J OURNAL OF

Economic Behavior
ELSEVIER
Journal of Economic Behavior and Organization
Vol. 27 (1995) 151-157
& Organization
Behavioral norms in the Islamic doctrine
of economics: A comment
Muhammed-Shahid Ebrahim a~ * , Akram Safadi b
a Department of Finance, Southern I llinois University at Carbondale, Carbondale, I L 62901, USA
b Department of Civil Engineering, Northwestern University, Evanston, I L 60208, USA
Received June 1993, final version received October 1993
Keywords: Islamic economic system; Equity participating contracts
J EL classification: P40
Timur Kurans widely cited 1983 JEBO article, Behavioral Norms In The Islamic
Doctrine Of Economics, unfortunately contains a number of functional inaccura-
cies and misrepresentation and seems as well to have been written in ignorance of
a good deal of relevant material that is very much at variance with his arguments.
We shall try to describe those scholarly deficiencies in this note.
To begin, in footnote 9 Kuran claims that Schacht (1959) has shown the
Ahadith (traditions) of Prophet Muhammad (PBUH) 2 to be spurious, without
recognizing many modem works pertaining to the authenticity and the documenta-
tion of the Ahadith such as Abbott (1967), Ahmad (1974), Azami (1967, 1977,
1985) and Sezgin (1967) 3. Ironically, he claims most of the traditions to be
spurious and yet uses one saying of the Prophet on page 363: My community
shall not agree on error, to suit his purpose. Kuran does not realize that this
saying is recorded by Tirmidhi as a weak (gharib) tradition (see Tibrizi (1985)).
l Corresponding author.
r This comment is dedicated to the As-Salaf-As-Saliheen, the first generation of God-fearing
Muslims.
2 PBUH implies Peace be upon him.
3 It is to be noted that Schachts arguments have been conclusively refuted by Azami (198.5).
0167-2681/95/$09.50 0 1995 Elsevier Science B.V. AI1 rights reserved
SSDI 0167-2681(94)00029-E
152 M.-S. Ebrahim, A. Safadi/J . ofEconomic Behavior & Org. 27 (1995) 151-157
Kuran conceptualizes the Islamic traditions from the works of recent Muslim
writers such as Abdul-Rauf (19791, Naqvi (1981) etc., without realizing that these
writers are not scholars of Islamic law (Shariah). Moreover, their work may
reflect their cultural biases. For example, the view of Mannan (1970) against
renting of land is based on the abuses of the zamindari system prevalent in India/
Pakistan and is not attributed to the directives of the original sources of Islam 4.
To correctly understand the Islamic tradition, one needs to resort to the original
sources (the Quran and the Sun&r) and benefit from the experience of the
previous scholars such as 5:
Abu-Yusuf (731-98 AD), who dwelled on economic development, taxation, and
responsibility of the State in his book Al-Kharuj (land taxation).
Al-Shiabani (750-804 AD), who discussed what is right and wrong with
respect to earning and spending in his book Al-I ktisab (earnings).
I bn-Hazm Cd. 1064 AD), who advocated what is currently known as social
security (Al-Labban n.d.).
Tusu (1201-74 AD), who worked on public finance. He reinforced the impor-
tance of savings and warned against extravagance and spending on jewelry and
uncultivable land, which he terms as unproductive assets. He also worked on
exchange and division of labour.
I bn Taimiya (1262-1328 AD), who studied various economic issues such as
equivalent price and the concept of fair profit. He was concerned about the role
of the government in economic activities and did not advocate a complete state of
laissez-faire in the market. He pointed out that it was the duty of the state to
intervene in order to control prices whenever imperfections enter the market. (He
regarded hoarding and speculation as akin to what is currently known as market
manipulation. Currently in the U.S.A., there are also laws against market manipu-
lation such as insider trading or cornering a market).
Zbn-Khaldun (1332-1406 AD), who is one of the greatest scholars in Islamic
history. Rozenthal (1967) quotes Arnold Toynbees view on the Muquaddimah
(an introduction to history written by Ibn-Khaldun) as: undoubtedly the greatest
work of its kind that has ever been created by any mind in any time or place. He
researched on various issues discussed later by prominent western economists such
as Adam Smith, Ricardo, Malthus and Keynes such as: Sources of value, division
of labour, the price system, the law of demand and supply, consumption and
production, money, capital formation, population growth, public finance, and trade
cycles.
