memri
January 15, 2002 No. 19

Commentaries on Islamic Economics Discipline and Islamic Banking

January 15, 2002 | By Dr. Nimrod Raphaeli
No. 19

The Islamic (unofficial Al-Azhar) website, Lailatalqadr,[1]has published in recent months a series of articles on some aspects of the Islamic economics discipline and the role and performance of Islamic banking and financial institutions. The articles were written by Islamic scholars, including professors of economics at the Al-Azhar University in Cairo, which is the leading Islamic academic institution of higher learning in the Arab world. The following pages highlight key elements of these articles for the benefit of the Digest readers who may not be familiar with this aspect of economics literature. In essence, however, there is no substantive difference between Western economics and Islamic economics except for the difference in their conceptual underpinnings—the former is rooted in Adam Smith, David Ricardo and John Maynard Keynes while the latter is rooted in the Qur'an and the Shari'ah (or Islamic law).

Islamic Economics is the Shortest Road to Welfare
The principal thesis of an article by Dr. Rif'at Al-Awadhi, Professor of Islamic Economics at Al-Azhar University is that studies have confirmed that the application of Islamic economics achieves and maintains economic progress while experience has proven the falsehood of the argument that Islamic economics leads to backwardness.

Dr. Al-Awadhi argues that Islamic economics, as a concept, was born in the second half of the last century although the subject of economics is as old as Islam. The first principle in Islamic economics is that of Al-Ibaha, or permissiveness. Basically, all economic transactions are permitted unless specifically forbidden by the Shari'ah. Islam, Dr. Al-Awadhi emphasizes, has left the entire subject of "Islamic economics and progress in the hands of human beings to manage with their brains and experience," and not according to any particular doctrine. Islam, he says, has also left most of the economic affairs to human beings "to interact with, and choose, the best and most effective." For this reason, Islam has let economic matters to develop freely; whether in agriculture or industry, or in terms of theoretical and mathematical analysis, or in terms of the use of modern technology like computers and the internet.

Dr. Al-Awadhi maintains that the technical aspects of the economic life such as the methods and means of production, communications and telecommunications, institutions and scientific formulations are allowed to fall in line with technological progress in general. For this reason, the author rejects the notion that the application of the Islamic economics delays economic progress or causes it to regress. Rather, he says, Islam encourages the Muslim to move in the direction of progress, following Allah's injunction: "We have created you on this land and made you live on it."[2] (Qur'an, Sura 61).

Foreign Investments –A Risk for Islamic Economies
In his study, "The Religious [Shari'ah] Alternative for Transforming Contemporary Islamic World," Dr. Muhammad Sayed Ahmad, a Professor in the Shari'ah College at Al-Azhar University, warned against the dangers of foreign investments in Islamic countries because of the negative impact on their domestic policies.

The study indicates that Islam rejects the stagnant economic conditions of the Islamic world in the present. The reason for this rejection stems from the laws of Shari'ah which consider growth as a necessity as well as a legitimate obligation, and which underscore the capacity of the Islamic regimes to employ and operate the factors of production in the best possible way. It has also been demonstrated that the Shari'ah can effectively influence the organization and management of the factors of production and the taking of risks, guided only by economic considerations.

The study, according to its author, has also proven that Islam rejects "structural monopolies" which impose restrictions on Muslims. It maintains that Islam has allowed foreign financing [in contrast to foreign investment] subject to certain restrictions such as the one which prohibits the subordination of Muslims to non-Muslims. Moreover, foreign investments are subject to the state's right to exercise its sovereign jurisdiction over its territory and natural resources as well as the right to regulate and supervise such investments. In this regard, the author argues, the international law is compatible with the Islamic Shari'ah which permits the acceptance of loans and grants under the restrictions cited above [of course, if this doctrine is applied literally, no Muslim country would be able to borrow from international banks or to allow their citizens to work in, say, international organizations where they may come under the authority and jurisdiction of infidels.]

