Wealth Creation: An Islamic Perspective

1. Wealth Creation: An Islamic Perspective Dr. Munawar Iqbal Former Chief of Research (Islamic Banking and Finance) IRTI, Islamic Development Bank Lecture in Distance Learning Program Islamic Development Bank October 2008.

2. Islamic Perspective on Seeking Wealth • Islam considers pursuing economic activities something very desirable. It abhors a life of asceticism and abstinence. • Wealth is declared God’s “blessing” and seeking wealth in a proper way is considered an act of worship.

3. What is Wealth Some Definitions of Wealth • All things having monetary value (Collier’s Dictionary) • All goods and resources having economic value (The American Heritage Dictionary) • The closest term for this in Quran is “Maal” which is defined as: • هو كل عين ذات قيمة مادية بين الناس • Anything that has a material value. • We can see that “Maal” is almost exactly equivalent to wealth. • Next we look for Quranic guidance on “Maal” or wealth creation.

4. Guidance From Quran on Wealth Creation: • يا أيها الذين آمنوا لاتأكلوا أموالكم بينكم بالباطل إلا أن تكون تجارة عن تراض منكم. • )سورة النساء، الآية 29(. • “O Ye who believe! Eat not up your property among yourselves unduly. Let it be trade amongst you by mutual agreement”. • This verse is perhaps the most important verse of Quran on economic matters. It tells us both the do’s and the don’ts in wealth creation. • First the don’ts.

5. What is Prohibited in Wealth Creation • The verse rules out ALL illegal ways of wealth creation. “Batil” encompasses any way of acquiring wealth that violates the rights of: (a) God (b) Contracting Parties and (c) Third Parties. • First and foremost those ways of wealth creation are ruled out that are declared “illegal” by the Supreme Law Giver. Examples of these are riba, gharar, qimar, ghish.

6. The scope of the verse also includes all those activities, which are declared “illegal” by the state and its various echelons. Examples of these are bribery, smuggling, money laundering. • Ways of creating wealth that violate the rights of third parties are also prohibited. Examples of these are creating pollution, obstructing common passage ways and other negative externalities. Zoning regulations by municipalities are covered here.

7. What is Allowed in Wealth Creation • Kinds of Legislation in Islam. Islamic Rulings (Ahkam) relate to two broad fields: • Relationship between God and Mankind. This is called Ibadat (Worshipping). • Relationships among Mankind. This is termed as Muamalat ( Mutual Dealings).

8. The general principal in case of rulings in the field of worshipping is that an act is worship only when permitted by Shari’ah. • On the other hand in case of mutual dealings, the general principal is that of permissibility, i.e. everything is permittedunless clearly prohibited by Shari’ah.

9. The Golden Principle of Ibaha (Permissibility) • In Islamic theory of contracts, parties are free to agree on any terms as long as known Islamic rules and principles are not violated. There is an authentic hadith stating: • المسلمون عند شروطهم إلا شرطا حلل حراما أو حرم حلالا • “Muslims are free to determine the conditions of their contracts unless they make something forbidden as permissible or something permissible as forbidden”

10. Wealth Creation: General Governing Principles • A. Freedom of Contract within Shariah • B. Conscious and Voluntary Agreement • C. Honoring the Rights of “Third” Parties (Externalities) • D. Honoring Both the Letter and the Spirit of Contract

11. Kinds of Contracts: • Compensatory. • Gracious (Charity). • Compensatory contracts are those whereby goods, services, and rights are exchanged on the basis of some compensation. Broadly defined, it includes all contracts, which “add value”, i.e. create wealth by someone and hence his claim for compensation. • The second type, i.e. charity, involves transfer of “value” owned by someone without compensation. The rules governing the two types are naturally different. We are concerned here with the first type.

12. Basic Rules in Compensatory Contracts • A. Freedom in determining the conditions of a contract • B. Prohibition of taking others’ property without compensation • C. Value Equivalence • D. Prohibition of “Unequal Exchange” • (Iztarar, monopoly etc.) • E.  Provision of Maximum Possible Information

13. Application of Rules: Some Examples • Prohibition of Riba • Prohibition of Gharar • Prohibition of Gambling

14. Prohibition of Riba • Riba literally means increase, addition, expansion or growth. • In the Shari’ah , however, the term riba refers to anything (big or small), pecuniary or non-pecuniary, in excess of the principal in a loan that must be paid by the borrower to the lender along with the principal as a condition of the loan or for an extension in its maturity. • In this sense, Riba has the same meaning and import as the contemporary concept of interest in accordance with the consensus of all the fuqaha (jurists).

15. Prohibition of Gharar • Gharar refers to act and conditions in contracts, the full implications of which are not clearly known to the parties. • In economic parlance it is very close to “Asymmetric Information.” • It has two kinds: gharar yaseer (trivial) and gharar fahish (substantial). • The first kind is tolerated since this may be unavoidable without causing considerable damage to one of the parties.

16. Prohibition of Gambling (Maysar) • يا أيها الذين آمنوا إنما الخمر والميسر والأنصاب والأزلام رجس من عمل الشيطان فاجتنبوه لعلكم تفلحون (سورة المائدة، الآية90(. • O Ye who believe, Intoxicants and Gambling, (Dedication of ) stones, And (Dedication of) arrows, are an abomination, of Satan’s handiwork: Eschew such (abomination) , That ye may prosper. • Gambling amounts to transfer of wealth without any value added.