Islamic Philosophy and the Challenge of Post Modernism: A Sociological Perspective

This paper briefly describes the Post Modernism philosophy, introduces the work of its key proponents, provides a critical appraisal of Post Modernism thought and finally it compares the Post Modernism philosophy with philosophical heritage of Islamic faith and civilization and recommends ways to cope up with the challenge of post modernism.Post Modernism, Sociology, Philosophy, History, Islamic Civilization, Modernism, Enlightenment, Globalization

Sources of Public Finance in an Islamic Economy

Since interest is prohibited in Islam, the government in an Islamic economy cannot issue interest based T-Bills, T-Bonds and/or obtain interest based sovereign debt. Based on the literature review, it is argued that neither Prophet Muhammad (P.B.U.H) nor the pious Caliphates (rta) levied any taxes other than Zakah. Accordingly, this study explores the sources of revenue for a government in an Islamic economy. In discussing sources of tax revenue, it is maintained that Zakah is the only tax the government in an Islamic economy can levy. Nevertheless, the government can charge service/performance based fees, duties, charges etc in providing public goods. Furthermore, the profitable operations of state owned enterprises form an important part of non-tax revenues. It is also analyzed that how the non-profitable public institutions like police and courts will be funded. This study also discusses that how the government can finance its deficit keeping in view that interest is prohibited in Islam and Zakah rates are very low and Zakah base is very narrow as per common understanding. The study also gives brief insights into how much Zakah can be collected in Pakistan. Finally, it suggests that the nominal GDP growth linked rate of return can be used to benchmark domestic and external loans including those from IMF, WB and IDA etc.Public Finance, Taxation, Expenditure, Fiscsl Policy, Deficit Financing, Zakat, Redistribution.

A critical analysis of Mudarabah & a new approach to equity financing in Islamic finance

Financial intermediation serves a valuable purpose, but it can also be structured using equity modes of financing. This can relieve the financee and increase diversity of entrepreneurial undertakings as in debt based commercial financing, there is little room for diversity with obligatory and stipulated servicing of debt. Using Islamic equity modes of financing poses the challenge of the agency problem and moral hazard. The extent of this agency problem in Mudarabah and its impact on economic payoffs between counterparties is analyzed in this study with a simulation model. Based on review of alternate solutions proposed, the author presents two possible covenants which could make Mudarabah mode of financing more acceptable and widely usable in financial intermediation. This would also further the egalitarian objectives of an Islamic economic order.Interest free economy, Islamic Economic System, Mudarabah, Agency Problem, Moral Hazard, Adverse Selection

Welfare Potential of Zakat: An Attempt to Estimate Economy wide Zakat Collection in Pakistan

In Pakistan, Naveed and Ali (2012) in a most recent study conclude that as many as 58.7 million people in Pakistan are living in multidimensional poverty with 46 percent of the rural population and 18 percent of the urban households falling below the poverty line. It is natural to ask what the government is doing for these poor people and how much it can expend to end extreme poverty in Pakistan. If we look at the fiscal position of the government, we see that Pakistan has a very low tax to GDP ratio, i.e. 9 percent. As a result of low tax to GDP ratio and high current expenditure, the government is suffering from a large budget deficit. Often, the development spending is curtailed to contain the large budget deficit due to high non-discretionary current expenditures in debt servicing and security expenditure. Expenditure on health and education is not even 5 percent of GDP in Pakistan. Due to such a low expenditure on developing human capital and maintaining health of the masses, poor people remain uneducated and unhealthy and hence they find it very difficult to get out of the poverty tra

Welfare Potential of Zakat: An Attempt to Estimate Economy wide Zakat Collection in Pakistan

In Pakistan, Naveed and Ali (2012) in a most recent study conclude that as many as 58.7 million people in Pakistan are living in multidimensional poverty with 46 percent of the rural population and 18 percent of the urban households falling below the poverty line. It is natural to ask what the government is doing for these poor people and how much it can expend to end extreme poverty in Pakistan. If we look at the fiscal position of the government, we see that Pakistan has a very low tax to GDP ratio, i.e. 9 percent. As a result of low tax to GDP ratio and high current expenditure, the government is suffering from a large budget deficit. Often, the development spending is curtailed to contain the large budget deficit due to high non-discretionary current expenditures in debt servicing and security expenditure. Expenditure on health and education is not even 5 percent of GDP in Pakistan. Due to such a low expenditure on developing human capital and maintaining health of the masses, poor people remain uneducated and unhealthy and hence they find it very difficult to get out of the poverty tra

