SASE Network Spotlight: Network R – Islamic Moral Economy and Finance

The tensions between “economy” and “society” stand at the heart of SASE’s agenda. One of the most fascinating of these tensions can be found in the relations between capitalist institutions or ideologies and religious beliefs, which is manifesting in the research on religious economics in Islam. 

Surprised by the size of Muslim finance, and curious about the distance it keeps from capitalist beliefs, I reached out to Prof. Mehmet Asutay (Durham University)—co-founder of the relatively new network R, “Islamic Moral Economics and Finance” (IME&F)—to discuss new developments in the field. In the context of the dominance of neoliberal economics, and especially in the face of the COVID-19 crisis, I wanted to understand how alternatives to the endless conflict between the economic and the social good are developed in religious economics and finance. Corresponding with Prof. Asutay, I bring you this discussion—through Q&A and interpretative reading—to reveal the depth of the discussion on this fundamental tension, taking place in (Muslim, similarly to other) religious thought and principals.

What kind of answers can research in this area offer to the questions that interest scholars of socio-economics—for instance, on inequality, the formation and spread of markets, and the potential for “re-socializing” finance?

Mehmet Asutay: Islamic economics emerged as part of post-colonial discourse, with the appearance of Muslim nation states. It aimed to create a systemic response to development needs of Muslim countries using authenticated knowledge derived from Islamic ontological sources, namely the Qur’an and the tradition of its Prophet. In a Polanyian sense, the founding fathers of Islamic economics aimed to rescue people, land, and environment from capitalist hegemony. However, due to the hegemonic global political economy, only the financial component could be institutionalized.

Islamic economics and finance started in the 1960s, as an experiment in social banking, gradually spreading during the 1970s and 1980s. In the decades since, the industry has achieved unprecedented success. In addition to Islamic banks, we have seen the emergence of Islamic financial institutions and instruments, Islamic capital markets, and Islamic financial markets, money markets, and stock markets. Today, more than 500 Islamic banks and financial institutions, often supervised and labeled by a specific religious council, are operating worldwide including in non-Muslim majority countries such as the UK and Luxembourg, which are managing assets worth no less than US$ 4 trillion. In Malaysia, for example, Islamic banking and finance institutions have already captured 27% of the market share and are expected to become the mainstream finance in some of the Muslim countries within this decade.

The principle of Islamic banks and financial institutions is the Islamic legal codes (Fiqh) to achieve Shari’ah compliance, based on profit-and-loss sharing, risk sharing, and the prevention of debt financing in the society. 

Asutay: Research in the field of IME&F demonstrates that Islamic banks and financial institutions have moved into financialization, mimicking conventional instruments and practices while focusing on the prohibition of interest. The Islamic term Iqtisad, which is used as equivalent to economics, is defined as balance, equilibrium, and justice to ensure human well-being as well as the well-being of other stakeholders. Islamic norms can authentically and substantively define and shape economy and finance to generate a moral economy based on Islamic principles emphasizing the salvation of the individual in this world (and hereafter). Our research network aims to bring such qualities back to Islamic banking and finance, along with developing the theory of IME as an alternative to neo-classical economics.

In my correspondence with Prof. Asutay, I found some optimism regarding the ability of religion to tame capitalism. Although religious institutions are sometimes linked to authoritarian control and limitations on liberal freedoms, Prof. Asutay articulated an alternative of potential liberation. 

Islam aims to shape individual behaviors through its normative principles. Where economy is a product of the value system of Islam, it is embedded into the value system in its root. IME does not aim to moderate consequences, let’s say of capitalism. On the contrary, Islamic modes of production fundamentally involve extended stakeholders… Let’s take the institution of Zakat (almsgiving, religious tax for those above a certain threshold of accumulated wealth). It aims to return the right of the social to society and undermine the accumulation of wealth, as another form of tax to be given to the poor, students, and others in need. In the same manner, in its normative meaning, the prohibition of interest aims to decenter capital and end the hegemony of one factor of production over others, as the Islamic central ontological source (Tawhid) is expressed as complementarity within unity.

