy budgetary deficits since financial intermediation plays a crucial role in the allocation and distribution of resources the needed economic restructuring for greater efficiency and equity may not materialize if the conventional financial system continues undisturbed
• proliferation of small and micro enterprises in both rural and urban areas should help not only in weakening the power centers but also in promoting greater competition and expanding employment and self employment opportunities

• role of the state such a comprehensive restructuring designed to actualize the desired goals and to minimize the existing imbalances may not be possible without the playing of an active role in the economy by the state
• this is because even in a morally charged environment it is possible for individuals to be simply unaware of the urgent and unsatisfied needs of others or to be oblivious to the problems of scarcity and to social priorities in resource allocation

• the greater the motivation people have in implementing islamic values and the more effective socioeconomic institutions and financial intermediation are in creating a just equilibrium between resources and claims and in realizing desired goals the lesser will be the role that the state may be required to play in the economy
• this will help provide a clear direction to government policies and expenditure programs and initiate effective measures for setting in motion the required structural and institutional reforms to enable the government and the private sector to cooperate in using scarce resources with optimum efficiency and equity for accelerated attainment of sociallydesired goals

• the inability of the prevailing economic systems to provide even the material ingredients of human well being and the fruitlessness of introducing cosmetic changes in these systems or of fine tuning them decidedly point towards the need for a new economic system
• a better fed healthy and properly educated and motivated population cannot but improve the quality of the work force in countries where serious consumption deficiencies and health and educational impairments are holding down the quality of work

• discussion question what is the difference between islamic state and welfare state chapra the islamic government has a role to play in the economy of the nation and it is an important role especially in case of market failure but it will not be a welfare state
• the same thing happened in education all rich and poor get free education although rich people can afford to pay for their children s education and it is their responsibility to do so

• it is very much apprehended that capitalism has the substitute of socialism but we have to propagate this in all possible quarters that capitalism has not succeeded in the face of failure of socialism
• abdul awwal sarker asks whether brotherhood does not mean that resources should be distributed properly among the muslim countries in this connection a question arises whether the rich muslim countries are acting in accordance with the islamic regulations if not why

• i mean within the prevailing conditions in bangladesh if you have money where you will invest will you give to those people whom you feel they will not be able to return it to you whereas you have earned money in a lawful manner and you like to use it first of all with the intention that your money should be safe and that will also give equitable return on it

• in this situation to attract the world to islam what action should be taken by islamic intellectuals the important thing is to explain islam and islam is so attractive that if you put it across to other people in a logical rational manner it is bound to attract their attention

• did i say in any part of my lecture that social interests would be more important than self interest all i am saying is that islamic values provide a certain framework for serving our purpose and we cannot exceed the bounds and we have to try to serve our self interests in a certain manner
• such that if you serve your self interest within this framework you will automatically serve social interest

• question talking about islamic strategy in solving economic proble miss may i please know what possibility exists within the realms of the idb for loan etc chapra this is a question you have to direct to the brother from the idb
• most of the western social sciences are determinist in their approach whether it is economics sociology or other social sciences they are all deterministic in their approach ie the social factors influence men and take them in a certain direction

• i did not talk about public finance i did not talk at length about the role of the state i did not talk about labor economics i did not talk about taxation and government expenditure and debt management etc naturally i was talking about economic system as such you mentioned these things because your concern is to focus on certain central idea

• so the fact is that as conviction spreads we talk about the increased conviction in the people and as we do this more and more automatically the change will come about in society and people who are opposed to the system will get converted or they will be thrown out by society
• islam still continues and even the capitalist system which was opposed by so many people but adam smith came and showed that self interest and social interest are coherent and his system extended and now it is all over the world but we see this is also coming to an end

• chapra as far as the gap between the teachings of islam and the actual reality in the muslim world is concerned we are realizing that islam is nowhere present in its ideal form but this is what we are to do and this is the motive of this seminar ie to increase conviction then you all will go and talk to other people
• could you please through some light particularly in the light of conditions obtaining in bangladesh chapra first of all the question of the use of word tactic or strategy

• if the capitalist world can convert the whole world to its viewpoint why we are so deviating from this very beginning monzer kahf chapra told us that was perhaps the last question

• in th same line of thought ibn khaldoon explains the relation between the management of the worldly affairs a i i i i i i i i i i a and allah s word being supreme a i i i oi Rae ci i i i i i i Oi i i a because according to shari ah worldly affairs are all considered with reference to their benefits in the hereafter a Y i i R a i i i i i ci i i a a i i Ri i i i i i i i i i i i i i i i i i i c i i i R Ca ibn khaldoon clarifies the function of the islamic state as getting everybody to follow the intent of the shari ah s rationale in their worldly and other than worldly affairs
• abu al hasan al mawardi al ahkam al sultanivah maktabat al babi al halabi cairo rd edition p

• imam shatibi argues that the islamic state has to make more e f f o r t in helping its citizens achieve their goals because the interests of religion have absolutely priority over the interests of the worldly life having a primarily religious role for the islamic state is the cornerstone of the islamic political system
• imam abu ishaq al shatibi al muwafaqat fi usul al shari ah al maktabah al tijariyah al kubra cairo nd edition v

• as for the welfare measurements it should be noted that the yardsticks of per capita income and per capita public spending on social services are inadequate in the islamic society since they lack the spiritual and religious content of welfare
• reported by bukhari and muslim see kitab al mardha richness does not mean having a great amount of property but riches is self contentment a i i oi i i i i i i i i i i i a Oa i i i i i i i i i ci oi R C i i Oi R a the ignorant man thinks that they who don t ask for charity are rich because of their modesty a i i i i i i c i i i i i i i i i i i i i Oi i a

• the economic implications of this wide function of the islamic state include the reallocation of resources necessary for the establishment of religion the formulation of anti moral pollution policies in places and environment of work and the elimination of the morally condemned goods and services from both production and distribution
• on the other hand the islamic state has two major limitations that are derived from the islamic ideology the state s commitment to shari ah and its commitment to shura

