イスラーム世界研究 第１巻 2 号（2007 年）3-18 頁 A Political Economy Approach to Islamic Economics

Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 3-18

A Political Economy Approach to Islamic Economics:

Systemic Understanding for an Alternative Economic System

Mehmet ASUTAY*

1. Introduction: The Essentialisation of Islamic Economics Beyond Islamic Finance

Islamic finance, which emerged as part of Islamic economics thinking, has gained roots
in the global financial system in recent years. In this novel and alternative financing method,
Shari’ah compliance, as a mandatory aspect in terms of legal and mechanical terms, is essential
and important. It is also important in a consequential manner that Islamic financing must fulfil
the foundational principles and aspirations of Islamic economics. In this particular point, recent
developments indicate that Islamic finance is moving in a ‘capitalist’ direction away from an
Islamic economic value system. Therefore, the essentialisation of an Islamic economic system is
necessary to asses whether Islamic finance is merely an alternative mode of capitalist production or
a unique and egalitarian alternative economic order, which aims to be a ‘moral economy’, as coined
by Tripp [2006].
This paper, thus, is an attempt to discuss the systemic nature of Islamic economics, in which
it argues that the modern variant of Islamic economics is a development that began in the 1970s
with an alternative system understanding to the existing capitalist modes of production. In this new
discourse, Islamic economics held that the capitalist economic order was responsible for the failure
of economic development and environmental issues in developing countries. Therefore, it claimed
to be an alternative economic system, that, also, owed its development to the emergence of identity
politics in the 1970s.
With the rapid development of Islamic finance, research focusing on the foundational
base, namely Islamic economics, has been largely ignored. However, without establishing the
foundational norms, which is the ethical system of this new paradigm, it is not possible to have a
robust financial system, as in Islamic finance. This paper, therefore, explores the original wisdom
in revealing the systemic and alternative system discourse of Islamic economics regardless whether
such a system is a possible or not.

2. Islamic Economics as a System

Before delving into discussion on the systemic nature of Islamic economics, it is important
to define what a ‘system’ is. A ‘system’ is defined as the “functional components that together
make certain sectors of the ethico-economic order work” [Choudhury and Malik 1992: 15], which,
therefore, refers to an integrated whole as part of an order. Islam, in this respect, represents the
overall order, and within that larger framework Islamic economics, as well as other systems related
to everyday day life, is possible. “An ‘order’ is thus a totality of several systems integrated together
through the bond of ethical relationships” [Choudhury and Malik 1992: 15]. Various systems,
therefore, in the Islamic order are linked through the ethical propositions of Islam. Consequently,

* Lecturer in Political Economy, School of Government and International Affairs, Durham University, UK

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=1735619
http://ssrn.com/abstract=1735619
イスラーム世界研究（2007）2 号

“the Islamic economy is defined within the parameters of its own ethical system, which fact,
incidentally, demonstrates its originality and relativity” [Naqvi 1994: 80]. In other words, the
ethical norms of Islam are fully integrated with its economic motives, as these are not voluntary
actions but, ontologically, part of the revealed knowledge; and therefore its dogmatic nature makes
it necessary for them to be followed.
This ‘system’ understanding also relates to the structural nature of an economic worldview
regardless whether “theoretically articulated and recorded or traditionally practised over
years” [Nomani and Rahnema 1994: 41]. This, then, rejects criticism of an Islamic economic
worldview, which is premised on the principles of revealed knowledge. Becasue, a lack of modern
theoreticising does not negate Islamic economics, ‘systemic’ claim, since an economic system is a
“static registration of how society organises itself to address the basic economic problems of what
is to be produced, how many, how and for whom” [Nomani and Rahnema 1994: 41]. Such decision-
making has existed in Muslim societies albeit it may not have been practised or understood in a
manner paralleling European notions of economics or Eurocentric expectations. In other words,
since the Islamic economic system has a particular moral economic understanding which governs
the production, consumption, exchange and distribution patterns and norms in a society through the
principles derived and rules and laws established by that system [Nomani and Rahnema 1994: 41],
it is normal that Islamic economics must be perceived as a system.
The ethical base of the Islamic economic system provides the value system through which it
governs all forms of economic interaction in society. The Islamic order, in other words, through
its ethical economic principles provides “the economic system with its basis and objectives on one
hand, and with its axioms and principles on the other” [Kahf 1989: 43]. The working mechanism
of this process is managed by a set of axioms and principles derived from the Islamic order with
the objective of bringing “the economy closer to the objectives of the system [which] represents the
testable ground of the system” [Kahf 1989: 43].
The components expected from an economic system, thus, can be located within the Islamic
economic understanding. However, in order to justify this statement Gregory and Stuart [1985:
12] rightly argue that “in order to distinguish one economic system from another, we need to
focus on and compare their fundamental elements”. For this purpose, through a systematic and
methodological manner, they provided a number of characteristics that should be sought in a
system. By following their systemisation, the Islamic economic systemic construct should consist
of the following pivotal characteristics for it to be considered as a system: the organisation of
decision-making arrangements; mechanisms for the provision of information and co-ordination;
property rights; and incentive mechanism. This paper, however, further elaborates on the
characteristics, which can make a viable Islamic economic system. Therefore, in order to talk about
‘systems’ in the economic realm the following is necessary:
(ⅰ) Framework paradigm (with ontological and epistemological sources) in terms of point
of reference;
(ⅱ) Value system;

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=1735619
http://ssrn.com/abstract=1735619
 A Political Economy Approach to Islamic Economics

(ⅲ) Foundational axioms;

