Presentation 1

The Social Aspects of Islamic Economics

Professor Monzer Kahf

Introduction
Bismillahi al Rahmaani al Raheem, alhamdulillahi Rabb ail aalameen, wa al salaatu wa al
salaamu ala Muhammad wa ala alihi wa sahbihi ajma’een. In the name of God most Merciful, most
Gracious, thanks is always to God, and praise is always to Him, and I begin by asking peace and
prayers on His last Messenger Muhammad and all the other Messengers, they are all respected equally
in the Islamic faith.

I want to focus on 4 points in this discussion,

1) The role of Islamic finance in regard to the social aspect of finance and the economy in
general,

2) The principle of cooperation\mutual solidarity and how it is entrenched in Islamic

economics and in the Islamic economics system with an outcome of it which is the
Islamic form of insurance,

3) The principle of caring about others, the principle of mercy, which is also entrenched
and functionalized in the Islamic economic system through the fourth point

4) Zakah, charities giving (Sadaqaat), and Awqaf which may be translated as endowment
or trust.

1. Islamic Finance

I’ll begin with the first point which is for-profit Islamic finance. Islamic finance for profit is itself
based and founded on the social aspects and social considerations of the Islamic economic system, it
is not alien from that, although it is actions for profit. It is definitely founded and based on the principle
of realism that we deal with things as they are on the ground. We do not deal with anything that is only
imaginary or fake or virtual or anything like that. We deal with things that are as they are in their reality
on the ground. This also means that we consider all things that do not harm individuals or society or
the environment, even harming pieces of things that could be very remote, not only other creatures but
even things that are called in our religion part of the nothingness and nothingness is very much hated
is very much made to be remote from Islamic economics and the Islamic system in general.

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 The point that I want to make here is that Islamic finance, even when it is for profit, deals with
things that benefit or at least do not harm society, individuals or the environment. When we restrict
the concept of financing as derived from the concept of property, because Islamic finance is definitely
asset based; not asset based in the meaning of Moody or other rating agencies, asset based in the real
sense that is to provide any finance you have to count on an asset that is transferred from hand to hand
along with the finance. When we talk about profit, or for profit Islamic finance, we talk about it as a
kind of finance that focusses on things that benefit society, benefit human beings, benefit the
environment, and benefit creatures in general. We do not accept anything that is outside this kind of
basket.

Now to that I want to add another element which is very important and which is often missed by
many writers, that is the implication of realism which is the rejection of any financing of any asset that
does not generate benefit, does not generate added utility. This is why, for instance, recycling of debts
is not acceptable in profit making Islamic finance. That includes what we talk about as or what we call
Islamic banks. By the same token we reject financing any virtual asset like for instance options and
futures. When you talk about this kind of realism in Islamic finance, being asset based, it means that
we are focusing, we are rechanneling all resources to be produced and to be used only in the production
and exchange of added value. When there is no added value to human beings and their environment
then Islamic finance that aims at making profit is not valid. In other words, Islamic finance that makes
profit by its nature and by the nature of the concept of the asset that it can use, is an Islamic finance
that is not only friendly to society but rather it is extremely friendly. It does not allow using financial
resources outside anything that does not generate added value to humanity, meaning that many pure
financial transactions are not really acceptable in Islamic finance. I will give a small example only and
go on to another point.

Example: Does the economy increase from transferring the creditor of a debt to be X instead of
Y? Or the debtor of a debt to be M instead of N? There is no added value created in this transaction,
and this is why we do not include it in the realm of profit-making Islamic finance. We do not include
trading debts or transferring debts from one bank to another, or one person to another, and this includes
most of the fake transactions that do not produce added value that are done in the world today, and
where a lot of finance is being used which we do not allow and we redirect all this finance to produce
goods and services that benefit humanity. In other words, the nature of Islamic finance is definitely
making it society friendly and very much important to increasing the welfare of human beings.

Now of course this is based on justice. When we say that you earn by asset you don’t earn by
fake transactions. One of the examples of fake transactions is gambling for instance, or similar to
gambling, the pure speculation.

