Category: Economics and Islamic Finance


Abstract

            Subprime Mortgage is the exit of capitalistic economy, in term of general assumption economic always developed from time to time; there will be no an economic system that able to sustain on it eternally. After the collapse of capitalistic economy, the world is looking for alternatives economic system that could endure on nowadays world eco-financial conditions. An Islamic economic system is one of those alternative system that recently being popularized. And when we talk about an Islamic system or its values it be really relevant to relate it to Indonesia as the world largest Muslims’ population. Although it is not an Islamic based country, its potential economic power to absorb the Islamic economic systems’ values could not be debated anymore. Since its establishment on 1990’s Islamic economic system especially in its banking lines succeed to reach a special place on the Indonesian peoples both from Muslim and non-Muslim community. To it, the Islamic finance also gets some privileges and a part of government intention. This paper will concern to a kind of Islamic monetary policy for that relevantly could contribute to build healthier economy; through some comparative reviews among conventional and Islamic monetary systems and policies itself.

Keywords: Subprime Mortgage, capitalistic economy, Islamic monetary system

I. Introduction

This writing begins from the assumption of there will be no an economic system that will sustainably endured over the economic development from time to time on its closed relationship with some externalities likes worlds’ trademarks on political power, supremacy of civilization and soon. An Islamic economic system ever became a dominant economic system during the Islamic golden ages   and fall a soon after renaissance. During renaissance and the development of modern economy socialistic economic system is fall after the collapse of Soviet Republic; then the world economy is dominated by liberal-capitalistic system where an Islamic economic system contribute a little part of the world’s economy. Today after a global financial crisis and the collapse of US economy which is the core of capitalistic system, the world is looking for the stronger economic system.

An Islamic economic system becomes popular and applicable on today’s world financial crisis and be an alternative for new applicable economic system. Indonesia is the biggest Muslim country on the earth; according to Indonesian Statistical Bureau (BPS) it has 237,641,326 total populations with 85.1% or around 182,570,000 of it are Muslims.[1] There will be no hesitations on its potential economic power that could be earned from ummah. But some issues will be arisen, is how an Islamic economic system will develop on a non-Islamic country like Indonesia? What is Islamic monetary policy’s instrument that could be applied? And how come Islamic monetary values could be applied in the Indonesian economy?

This writing focuses on the mainstream school of thoughts on the discussion of the base of monetary theory, element, strategies and policies building. It aims to give a figure for Indonesian Muslim peoples to be aware of Islamic economic contribution in actualization process of healthier economy.

II. Comprehensive Review on Money and its Function between Conventional and Islamic Economic System

 II.I. Conventional Perspective of Money

            On its development money is classified into some categories which are:

  1. Commodity Money or money that has an intrinsic value. This kind of money has several characteristics such as:

a)      Scarcity: Supply of commodity should be limited

b)      Durability

c)      High commodity’s value

The history is recorded that the usage of commodity’s money faced several critical problems such as; commodity’s money have no any unit of account, difficulty in saving and portability. Therefore, our ancestors shifted their mind to use others high valued metal as money. Gold and silver is commonly used to replace some commodities as money; due to its characteristics of durability, portability and measurements.

  1. Token Money

This kind of money is raised where some parties like banks, goldsmiths and several jewelers’ stores issued receipts of gold and silver that became well accepted by the community. Those receipts is generally accepted and were conducted as the replacement of their high-valued metals; with compared to the metals, a receipt is more portable and could be breakdown into more unit of account.

  1. Deposit Money

This kind of money is established by commercial banks through cheque or another form of money. It is used to be conducted as money in general perspective. Deposit money is more liquid and save with compared to another moneys. People could detect their lost deposit money and having its portability and lower cost. Some economist presumed that this kind of money is the source of bubble economic; when there is no balance between money supplies in the real sectors is lower than the interest rates with refer to some banks’ instruments.

II.II. The Conventional and Islamic function and motive to hold money

            In general term there are some major functions of money; first, as a medium of exchange, standard of value, sore value, unit of account and standard of deferred payment; those functions are applied for every currency all over the world. And in term of motive to held money Keynes came with three motives of people to hold money which are:

  1. Motive to exchange it for other goods or services
  2. Precautionary motives
  3. Speculation

There is fundamental diversity between conventional and Islamic economic system on how they view money, its functions, and peoples’ motive to hold on it. In term of money’s function conventional economic system assumes money as ‘commodity’ and they could sell it anytime they desired to do so; they take an interest rate as the cost of money. Karim Adiwarman, (2006)

There are no significant differences among convention economy and Islamic economic system in term of motivation to hold money; both of them are used money to exchange it with another goods and services and also for precautionary purposes. There is no controversy on the transactional motive but, in term of precautionary motive some of Islamic scholar argued that it could be classified as a speculation action and close to gabling. But still the majority of ulama argued that in term of human life, human beings will face some uncertainty of life, they never know what will happens in their future life. Therefore the majority of ulama permit some precautionary action on human beings life. But the thing will be different in term of demands’ motive of money for speculation. Some economists and scholars’ belief that the speculation motive of Keynes refers to bad speculative behaviors such as gambling on stock market, play with foreign currencies etc. This is the crossing point where conventional economic system and an Islamic economic system are differed.

III. Theory’s of money demand development

            In general acknowledgment there are three classification of demand for money’s theory; first, before-Keynes money’s demand theory, Keynes money’s demand theory and after Keynes money’s demand theory.

  1. Classical theory

a. Fisher’s theory of money demand

MV = PT

Where:  
M : The amount of money supply
V : Velocity of money
P : Prices’ level
T : The amount of goods and services

On this theory some Fisher assumed that the amount of money does not influenced by an interest rate but it is influenced by how fast its velocity on an economy. It can be concluded that according to Fisher money could not be conducted as a commodity.

b. Marshall and Pigous’ theory of money demand

Md = cY

Where:  
Md : The amount of money demanded
c : Constanta shows the percentage of hold’s money compared with people income
Y : Nominal income

According to Marshall and Pigou money is conducted more to be a store value, not for transactional motive. According to them the amount of money demanded is influenced by an interest rate, the amount of wealth, the expectation of high interest on the future economy, and the price level. To them those factors are constant in short term period, it will changes depend on the proportional of personal income.

            Those two different argumentations becomes the source of confusion among some economists. But for other circumstance it is close to the Islamic perspective in term of money.

  1. Keynesian theory of money demand

As the earlier discussion Keynes came with three motives of people to demand money. Those motives are derived into this equation:

Md = Mdt + Mdp +Mds

Where:  
M : The amount of money supply
Mdt : Money demand for transaction
Mdp : Money demand for precaution
Mds : Money demand for speculation

  1. Post-Keynesian theory of money demand (Friedman’s theory)

Md = k(r1,………rj)y

Where:  
Md : The amount of money demanded
r : Rate of return
1,………r : Kind of property including the interest rate

According to Friedman the amount of total money demanded is tend to be influenced by national income. The different among Friedman and Keynes is that Friedman argued that ‘k’ is not constant, the amount of ‘k’ is influenced by the interest rate and another factors. He argued that national income could be earned not only in the full-employment condition but also under full-employment time.

  1. Islamic theory of money demand

Generally Islamic economy has three major functions and motives of peoples to demand money. First, as an exchange tool; second, as a store value; money as flow concept or to be conducted as public good.

Due from its development there are several theories on money demand in Islamic economic system.

  1. Iqtishaduna school of thought money demands’ theory (Baqir As Shadr)

Md = Mdt + Mdp

According to this school of thought, money is functioned for transaction and investment or other precautionary purposes. The money demand for transaction has a positive relationship with personal income.

  1. Mainstream school of thought (Dr. Umer Chapra)

Md = Mdt + Mdp à Md = f(Y/µ)

Where:  
Md : The amount of money demanded
Y : Income
µ : Dues of idle cash

According to Metwally the demand of money is functioned as a transaction and precautionary tools. ‘Dues on idle cash’ is a major instrument of monetary policy for them.

  1. Alternative school of thought (Dr. M.A. Choudury)

Md = f (rPLS + y + p + G + X + Y)

Where:  
Md : The amount of money demanded
rPLS : Profit and lost sharing ratio
y : Nominal Income
p : Price level or inflation rate
G : Government expenditure
X : Socio-economic variables
Y : Government policy

Total money demand is a representative of real sectors transactional acts, it has positive relationship among them.

With concern on details of each mentioned theories, there is primary difference among conventional and Islamic school of thoughts theories especially with refers to Keynes and after Keynes theory with Islamic theory. In term of Keynes and after Keynes theory, they are focused on the role of interest rate while the Islamic theory tend to examine money demand with relate to profit-lost sharing and investment as a precautionary purposed activities. Islamic theory is closer to the classical school of thought in term of money’s cost. The transmission of those theories will be discussed on latter chapter. In further discussion we will focus on Islamic money demands’ theory rather than the conventional one; we will particularly examine on mainstream theory and describe another details of Chapra’s idea of Islamic monetary policy’s formulation.

IV. Profits and lost shearing/PLS and the ‘dues of idle cash’ as the major instruments to form an Islamic monetary policy

            Before step to further discussion on Islamic monetary policy, we should first examine how conventional economic system maintained its monetary policy. Commonly there are several major conventional monetary policies which are first, open market operation, reserve requirement, discount rate and moral suasion. Some conventional monetary instruments such are governments’ securities, interest rate play a major role on those mentioned policies. The three interest-based policies are against a fundamental principle of Islamic economic which justice and economic-social welfare is.

            To form a firm Islamic monetary policy which is applicable on the actualization of Islamic economic values on an economy, Umer Chapra came with several strategies to build an applicable monetary policy Chapra develop the abolition of riba’ with its replacement by profit and lost shearing/PSL and the principle of ‘dues of idle cash’. For sure that those strategies face some objection that tend to declare an interest is the absolute instrument in term of money with refer to its capital-stock concept, where money is conducted as a private good with interest as the cost of it. To face that contradiction Chapra argued that in an Islamic economy there will be no free-money; in fact that Islam is looking for another measurement that fulfill the requirement of justice and social welfare. Chapra argued that an Islamic economy charges money by the ratio of profits; and as the implementation of justice and social welfare he purposed to shift a risk of losing money for both lender and borrower party.

            The principle of ‘dues on idle cash’ becomes one of major strategy beside the abolition of riba’. This principle contradicts all conventional money demand theories mentioned earlier. Whet the conventional economic system rewards the people who save their money in idle condition, it will served by some amount of interest fees on it, and the Islamic economy suggests to allocate peoples’ idle cash to productive activities. Where they have an idle or progressive asset it will be charged with some dues on zakat; and after time to time the idle assets will decrease and decrease.

            With relate to the above strategies it will make short as well as long-term investment opportunities are relatively available with regard to investors’ will to allocate their idle assets to some productive business through PSL scheme in order to offset their expected returns rather than interest returns. In term of PLS scheme the rate of profit is post-determined unlike an interest rate. There will be pre-determined profits’ sharing ratio.

V. Islamic Monetary Policy

            There is no any doubt that Islamic economics is not a new discipline of science. It has been established seen on the prophetic period and experienced some fluctuation on its development. The paper starts from Chapra’s argumentation on the theory of money demands. Chapra argued that there is a positive relationship among total money demanded, national income, and welfare economy with the development of real sectors due to its capacity to create new employment, increasing on GDP, aggregate consumption and well-economic long-term stability.

            Some scholars agreed that to build an Islamic monetary policy a deep understanding on the principle of Islamic value and examining on the Islamic precedents on monetary issue are extremely needed. Some economic terminology such as foreign currency, cash and non-cash transaction, cheque and promise’s note are commonly conducted on the prophetic period. The specific monetary policy even conducted by Prophet (pbuh); when the stocks of gold and silver (dinar and dirham) are decreased and the scarcity is happened on it the Prophet export some gold and silver and vice verse. It reflects that Prophetic monetary policy is deserved to be referred. Mainstream school of thought describe that the fundamental motives of people to demand money and interest rate as the major difference among Islamic and conventional monetary system.

            The core of Islamic monetary policy is that there should be a stable domestic currency and the balance of money demanded and supplied. Currency’s stability reflects economic price level that project the development of national socio-economic goals such as the fulfillment of society’s basic needs, a just distribution of income and wealth, full-employment, real sectors’ development and middle-term economic stability. Islamic monetary of Islam suggests people to demand money only for clear and valid motivations. They should avoid extravagant consumptions and any forms of bad speculative behaviors. Islam suggests them to be moderate on their transaction and demand money only for validated precautionary purposes. The implementation of that suggestion will stimulate the allocation of money to real sector and indirectly build national goals; beside some allocations for social-oriented activities such zakat or another charities.

            Another element that could not be avoided easily due to the development of the world financial and monetary sectors is the high-powered money. It might influence the balance among Md and Ms is a high powered money Mo; some critical problems arise from such kind of money which is steamed from several causes; first, fiscal deficit; second, commercial bank credit creation and balance of payment surplus.

            Excessive government expenditures over its budget and the incapability of it to manage their budget stimulate them to borrow from central bank. This kind of wasteful behavior really burden national monetary sector. Therefore the management on high-powered money is a necessity to maintain economic stability. To implement Islamic monetary policy the central bank should really concern and careful in using money; central bank should examine it credit allocation to others commercial banks with profits lost shearing to abolish interest based conduct. As same as the central bank carefully allocate their credits to commercial banks, the commercial banks also should be selective to find appropriate entrepreneurs. It will prevent money demand from unproductive wasteful consumptions. Finally when government experienced balance payment surplus, the allocation of surplus must in accordance to domestic economic capacity in absorbing those surplus; so that inflationary impacts could be minimized.

VI. Conclusion

             In sort description starting from conventional monetary instruments which are open market operation, discount rate and reserve requirement are involved on interests could not be accepted. Some modification of available instruments with refers to syariah compliance could be figured such what Islamic school of thoughts defined. First, Iqtishaduna school of thought argued the early Islamic era has no any form of monetary policy, due to the stability of Islamic currency (dinar and dirham) and the balance between money supply and amount of goods and services produced at that period; second, mainstream school of thought tend to maximize available resources (money demand) to productive economic activity through ‘dues on idle cash’ principle able to allocate those potential resources to the real sectors that stimulate long-term economic stability as whole; third the alternative school of thought argued that any form of monetary policies should be in harmony with real sectors condition, it must pass the mechanism of “syuratiq process”.

VII. Recommendation

            This writing is merely theoretical conduct that needs to be verified with future research particularly in term of how effective and relevant those theories on its application in the real world.

References:

 

Chapra, Umer, Towards a Just Monetary System, United Kingdom: International Islamic Publishing House, 1405h

Chapra M. Umer, Masa Depan Ilmu Ekonomi Sebuah Tinjauan Islam, Jakarta: Gema Insani Press,  2000.

Chapra M. Umer, Sistem Moneter Islam, Jakarta: Gema Insani Press, 2000.

Abdul Azim. Islahi, Contribution of Muslim Scholars to Economic Thought and Analysis, Jeddah: Scientific Publishing Center King Abdul Aziz University, 2005.

Muhammad, Kebijakan Fiskal dan Moneter Dalam Ekonomi Islam, Jakarta: Salemba Empat, 2002.

Antonio M. Syafi’i, Bank Syariah Dari Teori Ke Praktik, Jakarta: Gema Insani Press, 2001, Tazkia Cendikia.

Karim, Adiwarman, Ekonomi Makro Islami , Raja Grafindo, Jakarta, 2007

Online References:

http://www.hendrakholid.net/blog/kebijakan-moneter-islam/

http://zanikhan.multiply.com/journal/item/2283

http://id.wikipedia.org/wiki/Uang

http://www.jurnal-ekonomi.org/telaah-singkat-pengendalianinflasi-dalam-perspektif-kebijakan-moneter-islam/


[1] Compiled data from Indonesian Statistical Bureau (BPS) and Wikipedia online encyclopedia

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Abstract

On today’s’ development of zakat Professional zakat appears on its controversies and potential power to an economy as whole. Professional zakat seems to be a good tool that classified into a source of zakat. For its founder professional zakat is derived from the figuration of agricultural zakat; due to its new existence, it comes with tough debate and controversies among some ulama’. This writing tries to examine some controversial element of professional zakat and how it finally becomes one of potential source of zakat in Indonesia that will also influence national’s economy by several mechanisms. In the end of the writing there will a compiled figure that project the contribution of zakat for Indonesian economy.

Keyword: zakat, professional zakat, agricultural zakat

I. Introduction

Zakat is one of five major pillars to strengthen the Islamic religion. As a way to worship Allah it has some uniqueness as a worshiping that relates mankind to their God and also mankind to others in term of social responsibility that could be assumed as a religion tax. Indonesia is the biggest Muslim country on the earth; according to Indonesian Statistical Bureau (BPS) it has 237,641,326 total populations with 85.1% or around 182,570,000 of it are Muslims.[1] There will be no hesitations on its potential power that could be earned from zakat. But the some issues will be arisen, is zakat’s contribution is significance on today’s Indonesian zakat collection? How well it contribution with compared to other national income source such as tax? These mentioned issues will be discussed further on the writing.

Some researches that concern on the Islamic potential contribution to Indonesian economy have adequate information on such potential economic power of ZIS (zakat, infaq and sadaqah) but, the discussion on originality of zakat itself. The former researches also concern on the way how zakat could be converted to formal fiscal policy’s instruments due to some Islamic jurisprudences’ circumstance, this writing will go forward to the contemporary issues of zakat; such as professional zakat become one of the major discussions on this writing. Indonesia with its complexity and heterogeneous people comes with complex understanding and discussion on some religious discourses, particularly in term of zakat the thing that will be concerned is on the contemporary forms of zakat that occurred in Indonesia lately. It will be focused on professional zakat due to its potential contribution in macroeconomic perspective. The origin of professional zakat laws’, the controversial element of it and it mechanism to help Indonesian economy as whole is discussed further.

II. Content

II.I Definition of Professional Zakat and its Controversy

Before step forward to its controversy a clear perspective on professional zakat is a necessity. Professional zakat is kind of zakat that be paid from professionals’ fees after certain nisab.[2] In term of professional zakat, a profession is classified into two catagories which are: first, personal private profession such as an architect, dentist, doctor, bankers etc; and second, the profession that depend on other people or institution such as public servants, ministers, government executive etc. Abu Hannan, (2010)

In general acknowledgment a professional zakat is a new terminology and considered as new form of zakat in nowadays time. It formulation is referred logically to a common conduct of agricultural zakat; which is type of zakat that farmers paid after their harvest without any waiting times’ requirement; an agricultural zakat requires only a quantity limit to pay which is 2.5% or nishab. From this common practice, some peoples do an analogical effort to convert it to be a new form of zakat. Which is started from an analogy that if the farmers should pay zakat on their harvest commodity, does another profession that generate more profits have to the same obligatory payment? In fact that there are other professions that generate more profits easily, should they have to do so? That analogical process provide a new terminology of zakat which is ‘professional zakat’ that really close to agricultural zakat in term of it laws’, purposes and requirement. Beginning here the controversies came up.

Those peoples argued that those who earn money from their professions such farmers; should pay around 2.5% for zakat. The controversies come from their analogy’s result. Some scholars assume that their analogy on agricultural zakat is improper and violate the divined rules of zakat such what the majority of ulama’ agreed (general syaria’ rules on zakat)[3] which are:

a)      The quantity’s requirement (nishab)

عَنْ عَلِيٍّ – رضي الله عنه – قَالَ: قَالَ رَسُولُ اَللَّهِ – صلى الله عليه وسلم – – إِذَا كَانَتْ لَكَ مِائَتَا دِرْهَمٍ -وَحَالَ عَلَيْهَا اَلْحَوْلُ- فَفِيهَا خَمْسَةُ دَرَاهِمَ, وَلَيْسَ عَلَيْكَ شَيْءٌ حَتَّى يَكُونَ لَكَ عِشْرُونَ دِينَارًا, وَحَالَ عَلَيْهَا اَلْحَوْلُ, فَفِيهَا نِصْفُ دِينَارٍ, فَمَا زَادَ فَبِحِسَابِ ذَلِكَ, وَلَيْسَ فِي مَالٍ زَكَاةٌ حَتَّى يَحُولَ عَلَيْهِ اَلْحَوْلُ

Meaning:

Transmitted from Ali: the prophet Muhammad (pbuh) said: “when you own 200 dirham along a year you should pay zakat for 5 dirham, and you have no any obligation to do so until you own 20 dinar along a year you should pay for half dinar for zakat, and every exceed on nishab will be adjusted in accordance with its calculation.

