As part of the Islamization of Knowledge agenda, Islamic economics as a discipline was formally laid down in the First International Conference on Islamic Economics in 1976. The objective was to present the case of Islamic economics (IE) in a language common to financiers, politicians, and economists. Deriving its inspiration from the ideals of Islam, IE studies the interaction of the spiritual and material paradigm, with the ultimate aim of establishing a just and fair socioeconomic system.
The biggest challenge faced by IE has been, and still is, to reconcile the material self-interest with the “etho-religious” or moral self-interest of agents and the welfare of society as a whole, and to replace interest-based financial institutions with interest-free institutions guided by Shariah, Islamic law, and moral standards. The compatibility between Islam and capitalism is studied by Maxime Rodinson in his book Islam and Capitalism (1966). In his work on the textual analysis of Qur’an and other Islamic knowledge sources and the economic history of the Islamic world, Rodinson demonstrates that Muslims never had any trouble reconciling the money-making mechanism under the Islamic framework. In contrast, Bryan S. Turner in Weber and Islam: A Critical Study (1974) argues that, for Max Weber, “it was the patrimonial nature of Muslim political institutions which precluded the emergence of capitalist preconditions, namely rational law, a free labor market, autonomous cities, a money economy and a bourgeois class” (Turner  1998, p. 2). Thus, Turner does not ultimately subscribe to Weber’s view of Islam. While posing a different critique from Rodinson’s, Turner ascribes a combination of Puritanism and orientalism to Weber that skews the latter’s view of the relationship between Islam and capitalistic development. However, the process of reconciliation between IE and other economic systems needs to emerge by implementing just socioeconomic paradigm (Chapra 2003).
IE seeks to devise ways in which economic agents and markets can be directed by moral and social values based on Shariah. Its supporters believe that all economic and business activities should be based on an ethoreligious paradigm, with the sole aim being the welfare of individuals and society as a whole. In many ways, it pursues the same objective as conventional economics, but within religious-based moral codes of Islam.
According to IE, moral codes and principles should regulate economic activities to ensure the elimination of poverty and glaring inequalities in the distribution of wealth and resources. The state should take responsibility for those objectives and utilize Islamic fiscal tools such as zakat (the annual 2.5% voluntary tithe to the needy), taxation, equity, loss-profit, and risk sharing to achieve them. Factors of production should be treated on an equity basis, and no predetermined return on capital is allowed. These are the core features of Islamic economics, and are what make it different from its conventional counterpart.
IE provides the means for the material and spiritual growth and welfare of the human race. It reflects the physical and spiritual aspects of life, holding them in a balance so that they supplement and reinforce each other, and if any clash does occur, moral and ethical values reign supreme. Religiously based moral checks on economic and market activities are set up to ensure the true success of both individuals and society. Activities that are in conflict with Islamic spiritual, social, and moral values are prohibited in Islamic economics.
Both the literature on IE and the number of financial institutions based on Islamic principles have increased rapidly in recent years. Many economics journals are allocating space for Islamic economics and finance, and there are some that are dedicated especially to the publication of articles related to Islamic economics and finance, including the International Journal of Islamic Economics (London), the Journal of Islamic Economics (Jeddah), and the Islamic Development Bank Journal. Islamic economics, especially Islamic banking and finance, is taught at universities around the world, including International Islamic University (Malaysia), International Islamic University (Pakistan), the International Centre for Education in Islamic Finance (Malaysia), the London School of Economics, Harvard University, University of Cairo, Monash University, University of Tehran, and numerous universities in Kuwait, United Arab Emirates, Sudan, Malaysia, Indonesia, and Saudi Arabia. Nevertheless, Islamic economics is still a nascent discipline, and a lot of work is being done to put theoretical, empirical, and applied proofs to its claims.
SEE ALSO Banking; Banking Industry; Development Economics; Ibn Khaldún; Interest Rates; Islam, Shia and Sunni; Muhammad; Orientalism; Weber, Max
Chapra, M. Umer. 2003. Islam and the Economic Challenge. Leicester, U.K.: Islamic Foundation.
Rodinson, Maxime.  1978. Islam and Capitalism. English rev. ed. Austin: University of Texas Press.
Turner, Bryan S.  1998. Weber and Islam: A Critical Study. London: Routledge.
M. Ishaq Bhatti