02 March 2013

Rethinking Islamic Economics

While studies in the area of “Islamic economics” have been undertaken for more than half a century, in recent years the field has grown and evolved. Conferences, seminars and workshops have been increasing in number; publications such as academic journals and compiled works have been diversifying; and new masters and Ph.D programs in the area of Islamic economics and finance have been created across different universities.

In the 1970s, idealist Muslim scholars founded the basic principles of Islamic economics. In response to colonial area studies in economics, these scholars sought to create a new system that would be suitable for the belief systems of Muslims. Their efforts led to the founding of the theoretical and ideological facets of Islamic economics. Their studies, which constitute the conceptual definition and content of Islamic economics, serve as the pioneering research in this field by specifying the framework and the subtitles of the field. Despite these theoretical and ideological efforts, in the 1990s, academic studies were conducted primarily in the field of banking instead of putting forth conceptual and systematic debates. In these years, interest-free banking emerged parallel to the scientific studies. The focus on understanding the financial issues of Islamic economies developed in response to issues associated with two trends: the fast economic growth of densely populated Muslim countries; and the accumulation of dollar reserves in petrol-generating Islamic states. At the heart of the financial research were two questions. First, how best can Islamic states make use of their existing capital? Second, how can these states find the necessary funds to finance high-cost investments, such as infrastructure? The search for answers to these questions generated an interest in interest-free banking, the basic principles of which were founded in the 1970s.
The pace of economic growth has inspired new interests in interest-free banking and in Islamic finance studies at both the individual and governmental level. The basic agenda of second-generation Islamic economists and new researchers in the field is driven by concerns about the ability to meet growing demand. Islamic economics started out with the motivation to be an alternative for the dominant financial understanding of the age. However, the studies of interest-free banking and “Islamic finance” have in the present limited the field of Islamic economics to the search for an alternative solution in order to meet the current financial demand. Certainly, the faultless execution of the financial system is related to the expectations for growth and development of the countries that are improving on the macro level as well as to the need for capital of the micro level entrepreneurs so as to operate their activities. The system of interest-free banking has thus taken its place in the sector for such kinds of financial needs of the Muslims. However, the current limitation of the field of Islamic economics studies—which normally should be striving to develop a universal system—to the realm of banking will not serve the needs of the Islamic world in the long run.

The “Financialization” of Islamic Economics

The rise in interest-free banking activity is related to the diversity of products and expanding demand emerging in the sector. However, there is a need to contemplate the factual reasons as to why new researchers and new graduate programs are focusing primarily on “Islamic finance.” In the mainstream system, an understanding of finance is seen as an important component of a professional’s career. Both among the academics and the professionals who are already working in the system, the studies of finance are rising in popularity because these studies meet the current needs of the sector and the consumers. In this context, institutions of interest-free banking that open the way to meet the everyday needs of Muslims as well as developments in this area comprise an applicable subsection of Islamic economics with opportunities for promising career growth. As such, the accumulated funds in the hands of the Muslims and their financial demands have even lead Western banks to maintain interest-free banking activities.
The fact that conducted studies can find their answers in the applied area and that they have an effective impact in the short run is a worthy reason for the studies in this area to increase. It is certainly important to conduct research in order to meet the specific demands emerging in a society. However, the total shift of the conducted studies towards this area presents problems for Islamic economics. While there is a need to undertake many issues of economics individually and to enforce new debates, the overwhelming “financialization” of current Islamic economics studies gives rise to a loss of identity (Islahi 2013). The financialization of Islamic economics has led to the deepening of the financial system and the production of financial tools that are nearly identical to the conventional system and to which the field initially set out to propose an alternative. These kinds of tools, by enabling the capitalist system’s permanent maintenance and then by integrating Muslims into this system, bear dangers for the future. The identification of finance with Islamic economics and the reduction of the field to the demand of interest-free procedures have caused the other basic postulates of mainstream economics to emerge in the minds of Muslim individuals. Such basic conjectures of modern microeconomics as the habit of consumption, rationality, and the motive to gain profit are being normalized in Muslim minds. The ingraining of modern financial engineering studies in Islamic economics has caused the banking sector to develop rapidly.

