The demise of communism is said to have left capitalism as the only option before mankind, so far as the economy is concerned. It is either private property and free enterprise or social ownership and collective planning. The latter having failed, the former carries the day! But this simplistic reasoning ignores the obvious point that freedom of choice tells us nothing about how that freedom will be used. It is men's views about life and what they want to make out of it that are decisive in that context. What gives contemporary capitalism its particular direction is not freedom but the goals people pursue and the values they cherish. These could very well be different, resulting in a different civilization. The goals and values men may adopt under the influence of religion are different from those materialism has witnessed. They could also be better!

Man is spurred into economic activity by his need to consume and desire to possess. Consumption brings strength as well as status and possessions can be a road to power. Since men are differently endowed and productive opportunities vary from place to place and time to time, an environment without norms and rules would soon result in domination by the strong, exploitation, conflict and war. Divine Guidance places the whole thing in a proper perspective, providing the right kind of motivation and laying down norms for appropriate economic behaviour as well as rules for optimal social organization. Should a people internalise this guidance, they will be blessed by peace and prosperity. The Qur'an says about some earlier communities:       

"Yet if the people of those communities had but attained to faith and been conscious of Us, We would indeed have opened up for them blessings out of heaven and earth: but they gave the lie to the Truth—and so We took them to task through what they (themselves) had been doing." (7:96)¹

The Essentials

Divine Guidance for the economy, as enshrined in the Qur'an and Sunnah, can be summarized, for the purpose of this brief paper, into some essential ideas: trusteeship, care for others, moderation in consumption, productive effort as a means of serving the Cause of Allah, mutual consultation as a method of collective choice, and treating wealth as a means to the good life rather than as an end in itself. It will be our endeavour in what follows to elaborate upon these ideas to see what kind of economic and financial concepts result from them.

Trusteeship

The idea of trusteeship has been central to all religious views of the economy. Islam reinforced the view that man's ownership of resources is held as a trust, the real owner being God, the Creator, to whom the trustee is accountable.

"Hallowed be He in whose hand all dominion rests, since He has the power to will anything: He has created death as well as life, so that He might put you to a test (and thus show that) He alone is almighty, truly forgiving."

"Believe in God and His Apostle and spend on others out of that which He has made you trustees: for, those of you  who have attained to faith and who spend freely (in God's cause) shall have a great reward." (57:7)

The idea of trusteeship distinguishes the religious/Islamic approach to economics from materialistic approaches like capitalism and socialism. It effectively rules out both extremes —laisses faire and collectivisation—while introducing a moral-spiritual element into the 'ordinary business of life'. The idea is made practical by rules governing individual behaviour and public policy.

Helping Behaviour

Care for others, or helping behaviour; is another cardinal principle of Islamic economic behaviour. It tempers the self-interest which is ingrained in human nature to ensure survival. It is a natural concomitant of trusteeship, since one serves the Master by caring for His people. The Prophet, peace be upon him, said:

"Mankind are God's dependants, so the most beloved of people in the Sight of Allah are those who do good to His dependants." (Mishkat, Bab al-Shafqah wa'l-Rahmah 'ala'l-Khalq).

Helping behaviour is required because of the interdependent nature of man's life. There is no fulfilment in life without interaction with others; individual felicity requires socialization. The exclusive pursuit of self-interest in social relations is counterproductive; it defeats its own purpose. Men serve their individual and collective interests best when each individual cares for the welfare of others while striving to protect and promote his own interest. This is what religion teaches. Those who deny it deny religion:

"Thus, when they are told, 'Spend on others out of what God has provided for you as sustenance', those who are bent on denying the Truth say unto those who believe, 'Shall we feed anyone whom, if (your) God had so willed, He could have fed (Himself)? Clearly, you are but lost in effort!"" (36:47)

"Have you observed him who denies religion? That is he who repells the orphan, and urges not the feeding of the needy."² (107:1-3)

We gain through giving; when everyone is keen only to acquire and unwilling to give, no one acquires anything. Since this insight into the nature of social living is not always obvious, the Qur'an has stated it in emphatic terms:

"That which you give in usury in order that it may increase on (other) people's property has no increase with Allah; but that which you give in charity, seeking Allah's countenance, has increase manifold."³

"God deprives usurious gain of all blessings, whereas He blesses charitable deeds with manifold increase. And God does not love anyone who is stubbornly ingrate and persists in sinful ways." (2:276)

So the calculation that shows wealth increasing through interest accrual and decreasing through charitable giving is an illusion. The reality is different. Social wealth increases when the rich give away part of their wealth to the needy — seeking no return save the Pleasure of Allah. An individual may not realise this, as he does not experience it directly and instantaneously. This is why the motivation for charitable giving is weak. Nevertheless, faith does what personal experience might have done, moving men to charity. Those who lack faith and a vision of the Hereafter behave otherwise, as noted in 107:1-3 quoted above.

