1. TOPIC 2 METHODOLOGY OF ISLAMIC ECONOMICS 1

2. TOPIC 2 Objective: Increase epistemic awareness Know position of shari’ah, fiqh and usul-fiqh Appreciate steps involved in developing IE 2

3. Presentation Outline 1.How to Develop Islamic Economics & Finance? 2.Shari’ah, Fiqh and Usul Fiqh 3.Building Models in Islamic Economics 3

4. 1] How to Develop Islamic Economics and Finance? 4

5. DEVELOPING IE =>Process of systematizing worldview into economic vision, then to economic theory based on Islamic epistemology Epistemology=> theory of knowledge is the branch of philosophy concerned with nature and scope (limitations) of knowledge. Islamic epistemology differs from western: Prominence and centrality of revelation Scientific method is the ONLY method? 5

6. EPISTEMOLOGY Domains of discussion: What we know How we can know Criteria to evaluate what & how Knowledge = justified true belief Types: a priori knowledge = independent from experience -> rationalism a posteriori = known by experience -> empiricism 6

7. EPISTEMOLOGY IN ISLAM Position of knowledge: “Is one who is obedient to Allah, prostrating himself or standing (in prayer) during the hours of the night, fearing the Hereafter and hoping for the Mercy of his Lord (like one who disbelieves)? Say: “Are those who know equal to those who know not? It is only men of understanding who will remember (i.e. get a lesson from Allah’s signs and verses).” (Az-Zumar: 39) 7

8. PROMINENCE AND CENTRALITY OF REVELATION In Islam, knowledge can be gained from: Fixed vertical axis = God-given revelation (via Prophets) Flexible horizontal axis = human effort via sense and intellect (‘aql) Tawhidi paradigm = human reason guided & aided by revelation. 8

9. IS SCIENTIFIC METHOD THE ONLY METHOD TO ACQUIRE KNOWLEDGE? Western epistemology: YES! vs. Islamic epistemology: NO! To understand this issue, need to appreciate the channels of acquiring knowledge 9

10. WESTERN EPISTEMOLOGY Sources of knowledge Senses – primary sight, sound & smell – info. from a distance taste & touch – info from immediate vicinity Reason – derivative Intuition – derivative Authority – secondary => Scientific method: empiricism & secular rationalism 10

11. ISLAMIC EPISTEMOLOGY In Islam, knowledge channels are: 1]True narrative: - brought by Prophet (Quran & Hadith): absolute - established by reliable past scholars: reviewable 2]Sound senses = sense perception 3]Sound reason = mind 4]Intuition = ‘heart’ presumes the existence of a higher authority => Scientific method: reason linked with revelation 11

12. ISLAMIC ECONOMICS Relatively new area of study Methodology discusses: Process of building models Testing hypothesis Developing theories Establishing and using criteria to evaluate our process How do we know that our models, theories and hypotheses are correct and on what authority do we say so 12

13. ISLAMIC ECONOMICS How do we use the Quran in the process of developing Islamic economics and finance? Islamic Worldview Islamic Economic Vision Islamic Economic Theory Quran and other sources provide the guidelines and this entails a process of deriving answers based on sources 13

14. ISLAMIC ECONOMICS From definition of Islamic economics Find values/rules directly in the sources If not directly available, then have to “derive” the meaning Most economic applications will have to be derived Need to understand Islamic worldview especially Islamic vision of economics Islamic / shari’ah boundaries of economics and finance must be determined Shari’ah must be interpreted and applied 14

15. 2] SHARI’AH, FIQH AND USUL FIQH 15

16. SHARI’AH Literal meaning: Path to watering place; path to guidance Technical meaning: path to tread for guidance in this world; commands, prohibitions; values Divine guidance to man for achieving success. Guiding human action 5 categories: Wajib (obligatory): doing gives reward, not doing is a sin Mandub (recommended): doing gives reward, not doing is not sinful Mubah (permissible) Makruh (reprehensible): not doing gives reward, doing is not sinful) Haram (forbidden): not doing gives reward, doing is sin 16

17. FIQH Literal meaning: Understand Interpretation of shari’ah Human effort and product of human ‘aql Knowledge of practical shari’ah laws (and principles and values) derived from particulars of supporting evidence (either primary or secondary) Interpretation follows certain rules and regulations, procedure and criteria, i.e. usul al-fiqh (science of usul) 17

18. USUL AL-FIQH Knowledge of principles and methods leading to derivation of fiqh To interpret shari’ah Man must use ‘aql Follow the Islamic methodology, i.e usul al fiqh In interpreting shari’ah, need to understand the objectives of shari’ah (maqasid al-shari’ah): Educating the individual Establishing ‘adl (justice) Promote welfare (maslahah) 18

19. USUL AL-FIQH Process of interpreting the shari’ah requires intellectual assertion i.e. ijtihad Performed by mujtahid or groups of scholars (group ijtihad) Methodology of deriving fiqh Ijtihad tools: Qiyas (analogical reasoning) Istihsan (juristic preference) Istishab (presumption of continuity) Ijma’ (consensus) 19