Proposal for a New Economic Framework Based On Islamic Principles

This book provides a holistic socio-economic framework working in conformity with the Islamic principles. Chapter 2 builds the ground for the proposed framework by discussing the foundations of the ethical precepts of Islam. It discusses the thesis of religion, answers some of the questions in the comparative study of religion and tries to resolve few of the misconceptions about the faith of Islam. Chapter 3 outlines the economic teachings of Islam with regard to earning and spending. It discusses at length the ideals Islam set before its adherents in the ethical sphere of life. The ethical principles are discussed based on the study of relevant Quranic text and the narrations of Prophet Muhammad (PBUH). Chapter 4 studies the comparative economic systems. It analyzes Capitalism, Socialism, Mixed Economy and Islamic economic system. Chapter 5 introduces the salient features of the proposed economic framework with special focus on fiscal reforms. It discusses the potential of the institution of Zakat to meet fiscal needs of the government and to assist it in doing away with deficit financing, fiscal bleeding, crowding out private sector and reducing deadweight loss by parting the way with private sector so as to ensure market economy operating on its own as far as possible and playing an active regulatory role. Chapter 6 introduces the monetary reforms. It discusses how savings would feature despite discontinuation of interest, how inflation will be checked with central banks not having at their disposal conventional OMO, how liquidity will be managed in banking sector when a central bank wants to inject liquidity or mop up funds. How and to what extent the institution of Zakat would enable the government to meet its fiscal targets and does not crowd out private sector with public borrowing. How balance of payments and exchange rate stability can be managed in an interest free economy. If in the short term, the government or central bank needs alternative source of revenue other than Zakat, they can issue GDP linked bonds. This could replace T-bill and provide a base instrument for OMO and liquidity management in the banking and financial sector. Chapter 7 introduces the currently practiced Islamic Banking and Finance. Since Islamic economic principles have more prominently been used in banking and finance, much of the discussion centers on Islamic banking and finance in lieu of analyzing the existing practices and then in the next chapter, preferable alternatives in areas where shortcoming is observed and need for improvement is felt are suggested. Chapter 8 discusses the financial system in the proposed framework with the role of institutions and the discussion on comprehensive need fulfillment mechanisms to serve every major need of a sophisticated contemporary financial system. Some important novel changes are recommended, such as introduction of options in mortgage financing, which will allow the bank to separate the tenancy and sale contract in a distinctive way. This will still ensure that it locks the sale with the borrower or with the third party without making both contracts dependent on each other. It will benefit the bank as well as the borrower, who will have an option but not an obligation to buy the asset at maturity. The modified role of bank entering in a Mudarabah contract as a “Rabb-ul-maal” (investor) will ensure that the bank takes on operational risk. It will enable the resources to go into productive avenues rather than in financial instruments. This modification will generate employment and productive activities in the economy in a more direct manner. The division of Mudarabah corporate and Mudarabah consumer will target two very distinct markets and will result in channeling of funds from saving surplus units to saving-deficient units. Reforms in equity markets and alternatives for insurance are also suggested. Chapter 9 introduces feasibility and structure of Micro credit as an alternative for interest based micro finance. It discusses how the potential obstacles in the form of lack of trust, funding commitment, lack of collateral arrangement, lack of documentation etc would be handled.Interest Free Economy, Islamic Economy, Islamic Economic System, Islamic Monetary Policy, Islamic Fiscal Policy, Interest, Zakat, Riba, Usury, Development, Redistribution, Economic Systems, Financial System, Financial Intermediation, Saving, Investment.

