"Not About Islam as Religion, About A Universe Recognizably Islamic"

Ali A. Allawi

The Crisis of Islamic Civilization

"This book is not about Islam as religion or as a code of outer conduct and transactions. This book is about Islamic civilization, a universe that is recognizably Islamic."

 One of The Globalist's Top Books of 2009.

Islam as a religion is central to the lives of over a billion people, but its outer expression as a distinctive civilization has been undergoing a monumental crisis. Buffeted by powerful adverse currents, Islamic civilization today is a shadow of its former self. The most disturbing and possibly fatal of these currents—the imperial expansion of the West into Muslim lands and the blast of modernity that accompanied it—are now compounded by a third giant wave, globalization.

These forces have increasingly tested Islam and Islamic civilization for validity, adaptability, and the ability to hold on to the loyalty of Muslims, says Ali A. Allawi in his provocative new book. While the faith has proved resilient in the face of these challenges, other aspects of Islamic civilization have atrophied or died, Allawi contends, and Islamic civilization is now undergoing its last crisis.

The book explores how Islamic civilization began to unravel under colonial rule, as its institutions, laws, and economies were often replaced by inadequate modern equivalents. Allawi also examines the backlash expressed through the increasing religiosity of Muslim societies and the spectacular rise of political Islam and its terrorist offshoots. Assessing the status of each of the building blocks of Islamic civilization, the author concludes that Islamic civilization cannot survive without the vital spirituality that underpinned it in the past. He identifies a key set of principles for moving forward, principles that will surprise some and anger others, yet clearly must be considered.

Ali A. Allawi has served as Minister of Defense and Minister of Finance in the Iraqi postwar governments. The author of the highly praised Occupation of Iraq, he is senior visiting fellow at Princeton University.

 http://yalepress.yale.edu/book.asp?isbn=9780300139310

Islamic Finance: A Utopian Idea?

Transcribed from a lecture (in 2008) by Mufti Taqi Uthmani

• The economy has been established by debts, debts over debts! When the debts defaults debts are sold, and this created a panic in the economy; and it affected also the stocks of the company. The stock market always runs on the basis of speculation.

• Debt based economy that has created money without any asset behind it.

• Speculative transactions carried out on the basis of short sales and blank sales (Blank selling and short selling are two ways of profiting from a falling stock market. Essentially, the seller first sells the securities and then buys them back at a lower price, netting the difference. For instance, if you sell 500 shares of Hubco at Rs 32 and buy them back at Rs 30, you would have earned Rs 2/share.)

• The Prophet on Debt and Living Beyond the Means

• Shariah and Refraining from Riba  (Creating an Artificial Economy) 

• Shariah and Selling a Commodity That You Do Not Possess. In Commodity and Equity Market etc. today the commodity and shares are sold and bought without having ownership.

• Shariah and the Alternative to Interest-Based System (A Utopian Idea?) More than 200 Islamic financial institutions in the world today. The first was Islamic Development Bank Jeddah. "The clientele in Bahrain is pushing us to establish an Islamic Unit or window." Non-Muslim Banking sees an emerging market they wish to capture. So it is not a theoretical thing anymore.

What are the alternatives?

• First of all the ideal transaction is partnership, in profit and loss. This brings equitable distribution of wealth. Interest-based is always in favour of the rich. The same 100$ is given as loan to A, To B, To C, to D on the basis of assumption only. This goes far away from reality. This creates inflation and a number of economic ails. This is Musharaka or Mudaraba. Profit and loss, equity participation system.There is no artificial money. Flow of wealth is from the top to the bottom.

• Needs an American Bank to transfer cheques…

• Other methods: Murabaha means you sell a commodity on a margin of profit disclosed to the client. Financing for purchasing cotton, for eg., the bank purchases the cotton from and sells the cotton to the client on a profit, may be a deferred payment sale, price can be altered to entertain profit for institution. There are strict conditions in this transaction.

• Home & Car Financing. The contemporary fuqaha have developed a lee way that instead of borrowing money from the institutions the house is purchased jointly by the finance institution and the client; Client offers 20% and 80% contributed by the bank, but the ownership is joint. The institution then rents out its share and charges a rent; and gives the client an option to purchase different units of its ownership. Here it is necessary that the bank must bear the risk of ownership to the house which validates the profit earned by the bank.

• Ijara wa Iqtina (Islamic Leasing and Ownership)  in my book Introduction to Islamic Finance how to act upon these modes of financing…

• Many financial institutions claim to be following Shariah but are deviant.

Blank and Short selling http://www.dawn.com/2003/02/24/ebr11.htm 

Read more on Islamic Finance Basics: http://islamicfinanceaffairs.wordpress.com/2007/05/25/islamic-finance-basics-what-is-murabaha-ijara-and-musharakahmudarabah/
Read more by Mufti Taqi Uthmani: The Place of Politics in Religion http://baytunur.blogspot.com/2010/06/place-of-politics-place-of-islamic.html

Biography of Mufti Taqi Usmani: 

Mufti Muhammad Taqi Usmani is one of the leading Islamic scholars living today, an expert in the fields of Islamic Jurisprudence, Economics, Hadith and Tasawwuf.

Born in Deoband in 1943, he graduated from Dars e Nizami at Darul Uloom, Karachi, Pakistan. He specialized in Islamic Jurisprudence under the guidance of his eminent father, Mufti Muhammad Shafi, the late Grand Mufti of Pakistan. He has been writing on various Islamic topics in English, Urdu and Arabic and is author of more than 60 books and numerous articles.

