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Economics

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The Islamic World: Past and Present What is This? Accessible coverage of Islam from the seventh century to the twenty-first century

    Economics

    Islamic ideas about economic practices date back to the Qur'an. Although Muslims may disagree on some issues, they generally hold to the belief that all wealth and property comes from God. Although Muslim countries have adopted some Western economic models, they continue to adhere to religious principles in their financial dealings.

    Islamic Economic Theory.

    Early Islamic thinkers had discussed specific economic issues, such as requiring fairness in trade, defining and distributing zakat, and prohibiting certain business practices. It was not until modern times, however, that Muslim scholars began to develop economic theories and a sense of the economy as a separate aspect of society. They sought to create a doctrine, separate from capitalism and Marxism, that would derive from traditional religious values.

    The Qur'an, the life of Muhammad, and the sunnah provide the foundation for Islamic economics. The Prophet's sayings and passages in the Qur'an emphasize modesty over extravagance in personal behavior. They promote the ideals of balance and compassion, calling for a society in which people help one another to meet their basic needs. For example, zakat ensures that Muslims share about 2.5 percent of their wealth with those who are less fortunate. The Qur'an says little about the operation of financial institutions, but it prohibits charging high interest rates on loans because that only increases the debt of the poor.

    In the early 1900s, a movement to establish Islamic economic principles began in India. Muslims in that nation sought to protect their culture from outside influences. Sayyid Abu al-Ala Mawdudi, the leading promoter of Islamic economics, believed that a system based on Islamic values could help restore the role of religion in the lives of Muslims. He envisioned an economy in which people treated each other honestly and fairly, abiding by the principles of altruism and brotherhood. The enforcement of zakat would spread wealth in an equitable way, he believed. He also interpreted the Qur'an as prohibiting all interest (not just high interest rates) and believed that such a prohibition would ensure fairness in lending practices. Mawdudi, however, said little about the practical aspects of finance and gave few concrete guidelines.

    In contrast to Mawdudi and his contemporaries, the next generation of Islamic economic thinkers studied modern economic thought. They used advanced theories to promote ethical behaviors and to justify Mawdudi's ideas, primarily those regarding charity and interest. They believed that, in a region governed by Islamic values, people would naturally work hard, avoid extravagance, and treat others fairly.

    By the beginning of the twenty-first century, Muslim economic scholars still had not produced a unified theory. Secular approaches shape many economies in the Islamic world. Muslim scholars disagree on a range of issues, including the sharing of profits and losses, interest payments, property rights, and whether zakat adequately combats poverty. Some Muslim economists seek to ease traditional religious restrictions on financial transactions. They believe that minimal government interference in the market is best for economic development. Other Muslims favor a stronger policy to redistribute wealth. They oppose what they consider the inequalities and excesses of Western capitalism.

    Islamic Financial Institutions.

    Islamic economic institutions have existed since the days of Muhammad. The Bayt al-Mal, or treasury, controlled tax collection and administration. It also managed the caliph's finances, established programs for the poor, funded maintenance of roads and public buildings, and performed certain banking functions. In the 1800s, Islamic governments established agencies to manage waqf transfers.

    Western institutions appeared in the Muslim world in the late 1800s, when colonial powers set up agencies to oversee economic functions. In many areas, new laws affected only dealings with foreigners and did not alter practices among Muslims. In Egypt, the British established special courts for non-Muslims that dealt with payment defaults and deceitful trade practices. These courts generally ignored Islamic law when deciding such matters, and the Egyptian government finally abolished them after the revolution of 1952 .

    As Western economies became more complex in the second half of the 1900s, Muslim governments responded by creating many new economic institutions. Islamic states formed ministries to oversee planning, oil production, industry, tourism, and other activities.

    Islamic financial institutions combine aspects of modern banking with religious principles. Because many people interpret the Qur'an as forbidding the charging of interest, banks charge membership fees instead. They issue debit cards, but not credit cards. Patrons may share in the bank's profits from investments if they are also willing to share the risks involved. Thus, bank members will profit if the bank makes money on its investments and lose if the bank investments fail.

    Economic Development and Reform.

    Throughout its history, the Islamic world has experienced both poverty and prosperity. The past two centuries have brought great changes to Muslim economic development. Islamic nations vary widely in their level of wealth.

    Islamic communities began to amass wealth in the 600s, reaching the peak of their prosperity during the Middle Ages. By the 1100s, the Muslim world had begun to fall into a state of economic decline, a process halted by the rise of the Ottoman and Mughal Empires in the 1500s. In the late 1700s, however, Islamic economies sank once again. The Industrial Revolution in Europe and the United States helped Western nations strengthen their productive capabilities. Meanwhile, Islamic economies stagnated as Europe flooded the world with mass-produced goods. By the early 1900s, Western powers had colonized many Muslim countries and had replaced their economic institutions with European ones.

    As Islamic nations gradually won their independence from European domination, their economies changed. Independent Islamic governments took a more active role in their economic growth, promoting new industries, improving taxation procedures, and expanding banking practices. Using European technology and investment dollars, Muslim countries improved their infrastructures. New ports, railroads, power sources, and irrigation systems were constructed. The building of these facilities, however, brought a high level of debt to the region. Muslim countries could not afford to repay their European lenders.

    The Islamic world currently consists of wealthy, middle-income, and poor nations. Many Muslim economies combine state ownership and central planning with free enterprise. Strong local banks that finance trade and investments characterize countries with solid economies. Wealthy nations include the oil-rich states of Kuwait, Saudi Arabia, Qatar, and Libya. Iran, Turkey, Albania, and Malaysia comprise the middle category, while Afghanistan, Egypt, Nigeria, Pakistan, and Bangladesh remain among the poorest nations in the Islamic world.

    Islamic economies had grown slowly until World War II ( 1939 – 1945 ), when demand for oil soared. The petroleum industry brought significant economic development to Islamic countries. To increase their importance, these nations formed the Organization of Petroleum Exporting Countries (OPEC) in 1960 . By 1970 Muslim nations were producing over 40 percent of the world's oil, as opposed to only 8 percent in 1940 . Oil exports brought tremendous profits to the OPEC nations. The leaders of the oil-producing nations began spending money on technology, infrastructure development, and public services. Some Arab nations also began to invest in foreign markets.

    The oil boom had a few financial drawbacks, however. Several Muslim nations neglected other areas of their economies. Agricultural production declined, and leaders lacked incentives to develop new industries. In the 1970s, OPEC raised the price it was charging for crude oil, driving Western nations to seek other oil sources. By 1991 OPEC's share of world production fell to 30 percent. Oil prices dropped, reducing the income of many Muslim states. Islamic nations scrambled to diversify their economies.

    International Organizations.

    In the late 1900s, Muslims created economic institutions that reach out to Muslims internationally. Several Islamic organizations operate within the United States. These promote financial planning and business dealings between Muslims. They help Muslim immigrants maintain their religious values while fitting into mainstream capitalist societies.

    The Organization of the Islamic Conference (OIC), for example, has over 50 member states. Islamic nations established the OIC in 1969 to promote economic solidarity. It seeks to unify efforts to protect the interests of Muslims worldwide. The OIC founded the Islamic Development Bank in 1973 to help impoverished Muslim nations and Muslims in non-Islamic countries. It works to prevent exploitation and to promote the efficient management of resources. See also Banks and Banking; Charity; International Meetings and Organizations; Mawdudi, Sayyid Abu al-Ala; Modernism.

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