Reprinted from Tobin 2016, 110-116; © Cornell University Press
Islamic Law (Shariʿa) and Islamic Economics: A Historical Overview
The general application of Islamic law to economic practices is not a new idea. In fact, it goes back to the very founding of Islam, the life of the Prophet Muhammad, and the ahl al-salaf, or first generations of Muslim scholars (Berkey 2003; Heck 2006; Kuran 2011; Rodinson 1978; Tripp 2006). During the first two hundred years of Islam (approx. 610–820 CE), the divine revelation and the sayings and traditions of the Prophet Mohammed were collected, organized, and authenticated in the Qurʾan, hadith, and sunna. To make sense of these, at times divergent traditions, a plurality of localized and Islamic jurisprudential and interpretive traditions, or fiqh, developed in a kind of decentralized “ethical imaginary” (Hefner 2011, 2). These volumes provided the new Muslims with localized bodies of knowledge and reference points for embarking on their everyday lives in new Muslim communities. Over time, the Qurʾ an, hadith, and sunna became consolidated and ranked for their reliability, truthfulness, and authenticity. Those same efforts put wind in the sails of a consolidated fiqh. As the third century after the advent of Islam passed, four primary fiqh traditions emerged for Sunnis (madhhab, pl. madhaahib). The four schools, named after founders Maliki, Hanafi, Shafiʿi, and Hanbali, offered interpretations on everything “from prayer, diet, and dress to commerce, taxation, and warfare” (Hefner 2011, 11). Rather than practicable law, Shariʿa offered general ideals for a good, Muslim life in a community. For example, professing the faith in community prayer made an early appearance, as did dealing honestly in business transactions and supporting a woman’s right to own property—a practice that was already occurring in Mecca at the advent of Islam (Ahmed 1992, 53).
This process of Shariʿa consolidation and codification began with Islam’s early traders and artisans (Zubaida 2003, 4). From the very beginning Shariʿa spoke to economic practices (Berkey 2003, 61–69; Lings 1994; Vikor 2005; Zubaida 2003), promoted entrepreneurialism (Nasr 2009), and began as a predominantly oral, ethical, and socially diffuse and informal process (Calder 1993; Zubaida 2003, 21). Within the context of ethnoreligious pluralism that characterized early Islam, an urban, middle-class bias emerged, and what would be considered contemporary ideas of individual privacy, responsibility, and initiative (within the limits of the community) are present in the fiqh of early jurists (Berkey 1992; 2003, 119–21). Fostering honest market dealings was of early interest, and the muhtasib—those tasked with “commanding right and forbidding wrong” (Cook 2000)—were its enforcers (Berkey 2003, 121). In fact, much of Shariʿa is designed to promote entrepreneurialism and a commercial spirit.
In contrast to contemporary concerns, most of these early Islamic responses to economic practices did not greatly emphasize more productive aspects of banking procedures, investment methods and types, or entrepreneurship as the means of Islamizing economic realities. Rather, Islam developed in an early capitalist society (Rodinson 1978), supporting trade and a massive commercial empire that eventually spanned three continents (Heck 2006, 3). A distinctively Islamic approach and early responses by Muslim societies focused on ethics of consumption and certain lifestyle developments, including prohibitions against alcohol and pork, the purification of animals for eating, and the regulations of modes of dress. In fact, many of the early developments of an “Islamic economy” would be better characterized in terms of the development of a “moral economy,” which grew out of a need for the “ethical regulation of human transactions” as a means to protect against the fracturing of society (Tripp 2006, 31).
As the centering and development of Shariʿa occurred, so too did the understandings and applications of it on economic transactions. It assumed a conventional form on a limited range of topics such as bans on usury and interest, implementation of inheritance law, and the enforcement of some technical aspects of rule of law in contractual arrangements (Heck 2006; Henry and Wilson 2004; Kahf 2004, 18). These emerging points of consensus, however, did not directly determine or regulate all aspects of economic life. Accommodations and variability, particularly during a long and extensive period of Empire growth and economic flux, were common (Heck 2006).