In tradition to the scholars of Deoband, recognizing the importance of Tasawwuf, he traversed the path under the guidance of khulafa of Hakeemul Ummat Moulana Ashraf Ali Thanvi (rahmetullah ajmaeen). In addition to his busy schedule he is himself a mentor to numerous spiritual aspirants all over the world. He also conducts a weekly session for the public interested in spiritual improvement.

List of publications include: (Updated May 2004) The Authority of Sunnah, An Introduction to Islamic Finance, Discourse on Islamic way of Life, Islam and Modernism, Islam aur Seasate Hazra ( Islam and Contemporary Politics), Islahe Ma'ashara (Perfecting society), Islahi mawa’iz (Discourses for spiritual perfection) (3 volumes)  http://www.albalagh.net/taqi.shtml; 

Elementary Financial Instruments in Classical Islam

Dr. Abdul Ghafar Ismail

Monetization came early, and the ban on unequal exchange of similar fungibles seems to have facilitated the process. Muslims started with Byzantine gold dinars and Persian silver dirhams, but early on they began to mint their own coins. The state had a monopoly on coinage, and any tampering with their weight or purity was severely punished.

Trade and commerce over the vast expanse of the world of Islam, which included North Africa, Spain and a large part of Asia, soon produced certain elementary financial  instruments such as the suftaja (bill of exchange) and the shekk (check). 

All these scholars together help enlighten us on the contributions made by these Muslim scholars to a number of economic concepts like the market mechanism, demand, supply, prices and profits, money, counterfeiting and currency debasement, labor supply and population, and the role of the state and justice, peace and stability in economic development.

However, in the 13^th and 14^th century, several theologians led by notably the Dominican St Thomas Aquinas, set down the dogma of the Catholic Church in light of the resurrection of the Greek philosophy in the hands of 12th Century Islamic Scholars. These views have been propagated and adopted through colonization in several Muslim majority countries. While nationalism tended to focus attention on rapid economic development, religion, the other motivating force in the struggle for freedom, made many turn to Islam for guidance.

During the eighteenth, nineteenth and the first half of the twentieth centuries, nearly the entire Islamic world was colonized by European nations who managed the economies and finances of Muslim countries in their own interests and in their own ways. As their national consciousness grew and movements for independence promised to bear fruit following World War II, a desire to manage their affairs in accordance with their own values and traditions emerged.

Rafiq al-Misri noted that al-Ghazali indicates the functions of money as standard of value, medium of exchange and store of value. Thus, where the function of money is concern, there is not much deviation between contemporary economics and the teachings of Islam. Money exists in the economy as a medium of exchange and store of value.

Contemporary economics value money as an asset by itself.  As an asset, money could be utilized to generate more money and money itself could be traded at its owners’ will. Meanwhile, the Islamic monetary philosophy holds on to the fact that the existence of money is just a means to an end, not an end by itself. Therefore, money, by itself, is not a commodity or an asset. Thus, money as a medium of exchange, cannot be taken as a production good, which yield profit on daily basis, as is presumed by theory of interest. Money becomes capital only when it is invested into business.

Here, money will be channeled through the Islamic financial institutions and at the same time, the Islamic financial system will have to offer their financial services in the form of contract. The contracts may fall under the following categories: trading contracts, participating contracts and supporting contracts.

The Islamic financial system design produces two important types of financing, i.e debt (murabahah - mark-up based scheme)  and equity (mudarabah - Profit loss sharing) financing. 

It is based on our believe that the Islamic financial system would be able to influence the economic growth by: (i) suggesting the new role of money; (ii) amending the law governing the financial transaction; (iii) introducing financial contracts that encourage the enterpreneurship (for higher productivity); and (iv) producing a more efficient allocation of capital.

Read full paper: http://webcache.googleusercontent.com/search?q=cache:uzja7Pk7ap0J:www.mellatinsurance.com/magazine/Article-site/takafol/Paradigm%2520Shift%2520from%2520Capitalism%2520to%2520Islamic%2520Economics.pdf+islamic+financial+system&hl=en&gl=pk

Abdul Ghafar Ismail is Professor of Banking and Financial Economics, Islamic Economics and Finance Research Group, School of Economics Universiti Kebangsaan Malaysia, Bangi, 43600 Selangor D.E., Malaysia.  email: agibab@ukm.my

Tanam Farsooda Jaan Para

Jami


Tanam Farsooda jaan para
Ze Hijra Ya Rasulullah
Dillam Paz Murda Aawara
Ze Isyaa. Ya Rasulullah!

My body is dissolving in your separation
And my soul is breaking into pieces. Ya Rasulullah!
Due to my sins, My heart is weak and becoming enticed. Ya Rasulullah!
______________________________________________ 



Choon Soo’e Mun Guzar Aari
Manne Miskeen Zanaa Daari
Fida-E-Naqsh-E-Nalainat
Kunam Ja. Ya Rasulullah!

When you pass by me
Then even in my immense poverty, ecstatically,
I must sacrifice my soul on your blessed sandal. Ya Rasulullah!
______________________________________________

Ze Jaame Hubb To Mustam
Ba Zanjeere To Dil Bustam
Nu’mi Goyam Ke Mun Bustum
Sukun Daa. Ya Rasulullah!

I am drowned in the taste of your love
And the chain of your love binds my heart.
Yet I don’t say that I know this language (of love). Ya Rasulullah!
______________________________________________

Ze Kharda Khaish Hairaanam
Siyaa Shud Roze Isyaanam
Pashemaanam, Pashemaanam, Pashemaanam. Ya Rasulullah!