 

b)      Annual time requirement

Payment of any kinds of zakat should fulfils annual time requirement,

وَلَيْسَ فِي مَالٍ زَكَاةٌ حَتَّى يَحُولَ عَلَيْهِ اَلْحَوْلُ

Meaning: “there is no zakat until its haul.”[4]

That mentioned prophetic tradition is not applicable for agricultural, profits’ of trading and animal zakat. [5]

So than, based on the mentioned argumentation the analogy on agricultural and professional zakat is failed. That analogy is in conflict with several prophetic traditions bellow:

  1. The Prophet is used to take Haul

When the people try to extract a new argumentation on some worshiping line they should consider all aspect of the existing legal proposition on their logical analysis. They could not use weaker proposition on the stronger and verified proposition. When the founder of professional zakat derived it with refer to agricultural zakat which is clearly stated before that it is free from haul requirement, for sure that this analogy is against the principle if istinbat al-hukm. Various kinds of zakat could not be justified on an equal law’ and requirement.

  1. The Analogy of Professional zakat on agricultural zakat is invalid.

Some shortcomings occur when the analogy on agricultural zakat and professional zakat with refers to the principle of istinbat al-hukm. Here are some of them: first, agricultural commodity is reaped around 3-4 months when the professionals’ fess or salary is given monthly; second, the amount of agricultural zakat depends on its irrigation cost and method, the farmers should pay 1/10 of the total harvest when it spent any irrigation cost, and the amount will be 1/20 of total harvest when it don’t spent any irrigation cost; and third, generally professionals’ fees and salaries are given in term of cash or money, it will be improper if someone compare it with an agricultural zakat that produce agricultural commodities.

II.II. The Suspending of Professional Zakat Analogy

With concerns on that factual argumentation, the supporting argumentation on professional zakat should be suspended soon. Here are some argumentations to suspend it:

a)      Logical proposition

The founder who comes with their argumentations on professional zakat argue that “Where the peasants are obligated to pay on their harvest, another professions such a doctor, officer and some executive should be charged with higher zakat for their professional fees”. [6] This argumentation violates the basic principle of istinbat al-hukm which explained that; worship should base on clear and verified propositions and not on merely analogical argumentation. With refers to historical studies, a thing such salary or wage is commonly conducted and whether the Prophet (pbuh) himself or other companions never discus and conducted such that zakat. Abu Hannan, (2010)

b)      Zakat on salary/income

Generally salary, wage or income received in cash/money, money is tend to be classified into a personal property. Therefore some scholars assumed money that charged by zakat should follow these two requirements, first, fulfilling its nishab separately or be a part of other property; second, has reached its haul. [7]

III. The mechanism of professional zakat as a source of zakat

The debate on professional zakat does not mean that it automatically eliminate its existence of in term of Gods’ worshiping. The majority of ulama’ have agreed that professional zakat is classified into wealth’s zaka[8]t that marge several property and fulfilling nishab and haul requirements; due to it physical indication that professionals’ fees or salary always given in cash/money. It should be paid 2.5% from total property.[9] We assume that professional zakat is a part of wealth, then calculation of it zakat will becomes a part of wealth’s zakat calculation. Here we go to some figuration came from former researchers on the potential resource of zakat in Indonesia.

We assume that professional zakat beings a part of wealth’s zakat we notify that there will be positive impacts for national Aggregate Consumption by using Aggregate Expenditure Approach. Yussof, (2006)

 He purposes these following models to examine the positive impacts of zakat to the aggregate consumption.

C1 = C01 + c1 (Y –Z –T),     0<c1<1 ……………………………………………. (1)

Where:  
C1 : MPC of the Muzakki (MPC1)
C01 : Autonomous consumption of zakat payers (muzakki)
c1 (Y –Z –T) : The disposable income after deducting zakat and taxes payments

The assumption is that the lower level of c1 where the desired consumption of the zakat recipients Cz (the mustahik) is:

Cz = C0z + czZE,      0<cz<1………………….…………………………………….. (2)

Where:  
Cz : MPC of the Mustahik (MPCz)
C0z : The autonomous consumption where the zakat recipients consume goods and services from sadaqah if they have no income and do not receive zakat
czZE : The amount of zakat spending. With the expectation of cz to be relatively higher than c1.

Yussof came with simpler equation in which the Mustahik is assumed to be depended on their consumption only from zakat; due to the unavailability of incomes. So that Mustahik’s MPC equals 1 and the desired Aggregate Consumption Cz will be:

 CZ=C0z+ZE……………………………………………………………….…..………………… (3)

With the assumption of equality among zakat and consumption CZ also saving Sz known that the distributed zakat’s equation is:

ZE = Cz + Sz ……………………………………..…………….……………………………… (4)

And finally the aggregate consumption function will be:

C= C1+ Zz
C = C01 + C1 (Y –Z –T) + C0z+ czZE ……………………………………………………………………..(5)

The mentioned equations show that professional zakat when it is assumed a part of wealth’s zakat theoretically has strong influence on the aggregate consumption. And latter could increase national GDP by stimulating the productive sectors on the economy.

In the beginning of the writing is mentioned that Indonesian total population is around 237,641,326 peoples with 182,570,000 of them are Muslim, when we assume that 50% or 92.185.000 peoples of Muslim population are in poverty and we assumed also based on family’s criteria which is in a family consist of 3 children there will be 18.437.000 families that prospered well economically. Here is the figure of minimum and maximum Indonesian zakat income Edy Sudewo, (2006)

Table 1. The Indonesian Minimum Zakat Income

The willingness to pay 50.000,- IDR zakat Amount
Muzaki (MillionPeople) Month

(Billion IDR)

 

Year

(Trillion IDR)

10% 1.8 90 1.08
20% 3.6 180 2.16
30% 5.4 270 3.24
40% 7.2 360 4.32
50% 9 450 5.4
60% 10.8 540 6.48
70% 12.6 630 7.56
80% 14.4 720 8.64
90% 16.2 810 9.72
100% 18 900 10.8

Source: Edi Sudewo, Potensi Zakat Indonesia, Republika, 17 November 2006, page. 7[10]

Table 2. The Indonesian Maximum Zakat Income

The willingness to pay 150.000,- IDR zakat Amount
Muzaki (MillionPeople) Month

(Billion IDR)

 

Year

(Trillion IDR)

10% 1.8 270 3.24
20% 3.6 540 6.48
30% 5.4 810 9.72
40% 7.2 1.080 12.96
50% 9 1.350 16.20
60% 10.8 1.620 19.44
70% 12.6 1.890 22.68
80% 14.4 2.160 25.92
90% 16.2 2.430 29.16
100% 18 2.700 32.40

Source: Edi Sudewo, Potensi Zakat Indonesia, Republika, 17 November 2006, page. 7[11]

Based from Edi Sudewo figurations on potential incomes come from Indonesian zakat it should be a huge challenge for Muslim community to manage and maintain those enormous potential incomes. Unfortunately Indonesia earns under-expected zakat income up today. In 2009 Indonesia is earned 1.2 trillion IDR and in 2010 Indonesia is earned only 1.5 trillion IDR or 300 billion increasing with an optimistic expectation on future earnings of 100 trillion IDR per year or go beyond Edi’s calculation. Didin Hafidhuddin, (2010)

IV. Conclusion

            From the above discussion it is clear that professional zakat need to be reconsidered, it might good on its intention but less on its propositions support. The majority of ulama’ is agreed to take the professional zakat as a part of wealth’s zakat or zakat maal. Based on that assumption we have a strong rational theory that implied a strong contribution of zakat to the aggregate consumption with refer to Yussof expenditure approach. Concerning some reference on this writing there are a big challenging problem in term of zakat’s management, its maintenance due to the lower percentage of Indonesian zakat earning with compared to Indonesian Muslim population. Finally government as the rulers’ party should give their good will to support its zakat institutions. Without all of their good will, the potential earnings of zakat will always in lower level and will not help national economy to actualize social welfare and economic justice.

Reference:

Al-Fauzan. Abdullah. 1429H. Fiqhu Dalil Syarh Tashil: Maktabah Ar-Rusyd.

Al-Qorodhowi. Yusuf. Fiqih Zakat. Bairut: Muassasah ar-Risalah.

Faizah. Abu.  Catatan atas Zakat Profesi.

Manshur. Abdullah. Nawazil Zakat: Dar Maiman.

Sulaiman. Muhammad. Abhats Fiqhiyyah fi Qodhoya Zakat Al-Mu’ashirhoh. Yordania: Dar Nafais.

Yuliadi. Immamudin. 2007. Perekonomian Indonesia Masalah dan Implementasi Kebijakan. Yogyakarta: UPFE UMY.

On line resources:

http://abiubaidah.com

http://abuhannanassundawi.wordpress.com/2010/12/03/menyibak-kontroversi-zakat-profesi/

http://bola.inilah.com/read/detail/1334092/penerimaan-zakat-baznas-capai-rp-15-triliun

http://www.scribd.com/doc/54486025/Mengulas-Kontroversi-Zakat-Profesi


[1] Compiled data from Indonesian Statistical Bureau (BPS) and Wikipedia online encyclopedia

[3] Al-Ijma’ page. 51-54 by Imam Ibnul Mundzir and al-Iqna’ fii Masail Ijma’ 1/263-264 by Imam Ibnul Qothon.

 

[4] Az-Zakat fil Islam page. 73-75 by Dr. Sa’id al-Qohthoni.

[5] Idem page. 4

[6] Al-Islam wal Audho’ Iqtishodiyyah page. 166-167 by Syaikh Muhammad al-Ghozali and Fiqih Zakat 1/570 by Dr. Yusuf al-Qaradhawi.

 

[7] Majmu Fatawa Syaikh Ibnu Baz 14/134 and Majmu Fatawa Ibnu Utsaimin 18/178, Fatawa Lajnah Daimah 9/281.

[8] Wealth zakat refer to Zakat Maal in Arabic terminology

[9] Majmu Fatawa Syaikh Ibnu Baz 14/134 and Majmu Fatawa Ibnu Utsaimin 18/178, Fatawa Lajnah Daimah 9/281.

[10] Eri Sudewo is a Social Entrepreneur who concerns on zakat potential to build a better Islamic civilization.

[11] Eri Sudewo is a Social Entrepreneur who concerns on zakat potential to build a better Islamic civilization.

Febryan Mujahid Panatagama (IPIEF Student)

febryagam@gmail.com

Abstract

Human resources always become crucial issues of some developing country like Indonesia. Human resources development could be presumed as a branch of Economic Development which implies to almost socio-economic elements. How could it be a part of Economic Development? What is the meaning of human resources development? Some Human Development theories would also be discussed here with our reaction as the student of economics. What is the condition of Indonesian’s human capital today in facing the globalization and how should we struggle to solve those problems as soon as possible? Starting Indonesian’s Human Resources Development from academic line will be an ending discussion on this writing.

Keywords: Human resources, human resources development, economics, globalization, economic development

Introduction

On our general presumption, Economic Development consists of two different terminologies which are “Economic” and “Development” itself. “Economic” here refers to something related with the trade, industry and development of wealth of a country, an area or a society; where the “Development” itself refers to the gradual growth of something so that it becomes more advanced, stronger, etc. When we use “Economic Development” terminology we should realize than “Economic” could not stand alone, there should be others aspects that following it. According to Michael P. Todaro, Economic development should be presumed as the multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as acceleration of economic growth, the reduction of inequality, and the eradication of poverty.

Economic development born from a huge inequality between the “rich” and the “poor” these could refer to personal, regional, nation or country.  In our opinion, economic development is the long-term process of transmission from zero starting point up to next better advanced conditions. It’s conducted ideally by the government or peoples on their socio-economical issues. Economic development succeed when the “poor” community able to fulfill their basics’ needs of life, to raise their levels of living and expand the range of economic and social choices.

Starting on these considerations stated that one of the economic developments’ objectives is to fulfill the basic needs of human being and we recognized Purchasing Power Parity (PPP) and Human Development Index as its sophisticated parameter. It automatically denoted Economic Development that concerns on Humanity could not be separated with its object which is the Human Capital itself.

The purposes of this writing are to provide useful informative ideas on human resources development and to motivate young readers to be better human resource. Therefore, the discussion will be limited on it definition, theories, academic encouragements and provide some issues related to Indonesian human capital.

  1. I. The Definition of Human resources and Human Resources Development

According to Wikipedia, Human Resource is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations. Human resources is also the name of the function within an organization charged with the overall responsibility for implementing strategies and policies relating to the management of individuals (i.e. the human resources).

According to Arfida BR, human resources could be defined into two definitions; first it refers to some efforts or struggles given on the production process. In term of it, human resources represent the quality of efforts given by a single individual on a certain period of time for producing any goods or services; second human resources is anything related to the working people that produce several goods or services. Working people means to whom that able to do any valuable economic activities, those activities refer to production process that fulfill social’s needs.  (Arfida BR, 2002, p. 19)

Concerning these definitions we could understand that human resources are one of the important elements of factors of production beside other factors such as capital. It implies that same as capital human resources has a similar characteristic which is limited while the needs of these factors are unlimited. This condition stimulates the existence of Human Resources Management as one other branch of Economic Development itself. It studies how to manage limited available human resource as a factor of production to produce its goods and services on the maximum level.

Based on those following consideration we could conclude that Human Resources Development refers to the gradual growth of human capital so that it becomes more advanced, stronger, and have better capacity to maximize their production of goods and services.

  1. II. Human Development Theories

Principally, in term of Human Development neoclassical model focuses on the self-interest and very mundane aspect of human life. (Masyhudi Muqorobin, 2008, p.1). According to Arfida BR, neoclassical economists presume that every individual with its own tastes, preferences, needs, and wants is struggled to get their satisfactory by fulfilling their needs on physical consumptions. While it’s general acknowledgment human development theory is a theory that merges older ideas from ecological economics, sustainable development, welfare economics, and feminist economics.

Furthermore, on its development there are some contemporary economists that develop their own theory on human capital such as Amartya Sen that build her theory about Human Development Theory, one of those economists is Amartya Sen is an Indian-born Cambridge economist who won the Nobel Prize in Economics in 1998. He was praised by the Prize Committee for bringing an “ethical dimension” to a field recently dominated by technical specialists. Based on the example of the former Soviet Union, Sen argued that political liberties are necessary for sustainable development. He also compared the development strategies of India and China, arguing that Indian democratic processes provide a firmer guarantee of long term stable growth. Sen argued against the notion that a specific set of “Asian values” exists that might provide a justification for authoritarian regimes.

Amartya Sen puts forth the argument that all individuals are endowed with a certain set of capabilities, while it is simply a matter of realizing these capabilities that will allow a person to escape from poverty and their state of ‘unfreedom’. In this detailed account, Sen questions the status quo of development economics and argues that income poverty should not be the single most important factor in determining development. Sen argues that though today we live in a world of sheer abundance, there simultaneously exists populations’ living in a state of ‘unfreedom’, unable to realize their capabilities.

Sen attempts to expand the basic interpretations of freedom by examining five elemental forms of instrumental freedoms: political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security. Each form of freedom is complementary to each other, remaining interrelated and inextricable. These freedoms constitute not only the means, but also the ends in development. Poverty, Sen asserts, should be seen “as a deprivation of basic capabilities, rather than merely as low income” (Sen, 1999), contesting the general belief amongst economists who view income as the be all and end all of development. (http://en.wikipedia.org/wiki/Human_development_theory)

As our first beginning consideration that human resource born with the problem of economic, human beings which are should fulfill their basic needs and increase their level of live should work and indirectly build their national economy as human capital (workman) the right management of human resource create a better condition of human being’s level of live (higher income) and automatically support their national economy as whole.

  1. III. The Condition of Indonesian’s Human Capital in Facing “Globalization” and its Problems.

The world multidimensional crisis occurred lately brought some bad impacts for economic depression due to Indonesians human capital burring as the negative results of globalization. Beside the globalization the impact of Indonesian long economic stagnation today caused into some companies bankruptcy that caused into a huge increases in the unemployment numbers. This condition is getting worse due to the durability, capacity and the quality of human capital in Indonesia. The quality of Indonesian human capital is extremely appealed with the quantity of human capital itself.  This condition becomes one problem that blocked Indonesian economic development and the development of human capital itself.

Unfortunately Indonesian government doesn’t really concerns on these issues. It proved with the lower level of national budget given by government for educational sectors which is not more than 12% on the reformation period. And it’s get rather better or bad in 2011 which is not more than 20% or about IDR 50, 3 Billions or decreased dramatically from the year before 2010 which is about IDR 60 Billions. (Detik.com, 17/08/2010, 13:00 WIB) this calculation don’t includes the amount of budget ineffectively from some corrupted bureaucracies and other educational issues occurred in Indonesia.

This factual condition shows that there is no suffiecient will of Indonesian goverment to increase the quality of its human capital. Wherease it should be done as soon as possible and really Indonesian nation should build its qualified human capital to maintain and maximize its huge potention of its natural resources in order to realize the national economic power.

The not working people or unemplyomed is one of national economic problem which is really difficult to be solved. In general acknowladgment there are three major obstacles of unemployement; the first is ”the cultural barriers”, educational curiculum and labour market. The cultural barriers here refer to culture and the ethos of working. The educational curriculum obstacle refers to unavailability the definitive formed curriculum that able to creates and develope human capital self-suffiency swiched with the demands on laboforce itself. And on the last point the obstacles on the maker of labour is merely coused of lowest quality of Indonesian human capital.

The 21st century economic era is explicitly indicate with the runs of economic globalization which is an economic trading activities where some nations all over the world became an intergrated market power with no boundes of inter-national teritories. Whatever it is Indonesis should face globalization, this condition requires national efficiency and compititive power of national bussiness. According to the World Competitiveness Report Indonesia reported on the 45th position or the lowest level among the researched countries, indonesia left far away from Singapore (8th), Malaysia (34th), Philipines (38th), and Thailand (40th).

On its development, globalization gives some implication on the development of human capital in Indonesia. The main problem on developing Indonesian human capital is missalocation of human resources and mismanagement of potential natural resources. On the orde before reformation period labor market follows the era of ”high cost economy”. Where human capital tend to get involve that conglomerative lines which is starting at manufacturing up to banking industries. Due to these reasons educational lines involved on the aimlessly eco-political conflicts, likes economic asymetry that accelerates on the destortion of market’s structures. The ironic fact that some of the best graduatioins that involved on almost economic sectors were not solving those economimc problems, but they unfortunatly strengtenting the concentrated high cost econonomies, that sharpening an economic asymentries. That phatetic condition occures because of the vision of almost Indonesian human capital is limitted on the existing less-condusive markets’ sturcture and does not able yet to create their own market, due to some macroeconomic condition that not yet condusive enought fot it.

The asymetric Indonesian human capital development could be indecated not only by the big different of human capital educational beckgrounds on one regional/province with others, but also on one city with one village in the scope of Indonesian country. This condition supported with the minimum availability of educational facilitites such as the availability of teachers in a certain remoted villages. Therefore, it will be so difficult for Indonesia to improve the its people’s living quality and its human capital capacity if Indonesian government unable to fix those problems.

  1. IV. The Strategy to Improve Indonesian Human Capital’s Qualifications

To faster the developing process of Indonesia toward well developed country with competitive human capital; at least there are four potential strategies to be done such as:

  1. Defensive Strategy

It refers to human capital development’s strategies that have so many shortcomings and always pressured with foreign parties. This kind of strategy is insisting on the activities that oriented with how to defense human capital sector and Indonesia human capital that less-competitive.

