UNIVERSITY OF MAIDUGURI CENTRE FOR DISTANCE LEARNING

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1 UNIVERSITY OF MAIDUGURI CENTRE FOR DISTANCE LEARNING ECO 215: Islamic Economics (2 Units) Course Facilitator: 1

2 STUDY GUIDE Course Code/ Title: Credit Units: Timing: Total hours of Study per each course material should be twenty Six hours (26hrs) at two hours per week within a given semester. You should plan your time table for study on the basis of two hours per course throughout the week. This will apply to all course materials you have. This implies that each course material will be studied for two hours in a week. Similarly, each study session should be timed at one hour including all the activities under it. Do not rush on your time, utilize them adequately. All activities should be timed from five minutes (5minutes) to ten minutes (10minutes ). Observe the time you spent for each activity, whether you may need to add or subtract more minutes for the activity. You should also take note of your speed of completing an activity for the purpose of adjustment. 2

3 Meanwhile, you should observe the one hour allocated to a study session. Find out whether this time is adequate or not. You may need to add or subtract some minutes depending on your speed. You may also need to allocate separate time for your self-assessment questions out of the remaining minutes from the one hour or the one hour which was not used out of the two hours that can be utilized for your SAQ. You must be careful in utilizing your time. Your success depends on good utilization of the time given; because time is money, do not waste it. Reading: When you start reading the study session, you must not read it like a novel. You should start by having a pen and paper for writing the main points in the study session. You must also have dictionary for checking terms and concepts that are not properly explained in the glossary. Before writing the main points you must use pencil to underline those main points in the text. Make the underlining neat and clear so that the book is not spoiled for further usage. Similarly, you should underline any term that you do not understand its meaning and check for their meaning in the glossary. If those meanings in the glossary are not enough for you, you can use your dictionary for further explanations. 3

4 When you reach the box for activity, read the question(s) twice so that you are sure of what the question ask you to do then you go back to the in-text to locate the answers to the question. You must be brief in answering those activities except when the question requires you to be detailed. In the same way you read the in-text question and in-text answer carefully, making sure you understand them and locate them in the main text. Furthermore before you attempt answering the (SAQ) be sure of what the question wants you to do, then locate the answers in your intext carefully before you provide the answer. Generally, the reading required you to be very careful, paying attention to what you are reading, noting the major points and terms and concepts. But when you are tired, worried and weak do not go into reading, wait until you are relaxed and strong enough before you engage in reading activities. Bold Terms: These are terms that are very important towards comprehending/understanding the in-text read by you. The terms are bolded or made darker in the sentence for you to identify them. When you come across such terms check for the meaning at the back of your book; under the heading glossary. If the meaning is not clear to you, you 4

5 can use your dictionary to get more clarifications about the term/concept. Do not neglect any of the bold term in your reading because they are essential tools for your understanding of the in-text. Practice Exercises a. Activity: Activity is provided in all the study sessions. Each activity is to remind you of the immediate facts, points and major informations you read in the in-text. In every study session there is one or more activities provided for you to answer them. You must be very careful in answering these activities because they provide you with major facts of the text. You can have a separate note book for the activities which can serve as summary of the texts. Do not forget to timed yourself for each activity you answered. b. In-text Questions and Answers: In-text questions and answers are provided for you to remind you of major points or facts. To every question, there is answer. So please note all the questions and their answers, they will help you towards remembering the major points in your reading. c. Self Assessment Question: This part is one of the most essential components of your study. It is meant to test your understanding of what you studied so you must give adequate attention in answering them. The remaining time from the two hours allocated for this study session can be used in answering the self- assessment question. 5

6 Before you start writing answers to any questions under SAQ, you are expected to write down the major points related to the particular question to be answered. Check those points you have written in the in-text to ascertain that they are correct, after that you can start explaining each point as your answer to the question. When you have completed the explanation of each question, you can now check at the back of your book, compare your answer to the solutions provided by your course writer. Then try to grade your effort sincerely and honestly to see your level of performance. This procedure should be applied to all SAQ activities. Make sure you are not in a hurry to finish but careful to do the right thing. e-tutors: The etutors are dedicated online teachers that provide services to students in all their programme of studies. They are expected to be twenty- four hours online to receive and attend to students Academic and Administrative questions which are vital to student s processes of their studies. For each programme, there will be two or more e-tutors for effective attention to student s enquiries. Therefore, you are expected as a student to always contact your e- tutors through their addresses or phone numbers which are there in your student hand book. Do not hesitate or waste time in contacting your e-tutors when in doubt about your learning. 6

