Download Social wellbeing criterion for Islamic banks

Islamic Financial Instruments
By
Dr. Syed Zulfiqar Ali Shah
Ref: Masudul Alam Choudhury
Summary of last lecture
• First we discussed about Critical thinking: in which we had
discussion on Islam v. rationalism
• The epistemological roots of Muslim rationalism: the scholastic
period
• Periods of different scholars in the History
• Ibn Khaldun’s, Al-Kindi (801AD–873AD), Imam Ghazzali’s social
theory (1058AD–1111AD),
• Al-farabi’s Theory Of The Universe
• Islamic epistemologists and the world-system
• Periods of different scholars in the History
• Ibn Al-Arabi on divine unity (1165AD–1240AD), Imam Ibn
Taimiyyah’s social theory (1263AD–1328AD), Imam Shatibi’s
social theory (d. 1388AD), Shah Waliullah’s social theory
(1703AD–1763AD), Malek Ben Nabi’s social and scientific theory
Plan of Today's Lecture
• Contemporary Muslim reaction: devoid of
epistemology
• Logical faults of Western thinking: resource
allocation concept and its Muslim imitation
• The future of Islamic transformation
• The tawhidi methodology in Islamic
reconstruction
• Social wellbeing criterion for Islamic banks
Contemporary Muslim reaction:
devoid of epistemology
The Islamizing agenda
In recent times, to get out of the human resource
development enigma of Muslims, Ismail Al-Raji Faruqi led
the way in the so-called ‘Islamization’ of knowledge.
Rahman and Faruqi formed opposite opinions on this
project (Rahman, 1958). Al-Faruqi (1982) thought of the
Islamization of knowledge in terms of introducing
Western learning into
Contemporary Muslim reaction:
devoid of epistemology
received Islamic values and vice versa. This proved to
be a mere peripheral treatment of Islamic values in
relation to Western knowledge. It is true that out of
the programme of Islamization of knowledge arose
Islamic universities in many Muslim countries. Yet the
academic programmes of these universities were not
founded upon a substantive understanding and
application of the tawhidi epistemology. The theory
of knowledge with a substantive integrated content
remains absent in Islamic institutional development.
Contemporary Muslim reaction: devoid of
epistemology
Islamization and Islamic banks
In the financial and economic field, Islamic banks have
mushroomed under an Islamization agenda, yet the
foundation and principles of Islamic banks give no
comprehensive vision of a background intellectual mass of
ways to transform the prevailing
Contemporary Muslim reaction: devoid of
epistemology
environment of interest transactions into an interest-free
system. How do the economic and financial economies
determine risk diversification and prospective diversity of
investment and production, thus mobilizing financial
resources in the real economy along shari’a-determined
opportunities?
Contemporary Muslim reaction:
devoid of epistemology
The financial reports of Islamic banks show an
inordinately large proportion of assets floating in
foreign trade financing. These portfolios have only to
do with sheer mercantilist business returns from
charging a mark-up on merchandise, called murabaha.
Contemporary Muslim reaction:
devoid of epistemology
Such a mark-up has nothing in common with real
economic returns arising from the use of trade
financing. Consequently the mobilization of resources
through foreign trade financing alone has helped
neither to increase intercommunal trade financing in
Muslim countries nor to increase returns through
development prospects in the real economic sectors of
undertaking foreign trade financing.
Contemporary Muslim reaction:
devoid of epistemology
Islamic banks have not constructed a programme of
comprehensive development by rethinking the nature
of money in Islam in terms of the intrinsic relationship
between money as a moral and social necessity linked
endogenously with real economic activities.
Here endogenous money value is reflected only in the
returns obtained from the mobilization of real sectoral
resources that money uses to monetize real economic
activities according to the shari’a. Money does not have
any intrinsic value of its own apart from
Contemporary Muslim reaction:
devoid of epistemology
the value of the precious metals that are to be found in real
sector production of such items. The structural change leading
to such money, society, finance and economic transformation
has not been possible in Islamic banks. Contrarily, Islamic
banks today are simply pursuing goals of efficiency and
profitability within the globalization agenda as sponsored by
the West and the international development finance
organizations. Thus, Islamic banks are found to have launched
a competitive programme in the midst of privatization, market
openness, rent-seeking economic behaviour and financial
competition, contrary to promoting cooperation between
them and other financial institutions.
