Interviews of Islamic Economic Experts

1
ON ISLAMIC FINANCE IN INDIA

ABDUL HASIB SIDDIQUI
(Former Executive Director, Reserve Bank of India)
Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

poor Muslims from the blight of Riba. Why?
I think the reasons are on account of both external and internal factors. Externally, when
the whole world finance is based on interest, it is extremely difficult if not impossible, to
introduce Islamic financial institutions on a limited scale. This is all the more so when the
world markets are getting integrated. The difficulty becomes greater when appreciate that
the Muslim community itself does not seem to be convinced either intellectually or on
practical grounds about the interest being haram. The questions being raised about the
difference between interest and usury or between interest and bank interest on the ground
that bank interest is not exploitative are examples of this confusion. Add to this the point
that in a world where it is practically impossible to completely eschew interest based
transactions and you come to a situation where the implementation of interest free
banking is fraught with impossibilities. I must admit that perhaps I am exaggerating the
point because the body of Islamic intellectuals are unanimous that there is no difference
between interest and usury. I also share the same belief. However, there are still some
doubts in the minds of a large number of people about the practicability of interest free
banking in the world today. There is also the additional and related point that that
nowhere in the world, including Islamic countries, Islamic banking has been introduced
in its purest form.
Among the internal reasons the most important are that Islamic banking is based on
ethical and moral principles and it is not possible to put the entire burden of Islamic
banking on the lending institutions. Borrowers` duties and responsibilities are not even
discussed in discussions of Islamic banking. Then there is the almost evident point that
Islamic financial institutions are almost always run by those who believe in Islamic
principles and are well versed in Shariat but are not so well aware of rules of Islamic
Banking, which are based on the fundamental principle that confidence is the backbone
2
of running a successful institution and confidence is a factor of implementing well known

canons of prudential banking by honest professionals. Many of the Islamic institutions
have come to grief because of the mismatch between demand liabilities and illiquid
assets, Of course, part of the reason was the absence of suitable invest opportunities, a
point related to the competitive integrated markets, discussed above,
How far the government’s rules and regulations have been responsible for theses
failures?
This point has been discussed at length in the Experts Report on Islamic banking,
prepared several years ago under the auspices of I.O.S. Briefly, all those Govt rules and
regulations which are interest related come in the way of running an Islamic Institution.
Examples are the maintenance of SLR and taking advantage of repose in India. It is
possible though not easy to live with these regulations. This however requires a
sympathetic attitude of authorities. One must admit that very few serious attempts have
been made to convince the authorities of the usefulness and practicability of Islamic
banking. For instance, a former Deputy Governor of the Bank of England is reported to
have said that he was convinces of the advantages of interest free banking but had yet to
receive an agreed and unanimous view regarding the instruments to be used.
How do you look at the future prospects of these MFIs under current liberalization,
privatization, and globalization scenario? What would be your suggestion to
improve their functioning?
Honestly, I do not believe the prospects to be bright unless ISLAMIC BANKING IS

SUCCESSFULLY INTRODUCED IN AT LEAST ONE Muslim country.
Any other point that you may like to add in the light of your experiences?
Islamic banking should be firmly conceived as apart, though an essential part of Islamic
economic system. It should not be treated in isolation.
3
ABDUL WAHAB DALVI
(Managing Director, Baitun-Nasr Urban Cooperative Credit Society Ltd.)

As far as I know a number of MFIs are not registered in their respective states under the
laws and rules applicable to them in those states. Of those which have been properly
registered some have not been strictly following all the laws applicable to them. Those,
which are trying their best to follow all the relevant laws, have to be flexible, to some
extent, with ‘Shariah’, with the result that somewhere some element of ‘riba’ stains their
Shariah purity. This has been happening in India. Though authentic statistics in these
matters is not available, many of these institutions have relieved their members from the
clutches of the merciless moneylenders and as such it cannot be said that all those MFIs
have replaced those Moneylenders.
MFIs failure in relieving the community from ‘riba’ and introducing Shariah is due to,
some of the following reasons:
a) The prevailing laws do not permit the institution to fully act on the Shariah
e.g. not allowing such MFIs to accept deposits from the public without
indicating a fixed return payable to the depositors on their money. The RBI’s
directive in this regard is applicable to all the financial institution and does not
make any exception.
b) There is no controlling and directing authority for the MFIs established for the
purpose which leads every MFI to follow its own ways in its operations and
functioning. Had there been regulating, inspecting, auditing authority for the
MFIs, they would not have faced failure on large scale.
c) A majority of the MFIs have not been functioning under the competent and
professional management which is required for all the financial institutions,
without any exception.
d) Barring some all the depositors of the MFIs are not fully aware of the
functioning of such institution. A general programme of bringing awareness
4
among the Muslims for the purpose will have to be prepared and
implemented.
e) An apex body to help financially and guide the MFIs in case of need is not in
existence. This needs to the created if the presently functioning MFIs are to be
saved.
failures?
Government’s laws and regulations have created hitches, without any discrimination in
implementing Shariah, which is not acceptable to them. These require amendments at
Central Government level e.g. The RBI Act, The Banking Regulation Act, N.I. Act etc.
As the MFIs have not at present made, their presence felt all over India generally, the
current liberalization and globalization is not much relevant to them for the time being.
The failure of the MFIs needs to be probed by a committee of experts who are not only
well versed with the functioning of the financial institutions in India but also Shariah.
The committee should also suggest a plan for making MFI successful in India, at all the
levels, in future.
5
M.H. KHATKHATAY
(Managing Director, Barkat Investment Group)

The two-fold mission of M.F.I.s as defined by you is to "introduce Shariah in their

operations" and to "relieve Muslims from the bane of Riba". But the former is not
possible without the latter. So really it might seem to imply that the two are synonymous.
There are however several aspects to be addressed. We need to understand these more
clearly.
To my mind, any comprehensive system of Islamic banking and/or investment needs to

address four major areas:
a) Provide the common public an avenue of risk free safe keeping of savings
which is not Riba based.
b) Provide an intermediary to help invest savings in profitable avenues without

involving Riba.
c) Make available funds for businesses on a non-riba basis
d) Make available funds on a loan basis for non-business needs (such as for
education, health, travel and urgent consumption needs) on a non-riba basis.
While at first sight the first & fourth areas on the one hand and the second & third on the
other, may appear to be two sides of two coins, the corresponding pairs do not necessarily
go together. Given the existing Indian legal & regulatory framework, the first & fourth
are more easily tied together and the second can usually go along with the third, though
not always. Hence all the four aspects need to be discussed separately.
Apart from the above aspects which involve questions of Shariah and may require
exploring non-conventional options in order to avoid Riba, another aspect on which the
MFIs’ operations need to be judged is that of promoting development of their
constituents and their efforts and success in diverting such development along desired
and healthy directions. It is often mentioned in the literature that Islamic banking in
6
contrast to the conventional banking industry should promote investment in socially

desirable & meaningful projects rather than merely in those that return the highest profits
in the quickest time. Have such pious hopes been realised in practice?
It is in the fourth area listed above that MFIs in India have scored the most significant
notable successes. From the Muslim Funds of Western UP to Toor Bait-ul-Maal of
Hyderabad, the Bait-un-Nasr of Bombay and Islamic Welfare Society of Bhatkal, we
have had several successful attempts at relieving the financial burdens of people in need.
These helping hands have not been confined only to the social & personal sphere but
have also aided small businesses, agriculturists and persons seeking to defray expenses
for obtaining overseas employment - all of which have a direct economic impact on the
well being of those concerned.
While it is true that some of these formats, particularly that of the Muslim Funds may
have been sometimes abused by unscrupulous elements for self aggrandizement or even
subverted for Riba-taking while posing as Shariah compliant operations, it cannot be
gainsaid that the basic motivation behind the initial efforts of these funds and even some
of the existing major operations is to save Muslims and others from the clutches of
usurious money lenders - and they have been eminently successful in that too,
particularly in the small towns in which they operate. While purists may legitimately join
issue with those running some of the genuine MFIs in this category regarding compliance
with Islamic norms, one needs to balance such criticism with appreciation of the legal &
operational difficulties that face such operations in the Indian environment.
The operations discussed above (apart from the Toor Bait-ul-Mal type) also cater to the
first objective. Their source of funding is mainly the risk free and interest free deposits
they receive from their numerous depositors. Here to some of the operations have had a
definite impact in not just mobilizing savings but also inculcating the savings habit
among their customers. Notable in this regard have been the Muslim Funds and the Bait-
un-Nasr with their respective daily deposit collection schemes. The point to be taken here
is that these deposits are mobilised with a zero rate of return.
Between the second & third areas listed above, it has been easier for the MFIs to cater to
the second than the third. This has been so mainly because the former involves a
7
compulsion to enter into a profit-sharing arrangement on the liabilities side. The

deployment can be in own business, on the stock market or in property, all of which
avenues are more amenable to control than in assets which imply giving over the money
to customers to invest in their businesses.
Thus the earlier experiments such as Al Meezan of Madras, the Markaz Group in
Hyderabad & Falah Investments Ltd and Ittefaq Investments Ltd in Bombay all showed
this pattern. In the late 80's & the 90's many MFIs in India started investing mainly in
Leases & Murabahahs. It is from this period onwards that most commercially oriented
MFIs (as against the earlier Muslim Funds & others) have started catering to the needs of
their customers by deployment from their assets side with their customers.
Unfortunately due to operational failures, none of the genuine attempts have been able to
cater adequately to the needs of lay investors among Muslims over a sustained period of
time. Some have been able to give attractive returns for some years only to fall below
market rates or skip returns and even fold up operations subsequently. It must be noted
however that probably none of the genuine operations apart from the early Al Meezan
experiment appeared to have flagrantly violated the profit-sharing understanding & paid
out non-existent profits (which would amount to Riba).
Of course there have been blatantly fraudulent operations which have lured gullible
Muslim investors with promises (and even pay-outs over limited periods) of super profits
on a supposedly interest free basis and then duped them of their capital. But I presume in
a serious discussion of operations motivated by Shariah considerations we do not need to
include such outfits in our purview.
The operations of Indian MFIs in the field of financing have unfortunately not been very
impressive. On the one hand Shariah compliance has been poor. On the other, in many
cases the rates of returns demanded have been excessive in comparison with market rates.
Murabahahs of most MFIs in India would not pass muster if the details of their
documentation & procedures were to be transparently revealed. Though to a lesser extent,
the same would apply to leases written by them too. As these have been the major
avenues of deployment of funds, the operations of such MFI s leave much to be desired
in terms of being Riba- free. When we come to the developmental aspect here too we
8
find little focussed application and achievement by the commercially-oriented MFIs.

