Palgrave CIBFR Studies - OPENMAKTABA

Palgrave CIBFR Studiesin Islamic Finance

Series EditorsNafis Alam

Sunway University Business SchoolSunway UniversitySelangor, Malaysia

Syed Aun R. RizviSuleman Dawood School of Business

Lahore University of Management SciencesLahore, Pakistan

The Centre for Islamic Business and Finance Research (CIBFR) is a globalcenter of excellence for developing Islamic business and finance as ascientific academic discipline and for promoting Islamic financial products,monetary and fiscal policies, and business and trade practices. Based at TheUniversity of Nottingham campus in Malaysia, CIBFR looks at the multi-dimensional aspects of Islamic business, cutting across the major themes ofIslamic economics, Islamic finance and the Halal market. True to thepioneering nature of the research CIBFR undertakes, the PalgraveCIBFR Series in Islamic Finance offers empirical enquiries into key issuesand challenges in modern Islamic finance. It explores issues in such variedfields as Islamic accounting, Takaful (Islamic insurance), Islamic financialservices marketing, and ethical and socially responsible investing.

More information about this series athttp://www.springer.com/series/15190

Nafis Alam • Syed Aun R. RizviEditors

Islamic EconomiesStability, Markets and Endowments

EditorsNafis AlamSunway University Business SchoolSunway UniversitySelangor, Malaysia

Syed Aun R. RizviSuleman Dawood School of BusinessLahore University of ManagementSciences

Lahore, Pakistan

Palgrave CIBFR Studies in Islamic FinanceISBN 978-3-319-47936-1 ISBN 978-3-319-47937-8 (eBook)DOI 10.1007/978-3-319-47937-8

Library of Congress Control Number: 2017930596

© The Editor(s) (if applicable) and The Author(s) 2017This book was advertised with a copyright holder in the name of the publisher in error, whereasthe author holds the copyright.This work is subject to copyright. All rights are solely and exclusively licensed by thePublisher, whether the whole or part of the material is concerned, specifically the rights oftranslation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction onmicrofilms or in any other physical way, and transmission or information storage andretrieval, electronic adaptation, computer software, or by similar or dissimilar methodologynow known or hereafter developed.The use of general descriptive names, registered names, trademarks, service marks, etc. in thispublication does not imply, even in the absence of a specific statement, that such names areexempt from the relevant protective laws and regulations and therefore free for general use.The publisher, the authors and the editors are safe to assume that the advice and informationin this book are believed to be true and accurate at the date of publication. Neither thepublisher nor the authors or the editors give a warranty, express or implied, with respectto the material contained herein or for any errors or omissions that may have been made.The publisher remains neutral with regard to jurisdictional claims in published maps andinstitutional affiliations.

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This Palgrave Macmillan imprint is published by Springer NatureThe registered company is Springer International Publishing AGThe registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

CONTENTS

1 Islamic Economics’ Contribution to ConventionalEconomics 1Nafis Alam and Syed Aun R. Rizvi

2 Islamic Financial Planning Towards Sustainable Eco-Growth 9Mohd Ma’Sum Billah and Buerhan Saiti

3 Remittances, Political Stability and Economic Development:Empirical Evidence from OIC Countries 29Mohsin Ali and Wajahat Azmi

4 Mitigating Shadow Economy Through Dual Banking SectorDevelopment in Malaysia 41Muzafar Shah Habibullah, Abdul Hamid Baharom,Badariah Haji Din and Fumitaka Furuoka

5 Islamic Common Market an Alternative Model toGlobalization 63Mohd Ma’Sum Billah

v

6 Issues Deterring the Continued Growth of Awqaf inBangladesh: The Way Forward to Its Development andWidening the Scope of Its Benefits 79Abu Umar Faruq Ahmad and Muhammad Fazlul Karim

7 Money in Islamic Banking System 99Bedjo Santoso, Khaliq Ahmad and Buerhan Saiti

Index 127

vi CONTENTS

CONTRIBUTORS

Abu Umar Faruq Ahmad Universiti Brunei Darussalam (UBD),Gadong, Brunei Darussalam

Khaliq Ahmad Institute of Islamic Banking and Finance (IIiBF),International Islamic University Malaysia (IIUM), Kuala Lumpur, Selangor,Malaysia

Nafis Alam Sunway University Business School, Sunway University,Selangor, Malaysia

Mohsin Ali International Centre for Education in Islamic Finance(INCEIF), Kuala Lumpur, Malaysia

Wajahat Azmi International Centre for Education in Islamic Finance(INCEIF), Kuala Lumpur, Malaysia

Abdul Hamid Baharom International Centre for Education in IslamicFinance (INCEIF), Kuala Lumpur, Malaysia

Mohd Ma’Sum Billah Islamic Economics Institute, King Abdul AzizUniversity, Jeddah, Kingdom of Saudi Arabia

Badariah Haji Din College of Law, Government and InternationalStudies, Universiti Utara Malaysia, Selangor, Malaysia

Fumitaka Furuoka Asia Europe Institute, University of Malaya,Kuala Lumpur, Malaysia

Muzafar Shah Habibullah Faculty of Economics and Management,Universiti Putra Malaysia, Selangor, Malaysia

vii

Muhammad Fazlul Karim Ahmad Ibrahim Kulliyyah of Laws (AIKOL),International Islamic University Malaysia (IIUM), Selangor, Malaysia

Syed Aun R. Rizvi Suleman Dawood School of Business, LahoreUniversity of Management Sciences, Lahore, Pakistan

Bedjo Santoso Agung Islamic University (UNISSULA), Semarang,Indonesia

Buerhan Saiti Institute of Islamic Banking and Finance (IIiBF),International Islamic University Malaysia (IIUM), Kuala Lumpur, Malaysia

viii CONTRIBUTORS

LIST OF FIGURES

Fig. 4.1 Estimates of size of shadow economy in Malaysia 49Fig. 7.1 Volatility of world currencies, 1880–1995 111

ix

LIST OF TABLES

Table 2.1 Right to wealth from capitalism, socialism, and Islamicperspectives 14

Table 2.2 Main steps in financial planning process 19Table 2.3 Major components of financial planning 20Table 3.1 Descriptive statistics 34Table 3.2 Remittances, political stability, and economic development 35Table 3.3 Remittances, political stability, and economic development 36Table 4.1 Results of augmented Dickey–Fuller unit root tests 50Table 4.2 Results of long-run model for shadow economy in Malaysia 52Table 7.1 Mafsadah of fiat money 108Table 7.2 Arguments and rebuttals regarding the weakness

of gold as money 110Table 7.3 Gold holder countries 117Table 7.4 Deductive analysis 118

xi

CHAPTER 1

Islamic Economics’ Contribution toConventional Economics

Nafis Alam and Syed Aun R. Rizvi

Abstract This chapter presents an overview of the key elements of Islamiceconomics and tracks its contribution to conventional economics. Thechapter draws upon particular features of Islamic economics and how theycan provide a blueprint for overcoming the chaos of the global economy.It also attempts to identify the role of players, from individuals to govern-ments, within an Islamic economic system.

Keywords Islamic economy � Socialist � Economic thoughts

Economic systems across the globe are expected to be designed, evaluated,and implemented with reference to some goal for economic activity.Marshall (1890) defines economics as follows: “Political economy or

N. Alam (*)Sunway University Business School, Sunway University, Selangor, Malaysiae-mail: [email protected]

S.A.R. RizviSuleman Dawood School of Business,Lahore University of Management Sciences, Lahore, Pakistane-mail: [email protected]

© The Author(s) 2017N. Alam, S.A.R. Rizvi (eds.), Islamic Economies,Palgrave CIBFR Studies in Islamic Finance,DOI 10.1007/978-3-319-47937-8_1

1

economics is the study of mankind in the ordinary business of life; itexamines that part of individual and social action which is most closelyconnected with the attainment and with the use of the material requisitesof wellbeing. Thus it is on the one side a study of wealth; and on the other,and more important side, a part of the study of man.” One interpretationof this definition would be that the main subject matter of economics,whether Islamic, capitalist, or socialist, is the allocation of scarce resourcesto produce and distribute goods and services in order to meet the needsand wants of individual human beings. But a problem arises from thescarcity of resources versus the unlimited wants of human beings, creatingeconomic imbalances in society.

Islamic economics can be defined as the knowledge and application ofinjunctions and rules of the Shariah (Islamic Jurisprudence) that preventinjustice in the acquisition and disposal of material resources in order toprovide satisfaction to human beings and enable them to perform theirobligations to Allah (God) and society. Islamic economics is founded onthe revealed philosophy of life as expounded by the Holy Prophet(PBUH). The philosophy of Islamic economics is based on the threefollowing fundamental tenets:

Tawhid: a comprehensive concept that implies complete submissionof oneself to the One and Only Unique Being, Creator,Sustainer, Owner of Everything;

Risalah: an institution of Prophethood, revealed guidance from Allahin all dimensions of human life. It demonstrates practicerecorded in the form of the Sunnah;

Akhirah: the afterlife, for accountability and for receiving the outcomeof all deeds, including economic activities, in the eternal life.

The first and third tenets require all economic activities to be in con-formance with Islamic norms and values as revealed through the institu-tion of the Risalah. Hence, Islam considers the economic activities ofhumans as one aspect of the fulfillment of their responsibilities on Earth.The more people are involved in economic activities, the better they canbe in a moral sense, provided they keep their life in balance. Piety isconsidered a positive function of economic productivity. The more piousone is, the more productive one should be, particularly in view of therequirement to balance life between economics and spirituality. This

2 N. ALAM AND S.A.R. RIZVI

constitutes the direct relationship between Islam and economics andrepresents the birth of Islamic economics.

Muslim economists regard the Quran as the first Islamic doctrine.Quranic verses clearly explain the prohibition of riba (“usury”), the obli-gation of zakat and its beneficiaries, and the permission to do trade.Meanwhile, the hadith elaborates in detail the issues that have generallybeen explained in the Quran, for example, how trade should be conductedand the definition and categories of riba. In the event that there is nomention either in the Quran or the Hadith (Sunnah) of certain issues orhukum (cases that did not happen during the Prophet’s time), then theparticular issue will be posted to the ijma, that is, the Muslim learnedscholars. Laws derived from ijma are called fatwas. The edicts bring Islamup to date with current conditions.

One of the purposes of Islamic economics, for some of the early writers,was “to identify and establish an economic order that conforms to Islamicscripture and traditions” (Kuran 1997, p. 82). This philosophy was based onthe basic sources of Islam (Quran and hadith), which consist of a number ofeconomic teachings and principles applicable to economic life and beingMuslim, and Muslim are required to practice them. It is important to high-light that the evolution of Islamic economics over the last fourteen centuriesfollowed a course of development similar to that seen by the main disciplineof conventional economics. Even though the term Islamic economics is aproduct of the twentieth century, the concept of Islamic economics hasexisted since the advent of Islam and has undergone refinement with thepassage of time. It gradually developed as an interdisciplinary subject. One ofthe early moments for understanding Islam and Islamic economics, whatmay be regarded as the central theme, can be found in the Quran, 5:120,which states that the dominion of the cosmos belongs to God (Allah) andtherefore we are but His vice-regents (or trustees) of all this dominion,whether we apparently own some part of this individually, jointly, or other-wise. Naturally, therefore, all economic and financial activities that couldeffect and regulate our lives must be driven by this key principle.

Many verses of the Quran contribute to laying the groundwork for anIslamic understanding of the principles of economics and finance, viewinghuman beings as individuals or collectively as a society or as a nation.These principles form the Islamic law that is commonly known as Shariah(the body of Islamic law based on the Quran and the Sunnah). IbnKhaldun’s (fifteenth-century) framework provided a summary of the

1 ISLAMIC ECONOMICS’ CONTRIBUTION TO CONVENTIONAL ECONOMICS 3

interdisciplinary dynamic model for an Islamic socioeconomic system thatcan be summarized as follows:

The strength of the sovereign (al-mulk) does not become consumed exceptby implementation of the Shariah; the Shariah cannot be implementedexcept by a sovereign (al-mulk); the sovereign cannot gain strength exceptthrough the people (al-rijal); the people cannot be sustained except bywealth (al-mal); wealth cannot be acquired except through development(al-‘imaran); development cannot be attained except through justice (al-‘adl); justice is the criterion (al-mizan) by which God will evaluate mankind;and the sovereign is charged with the responsibility of actualizing justice.

In an Islamic economy, individuals enjoy freedom within the boundary ofspiritual and moral values. This “freedom” is realized as follows:

a. Activities such as usury, monopoly, or hoarding are forbidden asthey would hinder the realization of the ideals and values ofIslam.

b. The state is allowed to intervene to protect and safeguard thepublic interest by limiting the freedom of individuals in theactions they perform. Based on the principle of limited ownershipthat is derived from the Quran, man is neither the absolute ownernor the total possessor of the earth and its resources. He does nothave the right to possess as much as he desires or to obtainmaterial wealth in any way he may choose. Because wealthbelongs to everyone, each individual is a guardian of publictrust. Consequently, a person’s ownership of wealth is limitedand is to be employed for public welfare.

Islamic economics considers overall human well-being to be the endproduct of the interactions of several factors, such as economic, social,moral, political, demographic, and historical factors, in such a manner thatnone takes precedence over the others.

The fact that Islamic economics is bound to religious faith facilitates theachievement of social and economic change leading to the betterment ofhumanity. It is also linked to fair redistribution, since the Holy Qurandeclares, “Deal justly, that is nearer to your duty.” Therefore, an economyon the basis of Islamic guidelines assures effectiveness and proper execu-tion. When participants within the economic system are more responsive to


the guidelines, a more Islamized economic system will emerge. Islamiceconomics serves both the individual and public interest since it does notignore the interest of the community and, unlike a socialist system, doesnot ignore the needs of the individual. An Islamic economic policy isconcerned with both interests and seeks to strike a balance between thetwo. Islamic economics serves to benefit material welfare and spiritualwelfare. It considers individuals within their economic activities as piousand dutiful—as long as their activities are planned and oriented to the causeof Allah. Moreover, individuals are gratified and rewarded to the extentthat their activities are beneficial to humanity.

In the system envisaged by Islamic economists, the individual is guidedby a set of behavioral norms derived from the Quran and the Sunnah. Theprimary role of the norms is to make the individual a useful member ofIslamic society, an individual who is just, socially responsible, and altruis-tic. The ultimate objective of an Islamic economy must therefore be toestablish social justice. This can be achieved by maximizing the desirableuse of resources, allowing others the freedom to work and earn a living,meeting the needs of those less well-off, and fostering human dignity.

In an Islamic economy, state intervention is necessary to restrain indi-vidual greed so that social welfare is maximized and legitimate Islamicpolicy instruments are implemented so that people may fulfill their socialduties. The state exists in the market as a producer, owner, and distributorof natural resources as well as a controller who makes sure that no moralrules are violated in the market.

The government’s role in an Islamic economy is vital for the smoothfunctioning of the economy. As mentioned earlier, the ultimate objectiveof the Islamic economy is to establish social justice. The government mayinterfere when the market fails to meet social objectives through thevarious policies at its disposal. Both Islamic and conventional approachesto economics provide a rationale for government participation in theeconomy. Keynes, an advocate of government intervention, argued thatthe government must play a definite role in increasing greater employmentopportunities through an increase in the level of government expendi-tures, which would in turn increase the level of income, savings, andinvestment in the economy (Jalaluddin 1991). An Islamic governmentmust formulate policies that can contribute to the positive development ofeconomic functions in society. Among its major goals are the eradicationof poverty, job creation, the maximization of economic growth, theestablishment of an equitable distribution system and social-economic


justice, and the creation of an environment conducive to economic activ-ity. Most importantly, the government should see to it that the welfareof the ummah is well taken care of, according to the values and codesof Islam. The key characteristic of Islamic economics is that economicand financial activities should be linked to real economic sector activ-ities and equity-based structures backed by tangible assets should beencouraged instead of debt-based ones when it comes to investment,where in the conventional world securities may not necessarily bebacked by real assets.

Though some economists believe that Islamic economics overlaps withconventional economics when it comes to using scarce resources to satisfyhuman wants and needs, it differs significantly in the way it defines humanneeds and wants and how to satisfy them ethically using available resources.Islam not only recognizes material needs but also looks after the spiritual,moral, and social needs of human beings. In Islamic economics, human well-being is not defined from a hedonic perspective; instead, it is defined from aspiritual, moral, and social perspective. Even though Islamic economicsgenerally comes down on the side of free markets, it does provide certainfilters to avoid the madness and unfairness of markets by avoiding gharar(speculation) and riba (interest). Thus, the answer to “what to produce” isdetermined by a comprehensive understanding of human nature and needs,not by self-interest.

If we look at the matter from a microeconomic perspective, in a profit-maximizing economy, all realistic market forms, such as monopoly oroligopoly, are possible, and these will lead to different outcomes of com-petition, crowding out producers of similar goods and controlling certainmarket segments. However, in an Islamic economy, there will be a suffi-cient marketplace for many producers to supply their goods and serviceswithin the same segment. The market form will be polypolistic instead ofmonopolistic. This can be attributed to the fact that a single producer withhis limited economic goals has no motivation to capture the entire market(because ends and wants are limited). On the macroeconomic side, themarket deals with the process of income determination at the level of theeconomy as a whole, which is connected with overall economic growth. Inan Islamic economy, the level of income is determined by the level ofaggregate expenditure. But since there are differences in the character andlevel of expenditure between an Islamic economy and an economy popu-lated with human beings with unlimited wants, the sectoral structure andthe growth process must be different.


Instead of looking at the commonalities between the two streams ofeconomics, one researcher in the field believes that Islamic economicthought served as the backbone of modern economics. David Graeber,an anthropologist who has taught at Princeton and the London School ofEconomics, noted that Adam Smith “got most of his best ideas and bestlines from medieval Islam,” specifically from Shariah law. Another refer-ence relevant to the present discussion involves Islamic thinker al-Ghazaliwho, around the year 1100, “highlighted the importance of the division oflabor” using “the example of a needle factory to illustrate his point.” Sevencenturies later, Adam Smith used the same example of a needle factory toillustrate the same idea, the division of labor, but without citing al-Ghazali(http://www.washingtonsblog.com/2016/05/father-western-economics-took-best-ideas-sharia-law.html).

Another scholar, IbrahimM.Oweiss, Associate Professor Emeritus in theDepartment of Economics at Georgetown, noted that another of Smith’sIslamic sources, and perhaps the most important, may have been IbnKhaldun. He acknowledged that Khaldun’s “significant contributions toeconomics, however, should place him in the history of economic thoughtas a major forerunner, if not the ‘father,’ of economics, a title which has beengiven to Adam Smith, whose great works were published some three hun-dred and seventy years after Ibn Khaldun’s death.” He goes on to add thatIbn Khaldun planted the germinating seeds of classical economics, whetherin production, supply, or cost, and that he also made pioneering contribu-tions in the study of consumption, demand, and utility, which are regarded asthe cornerstones of modern economic theory. Oweiss further records that itwas Khaldun, not Adam Smith, who first proposed the idea that laborcontributes to the build-up of the “wealth of a nation” and made the casefor a free economy and for freedom of choice.

In a nutshell, an Islamic economic systemholds that adherence to the rulesspecified by Shariah law will generate widespread economic benefits. Thesebenefits include, inter alia, a strong work ethic, honest business dealings,efficient production, nonextravagant consumption, redistributive justice,productive circulation of accumulated surplus with full participation in risksand rewards, full compliance with the terms of contracts, and maximumcooperation in economic activities with complete freedom of contracts(within the bounds of Shariah). Once members of a society fully internalizeIslamic values and act accordingly, a healthy, dynamic, andgrowing economywill emerge in which all possible sources of maldistribution of income andwealth are eliminated. In conclusion, an Islamic economic system has the


http://www.washingtonsblog.com/2016/05/father-western-economics-took-best-ideas-sharia-law.html

http://www.washingtonsblog.com/2016/05/father-western-economics-took-best-ideas-sharia-law.html

following features. First, it ensures everyone has equal access to naturalresources and a means of livelihood. Second, it ensures that each individualhas equal opportunity in all matters. Third, it ensures that the markets areregulated so that justice can be attained. Fourth, it ensures that wealthtransfer takes place from those who are more able to those who are less ableto work in accordance with the rule of Shariah. These features add value tothe existing global economic system, which is tainted by greed and specula-tion, occasionally bringing chaos to the global economic and financialsystem.

REFERENCES

Jalaluddin, A. K. M. (1991). The role of government in an Islamic economy. KualaLumpur, Malaysia: A. S. Noordeen Publication.

Kuran, T. (1997, Summer). The genesis of Islamic economics: A chapter in thepolitics of Moslem identity. Social Research, 64(2), 1–22.

Marshall, A. (1890). The principles of economics. McMaster University Archive forthe History of Economic Thought. London: Macmillan.

Prof Nafis Alam is currently Professor of Finance at Sunway University BusinessSchool, Sunway University. He previously served as an Associate Professor ofFinance at the Nottingham University Business School (NUBS) in the Universityof NottinghamMalaysia Campus (UNMC). He also served as the founding directorof Center for Islamic Business and Finance Research at UNMC.

Syed Aun R. Rizvi is an Assistant Professor at Suleman Dawood School ofBusiness at Lahore University of Management Science (LUMS), Pakistan.


CHAPTER 2

Islamic Financial Planning TowardsSustainable Eco-Growth

Mohd Ma’Sum Billah and Buerhan Saiti

Abstract Financial planning is undeniably important from an Islamicperspective; Muslims must be rich not only spiritually but also materially.This chapter discusses the importance, components, and processes ofIslamic financial planning and the means of achieving the goals set outin a financial plan. Three major instruments, such as wasiyah(bequest),waqf (endowment), and hibah (gift), are recommended as financial pro-ducts used by financial institutions and professional organizations that canhelp Muslims meet their individual needs when it comes to managing andenhancing their financial plans.

Keywords Shari’ah � Islamic Finance � Planning � Sustainability

The original version of this chapter was published on several social media platforms.

M.M. Billah (*)Islamic Economics Institute, King Abdul Aziz University, Jeddah,Kingdom of Saudi Arabiae-mail: [email protected], www.drmasumbillah.blogspot.com

B. SaitiInstitute of Islamic Banking and Finance (IIiBF), International Islamic UniversityMalaysia (IIUM), Kuala Lumpur, Malaysiae-mail: [email protected]


9

2.1 INTRODUCTION

While undertaking financial planning, we need to identify our currentresources, financial goals, and means of achieving them in the most effectiveand efficient manner. There are many reasons why financial planning isimportant to everyone, rich and not-so-rich alike.

First, proper financial planning allows us to identify what is mostimportant and meaningful in our lives. Once we do this, we can manageour finances and lives around those plans so that we do not end up on thewrong wall. Second, although our wants are infinite, unfortunately, ourresources are limited. Financial planning helps us to realize and under-stand that there are always tradeoffs or sacrifices to be made. Third,financial planning leads not just to financial enrichment but material,emotional, and mental enrichment as well. Without financial burdens,we can focus on more important aspects of our lives, like our health, ourrelationships with family members and friends, and devoting our time tocharitable causes. Last but not least, another important goal in financialplanning is to acquire a deep sense of security in our lives. We want to feelassured that no matter what happens, our goals can be achieved, either forourselves or for our loved ones.

Islamic financial planning is a holistic concept that is undergoing refor-mulation and has a relevancy to Islamic financial marketing, which wastraditionally defined by Ibn Abu Yusuf, Ibn Taimiyyah, and Ibn Khaldunas the creation, development, and delivery of unique customer-satisfying,competitive products and services offered at a profit to organizations andcustomers in light of Islamic teachings. In contrast, it is conventionallydefined as the process whereby an individual’s personal and financial goalsare achieved through the development and implementation of a compre-hensive financial plan.

Islam is a comprehensive, integrative, and holistic religion thatgoverns all aspects of life, major and minor, personal and social,spiritual and material, and relates this worldly life to the hereafter.This means that we need to practice Islam while engaging in businessand economic activities. Muslims are encouraged to plan for their life,devote effort to achieving their goals, and then ask for help fromAllah (swt). The final stage is tawakal (putting trust), which is one’sdestiny as bestowed by Allah (swt). Thus a Muslim shall commit tofinancial planning to avoid leaving an uncertain life with debt againstloved ones.

10 M.M. BILLAH AND B. SAITI

The Prophet Muhammad (s.a.w.) would supplicate Allah (swt) in thefollowing way:

My Lord, help me and do not give help against me, grant me a victory, and donot grant victory over me, plan on my behalf and do not plan against me,guide me and make my right guidance easy for me, grant me victory over thosewho act wrongfully towards me. . . .

(Narrated by Abu Daud)

A Muslim should prepare himself for the next world as if he is going to dietomorrow, but at the same time work hard to improve all his worldly comfortsas if he is going to live forever.

(Narrated by Al-Dailani)

In Islam, financial planning is not just a process of acquiring and accumu-lating wealth; it has a broad definition that relates to the concept of vice-gerent (kalifa). According to the Holy Qur’an, Allah (swt) created man ashis vicegerent (or ambassador) on earth. Allah (swt) says in Al-Quran:

Behold, thy Lord said to the angels: “I will create a vicegerent on earth.” Theysaid: “Wilt Thou place therein one who will make mischief therein and shedblood?—Whilst we do celebrate Thy praises and glorify Thy holy (name)?” Hesaid: “I know what ye know not.”

(Surah Al-Baqarah, Verse 30)

From the preceding verse and others like it we understand that as thekhalifah or vicegerent of Allah on earth, man is gifted with certain powers,which other creatures of God do not possess. For example, he possesses(within limits, of course) intellectual faculties. We also read that Allah(swt) created all things on earth for man:

He it is who created for you all that is on earth. ThenHe rose over (Istawa) towardsthe heaven and made them seven heavens and He is the All-Knower of everything.

(Surah Al-Baqarah, verse 29)

The duty of man asAllah’s khalifah is to make use of all the blessings ofAllah(swt) on earth for his own benefit. For this, man is given freedom, that is,freedom of choice and action (also within limits). It is because of man’s specialfaculties and his freedom that he rises to become the best of God’s creatures.

2 ISLAMIC FINANCIAL PLANNING TOWARDS SUSTAINABLE ECO-GROWTH 11

Financial planning is basically a discipline of wealth management thatapplies to the unique needs and concerns of the individuals involved. As aMuslim, even if a person possesses no form of wealth, he must still commit tothe financial planning process because either he would leave debt or childrento the trusted one. In the following discussion, we would like to focus on thecomprehensive aspects of financial planning whereby an individual develops abalanced approach to achieving his goals. Financial planning quantifies andmanages an individual’s success with respect to four financial pillars: (1) wealthmaking, (2) wealth accumulation, (3) wealth preservation, and (4) wealthdistribution. Each of these components plays a different role in addressingunique issues, and the objective must align with Shari’ah principles.

In Islam, we are blessed with the concept ofAllah’s bounty or sustenance.This concept means that Allah (swt) is the sole giver of “bounty” to everyliving creature in this world. Allah confers His bounty on those who earn andspend it in compliancewithHis covenants.Hedoes not bestowHis blessing ormercy on thosewho earn it illegitimately and spend it irresponsibly.Allah (swt)affirms:

For Allah is He Who Gives (all) sustenance . . .(Al-Dhariyat 51:58)

The concept of Allah’s bounty is considered very important in Islambecause a Muslim is required to have a proper balance between thefulfillment of his spiritual and worldly obligations (Nik Yusoff 2001).

The Prophet said:

A Muslim should prepare himself for the next world as if he is going to dietomorrow, but at the same time work hard to improve all his worldly comfortsas if he is going to live forever.

(Narrated by Al-Dailami)

Islam covers the extremes of zuhd (abstinence) and bulk (avarice). AMuslim should not forego wealth. Nor should he be avaricious in thepursuit of wealth. Zuhd does not mean rejecting pleasure but ratherleading a pious life by living moderately and within one’s means.

As Muslims we are not discouraged from acquiring wealth, but we mustknow how to earn and spend it in accordance with Islamic principles.Wealthshould not be abused or misused; Allah (swt) has laid down veryclear injunctions on how wealth is to be acquired and spent. Above all,


wealthis a form of trial by Allah (swt) for His servants to test whether theyare following His injunctions regarding wealth acquisition and disposal;the owners of wealth are to be held fully accountable on the Day ofJudgment for what they do with their wealth. In Islamic financial planning,an individual must understand the discipline of wealth-making, accumulat-ing, preserving, and distributing wealth according to Shari’ah principles.These are the components of financial planning that need to be addressedin achieving financial goals.

