A Bit About Islam and Economics

No country has a truly Islamic economic system, but with so much development attention going to Iraq, Afghanistan, and Central Asia, where I lived for several years, Islam is at the center of events so it is important to understand, if not the specifics, at least the concepts of the economic organization embedded in the dominant faith.

You have probably heard, for example, that interest in any form should be forbidden in an Islamic society. Yet most international micro-credit programs charge rather high interest rates. Are these programs recreating practices similar to the injustices Muhammed fought against?

About interest, by the way, the koran refers to "riba", which is not exactly interest. It refers to a practice common at the time in which a borrower in default would be penalized by having his debt doubled, and doubled again with another default. It was later that the word came to be associcated with charging interest or high interest.

The usury question is only the most obvious one illuminated by an inquiry into Islam, economic development, and liberal democracy. More arise in this essay. Greater depth and detail are in the extensive endnotes.

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Islam is gathering a bad reputation. While over a billion muslims lead peaceful lives, a dangerous minority have highjacked the religion and found converts far too easily among the disaffected and made themselves known with horrible consequences. This new notoriety has brought the religion and its adherents under scrutiny from many sides. Some criticize, some defend, some just try to understand.

Debate is widespread within the faith as well, and many try to fill the space between the murderous fanatics and the too silent majority. Among the commentators are some muslim scholars who are trying to bridge the gap between the guiding principles laid down in the koran in the seventh century and the challenges of the modern world.

Their task is very difficult because what I described as 'guiding principles' are, to muslims, the exact words of god, the koran. While the bible, for comparison, is a collection of stories, reports, and letters by at least 30 writers often describing events which occurred long before the writing, and so expected to contain errors and anachronisms, the koran is revered as the direct voice of god, unalterable and permanent. Allah's message is timeless, and god does not make errors.

The koran is the only miracle in Islam. As a moderate muslim scholar at Oxford told me, "to Muslims the proof that the Qur'an is the word of God devolved upon the Qur'an itself. It constituted its own proof by its inimitability, its literary beauty and eloquence, and its moving appeal which no human composition could match. The veracity of Muhammad and of Islam depends entirely on the Qur'anic text. The opponents of Muhammad in Mecca sought with their utmost vigor to repudiate the claim of its inimitability, and to affirm that the Qur'an is a human product. The Qur'an, as it is well documented, provoked this defiance further by inviting the opponents to produce even a small chapter which had fewer than thirty words. The Arab poets and literati as well as their leadership failed to deliver on that challenge. The Qur'an reasserts that this challenge remains forever." (B. Mustafa)

The acceptance of a literal reading of the koran is a basic element of the faith. Interpretations of verses and passages are common and often necessary as many passages are vague and full of imagery, but the koran is also very specific in many passages.

Money, for example, is a dinar coin containing exactly 4.25 grams of gold and a dirham coin with exactly 2.975 grams of silver. Though measured in 'miskals', an old measure of mass, this is clearly specified. Paper money is allowable as long as it is backed by gold and silver reserves equal to these amounts. (Hizb ut-Tahrir)

The implications for monetary policy are obvious and significant. A gold standard was once in place in western economies. "Promising long run price stability, it delivered short term price instability and numerous financial crises" before it was replaced by pegging to the gold-supported dollar in 1925. When this also failed, the gold standard was totally abandoned in 1972, and it is now understood that managing the money supply through bank lending rates is a vital aspect of economic policy. An economy based on a gold standard would be in constant jeopardy in a global economy. Any deficit would lead to gold outflows which would trigger belt tightening and recession. (Daniels/VanHoose)

Of course, the country could finance its deficits by borrowing from international financial institutions, but according to some muslim economists the IMF and World Bank are contrary to Islam because being in debt to non-muslims is a form of subordination to non-muslims, and this is forbidden. Moreover, the IMF and World Bank were "conceived to serve the interests of the advanced countries and often heavily biased against the interests of the developing countries... (in order to) guarantee (the west) global economic domination". (Mannan)

There is much more about money in the koran, such as an injunction against installment purchases which means that credit cards would be unislamic but debit cards would probably be acceptable. This might seem trivial or even odd, but in Islam "the economic order has an unmistakable cultural and religious dimension". (T. Kuran)

Issues like this are vitally important to many muslims. Unislamic things are called kufr and if a muslim uses them, he is violating his religion, committing a crime against god. Of course, this an extreme application of god's instruction, but it is not an extreme interpretation. In fact, it is hardly an interpretation at all; some verses are very specific. For example, this is how a contract must be made:

