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 allowed, 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 to 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 the free market and low government interference in trade.
• Belief in a 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 economies 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 economic thinking

Really the main difference is the banking system. 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 an interest they compensate by charging other fees which work out to be the same idea. That is they calculate the cost of lending with present value and risk factors. Then they charge no 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 is workaround 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 workarounds are implemented is the Middle Eastern market success stories in Dubai. Although facing a downturn now, this sleepy port city was transformed into money center metropolis based on free market and trade. Let’s 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 traveled to four Middle Eastern countries and in my personal experience, these economies show little difference in practice to western markets.