The need of developing a third economic system
Saturday, 15 May 2010
Hafizul Islam Mian
Profit and loss sharing: Islam formulates profit and loss sharing as the tool of trade contracts instead of interest. The motivation behind is the cooperation amongst the people. In profit sharing there are different types of financing such as mudaraba (profit and loss sharing) and musharaka (participation), etc.
Mudaraba is the agreement between both capital owner and entrepreneur to share the profit arises from the business and in case of loss, capital owner's capital reduces and entrepreneur's time and effort lose. Musharaka is the agreement to share profit and loss where all contributors participate in management of business. Both mudaraba and musharaka help the people, who have inadequacy of capital, to engage in business, production and contribute their share into the welfare of the nation and earn for their own. The latest introduction of investment in Small and Medium Enterprises (SME) is a milestone in the banking sector. The poor and small entrepreneurs can participate in economic and business activities, where the poverty of the poor businessmen might be reduced to a great extent.
Prohibitive Instruments/ Negative Measures
There are some prohibitions of God which has influence on the economic prosperity and welfare of everybody of the country. It is a hard fact that concentration of wealth in few hands usually takes place through unlawful means and corrupt practices adopted for acquiring wealth. It is through unfair and illegal means that few privileged individuals pile up big fortunes depriving the multitude of people from their legitimate share in national wealth. If natural process of distribution of wealth is allowed to flow unobstructed and all persons earn their livelihood through lawful means there cannot be concentration of wealth in a few hands and there cannot be unbridgeable gap between the rich and the poor. Thus the means adopted for earning play a vital role in governing distribution of wealth in a state or a community.
8.1. Prohibition
of interest
Riba (interest) or usury in every conceivable form has been abolished. Interest, whatever form, has been condemned by Allah and His messenger. Quran says Allah has permitted business and trade and prohibited riba (interest). Islam doesn't support interest but profit and loss sharing. Every financial transactions of Islamic economy should be free of Interest. Because, interest makes the financial position of a poor further worse. It is proven that absence of interest in an Islamic economy doesn't create any hindrance but help it flourish.
Some verses in favour of qard-al-hasan are:
"O ye who believe! Observe your duty to Allah and give up what remains [due to you] from riba, if you are [in truth] believers. And if you do not then be warned of war [against you] from Allah and His Messenger. And if you repent then you have your principal [without riba], wrong not, and you shall not be wronged." - (2:278-279).
Hoarding of Wealth Forbidden
Hoarding of wealth has been condemned by Islam with threats of severe punishment whereas circulation of wealth has been ordained. This measure not only forces the hoarded wealth out of coffers of the rich but also ensures its flow into investment channels ultimately helping its natural distribution.
Verses of the Qur'an
"They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings (O Muhammad) of a painful doom: On the Day when it will (all) be heated in the fire of hell, and their foreheads and their flanks and their backs will be branded there with (and it will be said unto them): Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard." -(9:34-35).
Prohibition of speculative instruments
Instruments which don't have any advantage to real economy such as futures and option are not permitted in Islamic economy. Stock market instruments like day trading, marginal trading are prohibited, either. Absence of these instruments in the economy reduces speculation which is harm to the entire economy. Speculative transactions are not in favour of entrepreneurs.
Other Prohibitive Measures
With a view to prevent concentration of wealth and ensure its fair and equitable distribution, Islam has adopted some additional prohibitive measures, i.e. all the unjust, unfair and illegal means of earning have been declared unlawful (haram) and hence prohibited. The prohibitions mentioned below regarding earning of livelihood or acquiring and accumulating wealth have been prohibited directly or indirectly by the Qur'an and the Sunnah. Following are some of these measures:
1. Bribery and corruption in every form is unlawful (haram).
2. Earning through wine, hard drinks, narcotics and other forbidden things is illegal.
3. Earning through gambling, forward sale, and games of chance is absolutely prohibited.
4. Theft and robbery are prohibited and declared punishable offences.
5. Income through adultery, prostitution, music, dancing, blue films, obscene literature, pornography, etc. is unlawful (haram).
6. Business malpractices such as wrong measuring and wrong weighing, adulteration, etc. are forbidden.
7. Misappropriation of the wealth of orphans, women and other weak persons is unlawful.
8. Earning through exploitation, blackmail, fraud, duress, deception, false oaths, misrepresentation of goods, is prohibited.
9. Financial benefits derived through misuse of office or power or through intercession, favouri-tism, nepotism, etc., are illegal.
10. Non-payment of debt or loan including loans of banks and financial institutions or remission of these loans secured through political or other influence is unlawful.
