Electronic copy available at: http://ssrn.com/abstract=1740729Electronic copy available at: http://ssrn.com/abstract=1740729

Self-Interest, Homo Islamicus and Some Behavioral Assumptions in Islamic Economics and Finance

Dr. Mohammad Omar Farooq Head, Centre for Islamic Finance

Bahrain Institute of Banking and Finance

Abstract:

The theoretical foundation of Islamic economics and finance is based on, among other things, Homo Islamicus or Islamic Man. Islamic economics and finance theoreticians contrast Homo Islamicus with Homo economicus or the Economic Man. This paper examines whether or not Homo Islamicus is significantly different from Homo economicus. This paper focuses on the relevance of self-interest in the context of both Homo economicus and Homo Islamicus.

JEL Classifications: D64; K0; Z12.

JEL Keywords: Economic man; Self-interest; Economic systems; Moral norms; Normative theory; Religion

2011 (forthcoming)

Electronic copy available at: http://ssrn.com/abstract=1740729Electronic copy available at: http://ssrn.com/abstract=1740729

I. Introduction

Homo economicus, the Economic Man, represents a rational human being formalized in certain social science models, especially in economics, who acts in self-interest to achieve in a goal-oriented manner. "He is self interested, materialistic, and obsessed with calculating his worth" and in the world of economics textbooks, "... he is the mainstay of economic life." (Kay, 2002) The edifice of modern economics is built on the foundation of Homo economicus, where his behavior is assumed to be ascertained in the positivist tradition of social science.

1

Islamic economics, and its offshoot Islamic finance, are built on the foundation of Homo islamicus, the Islamic Man, which is claimed to be distinctive from Homo economicus. Islamic financial institutions (IFIs) emerged as part of the Islamic banking movement, where interest (traditionally equated with riba) is prohibited and the underlying behavior of the constituent members, Homo islamicus, is assumed as a part of an idealized society, imbued with Islamic values and commitment. However, the experience of IFIs captures the reality that the Homo islamicus seems to be behaving more like the Homo economicus.

The distinction between the two is important because it is often cited, to contend Islamic economics is fundamentally different from conventional economics. This contention is made without consideration (a) whether the positive economics (reflecting “what is”) is essentially different from Islamic economics; and (b) whether Islamic economics recognizes economics at two levels: positive (what is) and normative (what should be). This essay briefly explores why the assumed distinction is narrowing, or the gap is much narrower than commonly claimed or perceived. The essay focuses on the notion of self-interest from the Islamic viewpoint.

II. Homo economicus vs. Homo islamicus

Homo economicus is "the human species in its capability to rationally decide, that is, essentially that people will act in their own best interest when making decisions."

2 In contrast,

The most important difference between Homo islamicus and Homo economicus is the assumption of altruism. As with other pre-capitalist systems, Islam is preoccupied with the welfare of a community where every individual behaves altruistically and according to religious norms. (Warde, 2000, p. 44)

Islamic economists are not comfortable or satisfied with Homo economicus as the behavioral model to capture or describe the essence of Homo islamicus. Monzer Kahf, a prominent Islamic economist, for example, offers the following explanation of consumer behavior in modern economics. It should be noted that Islamic economists are not monolithic in approaching these issues, theoretical or otherwise.

From this dual origin [i.e. economic rationalism and utilitarianism] emerged the theory of consumer behavior. This theory considers the maximization of utility as a postulated objective of the consumer. The utility to be maximized is that of a 'Homo economicus' whose sole goal is to achieve the highest level of economic satisfaction and whose only stimulus is the 'sense of money'. (Kahf, 1978, p. 16)

1 For various shades of positivism in this context, see Serrano, D., 2006. A Positivist Tradition in

Early Demand Theory. Journal of Economic Methodology, 13/1, 25-47; Boland, L., 1991. “Current Views on Economic Positivism,” in Greenaway, D., Bleaney, M. and Stewart, I. (eds) Companion to Contemporary Economic Thought, New York, Routledge, pp. 88-104.

