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Islamic Economics Project

IEP Newsletters Issue 6


To present Islam as a coherent, logical, rational and comprehensive system which has answers to all contemporary economic and other social problems of today and tomorrow with the goal to clear minds about Islam and its teachings before looking to influence actions and prevailing systems.
IEP

DO WE NEED ISLAMIZATION OF KNOWLEDGE? In this issue of Newsletter, I discuss do we need Islamization of Knowledge. The problem is with specialization of knowledge, not with knowledge itself. There are some false assumptions in Economics especially in its philosophy, but we cannot altogether discard this body of knowledge. Just like there are some very serious limitations/irregularities in fiqh literature, but we cannot just discard fiqh on that basis. In Islamization of knowledge, there is an important hurdle which is uniformity in Islamic body of knowledge. Two noted scholars in Pakistan, Mufti Shafi Usmani and Mufti Taqi Usmani argued on verse 275 of Al-Baqarah that "If rationale for prohibition of Riba is not known, then it must not make people uncomfortable". If there is such an ambiguity in the rationale of Riba, then Islamic body of knowledge first needs to develop itself than trying to present itself as a rival body of knowledge to most contemporary bodies of knowledge. Riba al Fadl is also a big misnomer in Islamic body of knowledge whereby it is assumed that Riba on cash transactions can also occur, whereas Quranic prohibition is concerned with something paid/charged over and above the principal amount in a loan transaction. This anomaly has been discussed by me in my book as follows: Some scholars state that in homogenous commodities, unequal quantity cannot be exchanged whether on spot or on credit. In heterogeneous commodities, unequal exchange on spot is allowed, but deferred payment is not allowed. Explaining the logic behind this principle, he argued that a spot transaction of homogenous commodities is allowed because such a transaction will be carried out at the market rate. But, the question arises why the same argument is not accepted when the goods are homogenous, but the quantity is different due to quality. Why the market is assumed to set the right cross rate between different commodities in spot sale, but not in unequal amounts of homogenous goods even in a spot sale. It is only in this case that the conventional understanding on Riba-Al-Fadl based on interpretation of two Ahadith is problematic. In credit transaction, interest can creep in and it suffices a logical test. If the conventional view on Riba-Al-Fadl is accepted; then, there arises a serious contradiction between Ahadith on Riba Nasiyah and the two Ahadith on Riba-Al-Fadl. The Ahadith which do not support the conventional viewpoint on Riba Al-Fadl are quoted below: 1. From Usamah ibn Zayd (rta): The Prophet (swt) said: "There is no Riba except in Nasiyah [waiting]." (Bukhari, Kitab al-Buyu', also Muslim and Musnad Ahmad). 2. "There is no riba in hand-to-hand [spot] transactions." (Muslim, Kitab al-Musaqat; also in Nasa'i)." In developing Islamic Economics, we first need to present the thesis of religion. After we have discussed why we need religion, then, we need to undertake comparative study of

religion. Then, there comes the stage when we need to present Islam as a coherent system of guidelines and principles i.e. Comprehensive Doctrine. Then, we can present the economic teachings of Islam which will act as broad guidelines for appropriate conduct in economic pursuits. Then, given the limits and constraints at the outset, utilizing both the literature of Classical Economics and Islamic Economics, we can develop and present the foundations, institutions, instruments, mechanism and delineate role of each in the new Economic framework. We cannot disregard all bodies of knowledge just due to that fact that they were all developed by non-Muslims. We can also not altogether classify western knowledge as based on atheism. In fact, any body of knowledge cannot be confined to geography or religion. Most post modernism literature has strong relationship with our analysis of the world at present. Post Modernists think that religion has a role in society and that enlightenment and modernization has not solved all of the worlds problems. There are some false assumptions in Economics especially in its philosophy, but we can not altogether discard this body of knowledge. For instance, economic analysis may point which of the particular business ventures have a higher probability of success. They can help in estimating demand, supply, understand consumer behavior, producer behavior and help in taking decisions backed up by empirical evidence. Religion will come in to teach ethical conduct in the entrepreneurial pursuit. So, both can co-exist. The problem comes in if Economics is taken as a comprehensive doctrine just like religion. But, Economics is not a comprehensive doctrine. Even, if some economists project it that way, we can restrict ourselves to Economics as an analytical tool/technique etc. There is absolutely no harm in that. Just to give brief examples of my take on Economic issues in relation with Islam, here are few examples: Capitalism, unlike Islamic economic system and Socialism regards capital as an individual factor of production creditable of a distinct factor payment i.e. interest. It supports the capitalists to benefit from wealth accumulation without having to put factor i.e. capital at similar risks that an entrepreneur faces. It shifts the break even line further away from the entrepreneur and crowds out entrepreneurs who cannot afford to keep feeding capitalists. In this regard, interest has a huge influence on allocation of resources. It influences the basic economic decisions like what and for whom to produce. Capital is needed for technological advancements. It is needed for production and consumption and for governments to expend on development. It is even needed to influence policies by winning elections after expensive election campaigns. There would not have been many complexities if markets were efficient and income and wealth distribution fair. But, the world we live in has never and perhaps never will have perfect equality and perfect competition. In fact, as per Islam, business cycles must

exist as this world is a place for test and the nature of this test is such that some people become privileged and some left behind. Both are tested for patience and thankfulness to Allah and how they take care of society and its needs. But, interest as a system of allocation of resources ensures a fixed return to one and uncertain for another. That is why, business cycles affect borrowers, leveraged companies and debt-ridden countries adversely. Equity financing as in the Islamic model of Mudarabah and Musharakah ensures justice and equity (as far as is naturally possible without interfering with the nature of this test and not contradicting with the values of justice). Interest serves capitalists and allows them to accumulate wealth. This is evident from the empirical statistics on inequality in income and wealth in second half of the 20th century when monetary capitalism with institutional support expanded in an increasingly integrated and global economy. Hence, much of the technological advancements, increase in production and better standards of living with increase in earning opportunities and welfare expenditure has occurred in that part of the world which was able to accumulate capital effectively than the rest of the world in pre-capitalistic and early capitalistic eras. (Chapter 1) In the following words, I have briefly defined Islamic Economic System: It is a blend of natural features present in Capitalism i.e. right to private property, private pursuit of economic interest, use of market forces etc used along with some distinct features derived through Islamic economic teachings i.e. interest free economy, moral check on unbridled self-pursuit and provision of socio-economic justice to achieve the goals of Socialism as far as is naturally possible without denying individual freedom and incentives. (Chapter 4) It is very unnatural to argue that there is no scarcity of resources. If there had been no scarcity of resources, there will not have been any difference between Heaven and this world. Scarcity of resources also includes physical and natural limitations and not just income/resource constraints. For example, limited life, illness etc. If there will not have been any scarcity of resources, there should not have been any direction for Infaaq. Next, I have shown comparison between Capitalism and Islamic Economic System. Difference is not in the fundamental economic fact, but in approaches to deal with it. Islamic Model Scarce Resources Seeking Allah's pleasure Differentiate between right and wrong Unlimited Wants

Capitalism Model Scarce Resources Seeking self benefit Neutral between right and wrong Unlimited Wants

The point I want to make is that we do not need to reinvent the wheel. If Islam is a natural religion, then, it must not require an isolated land and a different world. It will help in guiding towards dealing with problems of the real world, not to create a different world for itself. Further, Islam guides us to search for commonalities between rival doctrines or bodies of knowledge, rather than starting with differences altogether.

For more information, please contact Project Director, Islamic Economics Project islamiceconomicsproject@gmail.com www.islamiceconomics.viviti.com

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