It should be remembered that banking activities do not pursue social goals; rather, they are profit-based (Islahi 2013). Islamic finance is also driven by profit. Although the Islamic Development Bank—which is identified as the pioneer of Islamic banking—was founded with the aim to develop Islamic states, its desired outcomes have not been realized. There have been recent and increasing criticisms of the bank, claiming that its activities have tended to focus more on commercial aims. Thus, the bank cannot fulfill the requirements of an ethical economic system, having diverged from its original development aim (Asutay 2007). However, ontologically, the act of assigning development missions to banks must be reconsidered. Banks are the chief and most productive institutions of a capitalist system, given their ability to maximize profit. Since banks are institutions founded with the motive of profit, and thus, operate accordingly, it is against their nature to bear a different purpose in an Islamic economics system. Islamic finance institutions that bear the structural qualities of the conventional banks display similar behaviors. It would be wrong to expect more from an institution that operates in the area of “capital.” What is essential is to create a comprehensive Islamic economics system and to found distinctive institutions that are better suited to the aims and missions of this particular economic system.
The financialization of Islamic economics is in fact also related to the tendencies of the young researchers studying in this area. As stated in the first paragraph, Islamic economics studies have increased in the last decade, and young Islamic economists have started to voice their opinions. However, studies have shown that these researchers are inclined to study the area of finance. The issues of banking and finance saturate the subjects of articles, compiled works, or studies presented in different forums. In the studies, the other issues related to Islamic economics—except for its methodology, basic concepts, and financial institutions—do not attract much attention. This trend runs parallel to the rising demand for banking services as illustrated above. The needs and possibilities of the sector offer young researchers new opportunities. At this point, it is necessary to motivate and support young academics in order to direct them to the study of areas outside of finance. This process will require exceptional appreciation and support. In international platforms dedicated to areas outside of finance, new studies must be rendered possible and young researchers should be given priority to conduct them. Otherwise, the current market will limit the potential of Islamic economics to be a scientific area that is critical of conventional market economics, as it was originally envisioned to be. Although rapid developments occur in financial markets, it will not be possible to talk about an Islamic economics with no constitutive ethical basics and framework (Asutay 2007, 3).

Islamic Economics and the Methodological Search

The classical theory of economics rises out of the knowledge and scientific works that have been produced from the 16th century to the present. Parallel to debates rooted in philosophy, developments in social and commercial life have led to the formation of the mainstream economics system of today. This process helped develop the model of a human who puts preferences into an order, and thus, makes rational choices. In this debate, which started with the acceptance that humans are creatures that constantly follow happiness, the search for happiness is linked to beneficial gains. It is claimed that the more benefit a human has gained, the happier he or she should be. Given this argument, scholars and philosophers that discuss the issue of benefit have equalized this to the elimination of needs. Consumption patterns that eliminate needs and give satisfaction will raise the benefits available to consumers. These patterns thus raise the degree of happiness in humans.
The conception of a rational human that emerged out of this debate has transformed into the concept of a human who optimizes the benefit he gets and chooses by putting different options in order. Mainstream economics subscribes to this conception of humans and has developed mechanisms and institutions that are in line with such a conception, leading to the arrangement of economics with such structures as individual freedom and competitive markets. Two general actors have emerged from this process: the consumer, who is seeking to increase his benefit, and thus, his happiness; and the entrepreneur, who is seeking to maximize his profit. Entrepreneurs who follow the conception of humans as consumers seeking benefit will always run after profit, and thus, will accumulate capital, make investments, and produce and enable the system to maintain itself.

