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Economic Analysis: an Islamic Perspective Vol I ECONOMIC ANALYSIS: AN ISLAMIC PERSPECTIVE VOL I MABID ALI AL-JARHI PROFESSOR OF ECONOMICS & FINANCE ANKARA SOSYAL BILIMLER ÜNIVERSITESI The author is grateful to the Ankara Sosyal Bilimler Üniversitesi (ASBU) for the continued encouragement despite chronic delays in finishing the manuscript. I am also grateful for the colleagues and the students who took the trouble and time to read the first draft. My special thanks go to Prof. Monzer Kahf of İstanbul Sabahattin Zaim Üniversitesi who made serious comments that lead to fundamental changes I am also grateful to Ms. Eman Tabet, of the International Center for Islamic Finance Education, INCEIF, Kuala Lumpur, Malaysia as well as Ms. Amal Essayem of Sakarya University. I am also indebted to the management and the students in Hamad Bin Khalifa University in Qatar as well as in INCEIF, Malyasia. I-1 INTRODUCTION Behind the idea of this book In the late seventies, I had the honor of meeting and knowing some of the important pioneers of Islamic economics. To remember very few, I can mention1: Ahmed Elnaggar, Anis Ahmed, Arif Ersoy, Ausaf Ahmed, Eissa Abdu, Khurshid Ahmed, M. Fahim Khan, M. Nejatullah Siddiqi, Mohamed Abdul Mannan, Mohamed Anas Zarqa, Mohamed Sakr, Mohamed Shawqi Al-Fangari, Monzer Kahf, Kurkut Uzal, Muhammad Omer Zubair, Muhammad Umar Chapra, Muhammad Uzair, Munawar Iqbal, Sabahattin Zaim, Sultan Abo Ali, Syed Haidar Naqvi, as well as many others. I have met many of them during the First International Conference on Islamic Economics. On this occasion, I presented my article on “the Relative Efficiency of Interest-Free Monetary Economies, the Fiat Money case” (Al-Jarhi, 1976). The nature of the conference and the variety of its attendants, did not allow serious discussion of that paper. It rather appeared to be too cryptic and esoteric. By the late seventies, I had already joined the Islamic Development Bank, IsDB, when I struggled for the first time to find about how to apply Islamic finance in realistic situations. I have been influenced by the special relationship I enjoyed with Dr. Ahmed Elnaggar, Dr. Sabahattin Zaim and the guidance of Dr. Ahmed Mohamed Ali, the former IsDB President. In 1977, I took a leading role in designing a scheme to finance trade among Muslim countries, using Murabaha as the main vehicle. At the time, the paid-up capital of the IsDB had been entrusted with conventional banks, as Islamic banks were not available at the time. My idea was to use liquid resources to finance trade among Muslim countries. The first historical deal was between Algeria that imported coke and Turkey that exported the same. The deal set the desired rule and pattern, which were later became a basis for the “Islamic Trade Finance Program”. The program gradually evolved into an institution that started as a department and later became a member of the IsDB Group. This incident had an imprint on my thinking. In particular, I was confronted by the challenge of showing to some of the top brass of the IsDB that Murabaha is significantly different from interest-based lending. Needless to say, this does not imply that Islamic banks should use exclusively a particular contract out of the 20 available contracts. A more important question that came to my mind was what it meant to prohibit Reba or interest and for what rationale. These two issues have taken a central part of my thinking since then. A third related issue still awaits an answer. With a multitude of Islamic modes of finance, should there be an optimum combination at the aggregate level? Would such combination result from market exchanges or would it require 1 Alphabetically ordered. I-2 regulatory interference? Some of the pioneers I mentioned above were members of the faculty at King Abdulaziz University in Jeddah. Most of them worked in the then International Center for Research in Islamic Economics, which was later renamed to drop the word “international.” My thinking at that time focused around two issues. The first was how to apply the prohibition of Reba. The imposition of a zero rate of interest by any means appeared as a trivial solution. Forcing a zero-bound rate through continuous deflation raised in my mind many issues, which would be taken up later in the book. The second issue that occupied the center of my thinking has been whether interest- based lending carries with it some inherent risks and inefficiencies and whether a non- interest-based finance would bring in some advantages or at least help to avoid the inefficiencies associated with the rate of interest. Fortunately, I found out some important aspects about this issue. First, even though perfect-market models mask the disadvantages of the classical loan contract, still some economists found sufficient reasons for apprehension. Second, once a serious shift from perfect