Where there were conflicts between Islamic precepts and market demands in the large-scale Islamic empires, the “Books of Ruses and Circumventions” or Kutub al-Hiyal wa al-Makharij, enabled accommodations (Heck 2006, 6, 93–98). In short, the Hanafi school of law developed a series of ruses or “special exercises in juridical sophistry whereby the promulgators sought to craft legal circumventions of certain practices, that, on their surfaces, seemingly violated their religion’s ban” on certain transactions (Heck 2006, 93). This was particularly true for interest-based ribaʾ transactions (Henry and Wilson 2004; Kahf 2004, 18). These hiyal, or ruses, were legalistic accommodations made to promote certain economic transactions without violating Islamic law, at least technically speaking. Even in the early days of Islam and through the Ottoman Empire, Shariʿa was a “flexible anchor” invoked in legal transactions when it might be particularly financially fortuitous, but not always.
These early utilizations of Shariʿa to enable and foster economic transactions continue. One of the more prominent examples of this maneuvering in early Islam occurred in the ʿAraya contract, which allows for the barter of unripened dates on a tree against their value as calculated in terms of edible fruit. Such a speculative contract can be considered—technically speaking—in violation of Qurʾanic injunctions. However, the technicality was generally overlooked in order to provide for the livelihood of the growers; it was a pragmatic alteration, but not an arbitrary one (Zubaida 2003, 16). This arrangement demonstrates that the early work of fiqh served to inject religious and ethical content into commonly occurring practices, not to establish a structure against which Muslims were to measure themselves and their actions. As a result, local customary conduct in economic dealings was injected with an Islamic scriptural and prophetic ethic, even above and in opposition to strict interpretations of Qurʾanic injunctions (Zubaida 2003, 18). In its origins, Shariʿa’s ethical orientation enabled Muslims to utilize established alternatives and bypass unfavorable transactions.
Today’s Islamic banking practices still utilize many of these early accommodations. For example,
Ubida b. al-Samit reported the Prophet Mohammed (Peace Be Upon Him) said, “Gold is to be paid for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, same quantity for same quantity and equal for equal, payment being made on the same spot.” (Cited in Sahih Muslim, Book 9, Hadith 3853; Muslim ibn al-Hajjaj 2000, 1007.)
One popular means around the conditions of quantities, equities, and spot payment was to engage in two separate contracts that each does not, in and of itself, violate the terms of the hadith. In collaboration, however, they accomplish desirable outcomes that a single Islamic contract would not make possible: person #1 sells a bushel of wheat to person #2 in exchange for, say, two bushels of barley. Then person #2 sells two bushels of wheat to person #1 in exchange for, say, two bushels of barley at a later period. This arrangement effectively enabled person #1 to buy one bushel of wheat without spot payment and without violating the terms of the hadith above. This “double exchange contract” was used in the medieval period to “sell gold for gold” without spot payment, which is expressly forbidden by this hadith. This is the basis for today’s liquidity-raising and somewhat controversial arrangement, tawarruq, or Reverse murabaha, described below. This early proviso was the subject of much creative juridical work (Heck 2006, 94–95).
By the Ottoman Era, Muslims “entered into contracts that followed an Islamic template and were enforced through Islamic courts” (Kuran 2011, 7). This integration of Islamic law into legal-economic orderings has been well documented (Masters 1988, 2004). For example, the mudaraba contract (discussed below) explained and justified the example of the early economic relationship between the Prophet Mohammed and Khadija, the woman who became his first wife. Mudaraba, once legitimated and popularized, continued. It is found throughout the Ottoman Era, and is, in fact, present throughout the Mediterranean basin during the sixteenth through eighteenth centuries (Masters 1988, 50). Historically speaking, Islamic economics was anchored in Shariʿa to the degree that it endorsed certain preexisting, customary, and technical contractual arrangements rather than serving as a primary force in the production of new financial methods and instruments.
During the Ottoman Era, Islamic contracts expanded to included provisions for social justice, protections for personal and privately owned property, limitations on the abuse of wealth, and fortifications for a sacredness of contract (Masters 1988, 187) and the perpetuation of wealth through enforcement of Islamic inheritance laws (Kuran 2011, 7). The Mejelle (Tyser, Demtriades, and Ismail 1967) and works by Edhem Eldem (1999, with Goffman and Masters 1999), Timur Kuran (2011), and Charles Wilkins (2009), among others, point to these systematic applications of Islamic law in the enforcement and regulations of certain economic transactions during the Ottoman Era. In fact, as Kuran points out, during the mid-nineteenth century, the world entered into the period of modern economic growth, characterized by self-sustaining economic expansion as well as “rapid technological change, the doubling of life spans, massive urbanization, and the means of mobilizing abundant capital through complex organizations” (Kuran 2011, 13, 23). Nevertheless, much of the Muslim—particularly Ottoman—world lacked the institutional capacities and transformations necessary to accommodate the new financial needs prompted by this modern economic growth (Kuran 2011, 13–14). Furthermore, many of the institutions and processes of economic production, consumption, and distribution came under the influence or direct control of non-Muslims (Heck 2006; Kuran 2011; Masters 1988). Muslims and Shariʿa contracts were neither keeping up with the changes sweeping the economic world during the nineteenth century, nor regulating them. During the Ottoman Era, Shariʿa as a tool for an Islamic economics was largely passed by.
