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Ibadat (Worship) Mu 'Amalat
Ibadat (Worship) Mu 'Amalat
Introduction
1.Introduction
Socio-economic justice is one of the important purposes in all societies[1] including Islam. However,
every society has different strategy to pursue that objective. In Islam, those objectives only can be
pursued if two elements are fulfilled, which are: ibadat (worship) and mu’amalat (mutual dealings).[2] The
existence of those elements makes Islamic Economics is driven not only by human desires to fulfill his
needs but also to comply with rules from Allah because in the hereafter Muslim must be accountable to
Allah for all their actions, including in financial and commercial transaction.[3] According to Al-Quran
and Hadits, the general principle of ibadat is “nothing is permitted unless covered by explicit or
permission by Allah” while the general principle of mu’amalat is “everything is permitted unless that is
explicitly prohibited by Allah’. The consequences of this principle is, Islamic Scholars are given wide
range of freedom to use their knowledge to postulate Islamic Economic theory as long they follow the
general rules in Al-Quran and Hadits of transaction namely prohibition of riba,gharar & maysir and haram
business.
This essay will discuss the values of Islamic Economics to find out whether it offers a new socio
economic value or not and how that values are translated into Islamic Banking and Finance. The examination
will involving examination relevant Capitalism theory coined by Adam Smih, Socialism coined Karl Marx
and the Socio-Market Economics (Germany approach). Further, the second part of this essay will found out
how the socio-economic values of Islamic Finance is implemented in Islamic Finance and Banking (IBF) and
to find out how resilience IBF during 2008 crisis and its continuity until now. This essay will stand
with conclusion that Islamic Banking and Finance does provide new socio-economic value and viable option
of financial and banking.
Mureson postulates three main pillars of Socio-Market economy system namely: marketeconomy, social order,
and ecology.[29] Wrobel translates ‘market’ in this economic system as a procedure to balance the
domination of private enterprises in the market with the intervention of the State to establish fair
competition, low inflation, and social welfare.[30] While the social order is implemented through the
specific laws and institution carried by the state to channel the money from the private enterprises to
the ‘social’ side of the system.[31] This concept is similar to Islamic Economic theory that puts the
state as an authorized institution to canalize fund from zakah (obligatory alm) to the people in need.
In Islam, the responsibility to the creation of social justice is located in the society (ummah), not in
the State.[32] However, the State is given authority to ensure that such distribution is conducted well
and all citizens have a reasonable standard of living.[33] Further, in regard with ecology, Socio-Market
economy emphasis the responsibility of human towards the environment which according to AbdelMajjid
Najjar Islam also recognizes the importance to save and preserve the environment as one of the purposes
of shariah (Maqasidh Syariah).[34] However, same with Capitalism, the Socio-Market economy is also
operating interest in its financial system which according to Nienhaus this is the main different between
Islamic Economics and Socio-Market Economics.[35] Arguably, it is not just interest that make difference
between these economic systems. The prohibition to conduct illicit, as well as gambling business also
must be taken into account.