2 Online dictionary, accessed at http://www.everything2.com/index.pl?node_id=671969 December

24, 2007.

The author then offers the following Islamic perspective about consumer behavior. Although postulated in the context of consumer behavior, these are generally applicable to Homo islamicus.

Muslim writers have viewed the foregoing development of rationalization and consumer theory with suspicion and have accused it of being a limited and one-dimensional aspect of human behavior. They claim that it is based on 'rigorous calculations directed with foresight and caution toward economic success,' as Max Weber stated it. But they do not agree with Max Weber that the alternative to 'economic rationalism' is 'the hand-to-mouth existence of the peasant' or 'the privileged traditionalism of the guild craftsmen.' Following Max Weber's proposition that rationalism is a cultural concept, Islamic rationalism is suggested as an alternative which is consistent with the Islamic values. (pp. 16-17)

According to Kahf, the following are the basic elements of this Islamic rationalism.

a. The concept of success: "The concept of success in Islam is always associated with moral values. ... Values, in Islamic glossary, implies a positive attitude toward life and other human beings. ... [T]he pursuit of economic progress is not a vice according to Islam. (pp. 17-18)

b. The Time Scale of Consumer Behavior: "Islam associates belief in the Day of Judgment and the life in the Hereafter inextricably with belief in God. This extends the Muslim's horizon of time beyond death. ... This has two effects as far as consumer behavior is concerned. First, the outcome of a choice of action is composed of two parts, its immediate effect in this life and its later effect in the life-to-come. Therefore, the utility derived from such a choice is the total of the present values of these two effects. Second, the number of alternative uses of one's income is increased by the inclusion of all the benefits that will be gained only in the Hereafter." (p. 19)

There are more elements in the above construction of Islamic rationalism, but only two relevant to this essay have been mentioned above. Islamic economists often do not have any separate or distinct goals for the producers of firms, except redefined in light of the Islamic rationalism. As Kahf elaborates:

Maximization of utility is the goal of the firm in the Islamic economy; this is understood in the light of the Islamic rationalism ...

M.N. Siddiqi in his 1972 book mentions several goals of the economic enterprise in Islam, which are:

1. the fulfillment of one's own needs in moderation; 2. meeting the needs of one's family; 3. provision for future contingencies; 4. provision for posterity; 5. social service and contribution to the cause of Allah. (p. 32)

While there are valid criticisms of the underlying assumptions of modern economics in general and neoclassical economics in particular, and much criticism has been offered from within the western context, there is room for alternative and broader understanding of human behavior (economic and otherwise) from an Islamic perspective. The Islamic concept of success or time scale of decision-making, as enunciated by Kahf, for example, can be further studied as propositions about economic behavior from an Islamic perspective. However, Islamic authors often push the altruistic model of Islamic economics to an utterly utopian level.

Consider the underlying assumption of Islamic altruism in the following perspective on mobilization of public resources during war. Sayyid Abul A'la Maududi (1903-1979) was one of

the most influential Muslim personalities of the 20th century and the founder of Jamaat-e-Islami, an Islamic political party in Pakistan. He is considered one of the pioneers of the global Islamic revivalist movement. He was very influential in the emergence of the Islamic finance and banking movement. His book Sood (interest), originally in Urdu, made an ardent case why interest is prohibited in Islam.

3 His position on meeting the non-profit, public needs of the government is as

following:

The third category of debt relates to the public sector. Governments sometimes have to incur public debt, without any profit connection, to meet unexpected contingencies or during a war. In modern economies, such needs are almost universally met through public debt, and, of course, through interest-bearing instruments. However, in an Islamic system, its complete opposite would be possible. As soon as the government would inform the public about such needs, the public and the institutions would spontaneously and instantly donate from their wealth and income to the public treasury. In a system that is interest-free, and also based on a Zakah system, people would be economically so prosperous and thus worry-free that they would not hesitate to offer a portion of their surplus to the government. If the need of the government is still not met, the government could seek loan and the people would be voluntarily willing to offer interest-free loan in large amount. If the need of the government is still not met, the government can take any of the following [three] steps to effectively address the need. ... (pp. 134-135)

Yes, during the time of the Prophet Muhammad, people offered almost everything for public causes that the Prophet had considered merit-worthy. The sacrifices of the people in that context were exemplary. However, a modern state or economy can't be built on such an altruistic model even though altruism could always be relevant in any social context. That's hard reality.

