Islamic Economics Project

About the Project

Islamic Economics is a project to research on Islamic Economics in the research
areas of:

• Interest Free Corporate Finance.

• Interest Free Public Finance.
• Interest Free Commercial Banking.
• Theory of Taxation in Islam: Islamic Fiscal Policy.
• Postulates of a Monetary Regime: Islamic Monetary Policy.
• Inflation Targeting in Interest Free Economy.
• Dealing with Scarcity of Capital in Interest Free Economy.
• Holistic Development Economic Framework in Interest Free Economy.
• Pricing Capital Complying with Islamic Principles & Economic Theory.
• Phase wise Application of Proposed Principles in Economy.
• Empirical Research to Determine the Case for the Validity of Solutions.

About the Author

This project includes a preliminary account of my ongoing voluntary research
on Islamic Economic System. I took this project in 2004 when I started my
undergraduate studies at Bahria University. The inspiration for the project
came from my personal affiliation with Madrasa for 6 years. I was always
interested in Islamic studies, but when I decided to pursue higher education in
business and finance, I felt that luckily I possess the needed aptitude and
dedication to contribute in the field of Islamic economic and financial system. I
do not claim to be an expert in Islamic studies nor in Finance and Economics.
The recommendations presented in this project have the sole objective of
presenting ideas that can cure our socio-economic ills before the general
readers, religious scholars, economists and policymakers. The objective is not
to infer and endorse, but to seek solutions to our chronic socio-economic ills in
the framework of Islamic principles.

I was born in Karachi, but my schooling and college education was completed in
Hyderabad that is 160 miles north of Karachi. I have had a very unique
educational background. I have studied in Madrasa, a private school and then in
a semi-government university. In Madrasa, I learnt Quran by heart. I came to
Karachi to pursue Higher Education in 2004 and graduated Cum Laude in 2008
from Bahria University. I did my MS in 2010 from Szabist, Karachi. Currently, I
am pursuing my PhD in Islamic Economics.
In Academics, I was Editor of Bahria Economic Magazine and contributed with a
research paper in its inaugural issue. Another paper was published in
Accountancy Magazine with the title “Critical Analysis of Islamic Banking” in
2007. Besides that, I have also written and presented a research paper on “Risk
Management in Islamic and Conventional Banks” in 12th National Research
Conference at Szabist in 2008 and on “Role and Functions of Central Bank in
Islamic Finance” in 14th National Research Conference at Szabist in 2009.

A research paper on "Analysis of Stock Screening Principles in Islamic Mutual

Funds Industry" was presented at National Conference on Global Management
held at Fast in July 2009.

I was awarded a commendation certificate for writing the book “Industries of

Pakistan” for National Book Foundation. I have given lectures at various
universities on issues relating to Islamic Economics and currently serving as a
visiting faculty member at University of East, Hyderabad.

My principle issues of interest are ‘poverty’ and ‘inequality’. Both of these

problems are pertinent to developing countries like Pakistan. In Pakistan, 25%
of the people live below the line of poverty according to the government
statistics. There is huge income inequality with 20% of the rich, affluent and
resourceful class occupying 80% of the country’s wealth.

Income inequality leads to social stratification. Class divide expands into social
relations like marriages and professional relations in the form of nepotism.
National cohesion and collective work towards national goals is overlooked.
Classes exist to consolidate their own existence and vested interests. Only
short-term policies are pursued and that too on the direction of International
agencies like IMF and World Bank. Policies even though proven effective in one
system need modification sometimes to be effective in another system with a
different set of characteristics.

Short-term orientation leads to economic growth in patches but without any

long-term orientation towards capacity building and infrastructural
development, the growth is unsustainable. Therefore, poverty and inequality
persist in the society. Poverty and inequality lead to illiteracy, inadequate
health conditions and poor standards of living in general. Education, health,
sanitation and adequate standards of living can all be provided if the country
has enough income and if that income is distributed fairly equally. Conversely,
if there is low per capita income and if it is distributed unequally, the basic
amenities of life cannot be provided to the masses.

Fundamental problems of developing countries and since developing countries

make up most of the world’s population; the fundamental problems of world
can generally be categorized under ‘poverty’ and ‘inequality’ in the 21st
century. However, it is overshadowed by its consequences in the form of
terrorism, poor health, sanitation facilities and illiteracy.

