ABSTRACT

Transformation from an existing socio-economic system to another system cannot be done in a go. It should be done in a step by step manner. This is equally true about transformation from conventional system of economics to Islamic system of the sort. Conventional system of economics has become harmful for economies of the world and search of a viable alternative is the need of the hour. This paper discusses the issue with the primary assumption that Islamic system of economics is the required alternative. The roadmap of alternative economics may be traced to a few basic approaches and consequent methods. This paper pinpoints four such issues which need attention in the beginning. Further, the paper delineates six initial steps that should be adopted. The four issues and the six steps discussed in the article are not intended to be any exhaustive list of required actions, rather these are primary suggestive actions.

INTRODUCTION

The transformation from one system to another in socio-economic systems is an iterative and step by step process. Unlike matters of faith and belief, changeover in bulk is not advisable here. One may believe in one set of ideas or convictions and may opt to another such set after being convinced about the correctness of that other. Such a revolution in the matters of existing practices on which a society is built and running will create chaos and do more harm than the intended good. Hence, learning, repetitive, and incremental approach is advised. The method of changeover in matters of an economy is to take a step today, consolidate it and take another tomorrow, which should be better than that of today. A further better step may be taken the day after tomorrow and so on. There is no point in leaping forward before careful planning and before the consolidation of the first step. Something good can be done today, to achieve something better tomorrow, to be followed by a much better day after tomorrow, and so on. So, what is required is an EVOLUTIONARY approach against a REVOLUTIONARY approach.

ALTERNATIVE ECONOMICS

So, the first question is whether we need alternative economics or not. The problem with conventional economics is that it is in turbulence. We are having trade cycles, based on psychological factors, not on human economic needs. So, the animal spirit takes care of human needs. Despite the need for the society and availability of factors of production, including the capital, nothing will move, or the economic activity will be severally interrupted owing to the animal spirit being on the ebb. Capital not invested remains in the system; it is not wasted but goes out of circulation and beyond the reach of economic activity.

What is taught about capital formation remains only in the books of economics? It is taught that people save and that saving is mobilized, and thereby, capital assets are acquired. The economy is not moving in the direction that theoretically it should have. So, the economy in almost all parts of the globe is not kick-starting from savings. Instead, debt has become the pivot for economic growth. Such debts entail a charge which is named as interest or usury in the modern parlance and riba in the Islamic literature. A simple line of demarcation between Debt and Equity is that risk is shared in the former and transferred in the latter.

ISLAMIC ECONOMICS

This may be debated whether Islamic Economics, as such, is a separate branch of economics or only the application of certain teachings of Islam in this branch of knowledge (Anwar, 2012). There are merits in favor of both arguments. However, one thing is evident that Islamic Economics, as is popularly called, differs from conventional economics only on some specific approaches while the majority aspects do not disagree. It would be interesting to describe those differences first and then think about the applicability or otherwise of this particular alternative to existing economic thoughts and practices.

A description under the following heads would be sufficient to delineate these alternative economics.

1. Moral Filter

2. Interest

3. Zero-Sum Game

4. Golden trading principle

1. Moral Filter

Economics is considered as a fact-based science that is governed by laws like the physical sciences. Conventional economics is taken as value-neutral and value-free. An economic-man is rational. Every individual is the best judge of his self-interest and should be left free to choose any of the various alternatives that are most suitable for him. In such a situation, a problem of the clash between private and public interest may occur. However, the symmetry between these two competing interests exists, according to Say's Law, and the invisible force (hand) of market forces promote the interest of the whole society, setting in harmony between these two (Chapra, 1995). However, in case of deviations recourse may be had to the visible hand of markets like central planning, taxation, and other fiscal and other like measures by the government. This much is sufficient for the health of an economy.

Islamic approach is not an absolute denial of the laws and forces functioning and running as currents and sub-currents in an economy. However, Islam would insist on another factor, which Dr. M. Umer Chapra, calls Moral Filter (Chapra, 1995). This filter mechanism has two features: i) It makes the claims on resources a function of human well-being, disallowing their use for purposes harmful for humankind; and ii) It has divine sanction (Chapra, 1995).

The concept of divine sanction needs to be elaborated further. Islamic teachings have a list of forbidden economic activities, which is small. However, it is not negotiable. It is evident that values are always universal and cannot be subject to human interjections. However, for all practical purposes, these are targets that an economy should achieve in the proper course of time.

2. Interest

(a) INTEREST IN CONVENTIONAL ECONOMICS

Interest and rate of interest in conventional economics are justified based on different theories, including the following:

i) Marginal Productivity of capital;

ii) Abstinence theory, i.e., at the benefit which would induce savers and investment for production and services would be mobilized; and

iii) Liquidity preference is based on the equilibrium between demand and supply of money.

These theories called Real Theories and Monetary Theories, are based on the demand and supply of money capital or the equilibrium between the two (Mitra, 2010).

Conventional economics justifies interest and rate of interest on following bases:

i) Loan capital may be used for productive purposes;

ii) Serves economic functions like allocation of savings among the competing borrowings and ensuring that loanable funds are used in productive manners; and

iii) Ensures and induces savings (Mitra, 2010).