There has certainly been funding of the socially weaker sections such as Rickshaw
pullers, autorickshaw & taxi drivers and petty shop keepers but probably this is no more
than carried out by other conventional NBFCs (Non banking Financial Cos.) and
community based cooperative banks. In this area as noted above, it is the efforts of the
non commercially oriented MFIs that have been much more significant. This has been all
the more so as the pricing of the latter's funds has been generally much below market
rates of finance.
Then, apart from the Barkat Group & the much earlier Markaz Group of Hyderabad and
to some extent the Falah Mutual Benefits of Lucknow, all of which did make valiant
attempts to deploy their funds in other than merely Murabahah & Leases, the other
commercially-oriented MFIs have by & large restricted themselves to Murabahah &
Leases. Thus if one were to guage the performance of these MFIs, on the score of
Islamicity of their investment, they would not rank very high. Probably the same is true
of most Islamic banks worldwide too. However due to legal constraints, probably even
the compliance of Murabahah of Indian MFIs with Shariah requirements is less than is
the case with foreign Islamic banks and investment Cos., which are at least formally
recognised as such or for whom the regulatory framework is less rigid.
failures?
In any country, the format nature & direction of development of Islamic financial
Institutions is necessarily dictated by the legal framework in which they operate. Thus in
a tightly regulated environment such as India's MFIs face so many obstacles that few
MFIs can be found which exhibit fairly good compliance with Shariah. Then, as the
regulations are not framed with any Islamic stipulations in mind, it is also true that the
extent of Shariah compliance by MFI's is equally a function of their ingenuity in devising
structures which permit greater shariah compliance, while allowing them to abide by the
letter of the law.
The recent rapid & frequent changes in the regulatory structure for the financial sector is
also another reason MFIs have had difficulty in ensuring Shariah compliance.
9
The future for MFI's does not look very promising. Many institutions have already folded
up. Some, which are in operation are in a fluid state and may be forced to down shutters.
The stringent norms now stipulated for registration and for accessing public deposits are
making it difficult for most existing MFIs except those registered as cooperative societies
or mutual benefit companies to continue in operation. The entire Muslim Funds sector is
in a legally precarious state.
Nor does the scenario for new MFIs look much better. To start with the entry threshold
for MFIs in the form of Companies has been raised steeply to a level of net owned funds
of Rs. 2 crores. Then the definition of "Public Deposits" has been broadened to plug
virtually all avenues of raising funds from the public other than as share capital & public
deposits. And it is now mandatory to pay a pre-specified rate on deposits which is within
the prescribed ceiling rate. This amounts to Riba.
The scope of Cooperative Societies is limited and non-Riba Cooperative Societies cannot
be commercially oriented. Mutual Benefit Companies have some flexibility but are
difficult to register. Scope for expansion and opening of branches has also been severely
circumscribed for all NBFCs including Mutual Benefit Cos. Deposit raising capacities of
NBFCs via gearing has also been severely curtailed and is regulated & monitored closely,
though these steps in themselves are to be welcomed from the point of view of sound
financial management. Public deposits also require the NBFC to compulsorily invest in
Govt. Securities, which are again interest-based.
Thus for existing as well as new Companies technically equity is the only legally feasible
instrument which can lead to a profit sharing operation. But equity is costly and its
mobilization a discreet and discontinuous process for raising finance. Another indirect
option, which will still be in effect based on profit sharing is equity-linked debentures
subscribed proportionately by all shareholders.
10
DR. M.Y. KHAN
(Former Senior Economic Advisor, Security and Exchange Board of India)

First of all there is a lack of awareness in the masses of functioning of these institutions.
Since they work as NBFCs they do not offer check facility so transaction facility is
limited. Moreover these institutions have failed to mobilize resources or deposit due to
lack of infrastructure. Their manpower is not equipped with technical aspects of banking.
They function by and large in poorly located premises it may be mentioned that these
infrastructure create confidence in the investors. There is no apex institution in India to
take care of these FIs when they are in distress. As regards helping the poor their small
resources work as a limitation for their poor performance in respect of improving the
condition of have-nots.
As a matter of fact it has to be the movement to transform the society into the people with
financial literacy. Institutions have been set up and credits have been extended to people
without making them aware of their responsibilities as how to use this money.
A Non Banking Company set up in Pondichery covered 94 villages made nearly 100,000
members with the commitment of small deposit by them and extended loans under the
guarantee of five members of the committee. The company conducted several training
programmes for depositors as well as borrowers in order to teach the use of the money
and how to maintain their accounts. This company had resources of nearly 50 crores in
1993 and all money leaders were wiped out from those 94 villages. The loans were
sanctioned as equal to a number of times of deposits. Their accounting standards were
comparable with any bank. I have myself visited and found their monitoring system very
good.
failures?
The R.B.I. Supervises financial companies, NBFCs as well as banks. The MFIs can very
well work as NBFCs provided they could meet the required norms of capital adequacy
11
and accounting standard prescribed by the RBI. It will be easier for them to work by
soliciting funds through capital participation as well as equity paid up capital to avoid the
interest component. There are many NBFCs in India who have grown very fast and with
stand.
Muslims generally, complain that Government or R.B.I. does not encourage Islamic
banks. It is totally wrong. Many of these MFIs have failed due to their faulty policy of
financing. They are unable to identify the good projects. They do not follow the norms of
feasibility or economic viability of the projects. For instance one famous company in
Bombay crashed due to their heavy concentration on real estate finance and lack of
diversification of investments. It is also understood that the company was technically
weak so how we can say that Govt. does not permit the growth of these companies. They
have to look into their own functioning, their weaknesses. They should also make efforts
to diversify their products there are many financial services that are offered by the banks
and they do not involve any interest component. Many of these MFIs are dominated by
few persons without having any democratic set up which is the corner stone of Islamic
System.
Privatization and globalization have been the tool basic philosophical angle of Islam and
these two cannot be achieved without liberalization. Thus globalization privatization and
liberalization combined well to reflect the economic philosophy of Islam. Islamic
financial institutions have therefore tremendous scope to grow under such an
environment. However, they will have to adopt international practices, excellent
accounting standards, clear and fair monitoring to the public as well as to the regulators.
They should adopt disclosure norms and transparency in their function. The time will
come when Islamic financial institutions anywhere in the world will have to complete
with large banks offering variety of services with speed and easiness. In this regard
human resources of these institutions will need restructuring. The problem is that MFIs
12
are of very small sizes if we can merge them at district level and manage with locally
available professional. There are prospects of growth for them.
It is expected that in future institution like mutual funds, pension funds, venture capital,
leasing will grow so MFIs can enter in these areas. Now Government is promoting
projects on the basis of on-operate and transfer. In these projects MFIs can finance
private projects on partnership basis.
Now Government is privatizing public undertakings MFIs can invest in equities of these
companies however it will lead management of risks associated with such investment like
equities.
MFIs can adopt ‘mark to market’ mechanism to protect the value at risk. For this they
will have to create risk reserves. One caution may be observed here that the company
should not indulge in trading activities and securities and create speculative bubbles in
the market.
In globalization the size of companies are enlarge through joint venture from abroad,
takeovers and mergers. A big MFI can adopt some of these techniques to increase their
size so that operational cost can come down and they can have competent professionals to
run the organizations. There are few MFIs which can afford R & D for growth of their
company by innovating new products.
MFIs have greater responsibility of making the people aware about their objectives and
functions they should not confine only to seminar and discussion among the intellectuals.
They should go to villages, slums and to the areas overlooked by the conventional banks
and educate them about the benefits of their financing schemes. What I mean is that they
have to increase the financial literacy in the segment of the people whom they want to
serve. They should identify themselves as a guide to the people. The community whom
they want to serve has little money but drop-by-drop you can create an ocean. It will not
only help the people but the MFIs will also reap the benefit of it. Institutions cannot be
run on religious slogans they need clarity and competency.
13
PROF. M.N. SIDDIQI
(Eminent Islamic Economist)

I do not agree that they have failed. The judgment is too harsh in view of;
 Relatively short period of time to the experiment
 Variety of models involved
 Variety of ORTHODOX views on RIBA in INDIA, to which some take recourse

faced with difficulties in the field.
failures?
To a relative insignificant extent.
MFI involve money and entrepreneurship. Liberalization, privatization and globalization

all create opportunities as well as increase pressure for do it yourself model of economic
activity. The important thing is for the State to maintain a level playing ground, exercise
caution ant proceed gradually, which I think the Indian state has been trying to do. So in
future there will be MORE need and greater role for MFIs.
The important thing is to go on trying. Do not stop because you are supposed to
have failed in fulfilling the expectations of many. Life must go on, and finance is very
important for a healthy life. Arranging it Islamic way is a greater challenge. Our role as
theoreticians is not to pronounce judgments or issue death warrants. We have to analyze
and advise.
14
Islamic Economics & Finance Have a Great Future:
(Prof. Rodney Wilson)

From this issue of Islamic Economics Bulletin, we are starting the interviews with the
leading scholars of Islamic economics. In the first of this series, Prof. Rodney Wilson of
the University of Durham, United Kingdom, shares his views with Shariq Nisar, the joint
editor of this bulletin.
Prof Wilson is a highly respected scholar of Islamic finance in the Muslim world. His
research papers on Islamic Economics and Middle Eastern Economics are published in
the reputed journals. He has supervised several PhD scholars. Among his notable works
include: ‘Economics, Ethics and Religion: Jewish, Christian and Muslim Economic
Thought, Palgrave, 1997 and ‘Islamic Financial Markets’ (ed.) Routledge 1998, (Editor).
What are the main messages of Islamic economics to humanity? How it is different from
conventional economics?
Islamic economics is concerned with justice in all transactions, whether buying and
selling activities or financing or labour recruitment and retention. The Shariah law
provides the framework for the economic system to operate in accordance with Islamic
teaching, and hence there is a moral filter. Conventional economics is concerned to
explain human economic behaviour merely in material terms, and specifically in the
balance between utility and disutility. It disregards the spiritual realm, the emphasis being
on material reward in this life. Islamic economics does not reject conventional theory, but
rather provides a normative dimension.
What are the prospects and opportunities for research in Islamic economics, particularly
for the students of Indian subcontinent, at western universities especially yours?
We offer an M. Sc. in Islamic Finance for students with mathematical ability who are
capable of taking courses in financial theory and econometrics and an MA in Islamic
Political Economy where there is an opportunity to combine Islamic economics and
finance with Economic Development and Contemporary Islamic Thought. These one-
15
year taught Master’s Programmes include modules in research methods which makes
them a suitable prerequisite for further study to PhD level. Unfortunately we have little
scholarship funding. Details can be found on our Website.
What paper / book of yours you regard to be your most significant contribution to the
subject?
My book on "Economics, Ethics and Religion: Jewish, Christian and Muslim Economic
Thought", Palgrave, 1997.
You have been associated with teaching and research in Islamic economics at various
levels, what do you think should have the highest priority in research in Islamic
economics?
Relationship between Islamic economics and social economics and institutional

economics. Working out the implications of Islamic economics for economic policy
making at the national (macroeconomic) level and for corporate governance and strategy
at the level of the firm.
(Microeconomic) Exploring how Islamic economics relates to the trends towards

globalization.
What would be your critique (if any) on Islamic economics and finance?
Basic premises well established and accepted, but need for clarity in exposition. Islamic
economics and finance should not simply involve taking conventional theories and
modifying them slightly, but rather implies constructing a distinctive moral paradigm.
Where do Islamic banks stand now as compared to 27 years ago when the first Islamic
bank, Islamic Development Bank was established?
Islamic banking has become a worldwide industry with Islamic banks operating in most
Muslim countries and many countries in the West. Much has been achieved in the
creation of Islamic financial products that have proved viable and robust, and most
recently Islamic securities markets have been developed. The majority of Islamic bank
clients are satisfied with the services they receive, and Islamic banking is treated
seriously by leading international banks, many of whom provide Islamic services.
16
Critics say that Islamic banks are loosing the ground and credibility, which they had
succeeded in generating in the past. What do you think is the reason for that?
This is not the case, although in mature markets where Islamic and conventional banks
compete it has been difficult for Islamic banks to increase their share of the market
beyond 20 percent. In the West Islamic banking has great potential if large international
banks with proven brand strength marketed their Islamic services to the general public
rather than simply concentrating their efforts on a few individuals of high net worth.
Any message to the readers of Islamic economics?
Islamic economics and finance have a great future. Those working in the field are
motivated by faith rather than simply material reward. They genuinely believe in what
they are doing, and see their subject as distinctive and worthwhile.
17
Islamic Banking at the Cross-roads: (Zamir Iqbal)

