The principles of Islamic economics are essential for the study of financial inno- vation from an Islamic perspective. They set the broad structure for a possible conceptual framework for financial innovation. These principles are explored further in the following sections.
7.9.1 The Principle of Moderation (I ’ atidal) in Financial Innovation
The principle of moderation implies that human behaviour, the economic and even non-economic should be exercised with moderation, avoiding any extremism.
Consumption should be in moderation, Qur’an says, “Let not your hand be tied to your neck (in not spending) nor let it be stretched fully (in spending extravagantly) so that you may not end in poverty and regret”, (Qur’an, 17: 29).
The concept of moderation, therefore, is based on Islamic ideology and it applies not only to the utilisation of resources, but also to religious devotion in obeying God (Wilson and El-Ashker 2006: 40). Muhammad (pbuh) instructed Muslims to be moderate in all their affairs; he described Islam as the “middle way.” A balance in human endeavours is required to ensure social well-being and the continued development of human potential (Rice 1999).
Ahmed (1976) argues that Islam recognises what Marxism sought to deny: the contribution of individual self-interest through profit and private property to indi- vidual initiative, drive, efficiency and enterprise. At the same time, Islam condemns greed, unscrupulousness and disregard for the rights and needs of others, which the secularists, sometimes encourage this worldly aspect of capitalism. The individual
profit motive is not the chief propelling force in Islam (Siddiqi 1981). Social good should guide entrepreneurs, businessmen, banking and finance professionals and even financial regulators and policy makers in their decisions, besides profit. A relevant saying of Prophet Muhammad is “work for your worldly life as if you were going to live forever, but work for the life to come as if you were going to die tomorrow”, (al Qasimi 1976: 68).
Like some other religions, Islam places a greater emphasis on duties than on rights. This is because, if self-interest is automatically held within bounds and the rights of all members of society are undoubtedly safeguarded, duties then, relating to justice and trusteeship, for instance, are fulfilled by everyone. Therefore, society is the primary institution in Islam and not the state (Cantori and Lowrie 1992).
Chapra (1992) argues that it is crucial to focus on human beings themselves, rather than on the market or the state, in order to create equilibrium between scarce resources and the claims on them in a way that realises both efficiency and equity.
This argument by Chapra is necessary for demarcating the theory of financial innovation in Islamic economic thought; as the well-being of humans is the focus in this theory rather than the market or an individual institution. It should also consider any adverse consequences on society rather than being driven by self- interest and profit maximisation.
Islamic jurists and the Islamic law or‘Shariah’directs governmental power. In particular, Muslims believe that the Qur’an contains a final and unambiguous statement of the truth, added to and complemented by what had gone before in previous Divine revelations (for example, the messages delivered to prophets Moses and Jesus). The duty of the Muslim community, therefore, is to preserve this message (Cantori and Lowrie 1992). Thus, Muslims have a profound horror of anything regarded as innovation in matters of religion that is not permitted or based on the innovation theory that has been discussed herein, including what modern Christians interpret as necessary adaptations of religion to changing times (Eaton 1994).
7.9.2 The Principle of Economic Efficiency in Financial Innovation
This concept complements the previous concepts of unity and trusteeship. Eco- nomic resources should be used in the most economically efficient manner to maximise the value of output in relation to that of the input regarding financial innovation. The input is provided to us by God in the form of natural and economic resources, which along with other factors of production; generate the increase in the wealth of nation in the form of its gross national product (Wilson and El-Ashker 2006: 41). Thus, indulgence in luxurious living and the desire to show-off is very disliked and condemned. Islam does not tolerate conspicuous consumption (Hamed 2000: 158).
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Islam differentiates clearly between two important thingsisrafandtabzir.Israf means extending the level of consumption beyond the level of acceptable basic needs.Tabzir, on the other hand, is the unnecessary use of economic resources, which means wastage of economic resources at all levels of consumption.Tabziris not limited to the level of extravagance; it goes even further beyond that to include the wastage in the consumer behaviour in satisfying his or her very basic needs of these physio-sociological wants (Hamed 2000: 57).
Keynes’(1972) observations on this subject, as Rice (1999) advocates, may be useful to draw on. He asserted that even though “the needs of human beings may seem to be insatiable,” they would fall into two classes, those needs which are absolute in the way that we feel them whatever the state of our fellow human beings may be, and those that are relative ones in the way which their satisfaction ranks us above or makes us feel superior to others. According to Chapra (1992) Islamic jurists’categorisation of necessities (daruriyyat), conveniences (kamaliyyatt) and refinements (tahsiniyyat) would fall into Keynes’first class of needs. These are any goods and services which fulfil a need or reduce a hardship and make a real socio- economic difference in human well-being.
