Monday, October 27, 2008

Are Islamic banks in Malaysia really ‘Islamic’?

By Ezry Fahmy B. Eddy Yusof
Edited by Sir. Abdul Shakour Preece


Understanding the underlying wisdom of the origin of Muamalat could clear some misconception towards Islamic banks in Malaysia. These misconceptions arise when we talk about transformation from conventional bank to Islamic bank. The development process of Islamic banking and the services offered by Islamic banks may be similar to those of conventional banks with some exception that include general banking principles. Therefore this term paper combine both practitioners and academicians thoughts and ideas regarding the Islamic banking and finance operating mechanisms and its possible impacts to clear some common misgivings.

The emergence of Islamic banks

Islamic banking pre-supposes an Islamic society and an Islamic polity. A society bereft of faith in Allah and in Islamic values can hardly be able to establish an Islamic banking order. And that is why the Holy Quran has emphasized faith as the first pre-requisite in setting up an Islamic economic order. Muslims should come forward to help their brothers in society to do their business, to do their trade, to carry on their industrialization, to carry on their cultivation, to carry on all that is required to get the wheels of the society and continuing to move more easily.

In ensuring the smooth functioning of the society, the role of money is of paramount importance. And having recognized this importance, the pioneers of Islamic history had come forward to invent the banking system at a time when the present ‘Western World’ was drawn into the interest based system. Allah Almighty has mentioned clearly in the Holy Quran, Surah Ali Imran: 130-131, “O you who believe, devour not usury, doubling its rate many times, but fear the Almighty God that you may really prosper. Fear the fire which is prepared for unbelievers.”

Since its very inception, banking has never remained static. In keeping up with the needs and aspiration of different people and times, it has undergone continuous changes. Thus, a variety of banking models has been developed all over the world. Whatever is the nature and scope of the models, all of them function on the basis of the Interest. The most remarkable and revolutionary development in the field of banking is the emergence of Islamic banks.

By now, according to Azizul Hoque (2007), “About 15 Islamic banks have emerged and two countries are replacing their entire banking system with an Islamic one,” (p.107). While in Malaysia, the establishment of the Islamic bank started in 13 May 1983, known as Bank Islam Malaysia Berhad (Nik Mahani, 2008). The Central Bank of Malaysia also introduced an Act of Parliament which is the Islamic Banking Act 1983. Thus, according to the Islamic Banking Act 1983 (Act 276), Islamic banking business in Malaysia can be transacted only by a licensed Islamic bank.

Despite in this era of development and growth in Islamic finance and banking, we should not ignore other relevant issues in order to ensure that the industry has a strong foundation and avoid any misconceptions. While some may disagree, I firmly believed that Islamic banks in Malaysia are fully Shariah compliant because it provides an interest-free banking system; sets justifiable prices, and produces Shariah compliant products.

Islamic Banks merely a change in name

The most common argument against contemporary Islamic banking in Malaysia is that there is “no difference at all”. Some people claim that Islamic banking in Malaysia merely involves change in name and documents. They argue that interest rate that being the practice in conventional banking is change of to “profit rate” in Islamic banking. Therefore, this imitation of so called ‘Islamic’ banking in Malaysia also involves an interest element that is clearly prohibited in Islam indirectly. This is because by changing names and documents, it is not enough to validate the contracts. Any excess over principle is riba, its include usury and interest. Thus no matter the interest rate is low or high, it is still considered as riba (Muhammad Musleh Uddin, 2007). Nor can there be any distinction between the interest for the productive and consumptive purposes.

The eagerness of Islamic banks in Malaysia to participate in the banking industry leads them to imitate the conventional products in order to attract the clients and compete with the conventional banks. Consequently, to compete with the conventional banks that have been established earlier than Islamic banks in Malaysia, the Islamic banks use the interest rate practices by the conventional banks as a benchmark in the products offered. Thus, while providing financing by way of any of the halal transactions, they determine their profit rate on the basis of the current interest-rate benchmarks prevailing in the conventional money market. Scholars believe that by applying these benchmarks, the Islamic banking industry makes their transactions “similar” to interest-based transactions and as a consequence, these transactions become doubtful from a Shariah point of view (Mustafa Ansari and Faizan Ahmed Memon, 2008).

The substance of transaction

Whilst this position has it supporters, their argument are untenable because functions and operating modes of manmade principles are dissimilar from one that is based on the principles of Islamic Shariah. The argument that Islamic banks changing interest rate to profit rate is not relevant, this is because according to Tajul Islam (2007):

An Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and forbids of the receipt and payment of interest on any of its transaction. All other Islamic banks, the Islamic Development Bank (IDB) and alsothe General Secretariat for the Organization of Islamic Conference (OIC) has accepted this definition of Islamic banking (p. 127).

Thus, no transaction can be undertaken which involves interest in any form such as simple or compound, low or high, institutional or individual. In Malaysia, separate Islamic legislation and banking regulations existed side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides Central Bank of Malaysia with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The different and separated legislation proves that the modus operandi of Islamic banks itself is different from that conventional banks.