Dr. Zamir Iqbal works as a Senior Information Officer with the Quantitative Strategies,
Risk and Analytics department of the World Bank in Washington, D.C. He is currently
also serving as visiting faculty of international finance at the George Washington
University. He has published articles on Islamic finance in various international
journals. He has presented papers on Islamic finance in international conferences in
Egypt, Iran, Lebanon, Pakistan, UK and USA. His research interest includes Islamic
Securitization, Financial Engineering, Structured Finance and Risk Management. Dr.
Zamir shares his views with Shariq Nisar Joint Editor, Islamic Economics Bulletin
(Editor.)
You are at the top most banking institution in the world. How people at the World Bank
look at Islamic banks. Do they see any material differences between both the banking
systems?
The Bank recognizes and respects the wishes of its member countries to develop their
financial system according to their cultural, ethical and moral principles. IFC, private
sector arm of the World Bank Group has successfully participated in several Islamic
financial deals and has played significant role in others. The Bank has started to evaluate
the areas such as regulations, standards, supervision, asset management and treasury
management where it may be able to offer technical assistance to its client members.
You have been writing at different aspects of Islamic banking in the past. In one of your
such paper you have written that equity based banking is not new to the world and in fact
it was Jews who established first equity based bank much before the advent of Islamic
banks. Any comment?
Equity financing has been in practice for ages but there are few examples where a
financial institution such as a commercial bank functions based on the principle of equity
participation with its clients and depositors. In more recent history, a French institution
by the name of Credit Mobilier is an example where a financial institution on the basis of
equity was successful in mobilizing funds for economic development. Also, recent trends
18
in global equity markets and emergence of diversified mutual funds are another positive
sign that a banking institution can operate on equity-basis provided risks are understood
by the investors. A bank which is designed to act as an intermediary who invests through
instruments of trade and equity finance, and shares the profits with its depositors instead
of paying predetermined interest rate would be fully compatible with Islamic principles.
Given advancement in financial markets and enhanced portfolio and risk management
tools, such financial institution is not inconceivable.
How do you look at the future of Islamic banking? Where it is heading?
Islamic banking is at cross-roads where they have demonstrated that there is enough
demand in the market to justify specialized banking institutions but need serious thinking
about going forward in terms of lack of products, lack of liquidity and lack of risk and
portfolio management practices. Financial engineering does not exist, asset base is small
which does not let Islamic banks enjoy economies of scale, and there is deficiency in the
area of standards. Unless these problem areas are addressed, it may face tough
competition from conventional banks who can offer similar services in more efficient
fashion.
It is said that Islamic banks rely more on propaganda than on actual work. A case in
cites is the announcing of Islamization of few economies, while the ground realities in
those countries still remains the same. Pakistan for example spends more than 60% of its
tax receipts on debt servicing alone and it also claims to be the first country to Islamise
its economy; Please comment?
State-sponsored implementation of Islamic banking has been troublesome mainly

because of significant fiscal deficits and balance of payment disequilibrium, which does
not leave much option for the govt. whose citizen, may wish to practice Islamic banking
but the economic realities are not very favorable. However, things are different in the
private sector where there are sincere depositors, entrepreneur and bankers who wish to
bank on the basis of principles of Islam. That is one of the reasons that growth in Islamic
banking is mostly taking place in the private sector.
Islamic banking is said to be passing through identity crisis. What reforms do you think
are needed to make the Islamic banking realize its goal?
19
Areas of financial engineering, risk management and sound regulatory and supervision
including transparency are the most critical areas in the near future. World-class research
is a must, which must take place to make further progress.
Which area should have the highest priority in research in Islamic economics and
banking?
Areas of public finance and monetary policy matters should be critical so that countries
wishing to implement Islamic system can make some progress. For the private sector,
financial engineering for new products in addition to addressing regulatory and
supervision issues.
Any message to our readers?
I would like to thank the Islamic Economic Bulletin for giving me this opportunity to
share my thoughts with the readers. The area of Islamic economics is very fascinating
and needs dedicated researchers who are committed to produce high quality of research.
There are several areas of research, which are being neglected mainly due to shortage of
researchers in the field.
20
The Future of Islamic Finance in India

(Mohammad Hussain Khatkhatay)
Mohammad Hussain Khatkhatay, popularly known as M. H., the Managing Director of the India’s
once largest Islamic Financial Institution, the Barkat Investment Group, has been instrumental in
almost every important Islamic financial activities in the country, whether it be an establishment of
Modern Educational Social and Cultural Organization (MESCO) 1958, Bait-un-Nasr (BUN) 1973,
Barkat 1983, Federation of Interest Free Organization (FIFO) 1986 to the establishment of Al-
Baraka Finance House in 1989, it has been a journey full of events. The man who built a financial
empire is now the helpless spectator of the falling all these one by one. First it was Barkat Group in
May 2000 and now the BUN, which is almost at the door of liquidation. MH explains to Shariq
Nisar, Joint Editor of Islamic Economics Bulletin, the tragic events of Barkat and its ramifications on
the Islamic financial activities in the country (Editor).
Having an academic background of B. Tech in Metallurgical Engineering and M.B.A.

in production. Why did you choose the field of Islamic finance?
By the time I had finished my MBA in 1973 I had already made up my mind to make the
switch from Engineering to Finance and Management. Islamic Finance was then a natural
progression. One factor, which did make me inclined to working in the financial field
rather than in other areas of benefit to the community was that I was struck by the wide
charm in this field between mere assertions by Muslim leaders and writers and the stark
reality. For instance, I remember having read, somewhere in the mid sixties in an old
magazine issue of the fifties, an article by Dr. Hamidullah about the feasibility of Islamic
Banking. I could not help feeling that we could do with some practical constructive work
in preference to mere discussion and self-glorification. This was the spur that led me to
decide to implement the Islamic injunctions in the finance area.
Your Barkat Investment Group has been one of the highly successful Islamic Finance
Company in India in 1980s and till mid 1990s. What do you think are the main reasons
that led to the collapse of the Barkat?
Apart from the obvious and immediate cause being the sustained recession in the real
estate market (in which we had a heavy exposure) and the vagaries of the stock market, I
think we can account for the following:
21
a) Failure of management in not taking care to diversify as well as not paying

sufficient attention to mismatch in tenures of assets and liabilities.
b) Weak capital structure due to high gearing.
c) Lack of institutional support infrastructure (absence of financial support on

Islamic basis).
d) The crisis period coincided with a period of very rapid changes in the regulatory
framework imposed by the government, which led to cutting off some Islamic
options, which could have eased our situation.
e) Management philosophy being oriented more to growth (to provide a palpable

justification for the feasibility of Islamic Banking), rather than a more cautious
income orientation.
f) One may also add, that the self-imposed restriction on not engaging in
Murabahah and the difficulties in engaging in profit-sharing business led us to
painting ourselves into the corner of real-estate investment. This was, however,
again a management failing as the same should have been anticipated by some
serious analysis.
I personally interacted with few depositors, who blamed to your adamant attitude of not
seeking help from the conventional financial institutions. Moreover, you never opted
for the Murabahah financing, which is allowed in the Shariah and practiced by
Islamic financial institutions the worldwide.
What you have stated is true. As far as dealing in riba is considered, that cannot be
condoned in any circumstances and I am satisfied that we stood our ground and did not
compromise on it. As far as Murabahah is concerned, we started with the idea that if we
are attempting an Islamic alternative, let us be sincere in it. There were already so many
people doing the same conventional financing under Islamic names. Then if we were
getting into Islamic finance, there was no point in replicating the same practices of
dubious authenticity. But once we got into a crisis I doubt going in for Murabahah would
have helped. It was already too late.
22
Why did you prefer liquidation? Has it brought any solace to the beleaguered
community?
Let me clarify that we did not voluntarily take Barkat into liquidation. We tried for two
and a half years to keep it afloat. It was finally taken over by the authorities when some
investors lost their patience and went to the police. In fact for us the period of struggle
before the closure was the most trying and stress-filled and yet we did not adopt the easy
way out.
Regarding the letter, certainly not. If anything, it has only increased their loss. For one, the
intervention of the authorities dried up the non-funding income from the Islamic bank, I
mentioned.
At that time we had several proposals in the pipeline, which could have materialized and
generated income in millions. In fact, we received Rs. four million from a completed deal
after the Barkat was closed and the money was deposited with the court when it came
through. If we had been allowed to continue, more people would have got repaid to a
greater extent. As things stand, for the last two years no investors are being paid and as
and when properties are sold they will fetch even less than they would have done if
Barkat was still a going concern. This is unfortunately how things happen in such
situations.
Why did you not approach the Islamic Financial institutions of other countries to save
your organization?
We did, we wrote to Islamic Development Bank (IDB) and also to some other Islamic
banks abroad as well as some other institutions and well-placed individuals. We did
receive some help from some individuals but nowhere near what was required. One
Islamic bank too helped us indirectly by paying us lucrative fees for arranging some
financing deals between them and Indian businesses. The regret is that these deals were
structured as murabahah and involved a compromise on our part though our participation
was not direct and our involvement was in a situation of extreme crisis.
Barkats’ parent organization Bait-un-Nasr (BUN) is also reported to be facing a lot of

difficulties.
23
Yes, BUN is in trouble. It is closed though not yet taken over by the authorities. It will be a
pity if it too folds up. BUN crisis was brought on by distorted media reporting. Though it
was indirectly linked with Barkat, at the time of the run on it, it had a healthy liquidity
position. At the time it was hit it had an asset base of about Rs. 150 to 160 millions and a
daily cash collection of Rs. 1.2 to 1.5 millions. With the infusion of Rs. 30 to 40 millions it
can be revived with a bold and dynamic team with vision.
It will be sad if BUN goes under. Unlike Barkat, which was based on profit and loss
sharing investment, BUN is based on small deposits and small shareholders numbering
almost half a million, mostly with an average stake of about a thousand rupees or less. It
was being run on a no-profit-no-loss basis.
One other reason why BUN needs to be saved is that unlike almost all other substantial
loans operations on interest-free basis. Such as the Muslim funds in the north, it did not
make compromises with Shariah principles. It is also the only institution to have tried to
scientifically work out its costs and link charges to costs. It had a developed HR
department, a proper performance evaluation system with remuneration levels linked to
performance and a planned management hierarchy. Its accounts were also computerized to
a fairly high level, mostly using in house talent.
It is alleged that you had put all your eggs in one basket?
It is not an allegation it is the truth. However, being wise by hindsight does not help. On the
other hand, as I mentioned in passing, insufficient analysis and attention to investment
strategy in the absence of the murabahah option and the difficulties in profit and loss
sharing investment, falsification of accounts, high investigation and monitoring costs and
hostile taxation/laws (taxing equity investment heavily while exempting debt, and
unlimited liability of partnerships) also prevented us from reducing dependence on what
had been a solid investment option (barring a few short lived downturns) over the previous
half century in India ; real estate.
What is the future of Islamic finance in the country?
A difficult one, I think we have missed the bus. It is the eighties and nineties that were the
best and most opportune period for Islamic finance in India. It was during this period that
24
the government threw open the fields of mutual funds, banking and insurance. Regulations
have also been made more stringent and thresholds have been raised. Then, many niche
areas, which were accessible earlier due to compatibility with Islamic requirements, are
now, due to changed regulatory conditions, either closed to us or will now involve bigger
compromises with Islamic stipulations. The political climate too has turned more
unfavorable to Islamic banking. Also, since in the earlier phase of liberalization, things
were in a flux, on the whole the bureaucracy and the entire polity was more open to new
ideas.
Of course I am still optimistic and hope for a new dawn. Only, it will require greater
efforts, much larger capital and more dedication.
25
Islamic Discipline of Economics Emerged in late-colonial India
Prof Timur Kuran
Prof Timur Kuran is known to be one of the most truculent critics of the whole
movement that is called Islamic Economics. A PhD from Stanford University, Prof
Kuran at present teaches at the University of Southern California. He also heads
the King Faisal Chair of Islamic Thought and Culture. He has got more than fifty
publications to his credit. Of them many have been translated in several
European languages. His book, Private Truths, Public Lies: The Social
Consequences of Preference Falsification has attracted the worldwide attention.
Prof Kuran shares his thoughts with our Joint Editor, Mr. Shariq Nisar (Editor).
In many of your articles you had suggested that Islamic economics emerged from pre
independent colonial India. How would you substantiate your arguments when not a
single Islamic bank could be found in the region before the Islamic Bank Bangladesh Ltd.
in 1983?
The concept of a distinctly and self-consciously Islamic discipline of economics emerged

