In the Name of Allah, the Most Gracious, the Most Merciful
Grande Strategy

Economic Insaf An Islamic Economic Framework

“O you who believe! Fear Allah, and give up what remains (due to you) from usury, if you are (in truth) believers. And if you do not, then be warned of war (against you) from God and His Messenger.” (Al-Quran)

A Draft Paper for the Pakistan Tehrike Insaf
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1. Executive Summary. 4
2. Introduction.. 6
3. A Metaphor. 6
4. Riba and Money. 7
5. Savings-Investment. 9
5.1 The Unfair Advantage of Banks over Equity Financing. 9
5.2. Large Versus Small Business 10
5.3. An Alternative Savings-Investment Framework. 10
5.3.1. Venture Capital Firms 10
5.3.2. Investment Banks & Deposit & Storage Companies 11
5.3.3. Restructured Corporations & Stock Market. 11
6. Land and Property. 12
6.1. Riba-based Systems Artificially Increase Prices 12
7. Taxation.. 13
7.1. The Credibility Problem.. 13
7.2. The Alternatives 13
8. Transition.. 14
8.1. Monetary and Fiscal Impact of Transition.. 14
8.2. Sunnah Money in Transition.. 15
8.3. Money Supply in Transition.. 15
9. Conclusion.. 16
10. Appendix: Proof of Riba & Money. 16
About the Author

The first point I wish to convey to the reader is that riba and Islamic economics are not a difficult matter to understand, and not outside the ability of an average mind that makes the effort. As Woody Guthrie notes, any fool can make something complicated, it takes a genius to make it simple. While I may not be a genius, I want to assure the reader that there is nothing to be afraid of, and that this paper will explain to you insh’Allah what you may have wished to know about the subject at hand, in the simplest and easiest manner. In fact, the Quran states the same, that Islam is understandable to us:
To each among you have We prescribed a Law and an Open Way. (5:48)
The second point I wish to convey, is that the great challenge is not stating what is haram, but rather finding a viable alternative to the present Western economic model, that can compete effectively against it, while staying genuine to Islam’s principles. It is in this challenge that this paper is exclusively focused on.
The third point is to note that in the present Muslim world we have on the one hand, nominally Muslim economists who accept the Western model implicitly or explicitly, on the basis of a fait accompli, that there is no other alternative for us, and we have on the other hand more traditional Islamic scholars that fail to understand the basic mechanics, advantages and characteristics of modern (Western) economic systems, and are thus unable to understand that the feeble “models” they put forward would not be able to compete against the West. This paper attempts to find a middle way that makes some sacrifices, the principle of which is the exclusion of the consensus and opinions of past Islamic traditional scholars. Instead we take our basis solely in the Quran and Sunnah.
Fourthly, I wish to enlighten the reader about the seriousness of the matter, that we are collectively responsible for making sure that riba, one of the gravest crimes and evil in Islam, is not the de facto central element in the economic life of this great nation. In this connection, we note that Allah subhanahut’ala has used perhaps some of the strongest words, that we ignore them at our own dire peril:
O you who believe! Fear God, and give up what remains (due to you) from usury, if you are (in truth) believers. And if you do not, then be warned of war (against you) from God and His Messenger. And if you repent, then you have your principal (without interest). Wrong not, and you shall not be wronged. (2:278-279)
If that has not had any effect on a Muslim nation for the last 60 years, dear reader, something is the matter and we need to do some serious soul-searching.
A key type of riba is riba-al-fadl, or riba in money transactions. The Prophet (peace be upon him) noted money to be only precious metals (i.e. gold, silver, copper, etc.) or staple food items that have a shelf life (i.e. dates). This implies:
1. That fiat currency (paper money) is not acceptable in Islam, particularly so if it is not backed by precious metals as is the case today.
2. That money and items that can be used for money (i.e. precious metals and commodity food items with a shelf life) are prohibited from like for like transactions unless they are exchanged equal for equal and the transaction is a spot transaction (and not on credit).
Thus, for instance, Hazrat Bilal (R.A.) buying dates for dates was seen by the Prophet (peace be upon him) as riba because it was a commodity food item that had a shelf life, and was often used as currency. In similar vein, the Pak Rupee cannot be exchanged for Pak Rupees unless it was of equal value and on the spot, not that a banker exchanges Rs. 100 for Rs. 110 to be received after 2 months.
3. That money cannot be created out of thin air.
4. That someone seeking to keep another’s money must have explicit permission to invest it elsewhere.
The discussion for these four proofs is given in the paper. If we apply these four proofs, the following become unacceptable:
1. Fiat currency
2. Interest-based lending
3. Fractional reserve banking
4. Limited Liability in any form
However, simply removing these four elements from the economy would lead to an economic collapse, and would create a vacuum in the important work of converting savings to investments; the main task of the conventional financial model would be left undone. Two issues then become pertinent:
A. By what mechanisms the functions of the financial system can be effectively replaced particularly the problem of savings-investment.
B. How to transition the economy from its present state to the Islamic economic system we envision.
With regards to Point A, Our alternative savings-investment framework could include:
1. Venture capital firms;
2. Investment banks;
3. Restructured corporations; and
4. Restructured stock market.
5. Deposit and storage companies
For Point B, a gradual process is important to transition the economy slowly, and yet steadily. In this gradual process, bank reserve ratios can progressively be increased and laws can progressively be changed with regards to the stock market, corporate law and taxation.