In addition, the investor in a conventional bank is assured of a predetermined rate of interest while in Islamic banks which promote risk sharing between provider of capital (investor) and the user of funds (customer). Rate of interest applied by conventional banks is known as Base Lending Rate (BLR) which fluctuates according to the interest rate. In contrast, Islamic banks determine the price upfront, the clients who are then free from interest rates risk. A case in point, if a purchase house financed by the conventional banking which may seem attractive with lower rate for the first few years, but the clients cannot predict the next rate that will be imposed on them because it is according to the fluctuation of Base Lending Rate (BLR).

As a result, Zaharuddin (2008) holds the view that during the inflation period, the clients may face Base Lending Rate (BLR) as high as 10 %. This is what happened in Malaysia during 1995 until 1998, Base Lending Rate (BLR) during these time was higher than 8 % and the clients had to pay at a higher rate. If the clients failed to pay according to the time period given, the clients will be subject to a higher penalty by the conventional banks and the total loan payable will be increased significantly. Nevertheless, the prices that are agreed upfront by both Islamic banks and their clients are much safer for the clients from any uncertainty in payments. Faizan Ahmed Memon and Omar Mustafa Ansari (2008) explain the similarities that lead to many misconceptions towards Islamic banks when they write:

The basic reason behind this similarity is to ensure three objectives. The first one, which can be considered the most important, is to provide a level playing field to ensure the survival of Islamic Financial Institutions in the financial landscape. The second is to ensure shareholders and depositors of Islamic Financial Institutions are not deprived of returns, preferably equivalent to that in conventional banks. And the third is to avoid arbitrage among Islamic and conventional financial systems which may be exploited by a few big guns to take advantage of the pricing difference between the two parallel financial systems. For such reason, time value of money concept is used for performance measurement and pricing of financial products (p. 25).

The above views have it merits because the objectives explain the purpose of establishing Islamic financial institutions in Malaysia which is Islamic bank. It means if a transaction can be engineered in such a way that it becomes Shariah compliant, we should not conclude that the same is haram only because of its similarity to interest-based financing. For example, only by uttering the name of Allah Almighty upon an animal at the time of slaughter makes it halal and permissible while not doing makes it haram.

That’s the reason why Faizan Ahmed Memon and Omar Mustafa Ansari(2008) highlighted among the objectives of the Islamic banks is to provide Shariah compliant and prudent banking opportunities; hence providing an opportunity to Muslims to do their banking transactions in a halal manner. In other words, this is just an effort to avoid riba and other prohibited elements present in commercial and banking transactions, in order to ensure that we do nothing that is haram. It can be concluded that it is the substance of a transaction that makes it halal or haram as the differences in rules and regulations implemented by the Islamic banks compared to conventional banks in its operations. By establishing the Shariah Advisory Council in every Islamic banks helps the Islamic banks to evaluate their product to make sure it is in line with the Shariah. Cooperation between the committee members of Shariah Advisory Council and the practitioners plays an important role to make sure the Islamic banks achieving their objectives.

Islamic banks charge higher price

In addition, there those who argue that Islamic banks are not Islamic because of it cause higher cost. Therefore, Islamic banks in Malaysia could not contribute anything positive towards the socio-economic changes that Islam desires. As an Islamic financial institution, Islamic banks should help in reducing the poverty rate in Malaysia and those people argue that the Islamic banks should help the poor people by financing the poor people. But what happens nowadays is by charging higher prices, Islamic banks only deals with clients that deserve doing transaction with them while poor people are neglected.

If microfinance organization like Grameen bank could help the poor people in Bangladesh, the Islamic banks in Malaysia could also do the same. By helping the poor people with small sums of money, they are able to purchase the inventory, supplies and tools needed to start or expand micro businesses. The Grameen bank also helps the rural poor to start technology micro businesses, such as selling cell phone time to other villagers, which also provides valuable means of communications and access to vital information. As a result, the entire community benefit from the microfinance, therefore the Islamic banks also could imitate the Grameen bank and focus helping the poor.

On the other hand, higher charges by the Islamic banks seem more oppressive compared to the conventional banks. Therefore, the clients are complaining and feel regret. Due to this higher price, the clients may turn to conventional banks since they offer lower price. The clients also maybe confused when Islamic banks in Malaysia use some Arabic terms in their product but then charge the clients a higher price than the conventional.

The establishments of the Islamic banks are supposed to help the Muslims, not burden them further by charging higher price. As an Islamic finance institutional in Malaysia, Islamic banks should help the Muslims citizens in Malaysia in the same spirit that a Muslim person helps his own family and the ummah. By scaring the clients that riba is prohibited but at the same time charging people with higher price is deem as unethical act done by the Islamic banks to attract people to come and use their products, because this is against the objective of Shariah which is the end does not justify the means.

Halal transaction is priceless

According to all the arguments above, there are many points in answering the claims, which could be explaining through a real understanding of the purpose and the progress of the Islamic banks. The objectives of Shariah also state that the origin of Muamalat matters is by understanding its underlying wisdom. Datuk Abdul Halim, the pioneer of Bank Islam Malaysia Berhad in Malaysia, used ‘sale’ as the basic methodology in Islamic banking. According to him the Quranic verse in Surah Al-Baqarah verse 282 which means: “O you who have attained to faith! Whenever you give or take credit for a stated term, set it down in writing. And let a scribe write it down equitably between you; and no scribe shall refuse to write as God has taught him…” gives the solution to the banks problems from ‘loans’ to ‘defrayal in sale’ (Nik Mahani Mohamed, 2008).

