[This essay is part of the Solutions series.]

Eight years ago, around this time of the year, the 2008 financial crises was peaking. I won’t go into details of its effects, but it’s enough to say that many of the headlines even today are direct consequences of the 2008 crash (e.g. Greece’s depression,1 the Brexit,2 the rise of figures like Trump3 etc.) An excellent source of analysis for this, is the former Greek Finance Minister, Dr. Yanis Varoufakis, who was not only a professor of economics, but he has something which most academics do not: real world experience dealing with international power-brokers. In the links provided in the footnotes, he summarize the nature of capitalism and feudalism4, the history of interest and money5 and the basic flaw with capitalistic economic theory and why it is unscientific, 6 being nothing more than a “religion with equations.”7 Varoufakis uses “The Matrix” (the movie) as an analogy to emphasize how this system has locked the world in an “epic drama,” ever fluctuating and always uncertain, creating increasing degrees of misery by inventing brand new ways of deprivation, despite all the wealth and gadgets invented.8 This is the same system on which God Himself has declared war (2:275-279.) But God didn’t just critique this system, He also provided axioms for the only workable alternative.

Before we get to this alternative, note that when Varoufakis calls capitalistic economic theory a  “religion,” he is using the same operative definition for “religion” that I used in my first introductory post: “any system which fails the tests of logic and empiricism.” Economic theory, as it is taught, may have equations (unlike conventional religions) but those equations are not connected to this universe, via empiricism. I also claimed that the consequences of following any religion, is that when reality inevitably gets in the way of your religious claims, the religious do not abandon their religion, instead they abandon reality. Which is exactly what happened when Varoufakis appealed to the European ‘troika’ (the EC, ECB & IMF)  to argue against the ‘austerity measures,’ using empirical data that their own institutions collected.8 They simply ignored it.9,10  All of this is to show that the orthodox financial model the world has been operating with is not only deeply flawed, but much of the misery in the world is its direct consequence.

What about the Quranic alternative? The two fundamental axioms which underpin a theoretical Quranic economic model are encouraging “Zakaat” and forbidding “Riba.” The problem we have is that the meaning of both these terms has been corrupted by mainstream sectarian ‘scholars.’ The prevalent misconception about zakaat in our societies is that it is basically the same thing as charity. Some translations even use these words interchangeably. For example, if you look at Sahih International translation of the verse 9:60, it uses the word “zakah” but the actual word used in the Quran here is “sadaqat.” The purpose of charity/sadaqaat, as defined in this verse, is to help someone in immediate need, and the fundamental difference between “charity” and “zakaat” is that the former is a temporary adjustment to specific situation, while the latter, zakaat, is meant to fundamentally restructure the economic system .

The trilateral root zāy kāf wāw (ز ك و), occurs 59 times in the Quran. G.A. Parwez, in his Lughat-ul-Quran, looks at the meaning and application of this word, to arrive at a general definition of zaka being: “to develop, prosper, grow and blossom in all respects.11 It has also been used as a term to signify purification of the self, in contrast to burying one’s potential (e.g. 91:9.) The key aspect here is that there is no restriction on who gets “zakaat” in the Quran. Unlike sadaqaat, which is meant for those in immediate need, zakaat is for all of humanity, with a purpose of perpetual development.

But what makes zakaat important enough to be considered an axiom?  Parwez has shown with a collection of verses, and a deductive argument, that the “basic duty” of the Quranic State is the collection and redistribution of Zakaat.15 Towards this end, all surplus wealth of individuals should be willingly given: “And they ask you what they should spend. Say, “The excess [beyond needs]” (2:219) and “Allah has purchased from the believers their lives and their properties [in exchange] for that they will have Paradise” (9:111.)

The core concept of Zakaat is declared by God as follows: “We are responsible for your sustenance and that of your offsprings” (17:31.) He is not saying that angels will come down from heaven with burgers and fries, and while they’re at it, they’ll open up universities and hospitals for us wherever we need them. God is saying that the system that He has revealed, was revealed so that it could provide sustenance for all humanity, via zakaat. Also note that Muslims are not the ‘beneficiaries’ of this system, they are the ones primarily responsible to serve all of humanity. This verse is declaring the mission statement of all those who have truly committed themselves to God, and taken it upon themselves to “establish salah and give zakaat.” This is what the Quranic State is for, it is a means, not an end to itself.  Parwez comments:

