As the number of trained economists taking up our subject increases analytical approach to the issues under discussion gains in strength. The generation represented by Dr. Anwar lqbal Qureshi and Shelkh Mahmud Ahmad is followed by a number of younger economists like Khurshid Ahmad, Monzer Kahf, Abu Sulaiman, Muhammad Sakr, Anas Zarqa, Faridi, Chapra, Abdul Mannan, Masudul Alam Chawdhri, Uzair, Mohammad Akram and Siddiqi, who go further and deeper into the analysts of abolition of interest, Zakat and mudarabah and analyse the behaviour of economic units under the influence of Islamic teachings. Though most of these attempts are still rudimentary, they indicate uncharted explorations which might lead to new insights and better policy prescriptions. It is the promise and not the performance that persuades us to pay closer attention to the contributions relevant for this section. This we do under the following heads: (i) Consumption (ii) Production (iii) Factors of Production (iv) Exchange and Determination of Prices and Profits (v ) Profit Sharing (Mudarabah or Qirad) (vi) The Role of Zakat (vii) Interest and its Abolition (viii) Nature of Islamic Economics (i) Consumption Both Siddiqi (619: 88-90) and Kahf (()12: 7 1.1) discuss economic rationality assumed by modern economic and indicate the various ways in which this concept must be modified and made broader before it is applied to the behaviour of the consumer in an Islamic society. Kahf notes that "the time horizon of an Islamic individual is extended to include the hereafter" which implies that he "should not limit his behaviour to doing things which he can collect the benefits resulting from them in this life, he is so oriented that he will do what is good or useful for its sake" (612: 10). According to Siddiqi the consumer must, first of all, be satisfied that he is living up to the Islamic standards. To get this satisfaction he can forgo any satisfaction in the economic or utilitarian sense of the term (619: 89). Despite this modification which introduces non-temporal, non-individualistic elements in the objectives of the consumer, these writes still find the principle of rationality applicable. As Siddiqi puts it Islamic rationality implies "orientation of action towards maximal conformity with the Islamic norms" (619: 90). Kahf proceeds to affirm, on the basis of this point, the validity of the maximisation proposition in the context of consumer behaviour in Islam (612: 13). Siddiq’s attempt to trace the impact of "Islamic rationality" on the pattern of demand throws up some interesting points. Obviously, prohibited articles of consumption will go out of demand, but that is followed by the observation that "the extent of complementarity" amongst these goods (along with items of luxury whose demand he expects t decrease, relatively speaking) is greater than "in the group that constitutes the necessaries of life". "The abandonment of wine, women and gambling as a way of life, is therefore sure to tell upon a host of other goods and still more upon services attached to this way of life" (619: 93). He also makes a point made earlier by Hameedullah in a different context (433: 229), that "leisure" may be in greater demand in an Islamic society (456: 95). Social wants are also-visualised as gaining ascendancy on the ladder of priorities (619: 97-98). While the above-mentioned points relating to the pattern of demand have several precedents in the literature, Kahf has sought to present a model of household decision assuming an Islamic system with Zakat, replacement of interest by profit sharing (Qirad) and of competition by co-operation, where economic units maximise utility of profit (615). He describes the behaviour of the consumer as maximisation of utility subject to two constraints, the size of income and a desire to maintain wealth. Abolition of interest encourages current consumption at the expense of deferred consumption but Zakat urges a higher savings ratio. It also raises the aggregate consumption by redistributing wealth in favour of classes having a higher propensity to consume. The combined effect of Zakat and non-interest is called the "Consumption effect"(615: 22). A resolution of these conflicting "effects takes place by the direct linkage between savings and earnings (profits) through investment on the basis of Qirad (profit sharing) that the abolition of interest ensures in the system. This leads Kahf to the most important conclusion of his brilliant paper: "saving is positively related to investment opportunities and expectations. This relationship implies that at times of declining investment expectations saying will decline and consumption will rise, this in turn increasesaggregate demand and raises business expectation" (615: 26). The question arises, however, what might happen to the level of income if the volume of investment decreases "at times of declining investment expectations", and if a fall in the level of income may not decrease aggregate demand despite a rise in the propensity to consume ? Kahf has neither raised this question nor answered it. Najjar (58:,280-286) questions the validity of the proposition that savings are a function of income. With reference to poor developing countries, availability of suitable channels of investment play a significant role in mobilising voluntary savings, as experienced by Najjar while conducting the experiments of interest-free banks in Egypt In the early sixties. Failure to note this possibility has led to a policy of forced savings and deficit financing with disastrous consequences. Recently Anas Zarqa had a closer look at the utility function of a Muslim community which "has a new variable in It, namely, the