7 You must learn how to operate , because ing will give you opportunity for getting better explanation at no cost. In addition to your e-tutors, you can also contact your course facilitators through their phone numbers and s which are also in your handbook for use. Your course facilitators can also resolve your academic problems. Please utilize them effectively for your studies. Continuous assessment The continuous assessment exercise is limited to 30% of the total marks. The medium of conducting continuous assessment may be through online testing, Tutor Marked test or assignment. You may be required to submit your test or assignment through your . The continuous assessment may be conducted more than once. You must make sure you participate in all C.A processes for without doing your C.A you may not pass your examination, so take note and be up to date. Examination All examinations shall be conducted at the University of Maiduguri Centre for Distance Learning. Therefore all students must come to the Centre for a period of one week for their examinations. Your preparation for examination may require you to look for course mates so that you form a group studies. The grouping or Networking studies will facilitate your better understanding of what you studied. 7

8 Group studies can be formed in villages and township as long as you have partners offering the same programme. Grouping and Social Networking are better approaches to effective studies. Please find your group. You must prepare very well before the examination week. You must engage in comprehensive studies. Revising your previous studies, making brief summaries of all materials you read or from your first summary on activities, in-text questions and answers, as well as on self assessment questions that you provided solutions at first stage of studies. When the examination week commences you can also go through your brief summarizes each day for various the courses to remind you of main points. When coming to examination hall, there are certain materials that are prohibited for you to carry (i.e Bags, Cell phone, and any paper etc). You will be checked before you are allowed to enter the hall. You must also be well behaved throughout your examination period. 8

9 COURSE CONTENT Definition of Islamic Economics Economic theory Principle of Islamic Economics The theory of consumer behavior The first orders efficiency conditions Conditions of the firm in an Islamic Economy Introduction to the financial statement of the firm in an Islamic economy The sole of the Zakat, profit/ lost sharing 9

10 STUDY SESSION 1: THE ISLAMIC PERCEPTION OF ECONOMIC LIFE INTRODUCTION: The search for efficiency and equity in the distribution of resources becomes a serious concern for economists all over the world, as many theories have been propounded to ensure this. One of the systems adopted in the world is the capitalist economic system where all factors of production are privately owned and controlled, and the individual or group has absolute right to engage in any type of business he or they desire. Capitalism was brought forth by many economic principles, one of the most important being the principle of the scarcity of resources. LEARNING OUTCOME: At the end of the class, students should be able to: i. Know the Holy Quran says about life and resources ii. Explain the reasons why scarcity existed in the world iii. Know the capitalist and Islamic view of global economic system iv. Elaborate further on the context ISLAM BOLD 1.2 IN-TEXT Muslim economists do not totally support the theory of the scarcity of resources, as it implies the imperfection of nature and Allah s plan. The Qur an states that Allah 10

11 has provided an abundance of everything that humankind needs in order to subsist. The limitations of mankind s productive capacity are what cause scarcity. The outcome of what is dubbed the economic problem is the same when viewed by capitalists and Islamic economists, though they arrive at the same point through different arguments (Nomani, 1994: 83-84). Another shortcoming of this economic system, as shown by Marx, is that capitalism is based on exploitation of the working class by the owners of capital whose profits come from the difference between the wages of labour and the value of the product. The system also poses the problem of equity in goods distribution and exposes women who are supposed to be the first teachers at home to all sorts of businesses, which do not befit their feminism; while children, orphans, widows, the handicapped and the aged with little or no bargaining power suffer the consequences. Apart from this, the system fails to realise the unity of life by over-emphasising man s material values at all costs and gives no consideration for spiritual value. The worship of money and the lust for material acquisitions thus lead to all sorts of corruption, looting, and exploitation at all means. In order to check the exploitative nature of capitalism, resource misallocation and the inequitable distribution characteristic of modern mixed economies, socialism or communism was propounded and adopted by some nations. The economy is centrally controlled that the state takes grasp of everything by owning and managing all the factors of production, while all the citizens of the country are regarded as employees of the state. However, the shortcoming of this economic system lies in the fact that it creates a wide gap between man s material desires and his spiritual aspiration. Though it restores equilibrium in the distribution of income and wealth, it succeeds in destroying the most fundamental equilibrium in the distribution of political and economic power. Not this alone, the concentration of power in the hands of the state or the ruling elites seems to have violated the principle of free- 11

12 will, as it reduces man to a mere cog in a gigantic social machine. Apart from this, it goes against human nature, as men are not equally endowed and so cannot be equally remunerated or compensated, hence, socialism or communism cannot totally do without resorting to capitalism. Conversely, it is difficult to get a state which is purely capitalistic to the extent that governmental non-interference in the machinery of business and the market is at zero level. The wobbling of mankind within multifarious economic theories and practices is a welcome development as long as these exercises are operated within the limits of divine guidance sent through the prophets. Such theories become faulty and ineffective when their e protagonists decide to leave aside the divine guidance and so opt for their own personal whims and caprices. The Islamic economic system therefore becomes an alternative system, which considers the operation of economics in the realm of divine authority for the purpose of attaining felicity in this life and the hereafter. 1.2 Conceptual Framework Islam The term Islam is an Arabic word derived from the word salam, which literally means peace or submission, surrender and of obedience. By extension, it implies peace with one s Creator, One s self and other creatures. By maintaining peace with the Creator, it means complete submission and total obedience to His will and, through this, he himself achieves peace of body and of mind, and this consequently leads to peace in the society at large. To maintain peace with Allah, a Muslim realizes that Allah is his Creator, Sustainer and Nourisher of the world, and He has power is over everything, and so deserves to be worshipped. Everybody therefore has no option than to abide by Allah s rules and abstains from what He prohibits. A person is also at peace with other human beings by engaging in plain and faithful interaction with them in all human endeavours. He abstains from any transaction that 12