Beyond this point, addressing the system of Islamic economics should first begin by addressing its understanding of the “human” and the economic activities of this human. The purposes of an individual’s economic activities will be contrasted against classical economics, which constitutes a relationship between benefit and happiness. What should be taken into consideration while doing this is that the conception of a human should not be only as a Muslim individual but should also cover all of humanity? An economics system that is informed by Islamic teachings should be created in a form that serves humanity as a whole. If Islamic economics studies—which must cover all the issues of economics, beginning with the conception of the human—are limited to studies that concern only one sector, such as banking and finance, the system will remain insufficient. For an economics system that has many basic principles, it is inadequate to improve upon just one of them.
In spite of the first forty years of Islamic economics research, the field still lacks a specific union of the methodology and concepts as a whole. As such, even in the sectors of banking and finance, there is no well-defined and singular method that relates to the Islamic law (Shariah Law) (al-Jarhi 2012). The use of different canonical approaches has led to different applications or to the change of financial tools over time. In this context, the items discussed by Abdulazeem Abozaid in his article for this book are illuminating. According to his article concerning the canonical tools that can or cannot be used in developing financial products, “Islamic law politics” (al-siyasah al-shar’iyyah) and fatawa (legal opinions given by jurists or muftis) pertaining to the Islamic financial sector are mentioned. The author has criticized this methodology by pointing out that this method cannot be used by everyone and in every case. The use of different tools by different scholars violates unity in the finance sector. Outside of the banking sector, we see the deficiency and incapability of methodological discussions relating to the economics field. Asad Zaman and Syruki Salleh discuss this problem in their articles for this book. Asad Zaman redefines the scope of the “micro” and “macro” distinctions—which are the basic divisions of economics—by adding to them a new class: meso-middle-economics. On the other hand, Salleh claims that the concept of poverty should be redefined and criticizes the articles produced in this field from the point of view of Islamic economics. These two examples demonstrate that there is not yet a unity of method in Islamic economics. It is natural for different approaches to be constituted in an economic system of which the basic principles are determined. However, the emergence of diversions in a theoretical approach that has not yet completed its basic formation is problematic for the extended idea of a system. The existence of a unified Islamic economics methodology will render it possible to create a common language between academics who specialize in the formation of economic systems and scholars who specialize in the basics of Islamic teachings. Without such a common language, researchers that examine the issues of Islamic economics from their backgrounds in different disciplines will develop divergent theories. Such divergence will hinder the healthy formation of an Islamic economic system (Haneef and Furqani 2011).

The “Capitalization” of Islamic Economics

In contrast to the meanings of “capitalization” in finance and accounting, capitalization here means the transformation of religious-value-based consumer demands into commercial commodities. Capitalization also relates to being a member of the current market under the heading of Islamic economics. At the same time, Islamic economics’ engagement in the capitalist system is mentioned. “Islamic economics” is defined by Asad Zaman as the “struggle to implement the orders of Allah pertaining to economic affairs in our individual lives (micro), in our communities (meso), and at the level of the Ummah (macro)” (Zaman 2015). Here, fulfillment of economic activities and relationships in conformity to Allah’s orders is taken as the central goal of Islamic economics. Moreover, Muhammad Arif (1986) defines Islamic economics as the analysis of Muslim activities that use/arrange resources in order to reach “happiness.” In this definition, Muslim activities and the economic facet of these activities are the central factors. Definitions of Islamic economics can be enhanced in this way (see Khaf n.d.) The basic point illustrated in definitions of Islamic economics is that economic activities should conform to Allah’s orders and to the Prophet Muhammad’s (pbuh) sunnah.
However, as stated above, developments in Islamic finance markets to date have evolved to be more suitable for “capitalist” market conditions; and thus, they integrate primarily with these markets (Asutay 2007, 3). The improvement and deepening of the markets and coordination of Islamic banking activities even in conventional banks such as HSBC in their sub-modules can be shown as an indicator of this situation.
Trends in the consumption of commodities run parallel to capitalist developments in the finance sector. Along with globalization and the increase of incomes, there is an increase in the demand for commodities for consumption that are suited to Islamic beliefs. A new class of entrepreneurs has emerged to produce and sell products that will meet this demand. However, the approach of Muslim businessmen in developing and marketing products suitable for Islamic beliefs has been transformed into an open, commercial challenge to the West, rather than being an economic system or the search for an alternative order. Muslim merchants who have started to compete with their Western equivalents both on a local and global scale have developed products conforming to the emerging demands; but on the other hand, they have started production activities that encourage consumption and create their own demands. With the entrance of the current economic system into the competition of the production-consumption cycle, these financial activities—with or without intention—have transformed into being parts of the capitalist market.

In this context, despite the discussions occurring in the epistemological area of Islamic economics, a parallel “market” with the name of “Islamic economics” has started to emerge in the contemporary market. In the year 2013, a report was prepared by Thomson Reuters (2013) with the support of an enterprise undertaken by the United Arab Emirates under the name “Dubai: The Capital of Islamic Economy” and by the company Dinnar Standart that works on “Halal Markets.” This report evaluates the potential of “Islamic economics” on a global scale and the new possibilities for investment. In the summary of the report, by emphasizing the importance of the potential of Islamic economics and the permeability of global economics, it is stated that Muslims spent 1.62 trillion U.S. dollars on food and lifestyle expenses in the year 2012. For this reason, it is stated that halal food and lifestyle markets have an important potential that cannot be overlooked. The report claims that the value of “Islamic” products will rise in the future in relation to the expenses of food, travel, clothing, and even media and cosmetics. In addition, the basic motivating power of Islamic economics is stated to be “demography, economical growth, Islamic values/teachings and commerce increasing among the OIC” (Thomson Reuters 2013).