reward of penalty in the hereafter". Using a diagram to explain interaction between consumption and reward, he concludes that "rational Islamic behaviour should lead the individual to settle somewhere between the sufficiency threshold and the prodigality frontier". (ii) Production Siddiqi summarises the main aspects of business motivation In Islam as under (619: 103): (1) "Full compliance with the Islamic idea of justice. (2) An urge to serve the society which makes the entrepreneur take the welfare of others into consideration, while he makes his entrepreneurial decisions. (3) Profit maximisation within the limits set by the operation of the above principles." The last point is seen to imply that: (1) Producers would not be maximising their profits if, and when, they feel that by lowering their profit margins they can further the good of the society by satisfying unsatisfied needs. (2) No producer, in any circumstances, shall increase his profits at the cost of explicit injury to the consumers or to his competitors .... (3) Producers will generally be content with satisfactory profits .... (619: 136). He tries to define "satisfactory profits" with reference to an upper limit permitted by the circumstances (without violating the legally-binding part of the Islamic code of conduct) and a lower limit affording the entrepreneur a decent living and a surplus to average out the losses. "Satisfactory profit... is any profit, in between the two limits defined above, which satisfies the entrepreneurs sense of goodness as well as his urge to earn money, maintain and develop his enterprise, and keep it in the good books of the customers, the government, and the people in general" (619: 107). This notion of satisfactory profits has, however, been criticised as subjective and vague (616). Reviewing the subject, Kahf rejects "profit maximisation because it does not fit the Islamic rationale as far as the time horizon and the connotation of ‘success’ are concerned". He thinks, however, "that profit maximisation can be used as fair approximation if we look at it as constrained not only by cost but also by a minimum level of goodness guaranteed by both ethical values and legislation" (612: 20). The notion of constrained profit maximisation is also upheld by Chapra (115: 20-21) and Tahawi (77, I: 227-230). Whether we regard it as multiplicity of goals (including non-economic goals) or interpret it as constrained profit maximisation, entrepreneurial behaviour ceases to be predictable and uniform once the simple maximisation hypothesis is abandoned. Tracing the unpredictable and potentially varied behaviour of the Islamic entrepreneur is therefore a hazardous task few have attempted. Sidd4s rudimentary analysis indicates a weakening of the competitive process and its inevitable transformation into a "cooperative" one (619: 137-141). (iii) Factors of Production It is interesting to note that Islamic economists have given different answers to the question: what are the factors of production? Mawdudi endorses the traditional list: land, labour, capital and organisation and finds its justification in the Islamic law relating to profit sharing (mudarabah) (51 : 159). It also fits in with his views on the legitimacy of share-cropping (mudarabah). Abu Saud reduces the list to three: elements of nature, good work and capital (5: 54-55), subsuming labour and organisation under one category. He views capital as resulting from the operation of human labour on elements of nature. Baqir notes these three factors as they are so characterised by Political Economy but remarks that labour (including organisation) is not material wealth subject to ownership but the human element in production. Capital results from the operations of this factor. Hence nature is the chief source of production ( 171: 396-397). A. Mannan also proceeds on the basis of this tripartite categorisation of the factors of production, considering capital "not as a fundamental factor of production but as an embodiment of past land and labour" (132: 126). Tahawi (77, I: 277) includes land and capital in ‘wealth’, so that there remain only two factors of production "wealth" and labour, which includes enterprise- As all wealth belongs to God, He is the real owner of the return to this factor,. i.e. of the return to land (rent) and capital (Interest). He notes, however, that rent is sometimes allowed to be appropriated by the "owner" of land in view of mans needs. The return to labour belongs to the labourer. Najjar would a1so confine the list to labour and capital, including land in capital and entrepreneurship in labour (58: 106). Abdul Hamid Abu Sulaiman rejects the idea of characterising "labour" as a factor of production, regarding it as a result of the capitalistic philosophy which views production as an end in itself. He would characterise only land and capital as factors of production, labour - or more exactly man - being the entity for whose benefit these factors are created (7: 16-17). As a corollary to this distinction between capital and land on throne hand and labour or man on the other hand he lays down the rule that the entire produce of land and capital must be distributed among those who work-on them. To regard labour itself as a ‘factor’ of production might pave the way for their subjugation by others. Of special interest is Malik ben Nabi’s concept of Capital as stored by surplus labour (484: 81). As a result of the process of accumulation capital became a "prison-house" for labour, denying to labour every right except that of serving its (capitals) interest. Our thinking on economic development is also clouded by the newly assumed importance of capital as we tend to forget its real nature