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Seminar Address on Monetary & Fiscal Economics of Islam

Mr. President, Distinguished Guests, Ladies and Gentlemen,

A ssalam-o-A laikum


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I have great pleasure in welcoming you to the inauguration of the International Seminar on Monetary and Fiscal Economics of Islam. I and my colleagues on the Organizing Committee of the Seminar feel honoured by your presence. We are specially grateful to the experts who have responded to our request for participation in this Seminar. Some of you have travelled long distances in order to contribute to the deliberations of this meeting. We can only assure you of our sincere effort to make your visit pleasant and fruitful.

This is not just one more Seminar in the interminable series of international meetings of intellectual groups held the year round. This must be viewed as an important land-mark in the struggle of the Muslim Ummah to re-shape its destiny in the light of Allah’s Command. All those participating in this endeavour can legitimately take pride in their work, only moderated by a sense of humility in relation to the magnitude of the task.

The advent of the fifteenth century Hijra has coincided with a new phase in the renascence of Islam. In the latter half of the last century, Muslims all over the region stretching from Indonesia to the Maghreb were seeking independence from foreign rule in the limited context of national movements. With independence came a greater realization of the true sense of their identity and their heritage as a single Ummah transcending geographical boundaries. Re-discovery of Islam as a truly dynamic force in determining the way of life of individual Muslims and the shape of the Islamic society is today a major concern of all Muslim countries and has naturally brought us closer together once again. From the'vantage point of the opening year of the new century, Islamic resurgence can be seen as the tidal wave, destined to change all aspects of existing national and international relationships.

Muslim Scholars all over the world are currently engaged in the task of transforming the institutions of modern developing societies to conform to the basic tenets of Islam. A number of countries are attempting to move ahead with practical measures in this direction. We in Pakistan are not only an integral part of this universal movement; we have a special responsibility to be in its vanguard. The creation of Pakistan on a clearly-defined ideology implied a solemn commitment that the life in the new State would be regulated by Islamic injunctions. This has placed an obligation upon us, the non-fulfilment of which will tend to undermine the very foundation of the nation.

It is indeed a sad and regrettable fact that during almost one- third of a century since the birth of Pakistan, our progress towards Islamization of the laws and institutions was slow to the point of being negligible. Finally, the forces in favour of an unqualified commitment to Islam triumphed over the elements supporting the status quo, and since then there has been a remarkable change in the pace of implementation of the Islamization measures. Today the national commitment to Islam is total and unqualified. We are determined to keep up the momentum. But we must build on sure and strong foundations. Debates on the interpretation of Islamic injunctions governing sociopolitical relations in a Muslim society are no longer confined to the realm of theory. Practical progress is only one stage behind the development of thought and ideas which are now clearly emerging. Intellectuals and experts, not only from Pakistan but from all over the world have a role in assisting us in this task, and we would sincerely welcome their contributions.

We have the immense task of fully grasping the “totality” of Islam as a complete, perfect and ideal way of life free from the restrictions of space and time. We have to work towards reformulating each single element of our entire societal framework in the light of this complete vision. It is, of course, unavoidable in practice that we should be discussing elements of the system separately, taking one of them at a time. But it is essential that at no stage we lose sight of the “totality” of the system and its fundamental objectives as enshrined in the Quran and Sunnah.

This is because Islam demands of the “believers” nothing less than a complete attitudinal transformation that comes only from a voluntary dedication to Allah’s will:

"Say: Lo! my worship and my sacrifice and my living and my dying are all for Allah      ” (6; 7 63).

Emanating from this all-embracing Unity, life to a Muslim comes as a homogeneous whole, which admits of no breaks or discontinuities. The interaction between Man’s material acquisitive instincts and his spiritual aspirations within this whole imbues him with a sense of the sacred and urges him to participate fully in life, which is a gift from Allah. The process of Islamization must, therefore, be ‘total’,

"O ye who believe come, all of you, into submission (unto Him) ” (2; 208).

The “totality” covers life in this world and the Hereafter. Wordly goals of a true Muslim are inseparable from his spiritual aspirations. At the same time, the development of the individual and the progress of the society must blend harmoniously.