When we deal with these good beneficial activities and resource uses, then we are talking about
Islamic for-profit finance as always taking care of the ethical values of benefitting society, benefitting
others and all the time value creating. A transaction without added value creation like the charge that
you take for transferring a debt from one person to another is a fake value added. It’s not a value added
although our current statistics calculate it as part of the GDP. It is not as a matter of fact because it’s
not a true added value.

The point: Islamic for-profit finance is itself the main block of the Islamic social finance all over,
and it is a big block in that consideration.

2. Principle of Cooperation
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 The second point is the principle of cooperation. The principle of cooperation is well established
in the Holy Quran, there is no need for quoting any specific verses, although there are specific verses
in the Quran and examples in the sunnah, that talk about it but out of all these original texts from the
main source of Islam, we got the concept of cooperation. This is applies in Islamic insurance, Takaful.
The Organization of Islamic Cooperation (OIC) Fiqh academy decided to use the term Islamic
insurance rather than the term Takaful for several reasons. One of them is that the term Takaful is a bit
general. Islamic insurance is specific but Islamic insurance is founded on cooperation not on the sale
of risk, and now here again, the elimination of the sale of risk, this is a thing that is also a socially
friendly principle, because how can you sell risk? Risk is unsellable. Risk is something that always
relates to an asset or to action. How can you sell it by separating it from action or asset? It becomes
really a different kind of mentality similar to the mentality that separates profit from production. You
want to make profit without producing and that is an odd concept for Islamic finance. Similarly you
cannot separate risk from action of asset, one can take a risky action of risky step in life and an asset
may be more or less risky than another asset; but risk alone is not a commodity offered for sale,
rationally as well as Islamically. You can cooperate to avoid risk and\or compensate the loss caused
by a peril when it happens.

The principle of cooperation is very important and it makes the core of Islamic insurance,
because the idea here instead of sale of risk, we create an institution based on cooperation; this is not
new as a matter of fact because it does exist in the capitalist society among that small number of wise
persons who look at the idea from a cooperative basis. The same principle is adopted in Islam, but the
difference here is that we do not accept the sale of risk, and we say that the only alternative, the only
way to face risk that we may come across in our daily life and that grossly increased in the
contemporary society, and contemporary mechanical society where we use many mechanical things,
that risk should be faced through a principle of cooperation, not through a principle of the sale of risk.
Cooperation is to put resources together and then face the risk that anyone of us may be exposed to
and we compensate the person to whom a peril may happen. The older form of this kind of insurance
was really the Waqf. That idea was undertaken in the full sense by the Waqf on the social level and on
the personal level by the Zakah. Essentially, there were Awqaf that were created in our history, and
part of their objectives was to help those people who were exposed to any disaster or any peril instead
of letting such risk destroy their lives. A modern form of this Waqf is a Takaful organization.

The concept of Takaful is to put resources together, especially of those who are exposed to
similar perils. We put resources together and compensate those who are actually exposed to any of
those personal or economic disasters. Takaful is based on this principle of cooperation, and this is
where we see many writings that try to reform Islamic banks. Some of them even go a bit too far - they
say Islamizing or re-Islamizing the Islamic banks. Yes, definitely we need a reform Islamic banks in
several areas after the actual experience of almost half a century although there are many areas of
excellent performance by Islamic banks, like for instance not financing anything that is harmful to the
society or to human beings. That is one of the prides of Islamic banks today, even though they need
some reform, and maybe revitalizing their Islamicity again, which is fine, I mean we can talk about it
later, but my task at this point is talking about Takaful companies. Unfortunately, the Takaful principle
and the Takaful idea were hijacked by profit making companies\persons. There were reasons for that.
We can discuss them in a different setting, it’s not the time for them, but what happened actually,
whether we like it or not, was that the principle of Takaful which must be purely cooperative has been
hijacked by profit makers, by the profit lusters, I should say, and they transformed it into an entity
within their profit-seeking enterprises; they established a company that aims at making profit through
providing managerial services to a cooperative fund of Islamic insurance. I remember when the first
company of that kind was established, it was the Jordan Takaful company in Amman, Jordan.