20. INTERPRETING SHARIAH Potential buyer needs your advise! Should he/she get benefit from the possession of an item that potential seller has passed to him/her prior to seller informing buyer about price? Assumptions: buyer has strong intent to buy & object of sale (mahallul ‘aqdi) is halal. Analyzed cases: a)Item is a usable property (isti’mali) b)Item is a perishable property (istihlaki ) 20

21. MINI CASE ANALYSIS Shariah: Absence of info. on price => Gharar Fiqh: Is the sale permissible (halal)? Two types of hukm (ruling): hukm qada’i vs. hukm diani hukm qada’i = concerns with form & structure => sahih (validity) status hukm diani = requires compliance of substance or contract purpose => halal (permissibility status) Observance of substance compliance to shariah Sale is permissible => yes, buyer can benefit Any dispute later; solve via arbitration process So, what’s your advice? 21

22. MINI CASE ANALYSIS My humble advice: He/she should wait until info. on price is obtained Why? Ethical principle laid down in Quran: “O you who believe! Seek help in patience and As-Salat (the prayer). Truly, Allah is with the As-Sabirin (the patient ones).” (Al-Baqarah: 153) Qawaid fiqhiyyah (legal maxim): Man ta’ajala shayan qabla awanihi ‘uuqiba bihurmaanihi (Whoever tries to get something before its time; will be punished with the prohibition from getting it) 22

23. 3]BUILDING MODELS IN ISLAMIC ECONOMICS 23

24. What are Models and Theories? Model/Theory- abstract, simplified representation of the world You do not need to put all details; sometimes this may confuse (esp. in the beginning) We want to explain human behaviour in a certain ‘economic’area (e.g. consumption) i.e. what are the factors that will have impact on consumer choice Some variables have large impact, others small. Focus is on the important ones. Theory of Consumer Behaviour (Dd for X is a function of ……….. ) 24

25. Standard procedures in Building Models/Theory Decide what you want to explain or predict Identify the variables you believe are important State the assumptions of the model/theory (assumptions are not facts) State the hypotheses- conditional statement on how we think two variables are related (if-then form) ‘Test’ the Hypotheses Theoretical test (logic; deductive process- rules to be followed) Empirical test (inductive process; survey, interview- rules to be followed) What action we take after results (i.e. relationship between the normative and positive) 25

26. Is there Only One way of Scientific Thinking? Every positive analysis has a normative base (the assumptions, the ideology, the worldview) we must be able to recognise the normative framework of neoclassical economics Some Issues The Association- Causation Issue Fallacy of Composition Issue Ceteris Paribus Assumption- important for models, but not realistic 26

27. Building Models in Islamic Economics 1. Identifying subject matter- Islamic Economic Vision Based on scope of economics- what problem to be studied, relevant variables 2. Establishing assumptions, and intuitively the relationship of the variables- refining the Islamic economic vision (the normative framework) - Refer to primary sources of Shariah i.e. The Quran and the Hadith - Modify Islamic economic vision - - Refer to work of scholars of Islam and Islamic economics - Modify Islamic economic vision - Refer to contemporary economics and finance - Modify Islamic economic vision 27

28. 3. Establish/State hypothesis based on (1) and (2) i.e. the tentative theory (what should be: normative) 4. Test hypothesis and models - logic/deductive reasoning; based on ayat al-Qur’an - empirical studies (what is: positive) If empirical tests verify (or do not falsify yet) the hypothesis, they are accepted and if repeatedly observed, they become ultimately the building blocs for theory. If empirical tests do not support the hypothesis, all aspects of steps 1-4 are rechecked. If this review manages to solve the divergence, then the problem is solved. If after this review, there is still a divergence between the tentative theory and the practice observed, we would ask why the “what is” differs from the “what ought to” and then proceed to change the “what is” so that it conforms to the “what ought to.” 28

29. CASE ANALYSIS Should bay’ al-’inah (sale & buy-back contract) be applied in contemporary IE practice? 29

30. CASE ANALYSIS Should bay’ al-’inah be applied in contemporary IE? Stages: 1] WV-i = Quran is truly the word of God 2] Quran- (Al-Baqarah: 275) = “…Allah has permitted bay’ (trading) and forbidden riba (usury).” a) Most scholars condemn bay’ al-’inah as it is a form of hilah fiqhiyyah (legal trick) b) Rampant contemporary practices; leading to close resemblance with interest-based system c) So, IE vision = bay’ al-’inah does not fall under the general concept of bay’ 30

31. CASE ANALYSIS 3) IE framework should include bay’ other than bay’ al-’inah 4) Murabaha sale is usually linked with bay’ al-’inah in IBF and ICM 5) Recheck outcome: what is ≠ what should be 6) Policy recommendation: Pure murabaha sale is allowed Change banking act to allow financial institutions to actually engage in equity-based financing Formulate legal infrastructure to promote equity- based financing Wallahua’lam 31