• achieving of economic capability necessary for strengthening islamic state in such a way as to allow it to be a safeguard of religion the protector of the society and its values and a vehicle of spreading islamic daw wa in the world
• ordaining that which is good and preventing that which is bad in general and protection and reservation of moral commitment and requirement of members of the society

• attaining quantitative maxima is undoubtedly an essential ingredient of the benefits of all people although alone it is not sufficient because the islamic state is also charged with the safeguard of religion and observance of its moral and ethical standards
• on the other hand this objective also covers matters related to economic stability in general and stability of the value of money in particular economic equilibrium and creating job opportunities sufficient to achieve full employment for all labor force in the society

• what is required by all means from the state from the society and from the neighborhood is to guarantee the minimum level of living that must be served to everyone and if it is not ie if there is shortage for any person as you find it in many statements by some sahabah and others then there would be no recognition of any private property ie all private properties should be made available towards servicing this objective regardless of any other consideration

• i would rather say the issue needs to be carefully studied and perhaps we may reach a conclusion that it is essentially the responsibility of the father or the family and only in those cases where they can not provide it or they can not provide it adequately or they can not provide it with justice then the state may step in and only in as much as required
• so he said he didn t do all that and how would you expect me then to be good to him turning to the father umar concluded you abused your son long time before he abused you

• for example umar bin al khattab once preserved certain land a lot of land for the camels and herds that are collected as zakah and he instructed the officer on it that well if some poor man comes to you with his few sheep or few camels let them graze in this land that is ok

• commitment to the terms of shari ah shari ah outlines a framework for action that determines what is permissible and what is not permissible knowing that there is a broad area left by shari ah itself for human mind to exercise its role is discovering that which is best within the broad guidelines provided by the divine revelation

• if an individual is interested in producing perfume because it is more profitable for him her than producing baby milk or even basic food stuff can the state force this individual to abandon his her profitable perfume project in order to go into the baby milk it seems to me that an affirmative answer to this question would be very difficult

• the principle of social duties shari ah introduces a unique concept for things that are needed in a society requiring collective action whereby it establishes individual responsibility and accountability for fulfillment of these social duties ie a social duty is coupled in shari ah with an individual responsibility of all those who are capable of discharging of the social duties

• this requires that with regard to shura people may only be treated equally and in a metropolitan society of today s world it can only be fulfilled by voting
• like comb s teeth

• changes in the volume of production and employment in the public sector we shall see when we study the principles of ownership in islam that the islamic economic system designates considerable part of material resources in the society as public property
• section iii means of fulfilling the objectives of the islamic state the tools available for the islamic state to achieve its objectives are the following

• this principle was applied by the prophet pbuh to the lands of khaibar and fadak in the northern part of the arabian peninsula and late on a mass scale by the second khalifah umar to the lands of syria iraq persia and egypt
• these rules suggest that distribution may be on a permanent or temporary basis it may be free or for a nominal fee but insist that in all cases such distribution must serve the interests of the society and must not be restricted to selected individuals or groups except the poor

• pbuh gave them took the two dirham gave them to the man from al ansar and said buy food with one of them and send it to your family and buy an axe with the other and bring it to me

• it may be noted at this point that there is a need for studying the issue of discriminatory pricing of public sector products from shari ah point of view specially if price policy relates to products of what is called in shari ah community property a i i i i i i i i i Rssa community property is based on the saying of the prophet pbuh water fire grazing pasture and according to one version of

• lastly zakah itself can be used as a tool of fiscal policy although it is not disputed that zakah rates are fixed as stated in the sayings of the prophet pbuh the timing of collection and distribution of zakah and the monitorization level of its collection and distribution ie the percentage of zakah that is collected and or distributed in cash or in kind are issues left to the authority of the state and manipulation of timing and monitorization level may be used as tools for influencing the economy
• this is based on resemblance to land reserved as hima a i i i a whereby according to many muslim scholars hima land may privilege the poor and the needy but it is not permissible for the rich to have any privileges over the poor in the land of hima

• investment of public properties and surplus of public sector not all revenues from economic public sector and from the public properties need to be distributed for public consumption purpose
• monetary and credit policy monetary policy tools include changes in the supply of money through changes in reserve requirement credit ceiling and open market operations on shari ah permitted financial certificates

• the application of the principle of justice with regard to the economic behavior of the government requires fair distribution of land not utilized in production among individuals who can bring in the production process equal opportunities for jobs equal opportunities to benefit from the projects of the public sector maintenance of balance in the society between geographical areas sectors occupations etc
• section iv constraints on the economic activities of the government the islamic economic system being based on the divine revelation provides principle and ideas in establishing a balanced relationship between government and individuals ie the extent of government powers and authorities is not left to human reasoning alone but guided by a sort of constitutional boundaries and guidelines given by the revelation

• although nothing in shari ah prevents the economic public sector to go in other industries the nature of the islamic economic system does not allow this kind of expansion on behalf of the activities of the private sector
• in order to derive the islamic guidelines that outline the relationship between the public and private sectors and the constraints on the public sector in this regard let us have a quick survey on how islam treated land utilization and exploitation of minerals rivers springs and forests

• this is obviously in addition to per cent obligation of zakah f the economic public sector should follow a policy of gap filling so that it will undertake those projects that are either pioneering or necessary from the public point of view and are not advanced by the private sector with the ability of reallocating them to the private sector as much as possible
• lastly we have seen earlier that projects based on utilization of community property are distinguished from other public property since they may have restrictions of providing equal opportunity and equal accessibility to the output of these projects for all members of the community

• it has started at the time of the prophet pbuh in khaybar and then it continued for the conquered land that was made public property and owned by the whole ummah during the time of umar and after him
• question ijan latif from ministry of economic affairs and finance iran first of all i would like to thank monzer kahf for his very good speech and i would like to ask a question besides zakah it seems to me that there should be some kharaj

• because women are more or less in global context deprived of their rights and roles under the global syste miss so how the state can help in getting the resources of women promoted developed and involved in the process of production and distribution

