Islamic Credit Card Market Poised for Growth: Analyst

images42The credit cards marketed to Muslims carry no interest, favoring structured fees to cover the cost of lending.

While the MasterCard Worldwide and Visa International business models have dominated the global credit card industry for years, Islamic credit cards — which operate with an entirely different business model — are starting to evolve, primarily in Middle Eastern countries, according to Brian Riley, research director for TowerGroup.

“There is a definite need [for card issuers] in this market,” said Riley, who pointed out that current worldwide followers of Islam exceed 1.5 billion, or a quarter of the world’s population. So Tower estimates that total assets based in Islamic-compliant banks will exceed $1 trillion by 2011.

The Islamic credit card market, in existence for slightly more than a decade, has yet to be “stress tested” on a broad scale. However, given that adherents of the Islamic faith represent 24 percent of the world’s population, there is significant opportunity for card issuers to build volume. But to do so, they would need to change their business models.

The Islamic banking model rejects the assessment of interest in favor of structured fees, Riley explains. Islamic standards also require that all participating parties comply with Sharia, Islamic religious guidelines. More than the product itself must comply with the guidelines; the end-to-end business process must also comply.

Over the past several years, many financial institutions have created units solely focused on the needs of Muslims borrowers. For example, Sharia-compliant home mortgages became popular during the housing boom in the U.S. The mortgages, rather than charge interest, carried fees that were roughly equivalent to a traditional mortgage’s interest costs.

CitiBank and a few other financial services providers have entirely separate financial units to handle this growing market, said Riley. Other participants include traditional banks converting to the Islamic model and Islamic startups.

As the market emerges, entrants must foster both a sustainable business model and the ability deal with such core issues as interoperability with global card companies, product design and processing venues

source : insidearm


History of Islamic Banking

images32During the eighteenth, nineteenth and the first half of the twentieth centuries the European countries colonized almost the entire world of Islam. They managed the economies and finances of these countries in their own interests and in their own ways.
Other than the native elites who had to get involved, the Muslim masses stayed away from interest-based financial institutions.
As the national consciousness grew and freedom movements promised to bear fruits during the second half of the last century, the urge to manage their affairs in accordance with their own values and traditions also emerged in these countries. Indonesia gained independence in 1945 and Algeria in 1963. In between these two dates, all Muslim majority countries became independent. The discussion on the management of their respective economies in order to promote their own interests had, as an offshoot, brought the Islamic financial movement into being. While nationalism made them focus on rapid economic development, religion, the other motivating force in freedom struggle, made many turn to Islam for guidance.

Theoretical Literature

Early theoretical work on the subject appeared during 1940s through 1960s, in Urdu, Arabic and English. The focus was not banking and finance in the narrow sense but the economic system as a whole. The writer would, generally speaking, criticize capitalism and socialism and proceed to outline a system based on Islamic injunctions relating to moderation in consumption, helping the poor, encouragement of economic enterprise, avoidance of waste, justice and fairness, etc. The poor tax, Zakat, and prohibition of interest would be emphasized in this context. It would be argued that Muslims should not adopt the conventional system of money, banking and finance blindly. They must purge it of prohibited interest and modify it to suit the just and poor-friendly economic system of Islam. Some of these writers went beyond generalities and suggested that the early Islamic contracts provided sound bases for restructuring banking so that it was free of interest and served the goals of Islam. The youngest of Islamic countries, Pakistan, made the commitment to abolish Riba (interest) a part of its constitution.

Professional Muslim economists as well as Shariah scholars made significant contributions to the subject so that by the end of 1960s some kind of a blueprint of Islamic banking was available. Bankers and businessmen had also joined the task of evolving
a workable model since efforts were on in several Muslim countries to put the idea into practice. The political conditions in Arab countries were not favorable for any initiative at the state level. But private practical initiatives had a greater chance of mobilizing the monies needed for such a venture in these countries, as we shall see when tracing the history of the practice of Islamic banking.

The earliest theoretical model was based on two-tier Mudaraba, profit-sharing replacing interest in bank-depositor as well as bank-borrower relationship. Islamic banks would be financial intermediaries, like conventional commercial banks, only they
would purge interest from all their operations, relying on partnership and profit-sharing instead. They could operate demand deposits like their conventional counterparts and offer other services against fees, like other banks. Banks directly doing
business and entering the real estate market in order to make profits for their depositors and shareholders (partners) was not a part of this model.

But practitioners in the Arab world did not see much scope in this model. Accepting deposits into investment accounts on profit-sharing basis was acceptable, but their profitable employment needed direct involvement in business. Merchant banking was also nearer to the milieu with which Shariah scholars were familiar. They felt more at home with a model in which savings were mobilized on profit-sharing basis but their profitable use was based on familiar Islamic contracts of sale and purchase and leasing, etc.

Murabaha, that is cost-plus or mark-up financing entered into the model of Islamic banking in the second half of the 1970’s. By this time practice had revealed the difficulties of applying the mudaraba (profit-sharing) contract in dealing with businessmen in
a legal environment that failed to provide any protection to the financier in this case, unlike the protection it provided to interest-based finance. Adverse selection in an environment dominated by interest-based institutions was another serious problem.
Other Islamic contracts like Salam, Istisna’ and Wakala were also being explored. Shariah scholars, many of them formally advising Islamic financial institutions, made significant contributions in developing the model.

One of the specific needs to meet was financing house purchase on Islamically acceptable terms. Three models of interest free financing were developed. The first, which formed the basis of the House Building Finance Corporation of Pakistan (1980), was based on joint ownership and rent sharing, eventually leading to the home dweller possessing it in full as he purchased the government owned part bit by bit. The second was a cooperative in which members pooled resources and got funded in turn,
the pooled resources being profitably invested while waiting. The third method is based on Murabaha, the customer paying the higher deferred price in installments.

In practice small variation were introduced to ensure Shariah compatibility as well as financial viability.

During 1980s the subject of Islamic banking and finance received broad-based academic and professional attention. A number
of Muslim countries considering implementation of the idea, officially appointed expert bodies to work out the details. Several universities started teaching the subjects and encouraged research resulting into hundreds of Ph.D dissertations, some of them in the universities in Europe and America. Numerous seminars and conferences drew attention to the subject in places as wide apart as Kuala Lumpur, Dhakka, Islamabad, Bahrain, Jeddah, Cairo, Khartoum, Sokoto (Nigeria), Tunis, Geneva, London and New York. A number of research centers made Islamic economics their field, paying special attention to money and banking. Some of these launched academic journals providing forums for exchange of views and dissemination of information on a worldwide scale.

During the 1990s the model was further developed and refined. The liabilities side saw frameworks put in place for handling
trust funds, venture capitals, and financial papers based on ijara (leasing) salam (forwards) and murabaha (mark-up). The special techniques for launching Shariah compatible mutual funds were also developed in this period. This involved selecting companies whose shares could be traded as they did not violate any Shariah norms. This selection was made by screening
out the undesirables. The first norm was that the products in which the company produced or sold should not be prohibited
ones like alcohol or pork. The other was that its finances should be free of interest bearing loans and its revenue free of interest income. Since the condition about debt finance would eliminate almost all shares traded on the stock exchange, some scholars allowed a leverage of 30% or less. There could be other criteria also but these two are the main, common to all existing Islamic funds. Once the filtering process was complete, managing a portfolio became a professional job. This is why the phenomenon
of Islamic mutual funds, even though endorsed by a group of Shariah scholars, owes itself to the initiative of professional players in the field. As the launching of the Dow Jones Islamic Index evidenced, Islamic finance too needed the modern tools designed
to handle the complex web of financial transactions.

Advantages of Islamic Banking and Finance
Before we turn to Islamic banking in practice, let us note some of its features emphasized in the literature.

Justice and fairness to all concerned was the main feature of a model of financial intermediation whose core was profit-sharing. Interest was essentially unfair because our environment does not guarantee positive returns to business enterprise financed
with borrowed money capital. Current practice penalizes entrepreneurship by obliging it to return the principal even when part of
it is lost due to circumstances beyond the entrepreneur’s control. Justice requires that money capital seeking profits should share the risk attached to profit making. A just system of financial intermediation would contribute to a more equitable distribution of income and wealth.

Islamic finance will foster greater stability as it synchronizes payment obligations of the entrepreneur with his or her revenues. This is possible only when the obligation to pay back the funds acquired from the financier and pay a profit is related to realization of profits in the project in which the funds are invested, as it is in the profit-sharing model. Contrary to this, in the debt-financing model the payment obligations of the entrepreneur are dated as well as fixed in amount. The same is the case with the financial intermediaries; their commitment to the depositors in time and saving accounts is to pay back the sum deposited with interest added. When a project fails and businessman defaults, the financial intermediary must also default, with ripple effects destabilizing the whole system. The debt-based financial system of capitalism is inherently prone to recurrent crises. This malaise of the capitalist financial system is well discussed by Hyman P Minskey in “Stabilizing an Unstable Economy” (New Haven and London, Yale University Press,1986).

