1

Comparing the Islamic economic model to

conventional economic systems

By

Ahmed Sameeh Abdel-Rady Hassan

Bachelor Thesis

Submitted to the department of Economics

At the faculty of Management Technology

German University in Cairo

Student Registration number: 28-9287

Supervisor: Prof. Christian Richter

Date: 3rd of May, 2016

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Abstract

After the global financial crisis of 2008, a lot of doubts with regard to the efficiency of the

worlds economic system had popped up. Many scholars and economic experts were trying to

figure out what went wrong. At this point of time, it was all about finding remedies to the

failures of the system and maybe, just maybe, an alternative approach in running world

economics.

Presented paper attempts to analyze the Islamic economic model and its different principles. In

doing so, it compares the Islamic model to capitalism and socialism. The study also conducts an

empirical analysis of the practices and characteristics of both Islamic and capitalist systems.

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Table of Contents

Abstract .......................................................................................................................................... 2

1. Introduction ............................................................................................................................... 4

2. Conventional economic systems............................................................................................... 6

2.1 Overview on capitalism (market economy) ...................................................................... 6

2.1.1 Origins and definitions ................................................................................................... 6

2.1.2 Adam Smiths contributions ........................................................................................... 7

2.1.3 The economics of capitalism .......................................................................................... 8

2.2 Overview on socialism (centrally-planned economy) ....................................................... 9

2.2.1 Contributions of Karl Marx .......................................................................................... 10

3. The Islamic economic model .................................................................................................. 12

3.1 Overview on economics in Islam ...................................................................................... 12

3.2 Principles of Islamic economics ....................................................................................... 14

4. Comparing Islamic economics to conventional systems ...................................................... 19

4.1 Ownership of factors of production ................................................................................. 19

4.2 Allocation of resources ...................................................................................................... 20

4.3 Income distribution ........................................................................................................... 20

5. Dimensions of capitalism and the Islamic model ................................................................. 22

5.1 Relation between employer and employees .................................................................... 22

5.2 Financial regulations ......................................................................................................... 24

5.3 Market structure ............................................................................................................... 25

5.4 Institutional differences .................................................................................................... 25

6. Methodology ............................................................................................................................ 27

6.1 Instrument design .............................................................................................................. 27

6.2 Sampling ............................................................................................................................. 29

7. Results ...................................................................................................................................... 30

8. Limitations and recommendations ........................................................................................ 41

8.1 Limitations ......................................................................................................................... 41

8.2 Recommendations ............................................................................................................. 42

9. Conclusion ............................................................................................................................... 43

10. References .............................................................................................................................. 45

11. Declaration............................................................................................................................. 47

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1. Introduction

Islamic economics, which is the economic system that is based on a group of principles that are

derived from Quran (Allahs book) and Sunnah, which are the teachings of Prophet Mohammad

ppuh -, is a topic that is causing a lot of debates in economics nowadays (Enaya, 1991: 35).

Many economists do say that there is no such a thing that is called Islamic economics. On the

other hand, there are other economists who believe in the existence of this model. And between

those two groups of economists, an interesting debate started to take shape in recent years.

As this area of research looks quite interesting, we decided to write about Islamic economics.

The main aim of this study is to explore the similarities and differences between the Islamic

economic system, if we can consider it as a system, and the conventional systems that the world

had known for the past three centuries. Obviously these systems are capitalism, which is called

market economy, and socialism, which is also known as centrally-planned economy. By the end

of the study, we seek to know more about the basic elements and principles of the Islamic

economic model.

The paper is divided into three chapters, which are organized as follows: The first is the

introduction. The second, which is the literature review, is divided into three main sections.

The first section is mainly an orientation about conventional economic systems, capitalism and

socialism. We start this section by discussing what capitalism is; we also illustrate the definitions

and origins of capitalism and its basic theoretical principles, which were first set by Adam Smith.

After this we move to discussing socialism; we give a brief overview about it, tackle its historical

background, and briefly illustrate some basic theories that led to the formation of this system.

After discussing conventional economic systems, we move on and discuss the Islamic economic

model in the second section. In this section we elaborate the basic foundations of the Islamic

economic model; we also tackle its features, goals, and principles. The third and final section in

this chapter, which is the core part of this paper consists simply of two comparisons, one

between the Islamic economic system and the two major conventional systems, capitalism and

socialism, in mainly three areas, which are ownership of factors of production, allocation of

resources, and income distribution. The other comparison has a narrower scope, as it is between

the Islamic economic model and capitalism only. This second comparison covers four

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dimensions, which are the relationship between employers and employees, financial regulations,

market structure, and institutional differences.

The third chapter is mainly the empirical part. This part contains the methodology we relied on

to test our hypotheses, results we have reached with their analysis, limitations that may have

hindered the effectiveness or the relevance of our study, and recommendations for researchers

who want to do some work on the Islamic economics area. The aim of this chapter is to test our

main hypothesis that Islamic economics differs from conventional market economy in

practice and to test three other hypotheses that came up during the course of the study and are

somehow derived from the main hypothesis.

We intend to do this empirically through collecting numerical data from countries that apply

Islamic economic principles (Malaysia and Kuwait) and countries that are known for being

close to capitalism (UK and USA). These data are related to two indicators, which are real

interest rate and vulnerable employment rate. These indicators represent the focal points upon

which we built our comparison between Islamic economics and capitalism. At the end of the

paper, there shall be a conclusion part to sum up our findings, references part, as well as the

declaration.

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2. Conventional economic systems

In the first chapter of the literature review, we will try to know more about the two economic

systems that the world has known for the past one hundred and fifty years, which are capitalism

and socialism. The aim of this chapter is to gain more knowledge about the philosophical and

theoretical basics of both systems, by concentrating on the contributions of two of the most well-

known thinkers in the history of economics, Adam Smith and Karl Marx, the two philosophers

who are regarded as the founders of capitalism and socialism respectively.

2.1 Overview on capitalism (market economy)

In this first section of this chapter, we will take brief overview about the idea of capitalism or

market economy. We shall illustrate the well-established definitions of this economic system and

state some of the historical and philosophical origins that led to its evolution. We will be mainly

concentrating on the contributions of Adam Smith, who is considered as the father of capitalism,

because his theories were the basic foundations of market economy. In addition, we will be

focusing on discussing the capitalist system from an economic perspective; we will not be

putting too much emphasis on other dimensions of capitalism (i.e. political) in order to make the

scope of our study more specific.

2.1.1 Origins and definitions

The latter stage of the eighteenth century was marked by what we know today as the industrial

revolution. The era of industrial revolution, which started in the United Kingdom and evolved

there, was marked by a rapid increase in production and industrial activity; this led to a major

boom in the general level of economic activity. This increase in economic activity was a stimuli

that led to the development of what economists call now as classical liberalism. Classical

liberalism was the umbrella under which new economic theories came out in order to match the

economic needs of this era and make use of this notable emergence of industry. The core

principles of classical liberalism, which are valuing self-interest and its role in reaching social

interest, creating an economy that is free from government intervention, and giving importance

to wealth creation, are considered the main principles of capitalism (Elbeblawy, 1996: 51;

Kucukaksoy, 2011: 108).

So, if we want to simply define capitalism from the economic point of view, we can say that it is

the economic system that encourages private property of factors of production and voluntary

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exchange of resources (Butgereit and Carden, 2011: 41). The main characteristics of capitalism

are capital accumulation, prioritizing profit maximization, and perfectly competitive markets that

are free of government intervention. By taking a deeper look at this definition, we can see that it

is derived mainly from the theories and foundations that were set by many scholars and

philosophers who adopted the idea of classical liberalism. However, no one of these scholars has

contributed more to the idea of market economy as Adam Smith did. In the coming section, we

shall examine Smiths contributions to the theory of capitalism.

