4. Realism amidst Communalism and Socialism
In Economics, Islam accepted a moderated path neither accepting the dogmas of capitalism nor communalism. It will be difficult to find concepts like Economic order, forces of demand and supply and market intervention in classical Islamic texts. But it is clear that all powers of such theories are rendered to Allah. And it becomes as a natural phenomenon, shunning human interventions on it.
Allah said: “We have apportioned their livelihood among them in the life of this world and have raised some of them above others in degrees of rank that they may make use of one another for service”. Here Allah elucidated Maeeshath (livelihood) under his ownership. In case of Demand and supply, there need a specific force that determines the rate. Consumers and buyers are the main players in this phenomenon. Both of them are mutually dependent. Islam says that Allah is the one who connect dependency of one to another. Thus he became as the major force in demand and supply function.
This Fact is also explicated in Hadees. Once people said “Oh the messenger of god, Price rate has increased, please make a price for us”. Prophet said “Allah is the giver and taker. Let him decide the price. Never ask me to do tyranny in blood and wealth”. Here Prophet has given the right of price determination to Allah, which is actually the outcome of demand and supply function. Whether it is government or sellers, it is prohibited the intervention of people in market price. Here Islam never gives complete ownership to government which is against the principle of communalism. On the same hand, Islam negates complete freedom to people as done in capitalist economy. A complete freedom may destroy the natural flow of market. It doesn’t generate real value assets. It may cause inflation and inequality in income distribution.
In brief Islam has conveyed individual freedom. But it is gummed to the freedom of society. For the smooth flowing of market function, Islam has banned certain business like usury which creates non value assets in the markets. Thus, three types of market interventions are allowed in Islam
· Intervention of deen (creed): It gives permission to all dealings under Sharia rulings.
· Intervention of government: If market is flowing without any hindrances, government has no right to intervene in market prices. But has the power to instruct in case of illegal human interventions. Once Caliph Umar (r) ordered one of his companions to increase the price1.
· Intervention of akhlaq (matters of discipline): As ensured in all sects, Islam considers akhlaq as the fundamental principle in Economics. The target of a business man should not be concentrated in earning profits. So that he need to respect the rights of others and show husn (good) to them. The competition amidst two needs to be effective and respectful.
In nutshell, Islam never pursues an economic development without equality in income distribution. Realism occurs only when the goods are genuinely used. The purpose of earning wealth needs to be welfare oriented. The moderate approach of Islam gives equal consideration to all sections and it promotes financial inclusion. It is not possible in capitalism and socialism. The mixed economy like in India is also different from Islamic economics. It permits government control in profit sector and allows private intervention in production sector which creates economic imbalance and unreal assets.
5. Realism and Interest
Prohibition of interest is one of the basic principles of Islamic finance. Many scholars justified the prohibition from different angles. Monzer Kahf considers realism as the prime objective behind the prohibition.
In interest, debt does not create increments. In leasing, the physical nature of usufruct in leasable assets generates increments. The increment is the result of market forces. Thus, interest negates the prime concern of realism. There is no asset in interest-based finance. Thus, the ownership of an asset will also be denied from the contract.
In an economy, the abundance of non-value assets will cause inflation. It will further create an economic imbalance in income distribution. The poor will become poorer and rich will become the richest. This will increase unemployment and poverty in a nation. Thus, for an inclusive development, realism is necessary and it is well found in Islamic economics.
6. Realism in Islamic financial instruments
All Islamic financial instruments are bounded under the principle of realism. This part will have a look at some of the most important financial instruments applied in Islamic economics. According to Kahf, the conditions for an asset to uphold the principle of ‘realism’ are following;
· It can able to generate increments
· It should be genuinely used for what is
· The returns should be factually produced.
Now, let us have a look whether the Islamic financial instruments uphold these principles
Murabaha has now become a familiar term amidst economists. In this transaction, seller discloses the cost of the commodity and the amount of profit charged. It is an interest-free financial instrument. The charge rendered is for the ownership risk met by the seller during the period. It has many similarities with interest like credit assessment, due diligence, collateral asset, equal profit rate and interest rate. But it becomes permissible due to the availability of a real-good in the transaction. Indeed, the asset will provide material increments to an economy. Moreover, the end user is the customer. Thus it accomplishes three principles of realism.