The linking of depositors’ entitlements to the actual profitability of the projects in which their monies are invested through the services of the financial intermediary, the bank would almost eliminate the risk of runs on the bank insofar as the investment accounts are concerned. A report or rumor that the bank investments are not doing well will not prompt a rush of withdrawals from investment accounts as depositors could get only what is actually salvageable. Waiting till the situation improves would be
a more rational option.

Islamic finance is more efficient as it allocates investable funds on the basis of expected value productivity of projects rather
than on the criterion of creditworthiness of those who own the projects, as is the case in debt-based finance. There is no guaranty that the most promising projects seeking finance will come from the most wealthy. As Schumpeter has shown the
most innovative may be empty-handed. But debt-finance would not serve these. It would prefer those who, on the basis of other assets owned by them, would be able to pay back the sum borrowed, interest added, even when the project being finance failed to create additional wealth.

Last but not the least, Islamic finance will be less prone to inflation and less vulnerable to gambling like speculation, both of
these being currently fueled by the presence of huge quantities of debt instruments in the market. Debt instruments function
as money substitutes while equity-based financial instruments do not. And speculators find it much easier to manipulate debt instruments than those based on profit-sharing.

It is true that these advantages belong to a system whose core is profit- sharing. But even Murabaha (cost-plus or mark-up) financing keeps the system far less vulnerable to inflation and gambling like speculation than the conventional debt-based arrangements. Murabaha is firmly linked with exchange of real goods and services. It is a price, to be paid later. It is essentially different from money given as a loan, which may or may not be linked to production or exchange of real goods and services. An Islamic system of finance in which profit-sharing and mark-up financing both exist side by side would still retain the advantages noted above.

Islamic Banking Practice: Early Initiatives
A number of interest free saving and loan societies are reported to have been established in the Indian subcontinent during 1940s. But efforts to arrange finance for business enterprises seem to have started later. One pioneering but short lived experiment was that in Mit Ghamr in the Nile valley in Egypt in 1963. Same year saw the establishment of Tabung Haji in Malaysia. Money being saved for meeting the cost of the pilgrimage to Makkah is profitably invested by this organization, which
is still working. The Phillipine Amanah Bank was also established during the same period to enable Muslims to meet some of their financial needs without involving interest. Some people around the same time established an interest free bank in Karachi, Pakistan but it did not survive for long.

Islamic Banking Practice In The Private Corporate Sector
The Dubai Islamic Bank was established in 1975 under a special law allowing it to engage in business enterprise while accepting deposits into checking accounts, which were guaranteed, as well as into investment accounts which were to receive a share in the profit accruing due to their use in business by the bank. By 1985, ten years later, 27 more banks were established in the same manner in the Gulf countries, Egypt, Sudan, etc. Many more were to follow all over the Muslim world. Also by 1985, over
50 conventional banks, some of them located at money centers like London, were offering Islamic financial products. This was followed by up by some of the major conventional banks establishing Islamic branches dealing exclusively in Islamic products. Citi-Islamic in Bahrain and Grindlays in Karachi were followed by the National Commercial Bank in Saudi Arabia establishing
over 50 Islamic branches by 1990s.

Islamic investment companies and Islamic insurance companies also appeared in the late 1970s and grew in number. Later, in 1990s a number of Islamic mutual funds appeared, many of them being managed by reputed western firms.

By the year 2000, there were 200 Islamic financial institutions with over US $8 billion in capital, over US $100 billion in deposits, managing assets worth more than $160 billion. About 40% of these are in the Persian Gulf and the Middle East, another 40% in South and South-East Asia, the remaining equally divided between Africa and Europe and the Americas. Two thirds of these institutions are very small, with assets less than US $100.

Two Islamic banks operated in Europe for some years. Islamic Bank of Denmark was converted into an investment company
and Al Barakah London had to stop deposit taking. As the Bank of England explained, a deposit-taking institution had to guaranty its repayment in full in order to qualify for a banking license. As of now, western societies are served either by Islamic mutual funds or by grass roots initiatives at the community level financing the purchase of houses and other consumer durables.

Islamic Banking At the State Level
Pakistan “Islamized” banking between 1979 and 1985 through a series of Ordinances issued by the Federal government and a number of circulars issued by the State Bank of Pakistan, the country’s central bank. Even though profit-sharing replaced
interest as the basis of time deposits and saving accounts, the actual rates paid are not market determined as all major banks were nationalized during the previous regime. On the assets side mark-up became the main basis of bank finance for business. Some financial products based on profit-sharing were launched but their role in the market is minimal. Government finances remain conventional, burdened with huge interest-based foreign and domestic debts.

Private initiative played little role in the Islamization process and the market hardly got a chance to throw up Shariah compatible financial instruments. The whole process was conducted with some speed by the bureaucracy under orders from the top. Even the recommendation of the Islamic Ideology Council to make a start from the assets side was not heeded.

Iran passed its usury free banking laws in 1983. All banks are nationalized. In accordance with the school of Islamic law followed in Iran, depositors may get “rewards” on their savings provided they are not committed in advance. Financing of domestic and external trade is done on mark-up basis. But sharing modes do play a significant role in financing agriculture and industry.
Interest free loans are available for the poor to meet such needs as housing, their source being the state.

Sudan launched Islamic banking in 1984 whose coverage was later extended to the entire financial sector in 1989. Sharing
based modes of finance are used in agriculture and industry and the government is considering sharing-based investment certificates to be sold to public, the funds so mobilized to be used in developmental projects. The poor state of the economy stands in the way of the market playing any significant role in the process. But the recent phenomenon of oil as an increasing source of public revenue is likely to make a difference.

Malaysia had its first officially sponsored Islamic bank in 1983. All other banks also offer Islamic financial products. Overall supervision vests in the country’s central bank, Bank Negara Malaysia, which has a board of Shariah scholars to advise it. Malaysian Islamic financial system allows sale of debt instruments based on receivables from sale of real goods and services and those based on leasing. The government issues bonds (Malaysian Government Investment Certificates, MGICs ) to be redeemed at par but carrying coupons conferring financial benefits that vary. Malaysia has an active Islamic money market trading in assets based securities. Indonesia’s Bank Muamalat, established 1994 under state patronage, has about 400
branches all over the country. Its financial operations follow the Malaysian model. There are other smaller Islamic banks too
such as the Shariah Bank.

Turkey does not practice Islamic banking at the state level, but several Islamic banks were launched under special licenses in late 1980s to early 1990s. They are still functioning, along with other non-bank Islamic financial institutions.

The Islamic Development Bank
The Organization of Islamic Conference (OIC) took several steps culminating in the establishment of a bank of Islamic
countries, which would serve the entire Muslim ummah (community of the faithful). Share capital, initially fixed at US dollars two billion was supplied by member countries, the largest coming from Saudi Arabia, Kuwait, Libya, United Arab Emirates and Iran.
It started operations in 1975 with head quarters at Jeddah, Saudi Arabia. Clause one of its charter states that it was “to foster economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Shariah”. In compliance, the IDB does not deal with interest.

By the year 2000, the Islamic Development Bank (IDB) had financed inter-Islamic trade to the tune of over US $8 billion mostly using the mark-up technique. It also gives loans, taking only service charges according to actual administrative expenditures.
But it does try to promote sharing based modes of financing. It is also managing an investment portfolio in which individual Islamic banks place their surplus liquidity. Even though it can not, and does not aspire to, serve as a lender of last resort for all Islamic banks, it is trying to help them solve their liquidity problems. It fosters technical cooperation between member countries and has established or sponsored a number of institutions for this purpose. The Islamic Chamber of Commerce and the
Islamic Foundation for Science, Technology and Development are two of these. It is also distributing scholarships for higher learning and technical education to Muslim students in countries in which Muslims are in a minority.

In order to fulfill its mission, the IDB has established the Islamic Research and Training Institute (IRTI). It conducts in house research, sponsors external research, publishes a research journal, conducts training courses, organizes seminars and conferences and maintains a database on Islamic countries’ economies, etc.

The Islamic Development Bank interacts with all regional and international financial institutions like the International Monetary Fund (IMF), the World Bank, the Asian Development Bank, etc.

Islamic Banking And Finance As Part Of The International Community
The IMF issued its first study on Islamic banking in 1987. Since then more than a dozen research papers have come from that forum on important aspects of Islamic finance. IMF has reported no problems in dealing with member countries committed to Islamic banking. The Islamic financial institutions also never faced any problems dealing with regional and international financial institutions. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is in contact with standards committee of the Bank of International Settlements based at Basel, Switzerland.