Self-Interest in the Qur'an

The Qur'an, the primary revelational source of Islam, approaches even the matter of success in the life hereafter (akhirah) in a business-like fashion.

O ye who believe! Shall I lead you to a tijarah (i.e., trade, business, commerce, bargain, deal) that will save you from a grievous Penalty (in the life hereafter)? ... (61:10)

The Qur'an presents the success in the life-hereafter as an exchange or trade in which the human being takes part on his own volition:

God has purchased [ishtara] of the believers their persons and their goods; for theirs (in return) is the garden (of Paradise): they fight in His cause, and slay and are slain: a promise binding on Him in truth, through the Law, the Gospel, and the Qur'an: and who is more faithful to his covenant than God? Then rejoice in the bargain (or trade; bai') which you have concluded: that is the achievement supreme. (9:111)

Since business, trade or exchange is a process based on people's self-interest, the Qur'an unambiguously acknowledges self-interest as a foundational aspect of human behavior. Notably, self-interest should not be equated with greed, avarice or selfishness. Rather, it simply means actions based on one's recognition of his own interest.

3 I have not come across any English translation of it. The excerpts below are from the Bengali

translation of the book: Sood o Adhunik Banking, Dhaka, Bangladesh, Adhunik Prokashoni, 1987.

If any one does a righteous deed, it ensures to the benefit of his own soul; if he does evil, it works against (his own soul). In the end will ye (all) be brought back to your Lord. (45:15)

If ye do good, ye do good for your own souls, and if ye do evil, it is for them (in like manner). (17:7)

Therefore, the Qur’an quite explicitly acknowledges self-interest as a foundational aspect of human behavior. Of course, this self-interest may be somewhat distinctive compared to the one associated with Homo economicus, because a Muslim is expected to be “calculating” in terms of not just the economic consequences of a decision, but also its potential consequences in the life hereafter. However, that is more of a personal matter between a man and God. It can’t be legislated, mandated or imposed.

In regard to self-interest, there is a common tendency to confuse it with selfishness, as reflected in Islamic economics literature. This has been partly due to misreading of Adam Smith in particular and led to unwarranted criticism of his ideas and works.

Adam Smith floated the idea that purely selfish motivation on part of the individual agents leads to socially optimal outcomes. (Zaman, A, 2005)

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... Current economic theory is firmly set in the mold structured by Adam Smith (1776) where the objective is to look into factors which affect the wealth (and hence power, prosperity) of nations considered as a whole. This makes economic striving into a rat race, where everybody strives to get ahead but net gain to society is zero among the wealthy. (Khalid, 2007)

The underlying basis of modern Western economic thought is that in reality man is selfish, groups act in self interest, indeed individual governments act in self interest, and even groups of countries (like the European Union) in the main act in their own interests -occasionally to the detriment of other countries. This is the reality of the world, but it is not a feature of Islamic economic theory. The standpoint is totally different; Islamic theory describes" how people, groups or governments should act in a perfect Islamic community; how the Koran expects them to behave. (Dar and Presley, 1999, p. 7)

Quite the contrary to the portrayal that Smith as a prophet of selfishness, his use of the word ‘selfish’ has been consistently in negative sense, and wherever he has used the term ‘self-interest” or explained his notion of “invisible hand”, it has not been in the negative sense of selfishness.