The study has found that current foreign investments have had pernicious impact on the economic development of Islamic countries. In particular, companies investing in Muslim countries operate according to a global strategy which serves the giant capitalist states and strive to serve the latter's interests. The argument that these companies bring a large capital is but an illusion because, in reality, they bring a very small capital while most of the remaining investments are financed through the mobilization of domestic resources. In short, foreign investments are a major cause of deficits in the current accounts of Muslim countries.

Finally, while foreign investment in the Islamic world is legitimate on the face of it, there are nevertheless concerns about their legitimacy because Islam rejects the application of non-Islamic law which may govern such investments because Islam requires that business conflicts can only be adjudicated by a Muslim.[3]

Islamic View of Dumping
In economics literature, dumping is defined as the sale of goods or services at a price below cost. How does Islam treat dumping? The answer is provided by Dr. Muhammad Abd Al Halim ‘Omar, Director of the Economics Center of Al-Azhar University in his article: "Islamic View of the Phenomenon of Dumping."[4]

Islamic fundamental view of the subject, he says, rests on two principles; one is that of "satisfaction" in market transactions and the second is that contractual relations between parties should be anchored in "benefits and the avoidance of harm."

The phenomenon of dumping is related to price. The Islamic position calls for price to be determined in the light of the conditions of supply and demand but ultimately by the wishes of the buyers. In other words, the seller can set a price, but its acceptance or rejection depends on the wishes of the buyers. Islam has therefore rejected all practices and methods, such as monopolies, hoarding or cartels that would impact negatively on the conditions of the supply and demand, and ultimately on prices [OPEC falls into this category but clearly it was not on the author's radar screen.] The author summarizes the Shari'ah (or Islamic law) on dumping, as follows:

In principle, sale must be made at a price higher than cost because the purpose of trade (according to Islamic scholars) is the protection of capital and the making of profit. The sale of a product at a price below its cost does not preserve capital and does not generate a profit [and, hence, is not legitimate by the Shari'ah.]

However, there may be exceptions. According to the author, under special conditions of the market, such as a slump or stagnation, or special circumstances related to the merchant, the goods may be sold at a lower price than cost if liquidity is necessary "to buy something that would reap profit." However, the merchant may not use too pricing mechanisms, a lower one for the informed and a higher one for the uninformed.

Islam Does Not Protect Capital Hoarders
Some Western critics argue that Islam cannot adhere to its economic principles because such adherence would mean economic stagnation in a world economy driven by shareholding, insurance and banking companies. They further argue that banks make loans to companies and individuals to build factories and farms, and to undertake research, and make discoveries and inventions. The banks collect interest on their loans, that is forbidden by Islam. The author of this article, Muhammad Abd Al Rahman, from Jeddah, rejects this argument.

He says Islamic scholars distinguish between interest, which is not forbidden, and usury, which is. Interest rate, no matter how high it goes, may not exceed a fifth of the amount of the capital (loan) against which it is charged. Usury, by contrast, may be equal to, or higher than, the amount of capital (loan) itself. Also, in the past, the powerful lender would lend to a week borrower whereas today the week saver places his money at the disposal of powerful banks which offer him interest. In short, a small rate of interest differs from usury, which is forbidden, and this view, according to the author, has been adopted by legislatures in many Muslim countries.

The establishment of Islamic banks and financial institutions which provide funding to individuals to carry out useful projects was "a brilliant practical response to those who criticized Islam for making usury [interest?] illegitimate."

The author rebuts the criticism that Islam sides with capitalists and protects them. This criticism maintains that side by side with the very wealthy, there exist vast numbers of poor people. According to the author, Islam calls for social justice and does not protect money hoarders. The Qur'an, he says, has strongly denounced those who hoard money and keep it away from the general good. [This is the theory. The reality is that a few very wealthy Muslims, including many from Saudi Arabia, "hoard" hundreds of billions of dollars in European and American banks which do not benefit the (Muslim) public good. It is also Saudi Arabia which finances hundred of Islamic schools "madrasa" all over the world where students are taught to adhere to Islamic teachings. No wonder there is so much disconnect between the rulers and the ruled and between theory and practice.]