and the fundamental importance of labour and enterprise. This, lie regards to be a curse-for the Third World. Man, land and time, are the only factors crucial for the destiny of the backward nations, a fact recently demonstrated by China. These factors guided by a "cultural will" and not capital is the condition for economic development of the under-developed countries. For him the prime value rests in Man (494: 79-94). It is clear from this brief resume that the divergent approaches to the apparently innocuous issue of what are the factors of production are not without a deeper significance. They have important bearings on the authors views on distribution and growth. Further development of thought in this area might produce some thesis of greater significance. An important point has been made by some writers relating to the definition of capital. Wealth granted as loan or borrowed does not become capital. says Alavi ( 10: 30, 31) and Mahmud Ahmad clarifies that it is only risk capital that actually participates in production and can be characterised as productive "Loan-capital" does not do so (628). Stressing the need to modify the conceptual framework of economics to suit the requirements of Islamic economics Uzair says that "a beginning will have to be made by redefining the factors of production.... Capital as a separate factor of production does not exist but it is a part of another factor of production, namely enterprise". In his opinion "the separation of enterprise and capital has created not only conceptual problems but has also caused practical problems in the operation of the economy". (iv) Exchange and Determination of Prices and Profits While the analysis of the functioning of a "co-operative" market guided by Islamic norms has yet to yield any formal results, attempts have been made to analyse exchange and discover the root cause of the malaise in the free economy. Baqir’s analysts (171: 326-328) lays the blame on the use of money as a store of value which makes exchange a means to the accumulation of wealth. This distorts the equilibrium between supply and demand. The Islamic remedy lies in Zakat and the abolition of interest which will confine money to its basic role of mediating between production and consumption. Freed of monopoly, hoarding, speculation and other un-Islamic practices the free working of the competitive forces is expected to result in prices which may be regarded as normal. This seems to be the assumption underlying the following definition, of just profits given by Khurshid Ahmad and Naiem Siddiqi (126: 33)., "That which is determined in average and normal conditions according to the law of demand and supply in a free market - provided that the laws of the state, its plans and policies or any other controls are not interfering with the system of sales and purchase, production and supply of commodities and with free competition. Monopoly should not be allowed to influence the market and there should be no emergencies and accidents affecting the market." In the same vein Kahf declares, after defining the framework within which the market would function in an Islamic society, that: "All prices, whether of the factors of production or of products, stem out of this mechanism, these prices are looked at as just or fair prices in this respect" (612: 44). In the context of "just price" Kahf disagrees with Siddiqi’s reference to cost of production (612: 88) and refers to Ibn Taimiya’s "price of the equivalent". This concept originated in Juridical literature to serve as, a guide to the Judges in the courtroom. According to Kahf, Ibn Taimiya’s norm was a price determined in a market free of imperfections (663: 23). In view of what has been noted above about the role of government in the market, it can be safely concluded that Islamic analysts are not quite sure if the working of the market will ever result in prices, rates of profit and wages that satisfy the Islamic norms. The concept of just or fair prices and profits oscillates between what the modern economists regard as "normal" and what the Islamic economists will find satisfying to their norms. Najar (58: 123-124) has some new points to add in this connection. There is some disagreement among our economists regarding the nature of profit. According to Baqir, Islam does not consider "risk" to be a factor of production (171: 558) and profit is not the reward of risk bearing. It devolves on present work or past labour congealed up the form of property. He disagrees with the view that the share of the supplier of capital in mudarabah contract can be regarded as a reward. of uncertainty bearing (171: 559). This is in sharp contrast to Siddiqi’s point of view (221, I: 157-171). Baqir explains rents also with reference to labour that originally resulted in ownership of property.(v) Profit Sharing (Mudarabah) or Qirad Profit-share, defined as the percentage share of the supplier of capital in the profits of the entrepreneur, or the working partner, in the mudarabah contract is compared and contrasted with the rate of interest in its function and role in the economy. The rate of profit-sharing is also being explored as a toot of analysis and a possible instrument of fiscal policy. Kahf defines Qirad (mudarabah) as "the act of transforming money assets into factors of production as a result of a Joint action between the two parties". Two crucial differences between profit-share and interest are stated. Firstly, "the profit-share" has direct interest and real concern in the activity of the firm". second, "profit-share" is a long run phenomenon in which the preference for liquid assets is almost neglected, whereas interest is a dual phenomenon, short and long run, for which the economic thought could not provide any serious theory to provide the term structure... In profit-share the short run changes do not interfere in the finance of investment unless through their effect on the rate of return expectations only, so that one source of long run fluctuations is eliminated, namely variation in short run interest rate" (612: 62-63). He proceeds to discuss the equilibrium rate of profit-share which should be equal to the return on partnership, i.e. on share capital in Joint stock companies (612: 85-86). 