• and another point related to the public versus private proble miss in the paper it appears that you are giving too much emphasis on the private ctor and in analyzing the public sector you have always pointed out that one of the basic tasks of the public sector should be to give help assistance and incentive to the private sector
• monzer kahf has at the initial stage clarified that this paper although it is called economic role it also covers the politico economic aspects that means it also covers the political aspects that is fine

• because you mentioned yesterday the qard e hasan of course it is allowed it is mentioned in the holy qur an too and the credit of the loan whether the public institutions can and how i don t know how they are going to deal with a loan policy credit policy giving the dictates of the holy qur an
• therefore non muslim minorities are also taken care of you cannot leave their level of living lagging or unpromoted and unenhanced simply because they are not musli miss moreover one can definitely argue that you should also care about adequate level of living when resources permit for muslims and non muslims alike

• yet with regard to land for example even public land it would be better to follow the example that was done by the prophet pbuh and by umar after him to give it to the private sector to cultivate instead of keeping it in the hands of the public sector

• you can use zakah in that way as long as you are distributing the equity to the poor with the principle of tamlik that is you make it owned by the poor to make the project owned by the poor why not through an equity system of shares and stocks
• they also include rate of mark up and rate of mudarabahh or mushrakah rate of distribution of profit imposing certain limits or ceilings etc

• now in case of shura is it necessary to look for the approval of the people or can we rely on an individual s own judgment particularly if the judgment is in the light of some exposure to the teachings of islam thank you

• i think in your last sentence you are correct for highlighting the complementarity between islamic and conventional economics but this calls for you to keep in mind that most of us who speak about islamic economics don t usually like to talk about things that are known and are granted in economics an example of this is that i did not make any details about monetary policy and fiscal policy

• since you mentioned in your lecture that during the time of the prophet pbuh taxes were not raised by him and in some certain cases he resorted to voluntary contributions but during the history of islamic khilafah taxes were imposed and we have some problem in that
• it may be suggested that one should make specific effort to take the issues from the sources of islamic economic literature especially the classical one without putting them in terms of the conventional economics because i feel one need not to be bound by those terminologies and that approach while looking at these issues

• so he was able to force him sold but the king then found ways to be freed again but through that process bayt al mal got resources which were used for the battle in which muslims defeated their enemy even with a very small number

• the legal foundation of public property is derived from the many qur anic verses that assign property to the whole society or community in addition to certain sayings of the prophet muhammad such as people are common partners in three things water pasture and fire
• from the point of view of regulating the government power in this regard public property may be divided in three types community public property non used public land and state public property

• state s public property covers all other public properties whereby the only shari ah restriction on the behavior of the government is the criterion of serving the best interests of the people
• this form of community ownership is also present in some areas of the north african muslim countries where land owned by tribal farming communities is called arashi land in algeria and tunisia

• contractual relationships including exchange contracts such as sale and hiring contributory contracts such as those involving gifts and last wills and acceptance of religious and legal spending obligations such as taking zakah payment alimony money solemnly vowed to certain lawful purpose and expiatory payments determined in shari ah for committing certain sins such as breaking the fast in the month of ramadan or making certain mistakes while performing hajj pilgrimage to makkah
• prohibited means of acquiring property on the other hand shari ah does not recognize three kinds of means of obtaining property and invalidates ownership resulting from them

• the qur an exclusively specifies eight categories of potential recipients and heads of expenditures for the proceeds of zakah all but one are of charitable and community service nature the exception is the cost of collection and distribution of zakah itself
• since the true owner of all properties is god and private property is only a divine grant the ownership right holds as long as the owner lives but upon death it goes back to the true owner

• besides this obligation other financial duties or taxes on personal properties are determined by the needs and interests of the society if the stream of public revenues coming out of public property proves to be insufficient
• such taxes are of temporal nature and are determined by the legislative branch of the state

• al rubi public property in the early islam center for research in islamic economics king abdulaziz university died saudi arabia no date arabic

• tajul islam how do you differentiate between state ownership and community ownership monzer kahf the government has limited authority with regard to the community public property whereas the state public property can be disposed of by government decision or whatever collective decision making process ie by the normal working of the public authority
• for the individual and the community how can islam maintain a proper balance or coexistence of public and private ownerships there is an issue of freedom less freedom or more freedom chairman i invite questions from the participants

• another example suppose there is a spring in a village can the government take the water of that spring through a pipe to another place the government may not be allowed to do so as long as the village has inhabitants who need the water since the spring belongs to that village community and the state has no authority in changing its use
• my immediate question is is it really allowed in islam that a limit be put on land ownership such as this acres of land i am asking this question because it may happen that there is only one person in a particular family and you will have to face this allotment of land

• on the other hand you may agree with me in most cases we can review in our minds many muslim countries that imposed these limits and made land reform where they are not in fact exploitative and unfair to the extent that they are changing these systems now a days i think if you want to really put a limit on land ownership ie if you want to talk about the exceptional cases you have to prove that there is a serious harm that cannot be avoided except by such

• those definitely must be removed and if you know your property is of this kind definitely you should get rid of it and give it away where you think it belongs and if you don t know where it was originally and whose it is you give it to the state or give it to charity

• would the properties owned by these colonists be nationalized or not definitely yes in that case nationalization of those properties is a must because we know that before the year there was no single french person living in algeria and we know that there was no single property owned by any french person
• if you saw the new moon and nobody believes you you must fast alone because you are required to act according to your own knowledge even if the whole city or country did not fast

• why going into nationalization when you can use other means that are consistent with shari ah the chairman i believe that monzer kahf has explained his views

• he popularized the theory that the level of aggregate output in the economy is determined by the equilibrium between aggregate demand and aggregate supply and it is not always automatically assured that the equilibrium is attained automatically
• macro consumption theory in an islamic economic framework munawar iqbal the topic of macro economics almost always begins with a discussion of the consumption function what is it and why we study it you are all aware that there is a relationship between aggregate consumption in the economy and some independent variables