in late-colonial India, at a time when Indian Muslims were intensely preoccupied with a
matter of identity: were they Muslims living in an increasingly hostile culture or Indians
who belonged to one of many Indian religious communities? Which element of their
identity took precedence, Islam or their Indianness? For Indians who came to be known
as early Islamists, the answer was simple: they were Muslims first and foremost, and it
was critical that they live as Muslims.
In pursuit of the goal of accentuating their Muslim identity, Mawdudi and his followers
set out to identify Islamic alternatives to lifestyle choices, thought patterns, and even
academic alternatives that they considered "Western" or simply "foreign." One of the
inventions of this period was Islamic economics. The concept was already in the air, and
we do not know who coined the term. We do know that it was Mawdudi who popularized
it.
Mawdudi and his associates also coined terms such as "Islamic banking" and "Islamic
finance." They did so to reinforce the Muslim identity rather than out of a desire to
26
improve economic performance per se. This is entirely consistent, of course, with the
premise of your question. Had the Indian (and eventually also Pakistani) Islamists of
Mawdudi's generation been motivated by economic development, they would have
experimented with new forms of financial organization. That Islamic economics in
general, and Islamic banking in particular, could serve economic development emerged
as an afterthought, much later.
You are considered as one of most truculent critics of Islamic economics. What actually
is the basis of your critique?
The Islamic world was once highly dynamic and, relatedly, economically developed by
the standards of the day. Then it lost its institutional dynamism and fell economically
behind. Today, the world's Muslims are considerably poorer, on average, than the
economically advanced countries. Although wealth is by no means the only determinant
of well-being, it is one of them. Poverty is a source of humiliation and despair.
In view of this situation, there is an enormous need for innovative responses to real
problems. Islamic economics has not been of help in this regard. In fact, by putting
symbolism ahead of substance, and focusing on matters of identity, it has delayed the
identification and implementation of sound economic reforms. Though not promoted as
"Islamic", the "Grameen Bank" has made a greater contribution to development than
decades of economic experimentation undertaken recently in the name of Islam.
I'm not sure that any of the Muslim jurists who helped to codify the institutions now
being promoted by "Islamic economics" would have found what passes as "Islamic
economics" appealing. They tried to find workable solutions to real economic problems.
My guess is that they would have dismissed the methodology of Islamic economics as
flawed and its concerns as fanciful.
Do not you find any positive aspect in Islamic economics?
The Islamic world is in great need of venture capital. There are millions of ambitious,
intelligent, and energetic Muslims who can't get ahead for lack of capital. Give them
funds, and they will work wonders. An "Islamic bank" operating in the manner
prescribed by its charter would work like a venture capital firm. It would lend on a profit-
27
and-loss sharing basis to people with economically promising ideas, rather than simply to
established entrepreneurs with plenty of collateral.
For all their failures to date, I consider genuine Islamic banking to offer a potential for
improving the use of capital. If the world's Islamic banks start following the principles
outlined in the literature on Islamic banking, they will begin making a noteworthy
contribution to economic development in the Islamic world and beyond.
Turning Islamic banks away from conventional banking will require, of course, real work
and a desire to put real economic results ahead of symbolism. Above all, it will require
legal and political reforms that increase the level of honesty in credit markets to the point
where investors find profit-and-loss sharing appealing.
What is the future of Islamic economics?
The Islamic world is currently in deep crisis. Although its growth rate was respectable
until recently, in education its achievements have been disappointing, to put it mildly. It
also stands out as lacking in political freedom and creativity. To compound the problem,
fairly or unfairly, powerful countries see certain Muslim countries, and the Islamic world
in general, as a source of instability.
For all these reasons and more, the Islamic world is likely to go through a major shake-up
over the next few decades. Sooner or later, more democratic regimes will emerge, the
creative side of Islamic civilization will reappear, and current political conflicts will pass.
Whether Islamic economics will survive the upheavals that we are likely to see, I do not
and cannot know. If I had to guess, I would say that the doctrine will probably continue
attracting to a small minority of Muslim economists. It will also grow in sophistication.
However, the majority are likely to find secular schools of thought either more appealing
intellectually or more useful technically.
What do you consider as the most important contribution of Islamic economics?
From Mawdudi onward, Islamic economists have been right that moral values and social
norms contribute greatly to economic performance. Neoclassical economics long ignored
values and norms, and this reduced its usefulness. Although Islamic economics has
contributed next to nothing to the positive study of how values and norms emerge, and of
28
how they do or do not change, at least focused attention on two very important aspects of
personal fulfillment and social organization. This insistence has helped to create a
favorable intellectual climate for the study of values and norms.
Any message to our readers?
In Islam, there is no priesthood. In principle, the individual is allowed, indeed is

expected, to think for himself or herself. This principle applies, I would think, to
intellectuals as well, including economists. It thus calls for questioning currently
fashionable interpretations of what Islam requires in the economic arena. It calls for fresh
thinking about ways out of current problems.
29
Islamic Economics Needs a Great Deal of Creative Thinking
(Dr. Umer Chapra)
Dr. M. Umer Chapra is a Senior Research Advisor at the Islamic Research and
Training Institute (IRTI) of the Islamic Development Bank (IDB), Jeddah. Prior
to this position, he has worked at the Saudi Arabian Monetary Agency (SAMA).
He has also taught economics in various capacities at the University of
Wisconsin (Platteville), University of Kentucky and Lexington etc. Dr. Chapra is
well known for his seminal contributions to Islamic Economics and Finance
over the past three decades. He has authored 10 books and monographs, and
more than 60 papers. Many of his works have been translated into several other
languages. His most outstanding contributions have been his three books:
Towards a Just Monetary System (1985), Islam and the Economic Challenge
(1992) and The Future of Economics: An Islamic Perspective (2000). He has
received a number of awards for his academic excellence, including the Islamic
Development Bank Award for Islamic Economics and the prestigious King
Faisal International Award for Islamic Studies. In an exclusive e-mail interview
to Shariq Nisar, Dr. Chapra provides valuable suggestions to the young
researches in the field of Islamic economics and finance (Editor).
What is the main message of Islamic Economics to humanity?
The main message is that the humanitarian goal of achieving the well being of all
members of the human family cannot be attained by concentrating primarily on the
material constituents of well-being and making maximization of wealth as the main
objective of Economics. It is also necessary to raise the spiritual content of well being
and reduce all the symptoms of anomie, like family disintegration, conflict and tensions,
crime, alcoholism, drug addiction, and mental illness, all indicating lack of inner
happiness and contentment in the life of individuals. The market system as well as central
planning have both failed to lead mankind to such an overall well-being. It is, therefore,
necessary to lay down the contours of a new system which could help optimize human
well-being. This is exactly what Islamic Economics is trying to do.
30
In your two landmark books, Islam and the Economic Challenge and The Future of
Economics: an Islamic Perspective, you have given a micro- as well as macro-framework
for the future development of Islamic Economics and Finance. How would you assess the
current theoretical development in this area?
The current theoretical development of Islamic Economics is still far from what is
desired. The development has not been balanced. Primary attention has been given so far
to Islamic Finance. This has led to the false impression that interest-free finance is all that
Islamic Economics has to offer. Since most of the governments in Muslim countries are
not yet convinced that interest-free finance is workable, excessive emphasis on it has
created a resistance in official circles against Islamic Economics. They find it to be of
little value. This is unfortunate. We must blame ourselves for this. Islam is a complete
way of life and is capable of solving the problems of not only Muslim countries, but also
of mankind.
It would, therefore, be desirable to show that Islamic Economics has much more to offer
than just interest-free finance. There are a number of ways in which this may be done:
1. One way of doing this would be to concentrate on the socio-economic problems

that mankind is faced with, and to show how adoption of the Islamic strategy can
help solve them. It is also desirable to be realistic and balanced and to show that
application of the Islamic strategy is not an easy task. It requires a great deal of
theoretical as well as empirical analyses.
2. Very little work of an empirical nature seems has done so far. Without this, it is
not possible to know the actual condition of the Muslim world and to suggest a
strategy for the future.
3. The Islamic strategy needs to be clearly spelt out. It does not consist, as indicated
earlier, in just reforming the financial system. It rather consists in reforming the
individual human being and all other socio-economic and political factors that
influence his or her behaviour and well being. This would take us to not only
religious beliefs and values, but also to social, economic, financial, political and
historical factors. The problem with the Muslim world is not just the existence of
an exploitative financial system, but also illegitimate governments, moral decline,
31
landlordism, lack of education, absence of justice, and ineffective operation of

incentives and deterrents. Therefore, Islamic Economics needs to adopt a more
comprehensive model than what Conventional Economics is able to offer if these
problems, which are all interrelated, are to be solved. We need to take inspiration
from Ibn Khaldun who presented a multidisciplinary circular causation dynamic
model instead of the Neoclassical model which relies primarily on economic
variables.
4. While Islamic Economics talks about the ideals of Islam, it is also necessary to
know the actual position in Muslim countries – how individuals, families, firms
and governments actually behave. It will then be necessary to show the extent and
the causes of the gap between the ideals and the reality. Once we know the extent
of the gap and the causes of deviation, we will have to figure out practical
remedies in the light of Islamic teachings.
5. It would also be desirable to have studies that would address the following
questions:
a. Have the Muslim countries been able to improve the lot of the common man
since their independence from foreign domination? If not, then what are the
factors responsible for this failure? What can be done to redress the situation?
b. What kinds of data are needed to evaluate the Islamization of the economies
of Muslim countries. Which of these data are available and which are not, and
what can be done to bridge the gap?
c. What are the causes of the low rate of saving and investment in most Muslim
countries? What can be done in the light of Islamic teachings to remedy the
situation? Are the suggested remedies feasible?
d. What are the different socio-economic, political and historical factors

responsible for the low level of labour and entrepreneurial efficiency in
Muslim countries? Is it possible to do something to offset the effect of these
factors?
32
e. What are the causes of Muslim decline? How far were scholars like Abu
Yusuf, al-Mawardi, Ibn Khaldun and others able to present a satisfactory
explanation for Muslim decline. Can the models presented by non-Muslim
scholars like Gibbon, Spengler and Toynbee complete the picture?
f. How did the Islamic financial system operate in the classical period? What
was the role of sarrāfs and jahābidh? What is it that enabled them to operate
successfully? Why did the system get displaced?
g. The fuqhā’ have so far rejected options and derivatives, all of which are not
necessarily speculative in nature. They are also used for managing risks. If we
reject them, then we have to find other ways of managing risks. This subject
has not been addressed adequately so far.
h. What are the reasons for the fiscal and balance of payments deficits and high
debt-servicing burden of many Muslim countries? What are the Islamically
acceptable remedies for this situation?
Only by addressing these and a number of other questions will Islamic Economics be able
to gain the acceptability and the respect that it needs. If we do not do so, the discipline
will become marginalized. Concentrating only on interest-free finance will not be very
helpful.
Many of the most prominent faces in Islamic Economics were born in India. You in
Bombay, Prof. Khurshid in Delhi, Dr. Nejatullah and Prof. Faridi in UP and many more.
What prospects and opportunities do you foresee for young researchers in the field of
Islamic Economics?
You seem to be giving the impression that Islamic Economics has been promoted
primarily by scholars born in India. This is not right. There are many scholars in the Arab
world as well as Iran, Turkey, Indonesia, Malaysia and Nigeria who have made valuable
contributions.
Islamic Economics is gradually drawing international attention and recognition. This will
raise the demand for experts in this field. This demand can be satisfied by young Islamic
economists only if they are well-versed not only in Shari’ah but also in Conventional
33
Economics to be able to address international problems in a realistic manner. However, in