From the basic methodology stated we could clearly see the difference in substance and fundamental action between Islamic and conventional banks. It is important to note that an Islamic bank and conventional bank are worlds apart and cannot be compared. A bank that uses its functions and operating modes based on Shariah principle is obviously difference than manmade principles use by conventional finance. In a similar way, an Islamic bank’s sole function as a finance institution is to help Muslims avoiding riba and other prohibited elements present in commercial and banking transactions, its main purpose is not to help poor people, this is because in Islam, zakah system is establish to help the needy.

Therefore it is not the aim of Islamic banks to help the poor since the zakah system has already provide the solution, the time of Caliph Umar Abdul Aziz proved that with good administration of the zakah system, the poverty could be eradicate. Zafar Sareshwala (2008) believed that Zakah is universal in its scope can be seen in the manner in which it is collected and distributed. After providing for the needs of eligible kin, the zakah fund is designed to cover the needs of those who live in the community where zakah is collected and then to those eligible recipients living in the county, state, country, and finally the world at large.

Besides that, comparing Islamic banks with microfinance institution like the Grameen bank is incomparable. An institution that based it based on Shariah principle is incomparable with one that charging interest rate in its loans. Fernando (2006) and Hasina (2007) hold the same view that similar to all microfinance institutes, the interest charged by Grameen bank is higher compared to that of traditional banks, as Grameen's interest (reducing balance basis) on its main credit product is about 20%. The Grameen bank’s web site claims that the interest rates can range from 18 to 60 percent, depending on the conditions in each microfinance institutes service area. Thus Sudhirendar Sharma (2002), a development analyst, believed that the Grameen Bank has "landed poor communities in a perpetual debt-trap".

In contrast, how Islamic banks could help the poor is by paying zakah annually, all Islamic banks in Malaysia are subjected to zakah payment and the portion which comes from the total revenue is huge in number. Zaharuddin (2008) proves the amount of zakah payment by looking at the financial reports of Islamic banks in 2005 to give an example "RHB Islamic bank: RM920 thousand, HSBC Amanah: RM49 thousand, Maybank Islamic windows: RM 1.172 million, Public Bank Islamic windows: RM55 thousand, Hong Leong Islamic: RM45 thousand" (p. 137).

Therefore, Islamic banks are helping the poor people indirectly. The ultimate reason why Islamic banks have to charge their clients a higher price than what is on offer by the conventional banks because of the costs they have to bear, such as commodity risk, asset destruction, holding risk and price risk, as well as their relevant overhead expenses costs. Moreover, the Islamic banks products had gone through the approval of the Shariah Advisory Board in respective Islamic banks while the conventional banks did not. Nevertheless, according to Faizan Ahmed Memon and Omar Mustafa Ansari(2008), the financial experts have generally felt that even if these factors are considered, the pricing by these banks is on the higher side. On the other hand, in a profit and loss-based model, it is agreeable that they assign weight to different types of deposits in a manner that the total return on investment and financing pools is allocated among various depositors and the bank (working as a partner).

Even then, it is generally noted that Islamic banks are paying less than the market rate to their depositors. This is different with conventional banks that act as a lender, lending money and getting it back with compounding interest as its fundamental function. Another simple analogy in explaining the high price charged by the Islamic banks, if there is a place operating with a market monopoly selling non-halal chickens, a shop that sells halal chickens may consider to set up selling at a higher price to satisfy the demand in halal chickens. This basic economic theory shows that when demand is high while supply is limited in number, the price will increase. The value of a halal transaction compared to haram ones is clear to a Muslim where a halal transaction is priceless.

Future role of Islamic banks

In conclusion, one may say that we are required by our religion to implement a complete Islamic way of living in our individual and collective lives and the society and in our government as well. The Islamic banking and financial system is part of such a system and is not construed to be applicable in isolation while other laws and customs repugnant to the Shariah requirements are still in force. Therefore, I do believe that Islamic banks in Malaysia are fully Shariah compliant because it provides us interest-free banking system, give reasonable prices and constructs Shariah products for the benefits of Malaysia citizens.

However, for our own benefit, in order to avoid interest by ourselves with a view to providing interest-free opportunities to our brothers and sisters in Islam, we should promote and support Islamic banking and finance in the country to the best of our ability. This is because Allah mentioned clearly in the Holy Quran, Surah Al-Baqarah: 275, “God has permitted trade and forbidden usury.” Therefore we are in need of halal transaction to obey the command of Allah.

Islamic banks is expected to face a rapid growth in Malaysia, this is because since the experiment in 1983 has shown that it is a commercially viable proposition (Mohamed Ariff ,2007). Islamic banking in Malaysia can provide us with a reprieve from interest-based transactions and might support us in augmenting a truly Islamic financial system. Ahmed Memon and Omar Mustafa Ansari (2008) believe that “we should not try to pull the legs of an infant who is just trying to take his first step towards a long journey just because of some misconceptions. However, we should try to ensure that he commences his journey the right way, on a strong footing.”(p.27). More appropriately, it will serve us well when we are in a position to implement the complete Islamic way of living.


