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Humanomics Towards an integrative framework for understanding Muslim consumption behaviour Salman Ahmed Shaikh, Mohd Adib Ismail, Abdul Ghafar Ismail, Shahida Shahimi, Muhammad Hakimi Mohd. Shafiai,

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Towards an integrative framework for understanding Muslim consumption behaviour Salman Ahmed Shaikh

Muslim consumption behaviour

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Department of Economics, Universiti Kebangsaan Malaysia, Bangi, Malaysia

Mohd Adib Ismail Downloaded by Universiti Kebangsaan Malaysia At 00:07 07 June 2017 (PT)

School of Economics, Universiti Kebangsaan Malaysia, Bangi, Malaysia

Abdul Ghafar Ismail Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia

Shahida Shahimi Department of Economics and Management, Universiti Kebangsaan Malaysia, Bangi, Malaysia, and

Muhammad Hakimi Mohd. Shafiai Research Center for Islamic Economics and Finance, Universiti Kebangsaan Malaysia, Selangor, Malaysia

Abstract Purpose – This paper aims to integrate Islamic and mainstream economics framework towards a more realistic understanding of Muslim consumption behaviour. Design/methodology/approach – The model incorporates some of the Islamic institutions like period-wise deduction of Zakat from endowments. It also includes bequests which could be significant given the Islamic injunctions on inheritance distribution and the significance placed on the institution of family. Furthermore, the model integrates the assumption that consumption opportunity set will axiomatically filter out the prohibited consumption goods from the consumption set in both contemporaneous and inter-temporal consumption. Findings – Zakat ensures contemporaneous redistribution from endowment surplus households (those having Zakatable endowments above Nisab) to endowment-deficient households (those having Zakatable endowments below Nisab). The lifetime resources are scaled down for endowment surplus households because of the payment of Zakat in both periods and leaving bequests in old-age period, while the lifetime resources are scaled up for endowment deficient households because of the receipt of Zakat in both periods and receiving the bequests in youth. Originality/value – The authors show how some of the Islamic principles and institutions can be integrated in the mainstream economics framework, especially in research studies where the objective is to understand and describe reality rather than persuasion and idealization. Keywords Consumption, Zakat, Bequests, Overlapping generations model, Savings Paper type Research paper

1. Introduction Understanding consumer behaviour is one of the most intriguing and important part of economic theory. Inter-temporal consumption decisions determine savings, which is one of the most important drivers of economic growth. Aggregate consumption and investment

Humanomics Vol. 33 No. 2, 2017 pp. 133-149 © Emerald Publishing Limited 0828-8666 DOI 10.1108/H-01-2017-0005

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makes up three-fourth of the aggregate expenditure in most countries (Romer, 2012). Hence, fluctuations in aggregate consumption affect aggregate expenditure and trigger business cycles. Effectiveness of macroeconomic policy also hinges crucially upon understanding consumer behaviour. On the other hand, we know that Islam has its own distinct worldview. The theistic concepts of Tawheed, Khilafah and Akhirah govern the Islamic way of life. The concept of Tawheed implies that all living and non-living things are created by Allah. The concept of Khilafah engenders stewardship for the responsible use of resources. The concept of Akhirah inculcates a comprehensive sense of accountability before Allah for the moral content in economic and non-economic choices in life. The moral institutions in the Islamic framework also govern human-to-human socio-economic relations and interactions in life. We discuss these moral institutions and principles in detail in Section 2. A question naturally arises: Are the Islamic worldview and moral institutions compatible with mainstream methodological framework of economics. If the answer is in affirmative to some extent, then the natural question is in what research areas and to what extent. We discuss the points of distinction and compatibility between the Islamic and mainstream economics framework in Section 3. Section 4 discusses what shall be the response and attitude towards mainstream economics methodology in developing an integrative theoretical framework for understanding Muslim consumption behaviour. Finally, in Section 5, we attempt to use Zakat augmented overlapping generations (ZA-OLG) model to present an example of an integrative theoretical framework for understanding Muslim consumption behaviour. 2. Islamic texts on consumption and spending In this section, we look at some of the descriptive and prescriptive teachings of Quran and Sunnah (ways of Prophet Muhammad [pbuh]) on consumption and spending behaviour. Quran and Sunnah together constitute the fundamental sources of the religion of Islam. First, we take a look at the descriptive postulates about human nature in Islamic texts. Then, we give an account of prescriptions in Islamic texts regarding consumer behaviour in the realm of seeking endowments and spending these endowments on self-consumption and charitable spending. 2.1 Descriptive postulates about human nature Quran gives some descriptive statements about human nature which can help in understanding human behaviour in general as well as economic choices in particular. These descriptions could form the positive postulates in analyzing a Muslim’s consumption behaviour. Quran mentions that humans are generally hasty (Al-Isra: 11), miserly (Al-Isra: 100), impatient (Al-Maarij: 19) and have love of wealth (Al-Aadiyat: 8). Thus, humans have impatience, positive time preference, tendency to economize on expending and desire for material resources. Islamic texts recognize consumption externalities and desire to consume positional goods and indulging in conspicuous consumption (Al-Takaathur: 1-2). According to Islamic texts, human instinct prefers goods which serve survival needs as well as other wants which serve non-survival needs (Aal-Imran: 14). The story of Jews asking Moses (pbuh) for variety of food (Al-Baqarah: 61) also hints at the desire for variety in consumption bundles and what we call as diminishing marginal utility in mainstream consumer theory. In a Hadith, Prophet Muhammad (pbuh) said: “If Adam’s son had a valley full of gold, he would like to have two valleys, for nothing fills his mouth except dust (of the grave) […]”[1]. This also hints at the instinctive desire of humans for non-satiated preferences. Prophet Muhammad (pbuh) said: “The heart of an old man remains young with regards to two things:


