Islamic economic thought (or Islamic economics) constitutes the building block for the theory and practice of Islamic finance. Given the focus of this review on Islamic finance, we do not aim to provide a comprehensive examination of Islamic economics. In this section, we present the Islamic worldview and frame Islamic economics within it. We also highlight ways in which Islamic economics connects with wider debates on capitalism and distributive justice.
Highlights of this section are as follows
The Islamic worldview places moral checks and balances on the economic behavior of believers, but ideas associated with the market economy and capitalism are not necessarily inconsistent with Islamic economic thought.
Islamic economics places special emphasis on social justice. It has a strong preference for risk sharing, profit sharing, or equity-like modes of financing and views debt with suspicion. The salient instruments for redistribution are profit-sharing contracts,11 zakah (a social welfare tax), sadaqah (charitable giving), waqf (charitable endowment), qard hasan (interest-free loans), and inheritance.
Islamic economic thought largely remains ideals without practice, and economic decision-makers in Muslim-majority countries have shown little interest in translating the Islamic economic vision into reality. Islamic Worldview Islam emphasizes a moral purpose for human existence. Even the seemingly mundane act of earning an honest living constitutes an active form of worship in Islam. The Qur’an regards man as the “vicegerent of God on earth” (2:30).
The notion of vicegerency underscores the idea of trusteeship, in which the individual is regarded as the trustee for God’s resources. These resources are to be deployed for the ultimate good of society.
Financial Crisis Causes and Remedies From Islamic Perspective”) argues that “the worldly benefits of [Islam’s] social, political, and economic principles are not restricted to Muslims; they are meant for the common good of humanity at large.” In a survey of the literature on Islamic economics, Zaman (2008) argues that “regarding humans as solely motivated by selfishness is repugnant to Islamic traditions for many reasons, and this creates a substantial divergence between Islamic and Western views regarding economic affairs” (p. 17). The Qur’an subjects consumption to ethical constraints and accountability to God, discouraging waste by excess (7:31). Commenting on the dignity of work, prominent Shari’a scholar Yusuf Al-Qaradawi (1999) argues that the Prophet Mohammad taught his companions that “the whole of a human being’s dignity is tied up with his work—any sort of work”.
Islamic Economics – The CenterMark
Islamic economics relies on the notion that Islam offers a moral ideal that can guide various aspects of an economic system—consumption, production, and distribution. It emerged as a body of ideas partly as an effort to assert Islamic identity in the economic sphere. Although some take the view that Islam, as a complete code of life, offers a distinct Islamic economic system, others seek to be guided and informed by Islamic teachings in the design of an economic system through human intellectual effort instead of trying to find a detailed economic or financial system in the primary sources of Islam.
The Qur’an offers few specific injunctions about economics, but Islamic teachings can guide individual behavior by shaping behavior, incentives, constraints, and choices.
The sovereignty of God, responsibility toward society, and the promotion of social justice and equity figure prominently in the Islamic worldview. Islamic teachings discourage waste, excessive consumption, and unfair trade practices. Transactions are considered to be fair if they lead to neither an unearned gain nor an undeserved loss. By seeking to protect peoples’ wealth, intellect, and posterity, the Islamic approach to development has important parallels with notions of sustainable development.
Presenting itself as distinct from capitalism and socialism, Islamic economics attempts to balance competing considerations. Individual freedoms are respected, but they are instrumental to and conditional on public welfare. The Islamic model is sympathetic to a market economy but is deeply concerned about negative social externalities. Individual self-interest, profit maximization, market competition, and personal freedoms are recognized as long as they are not in conflict with the broader welfare of the community.
In a similar spirit, although private ownership of property is permissible, this right to ownership of assets is not absolute. Under Islamic injunctions, God is the ultimate owner of all assets and mankind needs to exercise its right to ownership in the broader interests of society. At its heart, the Islamic approach to economics emphasizes a balance between competing considerations: wealth accumulation versus wealth distribution, private incentives versus public interest, the spiritual versus the material, the needs of the present generation versus the needs of future generations, and the “here” versus the “hereafter.”
Critics note that Islamic economics consists mainly of a series of theoretical claims that often remain empirically unsubstantiated. Critics also note the absence of micro-foundations and doubt the internal consistency of some of the arguments in Islamic economics. Rather than being viewed as a comprehensive and systematic approach to economics, Islamic economics can be described as a set of ideas that define moral norms governing economic behavior. It merely sets out the Islamic ethics in economics, and by doing so, it builds a bridge with other ethical approaches. In fact, there are significant similarities between the moral economy of Islam and other ethical approaches. Khan (2013) argues that, despite lofty claims of developing Islamic economics as a distinct social science by the Islamic economists, most of what has emerged under the rubric of Islamic economics is a restatement of mainstream economics decorated with Islamic terminology or a collection of religious injunctions or a set of fond assertions which can be neither verified nor falsified.
This is not an isolated view. Rosly (2005) has also opined that considering Islamic economics’ excessive focus on riba and zakah (social welfare tax), it is not surprising that “Islamic economics is sometimes labeled as capitalism minus riba, plus [zakah]”
Another criticism relates to its emphasis on individual ethics and the neglect of political economy, which downplays the institutional requirements for creating an Islamic economy. Guidance on how moral cooperation will be sustained and Islamic norms enforced on a large, national scale is viewed as insufficient. The viability of an economic system does not depend simply on the beliefs and motivations of individuals but also on formal institutions that shape incentives and enforce moral ethics.
A related difficulty lies in translating basic moral precepts into enduring institutions and organizational forms. Reliance on old and well-established institutions—for example, zakah—produces limited institutional innovation. Some of the basic tenets of Islamic economics are also amenable to multiple interpretations. For example, significant differences mark the coverage and collection of zakah, curtailment of property rights, and the extent of and need for state intervention.