Download Foundation of Islamic Economics ECON1710

Foundation in Islamic Economics
(ECON1710)
Islamic Economics
Md. Harashid bin Haron, Ph.D
[email protected]
Website: http://www.icce.com.my
Epistemology and Methodology
of Islamic Economics
Epistemology
Importance of knowledge; epistemology - definition and
scope; sources and channels of knowledge in Islam;
Methodology
Definition; Shari'ah - definition, scope, sources and
issues; usul al-fiqh and ijtihad - definitions, scope and
issues.
Methodology of Islamic Economics
Fiqh, usul al-fiqh and Islamic economics; stages in
Islamic economic methodology - issues; comparison with
western economic methodology.
Developing Islamic Economics:
Sources of Knowledge and
Methodology
Chapter Preview
This chapter discusses the process of how Islamic
economics is developed. Central to the discussion is the
position of revelation as the ultimate source of
knowledge in Islamic scholarship in addition to the other
secondary sources that may also be found in modern
science. It is argued that since Islamic economics must
also refer to both primary and secondary sources it will
also develop different methods and standards of
authenticity/ authority. Hence while some aspects of
conventional methodology and model building can be
adopted/adapted, there are also clear areas of
differences.
After going through this chapter,
you should
• Know the different channels of acquiring knowledge and
sources of knowledge in Islamic scholarship
• Obtain an overview of the outline of the methodology of
Islamic economics
• Have a clearer understanding of the similarities and
differences between model building in Islamic economics
and western economics
• Understand how the shari’ah, fiqh, usul al-fiqh and ijtihad
concepts are related to each other and how they help in
developing Islamic economics.
Introduction
I bear witness that there is no deity (worthy of
worship) but Allah, and I bear witness that
Muhammad is His ‘abd and rasul. – Declaration
of a Muslim in his faith.
It was not religious doubt or skepticism which
inspired the success stories of Muslim
experimental science. The spirit of Muslim
experimentation was inspired rather by the
certainty of God as the absolute and as the
source of all truths. (Bakar, 1991: 7)
Taking the Islamic worldview as discussed
in Chapter 1, the process of systematizing
this worldview into an economic vision and
then into economic theories, must be
based on an epistemology i.e. theory of
knowledge that differs from the range of
western experiences. Proceeding from this
different basis, the process in which
Islamic economics is developed also
differs from modern economics.
What we know, how we can know it, and the
criteria to evaluate what and how we know in
Islamic economics, must necessarily be
projected from an Islamic conception of
knowledge and developed using the sources of
knowledge in Islam. Unfortunately, not much
serious attention has been given to the area of
methodology among Islamic economists since
the 1970s when contemporary Islamic
economics first began to be written by trained
economists. This we find to be a problem that
needs to be addressed.
Epistemology in Islam
First and foremost, it must be stressed that in Islam,
knowledge is possible and that certainty, at the human
level, is attainable. Just as all creations are from God,
so too is knowledge. God created man and “taught him
all the names,” i.e., gave him knowledge. This is in two
ways; firstly, by revealing to man directly (via the
Prophets) knowledge in the scriptures and books, and
secondly, by endowing man with the senses and intellect
() by which knowledge can be attained. In this sense,
one process sees knowledge “being put into man” and
the other sees “man striving for knowledge.” (Al-Attas,
1991).
The central point of departure of Islamic epistemology
from that of the west is in the prominence and centrality
of revelation in the pursuit of knowledge. It is revelation
that provides the foundation upon which the senses and
intellect function. Thus in Islamic epistemology, there is
a higher authority than the senses and human reason
which provides the stable “vertical axis” (the
transcendent) to which the “horizontal axis” (efforts of
humans) can refer to as a point of reference. This is
what is implied when a person declares the shahadah or
declaration of faith in Islam, i.e., one’s acceptance of
God’s authority over one’s own. This Paradigm of
knowledge sees human reason aided or rather guided,
by revelation. As stated by the well known Islamic
scholar Al-Ghazali (died 1111 A.D.), “prudence alone
does not guarantee restraint and moderation and
requires the aid of revelation.”
This proposition is at present considered as “unscientific”
in the western secular approaches to science. One must
keep in mind that conventional western economics as we
find in standard economics textbooks are products of
17th – 19th century western European modernity project.
A very important characteristic of the modernity project
was the elevation of man and his reason to replace any
transcendent authority. Man became the authority.
Hence all ‘science’ can only be science if it is based on
human reason or human observation and following
certain rules and procedures.
The Islamic tradition of scholarship rejects this view of the “scientific
method” (as understood and used in the west today), as the only
valid method of scientific methodology. Reason and observation
(senses) cannot be ultimate sources of knowledge within Islamic
epistemology. In contrast, as stated by Bakar (1991), Islamic
tradition, accepts varying methods of scientific inquiry (and channels
of knowledge) in accordance with the nature of the subject in
question and modes of understanding that subject.
Muslim scientists, in their cultivation and development of the various
sciences, have relied upon every avenue of knowledge open to
man, from ratiocination and interpretation of sacred scriptures to
observation and experimentation (Bakar, 1991: 15).
Channels of Acquiring Knowledge
vs. Sources of Knowledge
• In Islam, knowledge is acquired through
the channels of true narrative, sound
senses, sound reason and intuition.[1] We
submit that for Islamic economics, all
these channels are relevant.
•
[1] This classification is given in al-Attas
(1986, pp. 221-223).
1-True narrative is divided into two
kinds
-
that which is brought by the Prophet. As far as the
Qur’an is concerned, it is accepted as the word of God
in verbatim. The Prophet also ‘brought’ his Sunnah, i.e.
his sayings, deeds and his silence that also serve as
knowledge to be emulated by Muslims. (The latter has
been documented in the form of collections of Hadith
and fall under the second category of true narrative).
There have been voluminous works analysing both the
Qur’an and the Sunnah/Hadith and together with works
on the Arabic Language, these works were the first to
benefit from the ‘scientific tradition’ of Muslim
scholarship. Aspects of the sciences of the Qur’an
(‘ulum al-Qur’an) and the sciences of the hadith (‘ulum
al-hadith) are certainly two branches of knowledge that
form part of the required learning of every Muslim.
–
That which is established by past scholars, ‘whom it
is inconceivable ... would agree on a falsehood.”
While the reverence and respect given to true
scholars is not disputed, we do make a distinction
between the ‘level’ of authority between the first
category of true narrative and the second. While
the Qur’an and its text are absolute, the latter, which
includes works of past scholars, can be reviewed by
reason and experience, based on new situations
and scientific discoveries.
In modern science, this category is termed as ‘authority’ and is
limited to the second type only. An examples in economics to
illustrate authority is if anyone was doing research in the area of
methodology/philosophy of economics, they would have to refer to
and critically analyse the works of authorities in the area such as
Fritz Machlup, Milton Friedman, Mark Blaug etc. who in turn have
developed the ideas of philosophers of science such as Karl Popper
and Thomas Kuhn. Similarly, if students writing a research paper in
the area of Islamic economics or Islamic finance, they would have to
also refer to the works of the authoritative writers in these areas. As
we mentioned, respect does not mean unconditional acceptance of
all views of these authorities. They should be reviewed and can be
accepted, modified or even rejected.
