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Ma lay sia an d Isl amic Ec on omics

Saiful Azhar Rosly, Ph.D1

International Center for Education in Islamic Finance (INCEIF)

(Paper presented at the Hadhari Economics Roundtable Conference,
Universiti Kebangsaan Malaysia, 25th November 2008, MALAYSIA)

1.0 Introduction

Islamic economics as a subject is relatively new in Malaysian

universities but practically unknown in corporate business. People
may have heard about Islamic finance but there has been relatively
less discussion latelyon Islamic economics and many may think that
these two are the same.

To some extent there are similarities between these two fields of

studies since economics is the mother knowledge of business and
finance. The same is true for Islamic economics. But Islamic
economics today as a discipline is still a baby although Islamic history
is rich with economic lessons and policies crafted by the early
Caliphates to suit the needs of Muslim nations then. Currently,
Islamic economics has relied tremendously on the Shariah and Islamic
commercial law (fiqh muamalat) with its undue emphasis on fiqh2.

Professor and Head, Banking Department email:saiful@inceif.org
The prohibition of riba (usury) and the implementation of the zakat
system has been the backbone of Islamic economics, thus it is not
surprising that Islamic economics is sometimes labeled as capitalism
minus riba plus zakat. Focus on the financing aspects of economic
activities has been overwhelming. It is normal to see discussions on
Islamic economics to revolve around financial issues such as banking
and the capital market. Islamic finance seemed to have overtaken
similarly important issues such as economic methodology, the
problem of the consumer and the firm, market structures, factor
markets, public finance, poverty and economic development.

But Islamic economics is not about financial institutions alone. It

seeks to examine the behaviour of man in the market place, his likes
and dislikes and how these tendencies have impacted his way of
conducting economic activities.

This essay looks at 4 basic phenomenon’s or more accurately projects

of Islamic economics in Malaysia. These are:

a) Teaching of Islamic economics

b) Islamic Finance
c) Dinar movement
d) Halal Hub
e) Expanding the Zakat base.
f) Cash Waqf.

2.0 Teaching of Islamic Economics

There two basic questions one must be able to find answers in

teaching Islamic economics at college or university. First, concerns the
reasons for conducting economic activities. That is, why people buy
Fiqh which literally means “understanding” constitutes rules and regulation derived from human
intellection by way of Ijtihad when explicit text nass from the Quran and Sunnah concerning the
problem at hand is not found.
and sell? Or why people work for a living or invest to make money?
The problem at hand is how is Islamic economics defined? Or how to
best understand Islamic economics as field of study. One way is to
take a look at the textbook concept of scarcity. This is where the study
of economics begins. Others may reject this approach but I’ve so far
found no convincing modality.

As expected, the teaching of Islamic economics at Malaysian local

universities has no uniformity. Students are guinea pigs to passionate
academics, including me. Some teachers rejected scarcity and use the
Marxian approach instead, where the central issue in economics is not
about resource allocation (ie due to scarcity) but about income and
wealth distribution. Marxists said that resource allocation is useless
when ownership of resources fall into the hand of the filthy rich, the
bourgeois. Confused academics further rejected the maximization
hypothesis putting it at par with greed and acute materialism even to
some extreme kufr.

Scarcity however makes some sense, assuming that ownership of

resources is garnered within Islamic law3. I have chosen to stay within
this parameter. Islam has no objection to the concept of scarcity
because scarcity is a fact of life. It exists when the necessary
resources for producing things are not enough to satisfy all wants.
Scarcity to an economist is like gravity to a physicist. It is a
fundamental principle in the study of economics. Economists say that
scarcity arises when available resources are not sufficient to fulfill
human wants. In other words, economists have made two general
assumptions about the universe and mankind, namely:

a) Assumption about the universe – Limited resources

b) Assumption about man – Unlimited human wants

Islam does not see the above assumptions are false and evil. In fact
Islam recognizes scarcity as nature’s way arising from the two inherent
conflict between wants and ability. The limited resources assumption
Property ownership of by virtue of work and effort (kasb,ikhtiyar), risk-taking (ghurmi), gifts
(hibah and wasiyah) and inheritance (faraid).
is made to show that man’s ability to exploit resources is limited by his
knowledge. In this manner economics looks at relative scarcity and not
absolute scarcity. The same applies to Islamic economics. There is no
absolute scarcity in Islam because the Quran says:

