Islamic management of economy.
Let us first be clear about what do we mean by "Islamic Management of Economy". Can we discuss under the title the "Islamic way of managing an economy?" I think we cannot do that. To me there is no Chapter in Quran that tells how Muslims should manage their economy. As far as traditions of prophet (peace be upon him) are concerned, he was head of a state and he did manage the economy. But that economy was far different from the economy that we are faced with now. I, therefore, cannot give you the Islamic way of managing a modern economy from the traditions of prophet (peace be upon him). To be clear what we can discuss under this title let us be clear about the general approach of Islam towards such an issue.
Islam is a simple religion giving two things:
a) A set of beliefs including a very limited number of prohibitions which we call Haram.
b) A set of principles governing Man-God relationship and Man-Man relationship.
Besides these, there is complete freedom to manage your own affairs. There is freedom of choice in everything else. What it means with respect to our subject is this. Once everyone in the society clearly understands the beliefs and the principles of man-God and man-man relationship, and decides to adhere to them then whatever way the collection of these individuals decide to run and manage their economy then that particular way will be the Islamic way of managing an economy for that particular society at that particular point of time. There would be nothing sacrosanct about this particular way of managing the economy. They can change their way anytime or any other group of individuals (adhering to the same set of beliefs and principles) can have any other way of managing their economy.
Hence there is no one Islamic way of managing economy. There can be several rather innumerable Islamic ways of managing economy. This flexibility and adaptability in Islamic environment is something which hardly needs to be emphasized. It has always been recognized and utilized.
With this introduction, Islamic Management of Economy thus can be discussed in two directions:
1) We can describe and analyse this concept with respect to an Islamic society actually managing its economy.
2) We can discuss the concept, in theory, focussing on following questions:
a) What are the fundamental principles, particularly those relating to Man-Man relationship that would underlie any Islamic management of an economy.
b) Is it possible to manage a contemporary Muslim economy on the basis of these Islamic principles when we know that the society is not really Islamic in the sense that in dividuals, by and large are not committed to adhere to Islamic principles relating to man-man relationship. If so, what should be the starting point.
3) What substantial difference would it make if the management of our economy is based on the Islamic principles compared to what we presently have and what economic consequences we can expect while switching to an Islamic economy.
of an Islamic Society
The fundamental principles to adhere to are very few with respect to the economic activities of human being. Let us distinguish these principles with respect to:
a) activities for one's ownself.
b) activities while dealing with others.
Mandatory Don'ts for
One's Own Self
* Do not earn incomes through prohibited sources (the prohibited sources again being very limited in number; interest income and gambling income, stealing, and usurpation may particularly be mentioned).
* Do not eat or use prohibited goods (the number of which is countable on finger tips)
* Do not waste.
* Spending in the cause of Allah (Infaq Fi Sabilillah).
Mandatory Don'ts While
Dealing with Others
* Do not eat each other's property wrong fully or unjustly.
Note some of the verses from Quran in this respect:
Do not eat up by your property among yourself for vanities, nor use it as a bait for officials with intent that you may eat up wrongfully and knowingly a little of (other) people's property. (al-Quran II: 188).
Those who unjustly eat up the property of orphans, eat up a fire in their own bodies, they will soon be enduring a blazing Fire. (al-Quran IV: 10)
Nor take your oath to practice deception between yourselves lest one party should be more numerous than another. (al-Quran XVI: 92).
Mandatory Dos while
Dealing with Others
* Fulfil obligations (contracted formally or informally, explicitly or implicitly).
* Be just and be good and benevolent to others.
* Take care of your kith and kin.
Note following verses from Quran in this respect:
- Ye who believe!
Fulfil all obligations. (al-Quran V: 1)
God commands justice, the doing of good and liberality of kith and kin and He forbids all shameful deeds and injustice. He instructs you that you may receive admonition. (al-Quran XVI: 90).
That is almost all as far as the principles for the economy are concerned. There is freedom for everything else. Two features of these principles are worth noting. Firstly, they are comprehensive as we can hardly think of anything that may be good for the human being according to any acceptable norms but these principles do not allow for it.