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
Clamour of Islamic economic thinking over the last 70 years
or so has remained subdued. It has produced no truly
Qur’anic worldview to develop ideas, and thereby to
contribute to a new era of social and economic thinking and
experience.
The principle of marginal rate of substitution that remains
dominant in all of Western economic, financial and
scientific thought has entered the entire framework of
Islamic social, economic and financing reasoning.
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
This has resulted in a complete absence of the praxis of
unity of knowledge as expressed by social, economic and
institutional complementarities at the epistemological,
analytical and applied levels. No structural change other
than perpetuation of mechanical methods at the expense
of the Qur’anic worldview arises from incongruent
relations. The Qur’anic methodological praxis rejects such
an incongruent mixture of belief mixed with disbelief.
Logical faults of Western thinking:
resource allocation concept and its
Muslim
imitation
By a similar argument, the neoclassical marginal substitution agenda of
development planning is found to enter the imitative growth-led economic
prescription of all Muslim countries. Recently, such growth and marginalist
thinking has received unquestioned support by Muslim economists like
Chapra (1993) and Naqvi (1994). Siddiqui (undated) does not recognize the
fundamental role of interest rates in the macroeconomic savings function as
opposed to the resource mobilization function and, thereby, the
consequential conflicting relationship between the real and financial sectors.
He thereby endorses ‘saving’ in an Islamic economy. These Muslim
economists follow the macroeconomic arguments of capital accumulation via
‘savings’ as opposed to the substantive meaning of resource mobilization
(Ventelou, 2005) according to the Qur’anic principle interlinking spending,
trade, charity and the consequential abolition of interest (riba) (Qur’an,
2:264–80). The Muslim economists failed to understand the system of
evolutionary circular causation between these Qur’anic recommended
activities underlying the process of phasing out interest rates through the
medium of a money–real economy interrelationship (Choudhury, 1998, 2005).
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
The concept of financial ‘saving’ in both the
macroeconomic and microeconomic sense carries with it
an inherent price for deferred spending. Such a price of
deferment caused by ‘saving’ is the rate of interest on
savings. Likewise, savings and thereby also the underlying
interest motive in it, generate capital accumulation
(Nitzan and Bichler, 2000).
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
Capital accumulation so generated, in turn plays a central
role in economic growth. These, together with the
consequent pricing areas of factors of production in an
economic growth model, have simply been
misunderstood by Islamic economists while applying
classical and neoclassical reasoning and analytical models
to Islamic economic, financial and social issues (Bashir
and Darrat, 1992; Metwally, 1991).
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
The nearest that Islamic economists have come to
applying alternative theories of economic growth is by
using an endogenous growth model (Romer, 1986). Yet
the neoclassical marginal substitution roots of such a
growth model have been kept intact. Thus the
methodology of circular causation in the light of tawhidi
epistemology remained unknown to contemporary
Muslim scholars.
The future of Islamic
transformation
In the light of the above discussion we note the deeply
partitioned views in the development of Muslim thought
from two distinct angles – Islamic epistemology and
Muslim rationalism. This conflict started at the time of
the Mutazzilah, about a hundred years after the Prophet
Muhammad, followed by the scholastics.
The future of Islamic transformation
The same train of thought is being pursued today by a blind
acceptance of economic, social and institutional neoliberalism.
As a result of such imitation (taqlid) in Muslim thinking, no
overwhelming attempt has been made to bridge the gap
between the Qur’anic epistemological thinking and Occidental
rationalism. The totality of a tawhidi unified worldview according
to the Qur’an could not be introduced into the body framework
of Muslim thinking. The rise of the umma that would be led by
the tawhidi epistemology for guidance and change fell apart.
The tawhidi methodology in
Islamic reconstruction
Only along the epistemological, ontological and ontic circular
causal interrelations of the tawhidi knowledge-centred
worldview is it possible to establish a truly Qur’anic methodology
for all the sciences.We point out the nature of the tawhidi
approach using creative evolution for the realization of an
Islamic transformation.
