Principle to Practice - Islamic Economics

Many people always try to fit in the Islamic Economic Principles into the modern economic terminologies instead of adopting a vice versa approach. 

Many people always try to fit in the Islamic Economic Principles into the modern economic terminologies instead of adopting a vice versa approach. Without even realizing the fact that these modern terminologies were either originated from the Greeks or research of Muslim economists. In order to remove this misconception, this article is an endeavor to highlight the origin of modern economic concepts and key aspects of Islamic Economics including monetary and fiscal policy from principles to practice.

Monetary Policy in Islam

The prime concept of free economy is already present in Islamic Economic Principles [IEP]. IEP are strictly against the concentration of wealth and prohibits through the one and only evil – The Riba [Interest]. 

In contrast to conventional monetary policy, IEP does not suffer from the evils of interest rates, Seignorage (the benefit from printing money) and borrowing money from the population through bills etc. As the concept of interest is absent in IEP, hence, the concept of monetary policy in IEP is restricted to maintaining gold standard, that is, for what it was initially developed.

Gold Standard is based on Islamic principles. Islam considers commodities with intrinsic value as currency. Following are some examples of commodities used as currency: Gold, Silver, Rice, Dates, Wheat, Barley and Salt. Price of a commodity is set by the market itself without any government intervention.

The concept of money was prevalent even prior to Last Prophet PBUH, whereby 1 Dinar [Gold] is equal to 10 Dirhams [Silver]. Even today, silver has a defined parity with gold. The Goldsmith used to put there stamps on Dinar and Dirham to prove there authenticity.

In most of the historical accounts, it states that among the Rashideen caliphs, Syeddana Uthman ibn Affan RA was first to struck the coins, some accounts however states that Syeddana Umar RA was first to do so. When Persia was conquered three types of coins were current in the conquered territories, namely Baghli of 8 dang; Tabari of 4 dang; and Maghribi of 3 dang. Umar (according to some accounts Uthman ) made an innovation and struck an Islamic dirham of 6 dang.

Under IEP, the role of central banks under Islamic Economic Principles would be of International Trade Accounting of a country, review the Shariah Compliant Financial Products and regulate the financial institutions.  Consequently, the concept of banking under IEP would be offer Shariah Compliant Financial Products as intermediary, gold vaults for customer and converting currency into gold on account holders’ demand apart from currency handling in transitory phase.

Fiscal Policy in Islam
During the period of Islamic Governance in Madina, a social transformation took place as a result of changing land ownership giving individuals of any gender, ethnic or religious background the right to buy, sell, mortgage and inherit land. Based on the Quran, signatures were required on contracts for major financial transactions concerning agriculture, industry, commerce and employment. Copies of the contract were usually kept by both parties involved, hence, all we are practicing now is not an alien to Islamic Economic Principles [IEP].

As we all know that IEP is deduced from Quran and Sunnah. Early Islamic Economic Thinkers have developed various economic models that forms the concrete basis of modern economic principles.

Early Islamic Economic Thinkers
Among the earliest Muslim economic thinkers was Abu Yousuf (731-798), a student of Imam Abu Hanifah. Abu Yusuf was chief jurist for Abbasi Caliph Haroon Ar Rasheed, for whom he wrote the Book of Taxation (Kitab al-Kharaj). This book outlined Abu Yusuf's ideas on taxation, public finance, and agricultural production. He discussed proportional tax on produce instead of fixed taxes on property as being superior as an incentive to bring more land into cultivation. He also advocated forgiving tax policies which favor the producer and a centralized tax administration to reduce corruption. Abu Yusuf favored the use of tax revenues for socioeconomic infrastructure, and included discussion of various types of taxes, including sales tax, death taxes, and import tariffs.

Early discussion of the benefits of division of labor are included in the writings of Qabus, Ghazali, Farabi (873–950), Ibn e Sina (Avicenna) (980–1037), Ibn Miskawayh, Nasir uddin Tusi (1201–74), Ibn e Khaldun (1332–1406), and Asaad Davani (b. 1444). Among them, the discussions included division of labor within households, societies, factories, and among nations.

Many scholars trace the history of economic thought through the Muslim world, which was in a golden age from the 8th to 13th century. A common theme among these scholars was the praise of economic activity and even self-interested accumulation of wealth. Persian philosopher Ibn Miskawayh (b. 1030) notes - "The creditor desires the well-being of the debtor in order to get his money back rather than because of his love for him. The debtor, on the other hand, does not take great interest in the creditor."

By Mohammed Ashraf, FCCA

For more in depth, please click Principle to Practice - ISLAMIC ECONOMICS