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 I happen to have met, shortly after that, or may be during the process of establishing that
company, I happened to have met its founder that became the CEO later and when he explained the
idea to me. I looked him in the eye, and I asked him, “Did you learn that from the Devil himself, or
from anybody else?” And of course, the Shariah advisor of that company who gave them the idea was
really a devilish person who used his Shari’ah knowledge for personal enrichment. Anyway
subhanallah, (glory be to the God), this is the way life goes. The principle of cooperation, instead of
being managed on a cooperative basis as we have it now in very remote areas, like we have it in the
island of Trinidad, where we have a cooperative insurance union based on the cooperative principles
and it is still managed on a cooperative basis not on a for-profit basis like what has happened to almost
all the Takaful companies who run the Islamic cooperative insurance funds in the world today. We
need to go back really, to reform the Takaful companies and go back to create them either on the basis
of waqf as one of the scholars suggested or on the basis of pure cooperation both on contribution and
on management levels without having a profit maker among them to control and manage and create
problems in reality for Islamic insurance cooperation principle in today’s world.

3. Caring About Others

The third point of my discussion today is the point that in the Islamic economic system we don’t
believe in the invisible hand. I remember many years ago, about 40 years ago, in a public discussion
in Lafayette University, Indiana with one of its professor at that time, I told him that well, the invisible
hand has already been broken many years ago in the depth of history. It does not really work for your
own interest, does not assure the interest of the society nor the interest of the minorities who might be
neglected in the society. In Surah number 36 (Ya Sin) v 47 says, “Why should you ask us to feed those
whom God could have fed?” that is the ‘invisible hand of the capitalist mentality’ which we do not
accept in Islamic economics. Yes, we need you to feed those who God could have fed if He so wishes,
but God wants their feeding to be through you and through the expression of your goodness and
heartful consideration. For your own goodness you need to have and express a feeling\spirit of caring
about others and you should develop the attitude of mercy (rahma) and caring about others in your
heart because that benefits you yourself, not only benefits financially or economically or materially
the poor whom you are helping. In fact it may benefit you equally or maybe more and this is why the
other verse in Surah number 9, talks about the zakah as purifying. Some English translations add “On
the day of judgement” from their own pocket not from the original text. No. Purification may be in
this life! Why not? It purifies the heart of the payer. It makes him a person who cares about others. It
gives him that pleasure, and that heartly elevation and spiritual upliftment. The pleasure that when you
give you know that you really are helping. You are activating the stand of mercy and the attitude of
caring in your heart and once it is activated that takes care of you first of all before any other thing and
that helps you more than anybody else. Yes, you are financially helping the other, but here the Islamic
concept of mercy and caring is extended as a matter of fact even to the environment, even to all
creatures, even to (inanimate) things, because without it one’s life becomes empty and full of
nothingness. It’s just like sitting on the bank and throwing stones in the river. Action without mercy
and benefit is not acceptable in the Islamic economic system and in our religion in general.

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4. SPECIAL INSTITUTIONS FOR SOCIAL CARE IN THE
ISLAMIC SYSTEM: Zakah, Sadaqaat, Awqaf
a. Zakah

The principle of mercy and caring about others is expressed as a civic requirement because the
Islamic economic system is the only system in the world that institutionalizes this principle, among
religions and among economic systems. It is institutionalized with a minimum level that one cannot
escape. If you don’t do that minimum level, you are not even a Muslim. If a country does not do this
minimum level it is not a Muslim country, it is not Muslim majority, so you are required to do that
minimum as a religious requirement, because the verse number sixty in chapter nine of the Holy Quran
addresses the Prophet Muhammad as a leader, as the head of state or as a government, “Take out of
their properties the Zakah”. Now, this Zakah that is taken out of properties of the rich is actually a kind
of unique levy. It has strong religious support to the extent that if you don’t do it you are not Muslim,
it defines who is and who is not Muslim but more importantly it is a civil thing that is collected from
the rich and richness is in the meaning of wealth and income, not only income alone. Most taxes, and
there are many research writings today in America which argue that the world tax systems being
focused on income alone are a major reason for increasing the gap between the poor and the rich. The
zakah is not on income only it is on both wealth and income. It gives the example of the duty that is
actually considered as a right of the poor and needy in the income and wealth of the rich.