2 - Sound Senses
Sound senses correspond to sense perception. By this we mean
acquiring knowledge through the five senses of sight, hearing,
touching, smell and taste. Through these senses, and if they are
in sound (good) condition, we can acquire knowledge of the
world/universe by say, observation. However, the
authenticity/authority of this type of knowledge rests on the
condition that the senses are in a sound state and that there are
rules we use to ‘interpret’ what we see, hear, smell, touch and
taste. These rules therefore require some use of reason and also
the guidance of true narrative if they are to contribute to the
development of Islamic economics.[2]
[2] Al-Ghazali also classified the senses into ‘external’ and
‘internal’ or what he termed as ‘insight (basirah)
3 & 4 – Sound Reason and Intuition
As to sound reason and intuition, we have to first introduce the
cognitive organ known as the intellect or ‘aql. ‘Aql is the term used
in the Qur’an to denote a spiritual organ which is at once
performing all the functions of the “mind” (as in western science)
and is potentially capable of performing the functions of the
“heart,” (Qalb) i.e., intuition. Therefore, reason is ‘sound’ only if it
is connected to the “heart.” In this way, reason is not limited to
“ratio” but is connected to intuition, which assumes the existence
of a higher authority than human reason.[1] It is also interesting to
note that al-Ghazali used the term ‘aql almost synonymously with
qalb (spiritual heart), al-Nafs (soul) and al-Ruh (spirit).
[1] For Further clarification on intution see Nasr (1982) and alAttas (1989).
Another way of classifying knowledge
acquisition is to look at the sources of
knowledge. Following this classification,
scholars have identified two sources:
primary and secondary.
• Primary Sources- revelation (that includes
the sunnah).
• Secondary Sources- universe and reason
Where are they derived from? Refer
to Your Last Sem Notes (Transactions In Islamic
Economics)
1 Al-Quran [Words of Allah (the God)]
2 Al-Sunnah [Al-Hadeeth (Sayings) and
conducts of Prophet Muhammad p.b.u.h]
3 Ijtima (Consensus of Islamic scholars)
4 Qiyas (Analogy)
5 Istihsan
6 Istishab
7 Sadd Az Zara’i
8 ‘Urf
9 Maslahah @ Istislah
Al-Quran?
Words of the God
Revealed to Prophet Muhammad pbuh
In the space of 23 years (13 Makkah 10 Madinah)
Main subject: Guidance and/or manual for human
being
• Al-Qur’an, an Arabic word, literally means
'reading' and 'recitation'.
Al-Quran is the word of Allah, the Book of
Islam and is the final divine guidance in
the line of Holy Scriptures.
• Revealed to Prophet Muhammad (PBUH)
in a period of 23 years starting 13 BeforeHijrah (610 AD).
• A guide and beacon for all humanity till the
end of time, not bound by time, race or
nationality.
Best defined in its own verses, as:
“This is the Book, no doubt in it, guidance from
the God fearing.” (2:2)
Al-Hadeeth
The sayings of Prophet Muhammad (pbuh).
The sayings and conduct of Prophet
Muhammad (pbuh) constitute the Sunnah.
The Hadith is a supplement of Al-Quran as a
source of the Islamic law.
What is fiqh?
Illustrate the relationship between
shariah, usul al-fiqh and fiqh
diagrammatically.
¾ ‘Urf (Custom)
¾ Maslahah (Benefit/Interests)
• Ijmā' (‫ )إﺟﻤﺎع‬refers to the consensus of the
scholars on a particular injunction after the
death of the Prophet.
• The third fundamental source of Sharia
law (after the Qur'an and Sunnah).
Qiyas (‫ )ﻗﻴﺎس‬is the process of analogical
reasoning from a known injunction (nass) to a
new injunction.
As a result, the ruling of the Sunnah and the
Qur'an may be used as a means to solve or
provide a response to a new problem that may
arise. Only in a case where the set precedent or
paradigm and the new problem share operative
causes (illah).
Example
Alcohol is forbidden because it is harmful to
mind (illah)
So does drugs is forbidden since it is
harmful to mind as well.
Istihsan (‫ )اﺳﺘﺤﺴﺎن‬is juristic "preference".
Scholars may use it to express their
preference for particular judgments in
Islamic law over other possibilities.
Example
Islamic laws forbids one to do contract or trade
on goods or services that has no time of contract
(wakt al-aqad).
Based on Istihsan, it is permissible to make
contract on shares, rents, to place orders or any
matter pertaining to goods or services that have
no time of contract.
Reason: It is needed and has been done that
way.
Istishab literary means courtship or companionship.
Istishab means presumption of existence or nonexistence of facts.
Example of sadd al-zari`e is someone who sells grapes
to a person who processes them to make wine.
According to the Maliki Mazhab, such sale is prohibited
because every act of buying and selling that results in
prohibited issues is prohibited by law
Maslahah (benefit/interests), same as Istislah
(consideration of public interest)
Refer the rest to your last sem course, i.e Transactions
in Islamic Economics.
Thus in Islam, the “scientific spirit” was always
based in religious faith, and in fact, was first
used in the “religious sciences,” . Definitions,
logical clarity and semantic analysis were some
of the early disciplines which developed from
this religious based scientific spirit.
As stated by Bakar (1991), (logic) was used
extensively from the 11th century but did not
lead to the kind of secular rationalism
experienced in the west during the
enlightenment and renaissance. Similarly, the
empirical studies employed by Muslim scholars
did not lead to the kind of empiricism in the west
beginning with Roger Bacon. This was
because reason was always linked to
revelation and sense perception was never
made the source and verification of all
knowledge.
Finally, there is one very important relationship implied in
the above paragraphs. By talking of the intellect acquiring
knowledge through both the channels of sound senses and
intuition, we are submitting that in the Islamic perspective,
all aspects of man, including the physical, mental and
spiritual, must be nurtured and developed for the proper
acquisition of knowledge. By referring to a higher
source than human reason, i.e., God, we see that it is an
intellectual requirement that one submits to the
knowledge of God.
Islamic epistemology makes the connection between the
physical, intellectual and spiritual dimensions of man by
relating sincere devotion in worship (a physical and
spiritual activity) to one’s intellectual development. While
seeking knowledge is itself seen as an act of worship,
other acts of worship, if done sincerely and correctly,
helps to “actualize” the intellect by ‘enabling’ the
‘aql to better function as the spiritual substance it is.
Seen in this light, it is not illogical that the great Islamic
scholars of the past resorted to acts of worship and dhikr
(remembrance of God) when they were faced with
problems including those intellectual in nature (Bakar,
1991). The Prophet advises us to consult our intuition
(‘Wa istafti qalbak’) where reason has failed or is not
able to provide judgement/solutions.