As the interest of nations so differently circumstanced is very different, so is likewise the common character of the people: in those of the former kind, liberality, frankness and good fellowship naturally make a part of that common character: in the latter, narrowness, meanness, and a selfish disposition, averse to all social pleasure and enjoyment. (Smith, 1937, p. 633)

A hospitality in which there is no luxury, and a liberality in which there is no ostentation, occasion, in this situation of things, the principal expenses of the rich and the great. But these, I have likewise endeavoured to show in the same book, are expenses by which people are not very apt to ruin themselves. There is not, perhaps, any selfish pleasure so frivolous of which the pursuit has not sometimes ruined even sensible men. A passion for cock-fighting has ruined many. But the instances, I believe, are not very numerous of people who have been ruined by a hospitality

4 cited from the draft available online, with permission of the author.

or liberality of this kind, though the hospitality of luxury and the liberality of ostentation have ruined many. (Smith, 1937, p. 859)

I would not, however, by all this be understood to mean that the one species of expense always betokens a more liberal or generous spirit than the other. When a man of fortune spends his revenue chiefly in hospitality, he shares the greater part of it with his friends and companions; but when he employs it in purchasing such durable commodities, he often spends the whole upon his own person, and gives nothing to anybody without an equivalent. The latter species of expense, therefore, especially when directed towards frivolous objects, the little ornaments of dress and furniture, jewels, trinkets, gewgaws, frequently indicates, not only a trifling, but a base and selfish disposition. (Smith, 1937, p. 331)

As the Qur’an points out that whatever good we do, we do so for our own benefit (17:7), Smith used another term, self-love, to enunciate the notion of invisible hand, where he mentioned one’s own advantage as the reference point.

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. (Smith, 1937, p. 14)

The behavioral Experience of Islamic Financial Institutions (IFIs)

In several respects, IFIs seem to be acting more like Homo economicus than Homo islamicus.

First, the Islamic discourse pertaining to IFIs either has an ambivalent position about time value of money or it is simply denied. As far as the ambivalent positions, for example, it is argued that Islam recognizes time value in the context of sales, but not in the context of loans:

Provisions of sales and loans in Islamic jurisprudence fall within a single concept of time where time is recognized as having an economic value. However, time may be treated differently in sales and loans for reasons we indicated above to the best of our knowledge. (Saadallah, p. 100)

In contrast, Mufti Muhammad Taqi Usmani, a leading Shariah expert much sought after by IFIs, does not believe in any time value of money. He says, "in Shari'ah, there is no concept of time value of money." (Usmani, p. xvi)

However, whether it is denied at the polemical level, the IFIs at the operational level have not been able to avoid the time value of money. Cost of short-term and long-term financing from such institutions does differ, which is a clear evidence of time value of money. (Zaman, et. al. 2001) Indeed, in modern commercial and economic context, interest is recognized as the time price of money, and its equivalent is found in Murabaha, cost-plus financing in purchase and resale. Abdullah Saeed clarifies:

Murabaha finance and the higher credit price involved therein has clearly shown that there is a value of time in murabaha based finance, which leads, albeit indirectly, to the acceptance of the time value of money. It has been conveniently ignored that accepting the time value of money logically leads to the acceptance of interest. [Saeed, p. 95]

Thus, even though at the polemical level it is argued that either there is no concept of time value of money in Islam or, if there is, it is limited to only sales transactions, IFIs, claiming to be based on the precepts of Islam, definitely deal with transactions – and overwhelmingly so – that reflect the time value of money. Merely suggesting and postulating that Homo islamicus does not recognize time value of money is not reflected in the behavior of IFIs.