2.2 ISLAMIC FINANCIAL PLANNING

In the conventional approach to financial planning, any form of wealth canbe used in three ways, namely, immediate consumption (consume), sav-ings (store), and investment (invest). From an Islamic perspective, Islamencourages Muslims to be wealthy but to spend the wealth in the way ofAllah (swt). The true story of Prophet Yusof (aw) who became the Ministerof Finance of Egypt during the period of extended drought and famine is agood, classic example of the importance of wealth planning. Second, thecomprehensive plan of the Holy Prophet Muhammad (s.a.w.) on his migra-tion to Medina is another example of planning.

Based on a hadith:

The wealth of a Muslim should be spent first on himself then on his family thenhis immediate relatives and then on others.

The main distinction between conventional and Islamic wealth planning isthat wealth in Islam belongs to Allah (swt) and man is only a trustee to thewealth. Hence he must ensure it is used in accordance with the dictates ofthe Shariah so as to obtain the Pleasure ofAllah (swt). From a conventionalviewpoint, the owner of wealth has an absolute right to do what he wishesas long as it pleases him. All wealth belongs to Allah (swt), and man hasbeen appointed trustee of the wealth. As trustee, he can utilize the wealthbut will be responsible for how it is used and will be made accountable for itboth in generating and spending it. Islam requires adherents to strictlyfollow the prescribed rules of generating and using wealth. We may see theconcept of wealth from an Islamic perspective in Table 2.1.

Financial planning and management represents an effort to analyze andorganize financial affairs to achieve desired financial and lifestyle goals.Generally it deals with the generation, accumulation, protection, and


distribution of wealth. From an Islamic perspective, it also includes theproper means of generating and utilizing wealth including its purifica-tion. Therefore, there are five pillars of Islamic financial planning: (1)investment, (2) takaful (insurance), (3) tax and zakat, (4) infaq (expen-diture) and sadaqah (charity), and (5) faraid (inheritence), wasiat(bequest), and hibah. In what follows, we will describe and evaluateeach of these pillars.

2.2.1 Protection in Islam

Wealth protection is the wealth management pillar that identifies andmanages various sources of current and future income. This area offinancial planning involves cash flow planning, tax planning, familysecurity planning, disability income planning, and critical illness incomeplanning. In Islam the concept of protection is slightly different fromthe conventional notion in performing the concept of mutual coopera-tion or takaful under the umbrella of tabarru’ (donation). Takaful isan insurance concept grounded in muamalat (transactions), observingthe rules and regulations of Shariah. In fact, this concept has beenpracticed for over 1,400 years.1

In principle, the takaful system is based on mutual cooperation,responsibility, assurance, protection, and assistance among groups of par-ticipants. These fundamental ideas are based on the sayings of ProphetMuhammad s.a.w. that relate to the takaful.

2.2.1.1 Basis of CooperationHelp one another in al-Birr and in al-Taqwa (virtue, righteousness, andpiety): but do not help one another in sin and transgression.

(Surah Al-Maidah, Verse 2)

Table 2.1 Right to wealth from capitalism, socialism, and Islamic perspectives

Concept Capitalism Socialism Islam

Wealth/resources

Scarcity ofresources

Scarcity of resources Allah’s bounty and noscarcity

Ownership Individualfreedom

Origin of the exploitationof labor

A trust

Lifestylegoals

Personalsatisfaction

Equal welfare amongworkers

Al-Falah (prosperity)


Allah will always help His servant for as long as he helps others.(Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud)

2.2.1.2 Basis of ResponsibilityThe place of relationships and feelings of people with faith, between each other,is just like the body; when one of its parts is afflicted with pain, then the rest ofthe body will be affected.

(Narrated by Imam al-Bukhari and Imam Muslim)

2.2.1.3 Basis of Mutual ProtectionBy my life, which is in Allah’s power, nobody will enter Paradise if he does notprotect his neighbor who is in distress.

(Narrated by Imam Ahmad bin Hanbal)

Thus through this concept, Muslims can plan ahead for any foreseen negativeevents involving illness, permanent disability, diseases, or other conditions.

2.2.2 Accumulation of Wealth in Islam

The wealth accumulation pillar of wealth management seeks to achieve rea-sonable capital growth with the primary objective of preserving accumulatedwealth. This is the area that balances the risk of losing capital with the risk oflosing purchasing power. Wealth accumulation involves asset allocation stra-tegies, investment policy statement drafting, financial freedom planning, andchildren’s higher education planning.

In Islam, before an individual decides on an investment, he or she mustcheck the status of the investment and determine whether or not the fund isapproved by the Shari’ah Board. Basically, the Shariah way of investing is thatit must not involve any of the following features:

1. Operations must not be based on riba (interest) such as activities offinancial institutions like commercial and merchant banks or finan-cial companies that do not comply with Islamic principles. In SurahAl-Baqarah (275–281) Allah prohibits riba:

. . .But Allah hath permitted trade and forbidden usury (riba). . . . 2

(Surah Al-Baqarah, verse 275–281)


2. Operations associated with gambling. This is where one gains some-thing at the expense of another, who suffers losses in terms of assetsand personal dignity.

3. Activities involving the manufacture or sale of haram (forbidden)products, such as liquor, pork, and meat not slaughtered accordingto Islamic rites, or any other activities that go against Islamic teach-ings, such as pornography.

4. Activities containing elements of gharar (uncertainty), such as theconventional insurance business. There are companies engaged inactivities comprising both permissible and nonpermissible elements.The Shari’ah Council has applied several additional criteria for thesecompanies:

i. The company’s core activities must not contradict the Shari’ahas outlined earlier, and haram (prohibited) elements must bevery insignificant compared with the core activities;

ii. Public perceptions or image of the company must be positive;iii. The company’s core activities must hold importance and

maslahah (benefit in general) to the Muslim ummah (nation)and the country, and the haram element must be very slightand involve matters such as umum balwa (common plight),uruf (custom), and the rights of the non-Muslim communitythat are accepted by Islam.3

Muslims can participate several channels of investment to earn someprofit; these include, for example, wadiah (deposit), savings account;mudharabah (co-partnership), current account; mudharabah, invest-ment account; tabung haji, unit trust; takaful (with savings elements);Islamic bond (sukuk) via unit trust Islamic equity (stock market), andproperty.

2.2.3 Wealth Preservation

The wealth preservation component of a financial plan aims to protect thewealth one has accumulated against all conceivable financial risks andthreats. For an individual who has accumulated a reasonable amount ofwealth, a bad investment can cause some major discomfort, but still, poorinvestment performance is not debilitating. As far as wealth is concerned,inadequate effort to preserve accumulated wealth can cause unrecoverable


losses. The pillar of wealth preservation consists of wealth management,liability containment planning, business shareholder planning, businesssuccession planning, and debt management.

As per Islamic faith is concerned, wealth belongs to Allah (swt), but He(swt) has the right to give it to anybody He wants. However, we are asked towork hard if we want to succeed at wealth acquisition. Islam views wealth as atrial and humans are its trustees:

And know you that your properties and your children are but a trial; and thatit is Allah with whom lies your highest reward.

(Al-Anfal 8:28)

2.2.4 Wealth Distribution

Wealth distribution seeks to formulate a proper plan so that your accu-mulated wealth can be managed and distributed according to your wisheswith minimum hassle. This is important in wealth management becauseultimately distribution of your wealth is inevitable. Death is somethingthat most of us tend to ignore. This area of wealth management liesbeyond the scope of our purposes here.

In addressing the issue of wealth, Muslims must not forget that the trueowner of wealth is Allah (swt) and man is only a trustee. Allah mentionsthis in Surah Al-Qasas verse 77:

But seek, with that [wealth] which Allah has bestowed on you, the home of theHereafter, and forget not your portion of lawful enjoyment in this world; anddo good as Allah has been good to you and seek not mischief in the land. VerilyAllah likes not the Mufsidun [those who commit great crimes and sins, oppres-sors, tyrants, mischief makers, or those who have been corrupted].

(Surah A-Qasas, verse 77)

2.2.5 Wealth Purification

Spending on those in need is a highly commendable form of ibada wor-ship. The Prophet (s.a.w.) declared:

A generous person is close to Allah, close to Paradise, close to people, and farfrom Hell. However, a miserly person is far from Allah, far from Paradise, far


from people, but close to Hell. Allah loves more an ignorant man who isgenerous than a worshipper who is miserly.

(Narrated by At Tarmizi)

Sadaqa (almsgiving) and infaq (spending in the service of God) arevoluntary, whereas zakat is obligatory. Having the capability to purifyour wealth protects our soul from miserliness, selfishness, and greed.

Through proper risk management and insurance/takaful planning, wewill be able to provide our loved ones and ourselves with total peace of mindas we go about living our lives and building our wealth. Generally, financialplanning involves taking a broad view of one’s financial affairs, coveringmany areas of wealth management, and then going through a step-by-stepprocess to address financial issues and achieve our financial goals.

2.3 FINANCIAL PLANNING PROCESS

Financial planning is a scientific methodology for managing wealth from aholistic viewpoint. It involves developing, coordinating, and implement-ing a comprehensive range of strategies to address wealth managementchallenges. Financial planning as a process encompasses the following sixsteps (Yap 2003) (Table 2.2). The next question is how we achieve ourfinancial goals. We do this by formulating a comprehensive plan to guideus in our retirement, estate, tax, education, and investment decisions so asto achieve our financial goals. Thus financial planning normally comprisessix major components (Abdul Razak 2013), such as investment planning,tax planning, retirement planning, estate planning, education planning,and takaful planning (Table 2.3).

2.4 RECOMMENDATION

Several different kinds of financial products have been introduced byfinancial institutions and professional organizations to meet our needs inmanaging and improving our financial planning, such an Islamic unit trust,family and general takaful, Islamic bonds, and others. However, we havechosen alternative products in this chapter, especially in connection withwealth distribution, that have been provided and recognized worldwidefor their effectiveness in application to our lives, in this world and the next.The three major instruments included in our analysis are wasiyah, waqf,and hibah.


2.4.1 Wasiyah (Bequest)

Wasiyah is a legal document that outlines how you wish your assets to bedistributed upon your demise; wasiyah or will is one of many acceptablemodes of wealth acquisition and disposal in Islam. It is similar to a gift,though it differs in certain ways. It is executed following the demise of the

Table 2.2 Main steps in financial planning process

Steps Actions

Establish financial goal Goal setting is critical to create a successful wealth managementplan. The whole financial planning process starts withestablishing and prioritizing realistic financial goals andobjectives. An appropriate time frame and risk tolerance levelmust be clearly spelled out as well. It is important that the goalsmust be quantifiable so that their attainment can be measured.

Gather relevant data After identifying your financial objectives, you need to gather asmuch relevant information as possible. This information must beaccurate, up to date, and relevant to the financial objectives. Themore complex your situation and the more varied the number ofyour goals, the more challenging the information-gathering risk.This step requires a significant amount of time and patience.

Analyze the data Data analysis can begin when enough information has beengathered. The objective of this step is to establish where you arenow in comparison with the financial goals established in stepone. It is in this step where you determine the strengths andweaknesses of your present financial position.

Develop a plan forachieving goal

Normally there will be more than one way to reach a financialobjective, and multiple alternatives should be explored. Theplan should be specific in nature, detailing who is to do whatand when and usingwhat resources. To increase one’scommitment to the plan, the report describing the plan shouldbe put in writing.

Implement the plan A financial plan is useful only if it is put into action. The successof a financial plan largely depends on someone’s commitment toimplementing it. For example, the implementation of a planmay involve writing or updating a will to restructure currentasset allocation, reduce debts, pay down a mortgages, and soforth.

Monitor the plan The financial planning process is dynamic and requires constantmonitoring and reviewing. The plan should be reviewed at leastonce a year or more frequently if changing circumstanceswarrant it. The review process should involve tracking one’sprogress and ensuring that the plan is being followed.


benefactor and takes the form of a gift of wealth, valuable items (e.g.,mosques, real estate), or even debt. The total of wasiyah given cannot bemore than one-third of total assets. Eligible or legal heirs are not entitledto wasiyah.

Wasiyah should be put in writing. It must be signed by the testator (willmaker) and witnessed by at least two individuals. In Islam, wasiyah doesnot necessarily have to be in writing, but it must be witnessed by twopeople. It should comply with the requirement of Al-Quran and hadith ofthe Prophet (s.a.w.).

The actual receipt of willed items is a precondition for the legal validityof wasiyah; items may be gifts, according to Imam Malik, but others suchas Imam Shafie have opined that verbal acceptance alone may suffice.

Table 2.3 Major components of financial planning

Component Definition

Investmentplanning

The investment plan aims to help individuals formulate investmentstrategies with the objective of generating positive return oninvestment.

Tax planning By structuring the right mix of investments for the customer’sportfolio, the wealth planner can reduce the tax bite while ensuringoptimal returns. Tax planning can help customers who have complexwealth management needs and provide access to informed advice topreserve and grow wealth.

Retirementplanning

A retirement plan is used to ensure that a person will have sufficientmoney to spend in retirement. It includes amounts to save andinvest in a diversified portfolio. It should also consider the futureinflation rate, expected life style, and other relevant individualfactors.

Estate planning Effective wealth preservation and wealth transfer require prudent estateplanning. The term real estate here implies the total wealth of a person,which may include real estate.

Educationplanning

Having a plan on how to pay for college is becoming increasinglynecessary as the cost of education continues to surge. Tax and estateplanning form part of a proper education planning, and the earlier aneducation plan is drawn up, the better.

Takafulplanning

Takaful is a tool used to create an instant estate and is, hence, veryimportant in the distribution of an estate. We should not forget tosafeguard out ability to earn or generate wealth. This can be donethrough takaful.


The recommendation of wasiyah was prescribed by Allah SWT in theQuran and whoever carries out wasiyah will be rewarded:

O you believe! When death approaches any of you, and you make a bequest [thentake] the testimony of two just men of our own folk or two others from outside, whileyou are traveling through the land and death befalls on you.

(Al-Maidah: 106)

Although many scholars believe this verse has been abrogated by the morespecific verses enjoining inheritance, it still bestowswasiyah on non-inheritingrelations or according to at-Tabari for persons without heirs and for theummah in general.

Ibn Abbas relates the hadith of the Prophet s.a.w.:

The Prophet (s.a.w.) says giving one third of your property by wasiyah isabundance.

Another hadith related by Saad was written by Imam Shafie;

The Prophet (s.a.w.) forbids to wasiyah more than one third of one’s property.4

The person who giveswasiyah has the choice to arrange a program for alms orsadaqah and the distribution of two thirds of his estate to legal heirs. InMalaysia, all are allowed to make their own wasiyah, but it must be complywith the rules and conditions of Quran and hadith, as well as the Will Act of1949.

In existing practices in financial services in Malaysia, there is ampleroom for financial planners and government itself to improve and practicewasiyah. The current practice used mostly by financial institutions or ingovernment agencies like Employee Provident Fund (EPF) is to namecustomers as trustees.

There are differences between wasiyah and nominees according toIslamic laws. By virtue of Section 167 of the Insurance Act (Malaysia(1996), A nominee acts as a trustee only. According to section 167 ofthe Insurance Act of 1996, the nominee is entrusted to claim the policymoney from the insurance for payment of claims. Thereafter he must


distribute the money to the rightful heirs or beneficiaries in accordancewith Islamic laws or with their consent.

2.4.2 Waqf (Endowment)

Waqf in Arabic literally means “hold,” “confinement,” or “prohibition.”The word waqf is used in Islam in the sense of holding certain propertyand preserving it for the sole benefit of a certain philanthropic cause andprohibiting any use of it outside that specific objective. Waqf is a religiousendowment, a property producing revenues, as regulated by Islamic law.Waqf is in the same category as sadaqah (charity) or tabarru’ (donation).

The legal definition of waqf includes two conditions. The firstcondition is that one’s property rights are dedicated to any publicservice and cannot be repossessed by others. The second condition isthe perpetuity of this dedication.

Property must be real or have some sense of lasting in perpetuity. Theproperty should be given on a permanent basis. Some jurists approve of atemporary waqf only in the case of a family waqf. The example of a familywaqf is the condition that fruits and the revenues of their waqf must befirst given by parents to their own children and descendants, and only thesurplus, if there is any, should be given to the poor. If a person sets up awaqf for his children, he must treat males and females equally, because hehas included all of them in the waqf, which implies that they all have equalshares. Just as if he were to give something to them it should be sharedequally among them, so too if he sets up a waqf for them, they should haveequal shares.

The waqf founder should be legally competent and able to satisfythe objectives of waqf. Ultimately, waqf must ultimately be an actof charity. Hence a waqf only for the rich is not permissible because itis not charity. The revenues from the waqf can be used to financemosques and other religious institutions. Hence, the waqf isconsidered part of the mosque or the institution.

According to Ibn Qudama, waqf means bequeathing propertyand dedicating its fruits. As quoted from the Prophet’s (s.a.w.)words in His advice to Omar Ibn Khattab, when the latter consultedhim about a plot of land that he owned:

Bequest its stock and dedicated its progeny.


2.4.2.1 Advantages of WaqfSome points about why we should include waqf in of our financial planshould be highlighted. Normally when property holders engage in gather-ing, developing, managing, protecting, and diversifying the sources oftheir wealth, their life, thinking, and ambitions become slaves to theproperty; hence they become trapped in the process of protecting it. Forthis reason, they more than others need to be reminded to pay attention tothe hereafter and to seek its benefits, especially through their money, bycomplying with the Quran; we should strive for the hereafter:

But seek the abode of the hereafter in that which Allah has given thee.Surah Al-Qasas: 77

This can be considered “estate planning for the hereafter.” Faraid is the rule,wasiyah is the bonus, hibah is the exception, but all contribute to arrangingfor the legal heirs’ provisions in this world. Waqf and related terms such astabarru’ and sadaqah are for all and truly for one’s provisions in the here-after. The waqf endowment saves the soul from the worries, fear, andcovetousness surrounding money, and it compels one to spend it generously.

Waqf can also be treated as a way of securing inheritance for one’s legalheirs. While the benefits from waqf can be pious and good, the actualestablishment of the waqf might have been anything but pious. In Muslimsocieties, regulations on inheritance have presented a problem for richfamilies; property has been considered as belonging only to its owner, nothis descendants. When the owner dies, the property would then be trans-ferred to the ruler. But rich families have established waqf andmade childrentrustees. Salary or allowances are normally set at about 10% of revenues.Through the waqf, descendants are secured a part of the fortune or wealth.

2.4.3 Hibah (Gift)

Hibah is the transfer of existing property made voluntarily and without anyconsideration by the donor to the donee and accepted by or on behalf ofthe donor during his lifetime:

. . . and gives his wealth, in spite of love for it, to the kinsfolk, to the orphan andto Al-Masakin (the poor), and to the wayfarer and to those who ask.

Verse 177, Surah al-Baqarah


Some issues will arise from applications of hibah in our lives. Therefore,provisions for the implications of hibah transactions must be given. InMalaysia, Bumiputera-Commerce Trustee Berhad has introduced a new pro-duct called hibah harta to facilitate the needs of the entire Islamic community.5

Hibah harta is a private contractual arrangement between three parties,whereby a person (the donor) allocates his property, during his lifetime, tohis loved ones (the donees). In doing so, the property allocated in this waywill be held in trust and managed by Bumiputra-Commerce TrusteeBerhad, which will be the trustee. This product was approved by theMajlis Fatwa Wilayah Persekutuan (Yaacob 2013).

Upon the donor’s demise, the trustee will then transfer the giftedproperty to the donee. Because hibah harta is a private contract drawnup while both the donor and the donee are alive, the property will notform part of the donor’s estate and will not be subject to the Probate andAdministration Act and Will Act of 1959 or faraid. Hence, this makes thetransfer of the donor’s assets smoother and trouble-free.

There are two types of hibah harta as introduced by BumiputeraCommerce Trustee Berhad: hibah umra and hibah ruqba. Hibah umra isknown as hibah without conditions, where the property is transferred tothe donee following the death of the donor, whereas hibah ruqba is a hibahwith a condition—that the property is transferred depending on who diedfirst. If the donor dies, the assets are transferred to the donee. If the doneedies first, then the property is transferred not to the legal heirs but to thedonor.

Hibah ruqba and hibah with a condition are very important and crucialin today’s muamalat or transactions. There have been a few cases of hibahtransactions that ended with unforeseen and unexpected situations.

A similar transaction is ruqba (from raqaba, “he waited”), by which aman gives a house to another person on the condition that if the donordies first, the house becomes the property of the donee, but if the doneedies first, the house reverts back to the donor, as if each waited for thedeath of the other. Bukhari does not speak of ruqba, which, according tothe most informed opinion, is not allowed in Islam. With regard to ‘umra,it is agreed that when it is expressly stated that the property shall pass tothe heirs of the assignee or when no condition is laid down, it shall be a giftin all respects and shall not revert to the assignor; but when an expresscondition is laid down that on the death of the assignee it shall revert tothe donor or his heirs, there are two opinions: first, that the transaction


shall take effect in accordance with the condition laid down, as if it were aloan; and second, that it shall be looked upon as a gift, the condition beingdealt with as illegal and unenforceable.

Another example of hibah is where a couple gives away all their wealthand property to an adopted son as hibah with no conditions. Theadopted son has no legal heirs and has an accident in which he dies.Not a single penny owned by the late adopted son will be inherited byanybody; instead, it will pass on to a Baitul Mal, or house of charity. Theparents of the deceased adopted son who left him all their wealth in theform of hibah are left with nothing. Hibah ruqba is one of those toolsthat should be used to protect wealth and hedge from any unforeseencircumstances in the future. Hibah is one of the best choices for afinancial plan and should produce desirable outcomes. However, theexample given earlier concerns a hadith where, according to Malik,Umar Ibn al-Khattab says:

What is wrong with men who give their sons gifts and then keep them and if theson dies, they say, “My property is in my possession and I did not give it toanyone.” But if they themselves are dying, they say, “It belongs to my son, I gaveit to him.” Whosoever gives a gift, and does not hand it over to the one to whomit was given, the gift is invalid, and if he dies it belongs to the heirs in general.

Narrated from Abdullah Ibn Umar; Abdullah Ibn Abbas

The Prophet (PBUH) said: It is not lawful for a man to make a donation orgive a gift and then take it back, except a father regarding what he gives hischild. One who gives a gift and then takes it back is like a dog that eats andvomits when it is full, then returns to its vomit.

2.4.3.1 Advantages of HibahThe hibah property will not belong to the original owner because thecontract stipulates that the transfer of the property to the beneficiaries islegally binding. The person who gives his property as hibah will beprotected against any legal action from creditors in connection with theparticular assets.

In Malaysia, few corporate and professional bodies provide consultationon financial planning; one of those few is Darul Hibah Consultant Sdn.Bhd. Consultation with such an organization about hibah will allow thoseconcerned to avoid all issues associated with completing a hibah


transaction, and a hibah contract will take much less time than documen-tation for matters related to faraid.

Hibah can eliminate the problem of quarrelling among beneficiariesover ownership of property. The owner of the property has full rights totransfer any amount of his wealth to anybody, whether they are his legalheirs or not. Hibah has no limitations like faraid and wasiyah. Faraid isstrictly distributed to legal heirs only, and wasiyah cannot be passed on tofamily members as legal heirs, and at a maximum of only one third.

2.5 FINAL REMARKS

In Islam, accumulation of wealth is allowed and, in some circumstances,mandatory. However, wealth should not be abused and must be managedand planned properly, as Allah has laid down very clear injunctions on howwealth should be acquired and spent. Above all, wealth is a form of trial byAllah to His servants to determine whether they are following His injunc-tions regarding wealth acquisition and disposal. Owners of wealthy will beheld fully accountable for their actions on the Day of Judgment.

NOTES

1. Takaful Nasional Sdn Bhd, at http://www.takafulnasional.com.my2. See Al-Quran3. Shari’ah Advisory Council, Securities Commission of Malaysia4. Azman Ismail, Islamic Estate Planning, Darul Hibah Consultant5. Bumiputera-Commerce Trustee Berhad

REFERENCES

Ali, A. Y., The Holy Qur’an, (trans. eng.)Abdul Razak, S. H. (2013). Wealth planning and management. Malaysia:

INCEIF.Nik Yusoff, M. A., & Noor, I. (Ed.). (2001). Islam & Wealth: The Balanced

Approach to Wealth Creation, Accumulation, and Distribution. Malaysia:Pelanduk Publications.

Yaacob, H. O. (2013). Amalan dan Realiti Pengurusan Harta Orang Islam DiMalaysia. Malaysia: Darul Hibah Consultant Sdn Bhd.

Yap, M. H. (2003, August 16). Ensuring fitness of wealth management. Malaysia:BizWeek.


http://www.takafulnasional.com.my

Mohd Ma’Sum Billah, PhD is a Professor of finance, Islamic economics insti-tute, King Abdul Aziz University, Kingdom of Saudi Arabia. His area of expertisespans across finance, petroleum trade finance, insurance, investment, and capitalmarket. He has extensively taught, supervised, published, presented and advisedon areas of finance, investment, capital market and insurance both under Shari’ahand modern.

Dr. Buerhan Saiti is an assistant professor at IIUM Institute of Islamic Bankingand Finance. He received his doctorate from INCEIF, and his area of interest is inIslamic capital markets.


CHAPTER 3

Remittances, Political Stabilityand Economic Development: Empirical

Evidence from OIC Countries

Mohsin Ali and Wajahat Azmi

Abstract Using data from 16 Organisation of Islamic Cooperation (OIC)countries for the 20-year period 1993–2012, we examine the role ofremittances and political stability on economic development. We alsoexamine the interaction of political stability and remittances to determinewhether or not stable political conditions are expected to increase theeffect of remittances. Our results can be summarized as follows: (1)remittances have no significant effect on OIC economies, (2) democracyis a more effective form of government than autocracy/dictatorship, and(3) political stability reduces the effects of remittances on development.

Keywords Remittances � Political stability � Economic development

M. Ali (*) � W. AzmiInternational Centre for Education in Islamic Finance (INCEIF),Kuala Lumpur 59100, Malaysiae-mail: [email protected]; [email protected]


29

3.1 INTRODUCTION

The association between remittances and economic growth has attracted alot of attention, especially in connection with developing countries. Suchattention is driven mostly by the low savings, vast savings, investmentgaps, and prolonged budget deficits in these countries (Feltenstein andIwata 2002; Ndikumana 2015).

There are two contrasting views with regard to the effect of remittances oneconomic development. The first strand is known as the optimistic (Ratha2005; Pradhan et al. 2008; Goschin 2013) perspective, whereas the other oneis referred to as the pessimistic (Keely and Tran 1989; Niimi et al. 2010) view(Adams and Klobodu 2016). For instance, Ratha (2005) argues that sinceremittances are a source of foreign exchange for a recipient country, it helps instabilizing the balance of accounts andhence is good for development.Others,such as Elbadawi and Rocha (1992), classify remittances into two groups. Thefirst one is the endogenous migration approach, whereas the other one isclassified as the portfolio approach. The endogenous migration approach isbased on the earliest literature on remittances (Johnson and Whitelaw 1974;Lucas and Stark 1985), which treats inflows of remittances as acts of altruism.In fact, Lucas and Stark (1985) claim that “Certainly themost obviousmotivefor remitting is pure altruism—the care of a migrant for those left behind.Indeed, this appears to be the single notion underlyingmuch of the remittanceliterature” (p. 902). Thus, according to this view, remittances are not expectedto affect the economy. On the other hand, the portfolio approach is based onmigrants’ decision to split savings between the home country and the hostcountry. More precisely, according to this view, remittances behave like othercapital flows and, hence, are expected to have a positive effect on development.

On the other hand, the pessimistic view argues that remittances areexpected to have a negative effect on development. One of the argumentsput forth in support of this view is that remittances could lead to braindrain, especially if the migration is of skilled labor (Niimi et al. 2010). Theother argument according to which remittances have an adverse effect isthat it causes Dutch disease owing to exchange rate appreciation in therecipient country (Adams and Klobodu 2016).

Several motivations drive this research. First, the remittance–growth rela-tionship is still debatable, so we will revisit the debate here to explore furtherinsights about that relationship. Second, we also use the political stabilitymeasure to examinewhether political stability can increase/decrease the effectof remittances. To add robustness, we use three different variables. One

30 M. ALI AND W. AZMI

captures the form of government (democratic/autocratic) and the secondand third capture the duration of a regime and institutional quality, respec-tively. Finally, one of the most important motivations is the lack of literaturespecifically for Organisation of Islamic Cooperation (OIC) countries.

In recent years, OIC countries have witnessed slowing growth.1 As faras the fiscal deficit is concerned, it was −1.5% of gross domestic product(GDP) in 2014. Even foreign direct investment (FDI) inflows in thesecountries remained below their potential. In 2014, OIC countries saw adrop in inflows as FDI fell to USD 132 billion compared to USD 144billion in 2011. The decline is not surprising as some of these countries arefacing war and terrorism-related challenges. Further, the total externaldebt of these countries continues to increase, hitting the USD 1.4 trillionmark in 2014. As far as indebted OIC countries are concerned, the averagedebt to gross national income (GNI) rose to 20.7% in 2013 from 18.6% in2011 (OIC Economic Outlook 2015; Statistical Economic and SocialResearch and Training Centre for Islamic Countries 2015).