Egypt: Attempts to Collect Zakat (Religious Charity) by Government Denounced
In an attempt to find new financial resources to cover elements of social expenditures provided for in the national budget, the Egyptian Minister of Finance, Muhammad Abd Al Halim Omar, has agreed, in principle, to issue a Zakat law which would authorize the state to collect that Zakat. This exercise could generate 12 billion Egyptian pounds (approximately $2.5 billion) annually. Even though the draft law was prepared by the Islamic Economic Center, the Egyptian Government was confounded by the surprise rejection of the idea by Dr. Muhammad Sayyed Tantawi, the Sheikh of Al-Azhar. The latter argued that the collection of the Zakat by the government, under the proposed law, will cause people to escape their responsibility of donating their share of the Zakat. He said Islam has given the freedom to every Muslim to choose the object on which his Zakat will be spent. On the other hand, some Muslim economists have argued that Zakat is one of the pillars of Islam, and it is the responsibility of the state, in the framework of its role protecting religion and the earthly policies, to collect the Zakat by law.

Those who object to the proposed legislation raise the question of the interconnection between Zakat and taxes. Would the payment of Zakat, they ask, relieve the donors from paying taxes, or alternatively, would paying taxes relieve the donors from paying Zakat?[5]

Islamic Countries Discuss Trade
Representatives of chambers of commerce and industries from 56 Islamic nations met in Amman last week to discuss cooperation among them.

The Jordanian Minister of Trade, Salah Basheer, urged the delegates to develop products that would compete on the international markets. He said the joint ventures among the Islamic countries and the creation of trade and industrial partnerships are among the tools that will enable these countries to face economic challenges. Speakers called for the creation of an Islamic Common Market and for boosting joint ventures among private sectors in these countries.[6]

The Flourishing of Islamic Banks
The search for Halal [religiously permissible] profits by Muslims "has injected a new energy into the Islamic banks" which, at the same time, lowered the need of traditional banks. According to the executive chairman of the Bahrain Islamic Bank, Muslims want their financial transactions to be performed according to the Islamic Shari'ah. For this reason, Islamic banks have witnessed a considerable growth and are bound to grow by 10-15% per annum in the next decade. There are at present 200 Islamic banks and financial institutions which perform transaction worth $120 billion a year. With interest payments forbidden by Islam these banks and financial institutions share their profits with their depositors in the form dividends while they share the profits with their borrowers businesses.

The main difficulty for the Islamic banks is their inability to enter into long-term financing transactions because most of their deposits are short-term. For this reason, Islamic banks will need to develop flexible financial instruments in compliance with the Shari'ah that will be unique to their religious culture.[7]

Future of Islamic Banks-- in Danger
Dr. Omar, the author of the piece on dumping, warns that Islamic banks could be in danger of having their capitals frozen by the United States. Dr. Omar claims:

"America's wars, such as the one in Afghanistan, will cost her billions of dollars. Bank assets which allegedly belonged to terrorist organizations, frozen by the United States, will no longer benefit their lawful owners and the U.S. could use the war against terrorism as an excuse to take over these assets to finance the war. If it did, its action will serve as a warning to all Muslims who deposit their money in American and European banks."

This could happen, the author asserts, because of "American perverted practices" which make everything possible. This is not surprising because international decisions are currently made in accordance with "of book of insanity."[8]

Islamic Development Bank –New Instruments to Support Islamic Economies
At the annual meeting of the Islamic Development Bank (headquartered in Jeddah), held in Algiers last October, the Bank's President Ahmad Muhammad Ali, identified new instruments to support the bank's role in the economies of the member states. (The bank is a multilateral development institution whose membership is limited to Islamic countries.) Among these instruments:

  • Establishing the Bosnian Bank to cover activities in Eastern Europe
  • Establishing a development fund for Islamic Awqaf (religious endowments) and a call to establish a "World Waqf Authority".
  • Providing $645 million for infrastructure projects
  • Carrying out bank decisions to provide $55 million for human assistance and for a number of projects in the "State of Palestine"