Corresponding to the gradual disabling of the banking system and increase in reserve ratios, an equivalent fiscal expansion can help cancel out the deflationary pressures on the economy. This can prove attractive to a PTI government that can then use this money for public welfare and nation-building projects.
In terms of Sunnah money (i.e. silver, gold, copper), the aim would be to have both Sunnah money and fiat currency operate side-by-side, in transition, with a gradual increase in the latter, and a corresponding gradual decrease in the former. In equilibrium, fiat currency would be eliminated.
An additional key element to reforming the economy is reform of land ownership rights. Coupled with removing riba, this will significantly simplify and redistribute property ownership for the common people, particularly for those living in the rural areas. Land and property prices would fall and would come within the reach of common people without mortgage and other such haram financial instruments.
As a synopsis, our model makes a trade-off that enables us to have a more stable and less cyclic economic model at the expense of being able to inject massive liquidity relatively quickly. This implies that such an economy, while more stable, will by design be unable to grow at spectacular rates as was observed with such countries as Japan, South Korea, China, etc.
In the judgment of this researcher, the upper limit cap on growth rate is in the region of 6-7%, lower than the 8-12% growth rate some economies have been able to achieve, yet reasonably effective and within the growth rates that have been discussed in some PTI circles. This is the downside of the model, but within a Solow Growth model context, would become less important in the long-run as we reach nearer saturation levels of income. The upside is that our economic model would be significantly more stable, protecting people from busts, that it would have a more egalitarian and meritocratic economic order, and that it would stop the unjust (bey-insaf) economic exploitation of man.
Brother Asad Mahmood of the PTI IRW, in his dossier titled Pakistan Welfare State Report, has listed some of the key characteristics of an Islamic state. He describes the Islamic state as a welfare state, noting in fact that it was the first effective concept of a welfare state. He sums up his idea on the Islamic welfare state in the following words:
However, it is claimed that fundamental to the Islamic model is justice and fairness, with welfare at the core of the system. This has a number of implications including the abolition of interest (to prevent the wealthy becoming even wealthier), expectations that wealth should circulate rather than be accumulated and an idea that there are acceptable and unacceptable distributions of a society’s wealth. In religious terms, these expectations are bound up in the concepts of Sadaqat and Zakat. Sadaqat at its core is the need to ensure that all have access to food to celebrate the feast of Eid at the end of Ramadan. Zakat, is the wider expectation that all Muslims will make regular charitable donations.
Brother Mahmood notes pithily however, that “just labeling something as Islamic does not make it particularly fair or effective” and he notes the disparity of opinions on what an Islamic economy should be, as well as how it has to be more than just about giving charity. In this regard, as a former Financial Analyst, what struck this researcher in his literature review was how incongruent the present “Islamic models” put forward are, and how it is almost as if some don’t understand the role of the modern financial system and others don’t appear to believe that sticking to the principles to Islam would yield a practical solution for mankind today.
The fundamental viability of any state is its economic system. The inability of the Muslim world to create viable economic models that are not cheap replicas of Western economies is perhaps the biggest challenge that we face, because every other challenge we face, from poverty to military threat originate from this source.
Riba (interest) is central to the western economy and for Muslims to copy this is unacceptable; this is because perhaps among the strongest words used in the entire Quran is against riba, where Allah subhanahut’ala declares war against those engaged in it:
O you who believe! Fear God, and give up what remains (due to you) from usury, if you are (in truth) believers. And if you do not, then be warned of war (against you) from God and His Messenger. And if you repent, then you have your principal (without interest). Wrong not, and you shall not be wronged. (2:278-279)
Perhaps we have to stop and think; we have ignored these dire warnings for the last six decades, can Pakistan continue to ignore these direct commands? Can PTI rule on the basis of insaf if we continue engage in these actions? What kind of insaf is this when the economic models that we are copying from the West are fundamentally exploitative and haram in such a clear manner?
These are questions that may invariably vex PTI as we set forth in making a real difference in the economic wellbeing of the people of this great nation. We have to be brave in breaking new ground, in finding a viable alternative framework. Let us see in this paper, what can done, insh’Allah.
A metaphor for the situation as it stands is that of a Ferrari. A Ferrari is a beautifully engineered machine that is designed to be driven in the roadways of Europe. Let us consider the Western economic system to be the equal of a red Ferrari and what we have as equal to a rickshaw, it is small wonder that we are overtaken and lapped frequently in the race, and in the event of an accident between the rickshaw and the Ferrari, it is the former that is worse off. Somewhere down the line the Muslim world wanted its own Ferrari and imported a green colored one from Italy. However, our rickshaw driver did not know how to drive a Ferrari. Nor did we consider whether the pot-holed roads of the Third World were appropriate for the low ride and suspension system of the Ferrari. And we did not even considered the high cost of maintaining the Ferrari, the poor fuel economy or the lack of spare parts and skilled technicians to maintain it.
 Furthermore, the local mullah proclaimed rightfully that the Ferrari engine runs on petrol (riba) which is haram. Therefore, with our Green Ferrari imported from Italy, we decided to remove the engine.