“The purpose of establishing the Divine system therefore is to fulfil God’s stated responsibility and thus ensure that every single human being receives all that he requires for his development. The Qur’anic phrase for this is eeta-e-zakaat, i.e. to ‘give zakaat’… In other words, the entirety of the central administration’s revenue is to be treated as zakaat. Whilst this revenue will have been collected from the public, the administration will redistribute it immediately back to society and eventually to humanity as well. The amount of zakaat that is collected from the public at any time will of course be dependent on how much is needed to raise the living standards of the people as a whole. Ultimately therefore, it is the administration that does the giving and not the people, because the administration’s only job is to raise the living standards for all, and not to keep anything for itself. Thus we can describe this process of collection and redistribution of zakaat as ‘a means of universal development’.”12

Before I move on, I need to mention “incentives.” The charge of ‘reduced incentives’ is the most popular criticism of any such system, which seeks to provide the basic necessities for human development freely to humanity. This charge is based on the assumption that financial incentives drive humanity, and anything freely given, even the basics (food, water, shelter, education, healthcare etc.,) let alone a guaranteed basic income, will reduce incentives for hard work.

A lot of work on questioning this assumption has already been done. Experiments have been conducted verifying the benefits of Universal Basic Income models. Organizations promoting this research, like BEIN and USBIG, already exist. I’ll again cite Dr. Varoufakis, who also argues in favor of Basic Income in this lecture.  One can find find many other academics arguing along the same lines, because enough experiments have already been done on this, and newer experiments are being conducted all over the world today. The results of these experiments are so convincing that even the hyper-capitalistic Forbes Magazine has called attention to them:

“Subsequent research over the past decade, most of it conducted in laboratory settings, also has found that incentives can limit or impair performance, particularly in situations requiring creativity and innovation… the research findings raise provocative questions about the effectiveness of financial incentives as drivers of performance.

Not only does the charge of reduced incentives contradict experimental evidence, but financial incentives can actually reduce creativity and innovation. I encourage the reader to further investigate this issue on their own, as the details of it fall outside the scope of this essay. But as a start, if one simply begins by examining their own existence and innermost drives, the assumption that money is a primary motivator will be exposed as deeply flawed.

In the Quranic State, the core incentive is still based around competition. But the difference is that the metrics of success have been shifted to doing good (2:148) :

“Every one pursues his goal. Compete with each other in performing good deeds. Wherever you are, God will bring you all together. God has power over all things.”

This incentive is what brings a society together. If you are working in God’s State, then you are literally doing God’s work. The claim that this is a much greater incentive than working for the “bottom line” of a corporate entity, is practically self evident, for all those who believe in God. In such a system, “work” itself equals doing good, and whoever does the most good, wins. Not whoever has the fastest car, or the biggest house etc. You may also desire and work towards such unnecessary luxuries if you wish, but they will not count towards any favor from God, and no one will be impressed with such toys in a truly Quranic society, within a Quranic State.

The aim of the Quran is to spur a paradigm shift for society. Zakaat is one of the instruments of purifying one’s self, so as to compete with each other for God’s favor, and this also explains the other meaning of zakaat (“to purify”) as indicated earlier (91:9). The Quran also declares that: “Allah has bought from the believers their lives and their wealth because the Garden will be theirs” (9:111.) Heaven does not come cheap in Islam, certainly not with the 2.5% annual ‘zakaat tax’ rate, as is prevalent in our ‘muslim countries.’

Now moving on to the second axiom of Quranic Economics: the strict restriction on Riba/”Usury”/Interest based lending. The word “riba” means an increment or addition, to grow, swell or increase. On this, there is no confusion. The problem is its application to finance, because according to the Quran, riba is strictly forbidden, and in such strong words that God has declared war on riba in no uncertain terms: “O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. But if you do (it) not, then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital; neither shall you make (the debtor) suffer loss, nor shall you be made to suffer loss.“(2:275-279.) But this apparently didn’t stop the ‘islamic scholars’ from rubber-stamping the financial trickery of ‘islamic financiers.’  What they did was create an entire system based on riba, by coming up with the following argument that is now enshrined in their ‘fiqh’:13

a) A benefit gained from a loan is riba. A rule which is based on the ethics of Qard Al-Hassan (Benevolent or good loan) in Quran and on Hadith of the Prophet (p.b.u.h.) “the only reward for a loan is the thanks giving and the repayment”.

b) Which means that the capital owner has to choose either a “return” on his capital by sharing with its user in profit, or a “guarantee” to repay his capital intact. A “return” and “guarantee” on capital can not be combined together in one deal.

c) Which means that the capital owner will be entitled to “Profit” only if he is ready to accept “loss” if this happened. These rules are the basis of all profit and loss sharing financing methods in Islam, and they leave no doubt that interest paid to bank depositors above their money, or interest paid by borrowers from banks for the use of banks’ money is riba.