2.1.2 Adam Smiths contributions

Before illustrating the contributions of Adam Smith in capitalism, let us first know more about

this famous philosopher. Smith is a well-known Scottish thinker who was born in 1723. He

studied Philosophy in Glasgow and then Oxford universities. He is regarded as a pioneer in the

history of economic thought; his famous book An Inquiry into the Nature and Causes of the

Wealth of Nations, which was published in 1776, is considered the book that gave economics

the academic credentials needed to be regarded as a social science. The role that this book made

in defining what market economy is in theory as well as its importance for economics in general

made Adam Smith worthy of being regarded as the father of capitalism as we mentioned earlier.

In The Wealth of Nations, Adam Smith describes the basic foundations of market economy as

follows:

Because reaching social interest depends mainly on creating self-interest, a market

economy must give individuals, whether they are consumers or producers, the right to act

freely in the market and seek what meets their needs best without any externalities, such

as government intervention. Free (laissez-faire) market is the most effective one, and any

deficiencies in it is corrected by the invisible hand.

The concept of free market is not just limited to freeing commercial activities and

denying the government from intervening in the market, it extends beyond that. Making

the market free should be associated with preventing any activity that could hinder the

idea of perfect competition; such activities are monopoly, non-transparency in market

activities, and putting barriers in front of new market entrants (Graafland and Wells,

2012: 323-324).

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Although the invisible hand is the key factor in maximizing the economic benefits in a

society, this does not mean that the government and other mediating institutions have no

role in a market economy. There is an important role that these institutions are supposed

to play; this role is simply promoting efficiency and effectiveness in the market as well as

protecting the interests of the market players in order to reach greater general benefit in

the society (Elbeblawy, 1996: 58; Oslington, 2012: 433).

Creating wealth through capital accumulation is the main aim of capitalism. To

accumulate capital, producers need to work in order to increase their production.

Increasing production leads to promoting efficiency through increasing the products

quality; this will lead to lowering production costs. And when these costs are minimized,

producers will tend to increase their production in order to exploit this advantage. As

long as this cycle works well, more capital will be accumulated, which will lead to

increasing the nations wealth (Lazaro, 2009: 166-167; Kucukaksoy, 2011: 114).

As exchanging benefits is the main pillar in economic activity according to Smith,

division of labor and specialization are essential for reaching an effective market

economy. Division of labor will yield more skillful workers; it will also lead to increasing

dependence on machinery and saving time. Specialization will allow each individual to

work in one sector and cooperate with other individuals who work in other sectors in

order to maximize his self-interest; this will increase the social interest as well

(Elbeblawy, 1996: 59; Kucukaksoy, 2011: 114; Lazaro, 2009: 162-163).

The previous points were a brief summary of Adam Smiths contributions in capitalism. We tried

to give more attention on the contributions that are strongly related to economics without digging

deep in the philosophy that Smith had used in formulating them, because it is out of our scope in

this study. Let us now take a deeper look into the economics of capitalism.

2.1.3 The economics of capitalism

In this section, we are going to shed the light on some of the basic characteristics of a pure

capitalist economy. We will try to state them briefly; we will also try to focus on the

characteristics that were not mentioned in the previous section. The important points that we

need to illustrate with regard to the economics of capitalism are:

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Capital contributes to wealth creation more significantly than labor, as industrial

production depends more on capital.

Capital is privately owned and is largely diffused among individuals in the society.

Private owners of factors of production (land and labor) collaborate voluntarily together

for the sake of creating wealth.

Distribution of wealth depends on property rights of individuals engaging in the

economic activity. These property rights depend on the contribution of each individual in

the production process.

Increasing automation will lead to a more effective production process. However, this

will be associated with a progressive reduction in labor force in the industrial sector. As a

result, labor will be concentrated on leisure or subsistence, and not mechanical, work.

Technological advancement leads to an increase in industrial production and a decrease

in the subsistence work needed for production.

2.2 Overview on socialism (centrally-planned economy)

In this part we will focus mainly on examining the basic definitions of centrally-planned

economy; we will also tackle some of the theories that formed the socialist economic system.

Our main focus, with regard to these theories and definitions, will be on the contributions of Karl

Marx, the famous philosopher who is considered the greatest contributor to socialism.

In the previous chapter, we have discussed that the industrial revolution was a turning point in

the history of economic thought. This event led many countries, especially the industrial ones, to

embrace Adam Smiths idea of capitalism and free market economy (Jensen, 1993: 4-6).

The accelerating rate of industrial activity in the late eighteenth century was marked, by default,

by a significant increase in the number of factories. The owners of these factories (the capitalists)

needed to hire a lot of labor in order to get their industries up and running. As a result, a new

social class of proletarians (workers) started to grow in the society. It was believed that the

business owners (the capitalists) were deliberately and willingly taking advantage of their labor,

by making them suffer and work under unbearable conditions without compensating them

properly. This did not bode well with neither proletarians nor a number of philosophers and

scholars. As a result, some of these philosophers came up with opinions and theories that

opposed capitalism. Only one of them has been more famous than the others though, mainly

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because his theory, which was named Marxism after his last name, was the base upon which

socialism was built and shaped. This man is Karl Marx (Elbeblawy, 1996: 77). In the coming

section, we shall briefly examine some points related to the theoretical foundation that Marx set

for socialism.

2.2.1 Contributions of Karl Marx

Marx was born in Trier, Germany in 1818. He studied Law and Philosophy and was a political

activist. Because of engaging in many activities during his university days and after them as

well, he had a life rich of experiences; this was reflected in his most famous books, The

Communist Manifesto and The Capital. Those two books include the main theories upon which

socialism was built.

Marx is a philosopher. So, all his contributions to the economics of socialism has a philosophical

base. In this section, we shall focus only on the contributions that are directly related to

economics, without paying much attention to the philosophy. The reason for this is that we are

here looking for the economic theory of socialism, not the philosophy behind it.

The contributions of Marx to socialism that we are going to focus on are basically the principles

that he adopted in his book the Capital. These principles depend mainly on the arguments he

used to criticize capitalism. The coming few points will illustrate those arguments:

According to Marx, rational producers in an ordinary society should produce goods that

earn them profits, which only cover their consumption. However, capitalists do not do

that, as they tend to exploit their labor and make them produce way more than their

consumption requirements. This leads to a surplus in profit that is not supposed to be

there; all the extra profit, unrightfully, goes to the capitalists without compensating their

labor, who are the main reason for these profits (Elbeblawy, 1996: 96- 97).

Because of the industrial revolution, most projects in the era of capitalism tend to be

capital intensive projects. This will lead to a decrease in demand for labor, which will

harm them and by default, harm the whole society due to the increase in unemployment.

So, while capitalists are making more profits, which they do not have right in according

to Marx, workers are suffering from poverty, inequality, and unemployment (Elbeblawy,

1996: 101).

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The path that this inefficient capitalistic system is offering to capitalists has only one

ending, which is deep recession. The reason for this is that producers will continue to

produce goods and increase their supply of products in the market, depending on the

arsenal of their machinery, in order to maximize their profit. However, workers and

employees, the ones who are supposed to consume these products, will not be able to

demand all the supplied amounts, due to the lack in affordability that is based on their

very low incomes. As a result, there will be an excess supply of goods in the market,

which the market will fail to act to it, thus, there will be an economic crisis.

