Islamic economics deals with a paradigm that links the concept of responsible resource allocation and income distribution, in addition to the maximisation of utility by consumers and profit by businesses and taking into account property rights of members of the society in a way that maximise as social welfare, all of which are based on the laws and rules set out in the Quran and the teaching of Prophet Mohammad (pbuh). The Islamic law and rules (Sharia), covers a comprehensive range of rules and regulation relating to religious, social, economic and financial affairs and the governance of the financial dealings of groups and individuals in an Islamic society.
The application of such a system is seen by those who believe in it that solutions can be found for an unjust distribution of income, unemployment, poverty and environmental problems. Such a system is also supposed to promote the concept of corporate social responsibility. It is argued by Iqbal and Mirakhor (2007) that the Islamic paradigm “incorporate a spiritual and moral framework that values human relations above material possessions”, and that it is important to recognise that the betterment of the society is achieved through a sense of social and material responsibility to the whole without the denial of self-interest and private gains to the individual.
The role of the interest rate in an economic system, however, differs from culture to culture. While interest is considered a return needed for the debt capital provided in conventional theory of finance, an entirely different concept of it is subscribed to by those who believe in Islamic economics and an Islamic financial system, such a system is based on the Islamic law (Sharia), which is derived from the Quran and the teachings of Prophet Mohammad and covers a comprehensive range of rules and regulations relating to religious, social, economic and financial affairs and the governance of the financial dealings of groups and individuals in an Islamic society.According to Iqbal and Mirakhor (2007) the efforts to explain the principles of Islamic economics and finance in “modern analytical terms are only two decades old”, and that due to the fact that individual aspects of Islamic economics are studied in isolation of the totality of the social system might have resulted in some confusion relating to an economic or financial system that is based on Islamic principles.
Does the expression ‘Islamic Economics have any significance apart from (a) economic history or geography of the Muslim world, or (b) what Muslim social scientists have contributed to Economics? It might be thought that ‘Islamic Economics’ is also a theoretical social science that deals with the best method of maximizing material wealth within the parameters of Islam. If so, the scope of ‘Islamic Economics’ would go beyond the mere economic history or geography of the Muslim believers. According to this concept, the social economic policy of a truly Muslim state must reflect and promote the basic Islamic conception of the good life in all its multifarious aspects. However, as soon as we try to spell out the concrete socio-economic features demanded by ‘Islamic Economics’ we find ourselves faced with conflicting possibilities of choice. In addition, we are thrown back upon our own common sense, economic theory and actual experience in order to clinch various issues. This difficulty arises because Islamic values–equality, fraternity, generosity, charity, sympathy, justice, compassion and so on-are all abstract concepts. The moment we try to realize them in the framework of laws and a concrete polity, a plurality of social and economic blueprints become candidates for the title ‘Islamic’ as each claims to be the only true expression of Islam. The same difficulty (to a lesser degree) arises in connection with the two or three specific Quranic economic injunctions mentioned previously.
Islamic intellectuals and religious leaders must realize the plain truth that the economic directives of the Quran or the classical Islamic polity that gradually developed in early Islam will not suffice in modern times without developing the early economic models and modalities in the light of modern social sciences. The Quranic economic axioms are certainly valid, but they need to be developed in the light of ‘economic rationality’. Committed Muslims could, if they so wish, call the developed economic system Islamic or Quranic. Let me explain this crucial point.
As is generally understood, the object of all economic activity is satisfaction of human wants. However, in Islam this is not an end in itself. A man is not supposed to live for himself or for his kin. His obligations as a social being are much larger than this. He has obligations to all the needy of the society. The Prophet’s companions went to make a living not only to satisfy their wants and to support their families but to contribute toward financing Jihad. A Muslim earns in order to not only satisfy his own wants and his family’s but also discharge his obligations toward the society. This is what Allah has ordained for him and this is an objective, which also makes his earning a pious act (`ibadat). Does the definition suggested above incorporate all the characteristics of the subject? Does it really point out to the scope and subject matter of Islamic economics? Can it be termed as a precise definition? Let the other scholars on the subject come forward to criticise this definition and suggest modifications and substitutions. A sober academic discussion would help us in forming a standard definition of Islamic economics, which would serve as a criterion for judging the validity of so much talk on the subject.
Modern economists have defined interest in various ways putting forward several theories of interest. These theories are, at bottom, attempts to assimilate or reduce interest to some other concept such as profit, rent, price, cost, increment, reward and so on. As a student of philosophy,it appears to me, that no theory, which is purely reductive, could ever provide a complete analysis of the nature and function of interest in every possible context. It seems that, in the context of industry, interest approximates ‘a factor of the cost of production; in the context of consumption loans, interest approximates ‘price or rent of borrowed money’; in the context of state bonds, interest approximates ‘reward for deferring enjoyment of one’s purchasing power; in the context of distress loans, interest approximates ‘callous extortion or exploitation’. No single conception of the ‘essence’ of interest would thus suffice in all cases. Likewise, no ethical or economic appraisal of interest, in a blanket manner, would be valid. To arrive at a proper evaluation one must take into account the context and the exact function of interest in the type of situation under review. The concept of ‘increment’ which interest logically implies is, ethically, an indeterminate concept. We shall now briefly review some of the different conceptions of interest without attempting any reductive definition. One conception of interest is that it is the price a borrower is required to pay for satisfying a need he is unable to satisfy from out of his own available money. The excess payment he makes to the lender, over and above the principal amount, is the price of the borrowed money. Another conception is that the excess is the rent for the use of money belonging to the lender. Yet a third conception is that interest is the lender’s claim to be compensated for depriving himself of the actual or possible enjoyment of his own wealth which he places at the borrower’s disposal In the context of trade and industry, interest is a relatively small fixed charge upon the theoretically larger profit of enterprise. It may be viewed as guaranteed unearned profit whose justification is that the supplier of capital (one of the necessary conditions of production) is entitled to a small but assured return, for lending capital to the producer who expects to get much larger returns through profits. The other factors of production (apart from capital) are land, technical skill or knowledge, management, labour, and last but not least, leadership and organizational capacity of the entrepreneur.
Islamic banks have become an important player in the global financial industry. This is not only due to the amount of assets under management, which totalled over $1000 billion (The Banker, 2011), but also because these banks provide financial services that cater to the needs of a growing segment of investors and credit seekers worldwide who require services and financing opportunities that conform to their religious preferences. It is argued that the increases in income in the oil rich economies, a growing religious middle class in the Islamic world and a growing confidence in equity related investment instruments than debt-based type of products may have contributed and is probably expected to contribute to the growth of this segment of the financial industry.
The author of this article is studying at the University of Dhaka.