Thursday, July 26, 2007

Zakah and Waqf -- Form & Substance Revisited

Dr. Fahim Khan recently made an argument on IBFnet that we put the cart before the horse by jumping to Islamic banking and finance, which put the industry in bankers' hands, and therefore turned to satisfying historical forms of Shari`a, without any interest in substance. His prescribed cure is to turn to religious and historical Islamic institutions, Zakah and Waqf, focusing on Islamic economics, rather than merely finance -- which will take care of itself if we define proper economic objectives. I think that there is merit to this argument, but I fear that it is not sufficient.

First, and very briefly, financial considerations have been at the forefront of most economic activities nowadays. If we look at the real estate boom in Saudi Arabia, where Dr. Fahim lives, we will see that it is merely a mortar-and-steel manifestation of a financial bubble (that showed up first in the Saudi and neighboring stock markets, and in commodities, and then ultimately in the ridiculous waste of petrodollars in the building of vacant tall buildings in Dubai, Bahrain, Qatar, etc.). In the U.S., where I live, finance has also taken over much of what we do, with hedge funds and private equity firms buying and selling companies to turn a quick profit, rather than to restructure them and make them more productive.

Second, and more importantly, I fear that focusing on the historical institution of Waqf can be as detrimental to Islamic economics as focusing on sales and leases has been detrimental to Islamic finance. Moreover, the focus on Zakah is also misplaced given the narrow religious frame that real Islamic scholars (most notably, Dr. Al-Qaradawi) have imposed, despite the attempts of economists such as the late Dr. Mahmoud Abou El Saoud. Let me elaborate.

Problems with Awqaf

There is nothing distinctively Islamic about Waqf. At the advent of Islam in Arabia, there were two models of charitable trusts that the Muslims could have borrowed: the Roman and the Persian. The first texts in Sunna tell us that the first waqf in Madina was formed by one of the Medinese wealthy Jews, and then the second was by `Umar ibn Al-Khattab (r). In the second Hadith, the Prophet (p) simply told him "make it a waqf," clearly establishing that this was already a known practice. In fact, the Islamic Waqf, as the rules were later established by scholars, mimicked the Persian system. As historians have shown, this system of waqf then evolved with different rules, as scholars were very liberal in awqaf, since their essence
was charitable. In fact, however, awqaf quickly became means of circumventing inheritance rules -- to avoid division of property -- while ostensibly remaining charitable due to clauses that they became so once the waqif's genetic line ended.

Timur Kuran has written extensively on the inefficiencies of awqaf in Turkey and elsewhere in the Ottoman empire. The Iranian Bonyads continue to be a major source of monopoly power and inefficiency in the economy.

Of course, that does not mean that the trust/waqf model is inherently inferior to corporations, as Timur has argued. Indeed, one of the most powerful monopolies in the previous round of globalization around the turn of the 20th century was Standard Oil, which was a trust -- hence the U.S. has "anti-trust" rather than "anti-monopoly" laws, even when applied to corporations such as Microsoft.

Historians have traced the roots of the Anglo-American trust system to Awqaf, which King Roger II knew during his youth in Sicily. However, that model evolved in different directions, giving us much more effective trusts in the west today than the awqaf that have survived governments' attacks in the Islamic world. The evolution of the trust as an "un-corporation" might have given us a superior institution, as some legal scholars have argued recently, see Robert Sitkoff's papers on the topic. However, the Islamic world has in fact failed to make awqaf even play their own traditional role, let alone to become an engine for economic growth and development.

Thus, I fear that our focus on awqaf as a historical institution will put us in the same trap of looking at it as some kind of sacred institution, ignoring that there are no set rules for awqaf that are written in stone, and adhering again to form rather than substance.

Problems with Contemporary Zakah

Zakah is fundamentally a poverty-alleviation mechanism (the poor and destitute being the first two categories of recipients listed in the Qur'an), and therefore its role is by necessity quite restricted. In a country with limited poverty, it might turn into more general public finance, but even then restricted by scholars' categories of spending "in the way of Allah" (they include education, infrastructure building, etc.).

Those problems of spending Zakah funds notwithstanding, the biggest problem today with Zakah has to do with the collection of funds. The biggest source of Zakah funds if we were to apply the classical rules would be a percentage of oil and gas wealth (zakat al-ma`adin w al-rikaz). However, since those resources are generally nationalized, there is no point in going there!

For private individuals, there are numerous Zakah shelters. The rules of Zakah as a wealth tax was appropriate for the categories of merchants, shepherds, and farmers who possessed wealth during the Prophet's (p) time. Those rules are grossly inadequate today. Dr. Al-Qaradawi himself commented that when he visited Malaysia, he found that small farmers who produced grains and fruits paid the Zakah (zakat al-zuru` w al-thimar), but that the richer landowners who grew trees for the production of rubber paid no Zakah, since the classical rules do not include a tax on trees that did not bear fruit!