The approaches mentioned above of conventional economics regarding interest may be summed up in one line. Interest is considered akin to rent for the demand and supply of capital. We do not intend to analyze or enter into any criticism of the theories mentioned above. The precarious condition of the economy of the world today is simply an ample comment on the veracity or otherwise of these premises of conventional economics. We intend to present, in brief, the philosophy and concept of interest in Islamic economics.

(b) INTEREST IN ISLAMIC ECONOMICS

The term riba in Arabic means 'to grow, to exceed, to increase.' Technically, it denotes the amount that a lender receives from a borrower at a fixed rate of interest (Maududi, 2004) . The terms riba in Arabic and Interest in English are synonymous [1] . The situation of riba arises only when an increase in payment of debt is a precondition. Hence, if an increased amount is paid voluntarily without any prior stipulation, it would not be riba.

The meaning of riba in the dictionary is excess, and in the verse [2] of the Qur'an, it means an excess that has no counter value (Arabi, 1967).

[ ۔۔۔۔ والربا فی اللغۃ ھوالزیادۃ، والمراد بہ فی الایۃ کل زیادۃ لم یقابلھا عوض ]

The word counter value (عوض) in the above dictionary refers to the justification of the excess. If it is justified, there is no riba, and if it is not justified, it amounts to riba. The question as to what is justified and what is not is relevant. It has been addressed by (Late) Dr. Mahmood Ahmad Ghazi in the definition provided in a lecture. He said, "Riba means an increase over and above the principal amount payable in any transaction which is not covered by any corresponding labor, expertise, risk or commodity" (Ghazi, 1998).

Usmani (2012), in his lectures, has described riba as کل قرض جر نفعا (Every debt that fetches/brings profit). Thus, debt, as such, cannot be a source of profit in Islam.

The justification in the name of rent is not tenable in Islam because rent arises only in the case of use. There is no rental for consumption. Capital as a factor of production is consumed in the course of production, and so it cannot have a fixed rate of payment (rent). The difference between use and consumption is a characteristic feature of Islamic economics.

3. Zero-Sum Game

Islam discourages, rather forbids, transactions that are not backed by goods or services. Primary economic activity is a precondition for any business transaction. Thus gaming, forward and futures trading, and speculative transactions, including commodity trading and a score of activities that encompass the bulk of (so-called) economic activities in conventional activities, will be hit if the rule of such displeasure with "zero sum games" in business transactions is followed. In other words, only business as usual and prudent activities will get encouragement. This is a major deviation of Islamic economics from conventional economics.

4. Golden Principle

The above-mentioned characteristic features of Islamic economics are possible only if the golden principle of Islamic economics is accepted that Money and Debt are not tradable. Money should serve its primary purpose of the store of value, unit of account, and medium of exchange. Debt will not remain tradable in the absence of interest.

ISSUES IN TRANSITION

As has been mentioned above, transition as such need is not, rather cannot be, in a sudden manner – it has to be a well thought of, subtle, time-bound, and painstaking process. The following issues and processes are suggested for the purpose.

(i) Islamic economics should be pursued as a distinct alternative economy. This aspect needs to be stressed because the advent of Islamic finance as an alternative to conventional finance has shifted attention from Islamic economics to Islamic finance. Finance is essential but it is only a part of the whole economic system. Moreover, it cannot be the alternative for addressing all the ills of the economy. Many adjustments, some of which opposed to basic principles, have been done when short term methods, based on various stratagem (حیلہ), [3] are looked for. The holistic approach of Islamic economics gets adversely affected by this piece-meal approach.

(ii) Areas of agreements and disagreements between conventional economics and Islamic economics need to be delineated. The revolutionary approach of dismantling every brick and constructing something from scratch, ab-initio, takes no far. It will do more harm than heal. Many good things have been achieved under the banner of conventional economics. These are required not only to be maintained but also to be further developed. A clear understanding of the disease and the course of treatment is the first step in a positive direction. This is what has been described above as an evolutionary approach, as against the revolutionary approach.

(iii) Equity base is the primary feature of the Islamic economy, whereas conventional economics relies heavily on debt. [4] Nobody would deny the virtues of equity in financing.

However, a lot of inhibitions exist in the feasibility, let alone the viability, of equity-based enterprises. Although there are several debt-free big corporations in the world, a general perception is that of utmost difficulty, rather impossibility, of avoiding debt. These inhibitions are rooted in some genuine issues like dilution of control in the business of receivers of fund end and lack of faith in information about the business on the part of the providers. The detailed study of existing debt-free businesses, and enterprises through venture capital or angel finance are needed. This may entail changes in existing laws and practices,

(iv) New financial products suitable for production-based economies should be developed. Existing financial products of Islamic Financial Institutions (IFIs) are mostly developed for rentier-economies of Middle Eastern countries and are mostly replicas of existing products in interest-based finance institutions. Even IFIs functioning in production-based economies like Malaysia, in Asia, and in Western hemispheres are engaged in providing funds for the purchase of cars, residential accommodations, and educational loans. The needs of the industry, like term lending and working capital accommodations, have little or no concern for them. The fallacy of IFIs is their heavy reliance on LIBOR, the basic rate of interest used in lending between banks on the London interbank market. IFIs are concerned more with serving the business interests of their stake-holders than any search for alternative, as such.

