Islamic Finance Risk-Sharing and Macroeconomic Stability

Islamic Finance Risk-Sharing and Macroeconomic Stability – Book Sample

Islamic Economics: “New Paradigm” or “Old Capitalism”?

introduction

Capitalism which started in Europe a few centuries ago has become the dominant economic system across the world since the fall of its rival eco- nomic system promoted by former Russia. The conventional financial system has grown within the capitalist framework. It is hard to imagine them separately. The story is not much different for Islamic finance which has flourished within the capitalist economic system in the last decade. Even though Islamic economics defines itself as an alternative to capitalist economics, Islamic finance is very much collaborative with capitalist finance.

Indeed, rather than dealing with foundational axioms which define Islamic finance, the overwhelming majority of studies focus on financial products to draw the line between conventional and Islamic finance. They try to offer Shari’ah-compliant financial instruments as an alternative to conventional capitalist ones without delving into the core paradigm in Islamic world view. They seem to be quite successful if the assessment was done according to the industrial growth in the last decade.

However, the ultimate success of Islamic economics and finance will be determined by the compatibility of materialist/capitalist and Islamic values. In other words, even if Islamic finance becomes successful in terms of generating greater profit, it will be considered a failure if it derails people from the prophetic path.

For that matter, it is imperative to examine the compatibility of capitalism and Islamic economics and finance by asking the following questions: What are the fundamental paradigms behind capitalism and Islamic economics and finance? Are they compatible? How do they define human nature? What do they produce as the ultimate outcome? What values do they promote in society? This chapter attempts to answer these questions. This chapter also expands the existing arguments for Islamic economics and finance from social justice, equality, morality, and riba-free system points of view to the need for a new economic paradigm. After briefly discussing the paradigmatic differences between the two economic systems, the paper will discuss the key axioms of Islamic economics.

2.2 redefining Islamic economics and finance

Islamic economics has been a key subject matter among diverse pool of Muslim scholars such as commentators of the Quran, jurists, historians, and social, political, and moral philosophers. In last few decades, discus- sions on Islamic economics have intensified. Muslim economists have been discussing the need for Islamic economics as a new discipline. Even though there is a great consensus among scholars that Islamic world view differs from its secular counterpart, “the debate on ‘nature’ of and ‘need’ for Islamic economics and finance as an alternative paradigm is not settled yet” (Iqbal et al. 2007, p. 4). Despite significant progress in the discussion, there is still argument even on the very definition of Islamic economics.

The distinctive features of Islamic economics come from the Islamic world view, particularly its ontological, epistemological, and teleological differences from the materialist world view. Therefore, it is important to highlight multidimensional well-being goals and morally guided market mechanism in definition: “Islamic economics foresees an economic system based on the Islamic worldview aiming to realize spiritual, moral, intellectual, social, and material well-beings of individuals in this life and

the hereafter through allocation and distribution of scarce resources in a morally guided market system”. Thus, the answers to the core questions could be as follows: What to produce? Produce goods and services which help human beings to excel spiritually, intellectually, morally, and socially. What to produce? Produce the basic goods and services for everyone, but others for those who could afford. Accumulate spiritual, moral, and social capital in addition to physical and financial capital. How to pro- duce? Produce through efficient and fair market mechanism. Likewise, Islamic financial instruments should be based on the Tawhidi paradigm. Their Shari’ah compatibility should not be defined only according to riba, haram, gambling, and speculation. Rather, they should be assessed based on their ultimate outcome in terms of their contribution to human moral, intellectual, and spiritual excellence.

2.3 axiomatic reasons for isLamic economics and finance to be a “new Paradigm”

As discussed above, the difference between Islamic economics and free market capitalism is not limited to the prohibition of interest and haram activities. It is not instrumental; rather it is fundamental factors requir- ing Islamic economics to be a new economic paradigm. As Gregory and Stuart (1985) state “in order to distinguish one economic system from another, we need to focus on and compare their fundamental elements”.(( Gregory, P. R., & Stuart, R. C. (1985), Comparative Economic Systems, Houghton: Mifflin, p. 12)) This section discusses ten axiomatic differences between the two.