Two basic problems that arise as soon as we think of Islamization are: what are the dimensions of the ‘totality’, which characterise the Islamic system? And what guidance does this concept of totality provide in shaping all the components of a distinctive Islamic economic system? A clear answer to these questions is required to make any meaningful statements about particular policies being contrary to, or consistent with, the Islamic system.

We must keep in mind the distinction between the universally applicable and ever-lasting fundamental principles and objectives emanating from the immaculate Divine Vision, which govern life under the Islamic system and the changing forms their manifestations would take in the light of the evolution of human experience and the new challenges the society may face. There can be no compromise on the basic principles. They are inviolate. But let there be no freeze on man’s thought, his search for knowledge, or the application of knowledge for social, political and technological advance. The fundamentals of Islam are not impediments to our quest for progress; rather they are the guiding light illuminating our path towards the attainment of Falah both in this world and in the Hereafter. The Holy Quran repeatedly urges every Muslim to apply Fihr to the manifestations of nature around him. God promised Adam that mankind would be continually provided Divine guidance. The long line of prophets sent by Allah ended with our Holy Prophet, Mohammad (peace be upon him). Islam became the last revealed religion from God. This is because, among all religions, Islam alone combines the comprehensiveness and flexibility to continue to guide mankind irrespective of the passage of time. Allah in His wisdom proclaimed Islam as the culmination and completion of religion for mankind by clearly laying down the principles and by inviting man to use his Fikr for evolving the dynamic application of these principles and fundamentals to the changing social and physical environment. This was a Divine tribute to the maturing of human intellect. Man is now regarded as fully capable of using his own Fikr for finding solutions, within the boundaries defind by the Holy Quran and Sunnah to whatever new challenges he may face, and as a corollary it is incumbent upon him to continue with the process of Ijtehad.

It would be unduly restrictive and, in fact, unjust to the true spirit of Islam to assume that the process of interpretation of Islamic principles stopped with the compilation of any particular set of laws in any given period. The early history of Islam is characterised by the emergence of successive schools of Fiqh representing sincere attempts on the part of renowned scholars to interpret Islam in practical terms in response to prevailing conditions. They formulated not only the laws guiding the conduct of individuals and the society but also laid down methods for responding to new problems as these arise. This is indeed the basis on which we have to build. Fiqh should be used as a science indicating the laws governing interpretation of the fundamental principles and their application to new problems. The coverage of Fiqh will also need to be extended to these new problems with the help of its own guiding principles and methodology. It would be a dynamic approach, not just a historical one. It must be an evolutionary process based on the firm foundations of the Holy Quran, Sunnah and the methods applied by earlier scholars to derive laws from these sources. This, of course, has to be attempted within the unitary, indivisible and integrated view of Islam governing the conduct of both the individual and the society.

What is this view? It is so wide and all-embracing a concept of life that it is almost impossible to grasp it in any terminology or words, except the terminology used by Allah Himself. The basic guiding ethical principles are described in the Holy Quran as 'Adi and Ehsan. The Holy Quran says:

“Lo! Allah enjoineth al-'Adl-wal-Ehsan” (16; 90).

This is a view of a Society in Balance, with justice and fairness (‘Adi) assured to all; at the same time inviting kindness (Ehsan) and compassion (Rahma) seeking to give more than the minimum enjoined. The Quranic conception of ‘Adi is- much wider in scope than the word justice denotes. From the Islamic point of view, ‘Adi stands for the best configuration of social and economic relations. Similarly, Ehsan is not just kindness or doing good to others but signifies a specific attempt by an individual to excel himself by over-coming his basic instincts purely for seeking the pleasure of Allah. The Holy Prophet (peace be upon him) defined Ehsan in clear terms! “It is to pursue the system of obedience to Allah as if thou are seeing Him”. This is the highest standard for regulating conduct. There is also a minimum. You guide your actions by the realization that “He is seeing thee”. This leads to a continuous drive towards “creation of beauty in one’s conduct, which is achieved through beauty in knowledge and beauty in action”. The practice of Ehsan thus creates a special relationship in which Man as an individual stands before Allah and his fellow-beings, and together with ‘Adi requires of all men a special kind of social and economic behaviour that forges an indissoluble link between Man and the Universe.

