Issues in the Implementation of Ushr in Pakistan

Syed Hassaan Ali

Ushr is the financial obligation levied at the rate of 10% on agricultural output in Islam. There are several hurdles and issues which are hampering its successful implementation in Pakistan. This article attempts to discuss those issues and a few recommendations to overcome them.

The major issue is that the government has not been active in the collection of Ushr. Furthermore, historically, it never achieved its true potential in terms of the amount collected due to the trust deficit between the government and the landowners. It is also a fact that some greedy landlords try to evade it. On the other hand, poor knowledge about Ushr among the landowners results in the meager collection of Ushr at the national level.

Furthermore, corruption is also a major hurdle in exacerbating trust deficit between the government and the landowners. People tend to think that if they would pay their religious financial obligations to the government, then, they might be spoiled or misused.

Another problem is that usually landowners are not aware of the commandment of Ushr. There is a lack of initiatives for public awareness regarding Ushr. In the poverty alleviation programs, the government ignores the potential of Ushr collection as a tool for poverty reduction. Even if there is no agricultural income tax levied by the government, Muslim landowners engaged in agricultural production are required to pay Ushr on their agriculture produce. But, many of the landowners are not aware of this requirement and the procedure to determine their true financial obligations and the mode of payment.

On the other hand, low levels of collection of wealth Zakat and Ushr in the Muslim countries is due to the fact that governments have resorted to taxation and have pretty much disengaged from the central collection of wealth Zakat and Ushr. Now, a person defaulting on tax can be penalized, but a defaulter on Islamic financial obligations is not penalized by the government. Another reason of low central collection is the administrative hassle in the government departments which entice people to pay their financial obligations privately and without having to disclose their wealth and income status to the tax officials.

To change matters, some recommendations are listed below:

  • Raising awareness about the obligation of Ushr at the grass-root level in rural areas using different local platforms, such as Friday Sermons.
  • Moreover, the governments of Muslim majority countries may provide tax credits to those who pay Zakat and Ushr. Targeted subsidies in the procurement of seeds, fertilizers, tube-wells, pesticides and agricultural financing can also be provided to incentivize commitment.
  • Ensuring the transparent collection, monitoring, reporting and disbursement in the overall system of Zakat and Ushr administration is vital.
  • In the long term, when it becomes a tradition and a well-known financial obligation, then defaulters of Ushr should be penalized.
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Significance of Recycling for Environmental Sustainability

Dr. Dalia Shebl Said

Associate Professor in Architecture & Urban Department, 

Faculty of Engineering – Kafr Elshiekh University

The recycling process has become a core and essential element of sustainable development. Nonetheless, economic analysis of recycling relegates environmental concerns to mere externalities, which are un-priced costs and benefits that accrue to individuals outside of private transactions. Examples of positive externalities include decreased air pollution and greenhouse gases from incineration, reduced hazardous waste leaching from landfills, reduced energy consumption, and reduced waste and resource consumption, which leads to a reduction in environmentally damaging mining and timber activity.

The United States Environmental Protection Agency (EPA) has concluded in favor of recycling, saying that recycling efforts reduced the country’s carbon emissions by a net 49 million metric tons in 2005. In the United Kingdom, the Waste and Resources Action Programme stated that Great Britain’s recycling efforts reduced CO2 emissions by 10–15 million tons a year. Recycling is more efficient in densely populated areas where there are economies of scale since investment in environmentally efficient technology requires an upfront fixed cost.

Approximately 1.3 billion tons of Municipal Solid Waste (MSW) are generated globally every year and are expected to increase to approximately 2.2 billion tons per year by 2025. In fact, the amount of waste produced per person per day also depends on the economic status of the community concerned. The rates of MSW growth are fastest in Arabian countries and the Middle East.

Construction activities generate a large amount of waste compared to other industries. It accounts for up to 30% of the total waste output in the world. Construction and demolition waste management have become one of the major environmental problems in many countries. For example, in EC countries, about 200 to 300 million tons of construction and demolition waste is produced annually, which translates to roughly a 400 square kilometer area covered with demolition debris one meter high (Source: US Green Building Council, 2001).

In the Islamic framework, there is an emphasis on conservation, preservation and responsible use of resources. There is a discouragement for excessiveness, extravagance, lavishness and wastefulness in the use of resources. These norms are especially needed in the present times to foster a healthy, livable and sustainable ecosystem. In 2019 alone, humans have used up resources for the whole year within 7 months according to World Economic Forum. Thus, we are disturbing the ecological balance beyond repair and regenerating capacity and thus causing serious concerns for sustainability.

If we glean over the past, Muslim engineers over the past centuries were keen to use sustainable materials and achieve recycling in lifestyles. For example, the operational system of the “Hammam” public bathroom in Muslim cities was a successful sustainable model of recycling and management of resources and disposal of waste. Now, it is high time that we adopt norms, lifestyle and technology which ensure ecological balance and sustainability.

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Islamic View on Scarcity of Resources

Maher Kababji

Socialists claim that economic problems arise from the extraction of surplus value by the Capitalists in the production process. On the other hand, Capitalists urge that scarcity of resources is the basic economic problem which restricts output growth because wants are innumerable, but the resources for satisfying those wants are limited.

Nonetheless, the empirical evidence does not support that resources are scarce for legitimate and compulsory economic needs. The excess of the world output growth over the growth of the world population provides evidence that scarcity of resources does not exist at the global level. Food per capita availability has actually increased in recent decades as per Food ad Agriculture Organization.

Qur’an emphasizes the abundance of natural resources at the macro level:

(قال تعالى : وَجَعَلْنَا لَكُمْ فِيهَا مَعَايِشَ ” (الحجر 15 : 20

  • Meaning: The Almighty said: “And We have provided therein means of living”.

(قال تعالى : وَمَا مِن دَابَّةٍ فِي الْأَرْضِ إِلَّا عَلَى اللَّهِ رِزْقُهَا ” (هود 11: 6

  • Meaning: The Almighty said: “And no moving creature is on earth but its provision is due from Allah”.

(قال تعالى : وَأَنبَتْنَا فِيهَا مِن كُلِّ شَيْءٍ مَّوْزُونٍ” (الحجر 15 : 19

  • Meaning: The Almighty said:” and caused to grow therein all kinds of things in due proportion”.

(قال تعالى : وَإِن مِّن شَيْءٍ إِلَّا عِندَنَا خَزَائِنُهُ وَمَا نُنَزِّلُهُ إِلَّا بِقَدَرٍ مَّعْلُومٍ ” (الحجر 15 : 21

  • Meaning: The Almighty said: “And there is not a thing, but with Us are the stores thereof. And We send it not down except in a known measure”.

In some regions, the available resources may differ from the resources needed to satisfy the requirements of the community sometimes like in the case of famine. But, international trade as well as philanthropy helps exchange of resources and essential commodities.

Qur’an recognizes the differential in resources at the micro level:

قال تعالى : ” وَهُوَ الَّذِي جَعَلَكُمْ خَلائِفَ الأَرْضِ وَرَفَعَ بَعْضَكُمْ فَوْقَ بَعْضٍ دَرَجَاتٍ  ” (الأنعام 6: 165)

Meaning: The Almighty said:” the one who has made you the earth, and has raised some of you above some degrees “.

This differential is meant to test the spirit of sacrifice, cooperation and philanthropy among the rich and resourceful persons in society. But, it is different from the scarcity which results in deaths from hunger in the world. Such scarcity is driven by inequitable distribution of resources. Islam emphasizes on feeding the hungry and looking after the poor people through Zakat (compulsory charity), Infaaq (charitable giving) and Waqf (endowments). Furthermore, the state and its executive head is made responsible for ensuring basic needs of the living beings including even the animals in the Islamic social framework. Lastly, the prohibition of hoarding of essential commodities for raising their prices also ensure that disruptions in supply due to greed are contained.

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Using Mainstream Asset Pricing Models in Shari’ah Compliant Stocks

Salman Ahmed Shaikh

One issue that arises in using asset pricing models developed in mainstream financial economics literature is that can one use these asset pricing models in the security analysis of Islamic equity investments. It must be acknowledged that asset pricing models do not prescribe a particular rate of return to an investment project or in financial contracts. They are just an ex-ante means of analysing investment options available to the investors. Hazny and Yusof (2012) discuss the assumptions of Markowitz’s Mean Variance Analysis and CAPM from the Shari’ah perspective and conclude that some of these assumptions are simplistic only for the purpose of facilitating analysis. Rosley (2005) and Hazny and Yusof (2012) argue that Islamic principle of Al Ghunm bil Ghurm means that returns are justified by taking risks. Furthermore, Al-Kharaj bil Dhaman bases the entitlement to profits on corresponding liability for bearing losses. These maxims are broadly consistent with the positive ex-ante relationship between risk and return in investment literature. In addition to that, divisible investments are possible in real Islamic financial assets through Sukuk, Islamic mutual funds, and Shari’ah compliant common stocks. Thus, the assumption of marketability and divisibility of investment assumptions are also tenable.