11. Embezzlement of individual or public money or misappropriation thereof, is absolutely unlawful (haram).
12. Non-payment of Zakat and other taxes or non-payment of dues for utilities and services is strictly prohibited.
13. Non-payment of wages or salaries to the labourers or employees is forbidden.
Through these unlawful measures the rich are always illegally become wealthy depriving the poor section of the population. So prevention of these unlawful activities would help alleviate poverty and bring congenial atmosphere in the society.
Implication
The implementation of the positive and prohibitive instruments in an economy provides a number of optimistic fruits, which makes the state free from every form of poverty.
Increased redistribution of income and wealth will result in, when the people perform the religious obligations like zakat, sadaqah, donation, waqf, CSR, etc. It leads to flow of wealth and money from rich to poor. Thus the concentration and accumulation of wealth in a few hands come down. Poor and needy spend approximately eighty percent of their earnings to fulfill their basic needs. Economically Marginal Propensity to Consume (MPC) of the poor is larger than middle and high class. A large portion of whatever comes into handy of poor will flow to economy for consumption of basic goods; it lead to more demand for primary goods and then it result in the increased production of basic goods. It is difficult to restrict luxurious consumption and production completely by law and force. But the increased rate of redistribution of wealth and income increase the demand for basic goods and decrease the demand for luxurious goods. Automatically it reduces the utilization of resources for the production of luxuries. Consequently, natural resources use for the production of basic goods and for the benefit of public welfare.
This increased redistribution of wealth to poor enables them to get the accessibility of good education and nutritious food. Increased knowledge and skills help the poor to get good jobs and earn. This raises the entire poor family and dependence to heights. In turn, increase of income more than a certain limit make them capable for performing zakat and other voluntary donations for the sake of the benefit of poor and distressed people. Rise in the redistribution help to reduce the gap between rich and poor and bring economic justice to all citizens.
Increased marginal propensity to consume (MPC) of poor as the redistribution of income results in more multiplier effect in economy that fuels more income to the overall income of economy that help the poor people to raise their per capita income and living standards.
According to Professor Keynes, investment depends on two variables which are current rare of interest and the marginal efficiency of capital or expected profit rate. Investment would take place only if the expected rate of profit exceeds of interest. Due to the absence of interest, in an Islamic economy, only the size of expected rate of profit of profit will be the determinant of investment.
Speculative motive of money and liquidity theory of money will have no place in an interest free economy which reduces investment. But the presence of only expected rate of profit will result in investments, even in low rate of expected rate of profit to increase their principle amount and to avoid the deterioration of principal through zakat. The increased investment raises the production, employment, wages and overall national income of economy. It flows wealth to poor and raises their economic status.
Fishers quantity theory which states that quantity of money affects the price and value of money. It means that increase in the supply of money will proportionately increase the price in economy but the output will not increase. But in the case of Islamic economy money should not be supplied without making increase in the output. The central bank and commercial banks of Islamic state increase the money supply through making investment contracts on the basis of profit and loss sharing. So every flow of money into economy results in output growth without making proportionate hike in price. It is helpful to the poor to get need things at reasonable price.
Experts in the fields of development, food and population unanimously agree that the available natural resources in the world are so abundant that they can meet all the needs of the nations if goodwill were shown and if these resources were equally distributed among all nations. The root cause is the unjust distribution of the income and wealth and the failure of many nations to win their real independence decide the fate of their wealth and distribute it justly and fairly.
Russian scientist Ivan Shatilov has said that cultivated areas now could satisfy the hunger of tens of billions of people if their crops were distributed equally and fairly among the nations of the world. He further points out: 'On the other hand, we must not lose sight of the fact that the advanced industrialized world has not, so far, made use of the marine sources of food. The oceans constitute 71 percent of the total surface of the earth, whereas they produce no more that 1 percent of man's foodstuff. The dominating economic systems failed to alleviate poverty and establish justice in the society. The relevant question now arises, "Is it possible to alleviate poverty by following the Islamic economic system?"
The answer is aim and objective of poverty alleviation can be attained, in an Islamic economic system through reducing the inequality. It may not be possible to attain complete equality but equity and justice in the income and wealth distribution and consumption is possible through establishing Islamic economic system. Islam eliminates the absolute inequality which arises from unequal distribution of income and wealth.
Mufti Taqi Usmani once opined at the International Conference of the World Muslim Congress: "The twentieth century has witnessed the rise of communism and the conflict between capitalist and communist countries and lastly the fall of communism. The communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and have-nots and 'poverty in the midst of plenty' is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism.
The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms.
The writer is a Director of Islami Bank Bangladesh Limited
Profit and loss sharing: Islam formulates profit and loss sharing as the tool of trade contracts instead of interest. The motivation behind is the cooperation amongst the people. In profit sharing there are different types of financing such as mudaraba (profit and loss sharing) and musharaka (participation), etc.
