TOPIC 2

METHODOLOGY OF
ISLAMIC ECONOMICS
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TOPIC 2
Objective:
Increase awareness on theory of
knowledge
Know position of shariah, fiqh and
usul al-fiqh
Understand steps involved in
developing Islamic economics

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Presentation Outline
1. What is Islamic Economics (IE)?

2. How to Develop Islamic
Economics & Finance?

3. Shariah, Fiqh and Usul Fiqh


4. Building Models in Islamic
Economics

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WHAT IS ISLAMIC ECONOMICS?
An approach to interpreting and solving
mans economic problems based on
the values, norms, laws and institutions
found in, and derived from,
the sources of knowledge in Islam.
(Mohamed Aslam, 1997)

IE is the science that studies the behaviour of an
economic man who adopts the Islamic worldview
in facing the problem of relative scarcity.
ISLAMIC ECONOMICS
IE is comparatively a new area of study with a
promising future provided it is developed via
proper methodology
1976 is usually referred as the birth year of IE
when the 1
st
International Islamic Economics
Conference was held in Makkah.
IE is 2 centuries behind conventional economics
when compared to 1776; the birth year of
conventional economics, which was the year
Adam Smith wrote The Wealth of Nations.

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2] How to
Develop Islamic
Economics and
Finance?
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DEVELOPING IE
=>Process of translating worldview into economic
vision, then to economic theory based on Islamic
theory of knowledge.

It means that this process depends strictly on the
nature , scope and limitations of knowledge.


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THEORY OF KNOWLEDGE

Topics of discussion in understanding theory of
knowledge:
What we know
How we can know
Criteria to evaluate what & how

Knowledge = justified true belief (Platos version)
So, a statement is knowledge when it can be proven to
be true.
A false statement should not be considered as
knowledge.
Therefore, the criteria to establish the truth is vital in
building knowledge in a particular science.

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THEORY OF KNOWLEDGE
Types of knowledge based on secular worldview:
a priori knowledge = independent from experience
-> rationalism
a posteriori = known by experience
-> empiricism
Eg. Muhsins iced-Milo experience

Epistemology = the study of the origins,
nature, methods of authentication and
limits of knowledge


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ISLAMIC THEORY OF KNOWLEDGE
Since Islam determines the truth using a
different way from the west, Islamic theory
of knowledge would be different also.

Differs from western theory on two
major aspects:
Prominence and centrality of revelation
Is scientific method the ONLY method?

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PROMINENCE AND CENTRALITY OF
REVELATION
In Islam, knowledge can be gained from:
Fixed vertical axis = God-given revelation
(via Prophets)
Flexible horizontal axis = human effort
via sense and intellect (aql)
Tawhidic paradigm = human reason guided
& aided by revelation.
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IS SCIENTIFIC METHOD THE ONLY METHOD
TO ACQUIRE KNOWLEDGE?

Western theory of knowledge: YES!
vs.
Islamic theory of knowledge: NO!

To understand this issue, need to appreciate the
channels of acquiring knowledge


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WESTERN THEORY OF KNOWLEDGE
Sources of knowledge
Senses primary
sight, sound & smell info. from a distance
taste & touch info. from immediate vicinity

Reason derived from logic; both inductive and
deductive
Intuition derived from strong understanding and
feeling about something
Authority secondary info. gathered from reliable
and credible person or institution.
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WESTERN THEORY OF KNOWLEDGE
Scientific method: empiricism &
secular rationalism
Empiricism is the belief that info. should
be proven by real sense experience and
past observation
Secular rationalism is the belief that info.
should be proven by the power of
reasoning based purely on worldly facts
and not revelation from God.

ISLAMIC THEORY OF KNOWLEDGE
In Islam, knowledge channels are:
1]True narrative:
- brought by Prophet (Quran & Hadith): absolute in
nature
- established by reliable past scholars: reviewable
2]Sound senses = sense perception
3]Sound reason = mind
4]Intuition = heart presumes the existence of a
higher authority

=> Scientific method: reason linked
with revelation


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ISLAMIC ECONOMICS
Methodology discusses:

Process of building models@theories (an abstract
representation of real world that aims to describe,
explain & predict reality by considering the relationship
between independent and dependent variables chosen
primarily on the basis of past theories)
Testing hypothesis
Developing theories
Establishing and using criteria to evaluate our process
How do we know that our models, theories and
hypotheses are correct and on what authority do we
say so

ISLAMIC ECONOMICS
How do we use the Quran in the process of
developing Islamic economics and finance?