Interest in Islam is translated as ‘riba’ or “unjustified enrichment”[36] Interestingly, the prohibition
of interest is not merely the domain of Islam, because many religions, such as Hinduism, Judaism and
Christianity, and philosophers also promote interest-free transaction in their teaching. Judaism
prohibits a jewish to impose a rent interest to their jewish fellow, but Jewish teaching still allows
the imposition of interest to person outside Jewish society. Plato and Aristotle condemned interest
because it flourishes cupidity into and degradate human being. However, Plato divides interest into
types which are: interest in voluntary credit and involuntarily credit.[37] Plato gave room for the
imposition of interest if there is a condition of the retardation of payment in a case of involuntarily
credit while Aristotle condemned the interest totally because the interest has distorted the true
function of money as merely medium of exchange.[38]
What makes Islam different with another teaching is, Islam does not merely see prohibition of interest
as commercial matter, but it has greater objectives to create societal and human well being [39] based
on ‘Maqasih al-Shari’ah’ (the purpose of Shariah) to protec faith (din), self (nafs), intellect (‘aql),
posterity (nasi) and wealth (mal). Whereas, according to Islamic sholars, riba is not promotes even one
of those purposes.[40] Therefore the prohibition of riba in Islam cannot be negotiated as it is clearly
stated in Al-Quran, prophetic quote as well as consensus of Islamic scholars (fuqaha) throughout
history.[41] According to scholars consensus interest is prohibited whether for consumption purposes,
productive purposes, loans or personal, whether the borrower is government or individual and whether
the rate is low or hight.[42]
Therefore, it can be said Islamic Economics shares the idea of balancing the market and the role of the
State to create social justice with Socio-Market economic theory, however the prohibition of interest,
illicit and the high risk business become the principal different between both of systems. Moreover,
Islamic Economic theory has similarity in regard with professional work ethic and protection of individual
property with Capitalism and appreciation to labor as well as the business relationship with the Socialis
3.Islamic Economics Values in Islamic Finance and Banking and Its Viability
Having identified the values of Islamic Economy in Part 2, arguably the translation of Islamic Economic
theory in Islamic Banking and Finance (IBF) is lying in the form of: a) Prohibition of Interest; b)
Profit and Loss Sharing system; c) Prohibition of Debt Finance and d) Prohibition of illicit and activity
involving speculation (haram, gharar, masysir transaction).[43] Profit-Loss Sharing System (PLS) is an
alternative given by Islamic Finance to change interest-based products in conventional banking. PLS is
emanated through Musharakah (Join Venture Profit & Loss Sharing) and Mudharabah (Trustee Profit Sharing).
In Musharakah, the bank and the customer agree to fund one business product with certain proportionof
financial profit and losses that should be borne together.[44] While in Mudharabah, the bank sponsors one
of its business owner which has potential business proposal and skill but does not has money. In this
scheme the bank gets benefit from the experience and skill of the business owner and the business owner
get benefit from the fund invested to his business. If the there is a loss then the bank loss its money.
For both of those transaction should avoid haram, gharar transaction[45]
What can be drawn from those schemes is, every transaction in IBF is promoting equality between the
capital owner and the entrepreneur. The entrepreneur and the business owner/customer are encouraged to
participate in their transaction [46] which in this sense reflecting the emancipation and individuals in
the society.[47] While in regard with ‘prohibition of debt finance’ it is relevant with how Islam looking
the money. In Islam, money does not have instrinsic value, it is merely a medium of exchange and a store
of value, therefore it cannot be sold or rented to make a ‘surplus value by itself’.[48] Further, money
should be backed by an asset and therefore Bond or fixed-income securities cannot be used under in IBF.
Islamic scholars then created instrument namely ‘Sukuk’ which is a collective certificate of financing
identifiable assets. Unlike Bond which indicates a debt of the business owner, Sukuk represents the
level co-ownership of assets permitted under Islamic law.[49] The principles of PLS and asset-based
financing according to International Monetary Fund (IMF) can help promote better risk management by both
financial institution and their customer and discourage credit boom as that already happened in world
crisis in 2008.