13 can harm him and others. He equally maintains justice in his dealings with them. The manifestation of this quality in him could however be facilitated and enhanced through better understanding of Islamic worldview through the Islamic conception of God, Life and the Universe Iman Islam could be broadly divided into two the theoretical and the practical. The theoretical aspect of the pillars of Islam is faith and its articles, while the practical includes all that a Muslim is required to do physically. The theoretical aspect is called Iman, which is literally translated as faith or belief. A believer is therefore called a Mu min, meaning one who has come into peace or security because he has accepted the principles, which bring about peace of mind or security from fear (Muhammed Au, 1971). The Qur an further describes the believers as those who only believe in Allah and His Messenger, then, they doubt not and struggle hard with their wealth and their lives in the way of Allah (Q.49: 15). Iman (Faith) is therefore a sort of inner revolution, which reforms man and links him to his Creator. Chapra (2008) emphasizes the role played by faith in any economic system when he writes: Wealth is, however, a trust from God and needs to be developed and used honestly and conscientiously for removing poverty, fulfilling the needs of all, making life as comfortable as possible for everyone, and promoting equitable distribution of income and wealth. Its acquisition as well as use needs to be primarily for the purpose of realizing the maqasid. This is where faith has a crucial role to play through its values and its motivating system. Without the values that faith provides, wealth would become an end in itself. It would then promote unscrupulousness and accentuate inequities, imbalances and excesses, which could ultimately reduce the well-being of most members of both the present and future generations. Amal 13

14 The practical aspect of Islam is what is known as amal, which means deed. As such, iman is not merely expressed in words, but becomes manifest when it reflects in the act of righteousness. Thus, a man cannot claim to esteem Allah if he does not esteem his fellow men. A Muslim therefore cannot claim to believe in Allah and observe all the religious rituals if he does not carry out other activities along the dictates of Allah. This makes it difficult to compartmentalize his actions into the religious and the mundane. As a Muslim, all his actions are religious, and so, he has to follow the dictates of Allah in his socio-political and economic activities. Therefore, mu amalat is expected to regulate by Islamic rule. In other words the behavior of individual and society in the course of their production, consumption and distribution of goods should be permeated by Islamic values. Ihsan The Prophetic tradition, which succinctly describes the meaning of ilisan, is where the Prophet describes it as to worship Allah as if you see Him, for even though you could not see Him, He sees you. Expounding further on the linkage between faith and righteous deeds the Qur an says: Serve Allah, and join not any partners with Him; and do good to parent, kinsfolk, orphans, those in need, neighbours who are strangers, the companion by your side, the way-farer (you meet), and what your right hands possess: for Allah loves not the arrogant, the vainglorious (Q.4: 36) The Islamic World view The Islamic Concept of God The Islamic conception of God is better understood in the Islamic theological framework of Tawlzid, which is categorised into three, namely, Tawhid ar- 14

15 Rububiyyah, Tawhid al-uluhiyyah and Tawlzid al-asina was-sifat. By Tawhid ar- Rububiyyah, we mean belief in the Lordship of Allah (S.W.T) through His providence to mankind and His other handiwork. The Qur an for instance says on this: Say (0 Muhammad!) Who provides for you from the sky and the earth? or who owns hearing and sight? and who brings out the living from the dead and brings out the dead from the living? And who disposes the affairs? They will say: Allah. Say Will you not then be afraid of Allah s punishment. (Qur an 10:3 1). In another verse, the Qur an says: Say: whose is the earth and whosoever is therein? If you know. They will say: It is Allah. Say, Will you not then remember? Say Who is the Lord of the seven heavens and the Lord of the Great Throne? They will say Allah. Say will you not fear Allah. Say: In whose Hand is the sovereignty of everything? And He protects (all), while against whom there is no protector, if you only know? They will say, all that belongs to Allah! Say How then are you deceived and turned away from the truth. (Q23: 84-89). By Tawhid al-uluhiyyah, we mean the Godhood of Allah (S.W.T.) wherein man realizes that no other person deserves to be worshipped but Him, and as such all acts of worship such as prayers, fasting and others should be directed to Him alone and with all sincerity. Tawhid al-asma was-sifat implies that all that has been mentioned in the Qur an regarding Allah s names and attributes must be established and affirmed for Allah (S.W.T.) alone. Describing the attributes of Allah (S.W.T), the Qur an refers to Him as the First and the Last, the Evident and the Immanent (Q57:3). Some of the attributes of Allah (S.W.T) could be identified in the following Qur anic verses: 15