Welfare Potential of Zakat: An Attempt to Estimate Economy wide Zakat Collection in Pakistan

Islamic economics literature is rich in highlighting the welfare potential of Zakat, but very few empirical studies have undertaken the quantitative estimation of potential Zakat collection. In this study, we attempt to estimate potential Zakat collection at economy wide level to explore the welfare potential of the institution of Zakat. We attempt to estimate economy wide Zakat collection by including heads like Zakat on agriculture produce, value of livestock, tradable inventory, currency in circulation, foreign exchange reserves, estimated gold and silver deposits and financial assets like investments in National Savings Scheme (NSS), mutual funds, stock market capitalization, pension schemes and remunerative bank deposits. Our estimates suggest that approximately Zakat collection in Pakistan could reach 7% of total GDP and is sufficient for covering poverty gap in Pakistan. We also discuss that the institution of Zakat system can also have positive effects on flow of investment, promoting entrepreneurship culture and making capital markets and real estate markets more competitive. At the macroeconomic level, we also discuss the role of the institution of Zakat as a stabilizer

Equitable Distribution of Income with Growth in an Islamic Economy

In classical and neoclassical growth theory, it is argued that inequality is necessary to kick-start economic growth. In the Lewis model (1954), the capitalist class is expected to instigate economic growth through production in modern manufacturing sector. Kuznets (1955) argues that economic growth will trickle down to the masses once economic growth is sustained and allowed to mature. Solow (1956), Romer (1986), Lucas (1988) and Romer (1990) had emphasized on capital formation, technical progress, human capital, ideas and strong public and social infrastructure to achieve economic growth. Later on, economists like Meadows et al (1974) cautioned on the limits to growth amidst finite resources. However, since the policy direction did not take much notice of these concerns, the rapid growth in monetization and international trade has now put the future economic growth in serious jeopardy. An even bigger challenge is to ameliorate the great gap between rich and poor countries that has happened in the course of twentieth century economic growth program. In this study, we identify specific institutions in Islam that can help in achieving egalitarian distribution of income along with continued growth. We discuss that the principle of risk based productive enterprise can foster capital formation and entrepreneurship in an Islamic economy that disallows fixed return on money capital in the form of interest. We discuss that interest free financial intermediation can stabilize the economy from credit default shocks by ensuring broad risk sharing and linking monetary payments to factors of production with the result of productive enterprise. We discuss that a uniform Zakat levy on wealth and produce can result in tax rate smoothing, automatic stabilization of business cycle and encourage long term investments and decision making without leaving the long term planner in private sector to worry about fiscal policy reversals (i.e. Ricardian equivalence). In this paper, we also highlight the effects of inheritance laws of Islam on intergenerational redistribution of endowments. We argue that endowment redistribution in every generation in each family unit will automatically keep the inequitable distribution of resources in check without depending on the pace, nature and distribution of economic growth. We use mathematical modeling to show the effects of these institutions on economic outcomes

Using Waqf as Social Safety Net & Funding Public Infrastructure

This study explores the economic potential of the institution of Waqf in funding necessary social and public infrastructure and to act as a permanent social safety net. In section 2, we explain the motives behind charitable giving in the real world. We discuss the factors identified in the empirical literature and experiments. We also explain the need for reinforcing incentives in order to increase the scale of charitable giving as a personal choice in a non-economic pure altruist sense. In section 3, we discuss the reinforcing incentives for charitable giving in Islamic worldview. In section 4, we explain the importance of the institution of Waqf in overall Islamic redistribution framework. We explain how the institution of Zakat, Waqf and inheritance laws together act as redistribution devices and social safety nets in an Islamic economy. Finally, in section 5, we discuss the application of Waqf in contemporary policy framework

Using Waqf as Social Safety Net & Funding Public Infrastructure

This study explores the economic potential of the institution of Waqf in funding necessary social and public infrastructure and to act as a permanent social safety net. In section 2, we explain the motives behind charitable giving in the real world. We discuss the factors identified in the empirical literature and experiments. We also explain the need for reinforcing incentives in order to increase the scale of charitable giving as a personal choice in a non-economic pure altruist sense. In section 3, we discuss the reinforcing incentives for charitable giving in Islamic worldview. In section 4, we explain the importance of the institution of Waqf in overall Islamic redistribution framework. We explain how the institution of Zakat, Waqf and inheritance laws together act as redistribution devices and social safety nets in an Islamic economy. Finally, in section 5, we discuss the application of Waqf in contemporary policy framework