The meeting discussed six primary challenges facing Muslim economies: fighting poverty, reducing foreign debt, facing the issues of globalization and trade, the pricing of oil, the issue of [need for] capital, and the technological and communications revolution.[9]

The (Islamic) Legitimacy of Economic Dealings with Israel
The author, Dr. Hussein Shihata, professor at Al-Azhar University, seeks to answer three critical questions:

  • The rules concerning economic dealings with Jews
  • The rules concerning those who support Jews
  • The responsibility of the Muslim merchants or consumers concerning products by Jews or by those who support them

Dealings with Jews: The boycotting of Jews and those who support them is a Shari'ah (Islamic law) command. Those who firmly believe in Islam are prohibited from dealings with Jews and their supporters because they are the strongest enemies of Islam. Allah has dictated: "do not befriend Jews and Christians…" (Qur'an, sura 51).

Dealings with Jews and their supporters under certain Shari'ah restrictions: There should be no "embarrassment" dealing with Jews but only "with strict caution and from a position of Islamic strength and dignity." The author concedes that Prophet Mohammad did business with Jews and it was found upon his death that his "shield was pawned to a Jew."

Normalization of dealings with Jews and those who support them: There are those who tell Muslims that the state [of Israel] is a friendly and peace-loving state and that what happened in Sabra and Shatila, the Aqsa Mosque, Lod, and Ramla were acts of a small extremist group and that Israel has apologized for these acts..

The author warns those who may fall into this trap because they may end up losing this world and the next. The author reminds his readers of many facts: the Jews have occupied Muslim lands and the Aqsa Mosque is still captive. The author has a long list of other "facts" about Jewish crimes against Muslims and concludes by citing the Fatwa [religious ruling] issued by the former Mufti of Jerusalem (and Nazi ally] Haj Amin al-Hsseini who decreed in the mid-1930s against the sale of lands to Jews, accompanied by a warning that those who violated the edict "will not benefit from prayers and will not be interned in Muslim cemeteries."[10]

Egypt: The Role of the State in Regulating the Number of Pilgrims to Mecca
Since the events of September 11 and generally in recent years, Egypt has witnessed a tremendous growth in the number of pilgrims who desire to go to Mecca to perform the Hajj duty [pilgrimage to Holy Mecca], one of the most fundamental Islamic commands to the believers. The number of pilgrims has reached 700,000 in 2001, of which 500,000 pilgrims were in the month of Ramadan alone (December 2001). The cost of the pilgrimage has reached the neighborhood of $1.4 and $2 billion. At the current rate of growth, the number of pilgrims is projected to reach one million in a few years. The Government of Egypt argues that the cost of pilgrimage is imposing a heavy burden on a country suffering from what the Prime Minister characterized before Parliament on January 8, as "a liquidity crisis." Moreover, the government argues that the pilgrims go on a shopping spree in the Mecca bazaars for cheap Chinese goods which they use to flood Egyptian markets and thereby cause a considerable harm to Egyptian manufacturers. One religious scholar, Dr. Hasan Abbas Zaki "who is famous for his religious education," underscored the negative impact on the Egyptian economy wrought by the pilgrimage to Mecca. He suggested that spending the money locally on the needy is, from a religious perspective, as important as performing the Hajj. In addition, diverting the money to charitable causes will create employment and contribute to the elimination of current economic stagnation.

Dr. Muhammad Sayyed Tantawi, the Sheikh of Al-Azhar also threw his support for the government's efforts to regulate the number of pilgrims and the frequency of their visits to Mecca. He said while pilgrimage to Mecca is a duty for Muslims the government, because of economic, social and procedural factors, may intervene in regulating the pilgrimage trips from time to time. The Saudi Government, in an attempt to control the flow of pilgrims during the high season of Ramadan for safety and health reasons, has decreed that no one will be granted a visa to enter the Kingdom and visit the holy places more than once every 5 years. In Egypt, those who favor government control, are advocating a 10-year interval between one pilgrimage to the next, except for elderly people. [11]

First Islamic Fair in Jeddah
Under the auspices of the Islamic Development Bank, the first Muslim [six day] fair with the participation of 40 Islamic countries, was opened in Jeddah on January 5. The fair is intended to provide opportunities to exchange expertise and knowledge between the Muslim countries, including commercial transactions between participating delegations, and exploring investment opportunities.

