An Islamic critique of Mufti Usmani's justification of Capitalism

Since the 1990s, a group of Deobandi Ulema led by Moulana Taqi Usmani, Vice President Dar-ul-Uloom Karachi has presented arguments justifying capitalist practices on Islamic grounds. This initiative enjoys the support of American and European banks which have established Islamic financing subsidiaries under the guidance of these Deobandi ulema in several Arab countries.

Islam Aur Jadeed Maeeshat-o-Tijarat has been published by Dar-ul-Ulum Karachi and written by Moulana Taqi Usmani. Several editions have appeared since 1993. The book was written for the purpose of “providing Ulema and Fuqaha with a knowledge of modern economic and commercial concepts so that they can issue fatawa on economic and commercial issues” (p.6).* The Islamic authenticity of this book is much greater than that of the Islamic economics literature produced by Najatullah Siddiqui, Omar Chapra and Prof. Khurshid. While these vulgar texts gather dust on the bookshelves Moulana Usmani’s slim volume has become compulsory reading for higher level (darja takhasus) students in many madaris all over Pakistan and India.

The Smithian roots of Usmani’s thinking is evident in his conception of the nature and scope of economics. “All economic thinking accepts that resources are limited and human needs unlimited and the central question is how to fulfill unlimited needs with limited resources” (p.19). Thus according to Usmani, scarcity is the fundamental economic problem as Smith teaches “Economics is concerned with the maximum satisfaction of needs and the fundamental problems of all economic systems are (a) determination of priorities (b) allocation of resources (c) distribution of income (and) (d) growth” (Usmani 1993 p20-21). The natural law philosophy which underlies Smith’s conception of the economic problem (presented in the Theory of Moral Sentiments) is thus implicitly endorsed by Usmani.

The endorsement of natural law philosophy is also evident in Usmani’s conception of the “laws” of supply and demand. “There are many natural laws operative in the universe which always produce similar results – one such natural law is the law of supply and demand” (Usmani p22). If the “law of demand and supply” is accepted as natural, the Smithian (originally Physiocrat) conception of the harmony of individual and social well being is inescapable. “Although every individual works for his own profit but the natural laws of supply and demand force him to fulfill the needs of society. The laws of supply and demand determine priorities and the pattern of resource allocation” (Usmani p23). This leads Usmani to a justification of preferences as value determinants (on the basis of a manifestly absurd marriage centric discourse (p 32-33)) and an implicit rejection of the subordination of preferences to moral values (p32).

In essence, Usmani’s book provides a wholesale endorsement of capitalism. “The basic philosophy underlying capitalism is correct in that it identifies the law of supply and demand and the profit motive as the mechanisms for (effectively) addressing the fundamental economic problem (of scarcity),because this reflects natural human propensities” (Usmani p 35). Like Smith, Usmani’s only criticism of capitalism is the emergence of monopoly. “Monopoly obstructs the functioning of the natural law of supply and demand. The price system is distorted and the fundamental economic problems (allocation, distribution, growth) are not addressed in a manner which reflect social needs and priorities” (Usmani p36).

The book argues that “economic problems should mainly be solved by the law of supply and demand (but) the operation of the profit motive should be limited by considerations of hallal and haram, (refusal) to constrain individual profit (with reference to) hallal and haram renders the natural laws of supply and demand non operational” (Usmani p 37) and leads to the emergence of monopoly.

According to the book, “Islam does not possess an economic system of its own. The Quran and hadith have not articulated any economic philosophy or economic system in the sense in which we comprehend these concepts today. Islam endorses the market forces and accepts that the natural law of supply and demand should be the basis for addressing the economic problem (of allocation, distribution and growth)” (Usmani p38). “Islam also fully endorses the profit motive as a basis for economic behavior” (Usmani p39).

State intervention in the economy is also justified on the Smithian grounds of correcting market failure. “The government has the right to restrict activity which disturbs (price) equilibrium in the public interest” (Usmani p41). This will prevent the growth of monopoly and allow a person “to sometimes express a preference for gain in the hereafter” (Usmani p43). However, “the Shariah has not given any mandatory order obliging him to do so” (Usmani p43). Hence, the determining principle with reference to allocation, distribution and growth will remain the profit motive as articulated in the operationalization of the “natural” laws of supply and demand. Islam endorses the profit motive on growth stimulation grounds (Usmani p48). According to Usmani it also recognizes the classical factors of production and justifies their remuneration in accordance with market principles (Usmani p46-51).

This leads to a wholesale and comprehensive (almost totally unqualified) endorsement of the capitalist property form. This endorsement takes the form of an apology for most stock market practices currently prevalent in Pakistan.