So, based on Marxs criticisms to capitalism, socialism evolved and was seen by the economists

who adopted it as a viable replacement to capitalism. This evolution became significant in the

half of the twentieth century. The most famous countries that were branded as communistic

countries and adopted socialism during that time were China and the Soviet Union (Stiglitz and

Walsh, 2002: 13).

The characteristics of socialism, which these two countries and other smaller countries exhibited

are:

Elimination of private property, which means that individuals were not allowed to own

projects or capital at all.

Dialectical materialism, which means that social welfare cannot be achieved unless the

societys benefits are prioritized over the benefits of individuals.

Making all resources and factors of production publicly owned.

Centralizing the control over all resources in the hands of the government. This means

that the government was the sole entity that had the right to determine how to use

resources and what economic activities to engage in. This is why socialism is called

centrally-planned economy, as government had the full authority in taking economic

decisions, was responsible for running production, profit collection, and redistribution of

income among different economic agents (Courant et al, 1999: 11; Samuelson and

Nordhaus, 2005: 8).

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3. The Islamic economic model

After having a brief look over the theoretical basis upon which capitalism (market economy) and

socialism (centrally-planned economy) were founded, through emphasizing mainly the

contributions of Adam Smith in capitalism and Karl Marx in socialism, we will now try to know

more about economics in Islam. In this chapter we shall examine the framework of Islamic

economics, its principles, and the basic elements that form an Islamic economic system. This

chapter, alongside the previous two chapters, will be very helpful to us in our quest to compare

Islamic economics to capitalism and socialism, which we tend to do in the final chapter of this

literature review.

3.1 Overview on economics in Islam

Islam is a multidimensional religion. When Prophet Mohammad ppuh- was sent to humanity,

he was not just sent to teach people how to worship Allah and pray only. The evidence for this is

that Allah had said in a verse in Quran, addressing Prophet Mohammad And We have not sent

you, [O Muhammad], except as a mercy to the worlds (Quran 21: 107). Also the Prophet

ppuh- himself had said: I was sent to perfect good manners (Malik). Both the verse and the

Hadith mean that the purpose of sending Mohammad ppuh- to mankind is to teach people how

to make the world a better place through purifying their manners and behaviors. Thus, all

relations in a society should be characterized by equality, peace, and security (Sabek, 2000: 6).

The scope of the word relations here is wide, as it includes all transactions that individuals

encounter on a daily basis, which economic dealings are considered a major part of. What we

mean by the term economic dealings in Islam are the dealings that enable individuals to work,

make gains, and allocate resources efficiently in order to satisfy their needs and wants (Enaya,

1991: 33).

Islam has put a major emphasis on initiating and organizing the economic activity in a society. In

fact, building the mosque and structuring a proper system to the marketplace were the two main

priorities for Prophet Mohammad ppuh- when he migrated from Mecca to Al-Madinah. The

reason for this is that Prophet Mohammad wanted to set the environment in which the newly

founded Muslim community in Al-Madinah will be able to learn how to follow the teachings of

Islam while engaging in economic activities. After Prophet Mohammad ppuh- had set such an

environment for learning, the main principles of economics in Islam started to take shape.

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The main philosophical foundation upon which the idea of economics in Islam was built was to

emphasize that an individuals social welfare cannot be reached unless that the individual exerts

an effort in order to gain benefits in both the current life and the afterlife through exercising his

role as a vicegerent of Allah. This role can be exercised only when the Muslim person believes

that he has a duty in making the world a better place. And when the Muslim person does exercise

this role properly and effectively, he will be in a very good position to be successful in the

current life and reach Jannah (paradise) in the afterlife, which is the ultimate goal of any Muslim.

Quran describes the Muslim people who live their lives with this mindset by the following verse

(2: 201-202): Then there are those who say, Our Lord, give us what is good in this world and

also what is good in the hereafter and save us from the torment of fire. Such people will have

their due share (in both worlds) according to what they earn. And Allah is swift at settling

accounts. (Arif, 1985: 84 and 98; Ghazanfar and Islahi, 1997: 8).

So, based on the previous paragraph, we can understand that there are four basic foundations on

which the philosophy of economics in Islam is based. It is very important to note that these

foundations may seem very generic and have nothing to do with economics; this can be true if

we just state them and stop right there. However, what we are trying to do is to understand these

foundations and then derive the goals and principles of economics in Islam, which are the parts

we are focusing on, from them. So, let us now know what these four foundations are:

The first one is Tawhid which means that there is only one God in this universe. This

God is Allah; he is the one who controls our world.

Then comes the Khilafah, which means that Allah chose to create human beings on earth

to be vicegerents and perform his will.

The third foundation is Accountability, which means that the Muslim person must

believe that there is a judgment day, in which he will be asked about everything he has

done during his life; this means that he will be accountable for the good and bad things he

has done during his lifetime in front of Allah.

The last foundation is Tazkiyah, which means that a Muslim person should purify

himself spiritually, morally, and materially. He should also purify his relationships with

other people by promoting justice and equity when dealing with them (Arif, 1985: 83;

Haque and Tahir, 1995: 847).

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Based on these four foundations, we can have a clue to the answer of two important questions

regarding the Islamic economic model. These questions are: 1-What are the main goals of

economic activities in Islam? And 2- What are the main features that the philosophy of the

Islamic economic model is characterized with?

Al-Ghazali, who is one of the most well-known Muslim philosophers, gave us the answer of the

first question by saying that there are three main goals of economic activities in Islam. These

goals are: Reaching self- sufficiency that cover the needs for survival, empowering the poor who

do not have the ability to satisfy their basic needs through helping them financially or giving

them the tools that enable them the access the marketplace, and achieving the welfare of

successive progeny (Ghazanfar and Islahi, 1997: 9).

As for the answer of our second question (the one related to the features of the Islamic economic

model), we can say according to our understanding of the foundations and goals of the Islamic

economic system that there are two main features of the philosophy of Islamic economics. The

first feature is realism, which means taking the reality of the nature of human beings into

consideration while doing economic planning. This means that achieving social welfare in the

society should not be done on the expense of individuals wants, because realistically,

individuals will not care for social welfare if it harms their lives or ambitions. So, what the

Islamic economic model is seeking here is reaching a good balance between individual and

societal needs. The second feature is morality; morality should exist in the Muslim persons

goals, which are being happy in this life and the afterlife by reaching Jannah. It should also exist

in the methods he opts to use in order to reach his goals (Baqer Al-Sadr, 1987: 288-289).

So, after we knew the four philosophical foundations of economics in Islam as well its main

goals and philosophical features, lets now try to understand the principles of economics in

Islam.

3.2 Principles of Islamic economics

Before we start discussing the main principles of the Islamic economic system, it is important to

know the sources that these principles came from. Principles of Islamic economics are extracted

mainly from two sources, which are Quran and Sunnah (teachings of Prophet Mohammad

ppuh-). These principles are divided into two categories: premised or Halal practices, which must

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be done, and banned or Haram practices that should be avoided in order to preserve the shape of

the Islamic economic system. Let us start with the premised ones:

1- Application of Shariah: All economic activities must abide by the orders of Allah in

Quran and the teachings of Prophet Mohammad in Sunnah. These teachings of Quran

and Sunnah are general rules that have a high degree of flexibility, which enables them to

organize economic activities in different eras (Enaya, 1991: 38; Zaman, 1984: 49).