(ⅳ) Operational principles/mechanism;
(ⅴ) Specific Methodology;
(ⅵ) Functional institutions.
In searching whether Islamic economics proposes an alternative system, these characteristics
have to be located among the components of the Islamic economic paradigm. The following
sections, hence, attempt to deconstruct the Islamic economic understanding by revealing the
existence of these components in arguing for its systemic nature.
2.1. Islamic Economics: Emergence of Framework Paradigm
In the opinion of the founding fathers of an Islamic economics paradigm, the failure of
economic development in the post-independent states of Asia and Africa in 1960s and 1970s was
attributed to flawed capitalist economic development strategies, which ignored the importance
and centrality of human beings and their well-being. Their objective was, therefore, to develop an
economic system understanding as part of the Islamic world order [El-Ghazali 1994]. That would,
then, ultimately develop into a human-centric developmental strategy. The Islamic economics
paradigm, hence, aimed at the creation of an Islamic system of economics with its distinct values,
norms, rules and institutions with a politically oriented systemic understanding as ordained in
Islamic order. In other words, Islamic economics aims at a world order, where its ontological
and epistemological sources, namely the Qur’an and Sunnah, determine the framework of the
economic value system, the operational dimension of the economy and the economic and financial
behavioural norms of the individual Muslims.
The axioms and foundational principles of Islamic economics define the framework in which
which economic activity takes place within intra-and inter-generational social justice, that, in turn,
reveals itself in the methodological framework of the Islamic economic system. Therefore it is
based on a constructivist ideology, with the aim of forming an authentic Muslim identity as opposed
to the global dominance of capitalism, which has in reality failed in the economic development
process.
In searching rationale for a distinct discipline and system of Islamic economics, the values
and the sources of Islam provides the rationale. It is, indeed, a fact that no human endeavour is
value-free, which implies that reality including economic reality is socially constructed. Despite
the modernist projection of universal values, in the everyday life of an ordinary individual, each
action is produced and acted through a socially constructed manner, which explains the differences
in each realm of life. In a similar manner, “economic systems … do not function within a vacuum
[either]. They are significantly affected and shaped by a set of ‘influential factors’: the level of
economic development; social and cultural factors; and the environment” [Bornstein 1979: 7]. This
hence implies that “religion, ideology or any strongly held set of values, ideals and mores have an
impact and influence which have to be taken into serious consideration” [Nomani and Rahnema
1994: 43].
This is in accordance with the philosophical foundation of modern social sciences. Therefore,

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

J. S. Mill, the founder of political economy, referred to different constructions of economic

understandings when he argued as back as in 1836: “… in whatever science there are systematic
differences of opinion … the cause will be found to be, a difference in their conceptions of the
philosophic method of the science, the parties who differ are guided, knowingly or unconsciously,
by different views concerning the nature of the evidence appropriate to the subject. They differ not
solely in what they believe themselves to see, but in the quarter whence they obtained the light by
which they think they see it” [Mill 1836 (1995): 55].
Economics and finance, thus, is value-loaded, at its most elementary levell and shaped by
individual values derived from individual worldview, as part of individual social construct. This,
hence, provides the rationale for a distinct economic system. Since factors affecting worldviews
differ, different worldviews exist leading to different ‘systems’ for different peoples. Consequently,
an Islamic economic system differs from the prevailing economic systems due to the following:
(ⅰ) Foundations, operational principles, goals differ;
(ⅱ) Concepts and theories differ;
(ⅲ) Epistemological sources differ, as Islamic worldview based on the Qur’an, namely
revealed knowledge;
(ⅳ) Fundamental concepts in the Qur’an are not open for changes in meaning.
Islamic economics, hence, aims at creating a new system, the features of which, as a system,
can be defined as:
(ⅰ) It is part of din (religion), Islam;
(ⅱ) It deals with production, consumption and distribution activities of human beings
according to Islamic worldview;
(ⅲ) It makes economic and financial choices according to Islamic norms;
(ⅳ) It describes, analyses, and prescribes, as in the case of other economic systems.
Such philosophical and operational distinguishing characteristics make Islamic economics a
system as defined above. Thus, it is an “approach to, and process of, interpreting and solving the
economic problems of human beings based on the values, norms, laws and institutions found in,
and derived from the sources of Islam” [Haneef 2005: 5]. Regarding the place of Islamic finance
within this system, it is only the institutional aspect of Islamic economics, which regulates the
financing of economic activity in an Islamic framework. As part of systemic understanding, hence,
there is a need to have Islamic financial institutions using financial instruments according to rules
and regulations of Islam, which are bound by the Shari’ah.
2.2. Foundational Axioms and Philosophical Foundations
Having established that Islamic economics is a systemic political economy in nature, in which
epistemology, institutions and functions are all interlinked through revealed knowledge. Yet, in
order to assess its systemic nature, it is also important to search for the foundational axioms or the
philosophical foundations, without which it is not possible to consider an economic system. “It is
these foundations which generate the behaviour of the economic agents as well as the institutions in
the system; and hence effectively determine the micro-foundations of that economy” [Arif 1989: 84].