All Islamic financial institutions operate within the system supervised by their respective central banks and other relevant authorities. They are neither working in isolation nor engaged in creating a separate space of their own. They are inspired by a vision of financial arrangements more conducive to justice and development for all, especially the poor and the weak. This is a goal hopefully cherished by all.

source : MBSA

Islamic finance is going global

Jakarta – The 2008 Islamic Finance Festival (FES) was held in Jakarta from 16 to 20 January. Hosted by the Bank of Indonesia, this year’s theme was Islamic finance and banking for a prosperous Indonesia.

President Susilo Bambang Yudhoyono opened the event by describing how a system of Islamic banking had helped reduce the impact of the 1998 economic crisis in Indonesia. When conventional banks went bankrupt due to the hyper-devaluation of the Indonesian Rupiah (IDR), Islamic banking survived and became the backbone of Indonesian economy by channelling most of its funding to small- and medium-sized businesses.

Although the global share of Islamic finance and banking is still relatively small – comprising only 1.7% of total national economic assets in Indonesia – a shari’a-based economic market that follows the principles of Islamic law caters to the needs of around 200 million Muslims.

The current focus on Islamic banking in Indonesia came when, after observing the positive performance of the Islamic banks in Indonesia, the Indonesian government began to look at it as an alternative system with the potential to improve the economic situation of those people that were devastated by the 1998 crisis. On a larger scale, President Yudhoyono saw an opportunity for Indonesia to become the centre for Islamic finance and banking in Asia and the world.

An example of how Islamic banking differs from other types of banking is that Islamic banks often lend money to companies with floating interest rate loans. The floating rate of interest is pegged to the company’s rate of growth. Thus, the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded.

Another example is venture capital funding. An entrepreneur will provide labour and the bank will provide financing, so that both profit and risk are shared. Such participatory arrangements between capital and labour reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and preventing the lender from monopolising the economy.

In an Islamic mortgage transaction, instead of lending the buyer money to purchase the item, a bank might buy the item from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in instalments, with no additional penalties for late payment. In this third example, in order to protect itself against default, the bank requires strict collateral.

The benefits of Islamic finance have been recognised beyond Indonesia. The United Kingdom plans to issue and trade sukuk (non-interest bearing bonds) starting this year, denominated in sterling for the benefit of both local Muslims and others looking for exposure to sterling as a currency. In addition, there are a number of emerging European institutions, such as the Islamic Bank of Britain and the European Islamic Investment Bank. And Thailand and Singapore have begun to follow suit. In fact, along with Hong Kong, Singapore has become the most attractive Islamic finance market in Asia.

Global corporations, such as HSBC Amanah, Citibank Syariah, and Allianz Syariah, are also offering a number of Islamic finance alternatives in the insurance sector.

Deputy Governor of the Malaysian Central Bank, Dato’ Mohd Razif Abdul Kadir, says that there are currently 300 Islamic financial institutions operating in 76 countries in the world. The capitalisation of the global assets of Islamic finance has amounted to more than $1 trillion per year and the Dow Jones Islamic Index has reached $10 trillion. This share is still small compared to the total value of the global financial industry. In the past 20 years, however, the emergence of Islamic finance has become a stimulating phenomenon in the business world with a level of growth of 65% per year.

The temptation to engage in an industry with such growth levels is obvious.

Perhaps one of the most important benefits of Islamic finance is that it has proven to be a calm face for the global image of Islam, which over the years has been tainted by terrorism.

President Yudhoyono also claims that Islamic financial services are not only aimed at Muslim communities. There are common values in Islamic finance and banking, making it more accessible and acceptable for non-Muslims. An interest-free loan, for instance, is respected by all three Abrahamic faiths; passages referring to it can be found in the Qur’an (2:275, 278-279), and in other religious texts such as the New Testament of the Bible (Luke 6:34-35) and the Torah, or Old Testament (Exodus 22:25).

In addition, Islamic finance values equality, channelling credit to people through open investment opportunities, creditor-debtor loss and profit sharing.

Operating on such foundations makes Islamic finance and banking comparable to the idea of the “new monetary economy paradigm” outlined by Joseph E. Stiglitz, a 2001 Nobel laureate in Economy. Furthermore, all of these economic tenets are in line with the principles of democracy – an economy by the people and for the people, which is able to erase economic alienation.

Source : commongrounds


The Fairfax Institute in Islamic Finance

tfi2020lgThe Fairfax Institute (TFI) is a Northern Virginia based center of knowledge committed to continuing education and lifelong learning. TFI offers an instructional program to help students, academicians, lifelong learners, and concerned citizens, as well as professionals in government, policymaking, business, and information analysis, to enhance their skills through a better understanding of the laws, traditions, culture, and nuances of Islam and the Muslim world. 

Courses in Islamic Finance

Certificate Program In Islamic Wealth Management            
The certificate program in Islamic Wealth Management consists of four courses.  
Islamic Investing                          
Islamic Finance and Banking                  
Inheritance and Wills                                           
Faith-Based Entrepreneurship    


Turkey: Islamic Banking In Turkey – Indonesia – Pakistan A Swift Comparison And Benchmarking Against Malaysia


Article by Paul Wouters

Worldwide, the Islamic finance industry is developing fast. Whilst it makes sense for the Islamic financial institutions to foster growth and to regularly measure themselves against the financial market as a whole, sometimes it is also worthwhile to look around and see what happens in different countries.

It is easy to talk about “market shares” and “deposits”, but what do they really mean? And what can be expected in the near future?

Turkey and Indonesia both are secular republics with a large majority of Muslim population, but Islamic finance developed very different. With a population that approximately holds the middle between both countries; the Islamic Republic of Pakistan is used as an outside comparator. To put all into even more perspective, some data from Malaysia are also included as a benchmark.


Worldwide, the Islamic finance industry is developing fast. Whilst it makes sense for the Islamic financial institutions to foster growth and to regularly measure themselves From the very start in 1985 with Albaraka Türk, the Turkish participation banks (before called Special Finance Houses) were poised to aim at the Turkish market as a whole. Therefore they did not really target the small niche of the “convinced” Muslim population in particular. This of course influenced marketing and product development. Part as a consequence of this strategy (and compared to Indonesia), the Turkish participation banks could have a faster growth and now cover roughly 3.5 % assets of the total Turkish banking industry. One may also note the strong growth of the sector that outperforms the conventional counterpart now for 8 consecutive years.

The loss of Ihlas Finance House (2001 – alleged fraudulent insolvency) meant the loss of 40 % of the deposits held by the sector at that time and the subsequent stampede on the other Special Finance Houses (now participation banks) meant another 35 % loss. Because of their ties to the “real economy”, the Special Finance Houses were not hit by the big financial crisis that hit Turkey in 2001 and they recovered fast. Their deposits now have been taken into the guarantee fund of the banks (to avoid other shock withdrawals) and the sector has acquired bank status.

There is no specific government aid to the sector and no (government or corporate) Islamic bond. There also is no access to the money markets, so we can hardly talk about a level playing field, as compared to conventional banking.

There are no Islamic windows and therefore foreign market players can only enter the market through shareholdings in the existing participation banks (or have to start their own participation bank from scratch).

A Government sukuk issuance could be in the make, so has been rumored for some time now. The talks on the projected Rent (Ijarah) Certificate however move slow, subject to rather inactive local financial markets, cheap conventional international funding and political factors.

A well thought off strategy of decentralization – for instance using techno / tax incentives and privatizations – created upcoming of several bigger conglomerates throughout the country.


With its’ first established Bank Muamalat Indonesia (together with Bank Syariah Mandiri still today front runner), the situation differs profoundly in Indonesia. As from the very start, products and marketing were directly aimed at precisely that group of clients of “convinced” Muslim (market share of roughly 1.5 %). Whilst the present impressive government initiatives aim to broaden that base (a potential “floating market” of approx. 75 % of the population would be within reach), Bank Muamalat confirms to adhere as before to their strict policies and client target. It might mean an extra strong growth potential for the other market players.

The need to mobilize internal capital and attract foreign investment, required special measures. Indonesia’s Central Bank announced in July 2007 that – subject to full implementation of the “blue print for development of the Indonesian Shari’ah Banking system” – total assets of the Islamic banks (and Islamic business units) are expected to triple by the end of 2008 (growth of approx. USD 6 billion) to reach an overall volume of 5 % on the total Indonesian banking assets. When deposits / loans follow same development, it will be clear that opportunities are at hand (growth potential of approx. USD 5 billion).

Foreign banks are not really visible yet on the Indonesian Islamic finance market. HSBC pioneered as first big international institution with a full dedicated Shari’ah head office in Jakarta – the projected growth potential is enormous: they calculated that roughly 50 % of their clients would be willing to use the products if priced competitive. Recently also Albaraka Group announced the prospect of opening of a branch there.