Other assumptions which apparently look conflicting with Shari’ah can be modified for bringing consistency with Islamic capital market norms and practices. For instance, the risk-free rate can be replaced with Sukuk profit rate or to the benchmark with which Sukuk profits are linked. Iqbal (2002) argues that the assumption of short selling might be solved by assuming complete markets. In recent developments in Islamic capital markets, Bai Salam, Bai Arboun and Ready Buy Deferred Sale products have facilitated Islamic investors and Islamic capital markets to reach equilibrium price level through liquid transaction possibilities in over-priced and under-priced stocks.

In conventional finance, the interest rate on sovereign debt serves as a proxy for risk-free rate (Askari et al. 2011). Hanif (2011) suggests that inflation rate can be included in place of the risk-free rate in Islamic security analysis. Nonetheless, Ayub (2007) cites the Fiqh Academy of the OIC which has ruled out indexation of a lent amount of money to the cost of living indicators. Furthermore, in actual practice, there are no products in either conventional finance or Islamic finance in Pakistan which guarantee inflation-protected returns.

El Ashker (1987) suggests using Zakāt rate in place of risk-free rate. As per this proposal, investors would demand at least 2.5% return to keep intact their net value of the investment after payment of Zakāt. A question arises that can the investment companies or the government offer such a particular return on investment. As per Islamic injunctions, Zakāt is due on Muslims who own assets and resources equal to at least the minimum value of Nisāb. Risk-free rate implies return on safe investments; whereas, Zakāt is a religious obligation to pay a part of wealth and produce provided that the aggregate sum of wealth in ownership exceeds the value of Nisāb. Zakāt on wealth is on the stock of Zakāt eligible resources rather than on flow.

In searching for a better alternative for risk-free rate in Islamic capital markets, the return offered by the government on its sovereign Sukuk could be a suitable choice. Financial claims to the government have the highest security in terms of default risk. For market competitiveness, the ex-post return on Sukuk and interest based Treasury securities can be closely linked; however, the underlying structure of the transaction is different in both. Treasury bills involve loaning of money on interest. On the other hand, the government pays rent on the assets which are owned by investors in the commonly used Ijarah Sukuk structure. Investors owning a proportionate share of the assets get periodic returns in the form of rents. In fact, Sukuk are safer than Treasury bills for investors since investors have recourse to the real assets underlying the Sukuk. Schoon (2011) argues that as sovereign Sukuk issuance rises across countries, the rate of return on Sukuk solves the problem of the alternative of risk-free rate in security analysis for Islamic investors.

On the other hand, Hakim et al. (2016) argue that Zero-beta CAPM does not require a security paying fixed return. Thus, Zero-beta CAPM could also be applicable for Islamic capital market. On the other hand, the multi-factor models which use internal factors of the company to explain ex-post returns are empirical models based on facts without strong assumptions. The choice of factors in multi-factor models depends on observed relationships between internal factors of the company and the ex-post realized returns on stocks. By delinking interest as fixed return on investments, Islamic risk-sharing philosophy in financial investments is more aligned with the approach of focusing on internal factors of the company for financial decision making. Factors which represent financial standing of the company in terms of capitalization, book value to market equity, profitability and investment style focus on the nature and quality of companies in which investments are contemplated. Therefore, some of the mainstream asset pricing models can be used for security analysis in Islamic equity investments from the Shari’ah perspective. However, the choice of particular asset pricing models in practical use must depend on their ability to better explain returns on Shari’ah compliant stocks.


Askari, H., Iqbal, Z., & Mirakhor, A. 2011. New Issues in Islamic Finance and Economics: Progress and Challenges (Vol. 753). John Wiley & Sons.

Ayub, M. 2007. Understanding Islamic Finance. England: Wiley.

El Ashker, A. A. 1987. The Islamic Business Enterprise. London: Taylor & Francis.

Hakim, S. A., Hamid, Z. and Meera, A. K. M. 2016. Capital Asset Pricing Model and Pricing of Islamic Financial Instruments. Journal of King Abdul Aziz University: Islamic Economics, 29(1): 21 – 39.

Hanif, M. 2011. Risk and Return under Shari’ah Framework: An Attempt to Develop Shari’ah Compliant Asset Pricing Model (SCAPM). Pakistan Journal of Commerce and Social Sciences, 5(2): 283 – 292.

Hazny, M. H., & Yusof, A. Y. 2012. Revisiting Markowitz’s Mean Variance Analysis: A Review from Shariah Perspective. International Conference on Statistics in Science, Business and Engineering (ICSSBE), Langkawi, 2012, pp. 1 – 6.

Iqbal, Z. 2002. Portfolio Choices and Asset Pricing in Islamic Framework, in ed. Ahmed, H. Theoretical Foundations of Islamic Economics, pp. 167 – 189.

Rosly, S. 2005. Critical Issues on Islamic Banking and Financial Markets. Kuala Lumpur: Dinamas Publishing.

Schoon, N. 2011. Islamic Asset Management: An Asset Class on its Own?: An Asset Class on its Own?. Edinburgh University Press.

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Early Analytical Studies on Consumption in Islamic Framework

Salman Ahmed Shaikh

Muslim economists have employed the mainstream economics tools to explicate consumption in the Islamic framework. Kahf (1980) uses indifference curves and budget lines. Ahmed (2002) uses utility framework to incorporate Islamic injunctions in the model assumptions as well as parameters. Some economists in the Islamic economics literature argue that the utility function itself should include social caring spending utility (El Ashker and Wilson 2006; El Ashker 1985; Khan 1986). The problem with that approach is that if one introduces self-less spending in the utility function as a choice variable, then it is imperative to include its price as well. Price comes from the market and which requires a supply side too. Therefore, such an approach would not lead to the general equilibrium theory or interaction with other markets. Moreover, due to the fact that Islam encourages pure altruism alone, it is better to understand altruistic behaviour in a non-utilitarian, non-commercial and non-market context. This approach can help in modelling the market and economic behaviour of Muslim households with suitable modifications in the mainstream framework. Secondly, this approach would also help in understanding the nature, dynamics and characteristic features of altruistic behaviour and choices inductively through primary data without imposing the neoclassical deductive framework to pure pro-social and altruistic choices by the Muslim households.

In another attempt to discuss consumption behaviour in the Islamic framework, Zarqa (1992) presents a diagrammatic representation of Islamic worldview using indifference curves. In the diagrammatic model, the consumption is analysed from the moral perspective. However, the model is inadequate for applied analytical analysis as it leaves out any economic determinant of consumption including wealth, income and income distribution from the analysis. The use of subjective concepts like sufficiency threshold and prodigality frontier is suitable for conceptual mapping; however, this alone does not provide a solid analytical framework for empirical analysis.

Hassan (2017) emphasizes that the consumer can decide how and how much to spend on permissible goods the amount he/she eventually decides to spend on self. The mainstream economics framework can be employed as a tool with suitable modifications to understand Muslims’ economic consumption behaviour. Khan et al. (2012) use this approach by taking altruistic and religiously motivated social spending in the budget constraint rather than bringing it in the utility function.

Hasan (2005) provides a review of early studies on consumption in Islamic economics literature. Hasan (2005) notes that some initial efforts employed basic macroeconomic models in the Keynesian tradition and they incorporated some key Islamic variables into the models, such as the works by Khan (1986) and Iqbal (1985). Khan (1986) argues that Islamic injunctions of moderation in consumption and constrained consumption choices due to moral filters would raise overall savings, especially in the long run. Iqbal (1985) concludes that the injunctions on moderation might restrain consumption. On the other hand, transfer of resources from low-MPC rich households to high-MPC poor households might increase consumption (Ghassan, 2016). Iqbal (1985) argues that the net effect would be an empirical question which will depend on several parameters. As against the prevalent opinions, Iqbal (1985) reasons that the net effect of Islamic injunctions on the marginal propensity to consume will be neutral i.e. MPC will not be significantly different from a comparable secular economy. This conclusion by Iqbal (1985) highlights the importance of further empirical studies and for taking a flexible approach in attempting to understand Muslim consumption behaviour with regards to the methodological choice in the descriptive studies.

