lp them or establish a new civilization. All Muslims agree on thisâ€‌ (Omar, 2005).
As a rational result of the civilization challenge Muslims decided to find a middle ground where they can sustain their particular religious identity and at the same time satisfy the contemporary needs on a global scale.

1.1.2 The Importance of Studying Islamic Economics

Since the economy is the backbone of human existence, many Muslim specialists attach great importance to studying Western liberalist economic regimes as a more enhanced and improved and developed economic system. This is in order to modify it to comply with Islamic law or to offer Islamic alternatives that can satisfy the needs of human civilization without violating Islamic regulations. The outcome of these efforts is the accumulation of study and research materials which have evolved into a scientific field called Islamic economics.

“Islamic economics is economics in accordance with Islamic law. Because the Koran spoke against usury in the context of early Muslim society, it generally entails trying to remove or redefine interest rates from financial institutionsâ€‌ (Wikipedia, 2005). Accordingly, the Islamic Universities Union obliges its members to teach this subject as a course in the economic science field (Momen, 2004).

No one can claim that Islamic economy is an independent science or a part of Islamic heritage, since economics as a science and theory were established and developed centuries after Islamic heritage emerged. Scholars in Islamic economics try to reintroduce economic sciences with respect to Islamic law. “They incorporated many modern techniques and technologies. Some consider the emergence of these economic practices to be part of a revival of Islam and an Islamization of knowledgeâ€‌ (Wikipedia, 2005). Moreover, the term iqtisad, which translates to â€کeconomy’ or â€کeconomics,’ has a very different meaning in classical Arabic, i.e. moderation in spending or moderation in general (Ibn Manthur, 2000).

It is very important to differentiate the theoretical results of those who create Islamic economic sciences from Islam as a religion, even though the former is derived from the latter. There are two reasons for this: first, Islamic economics – as described by its founders – is based in interpretation of Islamic texts, specifically the Koran and the Sunnah – in an attempt to reproduce economic theories in the context of the general principles of Islamic law.

The second reason is a corollary of the first, in that any interpretation of Islamic heritage texts does not necessarily represent Islam itself. The Islamic religion is does not stand on rigid institutionalization so interpretation is relative. This is a reasonable result of the texts’ flexible nature.

Islamic jurists and legal experts agree that the principles of ideology, worship, and morality are unwavering in Islam but any other matter could be subject to jurisprudence or interpretation (Ibn Rushd, 1988). Indeed Islamic jurisprudence was widely developed during several centuries of successive Islamic regimes.

Arab culture before Islam was a product of the desert environment. After the rise of Islam during the 8th century, Arabs came to control large areas within less than a century. Meanwhile the Arabic language was not suitable for writing, so the letters of the Arabic alphabet could be read in different ways. Arabs began using their alphabet no less than 50 years after the death of the Prophet Mohammad (pbuh). Consequently, most Arab historians identify the Koran as the starting point of Arabic rationality. The Koran is in fact the oldest text written in the Arabic alphabet.

Under the pressure of the conquest of the area, with its wide cultural history, the new arrivals found themselves confronting the major challenge of digesting the entire past cultural heritage they encountered. The mission was not easy, as they were facing the vast of other societies which at the same time did not even have an alphabet conducive to writing. Only strong belief and tribal loyalty qualified them for this mission.

The new reconciliation this generation faces is somehow similar, but we cannot ignore the biggest problem in this case – that the construction of Islamic rationality was completed in the Middle Ages.

Generally speaking, we consider the collapse of Muslim Spain in the 15th century as a historical turning point where Islamic rationality became fixed, though many historians assert that it was earlier than that. In any case, Islamic rationality since that time has been in constant development and any attempt to reproduce its regulations according to the new situation require a deconstruction of the all the rationality structures. This deconstruction effort aims not only at understanding rationality structures but also at re-establishing them. This is indeed the most important task within the renaissance challenge. “Is it possible to build the renaissance without renaissance rationality, a rationality which did not yield a comprehensive review for all its mechanisms?â€‌ (Al-Jabery, 1991).