16 He is Allah, beside Whom none has the right to be worshipped but He, the All- Knower of the unseen and the seen. He is the Most Gracious, th Most Merciful. He is Allah beside whom none has the right to be Worshipped but He, the King, The Holy, the One free from all defects, the Giver of security, the Watcher over His creatures, the All-Mighty, the Compeller, the Supreme. Glorified is Allah! (High is He) above all that they associate as partner with Him (Qur an 59:22-23). With these attributes of Allah (S.W.T.), it is clearly evident that He is self-sufficient, and so deserves to be worshipped. In fact, the major purpose of creating humans and other beings is for them to worship Him. Since the primary aim of human creation is for him to worship Allah (S.W.T.), it therefore implies that the worship must be total; it should be carried out in all human endeavors the social, the economic, the political and other aspects of his life. A Muslim is therefore seen demonstrating his belief in God even while engaging in his commercial and economic activities. He conducts his transactions vividly in line with the dictates of Allah, his Creator. In the words of Al-Tantawi (N.D.), for someone to be admitted into the fold of Islam, such a person must have the knowledge of its system; believe in its principles; adhere to its regulations; and conduct himself in everyday life according to those principles and regulations. In economic discussions, the importance of tawhid is extremely relevant in the discussion of the scarcity of resources, as will be explained later. The germane nature of tawhid (the unity of Allah) is stressed further by Khan (1996: 396) when he writes: The theme of unity is fundamental in Islam and runs through the Qur an. Tawhid; in a broader sense, means divinity and also incorporates the concept of brotherhood of the uminalz. Brotherhood implies a relationship of mutual care and universal welfare in which all Muslims are treated as one umrnah, community, or nation, as 16

17 well as the collective responsibility of ensuring the well-being (falah) of each individual. It obligates humanity to maintain ainanalz (trust) among the ummah and to refrain from fasad (mischief, animosity, and corruption) (Qur an 2: 205), especially since all resources are in abundance, are for the welfare of all and not for just a few, and have to be utilized equitably for the well-being of all (Qur an 2: 29) The Islamic Concept of Life and the Universe A vivid description of the concept of life from the perspective of a Muslim economist is given by Chapra (1998) when he writes: When a Muslim economist talks of life, he will not get into its biological, genetic and medical aspects He will rather talk about those aspects of resource allocation and distribution that help in the development of the total human potential and the enrichment of life on earth. This will get him into a discussion of the kind of consumption, production, flcome distribution and collective goods (including education and health) that will enrich life by enabling a Muslim to fulfill his obligations towards God, himself and his Society. From the above, the Islamic conception of life could be appreciated. Apart from the fact that Islam sees Allah (S.W.T.) as the Source of life, it also sees I-Jim as the One who can determine the purpose of life. As can be Seen from the above, jinns and mankind are created Purposely to worship Allah. Other activities of mankind on earth therefore are secondary He carries out his economic activities to achieve the primary aim of being on earth. It could therefore be inferred that the most important basis of Islamic economic System is tawhicj, the unity of Allah (S.W.T.). Not only does tawhid espouse that there is no other god than Allah, but it also holds that Allah s plan for the universe is perfect. 17

18 It Should however be noted that man tends to transgress the boundary set for him by his Lord by forgetting his primary assignment on earth, concentrating on excessive and unlimited love of material wealth and focusing on the adornment of the world. God says in Surat al-fm ran, Fair in the eyes of men is the love of things they covet: women and Sons; heaped-up hoards of gold and silver; horses branded (for blood and excellence); and (wealth of) cattle and well-tilled land. Such are the possessions of this world s life; but in nearness to God is the best of the goals (to return to). Say: Shall I give you glad tidings of things far better than those? For those that fear God are, with their lord, gardens underneath which rivers flow, therein dwelling forever, and spouses purified, and God s good pleasure; for in God s sight are (all) His servants (3:15-16). The transgression of man makes him attribute to himself what does not belong to him. The Qur an testifies to this, saying: Nay, but man doth transgress all bounds in that he looked upon himself as self-sufficient (96:6-7). By extension, man started to design for himself certain ideological principles with little or no consideration for the rules of his Creator. The recent global economic meltdown is an indication of the repercussion of such self-designed and mundane economic principles, which give no regards to divine laws Conventional and Islamic Economic Systems: A Comparative Analysis Islam uniquely considers distribution as the economic problem, and Muslims do not share the obsession of capitalists and communists with production, Because Islam differentiates between the basic needs and luxuries, there exists no concept of 18

