Re-Thinking Economics Part 3

Almayer and Brooks

Let us imagine two city-states, Almayer and Brooks. Almayer’s economy is run on Credit-ism principles while Brooks economy are run on Shariah-based principle. Both have entrepreneurs and merchants that need to be financed. Almayer finance them using interest-bearing loans while Brooks opt for investment via Mudharabah & Musharakah.

Almayer creditors loaned $3000 at 10% interest rate and Brooks investors financed $3000 in return of 1/3 profit share. Assuming that both Almayer & Brooks trader made a profit in their expedition to Calvin as expected, say $900. Then the interest payment will be $300 to Almayer creditors and profit of $300 to Brooks investors.

Numerically, it looks similar as both the creditor and investor gained $300. Both traders now have $600 each in their account.

But this is when everything turns out as expected — normal profit one might say. But how does Almayer and Brooks fare during upsides and downturns?


Now we go for a second round of loan and financing of the same amount of $3000. The difference this time is that the goods sold by both Almayer and Brooks traders are in high demand. Thus they make higher profit of $1200.

Almayer creditors will just gain $300 in interest payment while Brooks investors will gain $400 profit. Almayer trader now have accumulated $1500 while the Brooks trader now have $1400. So what if the Islamic investors gained a bit more during upside? Still not much of a difference and the trader can’t retain maximum profit.

But they are not the same. Usury is not the same as profit. Interest-bearing loan are a different animal as compared to profit-sharing ventures.

Loan contracts alienates people, it squarely assigns people as debtor and creditor. A deal is a deal, whatever happened the debtor must pay the creditor the principal amount plus interest. The creditor doesn’t care what the debtor does as longs as he gets paid on time.

Even more perversely, the creditor stands to gain if the debtor can’t service his debt on time as the interest payment will increase. In short, the contract puts them on opposing sides.

On the other hand, Mudharabah & Musharakah agreements puts the investor and the entrepreneur on the same side. They became one team that have stake on the stewardship of the capital in order to generate profit. It is easy to imagine the investor coaching and passing down wisdom to the entrepreneur in order to protect his investment.

Downturn: Round 1

However, we can see how loan and investment diverged when the market starts to face downturn. This time, both Almayer and Brooks trader only make profit of $600 each as Calvin citizen faces poor harvest.

As the Almayer trader have some other obligations that require him to use the profit first he paid back his loan a bit later. His interest payment goes up to $330 instead of $300. The Almayer creditor just get his money later than usual but gained through higher interest payment.

Meanwhile the Brooks investors just get $200 instead of $300. But the Brooks trader is not under pressure to fork out more either. He can freely use his portion of profit.

The account balance of Almayer and Brooks traders begin to diverge. Almayer trader now only have $1870 ($370 + $1500) while Brooks trader have $2000 ($400 + $1600) to his name. Almayer creditors have anti-fragility at the expense of Almayer trader fragility.

But what happened afterward further illustrates the difference between loan and investment. For the Almayer creditor, it is still business as usual. His principal capital is protected so he lend out the same amount again.

Brooks investor had taken a hit and experienced pain. So they reduced their exposure to the market and invested only $2000 instead of $3000.

Downturn: Round 2

The market goes south a bit more. Both Almayer and Brooks traders barely manage to sell off all their goods. They had to give heavy discounts and end up with loss at the rate of 5%. The Almayer trader lost $150 and the Brooks trader lost $100.

At this point the difference really bites. Almayer trader have to claw earlier profits to pay the creditors. Their account balance is now only $1420 ($1870 — $150 — $300).

Brooks investors took a hit of $23 while the trader lost $67. So now their account balance is $1933 ($2000 — $67). The difference is $513, almost similar to their profit during normal times.

And Multiply All This Systemwide

Of course, this is just two traders with their respective creditor and investor. The same drama and dynamics must have taken place in various permutations several times over in each city.

In Almayer, the losses compounds as the downturn gets worse. More debtors are late in their payments and some started to default. This in turn made the creditors themselves in trouble with their own creditor. They had to fork out money to keep up with interest payment.