Based on the aforementioned facts, it is not surprising that the flows ofpersonal remittances play an important role in the development of thesecountries. The personal remittances contribute significantly to GDP.Moreover, they are a source of livelihood for many households in devel-oping countries. Therefore, it is important to examine the impact of theseflows since they have a direct effect on households, making the distribu-tion of funds as important as aid or FDI (Adams and Klobodu 2016).Additionally, they are less volatile than other external financial flows.

As for the flows of personal remittances in OIC countries, they increasedfrom USD 108 billion in 2011 to USD 117 billion in 2013. However, theydeclined steeply to USD 96.6 billion in 2014. On the other hand, duringthe same period, personal remittances into non-OIC countries increasedfrom USD 260 billion in 2011 to USD 270 billion in 2013.

Although OIC countries have always been attractive owing to theirabundance of natural resources, recently Lartey (2013) argued that aninvestment-friendly environment would bring remittances for investmentpurposes and that an investment-enabling environment would serve toharness remittances and, hence, would be good for the economy. But theimpact would be far more effective in countries with stable political andeconomic environment. In this connection, Catrinescu et al. (2009) claimedthat sound economic policies can bolster the long-term impact of personalremittances. Therefore, the question we attempt to answer in this chapter iswhether personal remittances in OIC countries impact growth positively,

3 REMITTANCES, POLITICAL STABILITY AND ECONOMIC DEVELOPMENT… 31

especially considering the current political and economic environment inthese countries. Moreover, we also examine whether political stability,regime durability, and institutional quality would enhance the impact ofremittances on growth. Our analysis applies widely used control variablessuch as FDI inflows, government expenditures, trade openness, and M2.

To achieve our objective, we analyse 16 OIC countries for the period1993–2012. The choice of countries was driven by data availability. Ourresults suggest that the flow of remittances has the desired effect oneconomic development since the coefficient is positive and significant.However, the interaction of political stability and remittance variable isinsignificant, suggesting that political stability does not necessarilyenhance the effect of remittances. Similar effects were found for interac-tion terms of regime durability–remittances and institutions–remittances.The remainder of the chapter is organized as follows. The next sectionelaborates the data. Section 3 reports the descriptive statistics. The estima-tion results are discussed in Sect. 4. Finally, Sect. 5 concludes the chapter.

3.2 DATA AND MODEL

As mentioned earlier, the objectives of this chapter are to examine theeffect of remittances and political stability on economic development.Further, we also examine the interaction of political stability variablesand remittances. Our data set consists of a panel of 16 OIC countries,for the period 1993–2012. Our dependent variable is GDP per capita. Theother control variables are trade openness (ratio of exports to GDP),schooling, FDI (ratio of FDI inflows to GDP), money supply (ratio ofM2 to GDP), remittances (ratio of remittances to GDP), and politicalstability. We use three different proxies to capture political stability. Thefirst and second proxies represent regime type and regime durability andthe last one reflects institutional quality. To proxy regime type, we makeuse of polity2 data. The polity2 variable reflects the democratic/autocraticnature of the government. It scales the country from −10 to 10. Higherscores are associated with democracy. To proxy regime duration, we makeuse of a regime durability variable. This variable reflects the number ofyears a government stays in power. To estimate durability, the first year ofnew government is assigned a zero score, and one is added to everysubsequent year thereafter. Thus, higher values signify greater durabilityand, hence, political stability. Both these variables (regime type andregime durability) are sourced from the Polity IV project.


To proxy institutions, an institutional quality variable (INS) was sourcedfrom the International Country Risk Guide (ICRG). We used the follow-ing indicators to proxy the overall quality of an institution in a givencountry: (a) Corruption, (b) Law and Order, (c) Bureaucratic Quality,(d) Democratic Accountability, and (e) Government Stability. The firstthree variables are scaled from 0 to 6, whereas Democratic Accountabilityand Government Stability are ranked on a scale from 0 to 4 and 0 to 12,respectively. In all five indicators, a higher value implies better institutionalquality while a lower score implies lower quality of institutions. To obtain asingle institutional variable, we followDemetriades andHook Law (2006).

All the data, except for political stability (regime type, regime durability,and institutions), were sourced from World Development Indicators (WDI).

Once we collected the desired information, we computed the followingestimate2:

GDPit ¼ αþ β0:þ β1REMITit þ β2STABILITYitþ β3INTERACTit þ β4Xit þ �i;t

(3:1)

In the preceding equation, REMITit is the inflow of remittances in coun-try i at time t; STABILITYit represents the political stability variables(regime type, regime duration, and institutions); INTERACTit is theinteraction term between the political stability variable and remittances;and Xit is the vector of control variables, namely, FDI/GDP, TRADE/GDP, SCHOOLING, M2/GDP.

3.3 DESCRIPTIVE STATISTICSTable 3.1 provides the descriptive statistics for the variables used in theestimations. The FDI of the selected OIC member countries averages3.11% of GDP and has a standard deviation of 3.54. GDP per capita onaverage is around USD 3086.50 with a very high volatility. As far as M2 isconcerned, the average for the selected OIC member countries is around62.95% of GDP with a standard deviation of 48.82. Schooling is 68.92% ofGDP in OIC member countries. Average remittances as a percentage ofGDP are quite low at 4.93%, which reaches a maximum of 30.75% for theKyrgyz Republic. The quality of democracy in general remains poor in OICcountries and the higher level of durability reflects the autocratic rule inmany Muslim countries.


Tab

le3.1

Descriptiv

estatistic

s

FDI

GDPP

CM2

Trade

Schooling

Rem

itDem

ocracy

Durable

Institutions

Mean

3.11

3086

.50

62.95

76.97

68.92

4.93

−1.06

15.90

28.67

Standard

deviation

3.54

3171

.56

48.82

40.02

19.30

6.60

5.69

14.89

4.21

Minim

um−2.76

341.08

8.57

22.87

22.86

0.05

−10

.00

0.00

17.08

Maxim

um23

.54

1422

0.40

243.94

220.41

100.00

30.75

9.00

55.00

36.94


3.4 RESULTS AND DISCUSSION

We present our results in Tables 3.2 and 3.3. Each table has three differentspecifications. In Table 3.2, we use three different variables to capturepolitical stability. In the first specification, political stability is proxied bythe democracy variable defined in the data section, whereas regime dur-ability and the institutional quality variables are used as a measure of politicalstability in the second and third specifications, respectively. In Table 3.3, weadd the interaction term of political stability and remittances variable.

We can see from Table 3.2 (all specifications) that personal remittanceshave no significant effect on the economies of OIC countries, suggestingremittances do not promote growth in these countries. Our results areconsistent with the findings of Barajas et al. (2009) and Adams andKlobodu (2016). Our results also correspond to those of Chami et al.(2005), who argue that remittances are not profit-driven and, hence, have

Table 3.2 Remittances, political stability, and economic development

Dependent variable 1 GDP per capita 2 GDP per capita 3 GDP per capita

M2 0.409*** 0.436*** 0.410***(0.000) (0.000) (0.000)

FDI 0.0140* 0.0153** 0.0125*(0.055) (0.036) (0.084)

Trade −0.133* −0.157** −0.0345(0.053) (0.025) (0.579)

Schooling 0.583*** 0.578*** 0.530***(0.000) (0.000) (0.000)

Remit 0.0196 0.0159 0.015(0.241) (0.197) (0.158)

Democracy 0.00527*(0.088)

Durability −0.0151(0.241)

Institutions −0.275***(0.007)

CONS 4.153*** 4.208*** 4.870***(0.000) (0.000) (0.000)

N 220 200 223R2 (between) 0.22 0.23 0.22

p-values in parentheses* p < 0.1, ** p < 0.05, *** p < 0.01


no effect on economic development. Further, our results are also in linewith the endogenous migration approach, which argues that there arealtruistic motives behind remittances. Our results are not surprisingbecause many OIC countries are affected by the war and terrorism, andhence we believe most remittances are made out of altruism. Interestingly,our remittance variable becomes significant (in the case of regime type andinstitutions) when we add the interaction term of political stability andremittances.

Our political stability variable measured by democracy is found to havea significant and positive effect on economic development in OIC

Table 3.3 Remittances, political stability, and economic development

Dependent variable 1 GDP per capita 2 GDP per capita 3 GDP per capita

M2 0.235*** 0.423*** 0.415***(0.003) (0.000) (0.000)

FDI 0.0241** 0.0139* 0.00911(0.049) (0.063) (0.202)

Trade −0.08 −0.131* −0.0153(0.391) (0.069) (0.803)

Schooling 0.700*** 0.583*** 0.552***(0.000) (0.000) (0.000)

Remit 0.150*** −0.0218 0.677***(0.000) (0.436) (0.001)

Democracy 0.0592***(0.000)

Interaction (1) −0.0751***(0.000)

Durability −0.0176(0.186)

Interaction (2) 0.0127(0.153)

Institutions −0.233**(0.021)

Interaction (3) −0.194***(0.001)

CONS 3.844*** 4.138*** 4.518***(0.000) (0.000) (0.000)

N 187 200 223R2 (between) 0.47 0.2 0.23

p-values in parentheses* p < 0.1, ** p < 0.05, *** p < 0.01


countries. Our results are in line with those of Grier and Munger (2006)and Adams and Klobodu (2016). Both of these studies also suggest thatdemocratic countries grow faster than autocratic ones.

On the other hand, political stability proxied by regime durabilityvariable suggests it has no significant effect on the growth of these coun-tries. This result suggests that it is not the longevity but the form ofgovernment that matters since the first specification suggests that democ-racies are expected to grow faster than dictatorships.

Finally, when we measure political stability by the institutional qualityvariable (specification 3), our findings reveal that institutional qualitylowers growth. Although this variable does not directly capture politicalstability, the results are very surprising. We expected the quality of institu-tions to have a positive effect on OIC economies.

Looking at Table 3.3 in which we introduce the interaction terms inour estimations, we can see that the interaction term is negative andsignificant except when that term is the regime durability–remittancesvariable. More precisely, our results indicate that political stability andremittances are substitutes rather than complementary in promotingdevelopment. On the other hand, the regime durability–remittances inter-action term suggests that the effect of remittances is independent of thelongevity of a government. To conclude, we can say that the effect ofremittances is lower in democracies and countries with better institutions.

With regard to other control variables, our results are usually in line withthose found in the literature. For instance, the financial development vari-able, proxied by M2, has a positive effect on development. This result is inline with the vast majority of the literature, which suggests that the associa-tion between the two is positive (King and Levine 1994; Easterly andLevine 2001). The channel through which financial development affectseconomic growth is by reducing transaction costs and bridging the gapbetween lenders and borrowers. A good financial system should promoteincreased savings and investment by improving available information onfirms, managers, and other aspects of organizations (Levine 2005).

Likewise, FDI and schooling also have a positive impact on OICeconomies. In contrast, our findings suggest that the impact of trade isinsignificant, except when political stability is used as a proxy for regimedurability, where the coefficient is negative and significant.

The positive impact of FDI aligns with findings in earlier literature(Romer 1993; Carkovic and Levine 2002; Chowdhury and Mavrotas2006). For instance, Romer (1993) suggests that there is an idea gap


between rich and poor countries and that foreign investment can reducethat gap through technology transfer and, thus, can have a positive impacton development. Similarly, the education variable is also in line withfindings in the literature (Barro 2001; Pelinescu 2015). This result is notsurprising since education is expected to improve the skills and capabilitiesof the labor force, which eventually leads to greater productivity and,hence, spurring economic development.

3.5 CONCLUSION

Although the literature on remittances and economic development isgrowing, the topic has been ignored in the case of OIC countries. Eventhough the importance of personal remittances in promoting developmentis debatable, we nevertheless revisit the debate for the case of 16 OICcountries for the 20-year period from 1993 to 2012. The countries andtime period were chosen deliberately, and the choice depended on dataavailability. We also examined the role of political stability in influencingthe impact of remittances.

Our results suggest that the inflows of personal remittances have noeffect on economic development. These results imply that other forms offinancial flows, such as FDI (FDI is found to have a significant effect onour estimations), may matter more for these countries than remittances.Thus, developing the infrastructural facilities can be beneficial for thesecountries as they can help attract more FDI. On the other hand, politicalstability proxied by regime durability and institutions also has no signifi-cant effect. However, when we measure political stability by the democ-racy variable, our findings suggest that democratic countries grow fasterthan autocracies. Overall, our results suggest that it is not the duration ofgovernment but the form of government (democratic/autocratic) thatmatters. This is a significant finding and has serious implications for oursample countries as a substantial number of our sample countries haveexperienced dictatorship for decades.

Finally, the interaction terms suggest that the effects of remittances andpolitical stability are not complementary as the coefficients are negative.Overall, our results imply that the effect of remittances is lower in coun-tries with greater political stability. This implies that countries with greaterpolitical stability do not necessarily have to rely on remittances even if thecountries have low saving rates and large budget deficits.


NOTES

1. The average economic growth in OIC countries was 3.8% in 2014.2. We employed Random effect estimations.

REFERENCES

Adams, S., & Klobodu, E. K. M. (2016). Remittances, regime durability andeconomic growth in Sub-Saharan Africa (SSA). Economic Analysis and Policy,50, 1–8.

Barajas, A., Chami, R., Fullenkamp, C., Gapen, M., & Montiel, P. J. (2009). Doworkers’ remittances promote economic growth?. IMF Working Papers, 1–22.

Barro, R. J. (2001). Human capital and growth. The American Economic Review,91(2), 12–17.

Carkovic, M. V., & Levine, R. (2002). Does foreign direct investment accelerateeconomic growth? University of Minnesota Department of Finance WorkingPaper. Minneapolis, MN: University of Minnesota.

Catrinescu, N., Leon-Ledesma, M., Piracha, M., &Quillin, B. (2009). Remittances,institutions, and economic growth. World Development, 37(1), 81–92.

Chami, R., Fullenkamp, C., & Jahjah, S. (2005). Are immigrant remittance flows asource of capital for development? IMF Staff Papers, 55–81.

Chowdhury, A., & Mavrotas, G. (2006). FDI and growth: What causes what? TheWorld Economy, 29(1), 9–19.

Demetriades, P., & Hook Law, S. (2006). Finance, institutions and economicdevelopment. International Journal of Finance and Economics, 11(3), 245.

Easterly, W., & Levine, R. (2001). What have we learned from a decade ofempirical research on growth? It’s Not Factor Accumulation: Stylized Factsand Growth Models. The World Bank Economic Review, 15(2), 177-219.

Elbadawi, I., & De Rezende Rocha, R. (1992). Determinants of expatriate work-ers’ remittances in North Africa and Europe (No. 1038). The World Bank.

Feltenstein, A., & Iwata, S. (2002). Why is it so hard to finance budget deficits?Problems of a developing country. Journal of Asian Economics, 13(4), 531–544.

Goschin, Z. (2013). The remittances as a potential economic growth resource forRomania. Annales Universitatis Apulensis: Series Oeconomica, 15(2), 655.

Grier, K. B., & Munger, M. C. (2006). On democracy, regime duration, andeconomic growth, Unpublished paper. Duke University, Durham.

Johnson, G. E., & Whitelaw, W. E. (1974). Urban-rural income transfers inKenya: An estimated-remittances function. Economic Development andCultural Change, 22(3), 473–479.

Keely, C. B., & Tran, B. N. (1989). Remittances from labor migration:Evaluations, performance and implications. International Migration Review,23(3), 500–525.


King, R. G., & Levine, R. (1994, June). Capital fundamentalism, economic devel-opment, and economic growth. In Carnegie-Rochester Conference Series onPublic Policy (Vol. 40, pp. 259–292). North-Holland.

Lartey, E. K. (2013). Remittances, investment and growth in sub-Saharan Africa. TheJournal of International Trade & Economic Development, 22(7), 1038–1058.

Levine, R. (2005). Finance and growth: Theory and evidence. In Handbook ofeconomic growth, Vol. 1, 865–934. Amsterdam: Elsevier.

Lucas, R. E., & Stark, O. (1985). Motivations to remit: Evidence from Botswana.The Journal of Political Economy, 93, 901–918.

Ndikumana, L. (2015). Savings, capital flight, and African development. TheOxford handbook of Africa and economics: Volume 2: Policies and practices,204. Oxford: Oxford University Press.

Niimi, Y., Ozden, C., & Schiff, M. (2010). Remittances and the brain drain:Skilled migrants do remit less. Annals of Economics and Statistics/AnnalesD’économie Et De Statistique, 97/98, 123–141.

Pelinescu, E. (2015). The impact of human capital on economic growth. ProcediaEconomics and Finance, 22, 184–190.

Pradhan, G., Upadhyay, M., & Upadhyaya, K. (2008). Remittances and economicgrowth in developing countries. The European Journal of DevelopmentResearch, 20(3), 497–506.

Ratha, D. (2005). Workers’ remittances: An Important and stable source ofexternal development finance. The Repository at St. Cloud State University,Economics Seminar Series. Paper 9.

Romer, P. (1993). Idea gaps and object gaps in economic development. Journal ofMonetary Economics, 32(3), 543–573.

Statistical Economic and Social Research and Training Centre for IslamicCountries (SESRIC). (2015). OIC Economic Outlook, 2015. Ankara:Publication Department, SESRIC.

Mohsin Ali is an ex-banker-turned-researcher. He is currently pursuing his Ph.D.in Islamic finance at INCEIF. His area of interest is Islamic banking and financialinclusion.

Dr. Wajahat Azmi holds a doctorate in Islamic finance from INCEIF. He spe-cializes in ethical and Islamic funds.


CHAPTER 4

Mitigating Shadow EconomyThrough Dual Banking Sector

Development in Malaysia

Muzafar Shah Habibullah, Abdul Hamid Baharom,Badariah Haji Din and Fumitaka Furuoka

M.S. Habibullah (*)Faculty of Economics and Management, Universiti Putra Malaysia,Selangor, Malaysiae-mail: [email protected]

A.H. BaharomInternational Centre for Education in Islamic Finance, Kuala Lumpur, Malaysiae-mail: [email protected]

B.H. DinCollege of Law, Government and International Studies, Universiti Utara Malaysia,Selangor, Malaysiae-mail: [email protected]

F. FuruokaAsia-Europe Institute, University of Malaya, Kuala Lumpur, Malaysiae-mail: [email protected]


41

Abstract Theory argues that as long as the shadow economy is ofsufficient size, the leakage or loss of tax revenue through tax evasionwill also be substantial. In this chapter, we provide new estimates of thesize of the shadow economy in Malaysia for the period 1971–2013.Further, we relate the shadow economy to its determinants as measuredby the misery index. This chapter reveals that the relationship betweenthe shadow economy and financial development in Malaysia exhibits aninverted U-shaped curve. The chapter concludes that the Malaysiangovernment should embark on programs that can reduce the size ofthe shadow economy, relying on its dual banking system of Islamic andconventional banks.

Keywords Shadow economy � Islamic banking � Malaysia

4.1 INTRODUCTION

The presence of a shadow economy in any nation is a fact of life(Schneider and Enste 2000). Shadow economies are also connectedwith criminal activities (Naylor 1996; Habibullah and Eng 2006).Shadow economies reduce the tax base and eventually reduces overalltax revenue and, consequently, may cripple the real economy (Eilat andZinnes 2002). Furthermore, since the activity of the shadow economy isexcluded from official gross domestic product (GDP) statistics, officialGDP statistics will provide wrong indicators for macroeconomic policydecisions. In addition, the existence of a shadow economy creates oppor-tunities for distortions in resource allocation, especially in the labormarket, whereby firms participating in underground activities are notsubject to labor regulations and workers working underground are sub-jected to unhealthy and unsafe working conditions, very low wages, andwith no job safety net (Eilat and Zinnes 2002). Thus, fighting theshadow economy should be an important agenda for any government.

However, estimating the size of a shadow economy is not an easy taskthe involved players avoid detection; furthermore, authorities lack theresources to monitor their activities (Singh et al. 2012). In the case ofMalaysia, Kasipillai et al. (2000) estimated the size of the Malaysianshadow economy for the period 1971–1994, using the standard currencydemand approach, as ranging from 8.1% to of gross national product in1971 to 3.73% in 1994, while tax evasion was calculated to be around

42 M.S. HABIBULLAH ET AL.

1.53% in 1971, shrinking to 0.5% in 1994. Kasipillai (1998) stresses thatbased on his 1995 survey in Malaysia, the construction sector contributesthe highest hidden income, followed by the professional sector.Mohammad (2004) reports that the service sector in 2002 formed thelargest percentage of the informal sector relative to the formal sector,with an estimated ratio of 4.2%. Further statistics show that among thedistributive trade sector, approximately 55% of the restaurant businessesoperate underground, followed by retail trade (30%), cyber cafés (20%),and wholesale and motor vehicles businesses (15%). However, the 2006statistics provided by Kamaruddin and Ali (2006) suggest that 24% offirms in the information technology industry operate underground, andthis is followed by manufacturing (3.5%) and the service industry (3%).On the other hand, Kassim and Jayasooria (2001) contend that theplayers in the informal sector are indeed very visible, particularly thepetty traders and hawkers operating in the night markets. Many ofthese traders are microbusinesses run largely by women, selling localcakes and foods, fruits, drinks, vegetables, home appliances, and otherproducts. According to Chin and Harun (2015) the night marketsprovide an avenue for newcomers to venture into business and as suchconstitute a very important activity in the Malaysian context.

Apart from the time-series estimates by Kasipillai et al. (2000) of the sizeof the shadow economy in Malaysia, Schneider et al. (2010), Elgin andOztunali (2012), and Alm and Embaye (2013) have also estimated the sizeof the shadow economy in Malaysia in a multicountry panel data frame-work. Using a combination of the multiple indicators multiple causes(MIMIC) procedure and currency demand models, Schneider et al.(2010) estimate the size of the shadow economy for 162 countries,including Malaysia, for eight years in the period 1999–2007. For theeight time periods, Malaysia’s shadow economy averaged 31% of officialGDP. Elgin and Oztunali (2012) estimate the magnitude of the shadoweconomy involving 161 countries by employing the two-sector dynamicgeneral equilibrium model over the period 1955–2008; in this periodMalaysia’s shadow economy averaged 47%. On the other hand, Alm andEmbaye (2013) estimated the size of the shadow economy for 111countries using the generalized method of moments for the period1984–2006; according to their estimates, Malaysia’s shadow economyaveraged 30% for the period.

Nevertheless, these estimates have been criticized by Breusch (2005a, b, c)and Ahumada et al. (2007, 2008). Breusch (2005a, b, c) pointed out that

4 MITIGATING SHADOW ECONOMY THROUGH DUAL BANKING SECTOR . . . 43

the MIMIC model suffers from serious econometric and mathematicalflaws. On the other hand, Ahumada et al. (2007, 2008) pointed out thatthe estimates of the size of the shadow economy using the currencydemand approach is correct if the long-run elasticity of income is unity,but in most cases it is not. However, more recently Pickhardt and Sarda(2011, 2015) proposed a simple procedure to estimate the size of ashadow economy that do not suffer from the flaws pointed outby Breusch and Ahumada with respect to the previously mentionedapproaches. Pickhardt and Sarda (2011, 2015) modify the originalcash-deposit-ratio approach pioneered by Cagan (1958) and first appliedby Gutmann (1977) and show that the modified-cash-deposit ratio offersa “reasonable” estimate of the shadow economy in Germany and Spain.

The purpose of this chapter is to estimate the size of the shadoweconomy in Malaysia and, further, to identify the factors affecting theMalaysian shadow economy. To estimate the magnitude of the Malaysianshadow economy, we employ the modified-cash-deposit-ratio procedureproposed by Pickhardt and Sarda (2011, 2015). In this study, our focusis on the role of banking sector development as a vehicle to reducing theshadow economy in Malaysia. Our study concludes that the bankingsector can play an important role in mitigating the shadow economyin Malaysia.

4.2 HOW THE BANKING SECTOR CAN MITIGATE

THE SHADOW ECONOMY

Numerous factors or drivers cause people or firms to participate in theshadow economy. Economists recognize that the tax burden, either director indirect taxation, social security contributions, regulation, tax morale,unemployment rate, GDP per capita (Schneider 2005; Dell’Anno andSolomon 2008; Bajada and Schneider 2005); government spending orconsumption (Vo and Ly 2014; Wang et al. 2006; Buehn and Schneider2012); weak government and bad governance (Friedman et al. 2000;Manolas et al. 2013); lack of trust in government (D’Hernoncourt andMeon 2012); crime rate (Wang et al. 2006); and inflation (Bittencourtet al. 2014) all contribute to increasing the size of the shadow economy.

Another strand of studies investigates how access to the financial orcredit market could mitigate the shadow economy. Numerous studieslinking the shadow economy and financial markets suggest that although


formality imposes a fiscal burden on a firm, such as taxes or the costs ofcomplying with regulatory requirements in the form of registration andlicensing fees that allow a firm to operate formally, the benefit of formalparticipation in the economy consists in having access to public goodsand services. Straub (2005) posits that by assessing public goods, firmsare protected by the police and the judicial system against crime so thatoutput will not be disrupted and productivity can be enhanced with theuse of public infrastructures. Furthermore, the exchange of goods andservices is more efficient in formal markets as the enforcement of prop-erty rights and contracts is ensured and secured. In fact, Singh et al.(2012) have stressed that firms operating in the shadow economy face avariety of constraints that make it difficult for them to do business andgrow. To expand and increase their productivity, firms need to haveaccess to public infrastructures, electricity, land and water, institutions,new technology, external financing, and other benefits associated withparticipation in the formal economy (Dabla-Norris and Koeda 2008;Dabla-Norris et al. 2008).

In her study, Straub (2005) emphasizes the role of financial markets inreducing the shadow economy. She (p. 299) argues that “complying withcostly registration procedures allows the firms to benefit from key publicgoods, enforcement of property rights and contracts that make participa-tion in the formal credit market possible.” Antunes and Calvacanti (2007)contend that the benefit from formalization is better access to outsidefinance, and Quintin (2008) stresses that the size of the informal sectordecreases as the degree to which financing contracts can be enforced in theformal sector rises.

According to Bose et al. (2012), in developed economies character-ized by a highly developed financial sector, individuals or firms haveeasy access to credit markets. However, borrowers must declare theirincome or assets, and this can be used as collateral or to gauge theircreditworthiness, but in doing so they will subject to a tax liability.Since the value provided by financial intermediation is considerable(Gordon and Li 2009), there is less incentive to evade taxes, and theneed to participate in the shadow economy is minimal. In contrast, indeveloping economies with poorly developed financial markets, there islimited access to the credit market because of a shortage of loanablefunds, asymmetric information, and the high cost of borrowing; bor-rowers have less incentive to declare income or assets. In such anenvironment, tax evasion is substantial and the shadow economy is


also larger. In Gordon and Li’s (2009) cross-sectional and panel analysesindicate that improvements in the development of the banking sector as wellas the depth and efficiency of that sector lead to a smaller shadow economy.

Blackburn et al. (2012) explain the connection between shadow mar-ket activity and credit market development using a simple model of taxevasion and financial intermediation. In imperfect financial markets (withasymmetric information), prospective borrowers are required to declaretheir income or wealth in order to secure a loan to finance their invest-ments. The amount of wealth will determine the amount of collateral forsecuring a loan and the terms and conditions of the loan contractextended to them. Thus, the less wealth that is declared, the less collateralto secure the required loan and the worse the terms and conditions of theloan contract. Blackburn et al. (2012) point out that at low levels ofdevelopment of the financial sector, credit arrangements worsen. Thus,the benefit of wealth disclosure increases with the level of financial devel-opment, with the implication that individual or firm participation in theshadow economy declines as the economy moves from a low to high levelof financial development.

In another study, Capasso and Jappelli (2013) provide a theoreticalframework in which agents allocate investment between a low-returntechnology that can be operated using internal funds and a high-returntechnology requiring external finance. Firms can reduce the costs of fund-ing by disclosing part or all of their assets and pledging them as collateral.The disclosure decision, however, also involves higher tax payments andreduces tax evasion. Capasso and Jappelli’s (2013) model predicts thatfinancial development (a reduction in the cost of credit) induces firms todisclose more assets and to invest in a high-tech project, and improvementsin the efficiency of the legal system reduces the costs of credit and the size ofthe shadow economy.

On the one hand, using a standard overlapping generation framework,Bittencourt et al. (2014) posit that both a lower (higher) level of finan-cial development and a higher (lower) level of inflation lead to a larger(smaller) shadow economy. Furthermore, societies with a higher (lower)level of financial development will have a lower (higher) cost of monitor-ing. Borrowers that choose not to declare their income to the bank willbe subjected to higher costs of access to and conditions of obtainingloans. These higher costs, combined with a lower level of financialdevelopment, will provide an incentive for borrowers to participate intax evasion activities.