According to Beck, although IBF is less profitable then conventional bank, but it had higher
capitalization, higher liquidity reserves and more stable compared to its conventional counterpart during
2008 crisis.[50] Zehri at al’s research showed that the main reason IBF stability are: 1) an absence of
artificial money that often driven by interest charging; 2) PLS principle that makes the convergence
between bank and depositors, bank and investors.[51] While according to Islamic Financial Service Board
(IFSB) Report 2016, up to the end of 2015 the overall asset of global Islamic banking are
about approximately USD 1.57 trillion, this shows the double digits growth rates of IBF after 2008
crisis.[52] IMF is also confidence that IBF has potential to contribute higher in economic growth
because of the large segments of the Muslim population that are still underserviced by conventional
finance.[53] However, Asutay argues, the resilience of IBF is ‘overly exaggerated’ as in fact IBF was
still affected by the crisis 2008 especially for its Murabahah (mark-up priced financing products) which
has similar nature with conventional product. Therefore he concluded that the ‘resilience’ of IBF during
2008 was more influenced by the ‘internal’ rather than ‘external factors’.[54] This statement is also
supported by Beck which argues that the resemble product of IBF with conventional makes IBF only
slightly outperformed conventional system. Arguably, this condition shows that IBF is still struggling
to create and market its ‘authentic’ products. If this condition is not overcame the IBF will not
resistance if another global crisis come.
Moreover, Beck, Zehri and IMF and IFSB also point out that IBF certainly has regulatory and supervisory
challenges that will affect its viability in the future.[55] Islamic banks subject to ‘equity investment
risk’ as their assets are made up by physical investments that the return are uncertain.[56] Mirrored to
2008 crisis, apart from hight rate of interest and gigantic speculation of Mortgage Backed Securities
(MBS), the crisis was also triggered with the easy initial terms to get a credit.[57]Arguably, this
condition can also attack IBF if the assessment of business feasibility of a business project is not
applied carefully following a high and reasonable prudential standard. IMF addresses this potential risk
may also come from supervisor of Islamic Banking which do not have the capacity to oversee the cross
sectoral approach that is involved in Islamic Banking activities according to mutual fund-like
activities.[58] Further, in term of liquidity, although IBF tends to hold high levels of liquidity
compare to conventional bank, but the Islamic bank lacks of Sharia’ah compliant and high-quality liquid
assets (HQLA). This condition tends make Islamic banks hold a higher share of cash, which can affect
their profitability.[59] What can canvassed from this condition is, the viability of IBF in the ensuing
year may be threatened if the IBF does not build its own prudentiality, risk assessment as well as sharia-
compliance that must be compatible with its uniqueness. In this case the regulation on conventional
banking and finance cannot be applied to IBF as both of these system are different in nature.
4.Conclusion
Islamic Economic theory shares some socio-economic values with Capitalism, Socialism and Socio-Market
Economy system. In regard with Capitalism it has similarity in terms of work encouragement and protection
of private ownership, while with Socialism it shares the same value in regard of reward to partnership
and labor. Islamic Economic theory may be comparable with Socio-Market Economy in regard with social
equality and socio-justice. However, it does not indicate that Islamic Economics is same with Socio-
Market Economy because there are some principle transactions such as interest-based transaction, high
risk transaction and illicit (haram) transaction that are still exist in the Socio Market Economy.
Therefore, it can be said that Islamic Economic theory offers new socio-economic reading in term of
social justice, private ownership security, encouragement to work hard, reward to partnership and labor,
and transaction based on shariah. Those values fall within the ambit of Maqasidh Syariah (the purpose
of Shariah). Islamic Economics’ values and are translated to IBF through Profit and Loss Sharing
Transaction and Prohibiton of Debt Finance. In regard with with viability, IBF has already succeed in
passing 2008 crisis because of its its interest-free system and profit and loss sharing principle.
Further, the general trend of its growth is also positive.However, its resistance only slightly
outperformed the conventional financial system. This is caused by the products of IBF at that time that
was not reflected the primary values of IBF such as Murabaha. Further, IBF has faced challenged in
regulatory, supervisory and sharia-compliance in IBF to discipline the system. Regulation regarding
prudentiality is needed to assess any mutual-fund business transaction while the sharia-compliance is
needed to ensure the IBF create ‘authentic’ sharia products. IBF can be a new viable option if its moral
value regarding ‘participatory in economy’ which is translated to Profit and Loss Sharing-based product
can be marketed well to the public and is attached with the good governance and regulation to improve
risk-assessment management.