Income inequality stems from wealth inequality. I have argued in my work that
direct taxation should not only focus upon income but also on wealth.
Documentation of the economy is necessary to make facts based effective
policies. Fiscal expansion through desperate deficit financing only increases
leverage in the economy and even put its existence at risk. It only delays the
inevitable and the central issues remain unresolved. Documentation is
necessary to increase the tax base and the size of the formal sector.

I have always been open to diversity in ideas, culture and society. I have the
habit of accepting something different in favor of rejecting some of my former
views if anyone can prove them wrong. I have always maintained that issues
should be resolved through intellectual reasoning.

The readers’ comments, guidance and criticism will enrich my knowledge and
give me the chance to further sharpen my knowledge base and convert these
ideas into practicable models for the development of our people.

Salman Ahmed Shaikh

Email: salmanahmed_hyd@hotmail.com

A Brief Overview of Research Undertaken

Ethical Crisis in Capitalism: Filling the Ethical Void with Islamic

Economic Teachings in Economic Practices

Abstract

This paper discusses the ethical void in Capitalism which does not look
prominent in welfare societies and states. But, its effects become more
eminent in tough economic conditions and more so in developed regions where
economic relationships by themselves will not result in win-win situation for
all parties concerned in a Capitalist economy. Unbridled pursuit of self
interest, moral relativism, inventive-led economic choices and apathy to
communal responsibilities would lead to a society where economic interests
become the sole basis of maintaining and sustaining relationships. This inner
void of identity and purpose at individual level and social void in the form of a
stratified society bound together only for economic interests can be better
filled with incorporating religion. Humans are much more than utility driven
species, they are capable of using both instrumental and critical reasons to
differentiate right from wrong and need reinforcement to adopt virtues
influenced by an inner urge other than material interests as in Capitalism.
This inner urge can be rekindled by looking beyond utility maximization to re-
acknowledge the fundamental identity that humans are moral being than just
an instrument for material advancement

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

Determining Conformity to Islamic Ethical Principles in Economic

Practices: A Case of Pakistan

Abstract

The paper discuses sources of income permitted and prohibited in the faith of
Islam. Under ethical constraints i.e. the allowed framework in which an
individual or group of individuals can undertake economic pursuits, the Islamic
teachings relating to the right conduct in economic pursuits are provided.
Then, when the person in his/her economic pursuits becomes an earning
individual, the Islamic teachings to an earning individual are provided in the
light of Quran and Hadith. The paper also compares secular and Islamic ethics
briefly. The paper also analyzes conformity of economic practices with Islamic
principles and identifies specific ethical issues and deviations in specific
sectors of economy at the sector and industry level.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)
Econ Papers http://econpapers.repec.org/RAS/psh371.htm

A Comparative Study of the Major Economic Systems in the

aftermath of the Great Recession

Abstract

This paper compares the fundamental postulates of major economic systems

i.e. Capitalism, Socialism, Mixed economy (a hybrid of Capitalism and
Socialism) and the Islamic economic system. It identifies through a review of
theoretical economics the structural problems that lie in the current economic
order. Poverty and Inequality have increased in last two decades and the
millennium development goals are still far from achieved. The research
identifies that lack of an ethical foundation, unbridled pursuit of self interest
in production as well as in consumption, interest based financial ad monetary
system are the major problematic issues in Capitalism against which mixed
economy has also shown limited effectiveness. Socialism promises to create
heaven on earth, but takes fundamental human rights and profit motive away
and in the extreme case give way for an autocratic or totalitarian regime.
Islamic economic system in its true sense is not present in any country. It is a
blend of natural features present in Capitalism i.e. right to private property,
private pursuit of economic interest, use of market forces etc used along with
some distinct features derived through Islamic economic teachings i.e.
interest free economy, moral check on unbridled self-pursuit and provision of
socio-economic justice to achieve the goals of Socialism as far as is naturally
possible without denying individual freedom and profit motive.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

 Corporate Finance in an Interest Free Economy: An Alternate
Approach to Practiced Islamic Corporate Finance