Now, with the engine removed, the quandary came about, how we could generate kinetic motion for our Ferrari. In this regard, some brothers from the local masjid come along and start pushing the green Ferrari down the road and there thus was a jubilant round of nara-e-taqbirs. However, the Western Ferrari was still way faster, and no matter how hard the brothers pushed, there was a definite speed limit for our Green Ferrari.
While lapping the Green Ferrari multiple times, on one occasion, the Red Ferrari decided to rear-end the Green Ferrari, perhaps out of spite. The result was that the brothers from the masjid pushing the Ferrari all ended up at the hospital. Now, there was a Green Ferrari without an engine parked at the side of the road with no brothers brave (or stupid) enough to push the Ferrari forward.
In these circumstances, some academics from a local “Islamic university” then showed up, deciding that the Green Ferrari needs a new diesel engine. And these fine folks and their helpers have been trying to build and fit a diesel engine into the Ferrari ever since. However, there are some fundamental problems with this approach. Firstly, a diesel engine would be bulkier and heavier than a petrol equivalent. This would mean the space provided in the Ferrari engine compartment would not be enough. Even so, the mounts would not be strong enough to hold up the engine; and, the fuel pump, gearing and transmission would need to be changed. And in the end, all said and done, the balance of the Ferrari would be lost; and it is the balance of the Ferrari that is a key element to why people buy a Ferrari in the first place. In any case, it would be by far a very poor solution from an engineering point of view; you see, a Ferrari is designed around an engine, not the other way around.
What we perhaps need is not replacing the Ferrari engine but in building our own car around a diesel engine we have researched and developed. Yes, certainly we can take apart a Ferrari and take a good look at the internal mechanics and engineering. But the solution is not imposing diesel into a Ferrari but building a car that is optimal for our circumstances and our engine.
Perhaps the car that we come up with will not be a Ferrari but it would still be a far more meaningful solution than what we have today or what our misguided academics and other incompetents are leading us towards.
The Ferrari petrol engine is the equivalent of the riba-based financial system. Its main advantage is its ability to garner savings and convert those savings into efficient investments, at a huge scale unforeseen in history. To compete with this system, we need to build a savings-investment engine that does not run on riba but can compete with the Ferrari engine along the following lines:
1. Effectively gather and encourage savings
2. Convert savings into efficient investments
3. Do so at a scale and scope that can nurture, support and sustain modern industry, commerce and technological development.
We shall return to the savings-investment issue, but with this allegorical overview in mind, let us then start this discussion with a look at what is considered riba and how we can understand it today.
In the first verse on riba, the Quran discusses riba in the following manner (30:39):

The above is given in the clearest possible word-for-word translation of the first ayat revealed regarding riba. Muhammad Asad in The Message of the Quran defines riba in the following manner:
Roughly speaking, the opprobrium of riba (in the sense in which this term is used in the Qur’an and in many sayings of the Prophet) attaches to profits obtained through interest-bearing loans involving an exploitation of the economically weak by the strong and resourceful: an exploitation characterized by the fact that the lender, while retaining full ownership of the capital loaned, and having no legal concern with the purpose for which it is to be used or with the manner of its use, remains contractually assured of gain irrespective of any losses which the borrower may suffer in consequence of this transaction.
With this definition in mind, we realize that the question as to what kinds of financial transactions fall within the category of riba is, in the last resort, a moral one, closely connected with the socioeconomic motivation underlying the mutual relationship of borrower and lender; and, stated in purely economic terms, it is a question as to how profits and risks may be equitably shared by both partners to a loan transaction. It is, of course, impossible to answer this double question in a rigid, once-for-all manner; our answers must necessarily vary in accordance with the changes to which man’s social and technological development – and, thus, his economic environment – is subject. Hence, while the Quranic condemnation of the concept and practice of riba is unequivocal and final, every successive Muslim generation is faced with the challenge of giving new dimensions and a fresh economic meaning to this term which, for want of a better word, may be rendered as “usury”.
Having thus understood riba, let us now turn our attention to an important kind of riba, riba al-fadl, which relates to riba in money transactions. After all, money is the fundamental financial building block, riba here is thus of extreme importance. We start with two principles:
1. What constitutes money should have intrinsic value either in the form of precious metals or commodities of staple food consumption that have a shelf-life.
2. These precious metals and commodities as given in Point 1 are prohibited from like for like transactions unless they are exchanged equal for equal and the transaction is a spot transaction (and not on credit).
The proof of these two points is given at the end in the appendix, Section 10. Sheikh Imran Hosein, in The Prohibition of Riba in the Quran and Sunnah explains the issue with great clarity:
If one person gives a loan of one gold dinar to another, then the contractual obligation for repayment of the loan should not exceed one gold dinar. Secondly, just as we need to buy French Francs when we visit France, so too, in a market which uses real money, people need to buy money. Just as we may seek to buy the French Franks with US dollars, so too, in a market which uses real money, we may seek to buy gold dinars with silver dirhams. Or we may wish to purchase a dozen larger size gold coins with a weight of one dozen ounces, with smaller size gold coins (and this is like changing five US $20 currency notes for a US $100 currency note, - with the exception that paper money is itself riba). Such money transactions, i.e. in which money is exchanged for money, are required to meet the condition of equal for equal and hand to hand in order to avoid riba.
It is of crucial importance for us to carefully note that while like for like required an equal for equal transaction which was also a spot transaction, when gold, silver, dates etc., were being bought and sold, this was not so for camels:
‘Hassan bin Muhammad bin Ali bin Abi Talib reported that Ali bin Abi Talib sold his camel, named ‘Usaifir, in return for twenty camels (on credit).’ (Muwatta, Imam Malik).
