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Islamic Banking : Environment, Conception and Methodology

Thoughts on Islamic Banking: Articles Presented at the 2-Day International Seminar on Islamic Banking held under the auspices of Islamic Economics Research Bureau on the 15th and 17th DecemberDacca, Bangladesh, Islamic Economics Research Bureau, 1982, 57-62, - By Professor M. Raihan Sharif

I.

Introduction: Conceptual and Operational Issues Islamic banking is probably the easiest thing to think of within an Islamic framework. Conceptually it is simple; banking institutions are already operating in some countries on no-interest basis. It may be quite tempting to think that in countries yet to install Islamic economics, Islamic banking can be started right away as a promising beginning and also as a catalyst of producing other desirable changes. In such a proposition, the existing banking institutions have only to be converted into Islamic banking by changing the methods of operation. Instead of operating for interest income and payment of interest on savings deposits, the banks have only to work for earning net investment income income earned on the investment of the deposits in share capital and direct enterprises. If gross income on investment is likely to be reasonably high and safe, part of the income can be allocated and distributed to the depositors themselves as participants in the investment business. Security and confidence ate only to be built up; And that is no innovation. Historically mixed banking in Germany and Japanese banking after the Meiji era of radical changes are instances. But the critically important issue is: transformation of one system into another (which is radically different) is not a turn-key job. Conceptual simplicity and operational experience in history or in, other, contemporary countries do not make it a ready project.

In fact, for countries where an Islamic social and economic system: is not operating. Islamic banking will be a new projecta project -of study, appraisal and establishment of viability within the major constraints of (i) risks and uncertainties, (ii) international inflation, and (iii) requirements of rapid development in the populous poor developing countries -like Bangladesh in Asia and Africa. Banking and finance will in fact be one subsystem to be so radically readjusted as an innovation in an environment of highly entrenched different traditions. The establishment of viability on Islamic banking as a new subsystem will not only imply this specialized study of the area only; the interrelationships with other subsystems and the planned transition to the Islamic socio-economic system as such can hardly be ignored. It is in the latter considerations that the success of the new innovation of the subsystem of Islamic banking will depend. II. Capital Theory and Islamic Banking Historically, organized financial system emerged in Europe during and after the medieval period with the emergence of a trade-induced middle class; they lived by trade and developed a sophisticated financial system to support their activities. The same financial system was 'sharpened and polished until it became not only a tool of the mercantile middle class but an embodiment of the politics of money.1 'Politics of money' became manifest in the phenomenon of domination of the whole economy by the capita list class (emerging out of the mercantile class) who seized political power. To lend sophisticated support to such capitalism, classical and neoclassical theories of demand and supply for goods and factor-services came to be used in developing the models of production and distribution within the conceptual framework of equilibriuma borrowed gadget from the laws of mechanics. Homogeneous quantities of labour and homogeneous quantities of capital were brought into balance extremely arbitrarily for providing subsistence of food and fixed rates of interest to rationalize a double-edged undue advantage to the capitalist class (i.e. capitalist-entrepreneurs). The subsequent history of the post-First-World-War dislocations and the severest depression of the 1930's gave J.M. Keynes a unique opportunity of changing the framework to save capitalism from complete disintegration. In Keynesian economics, the framework demolished the old theory of money as a 'veil' and money became essentially "the theory of the economic processes as a whole". Keynes' concepts of dynamic equilibrium with unemployment, deficit financing, low interest rate (and zero rate of interest in the long run) provided operational tools for planning public investment, saving, fiscal policy and consumption policy. These also showed the way to the spate of new thinking on the methods of development planning in the Third World countries. But recent re-examination of Keynesian economics brought out important failures arising out of Keynes' pre-occupations with aggregate demand, level of markets etc. inadequately linked with the institutional features of the capitalist system. Michael