2- Zakah: It is an amount of money that each adult Muslim person with a financial ability

must pay to the state; it is somehow similar to taxes. Islam enforced this Zakah in order to

promote fairness and social equality through redistributing this Zakah on eight types of

people stated in this verse in Quran The alms are only for the poor and the needy, and

for those employed in connection therewith, and for those whose hearts are to be

reconciled, and for the freeing of slaves, and for those in debt, and for the cause of Allah,

and for the wayfarer an ordinance from Allah. And Allah is All-Knowing, Wise. (9:

60). We can see that Zakah has a direct relation to the fourth philosophical foundation of

Islamic economics, which is Tazkiyah; the reason for this is that Muslim people pay

Zakah in order to get closer to Allah by reaching Tazkiyah, as Allah said in Quran Take

alms out of their wealth, so that this may cleanse them and purify them thereby. (Enaya,

1991: 35, 73, and 117; Kuran, 1995: 159).

3- Freedom of contract and ownership: Allah said in Quran O ye who believe! Let not

your wealth and your children divert you from the remembrance of Allah. This verse

indicates that individuals are allowed to engage in trade and own private property; they

are also allowed to engage in lawful contracting.

4- Permission is the general rule in earning: It means that Islam encourages individuals to

work and earn profit as long as they are working in fields that are not prohibited by Allah,

such as trading tobacco or alcohol for example. Islam does not allow trading in such

things because they are harmful for individuals and thus, societies (Enaya, 1991: 75;

Sabek, 2000: 89).

5- Mudarabah: It means that when two parties, one has some funds or capital he wants to

invest and the other has a business idea or an ability to work and needs funds, when those

two parties interact with each other (the one who has money and wants to invest it and

the one who has the idea and ability to work but has a deficit in funds), they must share

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not only profit, but risks as well. The aim of this principle is to achieve the highest

possible level of fairness for both parties. Such a level of fairness can be reached through

this basic element in Mudarabah, which is Al-Ghunm bel-Ghurm; this means that an

individual cannot earn profits unless he pays funds, puts effort, or be subjected to risk

first (Sabek, 2000: 148).

6- Satisfy wants and social responsibility: Prophet Mohammad ppuh- said The relation

of believers with one another should be like the components of a solid building, which

(i.e., the components) are source of strength for one another. This indicates that when a

Muslim person engages in an economic activity, the aim of such an activity should not be

constrained by achieving profits only; it should include making the whole society better-

off as well (Haque and Tahir, 1995: 848; Zaman, 1984: 50).

After discussing the premised principles, lets now discuss the principles that ban certain actions

or activities:

7- Riba: The word riba means lending people loans and take principal amounts back plus

interest. Riba is totally prohibited in Islam for many reasons; first, it causes harm to the

borrower or indebted person, because the accumulating interest always puts an extra

burden on him. Another reason is that some people with excess funds usually take

advantage of borrowers and use them as a source of easy money, by forcing them to pay

high interest rates on the loans they took from them; the extra money that comes because

of these interest rates is considered in Islam as an unjustifiable increase in capital. Riba

also causes harm to the society as a whole because it reduces the sense of cooperation

between people, as there is always a party that is trying to take advantage of another

party. The verses and sayings that discuss riba in Quran and Sunnah are many; for

example, Allah said in Quran O ye who believe! Devour not interest involving diverse

additions; and fear Allah that you may prosper. (3: 130). There is also a general rule in

Islamic Shariah regarding riba; this rule is that Any loan that generates benefit is

prohibited (Kuran, 1995: 156-157; Sabek, 2000: 123, 124 and 129).

8- Harm: In order for a certain economic activity to be accepted within the framework of

the Islamic economic model, this activity must not cause any kind of harm to the society,

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whether directly or indirectly. As Prophet Mohammad said There should be neither

harm nor malice (Haque and Tahir, 1995: 850; Mahmoud, 1983: 72).

9- Monopoly: Islam prohibits all kinds of exploitations that can harm individuals and thus,

the society. Because of this, monopoly was prohibited, as it enables one producer to be

the sole controller of a certain market; this producer can cause severe damages to the

market by setting very high prices to his products, which can be of low quality, and

buyers will be forced to take from him because he is the sole producer in the market. This

is totally unacceptable in Islam. Whether this point can be considered as a similarity

between Islamic economics and capitalism or not can be determined after some thorough

research.

10- Gharar: It means excessive risk. Engaging in economic activities that are associated

with such a level of risk is prohibited in Islam. The reason for this is that these very high

levels of risks usually will lead one party to huge losses or huge gains, both

undeservedly.

11- Short-selling: It means borrowing something from a person and selling this thing to

another person without actually owning that thing. Short-selling offers no guarantees to

any of the parties in a trade. That is why Islam bans it.

12- Fixed pricing: The Islamic economic model allows for a certain degree of intervention

from the government in the market in order to regulate it and promote efficiency in it.

However, the model does not allow any player in the market, including the government,

to fix the prices; prices should be set based on supply and demand. The only cases that

can cause a government intervention in setting prices are when certain producers engage

in monopolistic practices and when there is a harm on either buyers or sellers (Asutay,

Azid and Khawaja, 2008: 56-57; Sabek, 2000: 113).

So, if we want to define Islamic economics based on all these foundations, philosophical

features, goals, and principles, we can give it the following definition: Islamic economics is an

economic system that is based on a group of principles, which are derived from Quran (Allahs

words) and Sunnah (Prophets teachings). The application of these principles will result in the

control and organization of economic activities in the society (Enaya, 1991: 35).

18

From this definition of the Islamic economics arises a very interesting question; this question is:

What is the structure of the Islamic economic model? Or in other words, what an Islamic

economy should, theoretically, look like? According to our preliminary research, we cannot

claim that we found a clear answer to this question. However, what we did find out is that the

structure of the Islamic economic can be considered as a work in progress and that this model

can offer certain reformulations that can be applied on the current dominant structure of the

world economy nowadays, which is the mixed economic system. To conclude, we can say that

what comes out of applying the principles of Islamic economics can be considered as a structure

that needs to be developed in order to reach the degree of a well-established economic system.

This claim should be subject to further research that will either prove or refute it.

19

4. Comparing Islamic economics to conventional systems

Before we go through this part of the paper, let us first examine the criteria that we are going to

depend on in our comparison between the Islamic economic model and conventional economic

systems (capitalism and socialism). We are going to use three criteria in our comparison. These

criteria are ownership of factors of production, allocation of resources, and income distribution.

4.1 Ownership of factors of production

The general rule in Islamic economics when it comes to owning factors of production is the

multi-faceted ownership. This means that the Islamic economic system necessitates private

ownership in certain cases and public ownership in some other cases. Determining the most

effective form of ownership depends on the case in hand as well as the economic situation during

the time of this case. For example, during the early years of the Muslim state in Al-Madinah,

individuals were encouraged to enter the marketplace and engage in trading and other economic

activities; they were also allowed to own property, open private businesses, and make individual

trade agreements. Individual ownership was not only encouraged, but it was protected as well, as

Prophet Mohammad ppuh- has said Every Muslim should not harm other Muslims safety,

honor and property (Enaya, 1991: 275; Qureshi, 2011: 104). Public ownership was also applied

in Islam; it was encouraged in some cases in which private ownership would have caused harm

to the society. An example for this is when Omar Ibn Al-Khattab, the third ruler of the Muslim

state, refused to privatize the ownership of certain water mines and agricultural lands that

contained rare crops. He did this in order to eliminate any chance for possible monopolistic

practices that may occur if certain individuals put their hands on these strategic resources (Enaya,

1991: 304). So, we can conclude that both forms of ownership can be obligatory general rules

based on the context and circumstances they are required in.