In a novel integration of Zakat analysis with the analysis of profit-share Kahf finds that "the critical situation where the expected dividend (considered in percentage terms) ... is below az-Zakat line can be distinguished from the situation where the expected dividend is at or above az-Zakat line" (drawn at a height of2.5 per cent above X axis in the diagram reproduced above), "the difference between M and O is the remuneration of the entrepreneur" which he calls profit (612: 91-82). Then he proceeds to analyse the behaviour of investment, depending on the elasticity of Q curve and the determination of profit. Traditional economic theory falls to determine profits (612: 82, fn. 84) whereas his own theory is able to do so. Turning then to the capital market he notes that in the traditional theory this market determines the rate of interest but not the entrepreneurial profit, whereas by having prices to be sought in percentage terms both profit-share and profit are determined simultaneously- (612: 85-86). "It is noted that the demand and supply functions in this (capital) market are really more likely to offer curves known in international trade theory than ordinary demand and supply curves. The other difference lies in the slope of the demand for finance which is positive in this market: this, in fact, reflects that, as the ratio of capital entrepreneur rises, the profit-share offered by entrepreneur increases in order to attract more capital" (612: 86). Kahf’s analysis goes further than the earlier attempts by Muhammad Akram and Siddiqi. Akram’s attempt is vitiated by his misconception about liability to losses in the mudarabah contract and some of his assumptions relating to supply of savings in an Islamic society (404). Siddiqi pointed out the elasticity of the savings curve in relation to profit-share (417: 24). A recent contribution to the subject is a paper by Chowdhury (620) in which he shows that the only value which comes nearer to a suitable capitalisation rate or acts as a reasonable substitute for the interest rate, is the rate of profit actually realised by the firm or the economy or the individual at any time during the period and process of capital formation.(vi) The Role of Zakat Zakat 1. Zakat transfers part of the wealth of the haves to the have-nots. lessening the inequality in the distribution of income and wealth. and counteracting any tendency towards concentration of wealth. In a recent contribution (624) Mabid Mahmud correlates the distribution of political power and the distribution of wealth. He finds that: (1) "The degree of association between the distribution of wealth and that of power increases with the size of the political unit measured in terms of the number of voters. (2) That degree of association increases with the degree of monopoly in information media" (624: 41-42). He concludes that "the association between the distribution of wealth and that of political power can be broken by a redistributive scheme. This scheme must operate on wealth, not income.... It should be designed to cheek accumulation on an asset by asset basis, taxing more remunerative assets more heavily, for they provide a greater prospect for power accumulation… the conditions of such a redistributive scheme are all fulfilled in az-Zakat" (624: 43). 2. As a result of this transfer there is an upward shift in the aggregate demand function because the marginal propensity to consume of those who receive the transfer payments is comparatively higher. As noted above, Kahf finds the "consumption effect" of Zakat re-enforced by abolition of interest (615: 222). 3. Zakats distributive role involves an allocative role, too, as the Zakat funds are mostly used on essential goods and services. Factors of production arc thus diverted to the production of necessaries from that of luxuries on which the taxed persons might have spent these amounts. Hasanuzzaman argues that Zakat will also lead to "a fall in the rich mans demand for imported luxury items" thus resulting in foreign exchange savings. 4. Zakat discourages hoarding and accumulation of idle wealth. It tries to put the waiting resources back into economic activity as increased capacity, through the investment of such wealth, or as increased demand for consumption. "it helps in pushing every bit of wealth into productive activity by increasing the cost of waiting- (612: 51). This point has been made by several writers including Mahmud Ahmad (168: 124), Nasir A. Sheikh (154: 90) and Hasanuzzaman. Afazuddin (621: 9) points out that "the incidence of Zakat falls on liquidity preference and negates its Influence on the rate of Interest". The latter part of this statement means that Zakat would encourage the cash holder to employ it in a profitable manner so that Zakat is paid out of the profits and no depiction is caused in the assets. This would cause an addition to the supply of cash while liquidity preference works the other way round. But Afazuddin has apparently ignored the fact that cash is very often field in expectation of better investment prospects in the future and In that situation Zakat would fail to negate "liquidity preference". 