‘Nafi’ reported that Abdullah bin Umar bought a she-camel in exchange for four camels and arranged that those four camels should be delivered to the owner at Rabdhah.’ (Muwatta, Imam Malik).
The reason for this was that camels were not used as money, while dates were sometimes used as money. And so four young camels could be exchanged for one adult camel, but two baskets of inferior quality dates could not be exchanged for one basket of superior quality dates.
To sum up:
1. Fiat Currency is un-Islamic
2. Transactions in a medium of exchange (i.e. any form of money) must have like-for-like and equal-for-equal, spot transactions
In addition, we have these principles:
3. That money cannot be created out of nothing
4. That someone seeking to keep another’s money must have explicit permission to invest it elsewhere
Point 3 may be derived in a number of ways, including based on the intrinsic value necessary in Islamic money transactions. Money being created without effort and without risk are two key characteristics of riba and fractional reserve banking does both. Point 4 is self-evident. These two points imply that fractional reserve banking is un-Islamic.
Furthermore, corporate personhood did not exist until recent history and has no basis in Islam. Limited liability is itself another key characteristic of riba, both these implying that corporations as they stand today are un-Islamic. Thus we conclude that the following are un-Islamic:
1. Fiat currency
2. Interest-based lending
3. Fractional reserve banking
4. Limited Liability in any form
With this premise, let us now look at the economy today and the quest for an alternative system to the present interest-based system. We thus return to our discussion of the savings-investment issue we touched upon in the earlier section.

The fundamental question for an Islamic economy, or perhaps any economy for that matter, is in defining how savings-investment will work in an alternative framework. That is, how savings in an economy may effectively be transformed into investments. In our analogy of the Ferrari, the conversion of Savings to Investment is like the conversion of chemical to heat energy in the engine and thus, the Savings-Investment mechanism of the economy is like the engine that drives the Ferrari.
If we take out interest-based, fractional reserve banking and limited liability (thus corporations as we know them, stock flotation and leverage), we appear to be taking out this important link between savings and investment that economies today thrive on. It would be like our Ferrari not having an engine. In taking out this important feature, we need to find an adequate replacement.
This replacement insh’Allah can be an alternative venture capital centered investment economy. An additional policy may be to redesigning the corporation as we know it to incorporate liability. This would create a very different economic system.
Let us look at why Venture Capital (VC) and other equity investment vehicles are not able to compete today with banking. One reason is that western economies subsidize loans over investment in equity because interest payments are not taxable while dividends are. This puts VC at a disadvantage and gives banking an unfair advantage. There does not seem to be any real rationalization for this without going into a “conspiracy theory”, but suffice it to say for intended or unintended reasons, this is the case. VCs are also restricted to only receive funding from accredited investors, effectively barring the public. Another disadvantage is the VCs cannot create money out of nothing through fractional reserve banking, which again allows banks an unfair advantage.
As a result of these unfair practices, venture capital and other forms of equity investing suffer a double jeopardy. We see that venture capital is greatly marginalized in western economies both in quantity and in quality, focusing narrowly on the highest yield opportunities which also involve the highest risk. They tend to focus on industries that are “leftover” from conventional banking, such as volatile emerging industries in the technology sector.
Thus we note here the unfair and artificial advantage of banking in the investment economy.
 This unfair advantage of banks has further implications for the investment economy; it is well-known that banks prefer large corporations to lend to, meaning that the natural investment order is skewed by firstly banks dominating savings-investment, and at the same time preferring large corporations, leaving out small companies.
Small companies also find raising capital through the stock market more difficult as the upfront and entry costs of gaining access to the stock market are often too great for smaller companies. Thus getting access to investment for smaller companies is difficult, as the savings-investment channels are dominated by a system that artificially works against them. 
This has further implications because small companies are often family businesses while large corporations are more dependent on being limited liability entities. As we have noted earlier, limited liability is haram. This implies that a haram aspect of the economy is further skewing the order of savings-investment, allowing large limited liability corporations to flourish at the expense of smaller businesses; something that would have been less likely had limited liability not existed. Furthermore, only limited liability corporations are allowed to participate in the stock market; in fact, in the presence of limited liability, a rational investor would not seek to take on unnecessary risks, ceteris paribus.
If we Islamize banks along the lines advocated; such as if we incorporate limited liability into them and take away riba and fractional reserve banking from them, banks would have two choices before them in the context of the Islamic economy: become essentially deposit and storage companies, whose main work will be to protect and secure the assets of clients, or become investment institutions, that help people invest their money. People would have the option of storing or investing their savings.
In general terms we would be disabling the handicaps to private equity and enable handicaps on unfair money creation through the interest-based banking system. Our alternative savings-investment framework could include:
1. Venture capital firms;
2. Investment banks;
3. Restructured corporations; and
4. Restructured stock market.
5. Deposit and storage companies
Venture capital firms would need to play a key role in the economy, a role that will be far less restricted by regulation and would also not be restricted by the opportunity costs created by interest (riba) in Western countries. They will therefore need to be structured differently from the VC firms in western markets. They will naturally evolve, through the competitive process, to become larger, more “bank-like” in their investment decisions and willing to take on lower yield investments.