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Kalecki's analysis was found by many as more revolutionary. Kalecki unearthed the social inequities of financial economics by probing deeper into the processes of monopoly capitalism. His revealing findings, about the "limitation of the size of the firm by the availability of entrepreneurial capital and that firms below a certain size have no access whatever to the capital market explain the realities of the capitalist system. Kalecki's conceptualization is known to have helped the Marxian analysis greatly.2 It is because of the failure of influencing the institutional framework that Keynesian philosophy of low interest (and long run zero interest) did not work; and aggressive monetarists entered the arena in Europe and America. Islamic economics is conceptually equipped on all frontseconomic, political and institutionalto install the theory of money as one of "economic processes as a whole" and make it work in a society where the human mind is spiritually motivated to accept that interest is forbidden by Allah. Language barrier does not allow the wide world to know how much research work exists in the Muslim countries to throw light on effective operational knowledge on institutional change needed for the functioning of Islamic banking in the varying conditions of the individual Muslim countries representing so many different kinds of situations out of which variables have to be chosen for the construction of workable models. Even the history of contributions by our classicists and neo-classicists (7th to l4th Centuries) is yet to be systematically written and analysed. Dr. Monzer Kahfs effort at the analysis of Taqiiddeen Ibn Taimeyah (1263-1328)s theory of 'Value of Equivalence' is a commendable instance.3 But whether 'equivalence' can be interpreted as a mechanism of demand and supply equilibrium of goods and factor-services including capital of Islamic definition is still to be explored. Nor will this be enough without designing and testing the institutional innovations for the successful functioning of the Islamic financial system in the real conditions as are existing. III. Conclusion: Suggested Action Any social system, after its own history of development through human efforts, has its moorings in the physical environment molded by it. Study of theories and principles influencing the environment are as important as the lessons of past applications left in the continuing traditions, especially in the institutions of the functioning the system in question. For the Islamic social system, the principles of application derived from Al-Qur'an and Sunnah have not to be theorized; but the applications and institutions left in the environment need careful study because of the continuous changing in the elements which historically lost the link with the controlling role of the principles. The progress of civilization, dependent on growth of knowledge and application of such knowledge, was of a dynamic kind of Islamic ideology upto the 11th century; this Can even be extended to the period upto the 14th century. But subsequently, other system grew on deferent lines, depending on applications of science and technology to colonialism and material prosperity, creating a new environment. To bring back the conditions of success for the principles of the Islamic social system, we have not only to study the theoretical aspects of the implicit principles but also the institutional framework working as the environment with a view to finding the methods of adjustment and adaptation in the existing situations of the various Muslim countries. This is true about the researches needed for the whole system as well as for the component of Islamic Banking System. The international and national organizations of Islamic research will have to meet the demands of this challenge. I suggest, an initiative be taken by this Seminar for developing a, programme of action of appropriate nature to enlist the support of the international organizations concerned on a coordinated basis. Besides the normal international organizations, the Arab members of OPEC should come forward in a big way to support the research efforts towards introduction of Islamic institutional innovations in a planned manner. Broadly speaking, the programme of research efforts for a coordinated international support can be grouped as: A. Programme of Translations: this should be an expeditious effort with the examination, selection and publication of the English versions of all important Islamic thinkers with contribution on problems relating to the social sciences, especially to economics. B. Economic History: a group of authoritative scholars need be engaged in writing the Economic History under Islam; the work may be published in series, both in Arabic and in English. C. Schemes of Socio-economic Union: elimination of disunity and development of mutual strength among Muslim countries maybe-come feasible with the organization and support of such relevant and concrete proposals. D. Distribution of reference books and publications and organization of study abroad for limited periods in connection with the production of Islamic books based on research related to the introduction of Islamic system or subsystem in major areas. E. Establishment of a Clearinghouse of Information on already available research results and researches in progress throughout the world. The programmes of research, nationally and internationally implemented, will and should expeditiously lead to the production of reference books, textbooks and operational manuals that can be the instruments of training and preparation for the manpower and of orientation to the people; in general. Education is the process of preparedness for building the conditions of success for the innovation we are talking about. Glibly talking about it in an academic fashion and holding seminars alone will not lead us to any hope of positive achievement towards the objective. Even the concrete step of opening a window of interest-less banking in one commercial bank in Dacca is not likely to catch the imagination of all concerned. The prerequisites of success and conditions of environment must receive clue attention in the hands of planners in the countries concerned. The conditions of economic and cultural cooperation among the Muslim countries within the

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Islamic world need be adequately responsive to this crucially important requirement. And for this, consensus may be deficient only at the cost of our own faith in ourselves and in Islam. 1. Nicholas Holmes Environment and Industrial Society, Hodder and Stoughton, 1916, pp. 17-18. 2. K.R.Ranadive, "Relevance of Recent Developments in Monetary Theory for Developing Economics", World Development, Vol. 7, Pergamon, 1979, pp. 945-48. 3. Monzet Kahf, The Economic Views of Taqiiddeen Ibn Taimeyah, Dec. 1976 (unpublished).

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