Jazeera Bank Adopts "Modern Islamic Banking" as a New Slogan
In an attempt to face keen competition with other banks, the Saudi Jazeera Bank has adopted a future business plan which reflects a new slogan: "Modern Islamic Banking." Among new services is a new savings system and a new visa card, both meeting Islamic restrictions and values as well as acceptable international payment procedures. [12]

Al-Rajihi Banking Company Inaugurates Branches for Women
The Saudi Al- Rajihi Investment Bank has opened two new branches for women [only] in the cities of Dammam and Jubail. According to the manager of these branches, Muna Al-Qu'ood, the branches will serve a broad range of [female] customers in the framework "of complementary banking products which will offer privacy to the women conducting their banking transactions." Al-Rajihi is the largest banking organization in Saudi Arabia in terms of the number of its branches serving women (370).[13]

Miscellaneous Economic News

IRAQ-MYANMAR (BURMA) TRADE RELATIONS "In recent weeks there have been numbers of stories in the Iraqi press about trade delegations exchanges between Iraq and Myanmar (Burma), as well as greetings on a number of occasions exchanged between the presidents of the two countries. The stories would have gone as a curiosity except when it became known that Myanmar is buying a nuclear reactor from Russia."

ALESCO Warns Against Spread of Illiteracy
The Arab organization for education, culture and sciences (a small version of UNESCO) issued a warning regarding the spread of illiteracy in the Arab world. This problem will create a barrier against comprehensive development in an age when knowledge has become the key to progress. According to the report issued by the organization there are currently 68 million illiterate people in the Arab world.[14]

Arab Labor Organization: 15.7 Million Arabs Unemployed
The Arab Labor Organization warned that the unemployment average, particularly among the young, in the Arab countries is rising despite ambitious programs by some countries to control it. In 2001, the number of unemployed had reached 15.7 million, or 16.4% of a labor force totaling 104 million. At the same time, there are 7-8 million of expatriate workers transmitting $22 billion overseas annually which, according to the report, represents a serious waste in Arab economic resources.

Dr. Ibrahim Quwaider, the director general of the organization, has demanded a quick mobilization of $12 billion a year, in 1997 prices, to support employment policies.[15]

Egyptian Government –Biggest Beneficiary of September 11
The Egyptian Government may be the biggest beneficiary of September 11 because people's attention was diverted from the worsening economic situation to the government's efforts to stay in power. Despite problems of unemployment, crisis in prices (inflationary spiral) and the failure of the exports policy, which are the same problems that persisted in 2000, the government is the first in 50 years to acknowledge the existence of a crisis in the country but continue to follow the programs of its predecessors by promising quick solutions.

"If the government considers the Egyptian economy has changed by comparison with the past" the change is "a retreat to a situation which causes concern about the possibility of not finding solutions." The answer of the man in the street about the conditions of his country is this: "The situation does not please enemy or friend alike." It suggests a frustration with the government's direction and with policies which are never implemented."[16]

In the meantime the bailout of Egypt will continue. The representative of the World Bank in Egypt, Dr. Mahmud Ayyub, declared that Egypt will soon receive $2 billion from its external donors to help alleviate the problems created by September 11.[17]

Egypt: Demonstrations and Revolt by Merchants in Port Said
The port city of Port Said witnessed last week "violent demonstrations and a revolt by businessmen and traders" accompanied by closings of businesses because of the introduction of higher tariff rates on January 1st. Port Said is a free trade zone which has encouraged a lot of smugglers to buy garments duty free and sell them at other Egyptian markets at a good profit. The demonstrators have argued that the higher tariffs have driven buyers away from the city. [[1]8

Jordan: Highest Priority – Lifting Sanctions on Iraq
The Jordanian Foreign Minister, Abd Al Ilah Al-Khatib told religious leaders in Jordan that one of the most important Arab issues that occupies the attention of the Jordanian Government is the lifting of the embargo on Iraq. The minister blamed the Security Council for the continuation of the embargo.[19]

It should be noted that Jordan receives the equivalent of approximately $350 million in oil, or half of its consumption, from Iraq as "a gift" from Saddam Hussein.