The chain reaction doesn’t stop there because even the second-level creditor have their own higher level creditor. Loss quickly snowballed and before long money had dried up from Almayer capital market and the apex creditor went bust. This is despite we didn’t introduce Fractional Reserve Banking system into Almayer economy yet. If not, the losses had been exponential.

Back in Brooks, things are a different. As they had experienced pain earlier, some investors had stopped investing. Those who continue to invest experience losses but it is ditributed justly among the players. The loss also didn’t have second-order effect since the investors capital doesn’t (and can’t ) come from loan. As a result, aggregate capital is still intact in Brooks and they can quickly regain profit once the market went up again.

To the Almayer people, market simply suddenly collapse. The city of Brooks however had been more attuned to the fluctuations and adjusted their exposure accordingly. Thus they perceive gradual decline in profit rather than a sudden one.

Legalizing commercial loan in Almayer did gave them short term boost as more capital are made available. However, taking loans upon loan upon loan had made Almayer financial system tightly coupled. In the short term Brooks have less money but in the long term their loosely coupled system can effectively retain more of that money.

But this is just business, how does Islamic acts of worship made the Brooks investors and traders better economic players?

Re-Thinking Economics Part 2

Of Outlook and Attitude

The difference in definition leads to difference in assumption. This in turn shape the attitude of the players of the system.

Credit-ism believes that everything is quantifiable and can be calculated — both profit and risk. But in Islam profit and risk is in the hand of God. We do the best we humanly can, but it is up to God to determine the outcome.

The difference in attitude is also reflected in regard to the way profit expected to come. Credit-ism demands steady profit but Shariah-based Economic System anticipates ups and downs as God do as He please.

This stark difference can be seen in the way banks demands steady loan installment payment at set interval while Mudharabah and Musharakah ventures distributes profit at the end of each venture.

Muslims believe each and every creature had their share of rizq (sustenance) allocated by Allah. Thus its futile to strive for more through work and trade alone. Western attitude is the opposite of that, believing that human effort can break all barriers.

Modern Mainstream Economic System seeks to squeeze profit from the available resources while Islamic Economic System believe in nurturing prosperity. This can be done through various ways — such as zakat (tithe) , sadaqah (donation), and waqf (perpetual trust).

We can see the difference in approach to farming. Modern farming seeks total eradication of pest but Islam enjoins that birds eating some of the crops are a form of sadaqah.

The way we assume ourselves are remarkably different as well. Modern Mainstream Economic System assumes that humans are rational and can completely manage the market on their own. While in Islam we learn that human by nature are forgetful and require divine quidance.

Humans are are also greedy, when given one valley of gold he will want another valley of gold. Islam acknowledges human nature and constructed to contain (but not completely eradicate) human greed. In contrast, modern mainstream belief put a premium on accumulating wealth.

The accumulation of wealth is also not pun in context to what is sufficient and enough. Work is for work (wealth) sake but in Islam work & wealth is to achieve higher purpose. Wealth and money are simply means to achieve the end and not the end.

More fundamentally, Modern Mainstream Economic System are secular — separated from morality. Shariah-based Economic Systems on the hand are deeply embedded in religious morality. The prophet is a trader/entrepreneur/fund manager and the acts of worships affects the economy.

Bridging the Worlds

Islam should not be diametrically opposed to the ‘West’. True, it is different but Islam is accomodating wisdom from other traditions. Dinar & Dirham comes from Denali (Roman currency) and Drahma (Greek currency) after all. Wisdom belongs to Muslims wherever and whenever they found it.

The one who enlightened me to separate Credit-ism from Capitalism is trader-turned-thinker Nassim Nicholas Taleb. Perhaps it is fitting that he hails from the Levant, one of the most chaotic place in the Muslim world these days.

I’m particularly awestruck by his chief ethical rule;

“Thou shalt not have anti-fragility at the expense of the fragility of others.”