If Zakah is required by law in the Muslim majority countries its collected proceeds would make
something between 2.5% and up to 7 or 7.5% of GDP. There are several studies. I made one of them
earlier in the mid 1980s and other studies came after mine in different countries to the effect that zakah
can actually bridge the gap between the poor and needy on the one hand and the wealthy on the other
hand. Notice that zakah is a yearly obligation that continues and repeats year after year, and one of its
objectives is to force you not to freeze or evade investment of your properties, because the Prophet,
pbuh, advises that you should invest properties of the orphans on which you are a guardian in order to
avoid their being depleted by the consecutive repeated payment of zakah.

Zakah then is a minimum obligation that was practiced throughout the history (of Muslims) when
the Islamic law prevails but Muslims did a lot more than zakah. Muslims throughout history were not
satisfied to pay their zakah alone. They were paying their zakah and their zakah used to be distributed
immediately to the poor and needy. Even there are historical narrations that the zakah used to be
collected and distributed very quickly and immediately to the poor and needy but historically rich
Muslims were not sufficed by zakah alone. Actually, the Qur’an calls for making charity a lot more
frequently than it calls on the obligation of zakah. There are about 167 verses that talk about voluntary
charity and encourage it whereas there are about 28-30 verses that talk about the obligation of zakah.
And in the Sayings of the Prophet, pbuh, also there are many references to voluntary charity. In fact,
one of these kinds of charities are very marvelous, like the prophet, pbuh, narrates from God that God
says, to a man on the Day of Judgment “I was hungry and you did not feed Me.” How come, Lord,
that you would be hungry. He says that a person X was hungry and you knew about it and you did not
feed him, and if you had fed him you would have seen me there as if you had fed Me.” The idea is so
strong in the Hadith that Muslims as a matter of fact did multiples of the zakah through voluntary
donations, and they have given historically a lot of voluntary donations. There are lots of stories about
this in our history and also in our present-day societies.

b. Waqf

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 Definitely, if we want to talk about the voluntary donations there are several multiples of the
amount that is due as zakah. One of these voluntary donations is a kind of unique form although it was
not invented by the Prophet Muhammad, peace and prayers be upon him, or by his companions. But
yet the Prophet Muhammad, pbuh, apparently did not know about earlier examples because when he
suggested to Umar ibn al Khattab, he suggested a unique form of endowment, he did not suggest a
waqf like it was done in other societies. There are reports that in ancient Egypt and in ancient Rome
there were some kind of endowments, but these endowments were exclusively in the hands of the
religious monks and priests as religious ranks. Now the Prophet, peace be upon him, when he advised
Umar ibn Khattab, his companion to create an endowment, a waqf, he advised him to make it civil, he
told him, “Hold on to the property itself so that it cannot be inherited, sold or traded by anybody, like
any of your heirs, it cannot be sold, it cannot be disposed of, and assign its fruits to the poor and needy
and their likes. Umar ibn al Khattab did that and he kept himself as the manager (the name that came
to be used historically is Muttawali or Nadhir), manager of this endowment of this waqf, and when he
died he did not assign the imam of the mosque or the khalifa who would succeed him, he did not assign
either of them as the manager of his waqf, he assigned his daughter and he said after her anybody from
our descendants of the Khattab family. Waqf is a civil institution not a religious institution. This is
what the Prophet, peace be upon him, created in the form of Awqaf, and then it was carried by Muslims
throughout history until the eighteen hundred when the government started controlling it unfortunately.
In the eighteen hundreds the first attempt or the first successful attempt I should say was the creation
of a ministry of Awqaf in the Ottoman State and that was when they took Awqaf from being a civil
institution to becoming an addendum, with all the bureaucracy and the mismanagement, of the public
sector properties. Now the Awqaf idea is that it is a civil organization which is run on the basis of
efficiency and given to the poor and needy and\or other objectives as determined by the founder.