(v) The limits and conditions of current expenditure based on future income for individuals, families, corporations, and nations should be scientifically studied, fixed, and implemented. This is one of the most important exercises required to be done for alternative economics. The availability of easy credit is a fundamental problem of conventional economics. Future incomes and resources are consumed in the present. Individuals, families, and corporations avail credits expecting to pay off in installments in the future, based on the inflow of income then. However, no one generally comes out of the trade trap. The level of debt goes on, going up and up, from service lane of debt to its highway. Nations, on the other hand, go for deficit financing, and they, except for a few, do not come out of this vicious circle. Almost all nations take new loans to pay off installment of past loans and interest accrued and due for the year. (vi) Another important area of activity for alternative economics is the study of the pros and cons of the existing monetary system and the method and impact of creating money and bringing it to circulation, suggesting corrections based on the principles of equity and justice. In the present scenario, the currency is created by increasing the burden of debt in the economy. Money needs to be relegated to its basic functions; otherwise, it would remain a source of economic corruption, as it is today.

These basic steps would pave the way for the development of alternative economics in order to ease out the economy from its present mess.

BENEFITS OF THE SUGGESTED ACTIONS

The economies of the world have drifted away from the theories of economics taught

in the books of the subject. Financial economics has taken over the real economics. The whole discussion about production of goods and services to cater to the needs of economies, based on mobilisation of savings and the consequent capital formation, have lost their relevance because equity in economics, is swayed by debt. So, the initial action of economic activity now a days is not the savings, but the debt with is loaded with interest. In other words, the system of economics is now seldom booted by equity, where risks are shared, but by debt, where risks are simply transferred. The discussion in this paper are aimed at bringing the economics back to its original position of utilising the scarce resources to serve human society.

Some aspects of economics, as a subject, also require to be revisited. The paper aims at pinpointing those aspects, suggesting alternative approach and related methodology. It is true that discussions in economics today no longer take the extreme stance of value-free and value-neutral fact-based science. Welfare of humanity cannot be ensured with this approach and this is now being recognised. However, the baggage of old related thoughts is required to be squashed and a clear-cut source of global values which are true in all times and all economies have to be stressed. Islamic economics provides that basis. And, one such value which cannot be negotiated in Islam is prohibition of riba (interest). A detailed discussion of interest in conventional economics regarding theories of interest and its rates have been done, providing their rebuttal from Islamic perception. An attempt has been made to theorise interest in Islamic parlance, providing economic rationale of its prohibition.

CONCLUSION

Operation of interest in economics has led to two undesirable events, from Islamic angle: (i) trading of debt; and (ii) trading of money. Discouragement of the trading of these two things, relegating money to its original functions, has been described as a GOLDEN PRINCIPLE. All the discussions done and steps suggested should ultimately lead to attainment of this ultimate stage. These are basic indicators of the transformation from conventional to Islamic economics. Such a transformation to the alternative economics is possible and is not idealistic, provided the positive approach of subtle changes with well thought of manners, without bringing any destruction to the socio-economic needs of human beings, are adopted. However, there would be need of the journey in desired direction with exact moves. The four principles outlined in the paper are meant to provide that direction and the six steps sketched are aimed at presenting the measures to be adopted initially.

NOTES:

1. Those who differentiate between riba and interest, in order to prove that bank interest is not riba, tend to differentiate between interest and usury, between low rate interest and high rate interest and between commercial interest and consumption interest. However, all these differences may be true in usage in English language, but are not in the subject Economics, which is the subject matter of present discussion. Interest, the factor of production, has no such classification.

2. Al-Qur'an 2:175

3. A term heela ( حیلہ ), which may be translated loosely in English as stratagem is used in Islamic jurisprudence

4. The term 'Debt' used along with and as against 'Equity' refers to liabilities payable with a charge, i.e. interest. Otherwise, trade debts and credits arising in normal course of transactions are without any such charge and so are not covered for discussion here.

REFERENCES

1. Anwar, W. (2012). Economics in Islam. Markazi Maktaba Islami Publishers: New Delhi

2. Chapra, M. U., (1995), Islam and Economic Challenge.The International Institute of Islamic Thought & The Islamic Foundation, Herndon: USA

3. Mitra, J. K. (2010). Economics, Micro and Macro. World Press Private Limited :Kolkata

4. Maududi, Sayyid Abul A'la, (2004). Towards understanding the Qur'an. Markazi Maktaba Islami Publishers: New Delhi

5. Arabi, I. (1967). Ahkamul Qur'an

6. Ghazi, M. A. (1998). Interest and Modern World. Retrieved from: https://www.youtube.com/watch?v=pzxlfmJX2tw

7. Usmani, M. T. (2012). Riba kya hai? Retrieved from: https://youtu.be/mrJujg21prA