  1. Conservative Strategy

It refers to human capital development’s strategies that have so many shortcomings, but it has potential opportunities to be developed. Programs and strategies here emphasized on some activities orient to strengthen by the Indonesian human capital basis such as the architectures lines, art’s works, movies and entertainments etc.

  1. Competitive Strategy

It refers to human capital development’s strategies that already have competitiveness on business, but facing some threats from foreign power (Imports). Programs and strategies here are emphasized on the human capital competitiveness improvement with its new innovative works, the improvement of Indonesian Workers to Foreign nations (TKI) etc.

  1. Aggressive Strategy

It refers to human capital development’s strategies that already have some powers and opportunities to develop continuously. Programs and strategies here are insisted on some activities orient to the values’ growth of Human Capital; such as invention of new innovations, the improving on the competitiveness and the development of professional human capital allocation on the potential pos and strategic sectors such as mining, technological development, or an expert of petroleum.

Those following strategies should be conducted integrally with others factors existing. Government though its related ministries should find the proper combination to solve and develop those mentioned strategies and programs for sure it should be suited with Indonesian frequent socio-economic dynamical condition.

  1. V. How to Start Indonesian’s Human Resources Development Beginning from Academic Environment

If we discus about early development of human capital it really suitable if we start from academic institution such as collage and campus as the good starting point. So that entrepreneurship mental is about a magical word for almost people that lately becomes a bit dilemma among Indonesian collegian. “Entrepreneur” in our consideration could be very dangerous particularly for those who still on their student’s degree. But it should be conducted as a good starting point to develop the quality of Indonesia human capital development. Some considerations should be concerned in term of collegian entrepreneurial activities. Those considerations and its problem solving will be discussed further.

  1. VI. The Definition of Entrepreneurship and Entrepreneur

According to Wikipedia, In general knowledge entrepreneurship is the act to be an entrepreneur, or someone who innovate some ideas to have any venture. It might be caused into some organization, enterprise or business company. According to Richard Cantillion the first Irish-French economist who was defined this terminology; original entrepreneur refers to a loan word (French) or a person who us willing to launch a new venture or enterprise and accept full responsibility for the outcome. IN 1800’s Jean Baptiste Say defined an entrepreneur is one who undertakes an enterprise. But after years people start to enlarge the essence of entrepreneur to some wider lines including socio-politics entrepreneurial activities. With refer to these acknowledgment we could easily conclude that an entrepreneur is not merely a materialistic or business activities but more. It could be any social or political entrepreneurial actions. The thing that I’m trying to express is smart entrepreneurial acts that suitable for student/collegian degree.

  1. VII. The Definition of Young Entrepreneur

After a brief discussion on entrepreneurship and something related on it we would like to describe about young entrepreneur meaning. A young entrepreneur seems to be different term but it’s actually the same with entrepreneur in general. We just see an adjective “young” before entrepreneur term. The word young with refer to Webster English dictionary could be defined in several meanings such as being the first or an early stage of life, growth, development, junior, having little experience, recently come into being etc. Here we tend to define a young entrepreneur as those who recently come to be an entrepreneur and still have little experience on it.

  1. VIII. Why entrepreneur could be dangerous?

In our humble consideration for some circumstances entrepreneurship could be harmful for those who still in their student or bachelor degree. In ideal condition a student or collegian should focus on their study first than spending their time and energy to looking for pennies. For real there are many students or collegians that too busy on their business then their collage. Some friends of me event should spend their study’s period 3 up to 4 years more than the normal one. Another reality is some of my friend also trapped on excessive debts with some financial institutions like bank, debt collector or event with their friends and colleagues. Finally, when their business suffered some lost their school or university fees are scarified for debt payment or event they unable to pay it.

Furthermore, beside disturbs academic activities and debts problem there are other bad impacts that might be occurred due to over in entrepreneurial activities. For physiological aspects students or collegians which are in their young ages tends to be materialistic person during their business activities. They will begin to measure everything with money, seems that there is no something valuable that could not be measured with money. In this case, when they succeed on their business activities parental guidance is a necessity in order to balance their success with some other spiritual maintenance such as religion or social responsibility.

  1. IX. Starting Smart Entrepreneurship for Collegian

On these argumentations we do not presume that starting to be entrepreneur earlier or in our young ages is bad at all but, what we are going to assume is we should start our early entrepreneurial activities smartly. Smart entrepreneurship refers to entrepreneurial activities to gain some profits with minimum risks and capitals. We realize that young people will not have much capital as much their expectation. Some of them also have no sufficient mentality to play on big capital business.

Back to our first consideration that entrepreneurship is not merely business activities but including socio-political activities. This condition allows those that still on their study’s period to expand any entrepreneurial activities. Refers to our first consideration a young entrepreneur is not only those who exist in direct business activities such as trading, foreign currency, financial market or other business activities that need amount of capitals and a lot of risks. But also those who struggle on their studies, produce some academic writing and achievements became the function of collegian productivity and result of their opportunity cost scarified by paying some amount of school fees; simply we could presume that studying is also the shape of promising business activities that could improve their capacities and qualifications in term of their possibility to be a good potential Indonesian human capital.

We presume that young entrepreneur especially for students moreover collegians should start to enterprise smart business such as establishing or joining “koperasi” cooperation. When we join cooperation it means that we will share not only our capitals, profits, lost and also the risks. So it will not impact our academic acts much. When we talk about cooperation it means that we will talk about low-end profits gains as low as our low capital that being invested there. Low returns might be no so good, but we could experience much there. Beside we could study from other members of cooperation in business, we able to have direct experience in the business activities. Cooperation not merely business activities but, it include leaderships forum, social forum and legal organizational institutions that ratified by the constitutions. Since that cooperation is mushrooming lately, student and collegian could access it everywhere such as Students Cooperation, Campus Cooperation, Employees cooperation etc.

Last point of this discussion is how student and collegian should face their desire to be an entrepreneur. After our long discussion with some Entrepreneur University’s students, we could conclude that being an entrepreneur is something necessary but it should be prepared well. According to them a success entrepreneur is those who are all out on their entrepreneurship. Therefore, young entrepreneur including student and collegian should be really careful to have their entrepreneurship.

  1. X. Conclusion

Indonesia as a developing county should realize that its development really depend on its human resources development, unfortunately Indonesian government don’t really intended to solve some critical problems related to human resources. But anyway as one of Indonesian human capital, staying quite and being a passive human capital is unforgivable. As student of economic on the bachelor degree we are claimed to be able to solve or at least help the government in solving human development problems. The lowest minimum effort that we could struggled as soon as possible are to analyze and identify our human resources miscellaneous obstacles and how to solve it. Less government supports, cultural barriers and less competitiveness become the major problem of Indonesian Economy today. Defensive, conservative, competitive and aggressive strategies should be conducted by the government. And our final struggles as a collegian to help in solving those discussed problems is by doing smart entrepreneurial activities.

 

 

 

 

 

 

 

 

 

 

References:

Karim Adiwarman A, Ekonomi Islam Suatu Kajian Kontemporer (Jakarta: Gema Insani, 2001)

BR Arfida, Ekonomi Sumber Daya Manusia (Jakarta: Ghalia Indonesia, 2003)

Fadjar Malik, Platform Reformasi Pendidikan dan Pengembangan Sumber Daya Manusia, (Jakarta: Logos, 1999)

Tumpman Simon, Mengapa Entrepreneur Perlu Makan Pisang, (Jakarta: Liblr, 2005)

Todaro P. Michael, Economic Development, (London: Addison Wesley Longman, 2000)

Restricted sources:

http://www.portalhr.com/majalah/edisisebelumnya/strategi/1id177.html

http://sammy-ekonomiku.blogspot.com/2008/03/pengembangan-sumber-daya-manusia.html

http://www.geogle/SDM Indonesia dalam persaingan global/.co.id

http://www.wikipedia.com

 

 

 

Febryan Mujahid Panatagama, IPIEF student

febryagam@gmail.com

One thing that almost being forgotten by majority of Muslim society nowadays is that Islam ever became a world leader with its well developed civilization and its noble thoughts. Islam has its golden era of glory, thousand years ago before Renaissance up today when, the development of rational science (al-‘ulum al-‘aliyyah) almost developed and introduced by the western scientists and scholars. But how we as Muslim stand on this factual glory of Islam in the previous era? This writing is supposed to give some motivations to Muslim to be aware of it own rich of knowledge and it’s noble thoughts not to be a merely reflection or remaining history of Islamic glories. This short informative writing will be limited to explore only on the economic lines. How were the Islamic thoughts transformed to be a western science; its history and its development phases? [1]

Keywords: noble thought, Renaissance

Introduction

Ir. H. Adiwarman A. Karim on his book “Ekonomi Islam” a contemporary’s studies (2001, p.11) defines that Islamic Economic is actually not a new discipline of science and also not a merely derivative of the existing conventional economic science is undoubted today. According to him the history has proved that the former Islamic scholars are the inventor of all basic sciences including an economic science.

The Muslim economist have admitted that they were read and being influenced by the Aristotle’s writings (367-322 BC) as a philosopher that wrote more on economic issues beside, Qur’an and Prophetic traditions as their main sources. Joseph Schumperter mentioned two major contributions of Scholastic economist, first the founding Aristotle’s writings on economics and towering achievement of St. Thomas Aquinas. J. Schamperter only wrote three lines on his footnote the name of Ibn Sina (Avicenna) and Ibn Rushd (Averroes) on the transmission phases of Aristotle’s thoughts to St. Thomas.

St. Thomas itself thought extremely contradicts the church’s dogmas in term of economic. Therefore the majority of history’s experts claimed that Thomas stole a lot of Muslim scholars’ ideas on various ways; those stealing will be discussed on the next chapter of this writing.

  1. I. Channels of Influence

According to Syarif, Muslim philosophy has influenced Medieval Europe in the following ways: It initiated humanistic movement, introduced the historical sciences and the scientific methods. Helped the Western scholastics in harmonizing philosophy with faith, stimulated Western mysticism, laid the foundation of the Italian Renaissance and to a degree molded the modern European thought down to the time of Immanuel Kant in certain directions even later. (Sharif, M.M. (ed.), 1966, A History of Muslim Philosophy, Vol. 2, p. 1349).

Literally, the meaning of Influence Channels here is the ways how the existing conventional economics overlapped the value of Islamic thoughts. Base in Syarif Muslim notions before, the existing conventional economics overlapped some Islamic economics’ thoughts troughs some translations, oral transmission, trade and commerce, crusades, travelers and explorers, diplomatic channel, and pilgrimage.

  1. I. A. In Term of Translation and Oral Transmission

On the 11th and 12th century, some of western scholars such as Constantine the African, Adelard of Bath explored toward some Middle East regions. They studied Arabic language and brought back some new disciplines of science to the European world. Leonardo Fibonancci or Leonardo of Pisa learnt in Bougie, Aljazair on 12th century. He learnt there arithmetic and Kawarizm Math and wrote Liber Abaci on 1220 as soon after his returning.

Raymond lily (1223-1215) has visited the Arabian countries and formed five universities that learn about the Arabic language where after then, translated many of Islamic economics works. Some of those translator were Adelard of Bath, Constantine the African, Michael Scol, Hermaan the German, Dominic Gundisvli, jhon of Serville, Plato of Tivoli, William of Luna, Robert Chester, Gerard of Cremona, Theodorus of Antioch, Alfred of Sareshel, Berenger of Valencia and Mathew of Aquasparta. And from the Jewish translator were Jacob of Anatolio, Jacob ben Macher Ibn Tibbon, Kalanymus ben Kalonymus, Moses ben Solomonof Solon, Shem-Tob ben Isaac of Tortosa, Solomon Ibn Ayyub, Todros Todrosi, Zerahiah Gracian, Farej ben Salim, and Yaqub ben Abbob Marie. Where the Islamic Economics works that have been translated were the works’ of Islamic Economist such as al-Kindi, al-Farabi, Ibn Sina, al-Ghazali, Ibn Rushd, al-Khawarizmi, Ibn Haitham, Ibn Hazm, Jabir Ibn Hayyan, Ibn Bajja, and ar-Razi. Some of the Islamic financial institution also being duplicated ny the western world such as syirkah (corporation), suftaja (bills of exchange), hiwala (letter of credit), dar-ut Tiraz (Government manufacturing) and Ma’una (a kind of private Bank) Adiwarman A Karim (2001, p.12)

  1. I. B. Trade and Commerce

The turning paradigms of Medieval Christianity’s trading outlook are highly influenced by the Muslim scholar’s trading activities. According to Cook (1974, p. 238), “The beginnings of the commenda as an accepted legal category in the Italian mercantile cities may have arisen from an acquaintance with the commercial practice of the Arabs”. Enough evidences are available that trade was conducted from Arab world though Russia to Poland, the shores of Baltic seas to Scandinavia, to north central Europe. ‘Series of hoards, containing many thousands of Muslim silver dirhams that have been found in the countries around Baltic’ (Lewis, 1970, p.85) are proving the vast trading network with Muslim countries. According to Bernard Lewis: ‘Italian and Spanish archives contain many documents relating commerce, including a number in Arabic” (Ibid, 1970, p. 81).

  1. I. C. Crusade, Travelers and Explorers, Diplomatic Channel and Pilgrimage.

Literally, any Crusades will automatically provide the direct or indirect interaction between West and East, it lets Western communities to adopt or initiated some ideas and institutions of the Muslim East. Langholm says: “The Crusades had opened up the world; towns and markets were expanding with the growing economies, new commercial techniques were being introduced.” (Longholm, 1987, p. 115)

The basic human nature which is “curiosity” to know and explore something new have become powerful force to travel, analyze, study, and adopt other nations system to be applied in their own countries. In case it could become an obligatory for some peoples. Starting from this point it stimulates some diplomatic relationship among countries and on the highest level of conduct could be the application of religious obligatory likes “Pilgrimage” for Muslim, Christianity or the Jewish.

 

 

  1. II. Contribution of Muslim Scholars from Part of the Family Tree of Economics.

To understand easily about this chapter, let we pay attention on this following Samuelson’s Family Trees of Economics Thought including Islam.

 

 

 

 

 

 

 

 

Fig. 1.1: Family Tree of Economics (Samuelson, 1976)

Samuelson’s Economics, one of the best textbooks is published in 1948. It have up to 11 editions an drawn a family tree that shown Aristotle and Bible as the originating point from whom schoolmen were created; St. Tomas acquired the ‘respective personality, that created mercantilists and physiocrats. Mercantilists were also rooted in earlier practitioners. Both Physiocrcy and Mercantilism ended in Adam Smith.

Bell shows many contributory currents in the development of economic thought. From Biblical times up to Adam Smith, main stream passed though middle ages comprising the church, Aquinas, Scholasticism which had direct relationship with Greek Philosophers and Roman law-givers. The other points mainstream are ‘rise of national satates’, ‘beginning of modern capitalism’ (to which are related French Colbertism and German Cameralism), English physiocrats, all constitute various elements of Mercantilsm as may be testified by all textbooks of Economics’ Thought.

 

 

 

 

 

 

 

 

 

 

 

 

Fig. 1.2: Contributory Currents in the Development of Economic Thought. (Bell, 1967, p.9.)

Contributions of Muslim scholars come after Greek in the family tree of economic. They were the main cause, not only, of the birth of scholastic economic ideas but for the rise mercantilism also shown there. Scholastic ideas stand nowhere in quantity, quality and originality as compared to Islamic tradition in economic thought. About St. Tomas Aquinas who is considered the most outstanding scholastic scholar, Copleston, a historian of medieval philosophy observes: “The fact that Aquinas derived ideas and stimulus from a variety of sources tent to suggest both that he was an eclectic and less of originality.” (Copleston, 1972, p. 181, quoted by Mirakhor. 1987, p. 249)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1.3: Development Chart of Islamic Economics (Abdul Azmi Islahi, 2005, p. 97.)

Abdul Azmi mentioned there that Islamic Economic thought drawn beautifully rise from beginning up to its modern development. The present philosophy provides an explanation up to 1500 A.D. Period after remained unexplored at all. In the Modern economics today, Islamic economics thought come as a response of Marxism and capitalism.

 

  1. Place of Muslim in the Family Tree of Mainstream Economics.

According to Abdul Azmi, the fact that scholastic scholars could possibly get Greek ideas though the medium of Muslim scholars and based their ideas on Greek philosophy and its commentary presented by Muslim philosophers, and the fact that mercantilism came as a result of Muslim influence, the contributions of Muslim scholars deserve as place in development of mainstream economics. And they must be rehabilitated for the sake of doctrinal continuity and objectivity, academic honesty and justice. (Abdul A. Islahi, 2009, Contribution of Muslim Scholars to Economic Thought and Analysis, p. 98)

 

 

 

 

 

 

 

 

Figure 1.4: Place of Muslim scholars in the family tree of Mainstream Economics.

  1. IV. Stealing

According to Adiwarman, A. Karim, there are many of modern economic theory that actually originated and invented based on Islamic scholars’ thoughts. Those scholastic philosophers stole that Islamic thought in various ways such as removing of Muslim scholar’s names and siscarding their citation and adopted it by its own name. Simply we could say that there should be a closed relationship among the Christian Scholastics, Ideas of Muslim Scholars and Greek Philosophy due for those discussed courses before.

Here is some stealing by the scholastic scholar on Muslim heritages:

  • Pareto Optimum theory was taken from Nahjul Balaghah by Imam Ali.
  • Martini from Spanish Dominical Ordos copied many chapters of Tahafut al-Falasifa, Maqasid al-Falasifa, al-Munqid, Mishkat al-Anwar, and Ihya Ulumuddin.
  • Bar Hebraeus, the priest of Syriac Jacobite Church copied several chapters of Ihya Ulumuddin by al-Ghazali.
  • St. Thomas copied many chapters of Al-Farabi (St. Thomas is a student of Bar Hebraeus and Martini that adopted more from al-Ghazali)
  • Adam Smith (the farther of western economy) on his Wealth of Nation (1776) claimed to take without acknowledgment many ideas of al-Amwal by Abu Ubaid (838)

 

  1. V. Conclusion

After these brief reviews on some references on the originality’s ideas of Islamic Thought particularly in term of Economics and the bad historical academicals crimes conducted by Christian Scholastics scholars that removed the original resource on their works is being a shamed facts that should be known by all Muslim generation. Due to these facts Muslim people in term of studying an economic science should really concern and act with their right proportion and capacity. Not all of western economic science that developed by western scholars should be eliminated because of its originality of Islamic thoughts there; and also should be insisted that not all of those science is totally acceptable due to several western philosophical developing influences on it. As a Muslim we should examine the right permitted original ideas of Muslims’ thoughts on some economics theory from the conventional economic science existing today that also already getting weak and weak after US’s economic crisis and the revival of Islamic Economic system all over the world.

 

 

 

 

 

Reference:

Islahi Abdul Azim, Contribution of Muslim Scholars to Economic Thought and Analisis (Jeddah: Scientife Publishing Center King Abdul Aziz University, 2005)

Karim Adiwarman A, Ekonomi Islam Suatu Kajian Kontemporer (Jakarta: Gema Insani, 2001)

Muhammad Umar Chapra, An Introduction to Islamic Finance (Kuala Lumpur: Quill Publishers, 1992)

Wahbah Zuhaili, Fiqh Muamalah Perbankan Syariah, (Team Counterpart Bank Muamalat Indonesia, 1999)

Majalah Pendidikan dan Peradaban Islam Islamia, (Jakarta: Thn I No. 6, Juli-September, 2005)

 

Restricted Online references:

http://www.wikipedia.com

http://www.wikipedia-anwer.com

 

 

 


[1] The paper is presented to fulfill the final midterm academic assessment on the major of “History of Western Economic Thoughts” under the guidance of honored Lecturer: Mr. Hudiyanto, Drs.