Azizul Hoque, (2007). Islamic Banking and Some of Its Possible Impacts. In Ataul Huq Pramanik. (Eds.), (2007). Islamic banking how far have we gone (pp. 107). Kuala Lumpur: Research Center International Islamic University Malaysia.

Fernando, N. A. (2006, May). Understanding and Dealing with High Interest Rates on Microcredit - A Note to Policy Makers in the Asia and Pacific Region. Retrieved October 4, 2008, from

Hasina (2007, February 18). Sheikh Hasina sneers at Nobel winner Yunus's bid to enter politics. Retrieved October 4, 2008, from ?id=702180187&cat=&n_date=20070218.

Islamic Banking Act 1983 (Act 276). (1983).

Mohamed Ariff, (2007). Islamic Banking: A Southeast Asian Perspective. In Ataul Huq Pramanik. (Eds.), (2007). Islamic banking how far have we gone (pp. 329). Kuala Lumpur: Research Center International Islamic University Malaysia.

Muhammad Musleh Uddin, (2007). Meaning of Riba. In Ataul Huq Pramanik. (Eds.), (2007). Islamic banking how far have we gone (pp.27). Kuala Lumpur: Research Center International Islamic University Malaysia.

Mustafa Ansari., & Faizan Ahmed Memon. (2008, January 25). Is Islamic Banking Really ‘Islamic’?. Islamic Finance news, 5, 24-27.

Sharma, S. (2002, September 25). Is micro-credit a macro trap?. Retrieved October 4, 2008, from 00.htm.

Frequently Asked Questions about Microfinance from the Grameen bank foundation web page.

Nik Mahani Mohamad. (2008, March). Benarkah Tiada Perbezaan di antara Perbankan Islam dan Perbankan Konvensional?. Millenia Muslim, 67, 32-35.

Nik Mahani Mohamad. (2008, April). Benarkah Perbankan Islam Sebenarnya Adalah Sama Dengan Perbankan Konvensional Malah Lebih Dahsyat Darinya? (Bahagian 2). Millenia Muslim, 68, 32-33.

Nik Mahani Mohamad. (2008, May). Persoalan Perbankan Islam. Millenia Muslim, 69, 32-35.

Tajul Islam, (2007). Mechanics of Islamic Banking. In Ataul Huq Pramanik. (Eds.), (2007). Islamic banking how far have we gone (pp. 127). Kuala Lumpur: Research Center International Islamic University Malaysia.

Zafar Sareshwala. The Institution Of Zakat and its Economic Impact on Society. Retrived August 16, 2008, from

Zaharuddin Abd Rahman. (2008). Wang, Anda dan Islam. Kuala Lumpur: True Wealth Sdn Bhd.

Ibn Yusof
27 October 2008 / 27 Syawal 1429
6:01 p.m.

Wednesday, October 15, 2008

Affirmative Action in US appears close to elimination

Affirmative action policies describe many policies aimed at a historically socio-politically non-dominant group with various missions. The non-dominant group in the United States of America includes the minorities, women, and all racial groups. Among its sole objectives according to Sally Coleman Selden (1999) it can be conclude that among the main thing are to promote access to education, employment, or housing among certain designated groups, to redress the effects of past discrimination, to encourage public institutions to be more representative of the population and to enhance racial, ethnic, gender, or other diversity.[1]

Based on the objectives of the affirmative action policies, the American were supporting these idea when the federal government of the United States of America renewed its century old written commitment to removing the barriers to equal opportunity created by slavery, segregation, and discrimination that had hampered Americans of African descent for nearly four centuries. In 1965 the American government promised black Americans a better America; free from the barriers of discrimination that had denied them equal access to education, employment, housing, political participation, and the many other rights and privileges that white Americans enjoyed (F. Michael Higginbotham, 1999). [2]

Affirmative action policies has been implemented in many fields including in the employment, judiciary system, military, higher education system, the nation’s health, the health care workforce and list goes on. It is an objective of most governments to ensure public institutions, are open and accessible to a broad and diverse array of individuals, including individuals of all races and ethnicities. The government believed by ensuring diversity, accessibility and opportunity are government's responsibility to its citizens.[3]

History of the policies and it progress

It is important to note that the affirmative action policy in the United States of the America has been supported by all presidents since it first being implemented during 1961 by President John F. Kennedy. According to Shirley J. Wilcher (2003) it is first being introduced when President John F. Kennedy used affirmative action by instructing federal contractors to take "affirmative action to ensure that applicants are treated equally without regard to race, color, religion, sex, or national origin." These policies followed by President Lyndon B. Johnson that become a real supporter of the affirmative action, he requires all government contractors and subcontractors to take affirmative action to expand job opportunities for minorities including for women.