Following the collapse of the Soviet Union, several studies appeared in the United States and other Western countries trying to predict other possible dangers after communism. A famous example in political philosophy is the work of Samuel Huntington. In his book The Clash of Civilizations, Huntington concludes that Islam is the main strong alternative that can challenge western culture and the system of liberalism (Huntington, 1993). As a dialectic analyst of history, his student Francis Fukuyama refutes that conclusion in his book The End of History and the Last Man. By regarding Islam as part of the human history, he concludes that nothing but the liberalist regime could be the last stage in human history. Fukuyama ranks the liberalist stage as corresponding to the communist stage in Marxist historical materialism (Fukuyama, 1994).

Whether we agree with Huntington or Fukuyama or with still others, it remains important to study and evaluate the efforts of Islamic economics and, by extension, Islamic banks as the most significant part of it.

1.1.3 The Human Being as God’s Successor on Earth

The foremost way to understand human life in Islam is that the human being is God’s successor in building the earth. In chapter 2, verse 26 of the Koran we read: {And then God says to the angels, I will form a successor in the land.} Being God’s successor denotes human control over the planet, and literally indicates humans as having their own will derived from God’s will, though it is God who decides the ultimate ends of this succession.
The main goal is the development of land, which in Islam has a vast meaning. Humans build while being obedient to God; all activities should be in obedience to God. Even instincts desire satisfaction, and this is ensured so long as we do not break His laws, since God created humans to be His worshipers.

The concept of succession appears in many facets in Islamic texts; it is the trust which humans accept to carry while even mountains refuse, and a sign of worship. Ultimately all humans will be asked about everything they obtained in their lives, how they did so, and how they used it. Islam as a religion uses the concept of land to build the imagination of why we are here and what the aim of human existence is.

1.1.4 Some Macro-Microeconomic Principles Evaluated from Islamic Viewpoints

1.1.4.1 Economic Resource Scarcity

Scarcity of economic factors is the core of the economic problem, which is considered twofold:
A) Unlimited needs: human needs are infinite and always renewed.
B) Economic resources are scarce: contrary to human needs, economical resources are limited. We do not have enough economic resources (land, labor, capital, and entrepreneurs) to satisfy all human needs. “Economics actually limits itself to relative scarcity while not dealing with the more fundamental form of absolute scarcityâ€‌ (Faber, 2003). Nevertheless, the degree of scarcity is measured by our demand degree, so economic scarcity is relative, not absolute.


Islamic texts consider resources unlimited in the universe, and focuses on the primarily concern of utilization. “The resources available on earth are sufficient to secure the basic needs (food, clothing, and shelter) of fifty billion human beings, Economic backwardness results from misdistribution exacerbated by man-made laws and systemsâ€‌ (Islamic-world.net, 2005).

Economic resource scarcity is therefore strictly a result of unwise handling of resources treatment. It has been proven by historical attempts that the production we can derive from the same economic resources is improved or even multiplied several times by improvements in technology improvement. Most economical theories collapse under ongoing analysis because they cannot estimate all the operative factors or the level of each factor’s efficiency.

One famous example is the demographic theory by Thomas Malthus (1766-1834). Malthus analyzed the conditions of the British society from a historical point of view and found that population growth is exponential while food growth is arithmetic. He therefore concluded that within less than 50 years England would face real starvation. Moreover, he considered war a positive occurrence in that it limits population growth. “I say that the power of population is infinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratioâ€‌ (Malthus, 1970). In fact, if everything is maintained at a constant, both food and population growth will continue along the same tendencies, as Malthus pointed out, and his conclusion would be correct.
The development of human society development can be easily explained in terms of history, but it is very difficult to make forecasts. In the case of Malthus, what has happened in reality is quite different. Demographic growth has decreased over time under the effect of the needs of civilization in the modern model, to the point that England’s demographic growth level has reached negative or close to zero growth. Additionally, technological developments have improved the agricultural capacity to levels that will supply the population even if growth remains the same.

Presently, economic planners do not face food scarcity, but rather food surplus. In many food producing areas they are trying to reduce production in order to raise prices. “Agricultural policies on American wheat and Brazilian coffee are good examples for what we assertâ€‌ (Al-Baiatee, 1997).

Islam considers the economic problem to be as the primary one, while the macroeconomic questions remain the same: how to reach the highest level of social utility level, and how to reach optimal implementation or utilization of economic resources.

