Role of Private and Public Sectors in Economic Development in an Islamic Perspective

Author: Ed: Ehsan Ahmed

Publisher: International Institute of Islamic Thought (IIIT)

This book is a compilation of selected papers presented at the fifth international Islamic Economics Seminar (1414-1993) jointly sponsored by the International Institute of Islamic Thought and the World Bank. This Seminar adopted the theme of this book.

This work, which is edited by E.Ahmad, includes M. A. Chaudry’s “Why Cannot Neoclassicism Explain Resource Allocation and Development in the Islamic Political Economy”, J. Abu-Rashed’s “Altruism in the conduct of the private and public sectors”, S. M. Ali’s “operation of an Islam Bank under Conventional Banking Framework: A Comparative Efficiency Analysis”.

In all, ten prominent scholars share their valuable insights on their respective fields in this book.

Islamic economic forum urges reduction of trade barriers

An international Islamic economic conference ended Wednesday with calls for the reduction of trade barriers, development of alternative energy sources and stricter regulations in the global financial industry.

The three-day World Islamic Economic Forum in Jakarta, attended by 1,500 delegates from 38 countries, discussed ways to deal with the global financial crisis and food security, as well as exploring possibilities for non-carbon fuels.

A statement issued at the end of the conference called on delegate countries to “reduce regulatory barriers such as food subsidies, which would hinder sustainable food production and trade”.

“The declaration has a host of policy recommendations that, if implemented widely, would enact real change within the Muslim and non-Muslim world,” said Musa Hitam, chairman of the World Islamic Economic Forum Foundation.

The statement urged countries to develop policies to ensure a proper balance between food production for human consumption and energy usage.

Effective regulations are needed in the global financial industry to mitigate risk and failure, the declaration said.

“Governments, corporations and individuals can use this as a road map to not only help out their local communities, but also affect real change within their districts, countries and regions as other people and organisations join in,” said Sofyan Djalil, co-chairman of the conference.

Organisers say the forum aspires to change the global perception of the Muslim world from a conflict zone to a lucrative economic region. It is also aimed at promoting trade and investment opportunities in the Muslim world.

Speakers also called for the promotion of Islamic finance, which has not not been hit as hard as its Western counterpart mainly because Islamic banking prohibits speculation and high levels of debt.

The sixth World Islamic Economic Forum will be held in Malaysia May 18-20, 2010.

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


A Good Company

sps0168What have Islamic economics, animal rights protesters, social justice activists and ethical investors got in common? M Iqbal Asaria highlights the links.


The social justice protesters who disrupted gatherings of leaders of the industrial world in Seattle, Genoa and Quebec have highlighted on the international stage a growing unease with the operations of unfettered markets. For protesters the present arrangement perpetuates gross global inequity, made worse by rampant globalization.

In Britain, and on a somewhat smaller scale, the drama of Huntingdon Life Sciences was unfolding. As a leading user of live animals for experiments, this scientific research company fell foul of animal rights activists. During a sustained campaign, protesters were able to cut off all sources of bank finance to the company. Huntingdon Life Sciences had to move its operational headquarters from Britain to the US and rely on funding from non-banking sources.

This was a dramatic illustration of banks bowing to pressure from the providers of their funds — the general public. Similarly, the Bank of Scotland was forced to withdraw from a deal with the US televangelist Pat Robertson because of his extreme right-wing views. The embarrassing about-turn was forced on the bank by its shareholders and depositors.

These developments, illustrating shifts in public perception about how economies and businesses operate, provide parallels with the ideals of Islamic economics and finance. Like the social justice protesters, Muslim economists see the dominant economic structure as intrinsically unjust and biased towards the industrialized countries of the North. Islamic economics challenges the prevailing dogma of free markets and seeks to introduce regulatory regimes to safeguard public interest. Moreover, it questions the absolute freedom of financial intermediaries to provide funding for operations with no regard for moral and ethical criteria and without taking into account the wishes of the providers of the funds.

The basic ideas of Islamic economics have emerged since its academic and intellectual foundations were developed in the 1970s and 1980s. Today, it is a global movement aiming to provide Muslims with alternative banking and financial arrangements where ethical considerations are paramount.

Economic teachings of Islam are simple but profound. Islam regards usury of all kind as anathema and thus forbids all transactions involving interest payments. Making money out of money is prohibited; as are monopoly and raising prices by artificial means such as hoarding. While ownership of private property is allowed, the accumulation of wealth in fewer and fewer hands is strictly forbidden. This is why the Islamic inheritance laws are designed to redistribute wealth; and ownership of land beyond an individual’s or family’s capacity to handle is discouraged.