Second, the relevant Islamic discourse idealizes profit-loss-sharing methods. The movement for Islamic banks and financial institutions originally began with identifying Mudaraba [investment partnership involving (a) active or managing and (b) silent or capital-contributing partners] and Musharaka [partnership in general] as the primary modes of operation, arguing that Islam believes in profit-loss-sharing (PLS and thus, risk-sharing). "The most important feature of Islamic banking is that it promotes risk-sharing between the provider of funds (investor) and the user of funds (entrepreneur)." (Iqbal, et. al., p. 28) Mufti Usmani echoes, "The real and ideal instruments of financing in Shari'ah are musharakah and mudarabah." (p. xv)

However, it is now clearly established that most of the Islamic banks have given up or marginalized those two (risk-sharing/PLS) modes, and have turned to the predominant mode of Murabaha, a mode that allows them to ensure that they avoid risk almost altogether in their transactions

and earn relatively high

return. These banks have found Mudaraba and Musharaka to be inoperable in the modern context. (Saeed, pp. 76-95; Aggarwal and Yousef, p. 106; Vogel and Hayes, p. 7) Thus, quietly they have disengaged from the PLS/risk-sharing modes and embraced Murabaha, which is described by many as "murabaha syndrome: "the strong and consistent tendency of Islamic banks and financial institutions to utilize debt-like instruments" particularly in external financing. (Yousef, p. 65)

Murabaha, which is the dominant method of investment of funds in Islamic banking is, for all practical purposes, a virtually risk-free mode of investment, providing the bank with a predetermined return on its capital. As the Council of Islamic Ideology Report recognises, in murabaha there is 'the possibility of some profit for the banks without the risk of having to share in the possible losses, except in the case of bankruptcy or default on the part of the buyer.' (Saeed, p. 87)

Islamic discourse often identifies “Islamic morality” and a conducive environment as requirements for the development of true Islamic economy and IFIs. This in itself has become a constraint against introducing PLS modes, creating a formidable gap between the rhetoric and reality:

Some Islamic proponents ... resort to the assumption that commercial standards of morality would improve once society is 'Islamized' along with the financial system. Greater belief in God's ultimate judgement, and regard for the interests of others, would reduce the system's propensity to foster moral hazard, and need for legal enforcement methods .... Indeed, some regard observation of higher ethical standards as a prerequisite for the introduction of PLS banking since: ‘as interest-free system can successfully function and really prove to be fruitful only subject to the condition that simultaneously with its introduction strenuous efforts are made on a wide front to inculcate in society such basic virtues as fear of God, honesty, trustworthiness, sense of duty and patriotism.’ … This reliance upon greater moral uprightness to make PLS banking workable prompts the charge of utopianism. (Mills and Presley, p. 28)

Some proponents of Islamic finance and banking are willing to push their utopianism to the level that there should not be any profit-motive on the part of Muslims, seeking service from Islamic Banks:

Applying this principle to the banker-customer relationship would mean that the customer should not be discouraged by the low profits or limited success of Islamic banks. ... In light of these three principles, Islamic bank customers are expected not to be guided by the profit motive. Instead, the reason for placing their monies with the Islamic banks is directed towards receiving a blessing from Allah and this action is considered the best way of managing the resources given by Allah. (Haron and Ahmad, p. 3)

However, such pious sentiments have not been effective or adequate either in mobilizing deposits at a sub-competitive rate or in introducing PLS modes.

Although religious sentiment has played a part in attracting deposits, Islamic banks have nevertheless offered competitive returns on investment deposits. Not only do they face competition for funds from other non-interest investment outlets (e.g., property) and other Islamic financial institutions, but they wish to attract the deposits of less zealous Muslims seeking a competitive return. The result has been strong pressure to provide returns at least commensurate with the conventional competition. This goal has generally been achieved, but at the expense of skewing investment policy towards short-term, secure and quick-returning outlets. (Mills and Presley, p. 50)

Apart from the ideological/theological context of IFIs, it is important to note that the phenomenal success and spread of these institutions have been greatly facilitated by solid demand from pious Muslims, who would like to have “shariah compliant” financial products and services – whatever that compliance means. Yet the IFIs have not been able to secure patronage of the customer base on the basis of sub-competitive performance or return. For the same reason, neither business has shown a great deal of interest in seeking financing under PLS modes, nor are the IFIs that enthusiastic in promoting those modes.

