NEW ECONOMIC THINKING FOR MUSLIMS
In the second half of the twentieth century, Muslims were presented with a new economic model, which could be referred to as neoclassical Islamic economic thinking for an easy reference. The basic tenet of neoclassical Islamic economics is the prohibition of interest and an emphasis on economic equalities. A more just monetary system was central to this thinking (Chapra, 1985), which was attempted to be manifested in Islamic banking and finance. The initial thoughts were formulated by those who preferred to call themselves Islamic economists, but the movement was later taken up by Shari’a scholars who became the forerunners of Islamic legal applications to banking and finance. This gradually led to a juristic analysis of economic and financial phenomena, thus marginalising the role of Islamic economists.
As an influence on the practices of finance, several Islamic banks and other Islamic financial institutions were set up in different parts of the world, with three countries, namely Pakistan, Iran and Sudan, deciding to establish completely interest-free economic systems. Many other Muslim-majority countries opted for what was labelled as a dual financial system, allowing interest-based financial institutions to operate along with the newly-established interest-free banks and financial institutions.
In the past two decades, a new body of empirical research has emerged to test whether interest-free Islamic banks and financial institutions individually and the interest-free economic system as a whole improved resource allocation, and production and distribution of income. Also, various studies attempted to test efficiency and systemic stability of the new system. In recent years, multilateral institutions like the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) have also started engaging themselves in Islamic banking and finance.
It is completely legitimate to ask if the neoclassical Islamic economic thought has succeeded in allocating resources in a better way, improved price efficiency, and has indeed contributed to social welfare. While rigorous empirical analysis is required to answer this question meaningfully and authoritatively, an immediate answer appears to be negative. Islamic banks and financial institutions follow the same price determination model, with the only difference that interest rate mechanism is exogenised to use interest rate as given. The Islamic financial products are simply benchmarked to this exogenous factor. The consequent resource mobilisation is no more or less efficient than what conventional interest rate mechanism would result. This does not bring any net welfare gain either.
This has led to the perception that the neoclassical Islamic economics is in effect not different from other economic models. This not only puts a question mark on the viability and sustainability of the neoclassical Islamic economics, but more importantly questions its authenticity.
Given this, there is a definite scope for a new Islamic economic doctrine away from the semantics of law and jurisprudence towards modern realism based on economic reasoning. For convenience, the combination of both could be termed as economic jurisprudence.
What is economic jurisprudence as opposed to a framework of jurisprudence exclusively based on legal analysis?
Economic jurisprudence should be a set of principles based on differentiation of economic outcomes. If a legally different economic phenomenon gives rise to an outcome which is not different from another impermissible economic phenomenon, it should not be deemed different. To be specific, if interest is considered impermissible than any other tool that leads to the same outcome as interest, should also be deemed impermissible. If the outcome is in fact socially optimal and is indeed desired, required and intended, then interest should be deemed acceptable provided that the alternative tool requires more (additional) resources to get implemented.
This is indeed radical, and therefore it merits a pause for thought.
