Renowned Islamic Economist, author of several books and recipient of Islamic Development Bank Award Monzer Kahf clarified certain misconceptions about Islamic Economics and Finance, while talking to us during his visit to Research Centre of Islamic Economics (IKAM). The full text of the interview is as follow:
Ahsan Shafiq (Interviewer): Asalam o Alikum Professor, we are privileged to have you here at IKAM. Knowing your contributions to the field of Islamic Economics and Finance which are extended over last 30 years, we would like to take this opportunity to clarify some misconceptions about Islamic Economics, the general public has. Would you like to tell us a little about yourself first?
Monzer Kahf: Well, I am Monzer Kahf, and I was born in Damascus. I lived in America for the last 45-46 years probably. And during this period also I contributed working into the Islamic Development Bank. For some time I taught in more than one university in Jordan. I taught also in Qatar. And most likely shortly I am going back to California, Southern California.
Ahsan Shafiq: And as always are starting question is. How would you define as an expert to the general public, what Islamic economics is?
Monzer Kahf: Well, In a few words probably, Islamic economics is economics Guided by the moral and and high level values that are revealed in the Revelation to the prophet Muhammad peace be upon him so it is economics like any other economics but with this guidance that affect our world view of things and of life and relationships.
Ahsan Shafiq: So when we basically say it's the economics the normal economics may be, guided by the revelation. So how do we exactly differentiate it from the conventional economics?
Monzer Kahf: Well we do differentiate it from conventional economics in essentially two areas. One, sources of knowledge are recognized in Islamic economics as not only Human Experience and human observation but also the Revelation that comes from God, so Revelation is equally a truth that is not less important than the truth we notice and we derive from our own observations you know in economics and in other social sciences very often it's difficult to make experiments like we do in scientific material chemistry or in physics simply because we cannot experiment with the human minds and with human collectivities working together relationships instead of experimenting here the observation plays a more important role, the founder of social sciences was Ibn Khaldun as a matter of fact and Islamic economics is one of the social sciences in his introduction Muqaddima, he mentioned that the study of searching for rizq for obtaining material sustenance from our surrounding in the world and distributing this rizq to people to families is the object of the part of social studies that is economics. Later on, other philosophers in fact, at that time, Western, came with a definition of the same thing in fact not any different, that the study of Economics is the study of obtaining resources from the environment around us and distributing them to individuals and families. Now, the same study. Ibn Khaldun was, I should say, very realistic and wise at the same time in saying that the study of Economics as well as the study of other social sciences is a study that is, I should say probably, guided. Not bound, but guided by two fundamental principles. One, We look at a human being as is, regardless of his religion, regardless of his ethnicity and his gender or his geographical place. So we look at human being as it is, and then the other principle is that we look at a human being as a whole unit.
We do not compartmentalize him, we do not disintegrate him into sections. We look at human being as one unit that is affected by all the internal and external institutions around him and inside him. So that human being, these two principles are important principles in Islamic Economics that you do not find in Capitalistic studies or in socialist studies that, one, taking the human being as one unit and two, look at the human being without limiting him to a given environment or religion. So, In Islamic economics we look at human being as human being. How the human being uses resources given by God in the nature in our environment. How we use these resources to extract from them things that are beneficial to us and then how we distribute these things. Now, of course, this means because human being is looked at as is. All human beings are the same. That means we do not distinguish between one person and another. Human beings are equal, are the same. And, this is again expressed by the Prophet saw, that “Annasu...”, when he said that human beings are like the teeth of a comb. Each teeth of a comb is exactly like the other teeth, so they are exactly equal. This is the suggestion of Ibn Khaldun in understanding or in defining what is Islamic economics and what are the guidelines that determine its features.
Ahsan Shafiq: This is very relevant, probably, one of the principles of Ibn Khuldun you just stated, that study of human beings as they are. If I say it in other words that the modern economics, it has laid a lot of stress on the microfoundation approach which I can say focuses on examining the behavior of individual agents in the economy first, when we are starting the macroeconomics also. In that regard, maybe it would be a repetition, if I ask again that the assumption which conventional economics lays with the behavior of the economic agents, is it any different than that which Islamic economics lays.