When I see the rule, my mind quickly relate it to Islamic teachings. It fits nicely to the prohibition of usury as practiced by modern banks. You can’t have guaranteed profit at the expense of other people’s risk. Even more unjust, you can’t raise interest rate when the economy turns sour and some of your debtors default.

Nassim Nicholas Taleb also attacks the notion that risk is quantifiable;

“Fragility is quite measurable, risk not so at all”

His triad of Fragile, Robust and Anti-Fragile is instrumental for me to put Islamic Economic System in context of the modern world. Credit-ism is definitely fragile. Shariah-based Economic System is robust and quite possibly anti-fragile as well.

Stressors are information but fragile systems can’t process it well. Credit-ism as practiced by Wall Street and its followers seeks to insulate from this very stressors a.k.a risk. Thus spring forth insurance, re-insurance, credit default swap, derivatives and a lot more exotic financial instruments. Rather than protecting from risk, these instruments simply abstracts the risk. It hides and obfuscates the risk rather than facing it head on.

And facing risk head on is one of the maxims of Shariah-based Economic System — one can’t have profit without risk. Placing it side by side with Nassim Nicholas Taleb’s chief ethical rule, it doesn’t seem that much different after all.

In upcoming part, we’ll simulate the effect of using interest-bearing loan as opposed to profit sharing scheme.

Re-Thinking Economics Part 1

Sure, many people can agree that the current economic and financial system are broken. But what are the alternative? I decided to contemplate on the crossroad of great traditions and future thinking to seek out the answer.

This thesis is a response to the burning issues of income inequality, economic stagnation, market collapse and so on. Current issues in the form of GREXIT, 1MDB fiasco, runaway housing price and the rest are just symptoms of the underlying sickness. To cure it we need to rethink everything about economics, stripping it down to the bare studs.

First off, why does economics need to be so complicated while we engage in it everyday? Why is it so complicated and difficult just to buy a house for one’s family? Why do we have all these fluctuations of interest rate & currency exchange rate? Commerce should be straight forward; we work and we get the money, then we use the money to get what we need.

Muhammad al-Fateh examined the readiness of his people by their willingness to refer sales to their neighbours even though they have the item in stock. This is in contrary with modern business practices that want to gobble up all possible sales. Can you imagine Tesco asks you to buy tomatoes from a local merchant next door?

We all can feel that the current economic system particularly the financial sector is unjust. But what is so unjust about it and more importantly, what is the alternative?

I’m standing on the shoulders of giants before me, piecing together the visions they offered in an attempt to produce a coherent whole. These giants are; Alvin & Heidi Toffler, Benedikt Koehler, Seth Godin, Shaykh Abdal Hakim Murad, Harris Irfan, Peter Thiel, Nassim Nicholas Taleb, Thomas Piketty, Imam Muhammad al-Hassan al-Shaybani, Imam al-Ghazali, Dr. Adi Setia, Hasrizal Abdul Jamil, Ainon Mohd, David Graeber, Tim Harford and many more.

Admittedly, this is a very raw & rough thesis. It is meant to be challenged and refined in collaboration with others both scholars and practitioner, amateurs and professionals alike. I believe the raw-ness is an advantage since it allows me to break through silos of knowledge. I’m a total outsider here so let me ‘interlope’ as I please.

On Defintion and Assumptions

This is the most obvious place to start as definitions shape our understanding and worldview. It also inform our assumption and modern mainstream economic assumption are totally different compared to Islamic economic assumption.


Modern mainstream economics defines it as allocation of scarce resources but in Islam it is tadbir al-manzil — management of household. The objective are also different, one concerning of maximizing profit while the other is of provisioning for the need of one family.


Scarcity is built into the modern mainstream definition but in Islam the belief is that if we are grateful God will add more.

We will see that this difference will have ripple effect on many other definitions and assumptions.


Money have intrinsic value in modern mainstream economic system but only have extrinsic value in Islamic system. It is to equalize difference in trade rather than being the object of trade itself.

Ghazali analayzed the nature of money stating that Allah had created dinar and dirhams ‘so that they may be circulated between hands and act as a fair judge between different commodities and work as a medium to acquire other things’

In fact, it is forbidden to trade money in Islam. That applies even though the money is from valuable metal such as gold and silver. Even more so if it is fiat money.