Discourse along lines of tawhidi epistemology and its
ontologically constructed worldsystem needs to prevail in all
sectors between Muslim nations. According to the learning
impetus within a maturing transformation process, consensus on
such interactive venues can be attained.
The tawhidi methodology in
Islamic reconstruction
Thereby, the Muslim world as a whole and her communities
would come
to evaluate the level of social wellbeing determined through the
participatory and complementary process of development in the
light of the shari’a. The evaluation of such a social wellbeing
criterion, within the interactive institutions of economy, markets,
society, governments and the extended Muslim community,
gives rise to consensus and creative evolution. This in turn leads
to heightened understanding and implementation of the circular
causation and continuity framework of the knowledge-centred
worldview. In this way, the worldview of tawhidi unity of
knowledge is generated through a cycle of human resource
development and participation – a complex symbiosis
(Choudhury, 1998).
Social wellbeing criterion for
Islamic banks
The social wellbeing function as the objective criterion of Islamic
banks serving the shari’a tenets of social security, protection of
individual rights and progeny, and preservation of the Islamic
State, ought to become a description of ways and means of
stimulating resource mobilization that establishes sustainability
and the high ideals of the Islamic faith. This goal involves the
principle of tawhid. That is, the Oneness of God as the highest
principle of Islam.
Social wellbeing criterion for
Islamic banks
The model implementing the principle of tawhid in the
socioeconomic, financial and institutional order involves
organizing the modes of resource mobilization, production and
financing these in ways that bring about complementary linkages
between these and other shari’a-determined possibilities.
Social wellbeing criterion for
Islamic banks
In this way, there will appear co-determination among
the choices and the evolution of the instruments
to be selected and implemented by many agencies in
society at large through discourse.
Islamic banks ought to form a part and parcel
interconnecting medium of a lively developmental
organism of the umma.
Social wellbeing criterion for
Islamic banks
Development possibilities are realized both by the networking
of discourse between management and shareholders of an
Islamic bank as well as in concert with other Islamic banks, the
central bank, enterprises, government and the community at
large. This construction is extended across the Muslim world.
In this way, a vast network of discourserelated networking and
relational systems is established between Islamic banks and
the socioeconomic and socioinstitutional order as a whole.
Such unifying relations as participatory linkages in the
economy and society-wide sense convey the systemic
meaning of unity of knowledge. This in turn represents the
epistemology of tawhid in the organic order of things.
Social wellbeing criterion for
Islamic banks
In the present case such a complementing and circular
causation interrelationship is understood by their
unifying interrelationships with the socioeconomic and
socioinstitutional order in terms of the choice of
cooperative financing instruments.
Social wellbeing criterion for
Islamic banks
The literal meaning of tawhid is thus explained in terms
of an increasingly relational, participatory and
complementary development, wherein events such as
money, finance, markets, society and institutions unify.
In the end, by combining the totality of the shari’a
precepts with financing instruments, Islamic banks
become investment-oriented financial intermediaries
and agencies of sustainability of the socioeconomic
order, the sociopolitical order and institutions of
preservation of community assets and wellbeing.
Social wellbeing criterion for
Islamic banks
The nature of money now turns out to be endogenous.
Endogenous money is a systemic instrument that
establishes complementarities between socioeconomic,
financial, social and institutional possibilities towards
sustaining circular causation between money, finance,
spending on the good things of life and the real economy.
Social wellbeing criterion for
Islamic banks
Money in such a systemic sense of complementary
linkages between itself, financial instruments and the real
economic and social needs according to the shari’a
assumes the properties of a ‘quantity of money’
(Friedman, 1989) as in the monetary equation of
exchange.
Social wellbeing criterion for
Islamic banks
In the endogenous interrelationships between money and the
real economy, the quantity of money is determined and
valued in terms of the value of spending in shari’a goods and
services in exchange. Money cannot have an exchange value
of its own, which otherwise would result in a price for money
as the rate of interest. Money does not have a market and
hence no conceptions of demand and supply linked to such
endogenous money in Islam.