"Believers, when you contract a debt for a fixed period, put it in writing. Let a scribe write it down between you with fairness; no scribe shall refuse to write as Allah has taught him. Therefore, let him write; and let the debtor dictate, fearing Allah his Lord, and do not decrease anything of it. If the debtor is a fool, or weak, or unable to dictate himself, let his guardian dictate for him in fairness. Call to witness two witnesses of your men, if the two are not men, then a man and two women from the witnesses whom you approve; so that if one of the two errs, one of them will remind the other. Whenever witnesses are called upon they must not refuse, and do not be weary to write it down, be it small or large, together with its term. This is more just with Allah; it ensures accuracy in testifying and is the least of doubt. Unless it is present merchandise that you circulate between you; then no guilt shall be on you if you do not write it down and take witnesses when you are selling, and let no harm be done to either scribe or witness. If you do, that is a transgression in you. Fear Allah. Allah teaches you, and Allah has knowledge of everything." (koran 2.282)

The existence of such specific instructions should be understood. Muhammed was not just a prophet but a political leader, so much of what he said was fairly specific, detailed policy statements and decrees. The prohibition of interest is a good example (koran 2.275). Muhammed did not ban interest outright. It was done gradually to ease the economic consequences on the sellers, consumers, and money lenders who had become reliant on credit.

Not to accuse Mohammed of cynical manipulation of his followers' faith, I think it is safe to say that interest was made illegal because Muhammed's followers, the very poor, were being exploited by unscrupulous lenders. They knew the debt was hurting them financially, but they had become dependent on the loans. To motivate them, perhaps, Mohammed told them Allah didn't want them to pay interest, that paying interest was a crime against god.

The religious aspect aside, this is good advice. One rarely escapes poverty by going into debt-- probably a point worth taking among development planners, and not just in muslim areas.

In any case, modern islamic banks have replaced their lending operations with different versions of joint ventures and equity investments. There is 'mudarabah' in which one person contributes capital and another labor, 'musharakah' in which partners contribute both capital and labor, and various lease arrangements. Today's islamic banks, then, operate more like mutual funds. (Khan, Ahmed)

Understandably, this approach is finding few depositors willing to commit to long-term savings. Would you put money into a mutual fund without knowing what the fund will invest in? And imagine if all of your savings were locked into funds. What would this mean to your liquidity? So today, the approximately 100 banks in about 40 countries are facing challenges which could be solved with interest-based products, but as god commanded, it is forbidden.

Economists today are trying to build a reasonable theoretical structure to support the banks, trying to "rediscover forgotten teachings", as one puts it. (T. Kuran) At least one, Rifat Al-Awadhi at a Cairo university, is arguing that interest can be legal if it does not exceed one-fifth of the loan. Even if he is right, this is not enough interest to make a long term loan. And he is probably not right; islamic economics prohibits any predetermined return on investments. He would have to construct an interest-plus-dividend scheme, but that wouldn't eliminate the problem of uncertain returns, and investors will always demand the security of predictable returns for at least some of the portfolio.

Anyway, in islamic economics money a medium of exchange and no more. Money equals purchasing power, so making money from money is making more purchasing power from purchasing power, making power from power, oppression. "Interest is responsible for the growth of capitalism with all its attendant evils in society: it creates the problem of unemployment; it retards the process of recovery from depression; it aggravates the debt-servicing problem of underdeveloped countries; finally, it uproots the basic principles of cooperation and mutual help and creates selfishness in man." (Mannan)

This is no more persuasive here than on the streets of Genoa or Seattle. Money is obviously a store of value and as such, an asset, which can be used to earn income. Some contemporary islamic economists argue that because money cannot "perform a function, it is not a commodity so it cannot be bought or sold on credit" (Khan), but this is an artificial distinction and an example of the reasoning needed to accommodate the more extreme aspects of islamic economics to the realities of contemporary society. The basis of these directives might have made sense 1400 years ago, but they do not anymore. Remember, usury was punishable by death in feudal Europe as well.

Along these lines, though, like contemporary populism, islamic economics has its merits. It might appeal to poor people, especially those in underdeveloped countries beset by great disparities between rich and poor, because "the most important attribute of islamic economics is social justice." (Tashkiri) Equity and "distributive justice" are added to production and consumption as topics within economics.

This is put into practice in zakah, one of the five pillars of Islam. Zakah is a sort of annual tax on net wealth and agricultural production. It is an obligation to distribute part of one's wealth to the needy, and the rates are specified-- 2.5% on financial and business assets, 10% on rain-irrigated agricultural cultivation, and 5% on artificially-irrigated cultivation.

