Good company: what have Islamic economics, animal rights protesters, social justice activists and ethical investors got in common? M Iqbal Asaria highlights the links - Islam: Economics

New Internationalist, May, 2002 by M Iqbal Asaria

THE social justice protesters who disrupted gatherings of leaders of the industrial world in Seattle, Genoa and Quebec have highlighted on the international stage a growing unease with the operations of unfettered markets. For protesters the present arrangement perpetuates gross global inequity, made worse by rampant globalization.

In Britain, and on a somewhat smaller scale, the drama of Huntingdon Life Sciences was unfolding. As a leading user of live animals for experiments, this scientific research company fell foul of animal rights activists. During a sustained campaign, protesters were able to cut off all sources of bank finance to the company. Huntingdon Life Sciences had to move its operational headquarters from Britain to the US and rely on funding from non-banking sources.

This was a dramatic illustration of banks bowing to pressure from the providers of their funds -- the general public. Similarly, the Bank of Scotland was forced to withdraw from a deal with the US televange-list Pat Robertson because of his extreme right-wing views. The embarrassing about-turn was forced on the bank by its shareholders and depositors.

These developments, illustrating shifts in public perception about how economies and businesses operate, provide parallels with the ideals of Islamic economics and finance. Like the social justice protesters, Muslim economists see the dominant economic structure as intrinsically unjust and biased towards the industrialized countries of the North. Islamic economics challenges the prevailing dogma of free markets and seeks to introduce regulatory regimes to safeguard public interest. Moreover, it questions the absolute freedom of financial intermediaries to provide funding for operations with no regard for moral and ethical criteria and without taking into account the wishes of the providers of the funds.

The basic ideas of Islamic economics have emerged since its academic and intellectual foundations were developed in the 1970s and 1980s. Today, it is a global movement aiming to provide Muslims with alternative banking and financial arrangements where ethical considerations are paramount.

Economic teachings of Islam are simple but profound. Islam regards usury of all kind as anathema and thus forbids all transactions involving interest payments. Making money out of money is prohibited; as are monopoly and raising prices by artificial means such as hoarding. While ownership of private property is allowed, the accumulation of wealth in fewer and fewer hands is strictly forbidden. This is why the Islamic inheritance laws are designed to redistribute wealth; and ownership of land beyond an individual's or family's capacity to handle is discouraged.

In Muslim societies the injunction of Zakat provides a vital mechanism for addressing social welfare issues. Zakat is normally translated as 'poor tax' -- but it is not charity that the rich give to the poor. It is the right of the poor and a duty of the rich. Thus, all Muslims are required to give away at least 2.5 per cent of their total annual income to the poor and the needy as Zakat. As the principle is well established, contemporary Muslim economists have argued for it to be institutionalized, with even higher rates of giving. A social welfare state is therefore not alien to Muslim economic thinking.

So Muslim societies should have a much more equitable ethos than they actually do. There are a number of reasons why they fall short. One reason is that Islamic economic injunctions have only existed in theory and have never actually been put into practice. Instead, Muslim countries have tended to embrace Western development policies uncritically. However, there are signs that the Islamic ethos is slowly gaining ground. We can see that most clearly in the area of banking and finance.

Ways of lending

Islamic banks can be compared with ethical investments which incorporate the desire of the providers of the funds to have a say in how their money is used. Some funds do not invest in companies which deal in tobacco or military hardware or which exploit their workforce. Others only invest in corporations that meet certain environmental criteria.

Islamic finance has a similar rationale. Indeed, in some respects it goes further, being concerned not just with what kind of activities are being financed but also with the way in which they are funded. Muslims are encouraged to invest in 'permissible' (Halal) activities via permissible' means. This means that not only will they avoid corporations connected with, say, alcohol or gambling or exploitation, but they also will not deal with those involved in usury -- which obviously includes conventional banks.

In practice this is less dramatic than it sounds. Muslims still make everyday transactions like investing their surplus funds, house-buying, and taking out loans and working capital for their businesses. And for investment purposes Islamic financial institutions employ criteria similar to those used by the ethical investment funds. The big difference comes in the way they lend, both for personal finance and business purposes. In simple terms, lenders enter into risk-sharing contracts with borrowers; return is based on the outcome of the venture or investment, rather than a predetermined rate.