Through our correspondence, I discovered some basic foundations of Islamic economy and its institutions—Zakat, Waqf and Hisbah—and the ways Islam works to bend foundational principles of capitalism to religious fundaments. For example, as in Judaism, Islam forbids interest-based loans; but while the battle between Jewish and capitalist principles seems to take place only at the margins of the religion, in the Muslim world this debate is very much alive.  

The Islamicity of Islamic banking and finance is commonly debated. In their essence, all the world religions share the common goal of human goodness. However, each has a particular way of achieving this. Some might suggest that economics is a reality, and as long as money, goods, and services move, that should be enough. However, Islam suggests that first we need definitions: what is money? What is a good? What is a service? We need to answer these questions before we can “move them” using Islamic metaphors. 

As a labor and industrial relations scholar, I asked Prof. Asutay about the place of class and labor-capital relations in IME. The IME approach to class conflict has similarities to other “unitarist” perspectives, which aim to establish equilibrium among the factors of production and marginalize questions of power and domination

While most Muslim countries follow neoliberal policies, IME does not address class as a structure, with the exception of the concept of Tawhid—the complementarity within unity. This concept suggests that there cannot be conflict between different factors of production, as they complement each other under the unity of God. This unity is based on trust (Amanah), which stands at the heart of Islamic socioeconomic relations. Therefore, IME&F theoretically suggests a socialization process in which one considers the development of others as part of one’s own “salvation function.” 

While many Muslim countries do not allow trade unions free operation, historically, various institutions have emerged to prioritize Islamic morality in the market (Bazaar), including Hisbah (a morally oriented corrective mechanism), and the Ahilik (a guild system). These have been important regulative institutions, instituting Islamic substantive morality.

Regarding the research being conducted by members of network R, Prof. Asutay explains that work on IME is mainly empirical, using Islamic banking and finance data to examine conventional issues such as profitability and efficiency.

There is a tendency among some of us to develop theory by rethinking existing socio-economic concepts and terms, while others focus on socio-economic institutions, such as Zakat (almsgiving or religious tax), Waqf (pious foundations for social well-being), charities, and other institutions. The network also deals with ontological heterodoxy and how knowledge about economy and finance are constituted through religious norms. We expand the debate over socio-economic issues by introducing a normative value system from an “other” religion. Finally, our network brings non-Eurocentric ideas into socio-economic scholarship, through both knowledge creation and area studies focused on Muslim regions and communities across various subject areas. 

For example, I use a political economy approach and therefore focus on concepts such as Islamic modes of production, value, distribution, and development, and examine the divergence of Islamic finance from IME objectives. Professor Necati Aydin, a network co-organizer, works on individual behavioral issues and how Islamic value systems shape well-being. Professor Zurina Shafi, the third network co-organizer, focuses on the nature of Shari’ah auditing for Islamic financial and social institutions. She has also developed a Shari’ah audit that internalizes moral conditions of Islam so that Islamic banks and financial institutions, along with zakat and waqf institutions, can comply with the substantive morality of Islam.

Journals focusing on Islamic economics, finance, management, governance, and Halal markets are available in the periphery of the academic world. They are terribly limited, and only a tiny number of mainstream finance journals have published empirical studies material related to Islamic finance. But edited volumes from mainstream publishers have become more common.

In the face of the current pandemic, Prof. Asutay emphasizes the importance of IME’s approach, which highlights the moral deficiencies of capitalism, including the subordination of human well-being and the excesses of neoliberal policies. IME suggests that individual salvation is only possible by contributing to equilibrium in society and contributing to the well-being of others. Islamic distributive schemes and institutions such as Zakat and Waqf have demonstrated their vital role in responding to the current crisis, emphasizing the importance of civil society to social resilience. As Muslim civil society has expanded its “good lending” (Qard al-Hassan), without expecting any return, we also hope to see Islamic banks and financial institutions develop similar practices, as expected of them by the Shari’ah.

Article by Assaf Bondy

This article is taken from the SASE Summer Newsletter 2020. Click here to go back to the contents.