 

Dear readers, here is a good paper on Interest Abolition, its belong to my Major’s director Mr. Masyhudi Muqorobin, enjoy it….. Yummy…..

Theoretical Analysis of Interest Abolition and

Introducing Profit-Loss Sharing

(Special Paper for Innaugurating the Centennial Mu’tamar of Muhammadiyah)

 

by

Masyhudi Muqorobin

 

Head of Dept. of Economics and Director of International Program for Islamic Economics and Finance (IPIEF)

Universitas Muhammadiyah Yogyakarta

 

masmubin@yahoo.com

 

 

  1. 1. Introduction

The Council of Tarjih of Muhammadiyah has just discussed the issue of a fatwa on prohibition of interest, following a fatwa on the same issue by the Council of Indonesian Ulama (MUI). However, differences in interpretation of riba in Islam make the two fatwas remain unworkable significantly. This is because the majority of the Muslims remains unclear about the difference between riba– and equity-based participation, as represented by conventional and Islamic systems respecvtively, especially in banking and financial activities. Abolition of interest is not merely of religious significance, but also part of economic needs of a society, which necessitates academic analysis. This paper attempts to clarify from theoretical perspective, to provide more understanding about interest prohibition in an Islamic economy, and in support academically of the soundness of the two fatwas.

 

  1. 2. Candid Prohibition of Riba in Islam

Islam prohibits riba, as declared by Allah SWT in Surah al-Baqarah 275. “wa ahallaahul-bay’a wa harramar-ribaa” Allah has permitted trade and prohibited riba. Chapra in the appendix of his “Towards a Just Monetary system” (1986) maintains that this clear injunction concerning prohibition of riba in Islam abbrogates the previous verse “walaa ta’kuluur-ribaa adh’aafaan mudhaa’afah” (and do not eat multiple usury), which had been revealed previously. There are four steps of reveleation of riba. Two first step gives a positive explanation of riba that gives no blessing in the economy, and Jewish acquisitive behaviour generated by applying usury in the economy. Normative aspect of riba was sent down by Allah in two stages. In the first instance, Allah prohibits only multiple usury. Following the years of appreciation of the verse on prohibition of multiple usury, then the final decision on candid prohibition on any additional payment on borrowing was sent down by Allah to clearly prohibits all kinds of interest.

 

  1. 3. Theoretical Perspective of Riba Prohibiton

Differences in interpretation to what extent riba equals the modern economic term “interest” remain unresolved. Some sholars are of the opinion that some forms of “interest” is inevitable as it is a reasonable excess, thus does not meet the meaning of prohibited riba, to which the word “usury” is closer, and “the difference between riba and interest is the one of the degree not of kind” Choudhury (1975). On the other hand, the rest are in agreement to refer interest as riba and therefore rule out the role of interest as a cost of production from the Islamic socio-economic set up (Haneef, 1995; Mannan 1980,1992).

 

Following the abolition process of riba prohibition in the Qur’an, interest abolition from an economy requires a stepwise process, through what Naqvi (1981a, 1981b, 1983, 1994) calls  “transition period.”[1] It is inadequate to abolish interest, particularly using administrative fiat during the period. This also appears in his joint effort with Qadir (1981), and with others in An Agenda for Islamic Economic Reform.[2] However, if all conditions for a “complete” Islamic economic system are satisfied, he maintains, prohibition of riba implies the existence of “exploitation-free” economy, not only “interest-free” economy, as it accordingly implies elimination of the entire capitalistic system. The logic is that abolition of interest is necessary condition for such a system, but not sufficient (Naqvi, 1981a:  110). He further admits, in the context of capitalism as adhered by the majority of Muslim countries, positive interest rate is of its properties and thus satisfies the criterion of equilibrium. Hence, as capitalism bases its operation on limited liability to risk, limited knowledge about large-scale enterprise logically implies only a limited risk (1981a: 111-112). To provide arguments, he develops a model based on the assumption that positive time-preference is given in the society as a decreasing function of time (Naqvi 1981b and 1983, Naqvi and Qadir 1981). It is “reflecting the essentially myopic nature of individual’s economic calculus” (1981a: 115), and should be acceptable in Islam (1994: 114).

 

  1. 4. Interest, Intertemporal Choices and Production Possibilities

Interest is thought being the main pillar of modern conventioanl economy, Interest as a “price” or “cost’ of capotal can be defined, following Fisher (1930, 1970), as “the per cent of premium paid on money (or wheat or any other sort of goods) at one date in terms of money to be in hand one year later.” Interest rate in general determines the rate of investment relative to the gross national income and thereby the rate of economic growth. The lower the interest rates the higher the level of investment and thus the rate of economic growth. Accordingly, the investible resources are influenced by the rate of interest.

 

It is evident that the above proposition had been envisaged in a number of writings in the early years of the century, in the works of prominent economists like Marshall, Bohm-Bawerk, Walras, Knight, Wicksell, Fisher, etc.[3] In a chapter of his Theory of Interest, Fisher (1930) argues that interest is hardly separable from the involvement of time dimension to evolve the discounting concept. Suppose “the value of dinner about to be eaten involves no time of waiting and so no discount or interest,” meaning inversely that the price of any good or service (or in a generalised sense, asset) that involves time for waiting should be discounted, or in other words, “interest should be accounted for.” This is the very beginning of the process of determining the rate of interest.

 

The process begins with the difference between interests of two assets, matched exactly by the expected change in their relative prices, to form an interest parity formula[4]

 

1 + j

—— = 1 + a (1)

1 + i

 

where i and j are the interest parity rates on individual assets 1 and 2 respectively, showing that each asset has its own interest rate related to its future price expectation, and a is expected appreciation of asset 1 relative to asset 2.

 

Fisher accomplishes the model by making use of time preference (consumption) and production possibilities, and their relationship with income in terms of general equilibrium framework. Figure 1 provides two basic foundations of neoclassical theory, which can be blamed for the originating causes of the existence of interest rate. First, time preference that defines the objectives of individuals’ intertemporal preferences. Second, production function that defines the constraint, transformation possibilities, from the available individual’s income.

Figure 1

Time Preference and Transformation Possibilities

 

C1

 

M

 

 

P

A

K

 

 

 

Y1 X      B              I2

I1

45o I0

0               P’ M’                                            C0

Y0

– ( 1+ m )

 

Consider a two-period case, where indifference curves describe present and future individual consumption. Its slope illustrating the rate of exchange between units of present consumption, C0, and that of the future, C1, can be developed in the same way as definition (1) so that

 

dc1

—— =  – (1 + i)                                                           (2)

dc0

 

The slope also reflects the marginal rate of time preference (MRTP) consumption, which is influenced by two factors: available amounts of present and future consumption, and individual income. If an expected future income of an individual is higher than current income, at above 45 degree line (suppose at point A), he will tend to give up a larger amount of C1 for a given increment in C0, than that one at B under the 45 degree line. The 45o line through the origin illustrates the equality amount of present and future consumption. Along the line, the individual still gives up more than one unit of C1 for an additional unit of C0, as indicated by the asymmetrical indifference curves in the figure. This exists because people are impatient and, at the same time, want to get opportunities for investment.[5]

 

On the other hand, MM’ is the only income constraint that reflects the financial opportunities facing the individual, with the slope of, say to avoid confusion from the MRTP slope, -(1+m). If the present individual’s income is entirely spent for C0, the situation is represented by point M’ =  Y0 + Y1 /(1 + m), he avoids using his income for financial opportunities in the future. Conversely, M = Y1 + Y0 (1 + m), represents another extreme for putting all income for future financial opportunities and not to consume today. Along the line MM’, the income (or budget) constraint becomes C0 + C1 /(1 + m) =  Y0 + Y1 /(1 + m), where financial opportunities may be exchanged, so as to form a “market line”.[6]

 

Financial opportunities also provide production possibility frontiers, one of which is, PP’, illustrated as “another blade of a scissors.” K represents an optimum choice of a combined set of production possibilities, shown by the tangential of the market line to the frontier, so that the marginal rate of transformation (MRT) of Y0 into Y1 can be given by:

 

dy1

—— =  – (1 + r)                                                           (3)

dy0

 

If the optimum levels of both, the utilities represented by indifference curves and the production possibilities, meet at one point in this line, where the production frontier is tangential to the indifference curve, there will be no trading. So, his equilibrium condition is attained at such a point. Otherwise, there will be alternatives for mechanism enduring the “lending” and “borrowing” process reflected in the movement along the market line. Given the income in the current period, an individual who wants to attain an optimum productive level at K, can consume at his optimum utility by borrowing the money amount of C0 -Y0 as depicted in Figure 2.

 

 

Figure 2

A Lending-Borrowing Mechanism

 

C1

 

 

M

 

 

 

 

K

 

 

 

Y1 X

 

45o

0          Y0 C0 M’ C0

 

There are two possible reasons for why positive interest rate is said to exist. First, a bias in favour of the availability of future consumption through the attainment of certain level of production, shown by asymmetric production possibility frontiers; and second positive bias of individual’s time preference (Dougherty, 1980). There are also two factors influencing the establishment of equilibrium with a positive time preference, subjective preference affected from tastes and expectation of the consumers and the second is technology that influences the production possibilities.

 

Having elaborated the above issues, it is possible, with the help of Figure 3, to derive the demand for (and supply of) loanable funds, for each individual as a function of the rate of interest. It should be thought that intertemporal efficiency conditions are stipulated in a general equilibrium, which is simultaneously determined by all agents. Accordingly, individual consumption-investment decisions can be undertaken, given the information of interest rate. On the other hand, interest rate is known after the aggregate consumption-investment has been made by occupying market mechanism of loanable funds. The Walrasian auctioneer is hence used to determine the rate of interest. In order to satisfy the Pareto Optimality in general equilibrium, the aggregate lending must equal the aggregate borrowing. Thus, the equality of MRTP or i (definition 2), MRT or r (definition 3), and also interest rate reflected then in the market (m), to all individuals is attainable. Figure 3, derived from Figure 2 by reformulating time preference consumption in terms of saving-investment relationship, depicts the market mechanism of loanable-funds illustrating the equality of saving and investment.

 

Figure 3.

Saving and Investment Equilibrium

Interest rate

(+)

 

Saving

 

 

 

E

 

 

Investment

0                                                                              S,I

(-)

 

 

  1. 5. Abolition of Interest and Islamization of Economy

Now let the paper goes back to an analysis from Islamic perspective. An attainment of the falah in Islam carries time-preference, current and future socio-economic setting. This also tells us that future dimension illustrated by the ultimate objective, i.e. attaining the falah in the hereafter (al-Qasas: 77), should be more valuable than that one in the world. Appreciation of this matter will presumably govern the Muslim to prepare for their future lives better. The Qur’an clearly states the Islamic appreciation of time. Allah says:

 

O, ye who believe! Fear Allah, and let every soul look to what (provision) he has sent forth for the morrow. Yea, fear Allah: for Allah is well-acquainted with (all) that ye do. (al- Hashr 59:18)

 

By the time, verily man is in loss, except such as have Faith, and do righteous deeds, and (join together) in the mutual enjoining of truth, and of patience and constancy. (surah al-‘Asr 103:1-4)

 

 

In an Islamic economic reform, i.e. Islamisation of the economy, Naqvi (1981a) advocates a gradual, dialogic or even a compromising process (Naqvi 1994). The purpose is to let the existing conventional economic system gradually dissolves and smoothly provides a chance for the Islamic reforms to take over its position, without giving any significant impact to the society. He adheres:

 

“The elements of the Islamic reforms must be looked at in relation to its “totality” – i.e. the ‘fact’ that Islam’s is a complete socio-economic system.…

The pace of the Islamisation process must be slow enough to allow the existing economic system to change on abroad front and to maximise the flow of knowledge about how the Islamic system operates in practice.” (Naqvi and Qadir, 1981)

 

However, suggestion is given, such a reform requires a policy package, in which, among others, a priority is given to a programme for Islamising the institution of private property, where Muslims live under oppressive feudalistic system. Differently speaking, the issue here is not a mere prohibition of interest but by and large Islamisation of Muslim economy.

 

By contrast, the majority of Muslim economists who advocate the interest abolition consider undertaking a segmental step of contribution towards the Islamisation process, in which their participation is of great significance. A comparative feature of the above process from the starting point of interest abolition is depicted in Figure 4. Haque and Mirakhor (1986) accentuate that the notion of the absolute prohibition of interest is clear. Thus, application of PLS system, as at least interpreted under mudharabah and musharakah schemes is plausible without resort to charging of interest. However, theoretical elaboration is required to supply with a rigorous support for the study.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes:

 

  1. 6. Time Dimension and Intertemporal Analysis in Islam

Those who realise the importance of the time would spend it for the benefits of their future, as the future would be more valuable for them. All their activities are carried out through time. Therefore, they should decide which activities provide better alternatives for achieving their future ends, which can be defined in our worldly life as multiple, and not independent of time. The difficulty arises, as the time for achieving these ends is limited and capable of alternative application, even in the very simple world (Robbins, 1988). Robinson Cruzoe or his Arabic original name Hay bin Yaqzan (Kahf 1994) who lived alone in an island, being defined to provide only two alternative choices of consumption (an apple and a fish) either which he must take the decision to consume, exemplifies this problem. He needed time to enjoy and utilise such consumption or even to decide the best choice. On the other hand, when the activities were defined in terms of investment or production, the scarce resources made him decides to have an appropriate choice.

 

Considering the importance of time dimension, Islam provides the notion of deferment in transaction. In principle, there are two kinds of deferment in Islamic transaction as mentioned in Kahf (1994), and Khan (1991 and 1995): bay’ muajjal or nasi’a (Sa’adillah, 1994) for deferment in price, and bay; salam for item deferment. Khan views the deferment as recognition of time value of money as there is time element involves in the process of exchange. Hence, not only time preference should be considered but also supply–demand mechanism. Accordingly, it should be time preference or intertemporal factor that needs examination here. Choudhury (1986 and 1992) suggests derivation of intertemporal consumption-investment menu from the attainment of the falah in the hereafter, as principles of maximisation of the total felicity attainment. Together with the principles of work and productivity, among others, the principle of maximising total felicity yields Islamic time-preference in consumption and investment.

 

Kahf (1994) is true in revisiting Khan’s (1991) view that time value of money is not a purely consumption phenomenon, it is rather of an investment, which seems to fit for the Islamic precepts. The purpose of the human creation is nothing but for the obedience to Allah (al-Dzariyat 51:56), the activity man can observe. Therefore, the principle of work and productivity or in other word entrepreneurship becomes the pivotal role, which a Muslim has no other choice. It is worth presenting the words as quoted by Hirshliefier (1970) with the opposite emphasis:

 

There is the “work to live” school, in which wants are treated as ends, and the “live to work” school, in which activities are treated as ends….. One who (implicitly perhaps) takes the former position, like Alvin Hansen, is likely to regard existing wants as primary and the consumer as the dominant economic entity. From this it is but a short step to the idea of a stable consumption function to the idea of stagnation. On the other hand one who takes the latter view point, likes Schumpeter, will conceive of activities as primary. The producer-innovator is the dominant economic entity; innovation is the primary theme, even though it may come in waves, and one arrives at theory of economic development.

 

“Life is for struggle” (al-Balad: 90) and not “struggle for a life,” struggle to maximise man’s achievement in fulfilling his obligation and service to Allah. Work or activity (or to be more specific investment or production) is given priority over consumption, as in this sense that consumption constitutes a means and production is an ends. Combination of both may lead to attaining his optimum obedience to Allah, and he can survive to maximise his service to Allah. The emphasis on production or investment side obtains philosophical bases, as discussed in the beginning, as compared to consumption that deserves only “moderation” (not “maximisation”) of human commitment, even from Khan (1995) himself. It is therefore theoretically reasonable to find using this way the rate of profit as appropriate measure of investment criterion in an Islamic economy (Azhar 1992).

 

  1. 7. Developing a PLS Equity-Based Intertemporal Analysis

Having discussed the philosophical basis, and thus holding the assumption of selecting time preference from the investment viewpoint, we can develop a theoretical construct of intertemporal analysis. The study hence underlines Azhar’s (1992) explicit statement that optimality conditions primarily pertain to saving and thus investment, which leads to optimality in intertemporal consumption, as the latter is dependent on the former. These conditions provide for an emergence of intertemporal consumption as a concomitant fact, in exactly the same way as neoclassical analysis treats the emergence of investment from intertemporal consumption.

 

The process begins with leaving aside the positive time preference in consumption, in favour of the negative one. The second step is to transform from consumption to production perspectives through a saving-investment mechanism. We can thus reformulate positive bias in “time preference” in terms of investment where positive rate of discount may still exist. In short, we resort to finding justification from consumer theory. Figure 5, following the same notation as in Figure 1, depicts the negative bias in time preference, shown by the asymmetric indifference curves in favour of future consumption. It follows the logic for the existence of positive time preference illustrated in the previous sections.

Figure 5

Negative Time Preference in Consumption

 

 

C1

N’                                                                       R’

 

 

M

 

P

I2

 

I1

Io

 

 

 

 

 

 

 

 

45°

Co

0        N                                                   P’ R                 M’

 

 

Supposing a symmetric production possibility frontier, the optimal point (X) lies at the above 45° ray from the origin, and there exists the negative rate of time preference. The study considers the rationality axiom of lexicographic preferences (ordering) in conventional framework, as also suggested by Zaman,[7] reflecting the fulfilment of five basic necessities as mentioned previously, represented by NN’ line. Moreover, Zaman’s axiom of satiation of basic needs is borrowed, and expanded to accommodate all types of consumption in general, to be applied within Prodigality frontier, RR’, as discussed by Zarqa’,[8] or under Choudhury’s (1986, and 1992), and Choudhury and Abdul Malik’s principle of avoiding israf. This can be so under time preference concept derived from the principle of attaining the maximum falah as presumably being held on one hand, and holding both the physical and Islamic ethical constraints i.e. of avoiding extravagance (al-Isra 17:27) to achieve efficiency.

 

Anyone will obviously decide to consume first before saving decision is undertaken. However, it should be assumed that after fulfilment of basic necessities, a Muslim’s income is sufficient to make him decides whether to put aside a fraction of it for saving or to entirely spend it on consumption. Therefore, the dharuriyyat (necessities) line (NN’) is the minimum level after which he, as a Muslim, is faced with two choices: investment decision, and pursuing further consumption for hajjiyat (conveniences) and tahsiniyyat (refinements) approaching the maximum consumption level, the israf line (RR’). He should first think of its postponement in favour of future consumption or investment, for the reasons explained above.

 

Hence, the optimality conditions occur at X, where the absolute value of the slope of an indifference curve (dc1/dc0) as defined in equation (2) is less than unity. At such a point, MRTP equals MRT (and as claimed in conventional analysis, equals interest rate, OM/OM’). So that MRTP is less than zero. (1 + i ) < 1, i < 0. It is seen that the positive interest rate constitutes something impossible to exist under such a condition.

 

It should be thought that in Islam, the lexicographical ordering and satiation concepts (reflected in the fulfilment of basic necessities and prodigality frontier respectively) altogether inherently entail individual and social obligatory responsibility for the people and the government to sustain the needy, whose income is not sufficient to meet these basic necessities, including those who have no income, i.e. children and disabled. This responsibility is then explicated through the formation of future consumption that can be defined in terms of saving. In addition, this also open to possibiity of expanding the analysis of the presence of zakah.

 

There will be two alternatives for the consumer, whether he wants this saving to be idle; or converts it into investment for production purposes. Both of these purposes have individual and social welfare enhancement roles too. The former i.e. idle saving exceeding the level of nisab (minimum level to allowable deduction) is subject to yearly 2.5% zakah rate,[9] which individually purifies his saving, and increases his spiritual uplift and achievement of falah in the Hereafter. Hence, this saving will be gradually diminishing to a certain level every year. To prevent it from diminishing because of zakah, he can thus take the latter position for investment, from which he can get the returns. The social dimensions of this choice stem from the schemes under PLS system, in particular, where participation of workers is considered. A brief discussion on such social dimensions shall be in a separate paper.