Hasan (2005) appraising these efforts concludes that there are conceptual mistakes and overdrawn conclusions in these pioneer research efforts in theoretical models. Hasan (2005) raises a pertinent point that monetary value of consumption basket in certain cases can be higher than the value of consumption basket without any moral filters. For instance, if prohibited food and financial services are cheaper than Halāl alternatives, then the value of consumption expenditure can be higher for the Muslim consumer who prefers Halāl goods. Nonetheless, he/she would still be more satisfied since Harām goods despite having lower prices may provide no or negative utility to him considering all the physical, spiritual and psychic effects.  Hasan (2005) emphasizes that income distribution and proportion of poor people in the population would also determine the net aggregate outcomes. Two of the key limitations of these early works are that they used the Keynesian framework without building micro foundations and they did not model the behaviour in an intertemporal context.


Ahmed, H. (2002). Analytical Tools of Islamic Economics: A Modified Marginalist Approach. Theoretical Foundations of Islamic Economics: 123 – 143.

El Ashker, A. A. (1985). On the Islamic Theory of Consumer Behaviour: An Empirical Inquiry in a Non-Islamic Country. Center for Middle Eastern & Islamic Studies, University of Durham, Durham.

El Ashker, A. A, & Wilson, R. (2006). Islamic Economics: A Short History. London: Brill.

Ghassan, H. B. (2016). A Consumer and Social Welfare Model based on the Writings of Shibani (750-805 AD, 131-189 AH). PSL Quarterly Review, 69(278): 235 – 266.

Hasan, Z. (2017). Consumption and Islam: Micro Foundations and Macro Modelling. Journal of Economic and Social Thought, 4(1): 108 – 118.

Hasan, Z. (2005). Treatment of Consumption in Islamic Economics: An Appraisal. Journal of King Abdul Aziz University: Islamic Economics, 18(2): 29 – 46.

Iqbal, M. (1985). Zakah, Moderation and Aggregate Consumption in an Islamic Economy. Journal of Research in Islamic Economics, 3(1):  45 – 61.

Kahf, M. (1980). A Contribution to the Theory of Consumer Behaviour in an Islamic Society. In K. Ahmad (ed.). Studies in Islamic economics, International Centre for Research in Islamic, Economics, King Abdulaziz University, Jeddah, Saudi Arabia: 19 – 36.

Khan, M. F. (1986). Macro Consumption Function in an Islamic Framework. Choudhary, M.A. Contributions to Islamic economic theory. New York: St. Martin Press, Inc.

Khan, Z., Farooq, M. & Asmat Ullah (2012). Optimization of Consumption in Divine Context: Basic Principles and Extension. Al-Idah, 2(2): 33 – 49.

Zarqa, M.A. (1992). A Partial Relationship in a Muslim’s Utility Function. In Tahir, S., & Ghazali, A. (ed.). Readings in Microeconomics: An Islamic Perspective, Kuala Lumpur: Longman Malaysia.

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Methodological Framework for Studying Consumption in Islamic Economics

Salman Ahmed Shaikh

There is considerable debate in Islamic economics literature on what shall be the correct response and attitude towards mainstream economics methodology. There are three varied responses among Islamic economists regarding the issue. The first response is to use the methodology of mainstream economics in Islamic economics as is. The second response is to modify it according to the needs and the context of Islamic framework. The third response is to discard it altogether and devise a new methodological framework from scratch. Haneef and Furqani (2011) raise a pertinent point that the choice of methodology shall depend on whether the purpose of the analysis is to understand, explain and predict or to persuade and transform the individuals.

Hasan (2016) emphasizes that Islamic economics is a social science; it is not theology. Addas (2008) argues that Muslim economists who favour discarding neoclassical economics methodology altogether had by and large misunderstood the purpose of economic theorizing. According to Addas (2008), the purpose of economic theorizing is to provide a framework as a foundation for understanding demand and supply behaviour in markets. Thus, the mainstream consumer theory does not attempt to define the purpose of life in its objective function, but a framework to explain response in choice variables due to changes in some relatively more important and measurable parameters. Thus, it will be inappropriate to compare the economic objective defined for the purpose of description of specific choices and outcomes in markets with the lifetime objective advocated by the Islamic worldview. Shamim A. Siddiqui (2012) explains it further by arguing that demand and supply framework has remained a useful tool in guiding different sectors of the economy and economists. According to Shamim A. Siddiqui (2012), there is no alternative apparatus that provides a better explanation of exchange values in market economies. Ahmed (2002b) argues that no substantiated alternative analytical models have been developed despite the assertion of some Muslim economists that there should be one.

The difference of opinion is also partly caused by the varied understanding on self-interest and selfishness, i.e. whether all self-interested behaviour is similar to selfish behaviour or not. Hasan (2002) thinks that the pursuit of self-interest should not be equated with selfishness. According to Hasan (2002), self-interest can be pursued along with sympathy and benevolence. Hasan (2009) contends that self-interest can be pursued within the ambit of morality, whereas selfishness would always violate it. Nejatullah Siddiqi (2012) also shares this line of thought and maintains that self-interest does not necessarily imply greediness or selfishness.

Hasan (1985) contends that a rational consumer allocates income among various uses in such a way that his satisfaction is maximized. These uses may serve materialistic or ethical desires. In another work, Hasan (2002) contends that maximization, per se, is not un-Islamic; what is maximized, how and for what purpose are the real issues to investigate. He prefers to include moral values and social considerations of Islam in the assumptions of economic theorems, rather than in the objective elements of the model. Hasan (2002) thinks that maximization as a notion is value neutral and the indiscrete condemnation of maximizing behaviour in Islamic economics is untenable. Mahdi (1984) clarifies that according to modern theory, it does not matter whether a consumer is a miser, spendthrift or a hoarder. Also, it does not matter what cultural values or religious preference he/she has. For example, according to modern theory, a Muslim consumer whose marginal utility for Hajj is far greater than his marginal utility for a new car is perfectly rational by deciding to spend his money on Hajj rather than on a new car even though all his satisfaction is spiritual. One of the pioneer Islamic economists, Kahf (1996, p. 34), writing on this theme gives following suggestion:

“There are small matters which are common to all members of the human race regardless of their faith and views. These common matters must be treated as value-neutral. Consequently, many of the minute instruments and premises of analysis fall in the latter category and should be considered value neutral for all practical analyses.”

Nejatullah Siddiqi (2012) thinks that rejection of old knowledge has no basis in Al-Quran and Sunnah. Khan (1987) also argues that Islamic economics cannot discard the valuable insights of modern economics by a simple stroke of disgust. Khan (1987) maintains that some of the findings of Western economics are based on the study of human nature, which may be the same everywhere and for all times. Nejatullah Siddiqi (2001) reveals that the Islamic tradition in economics has always been free of formalism, focusing on meaning and purpose with a flexible methodology. In this regard, Rashid (1991) recommends that an empirical approach will broaden the scope of Islamic economics and increase its interaction with others. Tag el-Din (2012) also favours flexibility and thinks that contextual interplay of positive and normative statements is indispensable for the understanding and promotion of Islamic economics. Farooq (2011) thinks that there is a role for both normative standards toward which Islam calls mankind and the understanding of human behaviour as human nature from a positivist angle. Sharing the same line of thought, Hasan (2017) thinks that it is not enough to just take a puritan approach, assuming as if an Islamic socio-economic order is already in place.

Zaman (2005) argues that consumer sovereignty represents the resolve not to judge or to attempt to change these preferences. If the mainstream economics framework disregards ethical and moral choices or preferences, then it will be going against the very concept of consumer sovereignty. From the Islamic perspective, the consumer is not sovereign and has to follow the Islamic injunctions of avoiding prohibited goods, services, trades, contracts and behaviours like conspicuous consumption, envy and wastage. Islam encourages pure altruism, moderation, self-less spending of surplus endowments and choosing only the Halāl means of earning non-labor income from Shari’ah compliant financial investments. For the test nature of this worldly life in the Islamic worldview, humans do have a temporal choice given by Allah to behave in compliance with Islamic injunctions to a full, large, small or no extent. In this regard, when a study is conducted towards understanding the actual human behaviour in consumption, the anticipation for obtaining descriptive results should also be flexible. Khan (1985) argues that it is unrealistic to think that a community of saints can be attained. If such were the case, it would be possible for example to say that hoarding and luxury consumption cannot be problems since they have been forbidden by Islam. Saud (1992) emphasizes that even when all the Islamic laws are applied in every domain of life, the individual will still commit mistakes. The impulse towards less ideal behaviour which influences choice should not be belittled or denied.