• The legal fiction of corporate personality is endorsed. The Wakf, sections of the Bait-ul-Mall, Tarka and Khaltaash Shio are theorized as capitalist legal personalities. “the concept of legal personality is not forbidden: nor is this a strange conception for Islamic Sharia-only this terminology is new” (Usmani p81).
• The concept of limited liability is justified with reference to the principles of modaraba and the practice of “abd ma zum fit tijarah” – the company is like the slave who trades on behalf of his master and liability is limited to the sale price of the slave (Usmani p81-82).
• Share trading is justified on the basis of the view that share values represent the value of the tangible assets of the companies whose shares are being traded. Trade in shares is justified when share value exceeds face value – this excess value is presumed to represent the value of non-financial assets of the company (Usmani p81-87).
• Dealing in shares of companies involved in Riba transactions is justified provided the share holder protests against such transactions at the annual general meeting of the company whose shares be holds (Usmani p87-88). This justification holds even if there is not the remotest possibility that this protest can ever be effective (Usmani p88).
• Accepting dividend income is justified provided the amount of dividend attributable to the interest income of the company is given as sadaqa (without niyyah of sawab).
• Speculative transactions are justified on the grounds that motives should not be involved in considering the permissibility of transactions. “Anything considered permissible for trade cannot be proscribed merely on grounds of transactional motives – speculation is not haram – it is involved in all transactions: All spot transactions are permissible whether or not the motive is speculation” (Usmani p90-91).

As far as money market transactions are concerned the book adds little to the conventional wisdom of the Saudi inspired Islamic economists – Nejatullah, Chapra and Prof. Khurshid. Moreover, there are serious factual errors in this section – the IMF is described as the world’s central bank (Usmani p100) and the IBRD is seen to be the World Bank – not one of its constituents (Usmani p102). The credit/money creation process is described without reference to the reserve operations of the central bank (Usmani p123-126).

Usmani’s book calls for an expansion of the Islamic financing instruments – profit sharing, Modarbas, leasing, murabaha, rent sharing etc. It is shown that most asset and liability side transactions can be restructured on the basis of Islamic financing contracts, within an interest based system (Usmani p126-158). The need for a systemic abolition of interest is not seen as a prerequisite for the Islamisation of bank depository or lending practices – indeed the book does not call for an abolition of the money market but basis its recommendations essentially on the existing practices of Islamic banks which (with the partial exemption of Iran) function exclusively within interest based financial systems.

The compatibility of such financial restructuring with capitalist practice is explicitly recognized by Usmani. No resistance is expected from foreign lenders – “(foreign) lenders are concerned with profit not with how these profits are realized ….. The IMF and the World Bank are conducting research on Islamic financing and supportive research papers are being published. The International Finance Corporation (IFC) is now voluntarily structuring transactions with Islamic banks within Islamic financing modes. In this situation, Islamic countries can easily conduct international financial transactions on the basis of Islamic financing principles. This will not be difficult at all” (Usmani p170-171).

There are several harmful consequences of legitimizing capitalist practice in this manner.

First the grotesque distortion of capitalist reality, which such Islamic justification projects is ideally suited to serve imperialism’s ideological needs. Capitalism’s claims to be a natural spontaneously evolved (Hayekian) system are fully endorsed. Economic justice is seen to be a function of the operation of competitive markets reflecting rational (utility / profit maximizing) choices of isolated individuals whose behaviour is determined by the “natural” commitment to the profit motive and utility maximization.

This abstracts/extracts capitalist rationality from its vicious, corrupt, unjust and morally debased historical context. Capitalism has not evolved spontaneously in response to the unfolding of natural laws governing human behaviour. Natural law philosophy has been discredited centuries ago. There are no non-physical natural laws governing human behaviour –there are only laws revealed by Allah or laws made by man. Imam Ghazali has conclusively demonstrated this in his chapter on knowledge in the Ihya.

The law of demand and supply is not a “natural law”. Researchers in price history have consistently failed to find evidence for the existence of this law in pre-capitalist times (Agleitta research on seventeenth, century France for example). Market equilibrium is a fiction as mathematical chaos theory has demonstrated. Chaos theorists have shown that in the real world markets do not adjust to create a unique stable equilibrium of price and output configurations. The concept of market clearance and unique stationary market equilibrium has been rejected even by Kenneth Arrow. He has shown that even without external disturbances permanent large patternless oscillations are the norm in competitive markets. Neo classical theory survives today only because it serves the ideological needs of capitalism – the ‘laws’ of supply, demand, equilibrium are the Father, the Son and Holy Ghost of the ontology underlying capitalist economics.

Men are not now – nor have they ever been –naturally profit motivated or utility maximizing. Capitalism deliberately promotes the vices of avarice and covetousness to universalize profit and utility maximizing behavior. To accept such behavior as natural is to misunderstand the epistemological status of economics (and political economy). Economics is not a ‘science’ but the religion of capitalism based on the absurd doctrine of the unlimitedness of wants. Anti capitalist authors, such as Maulana Maududi have developed their critique of capitalism on a rejection of this doctrine. In his Insan Ka Ma’ashe Masala aur uska Islami hal (first published in 1941). Maulana Maududi shows that limiting human wants is necessary for the promotion of the Islamic way of life and of Islamic virtues such as faqr, zuhd, istighna and infaq. Unlike the apologists Maulana Maududi insists that Islam is a fully articulated economic system intrinsically incompatible with capitalism (Maududi 1941 p.17-31, 42-60).