• the first was the classical theory of consumption function which can be described as consumption being a function of the rate of interest because consumption is the counterpart or residual of savings as the latter is a function of the rate of interest
• he formulated the question in the equation c i g y c s t he then emphasized the fact that since consumption appears on both sides thus temporarily assuring the balanced budget taxes are endogenous variables

• the long run consumption function is proportional and linear which means that the average propensity to consume equals the marginal propensity to consume in the long run
• deusenbury s relative income hypothesis which is that consumption is not only a function of current income but is also a function of relative income i

• the relationship between permanent consumption and permanent income is a proportional relationship and that is how he explains the discrepancy between the short run non proportional relationship between consumption and income and the long run proportional relationship between consumption and income
• then in the middle stage of their career when their income increases their consumption remains the same and they pay off what they have borrowed in the earlier part of their careers and they save something for their old age

• are current outputs wealth or rate of interest the determinants of aggregate consumption what the theory attempts to explain with the help of certain explanatory variables is the behavior of aggregate consumption
• however there are other explanatory variables which determine the behavior of aggregate consumption and many other variables have been included in the consumption function which range from income distribution a parameter of tastes rate of interest wealth and many others

• some of islamic writers have come to the conclusion that the aggregate consumption in an islamic economy that is the marginal propensity to consume and the average propensity to consume in an islamic economy will be higher than in the secular economy and the argument seems to be very simple
• in that case if you transfer money from a lower marginal propensity of consumer groups to a higher marginal propensity of consumer groups naturally the net effect will be positive that is the marginal propensity to consume in an islamic economy will be higher

• there are two groups of variables and in order to make a comparison between the islamic economy and the secular economy you should start with the functions like c a cy d uy even in a secular economy there are higher income groups which have a lower marginal propensity to consume and lower income groups which have a marginal propensity to consume which is higher than c
• so if for example zakah is percent of gdp some of it will be distributed to rich people including gharimeen people under debt for payment of their debt amileen alayha workers of zakah organization and al mu allafati qulubuhum those whose hearts are reconciled can also be either poor or rich as you know

• is it current income does the rate of interest or for that matter the rate of return have any impact on consumption through its impact on saving these are the kinds of things which we should be discussing if we want to develop an islamic theory of consumption function

• therefore the effect of israf will depend on the proportion of income that is going to the higher income groups and the net amount of money which is transferred to the lower income groups certain
• there is the difference between either the gross transfer that is alpha y and the net transfer which is the gross transfer minus the amount which does not go to the poor

• therefore we need not say that the marginal propensity to consume in an islamic economy will be unduly lower because of the introduction of zakah or unduly depressed because of the elimination of israf
• how do consumers decide on their consumption basket do they only take into consideration the needs of other people then we must build these variables into the macroconsumption function and build an aggregate consumption function from there

• i underscore the importance of the work stating the impact of these injunctions and whether empirically the value of a certain parameter will be such and such as even this has policy implications

• the income of the higher group of zakah payers strictly speaking can be known because in an islamic economy when we pay zakah and in a secular economy when for example they pay welfare tax it is equivalent
• if there is israf from their perspective they are getting utility from it and it is their own private affair and they are justified in doing that

• the normal assumption and i think it is a safe assumption is that while zakah is assessed both on income and wealth ie it is assessed on assets and wealth it is paid out of current income

• in the case of bangladesh pakistan and elsewhere even after the intervention of the institution of zakah the level of income of certain income groups will be insufficient for subsistence consumption
• therefore could you not take into consideration the impact of such consumption both in this world and the hereafter and for that matter could you not take zakah and sadaqa together

• on page paragraph you can find the following with these values the likely net effect of zakah and moderation would be to decrease the marginal propensity to consume and paragraph or page with these values or certain values i have percent of israf and the marginal propensity to the level of zakah percent

• as long as the number of endogenous variables is equal to the number of equations the system is completely identified

• the purpose of this note is two fold i to clarify some of the theoretical issues in the ongoing debate and ii to try to arrive at some conclusions with respect to the values of the relevant parameters and the level of aggregate consumption in an islamic economy
• therefore islamic economists are genuinely interested in investigating as to how the consumption function would behave in an economy which is governed by islamic values and injunctions as compared to secular economy

• firstly while the writers are genuinely interested in a theory of consumption function in an islamic framework what they actually do is to study the effect of certain islamic injunctions on aggregate consumption within the keynesian consumption theory or absolute income hypothesis
• if islamic teachings and values lead one to believe that the basic postulates of a theory are unlslamic then one has to attack that particular postulate s and come up with an alternative theory

• the result of this confusion is that most of the authors have adjusted the absolute income hypothesis for zakah and israf and have labeled the resulting consumption zakah moderation and aggregate consumption function as islamic
• he further maintains that the second quotation given above clearly suggests that consumption expenditure of the believers should vary directly with their income an increase in income leads to an increase in consumption

• there may still be a lower level of consumption in the islamic economy than secular economy because of differences in individual perceptions about what constitutes israf for a self centered individual of the secular model very little will fall in this category because he may well derive pleasure from lavish spending on him and hence is quite rational by the definition of that model

• the consumption function in an islamic economy therefore becomes where by is income of group one i b y that of group two and ay is the amount of zakah paid
• the individual of the islamic model derives pleasure from fulfilling the requirements of shari ah and hence from sharing his provisions with others and is happy with a simple living

• as darwish and zain have rightly pointed out in order to study the effect of zakah one should not start with a consumption function like c a by for capitalist economy and then bifurcate it for the islamic economy because in this function b represents the marginal propensity to consume of both the groups
• in order to have a meaningful comparison one should start with a function like however metwally insists on his position on the ground that we are comparing a capitalist economy with an islamic economy which has a zakah levy and not two islamic economies one with and the other without the zakah levy

• now when one adds to it another group with assumed higher propensity to consume and takes an average the aggregate marginal propensity to consume in the islamic economy comes out to be higher than the one in the capitalist economy even if there were no zakah levy
• if for analytical simplicity one considers the population to comprise of only two groups with their incomes by and b y respectively the function becomes which is the same as equation with b c and b d