Nejatullah Siddiqi (2014) writes in his critical evaluation of Islamic economics literature thus far that there was a clear tendency to overestimate the power of good intentions and to ignore the tenacity of material interests. Nejatullah Siddiqi (2014) concludes that the end result has been unrealistic utopias. Khan (1987) thinks that the idealism of Muslim economists has also done some harm to the scope of Islamic economics. Khan (1987) laments that since the analysis is perceived in ideal Islamic conditions, most of the real world problems are simply assumed away. Shafey (1983) thinks that Islamic economics in its primary concern with ‘what ought to be’ cannot ignore ‘what is’ the actual reality in a given time and place. One of the pioneer Islamic economists and IDB Laureate, Nejatullah Siddiqi (2008) is frustrated with self-imposed alienation in academic research on Islamic economics. Nejatullah Siddiqi (2008, p. 89) writes:

“Our fixation with a particular history not only alienates us from current reality, it also isolates us from the rest of humanity. It reinforces Muslims’ sense of being different from others to undue proportions, making frank, sincere outreaching and interaction almost impossible. The normal process of learning from others’ experiences and contributions is replaced by, at the least, indifference and apathy, and often by suspicion and hostility. No wonder we get the same in response.”

Khan (2013) is another staunch critic of mainstream economics and favours discarding mainstream methodology to replace it with a biological approach of harmonious interrelationships of different parts of the whole. His approach is another way to explain the ideation rather than the real world behaviour where one cannot ignore the encounter with frictions, disequilibrium, traps and transition paths. Khan (2013) argues that the mainstream economics tools are valid for analysing animalistic desires and degrade humans to lower order animals. Yousri (2013) in his response to Khan (2013) asks why or how satisfaction (or even maximization of human beings supposedly in a Halāl manner (within Shari’ah boundaries) would downgrade humans to lower order animals?

Other Muslim economists like Khan (1987) suggest that Islamic economics should not set aside the western economic thought which accumulated over centuries. Instead, with a modesty of a learner, one should cast a critical look on this pool of knowledge and should try to identify and isolate those components of thought which do not conflict either with the hard core of Islamic economics or with the rational and empirical criteria. He thinks that it would be the arrogance of the first order if Muslim economists and scholars dismiss the entire economic thought as un-Islamic.

One of the early writers in the Islamic economics literature, Kahf (2003) thinks that Islamic economists may have to redefine a few fundamental concepts of economic theory, but they do not need to negate its inductive methodology and tools of analysis on any ideological ground. Kahf (1980) sees a strong need for empirical studies which analyse the actual data to further contribute to research on economic potential and inter-linkages of Islamic institutions. Kahf (1992) argues that critical literature in Islamic economics on mainstream consumption behaviour is directed at the consumer values rather than at the tools of analysis. He reasons that tools can be used with alternate ideological basis.

Zarqa (2003) also explains that Islamic economics has a function distinguishable from that of Fiqh. It has a function to describe and diagnose real events, discover the relationships that link the various economic phenomena and to seek the economic rationale of Shari’ah rules. Zarqa (2003) does not hesitate to hold in error those who define Islamic economics in such a manner as to strip it from its descriptive content and make it synonymous to the jurisprudence of transactions. Saleem (2010) explains that the methodologies of Fiqh and Islamic economics also differ as the former focuses on prescriptions. It prescribes what an individual should do or avoid. In contrast, Islamic economics is more concerned with describing economic phenomena. Islamic economics in its search for finding the truth should rely on a methodology that suits its social and descriptive nature. Islamic economics can adopt methods of reasoning and analysis developed by conventional economics. Khan (2014) in his recent work suggests that Islamic economics should not feel shy of adopting and using tools of analysis used by conventional economics or other contemporary social sciences. These tools are available in the present form after centuries of thinking and experimentation and are a common heritage of the humanity.

Various Muslim economists recommend descriptive studies in the transitory stage of transformation rather than sitting content with only repeating the idealistic vision of Islamic teachings. Furqani (2015) argues that both microeconomics and macroeconomics become neglected and not properly explored as more resources, thinking and funding, have been mainly put in the sector of Islamic banking and finance.

Arif (1985) suggests that the human behaviour should be duly recognized as the basis of the micro foundations of Islamic economic system. Nejatullah Siddiqi (2008) thinks it will do no harm to know the current state of affairs thoroughly. That needs to be done with regards to individual behaviour in all aspects relevant to economics. Addas (2008) also sees no reason why Islamic economics should concentrate on normative goals to the exclusion of how the economy is in fact working. Addas (2008) contends that the failure to understand this has often led Islamic economists into rhetoric and a self-righteous mode. Azid (2010) thinks that Islamic economics system is not centrally planned and hence, it is very strongly affected by the behaviour of its individual economic units. Hassan (2017) argues that micro analyses of consumption provide the necessary foundation for dealing with the phenomenon at the macro level. Nejatullah Siddiqi (2014) holds it valuable if Islamic economists could explore the extent to which Muslims in various regions of the world are able to realize the Islamic economic goals. He thinks that even the instances of poor performance would have lessons to learn from. Jafari et al. (2011) agree that due attention shall be given to Muslims’ daily life practices in academic research. Finally, Hasan (2002) too wishes that an exploration of the life-cycle hypothesis or permanent income hypothesis for consumer behaviour from an Islamic viewpoint may prove to be rewarding. Hasan (2017) emphasizes that understanding consumption is of greater importance since production theory is more related to the use of technology and organization of factors of production.

What can be concluded from the above discussion? As argued by Haneef and Furqani (2011), the objective of the analysis is vital to know and determine beforehand. Table below discusses whether both the frameworks have any compatibility if the objective of the analysis is to understand the consumption behaviour.

Points of Compatibility in Intertemporal Consumption Framework

Mainstream Economic Framework

Islamic Framework

Desirability for consumption smoothing. Encouragement for Wasatiyyah (moderation), which in one sense is also consistent with smooth intertemporal consumption.
People plan and save for contingencies, post-retirement life and to leave bequests. Neutral towards the end-objective of saving. Can plan, save and leave bequests. Can also save for some religious acts like Hajj, Umrah, animal sacrifice and liquid savings to pay Zakāt by avoiding asset drawdown.
Desirability for variety and balanced consumption bundle. The desire for aesthetic tastes, variety and spending on comforts recognized.
Substitution effect of increased returns on financial investments increases savings. The instinct of substitution effect recognized. The total effect may still be altered by income effect.
Usually, a positive discount factor. The instinct of desiring immediacy recognized in intertemporal choice and exchange.
Preservation of wealth through profitable investments. Preservation of wealth recognized after payment of Zakah and by using Shari’ah compliant investment options.
Consumption on needs and beyond needs. Besides essential needs, consumption of Halāl comforts and convenience goods is recognized.


Distinctions Required for Integrative Framework

The discussion so far suggests that the mainstream economics framework can incorporate some of the distinctive characteristics of Islamic framework if the objective is to be able to understand and describe economic choices and outcomes. The concept of ordinal utility is a device to rank choices. The binary moral filter can help in deriving a restricted consumer choice set in which the ordinal preferences can be formed based on individual preferences. However, it shall be recognized that expenditure can be on self-consumption as well as on consumption of others including one’s dependents, family, neighbours, social circle and society in general. If the individual recognizes the ethical externalities, then it will reflect in preferences and captured in their choices. Chapra (1996) argues that if belief in God and the Hereafter can motivate consumers and producers to internalize moral values and moderate their pursuit of self-interest and thus facilitate the realization of the maqasid, then economists should take this factor into account. Mannan (1983) also argues that when moral preferences are revealed in choices, the descriptive theory and empirical studies shall accommodate such preferences and choices.

Table below looks at the difference in some of the values between Muslims and non-Muslims by taking data from World Values Survey 2014. Again, it could be conservatively said that value differences between Muslims and non-Muslims are somewhat significant with regards to some religious values, but not with regards to some other socio-economic values.