The first Government Sukuk (plans to raise up to USD 1 billion have been announced) is in the pipeline. Actual issuance could however be postponed till the fourth quarter of 2007 or even the first quarter of 2008, pending parliamentary approval. Indonesia at present already knows corporate Ijarah and Mudharabah Shari’ah Bonds. Access to the money markets has been opened.

Conventional banks that want to participate in the “Islamic pie” need to dedicate 5 % of their assets to such venture. This commitment, together with other incentives, will be responsible for the expected fast growth over the next two years.


From the late 70s onwards, Pakistan has a protracted history of Islamic banking. As from July 1st, 1985 all commercial banking in Pak Rupees was made interest free. The sudden conversion (and lack of preparedness) posed difficulties on implementation however. As from 2001 an evolutionary process was then chosen for, in order to nurture acceptability and development in a more structural approach. The first “Islamic bank license” was awarded to Meezan Bank back in 2002 (founded 1997). But as said, Islamic banking has been introduced since the mid 80’s.

Most note worthy is the present Islamic Banking Policy (December 2001), under which Islamic banking is promoted parallel to conventional banking. Implementation of AAOIFI and IFSB standards is on the way. Besides a Draft for the new Government Securities Bill, Draft Risk Management and Draft Shari’ah Compliance guidelines have been published.

A growth of % 40 per annum is being expected and a % 15 market share is targeted.

Next to the fully fledged Islamic banks, the conventional banks can opt to open up Islamic banks subsidiaries or even dedicated “stand alone Islamic banking branches”. A vast concentration of the Islamic banking to the big cities (Karachi and Lahore) can be noticed. There is government and corporate sukuk in the market.

In 2007 ABN AMRO opened an Islamic branch, Emirates Global Islamic Bank has started a dedicated Islamic commercial bank and QATAR Islamic bank has confirmed plans to setup a Shari’ah compliant banking unit soon. Citibank was another big foreign entry.


Starting off in 1983 with Bank Islam Malaysia Berhad, separate Islamic legislation and banking regulations exist side-by-side with those for the conventional banking system.

In order to create an efficient, progressive and comprehensive Islamic financial system, Bank Negara Malaysia recognized the need to, i.e.:

Attract a large number of global players;

Develop a broad variety of instruments; and

Install a comprehensive financial infrastructure.

A large variety of Islamic financial products and services (more then 100) are at present offered by the banks using various Islamic concepts such as Mudharabah, Musharakah, Murabahah, Bai’ Bithaman Ajil (Bai’ Muajjal), Ijarah, Qard, Istisna’ and Ijarah Thumma Bai’.. next to the existence of the Islamic Interbank Money Market.

Probably subject to pressure from the Dubai DIFC, Malaysia recently opened up regulations to allow sukuk issuance in foreign currency and competes with Singapore (and recently also Hong Kong decided to enter the race) to be the prime Islamic finance hub in the Asian region.


First of all, it has to be noted that real entrance of foreign investment in Turkey, Indonesia and Pakistan still bounces on inadequate tax regimes.

Though it is difficult to distract far going conclusions from the table hereunder, at first sight, it is clear that both Malaysia and Turkey share the following characteristics: relative big concentration of the population in bigger cities, lower portion of population working in agriculture and a lower weight of that sector in the overall economy. The GDP per capita (calculated in relative purchase power – not in hard dollars) in those countries also is 2 upto 4 times higher then in the other two countries.

Also in Indonesia and Pakistan there is a remarkable concentration of the Islamic banking sector around the big cities.

In Indonesia and Pakistan, the agriculture sector appear to attract socially very important, but statistically for the total economy less important “rural Islamic banks” (targeting micro finance). There is no such sector in Turkey.

Neither the percentage of Muslim population (Indonesia, Turkey, Pakistan), nor the zeal of the Government to promote Islamic banking (Indonesia, Pakistan) appears to be a determinant for success so far.

The marketing strategy of the Indonesian Islamic banks proved to be successful for the loyal but small niche of the “convinced” Muslim population, but did not succeed to appeal to the “public at large.

The Turkish participation banks on their side are severely handicapped (no sukuk, no money markets, relative few products, no government incentives and no Islamic windows) but expanded thanks to a more neutral banking approach (more focused upon the financial advantages and with slight emphasis to ethical merits).

Looking at the mix of relevant measures that are applicable to the different countries, he following guidelines appear to be clear:

dedicate sufficient means to Islamic rural banking / micro finance for the agricultural areas

create a good level playing field for the Islamic banks to compete with the conventional banks (for instance access to the sukuk and the money markets), without however any specific need to give them prime conditions (challenge makes competitive, superfluous benefits make lazy and distort the market)

open up the markets for international institutions (it attracts financial power and innovation)

install possibilities for all financial institutions to create Islamic windows and / or branches (better product awareness and overall acceptance of the Islamic banking also benefits to the dedicated Islamic banks)

have the conventional banks that want access to the market commit right from the start sufficient means (the need to dedicate assets to the activity enhances growth in the market)

promote diversification of products offered to the public (diversity is one of the handicaps of Islamic finance vis-à-vis the very mature conventional counterpart)

try to spread wealth out of the existing bigger cities to smaller cities and do not focus on the existing metro poles

try create sufficient liquid financial markets and stock exchanges, if needed through strategic alliances

give sufficient attention to international accounting standards, (corporate) governance, transparency and accountability

build strong prudential controls

give bank status and deposit protection

without loosing sight on the underlying principals, focus on market competition, quality of products and pricing thereof

How to read the table:

The table shows that Turkey has about the same market penetration but has approx. 6 times as much assets … tied in the Islamic finance industry as compared to Pakistan. It also has twice as much POS. When you see that the population of Pakistan is about twice as big, the gap even gets bigger.

On the other hand, the overall GDP of Turkey is more then 3 times as big and the same applies to the PPP (purchase power parity) per head. Also notice the dominance of agriculture (both turnover and labor force) in Pakistan and the lack of bigger cities.

With a market penetration that is half that one of Turkey talking in hard USD, the Indonesian Islamic finance still is close to 3.5 times as small as Turkey with only half the POS. The population of Indonesia being 3 times as big, the scale distorts even more.

In spite of the bigger population, the overall GDP of Turkey still is 10 % higher then that one of Indonesia and the PPP per head knows a multiplication of more then 2. Indonesia also lacks the big cities (38 on 231 million people compared to 24 on 74 million people for Turkey) and there also is a larger dependence on agriculture.

Malaysia has by far the best POS coverage of all. The GDP in PPP per capita even exceeds Turkey with 20 %. The comparative GDP (divided by population) is 10 % higher then Turkey. Malaysia has moved away from agriculture and has compared to the population of Turkey twice as much big cities.

Source : Mondaq

Is it necessory to have economics

1. Introduction

Conventional economics, which dominates modern economic thinking, has become a well-developed and sophisticated discipline after going through a long and rigorous process of development over more than a century. The development continues uninterrupted, as reflected in the publication of innumerable journals, books, and research reports throughout the world. Individuals, universities, research organizations, and governments are all participating actively in this development. As a result of accelerated development in Western industrial countries over a long period, substantial resources are available to scholars to pursue their research. It goes to the credit of the West that there is a great quest for knowledge; researchers are willing to work rigorously, and creative work gets richly rewarded in terms of both prestige and material benefits.

Islamic economics has, however, had its resurgence only over the last three to four decades. The number of individuals, universities, governments, and research organizations participating in its development is relatively very small. Since most Muslim countries are poor and in the initial stage of development, the resources they have available at their disposal for financing research activities are also relatively meager. Moreover, some of the governments in Muslim countries consider the resurgence of Islam, with its unmistakable call for political accountability and socio-economic justice, to be a threat to their survival. They are, therefore, reluctant to render any moral or material support for the development of Islamic social sciences.

An unavoidable question, therefore, is whether it is really necessary to have Islamic economics when conventional economics is already there in a highly developed form. This question acquires particular significance because the subject matter of both disciplines is nearly the same: allocation and distribution of scarce resources among their infinite uses. The justification would be there only if the effort to develop Islamic economics is directed toward the realization of a purpose that cannot be realized by the analysis developed by conventional economics. The need would be all the more acute if the set of variables employed for the analysis is broader, and the mechanisms and method to be used for the allocation and distribution of resources are also different.

