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ISLAMIC CAPITALISM AND FINANCE: ORIGINS, EVOLUTION AND THE FUTURE

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By Murat Cizakca

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The Montréal Review, December 2012

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 "Islamic Capitalism and Finance: Origins, Evolution and the Future" by Murat Cizakca (Edward Elgar, 2011)

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"It was a humbling experience to read the product of such a remarkable feat of scholarship. It is all at once an exploration in analytic history and a comprehensive text of Islamic finance theory and application. It is also one of the most succinct renditions of evolution of Islamic finance embedded in a comprehensive account of particularities of economies as diverse as Malaysia and Turkey. This is a unique contribution to Islamic finance and Islamic economic history. It has been a rewarding learning experience. It is truly a breathtaking effort."

Prof. Dr. Abbas Mirakhor, former IMF Executive Director and the recipient of the Islamic Development Bank Prize in Islamic Economics (2003).

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For a millennium, from the seventh to the seventeenth century, Muslims controlled the intercontinental and transoceanic trade between Europe and the Indian Ocean. While doing this, they also created one of the greatest civilizations of the world. They owed this success to a unique economic system: Islamic capitalism. This was a pre-industrial, commercial and ethical capitalism, which antedated western capitalism by about half a millennium.

It is to be expected that a modernized version of this classical capitalism will become the norm in the Islamic world as dictatorships are eventually replaced by democracies. This book aims to contribute to this process by describing in part one the basic values and principles of this capitalism from which its basic economic and financial institutions were derived.

These institutions are then studied through time and their evolution is compared with their counter parts in the West. Such comparison is attempted if a western institution had also functioned within the medieval interest prohibition and it may therefore be of interest for modernizing Muslims of the present.

It was Prophet Mohammed, himself, who said that nine tenths of livelihood is trade. In the world of Islam, particularly in the barren Middle East, trade was indeed, the most important path towards the riches. The book focuses, in part two, on the institutions of capital accumulation. Since loan-making banks cannot function in an interest free environment, these were replaced by business partnerships. When the capitalist and the entrepreneur become partners, risks, profits and losses are shared, in short, a share economy emerges. A thorough analysis of these partnerships and their comparative evolution follows. Another enormously important institution-cum-worship, pilgrimage, is also analyzed from the perspective of trade.

In part three, the redistribution of the accumulated capital is discussed. More specifically, basic taxes and the institutions of tax collection are analyzed. This is done by, first, going back to the impact of the Roman land system upon the early Caliphate, then by focusing on the continuously evolving iqta, timar and the iltizam systems. A discussion of how the business partnerships presented in part two were used to finance the government auctions follows.

Most historians agree that the Ottoman Empire should have come to its end, like the Mughal Empire, sometime during the eighteenth century. If it survived for another two centuries, despite fighting sometimes three front wars against formidable enemies, this was mainly thanks to their ability to reform their public finances. The malikane and, particularly, esham were basically institutions of public borrowing. Although the latter was quite similar to the medieval European Permanently Funded Public Debt, Ottoman historians are of the opinion that it evolved from the malikane. Whatever the origins, esham was probably the first ever modern Islamic securitization (1775) and as such constituted the origins of the contemporary sukuk, approximately a $100 billion industry.

Another powerful institution of voluntary capital redistribution was the waqf. Historical origins and its evolution are presented here. One particular statement of the Prophet led to the birth of this remarkable institution.

In part four, contemporary Islamic capitalism and finance are studied. Some of the most important institutions of modern Islamic finance emerged from the modernization of classical institutions. The book considers the establishment of the Tabung Haji, Islamic banks and the incorporation of cash waqfs into modern sukuk from this perspective. Due to its emphasis of institutional evolution, the book makes the modus operandi of these contemporary institutions easily comprehensible.

Since its author considers the past, the present and the future as inseparable parts of the same continuum, institutional evolution studied in this book inevitably leads to a final chapter discussing the future. Part five starts with a discussion of the heated debate on the so-called gold dinar. This is followed by a discussion of the future of Islamic banking and venture capital.

The book ends with the conclusion that neither Islamic capitalism nor its financial system, no matter how perfect, can function without a trustworthy state, which respects the rule of law. A modern interpretation of the maqasid al-Shari`ah follows. This leads to the conclusion that property rights, freedom of thought and expression, freedom of worship, human rights and democracy, the sine qua non conditions for any modern developed civilization are compatible with Islam, nay, Islam ordains Muslims to respect and cherish these values.

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Murat Çizakça is the Professor of Islamic Finance, Comparative Economic and Financial History at INCEIF in Kuala Lumpur. He is also a member of the Executive Academic Board of Istituto di Storia Economica in Prato, Italy.

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