Abstract

This paper suggests an alternate approach to corporate finance in an interest

free economy by looking beyond practiced Islamic finance and suggesting
alternatives for corporate finance in sourcing funds i.e. i) Ijara with
embedded options, ii) limited liability partnership, iii) equity modes like
Musharakah and Mudarabah iv) income bonds and v) convertible income bonds.
It also suggests alternatives for corporate finance in using funds i.e. i) Islamic
income funds, ii) Islamic REITs, iii) Treasury Bonds, iv) income bonds v)
convertible income bonds, vi) foreign currency reserves, vii) making strategic
expansion, and viii) equity investments in other companies. It also suggests
methods of valuation by suggesting an alternate means of pricing capital in
interest free economy and use of appropriate discount rate i.e. Nominal GDP
growth rate in public finance and corporate finance in CAPM, dividend
discount model, project valuation, calculating NPV, valuing income bonds and
stocks. It also discusses how the problems of scarcity of capital will be solved
and alternatives for insurance in an interest free economy.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

Monetary Policy & Monetary Regime in an Interest Free Economy:

An Alternate Approach In Monetary Economics amidst Great
Recession

Abstract
This paper reviews limited, but precious academic literature on central
banking and monetary management in Islamic finance. It discusses the building
blocks of an Islamic monetary system. It discusses how savings would feature
despite discontinuation of interest, how inflation will be checked with central
banks not having at its disposal conventional OMO, how liquidity will be
managed in banking sector when central bank wants to inject liquidity or mop
up funds. How and to what extent the institution of Zakat would enable the
government to meet its fiscal targets and does not crowd out private sector.
How balance of payments and exchange rate stability can be managed in an
interest free economy. If in the short term, the government or central bank
needs alternative source of revenue other than Zakat, they can issue GDP
linked bonds. This could replace T-bill and provide a base instrument for OMO
and liquidity management in the banking and financial sector.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

An Alternate Approach to Theory of Taxation and Sources of Public

Finance in an Interest Free Economy

Abstract

This unique study discusses the theory of taxation in Islam and the role of
Zakat in an Islamic economy. Zakat is a compulsory payment i.e. a tax in this
sense paid to the government on one’s income and wealth. The Zakat rates are
studied for their viability and effectiveness to fulfill fiscal needs of the
government. Based on the evidence from many countries, it is argued that
Zakat rates are substantial enough to generate the needed public finance
given the large tax base and free the government from using seignorage and
deficit financing. Its compulsory nature both as per law of the land and as per
religion would ensure minimum tax evasion and its progressive and direct
nature would effectively redistribute income. The effect of Zakat on the
overall macroeconomy, the financial system, monetary system, property
market, stock market, inflation, foreign debt, balance of payments, FDI and
the on the development oriented variables like inequality and poverty are also
discussed to give a holistic view of the effects of the proposed system.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030

Munich Personal Research Archive

http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

Micro credit using Equity Financing: an Alternate Approach to

Equity Financing in an Interest Free Financing

Abstract

Interest is prohibited in all monotheist religions; however, it features as an

essential element in practiced capitalism. Interest based financial system has
created two major havocs in last two decades i.e. in East Asia in 90s and in the
Great Recession since 2007. This paper highlights the extent of development
problems faced by the world. With interest at zero bound in U.S since 2008
and with unemployment at 11% level, scarcity of capital cannot solely explain
this. However, interest based Microfinance has had mixed results. Interest
based lending at Micro level is usually carried out at very high interest rates,
more so when the lending takes place informally without institutional
intermediation. Institutional intermediation serves a good purpose, but it can
also be designed using equity modes of financing. This can relieve the financee
and increase diversity of entrepreneurial activities as in debt based
microfinance, not much diversity can happen with compulsory servicing of
debt. The related questions as to how the institutional arrangement would
work to carry out this system, how documentation problems be resolved, how
trust level can be created, how effective monitoring can be undertaken and
how the intermediaries generate finance themselves and mobilize funds are
answered in this paper.

Paper is accessible at:

Social Sciences Research Network

http://ssrn.com/author=1407030
Munich Personal Research Archive
http://mpra.ub.uni-
muenchen.de/view/people/Shaikh,_Salman.html)

Econ Papers http://econpapers.repec.org/RAS/psh371.htm

______________________________________________________________

The readers’ comments, guidance and criticism will enrich my knowledge and
give me the chance to further sharpen my knowledge base and convert these
ideas into practicable models for the development of our people.

Salman Ahmed Shaikh

Email: salmanahmed_hyd@hotmail.com

Website: www.islamiceconomics.viviti.com