Therefore, in studying the behaviour of Muslim consumers, it is important to accommodate ethically charged behaviour whereby certain consumption goods are disregarded from the choice set and the budget is allocated on private goods for self-consumption as well as on spending for others. At the same time, it is important not to over-impose idealistic values and vision in a study of the actual economic behaviour of Muslim consumers.

 Socio-economic Values in Muslims and non-Muslims



Important in Life: Family 94.09% Muslims regard it ‘very important’ as compared to 89.94% non-Muslims.
Important in Life: Religion 70.61% Muslims regard it ‘very important’ as compared to 43.29% non-Muslims.
Thinking about Meaning and Purpose of Life 46.34% Muslims stated ‘often’ as compared to 39.05% non-Muslims.
Happiness and Income 39.24% high-income scale individuals stated ‘very happy’ as compared to 28.25% individuals otherwise.
Happiness and Religion 31.07% Muslims stated ‘very happy’ as compared to 32.69% non-Muslims.
Satisfaction and Income 85.59% high-income scale individuals stated ‘highly satisfied’ as compared to 65.22% otherwise.
Satisfaction and Religion 67.21% Muslims stated ‘highly satisfied’ as compared to 74.29% non-Muslims.
Important Child Qualities: Unselfishness 30.30% Muslims mentioned it as compared to 31.77% non-Muslims.
Important Child Qualities: Thrift Saving Money/Things 35.12% Muslims mentioned it as compared to 40.06% non-Muslims.
Membership: Humanitarian/ Charitable Organization 3.98% Muslims stated they are ‘active members’ as compared to 6.83% non-Muslims.
Membership: Self-Help/Mutual Aid 3.30% Muslims stated they are ‘active members’ as compared to 5.68% non-Muslims.
Richness and Money 12.87% Muslims stated ‘very much’ likeness to a person who strives for it than 7.73% non-Muslims.
Wealth Accumulation: Zero Sum Game 43.60% Muslims ‘agreed’ as compared to 40.30% non-Muslims.
Feeling Important to Do Good for Society 27.26% Muslims stated ‘very much’ likeness to a person who strives for it than 21.78% non-Muslims.
Feeling Important to Help Neighbours 16.39% Muslims stated ‘very much’ likeness to a person who strives for it than 15.35% non-Muslims.

Source: Calculations Based on World Values Survey Sixth Wave 2010-14


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Distinction and Compatibility between Islamic and Mainstream Framework

Salman Ahmed Shaikh

This article highlights the points of distinction and compatibility between the Islamic and mainstream economics framework. The distinction comes in the decision horizon and the addition of moral filters on the choice set. The difference also appears explicit when one looks at the encouragement and incentive structure for pure altruism in a two-worldly Islamic framework. 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 the moral content of economic choices.

This reflects in policy implications; whereby, in the mainstream economics framework, policy intervention is either suggested to be avoided with belief in the Pareto-efficient outcome of competitive markets or even when the intervention is tolerated, it is required to follow the principle of Pareto-improvement. Though, the practical public policy bypasses these theoretical policy implications and does favour excise tax on luxuries, subsidies on essential consumption goods and provision of public goods, which are funded from progressive taxation. On the other hand, Islamic framework does not need to resort to ad-hoc policy interventions. In the Islamic framework, enacting policies to promote Maslaha (social interest) and remove Mafsadah (social harm) govern the policy framework. Islamic jurisprudence suggests that in the presence of two evils, the one whose injury is greater is avoided by the commission of the lesser. Furthermore, severe injury can be removed by lesser injury. Table below gives a summary of the distinctive features in both frameworks.

Distinction in Consumption Framework

Mainstream Economics Framework

Islamic Framework

The economic objective of a consumer is to gain maximum satisfaction when endowed with some positive, but finite resources. Ultimate lifetime objective is to achieve Falah in both worlds and please Allah and this governs all human choices and actions.
Decision horizon is confined to this life. Decision horizon incorporates a two-worldly view of life.
No cultural and institutional constraints beyond the law of the land. Besides the law of the land, the preferences are shaped and influenced by moral imperatives.
Consumption set in every period is unrestricted. Moral filter on consumption choice set. Thus, some missing markets.
Endowments can be obtained by providing labour for any gainful employment. Endowments can be obtained by providing labour in permissible occupations.
Can use all means of investments to earn a return on savings. Can use only Shari’ah compliant investments to earn a return on savings.
Can use interest based borrowings to increase/maintain consumption. Can use only Shari’ah compliant finance to obtain specific durable goods.
Non-Satiation with respect to material goods. Encouragement for pure altruistic behaviour.
Old people can dis-save all wealth by self-consumption or leave bequests. Old people cannot leave bequests which are more than one-third of their wealth.
Policy intervention has to result in Pareto improvement in theory. Generally, the practice uses ad-hoc intervention. Promoting Maslaha (social interest) and removing Mafsadah (social harm) govern policy.


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Islamic Texts on Consumption and Spending

Salman Ahmed Shaikh

Islam has its own distinct worldview. The theistic concepts of Tawheed, Khilafah and Akhirah govern the Islamic way of life. The concept of Tawheed implies that all living and non-living things are created by Allah. The concept of Khilafah engenders stewardship for the responsible use of resources. The concept of Akhirah inculcates a comprehensive sense of accountability before Allah for the moral content in economic and non-economic choices in life. The moral institutions in the Islamic framework also govern human-to-human socio-economic relations and interactions in life. This section looks at some of the descriptive and prescriptive teachings of Al-Quran and Sunnah (Ways of Prophet Muhammad [pbuh]) on consumption and spending behaviour. Al-Quran and Sunnah together constitute the fundamental sources of the religion of Islam. First, the descriptive postulates about human nature in the Islamic texts are mentioned. Then, an account of prescriptions in Islamic texts regarding consumer behaviour in the realm of seeking endowments and spending these endowments on self-consumption and charitable spending is provided.


Descriptive Postulates about Human Nature

Al-Quran gives some descriptive statements about human nature which can help in understanding human behaviour in general as well as economic choices in particular. These descriptions could form the positive postulates in analysing a Muslim’s consumption behaviour. Al-Quran mentions that humans are generally hasty (Al-Quran, Al-Isrā 17: 11), miserly (Al-Quran, Al-Isrā 17: 100), impatient (Al-Quran Al-Ma’arij 70: 19) and have love of wealth (Al-Quran Al-ādiyat 100: 8). Thus, humans have impatience, positive time preference, tendency to economize on expenditure and desire for material resources.

Islamic texts mention consumption externalities and the desire to consume positional goods and indulging in conspicuous consumption (Al-Quran Al-Takāthur 102: 1-2). According to Islamic texts, human instinct prefers goods which serve survival needs as well as other wants which serve aesthetic desires (Al-Quran Al-‘Imrān 3: 14). The story of Jews asking Moses (pbuh) for a variety of food (Al-Quran Al-Baqarah 2: 61) also hints at the desire for variety in consumption bundles. This is also the basis of diminishing marginal utility in the mainstream consumer theory.

In a Hadith, Prophet Muhammad (pbuh) said: “If Adam’s son had a valley full of gold, he would like to have two valleys, for nothing fills his mouth except dust (of the grave)…”[1] This also hints at the instinctive desire of humans for non-satiated preferences. Prophet Muhammad (pbuh) said: “The heart of an old man remains young with regards to two things: Love of life and wealth.”[2] However, the next sub-sections explicate how Islamic teachings prescribe guidelines for moderating these instincts and inculcating empathy in conduct and behaviour.

Moral Filtering on Seeking Endowments

This sub-section discusses how the Islamic teachings govern the pursuit of earning incomes. The Islamic teachings encourage striving for Halāl means of earning (Al-Quran Al-Mulk 67: 15) as long as impermissible means and ways of earning are avoided, such as interest (Al-Quran Al-Baqarah 2: 276), bribery (Al-Quran Al-Baqarah 2: 188), fraud (Al-Quran Al-Mutaffifeen 83: 1-4), gambling (Al-Quran Al-Maidā 5: 90), theft (Al-Quran Al-Maidā 5: 38), business of intoxicants (Al-Quran Al-Maidā 5: 90) and prostitution (Al-Quran Al-Nur 24: 19), for instance.