market models to search models is undertaken, further inefficiencies of conventional finance would appear. Third, I realized that to analyze such an issue would require detailed specification of an Islamic economic system which I volunteered to do. My paper, (Al-Jarhi, 1981) introduced an Islamic macromodel in an attempt to answer many questions of this kind, but it lacked details and some comments on it sidetracked to side issues, like the system of total versus fractional reserves. Several of my later writings attempted to put more details into the picture. A serious handicap of this model was that it used the neoclassical Hicksian IS-LM structure (then falsely attributed to Keynes). This has been revisited in this book. During my work at the Arab Monetary Fund, I led a team from the Arab Fund for Social and Economic Development, the Arab League Economic Department and OAPEC to compose the Joint Arab Economic Report, JAER. I also participated in presenting to the Council of Arab Governors of Central Banks some options regarding a pan Arab scheme of payment settlement. During the preparations and discussions, I sensed some fear on the GCC countries that deficit countries might face difficulties in paying the outstanding balances and interest. I offered the idea of using equity-based financial instruments, which is explained later in the book to avoid delinquencies. The idea was simply laughed at. The big change in my thinking started when I worked in training Islamic banks’ employees. I realized then the tendency of mimicking conventional finance was persistent. A new school of thought has been forming from members of Islamic banks Shari’ah boards that became increasingly specialized in fishing on Saturdays2. This out of Egypt, they ﷺ joined Prophet Moses ,ﷺ When the descendants of the children of Prophet Jacob 2 passed through several tests. The most important to my mind was that fish disappeared from the sea on weekdays, but came in flocks on Saturdays. Meanwhile, they were ordered not to work on Saturdays. I-3 directed my thinking to further questions. First, does Islamic finance have an economic rationale? Second, would the advantages of Islamic finance be sufficiently convincing to warrant their honest application. The answer to the first question was collected from several of my writings in my paper on an economic theory of Islamic finance (Al-Jarhi, 2017b). The answer to the second question was a paper on the Economic theory of Islamic Finance Regulation (Al-Jarhi, 2017a). My teaching Islamic economics to graduate students, started with a short PhD course in Iran. It then moved to Qatar and Malaysia. From teaching I benefited from my students discussions and challenging questions in developing and evolving some of the central ideas in this book. During the 11th International Conference of Islamic Economics and finance, in 2016, I met Steve Keen3 for the first time and attended his workshop on debunking economics, which was held at the IIUM in Kuala Lumpur, through the generosity of my friend Mohamed Aslam Haneef, then the Director of the Center of Islamic Economics at IIUM. When I started teaching Islamic economics, I used neoclassical economics as an introduction. But later, I realized that this material served little purpose. I thought of teaching the critique to neoclassical economics. However, there had been so much material by many contributors to the literature, which have been sidelined or ignored. It would take another book and probably another lifetime to survey such counter orthodoxy. Meeting Steve Keen and reading his book Debunking Economics, brought with it an easy solution. As a start, I initiated teaching his book as a companion to my always expanding lecture notes. Later, when I started the preparations of founding the ASBU International Center of Islamic Economics and Finance (ASBU/ICIEF), I added a course on the critique of neoclassical economics, using Keen’s book. It became a prerequisite for my Islamic economics courses. The summary of many of Steve Keen surveyed points of the counter orthodoxy found their way to my lecture nots. However, Keen’s book became and would remain part of the curriculum of any program in Islamic economics that I would teach. I do strongly recommend that whoever uses this book as a textbook to use Keen’s book as a The ingenious ancient Arabs developed a ruse in order to fool God. On Fridays, before sunset, they dug deep holes by the shore. On Saturday, while they were sitting home, the tide brought the fish ashore, which fell into the holes. On Sunday, they collected their catch. The Almighty, cursed them for such a naïve ruse, which involves both transgression as well as a miserable attempt to fool their Cherisher. I have had this coined “fishing on Saturdays” to mean ruses that make deeds apparently compliant, while they are not indeed.
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