In a new paper recently published in Humanomics (Vol 33, Issue 2), an attempt is made to integrate Islamic and mainstream economics framework towards a more realistic understanding of Muslim consumption behaviour. First, the paper gives an account of the descriptive postulates about human nature in Islamic texts. Then, it gives an account of moral principles in Islamic texts regarding overall consumer behaviour encompassing the pursuit of earning incomes to spending these incomes.
Based on this discussion, the paper highlights the points of distinction and compatibility between the Islamic and mainstream economics framework. The distinction comes in the decision horizon and additional moral filters on choice set. The distinction is even deeper in values whereby the Islamic framework encourages contentment, pure altruism and self-less behaviour while, the mainstream economics framework is at best neutral between moral content of economic choices.
Nevertheless, the paper shows how some of the Islamic principles and institutions can be integrated in the mainstream economics framework, especially in research studies where the objective is to understand and describe reality rather than persuasion and idealization.
The paper attempts to use Zakat Augmented Overlapping Generations Model (ZA-OLG) to present an example of integrative theoretical framework for understanding Muslim consumption behaviour. The model incorporates some of the Islamic institutions like period-wise deduction of Zakat from endowments. It also includes bequests which could be significant given the Islamic injunctions on inheritance distribution and the significance placed on the institution of family.
In ZA-OLG model, the institution of Zakat ensures contemporaneous redistribution from endowment surplus households (those having Zakatable endowments above Nisab) to endowment deficient households (those having Zakatable endowments below Nisab). On the other hand, bequests affect inter-temporal redistribution.
Even after incorporating some of these Islamic institutions, we arrived at a comparable Euler equation as in the original OLG model. But, the difference is that the levels of choice variables would be different, i.e. the actual quantity of consumption today and tomorrow. The lifetime resources are scaled down for endowment surplus households due to the payment of Zakat in both periods and leaving bequests in old-age period, while the lifetime resources are scaled up for endowment deficient households due to the receipt of Zakat in both periods and receiving the bequests in youth.
So, a Muslim consumer who pays Zakat, who wants to leave family in a non-poor position after the end of his/her life and who wants to contribute in charity even during his/her lifetime in general would still use the (scaled down) lifetime income acquired from Halal sources whereby among the two substitute Halal consumption goods, he will buy the cheaper (all else equal) and among the two Shari’ah compliant investment options, he will prefer the one with highest return over risk (all else equal). The difference will be in the levels of consumption (contemporaneous and inter-temporal), but the analysis will be at the margin given the Islamic injunctions are satisfied and in the presence of Islamic institutions.
Full paper can be downloaded at: Towards an Integrative Framework for Understanding Muslim Consumption Behaviour
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