2.1.4.2 Ownership
Material ownership from the Islamic point of view is a figurative ownership; humans are God’s successors in the universe, so they have the right to use the materials in any form in service of God’s will by being subordinates. In the Koran, chapter 2, verse 284 states: {whatever is in the heavens and whatever is in the earth belongs to Allah....“God is the real owner of everything. All wealth belongs to Allah (swt):
{And give them of the wealth of Allah which He has given you} (Islamic-world.net, 2005).

In chapter 3, verse 189 of the Koran, we read {And Allah’s is the kingdom of the heavens and the earth, and Allah has power over everything.} Al-Zamakshari, who is one of the most renowned interpreters of the Koran, asserts that “the money which is in your hands is God’s money that He created; He gives it to you and He gives you the right to enjoy it; He makes you His successors in using it, so in truth it is not your money but you are God’s agentsâ€‌ (Al-Zamekshary, 1998). It is clear that individual ownership, state ownership, and public ownership are three parallel forms in Islamic law. Real ownership belongs to God, while man holds property in trust for which he is accountable to Him, in accordance with rules clearly laid down in the Islamic law underlined above (Al-Imam Al-Sadr, 1994).

Throughout Islamic history Muslims have experienced several kinds of ownerships: individual, private, public, with the addition of common and contribution ownership in line with the normal historical development. These are in fact the same forms of ownership known in all economies, but that is not the main point. Islam focuses deeply on the use of the ownership, not the forms or kinds, in the sense of being God’s successors in having the ownership.

What we own is the results of the use of ownership in society or in the world overall. Some socialist Muslims in particular – as is evident in Arab scholarship, especially books published in 1950s and 60s – use this notion to conclude that there is no conflict between Islamic principles and socialist ones. Of the well-known sources they depend on is one of the sayings of the Prophet Mohammed (pbuh): “People are partners in three: water, food and fireâ€‌.

As stated previously, Islam counts everything which can be owned as God’s possession and humans as His successors, and the final aim of any economic regime is utility maximization in society with the highest possible level of distribution of justice. It is on this basis that some conclude socialism as the best way to ensure fair results.

However, most Islamic jurists refuse these conclusions on the grounds of historical implementation of Islamic law and the holy texts, which regulate inheritance reversion and deposit agreements. This is mentioned specifically in the longest verse of the Holy Koran as well in classic legal books that cite the protection private ownership as one of the principal objectives of Islamic law. Moreover, no one in Islam can prohibit anything that has already been accepted. In actual fact, this last rule is not absolute; as one well-established Islamic rule advises: “necessities permit forbiddancesâ€‌ (Omar, 2005).

As most Islamic jurists agree, nationalizing private ownership under specific conditions is one of the rights of the ruler if it is a social necessity with fair compensation to owners. Prophet Mohammed (pbuh) himself exercised this in similar specific conditions.

The Islamic point of view on ownership lies between the two main regimes, capitalism in Adam Smith’s form and socialism in Marx's form. “Islam differs from socialism, capitalism and communism and other theories and perspectives in its ideological and doctrinal bases. Islam is a Divine Message with a special conception of the universeâ€‌ (Al-Balagh Foundation, 2005). The basic characteristics of both regimes are not completely applicable in Islamic society. Islamic society does not agree with capitalism in its perspective of private ownership as a general principle, or with socialism where common ownership is the principle. It does however acknowledge different forms of ownership at the same time, or as it mostly appears in the current regimes in the form of combined economy. Most Islamic economics researchers agree on this.

From the Islamic viewpoint, this means that ownership is accepted in a variety of forms – such as private, public and state – rather than within the principle of only one kind of ownership. For this reason, it would be a mistake to call Islamic society a capitalist society, even though it allows private ownership of a number of kinds of property and means of production, because in its view private ownership is not the fundamental rule. In the same manner it would be a mistake to use the term "socialist society" for Islamic society, even though it has adopted public ownership and state ownership for some kinds of wealth and property, because in its view the socialist form of ownership is not the general rule (Taheri, 2004).

These issues lie in the context of the forms of ownership, but Islam is more concerned with use of ownership, which should respect God’s law. One of the most important rules which regulate ownership in Islam is almsgiving, the third of the five pillars of Islam. It is a religious duty paid by the owner of money, though not only in cash form. The sum is calculated by an independent institution as an independent fund, which will be discussed in more detail later with the Islamic understanding of capital circulation.