• however by isolating the effect of zakah we can see that even though the magnitude of the effect of zakah on mpc and apc will be smaller it will still be positive
• first the marginal propensity to consume of the zakah receivers is higher than that of the zakahpayers and second there are always enough poor people in the islamic country to receive zakah

• however if the income is transferred to absolutely poor people who are unable to fulfill even their basic needs the effect on aggregate consumption is likely to be it may be mentioned that the time series studies show that while in the short run the average propensity to consume at low incomes is greater than at higher income levels in the long run the average propensity to consume is fairly constant
• almost all budget studies show that low income families typically dissave high income families typically spend less than income and as one moves along the distribution from lower to higher incomes the higher the income the less the rise in consumption from a further increment of income

• if one uses the above explanation then the effect of zakah on aggregate consumption can be traced as follows supposing that only a fraction y of the total amount of zakah z ay is transferred to group two the consumption function would look like on the basis of equations and darwish and zain conclude that since both d and y are less than one their product would be a much smaller fraction than d alone and therefore it is most likely going to fall below c

• equation for example says that the aggregate consumption will increase because of zakah by an amount which is equal to the difference in the marginal propensities for consumption of the two groups times the net transfer to the group with higher marginal propensity to consume
• to sum up the discussion on the impact of zakah on aggregate consumption and the propensity to consume it appears to us that cetris peribus this effect would be positive

• in order to have some idea about the overall picture we turn to the analysis of the other major determinants of the propensity to consume in the islamic economy ie the effect of the prohibition of israf extravagance and tabdhir squandering
• secondly even if it were true a smaller basket does not per se lead to a lower propensity to consume as long as the consumer has a sufficiently large number of commodities in that basket which in fact is the case and he is free to substitute one commodity for the other

• in order to see the likely impact of the islamic injunction on the level of aggregate consumption we first derive the equation for measuring the net effect and then present sensitivity analysis using some plausible values of the parameters involved
• the simplest and at the same time the most reasonable way is to assume that the consumers in the lowest income group who are barely able to survive on their incomes are not spendthrifts

• even though such payments are generally voluntary the islamic moral system is so strong that the rich people will be strongly inclined to take care of the poor because unless they do that they cannot hope to achieve the pleasure of allah
• it is obvious however that it is an empirical question and it is not possible on a priori grounds to claim that the marginal propensity to consume in an islamic economy would be higher or lower than its secular counterpart

• a comparison of table one and two reflects the effect of the relative values by changing the difference in the propensities to consume of the two groups whereas a comparison of table one and three traces the effect of changing absolute values while keeping the difference in the propensities to consume as constant
• specifically the value of the marginal propensity to consume of the higher income group affects the net result not only as an absolute value but also as a relative one relative to the marginal propensity to consume of the lower income group

• summary and conclusion after reviewing various opinions about the effects of zakah moderation and infaq on the aggregate consumption function and the propensities to consume and examining these theories critically we tend to conclude that while the effect of zakah and infaq on consumption cetris paribus would be expansionary and that of moderation contractionary the net effect cannot be determined unambiguously

• macroeconomic estimation of zakah proceeds and their relationship to economic development mimco paper presented to symposium on islam and development amss temple university philadelphia april
• zarqa m

• what might it be how might it work what policies might be called for to ensure its smooth functioning and to preserve its islamic character in an otherwise unislamic professor of economics the school of economics the international islamic university islamabad pakistan

• this will involve explaining existing realities in terms of departures from the islamic nor miss the principal aim will be to identify macroeconomic policies in order to steer the economy in the direction of the islamic ideal
• this paper is prepared for the international seminar on teaching islamic economics at the university level july august to be held in dhaka under the auspices of islamic research and training institute idb jeddah and islamic foundation ministry of religious affairs bangladesh

• the alternative reconstruction of islamic macroeconomics approach along the reconstruction of islamic knowledge line does not deny the importance of the points of departure for the existing islamization of knowledge approach

• it may be noted that the presence of zakah and the absence of an interest based financial intermediation mechanism will be the two most distinguishing features of models of an islamic economy
• a logical question arises on what basis do we judge an economy islamic as opposed to unlslamic such criteria would serve as terms of reference for reconstruction of islamic macroeconomics

• beyond these points one should also be careful about mathematical needs in modeling such as equality between the number of variables to be explained and the number of equations at hand independence consistency and solvability of the model

• further issues in modeling an islamic economy what will be the nature of the saving and investment process in an islamic economy in particular will savers and investors be the same entities in an islamic economy a clarification is necessary because some confusion prevailed on this subject for a while

• to be adequate reflection of an islamic economy the emphasis should be on contractual arrangements rather than the fixity or viability of the rate of return with due margin for shari ahpermitted economic instincts of all concerned
• the interaction of an islamic economy with other economies in an unislamic world and policies to preserve its islamic character from unfavorable external pressures are other exciting areas

• the models lack the capacity to capture the sequence of events in the case of loss
• ausaf ahmad income determination in an islamic economy research series in economics no

• herndon va international institute of islamic thought a scaled down version of this study incorporating zakah was presented under the heading macroeconomic planning models for islamic economies at the international seminar on islamic economics held at international institute of islamic economics
• paper presented at investment strategy in islamic banking applications issues and problems workshop organized by the royal academy for islamic civilization research jordan and irti idb jeddah in amman june

• paper read at the international seminar for university teachers of islamic economics held in islamabad during nd august rd september under the sponsorship of international institute of islamic economics islamabad and irti idb jeddah
• open economy models a c abbas mirakhor and iqbal zaidi stabilization and growth in an open islamic economy

• though the contemporary practice of islamic banking has concentrated its operations on what is called mark up based trade financing the theory of islamic banking has been advocating the use of what is called profit loss sharing pls based financing as first best alternative to the interest based financing

• will the investment level be higher under pls several writers have argued that under such a system the level of investment will increase because elimination of interest will allow the firms to invest up to a level where marginal product of investment becomes equal to one