President Richard M. Nixon also continues the policies by authorizing flexible goals and timetables to correct "underutilization" of minorities by federal contractors. He then revised the order by including women in it. A few years later in 1973 the Nixon administration issued "Memorandum-Permissible Goals and Timetables in State and Local Government Employment Practices," distinguishing between proper goals and timetables and impermissible quotas. The policies continue until the time of President Bill Clinton declared his support for affirmative action programs by announcing the Administration's policy of "Mend it, don't end it."[4]

To make a long story short, the policies are being implemented until now. It just that interesting to note that all presidents support these policies until the time of President Bill Clinton that he tries to improved the policies but not to end it. The reason may due to some of the problems that occur during the time of it being implemented. This happened around the late 90’s when many lawsuits were filed regarding the use of affirmative action policies. But many cases filed were regarding the admission into the higher education.

All the cases make clear that the Constitutional Court will face a difficult task in evaluating whether affirmative action programs conflict with constitutional principles of equality. While some guidelines, such as the term "equality" will be interpreted broadly and only unreasonable racial differentiation will be deemed to be "unfair discrimination", have been implicated by the Constitutional Court's examination of equality provisions in the Interim Constitution, these guidelines do not reconcile the conflict between the concept of equality and the notion of affirmative action (F. Michael Higginbotham, 1999).

Presidential candidates views on affirmative action policies

Besides looking at the history of the affirmative action’s programs, it is also important to analyze the future of the policies from the view of the presidential candidates of the America’s election 2008. Among all candidates, Sen. John McCain and Sen. Barack Obama are being highlighted much by the media for their chance on winning the post.

Regarding the affirmative action programs, Sen. John McCain waded into seemingly dangerous waters recently, endorsing a proposed Arizona ballot measure to end race- and gender-based affirmative action in the state. Though McCain's reversal might give minorities and women pause, Sen. Barack Obama hasn't exactly carried the affirmative-action torch (Young, Y. 2008).

Plus Sen. Barack Obama once said "Affirmative action is not going to be the long-term solution to the problems of race in America because, frankly, if you've got 50% of African-American or Latino kids dropping out of high school, it doesn't really matter what you do in terms of affirmative action. Those kids are not getting in to college."[5] In addition last year Obama mentioned to National Public Radio that, "Affirmative action is an important tool, although a limited tool.”[6] The statement was being criticize by Yolanda Young (2008) because Obama sidesteps the fact that affirmative action was intended not to solve racial problems, but to achieve racial equality.

However, Obama hold the same views as President Bill Clinton when he claims that he will support affirmative action “when properly structured”. In contrast, McCain choose to end race- and gender-based affirmative action in the state when he proposed amendment to the Arizona Constitution that would ban "preferential treatment" on the basis of "race, sex, color, ethnicity or national origin.”[7]


The debates in the United States over affirmative action have been controversial, and for some even divisive, most Americans of good will on both sides of the argument claim that they wish to create a society that truly affords equal opportunity to all. So in the final analysis, the question becomes what methods will facilitate such a societal transformation. Some opponents of affirmative action say simply ending discriminatory laws will do the trick. Supporters of affirmative action say that more must be done. The impact of centuries of discrimination will take more to eliminate than mere eradication of discriminatory laws. These members of groups which have suffered must be compensated for the harm done to them. They must be put where they would have been if not for the wrongful treatment.

Affirmative action will help to right the wrongs. Nevertheless, while it will take much longer, equal opportunity can be created without affirmative action. With it, however, the harm imposed on generations of black South Africans simply because of their color may be corrected more swiftly and with less economic and social disruption than other more severe methods.

The choice has already been made in the United States. Opposition to affirmative action by the courts, legislatures, and political leaders resulted in its limited implementation. With its broad and dynamic implementation who knows how much more progress could have been achieved. Yet, despite its positive impact, affirmative action in the United States appears close to elimination.[8]
[1] Selden, S. C. (1999). A Solution in Search of a Problem? Discrimination,Affirmative Action, and the New Public Service. Retrieved October 6, 2008, from custom/staticcontent/t2pdownloads/KelloughCommentary.htm
[2] Higginbotham, F. M. (1999). Affirmative action in the United States and South Africa: Lesson from the other side. Temple International and Comparative Law Journal. Retrieved October 6, 2008, from Lexis Nexis Academic Universe/General News.
[3] Richardson, L. A. (1998). What Is the Constitutional Status of Affirmative Action?: Reading Tea Leaves, in ABA Focus on Law Studies, Spring 1998, Volume XIII Number 2.
[4] Wilcher, S. J. (August 7, 2003). The History of Affirmative Action Policies. Abstract retrieved October 6, 2008 from
[5]Young, Y. (2008, August 15). Obama's fumble on affirmative action. USA TODAY, pp. 12A. Retrieved October 6, 2008, from Lexis Nexis Academic Universe/General News.
[6]Babington, C. (2008, June 28). Might Obama's success undercut affirmative action?. USA TODAY. Retrived October 6, 2008, from
[7]Jakson, D. (2008, July 27). McCain sides with ban affirmative action. USA TODAY, Retrieved October 6, 2008, from
[8] Higginbotham, F. M. (1999). Affirmative action in the United States and South Africa: Lesson from the other side. Temple International and Comparative Law Journal. Retrieved October 6, 2008, from Lexis Nexis Academic Universe/General News.