The fact that ‘Adi and Ehsan together define the ethical base of a distinctive Islamic economic system should be clear when it is remembered that these Divine concepts relate directly to the basic social structure, which implies a definite scheme of distribution of economic benefits within the society — and of their redistribution in the prescribed manner if the ‘initial’ position does not conform to the Islamic ideal.

If one looks for the components of the basic social structure, its most important and ‘dominant’ element turns out to be the pattern of property holdings and their use in the society. For instance, in the capitalistic societies most property is privately held because in them the individual’s right to property is considered to be absolute and inviolable. According to reliable estimates, about one-third of the GNP in the capitalistic countries is accounted for by income from private property. On the other hand, the communistic societies do not recognize this right at all. The originality of the Islamic point of view, indeed, its revolutionary character, rests on the fact that it replaced the concept of absolute “ownership” by that which is akin to “trusteeship”.

For only Allah is the absolute owner of everything in the Universe:

“Allah's is the heritage of the heaven and the earth” (3; 180).

Since the State and the individual are both bound by the same absolute Divine rule:

“And spend whereof He hath made you trustees” (57; 7), there is no place in Islam either for ‘private’ capitalism or for State capitalism. It follows that under the Islamic dispensation the exact dividing line between what the individuals own and that which the State can own should conform to the rules of trusteeship. Trusteeship gives rights to those who hold property but on condition of their fulfilling obligations placed upon them by Allah for the greater good of the society. While these conditions can be re-defined in the light of the evolution of the society itself within the framework of “Adi, individuals are urged to go further than that by eschewing all forms of selfishness and avarice, and adopt Ehsan:

‘'And who so is saved from his own avarice — such arethey, who are successful”.

Once such a philosophy is accepted, several far-reaching consequences will follow: Firstly, in such an economy wealth will not be allowed to be concentrated in a few hands. With the Divine promise of a manifold reward both in this world and in the Hereafter, Man has been urged constantly by the Holy Quran to keep the process of the re- distribution of wealth going through voluntary spending:

“The likeness of those who spend their wealth in Allah’s way is as the likeness of grain which growth seven ears, in every ear a hundred grains. Allah giveth increase manifold to whom He will ” (2; 261).

From the early days of Islam, there has been a distinguished and influential opinion among the Muslim scholars — among whom Hazrat Abu Zar Ghaffari’s name stands out as the most prominent — who have insisted that the widest possible distribution of wealth should be effected to implement the Divine Commandment of Infaq:

“And they ask thee what they ought to spend. Say:

That which is in excess of your need” (2; 219).

Whatever the exact size of the resource transfer — “that which is in excess” — from the individual to meet the collective obligation of the society towards its under-privileged, it has to be large enough to eradicate all froms of abject poverty.

What is “in excess” can only be defined in the context of the stage of economic development of a society. The starting point is the recognition that eradication of poverty and ensuring a minimum standard of living not only for the Muslims but even for the non-Muslim citizens of a Muslim State is the collective responsibility of the society. A minimum contribution to fulfil this obligation by way of Zakah is specifically prescribed. Without Zakah, there is no legitimacy for private wealth. Even beyond that, all form of waste has to be avoided. Simple living is encouraged so that there is more of this “excess” for increasing the element of Infaq.

The spending behaviour of the consumers in an Islamic economy is also directly subjected to ethical constraints. The principle of consumer sovereignty cherished by a capitalist society has no sanctity in an Islamic economy. In it the individual is not entitled to all his wealth in an unqualified manner, even that earned through his labour. The manner in which he spends it is subject to the prescribed ethical norms of such a society.

Logically, the basic approach thus determined will affect and modify all aspects of economic organization. Corresponding to the changes in income distribution as well as changes in the behaviour of the consumers, production structure and trading pattern will also undergo a profound transformation.

One should be careful, however, not to draw too many such specific conclusions on a priori basis, because exactly what and how much shall be consumed, produced or distributed is an empirical question that can be decided only in the real world, keeping in view the prevalent standards of living in the Muslim societies. Even a simple question like what is a “luxury” or a ‘necessity’ which inevitably will arise when deciding the production or consumption pattern cannot be answered without reference to the stage of development that an economy has already achieved.