Heated discussion between Egypt and Saudi Arabia on Trade
An Egyptian trade delegation to Saudi Arabia and its interlocutors had a heated debate on issues of trade and tourism.

The Egyptian complained that not enough Saudi tourists are visiting Egypt considering the large and growing number of Egyptian pilgrims who visit the holy places in Mecca and Medina. They also complained that Saudi exports to Egypt are "ten fold" those of Egyptian exports to Saudi Arabia (no figures were provided).

The Saudis complained that Egyptian products sold to Saudi Arabia do not meet the specifications agreed upon between the traders and that they are not of a quality to compete with goods from the Far East, in a highly competitive Saudi market. The Saudis also pointed out that their investments in Egypt exceeded $1 billion compared with Egyptian investments in Saudi Arabia which amount to $108 million.

The Egyptian delegation was led by the Minister of Supply and Domestic Trade Hassan Khadr, who is Muslim. This is noteworthy since the Egyptian minister of foreign trade, Yusuf Butrus-Ghali, who would regularly lead the Egyptian trade delegations, is a Coptic Christian who may have refrained from going to Saudi Arabia because of his religion.

Iran Occupies Last Place of Countries with Foreign Investments
The Iranian Minister of Roads and Transportations, Ahmad Kharam, declared that "Iran occupies the last place on the list of countries with foreign investments." He warned that Iran will fall behind other countries in the next two or three years "if there is not a major change in the investment environment which exists today." [20]

Local Palestinian Company to Market Products in Palestinian and Israeli Markets
A Palestinian company in Ramallah secured from an American company the right of distribution of environmentally related gadgets at both the Israeli and Palestinian markets. This may not be a major business but it is the first of its kind. [21]


[1] Lailatalqadr, or "the night of glory," is one of the holiest nights in Islam. According to Islamic Tradition the Qur'an was revealed on that night "when the angels and the Spirits leave by Allah's permission and come down with decrees. This night is better than a thousand months." (Qur'an, Sura 97). The Qur'an. Translation by N. J. Dawood, Penguin Books, 1959.

[2] D. Al-Awadhi, "Islamic Economics –Shortest Route to Welfare," www.lailatalqadr.com (December 24, 2001).

[3]"Foreign Investments – A Risk for the Economy of Islamic Countries," www.lailatalqadr.com (July 30, 2001).

[4] www.lailatalqadr.com. (July 26, 2001.)

[5] Al-Sharq Al-Awsat, December 31, 2001.

[6] The Jordanian Times, January 7, 2002.

[7] "Flourishing of Islamic Banks," www.lailatalqadr.com (June 18, 2001).

[8] www.lialatalqadr.com. (November 26, 2001).

[9] Al-Ahram, October 24, 2001.

[10] "Concerning the Legitimacy of Economic Dealings with Israel," a study by Dr. Hussein Shihata. www.lailatalqadr.com ((May 25, 2001.)

[11] Al-Sharq Al-Awsat, January 9, 2002.

[12] Al-Sharq Al-Awsat, January 7, 2002.

[13] Al-Hayat, January 6, 2002.

[14] Babil (Baghdad), January 9, 2001.

[15] Al-Qabas (Kuwait), December 28, 2001.

[16] Al-Hayat, January 8, 2002.

[17] Al-Ahram, January 8, 2002.

[18] Al-Sharq Al-Awsat, January 7 and January 10, 2002..

[19] Al-Thawra (Baghdad), January 6, 2002.

[20] Al-Sharq Al-Awsat, January 6, 2002.

[21] Al-Hayat Al-Jadeeda, January 7, 2002.


*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.

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