2. The vision

Every activity of rational human beings generally has a purpose, and it is usually the purpose that determines its nature, differentiates it from other activities, and also helps evaluate its performance. The first question that one may, therefore, wish to ask is about the purpose behind studying the allocation and distribution of resources. Such a study may not have been necessary if resources were unlimited. However, resources are limited and not sufficient to satisfy all the claims on them by all individuals and groups in society. We are, therefore, posed with the perplexing question of which uses and whose claims to choose and how to make the choice. A simple answer may perhaps be to use them in a way that would help the society realize its vision. A vision essentially incorporates the dream of a society about what it would like to be in the future. It may consist of a number of goals, which the society aspires to achieve. All of these goals may together serve as a guiding star and indicate the direction in which the society wishes to proceed. This may help channel the society’s efforts and energies in the desired direction and thereby minimize waste. The vision may never be fully realized. It may, nevertheless, continue to inspire the society to persist in the struggle for its realization by keeping the faith in the future perennially kindled.

Different societies may have different visions. Nevertheless, there is one dimension that seems to be common among the visions of most societies. This is the goal of realizing human well-being. However, the term well-being, even though used by a number of economists (Oswald et al., 1997) is itself a controversial term and may be defined in a number of ways. It may be defined in a purely material sense, totally ignoring its spiritual content, or in a way that also takes into account the spiritual aspect. Depending on which definition of well-being one adopts, there may arise the need for an entirely different configuration of goods and services to be produced by the society with the scarce resources at its disposal. This may lead to different mechanisms for allocation and distribution.

If well-being were to be defined in a purely material and hedonist sense, then it would be perfectly rational for economics to give prominence to the serving of self-interest and the maximization of wealth, bodily pleasures, and sensual satisfactions. Because pleasures and sensual satisfactions depend primarily on individual tastes and preferences, value judgments may have to be kept out to allow individuals total freedom to decide for themselves what they wish. All goods and services that provide bodily pleasures and sensual satisfactions to individuals in accordance with their own tastes and preferences may become acceptable. The impartial market forces may then be considered sufficient to bring about such an allocation and distribution of resources. Redistribution1 of the wealth produced may be important, but only to the extent to which it does not interfere with the freedom of the individual to pursue his or her self-interest. The government’s role may also have to be kept at a minimum, except to the extent to which it is necessary to enable the individual and the market to perform effectively.

However, if well-being were to be defined in a way that rises above the materialist and hedonist sense and incorporates humanitarian and spiritual goals, then economics may not be able to avoid a discussion of what these goals are and how they may be realized. These goals may include not only economic well-being, but also human brotherhood and socio-economic justice, mental peace and happiness, and family as well as social harmony. One of the tests for the realization of these goals may be the extent to which social equality, need-fulfillment of all, full employment, equitable distribution of income and wealth, and economic stability have been attained without heavy debt-servicing burden, high rates of inflation, undue depletion of nonrenewable resources, or damage to the ecosystem in a way that endangers life on earth. Another test may be the realization of family and social solidarity, which would become reflected in the mutual care of members of the society for each other, particularly the children, the aged, the sick, and the vulnerable, and absence, or at least minimization, of broken families, juvenile delinquency, crime, and social unrest.

Once economics gets into a discussion of human well-being in this comprehensive sense, then the task of economics may become wider and more difficult and complex. It may not be able to confine itself to just economic variables. It may have to take into account all those factors, including moral, psychological, social, political, demographic and historical, that determine well-being in this comprehensive sense. It may also have to answer a number of questions that may not need an answer if its goal were only to help maximize wealth and consumption. One of these questions may be about whether the serving of self-interest would be sufficient as a motivating force to realize comprehensive well-being, or would it also be necessary to have some other motivating force. Could such well-being be realized more effectively if all the agents operating in the market observed certain rules of behavior and had certain desirable qualities? If so, then it may be necessary to impose certain constraints on individual behavior. The individual may not then remain totally free to do what he or she pleases in accordance with his or her tastes and preferences. The question that would then arise is about who will determine these constraints, and how would it be ensured that the individual’s freedom is not unduly restricted. This is because individual freedom is also essential for human well-being and cannot be compromised except to a certain agreed extent.

In addition, there are a number of institutions in human society that influence individual and social outcomes. The market is only one of them. Some others are family, society, and the state. Family may perhaps be the most important of these because it provides the human input for the market, the society, and the state. It is the primary breeding place and training ground for all individuals. It is here that a substantial part of individual tastes and preferences, personalities, and behavior pattern get formed. The family’s health and solidarity would hence be of crucial importance. If the family disintegrates, would it be possible to provide the future generation with the kind of upbringing that it needs? If the quality of upbringing goes down, then it may not be possible for a society to sustain its development and supremacy for long in the economic, technological, or military fields. Because economics is also concerned with the rise and fall of a society, then would it be realistic on its part to ignore the integrity and stability of the family?

If the market, the family, the society, and the state all have a role to play in human well-being, then the question is how to make them play their roles in a manner that complements and does not hinder the effective performance of their role by others? Although the market may operate efficiently if every individual tries to serve his or her self-interest, would it also be possible for families, the society, and the state to operate effectively and harmoniously if everyone were to behave in the same self-interested manner?

These are not new questions. They have been addressed by social philosophers for centuries. The majority seems to hold the view that the serving of self-interest is only one of the motivating forces in human society, and maximization of wealth and consumption is only one of the goals. The spiritual and humanitarian goals stated above are of equal, if not greater, importance. Some of these goals may in fact be in conflict with each other, and a compromise may need to be struck. Would it be possible for a society to arrive at such a compromise if it sets maximization of wealth and consumption as its primary goal, and its members are not willing to sacrifice their self-interest for realizing the society’s humanitarian goals?

Sacrifice is of particularly great importance in the case of the family and the society. Experience shows that the more the parents are attached to each other and adopt an attitude of mutual sacrifice and cooperation, the greater harmony and stability is likely to be there in the family. The upbringing of children also requires a substantial degree of mutual cooperation and sacrifice of self-interest on the part of parents. Similarly social harmony may also require members to cooperate with each other and to sacrifice for the common good and to take care of the poor and the vulnerable. Even in the case of the market and the state, sacrifice may not be avoidable. In spite of competition, which helps safeguard social interest, it may be possible for operators in the market to make unjustified gains by cheating and obstructing competition in a manner that may be difficult to detect. Similarly, although democracy, public accountability, and a free press do help in protecting the public interest, it may nevertheless be possible for government officials to use their authority for personal benefit at the expense of the taxpayer.

Therefore, there has to be some motivating force that prevents individuals from wrongdoing even when it is possible for them to get away unscathed. Government coercive power has proved to be an effective motivating force. However, if this were the only force in human society to prevent wrongdoing, the costs of enforcement may tend to be very high. Is it possible to supplement competition, public accountability, and government coercive power by some other motivating force that might induce members of society to abide willingly to agreed values or rules of behavior and to fulfil their contracts and social obligations faithfully even when this involves a sacrifice of self-interest?

This brings us to the question of why should any person sacrifice his or her self-interest to serve social interest in the market place, the family, the society, or the government. If economics concentrates only on self-interest and has no place for a motivating force other than self-interest, then it may not be able to answer this question. If maximizing wealth and consumption is the only goal in the life of an individual, then there is no need to make any sacrifice for others. Serving self-interest may be the best policy. The family may then suffer; the quality of the future generation may decline, and even the performance of the market and the government may ultimately be adversely affected. The question, therefore, is how to motivate individuals to fulfil their contracts and other commitments honestly and not to undermine competition or to resort to unfair means of earning, even when it is possible for them to get away with it? This is a question that religions have tried to address by providing rules of behavior in the form of moral obligations of individuals towards other human beings, animals, and environment, and trying to motivate their followers to abide by these rules even when doing so hurts their self-interest in this world. Whether or not they have succeeded in this task is a different matter. However, economics may not be able to ignore religious values and the associated motivating force if its goal is the realization of comprehensive well-being.

A society may have attained the pinnacle of glory in the material sense, but it may not be able to sustain it for long if the moral fiber of individuals and society is weakening, the family is disintegrating, the new generation is unable to get the kind of attention and upbringing that are necessary for an achieving civilization, and social tensions and anomie are rising. The material and the spiritual aspects of well-being are not, therefore, independent of each other. They are closely interrelated. Greater family harmony may help raise better individuals to operate in the market, and better social harmony may create a more conducive environment for effective government and accelerated development. If this is true, then the emphasis on serving self-interest and maximizing wealth and consumption may have to be toned down to some extent to serve social interest and optimize human well-being. Some uses of resources that serve self-interest and fit well into the hedonist framework may have to be reduced to fulfil the needs of all individuals in society and thereby promote family and social harmony.

Available evidence supports the contention that material advance is not by itself sufficient to increase happiness and social harmony. “Rich countries are not typically happier than poor countries,” concludes Richard Easterlin after 30 surveys conducted in 19 developed and developing countries (Easterlin 1973; Easterlin 1995 and Oswald 1997). There is something else that is also needed to create happiness and harmony and to remove tensions and anomie. Therefore, if economics concerns itself with well-being in its comprehensive sense, then it may not be able to confine its discussion to just material prosperity.