 

The advocacy of using investment viewpoint necessitated in time preference analysis, however, does not necessarily means that analyses emphasising on consumption lose their relevance, as both perspectives are inseparable. Consideration to time preference consumption function will serve a clear view in analysing the society-wide context, in order to incorporate redistribution of consumption of outputs of an investment (either private or public) through time (see for instance Feildstein, 1964). Naqvi (1981b and 1982), and Naqvi and Qadir (1981) modeling the capital theory, start their analysis from production function. Haque and Mirakhor (1986) use equations of Y = C + I and S = Y – C = I to define the utility in macro-consumption space in terms of investment with a certain rate of return. A positive investment time preference, or in our term MRT (r) equating to positive rate of return, is possible to exist, resulting from positive bias in future production for the availability of future consumption.

 

However, since the significance of consumption time preference is merely considered as a concomitant fact, its optimal point (X) always coincides with optimality condition yielded from an investment decision (K) as illustrated in Figure 6. Consequently, there is no lending-borrowing mechanism as happens in conventional analysis (compare to Figure 2). It is unanimously agreed that Islam does not allow such a mechanism. The figure depicts the “only possible” cause of the existence of positive rate of return stemming from positive bias in production possibilities, from which profit rate comes to the existence.

This positive bias in future production is reasonable due to factors, as mentioned previously. First, subjective preference affected from tastes and expectation of the consumers, which being consistent hence shall be defined as such that future consumption will serve higher quality as associated with the second. Secondly, technological changes, on which, as Haque and Mirakhor theoretically prove, entrepreneur’s investment decision depends. There are some other factors, it is observed, which (should) influence such a bias:

Figure 6

Positive Bias in Intertemporal Production Possibilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Labours participation in PLS schemes increases their job responsibility, accordingly, ensures the quality enhancement of their products over time;
  2. Research and development (established in a company) is an important factor in improving the product quality too; and
  3. A possible increase in demand that calls for further expansion of the product, given the fact of high increase in population particularly in Muslim countries.

 

 

 

  1. 8. The “Fallacy” of Fisherian Approach

From the Islamic viewpoint, the above discussion does at the same time correct the “fallacy” of the Fisherian approach, which can be discerned from two features. First, Fisher’s (1930) first stage (approximation) says that the income stream of an individual can be modified trough lending-borrowing mechanism. Islamically, it is acceptable (but not encouraged)[10] especially for consumption purposes, provided no interest bearing entails in the mechanism, as he otherwise necessitates as a consequence of the “fallacy” of his human impatience. Fisher is true that humankind by nature, as the Qur’an says, is hasty (al-Isra: 11), impatient, and sometimes combined with fretful and niggardly (al-Ma’arij: 19-21). These characteristics in general belong to all mankind. However, Islam comes into the world to make use of human Free Will to get them emancipated from domination of such bad natures. Therefore, the assumption of the obedience of the Muslim following the Qur’anic teaching, rules out the assumption that the believers and non-believers behave similarly, or in other words, that these characteristics are applied, too, to the Muslims “eternally” (especially in consumption). On the other hand, PLS system for production purposes seems to fit with the Islamic teaching, though in the modern times Muslim economists have invariably considered several modes of financing that combine both (interest-free) lending-borrowing and PLS mechanisms, with the use of some Islamised conventional modes of financing.[11]

 

Second, in the second approximation, he suggests that modification of income stream is possible by (“buying and selling” the income to) investing, with interest rate as a “price”. He equalises the “intermediate rate of interest,” and the “rate of return over cost” as a result of investment, as explained in Table 1 (partially quoted from his Table 7, p.156).

Table 1

Farming and Forestry Use Compared in Terms of

Rate of Return over Cost

 

 

Net Value of Farming Use Net Value of Forestry Use Net Difference in Favour of Forestry Use
1st year $ 100 $   0 -$ 100
2nd year 100 210 + 110
3rd year 100 100 0
Each Subsequent Year 100 100 0

 

 

 

For more convenience, occupying the interest parity formula (formula 1), we may obtain:

 

 

1 + j

—— = 1 + a (4)

1 + i

 

which can be reformulated to get:

 

1 + j (1 + j) – (1 + i)

a =   ——  – 1  =  ——————  =   j (5)

1 + i 1 + i

 

where (1 + i) and (1 + j) representing an asset in two different points of time, say now and one year later. If the values of i and j are respectively 0 and 10%, therefore, we can find that a is 10% representing an “intermediate rate of interest”. He immediately shifts to the concept of “rate of return over cost.” The Table shows that there are two options (or investment opportunities) the farmer faces, say by the farming use; to produce Qi, and second, forestry use; to produce Qj. At the initial period (first year), he thinks of taking the second option with the cost of losing his opportunity to get the first option (QiQ0 = $100). Q0 represents the dollar amount to be reduced at the initial period, when he undertakes the investment project (equals zero). Fisher calculates the rate of return over cost, say p, as:[12]

Qj  – Qi

p = ————                                                                                   (6)

Qi – Q0

210 – 100

p = ————  = 10%

100

 

Equation 6 is not really similar as equation 5, that the former talks about interest rate, while the latter explains more on profit rate. It is seen that rate of return over cost at that particular time is appropriately considered as profit rate rather than interest rate, though all values may be similar. Formula 6 is also the same as formula 3 at a particular point, namely K, as shown in Figures 1 and 2.

 

 

  1. 9. Generalisation of Two-Period Model

We now turn to generalisation of the functions over time, and move towards social time preference analysis, which is considered to have the same pattern as that of individual. On consumption space, an assumption is taken that utility functions represented by indifference curves are convex and monotonically increasing with a diminishing rate. This assumption fulfils the macroeconomic requirement that consumption is a function of (disposable) income, likewise saving. As income is expected to increase over time, consumption (and saving) accordingly will also increase. Prodigality (israf) frontier however will slacken the rate of consumption in favour of saving. The consumption path thus will be steeper as depicted in Figure 6.

Figure 6

Consumption Path over Time

 

 

 

 

 

 

 

 

 

 

I2

 

I1

I0

 

 

 

 

 

 

 

 

 

 

Other factors including prices being constant, it is reasonable to assume the increase in MRT over time as accumulation of reinvested capital is expected to be higher. The assumption of future consumption preference leads to high growth rate of consumption, as a result of reinvestment of saving that produces future consumption. The increase in growth rate, given the assumption of convexity properties of indifference curves, will produce an MRT (or MRTP, or in general term discount) rate (Feildsten, 1986). However, this is subject to possible changes in population. When discussion on consumption per capita is held, prodigality frontier (RR’) is still reasonable for consideration. Figure 7, derived from Figure 6 explains an increase in discount rate as a result of the increase in consumption growth rate. This conclusion differs from Azhar (1992: 233) who observes linear (constancy) rate of return (profit) over a period of time.

Figure 7

Rate of Return over Time

 

Rate of Return

 

 

 

 

 

 

 

 

 

 

O                                                                                                    Time

 

 

 

 

 

Above all, it should be thought that the approach could optimally work if several assumptions are satisfied. As believed in neoclassical tradition, perfect competition is considered the main assumption, which sets the condition of perfect foresight, so that the lack of uncertainty is also held. Continuity and convexity are also held for both the indifference curves and possibility frontiers, so as to produce a unique optimum solution for each schedule at the same market line.[13]

 

 

 

 

 


[1] Naqvi defines the “transition period” as “the transition from the present un-Islamic economic system to a complete Islamic economic system” as the “second best” choice before arriving at the “first best” or the complete economic system (see Naqvi, 1981a, p.33). The period “of translating the Divine message within the crucible of real-life institutions” (Naqvi, 1992, p. 8).

[2] An Agenda is a report of the Committee on Islamisation of Pakistan Economy, appointed by the Government of Pakistan, having members: Naqvi, H.U. Beg, Rafiq Ahmed and Mian M. Nazeer. An Agenda was published by Pakistan Institute of Development Economic, Islamabad, 1989. See pp. 20-21.

 

[3] Among the good elaboration and enumeration of such theories is F.A. Lutz’s Theory of Interest, D. Reidel Publishing Company, Dordrecht, Holland, 1967. However, it may be unfortunate, due to time and space limitations, this subsection can only accommodate the views of Irving Fisher and a little addition from Bohm-Bawerk and Keynesian views, being of great relevance to the discussion in the next two subsections. It should be noted that Fisher’s Theory of interest (The theory of interest as determined by impatience to spend and opportunity to invest, Macmillan, New York, 1930) was dedicated to two previous writer on the related subject as discussed in this particular section, John Rae and Bohm-Bawerk. Therefore, it is reasonable to relate one of both, Bohm-Bawerk, with his Capital and interest: history and critique of interest theory, transl. by George D. Hunke and Hans F. Sennholz, vol I, Libertian Press, Illinois, 1959,  to Fisher’s theory of interest. On the other hand, Keynesian approach is meant to enriched the picture from which the next discussion  is expected to be clearer.

[4] Adopted from J. Niehans, “Irving Fisher”, a chapter inside A history of economic theory: classic contributions, 1720-1980, John Hopkins University Press, Baltimore, 1990, p. 274.

[5] The belief in such that positive time preference always exists in an empirical fact may also be seen from the title of  Fisher’s book itself. See n. 48 (Ibid).

[6] This market line is steeper than 45 degree line as “future income decreases faster than the present income increases,” when there exists interest rate. See ibid, p. 236.

 

[7] For mathematical details see Asad Zaman, Towards foundations for an Islamic theory of consumer behaviour, inside Sayyid Tahir, Aidit Ghazali, and Syed Omar Syed Agil, Readings in microeconomics, pp. 81-89. He exemplifies the preference of bread as a primary need placed in the horizontal axis, and diamond as a luxury need put in the vertical axis.

[8] Muhammad Anas Zarqa’, A partial relationship in a Muslim’s utility function, inside Sayyid Tahir, Aidit Ghazali, and Syed Omar, Readings, pp. 105-112. He defines “prodigality frontier” as maximum permissible “refinements” or “tahsiniyyat” .

 

[9] The rates of zakah(t) are, as already well known according to the traditions of the Prophet (pbuh), fixed 2.5%, 10% (‘ushr), 20% (khums), etc.(See for instance Naqvi, 1994, p. 102). However, we take a normal rate for this kind of wealth as also taken by Bashir and Darrat (1991); Choudhury (1986, 1992); Choudhury and Abdul Malik (1992); Hallaq (1994); Khan, 1995; Sattar (1991).

[10] The Prophet (pbuh) is reported to have said: “O Allah; I seek refuge in Thee from sin and from being in debt.” Someone asked him: “How often does thou, O Messenger of Allah; seek refuge from being in debt?” He said: “When a man is in debt he speaks and tells lies and he promises and breaks the promise.” (narrated by al-Bukhari). Quoted from M. A. Mannan, Understanding Islamic finance, p. 27.

[11] See  this Understanding Islamic finance throughout the book.

 

[12] For further elaboration see L.L. Pasinetti, Switches of technique and the ‘rate of return’ in capital theory, The Economic Journal, September 1969, pp. 508-531.

[13]Continuity and convexity are among the properties by which indifference curves (and also production possibility frontiers) may achieve unique solutions. Continuity states that if two bundles (x and y) are close to each other in the feasible set, they will be assigned utility numbers that are close to each other as well. This implies that (suppose in case of consumer behaviour) the consumer is indifference between an initial bundle (i) and any point/bundle (say, z) along the path connecting any bundle less than the initial one (x) to any other bundle that is better than such an initial bundle (y). This property is however violated by either lexicographic or satiation preferences, or  both. On the other hand, convexity property explains that on the line segment between two equivalent (equally preferred) feasible bundles (a and b), any bundle (c) generated by taking a fraction k of one bundle (a) and a fraction (I-k) of another one (b), where 0< k <1, is also a feasible bundle. This implies that if any other bundle (d) is better than both a and b, then it is also better than c. For further (mathematical) detail, see for instance J.M. Handerson and R.E. Quandt, Microeconomic theory, 3rd ed., McGraw-Hill Book Co., Auckland, 1980.

Theoretical Analysis of Interest Abolition and

Introducing Profit-Loss Sharing

(Special Paper for Innaugurating the Centennial Mu’tamar of Muhammadiyah)

 

by

Masyhudi Muqorobin

 

Head of Dept. of Economics and Director of International Program for Islamic Economics and Finance (IPIEF)

Universitas Muhammadiyah Yogyakarta

 

masmubin@yahoo.com

 

 

  1. 1. Introduction

The Council of Tarjih of Muhammadiyah has just discussed the issue of a fatwa on prohibition of interest, following a fatwa on the same issue by the Council of Indonesian Ulama (MUI). However, differences in interpretation of riba in Islam make the two fatwas remain unworkable significantly. This is because the majority of the Muslims remains unclear about the difference between riba– and equity-based participation, as represented by conventional and Islamic systems respecvtively, especially in banking and financial activities. Abolition of interest is not merely of religious significance, but also part of economic needs of a society, which necessitates academic analysis. This paper attempts to clarify from theoretical perspective, to provide more understanding about interest prohibition in an Islamic economy, and in support academically of the soundness of the two fatwas.

 

  1. 2. Candid Prohibition of Riba in Islam

Islam prohibits riba, as declared by Allah SWT in Surah al-Baqarah 275. “wa ahallaahul-bay’a wa harramar-ribaa” Allah has permitted trade and prohibited riba. Chapra in the appendix of his “Towards a Just Monetary system” (1986) maintains that this clear injunction concerning prohibition of riba in Islam abbrogates the previous verse “walaa ta’kuluur-ribaa adh’aafaan mudhaa’afah” (and do not eat multiple usury), which had been revealed previously. There are four steps of reveleation of riba. Two first step gives a positive explanation of riba that gives no blessing in the economy, and Jewish acquisitive behaviour generated by applying usury in the economy. Normative aspect of riba was sent down by Allah in two stages. In the first instance, Allah prohibits only multiple usury. Following the years of appreciation of the verse on prohibition of multiple usury, then the final decision on candid prohibition on any additional payment on borrowing was sent down by Allah to clearly prohibits all kinds of interest.

 

  1. 3. Theoretical Perspective of Riba Prohibiton

Differences in interpretation to what extent riba equals the modern economic term “interest” remain unresolved. Some sholars are of the opinion that some forms of “interest” is inevitable as it is a reasonable excess, thus does not meet the meaning of prohibited riba, to which the word “usury” is closer, and “the difference between riba and interest is the one of the degree not of kind” Choudhury (1975). On the other hand, the rest are in agreement to refer interest as riba and therefore rule out the role of interest as a cost of production from the Islamic socio-economic set up (Haneef, 1995; Mannan 1980,1992).

 

Following the abolition process of riba prohibition in the Qur’an, interest abolition from an economy requires a stepwise process, through what Naqvi (1981a, 1981b, 1983, 1994) calls  “transition period.”[1] It is inadequate to abolish interest, particularly using administrative fiat during the period. This also appears in his joint effort with Qadir (1981), and with others in An Agenda for Islamic Economic Reform.[2] However, if all conditions for a “complete” Islamic economic system are satisfied, he maintains, prohibition of riba implies the existence of “exploitation-free” economy, not only “interest-free” economy, as it accordingly implies elimination of the entire capitalistic system. The logic is that abolition of interest is necessary condition for such a system, but not sufficient (Naqvi, 1981a:  110). He further admits, in the context of capitalism as adhered by the majority of Muslim countries, positive interest rate is of its properties and thus satisfies the criterion of equilibrium. Hence, as capitalism bases its operation on limited liability to risk, limited knowledge about large-scale enterprise logically implies only a limited risk (1981a: 111-112). To provide arguments, he develops a model based on the assumption that positive time-preference is given in the society as a decreasing function of time (Naqvi 1981b and 1983, Naqvi and Qadir 1981). It is “reflecting the essentially myopic nature of individual’s economic calculus” (1981a: 115), and should be acceptable in Islam (1994: 114).

 

  1. 4. Interest, Intertemporal Choices and Production Possibilities

Interest is thought being the main pillar of modern conventioanl economy, Interest as a “price” or “cost’ of capotal can be defined, following Fisher (1930, 1970), as “the per cent of premium paid on money (or wheat or any other sort of goods) at one date in terms of money to be in hand one year later.” Interest rate in general determines the rate of investment relative to the gross national income and thereby the rate of economic growth. The lower the interest rates the higher the level of investment and thus the rate of economic growth. Accordingly, the investible resources are influenced by the rate of interest.

 

It is evident that the above proposition had been envisaged in a number of writings in the early years of the century, in the works of prominent economists like Marshall, Bohm-Bawerk, Walras, Knight, Wicksell, Fisher, etc.[3] In a chapter of his Theory of Interest, Fisher (1930) argues that interest is hardly separable from the involvement of time dimension to evolve the discounting concept. Suppose “the value of dinner about to be eaten involves no time of waiting and so no discount or interest,” meaning inversely that the price of any good or service (or in a generalised sense, asset) that involves time for waiting should be discounted, or in other words, “interest should be accounted for.” This is the very beginning of the process of determining the rate of interest.

 

The process begins with the difference between interests of two assets, matched exactly by the expected change in their relative prices, to form an interest parity formula[4]

 

1 + j

—— = 1 + a (1)

1 + i

 

where i and j are the interest parity rates on individual assets 1 and 2 respectively, showing that each asset has its own interest rate related to its future price expectation, and a is expected appreciation of asset 1 relative to asset 2.

 

Fisher accomplishes the model by making use of time preference (consumption) and production possibilities, and their relationship with income in terms of general equilibrium framework. Figure 1 provides two basic foundations of neoclassical theory, which can be blamed for the originating causes of the existence of interest rate. First, time preference that defines the objectives of individuals’ intertemporal preferences. Second, production function that defines the constraint, transformation possibilities, from the available individual’s income.

Figure 1

Time Preference and Transformation Possibilities

 

C1

M

 

 

P

A

K

 

 

 

Y1 X      B              I2

I1

45o I0

0               P’ M’                                            C0

Y0

– ( 1+ m )

 

Consider a two-period case, where indifference curves describe present and future individual consumption. Its slope illustrating the rate of exchange between units of present consumption, C0, and that of the future, C1, can be developed in the same way as definition (1) so that

 

dc1

—— =  – (1 + i)                                                           (2)

dc0

 

The slope also reflects the marginal rate of time preference (MRTP) consumption, which is influenced by two factors: available amounts of present and future consumption, and individual income. If an expected future income of an individual is higher than current income, at above 45 degree line (suppose at point A), he will tend to give up a larger amount of C1 for a given increment in C0, than that one at B under the 45 degree line. The 45o line through the origin illustrates the equality amount of present and future consumption. Along the line, the individual still gives up more than one unit of C1 for an additional unit of C0, as indicated by the asymmetrical indifference curves in the figure. This exists because people are impatient and, at the same time, want to get opportunities for investment.[5]

 

On the other hand, MM’ is the only income constraint that reflects the financial opportunities facing the individual, with the slope of, say to avoid confusion from the MRTP slope, -(1+m). If the present individual’s income is entirely spent for C0, the situation is represented by point M’ =  Y0 + Y1 /(1 + m), he avoids using his income for financial opportunities in the future. Conversely, M = Y1 + Y0 (1 + m), represents another extreme for putting all income for future financial opportunities and not to consume today. Along the line MM’, the income (or budget) constraint becomes C0 + C1 /(1 + m) =  Y0 + Y1 /(1 + m), where financial opportunities may be exchanged, so as to form a “market line”.[6]

 

Financial opportunities also provide production possibility frontiers, one of which is, PP’, illustrated as “another blade of a scissors.” K represents an optimum choice of a combined set of production possibilities, shown by the tangential of the market line to the frontier, so that the marginal rate of transformation (MRT) of Y0 into Y1 can be given by:

 

dy1

—— =  – (1 + r)                                                           (3)

dy0

 

If the optimum levels of both, the utilities represented by indifference curves and the production possibilities, meet at one point in this line, where the production frontier is tangential to the indifference curve, there will be no trading. So, his equilibrium condition is attained at such a point. Otherwise, there will be alternatives for mechanism enduring the “lending” and “borrowing” process reflected in the movement along the market line. Given the income in the current period, an individual who wants to attain an optimum productive level at K, can consume at his optimum utility by borrowing the money amount of C0 -Y0 as depicted in Figure 2.