Whilst pious Muslims have been eager to make deposits, businesses have been more cautious in requesting unfamiliar forms of Islamic partnership, which may involve a grater degree of bank supervision than is deemed welcome. When this is combined with poorly developed equity markets, Islamic banks have been forced to hold more cash than their interest-based counterparts. (Mills and Presley, p. 51)

The Problems with Behavioral Assumption in Islamic Economics and Finance

So is there no such thing as Homo islamicus? Islamic economists argue that there is. However, as explained in this paper, it pertains to a normative world, where people seek certain ideals motivated by self-interest as enunciated in the Qur’an. However, the Qur’anic values meant for the entire humanity are to be upheld as ideals. They are not necessarily a positive basis for establishing a system.

For example, respecting other people’s property rights is a fundamental Islamic value. However, does that mean that Islam teaches people to keep the door of their shop or home unlocked and unattended? Not so. Believers are supposed to be guided by Taqwa (God-consciousness) in every step of their lives. Does that mean that there is no need for any accountability or checks and balances in the system to establish the foundations for mutual protection of rights and duties? Not so. Sincerity and dedication to work are fundamentally important from Islamic viewpoint. Does that mean that there should not be any sort of supervision at work? Not so.

Because people can be forgetful, Islam reminds them as following:

Narrated Salim's father: The Prophet said, "Do not keep the fire burning in your houses when you go to bed."

5

Narrated Jabir bin 'Abdullah: Allah's Apostle said, "(At bedtime) cover the utensils, close the doors, and put out the lights, lest the evil creature (the rat) should pull away the wick and thus burn the people of the house."

6

These are relevant wisdom and advice. However, a system can’t be built on them, even though the quality and strength of a system can definitely be improved, if such wisdom and advice are adopted and upheld.

The fact of the matter is that while Islam teaches and demands a God-conscious approach to life, it also acknowledges innate human nature (fitrah):

Narrated Abu Huraira: Allah's Apostle said, "Every child is born on Fitra (innate nature given by God)."

7

Homo islamicus is based on the norms Islam seeks in human beings. This is the transformative role of Islam. As it is aptly articulated by an Islamic economist: “Because of the claims to positive status of western economics, the issue of whether Islamic economics is positive or normative is often debated in the literature … I would assert that the answer is neither – Islamic economics is transformative. It seeks to change society, and all individuals within that society, towards an ideal.”

8

However, it must be consistent with fitra or human nature, which must also be taken into consideration in a positivist sense.

Narrated Anas bin Malik: Allah's Apostle said, "If Adam's son had a valley full of gold, he would like to have two valleys, for nothing fills his mouth except dust. And Allah forgives him who repents to Him.”

9

The above narration helps us comprehend the underlying human behavior, if left unmodified or unaffected by the transformative role of Islamic ethics and morality. While Islam teaches to live modestly in this world and seek moderation in everything, the innate human nature is reflected in one of the fundamental assumptions of economics about human nature: unlimited wants.

Islam desires its adherents to rise above greed.

Narrated Hakim bin Hizam: I asked the Prophet (for some money) and he gave me, and then again I asked him and he gave me, and then again I asked him and he gave me and he then said, "This wealth is (like) green and sweet (fruit), and whoever takes it without greed, Allah will bless it for him, but whoever takes it with greed, Allah will not bless it for him, and he will be like the one who eats but is never satisfied. And the upper (giving) hand is better than the lower (taking) hand."

10

5 Bukhari, Sahih al-Bukhari, Vol. 8, Book 74, #308.

6 Bukhari, Sahih al-Bukhari, Vol. 8, Book 74, #310.

7 Bukhari, Sahih al-Bukhari, Vol. 2, Book 23, #441.

8 Zaman, Asad. “Islamic Economics: A Survey of Literature,” MPRA Paper No. 11024, October

2008, http://mpra.ub.uni-muenchen.de/11024/1/MPRA_paper_11024.pdf, accessed November 10, 2010. 9 Bukhari, Sahih al-Bukhari, Vol. 8, Book 76, #447.

