Timur Kuran does not like Islamic economics and finance. Regarding it as inefficient, and the interest prohibition nonsensical in the modern age, he appears to be particularly incensed by the growth of the Islamic finance industry. Modern day capitalism, with its checks and balances, and ability to self analyse itself, represents the pinnacle of human achievement.
Islamic economics, in all its pomp, came with a purported blueprint to change the global economic and financial system. It started humbly although with aggression as the likes of Maududi vociferously pilloried the western capitalist system.The projects of the Egyptian Mt Gamr and the Malaysian Tabung Haji showed the potential of socialised finance in which the financier had a direct relationship with the recipient, similar, almost, to the Grameen model.
Since then, the growth of the industry can be ascribed to two determinants: 1) Religious affiliation; 2) Replication of conventional instruments.
In the Muslim world, there has been a growing consciousness of one’s Islamic identity. Following the collapse of the Ottoman Empire and the slow erosion of India, Muslims were left in a vacuum forced to define themselves by the nation they ended up being part of. Along with migration to Muslim lands, identity politics emerged, especially as the states they ended up settling in were relatively recent in their formation. With the fall of Muslim empires, post-modernism and the growing antagonism towards religious laws and phenomena, a call for a return to the traditional sources became a battle cry amongst the pious. So in the last 100 years, we have seen the emergence of political Islamic entities with their own social manifestos such as the Muslim Brotherhood, Hizb ut Tahrir, the Al-Albani influenced Wahabism, Jamaat Islami and even Pakistan.
In this quest to promote the Muslim identity, Islamic finance was a natural bulwark against western, interest based capitalism. However, it became clear that with the rise of cities, the sprawl of inhabitants and impersonal relationships between financial institution and customer, socialised, partner based models were difficult to sustain and remain profitable. Conventional financial institutions needed to make profit – meaning interest – and the regulatory systems supported this need. Islamic financial institutions had to implant themselves into this system and be competitive.
Hence the Islamic finance industry moved towards replication. At the same time, many Muslim governments, in order to appeal to the Muslim polity and characterise themselves as independent in thinking adopted – at least vocally – Islamic finance. But most understood that the conventional system was too powerful and profitable to be completely ignored. In the end, countries which supported Islamic finance had to create a dual financial system, the most successful being Malaysia. However, even with a dual financial system, by replicating conventional finance, Islamic finance is in effect following the philosophy of conventional finance.
This means that its value as an ‘alternative’ is diminishing. The industry is failing to say much on economics, hiding behind platitudes and idealism. Perhaps this is due to the dominance of the western educational systems although the theories of Karl Marx still resonate today, even though he is associated with socialism and communism. The problem with Islamic economics is that it has not inspired the masses. It has yet to offer penetrating analysis on human transactional behaviour in a way that Adam Smith is still celebrated for. Islamic economics remains a niche, and very limited field. It has yet to enter the psyche of the global intelligentsia.
Yet a few notable economists and policy makers have referred to Islamic economic thinkers and even Islamic finance. Paul Krugman recently used Ibn Khaldun’s theory of why empires crumble to explain the slight decline of Microsoft and the potential reduction of Apple’s market share. By mentioning the 14h century polymath, Krugman brings out ideas of a man who lived in a time and place noted for the high level of intellectual output. He even goes onto say that ibn Khaldun “He was a 14th-century Islamic philosopher who basically invented what we would now call the social sciences.” Hardly faint praise from one of the world’s leading economists.
But what Krugman is good at, and what Islamic economists have failed to do, is that he applies economic theory to the world’s economic and financial problems. It is easily understood by non-economists. This application makes him such a powerful contributor to thinking and policy making. His analysis has also brought the ideas of his intellectual heritage, most notably, the thinking of John Maynard Keynes. There is a need for Islamic economics to offer insightful analysis to the world’s problems. The intellectual heritage is there; unfortunately the modern day Islamic economist remains quiet and ineffectual.