In Muslim societies the injunction of Zakat provides a vital mechanism for addressing social welfare issues. Zakat is normally translated as ‘poor tax’ — but it is not charity that the rich give to the poor. It is the right of the poor and a duty of the rich. Thus, all Muslims are required to give away at least 2.5 per cent of their total annual income to the poor and the needy as Zakat. As the principle is well established, contemporary Muslim economists have argued for it to be institutionalized, with even higher rates of giving. A social welfare state is therefore not alien to Muslim economic thinking.

So Muslim societies should have a much more equitable ethos than they actually do. There are a number of reasons why they fall short. One reason is that Islamic economic injunctions have only existed in theory and have never actually been put into practice. Instead, Muslim countries have tended to embrace Western development policies uncritically. However, there are signs that the Islamic ethos is slowly gaining ground. We can see that most clearly in the area of banking and finance.

Ways of lending


Islamic banks can be compared with ethical investments which incorporate the desire of the providers of the funds to have a say in how their money is used. Some funds do not invest in companies which deal in tobacco or military hardware or which exploit their workforce. Others only invest in corporations that meet certain environmental criteria. Islamic finance has a similar rationale. Indeed, in some respects it goes further, being concerned not just with what kind of activities are being financed but also with the way in which they are funded. Muslims are encouraged to invest in ‘permissible’ (Halal) activities via ‘permissible’ means. This means that not only will they avoid corporations connected with, say, alcohol or gambling or exploitation, but they also will not deal with those involved in usury — which obviously includes conventional banks.

In practice this is less dramatic than it sounds. Muslims still make everyday transactions like investing their surplus funds, house-buying, and taking out loans and working capital for their businesses. And for investment purposes Islamic financial institutions employ criteria similar to those used by the ethical investment funds. The big difference comes in the way they lend, both for personal finance and business purposes. In simple terms, lenders enter into risk-sharing contracts with borrowers; return is based on the outcome of the venture or investment, rather than a predetermined rate.

The principle of risk sharing can have far-reaching implications. For risks to be shared borrowers have to be willing to provide much more information about their situation than conventional banks would normally seek. It will include confirmation that the funds are to be deployed in permissible activities, as well as transparency in reporting financial information about the progress of the business or project for which the money has been borrowed.

Equity and inequity


To ensure that their principles are not compromised many Islamic financial institutions have a Shari’ah (Islamic Law) Supervisory Board of Advisors. This is usually a body of qualified Muslim jurists well versed in commerce who vet all new transactions and structuring of deals. Over the last three decades Islamic banking and finance has grown manifold in Muslim communities. In Malaysia, for example, about five per cent of all banking transactions are conducted by Islamic Financial Institutions. This is set to rise to 10 per cent by 2005. A full range of banking products are available to customers from Bank Islam Malaysia or the ‘Islamic Banking’ counters of all the major banks. The set-up is fully regulated by the Central Bank of Malaysia and Islamic financial products seem to exist side by side with more conventional ones, without problems. Similar moves are afoot in countries such as Pakistan, Egypt and the Gulf States. Malaysian and Middle Eastern corporations have also begun to raise long- and medium-term finance by issuing shari’ah-compliant bonds.

In other parts of the Muslim world, Islamic equity investment funds have mushroomed. Very much like ethical funds, these restrict their portfolios to approved corporations, based on criteria devised by their Shari’ah Supervisory Boards. An increasing number of Muslim investors are channelling their savings through these funds. There is even a Dow Jones Islamic Index measuring their performance.

In Britain and the US, Muslim communities have started to experiment with saving and mortgage products which meet the stipulations of the shari’ah. In the US, the Islamic housing finance company Lariba has had its funding augmented by Freddy Mac, the leading mainstream provider of housing funds. In Britain, I-Hilal and Parsoli have started to market shari’ah-compliant Individual Savings Accounts or ISAs.

Indeed, as a recent survey by business information company Datamonitor concludes: ‘The market for Islamic (shari’ah-compliant) finance in Britain is set to grow hugely. A huge gap exists for shari’ah-compliant equity and mortgage products. Muslims have historically been underserved by financial institutions, but this is set to change.’

Like the ethical investment movement, Islamic economics will in time help ‘persuade’ the big financial players to pay far more heed to their customers’ views and it will become easier to incorporate social and ethical criteria.

Admittedly, there are a host of external and internal realities which impinge upon the way Islamic financial bodies are organized. But as the move towards more representative societies gathers pace, principles and instruments of Islamic economics will spread far and wide.

In this endeavour Muslims will be in good company. The escalation of protest against global inequity and the growth of the ethical investment movement will provide platforms for like-minded players from across faith and ideological boundaries to come together.


Source :

M Iqbal Asaria

is an economist, writer and internet service