An Islamic Perspective on Governance (New Horizons in Money and Finance)

  • Book Title:
 An Islamic Perspective On Governance
  • Book Author:
Zafar Iqbal
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  • ·        Perspectives on governance 1
  • The methodology of Islamic economics 20
  • Justice: the inner core of governance 59
  • An Islamic perspective on taxation 91
  • Problems of implementing taxation in Islamic countries 135
  • Islamic position on budget deficits 168
  • Financing methods for government bodies 214
  • Accountability and governance 253
  • Governance and corruption 285
  • Conclusion 313


There is now a substantial Western literature on governance in its many dimensions, but there are few studies that examine governance issues from the perspective of Islamic economics and fewer still that compare the Islamic and Western viewpoints on the topic.

In writing this volume we sought to correct these omissions by providing a systematic analysis of certain key areas of governance from an Islamic standpoint, drawing on classical Islam and contemporary sources, to produce a framework that is then contrasted with the Western position.

The volume seeks to make a distinctive contribution in a number of ways. First, as we have said, it develops an Islamic perspective on matters widely acknowledged as being under-researched in the Islamic discipline. Second, it (hopefully) brings a fresh and contemporary perspective on these issues by drawing insights from modern theory and practice, combining them with classical and modern Muslim interpretations. There is thus an attempt to integrate East and West and merge the normative as well as the positive. Third, in order to provide a different reference point, there is abstraction from traditional terminology and a focus on the spirit of Islam.

That becomes explicit in the approach to the topics on taxation and the financing of public sector organizations. Fourth, the analysis explicitly acknowledges the self-interested behaviour of major economic actors, both local and international. This adds a public choice dimension to appreciating the limitations as well as the workability of any governance arrangements.

The study has its origins in the PhD dissertation, ‘An Islamic perspective on public finance’, completed by the first-named author under the supervision of the second. Not only did the dissertation win the World Business Institute Best Doctoral Thesis Award for 2005, but both examiners (eminent Islamic scholars) were adamant that it should be published, and we thank Edward Elgar Publishers for agreeing with them. For this purpose, all original chapters have been thoroughly revised and rewritten and much new material added especially on governance principles gener- ally, sukuk and other recently developed methods of government financing, and issues of accountability.

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It would be most remiss of us to conclude these comments without thanking our wives (one of whom, Kay Lewis, did much of the typing)

xvi An Islamic perspective on governance

for their patience and forbearance during the many hours that were spent working on the manuscript. We hope that they feel that it was all worthwhile.


The need for good governance has become almost a mantra in analyses of the problems of developing economies. Governance has been used in a number of different contexts, such as ‘monetary governance’ (the making of monetary policy), ‘economic governance’ (ensuring the smooth work- ings of a market economy), ‘public governance’ (the efficient running of the nation state and the public sector), and of course ‘corporate govern- ance’ (the effective functioning of market and state-owned enterprises). The concept of governance has also been used for defining the interests of international economic institutions like the OECD and World Bank in programmes of social and economic development and structural adjust- ment in developing countries.

Interestingly, despite the fact that some of the poorest countries in the world are Muslim nations, issues of governance are invariably discussed solely from a Western perspective, ignoring the contribution of Islamic economics – a branch of knowledge that aims at analysing, interpreting, and resolving economic problems with reference to the methodology of Islam. This volume consequently examines, from an Islamic perspective, some of the central issues in public governance, economic governance, and corporate governance. An appropriate starting point is to ask spe- cifically what we mean by these terms and, in general, by the expression ‘governance’.


There is not as yet a unified expression in Arabic to represent the meaning of governance in its various manifestations, although there has been work in this area by the Egyptian Linguistic Department (Sourial, 2004).

Perhaps the closest concept to ‘governance’ in Arabic is al-hakimiya, which in its connotations goes beyond the procedural view of governance to identify the blueprint of a higher moral social order to which all decision-making structures or ‘authority’ ought to submit, if they believed that peace in its outer and inner manifestations could be achieved only by surrendering one’s will to the Will of God (Bahlul, 2000).

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This is an illustration that some of the most commonly used categories in conventional social sciences are somehow changed and transformed when applied to societies and cultures in which they did not originate (Mumtaz Ahmad, 1986, p. 2).

By contrast, the English terminology has clear origins in terms of pro- cedural arrangements. The Macquarie Encyclopedic Dictionary, 1990, traces the etymological roots of the word ‘governance’ from the Greek kybernan to the Latin gubernare and to the Old French governer. Kybernan means to ‘steer’, ‘guide’ or ‘govern’. At its broadest, governance – the act of governing – refers to the relationship between the governors and the governed, such as that between the government and the people, and has at its basis the decision-making powers ceded by individuals to those in authority so that the common interests of society can be served. The ship of state needs a good captain and crew to guide it but it also has to have a clear idea of where it is, where it is going, and how well it is progressing. Governance mechanisms are designed for these ends.

In the prologue to his book The Mechanisms of Governance, Oliver Williamson provides two definitions of governance. One, based on the concept of eunomics, is ‘good order and workable arrangements’ (Williamson, 1996, p. 11). The other, based on John R. Commons (1932), is ‘the means by which order is accomplished in a relation in which poten- tial conflict threatens to undo or upset opportunities to realise mutual gains’ (Williamson, 1996, p. A2). These definitions make clear that the concept can be applied to a variety of organizations and institutions, and is thus not limited to economic activities, and can be expressed in a variety of political and social arrangements.

Public Governance

This would appear to be the concept of governance employed by the World Bank and the OECD. For example, World Bank documents have used the concept of governance to ‘capture and define the interest of both the World Bank and other international institutions in the political and institutional factors affecting structural adjustment’ (Frischtak and Atiyas, 1996).

As another example, the Development Assistance Committee of the OECD defined governance from the particular viewpoint of donor institu- tions as denoting the ‘use of political authority and exercise of control in a society in relation to the management of its resources for social and eco- nomic development’ (OECD, 1993).

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 In this respect, three specific aspects of governance are identified: the form of political regime, the processes by which authority is exercised in the management of a country’s economic and social resources, and the capacity of government to formulate and implement policies and discharge its functions. In these respects, governance of this type corresponds to what Apreda (2003) calls ‘public govern- ance’. As he puts it, ‘governance in the public sector of any country points to the running of the State, taking into account the mechanisms by which the government should work well’ (p. 12). Public governance is defined as ‘the governance of organizations in representative democracies’ (p. 13).

Public governance operates where economics, political science and law overlap and relates to the exercise of political, economic and administrative authority to manage a nation’s affairs. Box 1.1 sets out the three dimensions that co

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