On the other hand, if we look at capitalism and socialism, we find that ownership of factors of

production is somehow one-dimensional. If we look at capitalism, we see that the general rule is

private ownership, as it motivates individuals to achieve their self-interest and this will result in

public interest as well. And if we analyze socialism, we find the opposite; state (public

ownership) is the general rule, as socialism consider that private ownership of factors of

production gives a chance to capitalists to exploit workers and this is a thing that cannot be done

if the government was the sole owner of those factors (Elbeblawy, 1996: 56 and 101).

20

4.2 Allocation of resources

This criterion is related to how resources should be employed in the implementation of

investment decisions. We saw in the previous point that the Islamic economic model allows for

both private and public ownership of factors of production. So, it is safe to say that Islam gives

both individuals and government the right and ability to decide how to use their available

resources in the way they suitable.

However, it is important to note that this rule is not absolute. Individuals as well as the

government may sometimes misuse their resources, either unintentionally by mistake, or

intentionally by using the resources in order to achieve their own interests and not the interests of

the society. In order to make sure that this does not happen, Islam has made it clear that it is the

duty of the state, through independent entities, to regulate resource allocation and make it close

to its optimum state (Ahmed, Iqbal and Khan, 1983: 33-34).

Now if we look at how allocation of resources is organized in capitalism and socialism, we can

see that in capitalism, competition in the market is the main determinant of resource allocation

decisions. This means that the main purpose of individual producers should be to allocate

resources in the most efficient way that enables them to reduce their costs and maximize their

profits; if producers do so, they will be able to endure price competition in the market. As for

socialism, government is the entity that has the right to allocate resources, because it is the only

party that owns them in the first place. Government is the party that sets the economic strategy

and make investment decisions; based on these decisions it decides how resources should be

allocated (Stiglitz and Walsh, 2002: 13-14).

4.3 Income distribution

One of the main objectives of the Islamic economic model is encouraging people to work and

make an effort in production. Prophet Mohammad ppuh- illustrated this when he told a Muslim

individual: Your wage is determined according to your fatigue. This means that Islam

encourages offering incentives and rewards to those who exert effort and stand out in their work.

Based on this, we can understand that in this particular criterion, Islamic economics is similar in

a way or another to capitalism, as rewarding workers according to their productivity is one of the

main principles in market economy. We can see no much wrong in this approach, right?

21

In fact, there is a problem with this approach, as it did not take into consideration people who

suffer from their inability to work for a reason or another. If we look at a specific example,

people with physical disabilities find it extremely hard to work, mainly because nobody is

willing to hire them. As a result, those people may suffer from poverty and social oppression.

While the only answer that capitalism could find to this problem is to allow government

intervention in order to preserve the rights of this class of people, a thing that contradicts with the

philosophy of capitalism, the Islamic economic model was able to face this problem through

doing two things. The first thing is the application of Zakah, which is one of the principles of

Islamic economics that we have discussed earlier, as this Zakah will help to promote social

equality among all classes of the society. The other thing is giving the government the right to

perform the actions needed to preserve the rights of the poor and people with disabilities; these

actions may include levying taxes and using them in the development of infrastructure and

safety, as well as offering job opportunities that suit the category of people with disabilities

(Elbeblawy, 1996: 29-31).

As for the socialisms point of view with regard to income distribution, we can see that it

contradicts with the point of view of Islamic economics as well as capitalism in two points. The

first one is that the theory of socialism states that distributing income among people in the

society should be the responsibility of the government solely and individuals should have

nothing to do about it. The second point of contradiction is that, based on Marxs contributions to

socialism, income must be distributed in the society based only on peoples needs and not based

on their efforts or productivity in work. This socialist approach to income distribution faced two

major obstacles; first, there was no clear methodology that a government could follow in order to

determine the exact needs of each individual in the society. The second obstacle was the absence

of work-related incentives; when hard workers did find that their efforts are not rewarded and

that all workers, whether they are doing their work well or not, are equally compensated, they

started to believe that there is no point of exerting too much effort in work, as they will receive

their wages even if they did not produce anything at all. As a result, it is safe to say that

productivity and efficiency are not in their best under centrally-planned economy (Courant et al.,

2006: 14).

22

5. Dimensions of capitalism and the Islamic model

This chapter can be somehow considered as a complement for the previous one. In the previous

chapter we tried to illustrate the main similarities and differences between the Islamic economic

model and conventional economic systems. We used three main criteria to do so, which were

ownership of factors of production, allocation of resources, and income distribution.

What we are trying to do throughout this chapter is simply building on the already used criteria

and also adding new dimensions to the comparison in order to reach a deeper understanding of

how the Islamic economic model differs from the conventional systems.

However, there is an important thing that makes this chapter slightly different from the previous

one. This thing is that we will narrow the scope of our comparison by keeping only the Islamic

economic model and capitalism in it; as a result, socialism will be excluded from the scope of

our comparison at this stage of the paper. This decision was taken based on our main finding in

the previous chapter, which is that the Islamic economic system is in many ways similar to

capitalism more than socialism. So, it will be interesting to find out if the Islamic economic

model is a unique system in its own sense, or if it is just a variety of capitalism with some

religious principles added to it.

So, we decided to use certain new criteria to help us find out more about what we want to know.

These criteria are the relation between employer and employees, financial regulations, market

structure, and institutional differences.

5.1 Relation between employer and employees

There are many elements that govern the relationship between employers and employees either

in capitalism or in the Islamic economic model. In this section we will focus mainly on two of

these elements, which are wages and rights protection for both employers and employees.

As for wages, we can say that Islamic economics is somehow similar to capitalism when it

comes to determining the wages of employees. Both systems state that wages should be set based

on the effort and productivity of employees. However, when it comes to the measures used to

protect the rights of both employers and employees in the workplace, we can spot some

differences between both systems.

23

In capitalism, labor unions and laws are the key variables that organize the relationship between

employers and employees (Stiglitz and Walsh, 2002: 13). On the other hand, when we examine

the framework that Islam has put to manage this relationship, we can see that it is based on three

main pillars, which are:

1- Justice The main aim of this principle is to ensure the elimination of all means of exploitation

and injustice that may arise in the employer-employee relationship. For example, Prophet

Muhammad pbuh- said: Your brethren are your servants whom Allah has made your

subordinates. So, the man who has his brother as his subordinate should give him to eat from

what he himself eats and to wear from what he himself wears. And do not put on them the burden

of any labor that may exhaust them. And if you have to put any such burden on them, then help

them yourselves; he also said: Give the employee his wage before his sweat dries out. It is

very important to note here that justice in Islam is not limited to employees only, as it also

includes employers as well; for example, Islam makes writing a contract that states the rights and

obligations of both employer and employees towards each other a necessity in order to ensure

justice in their relationship.

2- Brotherhood: There is a verse in the holy Quran that says: The believers, men and women,

are protectors of one another (9:71). This means that both employers and employees should

care for one another and protect each other. This concept cannot be found in capitalism. I claim

this based on that, for example, in a time of severe recession, usually there is a need for

downsizing labor in factories and companies. What makes Islam different from capitalism in

dealing with such a situation is that the Islamic economic model will not allow an employer to

fire employees without at least helping them or giving them time to find an alternative source of

income. In a regular market economy, the employer will just fire the employees that he does not

need without doing anything to protect them against the danger of unemployment (Akhtar, 1992:

206-207; Shafi, 1979: 26).

3- Benevolence: The aim of this principle is to encourage employers and employees to be kind

and gentle toward each other. Allah ensured that doing this will be beneficial for both parties, as

said in the Quran Is there any reward for good other than good? (55:60) (Akhtar, 1992: 211-

212).