countries like India, the demand for scholars in Islamic Economics is bound to be limited.
Students should not, therefore, study this subject with the objective of finding a lucrative
job.
Any other message to the readers of Islamic Economics Bulletin.
It can be seen from the above discussion that Islamic Economics is in need of a great deal
of creative thinking directed towards promoting human well being. There is little room
for repeating what has already been written. It is unfortunate that a number of our writers
do not read what has already been written. They seem to give the impression that they are
the first ones to write on the subject. This does not add prestige to such authors. It only
shows their ignorance. Some of them go to the extent of including only the writings of
prominent conventional economists or classical Muslim scholars in their references. Only
if they build upon what has already been contributed by modern Muslim writers, will
they be able to push the frontiers of knowledge in Islamic Economics.
34
Islamic Banking is a Great Contribution of Islamic Economics
(Dr. M.H. Dar)
Muhammad Humayon Abbas Dar is an economist with teaching and research interests in prediction of
corporate failure, microeconomics, econometrics, foreign direct investment, and Islamic finance. A
Ph.D. from Cambridge, Dr. Dar is presently a Lecturer at the Department of Economics, Loughborough
University, UK. He has got several publications to his credit. In an interview with our Joint Editor,
Shariq Nisar, Dr. Dar shares his thought and also informs about one of the most ambitious M.Sc.
courses in Islamic Economics, Banking and Finance of the Loughborough University. (Editor)
What is the current level of academics in Islamic economics? Don’t you think it appears to
have reached its saturation?
Islamic economics is still in the process of emerging as a new academic discipline, with
an ever-growing literature on different aspects of an Islamic economy. The quality of
literature is mixed. With a few exceptions, most of the good literature is coming from the
second generation of Islamic economists. By second generation of economists I mean
those people who have some kind of formal training in Islamic economics, unlike the first
generation of Islamic economists who were exclusively trained in conventional
economics. Most of the first generation Islamic economists are either now retired [and
hence academically inactive] or have switched to non-teaching professions.
Consequently, their research is less appealing to an academically tuned mind. Only in this
respect one can say that there are some visible signs of saturation. Otherwise, frontiers of
Islamic economics have expanded quite significantly and there is a growing stock of
good literature that may potentially be included in Islamic economics.
Islamic banking has got more attention than it actually required. There are authors who are of
the view that it has hampered the growth of other branches of Islamic economics? Please
comment.
Islamic banking and finance has certainly received more recognition as an alternative
form of banking and finance than Islamic economics has as an academic discipline
perhaps because the former has more resources available for its promotion. Many of
those who were involved in promotion of Islamic economics as an academic discipline
later joined Islamic banks and other financial organizations as professional economists.
35
Just read curriculum vitae of most of the employees of Islamic Research and Training
Institute at the Islamic Development Bank, and you will find that almost all the
economists employed by IRTI were previously university lecturers/professor.
In a way, Islamic banking is a great contribution of Islamic economics. The two are
inseparable as Islamic banking represents an Islamic sub-economy. I am not quite sure if
it is true to say that more focus on Islamic banking has adversely affected the growth in
Islamic economics elsewhere, but it is certainly a fact that Islamic economics has not
focused much on poverty alleviation and other social issues as much as it has attended to
banking and finance. I believe that there is a need for creating a balance in research
agenda in Islamic economics.
Where does the future of Islamic economics lie: the Islamic banking, mutual fund, venture
capital or elsewhere and why?
Progress in Islamic economics depends on developments in all of its components and in

the system as a whole. Sustainable financial institutions like Islamic banks, mutual funds,
venture capital firms and other forms of Islamic businesses are imperative for further
progress in Islamic economics. In my opinion, however, development of sustainable
Islamic economic institutions is only a necessary condition for survival of Islamic
economics, as without creating a whole system based on Islamic principles, talking of
Islamic economics as an academically well-established discipline will be too optimistic.
You are at reputed Western academic institutions and also offering one of the best available
postgraduate programmes in Islamic finance. How would you compare the current levels of
research in both forms of economics?
The current research in Islamic economics is quite diverse. In most cases, it follows the
research agenda of conventional economics at least in methods if not in methodology.
Sometimes, I tend to think that Islamic economics is an “adopted child” – whatsoever is
the level of care and affection given to this child by Islamic economists, critics would
always portray it something not belonging to Muslims. This is one of the reasons that
many critics term the research in Islamic economics as merely an adaptation of the
research in mainstream economics. We, at Loughborough University, take a balanced
approach to Islamic economics and believe that close co-operation between Islamic and
36
conventional economics is mutually beneficial for the two disciplines. Islamic economics
has to offer quite a lot in terms of its emphasis on morality and ethics, while methods of
conventional economics are expected to enrich the discipline of Islamic economics.
Please tell briefly about your M.Sc. programme in Islamic finance, its entry norms, costs
involved and career prospects.
We offer MSc in Islamic Economics, Banking and Finance, a 12-month qualification, as

a part of our postgraduate programme. The course is divided into three terms: Fall, Spring
and Summer. There are a total of 8 taught modules and a dissertation carrying weight of 4
modules. Two out of six modules are specifically Islamic [the Islamic Economics module
in the Fall; and the Islamic Banking and Finance module in the Spring]. Other modules
are on conventional banking and finance. The students are required to write a dissertation
on a topic related to Islamic economics and finance. In this way, total Islamic content of
the course is about 50 percent of the whole curriculum. Given that employment
opportunities for graduates with exclusive training in Islamic banking and finance are
thin, we train the students in both traditions. This is expected to help our graduates in
getting a job with a conventional financial institution before switching to an exclusively
Islamic organization. Most senior practitioners of Islamic finance endorse this approach.
Entry requirements for our MSc programme include a qualification equivalent to a British
bachelors degree [with at least a B grade] in economics and related disciplines. The
tuition fee for the course from the coming academic year will be about £8,500. The
students are expected to arrange their own finances; although some nominal financial
help is available from the university and some other external sources like the Islamic
Development Bank. Most of our graduates have gone back to their previous employers.
Some others have been working with Islamic banks, central banks, and other financial
organisations in the Gulf. Quite a number of our graduates, especially from the Far East
are currently working as university lecturers in their respective countries of origin.
37
Islamic Banking and Finance in the 21st Century needs “discontinuous leaps”:
(Prof. M.A. Mannan)
Equally dexterous in Research and its application Prof. Mannan is considered as one of
the earliest Islamic economists of the subcontinent. With a Ph. D. degree in Economics
from Mich. U.S.A. Prof. Mannan has more than four decades of experience in money,
banking, finance, economic planning, civil administration, teaching, and research. He has
served about 13 years at the highest professional position of Senior Economist in Islamic
Development Bank (IDB). His book: Islamic Economics-Theory and Practice is
internationally recognized as the first textbook on the subject. With more than 20 reprint
the book has been translated in dozen of foreign languages. A Founder Chairman of the
Social Investment Bank Ltd. (SIBL) Dhaka, Bangladesh, Prof. Mannan shares his views
with Shariq Nisar.
Could you please let us know about your current area of engagement in Islamic economics?
I am currently involved in the (a) Neglected frontiers of Non-formal Islamic Banking and Finance
dealing with management of family empowerment Micro-credit for the poor (b) Islamic voluntary
sector Banking with special reference to introduction of Cash-Waqf Certificate, an innovation in
Islamic Financial Instrument for the first time in history and investment and (c) establishment of
World Social Bank with its Head quarters preferably in Indonesia for Global mobilization, creation
and investment of Cash Waqf Fund to expand and open up new frontiers of human freedom that
includes freedom from educational, social and economic deprivations.
Your famous book ‘Islamic Economics: Theory and Practice’ is still a prime textbook for the
beginners. What major development has taken place since last two and half decade that you could
add in your book?
I wrote this book almost 40 years ago on the assumption that my readers have no prior knowledge
of either economics or Shariah. To compliment this, I wrote a number of other books at my mature
age. The book; “THE MAKING OF ISLAMIC ECONOMIC SOCIETY”: Islamic dimensions in
economic analysis, is intended to offer the readers an analytical exposition of Islamic dimensions in
economic analysis at a level higher than my earlier book, a creative synthesis and an intuitive grasp
38
of many recent developments in the field of Islamic economics, money and banking. In this book, I
have advocated the concept of “effective need” instead of “effective demand” as a basis of market
mechanism in Islam, rejected “Pareto optimality” and “given demand” hypothesis in explaining the
behavior of the firm, advanced the notion of “expected desirable income” hypothesis in developing
the nature of consumption function and planed price differentiation”, limited indexation and credit
creation by Islamic banks, raised the problems of intra-poor distributional equity through the
disbursement of Zakat revenue, advocated the formation of Muslim Commonwealth of
Communities.
Your writings have much focused on the economic development in Islamic prospective. What are
major stumbling blocks in this regard?
In my view, Lack of Muslim Leaders with social vision, pro-colonial development policy adopted
by Muslim leaders in their countries, institutional rigidities and rampant corruption in Muslim
Societies are among others, the main stumbling blocks of development of Muslim Countries.
Following conditions pinpoint the development process in a modern Muslim Society.
1. Mass participation and sharing in economic activities through the establishment of Islamic
social banking at grass-roots level.
2. Using distributive consideration for determining production priorities.
3. Humanizing the line of production, distribution and consumption.
4. Institutionalizing the obligatory, Islamic tools of redistribution of income and the Islamic
voluntary sector.
5. Provision for future generations.
6. Increasing the level of economic cooperation and the levels of regional, economic and
monetary integration.
During half century of theory and quarter century of practice what Islamic economics has offered
to the most deserving class of the society?
Unfortunately, Islamic Banks have done little for the poor. To the best of my knowledge, Social
Investment Bank Ltd. is the only Islamic Commercial Bank in Bangladesh, which operates on the
basis of integrated three sector model: Formal, In-formal and Voluntary sector of the economy. This
39
is the only bank in Bangladesh, perhaps in the world which starts with the very phrase, “Targeting
Poverty”, while stating its objects in Memorandum of Association for achieving a goal of
participatory economy for a caring society.
Social Investment Bank Ltd. (SIBL) is indeed a concept of 21st Century participatory three sector
banking model in one: in the formal sector, it works as an Islamic Participatory Commercial Bank
with human face approach to credit and banking on the basis of profit & loss sharing; It is a Non-
Formal Banking with the poor in non-corporate sector dealing with informal finance, Micro-credit
and Micro-enterprises that empower the family and create local income opportunities and
discourage internal migration; It is a Development Bank intended to monetize the voluntary sector,
committed basically to financing development and management of over 1,55,000 Waqf, Mosque
properties in Bangladesh as well as Non-Muslim Trust properties. SIBL is indeed committed to
implement the principle of participatory economy with human face approach to credit and banking
on interest free basis with a view to empowering the family as the basic social unit.
The crucial lesson of operation of SIBL are that the real performance of Islamic Banks lie not
merely in their volume of deposit, investment and distributable profit as reflected in the
conventional financial balance sheet but also in the growth of human capital balance sheet
expressed in terms of broadening the base of Islamic finance and diffusing its concentration of
ownership, expanding the number of beneficiaries at the grass-root level as well as in the growth of
social capital accumulation balance sheet expressed in terms of re-inforcing family and social
values that stimulates civil society.
It appears that Islamic Corporate Banking is getting submerged in the wave of market and running
the risk of marginalising social and ethical ingredients of Islamic Finance. While the convergence
between Islamic Banks and Western Banks having Islamic window may bring efficiency in
operations of Islamic Banks, it is expected to face at least following five dilemmas in the corporate
sector:
(a) Concentration of ownership and beneficiaries of Islamic Finance;
(b) Neglecting the vast masses of people at the grass-root level;
(c) Secularizing Islamic Economics, Banking and Finance; Marginalising social,

ethical and moral ingredients of Islamic Finance; and
40
(d) Neglecting the growth of human and social capital which reinforce shared values and
stimulates caring society.
The fact is that Islamic Banking and Finance in the 21st Century needs “discontinuous leaps” - a
change in paradigm, to clear the backlog of history. It is however, felt that, the Islamic Banking in
the 21st Century will face great challenge of our time but it would create great opportunities as well,
for developing participatory economy beyond market, arrest the present trend toward the
globalisation of poverty and colonization, concentration of ownership and beneficiaries of Islamic
Banking and Finance, redefine the role of Islamic formal corporate finance, rediscover new role of
informal and semiformal finance, through developing tailor-made credit package for re-
empowerment of families of both the rich and the poor at the grass-root level, help development of
voluntary sector Social Banking for mobilization and capitalization of social savings and
investments.
Do you think Islamic economics/Islamic banking can make some significant contributions in
Bangladesh?
Despite pervasive corruption and institutional rigidities, I am sure that Islamic Economics Banking
and Finance can make a significant contribution in Bangladesh. There are at least five Islamic
Banks and three conventional Banks with Islamic windows operating in Bangladesh with over 200
branches through the country.
In fact, Islami Banks of Bangladesh is the largest bank in the private sector and top income tax
payer among over 40 private sector Banks in Bangladesh. Social Investment Bank Limited became
the three “A” Class Banks in the country in 2000. Overall Islamic Banks are performing better than
Non-Islamic Banks in Bangladesh.
Could you please let us know that how far the Islamic economics has traveled? What have been its
major achievements and failures?
The principles of Islamic Economics Banking and Finance existed since advent of Islam. I am
simply trying to unlock the code of our time and lock principles of Islamic Economics into our code
of time in the language, understandable to us. Our collective achievement lies in the fact that Islamic
Economy Banking and Finance can provide a viable alternative to existing Market Economic
system, not only in Muslim Countries but also in Non-Muslim countries as well. Our collective
41
failure lies in the fact that we have so far not yet been be able to put up a great resistance to the
present trend towards globalization of poverty and neo-colonization of our future.
There are many financial institutions in India that strive to work on Islamic principles. What advice
would you like to offer people running these institutions?
I am inclined to suggest that Islamic Financial institution operating in India should include in their
operations the most neglected areas of non-formal Banking dealing with micro-credit as well as
Islamic voluntary sector Banking with a view to introducing Cash Waqf Certificate.
Any message to young researchers?
If young researchers take the trouble of reading my books on Islamic Economics,

