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Introduction to
Islamic Economics
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Introduction to
Islamic Economics

Theory and Application

HOSSEIN ASKARI
ZAMIR IQBAL
ABBAS MIRAKHOR
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We dedicate this book to all those

who feel the pain of injustice and poverty
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Contents

Acknowledgments xi

About the Authors xiii

CHAPTER 1
Economic Systems 1
What Is an Economic System? 2
Current State of the Global Economic System 9
Islamic Economics Paradigm 19
Short History of Economic Thought in Islam 20
Summary 26
Key Terms 27
Questions 27

CHAPTER 2
Foundation of the Islamic Economic Paradigm 29
Meta-Framework and Archetype of Economic Rules 31
Implications of the Agent-Trustee Relationship 33
Signicance of Rule Compliance 34
Impact of Scarcity 35
Rationality and Freedom of Choice 38
Individual Obligations, Rights, and Self-Interest 39
Central Notion of Justice 41
Shariah: The Law 44
Summary 47
Key Terms 47
Questions 48

CHAPTER 3
Institutional Framework and Key Institutions 49
Key Institutions 53
Summary 72
Key Terms 72
Questions 73

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viii CONTENTS

CHAPTER 4
The Islamic Economic System 75
Social and Economic Justice 76
Prohibition of Interest (Al-Riba) 81
Risk-Sharing Economic System 84
Role of the State 91
Summary 93
Key Terms 94
Questions 94

CHAPTER 5
Key Microeconomic Concepts 95
Dening Microeconomics 97
Issue of Needs versus Wants 100
Consumer Behavior 102
Theory of the Firm 105
Dynamics of Demand and Supply 112
Efciency versus Equity 116
Market Models 117
Role of the State 121
Summary 123
Key Terms 124
Questions 124

CHAPTER 6
Key Macroeconomics Concepts 125
Principal Economic Agents 126
National Income 127
Consumption, Savings, Investment, and National Income
Determination 135
National Income and Output Determination 143
Ination 148
Unemployment 152
Open Economy: Trade in Goods and Services with
Other Countries 154
Why International Trade Is So Central to Islam 156
Summary 162
Key Terms 163
Questions 164
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Contents ix

CHAPTER 7
Macroeconomic Equilibrium: Characteristics of an
Islamic Economy 165
Models of an Interest-Free Economy 166
Summary 184
Key Terms 185
Questions 185

CHAPTER 8
The Financial System 187
Notion of Risk Sharing 190
Building Blocks of the Islamic Financial System 191
Takaful (Islamic Insurance) 210
Summary 216
Key Terms 217
Questions 217

CHAPTER 9
Role of the State and Public Policy 219
Basic Roles of the State in All Economic Systems 220
Role of the State in the Islamic Economic System 224
Policy Instruments of the State in Islam 228
Economic Justice and Public Policy 230
Role of Public Policy 232
Summary 243
Key Terms 244
Questions 244

CHAPTER 10
Fiscal Policy 247
Role of Fiscal Policy 250
Fiscal Policy in an Islamic Economy 254
Public Finance 259
Summary 267
Key Terms 268
Questions 268

CHAPTER 11
Monetary Policy 271
Role of Monetary Policy 272
Monetary Policy in an Islamic Economy 277
Summary 303
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x CONTENTS

Key Terms 304

Questions 305

CHAPTER 12
Economic Development and Growth 307
Evolution of Western Economic Thought: From Smith
to North and Sen 307
Foundation and Framework of Development and Growth
in Islam 312
Islamic Perspective on Financial Inclusion 322
Summary 330
Key Terms 331
Questions 331

CHAPTER 13
Economic and Social Welfare 333
Social Safety Net Provisions 335
Concept of Safety Net and Welfare 337
Empirical Evidence on Social Welfare from Select
Muslim Countries 339
Summary 359
Key Terms 360
Questions 360

CHAPTER 14
Economic State of Affairs in OIC Countries 361
Public Policy in the Islamic Economic System 362
Dimensions of Economic and Social Achievements
in Muslim Countries 364
Summary 372
Key Terms 373
Questions 373

Glossary of Arabic Terms 375

Bibliography 381

Index 393
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Acknowledgments

W e are indebted to Omar Fayoumi for assisting with Chapter 5 and to

Hamid Shaezadeh for his work on Chapter 6. The suggestions of the
Wiley editorial staff have been invaluable. As always, we are grateful for the
support of our families.

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About the Authors

Hossein Askari is the Iran Professor of International Business and Interna-

tional Affairs at the George Washington University. Before coming to GW, he
was a professor of Business and Middle Studies at the University of Texas at
Austin and assistant professor of Economics at Tufts University. He has also
served on the executive board of the International Monetary Fund and as
consultant to a number of governments, institutions, and multinational
corporations. He received all his university education at the Massachusetts
Institute of Technology, where he earned a BS in civil engineering and a PhD
in economics.

* * *
Zamir Iqbal is a lead specialist at Finance and Markets (F&M) Global Practice
of the World Bank. He heads the World Bank Global Center for Islamic
Finance Development in Istanbul. He has more than 20 years of experience in
risk management, capital markets, and asset management at the World Bank
Treasury. Islamic nance is his research focus, and he has coauthored several
books on Islamic nance topics such as banking risk, nancial stability, and
risk sharing. His most recent coedited book, Economic Development and
Islamic Finance, was published by the World Bank in 2013. He earned his
PhD in international nance from the George Washington University and
serves on the professional faculty at the Carey Business School of Johns
Hopkins University.

* * *
Abbas Mirakhor is currently the rst holder of the chair of Islamic Finance
at the International Center for Education in Islamic Finance (INCEIF).
He served as the dean of the executive board of the International Monetary
Fund from 1997 to 2008 and as the executive director representing
Afghanistan, Algeria, Ghana, Iran, Morocco, Pakistan, and Tunisia from
1990 to 2008. He has authored numerous publications and research papers
on Islamic nance; among them are Introduction to Islamic Finance (Wiley
2011), Risk Sharing in Islamic Finance (Wiley 2011), and The Stability of
Islamic Finance (Wiley 2010).

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