By: Iraj Toutounchian ,Ph.D.
Professor of Economics
Islamic Money and Banking

Islamic Money and Banking and its Comparison with Capitalism (in Persian)
Winner of the award "Best Economic Book of the Year 2002 in Iran"

This book which, in fact, is the product of my quarter of a century experience in research and teaching is a response to the existing literature on the subject. It is an attempt to clarify, somehow, several vague ideas and concepts I have found in contemporary writings. The book can be classified as a challenge on interest-based banking system and at the same time explores new frontiers towards an interest-free banking.

The approach taken in this book is somewhat different from both traditional and Islamic economic literature. Throughout the book a different perspective is seen to have been taken by the author. Specifically speaking, legal perspective is apparent in every section and sub-section of the book. The author has strongly been inspired by Seyyed Mohammad Bagher Sadre in adopting such perspective in the analytical treatment of the subjects involved.

Specific questions that have been taken and answered evolve around the following:

1- Would it still be possible for money, under zero nominal rate of interest (riba) assumption, to be a private good? Or something else which has long been neglected?
2- How would the conventional functions of money altered under above assumption?
3- Is it possible to integrate money in capital theory? If yes, how? Can legal perspective help us doing this? How?
4- What is the opportunity cost of capital, if any, under above assumptions?
5- How would Islamic Riba-free contracts change the nature of Islamic banks compared with conventional banks? Would they still be fund-intermediary or something else?
6- Do we still have monetary policy tools as effective as they are in conventional banking system under above assumptions? What kind of policies would have to be adhered to? And why?
7- Would we still have money whirlpool as there is in the conventional capitalistic system? Or would it be eliminated and make the equality between saving and investment a reality?
8- Is it possible to have full employment and stable prices under above assumptions given that the necessary condition is being fulfilled?
9- How above assumptions change the exogeniety of money and the bank as they are in the conventional system?
10- How equity taken as the ultimate goal of an Islamic system can be achieved and maintained?
11- How distribution of income ( and wealth) and growth would be affected by operating under the Islamic Riba-free banking system?

To address above and many other related questions, the book has unintentionally become a thick one. It is composed of six chapters as follows:

Chapter one deals with the principles and fundamentals of Islamic and capitalistic systems. In dealing with the subject matter here, the nature of human beings and the place of this world as well as the world hereafter have been used to develop the world view of Muslims as compared to the worldly views of non-Muslims in capitalism. The role of material things around human beings is analyzed and the goals of Muslims and non-Muslims will be taken to shape their behavior in next chapters.

The longest chapter of the book is chapter two whose contents center around the four most important economic concepts. These concepts,i.e. money, interest, capital and profits, are the most confused ones in the literature, as written evidences have been cited by the author, both from the part of Western and Muslim scholars alike. This chapter can be considered the core of the book in that everything else in chapters that follow will be the corollary and the consequences of money which has been demonstrated to have almost all properties of an impure public good, but very few characteristics of private good, as opposed to it being totally considered a private good in the conventional system. This very peculiar finding which makes it a big difference from any other writings is the novelty of my book. It has the power and legitimacy to totally change the whole views surrounding Islamic economics, in general, and Islamic banking, in particular.

Comparative analysis of conventional and Islamic banking systems is the concern of chapter three. In this chapter the role of the conventional system in investment activities is compared with that in an Islamic system. It has been shown that under both conditions of certainty and risk, the conventional banks take the passive role as opposed to Islamic banks which play an important role in investment decision makings. Rate of interest has proven to be unimportant in investment decisions and any futile attempt to intervene in the money market, despite all claims against any type of intervention in market mechanism, through discretionary action will not have any appreciable impact on investment unless there is a hope for higher profits. While changing the profit ratios between the prospective investor and the Islamic bank, without having to intervene in the market, has been demonstrated to be very powerful a device to encourage as well as discourage, whatever the case may be, in investment projects. The implications of this powerful financial, rather than monetary, tool can not be exaggerated. It can easily be used to alleviate the deprived regions of a country with least government involvement.

In order to have a somewhat clear idea how conventional and Islamic banking systems operate, chapter four has been designed to make such a comparison of performance. In so doing, a country is taken with hypothetical data under the two economic systems. It has successfully been demonstrated that inflation and unemployment are the two inevitable consequences of capitalism in which labor is paid its value of marginal product. While in an Islamic system the two inevitable evils of capitalism disappears.
This remarkable conclusion has been arrived at under the assumptions that both, labor, on equity grounds, and the depositors on the basis of Profit & Loss Sharing contracts have the right to share part of the profits enjoyed by firms.

Chapter five is exclusively devoted to the analytical performance of the so-called Riba-Free Banking Operations Act in Iran. I have long been critical to Iranian banking system on the grounds that many deviations have been taking place over the past twenty years of operations. Had we had the chance to properly launch the Act we would not have had unemployment and inflation rates as high as we have been experiencing and quite noticeable inequitable distribution of income and wealth throughout the country. This chapter deals with many circumstances under which these deviations have taken place. The Act, as has been made clear, if can not be defended to be the best of its own kind, it can safely be claimed to be one of the best ever in Muslim countries. I had the opportunity to be directly involved in the initiating committee of drafting this Act and have always impartially supported its outstanding merits. This has been reflected in many papers that I have written on the subject.

The final chapter of the book is chapter six. Having had long experience of teaching Islamic banking to many high-ranking bank officials of Iran, I have learned valuable lessons from them as to the reasons and solutions for the deviations of the Act. Hence, this chapter has been designed to make all possible amendments necessary to avoid any misunderstandings, whatsoever, on the part of the banking staff.