Some muslim countries have instituted an income tax in place of this, but the aim is the same. This is one way that muslims pay alms, as is required by the faith. It is required because, as the Islamic Declaration of Human Rights puts it, in Islam the poor have a "right to a prescribed share of the wealth of the rich" .

It is important to note that this obligation is not anti-wealth; it is not redistributive in its intent. The koran openly encourages enterprise to improve one's material well-being, and there is no honor in poverty. Working hard to earn a better living, self-reliance, and giving to the poor are three of several elements of falah, the Islamic way of life.

Falah is a multidimensional concept and not quickly grasped. The word has no English equivalent. It refers to spiritual, economic, cultural, and political behavior that is in accordance with koranic teaching in this life in preparation for an eternal life of honor, prosperity, glory, and knowledge. In this worldly life, this has implications for all aspects of behavior for both individuals and society.

For example, everyone needs to earn a living. Within a falah life, individuals are encouraged to work hard, hold private property, and prosper. As part of an islamic society, the individuals should work together to manage resources to generate a general prosperity and opportunities for others to work and prosper.

Another example: People should be free from poverty. In falah, then, individuals are obligated to work if they are able, and both individuals and society must provide for those in need.

In the islamic way of living, everything one does has a religious aspect. Work is an extension of prayer. "The koran provides a complete system of living." (Mahathir)

Returning to economics the way it is understood in the west, islamic economics has made interesting and recent contributions to economic thought. In 1967, an islamic economist named Ibn Khadun developed what would become famous later as the Laffer curve, and Muhammed Khan offers what he says is an islamically acceptable solution to the problems of high debt in underdeveloped countries: swap state equity to reduce the country's international debt burden.

While that is certainly an innovative solution to a pressing problem, research into new ideas generally only goes so far in islamic economics. There is a certain view of dissent which is contrary to the process of structured and persistent inquiry: "A theory which does not either incorporate any Islamic ethical norms or contradicts them or leads to predictions which would defeat or dilute the ethical norms should be rejected per se." (Khan)

Any topic that leads to questions about the inviolability of the koran is contentious, even dangerous. At the University of Nablus, a professor named Bashear suggested to his class that Islam, like all other religions, evolved over time rather than having been delivered whole to Muhammed. His students threw him out the second-floor window. (New York Times, Mar 02)

Recall the basis of money in islamic society, and consider that in January, 2003, Kuwait pegged its currency to the dollar and gave fundamentalists another complaint against another middle eastern government.

But even moderates find fault: "Islamic economics does not just study behavior..., but also aims at changing it in the goal-adequate direction." (Khan)

The change required, the degree of difference, is huge. In the west, economics is the study of the allocation of scarce resources, but in Islam scarcity cannot exist because Allah provided all that we need. (koran, 2.29) All that follows from the definition of western economics, then, is considered wrong from the start. With the koran's prediction of ultimate victory of Islam, therefore, western economies and the societies which depend on them will fall to be replaced by a system in which "duties and obligations have priority over rights" according to islamic law. (UIDHR)

But the koran, for all its specific injunctions, is not comprehensive. Islamic economists, like contemporary imams and mullahs teaching religion, absorb little bits from here and there, fragments, and piece them together to form a philosophy of economics. In religious observance, these are called hadiths, narratives, and religious leaders interpret the koran through these narratives. Within the faith, it is understood that these narratives might be wrong. They can be challenged, because they are written by men, not by god.

But read any of the following books by 'moderate' authors, and you will be repeatedly frustrated by lines of reasoning which end suddenly with something like 'because Allah said so'. These scholars see the shortcomings and flaws, but cannot bring themselves to question the rules laid down in 620 AD or the caliphs who codified them. Instead, they contort themselves to build arguments to deny anachronistic decrees and to brush aside the obvious and growing failures of the economies of muslim states today.

Perhaps, however, this topic could become an opening to discussion, an opening for true debate and reform within Islam, a reformation. One is needed to be sure, and for more on this, see also this article about a very accomodating view of Islam from Indonesia with comments quite different from many of those here. In any case, many problems come from within, and an islamic economic system is not the way out.

There are more signs of a different school of thought emerging in the field. Ravshan Adbullaev, the Deputy Rector of the Tashkent Islamic University told me that the main activity of the university's economics department was research into ways that contemporary market economics can coexist with Islam. He said the school was "taking a very critical approach" to current thinking in the field, to what has been described in this paper, because "the Arabs are trying to replace the market with Islamic standards".

Instead, this group would like to find ways to accomodate what is halal and the systems of modern society and commercial activity. He says that muslims need guidance on this, especially in Uzbekistan which is going through a difficult transitionary period. With "proper Islamic self-control", a modern society can adopt islamic values.