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

Leading Islamic economists such as Ahmad [1980; 1994; 2003], Chapra [1992; 2000],
El-Ghazali [1994], Naqvi [1981; 1994], Siddiqi [1981], and Sirageldin [2002] have developed an
axiomatic approach that forms the conceptual foundations of Islamic economics. These conceptual
foundations define an Islamic moral economy and its corresponding ethics as an ideal through
which economic and social policies dealing with every aspect of human life are assessed.
It should be noted that the philosophical foundations of Islamic economics is entirely different
than that of the other systems, such as capitalism and socialism, as in this approach Islam is seen as
a system of ethics. This indeed provides an important pillar through which its systemic nature is
established. The philosophical and conceptual foundations or the axioms of the Islamic economic
system are as follows:
First, the axiom of Tawhid (God’s unity and sovereignty): The Islamic worldview is based on
tawhid, or the Oneness of God. This “particularly denotes vertical dimension of Islam – linking
the imperfect and finite social institutions with a Perfect and Infinite Being” [Naqvi 1994: 26].
This vertical dimension and equality of the Islamic ethical system manifests itself by the inherent
equality of each individual as represented by their paralleling proximity to God. Tawhid, as the
essential part of this economic system, provides for freedom of action whereby each individual is
viewed as an integral part of the whole. This principle, also, implies a continuous and sustained
system through “risalah (God’s Prophets as the source of divine guidance); akhirah (life-after
death, that is the continuity of life beyond death and a system of accountability based on divine law)
[Ahmad 2003: 193]. These idoms provide the framework for economic activity to take place within
Islamic norms.
Secondly, the axiom of Al-’adl wa’l-ihsan (Equilibrium and Beneficence or Socio-Economic
Justice): Individuals are expected to establish justice (’adl) and promote beneficence (ihsan), which,
consequently “denote a state of social equilibrium” [Naqvi 1994: 267]. While this axiom implies
“giving everyone their due”, together with tawhid it “results in attaining high levels of good life
(hayat al-tayyebah), both individual and collective” [Ahmad 2003: 193]. This axiom, thus, provides
for the horizontal dimension of equality “of all the virtues of the basic set of social institutions
– legal, political and economic” [Naqvi 1994: 27]. In this intra-and inter-generational equality,
human beings and societies are expected to establish a balance between the needs of present
and future generations, develop policies to fulfil the needs of individuals, enable them to earn a
respectable source of living, develop policies for an equitable distribution of wealth and provide for
growth and stability-oriented policies.
Third, the axiom of Ikhtiyar (Free-will): In the Islamic economic systemic understanding,
humans are believed to be endowed with free-will. Although it is “both unrestricted and voluntary”
[Naqvi 1994: 29], it is guided by broad guidelines in order “to interpret-reinterpret that freedom
within specific societal contexts, and to suit the needs of changing times” [Naqvi 1994: 31] (emphasis
is original). This, thus, constitutes functional norms of economic activity in Islamic economic
system.
Fourth, the axiom of Fard (Responsibility): This axiom states that although ‘responsibility’ is

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

voluntary, individuals and society must recognize their mutual obligations for public good, which
stems from the principle of Tawhid and, hence, of humanity’s vicegerency on earth. In addition,
human responsibility towards God, to his/herself and the others in the society implies that “these
three facets of responsibility only underscores the central ethical principle that the individual,
though possessing a distinctive personality of his own, becomes even more distinguished as an
integral part of the totality of mankind” [Naqvi 1994: 33]. In other words, being a conscious part of
a society implies a functional responsibility towards society. Hence, in economic terms, there is a
social aspect and responsibility of every asset owned or managed by private or public entities.
Fifth, the axiom of Rububiyyah: This as an important axiom in the Islamic economic system
that refers to “divine arrangements for nourishment, sustenance and directing things towards their
perfection” [Ahmad 1979: 12]. This implies the necessity of sustainable economic growth and
development in terms of having harmony between various components of economic and social
life. It is expected that within this balanced and sustainable environment as defined by Qur’anic
principles that human efforts take place.
Sixth, the axiom of Tazkiyah, in the Islamic economics axiom, is “concerned with growth
towards perfection through purification of attitudes and relationships” [Ahmad 1994: 20]. This is
natural consequence of tawhid, ’adl, fard, and rububiyyah in an integrated manner, as it directs the
individual towards self-development, which leads to economic and social development in harmony
with the growth activity that requires purification. In other words, this principle refers to growing
in harmony in every aspect of life. “The result of tazkiyah is [therefore] falah, prosperity in this
world and the hereafter” [Ahmad 1994: 20].
Seventh, the axiom of Khilafah and human accountability before God: Allah created human
beings with the role of being His vicegerent on earth. By this “his (or her) role, position and
mission is described as istikhlaf, that is fulfilling God’s will on earth, promoting what is good,
forbidding what is wrong, establishing justice (’adl) and promoting beneficence (ihsan), resulting
in attaining high levels of good life (hayat al-tayyebah), both individual and collective” [Ahmad
2003: 193]. Thus, being a vicegerent on earth defines roles, outlines responsibilities and provides
the reasons of existence for the individual. “From this follows the unique Islamic concept of
individual’s trusteeship, moral, political and economic, and the principles of social organisation”
[Ahmad 1979: 12]. Thus, the implications of the principle of khilafah include the notion of universal
solidarity, sustainable consumption of resources, which are trust from God, pursuing a humble life-
style and having human freedoms to conduct daily life. Also, it should be noted, that alongwith
the idea of human accountability before God, or akhirah, an Islamic economic system is similarly
based on two-dimensional utility function, operating in a positive correlation with each other. For
instance, the more social good one does in the temporal world, the more sawab or glad tidings one
will receive in the hereafter.
Lastly, the Maqasid al-Shari’ah or the objectives of Shari’ah provides the legal-rationale
framework within which Islamic economic activities should be conducted. This final principle aims
to interpret the text and restore the principles of Islamic economics in relation to the objectives