• comparison of equation with equation is used to directly imply that investment in pls based will be higher than that in the interest based system because r
• these two factors may not allow capital supplier to supply funds unless he finds it quite likely to realize a certain minimum rate of return

• there are objective reasons to assume that the higher the i the higher k will be demanded by the capital supplier to compensate for the risk of putting all his eggs in one basket
• infinitely elastic demand for investment under pls on the other hand some authors have argued that pls system implies an infinitely elastic demand for investment funds

• the investor will demand the investment funds only up to the level where marginal productivity of capital becomes equal to hence demand for k will not be even theoretically allowed up to the level where its marginal productivity becomes unity
• its productivity cannot be less than its opportunity cost and hence whether investment level will be higher or lower is either an empirical question or has to be answered in a general equilibrium framework

• this may be due to the fact that the risks of giving higher amounts to a single investor may increase at an increasing rate because entrepreneurial abilities of the investor are fixed and marginal productivity of entrepreneur in producing profits may start declining after certain level
• we write production function as y f l i since labor and capital are sharing the income of the project and hence do not impose fixed costs this production function also represents net income function for the project

• c rk where c is total return that the provider of capital expects to earn on his capital i and r is based on his own utility function or on the opportunity cost of capital
• using equation and we can write this equation shows that profit sharing ratio will vary as more and more capital is invested because c is increasing at a constant rate and y is increasing a declining rate

• the distance between curve a and line b measures the income to be retained by the investor after paying the share of capital supplier from the income of the enterprise
• the value of k can be observed at only level of i as a ratio of the corresponding value at line b to the ratio of the corresponding value at curve a

• since capital owner is subjected to bear losses up to the full extent of his capital capital supplier would not like to give as much capital as demanded by the investor at a constant rate of return r
• in other words we will have to re write equation as follows c g i with g i g i the profit maximizing investor then faces the following profit function p y c p f i g i optimum demand for capital by investor will be for that level of k where f i g i

• profit maximizing investor will demand i where the distance between a curve and b curve is maximum reflecting the maximum profit left with the mudharib after paying the income sharing of the capital owner
• y c fig this can be shown in the following diagram as well curve a represents the production function as shown by equation

• the supply schedule of the funds owner would have been higher than bo say at b if the project were more risky and the supply schedule would have been lower than bo say at b if the project were less risky

• the market demand will decline as the s in the market of particular set of project goes up and the market demand will go up as the k value goes down
• the demand from these sets of projects and the supply of funds available for each set of project determines respective equilibrium level of s for each set of project

• this is because k implies that owner of funds will take all the profits that investor makes which will not be a rational situation from the investor s point of view and hence he may cease to effectively demand any amount of investible funds
• b it is possible that there may be a lower limit on k which may refer to as s below which k may not decline except to become zero

• this may occur because a the risk associated with investment does not increase with the increased investment b there are large number of suppliers of capital so that no one holds a significant portion of the total supply of capital and hence is not able to influence the profit sharing ratio c the investor the bank has access to and enjoys the credibility of the large number of suppliers available d there are large number of feasible projects available to the investor the bank
• the appropriate discount rate will still remain the opportunity cost of capital for investor in a particular project will be the expected rate of return on his capital that he expects by supplying his capital on pls basis in projects of similar riskiness

• the discount rate ro contains two elements of the opportunity cost of capital a a compensation for the pure time value of money or the pure time preference reflecting uncertainties associated with time alone and b a compensation for bearing the risks other than those attributable to time alone
• the average rate of return on such deposits paid in the past would be a close estimation of the expected rate of return and hence of the discount rate

• also in the proceedings of the international institute of islamic economics islamabad and the islamic research training institute of islamic development bank jeddah
• abbas mirakhor and iqbal zaidi stabilization and growth in an open economy imf working paper imf washington

• haq optimal profit sharing contracts and investment in an interest free economy in theoretical studies in islamic banking and finance ed khan m
• fahim khan contemporary practice of islamic banking lesson from the market for lemons lecture delivered in the monthly cultural meeting of idb

• at this stage only the following question is being addressed to if interest is eliminated from the economy because it has been categorically forbidden in islam and is replaced by an islamic alternative then what will possibly be the implications on growth and stability of an economy of course elimination of interest is not the sole factor that would islamize an economy but it is still important to study the impact of its elimination only as most of the conventional economic analysis and discussion on growth and stability centres around interest rate
• islamic economists believe that a true islamic alternative to interest would be the introduction of profit loss sharing based financial system in the banking system in which any loan will always be free of interest and any financing will have to be based on the concept of profit loss sharing

• the other line of argument is that investment level under the pls system will decline because profit loss sharing system will involve an extra cost for the owner of capital because of the asymmetry of information with respect to the productivity of enterprises
• one line of argument is that since there is no interest in the economy therefore investment can be made until marginal productivity of interest becomes zero whereas in the interest based system the investment will have to be stopped where marginal productivity of investment becomes equal to interest rate

• on the demand side since the banks would be providing financing on the basis of the profit and loss sharing the fact that the banks are willing to share the losses will motivate several potential investors to come forward
• whether opportunity cost of capital at a particular point of time was equal or not to the interest is an empirical question and the answer will determine whether or not investment level be same higher or lower if pls is introduced at that particular point

• stability regarding stability in the economy again we ask the question that when we eliminate interest rate and instead introduce profit loss sharing system what do we lose that will affect the stability what was there in the interest based system that will not be available now to us and will cause instability in the economy the argument that is given in this respective is the following in a system with fixed interest rate investors know what is the cost of capital and hence they can take appropriate investment decisions

• the profit sharing ratio of the banks with the depositors and the profit sharing ratios of the banks with their clients on assets side have been shown to serve as an effective policy variable
• the people who invested on the basis of an expectation will realize their mistakes when they see the actual return and will come back and withdraw their investment and this will create instability

• if the assets of the bank decline the liabilities to the depositors also decline to the same extent because bank is committed to share the profit loss with the depositors
• there is no profit calculation in consumption and hence they will either depend on mark up based financing which gives low return and which also requires them to be involved in trading or they will have to depend on leasing which will be costly business for the bank because they have to own and maintain the asset