For VC firms becoming larger and taking more of the lower risk spectrum of the market should be a natural adaptation and evolution for them given that there will be no unfairly competing interest-based system to take the lower yield and lower risk side of the market. Like in the ecosystem, when the condition becomes favorable, such VC establishments will eventually take root and thrive, insh’Allah. The government may of course give a nudge or a point in the right direction, but it may generally be better to have a hands-off approach and allow the market to determine its course.
We must note that banks cannot play the role of a venture capital firm because they lack the skills, training, organization structure and basic mindset. It is therefore not surprising that our attempts to turn banks into investment firms have met with limited success if not abject failure, as has been attempted in Malaysia. Consider the difference in the mindset of a typical banker and a businessman or an entrepreneur, and you have the wide gap between the kind of people we need and the kind of people we have running these aspiring investment houses. It will be up to banks on how they choose to evolve and if they can suffer the fundamental structural change of becoming equity investment businesses.
The financial system will not subsidize interest based lending (as in the west and discussed earlier) and there will be no "risk-less interest" to artificially raise yield requirements for risk-sharing investing.
The aim, eventually, is to move banking towards a theoretical 100 percent reserve ratio; depositors would have to give the bank consent to invest their money. One option would be that such banks would offer liquidity options with time horizons such as three days, one week, one month, etc. Investments would not have a fixed guaranteed return but rather a risk sharing return. Because of the nature of the investments, greater liquidity options would still generally yield lower returns and thus still maintain those natural patterns of investment that economists have come to consider almost equal to the law of gravity.
For those depositors seeking 100 percent reserve and complete liquidity, the banks should be allowed to charge a service fee for holding the money in safety. Charging a service fee for a clearly identifiable service in any case does not appear to be un-Islamic. After all, such a service would represent a clear service to the bank's customers with clearly identifiable costs to the bank.
The structure of a former-bank’s offerings can thus be the following:
1. Deposit and storage for a fee
2. Time horizon liquidity options; for instance, two months, 6 months, 1 year, etc.
3. A partner in the bank’s equity pool
4. Itemized investment options; for instance a monthly list of potential investments the bank is currently offering.
In sum, the balance the economies investing activities will be far more in favor of venture capital and equity investments, and banks will play a significantly smaller role, a stark contrast from their present overlord-ship of economies. This, at least in theory should be a more efficient Savings-Investment model than the Western equivalent.
Corporations may be restructured to include liability. In that case however, it may be reasonable to pass responsibility that information is provided accurately by the management. If the company fails because the management was hiding information in any way then those responsible for hiding that information should also be liable.
Any stocks that are showing poor balance sheets, income statements and cash flow statements could be de-listed from the stock exchange mechanism and moved to pink sheets. Investors investing in these pink sheet companies will be fully cognizant that they are dealing with companies that could default and fail, resulting in them being held liable for losses. This is but one possible solution to restructuring corporations as we know them.
Derivatives need to be severely restricted and regulated by the markets to ensure that speculation does not reign. This is important to ensure that the financial system is subservient to the "real economy". The rules earlier discussed under Riba & Money would play the role of judging if a certain derivative is acceptable or not (largely not).
However, we have only considered the supply side of a wider equation. The demand for loans / equity in the West will be considerably different from the Islamic economy because:
1. Riba-based systems artificially inflate prices
2. The unique nature of land and property rights
3. The role of the community and family in an Islamic economy
By and large, the vast majority of humanity lives today as tenants to property owners. The rents they pay (or their mortgage payments) are a substantial portion of their income. It is small wonder that buying a house is such a major facet of people’s lives. It is also an important salient that property booms and busts are of such critical importance to economies today. When the house of cards comes down, newspapers speak of this salient as defining their downturn: homelessness.
Yet, Islam does not allow man to claim property for himself perpetually. All land belongs to Allah, and according to Islamic Shariah, man cannot claim land that he has not been using productively. The land does not belong to some remotely located land owner; neither does it belong to a “nation state” or “government” without just cause.
An application of this Islamic law alone would liberate the common people. It would allow citizens of our Islamic state to live outside the oppression of either earning a wage or to live “homeless”. It would, along with the artificial impact of the banking system, drastically bring down property prices.
Simultaneously, it would introduce new workers into the work force who are the unproductive landowners and government stewards. For an economy where a portion of the populace originally makes no effort to earn a wage, the productivity of the economy would increase.
Those owning the land would also more likely be users of the land; this could further increase productivity because of utilization incentive, as long as regulation is in place to ensure that agricultural land-holding size is adequate for economies of scale. However, on the other hand, from the perspective of the economy as a rat race were the “rats” work increasingly harder for the same quantity of cheese, productivity would go down. This then would be the price we pay for real economic freedom.
While Maududi has spelled out that any land not in use for 3 years is open for people to make use of or in fact a duty upon government to allocate efficiently, very few if any Muslim economists consider how critically different our economy will be when people are freed from the oppression of the landed and propertied classes, and land as an instrument of oppression; how much less financing would be required for acquiring housing and how this would impact the stability and dynamics of the economy as a whole.
Economics is the study of supply and demand, imagine an Islamic economy where a man owns a piece of land and is not productively utilizing it:
1) He is afraid that it may be taken and is thus more pressured to sell.
2) In the market, people do not have banks and mortgages to fall back on, thus the bidding prices are significantly lower.