Monzer Kahf: Well, we should notice that human being is the same everywhere. So, and human mind is similar and probably God made mind more justly distributed among all human beings along the same thing so no one is wiser than the other in a sense but we have important things that the early Economists starting with Ibn Khaldun and continuing with the Western Economists later on they were looking not only at how we produce they were looking also at, for what do we produce? what is the objective of production? of the material effort we expend like Adam Smith and all early economists then later on we had a stage of economists who were really technicians that is not philosophers they were only concerned about the process of production the mechanical aspect of it like the French economists, several French economists and German Economists after the middle of the 1800s. Now, that era until may be the middle of 1900s, the sixties, 1960s and 1970s. Western Economics was dominated by technical view. Instead of asking, why should we produce, what is the objective of it? The question was, how do we produce? How do we put labour, and land and entrepreneurship together, that is a technical issue, that does not ask, neglects the question of what is the value of this production what determines its objective. Now it later on from probably 70's 80's but more in the nineties and in the New Millennium, the Economists many of them started turning back to see that when the issue of justice is very important take an example of statistical technical examples, if I put my head in an oven and my feet in a refrigerator, my average statistical avg temperature remains the same but what would be then to me? I will be dead. My head is burning and my feet are frozen so this is not then an approach to understand man. We need to talk about the moral value of it, the moral stand of human beings. So this is where Islamic economics reinvented in the last 50 years or so. Comes back to say that we need to correct our understanding of Human Being. Human Being is not alone a tool or a machine that processes of production. It's more than that. It's and entity that has objective that has values that observes Justice in its own inside so when we look at this human being in this approach we bring back the issue of values and the issues of objectives, of why do we produce? what is the objective of Life? What is the world view of a human being? this is important because that determines, in fact the environment of production, am I simply a machine like the other machine that produces or I am an entity come back to Ibn Khaldun, that has all constituencies; the moral one, the Justice feeling, the importance of the others and not only me alone. So now I become a different economic unit. I am no more a point in the process of production. I am a unit an entity that has objectives and that has also moral standards. This is what Islamic economics focuses on.
Ahsan Shafiq: Very right Professor. This one point from this answer itself when you say human beings are more than just a tool in the production process, is it like The Economists who both in conventional economics and Islamic economics have been very critical of the axiomatization of Economics. Are you agreeing with them like they're putting exams like in the process of mathematization of Economics like equating the human or the production processes to the axioms in the mathematics?
Monzer Kahf: Yep, well, well definitely we need to include the, we call it now the human element but it is in fact the moral element. Moral element includes also the institutional study of the history of any specific environment when we look at we look at it from economic point of view. It's not enough to say that we should produce and put the factors of production together. We need to ask why should we produce and how about the Dignity of the other not only me also the other. So we need to look at it from both an Institutional approach and a moral Approach at the same time. Here, where the idea of justice and the idea of dignity of a human being; dignity means that a person, a human being is a respected being, is a being that deserves the best. That where we will make a foundation of the welfare or well-being or the respect in fact the Dignity of that human being. The Koran expresses it in the term that God says we have honored the human being..walaqad karramna bani adam... but this idea means that this person, this entity that has this high dignity, is a dignified entity, should deserves the best and should deserve the best not only to me, but also to the other, to you, to the other person. So here where the justice comes in the human, in the human version of Economics which is Islamic economics, in fact Islamic Economics is no more than that.
Ahsan Shafiq: Right, so in short when we are saying that including the human or moral version of the economic agent and reconstituting it into Islamic economics, do we in other words, are we saying that the addressees of Islamic economics are also not just the Muslims but the whole human kind?
Monzer Kahf: Of course it is the whole human beings. I mean, take the example of the word both in English and in Arabic. In English the word goods and in Arabic the word ‘Tayyibaat’ the Koran expresses things that human being consume by ‘Tayyibaat’ and things that are bad for human being by ‘Khabaa’is’ so this, ‘Al-Tayyibaat’ infact means Goods but means Goods in the true meaning of the word not in the meaning of in the commercial meaning that Goods that we exchange, but Goods that benefit human being whether in its own entity or in its surrounding environment, both benefits. So here, when we talk about things that benefit we can call things that hurt as non-goods. Why should they be considered then properties? So in Islamic Economics, in this regard things that hurt human beings or its environment, we don’t call them ‘Tayyibaat’, they do not have exchange value because they do not have moral value, because they are harmful. And, what is the criteria? It is pure science. Look at the the, the verse in the Koran that sets the principle, it says that there are things that have some benefit but have some harms and if the harm is more than the benefit that thing should be considered bad. If the benefit is more than the harm then that is ‘Good’. Now, how do we define these goods? From the, If we can use the word the bads, so the bads are those that are hurtful, harmful, to the human being or its environment and these cannot be called Goods. And, so, if they are not goods they shouldn't be properties and they should have no exchange value. I mean we can take it as examples in real life. We know all, there is no dispute at all and this, the criteria is purely scientific, there is no dispute between a human being and of course I mean here, the specialized the human beings in all their different areas that a substance X, so I take opium, drug, or for the same reason liquor. It is harmful and if it is harmful it must not have exchange value. We must not assign to it an exchange value because it's harmful to human beings, so all beings, even to other beings, to animals, it is also harmful. So, a thing that is harmful, should we produce it? Or, we should abstain from it, morally, by the internal incentive of respecting human being and if it is so then these are not goods, they are bads and if they are bad they should not be produced or exchanged and this is why in Islamic economics anything that is scientifically determined as harmful to human being or to its environment, we consider it outside the realm of, basket of goods and services that are available in any community.