3. The mechanisms

How human well-being is defined is, therefore, an extremely crucial factor in the allocation and distribution of resources. If there is a difference in the concept of well-being, then there will also be a difference in the mechanisms and method for realizing it. There are three important mechanisms that determine the use of resources in any society or economic system. These are filtering, motivation, and socio-economic and political restructuring (Chapra, 1992, pp. 213-233). Just as it is possible to define well-being in a number of ways, it is also possible to have different mechanisms for filtering, motivation, and socio-economic restructuring.

Firstly, all the different claims on limited resources need to be passed through a filter, in a way that realization of spiritual or humanitarian goals is not jeopardized, to create an equilibrium between all the claims on these resources and their supply. There may be different ways of filtering. Three of these are central planning, market mechanism, and moral values (Chapra, 1992, pp. 71-112). Experience of socialist countries has shown that central planning is not an effective mechanism for filtering, even in the material sense, and almost all of them have abandoned it by now, except perhaps Cuba. However, market mechanism has performed extremely well. Prices determined through the interaction of supply and demand in perfectly competitive markets help filter out the various uses of resources in a way that an equilibrium gets established. But the problem with the use of market mechanism for filtering is that it is possible to have several market equilibria depending on which tastes and preferences of individuals and firms interact with each other in the market place. Any and every market equilibrium may not lead to the realization of humanitarian goals. It may, therefore, be desirable to complement the market system by some other mechanism that would help change individual tastes and preferences in a way that would lead to the desired kind of equilibrium. Could moral values help bring about such a change?

Secondly, if coercion is ruled out, then the desired kind of filtering may have to be brought about by motivating all individuals sufficiently to put in their best performance and to abstain from the use of resources in a way that frustrates the realization of the desired kind of well-being. Motivation acquires a great significance in economics as compared to, say physics, because economics deals with human beings who may or may not always behave in a standard manner that would be conducive to goal realization. The serving of self-interest has proved to be an effective motivating mechanism for increasing efficiency, whereas competition, public accountability, and government intervention have helped safeguard social interest. Would it be possible to safeguard social interest even more effectively if both market mechanism and government intervention are complemented by a sense of moral obligation?

Thirdly, the physical, social, and political environments also influence human behavior and the use of scarce resources. It may hence be necessary to supplement the filter mechanism and the motivating system by creating an enabling environment of economic, social, and political values and institutions that influence individuals positively, in a manner that would be conducive to the realization of well-being in its comprehensive sense. This would bring into focus the need for socio-economic and political reform.

For example, if the need-fulfillment of all is accepted as a goal, and the operation of market forces does not automatically lead to this, then some arrangement may need to be made to realize this goal. If budgetary constraints prevent the state from playing an important role, then is it possible for the family and the society to share the burden? However, if the values or the structure of the families and the society have changed over time, making them unwilling or unable to share the burden, then is it possible for economics to not discuss the kind of socio-economic change that is necessary to realize its humanitarian goals. Its refusal to do so may be tantamount to giving blessings to the prevailing inequities. These might accentuate social unrest and tensions, which may lead ultimately to a decline of the society even in the material sense. Similarly, even if a society has values, but individuals are able to get away with dishonesty, bribery, and other unfair means of earning, there being no effective system for detecting and punishing the culprits, then such practices may become locked-in through the long-run operation of path dependence and self-reinforcing mechanisms. Everyone may then condemn the practice, but may not be able to eliminate it single-handedly by himself or herself being honest and fair. Is it possible to eliminate the undesired practices by just giving sermons and not undertaking comprehensive reform through socio-economic and political restructuring? If such restructuring is needed, could it be brought about without the state also playing a supportive role? Would it be possible for economics to abstain from discussing the kind of change that is needed and the role of the state in it?

If the mechanisms chosen by economics are not in conformity with the desired concept of well-being, or if the desired restructuring is not, or cannot be, brought about, then that kind of well-being may fail to be realized. Within this perspective, anything that prevents the kind of filtering, motivation, and restructuring that the desired well-being requires may be termed as distortion, and any use of resources that does not directly or indirectly contribute to, or that is in conflict with, goal realization may be considered unproductive, inessential, or wasteful. The role that the state plays in the economy may also be determined by the kind of filtering, motivation, and restructuring that are necessary for realizing its vision.

4. Role of the worldview

The concept of well-being selected by economics as well as the filtering, motivation, and restructuring mechanisms adopted by it are determined essentially by its worldview. Some of the questions that the worldview tries to answer are about how the universe has come into existence, the meaning and purpose of human life, the ultimate ownership and objective of the limited resources at the disposal of human beings, and the rights and responsibilities of individuals and families toward each other and their physical and social environment.

The answers to these questions have a far-reaching influence on human thought and behavior and lead to different theoretical frameworks and policy prescriptions. For example, if the universe is believed to have come into existence by itself, and human beings are not accountable to anyone, then they would be free to live as they please. Their purpose in life would be to serve their self-interest through the realization of maximum wealth and consumption. The measure of their well-being would, in this case, be the extent to which they attain bodily pleasures and sensual satisfactions. Survival of the fittest may perhaps be the most logical behavior pattern. Value judgments may be unwarranted, and all the three mechanisms of filtering, motivation, and restructuring may be developed by human beings alone through reliance on their own reason and experience.

However, if all human beings have been created by the Supreme Being and the resources they have at their disposal are a trust from Him, then they would automatically become related to each other by a natural bond of brotherhood and also be accountable to Him. They would then not be absolutely free to do what they please, but would rather be expected to use the scarce resources and behave with each other and their environment in a way that would help realize the well-being of all individuals, irrespective of whether they are rich or poor, white or black, male or female, and children or adults. They would also be expected to ensure not only the realization of the material goals but also spiritual and humanitarian goals, particularly social harmony and absence of anomie. Revelation and reason would both in this case play an important role in filtering, motivation, and restructuring, and value judgments would not be out-of-bounds.

5. The method

The method of economics is also determined by its worldview. Linguistically, the term method refers to the rules and procedures of a discipline followed in a certain logical order to achieve a desired end (Blaug, 1980, p. xi; Caws, 1967, p. 339). Essentially, what the method does is to provide criteria for the acceptance or rejection of certain propositions as a part of the discipline ( Blaug, 1980, p. 264; Machlup, 1978, p. 54). The steps taken and the criteria for acceptance or rejection thus depend, as Caws (1967, p. 339) has rightly indicated, on the end sought.

If survival of the fittest is an acceptable behavior pattern, and if individuals are free to do what they wish in accordance with their preferences and their wealth, then the allocation and distribution brought about by market forces could not be questioned. There would be no point in talking about humanitarian goals. Economics would accept the status quo, pass no judgment on it, and make no policy recommendations to change it. Its method would then be just to describe (make positive statements about) how resources are actually allocated and distributed by the operation of market forces and to analyze, theoretically as well as empirically, the relationship among the different variables involved in such allocation and distribution, with a view to help make predictions about what may happen in the future. Economics would then be strictly a positive science with no normative role to play.

If, however, the purpose of economics is also to help realize the humanitarian goals, then the method may not be just to describe, analyze, and predict, but also to compare the actual results with the desired goals, to analyze the reasons for the gap between the two, and to show how the gap may be removed without unduly sacrificing individual freedom. Value judgments may not then be out-of-bounds. Because the purpose of revelation is to help in making such value judgments, it may also be welcome, and economics may then be based on both revelation and reason and experience. There may then be no justification for creating a watertight distinction between its positive and normative functions because both may be closely integrated and together constitute an indispensable part of its raison d’être.

6. The relevance of Islamic economics

The vision, the mechanisms, and the method of economics are all, therefore, the logical outcome of its worldview. Even though none of the prevailing major worldviews is either totally materialist and hedonist nor totally humanitarian and spiritual, there are, nevertheless, significant differences among them in terms of the emphasis they put on the material or the spiritual goals. The greater the difference in the emphasis, the greater may be the difference in the economic disciplines of these societies. Feyerabend (1993) has frankly recognized this in the introduction to the Chinese edition of his thought-provoking book Against Method, by stating that “First world science is only one science among many; by claiming to be more it ceases to be an instrument of research and turns into a (political) pressure group” (p. 3, parentheses are in the original). Even if the worldviews are the same, as is the case with institutional and conventional economics (Blaug, 1985, pp. 708-711), which are believed by a number of economists to be complementary, the Nobel Laureate, Professor Douglass North, clearly stated: “Introducing institutional analysis into static neoclassical theory entails modifying the existing body of theory. But devising a model of economic change requires the construction of an entire theoretical framework, because no such model exists” ( North, 1990, p. 112).