“It is Allah Who hath created the heavens and the earth and sends down rain from the
skies, and with it bringth our fruits wherewith to feed you; it is He who hath made the
ships subject to you, that they may sail through the sea by His Command; and the
rivers (also) hath He made subject to you. And He hath made subject to you the sun
and the moon, both diligently pursuing their courses; and the Night and the Day hath
He (also) made subject to you. And He giveth you of all that ye ask for but if ye count
the favors of Allah, never will ye be able to number them”.

Islam also recognizes that human desires are not limited. This is
further attested by the Quran and Traditions that:

“Surely man is created greedy and impatient” (70:19)

“Fair-seeming to men is made the love of desires, of women and sons and hoarded
treasures of gold and silver and well-bred horses and cattle and tilth: (3:13)
“And you love wealth with exceeding love” (89:20)
“He thinks that his wealth will make him abide” (104:3)
“If man is given a valley of gold, certainly, he wants the second and third one” (Sahih

Scarcity in Islam is through and through, a tabi’phenomenon.

Therefore, when scarcity exists, nature empowers people to make
choices (ikhtiyar) as nothing is available for free anymore. Let’s look at
the problem of choice in economics and how they affect our lives.

Economists usually say that with scarcity, nothing can be obtained

without costs. Hence economics is a science or art of making choices
dealing with the following questions:

• What goods and services people want and how much? This is the
problem of the consumer.

• What is the most efficient method to produce goods and services

that people want? This is the problem of the firm
• How to reward factor inputs such as labour, land and capital
taking part in the production of goods and services that people

• How to reduce unemployment and inflation? This is the problem

of the government.

• How to promote economic growth given the available supply of

labor and capital resources. This is the problem of the market
and government.

Making these difficult choices definitely requires knowledge. Making

correct decisions based on knowledge defines what the study of
economics is all about. The main focus of economic study is man
himself. The knowledge he uses to make correct decisions is expected
to help him find ways to overcome the problem he encountered in
allocating scarce resources. The knowledge sought must give him a
sense of certainty since any form of "knowledge" that bound to create
uncertainty and doubts would be of no use for him in making the right

In mainstream economic textbooks, the term “economic principle” is

often used to mean the fundamental law of economics, which is
knowledge itself. In fact, these principles are the well-established
economic theories that have passed through numerous tests. They
have become economic laws that serve to guide the decision-making of
consumers, producers, capitalists, workers, investors and government

However, these economic laws (i.e. economic knowledge) are the

product of the intellect (‘aql)alone with the scientific method to dictate
what truth is. Although Islam acknowledges the role of the intellect
(‘aql) and sense experience as a source of value and knowledge,
ultimately revelation i.e. Divine guidance (wahy) is put above them
In this regard revelation in Islam, becomes the primary source of
economic principles with reason and experience playing the supportive
role. The latter is popularly known as economic theory while the
former is embodied in the economic system. This means that
fundamental laws and regulations governing resource allocation fall
under the realm of divine guidance. These fundamental laws are
manifested in the Islamic economic system.

The next question is why should man submit himself to the rules and
regulation ordained by God? That is, why must he obey God in
conducting economic activities? Why can’t he resort to reason and
facts in making resource allocation choices? The answer lies in the
conception of Islam as al-Din. Islam in general means submission.
Islam as al-din is also understood as a way of life. Interestingly, one of
the meanings of din is indebtedness, i.e. man indebtedness to his
Creator. The term din is extracted from the root word dyn. It is this
notion of indebtedness that gives deeper meaning to the reason for
human economic existence in Islam.

Hence the teaching of Islamic economics should move beyond the

study of usul-fiqh and fiqh muamalat and other fiqh related dimensions
dealing with public finance and the role of the state. Equally important
is the study of philosophy, theology and the theory of akhlak ie
ethics/morality as these are the underlying parameters influencing
and shaping human behavior.