I am worried due to my misdeeds;
And I feel that my sins have blackened my heart. Ya Rasulullah!
I am in distress! I am in distress! I am in distress! Ya Rasulullah!
______________________________________________

Choon Baazoo’e Shafaa’at Raa
Khushaa’I Bar Gunaagara
Makun Mahruume Jaami Raa
Daraa Aan. Ya Rasulullah!

Ya Rasulullah! When you spread your hands to intercede for the sinners,
Then do not deprive Jaami of your exalted intercession.


http://www.defence.pk/forums/general-images-multimedia/58425-tanam-farsooda-jan-para-jami.html

The great Persian poet, mystic and scholar Mawlānā Nūr al-Dīn ʿAbd al-Raḥmān Jāmī was born in the Jām district of Ḫurāsān in 817/1414 ( d.1492 AD (A.H. 898), Herat) and educated in the literary, religious and Sufi tradition at Herat and Samarkand. His works are diverse and numerous, among them an exegesis of the Qurān and a compendium of notices of over 500 Saints. Jāmī spent nearly all of his life living quietly in Herat amidst his studies, poetry, and spiritual exercises. Though honored by his sovereigns, he never felt compelled to lavish them with flattery or the dedication of his poems. 

The Real Islamic Economics: A Radical Alternative

Dr. Asad Zaman

The creation, progress, and continued growth of numerous Islamic Financial Institutions is clearly the most important way in which the nascent discipline of Islamic Economics has influenced the real world. Nonetheless, the author shares with numerous other researchers and practitioners the impression that these institutions represent the impact of modernity on Islam, rather than conversely.

That is Islamic principles have been (and are in process of) being modified to accommodate modem institutions.  To the extent that Islamic Financial Institutions represent the reshaping of Islamic Laws in accordance with the demands of modernity, these represent the failure rather than the success of Islamic Economics. I propose to discuss below only the developments in Islamic Economic Theory.

Among contributors to the literature, it is widely agreed upon that Islamic Economics, with its concern for justice, equity, poverty, and its multidimensional conception of human development (not confined to income & material wealth) represents a paradigm shift and a radical alternative to conventional neoclassical views.

The existing literature in Islamic Economics does not reflect this radical perspective. Numerous papers introduce Islamic concepts entirely within a neoclassical framework, or else make minor adjustments to it, and therefore cannot from a basis for a paradigm shift. Another set of papers discusses the radical concepts offered by Islam in a general philosophical way, without offering any means of operationalizing these concepts. 

This is where I believe our biggest failure lies. Even though Islam offers us critical insights in the domain, we have failed to make these insights operational. Islam urges the feeding of the poor, and condemns those who do not do this. Even issues central to Islamic economics,  such as the effects of Zakat on poverty, have been addressed in a general theoretical and argumentative way, with little attention to empirical effects, and operational method of efficient utilization of Zakat funds for poverty alleviation.

According to the Quran, wealth should not become concentrated in a few hands - rather it should circulate freely.  Islamic teachings place a lot of emphasis on spending in the path of Allah. Muslims have not made any systematic study of charity behavior of Muslims, nor have they made any comparative studies of Muslim and non-Muslim societies with regard to charity contributions Muslim economics put forth the concept of Homo Is/amicus and suggested that actual human behavior is guided by motives other than pure self interest.

However no empirical evidence on this issue was offered. Behavioral and Experimental economists demonstrated that in many situations, human beings" will accept personal loss for achieving broader goals such as justice, equity etc., contrary to neoclassical teachings.

From the beginning, Islam has been substantially more concerned with spiritual and moral development of human beings, and not so much with material development. While these ideals were duly espoused in the literature, no operational or empirical aspects were developed. Other researchers developed the Human Development Index, as well as the Capacities approach to development to bring in these multidimensional components of development. The areas listed above represent failures in the following precise sense. 

Over the same period of time that we were engaged in the development of Islamic Economics, others developed, launched and established active research programs, which have had substantial influence, in many of the fields listed above. In each case, the research programs ran counter to established orthodoxy and faced resistance from conventional economists. In each case, Muslim Economists were there first with the ideas, but failed to make them operational, and did not participate in or influence the secular research programs that did translate these ideas into workable concept.

When it comes to theory, it seems clear that there has been no real progress in the area. We have no consensus as to what the field is, what its guiding principles are, what the methodology should be, what Islamic Economists are trying to achieve. Numerous people have written on these subjects and expressed their views with varying degrees of eloquence and conviction, but no consensus has emerged. The words of Umer Chapra, a leading luminary in the field, succinctly summarize the ills that plague Islamic Economics. It has been unable to suggest a balanced package of policy proposals in the light of Islamic teachings to enable Muslim countries to perform the difficult task of reducing their imbalances and simultaneously actualizing the Islamic vision. Moreover, its theoretical core has also thus far been unable to come out of the straitjacket of conventional economics, which takes into account primarily the economic variables that are measurable and generally avoids a discussion of the complex historical interplay of moral, psychological. economic, social. and political factors.

Islamic economics has thus "failed to escape the centripetal pull of Western economic thought, and has in many regards been caught in the intellectual web of the very system it set out to replace (Nasr, 1991, p. 388). It is thus unable to explain the difference in the performance of various societies with respect to overall human well-being.