Islam also forbids ownership usage in the form of selling, manufacturing, delivering, and any other dealings with any prohibited commodities and services, such as alcohol. Monopoly is prohibited in Islam, but we cannot say that meaning of monopoly here is the same as what is known in the economic sciences. Monopoly as prohibited in Islam is the collecting of a material from the market until it becomes scarce and virtually unavailable, such that the merchant can ask whatever price he wants. Economically this is called perfect monopoly.

Absolute single ownership is an alien concept in Islam. One of the strangest things in the history of Muslim emperors is the relation between the owners of wealth and the authority. The concept that 'God is the owner' was actually utilized to keep ownership in the hands of the successors of Prophet Mohammed (pbuh). The leader had political power which cannot be explained as capital owners’ need to control, but rather as the struggle of tribes to have both authority and wealth.

Ibn Khaldoun is known as the father of social sciences and his book Introduction [Muqaddimah] is the first known analysis of history as the movement of development. He considered the movement of development, or prosperity, as a cycle of tribal development which ends when the tribe grows weak after becoming civilized and wealthy. A new powerful tribe would then prevail, displacing the old authority and establishing its own with the transfer of all forms of ownership to new loyal leaders. This takes place when authority transfers from one successor to another, where the new successor brings the essential leaders of the previous time and expropriates ownership from them and their families or tribe (Ibn Khaldoun, 2005).

When the centers of the successor’s empire authority weakened, the tribal leaders took the opportunity to become independent. This is valid for historical implementation but not as resource for the crafters of Islamic economics. As mentioned before, they tried to subjugate economic theories to Islamic law and to evaluation of historical implementations and events, efforts motivated by the personal motives of self-interest and by the development of culture.

1.1.4.3 Self-Regulating Market

Adam Smith, the father of classical liberal economy, concluded in his book The Wealth of Nations that only the free market mechanism can ensure healthy economic equilibrium. He assumed that the state of equilibrium is the natural position of market forces. Demand and supply forces come together in the market and meet at the point of equilibrium point, where full and optimal employment is ensured. Any unemployment, recession or inflation is an exceptional situation; market forces will shift in order to return to equilibrium and reach full and optimal employment of the producing factors. However, after the Great Depression (1926-1934) it became clear that the free market mechanism could not ensure the full and optimum employment. Supply and demand forces are self-correcting enough and equilibrium could occur at lower unemployment levels where depression grows deeper.

The general theory devised by the economist John Maynard Keynes argues that improving the general spending level through governmental financing and monetary tools is the solution to economic depression by halting inflation, Keynes also argued that classical theory is not generally applicable:
I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. … I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience (Keynes, 2004).

Communist regimes ignore the free market mechanism and its fluctuations while depending entirely on centralized planning for decisions on the economic factors of employment, but even if they can ensure full employment they cannot ensure optimization (Al-Baiatee, 1997).

Islam, however, does not prohibit the free market mechanism and in fact encourages trade. At the same time, Islam defines forbidden activities and gives authority to the government to prevent any activity that negatively affects society, such as perfect monopoly. One of the most important missions of government in Islam is market supervision, which entails the right to control and coordinate market activities with full respect to Islamic law and the country’s general policy. The execution of this principle has been performed in the following ways:
1) The sacred law, in its general sources, provides the textual stipulation to forbid a group of social and economic activities which hinder, in the view of Islam, the realization of the ideals and values adopted by Islam, such as usury, monopoly and the like.
2) The sacred law laid sown in principle the supervision of the ruler over general activities and the intervention of the state to protect and safeguard public interest through the limitation of freedom of individuals in the actions they perform. Regarding self-interest, Islam emphasizes that the success of both the individual and the society depend on a balance between the spiritual and the tangible needs of man.

Based on the principle of limited ownership which is derived from the Koran text mentioned above, man is neither the absolute owner nor the total possessor of the earth and its resources (Taheri, 2005).

Islam in market regulation adheres to the market mechanism under the broad observation of government to ensure individual and public benefits with full respect to the moral and general aims of the Islamic religion.