By: Yusuf Wibisono
Student of Agricultural Engineering Department,
Bogor Agricultural University
(Winner of IDB Silver Jubilee Essay Competition 2000)
The ideals of social welfare and human solidarity, along with the belief in the oneness of God and the Prophetic messages, hold the highest level of cognition in the Quran. The Islamic philosophy and framework of political economy are built around these unique foundations. The principles and instruments so developed around these foundations pervade the Islamic political economy both in its domestic aspects as well as in global perspective. Human solidarity that emanates from the belief of mankind in the one true God, as Islam has inspired, is given a concrete form through the idea of Islamic economic co-operation and integration in diversified world.
The study of development co-operation in Islamic perspective requires the implementation of the normative and positivistic aspects of the Islamic ethico-economic principles to this area. First, the idea of Islamic economic integration must be enforced in the world nation of Islam, known as ummah. It has then to take rational and meaningful shape in terms of institutions and policy-theoretic foundations that can mobilize resources among the Islamic countries. The idea of Islamic economic integration must then subsequently evolve into global ethico-economic model of development and development co-operation. Thus, the human felicity that Islam bestows on mankind is extended to comprehend all of mankind, not just the Muslims and the Islamic nations.
Considerations of the Islamic ethico-economic foundations of socio-economic development, development financing and co-operation, are the principal areas that need to be studied in the context of world development in contemporary times. This evokes deep ethical parameters of development, new forms of institutions and concepts of the world order, and new dimensions in thought and social change. All these need to be studied seriously now, at a time when the world order is undergoing profound changes. The communist social facade is fast crumbling under the inscrutable human demand for greater freedom and social justice. The capitalist economies are fast transforming into welfare states by incorporating conditions of distributive equity as a socialization goal. The world economies are thus fast converting into mixed economies. Within this great transformation process, the moral and material needs of mankind are seeking expression in alternative paradigms and world views.
These phenomena of change in the social and thought processes apply particularly to developing countries, which have been long left out in the economic, catch up drive. The question remains to be examined as to where the fountains of new life and promise lie for these countries under alternative paradigms of thought and socio-economic development. Such questions and their bearing on the ethical and material tempo of development must be taken up at a juncture when United Nation’s today has entered its Fifth Development Decade and as the world launches into the third millenium to rediscover humanity.
Such are the questions and their proposed answers that are covered in this volume from Islamic perspective. The claim and rationale is throughout then made, that the Islamic worldview of change and order provides a unique “weltanschauung”. The universality of this alternative as it applies to all mankind and which can be rationally examined under the microscope of normative and positivistic criteria of investigation, makes the Islamic approach a venue for examination and study. This work makes this Islamic workview a unique one, in contrast to the idea of ethical relativism and cultural pluralism-based theories of socio-economic development, because the source of Islamic development concept are the Quran, the traditions of Prophet Muhammad sunnah, the analogy for deriving rules from these fundamental sources of knowledge through syllogistic deductionism ijtihad and qiyas, which all of these together are cast in the Islamic Laws, shariah.
Development of Islamic Financial Instruments
The history of Islamic economic co-operation and of the development finance institutions has began with established the first modern Islamic bank in a small city of Egypt, Mit Ghamr. Then, the First Islamic Conference of Foreign Ministers decided to establish a General Secretariat of the Organization of Islamic Conference (OIC) in March 1970.
The year 1974 saw the establishment of an Islamic Solidarity Fund at the OIC to promote economic co-operation among the Islamic countries. The establisment of the prime Islamic development finance organization, the Islamic Development Bank, also took place in 1974. The resources of the bank would be made up of subscribed shares of member countries of OIC and the operations of the bank would be guided by shariah in developmental direction. IDB is the first international aid organization that gift loan without interests. Then, established Dubai Islamic Bank, Faisal Islamic Bank, Kuwait Finance House, Jordan Islamic Bank, Qatar Islamic Bank, Bahrain Islamic Bank, Iran Saderat Bank and Indonesian Muamalat Bank. These finance institutions grow and would developed the Islamic countries.
The Islamic Development Bank had adapted a combination of project identification, project financing and trade financing methods to promote socio-economic development potential in its membership. It also uses instruments such as resource mobilization through share capital, secondary market instruments in conformity with shariah. Being a development finance institutions, IDB’s objective criterion can be seen to be equitable distribution and mobilization of a maximum level of resources to its membership utilizing the instruments at its disposal. In the area of project financing the principal instrument are : Loan Financing, Technical Assistance, Equity Participation with mudarabah/musharakah, Line of Equity, Leasing and Line of Leasing, Installment Sale, Profit-Sharing, Foreign Trade Financing, Special Assistance and Capital Market Operations.