Ibn Yusof
11.17 a.m
16 October 2008 / 16 Syawal 1429

Friday, October 10, 2008

Islamic Economics : How Far Have We Gone?


Islamic economics had been developing gradually as an interdisciplinary subject in keeping with the Islamic worldview in the writings of Qur'an commentators, jurists, histo­rians, and social, political, and moral philosophers. While some may disagree, I do believe that despite the extraordinary achievement that Islamic economic has made over the last three decades, the development process of Islamic economics as a scientific discipline has a long way to go in order to offer a complete and comprehensive economic system. Therefore, it is yet still could not be a viable alternative to conventional economics.

A large number of scholars, including Abu Yusuf (d. 798), al-Mas'udi (d. 957), al-Mawardi (d. 1058), Ibn Hazm (d. 1064), al-Sarakhsi (d.1090), al-Tusi (d. 1093), al-Ghazali (d. 1111), al-Dimashqi (d. after 1175), Ibn Rushd (d. 1198), Ibn Taymiyyah (d. 1328), Ibn al-Ukhuwwah (d. 1329), Ibn al-Qayyim (d. 1350), al-Shatibi (d. 1388), Ibn Khaldun (d. 1406), al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762), made valuable contributions over the centuries. These scholars were, however, not specialists in economics. Strict compartmentalization of disciplines had not developed by then. They were masters of a number of different intellectual disciplines, and their contributions are, therefore, spread over a vast literature, some of which has been lost because of the vicissitudes of time and a wave of invasions particularly by the Mongols.

In 1975, “Islamic Economics” came into light after the international conference made in Makkah on the subject. This conference and several follow-up conferences and seminars motivated several Muslim economists and even some non-Muslim economists to explore the theory of Islamic economics and economic system that teachings of Islam entail. The results show that it has made substantial progress as a scientific discipline and nowadays Islamic economics and finance are taught at several universities, not only in Muslim countries but also in the West and among the most prestigious universities.It just that after a few decades of development and growth in Islamic economics, people starts to realize there are some problems that need to be fix in order for Islamic economics to have a strong foundation.

The problems in present state of Islamic economics

Among the problem that we could see in the present state Islamic economics are some barriers that occurred in building the Islamic economics. The spiritual barriers face by Muslims nowadays also lead to the failure of development Islamic economics because as we can see nowadays there are still many Muslim that is not aware with the Islamic economics.

Moreover, we are still in need of human capital that understand Islamic economics and could strive together in developing the Islamic economics. Most Muslim nowadays is psychologically defeated when we talk about the objective and goals of an Islamic economics system. This is because we are trapped in the conventional system for centuries and to revive it is something impossible to certain people, there are also people who downgraded the effort of striving for Islamic economics.
As a result, Muslim leaders all over the world have been faced with the problem with the problem of diagnosing the cause of the ills of Muslim society and prescribing cures. An inferiority complex has led them to imitate Europeans without critical thought about those aspects of European knowledge, technology and institutions which are relevant and useful for us.

Besides that, Islamic economics nowadays is too focusing in Islamic banking and finance. When we say about Islamic economics, most of the Muslim will still start to think about Islamic banking. According to Dr. Khaled A. Hussein (2007):
A large part of those economists who have or had the ambition to develop a scientific theory of Islamic economics and development of an Islamic economic system are not very appreciative of directions in which Islamic banking system has developed itself. They do not see a direct relationship in this development and the claim that Islamic economics promises a paradigm to give a better economic future to mankind. The fundamental pillars of Islamic economics like emphasis on economic justice, endogenizing Islamic ethics into objective function and market behavior, significance of risk sharing in developing productive organizations etc. are hardly visible in the development of Islamic banking(p.57).

Even the progress of Islamic banking in the last thirty years is unprecedented, what we can see nowadays there are many issues arising and objections occurred. Most of it relates to the Shari’ah issues regards to the products promotes by the Islamic banks. While in Islamic Economics, with its concern for justice, equity, poverty, and its multidimensional conception of human development represents a paradigm shift and a radical alternative to conventional neoclassical views. Dr. Asad Zaman (2008) said:
Numerous papers introduce Islamic concepts entirely within a neoclassical framework, or else make minor adjustments to it, and therefore cannot from a basis for a paradigm shift. Another set of papers discusses the radical concepts offered by Islam in a general philosophical way, without offering any means of operationalizing these concepts (p.2).

Dr. Asad Zaman (2008) is among the scholars in Islamic economics that believe that we should have our own framework instead of imitating the Western style of economics. Among the points that he pointed out in most of his papers is that Islam urges the feeding of the poor, and condemns those who do not do this, Muslim economists have brought up the issue of poverty in their writings well before mainstream economics were paying attention to it. However we have participated only marginally in the huge literature which has since developed ­literature on basic needs, measurement of poverty. From my opinion, because of too focusing in Islamic banking makes we neglect other elements that are also important in the development of the Islamic economics as a whole.