Islamic principles do not deny self-interest; rather they purify the self-interest through a social, moral and religious filter. A Muslim consumer will not only operate under a budget constraint, but also under moral constraints. Looking at the rationale of these injunctions, it can be appreciated that bribery, fraud and theft can undermine social and governance infrastructure leading to loss of confidence in contract enforcement and thereby, these factors can have negative socio-economic implications. Gambling based contracts and trading methods can bring unnecessary speculation and thereby, they may increase systematic risk in the financial markets as shown in the negative effects of contingent financial derivatives in the global financial crisis of 2007-09. Furthermore, the business of prostitution undermines the very basis of human dignity. Intoxicants also undermine the rational faculties which humans have. Active moral conscience checks immoral behaviour, else drunkenness increases the risk of reckless behaviour. In general, barring the above exceptions, Al-Quran allows mutually beneficial and consensual exchange (Al-Quran Al-Nisā 4: 29). Endowments bestowed by Allah are to be used for material goods as well as for societal causes to earn Falah, i.e. well-being in both worlds .

Islam discourages idleness, dependency and unnecessary exit from the labor force. Prophet Muhammad (pbuh) said: “For one of you to go out early to gather firewood and carry it on his back so that he can give charity from it and be free of need from the people, is better for him than to ask a man who may give that to him or refuse. Indeed, the upper hand (giving) is more virtuous than the lower hand (receiving), and begin with (those who are) your dependents.”[3] In another Hadith, Prophet Muhammad (pbuh) explained: “The upper hand is better than the lower hand, and the upper hand is the one that spends, and the lower hand is the one that asks.”[4] Prophet Muhammad (pbuh) said that begging is not lawful for the rich and physically fit except for the one who is severely poor or in perilous debt.[5]


Divine Will on Endowment Inequality

According to the Islamic teachings, this worldly life is a trial for humans in which they are being tested for their thankfulness and obedience to Allah (Al-Quran Al-Mulk 67: 2). In this test nature of life, Allah has given unequal endowments to humans so that they employ each other (Al-Quran Al-Isrā 17: 30; Al-Ankabut 29: 62; As-Saba 34: 39; Ash-Shura 42: 12 and Az-Zukhruf 43: 32). The divine will on endowment inequality is also a means to test their thankfulness and patience.

Allah in Al-Quran says that had it not been a very difficult trial for the believers, Allah will have made every house of the non-believer with gold and silver (Al-Quran Az-Zukhruf 43: 33-34). Thus, Al-Quran asks Muslims: “And strain not your eyes in longing for the things We have given for enjoyment to various groups of them, the splendour of the life of this world that We may test them thereby. But the provision (good reward in the Hereafter) of your Lord is better and more lasting.” (Al-Quran Tāhā 20: 131). Nevertheless, Islam does not approve extractive institutions such as Ribā (usury) and public policies which result in concentration of wealth.  Islam accords due importance to redistribution and reducing the concentration of wealth in few hands (Al-Quran Al-Hashr: 7).


Moral Filtering on Consumption Set

Previously, we looked at how the Islamic principles govern activities related to earning a livelihood. This sub-section discusses the checks and filters which Islamic texts prescribe for consumption behaviour of Muslims. Islamic teachings make a distinction between permissible and impermissible goods. Al-Quran allows eating lawful and good things on earth (Al-Quran Al-Baqarah 2: 168; Al-Nahl 16: 114; Al-Mu’minun 23: 51). On the other hand, the impermissible goods are axiomatically excluded from the consumption bundle. Consumption opportunity set axiomatically filters out the prohibited consumption goods from the consumption set in both contemporaneous and intertemporal consumption. Thus, the ordinal preferences do not apply to the axiomatically excluded non-Halāl goods and services. For instance, Islam forbids intoxicants (Al-Quran Al-Baqarah 2: 219), the meat of dead animals, blood and flesh of swine (Al-Quran Al-Baqarah 2: 173). In financial services, Islam forbids interest (Al-Quran Al-Baqarah 2: 276) and gambling (Al-Quran Al-Maidā 5: 90), for instance. On some occasions, even the lawful goods become impermissible, such as during the time of fasting (Al-Quran Al-Baqarah 2: 183). Fasting in Islam is prescribed for Muslims to make them become God-fearing by restraining their desires and achieving moral consciousness. Nevertheless, Islam does not approve monasticism (Al-Quran Al-Hadid 57: 27).

In Islamic jurisprudence, a hierarchy of needs is emphasized upon. Imam Al-Shatibi has categorized human needs into three groups; i) Dharuriyah (necessities), ii) Hajiyah (conveniences) and iii) Tahsiniyah (refinements). In the hierarchical structure of needs given by Al-Shatibi, necessities include such activities and things that are essential to protect i) Imaan (faith), ii) Nafs (life), iii) Maal (wealth), iv) Aqal (intellect) and v) Nasl (progeny). Thus, Islam recognizes physiological as well as aesthetic needs but requires moderation in consumption which is discussed in the next sub-section.


Moderation in Consumption

Instead of being miser and spendthrift, Islam wants Muslims to have moderation in their consumption, both with respect to contemporaneous consumption as well as intertemporal consumption. Allah in Al-Quran says: “And let not your hand be tied (like a miser) to your neck, nor stretch it forth to its utmost reach (like a spendthrift), so that you become blameworthy and in severe poverty” (Al-Quran Al-Isrā 17: 29). In another verse, Al-Quran says: “And those, who, when they spend, are neither extravagant nor niggardly, but hold a medium (way) between those (extremes).” (Al-Quran Al-Furqān 25: 67). In a Hadith, Prophet Muhammad (pbuh) said: “Spend according to your means; and do not hoard, for Allah will withhold from you.”[6] Islam expects Muslims to avoid being spendthrift and extravagant. Allah in Al-Quran says: “… Waste not by extravagance. Verily, He likes not those who waste” (Al-Quran Al-Anam 6: 141). In another verse, Allah in Al-Quran says: “…Spend not wastefully (your wealth) in the manner of a spendthrift.” (Al-Quran Al-Isrā 17: 26).


Avoiding Envy, Pride, Egoism and Boastfulness

Islamic principles recognize consumption externalities and counter them by explicitly cautioning against envy, egoism and pride. Instead of consuming positional goods and indulging in conspicuous consumption, Islam wants Muslims to observe humbleness and shun pride (Al-Quran Al-Isrā 17: 37; Luqman 31: 18). Al-Quran says that Allah does not like self-deluded and boasters (Al-Quran Al-Hadid 57: 23).

Islam also does not approve envious behaviour. Al-Quran says: “The desire for piling up of worldly things diverts you until you reach the graves.” (Al-Quran Al-Takāthur 102: 1-2). Instead, Al-Quran prescribes: “… Do not covet the bounties which God has bestowed more abundantly on some of you than others…” (Al-Quran Al-Nisā 4: 32).

Prophet Muhammad (pbuh) said: “Envy consumes good deeds just as fire consumes wood, and charity extinguishes bad deeds just as water extinguishes fire.”[7] Prophet Muhammad (pbuh) educated Muslims to be like none except the one who is given the knowledge of Al-Quran and the one who spends in charity.[8] Prophet Muhammad (pbuh) advised: “Look at the one who is at a lower level than you, and do not look at the one who is above you, for that may keep you from scorning the blessings of Allah.”[9]

Al-Quran educates Muslims that wealth will not last forever (Al-Humazah: 1-3). Wealth and children are only a trial (Al-Quran Al-Taghābun 64: 15). In one Hadith, Prophet Muhammad (pbuh) said: “Richness is not in having many possessions, but richness is to be content with oneself.”[10] The temporary nature of this worldly life and the material dispensation is eloquently summed up by Al-Quran as follows:

“Know that the life of this world is only play and amusement, pomp and mutual boasting among you, and rivalry in respect of wealth and children, as the likeness of vegetation after rain, thereof the growth is pleasing to the tiller; afterwards it dries up and you see it turning yellow; then it becomes straw…” (Al-Quran Al-Hadid 57: 20).


Encouragement Towards Pure Altruism

Islam does not recognize impure altruism to satisfy ego and to achieve fame and recognition (Al-Quran Al-Baqarah 2: 264; Al-Ma’un 107: 6). Prophet Muhammad (pbuh) advised anonymity and secrecy in charitable giving such that the right hand does not know what the left hand is giving[11]. Allah says of the ideal believers in Al-Quran: “And they give food, in spite of their love for it to Miskin (poor), the orphan, and the captive. (Saying): ‘We feed you seeking Allah’s countenance only. We wish for no reward, nor thanks from you’.” (Al-Quran Al-Insān 76: 8-9). Al-Quran urges believers to spend what they love in order to achieve righteousness (Al-Quran Al-‘Imrān 3: 92), spend throughout their lives (Al-Munafiqun 63: 10) and the ideal is to spend whatever is beyond their needs (Al-Quran Al-Baqarah 2: 219).

