The Online Encyclopedia and Dictionary






Islamic economics

Islamic economics is economics in the political context of Islam. Because the Qur'an spoke against usury in the context of early Muslim society, it generally entails trying to remove or redefine interest rates from financial institutions. In doing so, Islamic economists hope to produce a more 'Islamic society'. However, liberal movements within Islam may deny the need for this field, since they generally see Islam as compatible with modern secular institutions and law.

For centuries Muslims have developed ways to integrate their religious beliefs with the external economic realities of the nations they live in. This has had varying degrees of compatibility with the empires and customs they encountered. Like most things in Islam, commerce adapts to al-urf, "the custom".

In the 1980s and 1990s Muslim bankers and religious leaders developed ways to integrate Islamic law on usage of money with modern concepts of investing and ethical investing. In parallel, a sophisticated economic discipline has emerged, almost an Islamic science, with its own categories, concepts, analytical tools and institutions. Some of these revived traditional micro venture capital and ethical investing frameworks that thrived in medieval times. However, they incorporated many modern techniques and technologies. Some consider the emergence of these economic practices to be part of a revival of Islam and an Islamization of knowledge. Others see them simply as a practical and wise response to problems of global debt and debt slavery.

Islamic economic institutions, not just the Islamic bank but all those connected with Islamic banking, claim to operate on the basis of "zero interest." However, the fundamental characteristic of charging interest (i.e. charging a premium, on the principal amount of a loan, for the time value of the loaned money) is not truly eliminated in Islamic economics, but merely hidden and relabeled. For example, consider the practical reality of purchasing a vehicle from an Islamic bank under an allegedly "zero interest" loan. The procedure, generally, is that the client tells the Islamic bank which vehicle he or she would like to own. The Islamic bank then purchases that vehicle in its name, and sells it to the client at a marked-up price, under an agreement that the new price marked-up price of the vehicle must be payed in a certain number of installments of a certain time period. Thus a $20,000 car might cause $35,000 if purchased from an Islamic bank at "zero interest," 5 year loan. Of course, the bank charges the extra $15,000 on top of the $20,000 cost of the car because money has a time value (that is to say, a payment of $20,000 5 years from now is worth less than a payment of $20,000 today). Usually, this time value of money is compensated to the lender by the lender charging the borrower interest on the principal amount of the loan. In the case of Islamic banking, the lost time value is compensated by charging a mark-up on the home or vehicle that the client might be seeking to purchase by way of a loan. The vehicle or mortgage usually remains in the name of the bank, until the principal loan including the mark-up has been paid. In the case of a business loan, instead of charging interest over the time that the principal amount is loaned out, an Islamic bank will demand a certain percentage of the borrower's business profits for an indefinite period of time.

Under a conventional interest based loan it is possible to "call" the loan if the interest rate drops and the borrower finds that he can find cheaper financing (i.e. pays off the entire loan before the end of its term, thus paying less interest). However, there is no way to call a loan issued by an Islamic bank. Thus while the borrower from Islamic bank is protected against rises in interest rate, the borrower cannot benefit from drops in the interest rate.

Most Islamic economic institutions advise participatory arrangements between capital and labor. The latter rule reflect the Islamic norm that the borrower must not bear all the cost of a failure, as "it is Allah who determines that failure, and intends that it fall on all those involved."

Conventional debt arrangements are thus usually unacceptable - but conventional venture investment structures are applied even on very small scales. However, not every debt arrangment can be seen in terms of venture investment structures. For example, when a family buys a home it is not investing in a business venture - a person's shelter is not a business venture. Similarly, purchasing other commodities for personal use, such as cars, furniture, and so on, cannot realistically be considered as a venture investment in which the Islamic bank shares risks and profits for the profits of the venture.

Perhaps due to resource scarcity in most Islamic nations, this form of economics also emphasizes limited (and some claim also sustainable) use of natural capital, i.e. producing land. These latter revive traditions of haram and hima that were prevalent in early Muslim civilization .

Social welfare, unemployment, public debt and globalization have been re-examined from the perspective of Islamic norms and values. Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. It remains to be seen if they will find niches - although hybrid approaches, e.g. Grameen Bank which applies classical Islamic values but uses conventional lending practices, are much lauded by some proponents of modern human development theory.

See also: modern Islamic philosophy, Islamic bank, Islamization of knowledge, green economics, creditary economics


  • Muhammad Nijatullah Siddiqui , Muslim Economic Thinking, (Islamic Foundation, Leicester, UK)
  • Syed Nawab Haider Naqi , Ethics and Economics: An Islamic Synthesis, (Islamic Foundation, Leicester, UK)
  • M. Umar Chapra, Islam and the Economic Challenge, (Islamic Foundation, Leicester, UK)
  • Islamic Economics book list
  • Islamic Banking references
  • Islamic Banking references (GDRC)

External links

  • Liberal and progressive Islam, from Alan Godlas' Islamic resources page at the University of Georgia

Last updated: 02-10-2005 18:46:42
Last updated: 04-25-2005 03:06:01