There are 2 critical errors in the above reasoning. The first is an observation I had, and the second is sourced from Parwez.

  1. The choice introduced in (B), between a “guarantee to repay his capital” versus accepting risk in profit sharing, isn’t a valid choice, because the Quran strictly forbids a “guarantee” (forced repayment,) in verse 2:280. If the debtor is unable to repay the loan due to hardship, then the Quran commands that either more time be given to repay (as much time as is needed by the debtor without limit) or better yet, to forgive the loan altogether and consider it charity. Those are the only two valid choices available to the lender, according to the Quran.  The choice of a “guarantee” on repayment is against the Quran to begin with.
  2. As Parwez has pointed out: If risk was a factor in such dealings, then gambling would also be allowed by the Quran.14 Since gambling is clearly forbidden, introducing an element of risk does nothing to make profit on a loan permissible.

These flaws in the figh/sharia reasoning clearly invalidate their basis for allowing interest based loans. No scheme in which the lender receives anything above the inflation-adjusted principal amount can be ever valid. It’s simply impossible to find logically consistent loopholes, which is exactly what the fiqh-based argument attempts to do, and fails. This is just straightforward deductive logic, anyone with basic reasoning skills should be able to see that the fiqh based argument, on which the entire edifice of current ‘islamic finance’ is based, is just financial trickery to get around the simple and straightforward laws of the Quran. No amount of rubber-stamping by any set of clerics can overturn this obvious deductive conclusion.

Understanding the definition of these two axioms of Quranic Economics, zakaat and forbidding riba, is critical, because nothing can be accomplished without them, from a Quranic point of view. With that said, we shouldn’t assume that a scientific ‘economic theory’ can be derived from these axioms, because all the points made by Varoufakis still apply to any ‘economic theory.’ As soon as we introduce concepts of space and time into economic mathematical models, infinities will arise. Maybe it will be possible one day to ‘renormalize’ those infinities, as physicists usually do (with varying degrees of success.) The goal for Muslims though, should be to come up with operational models which are bounded by these axioms and implement them after real-world testing. We do not need ‘economic theories’ to run an economy, that’s just a lie that was sold to the political leadership, by the academic economists, as Varoufakis has explained. Muslims should not repeat the mistakes of Western economists, who justified their flawed and exploitative operational models by using unscientific ‘theories’ that have no actual relation to reality. For operational purposes, these two axioms must define the economic mechanics of society, irregardless of any underlying economic theory.

  1. Explaining Greece’s Debt Crisis.” The New York Times. The New York Times, 31 Dec. 2015. 
  2. Makris. “Brexit Vote a Result of Europe’s Handling of the 2008 Crisis, Greek Government Sources Say.GreeceGreekReportercom Latest News from Greece. Greek Reporter, 24 June 2016. 
  3. Drutman, Lee. “Donald Trump’s Rise Is the Financial Crisis of Politics.Vox. 15 Mar. 2016. 
  4. Varoufakis, Yanis. “The Global Minotaur: The Crash of 2008 and the Euro-Zone Crisis in Historical Perspective”, 30m55s, Columbia University, Youtube. Nov 11, 2011. 
  5. Varoufakis, Yanis. “Yanis Varoufakis And The Nature of Money”, 30m42s. Youtube. Aug 29, 2016 
  6. Varoufakis, Yanis and Chomsky, Noam. “NYPL Discussion”, 21m16s, Youtube. Apr 27, 2016 
  7. ibid, 27m0s
  8. ibid, 36m40s. 
  9. IMF, World Economic Outlook: Uneven Growth – Short and Long Term Factors.  Ch 3: “Where Are We Headed? Perspectives On Potential Output.” 
  10. Janssen, Ronald. “Labour Market Deregulation and Productivity: IMF Finds No Link.Social Europe, 15 Apr. 2015. 
  11. Parwez, G.A., Lughat-ul-Quran, Vol 1, Parwez, pg 614. 
  12. Parwez, G.A.,  The Quranic System of Sustenance.  pg 253-254. 
  13. Dr. Ahmad, Abdel-Rahman Yousri. “Riba, Its Economic Rationale and Implications.” Institute of Islamic University. Institute of Islamic Banking and Insurance. 
  14. Parwez, G.A., Lughat-ul-Quran, Vol 1, Parwez, pg 531-533. 
  15. Parwez, G.A. “Quranic Laws.” Ch.14: Pertaining to the Economy.