Maximization of private advantage as the sole motive of the individual implies a particular attitude towards others with whom one interacts—that of regarding others as a 'means' to profit, 'instruments' through which to promote one's personal gain. The individual so motivated disregards social interest when he is acting on his own behalf as well as when he is acting as an agent. If this individual is a public servant, elected or appointed, he treats his office as a means to private gain. In a society comprising such individuals, the weak have hardly any protection against the strong. The society will soon be torn aptart by strife and conflict. Exclusive pursuit of self-interest does not suit mankind.

Moderation

Moderation in consumption is another feature of Islamic economics. Islam discourages ostentatious living and indulgence in luxuries. There are no specific quantitative limits to the consumption of what is permissible, but one should take into consideration what is available to others before one avails oneself of the good things of life. This follows from the two principles noted above, yet it has also received specific mention in the Qur'an:

"O Children of Adam! Beautify yourselves for every act of worship, and eat and drink (freely) but do not waste. Verily, He does not love the wasteful." (7:31)

The Work Ethic

Trusteeship, charitable giving and moderation in consumption all make sense when one has some possessions which, in the ultimate analysis, have come as a result of productive enterprise. Even though it is instinctive to work for a living, Islam has taken care, in view of the prevailing misconception about religion, to emphasise the duty of every individual to work for his living, as the Prophet said:

"To earn an honest living is a duty (ranking) next to the chief duty (of offering prayers)" (Mishkat, Kitab al-Buyu').

Islam creates a positive attitude towards wealth. The Prophet is reported to have said:

"Wealth properly acquired is a good thing for the good man." (Hakim: Al-Mustadrak, Vol. 2, p.2, Hyderabad, 1340 A.H.)

Indeed, he has extolled business by saying:

"The honest, truthful Muslim trader will be in the company of the martyrs on the Day of Judgement". (Ibn Majah, Sunan, Abwab al-tijarat, Bab al-Hathth al-makasib)

As a matter of fact, productive enterprise is looked upon as a means to serving the Cause of Allah, Jihad.

"And spend (freely) in God's Cause, and let not your own hands throw you into destruction; and persevere in doing good; behold, God loves the doers of good." (2:195)

"And strive hard in God's Cause with all the striving that is due to Him: it is He who has selected you (to carry His Message), and has laid no hardship on you in (anything that pertains to) religion, (and made you follow) the creed of your forefather, Abraham. It is He who has named you — in bygone times as well as in this (Divine Writ) 'those who have surrendered themselves to God', so that the Apostle might bear witness to the Truth before you and that you might bear witness to it before all mankind. Thus, be constant in prayer, and render the purifying dues, and hold fast unto God. He is your Lord Supreme, and how excellent this Giver of succour is." (22:78)  

The community of Islam has a mission with humanity which requires, among other means, wealth to be spent in this Cause. This realization has always moved good Muslims toward (and not away from) greater economic activity. As the perceptive fourteenth-century thinker Abu Ishaq Shatibi notes:

"Similar conduct is reported about a large number of pious men. The same is true of the companions (of the Prophet) and those of the following generation. They were expert in business enterprise, keen and persistent in a variety of economic pursuits. They did not do so to amass wealth or save it for themselves; rather their aim was to spend their earnings in good causes and for such purposes as are recommended by the Shari'a and are exalted in a life lived according to it. Their conduct in relation to their own wealth was like that of the keeper of the public treasury. In this, they conformed to different standards, as reported in their histories." (Shatibi,  Al-Muwafiqat fi Usul al-Shari'a, Vol. 2, p.188, Cairo, Maktaba al-Tijarah al-Kubra).

A prosperous economy need not necessarily be based on greed, as capitalism (and its 'economics') seems to imply. Social objectives, too, can move men to mobilize resources and organize production on a scale far beyond what the individual consumption of those involved would justify. Generations of Muslims have demonstrated this, as pointed out by Shatibi.