5. Kahf ascribes a "savings effect" to Zakat assuming a desire on the part of the household to maintain Its level of wealth intact and a similar urge oil the part of the firm to maintain non-decreasing capital (615: 21; 612: 51).... If the rate of return on wealth is 10 per cent, one needs to save 27.5 per cent of ones income in order to keep ones wealth constant. What is significant is that "it makes every individual merge ... the decision of income allocation with that of savings utilisation". Obviously, Kahf’s "savings effect" assumes a positive return to its utilisation through investment. Qardawi’s comprehensive work on Zakat compares it with modern taxation and explains the virtues of Zakat as a tax on capital (313, II: 1027-30). Zakat on agricultural produce, mineral wealth and salaries and rents can, however. be treated as a tax on income (313, II: 1033-1034). After making a comparative study of Zakat and other taxes in the light of universally acclaimed principles of taxation (3 13, II: 1038-1052) he proceeds to explain why there is no progression in the rate of Zakat, and dispels the misconception about there being a negative progression in the rates of Zakat on livestock (313, II: 1054). Mawdudi has pointed out that the burden of Zakat on merchandise cannot be shifted to the consumers (51 .362-363, but the reasoning is weak and unconvincing.(vii) Interest and its Abolition Islamic economists have analysed the role of interest in the economy and have traced the consequences of its abolition. They also compare interest and "profit-share" as means of mobilising savings and channelising them into the productive process. A discussion of these points necessitates a restatement of the causes why Islam has abolished interest. A: Rationale of Prohibition The main reason why Islam abolishes interest is that it is oppression (Zulm) involving exploitation. In the case of consumption loans It violates the basic function for which God has created wealth, which envisages that the needy be supported by those who have surplus wealth. In the case of productive loans, guaranteed return to capital is unjust in view of the uncertainty surrounding entrepreneurial profits. The second reason why interest has been abolished is that it transfers wealth from the poor to the rich. Increasing the inequality in the distribution of wealth. This is against social interest and contrary to the will (mardi) of God, Who would like an equitable distribution of income and wealth. Islam stands for co-operation and brotherhood. Interest negates this attitude and symbolises an entirely different way of life. A third reason why interest is abolished is that it creates an idle class of people who receive their income from accumulated wealth. The society is deprived of the labour and enterprise of these people. Such a way of life is also harmful for their personalities. Mawdudi has pointed out that a basic imbalance is caused between production and consumption by the phenomenon of interest. This happens in two ways. Firstly, interest on consumption loans transfers part of the purchasing power from a group of people with high propensity to consume to a group with low propensity to consume. This latter group mostly reinvests its income from interest which means that the decrease in consumption demand is accompanied by an increase in production. Secondly, interest on productive loans raises the cost of production, hence the prices of consumption goods. Once again the amount taxed away from the people, in the form of higher prices falls in the hands of a class with a lower than average propensity to consume. This imbalance is seen as the source of many evils such as stagnation and depression, monopoly and ultimately imperialism (321: 85-87). Supply of interest-free loans to needy consumers and denial of a guaranteed return to capital removed this basic imbalance. The incomes generated by the process of production in the form of wages profits and profit-share are more equitably distributed. Zakat-based transfer of wealth from the rich (profit earners) to the poor (wage earners) removed the remaining imbalance. Hameedullah (433) pointed out that the institution of interest introduces an essential duality of interest between the capitalist and the entrepreneurs, which is a source of fluctuation in the system. By abolishing interest and bringing the capitalists and the entrepreneurs together on the basis of profit-sharing, Islam ends this duality and harmonises the interests of the two classes. The above point is made by almost every writer on the subject. Mawdudi points out that this removes the premium set on capital and shifts the emphasis on to the entrepreneur whose activity becomes the only source of income besides labour. The hold of the "rentier class" on society is destroyed and dynamic entrepreneurs are given the upper hand (521) Elaborating on the first reason for the abolition of interest stated above, Hameedullah notes that the principle of unilateral risk involved in the institution of interest is the basis of its prohibition in Islam ( 119: paragraph 372). Ganamch (392: 86) also regards it to be the chief economic reason for Islam’s prohibition of interest along with two other reasons: that it violates justice and is contrary to the Islamic dictum: no reward without effort. Siddiqi argues (221, I: 173-75) that the borrowed capital whose repayment to the lender is guaranteed takes no part in the enterprise in which it is invested and is, therefore, not entitled to any returns even when the enterprise does make a profit. This capital does not expose itself to the risks and uncertainties of the enterprise. These are borne by the collateral pledged by the borrower as