While discussing the large-number problem, Kuran asserts that Muslims would
4 Ozdemir (1992) quotes Fazlur-Rehman, as stating: As Islam expanded, geographically and
intellectually, all kinds of new elements became part of the Islamic Tradition. But there arc a large
number of these traditions which have nothing to do with, indeed, which are contrary to the Quran.
See El-Asker (1987).
M.-S. Ebrahim, A. Safkdi/J . ofEconomic Behavior & Org. 27 (1995) 151-157 153
not display altruism in a large heterogeneous society. But Prophet Muhammads
(PBUH) early society was itself heterogeneous. It included not only the Arabs (of
different tribes), but also Non-Arabs such as Bilal (an African), Salman (a Persian)
and Suhayb (a Roman). Sakr (1989) quotes the Prophet (PBUH) during his
farewell speech as exhorting the same brotherhood irrespective of race or ethnic-
ity. If this equality were to be reinforced in America, current racial discord could
be eradicated 6. Kuran has also wrongly attacked the intentions of the early
inhabitants of Medina (the Awn-) who supported the migrants from Mecca (the
Muhujarin) on page 367 quoting that they were expecting to gain from the
Meccans commercial expertise. Sakr (1989) sheds some light on this issue
stating that their intention were purely charitable. Furthermore, on page 368, the
allegation that Prophet Muhammad (PBUH) engaged in external skirmishes to
unite the Muslims is also not true. The reasons for the battles fought by the
Prophet is explained by Budayuni (1981) as a resistance to the aggressions of the
enemy of Islam or as a preemptive strike against hostile forces threatening
Medina.
The highly heralded free-rider problem mentioned by Kuran is well known to
Muslims. Islahi (1988) points out that early reformers such as lbn Taimiya
discussed this issue, while exhorting Muslims not to evade certain taxes.
Kuran reveals a very distorted image of Islam, where he construes the laws as
being ambiguous. Al-Qaradawi (1984) is a good source of the Islamic laws which
are derived from the Quran and the explicit Sunnah. Al-Qaradawi quotes that:
In Islam, the sphere of prohibited things is very small, while that of permissi-
ble things is very vast. There is only a small number of sound and explicit texts
concerning prohibitions, while whatever is not mentioned in a nus 7 as being
lawful or prohibited falls under the general principle of the permissibility of things
and within the domain of Allahs favor.
Kuran has also misconstrued Zakat on page 360. One of the best sources on
Zakat is Sabiq (1989) who has studied the original sources and all the Islamic
Jurists. He elucidates the evaluation of Zakat for different assets. Anyone who has
filed a U.S. tax return will certainly find the calculation of Zakat to be a piece of
cake 8. We are also in disagreement with Kuran on the issue of insurance in Islam.
The preferred mode in an Islamic environment is that of tukafd (mutual insur-
ance) by society 9 Afzalur-Rehman (19791, and Siddiqi (1985) have discussed this
6 For the integration of Muslims of diverse cultures in the U.S. see Goldman (1993).
Nas as explained by Al-Qaradawi denotes either a verse of the Quran or a clear, authentic, and
explicit sunnah (practice or saying) of Prophet Muhammad (PBUH). These are the two main sources of
Islamic Law, i.e. its Shariah.
In a recent popular press article Tritch (1993) points out that U.S. tax experts evaluated 41
different tax amounts due on a single tax return based on our so-called unambiguous tax rode.
The suspicious income which Kuran mentions on page 359, is similar to the notion of ill-gotten
gains in Christianity (see the Summa of Thomas Aquinas).