10 Bukhari, Sahih al-Bukhari, Vol. 8, Book 76, #448.

However, it also acknowledges greed as part of the underlying human nature, as indicated in the narration about the valley of gold above. The Qur’an also acknowledges the same in the behavior of men (or people):

If a wife fears cruelty or desertion on her husband's part, there is no blame on them if they arrange an amicable settlement between themselves; and such settlement is best; even though men's souls are swayed by greed. But if ye do good and practise self-restraint, Allah is well-acquainted with all that ye do. (4:128)

So fear Allah as much as ye can; listen and obey and spend in charity for the benefit of your own soul and those saved from the covetousness of their own souls,- they are the ones that achieve prosperity. (64:16)

Fair in the eyes of men is the love of things they covet: Women and sons; Heaped-up hoards of gold and silver; horses branded (for blood and excellence); and (wealth of) cattle and well-tilled land. Such are the possessions of this world's life; but in nearness to Allah is the best of the goals (To return to). (3:14)

While Muslims are supposed to mould their lives and conduct based on Islamic values and norms, a system and analytical model for such a system require that the human behavior is approached in a positivist sense.

According to Timur Kuran, a major flaw of Islamic economics is with its assumptions.

The primary role of the [behavioral norms of Islam] is to make the individual member of Islamic society, Homo islamicus, just, socially responsible, and altruistic. Unlike the incorrigibly selfish and acquisitive Homo economicus of neoclassical economics, Homo islamicus voluntarily foregoes temptations of immediate gain when by doing so he can protect and promote the interests of his fellows. (Warde, p. 44)

This is like suggesting that in a world of scarcity our problems of making decisions or choices are solved by our selfless behavior.

Richards and Waterbury write: ‘The Islamist position is that harmony and social order will be achieved by the promotion of individual virtue – by individuals’ altering their behavior to conform with Divine Revelation.’ Insofar as God has created everything in the right amounts to meet human needs, scarcity is an unnatural condition caused by greed and avarice. Under normal circumstances, altruism, sobriety and virtue are expected, all the more so since the human being is God’s ‘Khalifah’, or vicegerent on earth (2:30) and the resources at his disposal are only a temporary trust (57:7).

In other words, what is ‘economically correct’ is not ‘Islamically correct’, and vice versa. Where one approach sees man as inherently selfish, the other considers him altruistic and virtuous. For economists, Islam does not have a realistic view of human behavior; for Islamists, economics is founded on the principle of individual self-interest and as such, it glorifies greed and is immoral. (Warde, p. 45)

However, as already discussed above, the Qur’an does acknowledge self-interest as a fundamental dimension of human nature. While Islam does set the norm and guidance as to how human beings best serve their self-interest by heeding its call and molding their lives in accordance with divine guidance, the Qur’an is explicit in helping us to understand ourselves – our innate nature.

This also helps us understand why PLS models can’t be made the dominant mode of transaction in Islamic finance and banking, because the kind of profit-loss and risk-sharing PLS modes envision is not consistent with human nature. (Farooq, 2007) It also explains why the presumed Homo islamicus of Islamic finance and banking behaves quite like Homo economicus.

However, the reality is that these two conceptions of human nature should not be treated as alternatives.

In reality however, the gap between Homo economicus and Homo islamicus has proved easy to bridge. For one thing, there is an original area of convergence in that, in some respects, ‘Homo islamicus is a modern incarnation of ‘the Protestant ethic’: an entrepreneur who works hard for material gain and is spiritually pure will be rewarded here on earth in the form of shared profits and social recognition’. In certain Islamic communities, sanctification through hard work is at the core of religion. ...

