ISLAMIC ECONOMICS MEF 3043

ISLAMIC ECONOMICSMEF 3043 Topic 7 Government Intervention in Islam

LEARNING OUTCOMES In this topic students will know the following, Role and function of the state in the market in terms of pricing public goods, monitoring the market etc. View of early Muslim scholars on the role of the state on the market.

CONTENTS Role of Government in the Market place Price determination in Islam. Government Intervention and Function. Market Monitoring System The institution of al‐Hisbah Role of al‐Muhtasib View of Ibn Taymiyyah on market and market regulations (al‐Hisbah). View of al‐Farra’ al‐Ahkam al‐Sultaniyyah.

THE ROLE OF ISLAMIC STATE Government role as Policy Maker. Government role as Public Trustee. Managing Natural Assets Role of the Government in the Market

GOVERNMENT AS POLICY MAKER An Islamic government has to carry out spiritual and material welfare functions.

SPIRITUAL DEVELOPMENT The government should create a conducive condition in the society to inculcate Islamic spiritual values. The government should mould the entire education system in accordance with the Islamic principles; and The government should enforce the prescribed penalties for any violation of Islamic rules and values so that they may serve as a deterrent to prospective violations.

MATERIAL DEVELOPMENT Eradication of Poverty and Unemployment Controlling Inflation Discourage monopolies Provide Law and Order Implement Social and Economic Justice Justice in Production Justice in Consumption Justice in Distribution

ERADICATION OF POVERTY AND UNEMPLOYMENT One of the prime responsibilities of the government is to eradicate poverty from the society. This can be achieved through an equal distribution of wealth for the welfare of the society. This would entail the full and efficient employment of all human and natural resources, the fulfillment of basic needs and efforts to achieve an optimum rate of economic growth (zakah) Help in providing necessary physical and social infrastructure (waqf and private sector)

ERADICATION OF POVERTY AND UNEMPLOYMENT (Cont.) Help in providing necessary physical and social infrastructure either through the role of the institution of waqf, the private sector, or to be taken by the government if necessary. (such as improvement of the roads and highways, building of dams and bridges, provision of irrigation networks, construction of ports, airports and telecommunication services and the provision of other facilities which would bring about economic growth). The eradication of poverty is greatly dependent upon the provision of social overhead capital such as education and public health.

CONTROLLING INFLATION One of the most serious problems of modern economy is persistent inflation, with an accompanying decline in the real value of money and monetary assets. the stability in the real value of money is vitally important not only for the continued long-term growth of an economy but also for social justice and economic welfare. Money is a measure of value, and any continuous and significant depreciation in its real value would have an adverse effect on social justice and general welfare, which are among the central goals of the Islamic system.

CONTROLLING INFLATION (Cont.) This implies that any activity or behaviour of individuals, groups, or institutions in an Islamic government, which significantly erodes the real value of money, should be considered as a national issue and treated with a sense of concern. Government policies must ensure that the real value of money is not constantly eroded.

DISCOURAGE MONOPOLIES One of the cornerstones of Islamic public policy is to discourage monopolies, since the government is committed to an equitable distribution of income and wealth. An Islamic government should not create monopolies by granting exclusive licenses. the Islamic government should encourage competition.

MAINTAIN LAW AND ORDER One of the most important duty of the Islamic state is to safeguard life and property of all individuals within its boundaries. Only in this case a determinant level of growth and stability of an economy will accomplish together with an inner happiness of individuals. In a hadith of the Prophet (s.a.w.s.), “a woman traveling alone from Hira’ to the Ka’bah feels such security that she has fear of none but Allah.”

SOCIAL AND ECONOMIC JUSTICE An Islamic government carries a great responsibility in rendering justice to its society. Its obligations in terms of economic affairs are as follows: It should collect and distribute the zakat from the rich to the poor, hence enhancing the situation of either categories of people. Only in case zakat is not sufficient the government can levy an affordable rate of taxes according to the people’s ability (without being oppressed). It should justly allocate its resources among the sectors. It should also fairly reward its officials as well as those who deserve to be rewarded.

SOCIAL AND ECONOMIC JUSTICE (Cont.) The government has the option to regulate wages and prices in the economy and this is aimed at checking exploitation and protecting interests of all economic agents in an Islamic economy. Also, the government should introduce public policies, which would ensure a balanced growth between the material and the spiritual development of its people. The government should eliminate injustice such as usury, fraudulent and speculative transactions, and the mal-weighing of commodities, to ensure the smooth running of the economy.

ENSURE SOCIAL AND ECONOMIC JUSTICE (Cont.) Islam considers mankind as one family, all members of this family are alike in the eyes of the Creator and before the law revealed by Him. There is no difference between the rich and the poor, the high and the low, or the white and the black. There is no discrimination due to race, colour or position. The only principle for a man’s worth is his character, his ability and his services to Islam and humanity.