19 relative scarcity of resources in Islam. The resources available on earth are sufficient to secure the basic needs (food, clothing, and shelter) of man. Such a misunderstanding has concealed the reality that starvation, poverty, and economic backwardness result from the mal-distribution exasperated by man-made laws and systems. The conventional economic systems have created a club of institutions - such as the IMF (the International Monetary Fund) and the World Bank, that employ tactics such as loans and structural deficit replanning to siphon off the world s resources to 1.3 ACTIVITY To understand the global economic problem one must understand what the holy quran says about mankind and resource abundance, expatiate. 1.4 IN-TEXT QUESTION (ITQ) Paraphrase: Nay, but man doth transgress all bounds in that he looked upon himself as self-sufficient (96:6-7). 1.5 IN-TEXT ANSWER (ITA) By extension, man started to design for himself certain ideological principles with little or no consideration for the rules of his Creator. The recent global economic meltdown is an indication of the repercussion of such self-designed and mundane economic principles, which give no regards to divine laws. 1.6 SUMMARY The first and perhaps the most important is the acceptance of the superiority of Allah, the holy quran and the messenger prophet Muhammad (SAW). The Islamic economics derives its authority from the aforementioned while the mainstream/conventional economic system from capitalist world material view. 1.7 Self Assessment Question (SAQs) i. scarcity of resources is not a major economic problem but rather man s laziness to explore abundant resources provided by Allah, elaborate further. 19

20 ii.write short notes on the following; Islam Imam Amal Ihsan 1.7 REFERENCE Sulaiman (2012). Islamic Economics; International Institute of Islamic Thought. 1.8 Suggested Reading Sulaiman (2012). Islamic Economics; International Institute of Islamic Thought. Sulaiman (2012). Islamic Economics; International Institute of Islamic Thought. STUDY SECTION 1: MEANING OF ISLAMIC ECONOMICS Introduction This section is aimed at introducing the concept Islamic economics. This section would also include elaborate comparison between conventional definition of economics and Islamic definition of economics. Learning Outcome. At the end of this section student should be able to define Islamic economics and be to distinguish between Islamic economics and conventional economics IN-TEXT 1.2. BOLD Definition: The study of Islamic economics is very important not only to Muslim student but to the entire mankind especially with the failure of the conventional economics to 20

21 bring about equitable distribution of wealth. In every society across the globe is increasing number of unemployment, poverty, high mortality and yet economists are out there doubling permutations as to why what is happening is happening but no solution- even when solution is provided, they are largely not successful. Many scholars has defined the term Islamic economics, for this study we shall mention some widely used definitions of Islamic economics, these include but not limited to the following: Hassanuzzaman (1984) defined economics as the knowledge and application of injunctions or rules of the sharia that prevent injustice in the acquisition and disposal of material resources in order to provide satisfaction to human beings and enable them to perform their obligation to Allah and the society In his contribution to the definition of Islamic economics Mannan opined that it is a social science which studies the economic problems of a people imbued with the values of Islam The paramount issue globally is always how to deal with scarcity of resources. This problem becomes more compounding with the insatiable nature of man. Implying the allocation and distribution of resources as it were, has not been effectively tackled by the conventional economists. What is the solution?. Why then did great economists fail to proffer workable solution to solving economic problem? The answer is Simple-Take for instance there are two groups of people, one is given a detail program on how to achieve success while the other, perhaps out of ignorance feel they can prescribe solution to problems that precede their generation. They are bound to be confusion, disagreement and in the extreme contempt. Thus, the key problem is absence of uniformity of ideas. Mainstreams economics establishes principles which will guide our choice when we as individuals, business or society must decide what to do with the limited resources available. It also helps us to understand some things, which influence 21

22 people functioning both as individual economic units and as collective society to behave the way we do (rational or irrational) thus economics could be defined as a social science which deals with how rational human being reacts to scarcity and his often infinite needs. In addition to how society ends up choosing between several alternatives. As a social science, it deals with the activities of human beings which more often than not are inclined to infinite. The definition of economics by mainstream economics is full of self contradiction, one, it says human behaviors can be rational or irrational and that economists are concern about how rational individuals/society reacts to scarcity. Then what happens to the welfare of the irrational (or should we say abnormal). At least they are part and parcel of the society they have right over socialist natural endowment as much as others. and again, the activities of human being are unpredictable how then could you prescribe a drug to sickness you do know. All these misgiving dwarfed the mainstream economists from realities. Then, if the conventional economics failed, what then should we do? The holy Qur an is a very bright touch light which aside from brightening our routes, guide us to attain various height at all times. Why link holy Qur an with economics. Economics teaches you how to attain highest level of satisfaction with the little available while Qur an is the way of life. Thus, everything about fulfillment is there in the holy Qur an. Islamic economics employed a systematic and more detailed specification of the characteristics of the ideal economic system (ideal in this context is what it is and not what it ought to be) and of economic behaviors that is consistent with Islamic injunctions. Meaning that individual/society should confirm to ideal in order to deal with scarcity. Islamic economic could also be defined as that branch of knowledge which helps realize human wellbeing through allocation and distribution of scarce resources that is in conformity with Islamic teaching. 22

