Values & Markets in Islamic Allocation

We have tried so far in this paper to underscore the fact that suitable discount rates are generated from the legitimate economic activities within an interest-free Islamic economy. There is neither theoretical nor institutional reasons in such economy to keep looking back at real or shadow interest rates.

But our repeated reference to the acceptability of profits in an Islamic economy, and to the availability of market-determined discounting rates, should be understood in Islamic context. We certainly do not wish to imply that projects, rates of growth or intertemporal decisions generally, ought to be based in an Islamic economy solely on rates of return and other market prices (even in purely competitive markets). Rather, Islam requires such decisions to be based on the economic calculus as well on, other relevant Islamic goals. For the public authorities, such goals are clearly enforceable. For individual decision makers, non-market Islamic goals remain moral imperatives whose realization depends on the level of Taqwa in their hearts. A Muslim society is required, however, to see to it that by education, moral suasion, and if necessary, by compulsory regulation, individual economic decisions do not thwart the realization of Islamic goals.

The market activity in general (including rates of return) is one very important tool for allocation in an Islamic economy. But an Islamic society is goal-oriented and not consumption-and profit-oriented. The moving forces in society are Islamic major goals (some of which are economic) and not markets and profits. Thus the allocation of resources, distribution, and the rate and direction of growth will be aided but not dominated by market forces.

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