On the other hand, Beck et al. (2014) investigate the impact of creditinformation sharing and a bank’s branch penetration on tax evasion.They postulate that banking outreach, that is, better information sharingand branch network expansion, might affect the benefits and costs ofcorporate tax evasion. Greater banking sector outreach increases theopportunity costs of tax evasion by raising the likelihood and benefitsof gaining access to formal financing, and more effective informationsharing and more extensive branch penetration reduce informationasymmetries and agency problems between lenders and borrowers and,thus, decrease the benefits of tax evasion. Their findings suggest that afinancial system that provides easier access to credit increases the oppor-tunity costs of tax evasion. Thus, in an economy with greater branchpenetration and better credit information sharing, information related tocorporate misconduct can be more easily observed and shared amongother potential lenders, which will make it more difficult and moreexpensive to obtain loans in the future (Jappelli and Pagano 2002).Therefore, the opportunity costs of engaging in tax evasion (or theshadow economy) should be higher in countries with better financialsystems or a high level of financial development.

4.3 DETERMINANTS OF SHADOW ECONOMY IN MALAYSIA

4.3.1 Estimating Model

In this study we specify the determinants of the shadow economy asfollows:

lset ¼ θ0 þ θ1lincomet þ θ2lgovcont þ θ3lfindevjt

þ θθ4lfindev2jt þ θ5lpersontaxt þ θ6lmiseryt þ εt;

(4:1)

where lset is the size of the shadow economy (calculated using themodified-cash-deposit-ratio (MCDR) approach discussed subsequently);lgovcont is the ratio of government consumption to GDP, lincomet is realGDP per capita to measure economic development or income, lfindevjt isbanking sector development measured by the ratio of domestic credit tothe private sector to GDP (dcgdp) and the ratio of liquid liabilities toGDP (llgdp), lfindev2jt (with j=dcgdp or llgdp) is banking sector develop-ment squared to establish whether the relationship between the shadow


economy and banking sector development is nonlinear, lpersontaxt is theratio of personal income tax to GDP, and lmiseryt is the misery indexcalculated as the inflation rate plus the unemployment rate. The errorterm, εt, is expected to behave well with a mean of zero and constantvariance. It is expected that the parameters θ5, θ6 > 0 and θ1, θ2 < 0. Theexpected sign for θ3 and θ4 is ambiguous. However, we conjecture thatthere is a nonlinear relationship between the shadow economy and bank-ing sector development, with an a priori expected sign θ3 > 0 and θ4 < 0.This relationship implies that at a lower stage of financial development,the shadow economy expands until at some point, at a higher levelof financial development, the shadow economy starts to decreaseand, thus, exhibits an inverted U-shaped curve. Furthermore, this con-jecture supports the contention made by Blackburn et al. (2012) andBose et al. (2012).

4.3.2 Sources of Data

Data on GDP, real GDP per capita, government consumption, domesticcredit to the private sector, liquid liabilities, inflation, and unemploymentrates were collected from the World Development Indicators publishedonline and accessible at the World Bank database (http://data.worldbank.org/indicator). On the other hand, data for individual income taxes werecollected from various issues of the Monthly Statistical Bulletin publishedby the Central Bank of Malaysia. All variables were transformed intonatural logarithm and denoted by l.

Although it is recognized that no one method is ideal for estimatingthe size of the shadow economy (Berger et al. 2014), in this study wetake the initiative to estimate the size of the shadow economy in Malaysiausing the procedure proposed by Pickhardt and Sarda (2011, 2015),which is free from the flaws pointed out by Breusch (2005a, b, c) andAhumada et al. (2007, 2008). According to Pickhardt and Sarda (2011:149–150), “all currency in circulation in the base year, C0, represents theentire cash agents wish to hold in any year after the base year for the setof legal transactions they prefer to carry out in cash.” By assuming that alladditional transactions in the legal economy are carried out via demanddeposits (in the Malaysian context), then, by definition, any cash hold-ings in excess of those in the base year can be fully attributed to theshadow economy. Based on these assumptions and using Fisher’s (1911)quantity theory of money, Pickhardt and Sarda (2011, 2015) arrive at


http://data.worldbank.org/indicator

http://data.worldbank.org/indicator

the following modified cash-deposit ratio, which equals the ratio ofshadow economy income to official income:

Ct � C0

C0 � Dt¼ YUt

YLt; (4:2)

where Ct denotes currency in circulation at the end of year t; C0 iscurrency in circulation at the end of base year, here 1971; Dt representsdemand deposits at the end of year t; and YLt and YUt denote the size ofthe legal and shadow economies, respectively. Thus, YUt=YLt measures theratio of the shadow economy to the legal economy (official GDP).

Applying Eq. (4.2) to the Malaysian financial data yields the time seriesestimates of the shadow economy as per Fig. 4.1. In Fig. 4.1, we have alsoplotted the Malaysian shadow economy estimated by Kasipillai et al.(2000), Schneider et al. (2010), Elgin and Oztunali (2012), and Almand Embaye (2013). Our estimates of the size of the shadow economyexplain reasonably well the performance of the Malaysian economy duringthe period 1971–2013, where increases in the size of the shadow economycoincide with several episodes of economic “hardships” in Malaysia. Theepisode of the first oil shock of 1973/1974, the second oil shock of 1978/1981, the commodity price collapse of 1985/1986, and the Asian financial

20

30

40

50

60

70

80

3

4

5

6

7

8

9

1975 1980 1985 1990 1995 2000 2005 2010

Schneider

Alm & Embaye

Elgin & Oztunali

Our estimate

Kasipillai

Siz

e of

sha

dow

eco

nom

y in

Mal

aysi

a (%

GD

P) S

ize of shadow econom

y in Malaysia (%

GN

P)

Fig. 4.1 Estimates of size of shadow economy in Malaysia


crisis of 1997/1998 all contributed to an increase in the size of the shadoweconomy, which reached very high levels during the second oil shock.During Malaysia’s economic boom of the 1990s, economic growth aver-aged 9% per year between 1989 and 1996, privatization policies encour-aged the private sector as an engine of growth, and large foreign capitalinflows and a booming stock market were seen (Perkins and Woo 2000),reducing the size of the shadow economy. Compared to the estimates bySchneider et al. (2010), Elgin and Oztunali (2012), and Alm and Embaye(2013), and excluding Kasipillai et al. (2000), our estimates of the size ofthe shadow economy fairly tracked the macroeconomic performance of theMalaysian economy.

4.4 LONG-RUN MODELS FOR SHADOW ECONOMY

IN MALAYSIA

To estimate Eq. (4.1), we first determine the order of integration of allvariables in the equation. The unit root test results using the augmentedDickey–Fuller (Dickey and Fuller 1981) tests are presented in Table 4.1.The results in Table 4.1 clearly indicate that all variables are I(1), that is,

Table 4.1 Results of augmented Dickey–Fuller unit root tests

Series Level First difference

Constant Constantand trend

Constant Constantand trend

lset –2.133 (3) –3.169 (1) –4.672***(1) –4.898***(1)lincomet –1.436 (0) –1.874 (0) –5.755***(0) –5.866***(0)lgovcont –1.955 (0) –2.932 (0) –7.887***(0) –7.793***(0)ldcgdpt –2.775 (1) –1.505 (0) –4.515***(1) –6.536***(0)ldcgdp2t –2.226 (0) –1.337 (0) –4.706***(1) –6.160***(0)lllgdpt –0.843 (0) –1.448 (0) –7.543***(0) –7.844***(0)lllgdp2t –0.794 (0) –1.503 (0) –7.403***(0) –7.594***(0)lpersontaxt –2.530 (0) –2.472 (0) –6.303***(0) –6.327***(0)lmiseryt –1.386 (2) –2.985 (3) –8.204***(1) –8.073***(1)

Notes: Variables se, income, govcon, dcgdp, llgdp, persontax, and misery denote respectively shadow econ-omy to GDP ratio, real GDP per capita, government consumption to GDP ratio, domestic credit to GDPratio, liquid liabilities to GDP ratio, personal income tax to GDP ratio, and misery index (inflation +unemployment rates). l denotes natural logarithm. Asterisks (***) denote statistical significance at 1%level. The calculated statistics are those computed in MacKinnon (1996). The optimal lag length inparentheses, (.), was chosen based on the Schwarz criterion (SC) throughout the analysis


the series achieved stationarity after first differencing. These results clearlysuggest that all variables are nonstationary in level form. Thus, estimatingEq. (4.1) using ordinary least square (OLS) is subject to spurious regres-sion results unless the variables are cointegrated. A cointegrating regres-sion implies a long-run model for the shadow economy as specified inEq. (4.1). It also implies that there are long-run relationships between theshadow economy and its determinants.

To estimate the long-run model as per Eq. (4.1) and apart from theuse of OLS, other procedures that are more appropriate for small samplesinclude dynamic OLS (DOLS), fully modified OLS (FMOLS), andcanonical cointegrating regression (CCR). Stock and Watson (1993)proposed DOLS, and Park (1992) introduced CCR, while Phillips andHansen (1990) suggested FMOLS. The DOLS procedure corrects for apossible simultaneity bias and small sample bias among regressors byregressing one of the I(1) variables on other I(1) variables, the I(0)variables, and lags and leads of the first difference of the I(1) variables.Incorporating the first difference variables and the associated lags andleads eliminates the simultaneity bias and small sample bias inherent inregressors.

On the other hand, the FMOLS procedure corrects for endogeneityand serial correlation effects and eliminates the small sample bias. TheCCR is closely related to FMOLS but instead performs a stationarytransformation of the time series data to obtain least-squares estimatesto remove the long-run dependence between the cointegrating equationand stochastic regressor innovations. Park (1992) shows that the CCRtransformations asymptotically eliminate the endogeneity caused by thelong-run correlation of the cointegrating equation errors and stochasticregressor innovations and simultaneously corrects for the asymptotic biasresulting from the contemporaneous correlation between the regressionand stochastic regressor errors.

In Table 4.2, we present the results of the cointegration tests as wellas the estimated long-run models for the Malaysian shadow economyfor both measurement of banking sector development: domestic creditto the private sector (dcgdpt) and liquid liabilities (llgdpt), shown inPanels A and B, respectively. For OLS we use the conventional Engleand Granger (1987) two-step procedure for testing the null hypothesisof non-cointegration or the presence of a unit root on the residuals. Inaddition, we report Hansen’s (1992) Lc-statistics, the test for the nullhypothesis of cointegration, when using FMOLS, DOLS, and CCR.


Tab

le4.2

Results

oflong

-run

mod

elforshadow

econ

omyin

Malaysia

Estim

ators

Constan

tlin

come t

lgovcon t

lfind

evjt

lfindev2 jt

lpersontax

tlm

isery

t

Pane

lA:D

omestic

cred

itto

privatesector

OLS

1.83

39–1.12

36**

*–0.66

64**

*6.20

36**

*–0.70

10**

*0.37

37**

0.25

27**

(1.179

4)(9.991

4)(2.785

2)(8.101

7)(7.503

0)(2.416

2)(2.597

3)E-G

test:–

4.32

0***

FMOLS

2.24

52–1.07

23**

*–0.69

88**

*5.77

19**

*–0.65

40**

*0.49

80**

*0.29

12**

*(1.289

2)(9.222

9)(2.870

6)(7.135

0)(6.646

0)(3.136

0)(2.797

7)L c

=0.61

9[0.136

]DOLS

1.81

70–0.63

45**

*–0.73

14**

*3.46

91**

*–0.41

13**

*1.08

33**

*0.98

93**

*{1,1}

(1.855

1)(6.823

8)(4.215

5)(7.368

5)(7.188

2)(7.606

9)(7.677

1)L c

=0.06

1[>0.20

]CCR

2.06

27–1.02

25**

*–0.68

19**

5.55

54**

*–0.63

05**

*0.56

54**

*0.34

72**

(1.318

8)(7.326

9)(2.288

5)(6.450

2)(5.973

4)(3.020

7)(2.398

0)L c

=0.70

8[>0.20

]

Pane

lB:L

iquidliabilities

OLS

–9.12

09–0.67

55**

*–0.60

68**

9.08

46**

*–1.03

73**

*0.30

71**

0.74

66**

*(1.725

5)(3.442

9)(2.127

6)(4.114

4)(3.958

1)(2.219

6)(4.338

4)E-G

test:–

5.35

2***


FMOLS

–7.56

51–0.82

36**

*–0.46

328.79

75**

*–0.98

97**

*0.25

430.63

49**

*(1.534

2)(4.096

3)(1.672

2)(4.312

5)(4.076

9)(1.906

5)(3.320

3)L c=0.90

6[0.057

]DOLS

–6.89

34–0.52

66–0.56

846.87

01**

–0.78

400.86

230.85

12**

{1,1}

(0.952

0)(1.417

2)(1.255

7)(2.252

5)(2.049

1)(2.048

3)(2.201

6)L c

=0.02

9[>0.20

]CCR

–7.92

45–0.76

49**

*–0.49

878.76

36**

*–0.99

23**

*0.27

340.71

44**

*(1.533

8)(3.794

6)(1.563

3)(3.815

8)(3.578

9)(1.467

0)(4.015

3)L c

=0.81

2[0.087

]

Notes:A

sterisks

(***

)and(**)

deno

testatistic

alsign

ificanceat

1and5%

levels,respectively.Fo

rthe

long

-run

mod

els,figu

resinparenthe

ses(.)aret-statistic

s,figu

resin

square

brackets[.]arep-values,and

figu

resin

curlybrackets{.}arelead

andlagforDOLS.

Forthecointegrationtests,theE-G

testde

notesthe

DF

t-statistic

onthecointegratingregression

’sresidu

al.L

c-statistic

measuresHansen(199

6)parameter

instability

testforcointegration.

The

E-G

testhasanu

llhy

pothesisof

non-cointegrationwhile

theHansentest

hasanu

llhy

pothesisof

cointegration


Generally, in both Panels A and B, cointegration is detected for all fourestimators used in the analyses. For OLS, the null hypothesis of non-cointegration can be rejected at the 1% level. On the other hand, thecointegration tests shown by the Lc-statistics under FMOLS, DOLS, andCCR suggest that the null hypothesis of cointegration cannot be rejectedat the 5% level. In most cases, the long-run model of the shadow economysuggests that income, government consumption, banking sector develop-ment, tax burden, and misery index are important determinants of theMalaysian shadow economy. This is evident in Panel A, where all variablesare statistically significant at least at the 5% level. The negative relationshipbetween the shadow economy and income (or real GDP per capita,lincomet) suggests that an increase in national income would lead to areduction in the size of the shadow economy. An increase in the wealth ofthe nation gives more opportunity for individuals as well as firms to seekand earn more income in the formal economy.

Our results further suggest that government consumption (lgovcont)shows a negative relationship with the shadow economy. The inverserelationship between government consumption and the shadow economywould suggest people’s satisfaction with the way government revenueswere spent. When people trust their government, tax morale is higher.Torgler (2005) argues that people are more prone to pay taxes if they trusttheir fellow taxpayers to do the same, and if they trust the government touse tax revenues to finance public goods. In this situation, the high level oftrust leads to a high tax morale and, consequently, reduced tax evasion(also shadow economy).

The positive relationship between the shadow economy and directtaxation, as shown by personal income taxes (lpersontaxt), indicates thatincreasing individual income tax will encourage people to participate in theshadow economy. Thus, direct taxation, such as individual income tax, is aburden on the Malaysian population. Fuest and Riedel (2009) argue that acountry with a large shadow economy signifies that the country also hashigh rates of tax evasion compared to the developed world. Franzoni(1998) asserts that the loss of tax revenue may result in slow economicgrowth, upsetting the proper functioning of the government as the abilityto finance its basic expenses is threatened. Thus, fighting the shadoweconomy and tax evasion should be an important agenda item for anygovernment.

On the other hand, the misery index measures the hardships of thepopulation due to both inflation and unemployment rates. Since an


increase in inflation or unemployment rates increases shadow economyactivity, an increase in the misery index should increase the size of theshadow economy. As shown in Table 4.2, the misery index (lmiseryt) has apositive correlation with the shadow economy in Malaysia. The combinedeffect of both inflation and unemployment rates will push people into theshadow economy in an attempt to increase their income and look forcheaper goods and services.

Our main interest that emerges from this study is the nonlinear relation-ship shown between the shadow economy and banking sector develop-ment for Malaysia. As indicated by the positive θ3 sign while θ3 is negativein both Panels A and B, this would suggest an inverted U-shaped curve,a nonlinear relationship between the shadow economy and financial devel-opment inMalaysia. The inverted U-shaped curve suggests that as financialdevelopment progresses in Malaysia from a lower to a higher level, theshadow economy increases initially and then shrinks. Our findings supportthe contention by Bose et al. (2012), Blackburn et al. (2012), andBittencourt et al. (2014) that access to financing is difficult at lower levelsof financial development, and players seek alternative financing in theshadow economy; but as the banking sector develops and becomes moresophisticated, access to financing will become much easier, the cost offinancing will become cheaper, and players will be willing to participatein the formal economy as the opportunity cost in participating in theshadow economy increases.

4.5 ISLAMIC BANKING AND THE SHADOW ECONOMY

We have demonstrated that the banking sector can play a very importantrole in reducing the size of the shadow economy in Malaysia. Our nextquestion is: As leaders in the implementation of the Islamic bankingsystem, do Islamic banks play a role in reducing the shadow economy inMalaysia?

It is a fact that Malaysia is a pioneer in practicing Islamic financing.The establishment of a savings corporation, Tabung Haji (formerlyknown as Perbadanan Wang Simpanan Bakal-Bakal Haji), in 1963 wassupposed to assist Muslims in Malaysia in performing their religious dutyof pilgrimage. However, not until 1983, following the introductionof the Islamic Banking Act (1983), was the first full-fledged Islamiccommercial bank established in Malaysia, the Bank Islam MalaysiaBerhad (BIMB). Eventually, the Takaful Act (1984) was introduced,


and in November of the same year, an Islamic insurance company,Syarikat Takaful Malaysia, was founded (Thomson Reuters 2015).

At present, the Islamic banking industry in Malaysia consists of 19Islamic banks, of which 10 are local and 9 are foreign owned. Thedomestic Islamic banks include Affin Islamic Bank Berhad, AllianceIslamic Bank Berhad, AmBank Islamic Berhad, Bank Islam MalaysiaBerhad, Bank Muamalat Malaysia Berhad, CIMB Islamic Bank Berhad,Hong Leong Islamic Bank Berhad, Maybank Islamic Berhad, PublicIslamic Bank Berhad, and RHB Islamic Bank Berhad, while the foreignIslamic banks consist of Al-Rajhi Banking & Investment Corporation(Malaysia) Berhad, Asian Finance Bank Berhad, HSBC Amanah MalaysiaBerhad, Kuwait Finance House (Malaysia) Berhad, OCBC Al-Amin BankBerhad, Standard Chartered Saadiq Berhad, Alkhair International IslamicBank Bhd, Deutsche Bank Aktiengesellschaft, and PT Bank SyariahMuamalat Indonesia Tbk (Bank Negara Malaysia 2016). In terms ofassets, in 2013, the Islamic banking sector contributed 21% to total bank-ing sector assets and the remaining 79% was attributed to the conventionalbanking sector. In the same year, Islamic modes of financing made up 23%of the banking sector’s loans, and Islamic banks collected depositsamounting to 23% of the total banking system. However, the conven-tional banking penetration rate was almost three times higher than that ofIslamic banks in 2013. Malaysia had a very high conventional banking ratepenetration rate of 170% compared to 45% penetration rate of Islamicbanks (Thomson Reuters 2015).

Nevertheless, scholars recognized that Islamic banks promoted eco-nomic growth, and Islamic banks appeared to be complements to, ratherthan substitutes for, conventional banks (Imam and Kpodar 2013, 2015;Gheeraert 2014). Naceur et al. (2015) discovered that Islamic finance andShariah-compliant financial products that form the core of Islamic bankingwere associated with greater financial inclusion in the Organisation ofIslamic Countries. Furthermore, Beck et al. (2013) posited that in timesof crisis, Islamic bank are less likely to disintermediate because they arebetter capitalized, having higher asset quality and a higher intermediationratio compared to conventional banks. Thus, given the relative low accessto financial institutions and products in most developing countries(Honohan 2008), there is considerable potential for Islamic finance andIslamic banks because they can contribute to financial intermediationdevelopment by moving lenders and borrowers from informal to formalmarkets, particularly in Muslim countries.


In a recent study, Schneider et al. (2015) found that among low- andmiddle-income countries, Islamic countries have relatively small shadoweconomies compared to other non-Islamic countries. Earlier, Gheeraert(2014: 55) argued that “strong believers who refused to participate orrestricted their participation in the conventional banking system may decideto become bank clients or to increase their formal banking activities ifShariah-complaint institutions offer them the requested ‘peace of mind’.”On the other hand, Abedifar et al. (2015) also contend that Islamic bankscan convince Muslim individuals and firms with religious concerns to haveaccess to financing or move from an informal to a formal financial system.

4.6 CONCLUSION

As long as the shadow economy is of substantial size, leakage or loss of taxrevenue through tax evasion will also be substantial. Revenue from taxationis important for the elected governments of all nations. The supply ofadequate government services to society will be met if the government cancollect enoughmoney to finance social and economic programs promised tothe population. The inability of a government to collect enough money tofinance required expenses, such as public infrastructure and services, mayresult in slow economic growth, disrupting the proper functioning of gov-ernment to finance basic expenses. Thus, fighting tax evasion and mitigatingthe size of the shadow economy should be an important agenda for allgovernments.

In this chapter, we provide new estimates of the size of the shadoweconomy in Malaysia for the period 1971–2013. Further, we relate theshadow economy to its determinants—income, government consumption,banking sector development, tax burden, and hardships as measured by themisery index. Our estimated long-runmodels suggest that declining income(say, economic recessions) and increases in direct taxation, that is, theindividual tax rate, lead to increases in the size of the shadow economy.Our results further suggest that government spending leads to a reduction inthe size of the shadow economy in Malaysia. When people perceive that taxrevenue has been spent appropriately and been put to good use, probably onpublic infrastructure and services, they will be satisfied with the governmentand refrain from participating in the shadow economy. Further, hardshipswill cause them to participate in the shadow economy.

Interestingly, our study reveals that the relationship between the sha-dow economy and financial development in Malaysia exhibits an inverted


U-shaped curve: the size of the shadow economy increases at lower levelsof financial development but shrinks as financial development increases.Thus, our findings support the earlier work of Bose et al. (2012), Blackburnet al. (2012), and Bittencourt et al. (2014). An important policy conclusionis that the Malaysian government should embark on programs that areknown to reduce the size of the shadow economy, and easy access to thecredit market and further reform of the financial sector should be the focus.Since Malaysia has a dual banking system featuring both conventional banksand Islamic banks, Islamic banks can play a pivotal role in efforts to enhancefinancial inclusion among the “unbanked” population, especially amongrural and “hard-core” religious subpopulations that refuse to patronizeconventional banks that practice usury. Islamic banks can also play animportant role in providing financing to small and medium enterprisesthat do not have access to conventional banks for credit.

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Capasso, S., & Jappelli, T. (2013). Financial development and the undergroundeconomy. Journal of Development Economics, 101, 167–178.

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D’Hernoncourt, J., & Meon, P. G. (2012). The not so dark side of trust: Doestrust increase the size of the shadow economy? Journal of Economic Behavior &Organization, 81, 97–121.

Dabla-Norris, E., Gradstein, M., & Inchauste, G. (2008). What causes firms tohide output? The determinants of informality. Journal of DevelopmentEconomics, 85, 1–27.

Dabla-Norris, E., & Koeda, J. (2008). Informality and bank credit: Evidence fromfirm-level data. IMF Working Paper WP/08/94. New York: InternationalMonetary Fund.

Dell’Anno, R., & Solomon, O. H. (2008). Shadow economy and unemploymentrate in USA: Is there a structural relationship? An empirical analysis. AppliedEconomics, 40, 2537–2555.

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressivetime series with a unit root. Econometrica, 49, 1057–1077.


Eilat, Y., & Zinnes, C. (2002). The shadow economy in transition countries:Friend or foe? A policy perspective. World Development, 30(7), 1233–1254.

Elgin, C., & Oztunali, O. (2012). Shadow economies around the world: Modelbased estimates.Working Papers 2012–05. BogaziciUniversity, Istanbul, Turkey.

Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction:Representation, estimation and testing. Econometrica, 55, 251–276.

Fisher, I. (1911). The purchasing power parity of money: Its determination andrelation to credit, interest and crisis. New York: MacMillan.

Franzoni, L. A. (1998). Tax evasion and tax compliance. Working Paper Series,University of Bologna, Italy.

Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (2000). Dodgingthe grabbing hand: The determinants of unofficial activity in 69 countries.Journal of Public Economics, 76, 459–493.

Fuest, C., & Riedel, N. (2009). Tax evasion, tax avoidance and tax expenditures indeveloping countries: A review of the literature. Report prepared for the UKDepartment for International Development (DFID), Oxford University Centrefor Business Taxation, Oxford, U.K.

Gheeraert, L. (2014). Does Islamic finance spur banking sector development?Journal of Economic Behavior & Organization, 103, S4–S20.

Gordon, R., & Li, W. (2009). Tax structures in developing countries: Manypuzzles and a possible explanation. Journal of Public Economics, 93, 855–866.

Gutmann, P. M. (1977). The subterranean economy. Financial Analyst Journal,35, 26–34.

Habibullah, M. S., & Eng, Y. K. (2006). Crime and the underground economy inMalaysia: Are they related? The Journal of Global Business Management, 2(1),138–154.

Hansen, B. E. (1992). Tests for parameter instability in regressions with I(1)processes. Journal of Business & Economic Statistics, 10(3), 321–335.

Honohan, P. (2008). Cross-country variation in household access to financialservices. Journal of Banking & Finance, 32, 2493–2500.

Imam, P., & Kpodar, K. (2013). Islamic banking: How has it expanded? EmergingMarkets Finance & Trade, 49(6), 112–137.

Imam, P., & Kpodar, K. (2015). Is Islamic banking good for growth? IMFWorking Paper WP/15/81. New York: International Monetary Fund.

Islamic Banking Act. (1983). LAWS OF MALAYSIA Act 276. Available athttp://www.bnm.gov.my/documents/act/en_ib_act.pdf.

Jappelli, T., & Pagano, M. (2002). Information sharing, lending and defaults:Cross-country evidence. Journal of Banking & Finance, 26, 2017–2045.

Kamaruddin, A. J., & Ali, N. M. (2006, May 11–12).Measuring contribution ofinformal sector/informal employment to GDP in Malaysia: Development ofsurvey instrument. Expert Group on Informal Sector Statistics (Delhi Group).New Delhi, India.


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Kasipillai, J. (1998). An insight into the workings of the hidden economy. AsianAcademy Management Journal, 3(1), 1–18.

Kasipillai, J., Baldry, J., & Rao, D. S. P. (2000). Estimating the size and determi-nants of hidden income and tax evasion in Malaysia. Asian Review ofAccounting, 8(2), 25–42.

Kassim, M. Y., & Jayasooria, D. (2001). Informal economy, micro-finance andnon-governmental organisations in Malaysia. Humanomics, 17(1), 134–140.

MacKinnon, J. G. (1996). Numerical distribution functions for unit root andcointegration tests. Journal of Applied Econometrics, 11, 601–618.

Manolas, G., Rontos, K., Sfakianakis, G., & Vavouras, I. (2013). The determi-nants of the shadow economy: The case of Greece. International Journal ofCriminology and Sociological Theory, 6(1), 1036–1047.

Mohammad, A. F. (2004, May 11–14). Measuring the non-observed economy inMalaysia. Paper presented as country paper in the OECD/UNESCAP/ADBWorkshop on Assessing and Improving Statistical Quality: Measuring the non-observed economy. Bangkok, Thailand.

Naceur, S. B., Barajas, A., & Massara, A. (2015). Can Islamic banking increasefinancial inclusion? IMF Working Paper WP/15/31. New York: InternationalMonetary Fund.

Naylor, R. T. (1996). From underworld to underground: Enterprise crime,“informal sector” business and the public policy response. Crime, Law &Social Change, 24, 79–150.

Park, J. Y. (1992). Canonical cointegrating regressions. Econometrica, 60, 119–143.Perkins, D. H., & Woo, W. T. (2000). Malaysia: Adjusting to deep integration

with the world economy. In W. T. Woo, J. Sachs, & K. Schwab (Eds.), TheAsian financial crisis: Lessons for a resilient Asia (pp. 227–255). Cambridge,MA: MIT Press.

Phillips, P. C. B., & Hansen, B. E. (1990). Statistical inference in instrumentalvariables regression with I(1) processes. Review of Economic Studies, 57, 99–125.