3.0 Islamic Finance

Islamic finance today is a buzzword that no one actually knows what it
stands for. Early in the 60’s scholars wrote passionately about Islamic
economics. In the 70’s and 80’s the euphoria was the Islamic banking
business. Now it’s Islamic finance. Across the globe, right from London
to Dubai to Kuala Lumpur and Hong Kong, business forums on
‘Islamic finance” have spread like mushrooms. Harvard University
called it ‘Islamic Finance Forum”. We have “Islamic Finance News” in
Kuala Lumpur. And many more “International Islamic finance forum”
held in Dubai, New York and Bahrain. Malaysia’s International Islamic
Financial Center (MIFC) was set up to make Malaysia a major Islamic
financial hub in the world. And Bank Negara Malaysia practically
sponsored the establishment of a university INCEIF that specifically
offers post-graduate degrees on Islamic finance.
What is Islamic finance? In the academia, the term ‘finance’ usually
points to the finance department that offers courses such as corporate
finance, managerial finance, international finance, financial planning
and financial derivatives. So, does Islamic finance refers to these
bodies of knowledge? Not really.
Finance or financing means giving money to someone as a loan or
shares. So the entity that provides the financing is one that has the
surplus money. It can be a bank. So, when an Islamic bank gives the
financing, it concerns Islamic banking.
Certainly, when the financing is given by the public via bond and
share issuances, it is quite accurate to see Islamic corporate finance in
When an Islamic financial institution pays the Zakat, we now see
Islamic public finance in action. It deals with the government’s role in
collecting zakat from the wealthy and distributing the proceeds to the
deserving zakat recipients.
Thus, in total Islamic finance looks like something that encompasses
banking, corporate and public finance and of course the Shariah
discipline. Then throws in takafuland wealth planning to fill up the
We then look at books written about Islamic finance. We have the
John Wiley Islamic finance series. A book by Muhammad Ayub called
“Principles of Islamic finance” examines the Shariah and Islamic
contracts, banking and sukuks plus Islamic stocks and mutual funds.
Zamir Iqbal and Abbas Mirakkor wrote “Introduction to Islamic
finance” put similar points. El-Gamal critical outlook of Islamic
finance is well-known in his celebrated work “Islamic finance-law,
economic and practice”. Even Taqi Usmani’s book is named after
“Islamic finance”.
What we see in the above, is that Islamic finance represents a body of
knowledge constituting the Shariah, economics, banking and the
capital market. It deals with Shariah based financing given by the
banking firms, the capital market, the venture capitalist, the high net-
worth individuals and government To set a level playing field, rules
and regulation are put forth by the regulators concerning licenses,
taxation, dispute resolutions and Shariah interpretations.
The bulk of the knowledge seemed to take off with the Islamic banking
business. Since 1960’s academic papers on Islamic banking are
aplenty. But less work are evident in Islamic corporate finance. For
example, what causes companies to use sukuk rather Shariah
compliant shares in raising capital? What is the optimal capital
structure of a firm seeking Shariah compliant status? How is CAPM
applied in Islamic fund management? What is the Islamic conception
concerning cost of equity capital and cost of sukuk capital? These are
not discussed in the business forums on Islamic finance where
marketing or promotion is the central agenda. The basic theoretical
underpinnings of Islamic finance is in utter neglect in these meetings.
To wrap up, I can say that Islamic finance at this moment is a field of
study and professional practice that concerns the Shariah compliant
status of the banking, takaful, investment, fund and wealth
management business.
3.0 The Dinar Movement
The Dinar movement in Malaysia in essence does not believe in Islamic
finance. They saw payment settlement and transactions Islamic
banking as still driven by the fiat money system and hence, money in
the Islamic financial system is created out of thin air rather than one
supported with gold (dinar).
The dinar movement is also critical about the nature of credit
financing in Islamic banks as opposed to the Quranic conception of
trading (al-bay). This is only natural since real asset sale does not
actually took place in most of the credit sale transactions in Islamic
banks today.
The dinar movement brought many positive proposals to reform the
monetary system. Certainly, the fundamental principle is to use gold
as the medium of exchange. One central issue is inflation. Too much
money created out of nowhere will spell disaster to the price level.
Using gold or dinar as money will provide a catalyst to enrich some
theoretical conception of money in Islam or bringing back Islamic
history to enlighten us about the use of dinar as money during the
Islamic Caliphates.
However some of the prescriptions of the dinar movement are quite
erroneous. One of these prescriptions is to invest one’s savings in gold.
Eventually, one saw the movement, at least locally, turning into a
commercial affair. Proponents of dinar were associated with companies
whose interest is to convert gold bullion into dinar coins. These
companies were able to garner license from the Royal Mint to do so.
They purchase the bullion from the Royal mint and convert the
bullions into gold coins. The coins were sold to agents and distributors
at a margin. Suppose 1 dinar coin is worth RM200 wholesale. It is
passed to distributor for RM230 each, who will sell at retail say,
RM250 each. People can gain when the value of gold increases as sells
the dinar later at say, RM300 each.
The man in the street has been convinced by the movement about the
evils of the US dollar, that the prime value of the dollar was
orchestrated by the Zionists. The dollar was created out of nothing as
the US government can lend without limits since they have the
ultimate power to print the greenback without any backing of assets.
With gold to back money will curtail US agenda to hold world
economic power.
The point is, of course there are some truths on the above. However,
the remedy ie. buying dinar coins as an investment is even more
destructive. This movement encourages people to hoard money in the
form of gold. Ideally, the money can be invested in joint-ventures to
produce new jobs and new good and services. We must know that that
spending one savings to buy the gold coin is equivalent to ihtikar or
hoarding, which is prohibited in Islam. When one purchases gold as
an investment, he must pay zakat on the gold. When gold is hoarded,
it will not lose value by virtue of the 2.5% zakat payment, but the
owner pays the zakatfrom his other pocket.
Undoubtedly, Gold coin can be used as a medium of exchange. But
when the coins are kept in the vault for safekeeping rather than in
circulation, it disrupts the supply of money. This was the root cause of
hyperinflation in the Mamluk era when, dinar coins as money were
converted by corrupts officials into utensils and decorative accessories.
I was also notified that these gold coins can also be used as collateral
(rahn)for interest-free loans (qard hasan) through certain Islamic bank
pawn broking business. We know well that this pawn broking
business is a form of back door riba as cost of debt is hidden under
cost of safe-keeping (wadiah amanah). And further more, the qard
hasan further leads to more money creation under the fiat-based
monetary system.

