Iraj Toutounchian ,Ph.D.
Professor of Economics
Islamic Money and Banking
Money and Banking and its Comparison with Capitalism (in
Winner of the award "Best Economic Book of the Year 2002
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.
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.
that have been taken and answered evolve around the following:
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
address above and many other related questions, the book has unintentionally
become a thick one. It is composed of six chapters as follows:
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.
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.
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
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.
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.
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