Mudaraba is the agreement between both capital owner and entrepreneur to share the profit arises from the business and in case of loss, capital owner's capital reduces and entrepreneur's time and effort lose. Musharaka is the agreement to share profit and loss where all contributors participate in management of business. Both mudaraba and musharaka help the people, who have inadequacy of capital, to engage in business, production and contribute their share into the welfare of the nation and earn for their own. The latest introduction of investment in Small and Medium Enterprises (SME) is a milestone in the banking sector. The poor and small entrepreneurs can participate in economic and business activities, where the poverty of the poor businessmen might be reduced to a great extent.
Prohibitive Instruments/ Negative Measures
There are some prohibitions of God which has influence on the economic prosperity and welfare of everybody of the country. It is a hard fact that concentration of wealth in few hands usually takes place through unlawful means and corrupt practices adopted for acquiring wealth. It is through unfair and illegal means that few privileged individuals pile up big fortunes depriving the multitude of people from their legitimate share in national wealth. If natural process of distribution of wealth is allowed to flow unobstructed and all persons earn their livelihood through lawful means there cannot be concentration of wealth in a few hands and there cannot be unbridgeable gap between the rich and the poor. Thus the means adopted for earning play a vital role in governing distribution of wealth in a state or a community.
8.1. Prohibition
of interest
Riba (interest) or usury in every conceivable form has been abolished. Interest, whatever form, has been condemned by Allah and His messenger. Quran says Allah has permitted business and trade and prohibited riba (interest). Islam doesn't support interest but profit and loss sharing. Every financial transactions of Islamic economy should be free of Interest. Because, interest makes the financial position of a poor further worse. It is proven that absence of interest in an Islamic economy doesn't create any hindrance but help it flourish.
Some verses in favour of qard-al-hasan are:
"O ye who believe! Observe your duty to Allah and give up what remains [due to you] from riba, if you are [in truth] believers. And if you do not then be warned of war [against you] from Allah and His Messenger. And if you repent then you have your principal [without riba], wrong not, and you shall not be wronged." - (2:278-279).
Hoarding of Wealth Forbidden
Hoarding of wealth has been condemned by Islam with threats of severe punishment whereas circulation of wealth has been ordained. This measure not only forces the hoarded wealth out of coffers of the rich but also ensures its flow into investment channels ultimately helping its natural distribution.
Verses of the Qur'an
"They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings (O Muhammad) of a painful doom: On the Day when it will (all) be heated in the fire of hell, and their foreheads and their flanks and their backs will be branded there with (and it will be said unto them): Here is that which ye hoarded for yourselves. Now taste of what ye used to hoard." -(9:34-35).
Prohibition of speculative instruments
Instruments which don't have any advantage to real economy such as futures and option are not permitted in Islamic economy. Stock market instruments like day trading, marginal trading are prohibited, either. Absence of these instruments in the economy reduces speculation which is harm to the entire economy. Speculative transactions are not in favour of entrepreneurs.
Other Prohibitive Measures
With a view to prevent concentration of wealth and ensure its fair and equitable distribution, Islam has adopted some additional prohibitive measures, i.e. all the unjust, unfair and illegal means of earning have been declared unlawful (haram) and hence prohibited. The prohibitions mentioned below regarding earning of livelihood or acquiring and accumulating wealth have been prohibited directly or indirectly by the Qur'an and the Sunnah. Following are some of these measures:
1. Bribery and corruption in every form is unlawful (haram).
2. Earning through wine, hard drinks, narcotics and other forbidden things is illegal.
3. Earning through gambling, forward sale, and games of chance is absolutely prohibited.
4. Theft and robbery are prohibited and declared punishable offences.
5. Income through adultery, prostitution, music, dancing, blue films, obscene literature, pornography, etc. is unlawful (haram).
6. Business malpractices such as wrong measuring and wrong weighing, adulteration, etc. are forbidden.
7. Misappropriation of the wealth of orphans, women and other weak persons is unlawful.
8. Earning through exploitation, blackmail, fraud, duress, deception, false oaths, misrepresentation of goods, is prohibited.
9. Financial benefits derived through misuse of office or power or through intercession, favouri-tism, nepotism, etc., are illegal.
10. Non-payment of debt or loan including loans of banks and financial institutions or remission of these loans secured through political or other influence is unlawful.
11. Embezzlement of individual or public money or misappropriation thereof, is absolutely unlawful (haram).
12. Non-payment of Zakat and other taxes or non-payment of dues for utilities and services is strictly prohibited.
13. Non-payment of wages or salaries to the labourers or employees is forbidden.
Through these unlawful measures the rich are always illegally become wealthy depriving the poor section of the population. So prevention of these unlawful activities would help alleviate poverty and bring congenial atmosphere in the society.
