Ghassem Salehkhou is an executive director of the International Monetary Fund. Here we publish an extract from his address to the seminar on Islamic banking in Teheran in June Using a conventional economic framework, non-Muslim economists have often incongruously interpreted the principles of Islamic social systems. Yet in spite of a hostile press, the resurgence of Islamic thought has reached every corner of the Islamic world. Under these circumstances, what are the responsibilities of Muslim economists? Should they use conventional economic theory to analyse how to implement Islamic principles? What is correct Islamic economic practice? What are the obstacles to building an Islamic economy? What would the reactions of existing financial institutions be to introducing an Islamic socio-economic system, for example banking? Why has banking become the most visible Islamic economic institution? Most of the obstacles to the Islamic economist come from within the Muslim community. A lack of faith in, and knowledge of, Islamic principles is but one, and it is exacerbated by poverty, the, after-effects of colonialism, dictatorship, and exploitation. As a result, mans self - interest has taken priority over the need to satisfy his creator. Communal responsibility Further difficulty is caused to Muslim economists by a general ignorance of the principles and practices laid down by Muslim scholars of previous centuries. Had these scholars indeed presented a unified definition of Islamic society, there would be much more unity among today's Muslim economists, making their efforts more conclusive. For example, had early scholars agreed on a coherent definition of al-lqtisad ul lslami with its implications of individual and communal responsibility, there would be less resistance to the establishment of an Islamic social system. But the obstacle within the community most difficult for the Muslim economist to surmount is the diversity of political systems adopted by Muslim countries. Muslim regimes are so diverse that they cannot even present a united front to their enemies. This, more than any other difficulty, hinders the task of introducing an Islamic social system. Islamic measures are introduced merely to serve political exigencies, and not as a result of a considered Islamic philosophy. Another common obstacle is the misunderstanding that to abolish riba (usury) will establish an Islamic banking system. It does not. Even if it did, a successful Islamic banking system would not inevitably usher iii a new Islamic social order. The existence of any type of zulm (injustice) in the name of economic or social progress invalidates any claim to be truly Islamic. Many supposedly “Islamic” institutions use Islamic terms for in-Islamic activities. Some even go so far as to deny that the disruption of commercial banking has never been the aim of Islamic banking, and that to liberate the banks from interest rates is not Islamic objective. They even claim that it would be in the interests of commercial banks to allow Islamic banks to flourish. Agnostic values Societies whose traditions differ from those of Islam, or are actively opposed to them, offer another challenge. The agnostic social values of western societies allow a wide variety of individual and collective activities. Religious belief does not influence the secular laws and business practices of the west, In an Islamic society even the smallest matters must be in fused with an awareness of Allah. The first challenge presented by the non-Muslim nations is outright hostility. Ignorance and mistrust of Islam have marked western societies for centuries, and this hostility has in turn affected the attitudes of Muslims. To change such attitudes, and to encourage a sympathetic examination of Islam in the west, requires the united efforts of all Muslim scholars. The present economic order makes the nations of the “south’ - including all the Muslim nations - almost totally dependent on those of the “north”. This dependence can be confronted effectively only by breaking the chains which bind the nations of the south to the north - greater technical know-how, legal sophistication, and administrative efficiency. The flow of resources from the south to the north results in a two-fold disadvantage for the south. It deprives the nations of the south of the opportunity to use their own resources, and it augments the economic strength of the northern nations. This situation is underpinned by usurious credit lending, a quinksand in which most nations of the south are floundering. A modern system The Muslim economist then, must overcome both the enemy without and the enemy within. He must show that: - there is such a thing as an Islamic financial system, sufficiently different from other systems to be considered as an alternative. - such a system can answer many of the problems faced by other financial systems. - it can finance the efficient working of a modern economy. - that it will enhance rather than damage existing investments, -finally, that once implemented it could interact with other financial systems. Preliminary efforts by the International Monetary Fund (IMF) to study Islamic banking have provided the international recognition that the issue deserves The internal challenge for the Muslim economist is to develop a programme for the study of Islamic finance which relies only on the Quran and the Sunnah. So far Muslim economists have merely borrowed empty economic boxes from the west and the east and filled them with ideas which are Islamic in appearance. I do not suggest that Muslim economists should abandon the analytical tools developed by other systems, only that the framework for analysis must be provided by the Quran and the Sunnah. Islamic banking: Dynamism for growth In this concluding part of Dr Ziauddin Ahmad’s paper on "Some Interest Free Banking”, the author can lead to a for giving greater dynamism to economic growth It has been claimed that replacement of interest by a system of profit- sharing may lead to greater exploitative tendencies in an