Of course, we can distinguish between two kinds of Awqaf. I show them through examples.
There was a house in Damascus that was assigned as a place for unwanted homely cats. I personallt
knew it and I visited it. Damascus was my hometown when I was born and I visited that house more
than once and I knew it. At my time when I was young, it was already in the hands of the government
and it was really neglected and no cats were in it but it was used or rather abused by the government
for other projects. This house of the cats was also part of the endowment, of the waqf that was
associated with an orchard where the fruits of that orchard were to be sold in order to buy food for the
cats and put for them in that cat house. The cat house still carries the name Cat House even today, but
it is used for other projects. The Awqaf in the Islamic context were expanded to create many kinds,
many forms, many objectives.

One of the forms that was created by our ancestors was what we call today a trust for the family.
In fact, the idea of trust was taken by Britain in the UK on the example of the Maliki school in Morocco
in the seventeenth century or a bit earlier. The family Waqf or trust for the family is to benefit your
descendants one generation after the other and that could be a very helpful and useful thing for creating
productive assets which will be used by different generations in the future. Of course, Muslims
throughout history expanded not only by adding just another kind, the family trust, the family Awqaf,
but they had expanded the objectives of Awqaf sometimes to areas that are unimaginable. There are
many areas, huge areas of Awqaf based on mercy. Even mercy to birds. There is a Waqf for birds in
the Omayad mosque in Damascus.

There is another Waqf, a field to produce grain and put grain for the birds in the grand mosque
in Mecca, and also in the mosque of the Prophet, peace be upon him, in Medinah, and another similar
Waqf in Algeria and other countries.

There is an interesting Waqf in Cairo whose objective is to boost the spirit of a terminal patient
in a hospital. From the Waqf revenue, you hire two persons to stand near the bed head of the patient
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chat together as if they are talking to between themselves only saying that this patient is going to be
well, he’s improving, he’s responding to medicine, he’s going to go out of the hospital quickly, they
don’t mention whether to the graveyard or to his family home, but simply they intend to improve his
spirit during this period they talk about and these are hired persons to do that by the Waqf for that
objective. There is Waqf in Istanbul for wild animals in the mountains to give them food in winter so
that the wild animals will not come down from the mountains to attack villages. There were Awqaf of
all kinds, and of course the cash waqf is one of these Awqaf which are marvelous and they have been
used by the Muslim Spain in the period of Andalucía to help businesses, give loans to small businesses
without any increment and they also existed during the Ottoman State. Our Turkish scholars don’t like
the use of the words ‘Ottoman empire’. ‘Ottoman empire’ is the name used by Westerners, but the
Turkish writers prefer the name ‘Ottoman State’. During the Ottoman State cash waqf was used to
provide financing for small business and also to compensate when disasters happened like the big fire
that engulfed over 100 shops in Istanbul in the late eighteen hundred.

The earlier Muslims invented the family waqf, and the later Muslims invented the cash waqf and
they have used it to give interest free loans to help small businesses when they need it, or to support
relief from disasters for the micro and small businesses in the Muslim lands.

Finally, the principle of mercy and caring about others is expressed in three ways. The minimum
requirement is an obligatory part of the system, that is zakah which is estimated to be around 2 ½%
and 7½ % of GDP which is not a small amount, and the second thing is the general charity which is
not less important in its amount than the zakah, and then the Awqaf which is a form of permanent kind
of charity where you distribute the fruits, revenues or benefits of it while you keep the assets for
generations to come and benefit from.

With this I rest my case this morning, and I thank you very much and thank everybody among
you, those who prepared and helped in this winter course, the audience and of course I thank all the
listeners who joined us, my fellow speakers and other colleagues also who are with us, wal
hamdulillahi Rabil alameen, praise be to God Lord of the worlds.