Love of life and wealth”[2]. However, in the following sub-sections, we shall see how Islamic teachings prescribe guidelines for moderating these instincts and inculcating empathy in conduct and behaviour. 2.2 Moral filtering on seeking endowments In this sub-section, we discuss how the Islamic teachings govern the pursuit of earning incomes. The Islamic teachings encourage striving for Halal means of earning as long as impermissible means and ways of earning are avoided, such as interest (Al-Baqarah: 276), bribery (Al-Baqarah: 188), fraud (Al-Mutaffifeen: 1-4), gambling (Al-Maida: 90), theft (Al-Maida: 38), business of intoxicants (Al-Maida: 90) and prostitution (Al-Nur: 19). If we look at the rationale of these injunctions, we can appreciate that bribery, fraud and theft can undermine social and governance infrastructure, leading to loss of confidence in contract enforcement, and thereby, these factors can have negative socio-economic implications. Gambling-based contracts and trading methods can bring unnecessary speculation, and thereby, they may increase systematic risk in the financial markets as shown in the negative effects of contingent financial derivates in the global financial crisis of 2007-2010. Furthermore, the business of prostitution undermines the very basis of human dignity. Intoxicants also undermine the rational faculties which humans have. Bertrand Russell regarded drunkenness as temporary suicide. Active moral conscience checks immoral behaviour, else drunkenness increases the risk of reckless behaviour. In general, barring the above exceptions, Quran allows mutually beneficial and consensual exchange (Al-Nisa: 29). As per Islamic texts, endowments bestowed by Allah are to be used for material goods as well as for societal causes to earn Falah (well-being in both worlds). Islam discourages idleness, dependency and unnecessary exit from labour force. Prophet Muhammad (pbuh) said: For one of you to go out early to gather firewood and carry it on his back so that he can give charity from it and be free of need from the people, is better for him than to ask a man who may give that to him or refuse. Indeed, the upper hand (giving) is more virtuous than the lower hand (receiving), and begin with (those who are) your dependants[3].

In another Hadith, Prophet Muhammad (pbuh) explained: “The upper hand is better than the lower hand, and the upper hand is the one that spends, and the lower hand is the one that asks”[4]. Prophet Muhammad (pbuh) said that begging is not lawful for the rich and physically fit except for the one who is severely poor or in perilous debt[5]. 2.3 Divine will on endowment inequality According to Islamic teachings, this worldly life is a trial for humans in which they are being tested for their thankfulness and obedience to Allah (Al-Mulk: 2). In this test nature of life, Allah has given unequal endowments to humans so that they employ each other (Al-Isra: 30; Al-Ankabut: 62; Saba: 39; Ash-Shura: 12; and Az-Zukhruf: 32). The divine will on endowment inequality is also a means to test their thankfulness and patience. Allah in Quran says that had it not been a very difficult trial for the believers, Allah will have made every house of the non-believer with gold and silver (Az-Zukhruf: 33-34). Thus, Quran asks Muslims: And strain not your eyes in longing for the things We have given for enjoyment to various groups of them, the splendour of the life of this world that We may test them thereby. But the provision (good reward in the Hereafter) of your Lord is better and more lasting (Taha: 131).