Accepting the doctrine of the unlimitedness of wants is first and foremost an attack on Islamic spirituality – it is natural that Islamic economics originally enjoyed the patronage of the Saudis, who severely constrain spiritual practice. Accepting wants as unlimited is justifying capitalism’s terrible history- its wanton slaughter of fifteen million Red Indians, its revolt against theology, its shocking moral depravity and sexual anarchy, its abuse and neglect of children, women and specially the elderly – as natural. It is to deny the relevance of moral/spiritual evaluation of economic practices. The attempt to Islamise capitalist finance takes a huge step in this direction. It thus paves the way for de spiritualization of economic life and the westernization of commercial culture in Muslim countries.

Secondly, the Islamic finance movement also paves the way for the subordination of the Islamic world to global capital. This is achieved by the legitimization of capitalist property. Islamic finance does not recognize that capitalism, like socialism abolishes private property – socialism does this through the state, capitalism through the financial markets. Legal personhood, limited liability, the separation of ownership from control, determination of values on the basis of speculation, distancing of finance from production, the use of the interest rate as the key refinance price – all these are moments in the circuit of capital which necessitate the abolition of private property and the subordination of all agents – managers, workers, rentiers – to capital itself. The functioning and institutional structuring of capital and money markets ensures that capital accumulation becomes an end in itself-the raison d’etre of all economic activity. Contrary to Maulana Usmani’s assumption, share values do not reflect asset worth (he justifies share transactions on this basis), asset prices are determined by the speculative activity that overwhelmingly determines share values. In practice the company is not a slave (abd ma zum fit tijarah) but a representative of capital, the real master ruthlessly subordinating all economic agents – managers, workers, rentiers – to its will.

Establishing the hegemony of capital is a necessity for capitalism. It is necessary for the universlaization of the vices of avarice and covetousness (takkathur). Islamic finance legitimizes the universalization of these vices by misrepresenting the price formation process in capitalist markets. It does not recognize that removing moral restraint on individual behaviour – legitimizing accumulation – turns competition into an instrument for the promotion of oligopoly. Today prices in virtually all major commodities and factor markets are administered prices – supply and demand are routinely managed and administered by the handful of companies which dominate these markets. Non monopolistic competition exists only in markets, which are as yet untouched by capitalist finance and property. The standard economics text books set out the perfect competitive model as an ideal to which monopolists/oligopolists are supposed to aspire. This is a deliberate, ideological distortion of the historical reality whereby competitive markets once freed of moral restraints become instruments for the domination of capital – the just price can be formed only in a market regulated to ensure the dominance of the will of God and the promotion of the Islamic virtues.

Endorsing capitalist price formation processes and property forms legitimates the incorporation of Muslim business in imperialist corporate structures. The Islamic finance initiatives of Prince Faisal subordinated European based Islamic banks to imperialist finance. Today a merger and acquisition wave is sweeping through the financial and the telecommunication and media (TMT) sectors. Banks such as ABN Amro, Citibank and Standard Chartered are skillfully using Islamic finance techniques to subordinate Gulf finance institutions and to capture a potentially lucrative niche market. Privatization initiatives in this region will also involve the use of Islamic finance instruments. Ulema on the board of multinational banks and firms will serve a useful purpose by legitimizing Muslim business subordination to imperialist finance on Islamic grounds.

Thirdly, subordination is of course not to be limited to the private sector. Legitimizing capitalist finance provides an ideological basis for subordinating Muslim states to America. Cutting back of state expenditure, sale of precious national assets to foreigners at rock bottom prices, dismantling trade policies, opening information floodgates to the imperialist media, all this will be a natural consequence of the Islamic legitimization of subordination to imperialist finance. No wonder the IMF and the World Bank have always been enthusiastic supporters of the Islamic finance movement.

Islamic finance seeks to enlist the support of the Ulema for capitalism. This attempt will not succeed for the Islamic rejection of capitalism is based on moral – not materialist – premises. Accepting the unlimitedness of wants negates the mainstream orthodox stance in Islamic thought and history. Islam – unlike socialism-recognizes capitalism as intrinsically evil. Capitalism is evil because of the goal it sets for itself-universal freedom-not because it fails to achieve this goal.**


* All page references in the text are to this book. All translations from Urdu to English are by the author.
** This Review was first published in Pakistan Business Review.

For the summary of above article go here Summary: Islamic Economics and Capitalism
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M. T. Usmani (1993) Islam Aur Jadeed Maeeshat-o-Tijarat Karachi Dar-ul-Ulum