 

 

Figure 2

A Lending-Borrowing Mechanism

 

C1

 
M

 

 

 

 

K

 

 

 

Y1 X

 

45o

0          Y0 C0 M’ C0

 

There are two possible reasons for why positive interest rate is said to exist. First, a bias in favour of the availability of future consumption through the attainment of certain level of production, shown by asymmetric production possibility frontiers; and second positive bias of individual’s time preference (Dougherty, 1980). There are also two factors influencing the establishment of equilibrium with a positive time preference, subjective preference affected from tastes and expectation of the consumers and the second is technology that influences the production possibilities.

 

Having elaborated the above issues, it is possible, with the help of Figure 3, to derive the demand for (and supply of) loanable funds, for each individual as a function of the rate of interest. It should be thought that intertemporal efficiency conditions are stipulated in a general equilibrium, which is simultaneously determined by all agents. Accordingly, individual consumption-investment decisions can be undertaken, given the information of interest rate. On the other hand, interest rate is known after the aggregate consumption-investment has been made by occupying market mechanism of loanable funds. The Walrasian auctioneer is hence used to determine the rate of interest. In order to satisfy the Pareto Optimality in general equilibrium, the aggregate lending must equal the aggregate borrowing. Thus, the equality of MRTP or i (definition 2), MRT or r (definition 3), and also interest rate reflected then in the market (m), to all individuals is attainable. Figure 3, derived from Figure 2 by reformulating time preference consumption in terms of saving-investment relationship, depicts the market mechanism of loanable-funds illustrating the equality of saving and investment.

 

Figure 3.

Saving and Investment Equilibrium

Interest rate

(+)

 

Saving

 

 

 

E

 

 

Investment

0                                                                              S,I

(-)

 

 

  1. 5. Abolition of Interest and Islamization of Economy

Now let the paper goes back to an analysis from Islamic perspective. An attainment of the falah in Islam carries time-preference, current and future socio-economic setting. This also tells us that future dimension illustrated by the ultimate objective, i.e. attaining the falah in the hereafter (al-Qasas: 77), should be more valuable than that one in the world. Appreciation of this matter will presumably govern the Muslim to prepare for their future lives better. The Qur’an clearly states the Islamic appreciation of time. Allah says:

 

O, ye who believe! Fear Allah, and let every soul look to what (provision) he has sent forth for the morrow. Yea, fear Allah: for Allah is well-acquainted with (all) that ye do. (al- Hashr 59:18)

 

By the time, verily man is in loss, except such as have Faith, and do righteous deeds, and (join together) in the mutual enjoining of truth, and of patience and constancy. (surah al-‘Asr 103:1-4)

 

 

In an Islamic economic reform, i.e. Islamisation of the economy, Naqvi (1981a) advocates a gradual, dialogic or even a compromising process (Naqvi 1994). The purpose is to let the existing conventional economic system gradually dissolves and smoothly provides a chance for the Islamic reforms to take over its position, without giving any significant impact to the society. He adheres:

 

“The elements of the Islamic reforms must be looked at in relation to its “totality” – i.e. the ‘fact’ that Islam’s is a complete socio-economic system.…

The pace of the Islamisation process must be slow enough to allow the existing economic system to change on abroad front and to maximise the flow of knowledge about how the Islamic system operates in practice.” (Naqvi and Qadir, 1981)

 

However, suggestion is given, such a reform requires a policy package, in which, among others, a priority is given to a programme for Islamising the institution of private property, where Muslims live under oppressive feudalistic system. Differently speaking, the issue here is not a mere prohibition of interest but by and large Islamisation of Muslim economy.

 

By contrast, the majority of Muslim economists who advocate the interest abolition consider undertaking a segmental step of contribution towards the Islamisation process, in which their participation is of great significance. A comparative feature of the above process from the starting point of interest abolition is depicted in Figure 4. Haque and Mirakhor (1986) accentuate that the notion of the absolute prohibition of interest is clear. Thus, application of PLS system, as at least interpreted under mudharabah and musharakah schemes is plausible without resort to charging of interest. However, theoretical elaboration is required to supply with a rigorous support for the study.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes:

 

  1. 6. Time Dimension and Intertemporal Analysis in Islam

Those who realise the importance of the time would spend it for the benefits of their future, as the future would be more valuable for them. All their activities are carried out through time. Therefore, they should decide which activities provide better alternatives for achieving their future ends, which can be defined in our worldly life as multiple, and not independent of time. The difficulty arises, as the time for achieving these ends is limited and capable of alternative application, even in the very simple world (Robbins, 1988). Robinson Cruzoe or his Arabic original name Hay bin Yaqzan (Kahf 1994) who lived alone in an island, being defined to provide only two alternative choices of consumption (an apple and a fish) either which he must take the decision to consume, exemplifies this problem. He needed time to enjoy and utilise such consumption or even to decide the best choice. On the other hand, when the activities were defined in terms of investment or production, the scarce resources made him decides to have an appropriate choice.

 

Considering the importance of time dimension, Islam provides the notion of deferment in transaction. In principle, there are two kinds of deferment in Islamic transaction as mentioned in Kahf (1994), and Khan (1991 and 1995): bay’ muajjal or nasi’a (Sa’adillah, 1994) for deferment in price, and bay; salam for item deferment. Khan views the deferment as recognition of time value of money as there is time element involves in the process of exchange. Hence, not only time preference should be considered but also supply–demand mechanism. Accordingly, it should be time preference or intertemporal factor that needs examination here. Choudhury (1986 and 1992) suggests derivation of intertemporal consumption-investment menu from the attainment of the falah in the hereafter, as principles of maximisation of the total felicity attainment. Together with the principles of work and productivity, among others, the principle of maximising total felicity yields Islamic time-preference in consumption and investment.

 

Kahf (1994) is true in revisiting Khan’s (1991) view that time value of money is not a purely consumption phenomenon, it is rather of an investment, which seems to fit for the Islamic precepts. The purpose of the human creation is nothing but for the obedience to Allah (al-Dzariyat 51:56), the activity man can observe. Therefore, the principle of work and productivity or in other word entrepreneurship becomes the pivotal role, which a Muslim has no other choice. It is worth presenting the words as quoted by Hirshliefier (1970) with the opposite emphasis:

 

There is the “work to live” school, in which wants are treated as ends, and the “live to work” school, in which activities are treated as ends….. One who (implicitly perhaps) takes the former position, like Alvin Hansen, is likely to regard existing wants as primary and the consumer as the dominant economic entity. From this it is but a short step to the idea of a stable consumption function to the idea of stagnation. On the other hand one who takes the latter view point, likes Schumpeter, will conceive of activities as primary. The producer-innovator is the dominant economic entity; innovation is the primary theme, even though it may come in waves, and one arrives at theory of economic development.

 

“Life is for struggle” (al-Balad: 90) and not “struggle for a life,” struggle to maximise man’s achievement in fulfilling his obligation and service to Allah. Work or activity (or to be more specific investment or production) is given priority over consumption, as in this sense that consumption constitutes a means and production is an ends. Combination of both may lead to attaining his optimum obedience to Allah, and he can survive to maximise his service to Allah. The emphasis on production or investment side obtains philosophical bases, as discussed in the beginning, as compared to consumption that deserves only “moderation” (not “maximisation”) of human commitment, even from Khan (1995) himself. It is therefore theoretically reasonable to find using this way the rate of profit as appropriate measure of investment criterion in an Islamic economy (Azhar 1992).

 

  1. 7. Developing a PLS Equity-Based Intertemporal Analysis

Having discussed the philosophical basis, and thus holding the assumption of selecting time preference from the investment viewpoint, we can develop a theoretical construct of intertemporal analysis. The study hence underlines Azhar’s (1992) explicit statement that optimality conditions primarily pertain to saving and thus investment, which leads to optimality in intertemporal consumption, as the latter is dependent on the former. These conditions provide for an emergence of intertemporal consumption as a concomitant fact, in exactly the same way as neoclassical analysis treats the emergence of investment from intertemporal consumption.

 

The process begins with leaving aside the positive time preference in consumption, in favour of the negative one. The second step is to transform from consumption to production perspectives through a saving-investment mechanism. We can thus reformulate positive bias in “time preference” in terms of investment where positive rate of discount may still exist. In short, we resort to finding justification from consumer theory. Figure 5, following the same notation as in Figure 1, depicts the negative bias in time preference, shown by the asymmetric indifference curves in favour of future consumption. It follows the logic for the existence of positive time preference illustrated in the previous sections.

Figure 5

Negative Time Preference in Consumption

 
C1

N’                                                                       R’

 

 

M

 

P

I2

 

I1

Io

 

 

 

 

 

 

 
45°

Co

0        N                                                   P’ R                 M’

 

 

Supposing a symmetric production possibility frontier, the optimal point (X) lies at the above 45° ray from the origin, and there exists the negative rate of time preference. The study considers the rationality axiom of lexicographic preferences (ordering) in conventional framework, as also suggested by Zaman,[7] reflecting the fulfilment of five basic necessities as mentioned previously, represented by NN’ line. Moreover, Zaman’s axiom of satiation of basic needs is borrowed, and expanded to accommodate all types of consumption in general, to be applied within Prodigality frontier, RR’, as discussed by Zarqa’,[8] or under Choudhury’s (1986, and 1992), and Choudhury and Abdul Malik’s principle of avoiding israf. This can be so under time preference concept derived from the principle of attaining the maximum falah as presumably being held on one hand, and holding both the physical and Islamic ethical constraints i.e. of avoiding extravagance (al-Isra 17:27) to achieve efficiency.

 

Anyone will obviously decide to consume first before saving decision is undertaken. However, it should be assumed that after fulfilment of basic necessities, a Muslim’s income is sufficient to make him decides whether to put aside a fraction of it for saving or to entirely spend it on consumption. Therefore, the dharuriyyat (necessities) line (NN’) is the minimum level after which he, as a Muslim, is faced with two choices: investment decision, and pursuing further consumption for hajjiyat (conveniences) and tahsiniyyat (refinements) approaching the maximum consumption level, the israf line (RR’). He should first think of its postponement in favour of future consumption or investment, for the reasons explained above.

 

Hence, the optimality conditions occur at X, where the absolute value of the slope of an indifference curve (dc1/dc0) as defined in equation (2) is less than unity. At such a point, MRTP equals MRT (and as claimed in conventional analysis, equals interest rate, OM/OM’). So that MRTP is less than zero. (1 + i ) < 1, i < 0. It is seen that the positive interest rate constitutes something impossible to exist under such a condition.

 

It should be thought that in Islam, the lexicographical ordering and satiation concepts (reflected in the fulfilment of basic necessities and prodigality frontier respectively) altogether inherently entail individual and social obligatory responsibility for the people and the government to sustain the needy, whose income is not sufficient to meet these basic necessities, including those who have no income, i.e. children and disabled. This responsibility is then explicated through the formation of future consumption that can be defined in terms of saving. In addition, this also open to possibiity of expanding the analysis of the presence of zakah.

 

There will be two alternatives for the consumer, whether he wants this saving to be idle; or converts it into investment for production purposes. Both of these purposes have individual and social welfare enhancement roles too. The former i.e. idle saving exceeding the level of nisab (minimum level to allowable deduction) is subject to yearly 2.5% zakah rate,[9] which individually purifies his saving, and increases his spiritual uplift and achievement of falah in the Hereafter. Hence, this saving will be gradually diminishing to a certain level every year. To prevent it from diminishing because of zakah, he can thus take the latter position for investment, from which he can get the returns. The social dimensions of this choice stem from the schemes under PLS system, in particular, where participation of workers is considered. A brief discussion on such social dimensions shall be in a separate paper.

 

The advocacy of using investment viewpoint necessitated in time preference analysis, however, does not necessarily means that analyses emphasising on consumption lose their relevance, as both perspectives are inseparable. Consideration to time preference consumption function will serve a clear view in analysing the society-wide context, in order to incorporate redistribution of consumption of outputs of an investment (either private or public) through time (see for instance Feildstein, 1964). Naqvi (1981b and 1982), and Naqvi and Qadir (1981) modeling the capital theory, start their analysis from production function. Haque and Mirakhor (1986) use equations of Y = C + I and S = Y – C = I to define the utility in macro-consumption space in terms of investment with a certain rate of return. A positive investment time preference, or in our term MRT (r) equating to positive rate of return, is possible to exist, resulting from positive bias in future production for the availability of future consumption.

 

However, since the significance of consumption time preference is merely considered as a concomitant fact, its optimal point (X) always coincides with optimality condition yielded from an investment decision (K) as illustrated in Figure 6. Consequently, there is no lending-borrowing mechanism as happens in conventional analysis (compare to Figure 2). It is unanimously agreed that Islam does not allow such a mechanism. The figure depicts the “only possible” cause of the existence of positive rate of return stemming from positive bias in production possibilities, from which profit rate comes to the existence.

This positive bias in future production is reasonable due to factors, as mentioned previously. First, subjective preference affected from tastes and expectation of the consumers, which being consistent hence shall be defined as such that future consumption will serve higher quality as associated with the second. Secondly, technological changes, on which, as Haque and Mirakhor theoretically prove, entrepreneur’s investment decision depends. There are some other factors, it is observed, which (should) influence such a bias:

Figure 6

Positive Bias in Intertemporal Production Possibilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Labours participation in PLS schemes increases their job responsibility, accordingly, ensures the quality enhancement of their products over time;
  2. Research and development (established in a company) is an important factor in improving the product quality too; and
  3. A possible increase in demand that calls for further expansion of the product, given the fact of high increase in population particularly in Muslim countries.

 

 

 

  1. 8. The “Fallacy” of Fisherian Approach

From the Islamic viewpoint, the above discussion does at the same time correct the “fallacy” of the Fisherian approach, which can be discerned from two features. First, Fisher’s (1930) first stage (approximation) says that the income stream of an individual can be modified trough lending-borrowing mechanism. Islamically, it is acceptable (but not encouraged)[10] especially for consumption purposes, provided no interest bearing entails in the mechanism, as he otherwise necessitates as a consequence of the “fallacy” of his human impatience. Fisher is true that humankind by nature, as the Qur’an says, is hasty (al-Isra: 11), impatient, and sometimes combined with fretful and niggardly (al-Ma’arij: 19-21). These characteristics in general belong to all mankind. However, Islam comes into the world to make use of human Free Will to get them emancipated from domination of such bad natures. Therefore, the assumption of the obedience of the Muslim following the Qur’anic teaching, rules out the assumption that the believers and non-believers behave similarly, or in other words, that these characteristics are applied, too, to the Muslims “eternally” (especially in consumption). On the other hand, PLS system for production purposes seems to fit with the Islamic teaching, though in the modern times Muslim economists have invariably considered several modes of financing that combine both (interest-free) lending-borrowing and PLS mechanisms, with the use of some Islamised conventional modes of financing.[11]

 

Second, in the second approximation, he suggests that modification of income stream is possible by (“buying and selling” the income to) investing, with interest rate as a “price”. He equalises the “intermediate rate of interest,” and the “rate of return over cost” as a result of investment, as explained in Table 1 (partially quoted from his Table 7, p.156).

Table 1

Farming and Forestry Use Compared in Terms of

Rate of Return over Cost

 

 

Net Value of Farming Use Net Value of Forestry Use Net Difference in Favour of Forestry Use
1st year $ 100 $   0 -$ 100
2nd year 100 210 + 110
3rd year 100 100 0
Each Subsequent Year 100 100 0

 

 

 

For more convenience, occupying the interest parity formula (formula 1), we may obtain:

 

 

1 + j

—— = 1 + a (4)

1 + i

 

which can be reformulated to get:

 

1 + j (1 + j) – (1 + i)

a =   ——  – 1  =  ——————  =   j (5)

1 + i 1 + i

 

where (1 + i) and (1 + j) representing an asset in two different points of time, say now and one year later. If the values of i and j are respectively 0 and 10%, therefore, we can find that a is 10% representing an “intermediate rate of interest”. He immediately shifts to the concept of “rate of return over cost.” The Table shows that there are two options (or investment opportunities) the farmer faces, say by the farming use; to produce Qi, and second, forestry use; to produce Qj. At the initial period (first year), he thinks of taking the second option with the cost of losing his opportunity to get the first option (QiQ0 = $100). Q0 represents the dollar amount to be reduced at the initial period, when he undertakes the investment project (equals zero). Fisher calculates the rate of return over cost, say p, as:[12]

Qj  – Qi

p = ————                                                                                   (6)

Qi – Q0

210 – 100

p = ————  = 10%

100

 

Equation 6 is not really similar as equation 5, that the former talks about interest rate, while the latter explains more on profit rate. It is seen that rate of return over cost at that particular time is appropriately considered as profit rate rather than interest rate, though all values may be similar. Formula 6 is also the same as formula 3 at a particular point, namely K, as shown in Figures 1 and 2.

 

 

  1. 9. Generalisation of Two-Period Model

We now turn to generalisation of the functions over time, and move towards social time preference analysis, which is considered to have the same pattern as that of individual. On consumption space, an assumption is taken that utility functions represented by indifference curves are convex and monotonically increasing with a diminishing rate. This assumption fulfils the macroeconomic requirement that consumption is a function of (disposable) income, likewise saving. As income is expected to increase over time, consumption (and saving) accordingly will also increase. Prodigality (israf) frontier however will slacken the rate of consumption in favour of saving. The consumption path thus will be steeper as depicted in Figure 6.

Figure 6

Consumption Path over Time

 

 

 

 

 

 

 

 

 

 

I2

 

I1

I0

 

 

 

 
 

 

 

 

 

Other factors including prices being constant, it is reasonable to assume the increase in MRT over time as accumulation of reinvested capital is expected to be higher. The assumption of future consumption preference leads to high growth rate of consumption, as a result of reinvestment of saving that produces future consumption. The increase in growth rate, given the assumption of convexity properties of indifference curves, will produce an MRT (or MRTP, or in general term discount) rate (Feildsten, 1986). However, this is subject to possible changes in population. When discussion on consumption per capita is held, prodigality frontier (RR’) is still reasonable for consideration. Figure 7, derived from Figure 6 explains an increase in discount rate as a result of the increase in consumption growth rate. This conclusion differs from Azhar (1992: 233) who observes linear (constancy) rate of return (profit) over a period of time.

Figure 7

Rate of Return over Time

 

Rate of Return

 

 

 

 

 

 

 

 

 
O                                                                                                    Time

 

 

 

 

 

Above all, it should be thought that the approach could optimally work if several assumptions are satisfied. As believed in neoclassical tradition, perfect competition is considered the main assumption, which sets the condition of perfect foresight, so that the lack of uncertainty is also held. Continuity and convexity are also held for both the indifference curves and possibility frontiers, so as to produce a unique optimum solution for each schedule at the same market line.[13]

 

 

 

 

 


[1] Naqvi defines the “transition period” as “the transition from the present un-Islamic economic system to a complete Islamic economic system” as the “second best” choice before arriving at the “first best” or the complete economic system (see Naqvi, 1981a, p.33). The period “of translating the Divine message within the crucible of real-life institutions” (Naqvi, 1992, p. 8).

[2] An Agenda is a report of the Committee on Islamisation of Pakistan Economy, appointed by the Government of Pakistan, having members: Naqvi, H.U. Beg, Rafiq Ahmed and Mian M. Nazeer. An Agenda was published by Pakistan Institute of Development Economic, Islamabad, 1989. See pp. 20-21.