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Nevertheless, Islam does not approve extractive institutions such as Riba (usury) and public policies which result in concentration of wealth. Islam accords due importance to redistribution and reducing concentration of wealth in few hands (Al-Hashr: 7). 2.4 Moral filtering on consumption set In Sub-section 2.2, we looked at how the Islamic principles govern activities related to earning livelihood. Now, we discuss what checks Islamic texts prescribe for consumption behaviour of Muslims. Islamic teachings make a distinction between permissible and impermissible goods. Quran says, “[…] Eat of that which is lawful and good on the earth […]” (Al-Baqarah: 168). Thus, impermissible goods are axiomatically excluded from the consumption bundle. Consumption opportunity set will axiomatically filter out the prohibited consumption goods from the consumption set in both contemporaneous and inter-temporal consumption. Thus, the ordinal preferences do not apply on the axiomatically excluded non-Halal goods and services. For instance, Islam forbids intoxicants (Al-Baqarah: 219), meat of dead animals and blood and flesh of swine (Al-Baqarah: 173). In financial services, Islam forbids interest (Al-Baqarah: 276) and gambling (Al-Maida: 90), for instance. On some occasions, even the lawful goods become impermissible, such as during the time of fasting (Al-Baqarah: 183). Fasting in Islam is prescribed for Muslims to make them become God-fearing by restraining their desires and achieving moral consciousness. Nevertheless, Islam does not approve monasticism (Al-Hadid: 27). In Islamic jurisprudence, we also come across hierarchy of needs. Imam Al-Shatibi has categorized human needs into three groups: Dharuriyah (necessities); Hajiyah (conveniences); and Tahsiniyah (refinements). Quoquab et al. (2015) explains that in the hierarchical structure of needs given by Al-Shatibi, necessities include such activities and things that are essential to protect Imaan (faith), Nafs (life), Maal (wealth), Aqal (intellect) and Nasl (progeny). Thus, Islam recognizes physiological as well as aesthetic needs, but requires moderation in consumption which we discuss in the next sub-section. 2.5 Moderation in consumption Instead of being miser and spendthrift, Islam wants Muslims to have moderation in their consumption, both with respect to contemporaneous consumption as well as inter-temporal consumption. Allah in Quran says: “And let not your hand be tied (like a miser) to your neck, nor stretch it forth to its utmost reach (like a spendthrift), so that you become blameworthy and in severe poverty” (Al-Isra: 29). In another verse, Quran says: “And those, who, when they spend, are neither extravagant nor niggardly, but hold a medium (way) between those (extremes)”. (Al-Furqan: 67). In a Hadith, Prophet Muhammad (pbuh) said: “Spend according to your means; and do not hoard, for Allah will withhold from you”[6]. Islam expects Muslims to avoid being spendthrift and extravagant. Allah in Quran says: “[…] Waste not by extravagance. Verily, He likes not those who waste” (Al-Anam: 141). In another verse, Allah in Quran says: “[…] Spend not wastefully (your wealth) in the manner of a spendthrift” (Al-Isra: 26). 2.6 Avoiding envy, pride, egoism and boastfulness Islamic principles recognize consumption externalities and counter them by explicitly cautioning against envy, egoism and pride. Instead of consuming positional goods and indulging in conspicuous consumption, Islam wants Muslims to observe humbleness and shun pride (Al-Isra: 37; Luqman 18). Quran says that Allah does not like prideful boasters (Al-Hadid: 23). Islam also does not approve envious behaviour. Quran says: “The desire for piling up of worldly things diverts you until you reach the graves” (Al-Takaathur: 1-2). Instead, Quran


prescribes: “[…] Do not covet the bounties which God has bestowed more abundantly on some of you than others […]” (Al-Nisa: 32). Prophet Muhammad (pbuh) said: “Envy consumes good deeds just as fire consumes wood, and charity extinguishes bad deeds just as water extinguishes fire”[7]. Prophet Muhammad (pbuh) educated Muslims to be like none except the one who is given the knowledge of Quran and the one who spends in charity[8]. Prophet Muhammad (pbuh) advised: “Look at the one who is at a lower level than you, and do not look at the one who is above you, for that may keep you from scorning the blessings of Allah”[9]. Quran educates Muslims that wealth will not last forever (Al-Humazah: 1-3). Wealth and children are only a trial (Al-Taghabun: 15). The temporary nature of this worldly life and material dispensation is eloquently summed up by Quran as follows: Know that the life of this world is only play and amusement, pomp and mutual boasting among you, and rivalry in respect of wealth and children, as the likeness of vegetation after rain, thereof the growth is pleasing to the tiller; afterwards it dries up and you see it turning yellow; then it becomes straw […] (Al-Hadid: 20).