security, and by the alternative source of finance to which the borrower must turn for repaying the loan. in case there are losses in the enterprise. He cites the famous tradition from the Prophet (al Khiraj bi’l diman) "Income devolves on liability" In this context. B: Interest, Savings and Investment This brings us to the impact of the abolition of interest on savings and investment and on the level of economic activity and allocation of resources in the economy. Many writers have dispelled the doubt that abolition of interest will decrease the propensity to save. Quoting Keynes they argue that savings are a function of income and earning interest Is only a minor motive of savings. In the absence of interest the possibility of earning profits on common stock or through mudarabah contract will serve the same purpose. Moreover, the bulk of the savings in a developed economy arise from institutional sources. Siddiqi gives an analytical exposition of the subject (417: 180-190) which has been discussed earlier. As regards investment, it is argued that "Interest holds back investment in production" (A. Mannan (132: 169). Mawdudi (521: 110; l : 270) and Dr. Qureshi (526: 2 18) point out that interest prevents the flow of capital towards projects with a low yield even though they arc socially most useful. It is argued that in the absence of interest the margin of investment could be extended till the rate o f return approaches zero. As regards the supply of savings making such an extension of investment possible, it is pointed out that investment creates its own savings by increasing incomes - a view which is hardly tenable unless qualified carefully. Mahmud Ahmad points out (168: 36-37) that "the institution of interest provides banks with unproductive channels to employ their capital". This causes scarcity of capital available for productive enterprise which raises the rate of interest. In the absence of interest peoples money will either be spent on consumption causing demand to rise or be invested in productive enterprise. Both ways there will be greater production and larger employment. Obviously the argument presumes taxation of hoarded money. Mawdudi has argued that the institution of interest discourages long-term investment, as the capitalist has a strong desire for liquidity. This is detrimental to the real interests of society (521: 105-106), Furthermore, long-term loans based on a fixed rate of interest introduce an element of rigidity in costs which investment on the basis of profit-sharing would not. The discouragements to long-term investment are not, however, confined to the interest cost. The real discouragement comes. from the fact that uncertainties surrounding the returns to investment increase with the length of the time period involved. It is reasonable to assume that capitalists or banks advancing long-term capital on the basis of profit-sharing will do so only when the expected rate of return on long-term investment is higher than that expected on short-term investment by a margin that compensates for the greater uncertainties involved. It is also doubtful if the "real" interests of the society always favour longer-term investment. The above argument, therefore, remains inconclusive. Chawdhri (620) has tried to demonstrate how ensuring a zero rate of interest which is a condition for Golden age equilibrium (in which capital labour and output are all growing at a constant relative rate) guarantees the best solution of resource allocation. He analyses the role of actually realised rate of profit in this context. Siddiqi also argues that "it is not the rate of interest but the priorities of a modem state and the rates of profit in various sectors of the economy that are decisive so far as allocation of investible funds is concerned" (158: 112). Tracing the consequences of interest in a recent paper, Siddiqi notes that fixed interest charges curtail the freedom of the entrepreneur who wishes to go by social priorities. The society is therefore obliged to admit low yield high priority undertakings into the public sector. C: Abolition of Interest and Demand for Consumption Loans Hasanuzzaman (629: 147-164) examines the argument that abolition of interest will increase the demand for consumption loans, accelerating inflation and, in under-developed countries, worsening the balance of payments. He finds little functional relationship between demand for consumer credit and the rate of interest. It is "increase in income and not the rate of interest that governs the demand for loans" (629: 160). Hence "abolition of interest even in the developed countries would not cause any substantial change in the existing set up" (629: 160). As regards the underdeveloped countries, he concludes that "when the supply of consumer loans and of goods is limited, the increase in demand, if at all, will be ineffective and will not materially disturb the economy and finance of the country" (629: 162). D: Interest on Internal and External Debt The "tyranny of interest" reaches its peak in relation to the public debt whose servicing has become a great headache for the modern state. Mawdudi (521), Qureshi (526: 189-201) and A. Mannan (132) decry interest on this basis. Abolition of interest and replacement of interest-bearing public debt by interest-free debt and funds obtained for the public sector projects on the basis of profit-sharing (Siddiqi: 417: 185-170) will relieve the state of this crippling burden. Foreign debts based on interest have done irreparable harm to the poor nations of the world. Issa Abdouh (505) focuses attention on this role of interest and Mawdodi (521 : 113-114) describes interest as the greatest instrument of exploitation at the international level. E. Interest and Trade Cycles Interest is seen as the root cause of the instability characterising the modern economic system. Interest creates -liquidity preference" for speculative purposes and results in keeping a large part of the money supply in hoards waiting for the rate of interest to rise. It encourages speculation which is the cause of instability in the system (Mawdudi, 521: 194, Mahmud Ahmad, 168. 