Worse, yet, today's capital for the average well-to-do Muslim may be in large part human capital (lawyers, doctors, etc.). Those can earn huge incomes, but then live in equally huge homes (Zakah exempt) and drive equally expensive cars (Zakah exempt), etc. In the end of the day, they have no gold or silver, no merchandise, no livestock, etc., and therefore pay no Zakah. The late Dr. Mohammad Al-Ghazali, and the late Dr. Abou El Saoud, tried to argue for an income Zakah, but Dr. Al-Qaradawi argued that Zakah contains a major ta`abbud (ritual worship) element, as the third pillar of Islam, and therefore did not want to apply analogical reasoning with much liberty. Needless to say, wealthy Muslims were more than happy to adopt this conservative view that allowed them to pay less!

Again, we have a problem with religious substance giving way to pietist adherence to forms. This is the general malaise of Muslims today. It is not restricted to finance.

Wednesday, July 04, 2007

Rising Islamism and (Bad) Islamic Economics

Any keen observer of the Islamic world must see this. Islamism is on the rise, first and foremost in terms of identity politics of the Muslim masses. Other forms of identity have failed, and have been abandoned by the masses: Arab nationalism and socialism of Nasser and the Ba`th; ancient nationalism such as Pharonic Egypt, Babylonian Iraq, Phoenecian Lebanon, and Cyrus's Persia, etc.; and globalized westernism. Elements of all three tendencies continue, of course, but they are constantly being pushed to the margins, as a new brand of Islamism is on the rise.

When they think of rising Islamism, people (and governments) in the west tend to think mainly of violent "jihadists", as they like to call them, but that is far from accurate. My own casual observation identifies mainly two groups. The first is a group who adopt the appearance of religiosity, in dress, language, etc., but retain a true identity that is some mixture of the three aforementioned (non-Islamist) tendencies. This includes people who use religion to advance their economic objectives, or simply to fit into an increasingly religious society.

The second group is much more interesting, but it appears to be suffering an identity crisis. They seek to live according to an Islamic ideal, but quickly discover that the Islamic ideal is largely fictional. This group includes well-meaning Muslims who turn to religious studies, only to discover the irrelevance and corruption of what they had considered scholarly circles. It includes MBA-holders who decide to get into "Islamic finance", only to discover that it is a racket for enriching cynical English bankers and lawyers, along with some corrupt, gullible, or greedy Muslims.

Most importantly, the second group includes most of the masses in Egypt, Pakistan, Indonesia, Malaysia, Turkey, and elsewhere, who would like to embrace the slogan "Islam is the solution", but fail to see how that solution would work in reality. This is the greatest failure of the school of thought generally known as "Islamic Economics", which sought to develop an understanding of Political Economy from "an Islamic perspective".

Timur Kuran has written a lot about this school of thought and its failures (most of those writings were reproduced in his recent book Islam and Mammon). Timur's conclusion is that the historical and intellectual record of "Islamic economics" illustrates that Islamism has also failed. It is definitely true that the brand of mid-Twentieth Century Islamism, which is still unfortunately marketed by most formal Islamic organizations, including the Islamic Development Bank and others, have indeed failed, and failed miserably, especially in the countries where it was taken most seriously -- Pakistan, Iran and Sudan.

However, if we are interested in real economic development in the Islamic world (beyond just pumping oil and gas, erecting buildings, and selling cell phones), we cannot dismiss the rising wave of Islamism. Indeed, religious inclinations can serve as a greater social bond for a new social contract than any nationalism or western materialism.

The difficulty is this: to find or develop and workable "Islamic solution", one must abandon historical and pietist utopianism. Islamic history, from its earliest days, has never painted a rosy picture. Islamic societies prospered when they were open to learning from others: Sassanid, Byzantine, etc. The famous Prophetic tradition said: "seek knowledge (`ilm), even [if you have to go to] China", and yet our young still seek knowledge (`ilm) only by going to Saudi Arabia, Pakistan, or Egypt, centuries after the Islamic world ceased to be a main depositary of knowledge.

The result is "Islamic finance", "Islamic jeans", and "Islamic Cola", along with satellite channels that broadcast feel good televangelist speeches about Islam, and broadcasting songs about Hijab and the Prophet in between MTV-style videoclips. This pattern cannot satisfy the increasing Islamist sentiment for long. Suspicions about the Muslim Brotherhood, Hamas, and other political Islamist groups notwithstanding, it seems almost inevitable that the growing wave of Islamism will bring a wave of political Islamists to power throughout the region.

The choice is most likely restricted to one of three scenarios:

(1) If they use the current pietist/historical brands of Islamism, those Islamist groups will fail, just like their predecessors did in Pakistan, Iran, and Sudan. Advocates of western capitalism will point to that failure to advocate abanadoning the Islamist identity. The Islamists will increase in their opposition to western capitalism, arguing that the fault was not with the ideal, but with its implementation. The rift between the two groups grows until every country in the region looks like Turkey.

(2) Some may follow the Erdogan route, but that is really just western capitalism dressed in Islamist garb, and thus unlikely to serve any long-term socioeconomic goals. In the meantime, as we learned from the recent Turkish presidency campaign fallout, the secularists will not allow even some token symbolic victories to Islamists. To survive, the Islamists must make more compromises to prove that they are "moderates", but they will only be tolerated if they become effectively more secularist than the secularists.

(3) A new definition of Islamic-democratic political economy emerges. It is not clear that Muslims have the requisite political and intellectual human capital to develop such a paradigm over the course of few decades. Daunting as the task may be, this seems to be the least painful of the available options, and the one most conducive to bona fide economic and social development in the short to medium term.