An Introduction to Islamic Economics

1
An Introduction to Islamic Economics

• Rizal Arryadi
• rizal_at_arryadi.com

2
Background

• The Five Pillars of Islam
• to make Shahadat (declaration of faith)
• to perform Salat (prayer)
• to give Zakah (charity)
• to make Shawm (fasting in Ramadan)
• to perform Hajj (pilgrimage to Kaaba)
• Islam teaches not only how to prepare ourselves
  hereafter, but also how to live properly on earth.

3
The Lawful and Unlawful

• Principles
• Since the things created by God in nature are for
  man and his benefit, they are halal or permitted
  (QS 732-33).
• Nothing is unlawful unless specifically
  prohibited by the Quran and or the Sunnah through
  a clear and explicit text. (QS 6119)
• If something is entirely beneficial it is halal,
  if it is entirely harmful it is haram, and if the
  benefit outweighs the harm it is permissible.
  (e.g., QS 2219)
• Make things halal and haram is the prerogative of
  God (QS 1959, 16116)

4
Some Prohibited/Discouraged Behaviour

• Creating Corruption on Earth (2118, 3161, 410,
  26181-3, 831-6)
• Accepting gifts favors and bribes (QS 458, 756,
  85, 11116)
• Withholding what is due (42,10 1734)
• Misappropriation and embezzlement of private and
  public funds, and fraud (2188, 3161, 410,
  26181-3, 831-6)
• Waste of resources (6141)
• Squandering of personal wealth (1726-27)

5
Business Transaction

• The issue of Riba
• Riba is an addition over and above the original
  size or amount.
• In Quran, it refers to the practice of lending
  money for a prefixed rate of return or interest.
• Historically in pre and early Islamic period, a
  debt can be doubled and redoubled when the
  borrower failed to make payment on time.
• First, Riba is discouraged in Quran (3039)
• However, despite its discouragement, the usurious
  of moneylanding business continued.. until the
  Quran directly banned usury. (2275, 3130)
• Taking back the capital sums is permitted
  (2279-280)

6
Islamic Financial System

• Islam seeks to establish society based upon
  fairness and justice (2279). Predetermined
  return, therefore, should be avoided.
• Based on profit-sharing and Equity-participation
• Musharaka A form of partnership where two or
  more persons combine either capital or labour
  together, to share the profits, enjoying similar
  rights and liabilities.
• Mudaraba A contract between at least two parties
  whereby one party, the financier, entrusts funds
  to another party, the enterpreneur, to undertake
  an activity or venture.
• Forms Islamic banks, Takaful Life Insurance, etc.

7
Other religions attitude to usury

• Hinduism condemned usury as a major sin and
  restricted the operation of interest rates
• In Judaism, the Torah prohibited usury amongst
  the Jews
• Under Christianity, usury is prohobited (Exodus
  2225, Leviticus 2535-7, Deuteronomy 23 19-20,
  Psalm 151,5). Severe restrictions upon usury
  operated for over 1400 years.

8
Private Ownership

• The Quran recognizes private ownership of
  property along with its social functions and
  owners responsibility
• Sadaqah (2263-4, 271, 276, 979, 5813)
• Zakat
• Infaq (e.g. 22, 74, 215, 219)
• Taxation and Social Spending in Islam
• Bearability of Financial Burden (2233, 2286)
• Avoidance of the Concentration of Wealth (597)
• The underprivileged as beneficiaries of
  government expenditures (597)

9
But.. in the real world..

• Many Islamic Countries are poor (look at exhibit)
• Statistically, Islamic countries is strongly
  related with poverty ? implies that Islams
  teaching in economy has failed?
• Look at the most common causes of poverty (the
  same characteristics among least developed and
  least income countries)
• Corruption
• Low Education
• Poor Law Enforcement
• Work morale and motivation
• High discrepancy among poor and rich people

10
Corruption (TI 2003 CPI for 133 countries)

• Out of the 38 OIC countries listed, there  is not
  a single OIC country in the worlds top 25 least
  corrupt nations.
• Only   six OIC  countries have a pass score of
  above 5 out of a clean score of 10, viz Oman,
  Bahrain, (both No. 26, 6.3), Qatar (No. 32,
  5.6),  Kuwait (No. 35, 5.3), Malaysia and United
  Arab Emirates (both No. 37, 5.2).
• 32 countries  or  84.2 of the OIC countries 
  ranked score less than 5, while 25 countries
  score 3 or less, indicating a high level of
  corruption.
• More than half of the 21 most corrupt countries
  out of 133 nations are members of OIC, i.e. Iraq,
  Sierra Leone, Cote dIvoire, Kyrgyzstan, Libya,
  Indonesia, Azerbaijan, Cameroon, Tajikistan,
  Nigeria and Bangladesh.
• Six of the 12 most corrupt countries in the world
  with score of less than 2 are from OIC countries
  and
• The worlds  two most corrupt of the 133
  countries are from OIC, namely Nigeria ranked 132
  with 1.4 CPI score and Bangladesh ranked last
  with 1.3 CPI score.

11
Causes of Poverty A Islamic/Quranic View

• Largely due to mans deviation from divine
  teachings (e.g. 1071-7)
• Not as a consequence of the lack of material of
  resources, but rather as a manmade problem
  (20118-119, 2960)
• Reflection of the irresponsibility of the
  relatively well-off (637, 6824, 6934, 7018,
  21)
• Unjust distribution or utilization of natural
  resources (3180, 934, 6817-24, 8918-20)
• Attitude problem of the poor themselves.
• Concentration of political and economic power in
  another segment, the absence of social peace or
  the presence of war (598-9)

12
Conclusion

• There is an explanatory variable.. The poverty is
  not simply caused by Islams doctrines.
• Most of muslim countries have not followed
  Islamic teaching, and even more unIslamic then
  some non-muslim countries.

13
References

• Bayraktar, Poverty and Health Problems in the
  Least Developed and Low-income OIC Member
  Countries, Journal of Economic Cooperation 23, 4
  (2002) 103-148
• Gambling Karim, Business and Accounting Ethics
  in Islam, Mansel, 1991
• Haq, I., Economic Doctrines of Islam A Study in
  the Doctrines of Islam and Their Implications for
  Poverty, Employment, and Economic Growth,
  Academic Dissertations, The International
  Institute of Islamic Thought, 1981.
• Lewis Algoud, Islamic Banking, Edward Elgar,
  2001.
• OIC Countries among the Most Corrupt in the
  World, 2003 http//www.malaysia.net/dap/lks2689.ht
  m
• Statistical, Economic and Social Research and
  Training Center for Islamic Countries,
  http//www.sesrtcic.org