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

of Shari’ah. Thus, it implies that the principles of Islamic economics must lead to ‘human well-
being’. Overall, the objectives of Shar’iah, namely the Islamic way of life and code of conduct, are
described by al-Ghazali (d. 505 AD) as “to promote the well-being of all humankind, which lies in
safeguarding their faith, their human self (nafs), their intellect (’aql), their progeny (nasl) and their
wealth (mal)” [Chapra 2000: 118]. In other words, as can be seen, Maqasid al-Shari’ah provides
the motivation through which economic activity should take place.
Recent re-interpretation of the maqasid by Siddiqi [2004] provides a more dynamic
understanding to this foundational axiom. Because, the defined objectives of Shari’ah, as defined
by al-Ghazali, clearly demonstrate individual-oriented objectives without social connotations.
On the other hand, Siddiqi [2004] argues that in order to have a properly defined value system
for an Islamic moral economy, it is important to examine the nature of the maqasid. Moreover,
for a systemic and dynamic understanding “maqasid al-Shari’ah could not be confined only to
protection (hifz), preserving what people had or saving them from harm, rather they must include
broader measures ensuring welfare [as] asserted by Ibn e Qayyim … who emphasized justice and
equity. Furthermore, he insisted that the means to justice and equity could never be captured by
a finite list. Reason will guide us how to ensure justice and equity in changing circumstances”
[Siddiqi 2004]. Thus, a dynamic understanding of the maqasid offers a better conceptualisation in
our contemporary circumstances “with reference to goals of Islam as a way of life rather than being
done with reference to the goals of Islamic Law. This will enable us to handle issues like poverty
and inequality that a Law-based approach has failed to handle” [Siddiqi 2004], as objective of Islam
refers to individual as well as societal considerations beyond the narrow definitional boundaries of
Islamic law.
Consequently, each of the aforementioned axioms and foundational principles constitute
the micro-foundations or the foundational principles of the Islamic economic system, which are
entirely different than the axioms and foundational principles of any other economic system.
“The universal ethical system, based on these axioms, is [therefore] believed to produce policies
aimed at enhancing motivation to seek knowledge and work, enhance productivity, and enhance
transparency in government. They should also enhance intra-and intergenerational equity” [Naqvi
1994]. Thus, the existence and efficiency of these axioms provide the rationale for the Islamic
economic system (see [Naqvi 1994; Arif 1989] among others).
2.3. Implications of Foundational Axioms
While the axioms and principles previously outlined provide the framework within which
the Islamic moral economy operates, they, similarly, have implications for shaping the economic
structure in relation to its operational and institutional nature in the Islamic economic system.
For instance, the principle of social justice indicates social responsibility and taking care of the
needy in society. Consequently, zakah, as an economic and social institution is proposed to meet
the needs of such people in the society, which is a fard for those people who are in a position to
pay [Ul-Haq 1995: 85]. In addition, rububiyyah, tazkiyah and accountability before God, as part
of the Islamic micro-foundations, require responsible use of “rightful earnings [by] keeping the

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

moral purposes of [human beings] in view” [Ul-Haq 1995: 85]. This further implies that earning
and production is necessary and good as long as it is conducted with balance, restricts the accepted
modes of production and operates without “misuse, abuse, conspicuous consumption, wastage or
israf ...; and squandering or tabdhir…; … its exclusiveness to oneself and denial of the share of the
society (zakah and other forms of sharing); and … the use of socially and ethically wrong or unjust
means to produce it – the immoral, prohibited modes, oppressive exploitation of human beings and
creation of ecological imbalance or environmental disruption” have to be avoided [Ul-Haq 1995:
85]. Moreover, the axiom ’adl necessitates equal opportunities for everyone, as individuals must
not prevent others in society and nature from meeting their basic biological needs; “all people
should have equal opportunities, without discrimination, to benefit from environmental and public
resources” [Ul-Haq 1995: 85]. These examples, consequently, clearly demonstrate how axioms
work to produce policies that respond to societal issues by instituting the operational dimensions of
Islamic economics.
Likewise, it is important to determine the operational and institutional features of an Islamic
economic system as derived from the stated axioms. An Islamic economic system is based on the
understanding that societal developments are based on the active motivation of participants in a
planned manner by both an individual and collective capacity. This indeed differs from historical
materialism, for instance, and therefore, its corresponding development methodology is different
than other political and economic ideological standings. Indeed, this difference can only be
explained with the vicegerent role given to individuals, who with their free will, are perceived to
be active actors of social change. Clearly, according to this analysis, every aspect of economic
activity is a result of individual’s decision making within the social constraints alongside economic
and financial constrainsts. Hence, Islam provides the framework containing the doctrine, value-
judgements and ethics for the functioning of an Islamic economy, where the usual economic and
financial choices are made.
In this balanced exchange, each constituent of real life activity is taken into consideration
through the axioms stated above in an integrated manner. Therefore, the emergence of the homo-
Islamicus, with a heart and mind shaped by Islamic values, is expected to motivate that individual
to works towards the (enlarged) maqasid al-Shari’ah understood as human well-being. As Ahmad
[2004: 194] suggests, “change has to be balanced, gradual and evolutionary. Innovation is to be
coupled with integration”.
With its ethical foundation and propositions, an Islamic economic system does not deny the
existence of self-interest as an important motivation for human action. However, an Islamic moral
economy suggests that not only self-interest but social interest is to be served as well [Chapra 2000].
Thus, the framework provided by the Islamic economic system is constraining so that conflict
between self-interest and social interest is removed. This framework also draws the line between
what is permissible or not as an economic activity; and therefore lawful (halal) and unlawful (haram)
ways of earnings have been defined by the Shari’ah. For instance, riba or usury-interest, gambling,
speculation, fraud, exploitation and extortion are all banned by Islam, as they are not the result of

10

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

productive economic activity.