13-14). Several writers including Hameedullah (433), Mahmud Ahmad (168: 13-14, 45-50), Mawdudi (521: 104), Muhammad Uzair (422) and A. Mannan (132: 170) have emphasised a causal link between the institution of interest and the occurrence of arises in the economic system, postulating that abolition of interest will contribute decisively towards elimination of trade cycles. Hameedullah regards the institutions of interest as the villain of the piece, "just when the vital interests of the entrepreneur demand that they should have financial resources to cope with the situation, the interest of the lending class demands a payment of the loans and are against their renewal.... The institution of lending on interest causes the whole trouble. It makes the lowering of prices so harmful and withholding of supplies impossible" (433: 221). Analysing in detail the role of interest in the various phases of the trade cycle, Mahmud Ahmad concludes, that "the abolition of interest can abolish the crises" (168: 49). Abdul Hameed Siddiqi (631) disagrees with this view. A change of the entire system involving a change in the basic attitude of economic agents, specially in the "acquisitive mentality" is a pre-condition to the solution of this problem. Siddiqi, however, envisages a reduction in the volume of credit instruments and public debt, consequent upon the abolition of interest, will have important implications for business cycles. Moreover, investment based on production possibilities directly assessed by businessmen and bankers, in a profit-sharing banking system, are not likely to overstep themselves to an extent that makes a crash in share prices inevitable at a later stage. F: Prohibition of riba Al-Fadl The prohibition of riba al-fadl (interest involved in barter) has been looked upon as a discouragement of barter and a step directed at monetisation of the economy (519: 9.. 403). The primary aim of this injunction is, however, to eliminate the possibilities of exploitation and injustice similar to that which is the target or prohibition of interest on money loans. There is some controversy regarding the coverage of this prohibition, which is a juridical issue not concerning us in this paper. G: Accounting Concept of Interest Waqar Husaini (121: 191) pleads for using an accounting concept of interest in economic planning and for project evaluation. Awsaf Ali ( 114: 199, 264) also thinks that in an Islamic economy the accounting rate of interest must of necessity be used and it is only in the sense of abolishing interest as a source of private income that the Islamic economy can function as an Interestless economy, it is not entirely clear, estimated average rate of profit should not be sufficient for this purpose. Abdul Baqi also suggests that the Islamic Bank should fix an accounting rate of interest to serve as a guide in allocation of investible resources, especially as a criterion for giving priority to one project over others. But the underlying assumption that the use of such a rate is inevitable has not been fully justified "by him nor the possible alternatives examined in detail. Why are the social priorities and the expected rates of profit not sufficient guides to allocation of resources and selection of projects? If the idea is that the Central Bank keep a certain rate of profit in view and reject such projects as fail to promise a return commensurate with that rate, why insist on calling it an accounting rate of interest? Sabri F. Ulgener notes that interest serves as "the most dependable factor in evaluating and comparing different investments" (632: 11). Without raising or answering the point why the current "rate of profit-share" paid by mudarabah-based interest-free banks should not form the basis of such an evaluation, supplemented by other estimates based on realised profits, he proceeds to declare that there is no escape from modern bank interest. Hence "the crux of the problem for under-developed countries is to differentiate between interest as a surplus and interest as a factor in computing the overall efficiency of their economics" (632: 14). He does not refer to the various techniques of "computing the overall efficiency" developed in the socialist countries, nor does he clarify how interest as a surplus can be denied to the capitalists while using interest as a factor in computation.(viii) Nature of Islamic Economics An important theoretical issue discussed by Islamic economists is the nature, scope and methodology of Islamic economics. They have tried to distinguish Islamic economics from economics as such and state its raison dètre. . Baqir al Sadr distinguishes between the science of economics which deals with production and the laws that govern it, and the art of economic policy which is concerned with distribution and social justice. The function of an economic system is to solve the economic problems in the context of the ideal state of justice (171: 343-347). Capitalism and Marxism are "schools of economics" advocating different economic systems. Islamic economics is akin to political economy, its function being "the discovery of laws and analysis of real life in the context of an Islamic society in which the Islamic way of life is fully established" (171: 291). Such a science can