The vast majority of current literature on Islamic economics is in fact structured around a critique of neoclassical theories, and the development of some alternatives which are mostly grounded in neoclassical assumptions and methodology. To escape the "centripetal pull" of neoclassical thought, we must build our camp in a distant location, and work together to achieve "escape velocity." This means radically modifying the existing methodology for the development Islamic economics. Proposals in this direction are put forth in the next section.

An important aspect of the lackluster past performance of Islamic economics is the failure to develop consensus and teamwork. Nearly all of the leaders in the field have their own unique approach to the subject while sharing a broad general approach based on Islam, they differ substantially on the details of how it should be implemented. A research program, like a building, requires teamwork with large numbers of participants working together on a common vision. In contrast, researchers in Islamic economics have all been placing bricks in different locations, with no two bricks being placed one on top of the other.

To achieve synergy, we need to have consensus. I believe it is essential for us to work from problems to theory instead of the other way around. We should look for a real world problem to solve, and then develop theory as part of a solution to this problem. Muslims economists must get involved in the problems of their communities as well as the larger problems faced by their nation and the Ummah as a whole. Each university should have-detailed knowledge of poverty in the neighborhood, and Muslim students should be actively involved in attempts to solve these problems. Theories about poverty should be assessed in order of their relevance to the solution of the problems.

In implementing the goal described above, it is crucial not to fall into the trap of defining our problems to be those that Western economists and policy makers see as our problems. For Western economists, the issues are "privatization", "Gender Equality & Female Education," "Democratization" and transition to modernity in general. We must set our own agenda. Our problems must be those that the Quran and Sunnah define as problems. For example, consider the "role of government" which continues to be a highly contested area between liberals and conservatives in the West. In Islamic teachings there is substantial consensus on the roles and responsibilities of the government (provision of justice, basic needs, and well defined roles in terms of taxation, provisions of services, defense, market regulation, etc.). There is a well developed theory of market regulation (Hisbah) which has no parallel in Western theory.

As spiritual development is at the heart of Islamic teachings, the core of Islamic Economics should be the efforts to strengthen faith, with resultant impacts on reduction/removal of corruption, development of an attitude of service and fellow feeling, all of which would substantially impact on economic prospects.

Western methodology suggests that theoreticians  should not get their hands dirty some perspective is needed for neutrality and emotion tree evaluation. As Muslims, we must reject this methodological principle. We should require translation of all theories into practical recipes. Our Prophet s.a.w. demonstrated the applied orientation of his teaching on many occasions.

Another common problem of Muslim countries is the post-colonial bureaucratic structure. In the colonized world, administrative structures were designed mainly for generation and collection of revenue trom the people, and its transport to the imperialist powers. They were not meant to serve the people in any real way. Post colonial governments typically continue in this tradition, exploiting the people to serve material interests of the people in power. Muslims are praised in the Quran as those who decide their affairs by "Shoora" or consultation - that is, decision making processes must be responsive to the needs of the people. How can we transition trom present oppressive and exploitative structures to Islamic ones? When students are motivated to solve problems, they will get a much better grasp of the strengths and weaknesses of economic theories as instruments which help solve these problems. 

The most urgent problem that we face as economists is the existence of massive resources, the phenomenal concentration of wealth into a few hands, together with large scale hunger and poverty. We should join hands with efforts to solve these global problems of inequity. We should strive to work for practical solutions, along the lines recommended by Quran and Sunnah. We should work on implementing the orders of Allah in the economic domain in Muslim societies.. In the course of solving practical problems we face, we will develop (and if necessary borrow) tools, techniques, and theories that we need. 

To develop Islamic economics, we need teamwork. This can only be built around the Quran and Sunnah. To establish Islamic economics as a viable discipline, we need to show a successful example. We have to show the world what Islam can do in the economic domain, rather than talk about it. This involves showing (for example) how Zakat can play a role in eliminating poverty instead of discussing the theory of this, Muslim economists must get involved in the nitty gritty of it - practical problems faced in identifying the poor, political problems in getting the money to the target population, etc. We must involve our students in this as well. We can borrow Western theories when they are useful to solve the practical economic problems being faced by our societies.

Read full paper: http://webcache.googleusercontent.com/searchq=cache:KZbM0fEZiYkJ:www.pafkiet.edu.pk/LinkClick.aspx?fileticket%3DfDo%252FqxwBFao%253D%26tabid%3D152%26mid%3D1553+islamic+economics+%2B+modernity&hl=en&gl=pk

Asad Zaman: https://sites.google.com/site/asaduzaman/

Other Papers by Author: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=289526

Asad Zaman is a Professor at International Institute of Islamic Economics, at the International Islamic University of Islamabad.

He has previously taught at University of Pennsylvania, Columbia University, Johns Hopkins and Cal. Tech, as well as at Bilkent University in Turkey and at LUMS, Lahore. He was elected to the Council of the Econometric Society in 2004.

He is the author of an advanced graduate econometrics textbook, Statistical Foundations for Econometric Techniques, published by Academic Press in 1996. He is the managing editor of International Econometrics Review. His current research interests include foundational issues for

probability, econometrics and economic theory. He is also working on developing new approaches to Islamic economics, based on cooperation and generosity, as an alternative to conventional economics, which is based on competition and greed.

Ottoman Empire [1600-1914] & The Inability to Bring State Finances Under Control

Dr. ŞEVKET PAMUK

Boğaziçi University, Istanbul

Based on the successful experience of Western Europe and European off-shoots, new institutional economics has argued that long-run economic change is the cumulative consequence of innumerable short-run decisions by political and economic agents that both directly and indirectly shape performance. Economic growth is attained because the underlying framework persistently reinforced incentives for organisations to engage in productive activity. The state is seen as a major player in this context. Institutional economics and economic historians have come to recognise, however, that a society rarely arrives at or creates institutions that are wholly conducive to economic growth. 