This sounds perfectly reasonable, I said, but isn't the koran too specific in its directions? It is very specific, he replied, but this is god's law and "only Allah can punish such transgressions".

The separation of church and state in a muslim society is what he is suggesting. Of course, says an American. Blasphemy, says an islamist. The particular conditions of post-soviet Uzbekistan make such thoughts mainstream here, but there is no telling how they will play elsewhere.

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Sources and Notes:

Formal coursework behind this came from Alliance for Lifelong Learning, "a not-for-profit distance learning venture among Oxford, Stanford, and Yale Universities formed to provide the highest quality, college level online courses". I studied POL 020.1-- Islam and the West, in autumn, 2002, led by Basil Mustafa.

The rest of it, the good and bad, came from an intellectual curiosity and professional interest.

Among the books I read in preparation for this essay are The Battle for God: A History of Fundamentalism and Muhammed, both by Karen Armstrong. I can't recommend either of these books without a strong caveat: they present a distinct point of view rather than an objective assessment of either subject. Her fans call her work balanced; her detractors label her an apologist for muslim extremists. If you like the Guardian, where her columns regularly appear, you'll like these books. If you don't, they are frustrating to read. In either case, you already know most of what's in them; there are much better sources of information.

The Islamic Threat: Myth or Reality? by John Esposito is a bit better, at least for the first 200 pages. The last third of the book is a spirited rebuttal of Samuel Huntington's 1993 essay on a "Clash of Civilizations". Or it's just ranting; Esposito appears to believe that no one has ever been more wrong about anything than Huntington was in 1993.

More serious, if less entertaining sources of information are Introduction to Islamic Economics by M.A. Khan (Kitab Bhavan, 1999), Economic Development and Social Peace in Islam by M.A. Mannan (Ta-Ha, 1989), and The Challenge by Malaysian Prime Minister Mahathir Mohammed (Pelanduk, 1986). While each of these books is as a biased as these others, these are better informed and are source documents. Unlike Esposito, these are not interpretations, and unlike Armstrong this is not the usual euro-left rhetoric dressed up in post-911 language.

There were many articles on my reading list, too many to list. The aforementioned "Clash of Civilizations" by Samuel Huntington is one, of course, and I have to say I found it far less controversial than I was led to expect.

He argued that as the 'westernized' conflicts are reducing in significance with the spread of liberal democracy and the end of the cold war, conflict based on other factors will be more visible, and that as changes occur in non-western 'civilizations', certain stresses might lead to internal and external conflict. He added that increased western attention to non-western civilizations will further contribute to tension. This seems reasonable and supported by events over the past 20-30 years. Whether it rises to level of a historical change remains to be seen.

And I would add that I was disappointed by most of the essay's critics because none that I read went very far in substantive arguments. A couple of articles by the decreasingly respected Edward Said in particular were weak and loaded with insults-- "cartoonlike", "ignorant", "ludicrous", "clumsy", "inelegant", "unseemly", and so on, instead of argument (The Nation, 22 Oct 01).

Better voices for islamic ideas come from Timur Kuran's The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity, Imad-ad-Dean Ahmad's Islamic Perspectives on the Wealth of Nations, Wali ad-Din Ibn Khaldun's The Muqaddimah, Ayatullah Muhammed Ali Tashkiri's Islamic Economy: Its Ideological and Legal Foundation, and the The Universal Islamic Declaration of Human Rights, published by the Islamic Council of London in 1981. These contain clear explanations of how islamic values shape policy.

Online, there are a number of good sources, Islamic Banking and Finance Net is quite good, and Dr. Masudul Alam Choudhury has posted a long list of excellent articles and essays at Islamic-Economy.com. Dr. Choudhury also had the grace and patience to exchange emails with me as I worked on this essay in 2003.

The Thought of Hizb ut-Tahrir has the clearest expression of fundamentalist thought I have found. One of the main fundamentalist groups in Central Asia, they are considered terrorists by many governments. This website presents the philosophy and goals of the organization very clearly and at length in English. It is apparently an official site, and if the link doesn't work, try a different ISP. The site is blocked in Uzbekistan and some other countries.

Among the general resources on economics are the Arab World Competitiveness Report published by the World Economic Forum, The Gold Standard and the Bretton Woods System by Joseph Daniels and David VanHoose, and the indispensable 100 year old classic Principles of Economics by Alfred Marshall.

And, of course, the koran, as the source document of the faith, is naturally a good place to look. Online, there is a good English version provided by "www.Allah.com, The Mosque of the Internet".

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