As a natural consequence of self-interest, the Islamic economic system favours private
property and private enterprise as the core of economic life as well as the legal foundation of
society. However, as in circumstance of self-interest, private ownership is filtered through the
moral codes contained in the Shari’ah dimension so that individuals understand private enterprise
and private property “is a trust (amanah) [from Allah], and as such, property rights are subject to
moral limits and used as a means of fulfilling ethical objectives – the maqasid al-Shari’ah” (Ahmad
2003: 195] (see also [Arif 1989: 86]).
As part of the domain of self-interest and private enterprise, the market provides the
institutional framework in which economic activity, from production, exchange and division of
labour, takes place. Also, the market provides the legal framework for contrast to be fulfilled,
which is an essential part of private enterprise enshrined in the Islamic economic system. However,
market mechanism is filtered so that social priorities are served alongside individually oriented
utility and profit maximising motives [Chapra 2000]. As important, within this Islamically filtered
market system “economic efforts take place through the process of co-operation and competition”
[Ahmad 2003: 195]. In other words, competition does not allow for the creation of conf lict
between self-interest and social interest but rather is arranged to work in co-operation so that
various individual and social claims to resources can, economically and socially efficient manner,
be fulfilled. The regulation of market mechanisms to produce social and economic efficiency
simultaneously through the institution of hisbah is suggested by Ibn Taymiya [1985]. Thus, a
moral filter is suggested to regulate the market. In addition, an Islamic economic system is content
with governmental regulatory role to prevent excesses of the market mechanism. Furthermore,
to overcome the market and government failure, an Islamic economic system developed waqf
(voluntary organisations, pious foundations) system as a third sector to serve towards welfare needs
of society. Moreover, the Islamic ethical system instituted voluntary instruments such as charity
and legal obligations, e.g. zakah, to respond to the failures in both the mechanisms so that the
needy are provided for. Importantly, filter mechanisms are endowed with systemic instruments
that provide sustainable development through preventing “waste, over-utilization and the excessive
exploitation of non-renewable natural resources and the ecological and environmental aspects
of moral activity” [Ahmad 2003: 196]. This is precisely so, because natural resources and the
environment is perceived to be an amanah, or trust from Allah to humanity. Furthermore, to
facilitate the efficient working of the market mechanism, “Islam lays down an elaborate code of
business ethics to ensure honesty, transparency and equity in business and financial dealings”
[Ahmad 2003: 197].
In summation, an Islamic economic system, as explained in the preceding sections, aims to
guarantee individual liberty, freedom of choice, private property and enterprise, the profit motive,
but, in the same instance, provides effective moral filters at different levels of life and activity.
Moreover, it establishes its own distinct institutions to fulfil the Shari’ah objectives, namely human
well-being, economic development and social justice in society. Ibn Khaldun’s (15th century)

11

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

framework provides a summary of the interdisciplinary dynamic model of an Islamic socio-

economic system in evidencing the alternative systemic nature and the political economy of Islamic
economics [Chapra 2000: 147-8]:
“The strength of the sovereign (al-mulk) does not become consumed except by implementation
of the Shari’ah; the Shari’ah cannot be implemented except by a sovereign (al-mulk); the
sovereign cannot gain strength except through the people (al-rijal); the people cannot be
sustained except by wealth (al-mal); wealth cannot be acquired except through development
(al-’imarah); development cannot be attained except through justice (al-’adl); justice is the
criterion (al-mizan) by which God will evaluate mankind; and the sovereign is charged with
the responsibility of actualising justice”.
In concluding this section, it should be noted that Islam does not prescribe a particular
economic system, but does provide the core elements and principals, which form the basic
philosophy of a system for an economy.
2.4. Methodology of Islamic Economics
In understanding the methodology of Islamic economics, it might be useful to recall the
methodological framework of the neo-classical/conventional economic system so as to distinguish
the Islamic economics methodology, which are as follows:
(ⅰ) The point of departure is methodological individualism.
(ⅱ) Behavioural postulate: self-interest oriented individuals who (a) seek their own
interests, (b) in a rational way, and (c) try to maximise his/her own utility;
(ⅲ) Market exchange.
Hence, the conventional economic system is based on a one-dimensional utility function,
which leads to homo-economicus̶the economic individual in a market system.
The methodological postulates of Islamic economics, on the other hand, can be summarised
as follows:
(ⅰ) Socio-tropic individual, for whom not only individualism but social concern is a
prerequisite;
(ⅱ) Behavioural postulates: socially concerned God-conscious individuals who
a. in seeking their interests are concerned with the social good,
b. conducting economic activity in a rational way in accordance with Islamic
constraints regarding individual and social environment and the hereafter; and
c. in trying to maximise his/her utility seek to maximise social welfare as well by
taking into account the hereafter.
(ⅲ) Market exchange is the main feature of economic operation in the Islamic system;
however, this system is filtered through an Islamic process that produces a socially-
concerned environmentally friendly system. In this process, socialist and welfare state
oriented frameworks are avoided not to curb incentives in the economy.
As can be seen Islamic economic system envisages two-dimensional utility function based on
the present and the hereafter (due to the accountability axiom) as the reflection of the actions of this