In many cases, institutions have favoured activities that promote redistributive rather than productive activity, that restrict opportunities rather than expand them. Similarly, rather than reinforcing incentives towards productive activity, in most cases states acted as instruments for transferring resources from one group to another, or promoting their own survival at the expense of others. In short, the process of institutional change has not always been favourable to economic growth. Politics and political struggles have played an important role in these unfavourable or less successful outcomes as well.

We will argue that Ottoman society and Ottoman bureaucracy brought about institutional change in selective areas, in monetary institutions and in public finance, for example, and that such selective institutional change enabled the Ottomans to maintain their rule and the empire over a very considerable period.

For most of its six-century existence, the Ottoman Empire is best characterized as a bureaucratic and agrarian empire. The economic institutions and policies of this entity were shaped to a large degree by the priorities and interests of a central bureaucracy. We will argue that the Ottoman state and society showed considerable ability to reorganise as a way of adapting to changing circumstances in Eurasia from the seventeenth century to the nineteenth century. The central bureaucracy managed to contain the many challenges it faced with its pragmatism and habit of negotiation to co-opt and incorporate into the state the social groups that rebelled against it. These traits enabled the Ottomans to retain power and survive until the modern era, while many of their contemporaries in both Europe and Asia were unable to do so.

The pilgrimage to Mecca gave rise every year to one of the largest payments and specie flows within the Ottoman Empire. The financing of the caravans including provisioning, payments to tribal leaders en route for security and funds carried by tens of thousands of pilgrims - in some years close to 100,000 pilgrims - gave rise to large flows of gold and silver from Egypt, Syria and Anatolia to the Hijaz every year.

Even more importantly, the governments in Istanbul and Egypt and the various official, semi-official and private foundations sent large sums every year to support the Holy Cities.

In addition, the annual revenues of many small and large pious foundations in Anatolia and some of the largest foundations in Egypt were set aside for the Hijaz. Total remittances by the foundations roughly equalled the amounts sent by the governments in Istanbul and Cairo.

From Egypt, some of these net revenues were sent in kind, as cereals. Faroqhi thus estimates that a total of 300,000 to 400,000 sultanis or ducats were sent to the Hijaz every year from Istanbul, Anatolia and Egypt combined, in addition to the payments and specie flows arising from the pilgrimage caravans themselves. The funds in cash were sent in gold whenever available, because gold was the preferred specie in the Hijaz.

It has often been assumed that the prohibition of interest in Islam prevented the development of credit, or, at best, imposed rigid obstacles in its way.

Neither the Islamic prohibitions against interest and usury nor the absence of formal banking institutions prevented the expansion of credit in Ottoman society. Utilising the Islamic court records, the late Ronald Jennings showed that dense networks of lenders and borrowers flourished in and around the Anatolian cities of Kayseri, Karaman, Amasya and Trabzon during the sixteenth century.

Over a twenty-year period which his study covered, he found literally thousands of court cases involving debts. Many members of each family and many women are registered in these records as borrowing and lending to other members of the family as well as to outsiders. These records leave no doubt that the use of credit was widespread among all segments of the urban and even rural society. Most lending and borrowing was on a small scale and interest was regularly charged on credit, in accordance with both Islamic and Ottoman law, with the consent and approval of the court and the ulema. In their dealings with the court, the participants felt no need to conceal interest or resort to tricks in order to clear legal hurdles. Annual rates of interest ranged from 10 to 20 per cent.

One important provider of loans in Istanbul, the Balkans and the Anatolian urban centres were the cash vakifs, pious foundations established with the explicit purpose of lending their cash assets and using the interest income to fulfill their goals. These endowments began to be approved by the Ottoman courts in the early part of the fifteenth century and had become popular all over Anatolia and the Balkan provinces by the end of the sixteenth century. An interesting development that became more pronounced during the eighteenth century was the increasing allocation of the funds to the trustees of these endowments. The trustees then used the borrowed funds to lend at higher rates of interest to large-scale moneylenders (sarraf) at Istanbul, who pooled these funds to finance larger ventures, most importantly, long-distance trade and tax farming.

Not surprisingly, a lively debate developed during the sixteenth century within the Ottoman ulema regarding whether the cash vakif should be considered illegitimate. The cash vakifs were opposed by those who believed that only goods with permanent value such as real estate should constitute the assets of a pious foundation and that the cash vakifs contravened the Islamic prohibition of interest. The majority of the ulema, however, remained eminently pragmatic and the view that anything useful for the community is useful for Islam ultimately prevailed. During the heated debate, Ebusuud Efendi, the prominent, state-appointed religious leader (Şeyhülislam) of the period, defended the practice from a purely practical point of view, arguing that abolition of interest taking would lead to the collapse of many pious foundations, a situation that would harm the Muslim community.

Even though there did not exist an insurmountable barrier to the use of interest-bearing loans for commercial credit, this alternative was not pursued in the medieval Islamic world. Instead, numerous other commercial techniques were developed which played the same role as interest-bearing loans and thus made the use of loans unnecessary. These included a variety of business partnership forms such as mudaraba or commenda, credit arrangements, transfers of debt and letters of credit, all of which were sanctioned by religious theory. Long-distance trade was thus financed not by simple credit relations involving interest, but by a variety of Islamic business partnerships, the specifics of which depended on the nature of the risks and the resources provided by the different partners.