The spiritual heart and ‘intuition’ as a channel of
acquiring knowledge is still not accepted in standard
scientific method textbooks. However, there is an
increasing awareness in the west that the
observation/reason basis of the scientific method cannot
explain the process of scientific development and
discovery fully. For example, many modern textbooks on
management testify that good leaders are those who
have good ‘intuitive’ abilities. They have documented the
successful stories of many ‘management gurus’ who
have taken decisions or given advice that defy normal
reason, but that later have been proven to be correct in
the decisions taken. The call to ‘read between the lines’
or to ‘look beyond the obvious’ are common everyday
examples that seem to show the possibility of going
beyond the strict observation/reason method in seeking
and developing knowledge/science.
Outlines of an Islamic Economic
Methodology
We now move to the more specific discussion on the
methodology of Islamic economics. Based on our earlier
discussion on epistemology, we can see that an
economic methodology developed in the west may not
be sufficient for the discipline of Islamic economics.
Since methodology relates to the formulation of
principles and systems of practices and procedures that
determine the analysis and development of a discipline,
in the case of Islamic economics, it would have to be
consistent with the epistemological foundations and
worldview of Islam. It should also be apparent that
differences in methodological details are also possible.
Methodology discusses process of building
models, developing theories, testing
hypotheses, establishing and using criteria to
evaluate our process i.e. how do we know that
our models, theories and hypothesis are
“correct” and on what authority do we say so.
Islamic economics just like any other disciplines
of study requires proper methodology to develop
theories which then can be applied to real life.
• In Islam, we have the central position of revelation i.e.
the Quran and the Sunnah as the ultimate authority. The
Quran is also known as ‘al-Furqan’ or the criterion to
distinguish between values. Thus, the challenge that is
faced is how to use the Qur’an, Sunnah and the other
secondary sources of knowledge in Islamic scholarship
to develop Islamic economics and finance today.
• From the definition of Islamic Economics given in
Chapter 1, you can either find the values etc. directly in
the sources of Islam or you have to ‘derive’ the
meaning. The latter is essential since most answers to
our contemporary economic problems are not found
directly in the Quran as it is not an economics textbook.
For example, the Quran does not tell you what stocks to
buy or what formulae to use to calculate the maximum
return on various stocks. However, the Qur’an (and other
sources) provides guidelines and this will entail a
process of ‘deriving’ the answers based on the sources.
• Following our discussion in Chapter 1, for this
process of deriving applications to be ‘authentic’,
‘authoritative’ and Islamic, it should begin with
understanding the Islamic worldview, especially
its Islamic vision of economics. The economic
vision will be derived from the Islamic worldview,
which in turn will lead to the development of the
Islamic Economic system and the theories to be
used in the various areas of economics.
Islamic Worldview
Islamic Economic Vision
Islamic Economic System
And Islamic Economics
As discussed in the previous chapter,
since Islamic economics and the choices
made by the economic agents will be
limited by the Islamic/ Shariah boundary of
economics and finance, these general
parameters must also be determined. To
do this we have to talk about four interrelated concepts i.e. shari’ah, fiqh, usul alfiqh and ijtihad.
Is Islam Pro- Science / Pro- knowledge?
Yes! Because:
1. The revelation itself emphasizes the need for
gaining knowledge. The first word that was
revealed was Read ( Al-Alaq: 1-5)
2. There are numerous verses in Quran and
numerous hadith of the prophet which signify
importance of Ilm. Furthermore, in Islam
knowledge is considered attainable: Adam was
taught the “names of all things”
Shariah and Fiqh
Shari’ah literally means path to a watering place.
The importance of this meaning is obvious when
one relates this to a desertland. Similarly,
Shariah as the source of guidance is important.
Technically, Shariah means a path to tread for
guidance in this world and consists of
commands, prohibitions, norms, values etc.
which the Almighty addressed to man for
achieving success or Falah.
•
•
•
•
•
•
Shariah is divine in nature – meaning that is determined independently of
the will of the people. It is also meant to be the guide till the day of
judgement. Therefore, most shariah contents are general in nature. Very
rarely are there details given in the Qur’an about a particular issue[1]. As far
as guiding human actions, shari’ah scholars categorises human action into
five categories
Wajib or obligatory (doing it gives reward, not doing it is a sin)
Mandub or recommended (doing it gives reward, however not doing it is not
sinful)
Mubah or permissible (this is the area where most economic activities would
be)
Makruh or reprehensible (not doing it gives reward while doing it is not
sinful)
Haram or forbidden (not doing it gives reward, doing it is a sin)
[1] Two examples of details are in the case of Wirathah (inheritance
divisions) and zakah.
In this context, the shariah can be seen to guide and
“limit” all actions. These categories above help human
beings to establish priorities and to make ‘good’ choices.
However, as stated above it is general in nature and
therefore needs interpretation and application. For
example, as far as economics is concerned, there are
only a few actions/items that are considered to be in the
haram category such as riba’, gharar and maysir etc.
Most economic actions and activities would fall in the
category of mubah, since there is no express prohibition
of them. In addition, the principle ruling on economic
activities is permissible unless there is a prohibition.
What becomes a necessity for human beings is to know
how to apply the general principles etc from the shari’ah
to the economic sphere. We need to interpret and apply
the shari’ah in greater detail so that it can serve as a
guide in our daily economic activities. The product of this
interpretation of the shari’ah is called fiqh.
The literal meaning of the word fiqh is understanding (of
the shari’ah), and the faqih (pl. fuqaha’) is the person
who understands the shari’ah, i.e. one who is able to
interpret and apply the general principles of the shari’ah
to the details of economic life. Technically, fiqh refers to
the knowledge of practical Shariah laws (and principles
and values) derived from particulars of supporting
evidence (either primary and secondary). Unlike the
shari’ah (which is divine), fiqh requires human effort and
is a product of human ‘aql (intellect). To ensure that the
shari’ah is interpreted and understood correctly, this
process of interpretation has to follow certain rules and
regulations, procedures and criteria. Knowledge of these
rules etc is called usul al fiqh.
Usul al-Fiqh and Ijtihad
Usul al fiqh is the methodology of deriving
fiqh. It is the knowledge of the principles
and methods leading to derivation of fiqh.
In many ways, knowledge of usul al-fiqh is
methodology in Islam since it provides the
framework and the standards to ascertain
the validity of the interpretation of the
shariah. The process of producing fiqh
from the shari’ah is called ijtihad
(intellectual assertion).
In addition to understanding and knowing usul
al-fiqh, to be able to interpret and apply Shariah,
especially to meet the legitimate needs of
contemporary society, the faqih must also have
other required knowledge and qualities such as
an understanding of the objectives of Shariah
(maqasid al-shariah). Among these objectives,
we have three:
• Educating the individual
• Establishing ‘adl (justice)
• Promote welfare (maslahah)
Again, these objectives are very general. The challenge
facing Islamic economists would be to identify what
these objectives mean for economics. Some scholars
have tried to elaborate a little further. For example, as far
as maslahah is concerned, Al-Ghazali and later AlShatibi have argued that the very objective of Shariah is
to promote the welfare of the people which lies in
safeguarding their din (religion/faith), their nafs (life),
their ‘aql (intellect), their nasl (progeny) and their mal
(property). Whatever ensures the safeguard of these five
essential elements (al-daruriyyat al-khams) serves public
interest and is desirable.