Social wellbeing criterion for
Islamic banks
Besides, such real exchangeable goods and services being
those that are recommended by the shari’a enter a social
wellbeing criterion to evaluate the degree of attained
complementarities between the shari’a-determined
possibilities via a dynamic circular causation between
such evolving possibilities. Such a social wellbeing
function is the criterion that evaluates the degree to
which complementary linkages are generated and
sustained between various possibilities as shari’adetermined choices.
Social wellbeing criterion for
Islamic banks
On the basis of valuation of exchange of goods and
services, the real financial returns are measured as a
function of prices, output and net profits and private as
well as social returns on spending.
Social wellbeing criterion for
Islamic banks
The economy and community in realizing the regime of
such endogenous money, finance and market
interrelations through the formalism of evolutionary
circular causation as strong economic, social and
developmental causality driven by the principle of
universal complementarities as the worldly mark of
tawhidi unity of knowledge in systems.
Summary/ Conclusion
The dividing line between current understanding of Islamic–
Occidental connection and the tawhidi worldview as the
methodological and logical formalism of unity of divine
knowledge in thought and its ontologically constructed worldsystem spells out the dualism caused by rationalism. With this
are carried the two contrasting perceptions, social
contractibility and institutionalism. The distinction is also
between the emptiness of Islamic theology (Nasr, 1992) and
tawhidi formalism with its application in the truly Islamic
world-system and its dynamics.
Summary/ Conclusion
On the distinct themes between tawhid and rationalism there
are several contrasting views. Imam Ghazzali wrote (trans.
Buchman, 1998, p. 107) on the tawhidi contrariness to
rationalism:
The rational faculties of the unbelievers are inverted, and so
the rest of their faculties of perception and these faculties
help one another in leading them astray. Hence, a similitude
of them is like a man ‘in a fathomless ocean covered by a
wave, which is a wave above which are clouds, darkness piled
one upon the other’. (Qur’an, 24:40)
Summary/ Conclusion
Recently Buchanan and Tullock (1999) wrote on the neoliberal
order of rationalism, upon which all of the so-called ‘Islamic
economic and sociopolitical paradigm’ rests:
Concomitant with methodological individualism as a
component of the hard core is the postulate of rational
choice, a postulate that is shared over all research programs in
economics. (p. 391) Regarding the Occidental world-system,
Buchanan and Tullock (ibid., p. 390) write on the nature of
liberalism in constitutional economics.
Summary/ Conclusion
For constitutional economics, the foundational position is
summarized in methodological individualism. Unless
those who would be participants in the scientific dialogue
are willing to locate the exercise in the choice calculus of
individuals, qua individuals, there can be no departure
from the starting gate. The autonomous individual is a
sine qua non for any initiation of serious inquiry in the
research program.
In the end, the tawhidi epistemological and ontological
precepts present the ontic economic and social phenomena
as integral and complementary parts of the whole of
socioscientific reality. In the case of Islamic banking as a
financial institution, the conception of money in Islam
together with the embedded views of social, economic and
institutional perspectives of development as sustainability and
wellbeing are to be studied according to the principle and
logic of complementariness. The emerging study of such
complex and rich interaction in the light of tawhid and its
learning dynamics rejects the study of the economic, financial,
social and institutional domains as segmented parts within
dichotomous fields despite what the mainstream analytics
and neoliberal reasoning prompts.
In the light of the arguments cited in this chapter the
development of economic and social thought in the
contemporary Muslim mindset has been a sorry replay of the
dichotomous divide of Islamic scholasticism. It is high time to
reconstruct, and reform and return to the tawhidi
foundational worldview as enunciated by the Qur’an and the
sunna through the shuratic process of discourse, participation
and creative evolution in the scheme of all things.
Summary of today’s Lecture
• First we discussed about Critical thinking: in
which we had discussion on Islam v.
rationalism
• The epistemological roots of Muslim
rationalism: the scholastic period
• Periods of different scholars in the History
• Al-farabi’s Theory Of The Universe
• Islamic epistemologists and the world-system
• Periods of different scholars in the History
Summary of today’s Lecture
• Contemporary Muslim reaction: devoid of
epistemology
• Logical faults of Western thinking: resource
allocation concept and its Muslim imitation
• The future of Islamic transformation
• The tawhidi methodology in Islamic
reconstruction
• Social wellbeing criterion for Islamic banks
THANK YOU