24

5.2 Financial regulations

The point of financial regulations can be regarded as one of the major differences between the

Islamic economic model and pure capitalism. The question is, where lies the difference?

When we discussed capitalism in the first chapter of this paper, we stated that accumulating

capital for wealth creation purposes is the main aim of any market economy (Lazaro, 2009: 166-

167). The financial system, represented in different types of financial institutions and markets, is

considered the driving force that pushes people to work and create wealth; it uses interest as its

main tool in doing this (Qureshi, 2011: 105). This interest (spread) comes from the difference

between the rates of return that financial institutions (i.e. banks) take from borrowers and the

rates of return paid to depositors (Okte, 2010: 191).

As for the Islamic economic model, we have mentioned earlier that it totally prohibits interest

(riba). Based on this, we can infer that the Islamic financial system depends on another driving

force to encourage people to invest in the economy; this force is profit sharing. There are four

main tools for profit sharing that are used in Islamic finance; these tools are:

Mudarbah: We have already illustrated this term earlier in this paper in the principles

of Islamic economics chapter.

Musharkah: It is a contract written between two or more parties; this contract means that

those parties have access to exactly the same information. It also means that they agree to

contribute factors of production (i.e. land, labor, and capital) in a certain investment or

business activity. They do so with the intent of sharing profit or handling loss by

distributing that profit or loss among them as partners.

Murabhah: It involves a financial institution that purchases a good on behalf of the

client, and then resells that exact good to the same client at a predetermined mark-up.

Ijarah (Leasing): It is a contract between the lessor (the owner of the asset) and the

lessee (the person who wants to lease the asset); according to this contract, the lessor

leases a capital asset to the lessee for a certain period of time, and the lessee pays a

monthly or annual rent in return.

25

5.3 Market structure

When we look at the market structure of any economy, we can see that it is usually determined

by four characteristics; these characteristics are: the number of firms in the market, conditions of

entry, degree of control over price, and type of produced output. We have learnt in economics

that there are four types of market structures, which are perfect competition, monopolistic

competition, oligopoly, and monopoly.

The philosophy of both the Islamic economic model and market economy shows us that, when it

comes to choosing an effective market structure, the perfectly competitive market will surely be

the answer; so, we can consider this as a point of similarity between the two systems.

However, when we analyze the history of capitalism, it is easy to spot that the other three market

structures (monopolistic competition, oligopoly, and monopoly) can dominate any market

economy, depending on the nature of industry, cost of entry, and some other factors. What I want

to say here is that capitalism accept the fact that some industries can operate under a market

structure that is different from perfect competition. In order to minimize any possible threat on

the economy that may result from not operating under perfect competition, it is the role of the

government to protect competition through regulations and anti-trust laws (Pindyck and

Rubinfeked, 2005: 262-263, 340 and 372).

On the other hand, if we look at the philosophy of the Islamic economic model, we can

understand that perfect competition is the only acceptable market structure for this system. In

other words, monopolistic competition, oligopoly and monopoly should not exist in an Islamic

market, which is somehow unimaginable nowadays. The role of the government is to make sure

that markets are perfectly competitive through regulations that come from Islamic shariah

(Hanif, 1995: 43).

5.4 Institutional differences

If we look closely at the two systems, we can see that there are two main institutions that govern

the economic activity in both of them; these institutions are the market and government. In both

capitalism and the Islamic economic model, those two institutions work together to achieve

social welfare in the society. This may seem as a point of similarity between the two systems, but

this is not the full story.

26

In fact, there is a major institutional difference between capitalism and Islamic economics.

Capitalism consider the market as the only core institution in the economy and that all other

institutions are secondary ones that just support the market. For instance, government cannot, by

any means, interfere with the market mechanism or control it.

On the other hand, the Islamic economic model does not consider the market as the sole main

institution in the economy, as it gives a similar degree of importance to the government as well.

This means that both market and government somehow enjoy the same degree of power under

the umbrella of Islamic economics. Elbeblawy (1996: 31) argues that giving the government

more authority and freedom in regulating the market and interfering in it when there is a need

make it easier to control the economy, promote efficiency and effectiveness in the market, and

prevent harm to the community.

27

6. Methodology

After comparing between capitalism and the Islamic economic model in the previous chapter, we

could clearly see that there are significant differences between these two systems on the

theoretical basis. It is now the time to try to figure out if these differences are actually exhibited

in practice or not. We intend to do so by engaging in an empirical study, in which we will be

collecting and analyzing some numerical data. These data represent two of the four dimensions

we have already used in the comparison; these dimensions are the financial regulations and

relationship between employer and employees. Because our analysis is based on numerical

data, we are considered to be using a quantitative method. The quantitative method in data

analysis helps us to reach deep understanding for the topic in hand (Cooper and Schindler 2008:

147).

The main aim of doing this piece of empirical work is to test whether the Islamic economic

model is practically applied in Muslim countries or not. Another purpose is to see if applying the

Islamic economic model does actually add a value or make a difference to the countries that

depend on it or not. If we are able to achieve these two purposes through the results of the

empirical analysis, then we can claim that we were able to deal with our research gap.

6.1 Instrument design

We will use real interest rate as an indicator for the nature of financial regulations and the

vulnerable employment ratio of as an indicator for the relationship between employer and

employees dimension. Before examining what each indicator tells us, it is important to note that

all data related to these two indicators were collected from the official website of the World

Bank. Let us illustrate what we should expect to understand from each indicator:

Real interest rate:

- According to the official website of the World Bank, real interest rate is the lending

interest rate adjusted for inflation as measured by the GDP deflator.

- Analyzing the collected data related to this indicator should tell us how the prevailing

rates of return in Muslim countries (Malaysia and Kuwait) actually differ from the

rates of return in US and UK (two countries known for adopting a mixed economic

system that leans toward capitalism).

28

- Hypothesis 3: If there is a significant difference in the rates between Muslim and non-

Muslim countries (with Muslim countries having significantly lower ones), given

unbiased estimators, then we can claim that there is a difference between Islamic

economics and capitalism with regard to real interest rate prevailing in the market.

- It is important to note that according to the theory of Islamic economics and based on

the literature we have shown throughout the paper, the economy of Muslim countries

that apply the Islamic economic model should be characterized with zero interest rate.

Vulnerable employment:

- This ratio represents unpaid family workers and own-account workers as a percentage

of total employment.

- We chose to use this ratio in order to investigate whether the Islamic economic model

offers better solutions or cares more about this segment of labor force than capitalism

or not.

- This should enable us to know if applying Islamic economics in practice offers a

better shape for the relationship between employers and employees than capitalism

does.

- Hypothesis 4: Muslim countries, which apply the Islamic economic model in

practice, should have a lower vulnerable employment ratio than countries that tend to

be close to applying capitalism.

The reasons for choosing Malaysia and Kuwait (as representatives for Islamic economics) as

well as the United States and United Kingdom (as representatives of capitalism) are:

We chose Malaysia and Kuwait because they are two of the biggest countries that apply

many principles of Islamic economics in their economies.

While choosing USA and UK was mainly based on the fact that they are two of the most

famous and economically powerful countries that apply a mixed economic system that is

close to capitalism in this world.

29

6.2 Sampling

The sampling approach that we are going to use is the non-probability sampling approach,

because it is feasible for our study and it represents lower costs as well as less time needed. The

sampling technique that we are going to rely on is the purposive sampling technique, because it

is the one that suits our data and criteria. The main characteristics of our samples are illustrated

in the following points:

For the real interest rate indicator, we drew our sample from four countries:

- Malaysia and Kuwait as representatives for Muslim countries.

- USA and UK as representatives for capitalist countries.

