Can Islam Save the Economy?

Today Religion Dispatches published an article that came out of my travels in the Middle East last fall. It’s about the financial and philosophical subculture of Islamic economics—the attempt to create an economic system consistent with religious law. This stuff has attracted a lot of attention lately because the very financial instruments that triggered the current recession, including subprime loans and credit swaps, aren’t allowed under the Islamic system.

Exploring the world of Islamic economic thought was fascinating. As well as a substantial and ever-growing Sharia-compliant banking industry, there is a body of deeply hopeful utopian literature. In a world that mostly consigns itself to the impersonal, ethics-free destiny of free-marketism, Islamic economics represents an ingenious attempt to return our humanity, or God’s divinity, to the markets.

Take a look: “Can Islam Save the Economy?





9 responses to “Can Islam Save the Economy?”

  1. Muhammad-Fawzi Amadu

    I do believe that Islamic Finance, properly practiced, will contribute immensely to the socio-economic well being of people the world of. The key is in the phrase if “properly practiced”. I have seen some of the practices in the Industry and there is both hope and despair.

    For example, I have seen that in the US Muslims are interested in the substance of the offering not just that some one is calling their product Islamic, they insist to know the product is Islamic both inform and in spirit take the story of Devon Bank in Illinois). On the other hand, I saw in the Middle East that quite a few people are happy to just trust the product simply because it is said to be Islamic.

    Finally, Mr. Timur Kuran’s skepticism is not well founded. Even the Qur’an does not deny similarity, but it hints that there is something more to one than the other else why does GOD forbid one and not the other. Deeper reflection will show that that fundamental difference (with substantial) effect on society does exist even in the case of Murabaha (which strictly speaking is not a finance tool but one that can be used to mimic one).

  2. Great comment, thank you for your response. I definitely agree that, as Islamic finance and economics develops, there will be a bit difference between those banks perceived to be Islamic in spirit and those not. There has already been a rift, I’m told, between those willing to accept Western banks like Citi that open an Islamic window but aren’t, on the whole, Islamic.

    But I would grant Dr. Kuran his skepticism. In a sense, when the difference is “why does GOD forbid one and not the other,” we might find ourselves in the position of Abraham’s sacrifice of Isaac/Ishmael. Either Abraham is understanding God correctly, and the son has to be killed, or he is killing his son for no reason. Or, as in the scriptural accounts, God intervenes and the whole thing has a meaning that wasn’t expected.

    All the economists I talked to were under the basic impression that clients of Islamic banks are generally making a financial sacrifice by using the Islamic system—though this may not be true in the long run as conventional banks fail in the current crisis. But if they are making a sacrifice, I think Kuran is right in insisting that people be made aware of this fact, so they are fully aware that the decision to use the Islamic banks is a decision of faith. Abraham, for instance, was very aware what sacrificing his son meant in ordinary terms; he knew what an extraordinary thing God was calling him to do.

  3. Muhammad-Fawzi Amadu

    Interesting point on Mr. Kuran insisting that people be made aware that they are making a sacrifice. Interesting because a fundamental foundation of Islamic Finance is the absence of ignorance (jahl), so if there is the need to tell Muslims what they are buying into, then there is a big problem.

    That brings us back to the issue of “if Islamic Finance is practiced properly”. I tried in my answer to show that when the Muslim cares (bankers and their clients alike), there would be now ground for the skepticism.

    I get the sense that you are implying that we are not sure of Abraham’s understanding of the sacrifice. There is no room for second guessing the Qur’an for its says (to Abraham) ” you have fulfilled …”. So Abraham and Ishmael did understand the essence of the sacrifice and because they “cared”, did not have to be “informed”, they had taken the time to learn and so they understood. Like them Muslims need to be patient and trust in God as they strive to implement HIS wisdom, in this case with regard to financial matters.

    So if it is the failure of Muslims to implement the system that he is skeptical about, he has a point. But if he is saying the system is unreal (“recognize its unrealism.”), them I seriously beg to differ.

    Islamic Finance is very real and will become a comfort for many if Muslims understand that practicing it is one of the mercies of God to mankind, but like every good thing it would come easily we need to study and strive to implement it properly.

  4. Yes—the point about the absence of ignorance is well-taken; in that sense, Dr. Kuran (who insisted to me he is not opposed to Islamic finance at all) is on the same page as the Islamic economists.

    When speaking of Abraham’s sacrifice, I mean that his understanding is incomplete before the event, which is crucial in most Christian interpretations of the story. Of course his understanding becomes much fuller afterward. But, as with any kind of sacrifice, we cannot know the consequences of the act until it is over, until time has had its way with what we have done. If we knew the outcome perfectly, it wouldn’t really be sacrifice!

    Do you, by the way, think of Islamic finance as being any kind of sacrifice? Or are those simply the terms I’ve imposed on the discussion?

  5. Muhammad-Fawzi Amadu

    Oh, definitely it entails many a sacrifice. My understanding of why some Muslims are skeptical is because in practice some Islamic Financial institutions are just use Islamic names for conventional products, just to keep their customers but otherwise reap the same profits as their conventional counterparts. Take the case of Tawarruq which is many cases is just and interest based loan, that is supposed to be used in exceptional circumstances but that some institutions have made into a standard financial product.

    Now, if the practicing Muslims looks at the physical rewards that can be derived from the conventional system, they would love to reap such rewards as well. But the fundamental requirements of Islamic Finance would mean that they steer clear of such “juicy” products. So a practicing Muslim will thus avoid a thing that they would otherwise desire but religiously mustn’t and that is a sacrifice,

    Also, in this modern day. The Islamic Financial system is in its infancy and thus less efficient (for one because it lacks economies of scale) than their conventional counterparts. So those who patronize the Islamic Finance system will necessarily have to expect a sub-par services and products (when compared to those in the conventional system). Again another layer of sacrifice.

    So yes inherent in the adoption of Islamic Finance are series of sacrifices, but then the Qur’an does inform Muslims that they should expect these if they indeed are practicing its teachings. It says that a true Muslims would say “Indeed my prayer, my sacrifice, my living, and my death is for God the lord of the worlds”. Qur’an 6:162

  6. Fascinating! Thank you.

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  8. Abdirahman

    It may be more than a mistake, but many writers on Islamic finance (usually non-Muslim) confuse murabaha and interest-based loans. Murabaha is a trade finance arrangment and the transaction is “tied” to a real commodity, a car for example. The deferred price in a murabaha transaction, unlike interest on loans, cannot grow and late penalties are deemed haram. On the other hand, the countervalues of a loan transaction are, being monies, identical and any subsequent increase in one of them is only against time. And since pure debt creation is less constrained than real wealth creation, it is just a matter of agreement between the parties of a contract to postpone payment and therefore increase the amount due, without any economic justification. Growth of debt is unrelated to the real ecomony while murabaha must be.