Ottoman merchants widely used the varieties of Islamic business partnerships practised in the Islamic world from the classical era. The most frequently used method in the financing of long-distance trade and certain other types of business ventures was the mudaraba  partnership of classical Islam, in which an investor entrusted his capital or merchandise to an agent who was to trade with it and then return the original amount. The profits were then shared between the principal and the agent according to some pre-determined scheme. Any loss of the capital resulting from the exigencies of travel or the business venture itself were borne exclusively by the principal. The liability of the agent was limited to his time and efforts.

To a lesser extent the Ottomans also used mufawada partnership of the Hanefi school of Islam in which the partners were considered equals in terms of capital, effort, returns and liabilities. In the related musharaka or inan arrangement, the partners were free to invest different amounts and agree to share the returns and liabilities in unequal but prearranged amounts.

Evidence from Islamic court records on commercial disputes and their resolution until the middle of the nineteenth century indicates that in Anatolia and Istanbul, at least, the Ottoman jurists were well informed about the teachings of medieval Muslim jurists and, in general, adhered closely to the classical Islamic principles in disputes arising from these partnerships. On the whole evidence from hundreds of business partnerships indicates that classical Islamic partnership forms not only survived but were applied, with minor exceptions, true to their original forms until the nineteenth century. 

One important instrument in the finance of long-distance trade was the sufiaja, a bill of exchange or letter of credit. The basic purpose of the sufiajas was to expedite long-distance payments or transfer of funds. In the Geniza documents of medieval Egypt the sufiajas consistently appeared as involving the repayment of exactly the same type of money to the issuing banker. They were as good as money; the bearer could fully expect to redeem his sufiaja for cash immediately upon arrival at his destination. The local judges (kadis) were actively involved in the enforcement of the sufiajas in their various forms.

Another type of letter of credit was the hawala which was the assignation of a fund from a distant source of revenue by a written order. It was used in both state and private transactions to avoid the dangers and delays involved in the transportation of cash.

In the Ottoman monetary system, there existed three levels of coinage: gold, silver and copper. The silver akçe until the middle of the seventeenth century and the silver kurush (from groschen/piaster) in the eighteenth century were the basic units of account and the leading means of payment in local transactions. The silver content of these units of account changed with the occasional debasements by the government. In contrast, the standards of the gold coins usually remained identical to those of the Venetian ducat and the gold coins of most other states around the Mediterranean. In an environment of frequently recurring shortages of specie, the Ottoman administrators knew that it was essential to attract into the Ottoman lands and maintain in circulation as much coinage and bullion as possible. Their monetary practices were guided more by this concern than any other. They were also aware that the ratio between gold and silver, as well as the value of different types of coins, was subject to fluctuations. Local court records show that the kadis relied on these market rates to settle disputes between individuals. In addition, the government announced the official rates at which different coins, gold and silver, would be accepted as payment.

After the Ottomans decided to embrace bimetallism and stable coinage, only one alternative remained for the finance of budget deficits: external borrowing. Ottoman borrowing in the European financial markets after 1854 led to a default in the 1870s and partial control of state finances by European creditors. Despite experimentation with different fiscal strategies, the inability to bring state finances under control during the nineteenth century thus proved to be the major, if not fatal, weakness of the Ottomans.

Read full paper:

Financial History Revint/ i i.i (2004), pp. 7-32. © Cambridge University Press 2004 Printed in the United Kingdom DOI: 10.1017/80968565004000022

http://webcache.googleusercontent.com/search?q=cache:vVDWczC17wIJ:www.ata.boun.edu.tr/Faculty/Sevket%2520Pamuk/publications/Pamuk,%2520Sevket_The%2520evolution%2520of%2520financial%2520institutions%2520in%2520the%2520Ottoman%2520Empire,%25201600-1914.pdf+financial+model+%2B+Ottoman&hl=en&gl=pk

Şevket Pamuk is Adjunt Professor at the Department of Economics at Boğaziçi University, Istanbul, Turkey [B.A. in Economics and  B.S. in Engineering and Applied Science : Yale University, 1972. M.A. in Economics :  University of California at Berkeley, 1974. Ph.D. in Economics : University of California at Berkeley, 1978.]

http://www.usakpedia.com/content/Sevket_Pamuk

Impact of Religion on Economic Growth: USAID Bureau Policy and Program Coordination 2004 Report

Peter Timmer, Development Alternatives, Inc. (DAI Pakistan http://www.dai.com/pakistan/ ) and Center for Global Development

Donald McClelland, U.S. Agency for International Development

The long-standing debate over the impact of religion on economic growth particularly the current debate over the impact of Islamic thought on the economic prospects of Muslim countries—parallels similar debates over the impact of Catholicism, Hinduism, and other religions. These debates have not had much impact on development practice, partly because of their inconclusive nature.

The issue addressed in this paper is whether Islam, as the “religion of practice” in a wide range of countries, poses serious problems for economic growth or whether the undeniably poor economic performance of many Muslim countries stems from sources unrelated to Islamic theology and practice.

