Building an Islamic Case for Open Markets
History, Thorey and Practice
Dr. HUSNUL AMIN
In pre-Islamic Arabia, the city of Makkah, which hosted the cube-shaped Ka’bah as the holy place for worship, was a melting pot of religion, commerce and politics. Tribes from afar would travel to both pay their respects at Ka’bah and also to engage in commerce. The custodians of Ka’bah, the tribe of Quraish, enjoyed peace and security in the midst of an otherwise tumultuous Arabia. Even the Qur’an would provide a divine testimony later for the accustomed security of their caravans in the winter and the summer. They were also accepted in their leadership role and never faced hindrance in their trade caravans. Thus, their religious role, as custodians of the holy land, granted them both political and commercial advantages.
Prophet Muhammad (Peace be upon him) (d. 632 CE), who belonged to the tribe of Quraish, inherited a rich tradition of commerce. Before he claimed, at the age of 40, that the angel Gabriel had revealed God’s message to him, he was well-known in Makkah and Arabia as Sadiq and Ameen, or “truthful” and “trustworthy.” He was an established man of commerce, to whom people would come for resolution of disputes. This background would allow him to leave behind a rich heritage of insight, knowledge and ethical principles about economy.
As a religion, Islam offered three definitive and broad moral principles of economic organization of a society evolved in the initial phase of Islamic history. These are: the principle of ownership which clearly delineates private and public property, principle of wealth creation, which is based on voluntary trade and price freedom and; the principle of wealth distribution by circulation and assignment of rights.
Without private property rights, there is no incentive for an individual to conduct commerce and to advance materially. However, an absolute ownership of private property, which disregards appropriate use of property, is constrained by Islam. The gifts of nature- water, fire and grass- are treated as commons and absolute private ownership is denied as these resources are commonly owned by generations. However, if a man uses these gifts of nature to produce something- for example, his own house, then this no longer remains property of commons, it becomes private.
Wealth can only be created and expanded through an attitude of savings and mutual consent in a process in which entrepreneurs and traders enjoy high level of freedom.
Believers, do not consume your wealth among yourselves in vanity, but rather trade with it by mutual consent. (Qur’an 4:29)
Finally, what we rightfully earn remain ours, however a small portion of that wealth is pre-assigned to others- both members of the family and of society, even if they do not claim any rights. Even this right is further diluted upon death, as inheritance laws minimizes discretionary powers.
Based on a reading of the primary sources of knowledge in Islam, we can derive specific institutional tenets which can be used to operationalize these principles. These tenets are price freedom, free trade, market regulations, sound currency, riba free banking, low and flat taxes, reliance on voluntary contributions, and strict inheritance distribution. We briefly present them here.
One of the central debates in economics is about prices. Qur’an is silent over price control (tas‘ir) and therefore we are left with the traditions of the Prophet Muhammad -hadith- as a benchmark to understand religious notion on the price control within the Islamic framework. According to a tradition of the Prophet, tas‘ir is forbidden, as it is injustice, and as the prices are determined by God. There are various hadith conveying this message. According to one of them:
At the time of the Messenger of God, the market price rose in Madinah. The people said, “O Messenger of God, fix the price.” He replied, “God is the taker and the disposer, the provider, and the controller of prices. I hope that when I meet Him none of you will have a claim against me for an injury concerning life and property2.”
Thus, in principle, economic freedom is guaranteed and there is a strong rationale for believing that it is economic freedom of both buyers and sellers that constitute the central pillar of Islam’s economic philosophy.
Trade, during both wars and peace, was critical for pre-Islamic Arabs. They were known for undertaking global trade caravans- exchanging precious metals which Arabia possessed with silk from China or spices from India. In such a trade-oriented society, it is not a surprise that the first institution which the Prophet of Islam established after migration to Madinah, after the mosque, was the marketplace. It wasn’t the first marketplace in that city, in fact four marketplaces existed already. However, he introduced unique features in his new marketplace. He required that trade be allowed to take in that market freely, without any charges or fees imposed on market participants, and appointed supervisors to prevent any fraud. It was a market without tariffs but with strong ethical rules.
By instituting an essentially tax-free market, Muhammad took a competitive advantage over others, which helped in redirecting the trade to the new community of Muslims. In doing so, he was laying down fundamental characteristics of a market economy. The underlying motivation, as we will see, was justice, fairness and moral conduct.
The Islamic traditions assume prevalent market prices as true representative of the costs for the seller and value for the buyer. However, this information may be distorted by certain unethical and unlawful actions by market participants besides natural factors like famines. The Islamic jurisprudence has defined five sources of intended distortion of price: ghabn (intentional over-valuation or under-valuation); ghish (cheating about the product features or adulteration in the product); najsh (Bidding up the price by a third party in the presence of the buyer and seller without an intention to actually buy); ihtikar (hoarding) and mawama (fore-buying). These forms of distortions were identified by the Prophet himself and are thus considered unlawful with consensus. Since they were practiced in the times of the Prophet, their practical meaning was well-understood by the people of the age, and therefore the exact implications of prohibition in these cases were explained by the interpreters of hadith and jurists.
When the Prophet established the institution of hisbah (market inspector), he delegated enforcement of this regulatory framework to this institute. One can readily observe that the enforcement of such a framework did bring parity between trading parties as well as between producer and consumer. It should be emphasized that despite this comprehensive framework of business regulations, the Prophet did not introduce any forms of price controls. For him, it is obvious, that price controls were unfair in their very nature and he quickly established norms- and legal boundaries- to remove characteristics of unfairness from business practices of his times. This was a model of an essentially free market with a strong rule-based regulatory regime.
It can be established without any doubt that Islam does not allow lenders to charge interest on cash loans. This prohibition is same regardless of the interest rate, purpose of loan and financial status of beneficiary. On the other hand, there seems to be less clarity among Islamic economists about how modern commercial banks create money due to fractional reserve banking. This is done on the back of a central bank which relies on discount rate for credit allocation preferences. For Islamic economists, the fiat currency, banks once Islamized, and the financial system they create are legitimate. It is where more research is needed both on empirical and legal grounds.
We should understand that the banks have evolved over centuries and in their social evolution, they have addressed several shortcomings in their model. They have ridden themselves off from highly exploitative functions particularly pertaining to interest. Under an Islamic economy, the banks as they function today take deposits, undertake trading and investment and provide financing facilities. As these functions entail provision of services while incurring costs, there will be a price tag, which can be a combination of fee, interest and share in the profit/loss depending on the nature of contract. Therefore, we do not need a separate “Islamic banking” system, and modern banking infrastructure is able to provide these services except in the case of explicit interest-bearing cash-loans which will be prohibited. Other forms of non-banking riba transactions are also disallowed.
Another issue of importance is the position of currency. It is difficult to take a clear position for a gold-backed currency or a fiat currency based on the Islamic precepts. However, what is clear that for Islamic principles, sound money holds a central importance. It is also clear that the backing of a central bank or a federal government is subject to changes in the geo-politics, which brings unsoundness in the money and has a great propensity of loss in the wealth for the holders of the currency. A stable government helps in the stability of exchange rate, but a change in the government brings instability. Therefore, an external benchmark for currency valuation, which may or may not be gold, sounds a better economic policy. This valuation should also take into account actual economic situation, such as production levels, in a country.