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IIIE-IRTI DLP – 2005
FISCAL AND MONETARY
POLICIES FROM AN ISLAMIC
PERSPECGTIVE
Sayyid Tahir
International Institute of Islamic Economics,
Islamabad
6 December 2005
From the IIIE Islamabad
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
A Clarification:
The listed topic is “Public Policies (Fiscal
and Monetary) from an Islamic Perspective”.
This lecture focuses on the public policy
concerns through fiscal and monetary
policies. Therefore, the main discussion will
revolve around the issues related to these
two policies in the Islamic economics
literature.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Literature Survey:
••••• n
The papers focusing on either the fiscal policy or
the monetary policy, fall into two categories.
Concept papers. For example, the papers read
at the follow-up seminars on fiscal and monetary
policies after the 1st International Conference on
Islamic Economics (1976).
Analytical papers. Papers by Ausaf Ahmad
and Tahir, e.g., focus on the fiscal side, and
those by Mohsin Khan (1986) and Mohsin Khan
and Abbas Mirakhor (1987), e.g., on the
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monetary side.
DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Literature Survey:
••••• o
As also for the Analytical Papers:
• In the models incorporating both the fiscal
and the monetary sides proposed by some
Islamic economists, both policies are
analyzed side-by-side.
• In the other cases, the focus is on
modeling either the fiscal or the monetary
side. In these cases the study is limited to
stabilization role of the respective policies.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Literature Survey:
••••p
Lately, with increasing attention received
by Islamic banking and finance in the
1990s, central banking, monetary
management and monetary policy have
received more attention from the Islamic
economists. This literature  e.g., Mohsin
Khan and Mirakhor (1994) and Choudhry
and Mirakhor (1997)  represents some
advances over the earlier ideas in the
sense that some theoretical background
for the argument is also provided.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Literature Survey:
••••q
The papers are silent on some major issues.
These include:
Islamic economy  the framework in which the
policies are to be conceived. The focus in Isl.
economics is on the Isl. Eco. System.
The nature and role of government in the
Shari’ah  The Fiqh for Government
The Shari’ah-basis of the policy goals
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Literature Survey: A Summing Up
•••r
Islamic economists are taking positions
without a proper conceptual framework:
Islamic economy, the nature and role of
government, the institutional setup for the
policies, etc.
Islamic economists are talking about policies
for the Muslim countries.
Scant attention is paid to “Islamization of
economy” as a policy goal.
Elimination of poverty gets a passing mention
as a policy objective.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Towards A Reconstruction of the Argument
› The Perspective: Islamic Economy
› The Fiqh for Government
› The Financial Scene
› The Policy Goals in an Islamic Economy
› The Policy Goals in a non-Islamic
Economy
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Policy Perspective: Islamic Economy
1.
2.
3.
4.
5.
Individual is a part of the economy, not
the vice versa.
Nucleus: Family
Market economy
Government
Financial Landscape:
The role the function of financial
institutions shall be redefined.
Financial and real sectors shall be
closely integrated.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Fiqh for Government •••••n
A.
Natural Role of the Government:
1- Protection of territorial integrity of the state
2- Enforcement of the state’s claims and discharge of the
state obligations
3- Civil Administration
4- Development and maintenance of an institutional
framework in which the citizens may operate
5- Maintenance of civil liberties
6- Protection of recognized property rights of the citizens
7- Provision of justice
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Fiqh for Government •••••o
B.
Economic Functions performed by
Governments in the Modern Age
1- Allocation of resources through affecting price signals
and sometimes through direct involvement in the
economic activity
2- Distribution ─ redistribution of income and wealth
through fiscal measures
3- Stabilization ─ macroeconomic management of the
economy for alleviating unemployment, inflation and
other socioeconomic evils.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Fiqh for Government •••••p
C.
The Issue
All activities in the name of the government by
the rulers, or those by the bureaucracy on
behalf of the government, fall in the domain of
mua’malat: transactions and exchanges.
Is there some Shari’ah for those at the helm of
affairs of the people or the government?
Note: In the case of government activity, the decisions are
made by one group of people (the ruling elite),
implemented by another (the bureaucracy) and financial
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obligations of yet another people (the public).
DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Fiqh for Government •••••q
1. The nature and role of government in modern
times, from the Shari’ah perspective
2. The role of the government as representative of
the Shari’ah
3. All the prohibitions of the Shari’ah apply to the
government. But the matter may be somewhat
different in the case of the permissible things.
4. The issue of public property
5. The government and economic activity
6. The government and charity
7. The government and pure public goods
8. The government and semi-public goods
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Financial Scene
V
V
V
V
Islamic banks
The Securities Markets
› Murabahah financing securities
› Salam certificates
› Ijarah financing securities & warrants
› Redeemable musharakah securities
The Equity Market: The Islamic stock
market
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Islamic insurance
DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Policy Goals in an Islamic Economy
(Debatable)
‹
‹
‹
‹
‹
‹
‹
‹
Development and preservation of institutional
framework to support economic and distributional
activity
Education, incl. that of science and technology
Fulfillment of the fundamental economic rights of the
citizens
Elimination of poverty
Reduction in inter-regional economic disparities
Temporary help to local communities to tied over
temporary economic constraints (for local public goods)
Economic development
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Maintenance of a credible deterrence
DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Policy Goals in a Non-Islamic
Economy
‹
‹
Islamization of economy
All other goals admissible in an Islamic
economy, as explained earlier
Note:Our focus is on the ultimate goals that fiscal
and monetary policies are supposed to aim
at. Of course, they may be translated in terms
of more specific targets.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
The Difference from the Traditional
Thinking
‹
Islamization of economy
‹
All other goals that admissible in an Islamic
economy on the Shari’ah criteria
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
A Note on the Goals traditionally assigned to
Fiscal and Monetary Policies
Monetary Policy (due to Dr. Chapra, The 1980 Islamabad Seminar):
1.
Economic well-being with full employment and optimum rate of
economic growth,
2.
Socioeconomic justice and equitable distribution of income and wealth,
and
3.
Stability in the value of money
Fiscal Policy
(Dr. Chapra)
(Consensus view at the 1980 Islamabad Seminar)
1.
Ideological orientation with equal attention to material and spiritual
welfare
2.
Fulfillment of basic needs of all the people
3.
Providing the necessary infrastructure to promote economic growth
4.
Promoting an egalitarian economic and social order
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Difference between the goals proposed
here and those advocated elsewehere
1. Same goals for both fiscal and monetary
policies
2. The recognition of Islamization of
economy as a goal for non-Islamic
economies
3. Some deviation from the goals
traditionally assigned to the two policies
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Some Reflections on Working of the Fiscal
Policy in an Islamic Economy •••••n
• The government to focus on the fulfillment of the
absolutely critical minimum needs of the citizens
and on the provision of a credible deterrence
• Both initiative and necessary action for antipoverty purposes to come from the private sector
with the government playing a facilitator’s role
• Government to also pay attention to distributive
implications of its expenditures for a given target
─ For example, no consumption subsidies and
making an also for an expenditure not
deteriorating economic disparities and poverty. 20
DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Some Reflections on Working of the Fiscal
Policy in an Islamic Economy •••••o
• The government to keep its hands largely off
direct participation in economic activity and, in
particular, avoiding entering into long-term
economic commitments
• The government to pursue its fiscal agenda in
conjunction with the options available on the
monetary side
• The government to spearhead the development
agenda with the involvement of the private
sector
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Some Reflections on Working of the Monetary
Policy in an Islamic Economy •••••n
• The Islamic financial system to find its own
equilibrium
• Activist monetary policy not to be on the cards
due to inflation not being a major concern in the
Islamic setup [because of to the financial flows
being tied to (or, running parallel to) the real
flows in the economy]
• The central bank to focus on solvency of the
financial system through prudential regulations,
reserve requirements and its discounting
operations.
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
Some Reflections on Working of the Monetary
Policy in an Islamic Economy •••••o
• The central bank to influence the flow of
financing into high-priority sectors through
annual financing ceilings, regulating the equity
stake of bank in deposits mobilized for the
various purposes, etc.
• Fresh money to be injected into the system
through Shari’ah-permitted fiscal deficits or
through injecting liquidity into the system on
partnership basis for financing high-priority
sectors
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DLP – 2005: Fiscal & Monetary Policies from Islamic Perspective
THANK YOU.
[email protected] for further comments and interaction.
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