Certain lines of action can, nevertheless, be determined for translating the guiding principles of Islam into specific economic policies. We have already discussed the role of the State in preventing the undue concentration of wealth and in ensuring fair distribution. But this alone would not suffice. The State has to play a more positive role to promote the advancement of man as the viceregent of Allah on this planet. Islam rejects the ascetic approach to life and regards society “as the natural framework of activity for human fulfilment”. An Islamic society has thus an obligation to create an environment in which each individual can develop and realise his full potential as a human being. Man is the highest and the most elevated creation of God. He has obligations and has to fulfil his trust. By the same virtue he is imbued with rights and dignity which it is the obligation of an Islamic society to preserve and uphold. There is a basic equality among individuals which determines their right to get equal access to opportunities. Beyond that, it is for each individual to strive and attain heights surpassing others. Each of them has a right to rewards according to this own talents and effort.

The economic and social system of Islam has to adopt a broad approach for meeting this obligation towards its citizens; equal access to opportunity would have to be ensured for all. This would imply a number of measures. To recount only a few, the programme of action will include: (i) an effective education and training system with universal coverage and full opportunity of advancement for the talented; (ii) widespread employment and business opportunities; and (iii) a comprehensive social security programme. A combination of these measures would enable individuals to participate in the economic system on equal footing. The social security programme will be directed to satisfying the needs of the destitute, the old and the sick and of those who cannot participate in productive activities even if they wanted to. Such persons are the collective responsibility of the entire society. However, equally important is to make sure that the process of economic growth does generate sufficient employment opportunities; since employment for the individual is not only a source of income, it also gives him dignity as a productive agent performing a creative role in the society.

The role of universal education in the Islamization process should particularly be noted. For Man has been advised constantly to pray:

“My Lord! increase me in knowledge’’ (20; 114).

This is because in the Islamic perspective there is a clear difference between those who have knowledge and those who do not have it:

“Say (unto them O Muhammad): Are those who know equal with those who know not? But only men of understanding will pay heed " (39; 9).

However, to make socially acceptable the inequalities that are based on the superiority of knowledge, every citizen of an Islamic State will have to be given equal opportunities and access to knowledge. The education system would not only impart knowledge; but would prepare the individual to be a responsible and productive member of an Islamic Society, capable of pursuing on his own his goals of both material and spiritual advancement.

I have attempted to elaborate some of the broader aspects which must receive attention in the search for creating an integrated Islamic economic system. In devising such a system, the experts and policy makers will have to be innovative all along the line because the road to the Islamic ideal is not the familiar one — at least not to the modern mind. For instance, the institution of interest, which is the bed-rock of the capitalistic system, finds no place in an Islamic economic system. And yet it will be grossly naive to argue that the switch from the interest-based system to an interest-free system can be accomplished without a basic transformation of the entire society and intra- societal relationships. The abolition of interest as an economic institution is not an object by itself. It is one of the means to realise the goals of an Islamic economy, which should be free from exploitation. The institution of interest is no doubt exploitative, but to assume that this is the only source of exploitation will also amount to betraying complete ignorance of the anatomy of social injustice in a modern society. There are various other forms of exploitation. Unbridled market mechanism, for example, can in certain situations be highly exploitative. Similarly, profits can be, and in some situations are, even more exploitative.

I wish only to warn against the complacent notion which many entertain that a definitive and viable alternative either exists or has already been found to the present-day interest-based system. The essence of the Islamic reform is not merely to find out that which is legitimate from the Islamic point of view: what is expected of economists and experts is that they undertake the more difficult and complicated job of devising ways and means which, in addition to being legitimate, are also nearest to the ideals of the Islamic way of life.

I am saying this because to my mind an Islamic society has to go beyond the mere abolition of interest as an instrument of exploitation. It has an obligation to find and abolish various other manifest ations of riba by whatever name called which may not be so obvious as interest. Profits as a reward for supplying capital, for rendering productive services, and for efficiency have a due place in the economic system of Islam. Profits derived from speculation or cornering the market for an essential item of consumption would, however, have to be curbed with the same determination with which we seek to cleanse our society of interest-based transactions. In particular, an industry or trade related to basic human needs would constitute the special concern of the State in order to ensure uninterrupted supply in adequate measure at reasonable prices.