• also leif johansen discussed the macroeconomic framework in relation to growth in the economy by explaining the price impact in the model and hence showing that casual demand encourages growth by increasing the profitability implicit in the rise in price level

• we thus write human resource equation as h e l where h is stock of economically active human resources e is that part of human resource that is active as entrepreneurs ie working for uncertain profits l includes all those who are either working for someone else for wages in a modern sector or are disguised unemployed in the subsistence sector
• an economically active population can be divided into two categories a those who work as what we may call entrepreneurs working for themselves to earn a profit and not earning a wage or salary and b those who work as what we call labor working for someone else

• the employment of labor in the modem sector l is generated by the demand for labor from the entrepreneurs e which in turn depends on the following i marginal productivity of labor ii reservation wage w referred to above the employment of human resources h into e depends on the following a opportunities for the human resources to avail to work for themselves b expected profits p from entrepreneurial activities c availability of the capital requirement for the activity d willingness and ability of human resources to avail of an entrepreneurial opportunity yielding a certain expected return p by beating certain risks
• the output that l shares in the traditional sector is sort of average product in the sector

• the curve implies diminishing marginal output on investments as more and more funds are used by the same entrepreneur
• savers are owners and suppliers of invertible funds and entrepreneurs are users of these funds

• under this arrangement owners of funds agree to share the actual profits according to a pre agreed ratio and to share the losses if any in the proportion of their funds in the total investment of the enterprise
• the entrepreneurial sector competes with the wage paid sector and an equilibrium is simultaneously achieved in the wage paid labor market and in the entrepreneurial labor market

• the profits that the supplier of funds will expect to receive on his investment may increase at a constant rate implying a constant expected rate of return on his funds or it may increase at an increasing rate because the risk may increase for the supplier of funds as he supplies more and more funds to the same entrepreneur
• what type of macro framework will result in the economy if the above strategy is to be implemented and what implications will such a framework have for growth to be discussed in the rest of the paper the above mentioned elements are primarily expected to affect investment demand and money demand

• the expectations about the profits for the entrepreneur as well as for the supplier of funds from the investment in a potential enterprise can be shown together in the following diagram curve a shows the total expected profits that the entrepreneur expects to make from his enterprise with different levels of investment

• the equilibrium point for an entrepreneur to enter into a contract with the owner of the funds will occur when the marginal productivity of investment in the enterprise becomes equal to incremental increase in the expected profits claimed by the owner of the funds
• curve b may shift up and down depending on various factors such as availability of more investible funds with the owners of funds improved credibility of the users of funds reduced risks due to an improved political and economic climate etc

• the possibility that the owner of funds may supply their funds at a may occur due to several reasons expected profits are too low and risk of loss is considered too high to be compensated by the share in the expected profits
• it is possible that there may be a lower limit on a which we may refer to as a below which am may not decline except to become zero

• we will therefore refer to the supply of investible funds in terms of units of investment funds rather than owner of investment funds available at different levels of a
• at macro level curve b thus is replaced by an upward supply curve as shown below on the other hand the available investment funds look for more productive entrepreneurs so that they are able to claim more profit

• because of the assumption of large numbers of enterprises entrepreneurs in the economy we can also assume that the profitability r of the enterprises in the economy at the margin will not be affected by the changes in the level of investment i and profit sharing ratio a
• goods market equilibrium let us take the simplest model of goods market y c i g c private consumption i investment demand g government expenditure y aggregate demand equal to aggregate c supply i io b b is t y g g exogenously given y ao ala

• money demand money demand function demand for real money balances will depend on the level of real income and the expected return on financial assets
• with the importance attached to qard ul hasan and with the embarrassment attached with not helping a brother in need the islamic environment would require every one to keep some cash for meeting the short term borrowing needs of others

• since there will be a natural urge to hold money in periods of low expected returns in order to be able to invest in periods of high expected returns and since such an urge cannot be institutionally controllable some speculative demand for money is inevitable

• in terms of lower q we have already discussed that it is not possible that any addition to money supply may add to the money demand because of the existence of a cost z of holding money
• is there a vertical section in the lm curve the answer depends on whether h can be zero ie whether demand for money can be insensitive to changes in a

• if r is very high there is scarcity of capital and there is excess supply of human resources willing to take entrepreneurial jobs the a may rise to a very high level still leaving enough p expected return for the entrepreneurs from the investment to induce him to remain in the entrepreneurial job

• we ask the question is there any level of q at which investment may continue to be done without decline in q in our framework this can occur as below i for a given r on investment for an entrepreneur there wilt be a level q which leaves just that amount of p which is threshold point for human resources to stay in an entrepreneurial job

• in this case a horizontal section in the investment curve will occur at a as shown below now we come to consider the conditions when b may approach to zero and hence may cause is curve to have a horizontal section
• this is because when r is low p and q will also be low and p will not be low if w is not low

• when a country has sufficiently developed people own a lot of financial assets and they are earning high rates of return on them pumping more money may not be as helpful to the economy as government spending that may achieve certain social goals are well while expanding the gnp
• in the initial stages of development meaning low incomes of capital low income of labor and low income for entrepreneurs the lack of taxable capacity may substantially limit government spending

• low income trap in the horizontal section of the is curve it is possible that even the money supply may not be effective if demand for investible funds from the entrepreneurial human resources ceases to exist
• now r is at a higher level than from where we started and there is no surplus so that a has to be reduced to attract human resources to employ additional supply of investible resources

• the value of a can be observed at any level of k as a ratio of the corresponding value at line b to the ratio of the corresponding value at curve a

• in other words we will have to rewrite equation as c g k with g k g k o the profit maximizing entrepreneur then faces the following profit function r y c r f k g k optimum demand for capital by entrepreneur will be for that level of k where f k g k
• thus a higher supply of capital for the same entrepreneur would mean a higher income sharing ratio with the same entrepreneur