 

[3] Among the good elaboration and enumeration of such theories is F.A. Lutz’s Theory of Interest, D. Reidel Publishing Company, Dordrecht, Holland, 1967. However, it may be unfortunate, due to time and space limitations, this subsection can only accommodate the views of Irving Fisher and a little addition from Bohm-Bawerk and Keynesian views, being of great relevance to the discussion in the next two subsections. It should be noted that Fisher’s Theory of interest (The theory of interest as determined by impatience to spend and opportunity to invest, Macmillan, New York, 1930) was dedicated to two previous writer on the related subject as discussed in this particular section, John Rae and Bohm-Bawerk. Therefore, it is reasonable to relate one of both, Bohm-Bawerk, with his Capital and interest: history and critique of interest theory, transl. by George D. Hunke and Hans F. Sennholz, vol I, Libertian Press, Illinois, 1959,  to Fisher’s theory of interest. On the other hand, Keynesian approach is meant to enriched the picture from which the next discussion  is expected to be clearer.

[4] Adopted from J. Niehans, “Irving Fisher”, a chapter inside A history of economic theory: classic contributions, 1720-1980, John Hopkins University Press, Baltimore, 1990, p. 274.

[5] The belief in such that positive time preference always exists in an empirical fact may also be seen from the title of  Fisher’s book itself. See n. 48 (Ibid).

[6] This market line is steeper than 45 degree line as “future income decreases faster than the present income increases,” when there exists interest rate. See ibid, p. 236.

 

[7] For mathematical details see Asad Zaman, Towards foundations for an Islamic theory of consumer behaviour, inside Sayyid Tahir, Aidit Ghazali, and Syed Omar Syed Agil, Readings in microeconomics, pp. 81-89. He exemplifies the preference of bread as a primary need placed in the horizontal axis, and diamond as a luxury need put in the vertical axis.

[8] Muhammad Anas Zarqa’, A partial relationship in a Muslim’s utility function, inside Sayyid Tahir, Aidit Ghazali, and Syed Omar, Readings, pp. 105-112. He defines “prodigality frontier” as maximum permissible “refinements” or “tahsiniyyat” .

 

[9] The rates of zakah(t) are, as already well known according to the traditions of the Prophet (pbuh), fixed 2.5%, 10% (‘ushr), 20% (khums), etc.(See for instance Naqvi, 1994, p. 102). However, we take a normal rate for this kind of wealth as also taken by Bashir and Darrat (1991); Choudhury (1986, 1992); Choudhury and Abdul Malik (1992); Hallaq (1994); Khan, 1995; Sattar (1991).

[10] The Prophet (pbuh) is reported to have said: “O Allah; I seek refuge in Thee from sin and from being in debt.” Someone asked him: “How often does thou, O Messenger of Allah; seek refuge from being in debt?” He said: “When a man is in debt he speaks and tells lies and he promises and breaks the promise.” (narrated by al-Bukhari). Quoted from M. A. Mannan, Understanding Islamic finance, p. 27.

[11] See  this Understanding Islamic finance throughout the book.

 

[12] For further elaboration see L.L. Pasinetti, Switches of technique and the ‘rate of return’ in capital theory, The Economic Journal, September 1969, pp. 508-531.

[13] Continuity and convexity are among the properties by which indifference curves (and also production possibility frontiers) may achieve unique solutions. Continuity states that if two bundles (x and y) are close to each other in the feasible set, they will be assigned utility numbers that are close to each other as well. This implies that (suppose in case of consumer behaviour) the consumer is indifference between an initial bundle (i) and any point/bundle (say, z) along the path connecting any bundle less than the initial one (x) to any other bundle that is better than such an initial bundle (y). This property is however violated by either lexicographic or satiation preferences, or  both. On the other hand, convexity property explains that on the line segment between two equivalent (equally preferred) feasible bundles (a and b), any bundle (c) generated by taking a fraction k of one bundle (a) and a fraction (I-k) of another one (b), where 0< k <1, is also a feasible bundle. This implies that if any other bundle (d) is better than both a and b, then it is also better than c. For further (mathematical) detail, see for instance J.M. Handerson and R.E. Quandt, Microeconomic theory, 3rd ed., McGraw-Hill Book Co., Auckland, 1980.

 

Febryan Mujahid Panatagama & Nasyi’ah Uswatun Hasanah

Abstract

One of the world famous economists is John Maynard Keynes, an economist that was presumed as the father of Modern Macroeconomics. Beginning on 1990’s he expand the worlds’ macroeconomics thoughts. His thinking about the causes of business cycle and his advisory on the rules of government in the economy by its fiscal and monetary policies really influenced the practice of modern macroeconomics. On the first part of this paper we would like to describe about the Keynesian Economics theory at glace. Due to the wide range of Keynesian Economic thoughts we would only be focused on his advises of the government roles on its national economy. Who is Keynes, the history of his economics’ thought, the mains idea of his economics’ thought and our own perspective on Keynesians thought would be also discussed here. Afterward, on the final second part of this paper we supposed to define the particular role of the government on its national economy according to the macroislamic perspectives. On this part we would like to describe on the government roles on the national economy, its role as the core of the nationals’ markets, its role as the huge depositor, and the government role of the enormous buyer and investor.

Keywords: business cycle, fiscal policy, monetary policy, macroislamic perspectives

I. John Maynard Keynes and his important contributions in the world economies’

According to Wikipedia John Maynard Keynes was born on 5th June 1883 in Cambridge, England. Around 1930s, Keynes comes up with new ideas of the economic thinking. It is started with his Keynes’s disappointment of the failure of neoclassical economics suggestions to cover the economics after 1929s great depression.

On October 1929 the New York stock market saw the fall of security values that eventually was to disturb the business confidence. After there, the business confidence is undermined; businesspeople cut back production and their investment. This condition stimulated the business environment to be worse and worse. It decreased the US national income significantly and caused into a large number of unemployment at that time. It became the worse moment of US’s economic disaster when thousands of companies closed up and millions peoples were unemployed afterwards.

On the period of 1929 up to 1932 there were more than 85.000 business failures; over 5.000 banks were suspended their operations; New York Exchanges’ stock values fell from $87 billion to $19 billion; the unemployment rose to 12 million; agricultures and farms income fell over 50%; and manufacturing output decreased by almost 50%.[1]

The Americans’ nation fell from the world most prosperous country to a country with a millions citizens lived in desperate because of poverty. The party that almost suffered this economic disaster was the blacks and other minorities groups; the proportion of the blacks among the unemployed was from 60 up to 400 % more than the proportion of the black in the general population.[2] Some areas on the US terribly suffered its bad impacts more than others. Congressman George Huddleston of Alabama reported in January 1932:

“We have about 108.000 wage and salary workers in my district. Of that number, it is my belief that not exceeding 8.000 have their normal incomes. At least 25.000 men are altogether without work. Some of them have not had a stroke of work for more than 12 months, maybe 60.000 or 75.000 are working one to five days a week, and practically all have had serious cuts in their wages and many of them not average over $1.50 a day.”[3]

How bad that situation, the executive director of the Welfare Council of New York City describes that terrible economic disaster:

“When the breadwinner is out of a job he usually exhausts his saving if he has any. Then, if he has an insurance policy, he probably borrows to the limit of its cash value. He borrows from his relative until they can stand the burden no longer. He gets credit from the corner grocery store and the butcher shop, and the landlord forgoes collecting the rent until interest and taxes have to be paid and something has to be done.  All of these resources are finally exhausted over the period of time, and it becomes necessary for these people, who have never before been in want, to ask for assistance. The specter of starvation faces millions of people who have never before known what it was to be out of a job for any considerable period of time and who certainly have never known what it was to be absolutely up against it.”[4]

The most terrible despair of US millions citizen reach it summit on 1932 when a report describing the unloading of garbage in the centre garbage of Chicago city: “Around the truck which was unloading of garbage and other refuse were about 35 men, women and children. As soon as the truck pulled away from the pile all of them started digging with sticks, some with their hands, grabbing bits of food and vegetables.”[5]

The condition before illustrate how bad that great depression impact the Americans. Keynes inquired to know where the classical and neoclassical economists were. Why doesn’t the market mechanism set this disequilibrium of unemployment rates, shortage of food, ceiling prices etc into its equilibrium anymore? Considering how the America’s condition at that time which still has plenty Natural resources, it still has as many as factories including tools and machines and thousands of human resources that waiting for an employments. These things would be discussed on the next subchapter of this paper.

II. Keynesian Economic and Government Interventions

Before further discussion on Keynes contributions and thoughts let us show you the simple scene of western economics thoughts’ history with their simple main ideas particularly on their thoughts about government interventions on the economy:

 

 

 

 

 

Figure 1.1

Explanation on the 1.1 figure, on 1776 Adam Smith (The Economic Father) written his book on title “An Inquiry into the Nature and Causes of the Wealth of Nations”. Smith’s book aimed to say that the economy is talking only about GDP. The book also defines Smith’s idea of “self interest” and “the invisible hand” that regulate the economy to be always on its equilibrium level. It defined that freedom is the basic principle of every nation’s wealth let the people free to express their self-interest or greediness without any government intervention in the economy.

Classical and neoclassical economic exist until 1900s after the great depression the economists tend to looked for an alternative thinking on the economy. Due to that great depression and the world economist’s confusion to look for the better theory, on 1920s Keynes begun to write his “Treatise on Money that was published on 1930 in two volume, the main idea of this book is to examine the relationship among unemployment, money and prices, when the interest rates of bank’s saving is high, the people tend to save their money rather than to investing it; according to Keynes this condition will stimulate the rise on unemployment rates. During the great depression in 1933, Keynes established the means to Prosperity aimed to discuss about the multiplier effect and some advices for the British Government and other countries that suffered for the economic crisis.

On 1936 Keynes established this General Theory of Employment, Interest and Money. The first important thinking of this book is Keynes’s circular Flow of Money’s Theory to make it clearer let us figure this theory into this circular distribution of money from the business un to public scene:

 

 

 

 

 

Figure 1.2

The first important Keynes point of view is his concept of circular flow of money. The figure tries to figure out that in general terminology a Business or Market will distribute its money in term of wages, salary, rents, interests, profits and another terms of money into public, and these money would be flown back into the business when public buy or consume their goods and services from the business. For sure that this theory would not apply smoothly, there after Keynes comes with his three leakages for his circular flow of money:

 

 

 

Figure 1.3

According to Keynes money would not be circulated such that easy, especially as our consideration that when the interest rate of savings increased; people tend to save their money on banks rather than to invested it to the business. Or in the other hand, people tend to save their income weather they spend it at all at a single period of time.

What General Theory of Employment, Interest and Money’s of Keynes trying to say is Supply (S) sometimes could be neither more nor less than Demand (D) or event equals. It contradicts the former economists’ theory such as the Say’s Law that argued “Supply creates its own Demand”, and that in the free market workers would always willing to lower their wages to the willingness of employers to pay them based on their interest. On it Keynes come with his “Price Stickiness Concept” that figured in the real market workers will refuse to decrease their wages rationally or irrationally. That’s why government might interfere in the economy to lead it into its stable “aggregate demand” and “aggregate supply” or its equilibrium level. This theory is well known as the Keynesian Synthesis.

 

III. About Keynesian Theory

After a brief discussion on the Keynes ideas of modern economy, we try to demonstrate our perspective on it. Principally, Keynes theory on the government’s intervention on the economy is arisen after the US economy experienced a terrible great depression and his disappointment on the former classical economist’s suggestion that unable to stabilize an economic disequilibrium at that time of period. Out from this course, we see that what Keynes struggled to settle is formally a human effort that might be has any shortcomings and faults.

On his point of view, Keynes still believe that the “Freedom” on the economy still becomes the problem solving on any existing economic difficulties. His belief stimulates and became the nature of liberalism and capitalism on the economy. We are trying to say that a revised thought of Economic idea might only complementary of its former idea, and it might be better or worse because none could forecast the economic condition in the future. The macroislamic thought suggests some government roles that might be applied in the economy as the complementary of Keynes’s ideas.

VI. Government Role in the Economy

The economic role of government can best be defined by a classification of its economic policy aims. Broadly speaking the political choices made by electorates in Western-type democracies influence governments to perform four functions.

  1. The production of services which private firms are either unwilling to produce or for some reason are not allowed to produce (or at least not exclusively). This public provision may be to provide immediate benefits (e.g. defence, law and order) or deferred benefits (e.g. investment in roads).
  2. The alteration of the structure of private production in order to conform with some conception of the allocation of resources which is considered ‘better’ than that resulting from private market transactions.
  3. To intervene in the distribution of income generated by private market transactions in order to conform to some acceptable criterion of equity, for example a minimum income guarantees.
  4. The stabilization of the economy by attempting to reduce fluctuations in income and employment and to control movements in the general price level. The effects of this action can be seen in both the volume and the mix of transactions between the government and the rest of the economy. Policy models of the economy which place particular emphasis on the control of the money supply and interest rates will pay close attention to the size of the government budget deficit/surplus. Therefore, no particular transaction with the private sector is solely identified with this function except perhaps for the interest paid by government to firms and households as a payment for holding government debt accumulated in the course of financing past government deficits.

V. The Place of Government in the Economy

  1. First, always check which definition of government is being used, for it can make a considerable difference to the perspective gained about government’s role in the economy.
  2. Remember that while recorded money transactions enable us to quantify the extent of government intervention for economic policy purposes in a relatively simple fashion, this biases discussion of the relations between government and industry towards forms of intervention involving financial transactions between governments and firms. The Ministry of Finance may have an important role to play in influencing the finance of industry in conjunction with the Central Bank, but that cannot be shown, except in an indirect way, by the size of the financial surplus or deficit (in this case) of the government.
  3. Do not be taken in by the idea that because some group is responsible for paying taxes or is in receipt of benefits, that this gives a complete picture of the distribution of benefits and burdens. It follows that the imbalances in receipts and payments by sector in budget-derived figures can only be the starting point for much further analysis of their effects.

 

IV. Government as the Core of an Economy

Ability and behavior of the government in spending and saving money, including from the very large number. Therefore, the government called as a buyer and seller giants and also the mother of all markets. As buyers and sellers of the giant, government must have a strategy for economic stability maintained and there was an increase / growth economy.

Every year the government made a plan budget of the State (State Budget), which contains the policy plan next year. State Budget which was approved by the House of Representatives into the state budget. In this budget reflected fiscal policy will be applied in that year along with achievement strategies.

In conventional economic theory, fiscal policy was made because of the failure of market mechanisms (market failure). If the failures of market mechanisms continue to occur, there will be distortion or disruption of supply and demand which can disrupt the balance of aggregate demand (AS) and aggregate Offer (AD) in an economy.

Competitive market would produce Private Goods efficiently. Producers can benefit from selling Private Goods such as Oran, people will pay to obtain and enjoy it. As for the goods Non-Excludable and Non-Rivalrous, manufacturers can not obtain benefits because people can still use and enjoy the goods without paying. Hence, Public Goods will be more efficient if manufactured not by private companies, but by the government. Government can take advantage by increasing the quality of the community in which the next government to obtain funds from taxes paid by the community itself.

In society there are various kinds of human beings. There are rich and some poor, some were skilled and the unskilled, so there are natural gaps. To that required distribution (equity) for this gap can be minimized. Equity is fairness in distributing resources. The government should help people less fortunate with the help of more fortunate people. Assistance may be provided through taxes, donations, grants, and others.

Any changes to revenue and state revenue impact on government budget. When state revenues greater than revenues, there will be a budget surplus. Conversely, if state revenue is smaller than the state expenditure, there will be a budget deficit.

With no budget deficit means no new money is printed, this means there will be no inflation caused by monetary expansion. For countries that bond markets are not well developed, another alternative is to print money. As disclosed Irving Fisher’s MV = PT, then the application of monetary expantion increase, by printing money, which eventually will cause an increase in inflation rates. High interest rates mean the higher the debt interest to be paid.

To meet the needs of the country in a state budget deficit, the most commonly performed is increase state revenues through taxes or borrowed funds (debt) from public or other parties through the bond. And if it takes a loan from another party, it must be ensured the ability to return the loan.

In the reign of the Prophet. and Khulafah Rasyidin, rarely state budget deficit because the leaders adhered to the principle that expenditure should only be done when there is acceptance. At the time of the Prophet, A budget deficit that occurred only once before Hunayn War. At that time the number of people who converted to Islam more and more so that expenditure is greater than the acceptance of zakat. Messenger pay off the debt before the one year that is after the war. After that, during the leadership of the Prophet. and Khulafah Rasyidin never again occur the budget deficit, even at the time of Utsman bin Affan ra, state budget surplus.

IIV. Government as a Huge Saver

IIV.I Government Budget

There are several ways that governments use to raise funds to run the wheels of government, such as: business, collect taxes and borrow money. In so doing the government set up state-owned business that is expected to generate profits that can be used for the source of State revenue. While the withdrawal tax is imposed on society in various forms such as the UN, VAT and so on. Intake of such tax does not distinguish its form so that it causes instability. The tax reduces the supply of conventional theory. Governments can borrow money from the public or to other sources and must be returned in the future, as well as the loan is only temporary should not be made continuously.

IIV.II slamic Government Budget

Budget revenue sources on the Prophet shaped Kharraj, Zakat, Khums, Jizya and other revenue.

  1. Kharraj

Kharraj is a tax levied against the land based on productivity rather than zoning. So between land owners and the other one pays Kharraj different. What determines the amount of Kharraj is the government, the magnitude Kharraj determined based on the following criteria:

· Level of soil fertility

· Type of plant (market ability and quantity)

· Type Irrigation

  1. Zakat

At the beginning of the reign of Islam, zakat is collected in the form of cash, the livestock and agricultural products. Below is the system of zakat for each – each form of business.

  1. Zakat Revenues

Zakat is calculated based on nishab income (minimum income). Nishab alms for the dinar are 20 dinars and dirham to 200 dirhams is issued and the amount of zakat is 2.5% of total revenue has reached or exceeded nisab.

 

  1. Zakat Farms

Zakat is calculated based on differentiation in size for each type of animal.

  1. Zakat Agriculture

Agricultural use a flat rate of zakat is distinguished from the type of irrigation. Agricultural products are perishable goods.

  1. Khums

Islam uses Propotional Tax in collecting taxes while his opponent is a Lump-sum Tax. The difference can be seen by using analysis charts that illustrate the long run GDP using actual GDP that describe the business cycle fluctuations. By using Tax Propotional then the amplitude will be small so that when the shocks were then changeable smaller. Instead Lump-sum tax, so if there is a large amplitude shock will bubbling when riding and crashes when it fell.

The amount of amplitude calculated from the following equation

Y = C + I + G

Where C = a + b (1-0.2) y; C = a + 0.8 by

Then: Y = ___1____ (a + I + G)

1 – 0.8 b

Figure 1.4

  1. Jizya

Jizya is a tax paid by non-Muslims as a substitute for social-economic facilities and other welfare services. Jizya same poll tax, equal to the minimum amount paid by the Muslims.

  1. Other Receipts

The meaning is kaffarat or fines. An example for the husband and wife related in the daytime during Ramadan. Or heirs of excess and at times there is zakat Khalifah Umar to get past the bridge.

IIIV. Government as a Huge Buyer and Investor

Government acts as a large buyer is one of the practices of fiscal policy from the expenditure side. One practice from the expenditure side of public policy (government expenditure) in the time of the Prophet. and Khulafah Rasyidin is investment spending for infrastructure development that will support these activities.

Economic growth requires a political environment that could create incentives for investment, the legal system that protects property rights, and protecting the public against corruption, bribery, theft, and taking over the results of their investment.

Infrastructure is a capital that not all types of business firms owned by individuals who make the company become more efficient production. In some poor countries, the value of an investment business and the airport road is reduced due to bad air, the absence of railroads, telephone network, which took many months for installation, the electricity network capacity is not sufficient. As well as political decisions, the physical infrastructure necessary for growth and the numbers can be affected by government decisions.