Islamic
Worldview
Islamic
Economic Vision
Islamic
Economic
Theory
Quran and other sources provide the guidelines
and this entails a process of deriving answers based
on sources of knowledge in Islam.
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ISLAMIC ECONOMICS
From definition of Islamic economics
Find values/rules directly in the sources
If not directly available, then have to derive the
meaning

Most IE applications will have to be derived from
the right understanding of shariah.

So, need to understand Islamic worldview especially
Islamic vision of economics
Islamic / shariah boundaries of economics and finance
must be determined
Shariah must be interpreted and applied
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3] SHARIAH, FIQH
AND USUL AL-
FIQH
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SHARIAH
Literal meaning: Path to watering place; path to guidance
(relate with vision)
Technical meaning: path to tread for guidance in this world;
commands, prohibitions; values (relate with mission)
Divine guidance to man for achieving success. Classification
of human action into 5 categories:
Wajib (obligatory): doing gives reward, not doing is a sin
Mandub (recommended): doing gives reward, not doing is not sinful
Mubah (permissible): either course of action is allowed
Makruh (reprehensible): not doing gives reward, doing is not sinful
Haram (forbidden): not doing gives reward, doing is sin

Understanding context and priorities would further guide us on
how to apply the knowledge on classification of actions in line
with the true meaning of shariah (i.e. the way and NOT the
rule). 20
FIQH
Literal meaning: Understand

Interpretation of shariah
Human effort and product of human aql
Knowledge of practical shariah laws (and principles and
values) derived from particulars of supporting evidence
(either primary or secondary)

Interpretation follows certain rules and regulations,
procedure and criteria as outlined in usul al-fiqh
(science of origin).
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USUL AL-FIQH

Knowledge of principles and methods leading to
derivation of fiqh
Aim: To interpret shariah
How? Man must use aql while following the Islamic
methodology or usul al-fiqh.

In interpreting shariah, need to understand the
objectives of shariah (maqasid al-shariah):
Educating the individual
Establishing adl (justice)
Promote welfare (maslahah)


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USUL AL-FIQH
Process of interpreting the shariah requires
intellectual assertion i.e. ijtihad
Performed by mujtahid or qualified groups
of scholars (group ijtihad)
Methodology of deriving fiqh
Ijtihad tools:
Qiyas (analogical reasoning)
Istihsan (juristic preference)
Istishab (presumption of continuity)
Ijma (consensus)



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4]BUILDING MODELS
IN ISLAMIC
ECONOMICS
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STAGES IN MODEL BUILDING
=> Stages in producing fiqh i.e. detailed application
of shariah in economics and finance matters

1. Understand Islamic worldview

2. Establish Islamic economic vision:
a] Refer to primary sources of shariah, i.e. Quran and
hadith

b] Refer to works of past and present scholars of Islam
and Islamic economics

c] Refer to contemporary economics and finance


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STAGES IN MODEL BUILDING
3. Establish principles, laws, assumptions,
hypotheses, and models based on (1)-(2), i.e.
tentative theory (what should be)

4. Test hypotheses and models, i.e. empirical
studies (what is); if what is what should be

5. Recheck (1) (4); if still what is what should
be

6. Put forward policies to change the what is to
conform with what should be

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CASE ANALYSIS
Should bay al-inah (sale
& buy-back contract) be
applied in contemporary
IE practice?

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CASE ANALYSIS
Should bay al-inah be applied in contemporary IE?
Stages:
1] WV-i = Quran is truly the word of God
2] Quran- (Al-Baqarah: 275) = Allah has permitted
bay (trading) and forbidden riba (usury).
a) Most scholars condemn bay al-inah as it is a form of
hilah fiqhiyyah (legal trick)
b) Rampant contemporary practices; leading to close
resemblance with interest-based system
c) So, bay al-inah might not be in line with IE vision of
distributive justice.







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CASE ANALYSIS
3] IE framework should include bay other than bay
al-inah
4] Murabaha sale is usually linked with bay al-inah
in IBF and ICM
5] Recheck outcome: what is what should be
6] Policy recommendation:
Pure murabaha sale is allowed
Change Banking Act to allow financial institutions
to actually engage in equity-based financing
Provide other related requirements, eg. Human
resources need and operational system procedure
to promote equity-based financing
Wallahualam



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