Now consider the Western economic system where not only does property get unjustly owned by a privileged class, but riba-based lending inflate the price by bidding up prices due to credit availability.
Bottom line: Property and housing will be significantly more affordable. The barriers to entry are low; one can simply find a piece of unused land, build a simple hut and own his own residence. Certainly, he or she is not homeless, even in the worst downturn.
Ignoring the economic revolution behind reformulating today's property rights is perhaps the biggest crime Muslim economists are doing today. We continue to assume Western property rights as if it were a sacred text.
As things stand today, taxation is a major problem in Pakistan. It seems that people in Pakistan just do not like paying taxes, a tad bit more than other major nations. In fact, the government has largely been relying on indirect taxation (i.e. taxation of goods, services, utilities, import duties, etc.)
Yet indirect taxes are not particularly Islamic, in the sense that the market place of Medina during the time of the Prophet (peace be upon him) and the rightly guided Caliphs did not see such a thing. Furthermore, modern economic theory also notes how they distort the market and are technically worse than direct taxation of an equal amount. If we look more deeply, a lot of the people who are dissenting against the state, as well as the common people complain about the high price of electricity and other basic food items, a price that is largely due to these indirect taxes, which are often a requirement from the IMF, to pay off loans that were siphoned off in a hurry by corruption and safely returned the vaults of Western nations. 
To correct this fundamental lack of credibility of the state taxing the common people in such a way, the PTI has to deal with:
1. The problem of loan repayments to the West. Interest-based loans are haram in Islam, and the people are all too aware of how they are being milked by the West. However, if the PTI does this, then Pakistan will be plugged out of the international lending market and will not in the future be able to access financing, except at even more exorbitant costs. This is a lose-lose or a win-win depending on how you look at it; if we want to get out of this haram system permanently, it’s a win-win, otherwise it’s the former.
2. An Islamic state that Pakistan claims to be, collects Islamic taxes. It does not continue a tax system designed by non-Muslims six decades past independence. Secularism is very distinctly outside the pale of Islam:
It was We who revealed the law (to Moses): therein was guidance and light. By its standard have been judged the Jews, by the prophets who bowed (as in Islam) to Allah’s will, by the rabbis and the doctors of law: for to them was entrusted the protection of Allah’s book, and they were witnesses thereto: therefore fear not men, but fear me, and sell not my signs for a miserable price. If any do fail to judge by (the light of) what Allah hath revealed, they are (no better than) Unbelievers (kafirun). (5:44)
The similitude of those who were charged with the (obligations of the) Mosaic Law, but who subsequently failed in those (obligations), is that of a donkey which carries huge tomes (but understands them not). Evil is the similitude of people who falsify the Signs of Allah. And Allah guides not people who do wrong. (62:5)
So, unless we see ourselves as kafirun, we cannot continue this state of affairs, and if we consider how little credibility is left when we do this in the eyes of the common people, it becomes imperative that we wake up. After all, which Muslim in this planet is eager to pay kafir taxes to a kafirun state?
With that red light in mind, let us consider the alternatives open to us. The average Pakistani is generous and spends for the poor, and masjids are remarkably well-funded through private donations. Edhi has no problems getting funding from local donors, and does not need to beg foreign funds. As we have noted, the problem perhaps lies in that they do not trust that government will effectively utilize their tax money.
Pakistanis on average are more religiously inclined than many other nations, and they see zakat and other Islamic taxes as an important duty. Islam stipulates zakat as a wealth tax and the first Khalifa Hazrat Abu Bakr (r.a.) was adamant that everyone must continue to pay it to the state, after the Prophet (peace be upon him) passed away; he went to war over it and noted that he would fight even for the amount equal to a rope to tie a camel.
Connecting the dots, it would appear that moving to an Islamic model of taxation could help solve the perennial problem that Pakistan has faced: lack of tax revenue. It would bring a fresh breathe of legitimacy to the state and tax collection. It would also instill a deeper sense of duty on the tax collectors, who suffer from endemic corruption, working in conjunction with the other plans that PTI has in dealing with the corrupt bureaucracy.
However, there are some problems that must be discussed. One such problem is that Shi’ite Muslims consider zakat to be voluntary and not involving the Islamic state. This became an issue during the time of General Zia, who decided that Zakat was to be charged directly from bank accounts, except for non-Muslims and Shi’ite Muslims. This in turn resulted in many people registering themselves in the banks as Shi’ite to save them the payment. This was obviously not an effective solution.
At the same time, we do not want to impose ourselves on our Shi’ite brothers. The solution is perhaps that we charge them an equal amount and instead of calling it by the religious terminology, we call it “tax”. Since they already pay secular taxes, they would not be offended any more than they are presently. This way everyone can be happy, and we can move forward.

In the event of the establishment of an Islamic state, abolishing banking outright would be catastrophic. Money supply would shrink rapidly. Demand and investment would collapse and spiral the economy into recession. The knee-jerk reaction from the populace would be to increase savings, further reducing consumption and compounding the problem. Panic would set in, and the Islamic economic experiment would serve as a sniggering point for our detractors.