Ahsan Shafiq: Right, Sir. So, this was basically more about the microfoundation of the discipline of Islamic economics. If we change our question and we take the question to the macro level or we put it the other way and we say if any conventional economics as of the day, we want to transform it into an Islamic Economy, what are the major macroeconomic tasks which need to be done before the economy turns into an Islamic one?
Monzer Kahf: Definitely, there are certain measures that are needed. 1., we should know the good and the bad. We should know the good and the bad by exerting a word scientific abilities to determine what is harmful and what is beneficial or what is at least non harmful, or not harmful. Things that are harmful, should be outside the basket of economic production, distribution, consumption. And then we just put them outside. Now, for the macro policy it must be always based on the principle, 2 principles. 1. same that I mentioned, human being is respected so we do our policy with the idea of giving more benefits, maximizing the benefit to human beings in the economy of course when you talk about macroeconomics, we are talking within georaphical area. So when we talk about an economy then so for that the economy the economic players or determinants must be guided by the principle of the Dignity of the human being by making the most benefits available to that human being and on the other point, making it on the principle of equality between human beings that human beings are all alike and all are equal so there should be; the objective of production is distribution with Justice not simply distribution because simply distribution may end up having as I mentioned if we have people in extreme poverty and people in extreme richness and the average is X if we increase people who are rich increase the top 5% of the, of that economy by certain percentage and increase the poverty of the bottom 10% by certain number the average may not change, that is incorrect. So, it's not a matter of if averages, it's a matter of justice that all human beings are equal and therefore all human beings deserve by their dignity deserve equal opportunities and equal benefits of the economic activity.
Ahsan Shafiq: Right professor. So, one of the things, one of the synonym generally used for Islamic economics is reba-free or interest-free economy. So if we talk about riba-free economy, do you agree on the macroeconomic aspect that one of the main impediment in any economy being Islamic is the system of Reserve banking which is common or pertinent all across the globe today.
Monzer Kahf: Well, I do not like that statement, Islamic economics being defined as interest-free or reba-free economy. I think this is a negative definition not a positive definition. You cannot define a thing by what it is not because there are many things it is not, you must define a thing by what it is. So the saying that Islamic economy is an interestless economy you did not tell me what it is. You tell me here what it is not so Islamic economy is an economy that cares about human beings by producing the utmost in order to maximize the human dignity and also by Distributing the best, by also making resources available to all human beings. So, this is a different issue than being Riba-free or interest-free. Now, we come back to this point of interest. The financial sector in an Islamic economy is a sector that is linked directly to the real sector. It is not a sector that works outside the box, it is part of the box, i.e. in other words, In an Islamic economy every, every literally every single Finance transaction is a reflection or its connected directly on a one-to-one correspondence to the real activity. So, there should be no Finance if there is no exchange of ownership from one person to another. There should be no Finance if there is no resources put together to produce a new product or a new good. There should be no Finance if there's no asset whose use or benefit or utility is assigned to another person although the ownership of the corpus remain with its owner selling the utility. So, all these define the finance sector as integral part of the economy not on the side of it. So you cannot make gain in the finance sector except if there is real value produced on the real sector. This is an important principle, and this is the meaning of we finance only through sale, through lease or through sharing relationships. Sale, lease or sharing relationships, all these reflect the real transaction in the real sector. What does that mean? It means very important thing that Finance cannot grow on its own. In the Contemporary economy, in the western economies the finance sector can grow, can multiply on its own. This does not happen in an Islamic economy because you cannot make a single Finance transaction without being associated with real sector or real part of the economy transaction. Sale, Exchanging goods from one hand to another can be financed. Leasing can also be financed, one owns the corpus, the other owns the utility. Making new project through sharing through putting resources together that is a mean also of finance. But beyond that letting the finance sector grow on its own becomes meaningless. Let’s take an example which is interesting here. Assume that the whole economy consists of 10 people and let's play a game, assume also that we have a given amount of resources, say a 1,000 dollars and the job of all these economic units, the 10 people who are the whole economy, the job of each one of them is to give a loan to another. So we start with the first one and then we give loan to the other at interest and the other and then the next the next until we reach the 10th who will give it again a loan to the first one at interest. Will such economy eat, will such economy have food on the table? Who is going to produce? Finance alone does not create wealth, this is what we should realize but when Finance is associated with real Market transaction it does create wealth because sale creates wealth so financing a sale will be a contribution to the wealth creation in the economy. change But financing a transaction between one bank and the other doesn't produce anything. What is the meaning of interbank transactions, changing the indebtedness from one person to another or changing the Creditor from one person to another, does that change the wealth of the economy? If X becomes the Creditor of Y instead of M who was previously the creditor of Y, does that change the wealth of the economy does that increase the wealth in the economy? It does not.