Islamic states that have young and growing populations and developing economies are regarded as possible markets for investment. They are dynamic in comparison to the old and static Western states, which are integrated completely into the capitalist economic system. Such global/multinational (cosmopolitan) companies as Nestle, Carrefour and Tesco are beginning to respond to the belief-based demand of consumption in Muslim markets by forming products and services that meet standards of “halal” consumption. Given that markets operate on the presupposition that both consumers and producers make rational choices in order for them to maximize their respective benefits and profits, in this new situation, demand for “halal” consumption has pushed producers to maximize “halal” consumption in order to augment their own profit in markets where this demand can be found.

The original aim of the founders of Islamic economics was to create an economic system that can serve as an alternative to the conventional capitalist system. Instead, it has given way to a conventional system in which existing economic relationships have merely been “Islamicized.” In spite of the scholarly discussions and the existing literature in Islamic economics, the current Islamic economic system has progressed in a completely different direction. The market economy dissolves the different ideas/outputs into its mentality and just maintains the current system’s permanence. The market economy has changed the demand for a belief-centered economic system into the demand for belief-centered consumption. Thus, the search for an “Islamic economics” has become part of the current market; the economy may be described as “Islamic,” but its components fit into the contemporary economic system. Consequently, a discipline that set out to critique the capitalist economic system and provide an alternative has instead contributed to the continuation of the capitalist economic system.

Studies in Islamic economics can have important implications both for those who share an Islamic belief and for all of humanity. They have the potential to develop alternative systems and practices that could enable a more righteous economic lifestyle and distribution of services and products. New studies in this area should look to past studies seeking alternative systems in order to remain aware of the responsibility that they inherit. The struggle to achieve an “Islamic” economic system originates from belief, and the teachings of this belief system ascribe responsibilities to Muslims to act and speak according to religious values and principles. The discussions that will shape the economic lives of Muslims will bear the consequences of the actions to which they have led those Muslims. Accordingly, Islamic concerns as to the contents of the economic system should inform the formation of theories of Islamic economics. It is vital for scholars of Islamic economics to remain aware of Islamic values and jurisprudence. In this context, even if the current studies have diverged from the original intent of the study of Islamic economics, past studies can guide future researchers. Dynamic and qualified researchers, particularly from the younger generation, should be encouraged to move beyond studies of finance and banking. With this book, it is our hope that we can move the study of Islamic economics beyond the issues of banking and finance to develop a more genuine alternative to the contemporary capitalist economic system.

Al-Jarhi, M. A. 2012. “Gaps in the Theory and Practice of Islamic Economics.” Paper presented at Workshop On the future of Islamic Economics, Jeddah, Islamic Economics Institute, King Abdulaziz University, November 12-13.
Arif, M. 1985. “Toward a Definition of Islamic Economics: Some Scientific Considerations.” Journal of Research in Islamic Economics 2(2): 79-93.
Askari, H., Iqbal, Z., Krichene, N., and Mirakhor, A. 2012. “Risk Sharing in Finance: The Islamic Finance Alternative.” Singapore: John Wiley and Sons (Asia), Pte. Ltd.
Asutay, M. 2007. “A Political Economy Approach to Islamic Economics: Systemic Understanding for an Alternative Economic System.” Kyoto Bulletin of Islamic Area Studies 1(2): 3-18.
Haneef, M. A., and Furqani, H. 2011. “Methodology of Islamic Economics: Overview of Present State and Future Direction.” International Journal of Economics, Management & Accounting 19(1): 1-26.
Islahi, A. A. 2013 “First vs. Second Generation Islamic Economists: Deviations and Differences in Thoughts.” Paper presented at 9th International Conference on Islamic Economics and Finance, Accessed 10 December 2014.
Kahf, M. (n.d.). “Islamic Economics: Notes on Definition and Methodology.” Accessed December 14, 2014.
Thomson Reuters (2013). State of the Global Islamic Economy 2013. Report. Accessed December 14, 2014.