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FOUNDATIONS OF ISLAMIC

BANKING

By :
Edi Susilo
Critical thinking: Islam v. rationalism
Islamic scholarly activity has gone in waves of intellectualism over
four cross-currents and conflicts through history:
The first category belonging to the rationalist tradition belongs to
people who are spiritually damned. Today it is found in the Muslim
mindset based on the rationalist and liberal and neoliberal doctrines
of Occidentalism. In it the Muslim homage to Western tradition
increases as taqlid (blind submission to [Western] authority) (Asad,
1987).
The second category of the Muslim mindset is rare in contemporary
Islamic intellectualism, yet it existed powerfully in cultivating Islamic
intellectual and spiritual contribution to the world (Ghazzali trans.
Karim, undated). To this class belong the high watermarks of the
mujtahid,
The third category of intellectualism mentioned by Ghazzali comprises
the rationalist mendicants of Muslims. They indulged in speculative
philosophy without a worldly meaning of practicality.
The fourth category of intellectualism comprises common members of
the Muslim community called the umma.
The epistemological roots of Muslim
rationalism: the scholastic period.
The rationalism of the Mutazzilah, Ibn Rushd, Ibn Sina and Al-Farabi
The above-mentioned names were among the rationalist Muslim
philosophers who perceived the nature of the world in the light of ideas of
deductive syllogism derived from Greek thought.
Ibn Khaldun (1332AD1406AD) also belonged to the rationalist and
empiricist school (Ibn Khaldun, trans. Rozenthal, 1958). His conceptual
philosophy of history was not premised on a Quranic understanding of
historicism.
Al-Kindi (801AD873AD)
Atiyeh (1985, p. 23) points out that Al-Kindi had no consistent way of
treating the subject matter of revelation and reason. The philosophical
thought of the rationalist scholastics as exemplified by Al-Kindi manifested
a separation of reason from revelation or a tenuous link between the two.
The precept of divine unity was thus simply invoked but not
epistemologically integrated with the Quranic interpretation of the
mattermindspirit interrelationship.
Islamic epistemologists and the
world-system
Imam Ghazzalis social theory (1058AD1111AD).
Ghazzali was by and large a sociopsychologist searching for the source of spiritual solace for the
individual soul.Within this field he thought of society. The spiritual capability of attaining moral eminence
conveyed the real meaning of freedom to him. Such a state of freedom was to rescue the soul from
material limitations of life. Self-actualization was possible in the perfect state of fana, the highest state
of spiritual realization that the individual could attain by coming nearest to God.
Ibn Al-Arabi on divine unity (1165AD1240AD)
Imam Ibn Taimiyyahs social theory (1263AD1328AD)
Ibn Taimiyyahs significant contribution to the field of political economy was his theory of social guidance
and regulation of the market order when this proved to be unjust, unfair and inimical to the sharia.
Imam Shatibis social theory (d. 1388AD)
A similar theory of social contract was expounded by Imam Shatibi, who was a contemporary of Imam
Ibn Taimiyyah. The two developed and applied the dynamic tenets of the sharia to practical social,
economic and institutional issues and problems of the time.
Shah Waliullahs social theory (1703AD1763AD)
Shah Waliullah was a sociologist and a historian. His approach in explaining Islamic social theory took its
roots from the Quran. In his study he saw the need for an independent body of knowledge to study all
the worldly and intricate problems of life and thought. As one of the great scholars of the sharia, Shah
Waliullah combined reason, discourse and extension by ijtihad (rule making by consensus and
epistemological referenceto the Quran and the sunna) in the understanding and application of the
Islamic law.
Malek Ben Nabis social and scientific theory
A significant use of the interdisciplinary approach to Quranic exegesis in developing sharia rules as a
dynamic law was undertaken by Malek Ben Nabi in his phenomenological study of the Quran (Nabi,
trans. Kirkary, 1983).
Contemporary Muslim reaction:
devoid of epistemology
The Islamizing agenda
In recent times, to get out of the human resource development
enigma of Muslims, Ismail Al-Raji Faruqi led the way in the so-called
Islamization of knowledge. Rahman and Faruqi formed opposite
opinions on this project (Rahman, 1958). Al-Faruqi (1982) thought
of the Islamization of knowledge in terms of introducing Western
learning into received Islamic values and vice versa.
Islamization and Islamic banks
In the financial and economic field, Islamic banks have
mushroomed under an Islamization agenda, yet the foundation and
principles of Islamic banks give no comprehensive vision of a
background intellectual mass of ways to transform the prevailing
environment of interest transactions into an interest-free system.
Logical faults of Western thinking:
resource allocation concept and its
Muslim imitation
Islamic economic thinking over the last 70 years or so has remained
subdued. It has produced no truly Quranic worldview to develop
ideas, and thereby to contribute to a new era of social and
economic thinking and experience.
Recently, such growth and marginalist thinking has received
unquestioned support by Muslim economists like Chapra (1993)
and Naqvi (1994). Siddiqui (undated) does not recognize the
fundamental role of interest rates in the macroeconomic savings
function as opposed to the resource mobilization function and,
thereby, the consequential conflicting relationship between the real
and financial sectors.
Islamic economists have come to applying alternative theories of
economic growth is by using an endogenous growth model (Romer,
1986). Yet the neoclassical marginal substitution roots of such a
growth model have been kept intact. Thus the methodology of
circular causation in the light of tawhidi epistemology remained
unknown to contemporary Muslim scholars.
The tawhidi methodology in Islamic
reconstruction
Discourse along lines of tawhidi epistemology and its ontologically
constructed worldsystem needs to prevail in all sectors between
Muslim nations.
Muslim world as a whole and her communities would come to
evaluate the level of social wellbeing determined through the
participatory and complementary process of development in the
light of the sharia.
The evaluation of such a social wellbeing criterion, within the
interactive institutions of economy, markets, society, governments
and the extended Muslim community, gives rise to consensus and
creative evolution. This in turn leads to heightened understanding
and implementation of the circular causation and continuity
framework of the knowledge-centred worldview. In this way, the
worldview of tawhidi unity of knowledge is generated through a
cycle of human resource development and participation a
complex symbiosis (Choudhury, 1998).
Social wellbeing criterion for Islamic
banks
The social wellbeing function as the objective criterion of Islamic
banks serving the sharia tenets of social security, protection of
individual rights and progeny, and preservation of the Islamic State,
ought to become a description of ways and means of stimulating
resource mobilization that establishes sustainability and the high
ideals of the Islamic faith.
The model implementing the principle of tawhid in the
socioeconomic, financial and institutional order involves organizing
the modes of resource mobilization, production and financing these
in ways that bring about complementary linkages between these
and other sharia-determined possibilities.
Islamic banks ought to form a part and parcel interconnecting
medium of a lively developmental organism of the umma.
The significance of Islamic law
There are strict rules applying to finance under Islamic law,
and it is to these that we now turn. In order to conform to
Islamic rules and norms, five religious features, which are
well documented in the literature, must be followed in
investment behaviour (Lewis and Algaoud, 2001):
riba is prohibited in all transactions;
business and investment are undertaken on the basis of halal
(legal, permitted) activities;
maysir (gambling) is prohibited and transactions should be free
from gharar (speculation or unreasonable uncertainty);
zakat is to be paid by the bank to benefit society;
all activities should be in line with Islamic principles, with a
special sharia board to supervise and advise the bank on the
propriety of transactions.

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