At the same time, it has to be realised that in an interest-free Islamic system resources cannot be allowed to be directed with the sole objective of maximizing profits without regard to the overall Social Good. An Islamic society is essentially egalitarian in character. The social gospel of Islam requires of such a society that it should seek to ensure that support would be available for those also who cannot compete for available loanable funds by offering a promise of high profits. A student seeking to complete his education or a talented individual striving to set up his own business, for example, should not be denied financial assistance only because they cannot offer attractive profit-sharing opportunities. Thus, a more basic attempt has to be made to replace the entire concept of interest and its role in modern economic relations.

Interest, as we all know, is not only a payment for the use of borrowed funds by the borrower to the lender; it also has a highly important role in modern economics in determining the allocation of resources, in control of inflation, in selection of development projects and in suggesting relative priorities for various sectors in economic development. The alternatives that we seek will have to be comprehensive enough to replace this conceptual framework of modern economics built up on the cornerstone of interest and its allocative function. We still face the challenge of finding a new basis for regulating the allocative process in an interest-free society without too much of state interference.

In terms of monetary policy, as the pricing of credit by interest rate is removed, there would be a clear need to either ration the funds which are available or work on an alternative system for containing demand. How much credit can be replaced by equity? How much reliance should continue to be placed on profit-and-loss-sharing loans in business expansion? Would an economy, not based on interest, continue to be based on seeking an unlimited return on capital, even though theoretically sharing in loss as well. What measures would be required to encourage savings? These and many more such questions would arise as we move further along the road. We have to continuously face these issues and provide solutions.

The Government of Pakistan has taken a series of measures along the lines indicated above. The new Education Policy seeks to achieve universal education, at the primary level to begin with, with proper Islamic orientation. Training in skills is being strengthened at all levels. An ordinance providing for the compulsory collection of Zakah at the State level has been promulgated to give a practical shape to the responsibility of the “Haves”:

“In whose wealth there is a right acknowledged for the beggar and the destitute” (70; 24-25) — towards the “have-nots”. It is hoped that, with the passage of time and with more experience, an ambitious and a viable social security programme will emerge, wholly financed through Zakah. Steps are also being taken to move away from the present interest-based financial system. Interest-free counters have been opened in all Pakistani commercial banks; and preparations are under way to float mudarabah companies. The small farmers and meritorious students are being granted interest-free loans. The National Investment Trust, the National Investment Corporation and some other financing institutions are offering interest-free alternatives to investors; and the House Building Finance Corporation has evolved an ownership- participation scheme, under which loans will not be given on interest.

However, while these steps are an unmistakable earnest of our firm determination to evolve an Islamic economic system, we are fully conscious that we have yet a long way to go. The present Seminar has been organised to promote the meeting of the best minds in the Muslim World so that some fresh thinking is done on these difficult problems. The abolition of interest and the introduction of Zakah are no doubt momentous steps in the right direction; but they by them- sleves do not add up to an Islamic economic system. We need your guidance for strengthening the measures we have already introduced, for correcting our mistakes if any, and for advancing further to give greater depth to the measures we have taken towards Islamization of the economic system and institutions.

We would look forward to the deliberations of your Seminar with a keen desire to learn more. We are conscious that it would be too optimistic to expect final judgement emerging from any meeting on ations of riba by whatever name called which may not be so obvious as interest. Profits as a reward for supplying capital, for rendering productive services, and for efficiency have a due place in the economic system of Islam. Profits derived from speculation or cornering the market for an essential item of consumption would, however, have to be curbed with the same determination with which we seek to cleanse our society of interest-based transactions. In particular, an industry or trade related to basic human needs would constitute the special concern of the State in order to ensure uninterrupted supply in adequate measure at reasonable prices.

At the same time, it has to be realised that in an interest-free Islamic system resources cannot be allowed to be directed with the sole objective of maximizing profits without regard to the overall Social Good. An Islamic society is essentially egalitarian in character. The social gospel of Islam requires of such a society that it should seek to ensure that support would be available for those also who cannot compete for available loanable funds by offering a promise of high profits. A student seeking to complete his education or a talented individual striving to set up his own business, for example, should not be denied financial assistance only because they cannot offer attractive profit-sharing opportunities. Thus, a more basic attempt has to be made to replace the entire concept of interest and its role in modern economic relations.