Therefore, it was relatively late in the Muslim engagement with Western economic powers—namely the latter part of the twentieth century—a broad-based and self-conscious concern with formulating a systemic Islamic response to complex, modern economic challenges emerged, one that emphasized the production of distinctly Islamic goods and services. This contemporary movement, therefore, differs from the earlier vetting of “Islamicness” in the realms of consumption or through earlier ethical-contractual regulation or enforcement.
The tensions and opportunities created by the penetration of modern advanced capitalism and, most recently, consumer capitalism and neoliberal reforms into Muslim-majority societies such as Jordan have presented new and unprecedented demands for altered economic arrangements (Guazzone and Pioppi 2009). These were defined not only by the strength of Western economic ascendance but also by twentieth-century events including the Islamic Resurgence and heightened expectations for public piety and orthopraxy. In fact, it is well-documented that the “surge in Islamic banking and finance is part of the much larger phenomenon of Islamic reassertion” (Henry and Wilson 2004, 2; Vogel and Hayes 1998, 21, 25–26, 29). In these large-scale programs of change, actor-oriented assertions of authentic Islam are both accessible and important.
Islamic Economics in the Twentieth Century
In the 1940s Indian Muslims launched what became today’s Islamic economics out of a desire to define an Islamic civilization that was set apart from foreign cultural influences (Kuran 2004, 39). Later on, the writings of the Pakistani ideologist Sayyid Abul-Ala Mawdudi established the term “Islamic Economics” (2009). The Islamization of Knowledge Debates in Saudi Arabia (Abaza 2002) describes the push for a new methodology for the discipline of economics, envisioning it as a vehicle for establishing and recentering Islamic authority in a domain that was increasingly falling under the influence of Western ideas (Kuran 2004, 39; Maurer 2005, 29). In the first half of the twentieth century, the impulse and agitation for an Islamic economics was found throughout the Muslim world.
The cultural meanings in an Islamic economics as an intellectual tradition and revivalist form of knowledge were intentional from the beginning (Tripp 2006, 103–18). Islamic economics was “Islamized” knowledge that carried economic, developmental, and social goals (Warde 2004, 40; Henry and Wilson 2004). The movement rejected a Western, value-free approach to social science, and it strove to develop the discipline of economics while still upholding ideological, cultural, and political ends that remained distinctly Islamic. These values and interests became important when some producers aimed to bring an Islamized abstraction into contemporary methods and applications, namely in the form of Islamic banking and finance. In fact, the principles informing the methodology manifest into two distinguishable elements that became the basis for the technical development of Islamic banking and finance methodologies: the prohibition of interest and regulation of the religious injunction on almsgiving and taxation, or zakat (Kuran 2004, 39).
Islamic banking and finance, in its most recent expressions, asserts that the laws and institutions put forth by Shariʿa provide a “just and equitable model for economic growth” by creating a “third way,” which balances the social justice and equality underpinnings of socialism with capitalist entrepreneurialism and the commercial traditions of Islam (Hefner 2006a, 2000b). In other words, contemporary capitalist practices that are often categorized as neoliberal have put wind into the sails of a morally oriented Islamic economics. The latter is an intellectual, cultural, and economic “invented tradition” that upholds terms for an alternative approach to the dominant capitalist system. In accordance with the idea that Islam is a “total way of life,” Islamic economics—in its most abstract and rigorous form—is an ambitious project of reforming all economic practices (Kuran 2004, 2).
At the same time, the most recent expression of Islamic economics in the form of Islamic banking and finance is very much reliant upon new technologies, contemporary forms and styles of implementation, and the steady growth of public ethics and consumer demands—including neoliberal technologies and ethical projects—that continue to fuel their shaping and reshaping.
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