Banking & Finance written relatively at my mature age, offer their comments, so that I
can learn and link my generation to their new generation, then my labor will be amply
rewarded. I have a dream; I need prayers for all of you.
42
Mudarabah Model Unrealistic and Inconsistent With Financial

Intermediation: (Prof. Monzer Kahf)
Dr. Monzer Kahf is Ph.D, in Economics from University of Utah. For over a decade he
has served as Research Economist at Islamic Research and Training Institute (IRTI) of
the Islamic Development Bank (IDB), Jeddah, Saudi Arabia. He has authored more than
25 books and monographs and above 70 articles in English and Arabic, on Islamic
banking and finance, Islamic economics, Zakah and Awqaf. In recognition of his
invaluable contributions to Islamic Economics he was awarded IDB Prize in Islamic
Economics: 2001. Prof. Kahf shares his views with Shariq Nisar (Editor).
Could you please let us know about your current area of engagement in Islamic economics?
I am presently working on Estate planning for Muslims in non-Muslim countries, the

theory of distribution in Islam, and the Islamic financing and banking theory and practice.
During the last two and half decade more than 130 member countries of the IMF have
faced some bout of banking crises. Several theories are put forth about the causes of
these crises including the one pointed out by Islamic economists. In your opinion how
important are these charges?
There is a lot of exaggeration in the claim that Islamic economics and elimination of
interest is the pass-par-tout key. It is not the cure of every economic illness. Basically the
late nineties crisis in Indonesia and other countries is the result of mismanagement, the
prevalence of the American style values of “run for money regardless of any standards as
long as you are not caught” and the promiscuousness of the system to abuses by dictators,
their family members and other opportunists. Islamic economics and elimination of
interest are no substitutes of honest and checked and balanced management of the
economy. The latter can be done and will succeed in any reasonable medium term with or
without interest as the economic history of Europe and Japan indicate.
Of course Islamic economics and elimination of interest bring in a lasting solution to the
negative performance of American corporate imperialism once the failure of corporate
values becomes well known.
43
Several western scholars have argued about remarkable shift in Islamic banking
practices from the theory. What do you think is the reason for that?
This argument came actually from Islamic economists. The problem is that they and their
Western imitators put the carriage before the horse. They theorized a model that turned
out to be unrealistic and inconsistent with financial intermediation. The Model they
theorized is the two-tier Mudarabah but the practice used Murabahah and leasing on the
use of funds side of the banking transactions. Both modes are more consistent with
financial intermediation while Mudarabah is more of a venture capital approach rather
than financial intermediation process. Obviously Mudarabah succeeded on the funds
mobilization side, in investment deposits because banks are regulated financial
institutions, businesses are different.
This means that the theory was wrong. Yet many Islamic economists stick to it in a
dogmatic manner because they accuse Murabahah to be less Islamic. This struggle is
apparent in the five-year discussion of the newly adopted law of a Islamic banking in
Kuwait. The law finally went along with permitting the Islamic bank to enter directly in
business venture on its own initiative. In spite of the restrictions and the discretionary
authority the central bank may exercise, this approach loosen specialization and allow the
Islamic bank to compete with business and to have its own stores for goods and services
instead of remaining a financial intermediary only.
How would you assess the developments of past quarter century in Islamic economics
and banking?
After a great take off since the First international Islamic Economic Conference in
Makkah 1976, we went into stagnation in the nineties, most of the writings since the
beginning of the nineties are repetitive and there is very little refinement, probably the
whole profession of Economics is presently stagnant too.
There has been a call for Shariah scholars and professional economists working
together to promote Islamic economics. How much progress you think has been
achieved?
44
I think this is been going on for the last quarter of a century. Now the stage is for a new
breed of Shariah well versed economists. This is what is direly needed now.
What would be your advice to the young researchers entering the field of Islamic
economics and finance?
Improve your systemic Shariah foundation; don’t take it from hunches you find scattered
in Islamic economics writing and go for rigorous economic training.
45
Masudul Alam Choudhury
Masudul Alam Choudhury is Professor of Finance and Economics; A PhD in Political

Economy from University of Toronto, Prof Choudhury has over 30 years of teaching &
research experience and over two dozen research publications to his credit. At present he
teaches at the Sultan Qaboos University, Oman. Prior to this he has taught at University
College of Cape Breton, Sydney, Nova Scotia, Canada & King Fahd University of
Petroleum and Minerals, Dhahran, Saudi Arabia.
What is the message of Islamic economics to humanity?
To configure, explain and apply the principle of Oneness of Allah (Tawhid) as the
functional medium for a just, fair, stable and progressive socio-economic order. Such a
socio-economic order remains embedded in a nexus of causally interlinked systems of
life and thought for the common wellbeing of mankind. In this sense the Islamic
economic and financial systems (likewise all other socio-scientific systems) are not
separately standing. They are all sub-systems of the holistic class of Tawhidi (oneness of
Allah = unity of knowledge) systems governed by the same unique law and methodology
but with diverse but interlinked problems extending across systems. This is a process-
oriented world order of life and thought. The derivation, study and application of the
Tawhidi knowledge formation in this nexus of causally unified systems is the essence of
Islamic economics, finance and thereby socio-scientific order -- of all scholarship. The
Tawhidi methodology yields -- not initially formed by -- but subsequently and causally
evolved by precepts such as avoidance interest rates, co-operation and the underlying
instruments. Islamic economics, Islamic finance, Islamic science are misnomers
borrowed from the West. Instead, these are embedded disciplines within the organic
holism of the Tawhidi worldview of unity of knowledge functionally applied to systems.
I have tried with difficulty the terminology of Islamic political economy (1990-1994
publications) and recently by the terminology of the Islamic world-system (1995-present
publications) having its specific configuration in the devotional meaning of scholarship to
self (micro) and the world.
46
How would you assess the past half century developments in Islamic economics and
finance? What are the major dilemmas that Islamic economics is presently faced
with?
Very sorry development. For the epistemology of Tawhid was never functionally and
structurally considered as the groundwork of a new and overarching paradigm of human
existence and experience. Consequently, there is no methodology underlying Islamic
economics, Islamic finance, Islamic science etc. These disciplines are fashionable
pursuits within the received theories of the western epistemological genre. Consequently,
the profound and earth-shaking ever-resilient epistemology of the Tawhidi worldview
was never discovered. Besides, where Islamic overtones were made to specific issues, it
was much of the Fiqi orientation, not of the Qur'anic exegesis of reality. Much of the
Qur'anic essence is missing in the building of Islamic economics. Thus Islamic
economics did not evolve beyond its own narrow world of certain personalities, regions
of the world and certain self-fashioned institutions in this regard. The coming of Islamic
Development Bank and Islamic banking was merely an entity not an organism, for the
understanding, establishment and furtherance of a distinctively new institutional order
fired by its own episteme that is the Tawhidi worldview in action, remains absent. There
is no discourse beyond 'Islamic mainstream scholarship'.
You have been advocating for a common currency for the Muslim countries. What
impact it would have on the future of Islamic economics?
The Islamic Dinar as a gold backed 100 percent reserve requirement money and
monetary system is the answer to all of humanities deeply uncertain and unfair interest-
based financial and economic order. That is because the conception of money in Islam is
not like the fractional reserve aggregate in a monetary relationship between the central,
bank, the commercial bank and the economy. In the 100 percent reserve requirement
monetary system financing is a development medium with causal and circular systemic
interrelations with the real economy. Money in Islam is micro-money entity that directs
financial resources to the real economy and thus becomes unified by circular causation
with the real economic and social world as further delineated by the Shari'ah. Thus the
interest-rate conception is logically replaced -- need not be merely institutionally
47
enforced -- by those instruments that carry the rate-of-return values of real economic
activity into the financial valuation of assets. Money is simply an artifact to do this and
its stable function of valuation depends upon its choice of numeraire. Such a numeraire
has proven to be the long-run stable evolution of the gold standard, despite bumps on its
ride caused by political deceptions of the West both against itself and the Islamic world
(e.g. Ottoman). This nature of money in Islam because of its endogenous circular
mobilization in respect to the Shari'ah guided real economic system will bring the real
interrelationship between social and economic needs at the micro-levels, and thereby
evolve into the economy-wide aggregate. Within this broad outlook the trade and
development aspects of a fair, socially meaningful, vibrant and sustainable self-reliant
economy will evolve. Please see for details my book, Money in Islam, London &
England: Routledge, 1997) and several papers and chapters of books and journals. My
edited book Inshah-Allah will be published in 2004 by the title, Money and Real
Economy (London & New York: Wisdom House Academic Publications). Presently are
my published works, Political Economy of Structural Change (London & New York:
Wisdom House Academic Publications), A Dynamic Analysis of Trade and Development
in the Muslim World: Selected Case Studies (Dhaka, Bangladesh: Bangladesh Institute of
Islamic Thought). All such and other works are centred on the Tawhidi epistemological
worldview at the conceptual and applied levels.
Why Islamic economics, which claims itself to be fair, ethical, just and stable, has
not been able to effectively replace the unfair, unethical, unjust and unstable
western financial system even in its own country?
I have pointed out the central role of Tawhid in the universal reconstruction of socio-
scientific epistemology and its high level of functional and structural application to world
and thought. The absence of this is the problematique of 'Islamic everything' and thereby
of the world of knowledge. The reader may refer to my most recent book in this regard
entitled, The Islamic World-System, a Study in Polity-Market Interaction (London & New
York: Routledge Curzon, 2004, advanced copy out)
Any suggestion to young researchers entering the field of Islamic economics and
finance?
48
The epistemological foundation and crowning legacy of a future 'Islamic economics and
finance' (?) is most definitely premised on the Tawhidi Worldview of Unity of
Knowledge. The young researchers ought to understand this premise as Ibadah
for comprehending the abiding epistemology of the Islamic world-system, only
particularized to problems of economics, finance, society, science, but not so in
segmented fashion. Rather the study of all such systems of knowledge are uniquely
combined within the global and immutable methodology of the Tawhidi worldview. Thus
is the terminology, Unity of Knowledge in world-system. Only 'problems' not
'methodology' of such diverse systems in the Tawhidi nexus are specific to them but are
interacted with the other ones. The Tawhidi worldview understood in its most dynamic
and organic form of unity of systems knowledge as processes of learning a la the Shura
(participation) of the Tasbih (knowing the Ayath Allah=Signs of Allah in world-systems
('alameen)) is the first level of suctainable scholarship as Ibadah and world-
empowerment. Upon this formalization will be erected the details of the Islamic world-
order (Ummah) in different fields -- economic, finance, society, science etc. The nature
of Islamic institutions and instruments and the development of the needs of such an order
will thereby emanate. There are many a lifetime of contemplative scholarship and
applications in this kind of the Tawhidi pursuit as Tasbih of world-systems ('alameen).
You may refer to my recent work and earlier ones. See my Explaining the Qur'an, a
Socio-Scientific Inquiry (Lewiston, New York: The Edwin Mellen Press, 2002);
Reforming the Muslim World (London & New York: Kegan Paul International, 1998) etc.
"learning systems", forthcoming, International Journal of Systems and Cybernetics, 2004
(33:10).
49
Dr. Saad Al-Harran