23 The major difference between Islamic economics and mainstream economics is ways and means of tackling scarcity. While Islamic economic employs real/ideal problems solving solutions as enshrine in the Qur an, the conventional economists employs abstract method based on assumption. 1.2 In-Text Question (ITQ) What is the major point of deviation between the mainstream economics and Islamic economics at solving the problem of scarcity. 1.3 In-Text Answer (ITA) The main difference between the two is that while one applies the traditional religious doctrine in solving problems, the other applies abstract 1.4 ACTIVITY The major difference between the mainstream economist and Islamic economy lies on the application of reality and abstract, discuss from the context of contemporary economic problems. 1.5 Summary In this session, students were exposed to the meaning of Islamic economics. Attempts were also made at enlightening the students on the baseline upon which both operate. 1.6 Self Assessment Question (SAQs) SAQ1. 1. define Islamic economics 2. what are the major difference between Islamic and conventional economics 3. Without prejudice, which one of them do you think can bring equity to the society. 1.7 Reference: Sulaiman (2012). Islamic Economics; International Institute of Islamic Thought. 1.7 Suggested Reading 23

24 STUDY SECTION 2: Islamic Economics vs Mainstream Economics Introduction In our previous class, we defined both the mainstream economics and Islamic economics. We also tried to buttress the main point of disagreement between the two. In session two, student would be taught the main distinguishing elements between the two. Learning Outcome At the end of the lesson, student should be able to state clearly the differences between Islamic economics and Western type of Economics. BOLD 2.1 IN-TEXT Definition: In keeping with the prayer of the prophet, may the peace and the blessings of Allah be on him, seeking the refuge of Allah from Knowledge that is of no benefit. The primary function of Islamic economics, like that of any other body of knowledge, is the realization of human well-being through the actualization of the maqasid. Within this perspective Islamic economics, may be defined as that branch of knowledge which helps realize human well-being through the allocation and distribution of scarce resources that is in conformity with Islamic teaching without unduly curbing individual A COMPARISON BETWEEN METHODOLOGIES OF ISLAMIC AND WESTERN ECONOMICS In the light of the foregoing expositions and analysis of the methodology of Islamic economics, it is pertinent to compare it with the western conventional methodology with a view to demonstrating its essential elements, frameworks and structures in much clearer terms. The major areas of contrast are the following: 24

25 Framework: While Islamic economics is built on the Islamic worldview, which is based on the tawhid paradigm, western economics Is built on the western concept of capitalism or socialism, both of which are secular in nature, and are entirely divorced from religion. The methodological framework of western economic system depends on experiment, empiricism, rationality and experience and considers these to be the only tools in their methodology, whereas in the Islamic economic system, even though all there are considered as tools in its methodology, they are, however, subservient to revelation. Revelation is the first and most important tool which supersedes all others. While Islamic economics is built on ethical and moral values epitomized in alhalal (lawful) al-haram (unlawful) and also al-ma aruf (accepted) and Munkar (rejected), and is also anchored on welfare, mutual aid, cooperation, etc among members of the ummah, and each member puts aside selfishness, and pursues common interest, rather than particular interest the western economic on the other hand emphases competition and selfishness. 2.1 In-Text Question (ITQs) What is the major difference between Islamic economics and Western Economics. 2.2 In-Text Answer(ITAs) While Islamic economic is built on the Islamic global viewpoint based on tauhid paradigm, the Western economics is built on the western concept of capitalism, communism, socialism with total absence of religious 2.3 Summary Students were taught the major difference between Islamic economic and western economics. They were told that while one is guided by religious prescriptions, the other is out rightly worldly. 25

26 i. By extension, man started to design for himself certain ideological principles with little or no consideration for the rules of his Creator. The recent global economic meltdown is an indication of the repercussion of such self-designed and mundane economic principles, which give no regards to divine laws. List and explain three difference between the Islamic and western economics 2.4 Reference: Sulaiman (2012). Islamic Economics; International Institute of Islamic Thought. 2.7 Suggested Reading 26

27 STUDY SECTION 3: Islamic Economic System Introduction: Section 3 deals with Islamic Economic Systems. It also covers some features of the Islamic system Learning Outcome At the end of session three, students should be able to explain in detail the Islamic economic system. It is also expected that they should know the major features of Islamic economy. 3.1 Definition Whether Islamic or conventional economics or mainstream economics, the subject matter is allocation and distribution of scarce resource which have unlimited uses. This becomes very important bearing the nature of the insatiable nature of human beings. There are number of problems faced by mankind. These include: poverty, lack of need- fulfillment, inequitable distribution of wealth, unemployment, macroeconomic and external imbalances and economic instability. All the nations of the world are suffering from one or more of these problems. Despite many years of economic theories and policies, some of the problems are on the increase. This means the main stream economics has failed. The reason for this lack luster performance of the mainstream economics is the absence of an agreed and uniform perspective for its theoretical discussions and policy prescriptions. Theory and policy are so closely related that it is hard to separate them. It is policy which provides a direction to theory, but policies cannot be formulated unless there is agreement on their ultimate objective. Only an undisputed acceptance of an ultimate objective could provide a sense of direction to both theory and policy. While human well-being should be goal of all scientific inquiry, the idea of human well-being has become vague and ambiguous in mainstream economics consequently, the general complain leveled against economics is that its dominant 27