Pickhardt, C., & Sarda, J. (2011). The size of the underground economy inGermany: A correction of the record and new evidence from the modified-cash-deposit-ratio approach. European Journal of Law and Economics, 32(1),143–163.

Pickhardt, C., & Sarda, J. (2015). Size and causes of the shadow economy inSpain: A correction of the record and new evidence from the MCDR approach.European Journal of Law and Economics, 39, 403–429.

Quintin, E. (2008). Contract enforcement and the size of the informal economy.Economic Theory, 37, 395–416. doi:10.1007/s00199-007-0295-7

Schneider, F. (2005). Shadow economies around the world: What do we reallyknow?. European Journal of Political Economy, 21, 598–642.

Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes andconsequences. Journal of Economic Literature, 38, 77–114.


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Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New estimates for theshadow economies all over the world. International Economic Journal, 24(4),443–461.

Schneider, F., Linsbauer, K., & Heinemann, F. (2015). Religion and the shadoweconomy. Kyklos, 68(1), 111–141.

Singh, A., Jain-Chandra, S., & Mohommad, A. (2012, June). Out of the shadows.Finance & Development, 42–45.

Stock, J. H., & Watson, M. (1993). A simple estimator of cointegrating vectors inhigher order integrated systems. Econometrica, 61, 783–820.

Straub, S. (2005). Informal sector: The credit market channel. Journal ofDevelopment Economics, 78, 299–321.

Takaful Act. (1984). LAWS OF MALAYSIA Act 312. Available at http://www.bnm.gov.my/documents/act/en_takaful_act.pdf.

Thomson Reuters. (2015). Malaysia Islamic finance report 2015. Kuala Lumpur:CIMB Group Sdn bhd.

Torgler, B. (2005). Tax morale in Latin America. Public Choice, 122, 137–157.Vo, D. H., & Ly, T. H. (2014). Measuring the shadow economy in the ASEAN

nations: The MIMIC approach. International Journal of Economics andFinance, 6(10), 139–148.

Wang, D. H. M., Lin, J. Y., & Yu, T. H. K. (2006). A MIMIC approach tomodeling the underground economy in Taiwan. Physica A, 371, 536–542.

Dr. Muzafar Shah Habibullah is Professor of Economics at the Universiti PutraMalaysia. He has published extensively in the field of applied economics andbanking.

Dr. Abdul Hamid Baharom is Associate Professor of Economics at InternationalCentre for Education in Islamic Finance (INCEIF). He is also the Director ofResearch and Publication at the university. His area of interest is in appliedeconometrics and economics.

Dr. Badariah Haji Din is a senior lecturer at the College of Law, Governmentand International Studies, Universiti Utara Malaysia.

Dr. Fumitaka Furuoka is an associate professor at the University of Malaya and avisiting senior research fellow at the Asia Europe Institute.


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http://www.bnm.gov.my/documents/act/en_takaful_act.pdf

CHAPTER 5

Islamic Common Market an AlternativeModel to Globalization

Mohd Ma’Sum Billah

Abstract A step toward the formation of an Islamic Common Market(ICM) was taken to bring about a unity among the Islamic countries thatwould allow them to achieve sustainable economic progress. Among theOrganization of Islamic Countries (OIC)’s prime objectives was tostrengthen intra-Islamic economic and trade cooperation in order toachieve economic integration, leading to the establishment of an ICM(http://www.oicun.org/2/23/). An attempt is made in this chapter toanalyze the possibility of the establishment of the ICM, which is the firststep towards the reawakening of the Muslim ummah in strengthening theties between Muslim countries by establishment of a Shari’ah-based trad-ing and commercial system, which would ultimately aim at creating aglobal market platform with cooperation towards furtherance economicprosperity in the globe.

Keywords Common market � Islamic � Shari’ah � Unity � Globalization

M.M. Billah (*)Islamic Economics Institute, King Abdul Aziz University, Jeddah, Kingdom ofSaudi Arabiae-mail: [email protected], www.drmasumbillah.blogspot.com


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5.1 AN OVERVIEW

The economic problems faced by several countries of the Islamic world callfor a reformed economic structure to rebuild the economic backbone ofthe Muslim world. Thus, a closer look at the economic and business statusquo of the Muslim world may reveal what had actually motivated theestablishment of the Islamic Common Market (ICM).

The establishment of an ICM entails many dimensions and phases,including determining the comparative advantage of each OIC memberstate, selecting priority sectors, facilitating market access, determining acompetitive policy conducive to a free flow of factors of production, andestablishing an Islamic free trade area. Sheikh Saud Al-Shuraim, imam ofthe GrandMosque inMakkah, Saudi Arabia, called for the establishment ofan ICM. In a 14 March 2008 sermon, the imam said the proposed marketshould follow shariah law, Arab News reported.1

A step toward the formation of an ICM was taken to bring about unityamong Islamic trading countries so as to enable them to achieve economicprogress. But after so many years, what has actually brought about thisglobal awareness? Apparently, the September 11 attacks on the WorldTrade Center and the Pentagon. These tragic events might have beenone factor behind the revival of an ICM. It was observed that, followingthese events, European countries united under one umbrella, the euro,establishing a common market for all European countries in terms ofcurrency and of running their economies and managing trade-relatedissues on the basis of common interests. The events also contributed touniting non-Muslim countries and making them hostile toward Muslims.Muslims have been generally humiliated and blamed for the events andrejected by non-Muslim countries. Now their very existence is underthreat. To ensure their identity and lives and that they may live withhonor, they must find a way to escape this unexpected humiliation andhatred. This must come about through intellectual effort using a peacefuland professional approach that does not result in harm to any livingcreature or damage to the wealth or property of others.

Hence, Muslim countries must use intellectual and strategic capacities toregain their rightful status. They can win over non-Muslims by means oftheir considerable intellectual prowess. But this is possible only if all Muslimsare united. Thus, unity may lead to the effective establishment of an ICM.The Iranian deputy minister of commerce for planning and information,

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MuhammadNahavandian, once commented that “to guarantee our politicalindependence” we must gain “economic power and expand our exports.”He further commented that “Europe endeavored for 35 years to set up itscommon market, so the Islamic countries need at least 20 years to imple-ment their ambition of creating ICM.”

5.2 RATIONAL OUTLOOK OF ISLAMIC COMMON MARKET

Because of the continuous economic and political competition betweenMuslim and non-Muslim nations, the concept of an ICM, which was firstproposed at the 12th Conference of Foreign Ministers of OIC in June1981, emerged to meet a need to bring about the economic unity of theMuslim ummah through economic integration. The main objective of theso-called Islamization of a commonmarket is to provide complete banking,financial, marketing, trade, and other related systems necessary for theummah to progress smoothly in its Islamic role, to furnish it with theessential powers and facilities for its proper functioning, and to clarify itsvision and methodology. In a nutshell, the Islamization of a commonmarket means an Islamic framework of transactions for human life andcivilization. It informs all human activities, struggles, and actions from anIslamic point of view. The ICM aims to address problematic areas such asthe following:

1. Relation between economics and politics,2. Sovereignty,3. International society and order,4. Ideology,5. Specific operational issues.

Relation between Economics and PoliticsAccording to international relations, the objectives of politics are:

i. To determine a framework for economic activity;ii. To channel economic activity in the directions necessary to best serve

the interest of the dominant nations in their economic activities. Onthe other hand, the global economic system takes on certain featuresfrom advanced industrialized nations, which in turn leads to a

5 ISLAMIC COMMON MARKET AN ALTERNATIVE MODEL TO GLOBALIZATION 65

transformation of the political system. In fact, in Western economicthought and politics, regional economic integration has been con-sidered as a means (to achieve political dominance) and as ends(greater material welfare). Therefore, the European EconomicCommunity puts forth the following proposals:•We should not think of achieving economic unity without politicalunity since these two are interdependent aspects of a general stateof unity;

• To reinforce political unity, we need the help of a common basis ofidentity and a supranational axis of loyalty.2

SovereigntyAlthough integration is very important to enrich the economic condi-tion of a country, it is not an easy task to accomplish because ofextended dependence of each nation on its sovereignty. Economiccooperation is not far of that in terms of its importance. An examinationof the history of economic development of any nation reveals thateconomic cooperation has been behind whatever does not depend onpolitico-economic adjustment but the use of sovereign rights. Since adynamic society is continually undergoing change and the needs ofsociety follow that path, economic integration helps to maintain theeconomic system by modifying existing elements and sometimes creat-ing entirely new ones. The emergence of the Organization of EuropeanEconomic Cooperation (OEEC) was the fruitful outcome of such aprocess.

International Society and OrderIn the era of globalization, no single society can gain economicallywithout creating or seeking the help of other nations. The developmentor decline of one nation is a good lesson for others. The emergence ofEuropean security policy is the outcome of continuous threats from theEast is an example.

IdeologyIdeology is a set of frameworks on the basis of which a certain issuedevelops. In the case of ICM, the ideological base is important. If wereally want to have a strong economic base, there should be no devia-tion of that particular ideology among Muslim countries. A properIslamic ideology, totally based on Islamic values and principles, can

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bring perfect economic progress for the Muslim ummah. Since ICMinvolves ummah, it should implement Islamic ideology.

Specific Operational IssuesAs mentioned earlier, the economic condition of a particular nationdepends entirely on the availability of foreign capital; hence, thecontemporary issue of ICM also depends on the formation of afree-trade zone. For the ICM to be successful, all Muslim nationsshould end competition among themselves, which is opposed tointegration.

In the modern world, dominated by the West, the Muslim ummahshould be united under one umbrella like the ICM,3 which can developthe ummah economically and politically. The ICM is being designednot only to help Muslims but non-Muslims as well. But the mainproblem with this program is that it is a gradual process that will taketime to be implemented, mainly because of the geographical distancesthat separate Muslim countries. Regardless of these distances, we stillbadly need to show a unified Muslim ummah to safeguard the cultural,economic, and political identities of Muslims from the onslaught ofglobalization.

5.3 IMPORTANCE OF ISLAMIC COMMON MARKET:UNIVERSAL VIEWS

i. Hosni Mubarak, Egyptian president, mentioned the importanceof an ICM by saying that all Muslims should work together to setup a common market based on frankness and transparency.Despite United Nations sanctions against Iraq, he said that weshould have economic ties with Iraq to set up a free trade zone.

ii. Former OIC secretary general Mr. Ezziddin Laraki emphasized eco-nomic integration of Muslim countries. According to him, the estab-lishment of an ICM is necessary to overcome Muslims’ sufferings atthe hands of the West. The Palestinian issue, the situation of Muslimrefugees, desertification problems in some African Islamic countries,and other issues are among the examples of situations that, accordingto him, need to be resolved through the establishment of the ICM.

iii. The topmost concern relates to Bangladesh. Actually Bangladesh firstmooted the idea of an ICM. The Bangladeshi foreign secretary said,


iv. “Bangladesh will urge further strengthening of cooperation amongMuslim countries on the basis of Islamic solidarity to face theemerging challenges of globalization.”Former prime minister of Bangladesh Begum Khaleda Zia alsoreiterated the country’s position on the Palestinian issue and theright of Palestinian refugees to return to their ancestral homes tolive in honor and dignity.

v. Mahathir Mohammad, former prime minister of Malaysia, empha-sized this issue and suggested implementing a single currency forOIC member countries and not to exclude other markets. He thusagreed that “A common currency will bring Islamic countries closer toone another.”4

The preceding discussion makes it very clear that the Muslim world holdsgreat potential for their enrichment, both economically and politically. Theycan form a dominant bloc in the world, especially vis-à-vis the West, as theyonce had been. But the problem is that they are not united and do not sharetheir resources among one another. If they can resolve these problems, then aunified economic system in the form of an ICM, which would represent agenuine threat to the West, would not be far off.

5.4 DIMENSIONS OF THE ISLAMIC COMMON MARKET

Two dimensions in the process of forming an ICM must be pursued: first,cooperating on intellectual, spiritual, and scientific matters; second, establish-ing suitable bases for pursuing and implementing common goals. Accordingto former deputy chief of the OIC Mr. Dialo, customs regulations amongIslamic countries inhibit trade among those countries in the internationaleconomic arena. The amount of imports and exports exchanged betweenIslamic countries indicates their vast potentials and market needs.Mr. Nahavandian, at the OIC conference held in Iran on the issue of creatingan ICM, was of the view that in order to establish an ICM, certain steps mustbe followed:

The approach towards the formation of the ICM should be a step-by-step process. Regional organizations, such as the Economic CooperationOrganization (ECO), the Persian Gulf Cooperation Council, the ArabicMaghreb Cooperation Council, and others, need to be unified. The OICsecretariat and all of its related bodies should mobilize their experiencesand power. A strategic committee should be formed to speed up the

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process and ensure the success of its formation by monitoring all thestages. Their duties include scheduling and setting up action groups tomake the necessary arrangements, addressing structural topics of modernglobal business such as electronic trade, conducting market surveys, iden-tifying comparative advantages, drawing up standards for transport, ser-vices, commerce, and customs, and adopting a unified Islamic stance withrespect to the World Trade Organization. Many prerequisites andenabling conditions must be dealt with to enable the actualization of thegoal of ICM formation. Hence, OIC member states should be deliberateand take a step-by-step approach to setting up a common market.

These prerequisites and enabling conditions include the buildingblocks, existing institutions, and various regional and subregional arrange-ments. The first step, as surmised at the Iranian Summit for ICM, is theimplementation of the Plan of Action for Economic and CommercialCooperation among OIC Member States providing the necessary basicframework for cooperation. This includes the OIC framework Agreementon Trade Preferential System signed in 1991 that provides a basic frame-work for setting up preferential trading arrangements. To ensure thesuccess of this first step, OIC member states that have not yet signed onshould do so as soon as possible.

In pursuing the establishment of the ICM, the sole purpose should be toremove the barriers and restrictions on exports and imports of goods, capital,and human resources among Muslim countries. This object was further con-firmed in the report of the OIC general secretariat Preparation of theUmmahfor the Twenty First Century in the Area of Economic, Trade and FinanceCooperation among the OIC Member Countries, in which it was also men-tioned that bringing theMuslim community under one umbrella is the key toestablishing an ICM. As an experiment, on 1 January 2008, the six-memberGulf Cooperation Council (GCC), with combined economies of USD 715billion, made history with the launch of a commonmarket, which should havebeen expected to attract more foreign investment to the region.5

Hence, given the differences in views among Muslims themselves, acomprehensive and phased strategy that can facilitate bringing togetherthe various ideas and concepts of the disparate Muslim communities is the“most wanted” objective today.

As is evident from the prospering Arab countries, many Muslim coun-tries that are members of the OIC enjoy a level of wealth that can be usedfor this cause. It is the duty of OIC countries to think about this projectand devise ways to use this wealth most efficiently in the creation of the


ICM. Another aspect, not to be ignored, is the so-called money matter. Itis essential that the countries participating in the establishment of the ICManalyze fully the potential benefits and costs of the various stages ofeconomic integration. This step is required to ensure that they do notenvision any potential obstacle that might prevent them from achievingtheir objective. This will assist them in coming up with solutions toemerging threats. Bringing the entire concept into one fold, it is herecommented that the realization of the ICM is heavily dependent on,besides the blessing of Allah, rationalizing the commercial and economicrelations among Muslim countries. Therefore, efforts should be directedtoward creating an agreement on economic and commercial cooperationamong Muslim countries since without this cooperation, a common mar-ket would just be a pipe dream.

5.5 CHALLENGES IN ESTABLISHING AN ICMIslam is a comprehensive way of life that addresses every aspect of life.Because we believe in Islam, we should, it seems, be able to simplyestablish an ICM by following the guidelines of Islam. But in reality,there exist barriers to achieving that plan. The main barriers are globaliza-tion and a lack of unity among Arab countries. They exist because ofcertain specific reasons, as follows:

5.5.1 Globalization as a Threat

Former Foreign Secretary Ambassador Farooq Sobhan (OIC) commentedthat the Western world considers Islam a challenge; hence, the entire Muslimummahmust be united for survival. In this context, it is not worth comment-ing that the dominant view on achieving success is that it must be done byadopting globalization in all activities. It is this path that Muslim countriesshould also follow. Globalizing their ideas will enhance their growth andprosperity. Yet, globalization is seen as a threat to their existence! Why isthat so? On the political throne of power today sit non-Muslims, especiallyAmericans, around whom political power and globalization are centered.Today, globalization favors non-Muslims. Everything in this sphere is con-trolled by them. Accepting and adopting globalization means adopting theways of non-Muslims. But is that what the ICM aims to do? Obviously not!WeMuslims would like to follow the path as laid down for us by our AlmightyLord, Allah. This means shifting the ideology of globalization from aWestern

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perspective to an Islamic one. With the Western world viewing Islam as achallenge, and given their hatred of Islam, this will be a very difficult task toaccomplish. And with the technological revolution, the goals of the ICMcannot be achieved at an international level if it does not adopt globalization.Shafi Sami argued that emotion cannot be the only basis for developingcooperation; expansion of trade and economic cooperation among OICcountries is required.On the other hand,Westerners will do everythingwithintheir power to stop them from globalizing because that would threaten theirpolitical power. This is where globalization is seen as a threat to the establish-ment of the ICM. Yet the achievement is being realized. Eckart Woertz,former program manager in economics at the Dubai-based Gulf ResearchCenter, said that “the new move demands opening of GCC markets andharmonization of regulations, ranging from labor laws to pension schemes andsocial security entitlements.”6

5.5.2 Lack of Unity

The greatest force of Muslims exists in the Arab world. More than 60% ofthe Muslim community is composed of Arabs. It is also noteworthy thatArabs have never made overtures toward their economic integration, andit is sad to say that this has never been their goal. If only such a hugepopulation were united! Then it would not be very difficult to establish anICM. Hence, unity could enhance Islamic growth economically on a largescale. Moreover, non-Muslims see a great benefit in their lack of unity interms of politics and economics and hence always make sure that thereexist some sort of differences in how they handle issues.

5.6 ESTABLISHMENT OF AN ISLAMIC COMMON

MARKET: THE WAY FORWARD

The following guidelines may be considered for the successful implemen-tation of the ICM:

1. It is not enough just to make strategic plans; the plans must beimplemented. To strengthen economic ties among Muslim coun-tries, they need to agree on three things:(a) Economic cooperation among Muslim countries,(b) Establishment of a preferential trade arrangement among the

countries,


(c) Agreement on Islamic cooperation for insuring investment andexport credit.

2. The implications of an ICM should be analyzed from the point ofview that it would play an active part in global trade.

3. To achieve the objectives of the ICM, Muslim countries shouldextend their cooperation and coordination to areas of market access,competition policy, and a policy on economic transfers.

4. To succeed at economic cooperation, Muslim states should cometogether to formulate a concrete proposal.

5. There should be ample inspiration to take the initiative to the privatesector.

6. Establish a free trade zone among Muslim countries to expand tradeand investment.

5.7 CHALLENGES7

Globalization is a threat to Muslim nations in general and the OIC inparticular. It is deadly against the decision of the OIC to establish anICM. To overcome this threat and to make the establishment of an ICMa reality, there is a need for strong unity among Muslim countries thatwould allow us to protect the cultural, economic, and political identitiesof Muslims from the onslaught of globalization. To implement theconcept of ICM, many fruitful and strategic plans have been suggestedby Muslim intellectuals from around the world. They have identified thethreats and indicated how they could be resolved. M. Kabir Hassanstressed the need for a massive transfer of funds from the oil-rich Arabcountries to non-Arab Muslim countries in the interest of solidarity andunity of the Muslim ummah. He stated, “Today, Islamic finance is one ofthe world’s largest growing sources of capital. Since 1985, the funds man-aged by Islamic banks have multiplied fivefold from only USD 5 billion tocurrent estimates of USD 80 billion.”

Indeed member countries need to exercise their political will overmeaningful trade and economic cooperation and avoid the dependenceon emotion through which we can also constitute a threat to theWestern world. But the main challenge to maintaining a smooth pro-cess of establishing an ICM is to avoid groupings and regroupings

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among Muslim countries for the development of trade. One of the mainsteps to take in this project is to enhance trade and economic activitiesamong Muslim countries with an emphasis on poverty eradication inthe least developed countries, followed by the introduction of a singlecurrency for OIC member states. Muslim countries must realize the factthat unity is power and comes through proper cooperation and under-standing of each other.

5.8 REGULATORY FRAMEWORKS

The establishment of any entity requires the application of a certain codeof ethics, and this implies some form of regulatory body. The regulatoryframework of the ICM has two main attributes, namely, Shariah rulingsand Cooperation, as enshrined in the Qur’an.8

5.9 ISLAMIZATION OF A COMMON MARKET:SHARIAH RULINGS

Before discussing the Islamization of a common market or the Islamicperspective on a common market, I would like to shed some light on theIslamization process itself. Islamization represents the truth, the justice, thetransformation, and the reformation that concern all Muslims. An Islamicmarket system is a unique system based on Islamic values and principles.Therefore, Islamization of a common market is of fundamental importanceand represent the foremost priority in actualizing Islamization. The primeimportance of the Islamization of a commonmarket is to reform the thoughtand methodology of the West as implemented in Muslim countries.

5.9.1 Mechanisms for Islamization of a Common Market:

The process of Islamization of a common market can be broken down intothree phases:

i. The entire Western system should be critically examined and itsdrawbacks and shortcomings pointed out.

ii. The rest should be restated so as to be in total conformity with anIslamic system.


5.9.1.1 CooperationCooperation is another important element in an ICM; it relies on variousfeatures. To establish an ICM in the modern world, at the very least a stateof neutrality is needed for the promotion of such a market. Islamic statesshould strive to eliminate the animosity and hostility that often characterizesrelations among various Muslim states. To ensure the ICM’s success, thereshould be no political disputes among Islamic nations; in addition, throughcooperation among OIC Countries, the Muslim ummah can be a dominantpresence in the world and establish a unique system through which it canserve the betterment of all humanity, both believers and nonbelievers,within the divine spirit of the Qur’an.9

Muslim nations are rich in natural resources. But those resources arenot used efficiently and remain within the country of origin. ButIslamic history does not teach this tradition. Islamic rule was thedominant model in the entire world at that time simply because OICCountries were to prepared to cooperate with and help their Muslimbrothers.

At this critical juncture, when Muslim countries are in danger, whenthe West represents a grave threat to us, we need to forget our jealousiesof each other. The situation calls out for us to unite. If we can cooperate,if we can help each other, then we can bring back the true marketingsystem for humanity, which is in line with Islamic teachings, and ulti-mately we can establish a perfect ICM, which will be the model forpeople everywhere.

5.10 STRATEGIES FOR ESTABLISHING

AN ISLAMIC COMMON MARKET

The main concepts required for an ICM to function are, as Dr. Ja`farSheikh Idris says in his reportUnity Among Western Muslim Communities,aqeedah, ibadah, akhlaq, jihad, and political unity.10Aqeedah means beliefsystem, and according to the Qur’an and the Sunnah of the Prophet, therecan be no deviation from it. Ibadah means doing things with the aim ofpleasing Allah. Akhlaq is to conduct activities with honesty. Thus, prac-tices like interest, bribery, usury, and hoarding should be avoided.

The effective establishment of an ICM requires possible strategic andShariah-justified regulatory plans, which means, first, bringing about anIslamic society with due awareness. But this strategy shall be free fromany element of terrorism. A strategy must contain a certain code of

74 M.M. BILLAH

ethics, but terrorism has none. That is why one cannot claim theSeptember 11 attacks were part of a strategy; it is considered to be anunlawful action committed by terrorists. And the second implication in astrategy is the means, in this case by word of mouth.

The last point is that of political unity. Muslims are supposed to be verydistinct from other communities, even in their political organization, thatis, a Muslim community must be ruled by a ruler who follows Islamic rulesand regulations (Shari’ah) and they must be well versed in the Qur’an andthe Sunnah of the Prophet.

5.11 FINAL REMARKS

The big picture: Even a man with closed eyes can clearly witnessMuslim oppression by the West, especially Jews and Americans. Theirsincere and devoted attempts to erase the Muslim race from the uni-verse more precisely from the solar system are evident and start throughsoft drink sales. On the practical side, what do we call the inhumanetreatment of the Palestinians or Iraqis? The cries of the Palestinians andthe realization that Muslims’ existence has been severely threatenedhave reignited an awareness of the need to rebuild Muslims’ identity,reunite the Muslim ummah, reposition our political structure. And totake the first steps, it is first necessary to lay a strong economicfoundation.

Looking at Muslim countries, it is clear that economic integration islacking. But without economic integration, economic wealth is a meredream. Hence the baby of a strong economic foundation is economicintegration. In an attempt to bring about this integration, the OICmember states have resolved to establish an ICM that will integrate thebanking, financial, political, and economic activities of all Islamic coun-tries. This integration will unite the Muslim ummah and enable the crea-tion of a major Islamic force that no foreign policy can overtake orsuppress. This is the aim of the ICM to reunite Muslims and to increasethe power of Muslims in the world and save them from the humiliationand harassment of foreign powers.

This is a difficult task. Unity is the key factor in this pursuit, and it isdefinitely absent in the Arab community, but the Arab community iswhere unity should start since Arabs represent the majority of Muslims.This disunity is seen in trade environments. Hence, these barriers need tobe removed. Moreover, global power is driving the efforts towards the


shallow part of the sea. Hence these are the two issues that must be dealtwith to establish an ICM.11

In terms of achieving the goal of an ICM, the following principles mustbe observed:

• Aqeedah (belief),• Akhlaq (conduct),• Ibadah (worship),• Siyasah al Islamiyah (political science),• Huquq wa al-Wajibat (rights and obligations),• Ta’awun (mutual cooperation and solidarity).

Just as technology is the right hand of the world order today, itscoming generation is the backbone of the “life of the universe”—just astechnology has conquered both the world and outer space. Muslim com-munity growth and enhancement will remain a buried story if Muslimyouth do not contribute to its survival because young people are our righthands, the backbone of the Muslim ummah,12 and have the power torestore Shariah in economic life. Thus to submit this vision, a true ICMrequires intellectual effort and strategies, along with unity within theShari’ah standard.

NOTES

1. https://www.thetrumpet.com/article/5395.82. Beg, T. (1994, January). Islamic Common Market: Some conceptual and

operational issues in the light of European community experience. Journalof Objective Studies, 6 (1), 48-67.

3. Dabour, N. M. (2004). Implications of establishing an Islamic CommonMarket: Gradual integration and possible consequences. Journal ofEconomic Cooperation, 25 (1), pp 71-98.

4. https://www.thetrumpet.com/article/5395.85. http://www.global-islamic-finance.com/2008/01/gcc-common-market-

becomes-reality.html#ixzz48KXDmHFv6. http://www.global-islamic-finance.com/2008/01/gcc-common-market-

becomes-reality.html#ixzz48KYxfqLX7. Resolution No.33/25-E, Resolution Establishing on Islamic Common

Market, Raahbar Informatics Co. Tehran, 1997.

76 M.M. BILLAH

https://www.thetrumpet.com/article/5395.8


http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html#ixzz48KXDmHFv


http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html#ixzz48KYxfqLX


8. See al-Qur’an 5:2.9. See al-Qur’an 5:2.

10. Idris, J.S., Unity among Western Muslim Communities, Islam.com11. http://www.global-islamic-finance.com/2008/01/gcc-common-market-

becomes-reality.html12. SESRTCIC (2003), Id.

REFERENCES

“Plan of Action to Strengthen Economic and Commercial Cooperationamong member countries of the organization of the Islamic conference”:Resolution No. 1/3-e (IS) of the third Islamic summit conference, 25–28January, 1981, Makkah al-Mukarramah and Taif, Kingdom of SaudiArabia.

http://www.oicun.org/2/23/https://www.thetrumpet.com/article/5395.8http://en.iccima.ir/news/iccima-news-bulletin/iran-chamber-bulletin/item/

7410-islamic-common-market-tied-to-halal-brand.htmlBeg, T. (1994, January). Islamic common market: Some conceptual and opera-

tional issues in the light of European community experience. Journal ofObjective Studies, 6(1), 48–67.

Dabour, N. M. (2004). Implications of establishing an Islamic Common Market:Gradual integration and possible consequences. Journal of EconomicCooperation, 25(1), 71–98.

Idris, J. S., Unity among Western Muslim communities, Islam.comResolution No.33/25-E. (1997). Resolution establishing an Islamic Common

Market, Raahbar Informatics Co., Tehran, http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html#ixzz48KYxfqLX,http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html#ixzz48KXDmHFv

SESRTCIC. (2003, February). Implementations of establishing an Islamic com-mon market: A Program for gradual integration. Ankara.