- We collected the real interest rates of those four countries between 1993 and 2014.

- The source of the data is the official website of the World Bank.

- Total sample size of the four countries all together is equal to eighty eight (88)

observations.

For the vulnerable employment indicator, we drew our sample from two countries (we

could not find data for the other two):

- Malaysia as a representative for Muslim countries.

- UK as a representative for capitalist countries.

- We collected the vulnerable employment rate of these two countries between 1995

and 2014.

- The source of the data is the official website of the World Bank.

- Total sample size of the two countries together is equal to forty one (41)

observations.

30

7. Results

Before stating the results we have reached, let us first give a brief orientation about the tools that

were used in order to get those results:

After collecting the data, we started analyzing them using Microsoft Excel software

program. We conducted several tests on both real interest rates and vulnerable

employment rates.

First we conducted regression analysis twice, once on each indicator separately, in

which we used dummy variables (0 for Muslim countries and 1 for capitalist countries) as

independent estimators (predictor variables) for each regression analysis.

Obviously, real interest rate and vulnerable employment rate were the dependent

variables at each regression.

To test for the quality and reliability of our estimators, we conducted two tests, which are

heteroscedasticity and autocorrelation tests. Each test was conducted twice as well

(once per indicator).

We also used Excel to examine some descriptive statistics related to each indicator.

After having an overview about the procedures we followed in our study in order to reach

reliable results, let us now turn our focus to the results themselves and see how they helped us

with our research gap and hypotheses.

A- Results related to the real interest rate indicator

a- Average real interest rate

Average real interest rate in Malaysia, between 1993 and 2014, is 3.21%,

while the average in Kuwait is equal to 3.19%.

On the other hand, we can see that the average real interest rates in UK and

USA during the same time period are equal to 1.8% and 3.9% respectively.

The interesting thing about these results is that they contradict with our first

hypothesis that Muslim countries differ from capitalist countries in financial

regulations (reminder: we were using real interest rate as a numerical indicator

for the financial regulations dimension).

We even thought that Muslim countries should have significantly lower real

interest rates (or theoretically zero interest rate according to the literature).

31

However, we found that UK, a country that does not apply Islamic economics,

has a lower average interest rate than Muslim countries. USA also had an

average interest rate that is not significantly higher than Malaysia and Kuwait.

Here are the plots of the real interest rates in the four countries:

-6

-4

-2

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020

Re

al i

%

Year

Real i (Malaysia)

32

-15

-10

-5

0

5

10

15

20

25

30

35

1990 1995 2000 2005 2010 2015 2020

Re

al i

%

Year

Real i (Kuwait)

-3

-2

-1

0

1

2

3

4

5

6

7

1990 1995 2000 2005 2010 2015 2020

REA

L I %

YEAR

Real i (UK)

33

b- Regression

The R Square is 0.0006, and the adjusted R Square -0.01. This indicates that

the variance in real interest rates in both Muslim and capitalist countries is

hardly explained by our econometric model.

The degrees of freedom are equal to 87, which indicates that we are dealing

with a relatively small sample. Thus, any results based on such a sample

cannot be generalized.

The P-value of the dummy variable is equal to 81.1% (greater than 10%),

which indicates the insignificance of the relationship between the variables.

0

1

2

3

4

5

6

7

8

1990 1995 2000 2005 2010 2015 2020

Re

al i

%

Year

REAL I (USA)

34

Here is the real interest rate regression table:

c- T-test

B1 (intercept)

Step 1: H0: B1 = 0, H1: B1 0

Step 2: t-stat = 3.15

Step 3: Critical t-value from the t-table, at degrees of freedom = 86 and

0.05 level of significance, is equal to 2

Step 4: Since the t-value of x lies in the rejection area, we will reject

H0.

B2 (slope)

Step 1: H0: B2 = 0, H1: B2 0

Step 2: T-stat = -0.24

Step 3: Critical t-value from the t-table = 2

Step 4: We will not reject H0.

d- Heteroscedasticity

We used Park test for heteroscedasticity.

Step 1: H0: B2 = 0, H1: B2 0

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.025731

R Square 0.000662

Adjusted R Square -0.01096

Standard Error 6.743613

Observations 88

ANOVA

df SS MS F Significance F

Regression 1 2.591023 2.591023 0.056975 0.811910119

Residual 86 3910.963 45.47632

Total 87 3913.554

CoefficientsStandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 3.204545 1.016638 3.152101 0.002232 1.183536121 5.225555 1.183536121 5.225554788

X Variable 1 -0.34318 1.437743 -0.23869 0.81191 -3.201320627 2.514957 -3.201320627 2.514956991

35

Step 2: Since the P-value of the predictor variable is less than 10%

(approximately 0.04 %), then the statistical relationship is NOT significant.

Thus, we will not reject H0.

So, we have a homoscedastic variance in the residuals.

Here is the real interest rate heteroscedasticity table:

e- Autocorrelation (runs test)

H0: Residuals are independent. H1: Residuals are auto-correlated.

K (number of runs) = 26, N (number of observations) = 88, N1 (number of

positive residuals) = 44, and N2 (number of negative residuals) = 44

Since that K was outside the confidence interval, we reject H0.

The reason for this maybe that the regression model is not correctly specified.

This means that maybe the model is not including some important variables or

it has a wrong functional form.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.371035639

R Square 0.137667446

Adjusted R Square 0.127522357

Standard Error 2.327293443

Observations 87

ANOVA

df SS MS F Significance F

Regression 1 73.498367 73.49837 13.56986 0.000403311

Residual 85 460.3850554 5.416295

Total 86 533.8834224

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept -17.86621892 5.301582441 -3.36998 0.001132 -28.40718514 -7.325252693 -28.40718514 -7.325252693

X Variable 1 6.500160591 1.764559826 3.683729 0.000403 2.991742919 10.00857826 2.991742919 10.00857826

36

The residuals plot also helped us to check for auto-correlation; here it is:

B- Results related to the vulnerable employment indicator

a- Average vulnerable employment rate

Average vulnerable employment rate in Malaysia, between 1995 and 2014,

equals 22.05%.

On the other hand, we can see that the average vulnerable employment rate in

UK during the same time period is equal to 10.4%, which is significantly

lower than Malaysia.

The interesting thing about these results is that they contradict with our second

hypothesis, which is that Muslim countries care more about their labor force

than capitalist countries (reminder: vulnerable employment rate was used as a

numerical indicator for the relationship between employer and employees

dimension).

We believed that Muslim countries should have significantly lower vulnerable

employment rates, but this was not the case. Malaysia, a country that is known

for implementing Islamic economic principles in practice, has a significantly

higher average vulnerable employment rate than the United Kingdom.

-20

-15

-10

-5

0

5

10

15

20

25

30

35

0 20 40 60 80 100

REAL I RESIDUALS

37

It is important to say here that one of the main reasons for the difference

between UK and Malaysia in this ratio is the simple fact that UK is a more

developed country than Malaysia.

Here are the plots of the vulnerable employment rate in the two countries:

0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015

Vu

l. em

p %

Year

Vulnerable employment (Malaysia)

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015

Vu

l. em

p %

Year

Vulnerable employment (UK)

38

b- Regression

The R Square and the adjusted R Square are both approximately equal to

95%. This indicates that the variance in vulnerable employment rates in both

Muslim and capitalist countries is well explained through our estimators.

The degrees of freedom are equal to 39, mainly because we depended on

observations of only two countries, which are Malaysia and UK (the reason

for this is that we did not find data for vulnerable employment in US and

Kuwait). This indicates that we are dealing with a relatively small sample.