Interest, as we all know, is not only a payment for the use of borrowed funds by the borrower to the lender; it also has a highly important role in modern economics in determining the allocation of resources, in control of inflation, in selection of development projects and in suggesting relative priorities for various sectors in economic development. The alternatives that we seek will have to be comprehensive enough to replace this conceptual framework of modern economics built up on the cornerstone of interest and its allocative function. We still face the challenge of finding a new basis for regulating the allocative process in an interest-free society without too much of state interference.

In terms of monetary policy, as the pricing of credit by interest rate is removed, there would be a clear need to either ration the funds which are available or work on an alternative system for containing demand. How much credit can be replaced by equity? How much reliance should continue to be placed on profit-and-loss-sharing loans in business expansion? Would an economy, not based on interest, continue to be based on seeking an unlimited return on capital, even though theoretically sharing in loss as well. What measures would be required to encourage savings? These and many more such questions would arise as we move further along the road. We have to continuously face these issues and provide solutions.

The Government of Pakistan has taken a series of measures along the lines indicated above. The new Education Policy seeks to achieve universal education, at the primary level to begin with, with proper Islamic orientation. Training in skills is being strengthened at all levels. An ordinance providing for the compulsory collection of Zakah at the State level has been promulgated to give a practical shape to the responsibility of the “Haves”:

 “In whose wealth there is a right acknowledged for the beggar and the destitute” (70; 24-25) — towards the “have-nots”. It is hoped that, with the passage of time and with more experience, an ambitious and a viable social security programme will emerge, wholly financed through Zakah. Steps are also being taken to move away from the present interest-based financial system. Interest-free counters have been opened in all Pakistani commercial banks; and preparations are under way to float mudarabah companies. The small farmers and meritorious students are being granted interest-free loans. The National Investment Trust, the National Investment Corporation and some other financing institutions are offering interest-free alternatives to investors; and the House Building Finance Corporation has evolved an ownership- participation scheme, under which loans will not be given on interest.

However, while these steps are an unmistakable earnest of our firm determination to evolve an Islamic economic system, we are fully conscious that we have yet a long way to go. The present Seminar has been organised to promote the meeting of the best minds in the Muslim World so that some fresh thinking is done on these difficult problems. The abolition of interest and the introduction of Zakah are no doubt momentous steps in the right direction; but they by them- sleves do not add up to an Islamic economic system. We need your guidance for strengthening the measures we have already introduced, for correcting our mistakes if any, and for advancing further to give greater depth to the measures we have taken towards Islamization of the economic system and institutions.

We would look forward to the deliberations of your Seminar with a keen desire to learn more. We are conscious that it would be too optimistic to expect final judgement emerging from any meeting on such complex issues spreading over such a wide field. But we would be happy if our path is illuminated even for a few additional steps. The difficult process of analysis and its application should, of course, go on until a society based on the principles of Islam is fully established. Even»at that stage, the economic problems will not go away but we would have at least discovered the Islamic way of meeting them and would be better equipped to resist the siren calls of foreign ideologies luring us away from the straight path.   

Man will have to traverse one cavern of darkness after another in the search of the noon-day brightness of the world of ideals. In this wondrous Universe, new challenges keep on cropping up, asking for a creative response. The great paradox of our life on earth, indeed its beauty, is that we get only by renouncing what we desire most. True happiness lies not in receiving but in giving — in jettisoning the deadweight of our wanton desires. At least this is what Islam teaches us:

“Ah, what will convey unto thee what the Ascent is! (it is) to free a slave. And to feed in the day of hunger, An orphan near of kin or some poor wretch in misery ..." (90; 12-16).

Hence, all we can do is to keep on making our best efforts to translate the Islamic ideals into the scaffolding of our thought processes and institutions, with an unyielding faith in Allah’s assurance:

“We squander not the wages of reformers” (7; 170).

 

Source: Fiscal Policy and Resource Allocation in Islam, Ziauddin Ahmed, Munawar Iqbal and M. Fahim Khan. Republished with permission.