Therefore, one of the important tasks
facing Islamic economists is to interpret
correctly the Shariah so that it can be a
guide to our economic behaviour and
choices made. This requires intellectual
assertion i.e. ijtihad. Ijtihad is performed
by a mujtahid (one who performs ijtihad)
or a group of scholars called group ijtihad.
What is fiqh?
Illustrate the relationship between
shariah, usul al-fiqh and fiqh
diagrammatically.
Flexibility of Fiqh
Flexibility of Fiqh
Branches of Fiqh
The Process of developing Islamic
Economic Theory
The detail application of Shariah in economics
and financial matters requires the process of
producing fiqh. While the shari’ah or precisely,
revelation (consisting of the Qur’an and Sunnah)
are the primary sources of knowledge in Islam,
Islamic economics would also benefit from
observing nature. Islamic economics was
broadly defined as:
an approach to interpreting and solving man’s
economic problems based on the values, norms,
laws and institutions found in, and derived from,
the sources of knowledge in Islam.
These sources of knowledge consist of both primary and secondary
sources. These sources can be also categorized into that of
revelation (primary), reason and the universe (secondary)[1].
Therefore, Islamic economists need to have access to all three
sources and to use them “appropriately.” There is by no means a
unanimously agreed upon formula as to how the sources will be
interpreted and followed, especially in all details dealing with the
secondary sources (reason and the universe). Priorities and details
differ among schools and scholars, hence different economic views
and policy prescriptions are potentially possible. Both deduction
and induction are accepted methods of analysis in Islamic
economics and this has never posed a methodological problem for
Muslim scholars in the past.
[1] See Abu Sulayman (1993) p. 68.
Economic models are simplified abstractions of a reality
that is to be studied. All models have at least three
components: assumptions, chosen variables and their
tentative relationships. This far would be no different in
Islamic economics. However. model/theory building in
conventional economics, does not take into
consideration the primary source of knowledge accepted
in Islamic scholarship. In Islamic economic models we
use reason to understand revelation and universe.
Hence, the choice of assumptions and the expected
behavioral implications of models in Islamic economics
have to be based on both primary and secondary
sources of knowledge.
Briefly, the stages involved in model/theory building in
Islamic economics are as follows:
1 -Establishing assumptions, relevant variables and their
tentative relationship
• understand Islamic worldview
• Establish Islamic economic vision
This stage may happen ‘naturally’ as everyone has a
worldview, even if they do not realize they have one.
Also in today’s world, most starting points are not from
zero but rather from past accumulated work of previous
scholars. In conventional economics, many scholars also
accept the fact that all economic analysis has to start
with a ‘vision’. The issue is what this vision is, its sources
and how it is formed.
2 - Refer to primary sources of Shariah i.e. The Quran and the Hadith
–
Modify Islamic economic vision
Knowledge of the Qur’an and Sunnah then becomes the core in
Islamic methodology and the “visualizing” involves the channels of
true narrative (the source of the vision), reason (consisting of both
deductive and inductive reasoning) and intuition. Therefore the
first step involves identifying all the verses of the Qur’an and
Traditions of the Prophet which relate to economics, including
those related to man, nature, man’s relationship to nature and
other humans, as well as those relating to consumption,
production and distribution. This stage will also involve identifying
the central terms and concepts in economics that are found in
these two sources.
The second stage involves systematizing these verses and
traditions, and the terms and concepts inherent in them, into
“principles, postulates, hypotheses, precepts and assumptions that
will be investigated and validated or otherwise” (Anwar, 1990).
Again, this stage will involve the channels of true narrative, sound
senses and intuition, including the interpretation of the relevant
verses, traditions, terms and concepts. The procedure agreed upon
by Islamic scholars is that we first understand the “occasion of
revelation,” i.e., the socio-historical background of a particular
revelation. We then try to locate other verses of the Qur’an that deal
with the same matter or related matters in order to obtain a “whole
picture” to which the particular verse or verses must relate. Then we
go to the Traditions of the Prophet (including the background of that
tradition), since the Prophet was the best interpreter of the Qur’an.
While the procedure is accepted, the interpretation itself can still
vary within the parameters set by the Islamic worldview and
economic vision. Qur’anic verses can be divided into two types –
some which are clear in meaning and others which are allegorical or
which can have different meaning. In addition, derived principles
can be interpreted differently at different times and places as well as
according to the training, experience and intellectual aptitude of the
scholar. For example, the prohibition of Riba’ in Islam has been
interpreted in the mainstream to mean the prohibition of interest.
Some scholars like Sulayman (1973) see it as the prohibition of
“unearned gain,” while others like Naqvi (1981) see this as the
prohibition of “exploitation.” The implications of these different
interpretations are very clear at the policy level.
While the first interpretation would call for the
abolition of interest rates as a fundamental
requirement in an Islamic economic system, the
second and third may neither consider it fully
necessary, and definitely not sufficient, and
would also require some form of structural
reforms such as those involving land reforms
and redistribution. While the first group may not
disagree on structural reforms, they do not see it
as proceeding from the verses on the prohibition
of Riba’.
In situations like this, semantic analysis of the terms involved, the
history and situation of “revelation” or a particular tradition is very
important to clarify the spectrum of opinions possible. In addition,
intuition and sound reason play very important roles in trying to
understand these verses and traditions within the overall worldview
and economic vision of Islam. In the case of , semantic analysis
would tend to support the second and third wider interpretation,
while the history and situations leading to the verses and traditions
would indicate a rather specific scope of . It is quite clear from this
example that while juristic interpretations are fundamental in
developing Islamic economic thought and policy prescriptions, moral
and ethical issues relating to “different possible interpretations” can
and do vary within the spectrum of Islamic economic thought.
3 - Refer to work of past and present scholars of Islam and
Islamic economics
•
Modify Islamic economic vision
This stage also involves the work of previous scholars, either on the
verses and traditions involved or on the economic implications of these
verses, traditions, terms and concepts. Since this is “true narrative” of
the second kind (in our epistemology), these works can be questioned
and developed or even rejected, if the situation demands. This is what
would constitute contemporary and provide the dynamism and flexibility
needed to address differing situations and times. In recent times, some
scholars have put forward the concept of ‘the opinion of the local
community’ (Saud, 1993: 393) or collective ijtihad which sees the setting
up of “committees of experts” combining those from the economics field
with those from the fiqh or Islamic studies. This may to a certain degree
curtail the negative effects of unqualified interpretations but it would not
avoid the possibility of different “systematic opinions” on various issues.