4.0 The Halal Hub

The Halal Hub is an important Islamic economic project that
epitomizes the demand for purity in the production sector, particularly
in the food processing, cosmetics and pharmaceutical business.
Impurities from non-permissible sources of the food chain such as pig
and swine products are rigorously screened through arrays of
processes to ascertain permissibility and cleanliness.
The Halal Hub is exactly the place wherein Islamic economic principles
can be applied to the firms embracing the halal labelling. These
economic principles can be identified in three basic operations of the
company, namely:
a. Production: It deals with the application of science and technology
in producing outputs that benefits (manfa’ah) mankind. Allah swt
has given man the faculties of sight, hearing, smell, touch and taste
to complement his power of intellection (‘aql) to pursue and
discover the Signs of Allah swt (Ayat) through scientific
investigation and innovation. Thus, basic research and
commercialization of new findings should enrich the production
sector with products that are both permissible and pure.

b. Human resource management: The legal and ethical dimension of

the Shariah is critical in this business operation to achieve
efficiency and most importantly justice in the working place. The
employer-employee relationship is driven by Islamic contracts (‘aqd)
wherein employees received proportionate rewards from the effort
and services rendered. The principle of mutual consultation (shura)
and cooperation (ta’awun) should become an integral component of
human resource management. The principal-agent and employer-
employee relations buttressed on taqwa4 are expected to remove
potential moral hazards arising from asymmetrical information in
the firm. Taqwa nurtures harmony in the working place when work
is consciously felt as ibadah over that of subordination, stress and

c. Financing: Fulfilling capital needs for Halal business communities

is critical. These small and medium sized companies (SMEs) are
usually surviving on bank loans. Spiked with the usual SME’s
tribulations such as lack of collaterals, low technology usages,
archaic management skills and small market penetration, the halal