Mohd Ma’Sum Billah, PhD is a professor of finance, Islamic economics insti-tute, King Abdul Aziz University, Kingdom of Saudi Arabia. His area of expertisespans across finance, petroleum trade finance, insurance, investment, and capitalmarket. He has extensively, taught, supervised, published and advised on areas offinance, capital market, insurance, and investment.


http://Islam.com

http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html

http://www.global-islamic-finance.com/2008/01/gcc-common-market-becomes-reality.html

http://www.oicun.org/2/23/


http://en.iccima.ir/news/iccima-news-bulletin/iran-chamber-bulletin/item/7410-islamic-common-market-tied-to-halal-brand.html

http://en.iccima.ir/news/iccima-news-bulletin/iran-chamber-bulletin/item/7410-islamic-common-market-tied-to-halal-brand.html

http://Islam.com





CHAPTER 6

Issues Deterring the ContinuedGrowth of Awqaf in Bangladesh:

The Way Forward to Its Developmentand Widening the Scope of Its Benefits

Abu Umar Faruq Ahmad and Muhammad Fazlul Karim

Abstract The awqaf funds in Bangladesh own a huge amount of under-utilized national assets, which have the potential to contribute immenselyto the overall socioeconomic development of the country. This chapterseeks to share and explore the current status of the awqaf sector inBangladesh from legal and regulatory perspectives and underlines theareas that need a fresh look for revitalization and utilization of awqaf .This paper primarily argues that the assets held by the awqaf propertiescould be utilized more efficiently to lift the poor segment of the popula-tion out of the ocean of poverty. This can be done by instituting necessarychanges in awqaf management to align with current needs.

A.U.F. Ahmad (*)Universiti Brunei Darussalam (UBD), Gadong, Brunei Darussalame-mail: [email protected]

M.F. KarimAhmad Ibrahim Kulliyyah of Laws (AIKOL), International Islamic UniversityMalaysia (IIUM), Selangor, Malaysiae-mail: [email protected]


79

Keywords Problems � Prospects � awqaf � Bangladesh � Socio-legalperspective � Waqfs Ordinance1962

6.1 INTRODUCTION

Bangladesh has a population of approximately 140 million, 87% of which isMuslim, which represents the third largest Muslim population in the world.Waqf , as a religious charitable institution, has been in existence in this SouthAsianMuslim country for centuries (Heffening 1987). BangladeshiMuslimshave high regard for religious activities and thus have a rich tradition ofestablishing awqaf for various types of religious, educational, and socialwelfare purposes (Rashid 2002). awqaf properties in Bangladesh consist ofmasajid, madaris, eidgahs,1 graveyards, pharmaceuticals, cultivable agricul-tural lands, barren lands, forests, hillocks, and urban lands. There are manyplots of urban real estate in the major cities, such as the capital city of Dhakaand the port city of Chittagong. Such waqf properties include, for instance,the Masjid Baitul Mukarram (the National Mosque) complex in the capitaland the Andarkillah Shahi Jame Masjid complex in Chittagong. Both prop-erties have huge shopping complexes that are leased (Bangladesh MosqueCensus 1983). In addition, there are residential buildings that are mostlyused by the descendant beneficiaries of the waqifs. Although dargahs andmazars2 have no place in Islam, they constitute a large portion of the waqfproperties in Bangladesh.Most of these properties are recognized aswaqf bylong-time users.3 Such estates include, for instance, Shah Jalal and ShahPoran’smazars in the northeastern district of Sylhet. Although these proper-ties are unlawful in Islam, they earn a huge income, albeit without anyapparent investment. The main sources of income for these properties arevarious kinds of offerings, gifts, and consecration of donations (Islam n.d.).

As far as registration with the Office of theWaqf Administrator (OWA) isconcerned, awqaf properties in Bangladesh can be categorized into threebroad groups: (1) awqaf registered with the OWA, (2) awqaf created asprivate trusts and not listed in the OWA in the Ministry of Religious Affairs,and (3) awqaf managed by mutawallis or committees without registeringwith theOWA.Onlywaqf properties in the first category fall under thewaqfadministrative system of the government. Since waqf properties in thesecond and third categories are not registered, they are not under the directcontrol of the OWA because the OWA is not directly involved in varioustypes of dealings, decision making, and day-to-day activities of these twocategories of waqf properties (Mannan 1987).

80 A.U.F. AHMAD AND M.F. KARIM

Recent years have also seen the emergence of a new trend, relatively newin Bangladesh, of making waqf money in cash or better known as cashwaqf.It is encouraging to note that in Bangladesh a couple of private banks havepioneered the introduction of cash waqf (IBBL 2004). Dedicating intellec-tual property as waqf is another interesting development in Bangladesh thathas come into practice recently. Some Islamic scholars initiated this nobletradition by dedicating the copyrights of religious books of their own thatthey have either themselves authoredor translations of other great Islamicscholars’ work (Gibb & Kramers 1981).

6.2 GENESIS OF AWQAF LEGISLATION IN BANGLADESH

During the British occupation, waqf estates were administered underMuslim personal law (Shari’ah) dealing with the fundamental aspects ofawqaf (Cizakca 1992). The chief qadi of a district would serve as theguardian of waqf properties in the district of his jurisdiction. However, thedistrict chief judge had no proper control and constructive or well-articu-lated mechanisms to supervise and manage the waqf properties. In theabsence of governing legislative guidelines, particularly on waqf ahli (familywaqf ),the privy council held in the case of Abul Fata Mohamed Ishak vRusomoy Dhur Chowdry4 that the dedication of property by way of waqf forfamily settlement was invalid. This controversial judgment created wide-spread discontent in the Muslim community throughout the Indian sub-continent.5 Cosequently, the Waqf Validating Act of 1993 was enacted; itskey objectives were to overturn the decision of the Privy Council regardingsettlement on waqf properties, among others. This act paved the way forMuslims to settle property by waqf for the benefit of their families, children,and descendants. This was how awqaf properties in Bangladesh (the thenundivided Bengal) started to come under government supervision.

However, it was not possible in an undivided Bengal to make provisionsfor financing the waqf Administration from the public exchequer, and sofor the first time the government passed a special act in 1934, known asthe waqf Act of Bengal 1934, on the supervision and protection of waqfproperties through a statutorily autonomous organization headed by anofficer designated as waqf Commissioner of Bengal. The Bengal Waqf Actof 1934 made it possible to pay expenses incurred by the waqfAdministration by collecting contributions from the net income of waqfproperties (Hashmi 1984).6 One of the main objectives of the act was tosafeguard waqf properties from mismanagement, misappropriation, and

6 ISSUES DETERRING THE CONTINUED GROWTHOF AWQAF IN BANGLADESH . . . 81

indiscriminate acts of the mutawallis concerning the administration ofwaqf properties.

Following the creation of Pakistan in 1947, the Bengal Waqf Act of1934 was adopted for East Pakistan (now Bangladesh) and was applied inadministering the awqaf . Then, in 1962, theWaqf Ordinance of 1962 wasenacted without repealing the BengalWaqf Act of 1934, and to date the actremains in force. Section 103 of the Waqf Ordinance 1962, however,provides that this ordinance shall be in effect regardless of any inconsistencytherewith in any document, decree, or order of any court, deed, or enact-ment other than this ordinance. Therefore, by virtue of Section 103, theprovisions of the ordinance shall prevail over the Bengal Waqf Act of 1934if any provision contradicts the ordinance. Some of the major changes thatthe ordinance brought about include, first, that a uniform rate of waqfcontribution was fixed for the first time; and secondly, that the very post ofthe Waqf Commissioner was re-designated as Waqf Administrator givinghim some quasi-judicial and administrative powers.

Bangladesh became an independent state in 1971 and the WaqfOrdinance 1962, which governed awqaf in then East Pakistan, was adaptedand retained by the government of Bangladesh as such in accordance withArticle 5 of the Adaptation of Existing Bangladesh Laws (PO 48) of 1972.7

6.3 PRESENT LEGAL AND ADMINISTRATIVE STRUCTURE

OF WAQF ADMINISTRATION IN BANGLADESH

Initially, the awqaf sector in Bangladesh used to be under the Ministry ofEducation. Then, in 1972, it was brought under the Ministry of LandReforms and Land Administration. Currently awqaf affairs in Bangladeshare governed by the Ministry of Religious Affairs. By virtue of section 7 ofthe Waqf Ordinance 1962,8 the government appoints an administrator,who must be Muslim, of Waqf 9 for a 5-year term.10 The ordinance alsoprovides for a waqf committee11 to assist the administrator. The ordinancealso contains provisions for deputy and assistant administrators12 whomthe government may, in consultation with the administrator, appoint asdeemed necessary. Pursuant to this, the waqf administrator of is assisted by2 deputy administrators, 6 assistant administrators, 18 waqf supervisors,18 waqf auditors, and 54 other staff members (Rahman 1984).13 Thatbrings the total number of staff to 98. The Office of the Administrator ofwaqf s is located in the capital city of Dhaka since is specifically required and


provided for in section 12 of the ordinance. Apart from the office ofthe administrator in Dhaka, there are 4 divisional offices and 24 district-level offices. This brings the total number of offices handling awqaf affairsthroughout the country to 29 (Rahman 1984).14 However, the WaqfAdministration in Bangladesh is highly centralized. The divisional anddistrict-level officers are not authorized to make decisions and give orders(Mannan 1995). The power to make decisions and to give orders lies solelywith the administrator at headquarters in Dhaka (Bode 2002). At present,however, the awqaf sector in Bangladesh is governed under the WaqfOrdinance 1 of 1962, which is the only legislation in force in the country.

In accordance with section 47 of the ordinance, all awqaf , whether existingor created after the commencement date of the ordinance, are to be registeredat the office of the administrator. Once an application for the enrollment of awaqf is received, the waqf administrator processes the applications by exam-ining the waqf deed, account, and objects. The application for enrollmentmay be made by the waqif (the settlor), mutawalli (manager), or waqfcommittees. Although such enrollment is required by virtue of this section(60), and the ordinance imposes a penalty of up to Taka 2,000 or imprison-ment of up to 6 months for those mutawallis who fail to enroll their awqafwith the waqf office, many mutawallis nevertheless do not enroll and some-how escape punishment which indicates lack of proper application of therelevant waqf laws. Properties not enrolled are managed by the mutawallisaccording to the provisions of thewaqf deed (TheWaqfsOrdinance 1962). Itsays: “…Notwithstanding anything contained in the waqf-deed, every muta-walli may pay from the income of the waqf property any expenses properlyincurred by him for the purpose of enabling him to furnish any particulars,documents or copies under section 47, or any accounts under section 52, orany information or documents required by the Administrator or a personauthorised by the Administrator, and for the preservation or benefit of thewaqf property.” [THE WAQFS ORDINANCE, 1962 (EAST PAKISTANORDINANCE NO. I OF 1962)].

6.4 KEY CHALLENGES IN DEVELOPMENTS

OF AWQAF IN BANGLADESH

Thewaqf sector in the country represents an underdeveloped, underutilizedsegment of the national wealth, which awaits proper and better utilization.The problems facing the country’s waqf institutions are numerous and of


enormous magnitude. Some of the major challenges currently facing thewaqf sector in Bangladesh are discussed in what follows.

6.4.1 Inadequate Manpower

As cited earlier, compared to the magnitude of the total number of waqfproperties, a very small number of officials manage the awqaf sector. Only98 officers and employees manage nearly 100,000 waqf properties through-out the entire country. For the proper administration and management ofsuch a huge number of waqf properties scattered all over the country theawqaf sector needs a sizable number of qualified staff. Bangladesh has 64administrative districts. Owing to a lack of manpower, only 29 district officesoverseewaqf properties in all 64 districts. These district offices have only onesupervisor to cover nearly 800waqf properties. If and when that person goesto audit or inspect a waqf property, the office of the supervisor remainsclosed. The divisional offices of Dhaka, Khulna, Rajshahi, and Chittagongdivisions have been brought under the direct control of headquarters, againowing to a lack of manpower (Islam n.d.).15

6.4.2 Unregistered Waqf Properties

Although section 47 of the ordinance requires that “all waqf s existing at orcreated after the commencement of this Ordinance shall be enrolled at theoffice of the Administrator,”more than one-third of the total waqf proper-ties in Bangladesh remain unregistered. According to the survey conductedby Census of Waqfs in 1986, the number of total waqf property inBangladesh was, 150,153 waqf properties in the country, among whichonly 97,046 were registered, 45,607 were verbal, and the remaining 7,940were traditionally acquired. Thus, as many as 53,547 waqf properties arenot registered. The reason for not registering the waqf properties is notknown. However, it could be due to various factors. First, the existence oftheWaqf Administration is not known tomany people, particularly in ruralareas. Second, the underregistration might represent a deliberate attemptto evade being controlled by the Waqf Administration. Third, it might bean attempt to evade payment of the 5% levy imposed on all registered waqfproperties. As such, the Waqf Administration has no control over theseproperties.16 This is a very disappointing state of affairs that must beaddressed with serious measures. Bringing these properties under the


direct control of the office of the administrator would, among many otherbenefits, definitely increase the waqf income in the country.

6.4.3 Illegal Occupation and Misappropriation of Waqf Properties

Many awqaf properties are illegally occupied by private individuals ororganizations and groups or even by government agencies. It has beenreported (to mention just one prominent example) that the country’spolice headquarter in Dhaka stands on waqf land.17 This area (that thepolice HQ occupies) is in the heart of the capital city. It could be developedinto a huge profit-making business enterprise. Many waqf properties areunderutilized, for example, they are leased at a very low rental rate, whilemany others are being misappropriated.18

There are innumerable cases of neglect and encroachments and illegaloccupations. There is hardly any mechanism for detecting detect suchthings and recover property in and outside courts of law because thereare no legal provisions exist to enable this, nor does exist any socialpressure for such recoveries. Adequate and competent staff is lacking,and as a result the lone waqf committee for the whole country does nothave the resources to make frequent and thorough inspections to preventthe mismanagement of waqf properties. The 5% contribution from waqfincome that is diverted to the committee has not benefited the countryvery much. Nearly the entire amount is spent on administration. Nor is thecontribution realized effectively and very large realizable balances havereportedly accumulated. Therefore, at the very least it can be said that thewaqf committees of Bangladesh have delivered no service of value for thecountry; the same may be said of the mutawallis.

6.4.4 Uncollected Arrears

The recovery of arrears of contributions is another systemic problem. Theordinance provides for this recovery under its section 71. Moreover, itprovides a punitive method of collecting contributions. But despite theseprovisions, huge amounts of arrears have piled up in recent years. To putthe finances of the Waqf Committee on an even keel, unpaid contribu-tions must be speedily recovered. In this respect, the experiences faced andprocedure adopted under the Indian Waqf Acts of 1995may be taken intoconsideration (WIR 1976).


6.4.5 Operational Inefficiency and Problem of Waqf Disputes

Hundreds of waqf -related disputes are adjudicated by the various courts andthe OWA.19 This number increases every day. The waqf administrator per-forms quasi-judicial functions. Disputes related to illegal possession or transferof waqf properties, misappropriation, improper management, and so on, arereferred to the waqf administrator. He conducts hearings like a judge andhands down a judgment that is binding unless it is overruled by an appealscourt. In cases of illegal possession or transfer of a waqf property or illegalinterference in the management of waqf properties, the waqf administratorenforces his order with the help of the local administration of the governmentat the district level. However, as mentioned earlier, compared to the totalnumber of waqf properties in the country, a very small number of officialsmanages the waqf sector, so the Waqf Administration is overburdened withnot only a large number of cases but also many other relevant matters thatrequire attention. This results in slow and inefficient operations.20

The statutory setup of the Waqf Administration in Bangladesh isempowered to handle and administer awqaf . But in many instances,mutawallis bring waqf cases to court, where every trick is employed tosecure decisions in a way that is convenient to the parties. The courts do nothave the means to conduct a proper investigation into the affairs of waqfproperties and so rely on records that are tampered with and evidence givenby hired witnesses. TheWaqf Administration is thus hamstrung. However,sadly enough, the Waqf Administration is also accused of handing downless than impartial and just decisions, and charges of bribery against waqfofficials are not uncommon. In many cases, the integrity of waqf officialshas been call into question. The statutory checks imposed to investigatecorrupt practices are found to be inadequate and the amount of autonomygranted to the Waqf Administration is one of the causes of cover-ups.

6.4.6 Absence of Provisions in Waqf Ordinanceof 1962 Relating to the Development of Awqaf

The Waqf Ordinance of 1962 contains no provisions concerning the devel-opment of waqf properties. This is a stagnant situation owing to which manywaqf properties are not utilized fully or remain idle. Those properties that arein use are underutilized, that is, they are not developed to their optimum level.The IndianWaqf Act of 1995, for instance, regards the issue of developmentof waqf properties as a function of the Waqf board of every state in India to


undertake the development of awqaf . Section 32 of the Indian Waqf Act of1995 has the following provisions in its subsections (4) to (6):

(4) Where the Board is satisfied that any waqf land, which is a waqf property,offers a feasible potential for development as a shopping center, market,housing flats and the like it may serve upon the mutawalli of the concernedwaqf a notice requiring him within such time, but not less than sixty days, asmay be specified in the notice, to convey its decision whether he is willing toexecute the development works specified in the notice.

(5) On consideration of the reply, if any, received to the notice issuedunder subsection (4) the board, if it is satisfied that the mutawalli is notwilling or is not capable of executing the works required to be executed interms of the notice, it may, with the prior approval of the Government,take over the property, clear it of any building or structure thereon,which, in the opinion of the Board, is necessary for execution of theworks, and execute such works from waqf funds or from the financeswhich may be raised on the security of the properties of the waqf con-cerned and control and manage the properties till such time as allexpenses incurred by the Board under this section together with interestthereon the expenditure on maintenance of such works and other legit-imate changes incurred on the property are recovered from the incomederived from the property: Provided that the Board shall compensateannually the mutawalli of the concerned waqf to the extent of the averageannual net income derived from the property during the three yearsimmediately preceding the taking over of the property by the Board.

(6) After all the expenses as enumerated in subsection (5) have been recoupedfrom the income of the developed properties, the developed properties shallbe handed over to the mutawalli of the concerned waqf.

The absence of a similar provision in the Waqf Ordinance of 1962 is aserious omission and is seen as an impediment to the development of awqaf .Many waqf properties in Bangladesh have considerable potential to be devel-oped into shopping and housing complexes, office space, and residentialbuildings that may bring in significant income. Likewise, unused cultivablelandsmay be brought under cultivation and dairy farming.Waqf properties inhilly areas like Chittagong and Sylhet could be used for tea plantation, whilethose in coastal areas could be used for fishery and salt industries. The incomegenerated from these projects could then be used for the benefit of waqfbeneficiaries and thus for the benefit of the ummah at large.


6.4.7 Integrity of Mutawallis and Their Qualifications

Cases of dishonesty on the part of some mutawallis are not uncommon.21

Dishonesty may be in the form of incorrect accounts of income, fabricationof bogus vouchers for amounts not spent, subscription not accounted for,illegal alienation of waqf properties, rents at high rates obtained from thetenants but receipts for lower amounts issued and the balance pocketed asblack money, and so on. The ordinance has a number of provisions toprevent such occurrences. For instance, a mutawalli is debarred from mak-ing a compromise in any suit or proceedings with respect to any waqfproperty without the administrator’s approval and the sanction of the tryingcourt.22 But very often these statutory checks prove inadequate.23 Theordinance provides for the imposition of fines on an erring mutawalli. Itis, however, to be noted that the ordinance gives the authority to imposefines to the law courts,24 acting upon a complaintmade by the administrator.Thus, in every case of default by a mutawalli, a court must be approachedwhere the process of complaints, countercomplaints, and explanations gen-erally consumemuch time andmoney. This is why, more often than not, theauthorities prefer not to enforce penal provisions. Since there is no hard andfast rule for qualifications that a mutawalli needs to hold, nor is its officeordinarily hereditary it is quite natural many mutawallis of waqf estates arenear illiterate or not educated enough to keep and maintain accounts ofincome and expenditure. Therefore, anyone can qualify to hold the office ofmutawalli even the waqif himself, his children, his descendants, any ordinaryperson be he a Muslim or non-Muslim can serve as mutawalli. This some-times may open the door to corruption.25

6.4.8 Unauthorized Alienation

The ordinance debars mutawallis from transferring in any way immova-ble waqf property over a specified period of time without the priorsanction of the administrator. As for the recovery of such property, theadministrator may file a suit or proceeding in a court under S-83 of theordinance, which provides:

If there is no mutawalli or the mutawalli refuses or neglects to act in thematter, within a reasonable time, the Administrator may, in his own name,institute a suit or proceeding in a court against a stranger to the waqf or anyother person (a) for the establishment of right, title and interest in a waqf


property, or (b) for confirmation of possession of a waqf property, or (c) forthe recovery of any waqf property wrongfully possessed, alienated or leased,or (d) for having any waqf property discharged of an encumbrance orobligation wrongfully created, or (e) for the recovery of any money belong-ing to a waqf, or (f) for any other relief in the interest of a waqf he mayconsider necessary.

Moreover, the general procedure that is usually followed appears to be that,if the mutawalli or stranger defies this provision, the administrator maysend a requisition to the deputy commissioner within whose jurisdictionthe property is located to obtain and deliver possession of the property tohim. Upon receipt of the requisition, the deputy commissioner shall takeaction. Any person aggrieved by the order of the deputy commissioner mayprefer an appeal to the district judge within whose jurisdiction the propertyis located. The decision of the district judge or, when there is an appeal, thedecision of the high court shall be final. This procedure involves delays andcosts. Therefore, a tribunal could be set up to handle these matters moreefficiently since the provisions in the existing relevant laws of waqf areinadequate and in courts there are hundreds of other cases are in the longqueue for hearing for decades, if not years.

6.4.9 Personal Use of Waqf Compensation Money

Complaints are often heard that the compensation money derived fromthe acquisition of waqf properties are kept for the personal use of officials.The ordinance provides that where any waqf property is acquired underthe Land Acquisition Act of 1894 (Act I of 1894) or any other law in forceat the time, the compensation money payable for such property shall bepaid to the administrator and shall be kept on deposit in the Waqf Fundtill it is invested for the purposes stated in subsection (3) of section 74.26

This provision should be reviewed and amended to prevent corrupt prac-tices on the part of the administrator. Such an amendment would surelybuild public trust in the Waqf Administration in Bangladesh and ensurethat waqf institutions are above corruption and shady practices.

6.4.10 Lack of Progressive and Innovative Ideas

It is sad to observe that progressive and innovative ideas for the devel-opment and extension of waqf properties are sorely lacking, from either


the public or private sector. The great majority of mutawallis andmanagers do not think in terms of adjusting the objectives of waqfproperties in these changing times. Mutawallis, even those known andbelieved to be honest, have no concept of property maintenance anddevelopment. The idea of investment in humans, that is, upgrading ofMuslim human capital through education and training, has not receivedany attention. Most waqf deeds have not built-in provisions for main-taining the property.

This sad state of affairs raises doubts about the efficacy of existing waqflegislation, theWaqf Administration that operates under it, and the way inwhich the management of waqf properties is handled. The problemsmentioned earlier are deeply rooted. The Waqf Administration is farfrom satisfactory and efficient. If the ordinance was enacted to eradicatethe evils tormenting the holy purpose of the waqf institution inBangladesh, it has failed to achieve its purpose. The ordinance underpresent circumstances does not have sufficient potential to become themodel waqf legislation in Bangladesh. It must be replaced by a new one.In this respect, a legal and administrative analysis is necessary.

6.5 PROSPECTS OF UTILIZING THE POTENTIALS

OF AWQAF IN BANGLADESH

Waqf properties in Bangladesh have an immense potential to be devel-oped into income-earning ventures generating enough income to supportsocial welfare programs in the area of education, health, and social sectors,thereby reducing government expenditures in these areas. It is estimatedthat the proper development of waqf properties could generate an incomeof at least one hundred million taka27 a year, which could meet somesocioeconomic needs of Muslims.28 This is a substantial amount of incomethat should not be ignored, particularly for a populous Third Worldcountry like Bangladesh.

6.5.1 Waqf Income and Program for Community Developmentand Poverty Eradication

History tells us that awqaf played a role, alongside Islamic governments orMuslim countries, in funding important community and state services. Theawqaf sector in Bangladesh can play a similar role in contributing to the


social and community development of the rural population of Bangladesh.Awqaf as an institution can mobilize community capital and provide qardhasan, which may be used to implement projects such as Islamic microlending and micro financing on a mudharabah or musharakah basis(Ahmad 2007). There can be established self-reliance programs, imaretsand skills training centers, small business and bursaries, youth developmentand activity programs, student exchange programs, training, general edu-cation and awareness programs, for example AIDS/drugs, dedicatedwomen’s institutions, literacy and da`wah programs, township masajidand madaris, community empowerment, poverty alleviation, and relatedprograms; and in fact any imaginable program that could further Musliminterests in the country could be implemented and supported (Khayrallah1984).

Several case studies, past and present, suggest that income fromawqaf investments and properties are used for a variety of purposesprovided that they are Shariah compliant. Examples of uses includepaying teachers’ salaries; providing free food; providing assistance tohujjaj (pilgrims); covering students’ tuition fees; paying for hospitalsand medical services; publishing literature; financing schools and guildsfor skills training; establishing a free-trade market; supporting centers forlearning the art of recitation of the Holy Qur’an; supporting masjid andmadrasah; supporting da`awah, art, and culture; financing research,seminars, and conferences; providing assistance to needy merchants;helping out start-up companies; and establishing factories.

6.6 RECOMMENDATIONS AND PLAN OF ACTION

There appears to be a clear need to revitalize and review the wholeawqaf sector in Bangladesh. The socioeconomic role that awqaf canplay toward the betterment of Muslim society is very significant(Mannan 1987). Therefore, to revitalize awqaf and to make it morerelevant to the overall development process in Bangladesh, we wouldlike to make the following recommendations:

6.6.1 Need for a New Waqf Act

A fresh waqf act is needed in Bangladesh. The existingWaqf Ordinance of1962 emerged as a poorly drafted piece of legislation in the face of con-temporary needs. Many of its important provisions were poorly drafted.


The machinery of administration it laid down in those days of Pakistan’smartial law is now incompatible with the new framework of Bangladesh.29

A resolution was adopted at a seminar on Awqaf Experiences in SouthAsia held in New Delhi, where it was resolved, with regard toBangladesh, that the implementation of Waqf Ordinance of 1962 with-out repealing the Bengal Waqf Act of 1934 introduced uncertainty intothe law of waqf and that the enactment of a new waqf law is necessary(Alam 1999). thirty another resolution specifically highlighted the needto amend section 86 of the Waqf Ordinance of 1962, which empowersthe administrator to pay from an individual waqf all costs and legalexpenses incurred by the administrator (Alam 1999).30 This againshows the need for a thorough and critical appraisal of all laws applicableto awqaf in Bangladesh to evaluate their appropriateness in terms ofmeeting the current need for effective waqf management.

As mentioned earlier, waqf plays an important role in the religiousand socioeconomic development of Muslims. The vast resources ofwaqf s can, in theory, become a powerful instrument not only in termsof safeguarding religious, charitable, and philanthropic institutions butalso bolstering educational and economic institutions in the community(Cizakca 2000). It is of the utmost importance that waqf s should bemaintained properly. Thus, the need for a pragmatic and empiricalapproach in the area of waqf s is obvious. The ordinance cannot fulfillthis task in today’s changed situation; it has become ineffective. Hence,an appropriate act is essential.

6.6.2 Development of Urban Waqfs and Issuance of Waqf Bonds

The urban waqf properties situated in busy commercial areas possessimmense potential for development. However, there is no scheme todevelop these properties. Because these properties are more secure,financing may be easily accessible. It seems to be the need of the hourthat the government should have on a contractual basis the services ofsome consultant engineer who can help develop these waqf properties.To remove any hesitation on the part of financing institutions to advancemoney on the security of waqf property (because of its inalienability), asuitable clause may be added to a future waqf act. The procurement ofnecessary financing for such ventures could be negotiated by the admin-istrator with various banking institutions locally and internationally.Moreover, the Waqf Administration should be empowered to issue


bonds and debentures to make available the needed funds. This venturewould have bright prospects. Therefore, adequate attention must be paidto the development of urban waqf properties.

6.6.3 Collaboration with Other Countries

In Bangladesh, what really remains to be done in this important andinteresting area is to undertake a collaboration and comparative study ofwaqf administration with countries where there is already in place anadministrative arm for waqf s. Such countries include almost all MiddleEastern countries, Malaysia, and Indonesia, to name just a few. Amongcountries where Muslims are minorities, India and Singapore have madeconsiderable progress in developing the awqaf sector. Obviously, such astudy would go a long way toward the betterment of waqf administrationin Bangladesh.