Increased government spending will also increase the demand aggregate. When we enter the price level effects into the calculation, the increase in government spending continues to have a streak effect (multiplier) on the real GDP, but the impact is smaller than the state in which the price level constant. The more steep the slope of the short-run supply curve, the greater the increase in the price level, the smaller the increase in real GDP and the smaller the effect of successive (multiplier) of government spending.

In the long term, real GDP equal to potential GDP, the economy is at full employment equilibrium. While real GDP equal to potential GDP, the increase in aggregate demand have the same impact, but long-term effects are different.

Due to the successive effect (multiplier) of short-term public policy was not zero (0), expansionary fiscal policy can be used to increase the real GDP and reduce unemployment during a recession, a contraction in fiscal policy can be used also if the economy is hot (overheating) to reduce Real GDP and maintain or monitor inflation.

An event in which the investment was not in line with gross national product growth rate was found at the time the recession in the economic cycle also in the economy that is experiencing inflation. If the value of gross national product remains high and interest rates are also high stage these circumstances may reduce investment.

Unlike the savings and consumption, investment is a business that is unpredictable and risky, because the investment does not necessarily follow the same movement with the gross national product (GNP) different case with consumption expenditure that could affect the value of gross national product (GNP). Investment is an activity separate from the private sector and government sector.

Infrastructure is very important and gets the most attention. Therefore, the government should spend its budget for investment in public infrastructure and create conditions conducive for people willing to invest for productive things.

Conclussion

Starting on the world most influenced economist idea, John Maynard Keynes’s ideas of supply sometime could be over, lower or equals the demand, and there should be government intervention on the economy to lead the aggregate supply and the aggregate demand toward an economic equilibrium level. We try to conclude that government intervention is needed with concern to some macroislamic suggestions such as government as the core of an economy, government role as the huge saver, and government role as the huge buyer and a big investor on its economy.

 

 

 

 

 

 


[1] See Louis M. Hacker, The Course of American Economic Growth and Development (New York: Wiley, 1970), pp. 300-301.

[2] See Lester V. Chandler, America’s Greatest Depression (New York: Harper & Row, 1970), pp. 40-41.

[3] U.S. Congress, Senate, Hearings before a subcommittee of the Committee on Manufactures, 72d Cong., 1st sess., p. 239.

[4] Quoted in Chander, pp. 41-42.

[5] Quoted in Huberman, p. 260.

 

 

Abstract

Almost scholars agreed that there is no any riba’ on the cash sales and purchases. Riba’ commonly occurred on credit’s transactions. But, on the development of business today we recognized several kinds of sales and purchased contracts and agreements. One of latest kind of contract that well recognized particularly on real estate’s and properties sales and purchased is BBO “Buy Back Option Agreement”. In the first part of my essay I would like to explain about the definition of BBO. Then, I would like to give some comments and views on available example, and finally I will try to give some laws preference on Buy Back Agreement applications.

Keyword: riba’, cash, credit, contract, agreement, buy back option

Introduction

The definition of Buy Back Option Agreement

Base on my own experience buy back option is a kind of agreement on contract that band some parties on several circumstances. To make it clear here is the example of buy back option agreement’s application.

The Application of Sale and Purchasing of House

Several months ago a friend of me bought a house from someone. Here is the detail of transaction:

Let’s illustrate that the parties involving on this transaction are Mr. A and Mr. B, Mr. A wanted to sell his house cost 2 billion IDR to Mr. B with some conditions. The conditions purposed by Mr. A are:

1. He wanted to sell his house to Mr. B but, if it possible he intended to stay in that house afterward. For this circumstance he will pay annual rental fees to Mr. B.

2. Beside sale and purchased agreement there should be another contract that defines a “buy back agreement” Mr. A able to repurchase his sold house after determined agreed time with Mr. B.
3. After 5 years Mr. A will repurchase his sold house from Mr. B with additional value 30% or around 2.6 billion IDR.

4. Every single transaction is paid in cash.

These conditions are what Mr. A purposed on this transaction.

The Comments and Views on the Available Case

From the case above we could summarize that there are 2 different transactions and 2 different agreements in a single time, the transaction of sale and purchasing, the transaction of rent, the agreement of sale and purchase and the agreement of repurchasing. In my opinion there are no serious syari’ah obstacles available on it.  That sale and purchasing transaction is completed, there are 2 parties (seller and buyer) as the ‘aqidain, there is a house as the object of contract and there is sale and purchasing agreement on it.

Also the rent transaction, it already completed some preconditions of rental agreement. But the obstacle is available on the banded repurchasing agreement among Mr. A and Mr. B. On the agreement before, Mr. A purpose some conditions that should be agreed by both parties, one of them is the condition to repurchase his house back after 5 years. In my opinion repurchasing activity is fine as long as it does not being designed before, means that it happen spontaneously without any binding agreement on one party involved on the contract. The obstacle on previous case is Mr. A. was trying to band Mr. B with his banded repurchasing agreement.

Some laws preference for BBO

The Islamic legal notice on sale and purchasing activity:

1. Al-baqarah verse 275 and An-Nisa’ verse 29, on the permission and suggestion of sale and purchasing

275. those who devour usury will not stand except As stand one whom the evil one by His touch hath driven to madness. that is because They say: “Trade is like usury,” but Allah hath Permitted trade and forbidden usury. those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (for ever).

29. O ye who believe! eat not up your property among yourselves In vanities: but let there be amongst you traffic and trade by mutual good-will: nor kill (or destroy) yourselves: for Verily Allah hath been to you Most Merciful!

2. The prophetic tradition that indicate some permission of khiyar (conditions)

أنت باخيارفي كل سلعة ابتعتها ثلاث ليال

‘you have your option on your every purchased good at three nights”

(Baihaqi and Ibnu Majah)

3. The disallowance of banding (ikrah) on the contract al-baqarah verse 256

256. let there be no compulsion In religion: truth stands out Clear from error: Whoever rejects evil and believes In Allah hath grasped the Most trustworthy hand-hold, that never breaks. and Allah heareth and knoweth all things.

Conclusion

Due to some providences before I conclude that repurchased agreement consists of some forcing (ikrah) element of one party on other party, sale and purchasing activity is not consist any usury as long as it conducted in cash, some condition might be charged on any transaction with concern on some ethical element of Islamic economy. Therefore, to legalize the case mentioned before Mr. A should skip his banded repurchasing agreement beside sale and purchasing agreement among him and Mr. B.

 

References:

Dr. Al-Amien Ahmad , Jual Beli Kredit ; Bagaimana Hukumnya? (terjemahan), Gema Insani Press, Jakarta, 2001.

Irfan Syauqi Beik & Radiyta Sukmana, Malaysia dan Bai al-Inah, Republika, 18 Januari 2006.

Prof.Dr.Abdullah al-Mushlih, Fikih Ekonomi Keuangan Islam (terjemahan), Darul Haq, Jakarta, 2004.

 

Resticted Sources:

http://www.badralislami.com/glossary/a-h.asp

http://www.azmilaw.com/Article/Article_8_&_9/Article_9_Tawarruq_00093603_.pdf

http://natsirasnawi.blogspot.com/2009/05/akad-perikatan-dalam-hukum-islam.html

http://catatangadisku.blogspot.com/2010/03/jual-beli-dalam-islam.html

 

 

 

 

 

The basic of fiqh muamalah

The definition of Fiqh

Literally Fiqh refers to an Arabic word al-fahm al-daqiq means a deep understanding. Legally it means the knowledge of the shar’I ahkam legal rules, pertaining to be conduct, that have been derived from their specific evidences. It supposed to be studied to derives the legal rules of conduct and concludes them beased on the method that have been described.

The division of fiqh

Fiqh is divided into two; fiqh Ibadah and fiqh muamalat.

Fiqh ibadah is the Islamic laws that regulate the practicing of worship and the relation among human and their God. (The five prayers, fasting and pilgrimage) (Anything is forbidden up to there are some provisions that command it)

Fiqh Muamalah is the Islamic laws that regulate the relations among humans being and all their acts and interconnections. (Anything is permitted up to there are some provisions that forbid it)

The scope of fiqh muamalah

The law related to all aspects of human life.

The law related to Government system and human rights.

The law related to financial acrtivities.

The law related to Crimes.

The law related to national’s budget.

The law related to Non-Muslim peoples who live in Muslim country.

The law related to the process of laws.

 

Wealth in the perspective of Islam

The definition of wealth

A Wealth could be defined as something valuable, profitable and interesting for human beings that could be used only in the normal capacity.

Is wealth included as a right (haq) or function (manfaah)?

There are two views to answer this question;

First views comes from hanafiahism, according to them, right or functions of wealth is not regarded as properties and second views comes from jumhur ulamas, according to them right or function of wealth is regarded as property.

The position of wealth in Islam

1. Wealth is amanah (trust) for human beings and the only wealth owner is Allah SWT

2. Wealth is only a tool of life and not the purpose of life.

3. Property is regarded as the basic necessities of human beings.

4. Islam allows his people to get wealth as many as possible but, it should be balanced by paying zakat and other charities.

The division of wealth:

1. Mal Muttaqawwim (the allowed wealth to be used) & Ghair Muttaqawwim (the unallowed wealth: stolen shoes etc)

2. Mal Mitsli (common wealth) and Mal Qimi (scared wealth)

3. Istihlak (durable wealth: matches) & Isti’mal (endurable wealth: land)

4. Manqul (car, bikes, etc) & Ghair manqul (house, apartment etc)

5. Mal ‘Ain (houses, bonds, stocks) & Mal al-nafi’I (developing wealth: Jati, Cacao)

The functions of wealth

Maqasid Syariah

Al-Milkiyyah (the possession)

Possession is the specialty of someone to own something as long as there are no syariah barriers (syariah disallowance).

The division of al-milkiyyah:

1. Al-milkiyyah at-thammah (a complete possession)

The possession’s of good physically and beneficially.

2. Al-milikiyyah an-naqisah (incomplete possession)

The possession’s of good only its physic or its benefit. (car retal n house)

The causes of al-milkiyyah

1. Ikhrajul Mubahah (something that is mubah: fish in the river, waters, airs)

2. Khalafiyah (turn-overing the possession’s of right from a party to another: at-tirkah: inheritance)

3.  Khalafiyah syaiin ‘ala syaiin (the repayment of something we have broken before)

4. Tawaluq min Mamluq

5. Al-uqud (contracts: the speciality given by syariah to someone to own something for acting on it freely)

The contracts in Islam

Tasharruf (everything comes from a human being on their own intention and it being determined by the syariah compliance its several rights. (tasharruf fi’li and tasarruf qauli)

The definition of contract

Contract refers to an Arabic word ‘aqada means an agreement, a rope, that connects some peoples to be involved to a certain agreement.

A contract is a restricted connection among ‘ijab (offer) and qabul (acceptance) based on syariah compliances which caused into law’s barriers when it being agreed by the offerer and acceptor.

The conditions of Offer and Acceptance:

1. The offerer and acceptor both clearly declare their intention to take an offer and acceptance.

2. The relevancy of offer and acceptance.

3. Each party known other’s real intention clearly.

4. The moment of acceptance (majlis aqad)

The element of contract:

1. Aqid refers to someone who act a contract (it should be two parties)

2. Ma’qud ‘alaih refers to something that becomes the object of a contract)

3. Maudhu’ al-aqd refers to the main objectives of a contract.

4. Shighat al-aqd the statement that related to the oral acts  (offer and acceptance)

The conditions of a contract:

1. The aqid should be lawful and compatible physically and mentally to perform a contract.

2.  The lawful objects.

3. The contract should be caused into some advantages.

4. A complete Ijab and qabul.

The types of contract:

1. Aqad munjiz (direct implementing contract)

2. Aqad mu’alaq (predetermined: delivery etc of contract)

3. Aqad Mudhaf (determined contract)

 

Interest

The definition of usury

Usury is an addition, increasing or growth or some additional value that obtained by one party from other without any conditioned before weather in the sale and purchase or leading’s contracts.

Types of usury:

Predetermined value:

1. Riba duyun ( the interest of debt )

2. Riba buyu’ (barter: uncertain take and give)( the interest of sale and purchase )

Why usury is forbidden?

Because, it’s assumed as the cruelest crime in Islam. It consists of some dangerous and damages. Such as:

1. The physiological impacts (usury encourage a selfish that caused into individualism ignorance of the social problems)

2. The social impacts (usury causes some hates and separations among the society)

3. The  economical impact (unfair economic wealth distribution)

 

 

 

 

 

 

 

 

 

 

 

I. Introduction to ‘Aqad

‘Aqad is a kind of tasharruf/intention that caused into syari’ah barrier, which refers to “everything comes from a human being on their own intention and it being determined by the syari’ah compliance comes with its several rights.” Tasharruf itself is divided into two parts: tasharruf fi’li and tasharruf qauli/intention being act and intention being said. Tasharruf fi’li means something act by the people with their physical efforts more than their oral saying and tasharruf qauli in the contrary.

We could assumed some activities such as receiving the commodities of sales and purchasing activity as tasharruf fi’li where, its agreement being the tasharruf qauli one.

II. Definitions of ‘Aqad

Literally ‘aqad refers to the Arabic word, عقد يعقد عقدا means an agreement, and ‘aqad might also refers to “the rope” which is connecting some people which are involved in a certain agreement. Syari’ah also defines ‘aqad as the inter-connection among the people’s الربط and the covenant الاتفاق.

Terminologically, the scholars classified ‘aqad into two general views; ‘Aqad in term of general and ‘aqad in the specific term. According to Syafi’iyah, Hanafiah and Hanabilah ‘aqad in general has the same meaning as the literal definition. It is anything being act by the peoples on their own intention such as donations, divorcing statement, purchases, sales, etc.

Furthermore, the syariah’s scholars define ‘aqad as the restricted connection between ‘ijab and ‘qabul’ based on the syari’ah compliances which is caused into law’s barrier when the ‘aqad being agreed by two peoples or more.

III. The Element of ‘Aqad

From the explanations above, we could conclude that ‘aqad is an act that might be acted intentionally among the peoples (two or more), on their free personal will; this action is caused into some rights and obligations among them. An ‘aqad should consists of same element which are will be mentioned bellow:

  1. ‘Aqid refers to someone who have its ‘aqad, it should be two persons and more.
  2. Ma’qud ‘alaih refers to something which is became the object of ‘aqad.
  3. Maudhu’ al-‘Aqd refers to the main objectives of the ‘aqad.
  4. Shighat al-‘Aqd refers to the statement of the ‘aqid, it could be recited by the ‘aqid. In the past era shighat al-‘Aqd should be recited by the ‘aqid but, nowadays, it applied seems just like tasharruf fi’li which is more assumed as the acceptance of the parties who have the ‘aqad on their mu’ammalah activities.

Particularly for shighat al-‘Aqd it has 3 conditions which are:

a)      It should be clear and could be understood.

b)      It should be relevant and factual based on its íjab and qabul.

c)      It should represent the real intentions of the ‘Aqid without no hesitations and pressure from the other parties.

While shighat al –‘Aqad refers to any statement that related to the oral acts, there are some other actions that caused into ‘Aqad. Some of those actions are:

a)      The kitabah/written ‘Aqad it’s based on the syari’ah laws: الكتابة كالخطاب means: “writing of man is what he said”. It generally happened when the ‘Aqid is separated in long distance.

b)      The isyarat/signal it generally happened when one or both ‘Aqid is unable to perform several sensed acts such as deaf mutes. It refers to the syari’ah laws: الإشارة المعهودة لأحرس كالبيان بالسان means: “The signals of deaf mutes presumed as their oral statements”.

c)      The ta’athi/take and give with undetermined quantity. For instance: a fisherman who used to give some of his fishes to a farmer who used to give some of his rice back to the fishermen. It definitely different with sale-and purchased activities but it’s merely take and giving actions.

d)      The lisan al-bal according to some scholars it happened when someone leave his property somewhere under someone intentions, it automatically caused into ida’ or the deposition of ‘Aqad.

IV. The Conditions of ‘Aqad

In the establishment of some ‘Aqad there are some conditions that should be fulfilled by the ‘Aqid. These conditions are generally classified in two categories; the general and specific preconditions. The general conditions should be fully completed during the contracts while the specific conditions pretended as the idhafi or additional conditions that ideally could be provided in additions of the compulsory one for instance: the precondition of witnesses in the marriage ceremony.

Here are some general conditions of ‘Aqad:

a)      The one who take any ‘Aqad should be compatible in their actions. They couldn’t be unconscious ‘Aqid.

b)      The syari’ah allowance on the objects of ‘Aqad.

c)      The syari’ah allowance on the ‘Aqid to take some ‘Aqad.

d)      The ‘Aqad on the forbidden sales.

e)      The ‘Aqad should be caused into some advantages.

f)       A complete ijab and qabul.

V. The types of ‘Aqad

There are kinds of ‘Aqad which are:

a)      ‘Aqad Munjiz/direct ‘aqad means: the contract that directly being actualized a soon after the ‘Aqad is taken.

b)      ‘Aqad Mu’alaq/pre-determined ‘aqad means: the contract that requires some pre-determined requirements such as the on-line shopping that generally requires the pay-pal or full payment before the stuffs delivery.

c)      ‘Aqad Mudhaf/determined ‘aqad means: the contract that being determined its actualization period, it means that this kind of contract has no laws barrier up-to the determined period of contract’s actualization.

Beside ‘Aqad Munjiz, Mu’alaq and Mudhaf there are a lot of ‘Aqad that mentioned in syari’ah allowance, it based on its own point of views that might be different each other. Some of them differ in its point of views such as:

a)      The availability of qismah on ‘aqad that differs ‘aqad into two: ‘aqad musammah that already determined by the syari’ah compliance its names and permissibility. For instant: sales and purchasing, charity and leasing. And ‘aqad ghair musammah in the contrary.

b)      The permissibility of ‘aqad that differs ‘aqad into two: ‘aqad musyara’ah that its existence being allowed by the syari’ah compliance. Such as sales and purchases and some pawning activities. And ‘aqad mamnu’ah in the contrary, for instance: sale and purchasing pet’s embryo.

c)      The validity of ‘aqad that differs ‘aqad into two as well: ‘aqad shahihah/ valid contract refers to the contract that has completed its conditions as whole. And ‘aqad fasihah/invalid contract refers to some ‘aqad that incompletely fulfilled its conditions.

d)      The kinds of objects also differ ‘aqad into two: ‘aqad ‘ainiyah refers to it take and giving acts. Such as sale and purchase. And ‘aqad ghair ‘aniyah in the contrary such as aqad amanah.

e)      The actualizing methods differ ‘aqad into two: the ‘aqad that should be done with the specific ceremony likes wedding ‘aqad that requires certain ceremonial acts. And ‘aqad ridla’iyah that need not some specific ceremonies.

f)       The objectives of ‘aqad differ ‘aqad into five:

  1. The objective of possessions/tamlik.
  2. The objective of cooperation in business/musyarakah and mudharabah.
  3. The objective of trust building/tautsiq pawn activities.
  4. The objective of replacement/wakalah or exhortation/washiyah.
  5. The objective of deposition/ida’.

VI. Conclusion

An ‘aqad is a crucial element of all muammalah activities, its define weather a muammalah is allowed by the syari’ah compliance or not. An ‘aqad should fulfill the mentioned element and conditions to be eligible contracts in Islam. There are many kinds of contracts in Islam and being classified in certain categories based on its point of views such as its availability, permissibility, validity, its object, actualizing ways its objectives etc. Furthermore, an ‘aqad causes into syari’ah barrier that could be violate by the ‘aqid (ilzam and iltizam) ilzam is the violations of one party on its own on the contract that being agreed among the two parties or more in an agreement. While iltizam is the authority on every party involved in an agreement to  take an action or avoid it with refers to the contract.

References:

Suhendi, Hendi., 2002, Fiqh Muammalah, Rajawali Pers, Jakarta

Hasbi Ash Shiddieqy, Muhammad., 2001, Pengantar Fiqh Muammalah, Pustaka Rizki Putra, Semarang.

Restricted sources:

www.fiqhmuaamalah.blogspot.com

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