4 - Refer to contemporary economics and finance
•
Modify Islamic economic vision
This stage is merely an extension of the previous, involves the
study and sifting of contemporary western economic thought.
Islamic economists must accept the fact that Islam has ceased to
play a direct role in modern economic thought for well over 400
years. Most theories, methodologies and research methods in
economics today are the product of the west or at least have
evolved in the west. Some scholars are of the opinion that to be
“truly Islamic,” we have to build an independent discipline from our
own concepts and values, totally rejecting western economics and
methodologies. However, it would be totally naive and unrealistic
to believe that Islamic economics would have a unique view on
every matter and issue from the whole range of western
economics.
While we agree that Islamic economics must proceed from the
Islamic worldview and economic vision, utilizing an Islamic
methodology founded upon the epistemology of Islam, we cannot be
oblivious to developments in western economics. This is made
even more important since we have with us systems of economics in
practice which were born in the west, and with the levels of
communications and travel as they are today, have made the
interdependency of nations and the “world-economy” as factors
determining local economies. What is important is to be able to
understand western economics in all their variations and differences,
to understand the development of western economic thought and
the worldview it grew out of, to know where this worldview differs
from that of Islam, and how these differences affect the corpus of
the economic vision and, subsequently, issues and problems in
economics. In this sense, selective assimilation cannot be ruled out
as a valid ingredient in economic theory building in Islam.
5 - Establish principles, laws, assumptions, hypothesis, models
based on (1) to (5) i.e. the tentative theory (what should be:
normative)
This step is found also in standard economic model/theory building.
Based on the assumptions founded on the Islamic economic vision,
empirical studies would naturally constitute part of the process of
developing an acceptable body of economic thought. There would not be
much difference between the Islamic view on the technical aspects of
empirical studies and that of the west. However the criteria used to test
hypotheses would have to reflect the values and norms of Islam which
would then have to be consistent with the economic vision developed in
stage two. If the empirical data does not support the economic vision
envisaged, then a few steps need to be taken. First, a recheck of the
data must ensure that no technical mistakes were made. Secondly,
rechecking the economic vision derived would determine if any errors or
omissions were committed in the process of developing the vision. Then,
if both these steps are done, the third step would be to analyze why the
“facts as there are” (the results of the empirical study) were against what
“they should be” (the economic vision).
6 - Test hypothesis and models i.e. empirical
studies (what is: positive)
• In contemporary economics, the dominant
methodological position is empiricism.
–
If empirical tests verify (or do not falsify yet) the
hypothesis, they are accepted and if repeatedly
observed, they become ultimately the building blocs
for theory. From an Islamic perspective, this step
would also be acceptable.
– If empirical tests do not support the hypothesis, all
aspects of steps 1-6 are rechecked. This would also
be acceptable in Islamic economics. There would be
a need to ensure that our assumptions, variables and
their ‘intuitive’ relationships correctly reflect the
Islamic economic vision. Since there should not be a
contradiction between the position of revelation and
that of sense-observation, this double-checking would
be very important. If this review manages to solve the
divergence, then the problem is solved.
– If after this review, there is still a divergence between
the tentative theory and the practice observed,
conventional economics moves to change theory to
suit practice since ‘practice determines theory’.
Unlike western empiricism, sense experience does not provide the
absolute proof for “truth.” In Islamic methodology, facts must be
distinguished from truth. While “proofs” from sense experience have
certain authority, in Islamic epistemology, secondary sources cannot
escape the criteria and proofs from revelation. If ‘correct’
interpretation of “revelation” is established, i.e., the economic vision
is correct (something that is prone to debate and difference of
opinion), then, rather than change the “ought to” (the models,
theories and hypotheses), we would ask why the “what is” differs
from the “what ought to” and then proceed to change the “what is”
so that it conforms to the “what ought to.” It must also be kept in
mind that one would find it difficult to find a living contemporary
example of a society that represents the ideal.
Seen in this context, the process of investigating
economic phenomena would then be a process of
“Islamization,” i.e., a process of socio-economic reform
according to the worldview and vision of Islam.
Conducting economic research and developing
economic policy prescriptions would no longer merely be
economic issues, but would be a manifestation of
establishing the will of God on earth in line with the very
purpose of man’s creation. While founded on the Qur’an
and Sunnah, the manifestation of the Islamic worldview,
more specifically its economic vision, would necessarily
depict varying shades of Islamic economics. The
process of Islamization at the policy level would then be
seen as a natural progression from Islamization at the
conceptual or theoretical level.
References
• Wan Mohd. Nor Wan Daud (1989), ‘Islamic Attitudes
Towards Knowledge and its sources’ in The Concept of
Knowledge in Islam and its implications for developing
countries, Mansell, London.
• Mohammad Hashim Kamali (1989), ‘Source, Nature and
Objectives of Shariah,’ Islamic Quartely, 4th Quarter
• Mahmoud Abu Saud (1993), ‘The Methodology of
Islamic Behavioural Sciences,’ American Journal of
Islamic Social Sciences Vol. 10 No 3
• Mohammad Anwar (1990), ‘Islamic Economic
Methodology’, Journal of Objective Studies, Vol 10 No 3
• Saiful Azhar Rosly (1994), ‘Economic Principles in Islam:
Some Methodological Issues,’ Journal of Islamic
Economics, Vol 1 No 1
Problem Set
1 What are the source and channels of knowledge in
Islam? Explain
2 What is the relationship between revelation and reason
in Islamic Epistemology?
3 What are the issues involved in contemporary ijtihad?
4 Differentiate between shari’ah, fiqh and usul al-fiqh.
How do they relate to Islamic Economics?
5 What are the stages involved in Islamic Economic
methodology? How do they differ to conventional
economic methodology?
THE ISLAMIC ECONOMIC SYSTEM
Objectives:
This chapter aims to cover the following topics:
• Economic system – definition, components,
classification/characteristics.
• Islamic Economic system – general
introduction, philosophical foundation,
operational principles and goals.
• Property ownership – Definition and types,
general principles and types of ownership in
Islam and implications for the Economic
System
• Motivation/ incentives – Definition, types
and importance, relationship between
Islamic Worldview and Motivation,
implications for ‘rational behavior’
• Organization of Decision Making –
Definition and types, the concept of Shura’
and implications in Economic Decision
Making
• Coordination Mechanism – Definition and
types, the importance of Markets and the
Importance of Planning.
Further Readings:
• Gregory/Stuart (1992), Comparative
Economic Systems ( chaps 2, 3)
• Monzer Kahf (1998), ‘ Islamic Economic
System – A Review in Aidit Ghazali/Syed
Omar Agil (ed.), Readings in Islamic
Economics, Longman, Kuala Lumpur.
• Sultan Abu Ali (1986), ‘Islamic Economic
System’, Readings on Islamic Economics,
Islamabad.
Problem set:
• What are the philosophical foundations
and goals of an Islamic economic System?
• Discuss briefly the four characteristics of
an Islamic economic system.
• What are the types of ownership in Islam?
Elaborate.