6.6.4 Establishment of National Waqf Advisory Board (NAWAB)

Bangladesh should establish a National Waqf Advisory Board (NAWAB)that would work in collaboration with the Waqf Administration. It mayserve as a think tank and a key driving force that would have, inter alia, thefollowing strategic functions:

– To establish branches of NAWAB at district and thana (subdistrict)levels. Its aim, among others, would be to encourage, attract, andstrive to solicit every able Muslim to create waqf s;

– To provide consultancy services to the Waqf Administration and itsvarious chapters;

– To help establish various community development projects and insti-tutions that would be supported primarily from awqaf revenues andresources;

– To promote and establish stronger cooperation and coordinationwith Islamic nongovernmental enterprises and financial institu-tions nationally and internationally to find and determine commonand innovative methods of financing for better utilization ofawqaf ;

– To cooperate and collaborate with the World Waqf Foundation(WWF) established by the Islamic Development Bank (IDB).


To improve the situation, there must be a waqf administrator competent toperform all functions entrusted to him. The government should nominateexperts in law, finance, and administration asmembers of theNAWAB to helpthe administrator. The body would advise on matters such as settling suitsbrought by or against mutawallis and appointing mutawallis in cases wheremutawalliship is in dispute or no suitable person is available according to thewaqf deed.

6.6.5 Education and Training for Mutawallis

Mutawallis must be educated and adequately trained. The objective of suchtraining would be to equip them with proper knowledge and guidelines forproductive utilization of awqaf properties. The training should also helpthem realize that they are overseeing a trust and so must set a high standardof trustworthiness. This can be achieved by holding regular training campsat the district and divisional levels. Booklets and brochures containinginstructive materials can be issued by the OWA and distributed free tomutawallis.

6.6.6 Increasing Staff Benefits

Social security, an adequate salary, and other benefits for staff are currentlyunavailable, which is why the sector is failing to attract talented youngpeople. There is no insurance scheme that can help employees at differentstages of their careers.

6.6.7 Waqf Tribunal

Waqf disputes and their resolution represent another area that must beimproved. Litigation as the sole mode of resolving disputes leads to awastage of time, money, and vital waqf resources. Therefore, establishingwaqf tribunals would be a huge step forward in dispute resolution ofawqaf. Such tribunals, for instance, are operating in India and have beenfound to be effective. It may be made mandatory for the disputing partieswho must go to the waqf tribunal for mediation and arbitration before thedispute may be taken to a court of law. Then, waqf institutions must beexempted from paying court fees and registration charges, and, preferably,any legal action against a religious or charitable waqf may be defended atthe cost of the state because the state is the custodian of the public interest,


and waqf is a public matter. Only cases relating to family waqf need to bedefended by the beneficiaries themselves since it is their private matter.

6.7 CONCLUSION

As mentioned earlier, Bangladesh has a huge wealth of awqaf propertiesthat could be used to life the poor segment of society out of poverty. Thiscould be done by instituting necessary changes in the administration ofawqaf to align it with present-day needs. Empowering the poor throughwaqf based on Islamic principles of finance and not by donation grants,thereby making the poor segments of society an integral part of the devel-opment process (Zarqa 1984), should be the primary goal of the country’sWaqf Administration. Bangladesh should establish strategic goals thathave as their top priority awqaf development in the country, whichwould include setting up institutions to serve those goals. Awqaf as adeeply rooted Shariah institution offers a built-in developmental andempowerment tool. It is indeed a vehicle explicitly designed in Shariah topursue noble and creative goals and to elicit goodwill and positive tenden-cies within the community. The benefits of awqaf projects are far-reaching.The challenge for Bangladesh is therefore to pursue the establishment ofawqaf -related institutions as outlined earlier to serve the greater ummahand promote and protect the cause of Islam.

NOTES

1. Large open fields designed and dedicated to congregational Eid prayers.2. Dargahs and mazars are the graves of so-called Islamic personalities.3. Where there is no formal deed on the waqf estate but the owner of the

estate has for a long time allowed the estate to be used for some religious orcharitable purposes, such awqafs are known as waqf by the user.

4. 23 November 1894, PCJ on Appeals from India, 572; ILR 22 Cal. 619,68.5. The judgment given by the Privy Council, being the highest court of law in

London, used to be binding on all courts in the then British Empire,including India.

6. Management and Development of Awqaf Properties, proceedings of theseminar held in 1984, edited by Hasmet Basar, pp. 81–85.

7. This article required that the word Bangladesh replace the words EastPakistan throughout.

8. Henceforth may be mentioned as the Ordinance.9. Henceforth may be cited as the Administrator.


10. See section 7, subsection 2 & 3. Waqfs Ordinance, 1962.11. See Sects. 19–25, Ibid.12. See Sect.13, Ibid.13. Sadequr Rahman,Waqf Shompotti Proshonge (an appraisal of waqf properties)

an article published in six installments from 17 June 2003 to 24 June 2003 inThe Daily Sangram (a daily Bengali newspaper from Dhaka), see http://www.dailysangram.com

14. Ibid.15. Md. Azharul Islam. (n.d.). Waqf Mosjid, Mondir O Majar Bebosthapona

Proshongay [On the Management of Waqf Mosques, Temples andTombs], Office of the Administrator of Waqfs, Dhaka, pp. 4–6.

16. A. H. M. Sadeq, op. cit. p. 166.17. Sadequr Rahman, op.cit.18. For details of such misappropriation see “In Pursuit of Power: Local Elites and

Union-Level Governance in Rural North-Western Bangladesh.” Unpublishedresearch report. Dhaka: CARE Bangladesh. August 2002, p. 17.

19. Ibid.20. Office of the Administrator of Waqfs, Dhaka, “Bangladesh Sharkar Kortrik

Gothito Waqf Komitir 20-04-95 Tarikhey Onushtitabya Prothom ShobharKarjopotro.” pp. 7–9.

21. For details please see, for instance, the case of Hafiz Mohamed Fateh vSwarup Chand HUkum Chand. AIR, 1948, PC 76.

22. See Sects. 60–80 of the ordinance.23. Sadequr Rahman, op.cit.24. See for details, see Sect. 61(1) of the ordinance.25. A. H. M. Sadeq, op.cit.26. Section 85 of ordinance.27. The Bangladesh currency is called the taka. US$ 1 = 70 taka

(approximately).28. Sadequr Rahman, op. cit.29. The ordinance originated during martial law. It came into force on 19

January 1962, when there was no Parliament. Pakistan’s 1962 constitutionwas promulgated on 1 March 1962. East Pakistan became independentBangladesh in 1971.

30. Resolution Nos. 17 and 18 of aforementioned seminar.

REFERENCES

A brief outline of waqf in Bangladesh, Office of the Administrator of Waqfs(Dhaka, n.d.).

Abdur Rahman I Doi. (1984). Shariah: The Islamic law. London: Ta-HaPublishers.


http://www.dailysangram.com

http://www.dailysangram.com

Ahmad, Q. K. (ed.). (2007). Socio-economic and Indebtedness-related Impact of Micro-credit in Bangladesh. Dhaka: Bangladesh Unnayan Parishad (BUP).

Alam, M.M. (1999). Seminar on Awqaf Experiences in South Asia. New Delhi:Institute of Objective Studies.

Azharul Islam, M. (n.d.) ‘Waqf Mosjid, Mondir O Majar BebosthaponaProshongey’ (On the Management of Waqf Mosques, Temples, and Tombs)(Mimeo), Office of the Administrator ofWaqfs, Dhaka.

Bangladesh Mosque Census, 1983, Bangladesh Bureau of Statistics, Government ofBangladesh.

Bode, B. (2002). In Pursuit of Power: Local Elites and Union-Level Governance inRural North-Western Bangladesh, Unpublished Research Report. Dhaka:CARE Bangladesh.

Cizakca, M. (1992, January 28–February 2). The Relevance of the Ottoman CashWaqfs (Awqaf al-Nuqud) for the Modern Islamic Economics. Presented at theThird International Islamic Conference held in Malaysia.

Final Report 1976- Waqf Inquiry Committee, Part I and II, Govt. of India,Ministry of Law, Justice and Company Affairs (Legislative Department),Govt. of India Press, 1976.

Gibb, H. A. R., & Kramers, J. H. (1981). Shorter encyclopedia of Islam. Karachi:South Asian Publishers.

Hashmi, S.A. (1984). Management of Waqf: Past and Present. Proceeding of theSeminar on Management and Development of Awqaf Properties, August 4–16,Jeddah: IRTI/IDB, 19–26.

Heffening, W. (1987). Waqf, E. J. Brill’s First Encyclopaedia of Islam 1913-1936,vol. 8, Leiden, E. J. Brill, 1096–1103.

Islami Bank Bangladesh Limited, Instruction Circular No. BCD/836. June 1, 2004.Khayrallah, W. (1984). Al Muqarada as the basis of profit sharing, a paper pre-

sented at the Seminar on Management and Development of the Awqaf proper-ties, held in Jeddah, in August organised by IRTI, IDB.

Mannan, M. A. (1987). The institution of Waqf: Its religious and socio economicroles and implications. In Basar, Hasmat (Ed.),Management and Development ofAwqaf Properties. Jeddah: IRTI/IDB, pp. 27–37.

Mannan, M. A. (1995). Structural adjustments and Islamic voluntary sector withspecial reference to awqaf in Bangladesh. Discussion Paper No. 12. Jeddah:IRTI/IDB, p.144.

Murat Cizakca. (2000). A history of Philanthropic Foundations: The Islamic Worldfrom the seventh century to the present. Istanbul: Bogazici University Press.

Rashid, S. K. (2002). ed. Awqaf experiences in South Asia. New Delhi: Institute ofObjective Studies.

Report on the census of waqf properties 1986, 1987, Bangladesh Bureau of Statistics,Government of Bangladesh.

The Waqfs Ordinance, 1962 (East Pakistan Ordinance No. I of 1962).


Zarqa, A. (1984). ModernMeans of Financing Development ofAwqaf Properties –a paper presented at theAwqaf seminar held 4–16August 1984, IDB, Jeddah, K.S.A.

Dr. Abu Umar Faruq Ahmad is an associate professor at the UBD School ofBusiness and Economics, Universiti Brunei Darussalam. He was previouslyattached to INCEIF, the Global University of Islamic Finance, Kuala Lumpurand the International Shari’ah Research Academy for Islamic Finance (ISRA).

Muhammad Fazlul Karim is a doctoral candidate at Ahmad Ibrahim Kulliyyah ofLaws (AIKOL) of the International Islamic University Malaysia (IIUM).


CHAPTER 7

Money in Islamic Banking System

Bedjo Santoso, Khaliq Ahmad and Buerhan Saiti

Abstract The idea of revisiting currency and the gold dinar from an Islamicstandpoint is an interesting topic of discussion in the context of the currentmonetary system. This chapter examines the historical aspects and supre-macy of a gold currency and the weakness of fiat money using a maslahah-mafsadah approach. It considers some possible alternative forms of gold asmoney and then discusses some obstacles and barriers in the hope of findinga model of gold as money to implement in the current economic system. Adeductive method is used to explore the implementation of a gold currencybased on historical study and library research. The findings reveal that moneyis not limited to gold and silver. However, by deriving new law from originallaw process, the law (hukm) of gold or silver as money is permissible.

Keywords Islamic finance � Fiat money � Gold dinar � Monetary system �Maslahah-mafsadah

B. Santoso (*)Agung Islamic University (UNISSULA), Semarang, Indonesiae-mail: [email protected]

K. Ahmad � B. SaitiInstitute of Islamic Banking and Finance (IIiBF), International IslamicUniversity Malaysia (IIUM), Kuala Lumpur, Malaysiae-mail: [email protected]; [email protected]


99

7.1 INTRODUCTION

The discussion of money is interesting in terms of its role and function inthe economy. The discussion has been popular by relating the fiat moneyin the current monetary system and the economic crises that have hap-pened frequently. The general agreement is that the present monetarysystem has led to instability and created various injustices, especially in theeconomies of developing countries.

However, the most contemporary Islamic economic literature seemsto have implicitly accepted the existing monetary system based on fiatmoney (Abas 2014). Some of them, like Edawati (2012), have arguedthat gold and silver may not necessarily be the solution or is not requiredby the Shariah. Nevertheless, some gold activists (Meera 2004; Meeraand Kameel 2009) have argued that Islamic currency as sanctioned byShariah is gold or silver, and they called for revisiting the potential role ofthe gold dinar as money.

Hence, this chapter attempts to refine the debate by examining thestrengths and weaknesses of fiat money and gold money by employing amaslahah-mafsadah approach. Furthermore, we will discuss the variouscommodities that can be used as money and determine the best commod-ity money. In addition, the chapter also discusses the law and history ofusing gold as money from an Islamic point of view. Based on thesediscussions, we expect to arrive at a basic position from which to proposegold dinar as money. To address this issue, we explore gold as currencyfrom a historical and fiqihi perspective.

7.2 A BRIEF HISTORY OF CURRENCY IN ISLAMSince Islam was revealed through the Prophet Muhammad (PBUH)approximately fourteen centuries ago, the historical journey of Islamiccivilization has had its ups and downs. With regard to economic cycles,particularly the use of currency, we classify its history into four periods: (1)the era of the Prophet (PBUH) and his companions, (2) the period of thefour caliphates (Khulafa’ al- Rashidin), (3) the age of the Islamic cali-phates, and (4) the decline of the Islamic caliphates. The classification intofour periods is based on the significant changes connected with thecurrency used at the time.

100 B. SANTOSO ET AL.

7.2.1 History of Currency during the Time of the Prophet (PBUH)

The use of gold and silver is as old as human civilization. Before theemergence of Islam, both gold and silver were used by the nation ofLydia in the period 570–546 BC (Hasan 2005). This practice was fol-lowed by the Jews and Greeks. Besides the commodity currency, whichcirculated in the form of an axe, transactions were made in gold and silvercoins. The Romans also issued gold money called the denarius in 268 BCto support the bronze coin in circulation. From 546 BC until 621 AD, thePersians issued gold and silver currency. However, according toAl-Mawardi, their civilization fell because they started to issue money inthe form of an alloy of gold and bronze, which resulted in the disappear-ance of gold-based money (Al-Mawardi 1990).

The Arabs, before converting to Islam, were already using the dinar anddirham for trade with neighboring regions. When trading in Syria, theybought gold dinars from the Romans (Byzantium). When travelling fromIraq, they took silver dirhams from the Persians (Sassanid Empire).Occasionally, they also bought himyar dirhams from Yemen. This meansthat during the Prophet’s (PBUH) time, numerous foreign currencieswere circulating between the Arabs in Hijaz and the neighboring states.The Prophet Muhammad (PBUH) stated that the dinar and dirhamremained the main currency in circulation. He and his companions reliedon this currency to mediate economic activities (such as muamalah, trade,and zakat) (Zallum 1983).

The Prophet (PBUH) did not issue a currency exclusively for Islamicsociety (Hakim 2001). However, he did decide to set the Islamic dirhamat 14 karat. This initiative was to differentiate the Islamic dirham from themeasurement of the Persian dirham, which had three weights and mea-surements: 20 karat, 12 karat, and 10 karat. The number 14 originatedfrom 20 + 12 + 10 = 42/3 = 14.

The currency that circulated was not formed into circular coins like wehave today; rather coins were minted into squares. The Arabs did notconsider dinars and dirhams according to their nominal values but rathertheir weight. Such currency in circulation was determined on the basis ofits value in gold and silver. The minted currency extracted from gold wasnot considered to be a valid currency since its form and weight mighthave depreciated owing to its circulation. To obtain smaller values of the

7 MONEY IN ISLAMIC BANKING SYSTEM 101

gold dinar and silver dirham in circulation, it is possible to divide suchcoinage into half parts and fourths (Karim 2006).

After Muhammad (PBUH) became the Messenger of Allah, he urgedthe people of Medina to follow what the Meccan tradition of circulatingtheir dinars and dirhams in terms of their nominal values instead of theirweight. The Prophet said, “Weight is weight for the people of Mecca,however measurement is measurement for the people of Medina” (Hasan2005).

7.2.2 History of Currency during Khulafa’ al- Rashidin Period

Muslim society continued to use the Roman dinar and Persian dirhamduring the Prophet’s time. The practice was followed by Abu Bakr Siddiqas well as at the beginning of Umar bin Khattab’s rule. In 20 Hijriyyah(the eighth year of Caliph Umar’s rule) he minted new dirhams based onthe structure of the Persian dirham. Its weight, inner markings, and letters,written in Persian Bahlawi, remained unchanged. The only additions were“Lafaz” (words), written in Arabic, stylized in Kufi, like Lafaz “Bismillah”(in the name of Allah) and “Bismillahi Rabbi” (in the name of my God),placed in the corner of the coin. Muslims preserved this tradition in mintingcoins until the caliphate of Ali (Hasan 2005). At the beginning of hisadministration, Umar had the idea to print money from leather, but thispractice was abolished because his companions did not agree with it.

During the rule of Uthman bin Affan, the tradition of minting moneyfollowed the tradition initiated by Umar; however, during Ali’s rule,limited-edition coins were minted (Karim 2006). The measurement ofthe Islamic dirham at that time was weighed into 6 daniq, and 10 dirhamswas 7 mithqal, to correspond to the era of the Prophet (PBUH). Startingfrom this period, Muslims had their own officially legalized Islamic dinarand dirham.

7.2.3 History of Currency during Islamic Caliphate

In 75 Hijriyyah (695 M), Caliph Abdul Malik bin Marwan minted newdirhams characterized in the Islamic tradition, with lafaz written in Arabickufi letters. Thenceforth, the Persian dirham was no longer used. Twoyears later, 77 Hijriah (697 M), dinars in the Islamic tradition wereminted, replacing the Roman dinar in circulation. Additionally, the calipheliminated the human face and animal figure that had been inscribed on


the coins and replaced them with lafaz. The caliph oversaw significantmonetary reforms. The weight and measurement value of the dinar was4.25 grams; 1 dirham was equal to 2.98 grams, with the exchange rate ofthe two coins stabilized at a rate of 1:15. The measurement of the dinarwas equivalent to 6 daniq, whereas 10 dirhams equalled to 7 mithqal, inline with the Prophet’s era. For that period, the nominal and weightmeasurements were based on human memory; there was no written record(Hasan 2005).

Bani Mamluk rulers began to circulate three kinds of currency: golddinars, silver dirhams, and copper fulus (singular fils). The creation ofthe fils was initiated by the societal need to have coins of smallerdenomination. Owing to the circulation of fulus, gold dinars and silverdirhams became scarce and limited, forcing the fluctuation of the coin’svalue over time, and ultimately causing it to vanish from circulation. Atthe end of the day, the overabundant use of fulus replaced gold andsilver, leading to economic collapse (Rosli and Barakat 2002).However, the economic crisis was short lived. The ruling CaliphNasir Hasan immediately declared that the fils was no longer valid,which led to stabilization of the economy. Al-Maqrizi proposed usingonly gold and silver as money to stopping the debasement of moneyand restrict the use of fulus (Hasan 2005).

During the Abbasid dynasty, monetary policy was to reduce the weightof the dinar and dirham in circulation because of increasing budgets. Sincepeople tended to pursue life’s luxuries, the money needed did not meetoverall circulation requirements. The state needed to obtain additionalresources. Unfortunately, it could not acquire everything it needed. As aresult, the minted gold and silver metal had to be mixed with copper inorder to earn a profit from minting the coins (Hasan 2005). Islamic legalexperts and fuqaha disagreed with such a practice as it would lead toinflation and a gradual decrease in value. Inflation was precipitated bythe growing number of dinars and dirhams in circulation.

7.2.4 History of Currency Following Collapse of Islamic Caliphate

The gold dinar and silver dirham in circulation started to be replaced afterthe golden age of Islamic civilization. Initially, a plan to replace gold andsilver emerged before World War I, and its realization took place duringthis monumental war. After the war, the gold and silver standard contin-ued to be in force, but only partially. In the last days of the Ottoman


caliphate, the Islamic dinar and dirham were no longer valid as officialcurrency for Muslims (Hosein 2008). Hasan (2005) pointed out that theobjective of replacing the gold dinar with fiat money was to control globaleconomic, military, and political powers.

Currently, Muslims and the entire world use fiat money (paper). Fordomestic trade purposes, Muslims use the official paper money of theirrespective nations. However, for international trade purposes, Muslimsuse currency of high value like the U.S. dollar, the Japanese yen, theUK pound sterling, and the euro. For this reason, some opponents,such as Imran Hussein, contended that World War I might be aconspiracy among superpowers to deal with the situation, whichWestern powers perceived as a threat to their strategic goals(Hosein2008). In this connection, Griffin has pointed out that a conspiracy hadindeed taken place, especially in designing the new U.S. dollar. Theconspiracy started in 1910, and the resulting central bank is referred toby Griffin as the Creature from Jekyll Island. The strategy called for thecreation of a Federal Reserve System (FRS) in 1913. The FRS was setup to oversee all financial affairs in the United States, based on frac-tional-reserve banking (FRB), which is the fundamental means forbanks to obtain huge profits (Griffin 2000).

With the end of World War II, gold flowed into the winning countriessuch as the United States and its allies. In 1944, the United States initiatedthe G20 summits, similar to the Bretton Woods system. Its main principlesare to establish a system in which the U.S. dollar would be backed by gold(USD 35 = 1 troy ounce of gold). Unfortunately, in 1971, the USgovernment breached the agreement by printing the dollar withoutanchoring it to gold (Iqbal 2009).

As a result, public trust in the system declined owing to excessive fiatmoney in circulation. Over the years, this situation has led to manyfinancial crises. Bordo and Jonung (2001) explained that the volatility inforeign exchange markets lasted from 1880 to 1995. Between 1880 and1913, the main countries of the world used gold as their currency, and itsvalue was stable. The currency was abolished in 1914 because of the war.At that time, the fiat currency crashed. Between 1945 and 1970, theBretton Woods system was established and the currency stabilized. In1971, when the U.S. dollar fiat currency was no longer anchored togold, the result was high currency volatility.

The world experienced three global crises after the gold standard wasdiscontinued. The first generation of crises occurred in the 1970s and


1980s, the second in 1992, and the third in 1997 (Kruggman 1998). Twoadditional global crises were the global economic crisis in 2008 and theeuro crisis in 2010. These are large-scale issues inherent in fiat moneysystems and cannot be avoided.

However, this claim should be explored in more detail in terms of theadvantages and disadvantages of the gold standard, its viability feasibility,and issues pertaining to its implementation in modern times. This discus-sion should include the Islamic perspective, such as fiqh analysis, themaqasid shariah, and the siyasah Shariah approach.

7.3 FIQH DISCUSSION OF MONEY

Muslim economists Haneef and Barakat (2002) have investigated theviews of Muslim scholars one the use of gold and silver coinage. Theresults of their study showed that there exist two opinions among scholars:according to one opinion, currency is limited to gold and silver, whileaccording to the second is the opinion the currency is not limited to goldand silver.

Islamic scholars in both the Salaf and Khalaf periods hold variousopinions regarding the use of gold and silver as currency. The investiga-tion revealed two groups of opinion among the scholars; the first statesthat currency or money is limited to gold and silver, while the secondopinion argues against that view. Supporters of both groups are scholars ofthe Hanafi, Maliki, Shafi’i, and Hanbali, in addition to contemporaryscholars who base their views on the opinions of the Tabi’un, such asMujahid, Nakha’i, Laith Ibn Sa’ad, and Al-Zuhri (Haneef and Barakat2002).

Both groups of scholars provide evidence to support their views.Moreover, the greatest support for the second opinion comes from con-temporary scholars and contemporary fiqh councils. Although the secondgroup allows that currency is not necessarily limited to gold and silver,they agree that the precious metals can represent the value of othermaterials, such as copper. With regard to fils coins, they were made ofcopper and other metals, but the fils is different from the current fiatmoney. Fiat money is created out of thin air, with nothing of intrinsicvalue to back it up. Both come in different forms and have differentcharacteristics. A detailed discussion of this issue will be explored in thenext section of maslahah-mafsadah.


7.4 THE SIYASAH SHARIAH APPROACH

Literally, the meaning of siyasah shariah is a Shariah-oriented public policyor government in accordance with the Shariah. Muslim jurists havedefined siyasah shariah as decisions and policy measures taken by animam and the ‘ulu al-amr on matters for which no specific ruling can befound in the Shariah (Kamali 1989). Ibn Qayyim (1961) asserted thatsiyasah is any measure that brings people closest to beneficence (salah) andfurthest from corruption (fasad), and any such measure partakes in justsiyasah even if it has not been approved by the Prophet (PBUH) orregulated by divine revelation.

Contemporary scholars have also tried to define siyasah shariah. Kamali(1989) interpreted it as a broad doctrine of Islamic law that authorizes theruler to determine the manner in which the Shariah should be adminis-tered. Likewise, Khallaf stated that siyasah shariah is the administration ofpublic affairs in an Islamic policy with the aim of realizing the interest ofand preventing harm to the community in harmony with the generalprinciples of the Shariah, even if it disagrees with the particular rulings ofthe mujtahiden (Kamali 1989), while Ibn al-Qayyim (2005) introducedthe notion that siyasah shariah included government duties, legislation,and judicial rulings.

Among the examples of the implementation of siyasah shariahby the companions is the decision of Umar ibn Khattab to stop thedistribution of zakat to the muallaf. In addition to that, Umar alsovalidated a triple talaq pronounced in a single utterance (Kamali1989). Another example is the decision of the third Caliph, Othmanbin Affan, who ordered the collection of the text of the Qur’an in onevolume (Kamali 1989).

Based on the aforementioned cases where the caliphs used siyasahshariah as a tool to determine a ruling or to resolve issues, in whatfollows, this chapter examines which currency in the current monetarysystem should be used by the government to avoid harm and conferbenefits in accordance with maslahah, mafsadah, and maqasid shariah.It is based on the principle that government must resolve problemsbased on siyasah shariah and give due consideration to the qawaidfiqhiyyah, “Tasarruf al-imam ala al-rayat manut bi al-maslahah,”which means the government’s or leader’s duty to serve the peopleshould be based on maslahah (benefit).


7.4.1 Maslahah of Fiat Money

The principle of siyasah shariah should not contradict Shariah rulings, asstated by al-Khallaf, and the siyasah shariah should be in harmony with thegeneral principles of Shariah. Consequently, the Shariah ruling on fiatmoneyshould be addressed before going any further in our discussion. However,this issue was discussed in the previous section, where the conclusion wasdrawn that money in Islam is not limited to gold and silver. In other words,the use of other commodities, such as wheat, barley, dates, salt, and othersthat are of value, is allowed under Shariah jurisprudence. Hence, the nextstep is to analyze the maslahah and mafsadah of this system.

The fiatmoney systemhas several benefits, such as when central banks use itas a monetary policy tool to achieve its monetary objectives, like targeting theinflation rate or exchange rate by controlling the money supply. Moreover,paper money can be printed easily and at low cost. Paper money can also betransported more easily, safely, and cheaply than can metallic money. Fiatmoney has an elastic supply and can be printed for any purpose at any time. Italso helps the government in times of emergency, such as in times of war ordepression. Paper money is easily identified, even for small children.

Hasan (2005) highlighted the following advantages of fiat money: (1)it is easy to carry (mobility), (2) can be printed in various denominationsdepending on the size of a transaction, (3) not risky to carry, (4) has lowproduction costs, and (5) its issuance is flexible, which helps the govern-ment to finance spending in an emergency.

7.4.2 Mafsadah of Fiat Money

Besides themaslahah of fiat money,mafsadah includes the following featuresas described in Table 7.1. The Table describes the mafsadah of fiat money,which includes economic, political, and social illness. Economic illness con-sists of the value of money, seigniorage, FRB, and inflation. Fiat money causespoverty and leads one to unbelief. Political illness would stem from the factthat fiat money threatens the very sovereignty and security of a nation.

7.4.3 Maslahah of Gold and Silver as Money

Commodity money, especially gold, does not allow for the creation ofmoney. Accordingly, no institution or country may obtain a substantialseigniorage. In the absence of money creation and seigniorage, inflation


can be avoided and the sovereignty of the nation can be protected, familyharmony realized, and crime minimized. Moreover, if a commodity suchas gold were legalized as a common currency and serve as the nationalcurrency, then exchange rates would not exist. As a result, speculation andmanipulation would be impossible. This means previous financial criseswould never have happened, or at least the chances of its occurrencewould have been severely reduced (Meera and Kameel 2009).