TO FOSTER EQUITABLE DISTRIBUTION OF INCOME AND WEALTH It is the duty of the Islamic state to ensure a respectable standard of living for every individual who is unable to take care of his own needs and requires assistance. The Prophet (s.a.w.s.) stated that: “He whom God has made and administrator over the affairs of Muslim but remains indifferent to their needs and their poverty, God will also be indifferent to his needs and poverty.”

JUSTICE IN PRODUCTION There should be no exploitation in the production process. No unlawful method is pursued to acquire wealth. An employee deserves a fair wage in accordance with his contribution to the production process. He is also entitled to good human treatment and deserves all necessary human and technical assistance when he is unable to perform his duties. The interest of the employers in maximum production is also protected in Islam, as it urges employees to perform their duties with honesty, diligence and efficiency.

JUSTICE IN CONSUMPTION This means the fulfillment of the basic needs of everyone. The Islamic state is responsible to restore any unfairness in society. If supply and demand do not guarantee the provision of goods and services, the state may intervene and provide such basic needs. An Islamic state is also responsible for the supervision of observance of norms and values of consumption. Everyone is allowed to spend for a decent live in accordance with his economic status, but no one is allowed to waste resources in conspicuous consumption. It is advised that Muslims adopt a simple and moderate consumption behavior according to his or her capacity.

JUSTICE IN DISTRIBUTION Justice and sympathy/kindness are the two main principles in the field of distribution in Islam. Apart from the factors of production, the Islamic state should ensure that a share of the generated income is donated to those who cannot participate in the production process due to their handicaps. This is done to satisfy their basic needs through the financial support provided by the rich. In particular, an Islamic government must monitor two elements in the process of distribution of income and wealth, namely: There is no concentration of wealth in one part of the society, Each and every factor of production gets its fair share from the production process.

GOVERNMENT AS PUBLIC TRUSTEE Being a trustee it involves the holding of the wealth of the economy in an honest way and it must be distributed equitably as follows: Equitable Distribution of Income and Wealth Government and Income Distribution

EQUITABLE DISTRIBUTION OF INCOME AND WEALTH Arranging for training; Rendering assistance in finding gainful employment for those unemployed, in accordance with their ability; Enforcing a system of “just” remuneration for those who are working; Compulsory insurance against unemployment and occupational hazards; Old-age pensions and survivors’ benefits;

EQUITABLE DISTRIBUTION OF INCOME AND WEALTH (Cont.) Providing assistance to those who are physically or mentally challenged, and as such, are unable to support themselves or to attain a respectable standard of living by their own effort; Collecting and distributing zakat; and Enforcing Islamic codes relating to the division of estate of a deceased person to accelerate the distribution of income and wealth in Muslim society.

GOVERNMENT AND INCOME DISTRIBUTION The Hisba role of the state includes ensuring the supervised implementation of the tenets of Islam in all aspects of human life. The state administration is held responsible to ensure that the distribution system of income and wealth is operated smoothly, and its implementation is not unduly disturbed. If necessary, the government is allowed to apply force, or rather, it is the duty of the government to apply force to implement the compulsory measures of the distribution of income and wealth.

GOVERNMENT AND INCOME DISTRIBUTION (Cont.) For example, to ensure that activities which lead to the concentration of wealth are not practiced (namely, interest-based financial transactions, hoarding of necessities to create artificial crisis, gambling, bribing and other business malpractices). In addition, an Islamic government must be responsible for the proper distribution of the state funds, that is, the revenues of Bayt al-Mal (treasury). Besides, the government may be directly involved in other halal activities with favorable redistributive effects in the society. Of course, all these activities are in line with its role as public trustee.

GOVERNMENT’S ROLE IN PROVIDING BASIC NEEDS It is a responsibility of the Islamic government to guarantee basic needs for all. Therefore, providing the necessities of life to those who are needy, poor, unemployed and handicapped is a sacred function of an Islamic government.

MONETARY & FISCAL POLICY The government is to guarantee the basic needs of all its citizens, to help and supervise the full employment of all resources, and ensure the implementation of Islamic norms and values in factor pricing and transfer payments, and the equitable distribution of income and wealth to ensure economic development. In a modern society, there are two modern tools utilized in this regard, Fiscal Policy Monetary Policy

FISCAL POLICY Fiscal policy refers to the manipulation of the relevant government revenues including tax and control the direction and size of government expenditure. The economic functions involving public finance, the collection of public revenue and taxation, and associated public expenditure, in relation to the bayt al-mal and taxation are to discussed in more depth in topic 12.

MONETARY POLICY Monetary policy today means the monopoly and control of the supply of money, its availability, its pricing, and the direction of use by applying monetary policy tools in order to achieve certain policy objectives. The modern equivalents of conventional monetary policy instruments are, Regulation of high-powered money Statutory reserve ratio (SRR) Lending ratio: the ratio between long term PLS deposits and short terms interest free lending (qard al-hasan ratio) Demand deposit ratio Refinance ratio: central bank’s refinancing of a part of the interest-free loans provided by commercial banks Open market operations Credit rationing: a ceiling set by central bank, by sector, by bank Moral suasion Issues relating to money and banking are to be discussed in topics 10 and 11.