Therefore, resources would not be allowed to be diverted to the production of luxuries until the production of necessities was ensured in sufficient quantities (Siddiqi 1981). The definition of luxurious or extravagant is related to and mea- sured against the average standards of consumption in a society, the idea being that a large shift from the standards would not be permissible (Rice 1999).
Therefore, there is a clear distinction, as discussed above, betweenisraf and tabziras the former refers to the extensive use of resources, while the latter is the wasteful use of these resources (Wilson and El-Ashker 2006: 42). The Quran says
“Verily resource wasters (mubazzirin) are brethren to Satan and Satan is the worst unbeliever”, (Qur’an, 17: 27). Tabzir attracts the wrath of God, for which the penalty is His retribution. Hence, both production and consumption functions in society are, with no doubts, affected by this basic notion in Islamic economics about israf(extension) andtabzir(wastage) (Abduh 1974: 42). Islam teaches us that no one is allowed to destroy or waste God-given resources. This is very relevant to ethics concerning the theory of financial innovation and its economic impact on the environment, economy, culture and society.
When Abu Bakr, the first ruler of the Islamic state after Muhammad, (peace be upon him), sent an army on a war assignment, he exhorted the leader of the army not to kill indiscriminately or to destroy vegetation or animal life, even in war and on enemy territory. Therefore, there was no question of this being allowed in peace- time or on home territory. Trusteeship is akin to the concept of sustainable devel- opment. Models of sustainable development do not regard natural resources as a free good, to be plundered at the free will of any nation, any generation or any individual (UNDP 1994).
7.9.3 The Principle of Social Justice (al-A ’ adalah al-Ijtima ’ iyyah) in Financial Innovation
Social justice as a principle in Islam is embedded in all economic activities. Islam emphasises equality among people regardless of their race, gender, faith, social class and wealth (Abdul Meneam 1979: 54). Prophet Muhammad (peace be upon him) said “People are as equal as the comb’s teeth”, (Sahih al-Bukhari), and also said “the noblest of you are the best in character”, (Sahih Muslim).
Islam is certainly clear in its objective of eradicating all forms and traces of inequity from society, injustice, exploitation and oppression. This objective should be observed with due consideration in the financial innovation theory to ensure financial innovation is established on emphasising social justice and avoiding any form of exploitation of any stakeholder, including the environment, in the financial innovation cycle. The Qur’an also explicitly condemns vicarious guilt or merit and teaches the greatest possible individualism (Chapra 1992), “. . .no bearer of bur- dens can bear the burdens of another;. . .man can have nothing but what he strives for. . .”, (Qur’an, 53: 38–39).
This individualistic outlook on the spiritual destiny of humanity is counterbalanced by a clear rigorous conception of society and social collaboration in all aspects of the financial innovation cycle (Al Zarqa 2012: 230–239). In their acquisition of wealth, however, people should not lie, deceive, cheat, cause harm or damage; they must uphold promises and fulfil contracts. This underpins the eco- nomic theory of financial innovation in Islam by advocating a universal view rather an individualistic selfish one.
Islamic teachings show us the right path by teaching us that all wealth should be productive and people may not stop the circulation of wealth after they have acquired it, nor reduce the momentum of wealth circulation (Al Hamshari 1985:
83). This Islamic worldview of financial innovation, in contrast to the conventional worldview, is the product of a divine guidance that brings together economic activities and self-accountability if the above is not incorporated in every stage of financial innovation.
This firm commitment of Islam to justice and brotherhood and sisterhood stipulates that Islamic society takes care of the basic needs of the poor and needy.
Individuals are required to earn a living and only when this is unachievable does the state intervene. The institution of zakah in Islam, which is, a tax on wealth comprising compulsory alms-giving for specially designated groups in society, facilitates the care of all members of society. The rich are not the real owners of their wealth; they are only trustees in accordance with trusteeship agreement with God. Thus, they must spend it in accordance with the terms of this trust by very important requirement to fulfil the needs of the poor.
The word “zakah” means purification and as such, income redistribution is not only an economic necessity, but also a means to spiritual salvation (Naqvi 1981) and gaining God’s reward (“. . .of their wealth take alms so that you might purify and sanctify”, (Qur’an, 9: 103). Therefore, economics in general and the theory of 122 7 Financial Innovation Theory from an Islamic Perspective
financial innovation in particular is effectively integrated with the principle of justice.