Taqwa has been interpreted by many scholars as God-fearing but an accurate meaning is God-
consciounsness or awareness.
SMEs deserve more from the Islamic economics. One is certainly
spurning up their business plans in search for new capital.
Prevailing Islamic banking assistance in the form of bay inah and
murabahah facilities are not helping these halal SMEs in view of the
collateral they do not usually have. Partnership financing should
more suitable to attend their needs. Unfortunately, Islamic banks
do not provide partnership facilities in view of the high risk involved
in doing business with SMEs. This should have not taken place
given that the fundamental principle of Islamic banking is based on
al-bay (trade and commerce) where risk-taking under the rule of al-
ghorm bil ghonm or “reward comes with risk” predominates in all
aspects of banking transactions.
Partnership financing such as the musharakah and mudarabah
financing usually look at the strength of cash flows of the projects
at hand. Collateral and guarantors to the facilities are not
important as in interest-bearing loans, although they provide
comforts. To undertake this project poses a great challenge to
Islamic economists who should be able to provide financial models
for pricing risks. They can also learn from venture capitalist and
private equities to accommodate new parameters required by
5.0 Expanding Zakat base
Zakat plays a pivotal role in poverty eradication and income
redistribution of the Muslim people and it forms a critical component
of public finance in Islam. Zakat administration in essence deals with
the collection of Zakat from Zakat payers and distribution of Zakat to
the 8 recipients (asnafs). In the Federal Territories, zakat
administration is within the statutes of Federal government while in
the nine Malay States, it falls under the purview of the State Religious
The increasing number of shareholdings by Muslims in business
corporations as well as companies using the Islamic label such as
Islamic banks and takaful companies has provide strong basis for a
systematic and efficient zakat system of collection and distribution.
The Securities commission provided quarterly report of Shariah
compliant companies in the local bourse averaging around 850
companies per listing. The Shariah screening is based on the
Securities Commission’s formula involving qualitative or core business
screening and financial screening. The latter serves to minimize
indirect contact with interest in the profit and loss statement.
Incidentally, the screening is a passive one, which means that listed
companies put no request to become the object of screening.
However, this may change when local companies are actively looking
for capital, while capital is abundant in the Arab countries. To fulfill
Arab values, namely Islam, these companies may have to ask the
regulatory authorities and even private companies to conduct the
screening based on several models including Dow Jones and FTSE.
The screening formula may even require the company to pay zakat on
behalf on existing Muslim shareholders, if any. Currently Islamic
banks have contributed positively to zakat. When we put together
zakat from Shariah compliant companies, the zakat base will get
bigger and hence the collection too. Distributional issues have been
heartache to many observers, which can be discussed in other
6.0 Cash Waqf
Waqf is a religious endowment and it involves giving away one’s
property such as plot of land for Muslim religious or charitable
purposes. More waqf were made as people become wealthy, which
means that waqf expanded with the level of economic growth and
The institution of waqf in Islam constitutes the backbone of economic
development in early Islam. Waqf properties can be used as capital
when allowed by the founder (waqif). In the past, schools, hospitals
and public amenities were funded by waqf, thus relieving state
expenditure. Making waqf is driven and motivated by the ahadith that
says, “when the son of Adam died, his good deeds stopped except those
from three sources, namely the prayers of his pious children, his
charities (one of which is waqf) and his knowledge that people benefited
One type of waqf is cash waqf, wherein the founders gave away cash
instead of tangible assets. This is more pragmatic when people may
find it difficult to donate properties in large amounts or in the form of
physical assets.
In waqf, the waqf property shall remain intact or preserved while the
usurfruct is appropriated and used by the beneficiaries. In the case of
cash waqf, the mutawallis (trustee) can draw various models to
accommodate how the usurfruct can be best utilized by economic
agents. If it is capital that is needed, the usurfruct (and not the waqf
property) can be used as capital in project finance, either given away
as a grant or an interest-free loan or equity. In this way waqf is a
potent tool in financing economic development of Muslim
Thank You