Dr. Al Harran, a Ph.D in Economics, from the University of Durham, is an international
Business Consultant in Islamic Finance, At present he is Managing Director of Global
Horizon Limited, New Zealand. Dr. Al-Harran has a unique blend of twenty two years of
practical and academic experience in the field of Islamic Banking and Finance. He has
worked with Islamic Development Bank, Jeddah, Saudi Arabia. He was also Assistant
Professor of Islamic Banking and Finance at International Islamic University Malaysia
from 1991-1996.
Why do we need a separate economics?
We don't need to invent a new wheel and waste more financial resources by creating a
separate economics. What we really need is restructuring economics by linking it with
business enterprise and make necessary changes in our education curriculum to suit our
Muslim environment. We need our students to spend at least one year (during their
academic life) doing practical experience to gain knowledge as to how to run business
successfully. In doing so, students will benefit and so does our universities. We have to
develop strategic alliance with successful entrepreneurs and encourage them to spend six
months in our universities and polytechnic teaching our youth the tools of business
success and ways and means to create wealth and share it responsibly.
How would you evaluate the past quarter century developments in Islamic
economics and finance? What are the major achievements and failures?
The major achievements in Islamic economics is the introduction of this new subject to
be taught in our universities and Western institutions of high learning as theoretical
concept and models without any application to proof that these theories are applicable in
the real life. Islamic finance on the other hand as an applied field has played a major role
to open many Islamic banks in the Muslim World but at the same time has widen the gap
between those they have and have not. Islam promotes economic development and
empowerment of the poor and the needy to achieve economic justice. Sadly, Islam banks
have failed miserable to help these people so they can benefit from it.
50
Despite several tall claims we have miserably failed in transforming our economies
into Islamic one. Why?
Muslim economies are solely dependent on the western financial institutions in terms of
loans and technical assistance. The World Bank and IMF provide conditional loans to
almost all Muslim countries so as to make sure our economic and financial policy will
not succeed and our economies is controlled by these institutions and Multi-national
corporations.
With such unhealthy environment at economic front how do you expect us to transform
into Islamic system.
While comparing with conventional economics we claim Islamic economics to be

more efficient, stable, just, and growth oriented. How far this claim is true in real
practice?
Theoretically it is debatable that Islamic economics is more efficient, stable, just and
growth oriented. Practically speaking we have not succeeded either at Islamic banks to
show we are more efficient, stable, just and growth oriented level compare with
conventional banking. The wind of changes is moving fast in the Muslim World and
Islamic banks will also be affected in order to address socioeconomic problems that
confronting us as an Ummah.
As an Islamic economist what should be our priority?
I look forward to see major changes in our education curriculum to produce graduates
who are action oriented, market driven and successful entrepreneurs to assist our Ummah
to create wealth and share it responsibly.
What is the future of Islamic economics?
We need to lead in Islamic finance and create successful Muslim entrepreneurs who are
responsible and accountable to Allah and society. Once we succeed in the field then we
can develop our own theories and talk about Islamic economics from practical point of
views.
Message to young researchers.

51
You need to be action oriented and market driven. You need to go the field and study the
problem of poverty, hunger and youth unemployment and find practical solutions. If you
need help ask the Muslim practitioners to assist you in your effort to uplift our Ummah
and achieve our dream that we are the best Ummah in the globe. You need to understand
our problems require internally solution not external one. Time has come that our
educated youth face the challenges and be leaders not followers.
52
Need to Combine Islamic Economic History with Islamic Institutional

Economics:
(Prof. Murat Cizakca)
Born in 1946, Prof. Cizakca is one of the leading faces of Islamic economics from the
land of Ottoman. An author of six books and over a dozen research papers to his credit,
Prof. Cizakca obtained Ph.D. in Economics from the University of Pennsylvania and has
been recognized as “internationally distinguished scholar” by the Turkish Higher
Education Council. He has about three decades of teaching and research experience and
has presented over fifty research papers in various international conferences. He is also
Member of the Selection Board, Islamic Development Bank Prizes in Islamic Economics
and Banking. In an interview with Dr. Shariq Nisar, Prof. Cizakca shares his thoughts
and experiences (Editor).
Emergence of Islamic economics has given a new dimension to the subject of

economics Please comment.
Initially, that’s during the seventies, there was hope that indeed this would happen. Some
well-known western economists, such as professors Weitzman and Schlicht, had already
been working on what they called “share-economics” and it was thought that application
of the basic principles of share economics by the bulk of the Islamic world would provide
a global boost to the idea. But two impediments surfaced. First, some of the theoretical
problems of share economics, such as the reluctance of hard working workers to share the
profits they generate with those who work less could not be solved (This is not surprising,
for had it been solved, socialism would not have collapsed either). Second, the principles
of share economics have not been applied by the Islamic countries themselves. Consider,
for instance, the problem Saudi Arabia faced after the first Gulf war. When, after the war,
Americans forced the Saudis to purchase all the military material they had transported to
the region, the Saudi budget went overnight into the red. Thus, for the first time in its
history the Saudi state was forced to borrow. But how was this to be realized? How could
an Islamic government borrow from the public without interest? An intense debate
materialized within the Saudi ruling family. Led by Prince Mohammed b. Faisal, a
53
segment of the family was in favor of borrowing from the public resorting to the interest
free instruments of public finance. For this purpose the Prince even consulted Ottoman
economic historians, who were familiar with the Ottoman methods of interest free
domestic borrowing. But under pressure from the American government and banks, the
Saudi state was forced to borrow resorting to conventional methods. Had Prince
Mohammed’s vision accepted by the Saudi state, Islamic economics would have received
an immense boost.
How far Islamic economics has been able to fulfill its promises and what are the major
concern areas that still need attention?
To answer this question we need to look at the basic instruments of Islamic economics.
What exactly are these instruments? We all talk about Islamic banks. It is as if Islamic
economics is tantamount to Islamic banks. This is, of course, not true. The most urgent
problem, therefore, must be first of all, to review the basic principles of Islamic
economics and then identify the basic institutions, which would translate these principles
into reality. A redesigning or even a process of invention of the pertinent institutions
should then follow.
Concerning the fulfilling of the promises, we must face the fact that even countries such
as Iran and Saudi Arabia, which declare themselves as Islamic, cannot be considered as
truly Islamic economies: Saudi Arabian government has been borrowing with interest and
has been quite inhospitable to Islamic banking and Iran, nor for that matter any other
Islamic country, has been able to eliminate interest. Therefore, we need to look into
Islamic economic history. The three great Islamic empires of the relatively recent times,
the Ottoman, the Safevid and the Mughal may yield important insights. Of these the
Ottoman is the most promising one thanks to the enormously rich archives that have
survived in Istanbul.
These efforts should strengthen, what we may call, Islamic Institutional Economics.
Much of Islamic Economics has concentrated so far on the theory, itself greatly
influenced by abstract western economic theory. We even emulate the methodology of
western economics and try to write essays as mathematically sophisticated as possible. In
view of this, there is an urgent need to combine Islamic Economic History with Islamic
54
Institutional Economics. We should take notice that even the Nobel committee is trying a
balanced approach and granting its prizes not only to theoretical economists but also to
institutional economists (Coase, North), economists/economic historians (North, Fogel,
Friedman, Kuznets, Hicks) and even to social (Becker) and psychological economists
(Kahneman). In short, as acknowledged by the Nobel committee, western economics is a
synthesis. This is at least equally true for Islamic economics, which should encompass
not only the disciplines just mentioned but also traditional Islamic wisdom such as fikh,
tafsir and kalam. If even the western economics needs synthesis, the need is far more
urgent for Islamic economics, which has its own formidable tradition.
Waqf has been your special interest area. How do you see its potential as a tool for
economic development?
This question leads us directly to Islamic economic history and confirms the point I was
trying to make above. You see, in order to envisage about the current potential of the waqfs,
we need to understand its achievements in the past. If we look at Islamic/Ottoman economic
history, we would note that throughout the Ottoman realms, the waqf, was without any
doubt, the most important philanthropic institution. For six centuries, the Ottomans tried and
largely succeeded to eradicate poverty through this institution. It was primarily through the
waqfs that a voluntary transfer of wealth from the rich to the poor took place and the latter
were fed and taken care of. More importantly, health and educational services, essential
conditions for the development of human capital, were provided by this institution.
Moreover, it was thanks to the waqfs that property rights violations by a powerful state were
avoided; magnificent architectural heritage of Islamic civilization was financed and
maintained through the centuries; urban districts could cope with the crashing tax burden
imposed by an occasionally desperate state; excessive fragmentation of land could be
avoided; old age and disability pensions were provided; in an age when insurance as an
institution was unknown, rudimentary insurance for the members of a guild or an urban
district was provided; infrastructure projects such as bridges, roads, ports, lighthouses,
libraries, water conduits, aqueducts, public fountains and pavements were built and
maintained; in short practically all the services one can expect to have in a civilized society,
save defense, were financed, organized, built and maintained by this system. The waqfs,
actually, even aided the defense effort by building and maintaining urban walls and
55
fortresses. Finally, it was through the waqfs and the services they provided that Islam could
spread first in Anatolia and then in the Balkans.
Waqf ships even made the pilgrimage possible by providing a regular transport of the
Egyptian grain from Suez to Mecca’s port Jeddah. Moreover, all these services were
provided through de-centralized decision-making, i.e., not by a powerful but aloof central
authority but by concerned philanthropists determined to address social and economic
problems in their own neighborhood.
All of this means further that with a well functioning waqf system bulk of the
government expenditure can be substantially reduced. A reduced government expenditure
leads to a lower government borrowing, a reduced crowding-out effect and a reduced rate
of interest. A reduced rate of interest, on the other hand, leads to higher private
investment and finally growth. Moreover, cash waqfs are structurally very close to
banking. Indeed, if we look at western economic history, we would note that deposit
banking in the West had developed from the Italian cash foundations, Monti di Pieta.
American economic historians have discovered direct linkages between the American
philanthropic foundations in the northern states and massive capital accumulation that led
to the northern industrial revolution and eventual victory of the northern states versus the
South (McCarthy, 2003, ch.4). In short, there is a very serious potential for waqfs as a
tool for modern economic growth in the Islamic world. But recent research has shown
that with the possible exception of Turkey and India, waqfs are largely forgotten in the
Islamic world. Everywhere, including Turkey, the states have replaced bulk of the
functions of the waqfs with the result that decisions to provide services are taken by
indifferent and often corrupt bureaucrats, quality of the state provided services are often
dismal and the costs are sky high. Moreover, to finance these dubious results, the states
either borrow with the consequences I have just explained or impose taxes. Taxation, on
the other hand, curbs private initiative, reduces consumers’ and producers’ surplus and
impedes growth. The situation is much more acute in the rest of the Islamic world. A
thorough waqf reform sensitive not only to the formidable waqf tradition in the Islamic
world but also to the achievements of this institution in the West is therefore urgently
needed.
56
Islamic economics is said to have re-emerged in the 1970s. Being a student of Islamic
history as well, do you believe Islamic economics was ever practiced before?
The first century of Islam probably witnessed the true Islamic economy. But our
knowledge of Islamic economic history in this period is unfortunately very inadequate.
We are probably best informed about the Ottoman economy as I mentioned above. So,
was the Ottoman economy an Islamic economy? The answer is a frustrating “yes and
no”. Ottomans certainly were devoted Muslims and respected Islamic law. But, at the
same time, they were engaged in a constant struggle of life or death vis a vis the entire
Europe and therefore had to form a powerful state. In this, they were influenced by the
Roman and Sasanid empires with the result that they deviated from some of the basic
teachings of Islam, which promotes private initiative and entrepreneurship. I have
described the Ottoman economy as “proto- pseudo socialist”: proto because it antedated
Marx by several centuries, and pseudo because rather than being based on class conflict,
it promoted harmony between the classes. Our challenge as Islamic economists/economic
historians is therefore to look at our own past with a critical perspective and observe
where we failed. If we can do this adequately, we can then begin to attempt institutional
reforms with the goal of creating modern economic systems, which can both be more
loyal to the Islamic economic principles than those in the recent past and at the same time
be more efficient to face the challenges of the modern times.
57
Stock Market a Growing Opportunity for Muslim Investors in India
(Ashraf Mohamedy)
With the expansion of Islamic finance at the global level, muslim investors in India are
now eager to adopt their business and finance according to shariah principles. A number
of Islamic investment companies are now wooing investors and are in the process of
joint-ventures with similar institutions operating at the international market. Here, Mr.
Ashraf Abdul-Haq Mohamedy, a young entrepreneur, managing Idafa Investments Pvt.
Ltd, a stock broking firm affiliated with the Bombay Stock Exchange and National Stock
Exchange, talks about the opportunities for muslim investors in India’s capital markets.
This interview was conducted by Irfan Shahid, a Mumbai based free lance journalist.
(Editor)
What Idafa is all about?
Idafa (izaafaa) means increase by doubling or multiplying. As the name suggests, at

