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Islamic Economics Beyond Banking and Finance

Prof. Dr. Monzer Kahf
10 September, 2026

Since the rebirth of Islamic economics, writers have been busy talking about Islamic banking and finance, Islamic modes of finance, development models derived from the Western models of the sixties and seventies and, lately, models for corporate finance that copy the American studies in this area.

For such a long time we tried to convince ourselves that the real road to development is through the Islamization of the banking sector.

We were overtaken by making it founded on the double-tier Mudarabah to the extent that we spent a considerable amount of ink and paper, and probably energy too, on the issues of Murabahah and Mudarabah while the real practice of Islamic banks has been drifting toward Tawarruq!

It was a beautiful illusion for which we neglected the main concerns of our societies as well as the core of Islamic economics: the socio-political requisites of economic development. We even neglected the basic institutions of the Islamic economic system.

For apparent reasons, we concentrated our effort on developing Islamic banking, and they grew to an extent that may make them a monster that destroys the purity of the economic thinking of our elite activists.

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Islamic banking and finance also consumed the abilities of the elite Shari`ah specialists as if it was the most important issue of the life of our generation.

I still remember the cry, about two decades ago, of one Islamic economist for the need to discuss issues in the Islamic political economics; it went with very little response!

It was only recently that a few Islamic economists started dealing with issues of development, political economics of the role of government and of the economics of poverty reduction in spite of the lip service to these issues we find in a few generalist writings that are spread over the past five decades of Islamic economics.

Additionally, the institutional setting of the Islamic economic system and the role of the non-profit sectors have just started to be recognized as important fundamentals of Islamic economics.

There is a serious need for re-examining the existing writings on Islamic economics and to see whether it is acceptable to permit the past trend to take its hold on the future of Islamic economics.

Islamic Economics and the Need for Socioeconomic Development

There is a need to shift our focus to studying the economics of poverty in the Ummah and how to recruit the economic rhetoric to become an instrument of change and to develop a new generation of our traditional socio-economic institutions that would help reconstruct the interaction between the human element and the organizational setting in a way that creates an environment of development and growth.

The thinking of Islamic economists must lead the Shari`ah specialists to develop structures and rulings that motivate and regulate such reformed institutions instead of being led by, and restrictively limited to, the boundaries developed by scholars who applied the principles of Shari`ah to their socio-economic atmosphere a thousand years ago!

The richness of our Shari`ah lies in its ability to respond to changing circumstances and “modes of production” on the basis of its overwhelmingly powerful and universal principles and guiding rulings.

Islamic Economics’ Institutions

There are two kinds of institutions in any society:

Institutions that are  inculcated within the souls of women and men that make them pursue a  futurist pattern of behavior construed to create more and more material  welfare for everybody in one’s environment, like the spirit of Omar Bin al  Khattab who had always kept looking for improvements in everything and on  all fronts.

These are the within institutions that make a necessary condition for development. They are similar to the internal screening of Chapra but they are developmental in nature while Chapra talked only about a moral control screen.

The other type of institutions makes the sufficient condition. They are manifested in the external organizational setting that enables the human element to implement its developmental ideas and plans.

These institutions include the rule of law, the right of private ownership and private growth, role of women, the setting of the third sector, the charity, that covers the organization of non-exchange transfers including the role of Zakah and Awqaf.

While the second type of institutions is very important and is normally regulated by law, all of its components have internal reflections.

In the writings on Islamic economics over the last half a century, we have neglected both types of institutions as well as the internal reflection of the latter.

We did not give adequate attention to building developmental mentality and spirit; we did not emphasize the ethics of thrift, perfection and growth of which our religion is the richest of all religions on earth.

Rethinking Riba, Private Ownership, and Women’s Economic Role

We have always thought that what matters is —by an act of law— eliminating Riba and that will do the needed miracle, all of it.

Although we have studied the minute details of the institution of the prohibition of Riba especially from a legalistic point of view, we did not give enough time to studying the institution of private ownership or the economic role of woman in the Muslim society.

We shied away from scientifically criticizing the status quo because we did not want to be thought of as generalists or Islamic activists.

We neglected a major factor of the vicious circle of backwardness, women left behind of development, and even some of us thought of it as an Islamic pride!

Modernizing Zakah and Awqaf for Contemporary Economic Development

The external institutions of Zakah and Awqaf have recently received some of our grace but unfortunately with very little original thinking and a lot of third Hijri century formulation.

We dared not rethink these institutions under contemporary setting.

Instead, we assimilated the traditional Fiqh of these two institutions with little attention to changing circumstances, forms of assets, modes of production and the changing functions and functionaries of money.

The Zakah and Awqaf institutions we think of today are exactly the same that were applied when agriculture was irrigated by “the Saniyah” and a nice person is appointed as a Mutawalli regardless of the invention of the concept of corporation!

Institutional restructuring requires fresh innovative thinking that is only restricted by the necessary uncontroversial implication of the Revealed Truth.

We need to revitalize the functions of the two pillars of the third sector, Awqaf and Zakah, in a way that makes them fulfill in a contemporary system, their envisioned role as they did in a simple economy in the past; and we need to integrate their functions within the overall framework of the Islamic economic system and philosophy.

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Reference: This series is based on a paper published by Dr. Monzer Kahf.