• What is the relationship between market
mechanism and planning in an Islamic
Economic system?
• How does the Islamic worldview affect
‘rationality’ in an Islamic Economy?
• In topic one, we have established the premise
that every human endeavor is value-loaded and
that at the most abstract level, these values are
derived from a worldview.
• In order to organize various aspects of social
life, societies form ‘systems’. These systems
include the political system, social system and
the economic system. These systems have at
least three aspects i.e. the philosophical
foundation, operational principles and goals to
be achieved. In order to achieve these goals;
plans, strategies and institutions are formed. An
Islamic Economic System can be represented as
follows:
SYSTEM
A system can be defined as a set or
assemblage of things connected or
interdependent, so as to form a complex
unity, a whole composed of parts in an
orderly arrangement according to some
plan or a scheme.
• A variety of systems of which humans are a part;
social, economical, legal and so on.
• Three basic components.
-Entities or components which work together to
form a system, i.e persons, state or groups,
which are the agents of interaction within a
system.
-The mode of interaction within a system,
(among the entities). It is essential to realize that
the entities in a system would not interact with
each other unless they have a common
objective, which they believe, can be resolved by
working together.
-The goal, which could have been planned or
ordained.
ECONOMIC SYSTEM
An Economic system is any assemblage
of entities that interact with one another
according to a particular plan in order to
fulfill the economic objectives of a society.
Assar Lindbeck defines economic system
as ‘a set of mechanisms and institutions
for decision making and for the
implementation of decisions concerning
production, income and consumption.’
The Political Economy of the New Left: An outsider’s view. 2nd
Edition ( New York: Harper & Row, 1977) p.214
Ways to look at an economic system.
• Firstly, we can classify the systems based on
Production (how to produce), Consumption (what to
produce) and Distribution (for whom to produce).
• Secondly, we can classify it based on the sectors in
the economy: agricultural, manufacturing, service
etc. This approach is usually used in government
reports and other national level documents.
• Thirdly, we may classify the system based on the
comparative systems approach, which describes the
characteristics of an economic system by comparing
the contrasting features of the systems.
PERFORMANCE OF ECONOMIC
SYSTEMS
• How well is an economy doing? By
constant evaluation can one ensure that
the economies are pursuing the right goals
and if so, to find out how far have they
achieved in doing so.
Two bases of evaluation of the performance
of the economic systems
• Firstly, by comparing the models with the
actual performance (ideals vs. reality)
• Secondly by studying the factors which
affect the working of the economies.
Economic Outputs = f (Economic system,
Environment, Policies)
• The first factor, i.e. the Economic System
can be classifies based on the following
characteristics, as we have discussed
earlier in the chapter:
– property ownership
– motivation
– organization of decision making
– coordination mechanism
The second factor is the environment
which includes (a) Natural Resources and
their availability (b)Level of Economic
Development (c) Size of economy (d)
Labor and capital inputs (e) Geographical
location.
The third factor is the policies that a
system pursues. The policies that a
system pursues are an outcome due to the
inherent system or to the policies that
were pursued earlier. It is possible to have
two countries with the same system but
differing in the outcomes due to different
environment factors and policies pursued.
Thus there is a need to isolate the
environmental factors and the policy
factors.
•
•
•
The outcomes that result as a result of these factors need to be evaluated
using a set of performance criteria. The expected outcomes in different
societies may be the same; however, their meanings, priorities and ways to
achieve these outcomes may differ. Assigning them weights tends to be a
selective process, as people do not agree on the appropriate criteria and
their relative importance, and even their meanings (they may have to
consider Growth vs. Distribution or Unemployment vs. Inflation).
Determining the national priorities differ from system to system. Where
political power is largely centralized, the prevalent political authority
exercises the decisive control over formation of national goals, and
consequently the outcomes. In democratic capitalistic societies, although
the electorate may indicate a preference, pressure groups such as trade
unions and professional associations exert substantial influence. The
problem is compounded by the fact that specific goals can only be achieved
by sacrificing, less important goals. However, the nature of the trade-offs is
not always clearly defined.
Generally applied criteria
• Economic Growth
(Measured in GNP or Gross National Product and GDP
or Gross Domestic Product) refers to increases in the
volume of output that an economy generates over time.
It is most widely used indicator of economic
performance, but it suffers from severe measurement
problems. In addition, there is an uncertain link between
the growth of output and increase in the quality of life.
For example it doesn’t describe the quality of life whether
the goods that the economy produces are military goods
or investment.
Efficiency
• Refers to the effectiveness with which a
system utilizes its available resources, at a
particular time (static efficiency) or through
time (dynamic efficiency).
• Static efficiency is usually measured by
productivity calculations (ratio of output to
input). Other tool used in measurement is
Production Possibility Frontier (PPF) and
the shape of the movement.
Income Distribution
• This is usually measured by the Lorenz
curve and the Gini coefficient.
• For Gini coefficient, the more the dashed
line moves from the 45 degree line, the
more unequal the distribution. The Gini
coefficient (with a range of 0 -1) is the area
between the dashed line and the 45
degree line, divided by the entire area
under the 45 degree line.
•
In a capitalistic society, personal income is
determined by the human and physical
capital owned and their prices in factor
market. The central problem with regard to
income distribution is to what degree is it
possible to reduce inequality without
retarding effort, capital input and risktaking.
Stability
This refers to the absence of significant
fluctuations in growth rates (losses of
potential output), maintenance of
acceptable rates of unemployment and
avoidance of excessive inflation. The price
level would likely be constant or rising
slightly, consistently in a stable economy.
Development Objectives
This is a combination of the above
mentioned four, whose meaning and
priority are different for different
economies. There may be other
development objectives as well based on
the circumstances of the economy.
Performance in an Islamic
Economic system
All the above performance criteria are
acceptable. But the over-riding goal is to
achieve socio-economic justice. One of
the objectives can be given priority over
others at times, the prevailing
circumstances will be the deciding factors.
COMPONENTS OF ECONOMIC
SYSTEMS
• Philosophical Foundations
• Operational Principles
• Goals
ISLAMIC ECONOMIC SYSTEM: GENERAL
INJUNCTIONS
• Stems from the worldview of Islam. All aspects
of human behavior must be guided by the rules
of Allah. The economic system is just one of the
many sub-systems (including political, social,
etc.) of the various aspects of human life. Indeed
Islam does not classify economic system as a
separate entity. It recognizes that the economic
system is in fact related with other systems –
social, political and can’t exist without others.
• Nasr says that in Islam, “economics was never
considered as a separate discipline or distinct
domain of activity. That is why there is not even
a word for economics in classical Arabic, the
term iqtisad being a fairly recent translation of
the modern term ‘economics’ in Arabic and
having a very different meaning in classical
Arabic where it means primarily moderation and
keeping to the golden mean as witnessed by the
famous book al-iqtisadfi’l-I’tiqad of al-Ghazali.”