Secondly, these principles do not put any substantial limit to the degrees of freedom available to individuals to pursue their own economic interests. If we see around, similar restrictions we do find even in the societies which we consider most free. Narcotics cannot be consumed. Prostitution as a source of income is prohibited. Waste is socially deplorable. Bribery is also prohibited and so is steeling. Usurpation of other's property is not allowed. Fulfilling contractual obligations is strictly ensured. I think I will not be wrong if I say that if we compare restrictions imposed by Islam in economic field with the restrictions in the same field in the most free society of the contemporary world then we would find that Islamic teachings have provisions for more free and competitive economic environment than the most free contemporary economy has.
Islamic System is, thus, a complete LAISSEZ FAIRE according to any contemporary standard giving maximum freedom of choice to individuals. This Laissez faire, however, is different from that any contemporary economy allowed for. A distinctive feature of the Islamic LAISSEZ FAIRE is that it is:
THE LAISSEZ FAIRE THAT ABHORS INJUSTICE AND LETS ITS FRUITS SHARED BY THE LESS PRIVILEGED MEMBERS OF THE SOCIETY.
This is ensured by introducing into the individual economic behaviour two very strong elements, namely:
i) To avoid any injustice in any economic dealing. All dealings to be done with utmost justice (Adl).
ii) To give away to others by way of their help particularly to the kith and kins. To give away more than what is due to them legally or what justice may require.
No other Laissez faire economy in the world has cared to ensure these features to the extent Islam has cared for these features.
Just to give you one more glimpse of what is the attitude of Islam towards economic freedom. I will narrate a tradition from the Prophet peace be upon him.
Anas reported: During the life time of the Messenger of Allah (peace be upon him) price level went up. They (people) said: "Messenger of Allah (peace be upon him)! Fix the prices for us." On this he, the messenger of Allah (peace be upon him) said: Prices are fixed by Allah. He contracts and expands the sources of livelihood. And I hope to meet my sustainer (Allah) in a state that no one may raise a claim of injustice against me in respect of blood or money". (Tirmuzi, Kitab al-Buy, Chapter 73).
It has been only recently that Father of "Modern Economics", Adam Smith discovered that prices are determined by invisible hands and it has been even more recently that modern economists discovered that interventions in markets to change or fix prices reduces welfare of the society.
But the time has yet to come when the modern economists will realize the other part of the Hadith that I just narrated which says that the economic agents in the market have to deal with each other with justice. The justice in the market does not merely require to fulfil legal or contractual obligations. It also requires that no one tries to exploit someone who is in less advantageous position to bargain. The justice in market demands avoiding all sorts of exploitations in economic dealings with each other.
The modern economists have failed to realize how markets can be made to take care of less privileged classes without sacrificing the economic freedom in the market. Markets of Islamic societies take care of this issue very beautifully. Islam has made the caring of others a marketable good with a specific price tag on it. Let me quote from Quran.
The parable of those who spend their substance in the way of God is that of a grain of corn: it groweth seven ears and each ear hath a hundred grains. (al-Quran 2: 260).
For promoting the taking care of, the market mechanism has been utilized rather than suggesting state intervention in the market or social control of resources. It offers a price for caring for others. The price implies 70,000 per cent rate of profit. This is a lot of temptation to go for this commodity. An Islamic man thus faces a choice of choosing two baskets in the market. One basket gives him a certain profit in this world (a profit which no matter how big will always be a limited profit) and the other basket gives him a profit 70,000 per cent (and even more). The temptation is not small to overcome easily for a believer in world hereafter. The individual keeping in view his worldly needs and the needs of world hereafter then makes a rational choice how much to spend for "caring for others". "Caring for others", is a part of the economic behaviour of economic agents in Islamic framework and caring for less privileged members of the society occurs as a result of free choice in the market rather than as a result of government intervention or social control of resources.
There is one last thing to mention in order to complete the description of the principles for the management of an Islamic economy. Even the most free economies of the contemporary world feel the need of government intervention even for improving the efficiency of markets besides what may be needed for achieving non-market objectives. Market failures are widely recognised which necessitate government intervention. Government intervention is justified whenever private interests of economic activities of individuals are in conflict with the social interests of the society. This concept has always been available to the managers of Islamic economy as well. The concept in the Islamic literature is referred to Masaleh al-Mursalah or what we may refer in modern terminology as "social interest". There are certain rules when and how this principle need to be applied but this is not the place to go into this detail.