The correct solution perhaps would be to gradually impair banking. Gradual change is a prophetic methodology utilized during the advent of Islam. We see numerous examples of this, one of which for instance is the gradual process of the prohibition of drinking. Just as the Communists created a socialist state to attempt to achieve Communism, so too must the Islamic state act in staging itself through a transition. Staggered increase in the reserve ratio of banks and gradually changing the regulatory framework can go hand-in-hand in transforming today's banks from caterpillars to butterflies.
We have already touched upon how liquidity would dry up in transition. Even with the most gradual transition it would result in recession, and the more gradual it would be the longer the recession would last. Let us consider three possible policy options: increasing the reserve ratio, curtailing interest-based banking through regulation and restricting and regulating the stock market. All would result in a rapid reduction in the money supply, and a rapid downward projection of the economy towards an inevitable crash; ceteris paribus, deflationary pressures would reduce investment and consumption expenditures and reduce national income.
Is this a necessary pain to create an Islamic state? One, impoverished and destitute already, would he or she be willing to dip even deeper into unimaginable poverty and hopelessness? No. Insh’Allah there is a solution. It may in fact be an ideal opportunity. Let us consider the possibilities.
Keynesian economics dictates that an (un-Islamic, Western) economy can be revived by public spending to boost consumption and thus inject the system with new demand and new money.
C and I is counteracted by G
Y is National Income
C is Consumption
I is Investment
G is Government Expenditure
X is Exports
M is Imports
Because an interest-based Western economy is inherently cyclical and dependent on an ever increasing GDP & Money Supply, the Keynesian solution is often the last resort when all monetary and information options have failed. That is, for instance, when simply expanding credit and the money supply either becomes ineffective or becomes untenable.
The great downside of Keynesian fiscal expansion is inflation. Yet, this may not be a downside in deflationary times. Here is the opportunity within our framework of a transitioning Islamic state: if we attempted fiscal expansion during our earlier described banking and stock market transition, we would be ideally placed to carry out our expansionary fiscal policies without paying the price of inflation!
However, as with most issues in this world, timing and proportion is crucial. A cricketer (or a baseball player) perhaps understands this better than an economist. Yet for the economist, that mistimed ball would result in far more damage than the cricketer can fathom. It is perhaps for a reason that Alan Greenspan played the violin; dreamers must be good and timely executioners, if their dreams are to play the tune they seek.
There are groups in the Muslim world who are in a heated debate concerning the gold Dinar. While I agree that fiat currency is utterly haram, I also want to note that Sunnah money is not only precious metals but can also be commodities used as food that have a shelf life, as we earlier discussed. This is important because initially, we may not have enough gold and silver to be used as a medium of exchange. Furthermore, copper and other metals may also be useful.
In this regard, Pakistan is well-endowed naturally, with recent surveys indicating large copper deposits and even gold deposits. The matter as it stands is to engender an expertise and investment in exploiting these natural resources; something that should not be outside Pakistan’s capability given that she has been able to master the mining of uranium.
Furthermore, in transition, we will have to see both fiat currency and Sunnah money existing side-by-side. It is for the government to decide how fast (or slow) we can move towards Sunnah money.
As the government issues more dinars and dirhams, the problem then becomes one of Gresham’s Law, that bad money will drive out good money. The solution is to ensure that the price of gold/silver/precious metal currency is exchanged at market rate with fiat currency, and not artificially set by the government. The problem encountered with Gresham’s Law was with the government determining the value of the precious metal coins, which is circumvented by allowing the market to determine its true value.
In transition, it would be hoped that we, over time, increasingly move away from fiat currency and towards currencies that have intrinsic value. This will not only be superior from a theological perspective, but will also act as a check and balance against the central bank and foot-loose monetary policy.
While we are transitioning to a precious metal and commodity based monetary system, we would have a period of time where we need to manage the fiat currency, as it would be operating side-by-side with Sunnah money. The value of the fiat currency in this transition period may be maintained on the basis of:
1) A basket of goods and services that is reflective of the economy as well as;
2) The value of a basket of currencies that would be represented by their level of trade with the Islamic state.
Of these two factors, the former (a basket of goods and services reflective of the economy) should be weighted more than the latter (basket of currencies being traded with), given the importance of the Islamic state's own real assets and value to its citizens. This ratio would need to be determined and could perhaps be in the region of a 80:20 ratio, heavily in favor of maintaining the value of the currency for the local consumers.
Alternatively and more classically, the ratio could perhaps be equal to the proportion of foreign trade to domestic consumption, something discussed in conventional Western economic thought.
As a synopsis, our model makes a trade-off that enables us to have a more stable and less cyclic economic model at the expense of being able to inject massive liquidity relatively quickly. This implies that such an economy, while more stable, will by design be unable to grow at spectacular rates as was observed with such countries as Japan, South Korea, China, etc.
In the judgment of this researcher, the upper limit cap on growth rate is in the region of 6-7%, lower than the 8-12% growth rate some economies have been able to achieve, yet reasonably effective and within the growth rates that have been discussed in some PTI circles. This is the downside of the model, but within a Solow Growth model context, would become less important in the long-run as we reach nearer saturation levels of income.
The upside is that our economic model would be significantly more stable, protecting people from busts, that it would have a more egalitarian and meritocratic economic order, and that it would stop the unjust (bey-insaf) economic exploitation of man.
In fact, in the long-term, there is a clear advantage of our more stable economic order, in that there is less likelihood of permanent damage of busts on certain aspects of the economy such as increase in the long-term natural rate of unemployment. Slow and steady wins the race, or so we hope insh’Allah.