• According to Islam the material world is a
way to God, not a diversion from Him and
thus improving material life within the
boundaries of the Shar’iah is a means to
attain His pleasure.
• The components of an Islamic Economic
System emanate from the philosophical
foundation and the operational principles
derived from them.
Philosophical Foundations
• Based on the basis of a doctrinal stand towards
God, man and life. The four interrelated
foundations are:
– Tawhid: Tawhid in its essence is negation of any deity and
then accepting Allah as the only sovereign power.
– Ibadah: Any act within the boundaries of Shar’iah done with
the intention of seeking Allah’s pleasure.
– Khilafah: Khilafah or vicegerency is a concept whereby man
recognizes his duty as the servant of God and accepts his duty
as the caretaker, manager of affairs of the earth with the main
motive of gaining Allah’s pleasure.
– Tadhkiyyah: The process of economic activity must be seen
as a process that purifies the soul. It should not lead to greed or
vice in general.
Operational Principles
• Must be translated into a set of operational
principles, constituting the social, legal and
behavioral framework of the system. Some of
the more important ones are given below.
– ‘Adl/ Ihsan: While ‘Adl means giving what is due, Ihsan goes
one step ahead to mean giving more than what is due.
Ibn Taymiyah says, ‘As it is oppression to prevent
people from doing what they want with their property,
so it is oppression to allow them to exceed their limits
and extend their rights to spill over other people’s
rights.’ Thus a balance needs to be struck between
the interest of the society and the interests of the
individual. Production: Efficiency/Distribution: Proper
evaluation of factors and pricing of output,
redistribution to those unable to secure darruriyat
through market forces.
– Takaful/ Ta’awun : The Islamic economic system should
operate on the principles of Ta’awun (cooperation), but
competition in all good things (fastabequl khairat) as in the verse
of the Quran which reads:
– Responsibility / Accountability: The individual is
responsible to the society, but ultimately to Allah, who is the
sovereign owner of all things.
– Moderation: Man in an Islamic economic system would be
moderate (ummatan wasatan) in consumption, production and
distribution. In consumption this would be reflected in the
avoidance of extravagance or parsimony; as consumers realize
that consumption is not an end in itself but a means to an end. In
production this may be reflected in resources allocation shifting
towards dhururiyat (necessities) and away from tahsiniyat
(luxuries).
CHARACTERISTICS OF ISLAMIC
ECONOMIS SYSTEM
• Property Ownership
•
Property ownership (whether private or public) is a social/ legal
relationship of an individual or group with an object, involving a
system of rules of accesses to, and control of resources. Here it is
essential to note that property is not a thing in itself but a bundle of
rights. J.M. Montias has written that, “the word ownership refers to
an amalgam of rights that individuals may have over objects, or
claim on objects or services” and that “these rights may affect an
object’s disposition or its utilization.” Property can be private, public
or personal. Furthermore, property cannot be equated with private
property since other forms of property such as public property is also
acceptable and legitimate form of ownership.
Definition of property: object, subject
and content.
• The object must be “something of value
permissible and capable of being
possessed.” (Qadri, 1973) It may be
corporeal (having a body) or incorporeal
(e.g. intellectual property such as patents,
trademarks and copyrights). Thus the
object can be anything that can be owned,
from gold mines to things like food,
clothing and shelter.
• The subject of ownership may be an
individual, state or society. The system
may limit the ownership of certain objects
to only particular subject. For e.g. the
roads and other related infrastructure can
be owned only by the state. In many cases
the subject of ownership is a corporation,
and the owner of the corporation could be
any one of the three.
• The content of ownership deals with the rights
and we add, corresponding obligations/duties
with regard to property. This is in contrast to the
western societies where rights are weighed
against other’s rights i.e. where societies are
rights based. Rights include the right to own,
posses, utilize, exclude others, secure income
from, dispose, obtain compensation if damaged
and so on. The bundle of rights may differ,
including some of the above i.e. incomplete
ownership or be a complete ownership.
•
•
•
These rights are conditional upon the obligations that ownership is
permissible (no haram property may be owned), proper and
constant utilization (e.g. no hoarding, keeping the money idle),
avoiding misuse, and meeting all obligations (e.g. payment of
zakah). Some or all of the rights may be lost if the obligations are
not met.
The Quran uses the term ‘amwal’ (86 times) to refer to wealth _
property, possessions, etc. most of the verses deal with the content
rather than the object or subject, as it is the content aspects which
acts as the moderating factor between the individual’s rights and the
society’s rights.
The Arabic term for ownership (milikiyah) does not appear directly in
the Quran, although various derivatives of the root word ‘malaka’
appear 92 times. ‘Malaka’ means to posses, control, have power or
authority over, and is usually used in reference to God.
Islamic Vision of Property Ownership:
In the process of deriving Islamic
Economics, we need to establish the
Islamic ‘framework’ for specific areas in
economics.
– Allah is the absolute owner of property as He
created everything (examples in 2:21-22;
2:115; 3:190-191; 7:6-7; 15:26). All His
creations are in a state of natural submission
to Him in their own way. (examples 7:54;
22:18 and 24:41). Thus ownership of property
is by default, Allah’s.
– Man as ‘abd and Khalifa has relative and
conditional ownership. The Quran indicates
that God’s creation is meant for the utilization
by man for the betterment of mankind, but in
accordance with God’s will. (3:32; 4:59; 2:2122)
– Conditional ownership is manifested in the
fact that an individual doesn’t have the
authority to make bequests exceeding a third
of their property. Another example is the
Quranic injunction that there is a ‘share of
others’ – the poor and the needy in your
wealth.
– Man is responsible to society and accountable
to God for his property. The Quran indicates that
property is one of the trials and man will be rewarded according
to his actions. (3:32, 4:59, 2:21-22)
– Labor and need are both legitimate basis for
ownership
– Both private and public properties are
legitimate kinds of property in Islam. The relative
mix between private and public property depends upon
interpretation of the economic vision related to property
ownership, which in turn depends upon the culture, values,
environment and history of a country. However, society must be
bound by the Islamic Economic vision and its component
concepts, values, laws and norms in deciding upon the relative
mix between the private and public property.
Private Property
It is allowed in Islam as there is no Quranic ayah
or hadith that prohibits it. This follows from the
legal maxim that everything that is not prohibited
is permissible. The law of inheritance in Islam is
another proof of the fact that it is allowed.
However, it must be conditional and relative.
Another proof of the permissibility is that
property has to be acquired through labor and
Islam admits that man shall get what he strives
for.
A person may have complete or incomplete
ownership rights. When having complete rights
• He has right to own, posses, utilize, priority, right to
exclude others, secure income from the property,
ask for compensation when damaged/ purchased,
dispose
• He is completely responsible to society or state
and accountable to Allah.
• Conditions to maintain ownership are
permissibility, proper utilization, constant
utilization, meeting all obligations.
• Not meeting these conditions may result in losing
some or all rights.
Personal Property
Personal property is that meant for
consumption. This includes personal
belongings, shares, houses etc. and is
permissible in Islam; although there are
rules regarding its disposal (inheritance).