28 scientific model has drifted aware from reality so that inferences for economic policy are difficult. These short comings of the mainstream economics gave rise to the need to tap deeply into the legacy of the wealth of information in Islamic sources. The Holy Qur an, sunnah, scholarly writings, figh, ethics, philosophy, history of Muslim societies, and history of thought for the development of Islamic economics to solve human problem. Islamic economics, therefore, employed a systematic and rigorous specification of the characteristics of the ideal economic system and of economic behavior that is consistent with Islamic injunctions. This would provide a benchmark for policies to bring reality closer to the ideal, which has to be an essential element of the content of the framework of Islamic economics. Islamic economics reflects a world view which is in sharp contrast with that of western mainstream economics Features of Islamic Economic System The features of the Islamic system include the right to private property, private pursuit of economic interest, use of market force etc. which are similar to those of the capitalist. However, some of the distinct features are those derived through Islamic teachings which include an interest free economy, moral and ethical values as well provision of socioeconomic justice. The features of Islamic economy include but not limited to the following i. equitable distribution of income ii. prohibition of interest iii. spending in the way of Allah iv. protection of rights v. provision of justice vi. Equality of opportunity (equal right and justice) vii. No gender or ethnic discrimination 3.2 In-Text Question (ITQ) 28

29 What are the main features of Islamic economic that is also obtainable in Western economic system. 3.3 In-Text Answer (ITA) The right to private property ownership, private pursuit of economic interest, use of market forces etc. 3.4 Summary Student were taught that though there are similarity between the western economic system and Islamic economic system by way of private property ownership and the inter-play of market forces, the Islamic economic system is guided by the Islamic injunctions as prescribe in the holy Qur an. 3.5 Self Assessment Question (SAQs) i. what are the major difference between the western economic system and the Islamic economic system ii. list and explain five feature of Islamic economic system 3.6 Reference: Amina A. I; & Shehu U. A (2013) Reading in Islamic Economic International Institute of Islamic Banking BUK 3.7 Suggested Reading Amina, etal (2013) 29

30 STUDY SESSION 4: Theory of Consumer Behavior Introduction: In session three, we discussed the features of Islamic economic. We also taught student the similarity of Islamic economic and the western economics. In this session, students would be taught the theory of consumers behaviour Learning Outcome At the end of the session, student would be able to discuss consumers behaviour in Islamic economic 4.1 Definition To Allah if it is him that you serve (Al-bagra:172 )Allah has forbidden alcohol, pork, blood, carrion and those sacrifices to shrine and those over anyone other than Allah (Al-bagara:173) consumption depends on income with private ownership of resources/property, Muslims are allowed to accumulate as much as possible, so far they pay the zakah. They can therefore consume as much as possible. However the holy prophet peace be upon him said we should divided our stomach into three: for food, water and air. The consumer utility function in Islam consists of two categories of spending which are spending now and spending in hereafter. The Muslim consumer acts rationally in the usual sense maximize utility. His utility not only satisfied when he consumes for himself, but also include on what he expends in the way of Allah and in order to help others. Thus relationship between serving and consumption is classified into three categories of expenditure which are expenditure in the way of Allah, on consumption and on savings. There are three preferences of Muslims which are demand for necessities, utility derived from conveniences and utility derived from luxuries. The 30

31 consumer will firstly choose for necessities followed by the conveniences and lastly luxuries. The consumer income normally divides his income into various propositions for example income to be used in the way of Allah, for necessities, conveniences and luxuries. The traditional economic theory of consumer behavior is not directly applicable to the analysis of Muslim consumers. There is need to modify the theory of consumer to make it relevant to the need of Muslim ummah. It is compulsory for Muslims to customize all aspect of lives to the teaching of Islam. Making theory of consumer behaviors to comply with the shariah through modifying the conventional utility function is an important project for Muslim Ummah due to the fact that consumer behaviour is one the basic concepts in economics that have a significant influence in economic activities. It is apparent that in an Islamic environment, the consumer behavior of muslim is different from that of non-muslim. The Muslim ultimate objective is not only to maximize utility but also to enrich his live and achieve success in hereafter. 4.2 In-Text Question (ITQ) What did Qur an say about consumption? 4.3 In-Text Answer (ITA) Believers eat of the pure things wherewith we have provide you for sustenance and give thanks to Allah if it is him that you serve (Al-bagara 172) Allah has forbidden alcohol, pork, blood, carrion and those sacrifices to shrines and those over which there has been pronounced the name of any one over than Allah (Al-bagara :173). 31

32 4.4 Summary In the learning season 4, students were exposed to consumer behaviour as practicable in Islamic economics. 4.5 Self Assessment Question (SAQ) Discuss consumer behavior in Islamic economics. Reference Ahmad A. (1981) Studies in Islamic Economics. The Islamic Foundation Leicester U.K. Kahf, M (1988) lesson in Islamic economics IRTI, Islamic Development Bank Jeddah, Saudi Arabia. Shehu, U.R. A; Mansur, I.; & Amina A.I (2013) Reading in Islamic Economics International Institute of Islamic Banking and Finance BUK 4.7 Suggested Reading Shehu, U.R. A; Mansur, I.; & Amina A.I (2013), Reading in Islamic economic International Institute of Islamic Banking and Finance BUK 32