Decision by Consultation

Men are free to make private economic decisions individually, but public choice and collective decisions must be based on consultation. This is implied in the Qur'an's characterization of Muslims as a people "whose rule (in all matters of common concern) is consultation among themselves" (42:39). But the community has been especially cautioned regarding the allocation of offices and the dispensation of justice:

"Behold, God bids you to deliver all that you have been entrusted with unto those who are entitled thereto, and whenever you judge between people, to judge with justice. Verily, most excellent is what God exhorts you to do, for God is all-hearing, all-seeing!" (4:58)

The subject of ensuring an adequate supply of public goods has been approached by modern economics within the framework of selfish behaviour, focusing on the free-rider problem. The Islamic doctrine of al-fard al-kifa'i, or socially obligatory duties, seeks to take care of the matter through voluntary action complemented by state action. One significant expression of this tendency in Islamic history has been the proliferation of charitable endowments (waqf) devoted to education, health care and providing for the needy, etc. In general, the doctrine of socially obligatory duties has boosted the role of the voluntary sector in Islamic economies. Coupled with Islam's strong condemnation of hoarding and of all collusion between sellers to the detriment of customers, socially obligatory duties build those bridges between self-interest and public interest that are so vital for peace and prosperity in human society. The doctrine implies the valuable insight that the only durable basis for the protection and promotion of the public interest is orienting Individuals towards doing their duty.

Treating Wealth as Means

Islam looks at economic well-being as a means to peace, freedom from hunger-and freedom from fear of, or domination by, any being other than Allah. Beyond the satisfaction of basic needs, the ultimate objectives of earning and spending money are moral and spiritual. This rules out the seeking of economic gains at the cost of moral and spiritual values, both at the individual and at the national level. It is against 'Islamic rationality' to hoard money;

"O you who have attained to faith! Behold, many of the rabbis and monks do indeed wrongfully devour men's possessions and turn (others) away from the Path of God. But as for all who lay up treasures of gold and silver and do not spend them for the Sake of Allah— give them tidings of grievous suffering (in the life to come). On the Day when that (hoarded wealth) shall be heated in the fire of hell and their foreheads and their sides and their backs branded therewith, (those sinners shall be told:) 'These are the treasures which you have laid up for yourselves! Taste, then, (the evil of) your hoarded treasures'." (9:34,35)

It follows that savings, i.e., what is left after Consumption and charitable giving, must be put to good use. One who cannot undertake productive enterprise himself can do so in partnership with others, or he can supply funds on a profit-sharing basis. Men can also borrow and lend, but the lender cannot claim an increment on the principal, since interest is prohibited. Also prohibited is gambling. Men should seek to avoid these and other prohibited means, such as cheating, exploitation, coercion, etc., when making money. Their freedom to make monetary and financial arrangements is constrained only by these prohibitions and by the general Islamic tendency to treat money as a means to the good life.

History

The reality is seldom like the ideal, in fact the test in life inheres in a striving towards the ideal. Muslim peoples' historical record of living up to the ideals noted above has been a mixed story. They had an excellent start during the first forty years when the community was ruled by the Prophet and his successors, the four pious Caliphs. Thereafter, the economy prospered for quite a few centuries, but its moral quality tended to fall with only occasional rises. All in all, its record, relative to that of European and other contemporary people, was fairly good in terms of need fulfilment, stability and growth till the sixteenth century, when European powers started nibbling at its frontiers. During the next three centuries, everything changed. An alien civilization sought to impose its institutions on the community of Islam, whose defenses were crumbling due to myriad internal weaknesses. The community emerged from the colonial era, fragmented and confused, during the middle of the twentieth century. Since then, a process of reappraisal has resulted in a reassertion of its Islamic identity, expressing itself intellectually, politically and economically. We shall confine ourselves here to a brief look at the current scene in economics and finance.

Contemporary Expression

The first generation of leaders in the newly independent Muslim 'nation states' tried to ensure progress by emulating their (former) western masters, but the results were not very encouraging. In the search for new models for economic development and cultural progress, many turned to the Islamic heritage. One particular Islamic injunction which attracted special attention was the prohibition of interest. Long associated in the Muslim mind with inequity and exploitation, interest came to symbolise the un-Islamic structure of the western financial system. The search for, an Islamic alternative led to the emergence of a theory of interest-free banking during the fifties and sixties, followed by the widespread practice of Islamic banking during the seventies and eighties.

We do not propose to describe Islamic banking in this essay, as this is done at some length in the other contributions to this book. Rather, we would ponder over the concept of Islamic banking within the framework of the essential ideas of Islamic economics discussed above. This may help us to understand the contemporary phenomenon of Islamic banking as well as to evaluate it with a view to planning for a better future.