Implication
The implementation of the positive and prohibitive instruments in an economy provides a number of optimistic fruits, which makes the state free from every form of poverty.
Increased redistribution of income and wealth will result in, when the people perform the religious obligations like zakat, sadaqah, donation, waqf, CSR, etc. It leads to flow of wealth and money from rich to poor. Thus the concentration and accumulation of wealth in a few hands come down. Poor and needy spend approximately eighty percent of their earnings to fulfill their basic needs. Economically Marginal Propensity to Consume (MPC) of the poor is larger than middle and high class. A large portion of whatever comes into handy of poor will flow to economy for consumption of basic goods; it lead to more demand for primary goods and then it result in the increased production of basic goods. It is difficult to restrict luxurious consumption and production completely by law and force. But the increased rate of redistribution of wealth and income increase the demand for basic goods and decrease the demand for luxurious goods. Automatically it reduces the utilization of resources for the production of luxuries. Consequently, natural resources use for the production of basic goods and for the benefit of public welfare.
This increased redistribution of wealth to poor enables them to get the accessibility of good education and nutritious food. Increased knowledge and skills help the poor to get good jobs and earn. This raises the entire poor family and dependence to heights. In turn, increase of income more than a certain limit make them capable for performing zakat and other voluntary donations for the sake of the benefit of poor and distressed people. Rise in the redistribution help to reduce the gap between rich and poor and bring economic justice to all citizens.
Increased marginal propensity to consume (MPC) of poor as the redistribution of income results in more multiplier effect in economy that fuels more income to the overall income of economy that help the poor people to raise their per capita income and living standards.
According to Professor Keynes, investment depends on two variables which are current rare of interest and the marginal efficiency of capital or expected profit rate. Investment would take place only if the expected rate of profit exceeds of interest. Due to the absence of interest, in an Islamic economy, only the size of expected rate of profit of profit will be the determinant of investment.
Speculative motive of money and liquidity theory of money will have no place in an interest free economy which reduces investment. But the presence of only expected rate of profit will result in investments, even in low rate of expected rate of profit to increase their principle amount and to avoid the deterioration of principal through zakat. The increased investment raises the production, employment, wages and overall national income of economy. It flows wealth to poor and raises their economic status.
Fishers quantity theory which states that quantity of money affects the price and value of money. It means that increase in the supply of money will proportionately increase the price in economy but the output will not increase. But in the case of Islamic economy money should not be supplied without making increase in the output. The central bank and commercial banks of Islamic state increase the money supply through making investment contracts on the basis of profit and loss sharing. So every flow of money into economy results in output growth without making proportionate hike in price. It is helpful to the poor to get need things at reasonable price.
Experts in the fields of development, food and population unanimously agree that the available natural resources in the world are so abundant that they can meet all the needs of the nations if goodwill were shown and if these resources were equally distributed among all nations. The root cause is the unjust distribution of the income and wealth and the failure of many nations to win their real independence decide the fate of their wealth and distribute it justly and fairly.
Russian scientist Ivan Shatilov has said that cultivated areas now could satisfy the hunger of tens of billions of people if their crops were distributed equally and fairly among the nations of the world. He further points out: 'On the other hand, we must not lose sight of the fact that the advanced industrialized world has not, so far, made use of the marine sources of food. The oceans constitute 71 percent of the total surface of the earth, whereas they produce no more that 1 percent of man's foodstuff. The dominating economic systems failed to alleviate poverty and establish justice in the society. The relevant question now arises, "Is it possible to alleviate poverty by following the Islamic economic system?"
The answer is aim and objective of poverty alleviation can be attained, in an Islamic economic system through reducing the inequality. It may not be possible to attain complete equality but equity and justice in the income and wealth distribution and consumption is possible through establishing Islamic economic system. Islam eliminates the absolute inequality which arises from unequal distribution of income and wealth.
Mufti Taqi Usmani once opined at the International Conference of the World Muslim Congress: "The twentieth century has witnessed the rise of communism and the conflict between capitalist and communist countries and lastly the fall of communism. The communism was based on an emotional reaction against some evil consequences of the capitalist economy, specially, against the element of inequitable distribution of wealth, which has been experienced in the capitalist countries throughout the centuries. The capitalist economies still suffer from inequities in the distribution of wealth. There is still a large gap between the haves and have-nots and 'poverty in the midst of plenty' is still the major problem of their economy. These are the real problems created by capitalism and unless they are satisfactorily solved, it may give birth to another reaction that may be more aggressive than communism.
The world, therefore, is badly in need of a Third Economic System. The Muslim Ummah can work out this system based on the Islamic norms.
The writer is a Director of Islami Bank Bangladesh Limited