Islamic Economics: What Does It Mean?
by Daniel Pipes
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While the outside world hardly noticed, a significant and rapidly growing amount of money is now being managed in accord with Islamic law, the Shari'a. According to one study, "by the end of 2005, more than 300 institutions in over 65 jurisdictions were managing assets worth around US$700 billion to US$1 trillion in a Shari'ah-compatible manner."
Islamic economics increasingly has become a force to contend with due to burgeoning portfolios of oil exporters and multiplying Islamic financial instruments (such as interest-free mortgages and sukuk bonds). But what does it all amount to? Can Shari'a-compliant instruments challenge the existing international financial order? Would an Islamic economic regime, as an enthusiast claims, really imply an end to injustice because of "the State's provision for the well-being of all people"?
Now teaching at Duke University, Kuran finds that Islamic economics does not go back to Muhammad but is an "invented tradition" that emerged in the 1940s in India. The notion of an economics discipline "that is distinctly and self-consciously Islamic is very new." Even the most learned Muslims a century ago would have been dumbfounded by the term "Islamic economics."
The idea was primarily the brainchild of an Islamist intellectual, Abul-Ala Mawdudi (1903-79), for whom Islamic economics served as a mechanism to achieve many goals: to minimize relations with non-Muslims, strengthen the collective sense of Muslim identity, extend Islam into a new area of human activity, and modernize without Westernizing.
As an academic discipline, Islamic economics took off during the mid-1960s; it acquired institutional heft during the oil boom of the 1970s, when the Saudis and other Muslim oil exporters, for the first time possessing substantial sums of money, provided the project with "vast assistance."
Proponents of Islamic economics make two basic claims: that the prevailing capitalist order has failed and that Islam offers the remedy. To assess the latter assertion, Kuran devotes intense attention to understand the actual functioning of Islamic economics, focusing on its three main claims: that it has abolished interest on money, achieved economic equality, and established a superior business ethic. On all three counts, he finds it a total failure.
Indeed, Islamic economics possibly contributes to global economic instability by "hindering institutional social reforms necessary for healthy economic development." In particular, were Muslims truly forbidden not to pay or charge interest, they would be relegated "to the fringes of the international economy."
In short, Islamic economics has trivial economic import but poses a substantial and malign political danger.
June 21, 2010 update: The above account reflects the consensus understanding that Shar'i-compliant fiinance is going from strength to strength. At least in the United Kingdom, things appear to be otherwise, according to Katherine Griffiths in the Australian, "Sharia-compliant banking products a 'huge flop' in Britain."
Nov. 12, 2012 update: According to the World Islamic Banking Conference, Shar'i compliant finance now exceeds US$1 trillion.
Mar. 27, 2013 update: The Hong Leong Islamic Bank, a financial institution in Kuala Lumpur, reports that Islamic finance assets exceeded $1.1 trillion in 2011, according to the New York Times.
July 21, 2013 update: Much more explicit in a Financial Times interview than in his book-length study, Kuran says that Islamic banking, in its current form, "will go down in history as a mighty deceit based on an operational principle that is simply unfeasible."
Also of interest, his interviewer, William Barnes, asserts that global sharia assets could reach $1.8 trillion in 2013.
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