• therefore i think if islamic banking system is introduced it will not cause any harm to the society rather it will bring about more funds to invest and will bring about more return possibly more than the rate of interest that interest bearing banking system could offer
• in the context of bangladeshi economy we have an unorganized sector where the interest rate is very high then we may have interest bearing banking system as he mentioned then we have islamic banking system

• whether the instruments that you have used to explain the investment phenomenon will be equally efficient in a transitory period that is in a transition from non islamic system to islamic system
• answer the leasing is not the banks business because the banks need to have separate department for this purpose which does not fit in into the nature of their functions

• when these elements are clear then you can make your own model to study how the general equilibrium will be achieved and whether there will be a higher level of income more stability and lesser inflation
• if we want economic growth we can not maintain stability if we try to maintain stability we can not ensure growth or tab inflation

• question you have said that when a bank advances money it will not advance loans for consumption purposes and hence there may not be inflationary pressure

• most of what has been done now is the formulation of a sensible model for consumer behavior in islam starting with certain given that islam stipulates for that behavior and then trying to see analytically what consequence these given have for the utility function of the consumer and possibly for his demand function
• so there are some studies which have been conducted and i would be most appreciative if any of you could guide me to any other studies which have tried to empirically investigate the question of actual muslim consumer behavior

• the standard way of treating the matter is to modify the traditional theory before it is applicable to the muslim consumer
• i have tried to bring the contribution of al gazali and al shatibi who wrote the famous books ihiya ulum al din and al muwafaqat which are really encyclopedias of islamic science

• he further suggested that we should deal with two objectives in the function when we deal with consumer behavior in islam one function is related to the hereafter and the other is related to the here and now and that the amount which the consumer expends is constrained of course by his budget
• the shari ah emphasizes that your preference function may or may not coincide with your true utility function and the shari ah tells you what your true utility function is and encourages you to make your choice function conform or to become identical with your true utility function

• so we can say their contribution probably lies in showing that even when we accept the idea of necessities being given more importance than conveniences which are more important than luxuries we still can derive standard indifference curves and use them in the usual ways
• after that he moves on to conveniences where he makes another decision as to how to select among conveniences and then later he makes a similar decision among luxuries

• doctor asaduzzaman as i recollect showed that if you start with the concept of the necessities of basic needs that have to be satisfied and which cannot be traded against other goods and services ie when you have what they call lexicographic utility function then a lot of the utility analysis which is now conventionally presented in economic theory becomes invalid

• as far as i can see doctor mahbub did the following things first of all he clearly presents an analytical version of the question of how to spend in the way of allah or for the benefit of other people and for one s own benefit

• he says that if the consumer is willing to give up a little of his own consumption in order to increase expenditure to the way of allah or to give to other consumers lies at the same level utility as a consumer behavior which gives much more weight to his own expenditure compared to the expenditure on others

• what of the income he will allocate in the usual consumer analysis fashion over various goods and services if this is his budget line in the first diagram where he allocates income between e and e in the second diagram the income with the budget line would have to move in parallel fashion to express the fact that a lower amount is available to spend

• in the qur an allah subhanahu wa ta ala says in sura al imran and in other verses the same phrase is repeated you reach the level of righteousness when you spend out of what you love ie he will spend out of his own money or wealth for the love of allah

• my question is can we distinguish between e and e it is said the shari ah that when a momen that is the believer in islam spends even for his family that is also a part of ebadah and when he spends for others he has got the desire for having the sawab which is the benefit not only in the present but also the hereafter
• if so how can we distinguish between e and e answer professor zarqa you remind me of a very well known hadith which says the following what you spend on your own self allah counts as sadaka for you what you spend on your wife allah counts as sadaka

• he deals with this question at some length and relates that economists analytically distinguish between when my utility depends positively on your utility and when my utility depends on what you consume of a particular type of goods

• question what are the prices involved there answer you have a budget line and then in the first stage you are allocated at your income between e and e
• with this at some length but i am not sure that i have fully comprehended what you want to say to be able to present an answer to you

• ishaque ali khondar comment and question regarding the proper blending of reward in the hereafter and consumption in this world the diagram on page this is shown on the vertical axis and free on the horizontal axis
• question this diagram clearly depicts the compromise between soul and body in this materialistic world and especially in this aspect of life as blended in this diagram

• in the islamic framework we have the utility approach and the indifference curve analysis approach in order to expand consumer behavior in the modern economy
• of course it has been so thoroughly analyzed that one definitely could not say that there can be no new approach

• the diagram which you presented here it depicted and stated that your utility is a function of e and e does this apply to the believer of the muslim consumer alone or the behavior of every individual consumer because we found that every individual spends something for others
• in fact we know that human beings in general like to do good at least allah made human beings desire to do something good

• so i wonder if brother zarka would care to enlighten us on whether he took account of the consumption function and possibly undertook an approach for extending it beyond the time horizon of modality possibly in the form of something of islamic
• then how utility can be a function of e plus e which is more psychological and spiritual and which is not a measurable utility as a function of e e answer no e e are two objectives in one function

• doctor mahbub states that he finds no fault with the three standard assumptions that traditional economics has made about consumer preferences that the consumer can prefer one collection of expenditures and goods over another that these preferences are transitive and i forget the third one
• i think so but i do not know someone may challenge this but i think it is sensible because you see he wants to show the consumer s decision

• therefore i would like to close this session by congratulating all of your for giving your whole hearted cooperation in running this session in a very effective manner
• before concluding i inform you that there will be an announcement from our brother from the islamic foundation

• it is also charged with the responsibility of assisting in the promotion of foreign trade especially in capital goods among member countries providing technical assistance to member countries extending training facilities for personnel engaged in development activities and undertaking research for enabling the economic financial and banking activities in muslim countries to conform to the shari ah

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic economics

KeyWords

islam econometric banker economi research muslim universal rate income public zakah developed invest shariah function countries social resource import consumable

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DOCUMENT REFERENCES

Number of Pages

370

Published Date

2006-12-23 15:33:00

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