The future role of Islamic economics

From my humble opinion, the development of Islamic economics can be taken by improving three things, which are increase the awareness of the needs of Islamic economics in education, re-establishing zakah institution, and unite the trading system among Islamic countries.

Awareness of the needs of Islamic economics in education
Nowadays, many people do not really understand what Islamic economics is. They think Islamic economics is just about the transaction that is free from riba. In fact, they also do not know what is riba really is? Hence, to understand the term Islamic economics is very important. Again, Islamic economics also did not just deal with Islamic banking alone, it covers every aspect of human life. Therefore, there should be awareness among Muslims to show the need of Islamic economics in our daily life.

In addition, from academics perspective, we have to establish our own Islamic knowledge. In simple word, the Islamic scholars should produce more books and papers regarding education. Moreover, the books and papers should be written in Islamic ways, which does not neglect the standing of Al-Qur’an and Sunnah. The observation show that the students are still dependence on the western scholar’s writing because of the small amount of books and papers regards to Islamic economics. The dependence towards western scholar’s writing may influence us. That is the reason why we are in need of the islamization of knowledge as what mentioned by Ismail Faruqi in his framework.

An important part of the future agenda should be to write systematic and uninterrupted history of economic thought in Islam. There is also need to prepare textbooks on the subject to fulfill the growing needs of the departments of Economics in the wake of introducing study papers on the history of Islamic economic thought at the under graduate and graduate levels. Through education we may increase the number people who will strive for the implementation of Islamic economics. It is the time for us to return to the glory time of Islam where people from the western and all over the world are using our Muslim scholar’s writing in studies.

Re-establishing Zakah institution
Besides that, among the measure that need to be undertaken to ensure the future development of Islamic economics is regards to the religious and historical Islamic institutions, Zakah institution. Zakah institutions are among the priorities that we should not neglect. The religious and historical Islamic institutions, Zakah are focusing on Islamic economics, rather than merely finance which will take care of it if we define proper economic objectives.

The suggestion is not both denying the importance of Islamic banking and finance, or an effort of abandon Islamic banking and finance. It is more towards improving both institutions administration without neglecting Islamic banking and finance role. The importance Islamic teachings place a lot of emphasis on spending in the path of Allah. Muslims have not made any systematic study of charity behavior of Muslims, nor have they made any comparative studies of Muslim and non-Muslim societies with regard to charity contributions.

The problems occurs in some Islamic countries nowadays are relates to the administration of the Zakah. This happened because most of the administrators are subjected to some rules and regulations, procedures and so forth. In addition, the poor administration shown by some of the Islamic countries lead to the lack of effectiveness in showing the effects of Zakah in eradicating the poverty in Muslim countries.

Due to a variety of eroding factors, the institution of zakah, which once provided an economic safety net to society, has lost its meaning. Today, it has an ad hoc and irregular function reduced to almost a ritual practiced individually by a small minority of Muslims. Many who pay zakah, unfortunately, do not even know how to accurately calculate it, let alone its potential economic impact on society.

As Zakah institution nowadays, what could we see from the administration itself where there are too many procedures that the recipients of Zakah have to go through to get their right on the Zakah. More disappointing is when the money allocated for the recipient did not really help them and only enough to survive until next year if they are lucky. As a result, the condition of the recipients of Zakah is still unchanged while the cost of living is rising from time to time. Most countries failed to establish real distribution of zakah. For instance, in Pakistan, the study by foreign expert explained that approximately 63% of the zakah collection in this country is keep idle. In the same word, most of the zakah collection in Pakistan did not reach the zakah recipients. Actually, this part of zakah distribution is the most important part in developing Muslims countries for eradicating poverty as well as establishing equitable distribution of income. Hence, when this problem rises, once again we have problem in developing Islamic economics.

That zakah is universal in its scope can be seen in the manner in which it is collected and distributed. After providing for the needs of eligible kin, the zakah fund is designed to cover the needs of those who live in the community where zakah is collected and then to those eligible recipients living in the county, state, country, and finally the world at large. Through accumulation of surplus in zakah funds during prosperous years, the institution of zakah provides necessary contingency funds during depressed economic conditions when zakah revenues may not be sufficient to meet the required needs of the society. The levy of zakah, particularly on the idle portion of an individual’s wealth, induces the zakah payer to seek a return on his wealth at a rate at least as high as the rate of zakah, so as to be able to pay zakah without reducing his/her wealth.

In this context, we may recall that in Madinah and Basra during the caliphates of Umar ibn Al-Khattab and Umar ibn Abdul Aziz (717-720 CE.), respectively, there were years when there was a surplus in the zakah fund but no eligible recipients to receive it. We may not attain this ideal condition within a projected ten-year period as suggested in this example, but we would certainly be on the road for reaching contentment. The institution of zakah when fully operational would become a fountain of economic harmony and contentment.