We have noted earlier how a true Muslim looks at life as a test and wealth as a trust. Assuming a community of such individuals to be divided into those with a surplus and those with a deficit of wealth, what mechanisms for the movement of funds from the former to the latter are likely to emerge? One is tempted to Say that grants or charitable giving (sadaqa) and loans without interest (qard hasan) would be ideally suited to the needs of these with a deficit, but that their popularity with those with a surplus would at best be limited, as they might be seeking more income through their savings. This applies especially when the seekers of funds intend to use these funds; in profitable enterprises. Also grants and interest-free loans would not ensure the efficient utilization of funds by these fund-users. These modes can hardly ensure a continued supply of funds by those with a surplus. While grants and interest-free loans have an important place in an Islamic economy, especially when they are to be used for need fulfilment, the incentives to work and save require putting a price on funds which serves as a reward for fund-owners and also constrains the users of funds in business to use them economically and efficiently. But a fixed price on the use of money is incongruous with man's economic environment, which is characterized by uncertainty of the value and productivity of economic enterprises. The use of money capital in productive enterprise does not necessarily lead to profit. Islam has prohibited interest (i.e., charging a predetermined return on loans), characterizing it as oppressive (zulm). Hence the price to be put on the use of funds has to be a function of the actual profit accruing on its productive use. Some kind of sharing of the fruits of the productive use of funds could be aviable basis for the movement of funds in an Islamic society from those with surplus wealth to those with a deficit.

For large populations and complex economies, direct finance is inefficient and wasteful. A system of indirect finance is, therefore, needed, in which intermediaries obtain savings from those with a surplus and pass them on to those with a deficit for use in productive enterprises. The intermediaries could share in the profits of the enterprise and would, in turn, pass back a share of these profits to the fund-owners. This is the essence of the theory of Islamic banking, which assumes that it will apply to the entire system, i.e., interest will be replaced by profit-sharing in all banks in a country.

The Evolution of Islamic Banking

The practice of Islamic banking did not start at the national level. Instead, individual Islamic banks were established in a number of countries during the second half of the Seventies. These individual Islamic banks had to operate within the economic and legal framework of their respective countries. They had also to face competition from interest-based banks, which were well-entrenched in the system. This environment provided no effective protection against the moral hazards attending upon a sharing-based system of financial intermediation. The low levels of honesty and trustworthiness in the market, the poor system of audits and accounts, lack of means for monitoring a business and, last but not least; failure of the judiciary to help the financing agencies in case of default by fund-users, were some of the factors inhibiting the practice of profit-sharing by the newly established Islamic banks. Instead, they turned to trade and industry as partners, sometimes even as sole proprietors, so that they could have full control over the use of funds. Some found an easy escape door in financing real estate.

Direct involvement in trade, industry, agriculture and services is not, however, the vocation of financial intermediaries. They are not well equipped to manage farms, factories, warehouses and service networks. Even if they do their best, they will only add to the existing joint stock companies, leaving the function of financial intermediation unfulfilled. The advantage of financial intermediation lies in pooling, mobilizing savings on a large scale by accommodating savers with different amounts, time horizons and levels of risk acceptance. Financial intermediaries are able to cater to fund-seekers in all sectors of the economy, within different needs with respect to size of funds, time and risk involved. Many of these advantages would be lost if Islamic banks went into productive business directly. Perhaps individual Islamic banks can survive in this way, but it would be a great disadvantage for a modern Muslim country to confine itself to such banking.

The disadvantages of direct involvement in productive enterprise and factors inhibiting the practice of profit-sharing led the Islamic-banks to adopt, by the early eighties, murabaha as the Chief mode of finance. This is sale on deferred payment with a mark-up on purchase price in favour of a client, who requests the Islamic frank to buy for him. Instead of advancing funds to finance a particular purchase, the Islamic bank makes that purchase itself, only to sell it at a higher price to that client, the price to be paid after a period of time. Every murabaha creates a debt, which can be recovered through the courts of law and which also avoids the problems of moral hazard and poor audits and accounts. Murabaha provides Islamic banks with a safe way of investing depositors' money and makes it easier for them to compete with the conventional interest-based banks in so far as returns on deposits are concerned.

Islamic banking at the national level started in the early eighties when Pakistan, followed by Iran and then Sudan, switched over to interest-free banking. The process was hastened for political considerations and because of this, the required environment for the practice of profit-sharing on a substantial scale, some elements of which have been noted above, was not created. As a result, the dominant mode of finance for the national commercial banks came to be murabaha, especially in Pakistan. This also applies to the Islamic Development Bank at Jeddah, which started operations in the late seventies. As the decade of the nineties begins, the practice of Islamic banking at all levels is dominated by the seeking of predetermined returns to finance in the form of murabaha and leasing.