154 M.-S. Ebrahim, A. Safadi/J . ofEconomic Behavior & Org. 27 (1995) 151-157
issue to the best of their ability. Abdulkader (19931, Ebrahim (1993a) and Janahi
(1993) also shed some light on this issue based on the perspective of western
practitioners and Islamic scholars. Abdulkader (1993) is of the opinion that there is
a strong need for life, health and casualty insurance based on the Islamic principles
of dururu (necessity). But the contracts need to conform with the value system in
Islam. Janahi (1993) points out that recent Islamic awakening has resulted in the
formation of 16 Islamic insurance companies. Islamic law, which lays down the
basic framework for the operation of an enterprise, enforces contractual obligation,
and avoids fraud, deception and ambiguity. These ills have created an insurance
crisis even in developed nations such as the U.S.A. as discussed by Ebrahim
(1993a).
Finally, Kuran has missed the main idea of Islamic economics, which is based
on the premise that equity participating contracts are more efficient than those
based on ex-ante fixed interest as elaborated by Siddiqi (1991). In fact there is
ample empirical evidence on this issue in the literature of the Equity Premium
Puzzle. Economists, such as Mehra and Prescott (1985) and others, have been
perplexed by the fact that stocks, inspite of their risk, offer excessive returns,
while bonds offer low returns. Abel (1991) summarizes the work of top-notch
economists and assails the inability of sophisticated techniques such as the
Consumption Capital Asset Pricing Model (CCAPM) to explain this. He calls for
the overhauling of CCAPM and the theory of long-run economic growth and the
new strand of the real business cycle theory. Siegel (1992) concludes that
Equities, however, still appear to be the best route to long term wealth accumula-
tion lo.
In the light of the international debt crisis, the savings and loan (S and L) crisis
and the current problems confounding the U.S. banking industry 11, Akacem
(1991) has advocated a banking system based on equity participation like that
proposed by Muslim economist such as Khan (1986). Even prominent western
economists like Simon (1948) and Kindleberger (1985) have proposed certain
banking reforms which in effect, yield a banking system resembling to a large
extent that of an Islamic one . Moreover, Weitzman (1984) has advocated the
principle of profit-loss sharing (PLS) i.e. akin to equity participation in contrast to
pre-determined wage rates as a solution to the stagflation problem. There also
Practitioners such as Bernstein (1993) and the legendary mutual fund manager Lynch (1993) also
reinforce the same view.
According to the Federal Deposit Insurance Corporations Annual Report (1987, Table 122), no
less than 1,333 banks failed in the United States due to financial difficulties in the period 1934-1987.
Around half of that i.e. 631 closed during the period 1980-87, and 184 banks collapsed in 1987 alone.
* Both Simon (1948) and Kindleberger (1985) have suggested that the practice of western banks
paying depositors a fixed interest rate regardless of the success of the banks is a major cause for failure
in recent years.
M.-S. Ebrahim, A. Safadi/J . ofEconomic Behavior & Org. 27 (1995) 151-157 155
exists some empirical evidence on the merits of Islamic banking by Darrat (19881,
Bashir and Darrat (1992); and Bashir, Darrat and Suliman (1993).
There are some recent developments in Japan and the U.S.A. which also point
towards the growth of financial system/ products based on the concept of equity
participation. First, according to the Japan Economic Institute Report (19931, we
have learned that recently the Japanese Government has enacted certain reforms in
the banking sector bringing it closer to that of an equity participating one.
Secondly, in the U.S.A. there has been an explosion of financial products
involving some form of equity participation. The growth of the mutual fund
industry (half of which is comprised by equity funds) attests to this fact 13. The
emergence of participating mortgages or shared appreciation mortgages in the area
of real estate financing also bears witness to this. Finally, the recent innovation of
a Stock Index Certificate of Deposit by financial institutions also points to this.
It has been around ten years since Kurans paper has been published. In this
intervening period Islamic banking/ economics has grown tremendously. There
are Islamic banks in the U.S.A. and abroad. There are also mutual funds and
insurance companies operating on Islamic principles both in the U.S.A. and
abroad 14. There are at least 4 scholarly refereed journals abroad and one catering
to the practitioners in the U.S.A. specially dedicated to the field of Islamic
Economics 15. The reason for this p ro g ress is due to the rationality and effective-
ness of Islamic banking, which comes from the real world experience of Muslim
as well as Non-Muslim countries, and is backed by empirical evidence. Serious
financial analysts are welcome to study the field closely and assess it fairly and
objectively.
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