On the other hand, apart form economic co-operation under OIC, in several cases, Islamic countries are found to belong to more than one regional economic co-operation arrangement. For example, the Islamic countries merged into interregional or regional organizations. The interregional organization like OPEC, OAPEC, APEC, RCD and TPA. The African regional co-operations are ECOWAS, UDEAC, ENTENTE, NBA, OAU, PTA, CEAO etc., and the Asian regional co-operation like ASEAN, GCC and SAECS/SAARC. The common objectives have been trade liberalization, common tariffs on foreign export, joint-ventures, coordination of monetary policies, particularly in the Franc area African Islamic countries, and long-term plans for industrial development, industrial complementary, agricultural development and water resources development. Many of these regional co-operation arrangements also fall within the United Nations System of economic co-operation integration among developing countries. In fact, each of these countries in different regional economic co-operation in member of OIC and IDB.
Striving for the unity of ummah
The nexus of economic co-operation groupings influencing Islamic countries point to the inevitable common objectives of regional economic co-operation among Islamic countries. This fact is recognized by OIC. It makes the co-operation and integration schemes a globally linked regional co-operation system. Yet it is clear that none of these regional groupings need to abide by the Islamic financing goals of OIC and IDB when transacting as partners in projects not sponsored by the IDB. This obviously results in a loss of efficiency and breeds conflict of objectives and management of project between those sponsored by IDB and those sponsored by regional grouping. The concept of linked regional economic co-operation and integration as the formative edifice of global Islamic economic co-operation and integration is thus thwarted or made ineffective. It has been pointed out that this is indeed what happened when industrial complementary is lost, when the same country belongs both to OIC membership as well as to different grouping. This led to adoption of competing trade policies by OIC/IDB members in order to gain access to Northern markets.
Also, co-operation between IDB with the UNCTAD, the World Bank, the Asian Development Bank, International Monetary Fund and the African Development Bank, make overlap on the co-ordination goal and role of OIC and IDB because conflicting interests are face. For example, if one were to give Islamic communal economic co-operation and integration foremost priority, then one of the external sector policies that must be promoted would be trade liberalization among the Islamic countries in a regionally linked framework. Islamic countries within their regional groupings in Islamic economic co-operation must also levy a common tariff on specific import of tradables from countries outside the Islamic economic union while they liberalize trade between themselves. These prescriptions for the Islamic countries, although necessary for the establishment of Islamic economic co-operation, would obviously be an area of conflict between IDB and other international development organizations. In the area of industrial development, the Islamic approaches based-on profit sharing and equity financing, which are preferred by IDB, will be in conflict with the interest-bearing loan financing approaches of other international development organizations.
The ambiguous membership of Islamic country and un-autonomy of IDB are the key of these problems. To solve the problems, Islamic countries must be firmly united in one development organization. And the IDB could not co-operation with another international capitalistic development organization. Wealth of natural resources and human resources of Islamic countries, insya Allah afford to manage and self-developed on all Islamic countries. Great self confidence and autonomous of Islamic co-operation are the principal capital. Thus, Islamic countries, because of their large number and vast market potential, together with good prospects for economic complementary, can become a self-reliant trading bloc by themselves. This would require a period of import protection from countries outside the Islamic bloc while the latter promotes free trade within itself. Some problem will still be posed due to the lack of investments during the adjustment period of transformation to a full-fledged Islamic economic union. Liquidity will not be suddenly withdrawn from Eurocurrency markets by the capital surplus oil producers as long as proven investments potentials are not there.
Hence, in such an interim period, foreign investment must be invited into Islamic countries. In an Islamic economic union, these investors would be required to operate on the basis of equity participation, interest-free economy, a two-tier tariff system, a zero tariff between the Islamic countries and a nominal tariff on other countries’ imported good. Foreign investors would still have much to gain, as equity participation is usually accompanied with attractive tax rebates. They would also enjoy free access to the large markets of Islamic countries. An equity-based economy can continue in the face of price stabilization, non-deflationary conditions and growth of the private sector. The gradual elimination of interest rates in Islamic economies, their replacement by profit-sharing, the openness of Islamic countries to each others’ trade, and the setting of appropriate exchange rates, are the conditions that would favor a transition to a non-inflationary growth regime. This would generate attractive conditions for foreign investors to locate in Islamic economies.
In view of the goals of distributive equity of an Islamic politico-economic system, IDB would have to undertake many more projects in the social sector, such as, the financing of enterprises for the elimination of poverty and unemployment, self-reliant development for the Islamic countries in trade and industrial development, financing of appropriate institutions for the restructuring of the economic systems in accordance with shariah.
The model of Islamic economic co-operation must be a union system, and global Islamic politico-economic integration must be done. When viewed in this way, IDB would be required to play a key role in formulating the sosio-economic planning of its member countries. While the IDB do exist presently, it is important to see how it can be used most efficaciously for the common weal, unity and integrity of ummah. ***