This is the whole framework. Within this framework there can be 101 ways to manage an economy. There is no one particular a priority way of managing an Islamic economy. Though some attempts have been made to identify a particular system to be an Islamic economic system. For example, sometimes it has been referred that Islamic economy will be managed in the same way as a capitalist economy is managed except that interest will be to be eliminated and Zakat will have to be introduced. Sometimes it has been referred to be a socialist economy with social control on all its resources. Sometimes it has been referred to be a 'Welfare' economy. And so on. All of them may be correct and none of them may be correct. It all depends on what society we are talking about at what particular point of time. If for any particular society at any particular point of time, one of these suggested system meets the fundamental principles described above, then that will be an Islamic way of managing that economy.
Implementation of the
In a Contemporary Society
The message of previous section is that Islamic Management of economy will take place only in an Islamic society. The fact of the life, however, is that in almost all Muslim countries, the behaviour of the members of the society by and large is not very Islamic. Bulk of the population in most countries does not know what is Islamic and what is un-Islamic. In such a situation can we still talk of implementing Islamic economic principles in our societies, the answer is definitely yes. I will not emphasize this merely on the ground that it is our religious duty to implement Islam in all aspects of our life. I will emphasize this on the basis of economics only. It is in the economic interest of a society to manage its economy according to Islami principles. This is true for any society whether Muslim or non-Muslim. We highlight here only some salient features that need to be introduced in the management of the economy to start with. We discuss these features with respect to:
a) The Management of Private Sector.
b) The Management of Public Sector.
Management of the
Describing the management of the private sector of an economy in an Islamic perspective, first thing we should know about is the objectives of this management. The two fundamental principles for the management of the private sector would be to ensure the following:
a) Peace in the economy (eliminating all sources of economic disorders).
b) Minimum needs of all members of the society.
It is not difficult to draw these objectives from the teachings of Quran and Sunnah. What is important to note is that the teachings do not refer to full employment, GNP, growth, stability, or distribution of income. Those similar with the functioning of a modern economy may not find it difficult that ensuring the above mentioned objectives through appropriate institutional framework, in a type of a lessaiz-faire economy described in the previous section will be capable of taking better care of all such objectives as economic growth, stability, employment etc., than an economy would take care of by managing it in any other way. This point may get further elaboration to some extent in due course.
The institutional instruments to promote these two objectives are also clear from the teaching of Islam. The two fundamental instruments for this purpose are:
Al-adl (to be referred to as Justice Al-ihsan (to be referred to as Benevo-lence.
The former is primarily to take care of peace and order in the economy while the latter is primarily to take care of the minimum needs of the less-privileged members of the society.
Administration of these two basic instruments can achieve the desired objectives for the economy. Administration of justice eliminates disorder and promotes environment of fair competition which in turn means economic growth and stability. The principle of justice also puts restraint on the government temptation to increase supply of money because it would create inflation which would hit different classes of the economy differently (probably hitting the less privileged classes more) which would be against the principle of justice. The administration of justice would also require equal access to economic opportunities to every one and hence putting a restrained to if not reducing the income inequalities in the economy. Promotion of fair competition in the economy because of adherence of the principle of justice and access to economic opportunities also promotes full employment in the economy as the population in working age does not simply wait for wage-paid opportunity to arise, it creates an opportunity for itself, because of the access available to institution that can be helpful in its economic pursuits.
Administration of principle of benevolence and goodness is basically required to take care of the minimum needs of those who are unable to meet their needs or their own. Attempt to define a comprehensive institutional framework to administer these two instruments will require a comprehensive exercise with a specific reference to a particular society at a particular point of time.
Administration of economic justice is a multidimensional concept. To start with, the priority and emphasis, however is needed to the elimination of one element that is called Gharar in Islamic terminology and generally refers to uncertainty and ambiguity in economic dealings. This is an element which can always be exploited in economic dealings by a party which is in economically stronger position. This is also an element which can always be a source of dispute and conflict if not handled properly and carefully during economic dealings.