33 Study Session 5. Consumer Equilibrium Introduction This session will expose the students to the knowledge of consumer equilibrium in Islamic economics. Learning Outcome At the end of the class, students should be able to understand and discuss the consumer equilibrium. 5.1 Definition The consumer conventionally is assumed to be rational i.e. he seeks to maximize his satisfaction from a given income. Three approaches are used to achieve this objectives the cardinal utility approach ordinal utility approach and the revealed preference approach through these approaches are different their conclusion are the same. Despite their weakness they were used to establish the law of demand which justifies the inverse relationship between price and quantity demanded of a commodity, where the income of the consumer, the tastes, the price of related commodity and the market condition of consumption remained unchanged. Wealth in Islamic world is supposed to be spent consumer own needs and in the way of Allah. Similarly, the basket of goods of a Muslim consumer would be smaller than that of a non-muslim, as the Muslim consumer has to keep out the nonpermitted goods. Another difficulty is the fact that the conventional theory of consumer behavior insist on hierarchy of needs i.e scale of preference. However, this scale of preference is a matter of temporal thought and expressions the assumptions. The assumption that the consumer maximizes satisfaction implies that all goods and services have a common denominate called utility which can be measure or 33

34 compared with one another. This idea was rejected because utility is seen as intrinsic to commodities. The fact is that the locus of utility is human mind. It does not rest on commodities. Similarly, utility is an ex-ante concept it is guided by expectations. Satisfaction on the other hand is an ex-post concept. It explains how one feels after consuming a thing. Thus utility need not equal realized satisfaction. 5.2 In-Text Question (ITQ) Why the consumer is often assumed to be rational in dealing with economic activities? 5.3 In-Text Answer (ITA) Because he seeks to maximize his satisfaction from given income. 5.4 Summary In this study session five, students were taught the meaning of consumer equilibrium. The session also treated the approaches used in achieving satisfaction 5.5 Self Assessment List three approaches a rational individual deploys in order to achieve desired satisfactions Why do we say that utility is an ex-ante concept? Why is Satisfaction referred to as ex-post concept Comment on the fact that the basket of food available for consumption for both the Muslim and non-muslim is equal. 5.6 Reference Shehu, U.R. A etal (2013), Reading in Islamic Economic 34

35 International Institute of Islamic Banking and Finance. Buk 5.7 Suggested Reading Shehu, U.R. A etal (2013), Reading in Islamic Economic International Institute of Islamic Banking and Finance. Buk 35

36 Study Session: 6, Theory of Production Introduction: In the last class, students were taught consumer behaviour as it relates to Islamic economics. In study session six, student would be taught the theory of production. Learning Outcome At the end of the session, students would be able to understand and elaborate further on theory of production. 6.1 Definition Production analysis covers three important aspects the production function, costs analysis and analysis of theories of the firm. The production function relates input to output. It exposes the functional relationship between input and output. The output is the finished product produced and processed by the factories. The inputs are the factors which are used in the production of commodities. Traditionally, there are four factors of production, namely land, labour, capital and entrepreneur. Land refers to all natural resources provided by Allah, which are usable in the process of production. Man should utilize the resources according to alquran and al-sunnah as land is a valuable gift by Allah (SWT). Land does not only include the resources found on sea and land, but also include the climate (i.e rain, solar and wind), minerals and animals. Labour in Islam refers to the mean to extract most of the goods from the earth by labour (human effort) that is safe and healthy. The reward given to the labourer does not include only monetary term (wages); but also compensation in terms of good deeds in the hereafter. The relationships between employees are also stretched out in Islam, as both should treat each other according to al-quran and al-sunnah. For example, the employee should pay wages to the employees before his sweat dries out. 36

37 Capital refers to the combination of work to obtain wealth, and the use of the capital (equipment, machinery, wealth) must be in accordance to al-quran and al- Sunnah capital refers to those means of production which can not be used in the process of production until and unless during this process they are either wholly consumed or completely altered in form, and which, therefore, cannot be let or leased (or example, liquid money or food stuff etc). Entrepreneur refers to the man who makes the decision and has the ability and capability to produce within the Islamic value. His decision will determine the demand for factors of production, influence maximum production of output and quality of goods and services. Decision made by him must be in accordance with the teachings of al-quran and al-sunnah Objectives of production There are three objectives of production in an Islamic economy. This include: To improve the material condition of an individual To improve morals or morality To serve as a way of attaining goals in the hereafter. The implications of these objectives are that the products which deprive the human being of his moral value are strictly prohibited. The industrial activity related to those products and all types of relationship with that product also prohibited (i.e prostitution and income generated from it). Social aspects of production are emphasized and highly related to the production process. The aims of this process are distribution of benefits among a large number of people and ensuring the highest level of equity. For example rice production versus tobacco production. 37