Monetary Economics

Replacement of interest by proflt-sharing has been shown to have far reaching consequences. Some of the important points are noted below:

1. Money creation will become investment oriented and will cease to be based on lending as it is now. This applies to high power money created by the central bank as well as to the creation of credit by the commercial banks. This direct linkage makes it possible to control the supply of money with the growth of the economy far more effectively than it is possible in the present system.
2. Demand for money would be a function of the level of income and expected changes in the productivity of investment as reflected in the rate of profit. It is argued that demand for money will be more stable in an Islamic economy than it is in the regime of interest.

The same applies to such areas as labor, industrial relations and population. Discussion is generally confined to principles while the requirements of the second and third components of Islamic economics are not fulfilled. The same can be said about international economic relations. Even the goals of policy in an international context are not properly discussed. Independent analysis of the existing reality and strategies for Islamic transformation of international economic relations are attempted only with reference to Muslim countries. A more universal framework has yet to be adopted.

It may be noted that the Islamic vision has not prompted equal attention to all dimensions of economic management or all spheres of economic activity. Greater attention has been paid to Islamically oriented behavior of economic agents and functioning of the market mechanism under its influence. The monetary sector has received such attention because the abolition of interest is a major Islamic contribution to economic affairs. The second component, analysis of the existing reality, is essentially very weak. One reason may be non-availability of empirical data relevant for such studies. Most theoretical studies belong to the third component but they suffer from the dearth of material relating to the first component, i.e., derivation of Islamic ends and values specifically related to the various spheres of economic activity. This applies even to monetary economics which has high priority in contemporary Islamic economics. A major reason for this deficiency has been the inability of professional Muslim economists to acquire direct access to Qur’an, Sunnah, Fiqh and Islamic history. Contributions from Shari’ah scholars generally lack relevance because they are not fully aware of the specific issues relating to various aspects of the modern economy. Proper development of Islamic economics as a discipline requires, besides pioneering individual contributions, organized institutional efforts which only the universities and institutes of higher learning can afford. The progress made so far, which has been mostly due to individual efforts, is both relevant and encouraging in view of the present state of economics and the unanswered needs of the society.

Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.