ROLE OF STATE IN THE MARKET When the government can intervene? Market supervision: al-Hisba (the market supervisors office or public morals office)

REGULATORY ROLE OF THE ISLAMIC STATE THE INSTITUTION OF AL-HISBA “Let there arise from you a group calling to all that is good, enjoining what is right and forbidding what is wrong. It is these who are successful.” (Al-`Imran, 3:104)

WHAT IS AL-HISBA? Al-Hisba is a religious institution under the authority of the state that appoints people to: Carry out the responsibility of enjoining what is right, whenever people start to neglect it, and forbidding what is wrong, whenever people start to engage in it. ‘Amr bil ma’ruf wa al-nahyu ‘anil munkar’ It was through this institution that Muslim states used to control, intervene and supervise many economic activities.

THE IMPORTANCE OF THE HISBA IN THE ISLAMIC SYSTEM The main purposes of the institution of al-Hisba are : to safeguard the society from divergence, to protect the faith, and to ensure the welfare of the people in both religious and worldly manners according to the Law of Allah (s.w.t.)

THE IMPORTANCE OF THE HISBA IN THE ISLAMIC SYSTEM Islam aims to bring about a stable and secure society filled with love, whereby the members of society work together in righteous and wholesome activities. Such an environment allows everyone to carry out the responsibility of being Allah's vicegerent on Earth and to fulfill their purpose for existence, which is to worship Allah (s.w.t.). People are constantly in need of order in their lives and, consequently, they are in need of some authority to ensure that order. Because of this, there must be someone there to remind the people of this order and to monitor how well they are adhering to it.

ROLES AND RESPONSIBILITIES OF THE INSTITUTION OF AL-HISBA To enforced proper ethical behavior and restrained people from improper and unethical behavior. To provide public services such as; street lighting and street cleaning, preventing any violation or break up, and protecting the environment. To monitor the market by checking weights and measures, enforce contracts, force payment of debts by defaulters, and prevent any unlawful trade practices.

ROLE OF MUHTASIB (HEAD OF HISBA DEPARTMENT) To kept a strict watch on the supply position of the essential commodities so that the public did not face hardship. To guard free competition and took action against business persons who tried to collude against the public. To ensure free entry into and exit from the market. To make sure not to control prices unless they were being artificially inflated by traders (specially in the case of monopoly)

ACCORDING TO IMAM GHAZALI“Enjoining Good and Fobidding Evil”, Ihya Ulum id-Din, Vol.2, Bk.19 There are four major elements with regards to the procedure of Al-Hisba and these are as follows: Qualification of Al-Muhtasib. Conditions of the process of Al-Hisba. Who is subjected (accountable) to Al-Muhtasib. Degrees of Al-Hisba's measures

QUALIFICATIONS OF AL-MUHTASIB Al-Muhtasib is literally a judge (Qadi) who takes decisions on the spot, in any place at any time, as long he protects the interests of the public. He must be an appointee (fully authorized), pious and just.

CONDITIONS OF THE PROCESS OF AL-HISBA It is very important to define exactly what is and what is not strictly forbidden. Al-Muhtasib has to ensure that four conditions are met in preventing what is haram (Al-Ghazali, Ihya, 2:208): It is already defined by Shari'a law, It has actually occured, not merely hearsay, It is being performed publicly, without resorting to any spying in order to identify the said forbidden act, and It is obviously known, without necessarily resorting to detailed ijtihad and strenuous interpretation.

WHO IS SUBJECTED (ACCOUNTABLE) TO AL-MUHTASIB The nature of Al-Muhtasib's tasks are comprehensive, and comprises practically all aspects of society as well as everything in day-to-day life. This is not restricted to fellow human beings, but even extended to any damages or obstruction caused by animals, and cases of environmental pollution. In particular, the types of practices which need to checked according to al-Ghazali include, “…false statements about profits, false advertisement, incorrect weights and measures, usurious dealings, invalid contracts, transactions in prohibited items, and all other arrangements involving fraud…” (Ihya, 2:210).

DEGREE OF MEASURES OF AL-HISBA According to al-Ghazali (Ihya, 2:206-207) there are a number of different modes of prevention of sin, which should be applied gradually; The muhtasib cannot trespass nor spy in uncovering any sinful act. The inform first, unless the violator is unaware about the wrong-doing. To advise verbally through preaching, and God-fearing advice. To scold harshly if the initial advice is ignored. To affect the change, physically, like forcing a man not to wear silk, or breaking a jar of wine, or physically pulling someone out of a house. Threaten punishment with a warning if the violator ignores the reprimand (e.g. in the case of a drunkard). Applying punishment with a hand, or with a suitable weapon such as a stick if necessary. To enforce regulations by resorting to armed police, if the violator and his party refuse all previous steps, so that the transgressors are brought under control.

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ISLAMIC ECONOMICS MEF 3043