With the global system of Islamic finance standing at $2 trillion in value and rapidly growing, it is becoming increasingly important for Western economics to understand the principles underpinning Islamic economics. Western economists such as Timur Kuran have decried Islamic economics as incoherent, ineffective and confected, but when it has this much influence in the international economy, its theoretical framework must be considered with some degree of seriousness.
An important distinction between Western and Islamic economics that likely drives this criticism is that the former sees itself as a neutral science with a defined goal of allocating resources to maximise utility. As such, explicitly ideological or theological concerns are frowned upon in mainstream economics due to conflicting with their aspirations of objective science. Alternatively, Islamic economics has never historically been a distinct field of study with its own defined goals. Rather, it has been integrated into a broader structure of Islamic jurisprudence (fiqh) on commerce and moral philosophy, with the ultimate goal being to enact the will of Allah. Because of these radically different theoretical foundations, there is an inherent tension between Western and Islamic economics which makes a mutual understanding difficult.
This animosity extends into more blatant disagreements as well: the most prominent being the contrasting approaches to interest. Western economics sees interest on loans being fair and necessary, as the profits accrued to the lender reward the risk they took and the high time preference they demonstrated. Whereas Islam promotes a strict prohibition of what they call riba, meaning “increase” and referring to profit that a lender generates through interest on a loan. This stems from Islam’s conception of money as a measure of value and not value itself, with some scholars such as Ibn Khaldun proposing that labour is the source of value and money serves only to represent it. As such, Islam dictates that finance must be backed by “legitimate” economic activity, with interest not being considered so because there is no real increase in value. Also problematic is the fact that interest divorces the lender from any moral responsibility for their investment. Instead of loans with interest, Islam endorses contracts of partnership known as mudarabah and musharakah, where parties pool resources and spread risk. The sale of goods on a deferred basis with profit going to the seller (murabaha) and the leasing of a specified asset by a financier (ijarah) are also deemed acceptable. Because of this prohibition on riba, the contemporary Islamic banking system functions through non-interest deposits, profit-sharing investment accounts, and bonds which are structured to link to an underlying asset the lender receives profit from (sukuk). Thus, while Islam does restrict riba, there still exists firm theological grounds upon which a financial system can build itself.
Even more striking than the distinctions between Western and Islamic economics are the similarities. Interestingly, the movement of Islamic sciences into Europe via Andalusia and Sicily following the Crusades is a likely cause of this overlap, inspiring European thinkers in their theorising on economics. Ibn Khaldun, for instance, has been widely acknowledged by European scholars for his contributions to European thought both on economics and beyond. 370 years prior to Adam Smith, Khaldun was articulating the importance of the division of labour (first touched on by al-Ghazali in the 12th century), promulgating a labour theory of value, singing the praises of market economies, and expanding upon the supply and demand theory of his ideological predecessor, Ibn Taymiyyah. Both Khaldun and Taymiyyah believed in economic systems where prices were set by supply and demand but with a state that would step in during moments of injustice – or what today we would call “market failures”.
Despite beginning from wildly different foundations, Western and Islamic economics have reached similar conclusions on many of the discipline’s pressing issues. The utilitarian axiom of Western economics is paralleled in the analysis of thinkers like al-Ghazali, Ibn Taymiyyah, and al-Shatibi, who saw the goal of sharia as being the achievement of worldly and heavenly utility. Both uphold private property as a fundamental right that operates through its natural corollary of a free market driven by the profit motive, and both see the government as fulfilling a regulatory role that ensures fairness in this free market and a redistributive role that ensures a sufficient standard of living for all. For Islam, these beliefs are all subject to explicit moral requirements: market freedom must be balanced with obligations that allow for purification through our connection to others (tazkiyah), wealth must be shared with the poor (zakat) especially through voluntary charity trusts (waqf), and self-interest needs to be considered in tandem with the public good. Perhaps Western economics lacks this theological framework, but the discipline would undoubtedly find itself in agreement with many of these Islamic propositions.
None of this is to say that a complete reconciliation of Western and Islamic economics is possible. It is not, and that is a good thing. The disciplines vary too much in their historical developments and theoretical frameworks to wave away differences in the name of collaboration. Notwithstanding these conflicting frameworks, there is plenty of agreement between the two fields – but there are also conflicting views on issues such as interest and investment. However, this does not change the fact that both Western and Islamic economics exist in the same world. Neither is likely to subsume the other. So, instead it is more reasonable to hope for this historic process of mutual understanding and cross-cultural exchange to continue, and for the strongest, most effective economic ideas to proliferate far into the future.
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Hattab, K.T, & al-Morsi, M.A.M. (2013) ‘The Relationship between Islamic Economics And Western Economics.’ Arab Journal of Administration 33(1). https://digitalcommons.aaru.edu.jo/aja/vol33/iss1/12
Institute of Islamic Banking and Insurance. What is Islamic economics?, viewed April 2022. https://www.islamic-banking.com/explore/islamic-economic-thought/what-islamic-economics
Lewis, B. (2006). ‘Ibn Khaldun in Turkey.’ Ibn Khaldun: The Mediterranean in the 14th Century: Rise and Fall of Empires.
World Economic Forum. (2015). These are the top 9 countries for Islamic finance. https://www.weforum.org/agenda/2015/07/top-9-countries-islamic-finance/