Al-Quran urges Muslims to show kindness, generosity and benevolence to their fellow human beings. Allah says in Al-Quran: “… Do good to parents, kinsfolk, orphans, Al-Masakin (the poor), the neighbour who is near of kin, the neighbour who is a stranger, the companion by your side and the wayfarer (you meet) …” (Al-Quran Al-Nisā 4: 36). Al-Quran says in another place: “So give to the kindred his due, and to Al-Miskin (the poor) and to the wayfarer…” (Al-Quran Ar-Rum 30: 38). Feeding orphans and poor is regarded as a highly virtuous act (Al-Quran Al-Balad 90: 12-16) in Al-Quran. Al-Quran exhorts Muslims to look after orphans and treat them with kindness and generosity (Al-Quran Al-Fajr 89: 17-20), work honestly on their property (Al-Quran Al-Baqarah 2: 220) and avoid oppressive treatment (Al-Quran Al-Dhuha 93: 9) as well as refrain from harsh behaviour (Al-Quran Al-Ma’un 107: 2). Al-Quran strictly prohibits usurping the endowments of orphans (Al-Quran Al-Nisā 4: 2).

Prophet Muhammad (pbuh) declared that the best charity is to spend (in charity) while you are healthy, aspiring, hoping to survive, and fearing poverty, and not delaying until death comes to you”[12]. Allah wants the believers to avoid miserliness (Al-Quran Al-Nisā 4: 37). Instead of enjoining miserliness, Islam urges Muslims to help one another in good acts and endeavours (Al-Quran Al-Maidā 5: 2).

Since Islam only accepts pure altruism, it promises numerous incentives for it in its two-worldly view of life. Several verses in Al-Quran promise due reward for pure altruism (Al-Quran Al-Tauba 9: 121; Fatir 35: 29; Al-Hadid 57: 7). In several other verses, spending in charitable ways for the sake of Allah is compared to a good loan which Allah will repay with a manifold increase (Al-Quran Al-Hadid 57: 11; Al-Hadid 57:18; Al-Taghābun 64: 17; Al-Muzammil 73: 20). In several Ahadith also, Muslims are encouraged to spend so that Allah also spends on them with His blessings.[13]


Leaving Familial and Philanthropic Bequests

Islam regards spending on one’s dependents as charity if done with the intention to please Allah.[14] Prophet Muhammad (pbuh) said that the greatest reward for what you spend is on your spending on the family.[15] Islamic principles are not averse to financial planning, precautionary savings and leaving enough wealth for the dependent family members. Prophet Muhammad (pbuh) said: “It is better for you to leave your inheritors wealthy than to leave them poor begging others…”[16] In another Hadith, Prophet Muhammad (pbuh) said: “As for one who is the guardian of an orphan who has wealth, then let him do business with it and not leave it until it becomes consumed by charity.”[17] On the other hand, Prophet Muhammad (pbuh) also allowed philanthropic bequests[18] but instructed that these bequests shall not exceed one-third of wealth.[19]


[1] Al-Bukhari, Book of Ar-riqaq, Vol 8, Hadith No. 6436.

[2] Al-Muslim, Book of Zakāt, Vol 3, Hadith No. 2410.

[3] Jamai-at-Tirmidhi, Chapters on Zakah, Vol 2, Hadith No. 680. Also, Sahih Al-Bukhari, Book of Zakah, Vol 2, Hadith No. 1470.

[4] Sunan Abu Daud, Book of Zakah, Vol 2, Hadith No. 1648.

[5] Jamai-at-Tirmidhi, Chapters on Zakāt, Vol 2, Hadith No. 653.

[6] Al-Muslim, Book of Zakah, Vol 3, Hadith No. 2378.

[7] Sunan Ibn-e-Maja, Chapters on Asceticism, Vol 5, Hadith No. 4210.

[8] Al-Bukhari, Book of Virtues of the Qur’an, Vol 6, Hadith No. 5025. Also in Al-Muslim, Book of Virtues, Vol 2, Hadith No. 1894.

[9] Al-Muslim, Book of Asceticism, Vol 7, Hadith No. 7430.

[10] Jamai-at-Tirmidhi, Chapters on Zuhd, Vol 4, Hadith No. 2373.

[11] Al-Muslim, Book of Zakāt, Vol 3, Hadith No. 2380.

[12] Sunan Abu Daud, Book of Wills, Vol 3, Hadith No. 2865. Also Sunan An Nisai, Book of Zakāt, Vol 3, Hadith No. 2543.

[13] Al-Bukhari, Book of Commentary, Vol 6, Hadith No. 4684. Also in Al-Muslim, Book of Zakah, Vol 3, Hadith No. 2308. Also in Sunan Ibn-e-Maja, Chapters on Expiation, Vol 3, Hadith No. 2123.

[14] Al-Muslim, Book of Zakah, Vol 3, Hadith No. 2322. Also in Al-Bukhari, Book of Al-Maghazi, Vol 5, Hadith No. 4006. Also in Jamai-at-Tirmidhi, Chapters on Righteousness, Vol 4, Hadith No. 1965.

[15] Al-Muslim, Book of Zakah, Vol 3, Hadith No. 2311. Also in Sunan Abu Daud, Book of Zakah, Vol 2, Hadith No. 1691.

[16] Al-Bukhari, Book of Al-Maghazi, Vol 5, Hadith No. 4409. Also in Al-Muslim, Book of Wills, Vol 4, Hadith No. 4215.

[17] Jamai-at-Tirmidhi, Chapters on Zakah, Vol 2, Hadith No. 641.

[18] Sunan Ibn-e-Maja, Chapters on Charity, Vol 3, Hadith No. 2396.

[19] Al-Bukhari, Book of Wills, Vol 4, Hadith No. 2742.

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Intertemporal Consumption in Islamic Economic Framework

Salman Ahmed Shaikh

A typical lifecycle pattern of humans shows that the need to consume basic necessities exists throughout the lifetime, while the capacity to earn incomes is present mostly during the working years of life. In childhood and old-age, one usually does not provide as much labour supply in the labour market or none at all as compared to the youth and mature age. In working age periods, when consumption in a period is less than income in the period, people save so that they can continue to maintain their consumption levels even when they stop earning any income from labour supply after they retire. Thus, consumption decisions are intertemporal keeping in view consumption today and consumption tomorrow. Households save and seek financing in an effort to ensure consistent consumption throughout their lifetime in spite of having irregular income streams over time. Financial institutions enable people to save and invest and thus achieve smooth consumption in the wake of no or volatile incomes during the various stages of the lifecycle. Financial investments with financial institutions or in financial markets make the lifetime resources grow in periods when they are not needed for current consumption.


Furthermore, by living in society and extended families, one often also gets support from immediate relations in times of need. Parents bring up children and then children grow up, enter the labour force and gain financial independence. Eventually, the children look after their parents in their old age. Parents often leave bequests so that their children can continue to consume even if they do not earn any income in early non-working years of their lives. Finally, the social and redistributive institutions complement the commercial financial institutions by providing necessary public goods and transfer payments. Thus, these institutions provide valuable income support and skill enhancement for increasing the chances of market-based employment for the poor and needy.


Broadly speaking, the Muslim consumer would also want to smooth consumption throughout the lifecycle in a typically similar fashion. A Muslim consumer with surplus endowments would look to invest and earn income on investments for the possibility of higher consumption in future. Investment decision making requires a careful analysis of risk and return. The objective of financial investments is to achieve highest returns for a given level of risk or to minimize the risk of achieving a given target level of return. The difference in an Islamic framework would come with the normative distinction between investments which are declared as prohibited in the ethical injunctions of Islamic faith and other investments which are deemed as permissible. A Muslim consumer with net surplus endowments has to abide by certain restrictions in intertemporal consumption choices. For instance, Islamic principles prohibit the use of Ribā (interest), Gharar (uncertainty), Maysir (gambling) and certain sale transactions which do not fulfil the requirements of delivery, possession or price specification of assets. Hence, this Muslim consumer would have a relatively constrained choice set of investible assets and trading strategies for fulfilling the objective of lifetime consumption smoothing.


Furthermore, other factors may restrict the individuals to achieve consumption smoothing. For instance, if the income itself is not smooth and the financial services are not accessible to the masses; then, despite having the desire to achieve lifetime consumption smoothing, it may remain elusive for people with binding liquidity constraints. Low levels of income leave little surplus and savings. Hence, consumption may remain dependent on current incomes which can be highly volatile for informal industrial workers and farmers.