Thus, any results based on such a sample cannot be generalized.

The P-value of the dummy variable is equal to 0.9% (less than 10%), which

indicates the significance of the relationship between the variables.

Here is the vulnerable employment regression table:

c- T-test

B1 (intercept)

Step 1: H0: B1 = 0, H1: B1 0

Step 2: t-stat = 73.85

Step 3: Critical t-value from the t-table, at degrees of freedom = 39 and

0.05 level of significance, is equal to 2.021

Step 4: Since the t-value of x lies in the rejection area, we will reject

H0.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.975938167

R Square 0.952455306

Adjusted R Square 0.95120413

Standard Error 1.335250814

Observations 40

ANOVA

df SS MS F Significance F

Regression 1 1357.225 1357.225 761.248 9.64201E-27

Residual 38 67.75 1.782895

Total 39 1424.975

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 22.05 0.298571159 73.85174 1.18E-42 21.44557429 22.65442571 21.44557429 22.65442571

X Variable 1 -11.65 0.422243382 -27.5907 9.64E-27 -12.50478704 -10.79521296 -12.50478704 -10.79521296

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B2 (slope)

Step 1: H0: B2 = 0, H1: B2 0

Step 2: T-stat = -27.6

Step 3: Critical t-value from the t-table = 2.021

Step 4: We will not reject H0.

d- Heteroscedasticity (Park test)

Step 1: H0: B2 = 0, H1: B2 0

Step 2: The P-value of the predictor variable (21.2%) is greater than 10%.

Thus, we will reject H0.

So, we have a heteroscedastic variance in the residuals.

Here is the vulnerable employment heteroscedasticity table:

e- Autocorrelation (runs test)

H0: Residuals are independent. H1: Residuals are auto-correlated.

K (number of runs) = 9, N (number of observations) = 39, N1 (number of

positive residuals) = 20, and N2 (number of negative residuals) = 19

Since that K was inside the confidence interval (-26.8 K 26.8), we do not

reject H0.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.203984508

R Square 0.04160968

Adjusted R Square 0.015707239

Standard Error 2.053197104

Observations 39

ANOVA

df SS MS F Significance F

Regression 1 6.771969028 6.771969 1.6064 0.212917639

Residual 37 155.9778788 4.215618

Total 38 162.7498479

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 0.31333407 0.972812059 0.322091 0.749197 -1.657770392 2.284438532 -1.657770392 2.284438532

X Variable 1 -0.072526873 0.057223197 -1.26744 0.212918 -0.188472083 0.043418337 -0.188472083 0.043418337

40

The residuals plot also helped us to check for auto-correlation; here it is:

-3

-2

-1

0

1

2

3

4

0 10 20 30 40 50

Vulnerable employment residuals

41

8. Limitations and recommendations

We faced a lot of challenges while we were trying to implement the procedures of hypothesis

testing. There were some difficulties throughout the process, especially in finding the needed

data and analyzing them. Here are some of the limitations we have encountered during the course

of our study as well as some recommendations for potential future efforts in this area of research:

8.1 Limitations

Finding appropriate and credible literature related to comparing the Islamic

economic model to capitalism was a tough challenge. We did manage to find most

of the information that we needed to find though.

Selecting the criteria, on which we built the comparison between Islamic

economics and capitalism, was not an easy task. The reason for this is that the

comparison is too broad and there are a lot of criteria to choose from. We had to

narrow the scope of our comparison as much as we can; that is why we included

only four dimensions in the comparison between market economy and Islamic

economics.

We were very limited in choices when the time came for collecting numerical

data for the empirical analysis part. We managed to find indicators for only two

out of the four dimensions of the capitalism-Islamic model comparison. These

two indicators (real interest rate and vulnerable employment rate) were not even

the best indicators for their respective criteria (financial regulations and

relationship between employer and employees). However, we used them because

we could not find better indicators.

The number of observations that we managed to get for each indicator was not

large enough. For example, while collecting data for the real interest rates in the

four selected countries (Malaysia, Kuwait, UK, and USA), we got data starting

only from the year 1993. This resulted in limiting the generalizability of our

results.

The fact that we could not find data for vulnerable employment in USA and

Kuwait made us forced to test for this indicator in only Malaysia and UK; this

weakened the credibility of our study. What made testing for this indicator even

more complicated is that we only had twenty one observations during the

42

empirical analysis (from 1995 to 2014), which makes any results reached till this

point not generalizable.

8.2 Recommendations

I urge any scholar or researcher who wants to make a research related to Islamic

economics to do the following:

Check for the availability of numerical data and indicators that he/she will need to

use during his/her study.

Try to find an alternative indicator for comparing financial regulations in Muslim

and non-Muslim countries other than real interest rate, as it proved its

ineffectiveness during our study.

Increase the number of observations (i.e. years in time series analysis and

countries in cross-sectional analysis) in the empirical part as much as you can, in

order to make a case for generalizability of results.

Take more explanatory variables into consideration, but try to avoid

multicollinearity and over fitting.

Try to find literature that is talking more about the structure of the Islamic

economic model. This will enable for finding other dimensions in the comparison

between Islamic economics and other economic systems.

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9. Conclusion

Finally, after doing all the needed theoretical and empirical analysis, it is now time to examine

the hypotheses we have set at the beginning of our study and see if we were able to prove them

or not:

o Hypothesis 1: Islamic economics differs from capitalism in theory and practice

After discussing the Islamic model in all the previous sections and comparing it to

the other systems, the adequate answer for this question will be that Islamic

economics does differ from capitalism in theory.

However, the results that we have reached from the empirical analysis tell us that

the Islamic economic model that is partially applied nowadays in some Muslim

countries does not differ from capitalism in practice.

I believe that the reason for this is that the four or five Muslim countries that

claim to be adopting the Islamic economic model (Malaysia, Iran, and some Gulf

countries) apply only some of the Islamic economic principles and not all of them.

This hinders the evolution of the model in practice, because Islamic economics is

a unit, applying some principles and leaving others simply means that this unit is

not functioning properly.

o Hypothesis 2: principles of Islamic economics are actually applied in Muslim

countries

From what we understand based on the results we have reached, we can divide

Muslim countries to two segments:

1- Countries that do not apply the Islamic economic model at all.

2- Countries that apply few Islamic economic principles, especially in the

financial sector, but they disregard the majority of other principles.

So, we can conclude that the Islamic economic model is not being implemented

practically in a proper manner in Muslim countries.

o Hypothesis 3: there is a difference between Islamic economics and capitalism with

regard to real interest rate prevailing in the market

Based on the results we have reached, we can conclude that the theoretical

difference between the two systems in interest rates is not exhibited in practice.

44

We even reached results that contradict with the theory, when we found the UK

had a lower average real interest rate than Malaysia and Kuwait.

o Hypothesis 4: Muslim countries that apply the Islamic economic model in practice,

should have a lower vulnerable employment ratio than countries that tend to be

close to applying capitalism

This was not particularly true either.

The results have shown us that UK had a significantly lower average vulnerable

employment rate than Malaysia.

Although the theory of Islamic economics put a great emphasis on protecting the

interests of labor as we have shown in the literature review part, the practical

results does not support this theory.

At the end of this study, we must say that Islamic economics is a very intriguing area for

research. The efforts that were made throughout this paper in order to prove certain hypotheses

related to Islamic economics were maybe minimal and ineffective, as we failed to prove any of

the four hypotheses we wanted to prove. However, I do believe that with further extensive

research with smarter techniques, a lot of results that prove the worth and importance of applying

Islamic economics, not only in Muslim countries but also all over the world, will be reached.

45

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