Suppose a farmer wants to sell the forthcoming crop which has not yet fully grown and it is not sure how much the output would be. There is gharar in the deal. One of the party receives the price which is certain and known. The other party receives in return an uncertain output. Firstly, the economically weaker party is quite likely to be exploited in the deal. Secondly when the actual output comes out to be different from what was expected at the time of the deal, one of the party will be aggrieved. Such deals will quite likely be a source creating conflicts and disorders in the society. Administration of justice will be possible if such unjust distribution of uncertainty is kept at minimum in economic dealings. When dealing with each other, if the uncertainty is unavoidable then justice requires that both parties should face exactly the same uncertainty. For example, to invest certain amount of money at interest involves an unjust distribution of uncertainty. The lender knows with certainty his part of the return on investment but the borrower is uncertain about the return that he is going to get out of the investment. This transaction will be unjust and can create ill feelings on either side before as well as after the results of investment are known. If both agree to share whatever the outcome of the investment then this transaction will be just. Similarly, in insurance, the insured person knows with certainty what he is paying to the insurance company but he is not certain what he will be receiving back. Same is true for insurance company that knows with certainty how much it has received but does not know how much it will have to pay. This is unjust dealing. Teachings of Quran and Sunnah have paid special emphasis on this type of injustice in economic dealings. Prohibition of interest, prohibition of gambling and prohibition of the present form of insurance are based on this very principle that these activities make unjust distribution of uncertainties involved in these activities. The whole literature of Fiqh and Sharia on the subject of market dealings lays down a whole set of rules only to take care of this aspect. The fundamental principle to ensure justice in economic dealings and hence to ensure peace and order in the economy is that uncertainties have to be kept at minimum and whatever ambiguities and uncertainties are inevitable then the same should be faced equally by all the parties involved in the dealing.
The priority area to be attended to in the administration of justice hence is to develop an institutional framework that eliminates the practice of exploiting uncertainties and ambiguities in economic dealings. The managers of economy will have to particularly look into the following if justice as envisaged by Islam is intended to be administered.
in Constitutional and
First step in this direction of course is to amend the legal and constitutional framework of the country to ensure that the fundamental principles described earlier are enforced in letter and spirit. Laws are enforced to ensure that all sales and purchases and other economic contracts adhere to Islamic principles.
Reform in Goods Market
As a follow up to the introduction of laws relating to markets, all such institutions that are involved in trading not conforming to Islamic principles are required to be eliminated. The present practice of dealing in futures markets is one area that will require immediate attention. Institutions to disseminate all necessary information to all concerned in the market place are also required to be developed on priority basis to eliminate exploitative practices. Institutions to help the weaker parties in the bargaining process also require priority. Farmers in need of money, having imperfect access to the market has all the likelihood to be exploited by middlemen and brokers. Institutions to give an interim help to the producers till they are able to sell their goods appropriately in the market are a part of the Islamic Management of an economy.
Reform in Financial Market
As a follow up to changes in legal framework, financial markets will also need immediate reforms to enable them to function according to Islamic rules and norms. Reforms in Banking and other financial institutions, of course, will have to be done on priority because of the explicit prohibition of interest. The nature of the reforms needed have been discussed in detail by the scholars in this field. The seminal work in this area has been done by the Pakistan's Council of Islamic Ideology who prepared a comprehensive report on how to eliminate interest from the economy. In the preparation of this report they were guided not only by religious scholars but also renowned practical bankers including some Chairmen of Commercial Banks and very senior officials of the Central Bank of Pakistan. The report takes into account all practical considerations of the contemporary financial and monetary set up and suggests a reasonable time frame for eliminating interest alongwith practical suggestions for the interim period. Besides, there are several other reports and research works that are available to benefit in this respect.