‘Whoever affects the transactions of money is, in fact, discarding the blessings of Allah, and is committing injustice, because money is created for some other things, not for itself’

The implication is that there is no place for ‘Time Cost of Money’ in Islamic system. Money don’t have inherent value. It also negates ‘opportunity cost’ when you lend the money to someone else instead of using it yourself

‘So the one who has started trading in money itself has made it an objective, contrary to the original wisdom behind its creation, because it is injustice to use money other than what it was created for’

Commercial Loan

In modern mainstream economic system, you give out loan and set interest rate. But in Islam you only have Qardhul Hassan (Benevolent Loan)  — which is interest free . You loan $1000 you get back $1000. The rule are so strict that you can’t even charge management fee in recovering the debt should the debtor pay you late. You can’t make money off money, you must work.

The way to earn from your capital is to invest through Mudharabah & Musharakah ventures. Investor can set the profit-sharing ratio in consultation with the fund manager / entrepreneur but can’t set profit rate.


Max Weber defines it as a particular frame of mind that make someone wants to produce and trade good. Capitalism follow from a special set of attitudes — specifically, a willingness to invest time and effort, with a view to reaping a profit in the long run.

This definition is not in contradiction with Islamic ethics as long as the profit doesn’t come from usury.

God has permitted trading and made usury unlawful. (Quran 2:275)

Invest time and effort, not money alone by itself. Money alone should not bring you profit.

But what we have now is exactly the opposite — we have the non-working rich and working poor. This phenomenon is captured by Thomas Piketty in his book Capital in the 21st Century.

This structural disparity comes from allowing money to beget money seemingly without effort. Furthermore, it is aided by lower tax on income from investment. Arguably, this isn’t Capitalism anymore but Money-ism. Or perhaps in a world dominated by Fractional Reserve Banking System, the term Credit-ism is more apt.

Credit-ism is the real problem, not Capitalism.

Note that I use the phrase Islamic Economic System here instead of Islamic Banking and Finance. My standpoint here is attempting to unearth Shariah-Based Economic System and not ‘Shariah-Compliant Credit-ism’.

As Ghazali had presciently noted about the financier, ‘it becomes easy for him to earn more money on the basis of interest without bothering himself to take pains in real economic activities. This leads to hampering the real interests of humanity because the interest of humanity cannot be safeguarded without real trade skills, industry and construction

Rich & Wealthy

Credit-ism puts a premium on individual wealth — everybody is expected to behave rationally in order to maximize their personal wealth. Pursuit of happiness through wealth is demeed as everyone’s right. To a certain extent, Credit-ism adherents even implies that it’s only your own fault that you remain poor.

Bur Shariah-based economy have a different view. It is the community that must be rich and wealthy, not the individual. In today context, the community is in the form of cities, states & nations.

Community members help each other to generate value and income. Then the wealth is spread around to ensure that everyone had their basic needs fulfilled.

If we examine closely, it’s illogical that everyone could be invididually rich. This is especially true in the context of Credit-ism that assumes resources are limited.The scarcity necessarily implies that some people will be denied access to sufficient resources. Without sufficient resources they are of course by definition are poor.

The benchmark of wealth in Shariah-based economic system is when every community member have their basic need met. Meanwhile, Credit-ism creed promote that individuals must reach the coveted the financial freedom status.


This is the obsession of Credit-ism. Revenue growth, profit growth, customer growth — just name it. Making the same amount of profit as last year is deemed as a failure. It is not even enough to measure the growth yearly, now it even measured quarterly and weekly.

This is just an outgrowth from using credit as money. As the money itself have interest to be paid, then creating more money is a must. How more money could appear? Just take more loan!

Thus the winner in contemporary Credit-ism based world is just simply those who can borrow at a low interest rate and pay it back using other people money; that they borrow at a higher interest reate. It doesn’t matter how you get your hand on other people money — whether it is through business, loan, wager or outright robbery.