12

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

world, leading to homo-Islamicus, or as Arif [1989: 92-94] terms it tab’ay or an obedient human-
being who makes his/her economic decisions, including the allocation of resources, in a rational
manner. However, “to be a Muslim is a necessary but not a sufficient condition to be a tab’ay”
[Arif 1989: 91]. To be qualified as a tab’ay, one needs to operationalise Islamic principles in every
aspects of her/his economic life as an affirmed Muslim.
It is also important to state that in terms of epistemological sources there is an important
methodological difference between conventional and Islamic economics. While conventional
economics as part of the secular worldview does not accept any other source of knowledge other
than human, Islamic economics is based on divine knowledge [Khan 1989].
This section clearly demonstrates the distinctive methodology of Islamic economics, which
further, strengthen its systemic nature.
2.5. Mechanisms and Instruments of Islamic Economic System
The preceding sections lay the foundation of the Islamic economics system with an objective
to validate the claim that Islamic economics is an alternative system with its distinct value system,
axioms, foundational principles and institutions. As part of its systemic nature, Islamic economics
provides institutions, through which economic and financial activity is conducted, with defined
norms and principles. In other words, “an Islamic economy is different from the other economic
systems of the world as it calls for a different institutional set-up and a unique role of government to
achieve the goals of the Islamic society” [Arif 1989: 87]. Islamic institutions are related to business
(muamalat) but also to the governance of the economy and market, such as hisbah as a regulative
institution for the market system.
Overall, Islamic economic and financial activities are shaped by there kinds of measures and
institutions.
First, positive measures, such as zakah (compulsory alms-giving) to respond to the needs
of the poor. Methods have been developed to systematically manage the zakah funds to enhance
its positive impact on alleviating poverty. In other words, instead of simply giving funds to
those economically less fortunate for their immediate consumption, developing projects for the
sustainability, survival and continuity of the economically less fortunate is the new strategy with
zakah funds. Hisbah is another important positive institution in the Islamic economic system that
regulates the market mechanism by responding to its failures and shortcomings and overcoming its
excesses.
Secondly, voluntary measures, such as sadaqah (charitable giving), aims at providing the
immediate needs of an individual. Waqf, or pious foundation, as part of the voluntary third sector,
aims to provide the goods and services which either could not be provided for at all or sufficiently
due to the failure of the market mechanism or the government. In addition to awqaf aiming at
providing health services, education, and food distribution etc., the use of funds accumulated in
waqf in an efficient manner is being developed through cash-waqf system and human development
projects to enhance their contribution to the economic development of the societies.
Thirdly, prohibitive measures, such as riba, which is pre-determined interest, is prohibited,

13

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

as it is unlawful gain in terms of not being result of productive economic or financial activity.
Islamic economics proposes profit and loss sharing and risk taking and sharing against pre-
determined capital gains to motive individuals to actively engage in the economy. The objective
of the prohibition of riba is not only social justice but also due to achieving economic optimality
alongside social optimality with participatory economic objectives.
For this, Islamic financial institutions, in the form of modern banks, have been established
since late 1960s that aimed to function according to the values, axioms and principles of the
Islamic economics system. The growth in the development of Islamic finance has been remarkable
with over three hundred Islamic banking and financial institutions operating not only in Muslim
countries but also over seventy countries in the world. The assets of these institutions are estimated
to be about $500 billion with about ten to fifteen percent growth rate, which is unprecedented in the
global financial world.
Takaful or Islamic insurance is another important aspect of Islamic financial institutions,
which operate on a non-interest basis. While it provides Islamic compliant insurance products
for individuals and most importantly for business to secure their business and belongings, it also
manages funds in an Islamic manner that contributes to economic growth.
All these essential Islamic institutions and instruments aim at enhancing human well being,
or the maqasid, which constitute the operational dimension of an Islamic economics system. The
existence and successful operation of these institutions is an indication that Islamic economics is
a system of its own with its values, axioms, foundational principles, and also with its particular
institutions, which work within the Islamic framework.

3. Conclusion on the Systemic Nature of Islamic Economics and Reflecting on the State of
Islamic Finance: Ideals and Realities
As the preceding discussion on the analytical tools and value system of Islamic economics
indicates, it aimed at creating a world order with political aspirations. As an outgrowth of identity
politics, the Islamic economic system includes modern institutions and behavioural norms such as the
homo-Islamicus or tabaa’ya. In other words, Islamic economics, with the conceptualisation of homo-
Islamicus, proposes a normative world, which states ‘what people should strive towards, as opposed to
how people are likely to behave (the ‘ought’ as opposed to the ‘is’ ) ’. However, the Islamic economic
system is not devoid of positive economic statements or hypotheses. Several areas of economics are
truly positive and cannot be different in an Islamic or in any other framework [Zarka 1989].
As the discussion in the preceding sections demonstrate, Islamic economics fulfils the
prerequisites of a ‘system’ by having a framework paradigm; a value system; foundational axioms;
operational principles/mechanism; a distinctive methodology; and its functional institutions to
operationalise its framework. Add to that, a unique value system, axioms, operational principles
that work according to its methodology, then it can be rightly argued that Islamic economics
represents an alternative system. In addition, the axioms and philosophical foundation of the
Islamic moral economy constitutes the universal ethical system, which implies that “policies