On the brighter side, social norms could provide significant motivation for actions. There is strong incentive mechanism for pure altruism in Islamic worldview. Islamic principles make every wealthy Muslim liable to share a portion of his wealth with the poor in society. In this regard, altruism and philanthropic endowments provide a social cushion to the endowment deficient consumers. Thus, some of the liquidity constrained poor consumers could find necessary support from social finance as social finance primarily focuses on promoting prosperity and higher living standards of the lower income segments of the society. Even if endowment deficient consumers are unable to access the formal financial institutions and remain underserved by weakly funded public support programs, they can obtain ease in liquidity constraints through social finance.


To facilitate households and firms to meet different financial objectives in compliance with Shari’ah principles, the field of Islamic finance was conceived as an alternate financial system in the early part of the twentieth century. In the last quarter of the twentieth century, several Islamic financial institutions were established in banking, insurance and asset management sectors. In the area of asset management and investments, the Islamic scholars had devised certain screening criteria to identify and classify Shari’ah compliant equity investments. As per these screens, the core business of the firm should be Shari’ah compliant. Secondly, there are certain financial screens that are used in order to discourage involvement in interest based borrowings, investments and earnings. Consequently, a Muslim consumer with net surplus endowments can invest in bank deposit schemes of different maturities, Islamic mutual funds with varying investment styles, Shari’ah compliant stocks and Sukuk.


On the other hand, it is known that more than a billion people on earth live in poverty and approximately half of the global poor are Muslims. That is why; it is realistic to expect that a significant number of Muslim consumers might experience net endowment deficiency even in the working age period of life. People in labor force who are unemployed and who have limited accumulated savings and assets remain vulnerable to be excluded from the formal financial sector credit services. For such individuals, Islamic microfinance provides a useful way to access funds for their small enterprise and livelihood expenses. Besides that, the redistributive institutions like Zakāt and Waqf can provide non-market based assistance. Zakāt transfers wealth from people having wealth above Nisāb (a minimum threshold value of wealth) to the poor people directly or through the causes and organizations working for the welfare of the poor. On the other hand, Waqf is an Islamic institution which provides perpetual dedication of liquid and illiquid assets to particular social causes.

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Leveraging on Private Philanthropy in Pakistan for Establishing Waqf

Salman Ahmed Shaikh

Importance of Social Finance in Pakistan

The United Nations Development Programme in 2016 revealed that multi-dimensional poverty in Pakistan stands at 38.8%. Poor people usually depend on their incomes for consumption expenditure given the lack of other assets in their ownership. In addition to that, the non-availability of other marketable assets makes them excluded from the formal financial services. On the other hand, the government is constrained with a low tax to GDP ratio and high debt servicing and other non-development expenditure. As a consequence, it has a large fiscal deficit and very low spending on development and even less on direct support to the poor.

According to Pakistan Center for Philanthropy (2002), the government funds comprise only 6% of the total funding for the non-profit institutions in Pakistan while the average for several developed and developing countries is 40%. This shows that the government is also not able to provide substantial indirect support by funding non-profit institutions. On the other hand, the microfinance outreach in Pakistan is approximately 5 million people, which is less than 10% of the total poor population in the country. As a result, this void of social finance is largely filled by private giving in Pakistan.

Vibrant Operations of Third Sector Institutions in Pakistan

To give just a glimpse of how important the third sector is in the socio-demography of Pakistan, a few major success stories are mentioned. The Sindh Institute of Urology and Transplantation (SIUT) is a privately funded dialysis and kidney transplant centre in Karachi. It is the country’s largest public sector health organisation providing services free of any cost. Shaukat Khanam Cancer Hospital and Research Center is the country’s largest cancer hospital with an annual budget of Rs 10 billion ($ 96 million). The hospital was built through private donation drive in 1994. Edhi Foundation which originated from Karachi holds the Guinness record for the world’s ‘largest volunteer ambulance organization’ since 1997. Indus Hospital in Karachi provides free of cost treatment. It is a private hospital working on donations and has treated 2.3 million patients during 2007-2016. Among the numerous food distribution centres, Saylani Welfare Trust provides meals twice a day to more than 50,000 people in the city of Karachi free of cost.

In Pakistan, the annual corporate philanthropy is around Rs 4.8 billion ($46 million) which is around 0.6% of the profit before tax of the listed companies, according to Pakistan Center for Philanthropy (PCP). However, the share of corporate philanthropy in overall private giving is not significant. According to PCP, the total estimated charitable giving in Pakistan stands at Rs 300 billion ($2.8 billion) in 2015. In the provincial studies, the amount contributed in the year 2013 stood at Rs 67.9 billion ($0.65 billion) in Sindh and Rs 103.69 billion ($1 billion) in Punjab, according to PCP reports for individual philanthropy in Sindh and Punjab.

A recent estimate by Pakistan Peace Initiative (2017) contends that people in Pakistan pay around Rs 554 billion ($5.31 billion) in charity every year. When this amount is compared with Pakistan’s Public Sector Development Program (PSDP), it turns out to be 83.77% of the total PSDP for the 2015-16 budget. In addition to that, the estimated total annual giving by Pakistani Diaspora in the USA which includes money, goods and time exceeds $1 billion.

How to Promote Waqf in Pakistan?

From a practical and policy perspective, the above statistics highlight conduciveness for Islamic social finance institution of Waqf to provide an effective basis of channelizing charitable funds in the private philanthropic sector.

With a predominantly Muslim population which engages in significant private giving, social intermediaries who can transparently and efficiently mobilize charitable giving can enhance the socio-economic impact of private giving. Given the high prevalence of cash based giving and higher trust deficit between people and the public Zakat agency, the Islamic institution of cash Waqf can be suitable for effectively channelizing the charitable giving in the form of cash.

The current legal environment is favourable since charitable organizations are exempted from income tax. Since a great majority of people pay in cash, thus cash Waqf can be conducive in such a scenario by capitalizing on a consistent source of funds and giving them permanency in terms of the effects and impacts. Below, we list some recommendations for increasing the effectiveness of the institution of Waqf in contemporary application in the socio-economic milieu of Pakistan.

Charitable spending can be seasonal and impulsive. Hence, there is a need for accessible avenues to match targets and mobilize resources efficiently through organized institutions such as Waqf. Soliciting charitable contributions using online medium in cash Waqf can be more efficient and bring more participation, especially in the cases of emergency. It can also help in capitalizing on short term impulsive charitable spending on special occasions and events.

In soliciting charitable contributions to Waqf, it is effective to market the positive externalities. For example, Shaukat Khanam Cancer Hospital in fund raising campaigns highlighted that how much bricks a given contribution could provide for the construction of building. Also, Al-Khidmat Foundation highlights that how much a given contribution is required to finance studies of a particular number of students in their schools. This type of marketing strategies can create a sense of achievement and fulfilment for the respondents as well.

It is important to provide tax incentives to engage more people and corporations towards establishing Waqf. Corporations who engage in corporate philanthropy can effectively establish corporate Waqf. This will also help their social marketing. The contributions to these Waqf by individual and corporate donors shall be made eligible for tax credit like it is the case with other recognized institutions in Section 61 of the Income Tax Ordinance 2001. If a donor dedicates real estate to an existing Waqf or to establish a new Waqf, the taxes related to registration and transfer of property shall be exempted.

It is vital to create social awareness for creating right kind of Waqf at the right place. Given the preference ranking of the respondents and based on social needs, targeted efforts shall be made in sectors and segments of more social priority, such as food security, basic literacy and basic health. Some educational institutes and hospitals which receive donations also provide an opportunity for voluntary teaching and running free medical camps. Establishing such institutes independently, as Waqf or from Waqf capital can also offer opportunity of volunteering. This will be especially attractive and conducive for the 50 million youth in the age-group of 15-29 in Pakistan.

In past, the abrupt nationalization of Awqaf dented the confidence of people in the country. Thus, it is vital to ensure the independent status and operations of Waqf. Providing an enabling environment to the non-profit sector will help in scaling up the efforts to meet the underdevelopment challenges and making swift progress towards achieving the targets of Sustainable Development Goals (SDG) by 2030 in the area of poverty, inequality, quality education, basic health and providing decent work.

The article was first published in Islamic Finance News Malaysia on September 5, 2018.

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