Shariah-based economic system focus on qanaah or sufficiency. You just work to fulfill your need and those under your care. If there’s surplus, spread it around.

Classic muamalah textbook illustrates how a merchant decided not to go to market on a particular day because somebody returned the money he lent. That filled his need for that day so he didn’t need to go to the market. Could you imagine Tesco closes early today because it already reached it’s daily target by noon?

It is not growth doesn’t have a place in Shariah-based economic system. Your business do need to reach a certain level of profit to enable it to fulfill your basic needs. You can’t come to the market only once a month selling just one apple to fulfill your need. Even a tree need to grow to a certain level before it can bear fruit and provide shade.

As in the case of human desire, Shariah-based economic system doesn’t seek to deny growth. Growth still have its place albeit with a different quantum and pace.

Muslims readily plant trees which he know that he knows very well that he will not see the tree grow big enough to bear fruit. He readily accepts that his children and grandchildren will get to enjoy it.

Wealthy Muslims throughout the ages gave away their money for education regardless the benefit they can gain. It doesn’t matter whether the research produced can benefit their business. Or whether the graduates will work for them.

Contemporary practice in Credit-ism take it to the other extreme. Not only educational institutions are expressly set up for profit, they even primarily make money from student loan. Thinking deeper, the money created from student loan is just backed by an assumption that the graduates will be able to gain employment in the future.

In effect, it’s like eating the all the seeds now to extract benefit from future fruits that the seed will spring forth.

In the next part we’ll see how these difference of definition leads to divergence in outlook and attitude towards economy.

An Economic Revolution is Coming

One of the main reason why we decided to expedite this Ummatic Innovation initiative is because the economic revolution predicted by Alvin & Heidi Toffler are starting to become real. The impact will be huge and we can’t escape from it. In fact, certain economic sectors are already feeling the heat.


Just to bring dear readers up to speed, the idea of Revolutionary Wealth is quite simple. It categorized economic changes as waves – First wave, second wave and third wave.

  • First Wave : Extract value from the earth – agriculture, mining, fishing, etc
  • Second Wave: Process what had been extracted from the earth to create something of more value. This is what industrialization is all about.
  • Third Wave: Value are created from knowledge, idea, connection and creativity.

To make it clearer, let’s use the district of Sepang in Selangor as an example where all three waves are present.

First Wave


Believe it or not, Sepang folks still plant sugarcanes. They plant it quite literally in the backyard of the ultramodern KLIA and KLIA2 airport. This is straightforward First Wave economy, plant and harvest from the earth.

Second Wave

In the second wave, machines get involved. It can be small machines like the sugarcane juice machine. This allows small entrepreneurs to get more income selling sugarcane juice as a finished product rather than just selling sugarcane as a commodity.







A bit further away in Shah Alam, we can see how bigger machines and factory means bigger output and revenue. Central Sugar Refinery processes sugarcanes to become granulated sugar and distributed worldwide.


Third Wave

Of course, Cyberjaya is the obvious home of third wave economy in this district. But is it really third wave economy? Or is it just Second Wave economy masquerading as Third Wave economy? Early companies based in Cyberjaya are mainly MNCs taking advantage of the various incentives given by the government. Mostly they are outsourcing operations to support the main companies overseas. They don’t really create new values, just allowing greater efficiencies in extracting values from Second Wave economy.


MaGIC building horizontal

MaGIC, MDEC, and the likes are set up by the government to spur the growth of the real Third Wave economy. But so far, not much success yet. At least, not in the way that can replace jobs lost due to the decline of Second Wave economy.

Second Wave economy are starting to unravel. Many factories are closing down in Shah Alam. Malaysia Airlines – arguably the biggest employer in Sepang recently fired thousands of workers and many are still unable to find a replacement job. This is despite the comprehensive training and job placement program. The odds are against them because they assume the Second Wave is still alive while in fact it is dying.

