What is an Islamic Economics?

What is an Islamic economy and how can it help promote the development of developing countries like Pakistan?

            The primary purpose of Islam is to promote the well-being (falah) of all people in this world irrespective of their race, colour, sex or religion. This is the goal towards which the muadhdin calls the faithful five times a day. The purpose of a truly Islamic economy cannot be different. It has to promote development in such a way that the Islamic vision of well-being is actualized – the vision of a society where justice prevails, where the needs of all individuals are satisfied, where there is equitable distribution of income and wealth, where family integrity and social solidarity are strengthened, and where crime and anomie are minimized.
So when we talk of an Islamic economy, we are not talking of only economic development. We are talking of overall human well-being. Can such well-being he realized by concentrating only on raising per capita income and neglecting the other requisites for well-being? According to the classical Muslim scholars, and in particular Ibn Khaldun (d. 1406AC), all aspects of human life are interrelated, and if there is a decline in any one of the requisites for well-being, other aspects will also suffer. Therefore, even economic development cannot be sustained if there is injustice, corruption, and decline in family and social solidarity, or rise in crime and anomie.
            Within the framework of Islamic teachings as well as those of other religions, such overall well-being would be difficult to realize without reform of the human being who is the end and means of all development. It may not be possible to attain such reform by attending to merely the material aspects of life. Moral reform is indispensable for improving work ethics like punctuality, honesty, conscientiousness, sincerity, cooperation, and solidarity between labour and management, all of which are essential for development. Since Conventional Economics shirks discussion of the moral aspect of human development and well-being, Islamic Economics  can play a vital role.

            In Pakistan, development has been pursued within the perspective of Conventional Development Economics without any conscious effort to promote justice or moral uplift. One of our own reputed scholar and Minister of Finance and Planning, Dr. Mahboobul Haq, toed the conventional line of thinking by  writing: ”The underdeveloped countries must consciously accept a philosophy of growth and shelve for the distant future all ideas of equitable distribution  and welfare state. It should be recognized that all these are luxuries which only developed countries can afford” (The Strategy of Economic Planning: A Case Study of Pakistan, 1963, p.30).
            Even though Conventional Development Economics started laying stress on justice in the 1980s, the policies pursued in Pakistan, unfortunately, have continued to be a reflection of the old line of thought. This has done a great deal of harm to the country. The existing turmoil and tensions in Pakistan are a result of the persistent moral decline and the injustices that have been inflicted on a major part of the population. These tensions are hurting the development of the country. Ibn Taymiyyah (d. 1328AC) had rightly indicated that “God sustains a just state even if it is unbelieving but does not sustain an unjust state even if it is Muslim.”
Is the idea of Islamic economy picking up in the Muslim world?
            In spite of the ongoing revival of Islam, the moral decline continues in the Muslim world. One of the most important reasons for this is that the Islamic movements do not have the right priorities and the governments continue to have a secularist bent of mind. There is a great deal of corruption and the resources of the country do not get utilized effectively for the well-being of the people. It is accountability which forces governments to utilize the resources efficiently and equitably. Unfortunately, most governments in the Muslim word are illegitimate and not accountable before the people. The illegitimate rulers are not, therefore, motivated to realize the Islamic vision. They tend to provide benefits to themselves as well as to a small coterie of sycophants at the cost of the common man.

Does Islamic economy strictly mean interest-free system?
            The answer is no. An economy concerned with the realization of overall human well-being cannot be based only on one pillar. The prohibition of interest is only one of the pillars of the Islamic strategy. Nevertheless, it is an important pillar and Pakistan will not be able to succeed in promoting justice and the well-being of all people without gradually replacing the interest-based financial system. There are many ways in which the system has hurt Pakistan. I will mention only three of these below:
            Firstly, if the government had been committed to the prohibition of interest, it would have  streamlined the tax system to raise revenues and  also reduced its wasteful spending. It did not. .It rather borrowed excessively and now the debt servicing burden has become unbearable. Borrowing does not remove the ultimate sacrifice. It only postpones it. Given that nearly 55 percent of the budget goes to debt-servicing and another 25 percent to defence, the government does not now have adequate resources to finance education, health, infrastructure construction, and rural and urban development. Who has to make the sacrifice now as a result of this? It is primarily the poor and the lower middle classes. They do not get the services they need. Such injustice generates unrest and accentuates political instability, which hurts development.  Excessive external borrowing has also deprived the country of its independence and turned it into a virtual colony.
Secondly, the excessive borrowing has enabled the government as well as the private sector to live beyond their means. Consequently, the country’s savings are meagre and not adequate to finance development without resorting to deficit financing or external borrowing, both of which are not desirable beyond a certain indispensable level.

Thirdly, the banking system has also been highly unjust. While 43 percent of the banking system’s resources come from deposits of less than Rs. 1 lakh and only 15 percent from deposits of more than Rs 1 crore, advances of less than Rs 1 lakh account for only 4 percent of total bank advances and those of more than Rs l crore absorb 56 percent. Even worse than this is the fact that only 4,703 privileged borrowers get 55 percent of the resources provided by more than 28 million depositors. It is not even certain whether all of this money has been used by these privileged borrowers productively for the development of the country. Can such a system ever help Pakistan realize the Islamic vision of justice and equitable distribution of income and wealth. It is because of this injustice of the interest-based system that all major religions, including Judaism, Christianity, Hinduism and Islam, have prohibited interest.
What is the status of Islamic banking in Saudi Arabia and Bangladesh?
            Both these countries are among those which have followed the path of gradually Islamizing their financial systems.  Islamization has progressed gradually in these countries. There is nothing wrong in gradual progress because this is the strategy which the Prophet had himself adopted. Gradual transformation has the advantage of helping in the introduction of essential measures and the establishment of a number of institutions without which the Islamic system cannot operate effectively.

Does Saudi Arabia have a truly Islamic economy?

            Any country may be said to have a truly Islamic economy if it has ensured justice and laid down the foundation for overall well-being. Some of the material requisites for such well-being are:

Saudi Arabia has made some advance in this direction but a lot still remains to be done.

Will the restoration of democracy in Pakistan help improve the situation?

            There is no doubt that  it will, but not immediately. What it will help  achieve is an increase in accountability and transparency?  The elected leaders will be under continued public pressure to fulfil the promises they have made in their election manifestoes.  This will lead to the use of the country’s resources effectively for the development of the country and the well-being of all people.
It would be unrealistic to expect this to happen immediately. In the near future, the same corrupt and incompetent leaders will get elected. However, even such leaders will be under pressure to satisfy their electorates. If they fail, they will be thrown out and better leaders will gradually come to power. This will change the power structures in the country and create a better political climate for development.
            It is wrong to say that democracy is not suitable for a country like Pakistan where a majority of the population is illiterate and powerless. The condition was even worse in England at the time of Magna Carta and in America when the constitution was signed. What democracy did was to lay down the foundation for the future development of these countries. The governments were under constant pressure to spend resources on education, rural and urban development, and infrastructure construction. Without this development of human and physical infrastructure, these countries would not have reached their present positions.