appear only after the real Islamic society has come to exist - a condition yet to be fulfilled. It is, however, possible "to start investigation on certain given assumptions and derive the economic tendencies and course of events from them" (171: 226-227). Baqir considers modern economics to be relevant for modern capitalist societies and not for all societies all the time. Examining its laws, he finds that the only ones having universal validity are the laws of returns (in the theory of production), based as they are on nature rather than on man. All "laws" relating to man are relative as human behaviour depends on human volition which is shaped by beliefs and ethical ends. The celebrated law of demand and supply is no exception (171: 226-227). Siddiqi also thinks that "Islam’s science of economics or the economic analysis relevant to an Islamic society... will come into being when we have a people whose behaviour is Islamic, an economy which is truly Islamic" (73: 32). But he proceeds to define Islamic economics "in the context of the endeavour of the present-day Islamic peoples to live according to Islamic injunctions and ideals. It requires a study of the contemporary economic behaviour and socio-economic institutions, comparing and contrasting them with what could be their Islamic alternatives, with a view to defining the changes required to effect a transition to modes of behaviour and institutional arrangements conforming to the, Islamic norms" (73: 22). Accordingly, "the task of Islamic economics lies in building bridges between the is and the ought" (73: 33). Both Kahf (611) and Khurshid Ahmad (47) seem to have this role of Islamic economics in mind when they outline the task of Islamic economists today. Kahf wants Islamic economists "to visualise" an economic theory based on "free co-operation rather than on free competition" and to "reformulate" consumer's utility theory "in a way which makes it to cover morals and the consent of Allah". His Islamic economics will be a behavioural science which takes as-given the framework provided by "all the religious, moral, social, political and legal rules which constitute the surroundings of the behaviour of any member in the Islamic society" (611: 5-6). For Khurshid Ahmad, "Islamic economics is borne of the challenge thrown to a Muslim economist by the incongruities, paradoxes and complex problems" he observes in the contemporary Muslim world. This calls for "a critical reappraisal of the contemporary economic situation of the Muslim world", "A study of economic teachings of Islam", "an appraisal of the different variants of modern economic theory and policy", and, finally, for a "reconstruction and reformulation of the theory and policy of Islamic economics so as to identify the objectives and the modes of operation of economic activity in an Islamic or Islamising society" (644: 1-3). This stress on contemporaneity is quite recent in origin, the earlier emphasis being on model building. Shabbir Khan wanted us "to prepare a simple model based on certain simplified assumptions and then introduce the Islamic code of economic life into that model" (643), a suggestion appreciated by Faridi (637). Medhat Hass..ain also emphasised the need for building the Islamic economic model (641). A similar view has been expressed by Fanjari (636) and Fareed Naggar. A. Mannan is closer to Baqir when he defines Islamic economics as "a social science which studies the economic problems of a people imbued with the values of Islam" (132: 3). Of special interest is Professor Farooq1s stress on the need for "meta-economics" which could judge human processes according to moral norms - "the divine pattern relevant to mans economic life" (638). The idea has been further explicated in a later note (639). In one of the earliest contributions to this discussion Abdul Hameed Siddiqi (71) finds that economics ignored free will and focused its attention on "the animal aspects" of human behaviour, seeking to discover "laws" which had the finality of the physical laws of nature, thus severing all relations between the principles of economics and morality. Economics of Islam rectifies this error. Taking human volition into account it seeks to guide man in the light of the Islamic injunctions and to orient mans economic attitudes towards the Islamic ends and ideals. Baqir’s discussion of the process -through which the economic philosophy and economic policies of Islam can be "discovered" is detailed and illuminating ( 171 : 341-390). Siddiqi (647), A. M. Manzar (645), Fanjari (636), Khurshid Ahmad (644: 34) and Kahf (611) have indicated some of the areas for research in Islamic economics and the methods which should be adopted. The methodology of Islamic Economics necessitates a fresh look at the role of values in economics. Sakr (646) finds recent thinking gravitating towards the view that all economic thinking is value loaded and it would be better for an economist to be aware of his value premises and state them clearly. Islam’s contribution in this regard lies in providing a set of values which is, because of its divine origin, universal, permanent and immune from tampering by man. The subject has been taken up at a philosophical level by Faruqi. one of the main pillars of Islam’s economic system. has attracted the attention of almost every writer on the subject, who emphasise its redistributive function, besides emphasising its educative role in giving the individual the right approach towards society and its needs. Since It is difficult to record these contributions with names we confine ourselves to a statement of the points made, mentioning only some recent contributors distinguished by their analytical insight. |