Taxi drivers are the most recent and visible casualties of this revolution. At first, Third Wave companies such as MyTeksi a.k.a GrabTaxi helped them to increase revenue by helping them to get customers. But then GrabTaxi introduced GrabCar services that let anybody with a car be taxi driver without the added cost of license, training, and rent. And all along Uber is already providing similar service, first with premium cars and then with UberX that directly competes with taxi.

The scary thing is, nobody had figured out how to embrace Third Wave economy in a way that dignifies the society. As of now in the world of Tech Startups, only a few companies becomes super-rich while the rest are exploited to feed these giants.

Resorting to laws and policies to stem the decline of Second Wave economy and prevent Third Wave economy is futile. The government failed with taxis and they can’t prevent factories from closing down.

So, what is the way forward? I for one is taking a step back to be re-acquinted with our great Islamic intellectual tradition in search of the meaning of economy. Taking a step back is not to dwell there and be nostalgic about it but to gain momentum to move forward to the future.

Is This Idea Really That Radical?

At first brush, discussing about innovation in ummatic context seems paradoxical. It doesn’t help that the current image of innovators celebrated by the world are potrayed to be iconoclastic individuals. Such image is perceived to be at odds with a way of life that puts a premium on communal ties and brotherhood.

However, it is possible to innovate while maintaining a mindset of putting the community before the individual. Perhaps we are uncomfortable to put out our best self since we are ‘overdosed’ in brotherhood until it induced groupthink.

The world is moving too fast, the changing dynamics of society, politics, technology and economy are even challenging the so-called first world countries. Even they are unsure how to deal with this changing fundamentals.

We can’t wait for them to figure it out, we need to think for ourselves. We need to innovate our society, not innovating Islam. What we are changing is how the wisdom of Islam is being manifested in this world, the core teaching will remain intact.

The perceived radicalism is that sometimes we conflate the customs we practiced as the core part of Islam. But at the same time, we readily accept and follow new customs and way of life created outside Islamic framework. As if we are not confident to use our Islamic heritage as a source of solution to the challnges brought upon by the changing times.

The root word of radical is exactly that, a root. From the latin word radix, which means root. However these days, radical is usually taken to mean being root-less. But it also radical (from Western/post-Modern standpoint) to be deeply rooted in past tradition (ie: Quran, Sunnah, wisdom of elders, etc)


I paraphrased the above passage from a lecture by Shaykh Abdal Hakim Murad. This seemingly innocent wordplay strikes deep to the heart of the matter. What kind of radical idea we have – deeply rooted or completely uprooted? Challenging the ‘West’ or challenging ‘Islam’?

At times, we don’t even know what we are up against. Take capitalism for example, it is used as a convenient catch-all word to describe what’s wrong with the current economic system. But what if the arrival of Islam through Muhammad s.a.w itself means the beginning of capitalism? Does the unjust economic system we currently face is really capitalism?

We’ll let it linger for a while. But for the time being I suggest dear readers to watch this video by Benedikt Koehler deliverng his lecture entitled ‘Early Islam and the Birth of Capitalism’.

p/s: You can also get the transcript here


Statement of Ideas – Ummatic Innovation Initiative

The future of Islam is significantly depending on the qualities of Muslim individuals, communities and organizations. While we concur that Islam is revealed as a complete and perfect teaching for mankind, it depends very much on how Muslim society deals with dynamic, systemic yet radical changes from various dimensions of human affairs. In other word, we will never innovate Islam, yet we need to innovate Muslim society at large.


Moreover, as we gradually leap through the first quarter of the century, the need for Muslim societies that embrace this century multifaceted challenges through innovation appear to be demanding and sought after than ever. Muslim society must bring itself at the center-stage of post globalization era by playing active roles in leading critical areas of human endeavors including education, women empowerment, sustainable development, post digital economy, healthcare, sciences and social entrepreneurship.

Therefore, we would like start this Ummatic Innovation Initiative to spur conversation and discourse in the view of civilizational renewal of innovation leaning Muslim society.

We would like to invite similar minded individuals like you to contribute in any manner possible through series of conversations, writings and projects. Yes, we know this is a gigantic task to be shouldered on us.

Let us start small and start moving the mountain!