The objective of Islamic Management of an economy in the financial sector will be met only if interest is eliminated completely from the entire sector and Islamic alternatives alongwith the continuation of interest based practices will be a futile exercise even if it is done as an interim arrangement. The experience has shown that interest is one of those bad things that have the potential to drive good alternatives out. If interest is allowed to exist, the Islamic alternatives may never get popularized no matter how much effort is put into promoting them. This is the same phenomenon that we know as Grasham's Law where bad money drives good money out. Even more simple example would be to consider the case of promoting the use of Rooh Afza or orange juice while alcoholic beverages are permitted in the society. Such an exercise will obviously be futile. The society will never be able to get the healthy benefits of the use of orange juice while alcoholic beverages are allowed to continue to poison the society. Healthy effects of the use of orange juice on the society will appear only if use of alcoholic beverages is totally eliminated from the society.
Also it will not merely be a matter of eliminating the interest from the economy. A proper management of an Islamic economy will require the best possible Islamic alternative to be introduced and promoted. to continue with our previous example, if alcoholic bear is a popular drink in the society, then its replacement by a non-alcoholic bear though may serve the minimum purpose of Sharia yet this may not serve the true purpose of Sharia. The ultimate objective of sharia is welfare of the society. A good manager of the economy would look for the best alternative for the health of the economy. As already mentioned, Islamic approach here is not, that only one door is opened and all are closed. Instead only one door is closed and all others are open. We have to select the door that takes us to the best world or at least a world better than what we had while using the previous door (of interest). Pakistan Council of islamic Ideology made this point very clear in its report.
Other financial institutions will also need reform. Insurance, for example, will be as important as banks. Like banks, insurance companies also have usefulness which can hardly be denied. Both provide useful economic services. The problem is only how to operate them without violating the teaching of Quran and Sunnah. The present method of operating insurance is unjust according to the Islamic norms and does not conform to the Islamic principles of justice. It is, however, possible to reform the institution. Both theoretical and practical models are now available to suggest modifacations required to make it to conforming to Islamic principles.
Introduction of 'Hisbah' Institution
The institution of Hisbah which played a significant economic role in the early period of Islam is a different concept than what is presently understood by the concept of Ombudsman. The Hisbah institution, in fact, aims at monitoring that markets are operating under free and fair competition so that no one is taking undue and unjust advantage at the cost of others and hence disturbing the peace in the economy. Free and fair competition cannot be ensured merely through enactment and enforcement of necessary rules and regulations. It requires constant and careful vigil on the actual practices of the market to identify and weed out all such unscrupulous elements which hinder the market to perform its function and creates hurdles in the free and fair competition. The institution of Hisbah will also identify market failures that will require government intervention in the market through taxes, subsidies or any other appropriate means.
Management of the Public Sector
This is the most delicate aspect of the Islamic management of an economy. The sanctity of private ownership, freedom of choice, freedom of markets etc., suggest minimum intervention by the government in economic activity of the society. On the other habd obligation to pursue and look after social interest give tremendous leeway to the public sector. Appropriate Islamic political system and its institutions only can ensure such a balance. It is not the place to go into the details of the Islamic system. Only following will be highlighted with respect to the public sector from the economics point of the management of economy.
Economic Role of Public Sector
To keep the discussion simple, the economic role of public sector can be summarized under following headings.
Complementing the Management of Private Sector
As already mentioned, private sector is required to be managed to achieve two objectives:
i) Economic Peace
ii) Fulfilment of Minimum Needs of Everyone.
To the extent private sector fails to achieve this despite all necessary institutional provisions, the public sector will have to come in to achieve these two objectives to the maximum possible extent. This role would only be a complementing role where it initiates its own activities necessary to achieve the objectives without disturbing curbing or intervening into private sector activities.
Managing the Collective Interest
and Public Goods
There are certain economic needs and interests which are not or cannot be taken care of by the private sector but are in the collective interest of the society. Public Sector is required to manage these interests of the society. Three specific cases are described below:
i) Taking up the activities where private sector is inefficient or shy to enter.
ii) Controlling the negative economic effects for the society generated by the private sector.
iii) Promoting the economic desirability for the society not being generated by the private sector.
There are various forms of externalities which can make the private sector economic activities inefficient. Economies of scale is an example which may not allow private sector to enter a socially useful activity or if it enters it may act inefficiently. Public sector, therefore, comes in. Then there is the case of public goods which private sector cannot take up because of the inapplicability of exclusion principle.