In terms of its characteristics asmoney, gold enjoys high acceptance amongpeople and is divisible, scarce, durable, andmobile (Meera andKameel 2009).Gold has intrinsic value and its value is based on demand and supply.Undetermined by the government, its price, based on its own supply anddemand, has proven remarkably stable over long periods of time. Al-Maqriziproved this in his book Jastram (1977) and went on to show that the pricelevel based on gold was extremely stable. He analyzed all price index data over

Table 7.1 Mafsadah of fiat money

No Issues Explanation The SupportingAuthor(s)

1 Fiat money has noIntrinsic Value

Created from thin air Meera (2004),Meera and Kameel(2009), Meera,(2011b)

2 Government Freedom toPrint Money

The government may earnrevenue without levyingconventional tax. This profit isso-called seigniorage which isconsidered the source of riba

Mahani (2009),Saidi (2009),Alias (2010),Yaacob (2012)

3 Fiat Money alongfractional reserve bankingenables the banks to createmoney

The banks are making profiteasily, which encourages thepractice of riba in theeconomy

Meera and Kameel(2009), Meera(2012), Yaacob(2012)

4 Fiat Money EnablesCurrency Speculation andArbitrage

Speculators exploit theweakness of fiat money andcurrent monetary system

Hosein (2011),Meera et al. (2004),

5 Social Impact andInjustice

Fiat money creation createspoverty and unbeliever (kufur)

Meera and Kameel(2009)

6 Trigger Inflation, Nationaland Financial threats

Fiat money threatensnational/financial securityand sovereignty

Alias (2010)


400 years and concluded that the price stability was not because gold adjustedin conformity with commodity prices but because commodity prices even-tually adjusted to the supply and demand of gold (Meera and Kameel 2009).

The elimination of interest and fiat money are prerequisites to makingthe dinar a stable currency and the backbone of a stable monetary system.This could minimize the business decay cycle effect. The value of golddoes not require government protection. Its value depends solely onsupply and demand. It contravenes fiat currency whose value requiresgovernment intervention. On the other hand, gold does not need amonopoly, while fiat money requires a monopoly rule for it to work,meaning the government must be the monopolist. The Messenger(PBUH) has given primacy to gold and silver. He said that there willcome a time when nothing has value except gold and silver.

Regarding the superiority of gold over other forms of money, Meera andKameel (2009) asserts that “Gold has intrinsic value just like any othercommodity, but it distinguishes itself in that people of every race, creed andnationality desire it for its own sake as proven by the obsession humanity hashad for this metal throughout history.” Moreover, Meera and Kameel(2009) summarized some of the characteristics of gold as ideal money,such as its scarcity and compactness, stability and durability over very longperiods of time, its homogeneity and divisibility into small quantities, itsease of storage, and the fact that it can be neither created nor destroyed.

7.4.4 Mafsadah of Gold and Silver as Money

The mafsadah of gold and silver as money includes their inefficiency,constraints, scarcity, and economic impairment. However, these objec-tions have been rebutted by HTI (www.hti.uk.com), as depicted inTable 7.2.

In addition, to address these objections, such as the inadequate supplyof gold and gold elasticity issues, Meera and Kameel (2009) proposed anet-off payment system using an electronic payment system that wouldresult in efficient transactions.

7.4.5 Discussion on Masalih Al-Mursalah

Although any other money besides fiat money is allowed by some Islamicscholars as mentioned earlier, the physics of the current fiat money shouldbe questioned. In earlier times, currency other than gold and silver is fils,


http://www.hti.uk.com

Table 7.2 Arguments and rebuttals regarding the weakness of gold as money

No Arguments/Objections Rebuttals

1 A gold system does not provide thelevers for monetary policy control.Therefore, governments would beunable to alleviate downturn in businesscycles, stimulate growth, and generatecash to spend for emergency projects.

The ability of the fiat system to mitigatebusiness cycle is disingenuous given thatit is the primary cause. Islamcategorically forbids interest andincreasing money without the fullbacking of Gold and Silver. Emergencyspending in the fiat system benefits therich and results in hidden tax for themajority, while in Islam it is sourcedfrom the rich.

2 The gold system is inelastic and canintroduce a mismatch in the quantity ofmoney in relation to volume ofeconomic activity. The insufficient gold-based currency can result in high orcyclical unemployment.

The real problem is not that there is toolittle Gold but the fact there are toomany dollars in the world. The GoldSystem ensures the amount of money inthe economy is relative to economicgrowth, which therefore makeseconomic growth real and sustainable

3 The use of gold and silver requires costsof extraction, mining, and transport,which is a significant portion of the GDPof a nation. This also leads to allocationof valuable effort towards, that whichcould be avoided.

The use of gold and silver requires costsof extraction, mining, and transport,which is a significant portion of the GDPof a nation. This also leads to allocationof valuable effort towards, that whichcould be avoided. Based on office forNational Statistics, the average cost forbailing out of economic is 30.17 toGNP (http://www.statistics.gov.uk)

4 The gold and silver system suffers fromtendencies to devaluation bydebasement to generate liquidity. Thisnot only results in inflation but alsotakes the good money out of supply—anobservation commonly known asGresham’s Law.

Islam disallows debasement securingmonetary value of the currency. Moderntechnologies enable producingrepresentative legal tender backed bygold/silver, which avoids this problem.Converse to Gresham’s Law, strongcurrencies will soon become preferredmedia of exchange, making the goldsystem quickly resume its position in theworld

Source: www.hizb.org.uk


http://www.statistics.gov.uk

http://www.hizb.org.uk

which is made of metal or copper. It should be noted that fils differs fromthe current fiat money. Fiat money, in the current monetary system, hasfive features: it is created from nothing (thin air), is interest based, involvesFRB, triggers speculation, and is legal tender. Meanwhile, fils at that timewas accepted by people because it was legal tender.

Based on the explanation in the previous section, it can be seen that eachcurrency has its advantages and disadvantages. However, the current fiatmoney has led to the mistreatment of people rather than providing thembenefits. Moreover, it may hinder the implementation of Shariah. The princi-ple of justice inmuamalah is difficult to attain through the use of fiat moneybecause justice is an aspect of a system that determines the validity of mua-malah transactions. Justice covers relationships among individuals, groups,and nations, especially between developed and developing countries.

Fiat money has been in use worldwide for less than 50 years. However, ithas been the cause of five financial crises. Bordo and Jonung (2001) foundthat hyperinflation occurred in 1913–1950 as a result of fiat money. In1950–1970, under the Bretton Woods regime, inflation was low, but thetermination of the Bretton Woods system in 1971 ushered in the return ofhigh rates of inflation (Fig. 7.1). Inflation has very significant and deleter-ious effects on an economy, and those effects impact the entire country.

With regard to economic stability, Ibn Khaldun (1982) in his bookMuqaddimah said that stability a key for an economy and affects all sectors.A good economy means the stability of all sectors. In contrast, bad economicmanagementmay harm society. The fiatmoney systemmay have an advantagein terms of facilitating economic development; however, it also carries with itthe potential to cause economic instability, which may lead to destruction.

0

10

20

30

40

50

60

1880

1884

1888

1892

1896

1900

1904

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

Fig. 7.1 Volatility of world currencies, 1880–1995

Source: Bordo and Jonung (2001)


The economy today is growing rapidly. Nevertheless, economic growthis always followed by a growth in debt levels. Moreover, in certain countries,debt exceeds GDP. The debts will be a burden for the next generation.These facts prompt fiat money critics to call for the end of the fiat moneyregime. Evan and Griffin have said that since its beginning fiat money hasbeen the source of numerous problems, in addition to the conspiracy insome countries that wish to control the world. Evans (2010) said that thosewho control the currency of a country control that country. Griffin (1998)alleged that the first occurrence of fiat money is mysterious, alongside theestablishment of the Federal Reserve, IMF, and central bank.

Meera (2012) asserted that among the problems resulting from the useof fiat money are an unjust economy, poverty, starvation, growing indebt-edness of poor countries, deforestation, global warming, and exploitation.He thus proposed a monetary system based on gold as a measure of value,which would rectify the aforementioned problems. Some parties believethat the current fiat money system should not be changed but requiresgood management. However, this argument is weak because a fiat-money-based system cannot achieve maqasid shariah in any form. Fiat moneyconsists of five elements: it is created from nothing, is interest based,involves FRB, triggers speculation, and is based on legal tender.

To deal with these problems,Meera andKameel (2009) proposed the realmoney concept that fulfills the following requirements of money: (1) stan-dardized such that its value can be ascertained easily; (2) accepted widely,acceptable by means of law, and hence the term “legal tender”; (3) divisibleso that it can be used for exchange in a range of transactions; (4)mobile, thatis, easy to carry around; (5) stable/durable, so that it does not deteriorate;(6) does not perish, deplete, or erode easily due to its own chemical struc-ture, weather, pests, fire, or other reasons. A number of different real moniescan meet these requirements including (1) gold and silver money, (2) abasket of commodities such as wheat, shells, salt, and leather; (3) comple-mentary currencies, and (4) real money units (RMUs). Meera and Kameel(2009) also criticized some opponents of this idea as follows:

Therefore, the Holy Qur’ān, the traditions of the Prophet (s.a.w.), thehistory of Islam and the writings of Muslim scholars of the past all do indeedpoint towards gold and silver as money in Islam. But somehow with thepassage of time, Muslims seem to have lost the wisdom behind this, adoptedfiat money and have subjected themselves to subjugation, poverty andhumiliation as observed by al-Maqrizi’in Egypt with fulus as money.


7.5 STRATEGY TO ESTABLISH GOLD AS MONEY

IN THE CURRENT ECONOMIC SYSTEMHistorically, a gold-based monetary system has proven its ability to main-tain currency stability and reduce inflation compared with fiat money (thefloat system). Gold and silver currency also meets the criteria of Islamiccurrency quoted in the Qur’an and hadith. In addition, gold and silvercurrency fulfils nearly all functions of a currency outlined by classical andcontemporary economists.

However, a gold-based monetary system is not easy to implement. Itcannot yet be realized because there are various obstacles and problemspreventing the adoption of such a system. We therefore attempt to identifythe challenges to implementing a gold-based system and find solutionsusing a comprehensive analysis that consists of the following steps:

1. Determine the variants of a possible system;2. Determine the criteria for choosing the best alternative, including

monetary theories, infrastructures, and Islamic values;3. Using deductive reasoning, determine the best alternative.

7.5.1 Determining the Alternatives

According to Yaacob (2012), the global monetary system has undergoneseveral changes:

1. Bimetallism: A metal-exchange system based on silver and gold aswell as copper. This system began in 570 BC in the nation of Lydia(Hassan 2005) and lasted until the end of the Ottoman caliphate(1923).

2. Goldsmith issuance (1640–1800): This system used physical goldmoney as a medium of exchange but led to difficulties in tradearrangements in large volume, especially in terms of storage, security,and transport. Therefore, traders in gold and silver deposited theirmoney with private firms, especially goldsmiths. This system wasbased on the cash redemption of gold coin stored at goldsmithfirms; goldsmiths issue receipts or notes representing the gold stored.

3. Classical gold standard (1821–1914): The gold standard is definedas a monetary system whereby a nation declares the unification of itscurrency backed by gold. Here the country allows its people to freely


buy and sell gold within a certain price and facilitates the import andexport of gold (Mankiw 2007; Metzler 2006).

4. Floating exchange system/floating fiat currency (1915–1925): Theclassical gold standard ended with World War I, after which a papermoney system began as all countries involved printed money to pay forwar expenditures. Gold reserves were insufficient. Then the super-powers forced other countries to use paper money by asking the colo-nized countries to store their gold and issue debt notes (Bordo 1993).

5. Gold standard system II (1925–1931).6. Floating exchange system II (1931–1945) emerged because of the

Great Depression and World War II.7. Bretton Woods system (1944–1971): The system of Bretton Woods

fixed the exchange rate with gold as backing. The money value wasmeasured by gold. Gold’s price was fixed at USD 35 per ounce. TheU.S. dollar was exchangeable for gold. Every country that held U.S.dollars could exchange them for gold and vice versa.

8. Fiat money systems (1971–present): After the Bretton Woods sys-tem was cancelled by Nixon in 1971, paper money was printedwithout any backing.

Based on the preceding description, this study divides the currency systeminto three alternatives:

1. Fiat money system (current system);2. Physical gold dinar system (PGDS): This system combines elements of

bimetallism, a gold standard, a physical gold dinar, and the BrettonWoods system or gold-backed system. It is a currency system that usespaper money backed by gold reserves (Yaacob 2012).

3. Gold as measure of value system (GMVS): This system measures allprices of commodities in terms of gold.

7.5.2 Criteria Determination

Selected monetary theories are used as the foundation to evaluate theproposed alternatives. These theories are currency theory, Gresham’slaw, optimal currency area theory, and quantity of money theory(Yaacob 2012).


1. Currency theory: The currency represents a relationship between acommodity and the function of money. It refers to whether acommodity can fulfill the basic functions of money as outlined byclassical and modern economists. The basic functions are serving as amedium of exchange, a measure of value, payment instrument, andstore of value.

2. Gresham’s law: This theory says that if two or more currencies areused simultaneously in a country, a currency with no intrinsic value(bad money) and a currency that has intrinsic value (good money),the bad money will drive out the good money.

3. Quantity theory of money: This theory says that the balance ofsupply and demand for money should be maintained. An imbalancecan cause problems such as inflation, deflation, and instability. It isimportant to note that gold reserves must meet the demand formoney.

4. Optimal currency area (OCA) consideration: Implementation of agold dinar system must be carried out by several countries simulta-neously. If such a system is implemented by only one country, itcannot be effective because all nations are interrelated. A change inone nation’s currency will affect other countries, especially in thecurrency union. A currency union usually follows OCA theory.Countries that have joined the currency union must meet the OCAstandard to gain the optimumbenefits. Countries that do notmeet theOCA requirements will not receive noticeable benefits from currencyunion but will suffer. Furthermore, if a currency union is establishedby one or a few countries, then Gresham’s law will prevail (Sanep2009). In addition, macroeconomic conditions, GDP, currency het-erogeneity among countries, and the willingness of a country to use aparticular currency are the important factors to be considered.

7.5.3 Infrastructure and Regulations

The required infrastructures to implement the gold dinar system are asfollows:

1. International regulations: The infrastructure is the biggest obstacle, asestablished by IMF ACT on 30th April 1976. IMF introduced a


second amendment to Article IV-Part 2 (b) (i), which stipulates thatIMF member (countries) should use Special Drawing Rights (SDRs)or anything except gold as a backup of their currency. Nevertheless,this article can be cancelled if 85% of IMF members (countries) agreeto the amendment.

2. Agreement with other countries: Implementation of the gold dinaras a whole must be throughout the entire world and cannot beimplemented in a few countries. All countries are interdependent.However, achieving agreement among countries to implement phy-sical gold as a currency will face numerous problems.

3. Domestic acts (act of security and control value of the currency):Examples include gold counterfeiting and gold hoarding. In thecurrent situation/value, it is possible for people to hoard gold.Moreover, with current technology, it is possible to make whitegold by mixing silver and copper. Hence, the implementation ofphysical gold as a currency should be imposed by the government sothat it can regulate and manage the system.

4. Government awareness and willingness: Governments or coun-tries should have a strong awareness and enthusiasm in promot-ing the use of physical gold as a currency. This is importantbecause the use of gold is impossible without support from thecentral government, as printing money is one of the importantfunctions of government. For example, during the rule of CaliphAbdul Malik bin Marwan, who introduced physical gold as asymbol of unity of the people, the caliph was able to establishMuslim independence (Griersom 1960).

5. Gold dinar availability and adequacy of gold reserves: Gold-holdingcountries are not equal. The current available data show that thestock of gold among countries is conspicuous. If gold holdings arenot sufficient, some countries will face challenges trying to obtainenough gold to back their currency. Gold is concentrated in certainmajor countries. OIC members possess only 10% of the total gold.Table 7.3 shows the inequality of gold holders, which will affectinternational trade.

Moreover, Islamic values are also applied to evaluate the system. Islamicvalues include the capability to remove riba, gharar, and maysir andwhether the system is able to realize a just system. Characteristics of


money, such as its acceptability, scarcity, recognizability, divisibility, unifor-mity, mobility, durability, and stability, are also used to evaluate the system.

7.5.4 Deductive Analysis to Select the Best Alternative

The next step entails performing an analysis of the alternatives basedon the aforementioned criteria. A deductive analysis is depicted inTable 7.4.

The preceding analysis shows that the physical gold dinar (PGD)system faces many challenges, such as IMF articles, gold reserve adequacy,and international agreements. In addition, economic theory proves thatPGD cannot meet the requirements. PGD fulfills all Shariah criteria, whilefiat money is qualified in terms of all economic theory and infrastructures.However, this system does not comply with Shariah requirements, such asthe elimination of riba, gharir, and maysir. Furthermore, it does not leadto the creation of a just and stable system.

Therefore, GMV can be considered the proper system for the followingreasons:

a. The system can perform the function of money,b. The system can fulfill the requirements of commodity as money;c. The system does not contradict economic theories such as the

quantity theory of money, Gresham’s law, and OCA;d. The system satisfies infrastructure criteria.e. The system aligns with Islamic values in terms of fiqh requirements,

riba (usury), gharar (uncertainty), maysir (gambling), and justice/fairness principles.

Table 7.3 Gold holder countries

No. Countries Gold (Tons) Percent (%)

1 USA 8,133.50 292 Germany 3,401.00 123 Italy 2,451.80 94 France 2,435.40 9108 Comoros 0 0

Total 28,398.90 100

Source: IMF 2010


Table 7.4 Deductive analysis

No Structures/Infrastructures

Physical golddinar as money(PGD)

Fiat money(FM)

Gold as measurementof value (GMV)1

A Currency theory1 Function of money theory

a. Medium ofexchange

Well-functioning

Well-functioning

Well-functioning

b. Measurement ofvalue

Well-functioning

Notfunctioningwell

Well-functioning2

c. Store of value Well-functioningdue to itsintrinsic value

Notfunctioningwell

Well-functioning

d. Differed paymentinstrument

Well-functioningdue to itsstable value

Notfunctioningwell

Well-functioning

2 Characteristic commodity as moneya. Rare and compact Yes No Yesb. Stable Yes No Yesc. Storable Yes No Yesd. Mobile No Yes Yese. Can neither becreated nor destroyed

Yes No Yes

f. Durable for verylong periods

Yes No Yes

g. Acceptability Yes Yes Yesh. Divisible No Yes Yes

B Economic theory1 Supply and demand3 Not

functioningwell due togoldavailability.

Wellfunctioned

Well-functioning asGold is not usedphysically. Gold justas measure of value,other commoditiescan be used asmoney.

2 Gresham’s law theory4 It will takeplace if issuedtogether withfiat money orfulus

Gresham’sLaw will notoccur

Well-functioning asGold is not usedphysically. Gold justas measure of value.


Table 7.4 (continued)



Fiat money(FM)


3 Optimum currency area(OCA) theory

Very difficultto fulfill therequirement/criteria

Notinvolved inOCATheory

Not involved inOCA as the systemjust be implementedamong cooperativemembers

C Infrastructures requirement1 Awareness and willingness

of governments5Less powerful Not

involved intherequirement

Government willsupport the systembecause of economicand tax reasons6

2 Government agreement inthe bilateral /multilateraltrade7

Less powerful Notinvolved totherequirement

Not involved in therequirement becausethe implementationis only on thedomesticcommunity

3 International law (IMFarticles)8

Impossible Notinvolved intherequirement

Not involved in therequirement

4 Domestic law to ensurethe security andsmoothness of the system

Depends oninternationalagreement

Notinvolved intherequirement

Government willsupport the system9

5 Gold Dinar availability Not enough10 Notinvolved intherequirement

Not involved in therequirement11

6 Gold reserve sufficiency Enough but isnotdistributedwell

Notinvolved intherequirement

Physical Gold Dinaris not absolutelyrequired12

7 Central Bank acts forcontrolling the system andother domesticinfrastructures

Depends onInternationalagreement

Can beprovided

Can be provided

(continued )


7.6 CONCLUSION

This chapter discussed the siyasah Shariah and the implementation strat-egy of money in Islam. The masalih-mursalah approach was applied tohighlight the essence of money in Islam. Furthermore, the maqasid shar-iah constitutes the primary foundation by which to determine the appro-priate money for the modern age.

Through our historical analysis of money in Islam, we noted that goldand silver dirhams and dinars were used by Muslims from the time of theProphet (PBUH). During the Bani Mamluk era, there were three kindsof currencies: gold dinars, silver dirhams, and copper fulus. Under theBretton Woods system, the currency that circulated among nations wasstill backed by gold. However, following the collapse of the BrettonWoods system, fiat money was introduced and continues to be usedglobally to this day.

Muslim legal scholars argued about the issue from two major dif-ferent points of view. Some Muslim scholars opined that currency islimited to gold and silver, while others argued that other forms ofvaluable goods can be used as backing. According to salaf scholars, acurrency must be valued only in terms of gold and silver, whereasmodern scholars (khalaf) argue that currency can be other commod-ities and is not limited to gold and silver. They have shown thatcopper, tin, and other precious metals can be used instead of gold

Table 7.4 (continued)



Fiat money(FM)


D Islamic value1 Fiqh analysis Strongly

recommendedPermissible Strongly

recommended2 Riba eradication

capabilityCapable Incapable Capable13

3 Gharar eradication14 Capable Incapable Capable15

4 Maysir eradication16 Capable Incapable Capable17

5 Justice /Fairnessprinciples18

Capable Incapable Capable19


and silver. Both groups offer their own lines of evidence. Furthermore,the discussion on masalih-mursalah, the characteristic of fiat money,was examined by considering its benefits and advantages versus itsdrawbacks or harms. This discussion was based on the perspective ofIslam where the maqasid shariah was the main point of reference.

The preceding discussion showed that fiat money has its advantages,such as its mobility, ease of printing, dependence on the volume of tradetransactions, low risk to carry, low production cost, and flexibility (Hasan2005). However, as also was mentioned, its disadvantages far outweigh itsadvantages: it is not backed by anything, can be printed easily, is based ondebt, triggers inflation, leads to social injustice, leads to speculation andarbitrage, and causes other financial destruction.

The gold dinar also has its advantages and disadvantages. Its mainadvantage is that it facilitates attainment of maqasid shariah andmaslahah for the ummah. The gold dinar will establish justice in theummah and foster human wellbeing. Other advantages are its highacceptance among people, divisibility, scarcity, durability, and mobility.In addition, a gold currency does not create “seigniorage” in which itsvalue is its intrinsic value. Gold as a currency is the solution to theinflation problem. To sum up, a gold currency system is more stablethan and superior to fiat money.

A gold system cannot be implemented easily because the adoptionof a gold currency faces many challenges. The barriers are IMF rules,laws, acts, infrastructures, and international agreements. Deductiveanalysis shows that the PGD system would face these and manyother challengesIn addition, economic theory show that the PGDcannot fulfill the requirements of a currency, it meets all Shariahcriteria, but fiat money qualifies in terms of economic theory andinfrastructures. However, such a system does not comply withShariah requirements, such as the elimination of riba, gharar, andmaysir. Furthermore, it cannot lead to the creation of a just and stablesociety. Therefore, GMV can be considered the best system because itis in line with the function of money, fulfills the requirements of acommodity-based money, is in agreement with economic theory, suchas supply and demand, Gresham’s law, and OCA. Additionally, GMVmeets infrastructure criteria. Finally, such a system would be in linewith Islamic values in terms of fiqh requirements, riba (usury), gharar(uncertainty), maysir (gambling), and justice/fairness principles.


NOTES

1. In the first stage, the system can be implemented by cooperatives establishedby the community. Membership is based on cooperation, goodwill, andvoluntarism.

2. Every member already has a savings account in a cooperative.3. MV = PT4. Bad money will drive out good money5. The World Gold Council (WGC) was established in 2009 and asked the

IMF to return the gold standard system. Besides that, the World BankPresident, Robert Zoelick requested the return of gold standard in 2010.In addition, the G-20 summit in Paris, 2011 asked to reform the monetarysystem due to global economic imbalances.

6. The system will accelerate economic activity. Tax income will be imposed onany financial transaction.

7. Only a few countries agreed to use gold for trade settlement (Sudan, Libya,Iran, Bahrain, Norwich, Cape Town, and Malaysia in 2003)

8. At least 85% of IMF members (countries) agree on the amendment of thearticles (Article IV, part 2 (b)(i)

9. Government support is needed, especially political support. (Article no. 29and 33 UUD 1945)

10. Only a few countries have minted a gold dinar.11. Physical gold dinar is not needed.12. Valuable commodities also can be functioned as money13. The system is based on gold, not based on fiat money.14. A currency that does not have any value is considered gharar, because it

would lead to uncertainty and doubts (Edawati 2012).15. The system is based on gold, not based on fiat money.16. The current floating exchange currency system can cause maysir or gam-

bling, because it can be used as an instrument for speculation and arbitrageby other countries.

17. The system is based on gold, not based on fiat money.18. The current fiat system is unjust because it leads to a double pyramid of

money creation.19. The system is based on the cooperative model. There is no forced invitation

and based on voluntary membership.

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INDEX

AAbstinence, 12Akhirah, 2Al-Ghazali, 7Al-Mawardi, 101Autocracy, 31–33, 37, 38Avarice, 12

BBank Islam Malaysia Berhad, 55–56Bengal Waqf Act, 81–82, 92Byzantium, 101

CCapitalist, 2, 15, 30, 50, 56, 67, 69,

80, 82, 85, 90, 91

DDaniq, 102, 103Democracy, 32, 33, 35–38Denarius, 101Developing economies, 45Dickey-Fuller, 50

Dictatorship, 37, 38Dirham(s), 101–104, 120DOLS, 51, 54Dual Banking, 41–58

EEconomic Co-operation

Organization, 68Economic development, 29–39, 47,

66, 111Economic System, 4–5, 7–8, 65, 66,

68, 113Economic Thoughts, 7, 66Euro, 64, 104, 105

FFDI, 31–33, 37, 38Fiat money, 100, 104–105, 107, 109,

111–114, 117, 120–121Financial Marketing, 10Financial Planning, 9–26FMOLS, 51, 54Form of government, 31, 37, 38Fulus, 103, 120

© The Author(s) 2017N. Alam, S.A.R. Rizvi (eds.), Islamic Economies,Palgrave CIBFR Studies in Islamic Finance,DOI 10.1007/978-3-319-47937-8

127

GGDP, 31–33, 42–44, 47–49, 54,

112, 115Gold dinar, 100, 102–104,

114–117, 121Government consumption, 44, 47, 48,

54, 57Government’s role, 5

HHibah, 14, 18, 23–26Himyar, 101Hukm, 99

IIbn Khaldun, 3, 7, 10, 111Ideology, 65–67, 70Indirect taxation, 44Infaq, 14, 18Institutions, 2, 15, 18, 21, 22, 31–33,

35–37, 45, 56, 57, 69, 80, 83,89–95, 107

International Society and Order,65, 66

Islamic Common market, 63–76Islamic Doctrine, 3, 106Islamic Economics, 1–8

JJustice, 5–8, 73, 111,

117, 121

KKhalifah, 11Kufi, 102

LLafaz, 102–103Lydia Nation, 101, 113

MMalaysia, 21, 24, 25, 41–44, 47–51,

55–58, 68, 93, 122n7Manpower, 84Maslaha-mafsadah, 100, 105, 107Migrants, 30Misappropriated, 85Mithqal, 102, 103Modified-Cash-Deposit-Ratio, 44,

47, 49Monetary system, 100, 106, 109,

111–113Money, 21–23, 32, 48, 70, 81, 88, 89,

94, 99–122Money Supply, 32, 107Monopoly, 4, 6, 109Mudharabah Current Account, 16Mudharabah Investment Account, 16Muslim Ummah, 16, 65, 67, 70, 72,

74, 75Mutawalli, 80, 82, 83,

85–90, 94

OOIC member States, 69, 73, 75Operational Inefficiency, 86

PPolitical stability, 29–39Polity2, 32Polypolistic, 6Poverty alleviation, 91

128 INDEX

QQard hasan, 91

RRegulation, 14, 23, 42, 44, 68, 71, 75,

115–117Remittances, 29–39Riba, 3, 6, 15, 116, 117, 121Risalah, 2

SSadaqa, 14, 18, 21–23Sassanid Empire, 101Shadow Economy, 41–58Shariah, 2, 3, 7–8, 13–15, 56, 57,

73–74, 76, 91, 100, 105–112, 117Socialist, 2, 5Social security, 44, 71, 94Sovereignty, 65, 66, 107, 108Sukuk, 16Syarikat Takaful Act, 56

TTabarru, 14, 22, 23Tabung Haji, 16, 55

Takaful, 14, 16, 18, 55–56Tawhid, 2Tax morale, 44, 54Trade, 3, 32, 33, 37, 43, 64, 65, 67,

68, 69, 71–73, 91, 101, 104,113, 121

UUnemployment rate, 44, 48,

54–55Unit Trust, 16, 18Unity, 44, 64–66, 70–76, 116Usury, 3, 4, 74, 117

WWadiah Saving Account, 16Waqf, 18, 22–23, 80–95Wasiyah, 18, 19–23, 26Wealth accumulation, 12, 15Wealth distribution, 12, 17, 18Wealth preservation, 12,

16–17Wealth protection, 14Wealth purification, 17–18

INDEX 129

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