Recognizing the tension between progressive and moderate practitioners of Islam and their fundamentalist challengers—a tension that often spills into the political arena—the paper concludes that most Muslim countries face very difficult governance issues that have impeded rapid economic growth

Why do Muslims tend to be relatively poor? The facts are undisputed: Muslims make up 19 percent of the world’s population but earn only 6 percent of its income. The issue is whether there are any causal relationships between religion and economic development. Many scholars suggest that religion is typically not a problem, pointing out that Islamic beliefs and values that appear inimical to growth (e.g., the ban on interest and restrictions on speculation) are routinely circumvented. The corporation is now an acceptable and popular organizational form in most Muslim countries. Insurance contracts are legally enforceable. Banks are integral components in every Muslim country’s economy.

And contracts involving interest payments are commonplace, although payments are sometimes disguised as commissions or fees.

Others believe there are deeper problems. Characterizing an Islamic economic system—

“Islamic economics”— as a middle ground between capitalism and socialism, they cite the Koran’s overriding emphasis on the need for social justice; rejection of severe economic disparities; condemnation of economic exploitation, usury, and dishonesty; call on well-to-do individuals to use part of their wealth to help the poor and support various charitable endeavors; and repeated expressions of concern for those least capable of defending themselves against poverty. Despite the Koran’s emphases, proponents of Islamic economics argue that it can effectively promote both economic development and social welfare in predominantly Muslim countries.

It seems clear that the economic institutions Islamic law prevented—corporate law, banks, stock markets, modern firms, insurance—are all integral parts of most economies of the Muslim world. As a result, economic policy reforms needed to accelerate economic growth in the Muslim world could be adopted without having to confront Islam as a religion.

Although Islam harbors elements inimical to economic productivity and efficiency, these have not formed an absolute barrier to economic growth. In fact, Noland’s recent analysis (2003) of India, Malaysia, and Ghana provides empirical evidence that there is no consistent, systematic relationship between economic growth and the share of a country’s population practicing Islam. He concludes that the impact of Islam on short-run economic performance is as diverse as Islam itself.

The Muslim world is extensive and diverse, comprising 48 countries where at least 50 percent of the population is Muslim. It extends from West Africa (Morocco and Mauritania) to East Asia (Indonesia). The larger Islamic world includes several countries with a significant Muslim minority. India is the most prominent of these countries with a Muslim minority of over 125 million people (12 percent of the population). Others include Kazakhstan, with almost 8 million Muslims (47 percent of the population), and Uganda, with almost 4 million Muslims (16 percent of the population). In France, nearly 6 million people are Muslim (about 10 percent of the French population).

The top five Muslim-country recipients of USAID economic assistance over the five-year period 1997–2001 were Egypt, Jordan, West Bank/Gaza, Indonesia, and Bangladesh. In 2002, Pakistan and Turkey were among the top five recipients; Indonesia and Bangladesh were not, though they were still among the top 10. The top five recipients of USAID assistance per capita in 2002 included Albania, Kyrgyzstan, Egypt, Jordan, and West Bank/Gaza.

Khan (1999) zeros in on the crux of the issue, asking how would one  know what an Islamic economy looks like if there has never been one. He draws a sharp distinction between Islamic countries as political entities, of which there are many, several with very deep historical roots, and Islamic economies, where historical experience is thin. The examples of the latter usually cited—Afghanistan under the Taliban, Iran under the Revolutionary Council of Ayatollah Khomeini, and Sudan under Hassan al-Turabi—certainly give cause for concern that Islamism can be a vehicle for economic growth and improved standards of living. According to MSI (2002), the reason seems deeply rooted in the nature of Islam:

First, economics is, at best, of secondary importance to Islamists. It does not feature prominently in their political agenda, or in the books, articles and pamphlets that emanate from Islamist circles. Islamist thinkers, politicians, and activists are clearly far more concerned with matters of morality, ethics, and piety than with economic questions. Some even express contempt for economics. As Ayatollah Khomeini once remarked when pressed to address economic issues, “the revolution is about Islam, not about the price of melons.” Islamism is driven first by culture (the search for a “moral order,” consistent with God’s will for mankind, as revealed in the Koran) and, second, by politics (the quest for controlling the levers of power that will make it possible to

establish that moral order). Economic concerns are far less central to Islamist thinking and strategizing; they come well after cultural and political objectives.

To understand the impact of Islam on economic growth in Muslim countries, it is necessary to understand this challenge from Islamism and the links between economics and politics (economic governance). Although it is probably fair to say that Islam per se is not a significant impediment to improved economic performance in any Muslim country (Annex 1), it can be a contributing factor.

According to Jabber (2002), poor economic performance in so many of these countries is one of the three basic causes of widespread alienation of the populations of Muslim countries from their governments. This alienation in turn supports fundamental Islamism, which is the main challenge to political authority in Muslim countries. And Islamism’s political challenge— often using violent means—undermines the basic economic environment needed to improve investment returns and to stimulate higher standards of living.

From this perspective, analyses of what went wrong economically in the Muslim world have focused on immediate or proximate causes, rather than deep and fundamental causes. Abed’s review (2003) for the IMF of the Middle East and North Africa region, for example, provides an extensive litany of policy failures and poor governance as the reasons for their “unfulfilled promise.” Islam is not mentioned even once as a factor associated with these problems.

Similarly, a USAID review of lessons learned from USAID and other donor experience in providing economic assistance to selected Islamic countries never mentions Islam as a contributing factor to the success or failure of the ten specific projects reviewed. Moreover, neither the IMF nor the USAID review provides guidance on how to fix poor policies or improve governance, when both may well be held hostage to the political challenge from fundamental Islamists. Specific actions for possible support by USAID are identified at the conclusion of this report.