However, if there is a substantial difference even in the worldviews and the visions, there is no reason why there cannot be greater differences in the disciplines. One discipline may just try to explain what exists, refuse to make value judgments, and not concern itself with socio-political change for realizing a certain vision of life. Another discipline may not find what is to be acceptable and aim at helping realize the desired social vision. It may not then be able to avoid a discussion of how, and through what process, the vision may be realized. This need not make the disciplines mutually exclusive. The rational and amicable discussion of different worldviews and disciplines may in fact promote greater depth and breadth in the analysis of both disciplines through cross-pollination, thus making the world richer and better off. Feyerabend (1993) is hence right in asserting that “proliferation of theories is beneficial for science while conformity impairs its critical power. Uniformity also impairs the free development of the individual” (, p. 5).

7. The Islamic worldview

This brings us to the very pertinent question of whether the worldview of Islamic economics is significantly different from that of conventional economics. Although there is a great deal that is common among the worldviews of most major religions of the world, particularly those of Islam, Christianity, and Judaism, it may not be possible to say the same about the worldviews of Islamic and conventional economics. The worldviews of both disciplines are radically different. The Islamic worldview is not secularist, value-neutral, materialist, or social-Darwinist. It is rather based on a number of concepts that strike at the root of these doctrines. It gives primary importance to moral values, human brotherhood, and socio-economic justice and does not rely primarily on either the state or the market for realizing its vision. It relies rather on the integrated roles of values and institutions, market, families, society, and the state, to ensure the realization of its vision of ensuring the well-being of all. It puts great emphasis on social change through a reform of the individual and his or her society, without which the market and the state could both perpetuate inequities.

The fundamental Islamic belief is that this universe and everything in it, including human beings, has been created by the One and the Only God. All human beings are His vicegerents and brothers unto each other. There is no superiority of one over the other because of race, sex, nationality, wealth, or power. Their sojourn in this world is temporary. Their ultimate destination is the Hereafter where they will be accountable before God. Their well-being in the Hereafter depends on whether or not they live in this world, and fulfill their obligations towards others, in a way that helps ensure the well-being of all.

One of the things that seriously affects the well-being of all is the way the scarce resources, which are a trust from God, are used. God, the Creator and Owner of these resources, has provided certain values, rules of behavior, or institutions, within the framework of which human beings are expected to use these resources and to interact with each other. These values have been given not just to any one specific group of human beings, but rather to all people at different times in history through a chain of His messengers (who were all human beings), including Abraham; Moses; Jesus; and, the last of them, Muhammad.4 Thus, according to Islam, there is a continuity and similarity in the value systems of all revealed religions to the extent to which the message has not been lost or distorted over the ages.

The prophets did not, however, bring just the values. They also struggled to reform their societies. Socio-economic and political reform is, therefore, the major thrust of the Islamic message. To accept what is and not to struggle for the realization of the vision or what ought to be is a vote in favor of prevailing inequities and doing nothing to remove them. Such an attitude cannot be justifiable within the Islamic worldview. The mission of human beings is not just to abide themselves by the Islamic values, but also to struggle for the reform of their societies in accordance with these. This is what is meant by righteous living.

Righteous living would, it is believed, help promote a balance between individual and social interest and help actualize the maqasid al-Shari`ah (the goals of the Shari`ah), or what may be referred to as the vision of Islam, two of the most important constituents of which are socio-economic justice and the well-being of all God’s creatures.5 Injustice cannot but thwart the realization of true well-being, accentuate tensions and social unrest, discourage individuals from putting in their best, and thus retard development. However, whereas conventional economics assumes the prevalence of self-interested behavior on the part of individuals, Islam does not assume the prevalence of ideal behavior. It believes that, although some people may normally act in an ideal manner, the behavior of most people may tend to be anywhere between the two extremes of selfishness and altruism and hence a constant effort (jihad) needs to be made on the part of both individuals and society for moral uplift.

Islam, however, rules out the use of force for moral uplift: “There shall be no compulsion in religion” (al-Qur’an, 2:256), and “Say that the Truth has come from your Lord: Whoever wishes may either believe in it or reject it” (al-Qur’an, 18:29).6 It rather lays stress on proper upbringing, creating conviction through logical reasoning and friendly dialogue (al-Qur’an, 16:125), and creating an enabling environment for motivating individuals to do what is right and to abstain from doing what is wrong. This is, however, not sufficient. It is also necessary to provide both material and spiritual incentives and deterrents to motivate individuals to do their best for their own good as well as that of others and to prevent them from causing harm to others. Smoothly functioning competitive markets, where people interact with each other in their self-interest, are necessary for ensuring maximum efficiency. However, although competition does help safeguard social interest to a certain extent, total reliance cannot be placed on it because some people may use unfair means to enrich themselves. Hence governments have tried to pass and enforce regulations. But regulations may not be possible without having a perception of what is the right thing to do. Therefore, once we regulate, we do not remain value-neutral. Moreover, it may not be realistic to depend primarily on regulations because regulations may be circumvented and need to be effectively enforced. The cost of enforcing them may be lower if there is some effective mechanism for self-enforcement.

This self-enforcement is believed to come from two sources. One of these is the innate goodness of the human being himself or herself. Within the framework of Islamic beliefs, people are good by nature because God has created them in His own image (al-Qur’an, 30:30). The individual does not necessarily always act in his self-interest. He or she also acts in the interest of others and even makes sacrifices for them under a feeling of moral obligation. However, because the individual is also free and his or her behavior is not determined, he or she may or may not preserve his or her innate goodness and may act in ways that are against his or her nature. This may hurt him or her and his or her society. Therefore, it is necessary to provide incentives and deterrents as well as an enabling environment. The problem with a number of this-worldly incentives and deterrents is that they may be insufficient and may not even be justly implemented.

Therefore, the second source of self-enforcement is belief in the reward and punishment in the Hereafter. If I abstain from doing anything wrong and also sacrifice my material self-interest for the sake of others, I will improve my well-being in the Hereafter. The concept of Hereafter thus gives a long-term perspective to self-interest by extending it beyond a person’s life span in this world. It is not possible for competition and government intervention to always motivate a person to do what is morally right and to abstain from what is morally wrong, to cooperate with others and to make sacrifices for them. Governments can try to ensure competition and to pass laws to safeguard social interest. However, there are so many clandestine ways of restraining competition and of cheating and exploiting others without being caught that it may be difficult for governments to succeed unless there is an inner urge on the part of operators in the market themselves to do what is right, to fulfil their contracts and other commitments faithfully, and not to try to undermine competition or resort to unfair means of earning. In the last analysis, therefore, it may not be possible to safeguard social interest effectively without the help of moral values and without creating an effective motivating force and a proper environment for their enforcement. This may reduce the burden on the government of safeguarding social interest.

8. The historical link

Islamic economics had been developing gradually as an interdisciplinary subject in keeping with the Islamic worldview in the writings of Qur’an commentators, jurists, historians, and social, political, and moral philosophers. A large number of scholars, including Abu Yusuf (d. 798), al-Mas`udi (d. 957), al-Mawardi (d. 1058), Ibn Hazm (d. 1064), al-Sarakhsi (d.1090), al-Tusi (d. 1093), al-Ghazali (d. 1111), al-Dimashqi (d. after 1175), Ibn Rushd (d. 1198), Ibn Taymiyyah (d. 1328), Ibn al-Ukhuwwah (d. 1329), Ibn al-Qayyim (d. 1350), al-Shatibi (d. 1388), Ibn Khaldun (d. 1406), al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762), made valuable contributions over the centuries.7 These scholars were, however, not specialists in economics. Strict compartmentalization of disciplines had not developed by then. They were masters of a number of different intellectual disciplines, and their contributions are, therefore, spread over a vast literature, some of which has been lost because of the vicissitudes of time and a wave of invasions particularly by the Mongols ( Rosenthal, 1947, p. 19; Sarton, 1927, Vol. 1, p. 662). It was perhaps because of this multidisciplinary nature of their contributions that human well-being never got conceived as an isolated phenomenon dependent primarily on economic variables. It was seen as the end-product of a number of economic as well as moral, psychological, social, demographic, and political factors in such an integrated manner that it was not possible to realize overall human well-being without an optimum contribution from all. Justice occupied a pivotal place in this whole framework. This was to be expected because of its crucial importance within the Islamic worldview.

These diverse contributions over the centuries seem to have reached their consummation in Ibn Khaldun’s (n.d.) Muqaddimah, or Introduction to History, where he tried to analyze the closely interrelated roles of moral, psychological, political, economic, social, demographic, and historical factors over a period of three generations, or a 120 years, in the rise and fall of a dynasty (dawlah) or civilization (`umran). His analysis was thus not static and was not based on only economic variables. It was, rather, dynamic and multidisciplinary. The need for such an analysis was felt by him because he lived at a time (1332-1406) when the Muslim civilization was already in a process of decline and, as a conscientious Muslim, he was keen to see a reversal of the tide. However, this is not all that he did. The Muqaddimah also contains a considerable discussion of economic principles, a significant part of which is undoubtedly Ibn Khaldun’s original contribution to economic thought.