Idafa Investments Pvt. Ltd. we guide people to wealth creation opportunities according to
the Shariah way.
Share market is alleged to be a place where all kinds of un-islamic activities such as
gambling and speculating etc take place. How do you avoid all these things?
I agree with you that speculation is a part and parcel of stock exchanges today. That is
where Idafa plays a very important role. We educate our clients about the difference
between an Investor and a Speculator.
An investor buys businesses on the stock exchange and generally takes a long term view
on his investments whereas a speculator buys and sells "stock symbols" and would know
nothing about the company's business performance. The primary requirement of an
investor according to Shariah is that he invests to become a partner (shareek) in the
company and a Partnership cannot be a morning to evening affair like day trading.
What is the modus operandi of Idafa?
Essentially we guide people to invest in Equity Shares of Companies involved in Halal

Activities. So we screen companies sector wise and reject all companies dealing in Riba
58
(Banking & Finance Companies), Alcohol, Gambling, Entertainment, Tobacco, etc. Moreover
we apply certain financial parameters to check the financial health of the company and advice
investors to put their money there.
We also promote a MF Scheme promoted by Tata Mutual Fund called the Tata Select Equity
Fund, which is the only fund in India which works according to the abovementioned Shariah
requirements.
In recent years many Islamic finance companies have miserably failed. Do you think in such
an environment you will be able to win the trust of people?
In our line of business, people's trust could be won or lost in correlation to the movement of
market indices. Today the investor trust is very high as the sensex has crossed 6500 points and
everything you touch turns into gold! That may not be the case two years from now.
That is essentially why we educate people about the nature of Equity Investments and inform
them of the risks involved. The thumb rule, we inform our clients, is that only surplus money
can be invested and that it is unthinkable to invest borrowed funds in equity shares. Before
investing, a person has to take a fundamental view of the companies he is buying into.
Many people are eager for an Islamic investment option. Do you have any expansion plans?
Equity is an excellent form of investment available to Muslims. What could be better with
dividends being Tax Free, no long term capital gains tax and only 10% in tax for short term
capital gains. We would like to take this idea to as many people as possible and appoint
representatives all over India to make this option available to muslims. We solicit enquiries
from finance professionals who are interested in working on these lines.
We are also in the process of upgrading our website www.idafa.com to become a source of
valuable information on Islamic Financial Sector, which happens to be one of the fastest
growing industries globally. Going forward we will play an important role in offering Islamic
Banking and Insurance products in India. Insha-Allah.
59
Harness your Islamicity for Promoting the Good of Society

(Prof. M.N. Siddiqi)
Prof. Mohammad Nejatullah Siddiqi is a living legend of Islamic finance. He started writing on
Islamic economics and banking since early 1950s and till now he has authored over 35 books and
five dozen research papers. Prof. Siddiqi started his academic career as Assistant Professor of
Economics at Aligarh Muslim University in 1961. In 1978 he joined Centre for Research in
Islamic Economics of the King Abdul Aziz University from there he retired in 2001. He has been
a visiting fellow at Center for Near Eastern Studies, University of California and the Islamic
Development Bank, Jeddah. He also served as President of the International Association for
Islamic Economics fro over two years. For his distinguished contribution to Islamic studies and
finance he was awarded the Faisal International Prize for Islamic Studies 1982, American
Finance House Award, 1993, Award for Life-long Contributions to Islamic Insurance and
Banking, New York, 2000, and Shah Waliullah Award in 2001. In an Exclusive interview for
Islamic Business & Finance Prof. Siddiqi shares his thoughts with Dr. Shariq Nisar on current
trends in Islamic economics and finance. (Editor)
On the basis more than half a century of your involvement in Islamic economics, how
would you assess the development in this area so far?
I am not alone in saying that the progress has been impressive. Yet one feels it could have
been far better had Muslim economists paid more attention to world economic problems
60
first and then gone to Islamic economic principles to get inspiration and seek solutions.
Unfortunately many of us started from the opposite end, trying to blow up simple Islamic
precedents into panaceas for all ills. Furthermore some got bogged down in fiqh details
losing sight of objectives of Shariah that require fresh thinking and can no longer be
handled in the framework of qiyas/logical juristic deductions.
How did you envision this discipline at the beginning of your career as a professional
economist?
The best answer to this question is the first chapter of my book: Economics, an Islamic
Approach (IPS, Islamabad &Islamic Foundation, Leicester, UK, 2001) which first
appeared in Islamic Thought, Aligarh 45 years ago. I thought Islamic values and
principles gave us a firm anchor capable of giving some direction. Though I banked
primarily on response of Muslim economists I hoped we would evoke a wider interest as
we addressed problems common to entire humanity. All in all, I looked forward to
increasing interest in what I was doing.
In the context of your landmark survey of ‘Muslim Economic Thinking’, how would
you evaluate the latest trends?
The discipline of Islamic economics has branched out into numerous areas. Some areas
are receiving more attention because of their obvious relevance to the market. But there
are areas more important for long term growth of the discipline that are starved of
resources due to shortsightedness of Universities and research institutions. I include
historical as well as empirical research in this category along with philosophical musings
on the nature and scope of Islamic economics which received much attention in the
period I surveyed (1950-1975) but has almost dried up in recent years.
You are among the earliest Islamic economists who formulated the theory of Islamic
banking based on mudarabah. In practice however fixed return Islamic instruments
have dominated the Islamic finance businesses. Is it true that the profit and loss
sharing system is facing efficiency problem?
I must admit that my model which was based on two tier mudaraba only was too simple..
Traders have extended goods on credit since ancient times and a model of banking and
61
finance must take account of debts. Let me add that while financing cannot dispense
away with debt creating modes of investment, banks can perform intermediation without
creating debts. Please see my paper entitled: Comparative Advantages of Islamic Banking
and Finance…. On my website<www.siddiqi.com/mns>
Critics had always claimed Islamic economics and finance more as a “cultural
requirement” then an economic one. Don’t you think that failure of Iran, Pakistan,
and Sudan in their earlier attempt of Islamization and success of Middle Eastern and
South Asian region in recent past proves their point?
I think the relative success of the Middle Eastern and South-east Asian experiments in
Islamic banking and finance relative to official practice of Iran, Sudan and Pakistan
indicates something different than what you noted. The private sector is crucial. Schemes
imposed from the above have little chances of success. As a matter of fact state support
has been crucial in the growth of Islamic banking and finance in countries like Malaysia,
Indonesia and Bahrain and lack of support is responsible for its weak performance in
countries like Saudi Arabia and Egypt. But private initiative must precede state support,
something that did not happen in the politically motivated Islamizations.
How far you are satisfied with the current developments in the area of Islamic
economics, banking and finance?
I have answered this question in detail in a Survey of Islamic Banking and Finance to be
published shortly by the Islamic Research and Training Institute of the Islamic
Development Bank, Jeddah.
Islamic banking and finance emerged as a part of the broader movement called
“Islamic economics”. But over the years the formers have taken precedence over the
later. What could be the ramifications?
Part of the answer you will find above in my response to question 3.Iam not worried by
the market dictating its own priorities. But all of us stand to lose from the intellectual
leadership and the universities not playing their due role.
In the current global scenario of Islamic banking, finance, takaful, and others there
seems to be no place for an Islamic economist. Your comments?
62
The same may apply to conventional economists with no special skills to serve the
people. On the other hand we see experts in finance and related fields in high demand.
Islamic economists have to learn to be serviceable, not only to the Islamic financial
industry but also to meet the needs of teaching and research in Islamic economics.
Message to young students and practitioners of Islamic Business & Finance.
Be innovative. Think how to make the world better. Harness your Islamicity for
promoting the good of society. Forget what is irrelevant and learn more of what serves
you in this task.

Interviews of Islamic Economic Experts

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1

ON ISLAMIC FINANCE IN INDIA

(Former Executive Director, Reserve Bank of India)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

of running a successful institution and confidence is a factor of implementing well known

Honestly, I do not believe the prospects to be bright unless ISLAMIC BANKING IS

ABDUL WAHAB DALVI

(Managing Director, Baitun-Nasr Urban Cooperative Credit Society Ltd.)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

(Managing Director, Barkat Investment Group)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

The two-fold mission of M.F.I.s as defined by you is to "introduce Shariah in their

To my mind, any comprehensive system of Islamic banking and/or investment needs to

b) Provide an intermediary to help invest savings in profitable avenues without

c) Make available funds for businesses on a non-riba basis

contrast to the conventional banking industry should promote investment in socially

compulsion to enter into a profit-sharing arrangement on the liabilities side. The

find little focussed application and achievement by the commercially-oriented MFIs.

DR. M.Y. KHAN

(Former Senior Economic Advisor, Security and Exchange Board of India)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

PROF. M.N. SIDDIQI

(Eminent Islamic Economist)

Muslim Financial Institutions (MFIs) have failed in introducing Shariah or relieving

 Relatively short period of time to the experiment

 Variety of models involved

 Variety of ORTHODOX views on RIBA in INDIA, to which some take recourse

To a relative insignificant extent.

MFI involve money and entrepreneurship. Liberalization, privatization and globalization

Islamic Economics & Finance Have a Great Future:

(Prof. Rodney Wilson)

Relationship between Islamic economics and social economics and institutional

(Microeconomic) Exploring how Islamic economics relates to the trends towards

Any message to the readers of Islamic economics?

Islamic Banking at the Cross-roads: (Zamir Iqbal)

How do you look at the future of Islamic banking? Where it is heading?

State-sponsored implementation of Islamic banking has been troublesome mainly

Any message to our readers?

The Future of Islamic Finance in India

Having an academic background of B. Tech in Metallurgical Engineering and M.B.A.

a) Failure of management in not taking care to diversify as well as not paying

b) Weak capital structure due to high gearing.

c) Lack of institutional support infrastructure (absence of financial support on

e) Management philosophy being oriented more to growth (to provide a palpable

Barkats’ parent organization Bait-un-Nasr (BUN) is also reported to be facing a lot of

What is the future of Islamic finance in the country?

Islamic Discipline of Economics Emerged in late-colonial India

Prof Timur Kuran

The concept of a distinctly and self-consciously Islamic discipline of economics emerged

Do not you find any positive aspect in Islamic economics?

What is the future of Islamic economics?

What do you consider as the most important contribution of Islamic economics?

Any message to our readers?

In Islam, there is no priesthood. In principle, the individual is allowed, indeed is

Islamic Economics Needs a Great Deal of Creative Thinking

(Dr. Umer Chapra)

What is the main message of Islamic Economics to humanity?

1. One way of doing this would be to concentrate on the socio-economic problems

landlordism, lack of education, absence of justice, and ineffective operation of

d. What are the different socio-economic, political and historical factors

Economics to be able to address international problems in a realistic manner. However, in

Any other message to the readers of Islamic Economics Bulletin.

Islamic Banking is a Great Contribution of Islamic Economics

(Dr. M.H. Dar)