Gold Dinar: Unity in Trade among OIC countries
Besides improving the Zakah institution, another measure that should we take into consideration to ensure the development of Islamic economics is regarding the unity between Islamic countries itself. Trade is one of the main vehicle for da’wah activities for the spread of Islam from Andalusia in Spain to the Cape of Good Hope in Africa and to the Malay Peninsula. It is a fact that the volume of trade among Islamic countries, before the Western colonization began, was at a very healthy level. However, after the Industrial Revolution, Islamic countries has been colonized by the West and ruled with the objective of supplying raw material to satisfy the Western. Therefore, trade among Islamic countries began to deteriorate. Today trade between Muslim countries is small. It is not suggested that we reduce our trade with the non-Muslims. But we should endeavor to increase the trade between Muslim countries.

That is the reason why Malaysia's fourth Prime Minister, Tun Dr. Mahathir Mohamad is among the pioneer who proposed the use of Gold Dinar between the Organizations of the Islamic Conference (OIC) countries to bring about greater unity among the Islamic countries. The underlying basis of this greater sense of unity will be trade. The urge of using gold dinar is not only among the Muslim but also from the Non-Muslim. In addition there are many Non-Muslim economists that wanted the medium of exchange is made from the gold or silver because of their understanding of the stability and so forth. Some of them argue that the major reason why they are some people did not want to use gold and silver as medium of exchange; it is not because lack of technical expertise but it is because the gold and silver could overtake the nowadays monetary system.

Therefore we should support the effort and attempt of the Muslim economist to bring back the usage of gold and silver as the medium of exchange and units of account so that the economic could be more just. The Malaysia consul at the Organization of the Islamic Conference (OIC) to bring back the usage of the gold and silver is not to raise popularity but it is the matter a fact of responsibilities of bringing back the understanding and realization regarding the usage of dinar and dirham towards the Muslims as an exchange from nowadays monetary system.

It is for the betterment of the Ummah that should be fight for by all of us, if the Europe country could use their own currency which so called Euro,why can’t the OIC’s countries use Islamic dinar as the currency? The continued dependence of the Islamic countries on the West can be illustrated by the following:
(i) The intra OIC trade is only 12% of the total trade of the OIC countries. In other words, the trade of the OIC countries with the non-OIC countries is 8 times the size of the intra-OIC trade.
(ii) The total volume of the trade of OIC countries is only 7% of the total international trade, although 60% of the natural resources of the world are found in the OIC countries.
(iii) Lebanon and Turkey export butter to Belgium, the United Kingdom and some other European countries, while Iran, Pakistan and Syria import butter from Europe.
(iv) Egypt is a big export of textile, but Algeria, Indonesia and Iran purchase textile from Europe.

As we can see from the example given above, there is no unity in Islamic countries in terms of trading system. We could see Lebanon and Turkey rather export butter to Belgium, the United Kingdom and some other European countries rather than trade with Iran, Pakistan and Syria. In addition, Algeria, Indonesia and Iran rather purchase textile from Europe instead of purchase it straight with Egypt. If only we can start to trade among ourselves, without using the Western countries as intermediaries, we can substantially increase the volume of such trade based and bring about greater prosperity among the OIC countries. This will create a virtuous cycle.

As a result, the developing countries must come together to help each other to grow and develop, by buying and selling more from each other and minimizing the use of the currencies of the developed countries for settlement of the intra developing country trade. We should use our surpluses to finance each other. This is the ultimate objective of the Gold Dinar proposal.


In conclusion, in this era of development and growth in Islamic economics, while we celebrate the achievements of the Islamic economics, we should not ignore other relevant issues and objections in order to ensure that the Islamic economics has a strong foundation.

We should first try to understand the need in Islamic economics for the betterment of the ummah. Thus any actions to achieve the goals and objectives of an Islamic economic system will be rewarded by Allah Subhanallahu Ta’ala. As a true Muslims, we should strive to develop the Islamic economics. We need to focus more on the Islamic part that has been forgotten for many years. Conclusively, each and every Muslims must cooperate in this matter to materialize the true Islamic economics.

A new perspective in implementing the justice of Islamic economics in this era of globalization should be done comprehensively. The glory of Islam depends on the scholars from all aspect of life. Islamic economics has been accepted as a discipline in its own right. What we need today is to apply it on a massive scale to solve the problems of Muslim societies as well as humanity at large.

[1] M. Umer Chapra (2000).Is it necessary to have Islamic economics?. Journal of Socio-Economics. 29, 21-37.
[2] Khaled A. Hussein. Islamic Economics:Current State of Knowledge and Development of the Discipline. Retrived July 31, 2008, from
[3] Zafar Sareshwala. The Institution Of Zakat and its Economic Impact on Society. Retrived August 16, 2008, from
[4] Tun Dr. Mahathir Mohamad.(2002, April 29). The Gold Dinar in Multi-Lateral Trade Seminar. Retrived October 02, 2007, from
[5] Ahamed Kameel Meera. (2004). The Theft of Nations – Returning to Gold. Kuala Lumpur: Pelanduk Publications. pg. 168.
[6] Tun Dr. Mahathir Mohamad.(2002, April 29). The Gold Dinar in Multi-Lateral Trade Seminar.Retrived October 02, 2007, from
· Dr. Asad Zaman. (June, 2008).An Islamic Critique of Neoclassical Economics. IRI Journal Islamic Studies.


Ibn Yusof
11 October 2008 / 11 Syawal 1429
1.45 a.m