14

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

should not lead to dependency, limit opportunities that develop capabilities for the few, or reduce
individual responsibilities for taking action. Policies should enhance motivation to seek knowledge,
enhance productivity, and enhance transparency in government. They should also enhance intra-
and intergeneration equity” [Sirageldin 2002: 27]. This indicates that the Islamic economic system’s
policy orientation enhances its systemic nature. Furthermore, since “the validity of an economic
system can be tested by its internal consistency, its compatibility with the system organizing the
other aspects of life, and its provision for improvement and growth” [Kahf 1989: 43], it can be
argued that Islamic economics has a system of its own which is distinct from the other hegemonic
systems. Thus, the “Islamic system per se has the capability of providing the operational norm and
workable model, providing other things are equal. And these ‘other things’ are: (a) the degree of
adherence to Islamic norms and ideals, (b) the politically strong Islamic state, (c) the lack of internal
hostility from the political machinery to Islam through national governments, and externally,
through international pressure, and (d) the adaptability of Islam to new changes in society,
technologically and otherwise” [El-Ashker and Wilson 2006: 400]. As El-Ashker and Wilson state
that the micro and macro social and political environment must facilitate the functionality of an
Islamic economics system. However, since Muslims did not have the necessary global power, they
failed to establish their political and, hence, economic order. Therefore, Chapra [1992: 118] himself
accepts that “political factor is one of the most important factors responsible for the failure of the
Muslim countries to implement the Islamic strategy for development with justice.”
The reality of this Islamic economics system based on a particular constructivist ideology
is tested by developments that have taken place in Islamic finance, which by forsaking the value
system, identity-politics and systemic understanding of Islamic economics and become part of the
international financial system. This has serious consequences for the viability of Islamic finance,
which is the operational tool of Islamic economics, as in an aspirational sense, Islamic finance
is expected to operationalise and fulfil the economic system and moral economic imperatives of
Islam. Despite such a system understanding, a critical approach to the development of Islamic
finance, however, indicates a very pragmatic development. In other words, since the systemic
understanding of Islamic economics could not be achieved in real life, Islamic finance has
developed its own working framework that is located within the neo-classical paradigm. Thus,
in its current state, Islamic finance does not seem to share the foundational claims of Islamic
economics, despite the fact that the founding fathers of Islamic economics, in a modern sense,
aimed at creating an Islamic economic system with Islamic finance being the operational aspect of
that system.
The result, therefore, has been the divergence between the assumptions, normative principles
and aspirations of Islamic economics as a system and Islamic finance as an instrument of that
system. In other words, “a distinctive feature of the recent discussions on Islamic banking has been
the growing wedge between its conventional theory and current practice” [Hasan 2005: 11]. In
particular since the 1990s, while the operations of Islamic finance and the nature of Islamic modes
of financing have expanded, the lives of individuals have not been touched upon by this enormous

15

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

growth. The realities of financial markets which prioritise economic incentives rather than religious
behavioural norms has forced Islamic finance to become part of the international financial system,
in which it is recognised as heterogeneity of financial products deprived of their value system.
Since the 1990s, therefore, Islamic finance represents hybrid financial products of the international
financial system. Thus, the difference has been reduced to technicality, and the value system is no
longer mentioned beyond describing the prohibition of riba by quoting verses in the Qur’an. This
situation has been criticised by Islamic economists for its failure for economic development in the
Muslim world and also for being materialistic.
Indeed, this epistemological difference is related to a modern interpretation of the Qur’anic
verses and Islamic injunctions. The pragmatist position of Islamic finance as opposed to the
foundational and aspirational position of Islamic economics is based on the notion that “the
revealed word of God in the Qur’an itself embodies rational economic principles that are quite
in line with the modern assumptions of neoclassical economic theory. As a form of universally
applicable theory about human beings’ economic behaviour, economic theory necessarily is in
accord with and confirms the source of universal knowledge, the Qur’an: homo-Islamicus and
homo-economicus are one and the same” [Maurer 2005]. On the contrary, Islamic economics’
reading of the same Shari’ah rules emphasize social justice, need fulfilment and redistribution,
namely a socio-political reading within a political economy framework.
Despite the mentioned deviance, this paper does not suggest that Islamic banks and financial
institutions (IBFs) should be restructured to incorporate the authentic appeal to ethics and
social justice. On the contrary, they should be perceived as the second best solution, which is a
consequence of the inability to achieve the framework provided by an Islamic economic system.
IBF institutions, therefore, should remain to respond to the market in the capacity of commercial
banks, as “the current Islamic experience, notwithstanding its limitations, has proved to offer an
invaluable service for both consumer and producer needs and it may well remain for this particular
purpose” [Tag El-Din 2004].
Accepting the current state of Islamic finance as the second-best solution requires new models
of development within the authentic notion of Islamic moral economic system. In other words, the
failure of Islamic finance should be moderated. In this new model of development or reorienting “the
brand name of Islamic finance [should] emphasize issues of community banking, microfinance,
socially responsible investment, and the like” [El-Gamal 2006: xii], namely social banks as
experienced in the West. This probably is not something entirely novel; as the very first experience
in Egypt was a social bank. Such an institutional solution, aiming at correcting and moderating
the consequences of Islamic finance, will contribute to the development of individual lives by
focusing on micro dynamics of society rather than affecting the financial equilibrium. In checking
the extent to which social banks complement Islamic banks, it is clear that maslahah provides the
moral standard for social good, and Shari’ah requires justice and benevolence.
In reorienting towards an Islamic economics’ system understanding, “the ‘Islamic’ in ‘Islamic
finance’ should relate to the social and economic ends of financial transactions, rather than the

16

Electronic copy available at: https://ssrn.com/abstract=1735619

 A Political Economy Approach to Islamic Economics

contract mechanics through which financial ends are achieved” [El-Gamal 2006: xiii]. Thus, as
Siddiqi (2004) argues a move towards goals and policy rather mechanistic and legal structure of
Islamic finance will serve the human well-being much better. Islamic banking, thus, can provide
the “new identity based on substantive and ethical religious tenets” [El-Gamal 2006: 191] by
responding to the aspirations of Islamic economic system and the realities of developing economies.
Consequently, such a reorientation will operationalise the fundamental axioms and principles of
Islamic economic system leading to falah, namely “prosperity in this world and the hereafter” by
achieving tazkiyah, which is “concerned with growth towards perfection through purification of
attitudes and relationships” [Ahmad 1994: 20].

Bibliography

Ahmad, K. 1979. Economic Development in an Islamic Framework. Leicester: Islamic Foundation.