Murabaha vs. Profit-Sharing

The pros and cons of the dominance of predetermined rates of return in Islamic banking can be determined only after a close scrutiny of the similarities, as well as of the differences, between murabaha financing and interest-based lending. Such an analysis is also needed for deciding the right place of murabaha finance in an Islamic financial system designed to prevent exploitation, ensure justice and promote the socio-economic ends of growth and need fulfilment. Yet no comprehensive analysis is available so far.4 We may, however, note some essential points here:

1. Murahaba results in an IOU of a fixedvalue which is not subject to negotiation, unlike conventional bank lending, which results in an IOU whose value increases with time and whose rate of increase is also generally negotiable. The IOU created by bank lending is easily monetized, whereas the IOU created by murabaha is illiquid.

2. Murabaha eliminates the risk of inflation so far as the buyer (in whose favour bank funds are used) is concerned, since he receives real goods, not money. This does not apply to bank loans, whose value may be eroded before they are converted into real goods. Besides these two main differences we note two main points of similarity, as:

3. Both murabaha and bank lending create dated payment obligations, which may not synchronise with the firm's cash inflows, thereby sowing the seeds of instability in the system.

4. The payment obligations of the firms operating with murabaha-financed goods and services are independent of the profitability of the enterprise, unlike profit-sharing, thus exposing it to the charge of being inequitable, as is the case with debt financing.

Do the differences mitigate the ill effects of the similarity to any substantial extent? Can we envisage a mix of murabaha and profit-sharing in a 'realistic' system of Islamic banking which would work in the present environment and still retain an edge over conventional, banking in terms of justice, efficiency, stability and conduciveness to growth?

Islamic bankers, as well as Islamic economists, seem to be inclined to answer both questions positively, but so far little empirical evidence is available to support or reject their optimism.

The Future

One of the chief distinguishing features of Islam is that it charts a middle course between extremes. Its economy is envisaged as a regime standing between self-seeking this-worldliness and selfless other-worldliness, as we have noted above. Its financial system, too, rejects those who allow riba, treating it as on a par with trade, as well as those who condemn all profit-sharing as unethical. Muslims in history have demonstrated that they can take this middle road, however imperfectly. Whatever is happening in the context of Islamic banking and finance has also to be seen in this context. It is the community's effort to find its way to efficient financial arrangements that suit its temper and serve its purpose. To look at the developments of the last two decades as an effort to replace one method by another is to miss the very nature of that quest. The blueprint of future financial arrangements in modern Islamic societies must evolve through the kind of explorations witnessed in the past few decades. The Islamic heritage in finance, as incorporated in fiqh and Islamic history, contemporary financial arrangements, and the socio-economic goals of the Muslim community today — all three are likely to play important roles in shaping that blueprint. The proper evolution of Islamic banking and finance will occur in a process of economic development and growth which lifts the community from its present lowly condition to the level of vigour and dynamism required by its mission with humanity. The singular advantage of Islamic banking lies in its being rooted in the Islamic heritage and initiated by the community. It is an indigenous phenomenon acceptable to the community as a whole, unlike conventional banking, which never gained legitimacy.

But the economic travails of the community require an agenda far more comprehensive than any group in the community has adopted so far. We have the rulers supposedly engaged in developmental efforts, but their development strategies hardly reflect any Islamic values or priorities. We have the Islamic groups working for the 'Islamisation' of banking and the implementation of zakat, but they have little idea of how Islamic banking can stand on its own, through economic development, in a world dominated by a few developed countries. As regards the masses, their enthusiasm for either quest is lukewarm as they fail to see how their own lot could be improved by it. Let us hope the makers of agenda will take note of these realities.

Bibliography

Arif, Mohamed (ed.): Islamic Banking in South East Asia, Singapore, Institute of South East Asian Studies, 1988. Khan, Mohsin S. and Abbas Mirakhor (eds.): [Theoretical Studies in Islamic Banking and Finance, Houston, Texas; The Institute for Research and Islamic Studies,] 1987.

Notes

1. Translations of Qur'anic verses are taken from Muhammad Asad: The Message of the Qur'an, Gibraltar, Dar al Andalus, 1980, unless otherwise specified.

The first figure in parenthesis refers to the Chapter (Surah) and the second to the verse (Ayah) of the Qur'an.

2. Translation from M.M. Pickthall: The Giorious. Qur'an, Mecca, The Muslim World League, 1977.

3. Ibid.      

4. A good beginning has been made, however, in Khan and Mirakhor (1987), pp. 185-199. See also Arif (1988),pp.43-66.