Public Property
A hadith states “water, fire, herbage and salt”
should not be privately owned. Scholars have
interpreted the hadith to mean water sources –
oceans, seas, rivers; fire to mean sources of
energy especially non-renewable ones such as
gas, coal, oil and electricity (many of them are
accepted by conventional economists as natural
monopoly); herbage to mean grazing grounds,
parks, and so on; and salt to refer to the basic
needs of humans.
• Access to and control over public property
should be determined with reference to public
interest (maslahah al-ammah) which is one of
the major objectives of Shariah.
• Public property can be subdivided into two
categories, state owned and common.
• State owned property refers to that property whereby the
state has complete rights it, and can decide to use it for public
interests. The state may delegate the management to private sector,
e.g. corporation, privatization. Individuals will obtain a return for their
effort but the object continues to belong to the state.
• The common property refers to public parks, beaches and
so on which are accessible to all members of society equally.
Motivation
• Incentives or motivation mechanism
discusses how to make the subordinates
act in the way required.
• An effective incentive mechanism must
fulfill three conditions.
• Firstly, the person who is to receive the
award must be able to influence the
outcome.
• Secondly, the superior must be able to
check on the subordinate and
• finally, the potential reward must matter to
the subordinate.
“Material incentives promote desirable
behavior by giving the recipient a greater
claim over the material goods.” Such
incentives have typically been dominant in
modern economic systems, although
moral incentives, which raise recipient’s
social stature, are also being used
increasingly.
In an Islamic Economic System, moral
incentives promoting desirable behavior by
appealing to subordinate’s belief in Allah form
the basis of motivation. The motivation comes as
a result of the extended time horizon, which
does not limit the rewards an individual receives
to this earthly life, but to life after death. Thus the
rewards and punishments are not confined to
what an individual receives are not confined to
the earthly life. Doing right and pleasing Allah
becomes the prime objective even if the person
is not rewarded sufficiently on earth, the belief
that he is answerable to God makes its
imperative that the person is motivated to do
right even when nobody is watching.
Material and moral benefits must be
weighed together before deciding to
embark on an activity (e.g. invest on a
project). Thus when an Islamic man
makes a rational decision he includes the
spiritual benefits in the rewards. Whereas
providing material incentives are fully
justified in Islam (the material world is a
bounty from Allah and man shall get what
he strives for), the bounds of Shar’iah may
not be exceeded in seeking material
benefits.
Organization of decision making
• Economic systems are decentralized if decisions
concerning the allocation of resources are made
primarily at low levels; they are centralized if
decision are made primarily at upper levels in
the hierarchy.
• Resource allocation decisions may be made at
the lowest level ( an individual operating an
enterprise), at an intermediate level (a company
or a branch/division) or at a high level (the
conglomerate corporation or a government
ministry).
In Islam…
There is an avenue for people to voice their views on important
issues. The institution of ‘shura’ or mutual consultation enables
people to air their views on controversial issues before a decision is
made.
‘Shura’ does not imply that every individual will be consulted on
every issue at all times. Mutual consultation will decide the future
course of action, but the decision must be within the limits of the
Shar’iah. This is evident from the life of the beloved Prophet himself.
Sometimes the Prophet asked the suggestion of others and
followed, while at times, he asked and did not follow. And yet there
were other times when he decided on his own. Thus we see that the
opinion of the shura is not binding, however is one of the means
whereby the people participate in decision making. There is no bias
towards either extreme because there are different levels of decision
making.
Coordination Mechanism
• In a market economy, the market through forces
of demand and supply provides signals that
trigger organizations to make decisions on
resource utilization. Although consumer
sovereignty is presumed to prevailing market
economies, in practice governments, public
goods, externalities, market power of large
concentrated firms and other factors also exercise
considerable control over resources allocation
decisions.
• In a planned economy, planners make decisions.
Decisions are made at the higher level of
hierarchy.
• In the real world none of the two systems are present on
their own. There is always some degree of planning.
Compared to central planning where authorities of
decision making are centralized, indicative planning is
somewhat different. “Here the market serves as the
principal instrument of resource allocation, but a plan is
prepared to guide the decision making. An indicative
plan is one in which planners seek to project aggregate
or sectoral trends and to provide information beyond that
normally supplied by the market. An indicative plan is not
broken down into directives or instructions for individual
production units; enterprises are free to apply the
information in the indicative plans they see fit, though
indirect plans are often used to influence economic
ti it ”
An Islamic economic system
• largely supports a market mechanism for
coordination of economic activity. This is
based on a hadith reported by Ibn Majah
and Tirmidhi on bread prices in Medina
where the Prophet refused to intervene to
set prices (of wheat) saying, “I don’t want
to have the blood of these men on my
hands in the hereafter” because there was
a shortage due to natural causes
(drought).
•
• However, the market must reflect Islamic
norms and values in consumer/producer
behavior. The state does play an important
role in ensuring that the ‘rules of the
game’, which are in many respect quite
different from the conventional economic
systems, are being adhered to. One of the
means of achieving this is the institution of
‘al-hisbah’ (which will be discussed in topic
4).
AL-HISBAH
Derived from the root word HSB, which
literally means arithmetic problem, or
reward. Technically, the Hisbah is an
institution which promotes the proper and
forbids the improper, ‘amr bil ma’aruf wa
nahi ‘anil munkar’.
“… and the believing men and women, are
friends (in charge of) one of the other; they bid to
honor (ma’ruf) and forbid dishonour (munkar)…”
(At-Tawbah :71)
• This task is therefore a duty incumbent
upon every Muslim, to the extent of his
ability.
• However, scholars like Ibn Taymiyah, who
have written extensively on the institution
of al-Hisbah, stress the collective nature of
responsibility, and advocate that Islamic
state is charged with the responsibility of
making arrangements to oversee the
implementation of this institution.
• The institution of al-Hisbah discharges the
obligations relating to divine rights (haq Allah)
and those relating to the rights of the creation
(haq al-‘ibad).
• Under the first category, the muhtasib (who is
the head of the institution of al-Hisbah,, and
must be knowledgeable about the Shar’iah) is
responsible for ensuring that the community has
facilities for performance of Ibadah, the most
important of which is Salat. This includes
functions such as the maintenance of mosques,
appointment and supervision of muezzins and
imams, and punishing non-observance of
Shar’iah obligations in the society.
• The implication of the second category,
the muhtasib is concerned with the
implementation of adl in the society. Thus,
in direct contrast to laissez-faire economy,
the state should be actively involved in
managing the economy, bringing about
equilibrium through corrective action.
Numerous economic functions traditionally
fulfilled by al-Hisbah are as follows:
• Checking of weights and measures
• Ensuring availability of essential goods
and services.
• Correcting the market imperfections or
ensuring just prices
• Checking illegal and fraudulent practices
• Public Utilities
• Ensuring fair wages
• Checking corruption
JazakAllahu Khair
(May Allah reward you)
Thank You