2.3.1 Islamic Economics and Finance Pursue Different Goals as Ultimate End/Outcome

As well argued by Aristotle, the ultimate end or final good is what we should care about. For that matter, it is important to understand how the final good in Islamic economics differs from that of conventional one. Islamic economics offers God-centred (G-donic) happiness model, rather eudonic, or hedonic models. G-donic happiness model is based on the comprehensive understanding of human nature from the Islamic perspective.

Understanding and commanding our inner nature are very important in the pursuit of happiness. As Toynbee et al. (1946) argue that “the command over non-human nature, which science has in its gift, is of almost infinitely less importance to Man than his relations with him- self, with his fellow man, and with God”.(( Toynbee et al. (1946, p. 99))) In fact, Toynbee goes to the extent of saying that “a crushing victory of science over religion would be disastrous for both parties, for reason as well as religion is one of the essential faculties of human nature”.

From Islamic perspective, happiness is not a destination to reach. It is the experience while driving on the happiness highway. Happiness is the by-product of living according to the God’s pleasure. We can define hap- piness as overall life satisfaction for the residents of the recreational vehicle (RV), while driving on the straight path (siratul mustakim). In other words, happiness is to drive the RV to under the collaborative command of the King (heart), Judge (conscience), and Wazir (mind). It is to drive towards excellence in sincere spiritual, intellectual, and moral intentions and actions. It is to keep the Elephant (animal soul), Dog (anger), and Showman (egoistic self) under the command of the King, Wazir, and Judge.

While the G-donic model provides guidance to nourish heart, mind, and intellect, it also highlights the danger of being slave to the animal soul, ego, and anger. It warns people that if not trained, the elephant, showman, and dog will dominate the RV and urge for certain irrational actions despite any objection from the King, Wazir, and the Judge.

 The G-donic model provides nourishment for the King who has the capacity for love, compassion, and inspiration. It guides people on how to find authentic and lasting love in life for the fulfilment of the King. It discusses the role of loving mates, children, friends and jobs in the pursuit of happiness.

The G-donic model notes that the inner Judge (con- science) always makes judgement about what we do to others. If we treat someone unfairly, he causes us to be aware of this injustice and feel guilty for being unfair. If we treat others fairly, we receive spiritual pleas- ure experienced through the fulfilment of the Judge. The G-donic model presents the food station for the Wazir who is thirsty for knowledge and meaning. Finding meaning in life is very important for the Wazir because as the navigator, he needs to know where to go.

Life without meaning is like driving without knowing the destination. The G-donic model also offers a guide on how to keep the animal soul, showman, and god under control. It suggests moderation in consumption and warns about the poisons present in some food. It makes some recommendations for pleasure maximization under restraints of the “law of diminishing mar- ginal utility”, “adaption principle”, and the “hedonic treadmill”.

2.3.2 Wealth Is “Preferred Indifference” for Islamic (G-Donic) Happiness Model

In the G-donic model, it is necessary to have basic means for nurtur- ing the body and soul. However, it is not necessary to be wealthy even though there is nothing wrong to be so. For that matter, wealth is “pre- ferred indifference”. In other words, for the desired outcome of life, wealth is not necessary because it is just a means. As it is stated by the Prophet (pbuh), at the end what really matters is the deeds: “Certainly God looks not at your faces or your wealth; instead, He looks at your heart and your deeds”.

If it is available, wealth might be desired because it provides certain convenience in this life. Of course, one could argue for the importance of wealth particularly at this time to help people learning and pursuing sincere and virtuous deeds. We are talking about wealth as means for convenient worldly life.

For instance, working to be rich and live a virtuous and sincere life is possible. Abdurrahman bin Auf, a companion of the Prophet, was very rich before becoming Muslim. He kept doing business and earning enormous amount of wealth even after converting to Muslim. He was one of ten companions who had been told by the Prophet that they would go to the paradise. This means that wealth is not obstacle for the best outcome in life. However, it is important to note that Abdurrahman bin Auf did not want and use wealth mainly for his personal convenience. He used for himself and his fellows to flourish in moral, spiritual, and social aspects.

Ibn al-Qayyim says since the life is a test and trial, it does not matter whether the questions come through the form of poorness and wealth. As the possession of wealth is not a sign of God’s favour, the lack of

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