As for modern Islamic economics, distinctions should be drawn between early and later writings on the one hand, and between abstract, theological treatises and more pragmatic, policy-oriented writings on the other hand. The well-reasoned critique by Timur Kuran refers primarily to writings of the 1976-81 period. These were the early years of modern Islamic economic, when economic Islam was mostly theoretical (the Pakistani and Iranian experiments had barely started). The confident tone of the literature owes as much to the untried nature of the solutions proposed as to the euphoric mood of the years following the oil booms, when a New International Economic Order seemed within reach. As the abstract views collided with a harsh reality, Islamic economics became more pragmatic. ...

In sum, far from being inherently contradictory and irreconcilable, Islamic and conventional economics differ primarily to the extent that the former adds and ethical and social dimension that the latter usually lacks. (Warde, p. 46)

Homo islamicus, adhering to the guidance of Islam, brings distinctive moral and ethical dimension to the economic sphere of life.

…its agents act under the guidance of norms drawn from the traditional sources of Islam… These norms ‘command good’ and ‘forbid evil’… The intended effect of the norms is to transform selfish and acquisitive Homo economicus into a paragon of virtue, Homo Islamicus. Homo islamicus acquires property freely, but never through speculation, gambling, hoarding, or destructive competition. (Kuran, 1995, p. 159)

However, Homo islamicus, a normative construct does not automatically cause speculation, gambling, hoarding, or other unhealthy economic and business practices to disappear. A fundamental problem lies in the use of this Homo islamicus in understanding and developing a model or system. In this regard, a key predicament of Islamic economics and finance is that originally the movement began with revivalist ethos, where economic considerations were not important in themselves. Timur Kuran explains it this way:

... The main purpose of Islamic economics [based on the articulations of its advocates] is not to improve economic performance. Notwithstanding the claim that Islamic economics provides a superior alternative to secular economic doctrines of our time, its real purpose is to prevent Muslims from assimilating into the emerging global culture whose core elements have a western pedigree. (1996, p. 438)

However, it might be easier to artificially create a semblance of distinctiveness than to engineer or deliver superior or competitive performance. As the realities of the ground – what is – are encountered, “what should be” does not become a substitute for “what is.” Conventional economics generally treats positive and normative economics in a dichotomous way, where the effort to understand the positive foundations of economic behavior has led to ignoring the normative aspects to such an extent that the latter have been relegated into insignificance. Indeed, one could argue that with an overemphasis on positive economics, the Homo economicus has been elevated to “what should be.” It is no coincidence that rampant consumerism of the developed countries of the West indicates that materialistic self-interest has not remained a foundation for positive economics, but seems to have been idealized at the normative level.

In contrast with the tendency of conventional economics to treat positive economics in such a way, as if “what is “ is “what should be,” it seems that Islamic economics and finance has constructed itself treating “what should be” as “what is.” The result is predictable and understandable that Islamic economics has evolved as something “utopian”. (Asutay 2007), As the cases of IFIs illustrate, Homo islamicus, both from the side of the customers and the serving institutions, seems to behave like the Homo economicus.

One important limitation of the behavioral assumptions of conventional economics is that while it does recognize normative dimensions, in its construct of the Homo economicus it is completely static. It does not take into account the potential for human beings to transform – morally, ethically and behaviorally – into something better or higher. This ethical dimension is missing from conventional economics. The relevance, if any, of Islamic economics primarily lies in that transformation aspect of Homo economicus. However, there must be baseline behavioral assumption about Homo economicus from which such transformation must occur. Islamic economics seems to ignore that baseline construct.

Conclusion

Overemphasizing the distinctiveness of Islamic economics and finance at the positive level may be a serious impediment, as reflected in the gap between the rhetoric and reality of IFIs. Building a functional and effective social system requires appropriate understanding of human behavior. In this context, there is a role for both normative standard toward which Islam calls mankind and the understanding of human behavior as human nature from a positivist angle. The Qur’an does provide relevant guidance in understanding human nature and behavior. However, such understanding can’t be purely deductive. Rather, relevant theoretical constructs must be developed and tested empirically. When these two aspects become complementary, a better model in terms of its efficacy and its high ethical and spiritual standards may become possible, through which human behavior can transform to the desired ideal.

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