One day We shall raise from all Peoples a witness against them, from amongst themselves: and We shall bring thee as a witness against these (thy people): and We have sent down to thee the Book explaining all things, a Guide, a Mercy, and Glad Tidings to Muslims. (16:89)
These depend on guidance from their Lord. These are the successful. (2:5)
This section provides the proof of riba and money earlier discussed. This is taken from Sheikh Imran Hosein’s book The Prohibition of Riba in the Qur’an and Sunnah:
Ubada bin al-Samit reported Allah’s Messenger as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made on the spot. If these classes differ (i.e. if it is not like for like) sell as you wish if payment is made on the spot. (Muslim)
Abu Said al-Khudri reported Allah’s Messenger as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot. If anyone gives more or asks more he has dealt in riba. The receiver and the giver are equally guilty. (Muslim)
Abu Said and Abu Huraira told that Allah’s Messenger appointed someone as a governor over Khaibar. When the man came to Madina he brought him dates of a very fine quality called janib. The Prophet asked him: Are all the dates of Khaibar of this kind? The man replied: No! Oh messenger of Allah we exchange two s’as of bad dates for one s’a of this kind of dates (i.e. janib), or exchange three s’as for two. On that, the Prophet said: Do not do so, as it is a kind of riba. But sell the dates of inferior quality for money, and then buy janib with the money. The Prophet said the same thing about dates sold by weight. (Bukhari)
Abu Said al-Khudri said: Once Bilal brought barni (i.e. a kind of dates) to the Prophet and the Prophet asked im: From where have you brought these? Bilal replied: I had some inferior type of dates and exchanged two s’as of it for one s’a of barni dates in order to give it to the Prophet to eat. Thereupon the Prophet said: Beware! Beware! This is definitely riba! This is definitely riba! Don’t do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money. (Bukhari)
Abu Saeed said that Bilal brought the Prophet some barni dates, and when he asked him where he had gotten them he replied: I had some inferior dates so I sold two sa’s of them for one sa (of this). He said: Ah! The very essence of riba, the very essence of riba. Do not do so, but when you wish to buy, sell all the dates in a separate transaction, then buy with what you get. (Bukhari, Muslim)
Yahya bin Sa’id reported that Allah’s Messenger ordered the two Sa’ads to sell off all gold and silver plates obtained in booty (enemy property seized in warfare). They sold three plates for four (or four for three). The Prophet said: You have taken riba. Annul the sales. (Muwatta, Imam Malik)
Malik reported that it reached him from Qasim bin Muhammad that Umar bin al-Khattab said: A dinar for a dinar and a dirham for a dirham and a sa for a sa. Do not sell cash for credit. (Muwatta, Imam Malik)
Malik bin Aus Hadthan al-Nasri reported: I had need for changing one hundred dinars into dirhams. He said Talha bin Ubaidullah sent for me. We agreed on it (barter of gold and silver for gold and silver). He took gold from me and turned it over in his hands and said: Wait until my cashier arrives from Ghabah. Umar bin Khattab heard of this and declared: By Lord, do not leave him until you take money from him. He then said, the Prophet had said that the exchange of gold for silver is riba except when it is a cash transaction, the selling of wheat for what is riba except when it is a cash transaction, and the selling of dates for dates is riba except if it is a cash transaction, the selling of barley for barley is riba except when it is a cash transaction, and the selling of salt for salt is riba except when it is a cash transaction. (Muwatta, Imam Malik)
Ibn Shihab reported that Malik bin Aus said: I was in need of change for one hundred dinars. Talha bin Ubaidullah called me and we discussed the matter, and he agreed to change my dinars. He took the gold pieces in his hands and fidgeted with them, and then said: Wait until my store-keeper comes from the forest. Umar ibn al-Khattab was listening to that and said: By Allah you should not separate from Talha until you get the money from him, for the Prophet said: The selling of gold for gold is riba, except if the exchange is from hand-to-hand and equal in amount, and similarly, the selling of wheat for wheat is riba unless it is from hand to hand and equal in amount, and dates for dates is riba unless it is from hand to hand and equal in amount, and barley for barley is riba unless it is from hand to hand and equal in amount. (Bukhari)
Abu Salih al-Zaiyat said: I heard Abu Sai al-Khudri saying: The selling of a dinar for a dinar, and a dirham for a dirham (is permissible). I said to him: Ibn Abbas does not say the same. Abu Said replied: I asked Ibn Abbas whether he had heard it from the Prophet or had seen it in the holy book. Ibn Abbas replied: I do not claim that, and you know Allah’s Messenger better than I do. But Usama informed me that the Prophet had said: There is no riba (in money exchange) except when it is not done hand to hand (i.e. when there is delay in payment). (Bukhari)

The author is a former Financial Analyst who has worked in the United States in commercial real estate. He holds an MBA (Financial Management) from George Mason University, Virginia. He has some experience in working in Venture Capital in the VA-DC-MD region. The author has an undergraduate degree in Economics from the University of London / London School of Economics(LSE), externally and has received distinctions from the same including in Macroeconomics and Mathematics for Economists. He has also spent a year at the International Islamic University Malaysia (IIUM) on an incomplete PhD in Islamic Economics and is presently pursuing a PhD in Islamic Studies at the University of Brunei Darussalam. He may be reached at

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