His contributions did not, unfortunately, get fertilized and developed further in the Muslim world. As he rightly theorized himself, sciences progress only when a society is itself progressing (Ibn Khaldun, n.d., p. 434). This theory has become clearly upheld by Muslim history. Sciences progressed rapidly in the Muslim world from the middle of the 8th to the middle of 12th centuries. The development continued at a decelerated pace for two more centuries ( Sarton and Sezgin 1983 and ff). Thereafter, there appeared a brilliant star only once in a while on an otherwise unexciting firmament. Economics was no exception. It also continued to be in a state of limbo in the Muslim world. No major contributions were made after Ibn Khaldun, except by a few isolated luminaries such as al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762).

Consequently, whereas conventional economics became a separate scientific discipline in the West in the 1890s after the publication in 1890 of Alfred Marshall’s great treatise, Principles of Economics, (Schumpeter, 1954, p. 21) 9 and has continued to develop since then, Islamic economics remained primarily an integral part of the unified social and moral philosophy of Islam until the Second World War. The independence of most Muslim countries after the War and the need to develop their economies in a way that would help realize the Islamic vision has given boost to the reemergence of Islamic economics. This need not give anyone the impression that the attempt is to bypass the good and valuable analytical work done by conventional economics and its offshoots. It would be difficult not to agree with Blaug (1980) when he said that “any methodological prescription that amounts to wiping clean the entire slate of received economics and to starting all over again from scratch may be dismissed out of hand as self-defeating” (p. 121).

9. Achievements, shortcomings, and future prospects

Islamic economics has so far, however, been able to scratch only the surface of what Ibn Khaldun’s (1950) multidisciplinary dynamics entails. Greater emphasis has been laid so far on explaining what the ideal Islamic economic system is, how it differs from socialism and capitalism, and why the operation of markets within the framework of the Islamic worldview would help minimize some of the glaring inequities of the market system and exert a positive impact on the realization of overall human well-being without excessive reliance on the state. Most of the discussion is, however, of a normative nature–how all economic agents (individuals and households, firms, altruistic organizations, markets and governments) are expected to behave in the light of Islamic norms. This has been accompanied by some sporadic historical data to show that the system has actually been in existence for at least short periods at different times in Muslim history and that this has produced positive results. This was natural and in fact necessary. Economics is so closely related to the worldview and the economic system of a society that without clarity about these Islamic economics may have groped in the dark for the direction in which to proceed.

The other area where substantial, although still far from adequate, literature has become available is Islamic finance. An effort has been made to show why an economy that relies less on credit and more on equity may be superior in its overall performance to the one that relies substantially on credit, particularly on short-term credit (Mills and Presley, 1999, pp. 58-72 and 114-120; Chapra, 1985, pp. 107-145; 1992, pp. 327-334). Some progress has also been made in macroeconomics. There has been a considerable discussion of the Islamic vision (Ahmad and Khan 1994). There is, however, no theoretical macroeconomic model that would show how the Islamic values and institutions, and different sectors of the economy, society and polity would interact to help realize the vision. An appropriate macroeconomic policy package has hence not developed. The field where very little progress has been made is microeconomics. It has not been possible to establish the relationship among the macroeconomic goals and the behavior of different economic agents and the kind of socio-economic and political reform that the realization of goals may require. Yalcintas (1986) is perhaps right in stating that “Construction of microeconomic theory under the Islamic constraints might be the most challenging task before Islamic economics” (p. 38).

Although there is undoubtedly some merit in showing how the injection of a moral dimension into economics might help realize the Islamic vision without excessive dependence on the state, such a discussion does not take us very far. Because of centuries of decline, disintegration, and lack of proper education, Islamic values are not reflected either in individual or social behavior or in the prevailing legal, social, political, and economic institutions of Muslim countries. There is a great deal of deviation from Islamic norms. A number of morally wrong practices, such as dishonesty, corruption, extravagance, wastefulness, and lack of punctuality and conscientiousness have become securely locked-in through the long-run operation of path dependence and self-reinforcing mechanisms. The deviation is taking a heavy toll of justice, development, and general well-being (see Chapra, 1992, pp. 251-338). The task of Islamic economics does not, therefore, get fully accomplished if it does not show the causes of this deviation.

Other societies have translated their values into formal institutions in spite of an external secularist and value-neutral stance (Organization for Economic Cooperation and Development, 1996). They have formulated a legal framework and a proper code of conduct for government officials and put in place mechanisms for transparency, rule of law, public accountability, and protection of whistle blowers. They have also created sufficient checks and balances and adopted measures that would make it difficult for violators to get away unscathed. Muslim countries have generally lagged behind here. The question is why. It may not be possible to answer this question without also injecting psychological, social, political, and historical dimensions into the analysis. One of the major reasons for the Muslim malaise may be the failure of the political system. There is hardly any Muslim country where there is a truly democratic government, accountable to the people, where the press is really free, where the courts are independent of political interference, and where the law of the land gets applied fairly and impartially to all, irrespective of their wealth and power. This is in clear violation of the Islamic norms related to the polity. The result is that senior government functionaries are able to get away with corruption, inequities, and incompetence. This frustrates the effective and impartial operation of incentives and deterrents and creates a favorable climate for the general violation of Islamic norms. The country’s resources do not, therefore, get used efficiently and equitably for the well-being of the people. In addition, there is a glaring omission in Islamic economics of a scientific analysis of some of the crucial problems of Muslim countries, including budgetary and balance of payments deficits, high debt-servicing burden, low levels of saving, investment and real growth, high rates of inflation and unemployment, extreme inequalities of income and wealth, and miserable socio-economic condition of the poor.

There could be no escape from what Ibn Khaldun (1950) did for his society–adopting a multidisciplinary approach to find out the causes of the various problems and suggesting, in the light of such analysis, a comprehensive, well-integrated, and practical reform program. Within the framework of his multidisciplinary dynamic model, concentrating only on moral or economic variables may not be able to take the Muslim world very far on the path of development with justice.

Islamic economics also needs to collect reliable data on a number of important economic variables. Without knowing the actual position and the reasons for it, it may not be possible to prepare a well-conceived program for social, economic, and political change. Data create transparency and reveal the true picture, which some governments do not welcome. Hence one of the essential prerequisites for reform is the collection and publication of necessary data and their scientific analysis. Missing in particular are data on distribution of income and wealth, extent of need-fulfillment, and nature and quality of life, particularly of the downtrodden people. Without such data, it is not possible to know the degree of equity prevailing in the allocation and distribution of resources, which is the most crucial criterion for judging the Islamization of a Muslim economy. There are also inadequate data about government revenues and expenditures, consumption, saving and investment behavior of individuals and different sectors of the population, employment and unemployment, bonded, female and child labor, wages and salaries, working conditions, work habits, and productivity, along with a rational explanation for the deviation from Islamic norms. Once this is done, it may be possible for Islamic economics to do a more meaningful job of analyzing the impact that the introduction of Islamic values and institutions may have on aggregate consumption, saving and investment, economic growth and stability, and distribution of income.

The practical wisdom of Islamic economics has thus been unable to come to grips with the task of explaining the rise and fall of Muslim economies in the past, the lag between Islamic norms and the actual behavior of economic agents, and the causes of problems faced by Muslim countries. It has 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 reducing their imbalances and simultaneously actualizing the Islamic vision. Moreover, its theoretical core has also thus far been unable to come out of the straitjacket of conventional economics, which takes into account primarily the economic variables that are measurable and generally avoids a discussion of the complex historical interplay of moral, psychological, economic, social, and political factors. Islamic economics has thus “failed to escape the centripetal pull of Western economic thought, and has in many regards been caught in the intellectual web of the very system it set out to replace (Nasr, 1991, p. 388). It is thus unable to explain the difference in the performance of various societies with respect to overall human well-being.

The potential is, however, great but the expectations for the near future should not be pitched at a very high level. It may not be possible to raise Muslim societies, at least in the near future, to the high spiritual level that Islam demands and that Muslim economists assume in their analysis. Moreover, the performance of all the functions that are expected from Islamic economics may not be immediately feasible because of the lack of resources and political support, the nonavailability of data, and the difficulty of measuring a number of the socio-economic and political variables that need to be incorporated into the models. It is possible that even after a great effort, the achievements may not be significantly great. The discipline will mature over time after passing through an evolutionary process. It has, fortunately, the advantage of benefiting from the tools of analysis developed by conventional, social, humanistic, and institutional economics as well as other social sciences. Islamic Research 1986 and Chapra

by : Umar Chapra

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