Musharakah is a partnership form, where profit and loss are shared based on Islamic financial rule instead of interest-bearing loans. It brings each party involved in a business to have a share in the risks and profits. Instead of getting usury like a creditor, the party will have a return from the actual profits earned by the firm, in accordance with a predetermined ratio. However, unlike a conventional creditor, the partner will also need to bear any losses.
Here, realism is recognized by many of its attributes. Foremost, there is a profit and a risk. The financier will only get a deserved amount as profit. Moreover, he is responsible for bearing losses incurred by the firm in proportion to his investment. There will not be a negative compensation for managing partners. The duration of business will be a lifelong period. If one resigns, he is responsible for the damages incurred due to his resignation. Thus, it is vividly clear that Musharaka is working under the principle realism.
Mudaraba is a financial contract, where Investor or Rabbul Mal provides the capital, and manager or Mudarrib governs the business. The manager will get a portion of the profit. The losses will only be incurred by the investor. But, he will not be charged for a loss beyond his capital. The losses needed to be incurred by the manager will limit in his work. The investor will be the beneficiary for an increment in the value of the asset. Thus the contract is only relying on real transactions.
6.4 Ijara (Leaseing)
Leasing is a financial contract that allows lessee to make use of an asset owned by lessor for an agreed price over a definite period. The usage of assets without having an ownership is the benefit given to lessee. He acquires the asset he needs without paying an interest and receives the benefit of usufruct, while the lessor receives rental payment for a specific period of time plus the residual value of the asset.
Only durable assets are allowed for leasing. The lessor is responsible for maintaining the usability of usufruct. Lessee needs to bear the operational expenses for keeping the asset safe like electricity bill. The rent will be suspended while lacking usufruct of the asset. These all rules show that leasing is not dealing with a non-increment asset. Further, rent is given for bearing the ownership risk and operational expenses he met during the leasing period. Thus the contract ensures the principle of realism.
Sukuk is the asset-backed Islamic bonds which provide funds for long-term investment. Sukuk is a way to generate returns to investors without infringing Islamic laws. It characterizes undivided shares in the ownership of tangible assets. There will be no bubble as all Sukuk issuance are backed by a certain asset. In case of bonds, it does not represent a real good or service. In Sukuk, people will get the ownership of assets and company will gradually lease them and took over the ownership. These types of Islamic bonds will able to generate increments and it guarantees realism.
Like these financial instruments, all other Islamic financial tools convey the principle of realism.
7. Exceptions to realism in Islamic finance
In Islamic finance, we can able to see certain contracts lacking the principle of realism. Mainly it is seen in Salam (sale on deferred payment) and Isthisna (sale of manufactured or to be constructed goods).
In Islam, certain exceptions to the law are allowed to meet necessary needs. Salam was allowed for real socio-economic requirements. It meets real objectives in real life. Hence, in a sense, it pursues the basis of realism. Islam has proposed certain conditions to perform Salam transaction. Imam Navavi has counted seven conditions for Salam in his book ‘Minhaj’. The asset must be able to give in proposed time is the fifth condition. In any case, the asset is not delivered, the contract will be rejected. The complete knowledge of buyer on the commodity is the sixth condition. Moreover, it cannot be sold to the third party before possession. These all conditions well provoke the theory of realism.
Similarly, Isthisna is allowed for manufacturing and industrial purposes which is also important for an economy. Also, here we can see the aforesaid conditions in Salam. Thus, these two financial contracts cannot be considered as mere exceptions from the rule of realism.
Islam is a realistic religion which has practical implications. Its rules are based on realities and factual events. It negates assumptions and presumptions over future outcomes. The paper tries to analyze Sharia-compliant finance in terms of realism. Foremost, interest-based financing is prohibited due to its contradiction to the principle of realism. It is based on abstract values and assumptions.
Realism can be seen in almost all Islamic financial instruments. There are so many conditions to fulfill the principle of realism. As mentioned earlier, three things are essential to satisfy realism. The asset should generate increments. The contract should be used for its actual purpose. Returns need to be analytically proved.
When realism is accomplished, the financial system will provide moral and ethical principles of economics. Thus, the presence of asset will not provide realism unless it satisfies other conditions. In the modern economic system, the failure of trading indices and swap is a vivid paragon for the succession of realism in Economics. Islam always concentrates on financial inclusion than mere financial development.
1 Once Umar (r) ordered Khatib bin abee bulthaga to raise prices. He said: “Increase the price or left from the market”. Narrated by malik and Baihaqi, Kanz (4/104), Hadees no:882