Ahmad, K. 1980. “Economic Development in an Islamic Framework,” in K. Ahmad and Z. Ishaq
Ansari (eds.), Islamic Perspectives: Studies in Honour of Mawlana Sayyid Abul A’la Mawdudi.
Leicester and Jeddah: Islamic Foundation and Saudi Publishing House.
Ahmad, K. 1994. Islamic Approach to Development: Some Policy Implications. Islamabad: Institute
of Policy Studies.
Ahmad, K. 2003. “The Challenge of Global Capitalism,” in J. H. Dunning (ed.), Making Globalization
Good: The Moral Challenges of Global Capitalism. Oxford: Oxford University Press.
Arif, M. 1989. “Towards Establishing the Microfoundations of Islamic Economics: The Basis of
the Basics,” in A. Ghazali and S. Omar (eds.), Readings in the Concept and Methodology of
Islamic Economics. Selangor Darul Ehsan: Pelanduk Publications.
Bornstein, M. 1979. Comparative Economic Systems: Models and Cases. Illinois: Irwin.
Chapra, M. U. 1992. Islam and the Economic Challenge. Leicester: Islamic Foundation.
Chapra, M. U. 2000. The Future of Economics: An Islamic Perspective. Leicester: Islamic Foundation.
Choudhury, M. A. and Malik, U. A. 1992. The Foundations of Islamic Political Economy. London:
Macmillan.
El-Ashker, A. and Wilson, R. 2006. Islamic Economics: A Short History. Leiden: Brill.
El-Gamal, M. A. 2006. Islamic Finance: Law, Economics and Practice. New York: Cambridge
University Press.
El-Ghazali, A. H. 1994. Man is the Basis of the Islamic Strategy for Economic Development.
Jeddah: IRTI-Islamic Development Bank.
Gregory, P. R. and Stuart, R. C. 1985. Comparative Economic Systems. Houghton: Mifflin.
Haneef, M. A. 2005. “Can There Be an Economics Based on Religion? The Case of Islamic
Economics,” Post-Autistic Economics Review 34 (October). Available at: <http://www.paecon.net/
PAEReview/issue34/Haneef34.htm>, Acces Date: 30th August 2007.
Hasan, Z. 2006. “Islamic Banking at the Crossroads: Theory versus Practice,” in M. Iqbal and R.
Wilson (eds.), Islamic Perspectives on Wealth Creation. Edinburgh: Edinburgh University Press.

17

Electronic copy available at: https://ssrn.com/abstract=1735619

イスラーム世界研究（2007）2 号

Ibn Taymiya 1985. Public Duties in Islam: The Institution of the Hisba. Leicester: Islamic
Foundation.
Kahf, M. 1989. “Islamic Economics and Its Methodology,” in A. Ghazali and S. Omar (eds.),
Readings in the Concept and Methodology of Islamic Economics. Selangor Darul Ehsan:
Pelanduk Publications.
Kahf, M. 2003. “Islamic Economics: Notes on Definition and Methodology,” Review of Islamic
Economics 13, pp. 23-47.
Khan, M. A. 1989. “Methodology of Islamic Economics,” in A. Ghazali and S. Omar (eds.),
Readings in the Concept and Methodology of Islamic Economics. Selangor Darul Ehsan:
Pelanduk Publications.
Maurer, B. 2005. “Re-formatting the Economy: Islamic Banking and Finance in World Politics,” in
N. Lahoud and A. H. Johns (eds.), Islam in World Politics. New York: Routledge.
Mill, J. S. 1836. “On the Definition and Method of Political Economy”. Reprinted (1995), in D.
Hausman (ed.), The Philosophy of Economics. Cambridge: Cambridge University Press.
Naqvi, S. N. H. 1981. Ethics and Economics: An Islamic Synthesis. Leicester: Islamic Foundation.
Naqvi, S. N. H. 1994. Islam, Economics and Society. London: Kegan Paul International.
Nomani, F. and Rehnema, A. 1994. Islamic Economic Systems. London: Zed Books.
Siddiqi, M. N. 1981. Muslim Economic Thinking: A Survey of Contemporary Literature. Leicester:
Islamic Foundation.
Siddiqi, M. N. 2004. What Went Wrong? Keynote Address at the Roundtable on Islamic Economics:
Current State of Knowledge and Development of Discipline, held at Jeddah, Saudi Arabia
on 26-27 May 2004 under joint auspices of the Islamic Research and Training Institute,
Jeddah; and the Arab Planning Institute, Kuwait. Available at: <http://www.siddiqi.com/mns/
Keynote_May2004_Jeddah.html>, Access Date: 13th December 2006.
Sirageldin, I. 2002. “The Elimination of Poverty: Challenges and Islamic Strategies,” in M. Iqbal (ed.),
Islamic Economic Institutions and the Elimination of Poverty. Leicester: Islamic Foundation.
Tag el Din, S. E. I. 2004. Ethics, Entrepreneurial Behaviour and Production Organization. A
Working Paper presented at the Roundtable on Islamic Economics: Current State of Knowledge
and Development of Discipline, held at Jeddah, Saudi Arabia on 26-27 May 2004 under
joint auspices of the Islamic Research and Training Institute, Jeddah; and the Arab Planning
Institute, Kuwait, 2004.
Tripp, C. 2006. Islam and the Moral Economy: The Challenge of Capitalism. Cambridge:
Cambridge University Press.
Ul Haq, I. 1995. Economic Doctrines of Islam: A Study in the Doctrines of Islam and Their
Implications for Poverty, Employment, and Economic Growth. Herndon, Virginia: IIIT.
Weiss, D. 1989. “The Struggle for a Viable Islamic Economy,” The Muslim World 79(1), pp. 46-58.
Zarka, A. 1989. “Methodology of Islamic Economics”, in A. Ghazali and S. Omar (eds.), Readings
in the Concept and Methodology of Islamic Economics. Selangor Darul Ehsan: Pelanduk
Publications.

18

Electronic copy available at: https://ssrn.com/abstract=1735619