Ahsan Shafiq: I think it’s very much related to the collateralized debt obligations CDOs, which led to the financial crisis in 2007.
Monzer Kahf: Exactly, when you deal in, when you think of the finance sector as a sector that creates wealth, you fall into that trouble. Finance does not create, helps in creating wealth. How can you make it, help creating wealth only by relating it directly on a one-to-one correspondence what is the meaning of one to one correspondence? It means not a single Finance transaction can exist unless associated with a real Market transaction to the same size or to a bigger size because usually you may not Finance hundred percent but you cannot definitely finance 120%, see the point. So, it is to that size exactly one to one or to a lesser size. The finance cannot grow more than the real market transaction.
Ahsan Shafiq: Right, thought I have already asked so many questions but I would like to benefit the best from your presence here, the maximum. So, my last question, is there any concept of money in Islam? If I specifically ask, is there any specification about the intrinsic value of the thing which we use as currency, in Islam?
Monzer Kahf: Ok, as a matter of fact, No. Some people may think that because gold and silver were the money at the time of the Prophet Muhammad sallallahu wasallam then we should have gold and silver as our money. Some people think because gold and silver have intrinsic value because what is the intrinsic value, where does the intrinsic value come from? It comes from the other usages of gold and silver because they are used in nuclear industry today, they are used in many other industries, in Nano industry, many other Industries gold and silver are used and in the past they were used also in the jewelry industry and the ornaments and the prestige Industries, if you can call it. So, because of these other uses they have got intrinsic value. So, the idea is not really from Islam itself, it is from a historical incidence and historical incidence do not define what Islam is. What defines what Islam is, is that revelation in the Quran or the Revelation that came outside the Quran from the sayings of the Prophet Muhammad peace be upon him. Again, His saying if they are authentically related to us, are based on the Revelation given to him as the Quran says that it is all what comes from him is revelation. So, the point is, the intrinsic value is a historical incident, not a revelation issued, and therefore it’s not part of Islamic Economics. Now we think of it as some people before us thought of it, and, at one time, Omar ibn al Khattab, the second Khalifah after the Prophet Muhammad sallallahu alaihe wasallam. Omar ibn al Khattab thought to create currency from the camel hides but then some people told him that well, then people will slaughter all camels and Arabs will remain without camels and the camel was really the life of the Arabs so he stopped doing that and he did not do it. So, the issue of being, having intrinsic value is not a matter. Now what the today’s money, gold has now really become aloof from the monetary sector, from the monetary transactions. It's just on the very side, still has some relations but only in the mind of some people. Silver is completely now detached from being money, completely for the last three hundred years or maybe more. Now what is the currency of today, then what makes it currency? It’s the one that I can fulfil my financial obligations with. Now if I I am obligated to you and there are debts supposed to you of $100 or of a hundred unit, can I force you to accept this dollar I give you? if I can force you and if you don't accept I'll bring you the police, I take you to law, and the law forces you to do that then that is money but if I cannot do that even if two, three people among us accept to take any of other item as fulfilment of obligation but not everybody, not everybody is required to accept it. This is what we call today legal tender. Money today must be legal tender, if it is a legal tender that is, it has a legal force that it can be forced on anybody in that economy then it makes money, and in other words it is a debt on all the economy and each member of that economy is required to accept it and give me in exchange either goods and services or release from previous obligations that were on me. So, if it’s not a legal tender, it cannot be money today. And, today we have paper currency, we have currencies in the form of bank current accounts in banks, we have currency in the form of credit created by, when I use my credit card I create money not only banks create money, I also create money, that's fine. As long as it is a legal tender, it is legally binding on everybody. Maybe tomorrow we may have virtual money becoming legal tender adopted by an economy, adopted by a government and enforced on everybody in that economy we will deal with this virtual money digital money only we will deal with it then as money but not until it becomes a legal tender because money of today after gold and silver have withdrawn themselves from being money, today we need only the legal tender definition to make it money. So, acceptability of a group of people is not sufficient, this is what makes for instance Bitcoin not a money and we don't accept in Islamic Finance today Bitcoin as money because it is not adopted by a formal government as a legal tender. In the near future probably, one country or more than one country and maybe within 10 years all countries will adopt virtual money, then we deal with virtual money at that time when they become legal tender we deal with them as money and we apply though the rule of money because in Islamic Finance money has special conditions of dealing you cannot deal with money the same way you deal with Goods. Goods have special way and money has special treatment different from other goods, from goods and services.
Ahsan Shafiq: Thankyou very much for your time professor.
Monzer Kahf: You are welcome.