Islamic economics

The purpose of this post is to explain Islamic economics clearly for a Westerner. I wrote this because I see a lot of information on the web about Islamic economics that is confusing because people are debating the details of economics according to the Koran and missing the overall intent. People get lost in the details. My thesis is there is only one major difference in the two economic schools of thought.

The three main ideas in Islamic finance are:

  • Riba – This is interest or usury which is forbidden. This by far is the most important concept in modern economics and Islam as it relates to the banking system.
  • Gharar – The idea of speculation on chance which is not allow, such as insurance.
  • Zakat –  Taxing with a specific earmark for helping the poor.

These ideas all come from the Qu’ran. The first and second point is the most important and really only the first.

Islamic economics compared to Western Economics

I think the easiest way to understand the differences in philosophy is compare Western political economy with Islamic political economy. The following are similarities between two systems of political economy.

Similarities in the Western and Middle Eastern economic systems

  • Belief in free market and low government interference in trade.
  • Belief in private property.  Like in the West in the Middle East property is divided into private property, public goods , and state-owned property. Before there was John Locke who wrote about the definition of property rights or Adam Smith about free trade there was Ibn Khaldun the father of Muslim economics in the 14th century, similar ideas about supply and demand were addressed.
  • Belief in the Muslim, Christian and Jewish world in charity and brotherhood of all people and helping the poor. Tilting is part of this.

Differences in the economic thinking

Really the main difference is the banking system. The the Muslim ideal is to have a banking system without interest. This was clearly written about in the Qu’ran. There is no question. Interest free banking in the Muslim world.  However, because of the time value of money, it is very hard to run a modern economy based on these principles. Therefore, although Islamic banking does not have interest they compensate by charging other fees which works out to be the same idea. That is they calculate the cost of lending with present value and risk factors. Then they charge not interest but fees. So in the end it comes out the same.

Therefore, although Islamic banking is central to economists and academic writing in the end there are work around for day-to-day businessmen. The same is true for the insurance industry. The two ideas of riba and gharar are respected in spirit but in practice a practical solution is found for the modern world.

An example of where these work arounds are implemented is the Middle Eastern market success stories is Dubai. Although facing a downturn now, this sleepy port city was transformed into money center metropolis based on free market and trade. Lets face it, besides being oil rich, Arabian countries are very good at trading, wheeling and dealing. I think no one can make a strong point that Islamic jurisprudence interference much with everyday business and market operations.

If anyone has anything to add to this please let me know as I tried to cover the main points of Islamic economics for the westerner. I have travelled to four Middle Eastern countries and in my personal experience, these economies show little difference in practice to western markets.

One Reply to “Islamic economics”

  1. The main difference between non-Islamic banking which based on interest and Islamic is simple.
    Non Islamic banking counts on loans with interest (REBA Forbidden in Islam) and because its safer than investing money in profitable projects, while Islamic banking is not allowing but it run on partnership and profitable projects which equals a real ground economy and help with providing more jobs.

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