economy, It may harm the processes of saving and investment and may thus adversely affect economic growth. It may lead to greater allocative inefficiency, unemployment and a more unequal distribution of income and wealth. It may also make the economy highly unstable. A typical expression of such a view is as follows: “In the context of capitalism, wherein labour works for a fixed wage, profits can be even more exploitative than interest. In fact, the term profit as it is understood today is the product of sixteenth century capitalism when employment for wages became the cornerstone of a civilisation marked by a division of people between capitalists and wage-earners. It is interesting to note that Karl Marx had singled out profits as the worst feature of the capitalistic system, sym exploitation of the poor by the rich, and contributing to the “alienation” of man (the wage earner) from his environment. By contrast, the term has an entirely different meaning in the case of voluntary combinations,” where labour does not work for a fixed wage but receives a specified share in total profits”. (Naqvi, Principles of Islamic Economic Reform, pp.153-4)
Open competition necessary While the note of egalitarianism that is struck in expressions like the one above should be welcomed, the disturbing aspect of such views is that policy makers may shy away from a decision to Islamise the banking and financial system because they do not see any early possibility of such fundamental changes taking place in the economies of their countries as the complete supplanting of the fixed wage system by “voluntary combinations”. Moreover the statement that in a system “wherein labour works for a fixed wage, profits can be even more exploitative that interest” does not bear close scrutiny. The statement may be true in cases of the worst forms of “monopoly capitalism” but cannot be accepted as a universal truth. It is well recognised that in market conditions characterised by open never be excessive and reach exploitative levels. It follows that if open competition and free entry are ensured, a system where labour works for a fixed wage may well meet the ends of justice. It is for this reason that monopolies are not to be tolerated in an Islamic economic system and open competition has to be fostered as a matter of policy. Moreover, it is the responsibility of an Islamic state to ensure that wages paid to a worker are adequate to meet at least the basic needs of his family. It is necessary to highlight here the basic difference between interest and profit, and the reasons why Islam prohibits interest but regards profit as a legitimate return on capital and entrepreneurial effort, A return on loan capital in the form of interest, even when borrowing is for productive purposes, is prohibited because it is pre-determined to be positive irrespective of the ultimate outcome of business, which may be positive or negative depending on a whole host of factors, some of which are beyond the control of the entrepreneur who borrows the capital. On the other hand, the earning of profit is uncertain and its actual quantum, positive or negative, depends on the operating results of the businesses concern. Payment of something definite in return for something uncertain militates against the Islamic concept of justice and equity while an uncertain return on productive activity whose outcome is uncertain is fully in harmony with it. Besides, even - profits are not considered as sacrosanct in an Islamic economy. The level of profits can be regulated, through tax and other policies, in the general interest of the society. It has been argued that the replacement of interest by a system of profit/loss sharing may harm the processes of saving and investment and thus adversely affect growth. In the first instance it is claimed that because of the uncertainty of return, “all risk averters, e.g. those who have only their ‘nest egg’ savings put away for a rainy day, will be closed off from the investors market.” Secondly, it is suggested that to run the profit sharing system, it would be necessary to recruit a large technical staff projects. This would cut deeply into the distributable net profit margins and result in a lowering of the rate of return accruing to the depositors. The above issue can only be dealt with on a theoretical plane at the present stage. It must be admitted that the nominal return on d would be characterised by greater uncertainty if Mudarabah and Sharakah are accorded greater prominence in the financial operations of Islamic banks. However, as mentioned earlier, the variability in the real yield under a system based on Mudarabah and Musharakah may in fact be less than in the interest based system as variations in the nominal yield may tend to offset variations in the inflation rate. The interest-based system itself provides no haven for “nest—egg savings” as the real value of these savings is eroded by inflation and depositors get a negative return whenever the rate of inflation exceeds the rate of interest. It should also be emphasised that since Islam prohibits a guaranteed fixed return on capital, savers in an Islamic society do not look for complete certainty of return while investing their savings. In a fully developed Islamic capital market, savers would have an option to choose from a number of investment media with different degrees of “riskiness”, to suit diverse individual preferences. There is no reason, therefore to suppose that any category of savers would be closed off from the investors’ market. Greater Flexibility Similarly there is no sound theoretical basis for the contention that savings would be adversely affected by the change over to the Islamic system as the rate of return to depositors would be lower in the case of Islamic banks compared to interest based banks. It is true that Islamic banks would have to employ technical staff to assess’ the profitability of investment projects. However increased expenditure on this account is likely to return to pay off in terms of greater return on their funds. |
