Ateneo de Davao University

Ateneo de Davao

Initial step in understanding Islamic finance

IN THE past four years, Al Qalam Institute has given more time to study and understand the Islamic finance (IF) to help uplift the economic conditions of the Bangsamoro people.

In partnership with Peace and Equity Foundation and the Islamic University of Indonesia (UII), we conducted research, training, workshops, and community immersions with different Baitul Mal wat Tamwil in Jogjakarta.

As we study IF, we found out that we also need to study deeper the message in the Holy Quran, Sunnah, and Hadith. From these sources, we learned that Islam is not a mere religion, it is a guide for humankind how to live in this world in terms of social, political, economic issues and concerns. Islam is also defined in Arabic as “din” which means “a complete way of life”. Therefore, it is not merely a religion.

From this basic principle, if we connect it with Islamic finance, we need to further understand that Shariah economics may be different in the Western economic principle. (Shariah means “the right way”.)

According to Muslim scholars, in mainstream economic textbooks, the term “economic principle” is often used to mean the fundamental law of economics, which is knowledge itself. In fact, these principles are the well-established economic theories that have passed through numerous tests. They have become economic laws that serve to guide the decision-making of consumers, producers, capitalists, workers, investors, and government alike.

However, these economic laws (i.e. Economic knowledge) are the product of the human intellect (‘aql) along with the scientific method to dictate what truth is. Although Islam acknowledges the role of the intellect (‘aql) and sensory experience as a source of value and knowledge, ultimately revelation i.e. Divine guidance is put above them both.

In view of the above argument, we raised the question – how are the economic principles connected to economic theories, i.e., both microeconomic and macroeconomic theories with Shariah economics? How do we link the Islamic principles to that of the diverse field of economics? The work of Al Qalam aims to answer these questions. But before moving further, let us define the basic principles of Shariah economics.

Based on the research and work of Muslim scholars from different universities, the basic premise is that the basis of Shariah economics is enshrined in the spiritual norms of Islam. Islamic economy is based on a paradigm which has socioeconomic justice as its primary objective (Quran, 57:25). Unlike the modern economic systems which are based on the human philosophy, the Islamic economic system is directly guided by Allah Almighty Himself.

Some of the principles of the Islamic economic system, as taken from the Research Center for Islamic Economics and Finance, Universiti Kebangsaan Malaysia:

a. Allah determines Right and Wrong: Islamic economic system should principally, first, makes a distinction between what is permitted being lawful (Halal) and what is forbidden being unlawful (Haram), also has, compulsory and makeup. To determine what is permitted or lawful (Halal) and what is forbidden or unlawful (haram) is the sole prerogative of God. None but God is empowered to pronounce what is right and what is wrong. Allah has made a demarcation between lawful and unlawful in the economic sphere and has allowed a man to enjoy those food items and other articles of use which are lawful and avoid those things which are unlawful.

b. Principles of Uses: Within the bounds of lawful (Halal) and unlawful (Haram) prescribed by Allah and also keeping in view the rules of moderation and prudence, the man has been allowed to make full enjoyment of God’s gifts bestowed on him.

c. Principle of Moderation: Islam unequivocally discourages its followers to cross the limits and follow extremes. The Muslims have been called by the Qur’an a middle nation (2:143). Therefore, the principle of moderation carries paramount importance, especially in the economic field. This principle is followed by the true believers in the production of wealth as well as in the consumption and spending of wealth. Although earning of wealth through permitted (Halal) means is allowed, yet the piety demands that a Muslim should not become mad after amassing wealth like a greedy materialist. He should exercise restraint and earn wealth to meet his lawful needs.

d. Economic Freedom: Every individual, according to Islam, is accountable for his actions done in this world. He would be rewarded for his good actions and punished for his evil actions in the hereafter. Accountability for an individual’s actions is meaningless if the individual does not provide reasonable freedom to act independently. Therefore, Islam puts the highest value on an individual’s freedom of action in every field of human activity such as social, political, economic, religious, moral.

e. Principle of Justice: Islamic principle of justice operates in every sphere of human activity, may it be legal, social, political or economic. Islamic economic system, in fact, is based upon the principle of justice, which governs all the basic aspects of the economy like production, distribution, consumption and exchange.

Having defined the basic principles of Islamic economics, the next questions are: how do we link these principles with two important fields in economics, i.e., microeconomics and macroeconomics? The primary textbook could easily make a distinction between microeconomics (“small” economics), which examines the economic behavior of agents (including individuals and firms) and macroeconomics (“big” economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy.

Answering these questions will require a lot of practical work for Al Qalam. We need to bear in mind, before we can even establish our own version of Islamic finance, we need to define our version of Shariah econonomics.