Read full report: http://www.cgdev.org/doc/commentary/timmer_USAIDw.pdf

PETER TIMMER:  In addition to his faculty positions in three schools at Harvard, Timmer has also held professorships at Cornell and Stanford. In 1992, he received the Bintang Jasa Utama (Highest Merit Star) from the Republic of Indonesia for his contributions to food security. He served as the chief outside advisor to USAID for developing their strategy on growth and agriculture for the Natsios Report (Foreign Assistance in the National Interest), and he was one of the key advisors for the World Development Report 2008: Agriculture for Development. He currently serves as an advisor to the Bill and Melinda Gates Foundation on agricultural development and food security issues.

Some Statistics as Annex in this report: 

Annex 1. Countries in the Muslim World1

Middle East and North Africa (18)

Algeria

Bahrain

Egypt

Iran

Iraq

Jordan

Kuwait

Lebanon

Libya

Morocco

Oman

Qatar

Saudi Arabia

Syria

Tunisia

United Arab Emirates

West Bank/Gaza

Yemen

Europe and

Eurasia (7)

Albania

Azerbaijan

Kyrgyzstan

Tajikistan

Turkey

Turkmenistan

Uzbekistan

South Asia (4)

Afghanistan

Bangladesh

Maldives

Pakistan

East Asia and

the Pacific (3)

Brunei

Indonesia

Malaysia

Africa (16)

Burkina Faso

Comoros

Chad

Djibouti

Eritrea

Ethiopia

Gambia

Guinea

Mali

Mauritania

Niger

Nigeria

Senegal

Sierra Leone

Somalia

Sudan

Agrarian Economies (21)                              Oil Producers (22)                            Neither (9)

Ethiopia                                                               Albania                                                Turkey

Burkina Faso                                                      Algeria                                                 Uzbekistan

Niger                                                                     Azerbaijan                                          Kyrgyzstan

Guinea                                                                  Bahrain                                                Maldives

Mali                                                                       Brunei                                                   West Bank/Gaza

Chad                                                                     Egypt                                                     Lebanon

Tajikistan                                                            Iran                                                       Jordan

The Gambia                                                        Iraq                                                       Morocco

Eritrea                                                                  Kuwait                                                Djibouti

Comoros                                                              Libya

Senegal                                                                 Malaysia

Somalia                                                                Oman

Afghanistan                                                       Qatar

Nigeria                                                                Nigeria

Sudan                                                                   Sudan

Sierra Leone                                                       Saudi Arabia

Bangladesh                                                         Syria

Yemen                                                                 Yemen

Indonesia                                                            Indonesia

Mauritania                                                         Tunisia

Pakistan                                                               Turkmenistan

United Arab Emirates1

1. Member of OPEC (10)

2. Both agrarian and oil producing

Note: Agrarian economies are Muslim countries where at least 50 percent of employment is in the agriculture sector; oil producers are Muslimcountries that are members of OPEC and/or Muslim countries categorized in the exporters of crude oil or oil and petroleum products.

Source: CIA Factbook, 2002.

Agriculture         Industry               Services

Middle East and North Africa

Algeria                                                 8.8                          59.7                        31.5

Bahrain

Egypt                                                    16.7                        33.1                        50.2

Iran                                                        17.7                        33.3                        49.0

Iraq

Jordan                                                   2.2                          24.8                        73.0

Kuwait

Lebanon                                               11.9                        22.0                        66.1

Libya

Morocco                                               13.5                        32.2                        54.3

Oman

Qatar

Saudi Arabia

Syria                                                     22.8                        28.7                        48.5

Tunisia                                                 12.3                        28.8                        58.9

United Arab Emirates

West Bank/Gaza                               7.8                          26.6                        65.6

Yemen                                                  14.6                        48.0                        37.4

Unweighted Average                           12.8                        33.7                        53.4

Europe and Eurasia

Albania                                                50.7                        22.7                        26.5

Azerbaijan                                          17.0                        45.3                        37.7

Kyrgyzstan                                        36.8                        29.2                        34.0

Tajikistan                                            29.5                        29.7                        40.8

Turkey                                                  15.4                        25.3                        59.3

Turkmenistan                                    28.1

Uzbekistan                                         34.4                        23.1                        42.5

Unweighted Average                           30.6                        29.2                        40.1

South Asia

Afghanistan

Bangladesh                                         24.6                        24.4                        51.0

Maldives

Pakistan                                               26.7                        23.1                        50.2

Unweighted Average                           25.6                        23.8                        50.6

Asia and the Pacific

Brunei

Indonesia                                             17.0                        47.1                        35.9

Malaysia                                              8.7                          51.2                        40.1

Unweighted Average                           12.8                        49.2                        38.0

Africa

Burkina Faso                                      39.7                        19.1                        41.2

Comoros                                              40.9                        11.9                        47.2

Chad                                                     39.2                        13.8                        47.0

Djibouti                                                3.7                          14.2                        82.1

Eritrea                                                  15.2                        22.9                        61.9

Ethiopia                                               52.3                        11.1                        36.6

Gambia                                                33.2                        12.3                        54.5

Guinea                                                  23.6                        36.5                        39.9

Mali                                                       41.2                        21.3                        37.5

Mauritania                                         21.3                        29.1                        49.6

Niger                                                     37.8                        17.8                        44.4

Nigeria                                                 29.5                        46.0                        24.5

Senegal                                                 18.1                        26.9                        55.0

Sierra Leone                                       47.3                        33.6                        19.0

Somalia

Sudan                                                   41.1                        18.5                        40.4

Unweighted Average                           32.3                        22.3                        45.4