Managing the Economic
Development and Growth
Through this is covered in the previous section relating to management of collective interests, yet it needs to be emphasized independently. Economic Development is a religious obligation for individual as well as for the society as a whole for following reasons:
a) To improve the quality of life which is a legitimate goal of human efforts.
b) To be able to compete the development of non-Muslim world.
c) to be able to spread Islam.
Many aspects of economic development particularly with respect to contemporary environment cannot be taken up by private sector activities and public sector is required to come in.
Management of Resources for
Barring intervention into private property rights (which is allowed only under special circumstances to be justified by the social interest that cannot otherwise be taken care of) the option to mobilize resources for public sector are limited. This limitation of resources will always impose a restraint on the public sector to expand unless it is extremely necessary. The first limitation is a government borrowing. In the absence of interest, public sector cannot raise as much resources as it wants through borrowing. Second limitation is on raising revenue through taxes. Though there is no explicit prohibition on taxation in Islam, yet most of the Islamic jurist agree that the powers to tax are not unlimited.
The limited availability of resources thus require their extremely judicious management. The use of resources will be made keeping in view particularly the following:
1. A careful selection of activities to enter so that they are manageable within the resource constraint.
2. Efficient utilization of resources so as to avoid waste and misuse.
It will not be possible to discuss here in detail the public sector budgeting. One point, however, needs special attention. The management of public sector resources require much more care than the management of resources in the private sector. This is particularly because of the strict accountability of the public officials with respect to the management of public funds and hence to the economy.
Outcome of the Islamic
Management of an Economy
It can hardly be overemphasized that Islamic Management of an economy is capable of combining the - both worlds i.e. efficiency, growth and freedom of capitalism and an egalitarian society of socialism without creating any class conflicts and with incentives to efficiency and growth.
The preservation of the sanctity of private property and maintenance to the free but honest and healthy competitive markets ensures efficiency and growth in the economy. This is an axiom that anybody can hardly deny. The fair and free competition alongwith frequent transfers obligatory as well as voluntary does not allow to create wide class differences and to make them a sources of conflict in the society.
The absence of interest has been shown not only restraining inflation but also has been shown to be giving more stability to the banking sector. The elimination of interest leads to efficient use of investment funds as compared to interest based system.
Elimination of interest and its replacement by profit-loss sharing system also helps fighting unemployment and promotes better utilisation of human resources by mobilizing them to take up entrepreneurial jobs if wage paid jobs are not available.
Egalitarian distribution of wealth and income comes from within the market oriented system. All economic institutions are oriented with this spirit, alongwith some specific institutional arrangements to attain this objective. This is not the place to prove how an Islamic management of an economy can introduce all these features in the economy. But anyone interested in sincere and honest analysis can easily work out that if the Islamic management of an economy succeeds to introduce all the required institutions and succeeds in managing the economy according to Islamic principles than the following will be logical conclusion:
1. Economy will be more efficient and growing.
2. There will be more stability in the economy.
3. Full employment will be easier to achieve.
4. Poverty level will be continuously declining.
5. Income inequalities will be of lesser magnitude.
6. Development efforts will be more fruitful.
Most of these conclusions have been rigorous and proved in literature.
I will conclude this discussion with two notes of caution particularly when it is a matter of switching the management of an economy to an Islamic Management of an economy. Firstly, all institutions, if you analyse them carefully will initially lead resources of the economy to first catering to the economic needs of less privileged sections of the society and whatever growth will come in the economy it will have to come from the mobilization of the unemployed or underutilized human resources. This process, of course, will be resisted by the economic elite of the society when the managers of economy switch their management tools to conform to Islamic norms. This is an issue of political economy rather than of economic management. The political will and support, therefore, is pre-requisite for managing the economy according to Islamic principles.
Secondly, a switch to an Islamic management of an economy may not start giving its fruits from the moment it is introduced. There is a transition period when the new management will gain roots and start producing results. This transition may have its own costs. An entirely new system is to be created. This may not be painless. Some short lived pain, however, is worth tolerating to get rid of large sustaining pain. This requires the willingness of the society to bear the initial costs. This is again an issue that is a political economy issue. The manager roles, however, will at least be to let the affluent class to bear most of the costs. This again would meet resistance from the economic elite and depends on political willingness to bring the change.