In one hadith, Prophet Muhammad (pbuh) said: “Richness is not in having many possessions, but richness is being content with oneself”[10]. 2.7 Encouragement towards pure altruism Islam does not recognize impure altruism to satisfy ego and to achieve fame and recognition (Al-Baqarah: 264; Al-Maoon: 6). Prophet Muhammad (pbuh) advised anonymity and secrecy in charitable giving such that the right hand does not know what the left hand is giving[11]. Allah says of the ideal believers in Quran: And they give food, in spite of their love for it to Miskin (poor), the orphan, and the captive. (Saying): “We feed you seeking Allah’s countenance only. We wish for no reward, nor thanks from you”. (Al-Insaan: 8-9).

Quran urges believers to spend what they love to achieve righteousness (Aal-Imran: 92), spend throughout their lives (Al-Munafiqun: 10) and the ideal is to spend whatever is beyond their needs (Al-Baqarah: 219). Quran urges Muslims to show kindness, generosity and benevolence to their fellow human beings. Allah says in Quran: “[…] Do good to parents, kinsfolk, orphans, Al-Masakin (the poor), the neighbour who is near of kin, the neighbour who is a stranger, the companion by your side and the wayfarer (you meet) […]” (Al-Nisa: 36). Quran says in another place: “So give to the kindred his due, and to Al-Miskin (the poor) and to the wayfarer […]” (Ar-Rum: 38). Feeding orphans and poor is regarded as highly virtuous act (Al-Balad: 12-16) in Quran. Quran exhorts Muslims to look after orphans and treat them with kindness and generosity (Al-Fajr: 17-20), work honestly in their property (Al-Baqarah: 220) and avoid oppressive treatment (Al-Dhuha: 9) as well as refrain from harsh behaviour (Al-Maoon: 2). Quran strictly prohibits usurping the endowments of orphans (Al-Nisa: 2). Prophet Muhammad (pbuh) declared that the best charity is to spend (in charity) while you are healthy, aspiring, hoping to survive and fearing poverty, and not delaying until death comes to you”[12]. Allah wants the believers to avoid miserliness (Al-Nisa: 37). Instead of enjoining miserliness, Islam urges Muslims to help one another in good acts and endeavours (Al-Maida: 2). As Islam only accepts pure altruism, it promises numerous incentives for it in its two-worldly view of life. Several verses in Quran promise due reward for pure altruism (Al-Tauba: 121; Fatir: 29; Al-Hadid: 7). In several other verses, spending in charitable ways for the sake of Allah is compared to a good loan which Allah will repay with manifold


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increase (Al-Hadid: 11; Al-Hadid 18; Al-Taghabun: 17; Al-Muzammil: 20). In several Ahadith also, Muslims are encouraged to spend so that Allah also spends on them with His blessings[13]. 2.8 Leaving familial and philanthropic bequests Islam regards spending on one’s dependents as charity if done with the intention to please Allah[14]. Prophet Muhammad (pbuh) said that the greatest reward for what you spend is on your spending on family[15]. Islamic principles are not averse to financial planning, precautionary savings and leaving enough wealth for the dependent family members. Prophet Muhammad (pbuh) said: “It is better for you to leave your inheritors wealthy than to leave them poor begging others […]”[16]. In another Hadith, Prophet Muhammad (pbuh) said: “As for one who is the guardian of an orphan who has wealth, then let him do business with it and not leave it until it becomes consumed by charity”[17]. On the other hand, Prophet Muhammad (pbuh) also allowed philanthropic bequests[18], but instructed that these bequests shall not exceed one-third of wealth[19]. 3. Distinction and compatibility between Islamic and mainstream framework Based on the discussion in Section 2, we now highlight the points of distinction and compatibility between the Islamic and mainstream economics framework in this section. The distinction comes in the decision horizon and the addition of moral filters on the choice set. The difference also appears explicit when we look at the encouragement and incentive structure for pure altruism in a two-worldly Islamic framework. The distinction is even deeper in values whereby the Islamic framework encourages contentment, pure altruism and self-less behaviour while, the mainstream economics framework is at best neutral between moral content of economic choices. This reflects in policy implications; whereby, in mainstream economics framework, policy intervention is either suggested to be avoided with the belief in Pareto-efficient outcome of competitive markets or even when the intervention is tolerated, it is required to follow the principle of Pareto-improvement. Though the practical public policy bypasses these theoretical policy implications and does favour excise tax on luxuries, subsidies on essential consumption goods and provision of public goods, which are funded from progressive taxation. On the other hand, Islamic framework does not need to resort to ad hoc policy interventions. In the Islamic framework, enacting policies to promote Maslaha (social interest) and remove Mafsadah (social harm) govern the policy framework. Islamic jurisprudence suggests that in the presence of two evils, the one whose injury is greater is avoided by the commission of the lesser. Furthermore, severe injury can be removed by lesser injury. Table I gives a summary of distinctive features in both frameworks. 4. Choice of methodological framework There is considerable debate in Islamic economics literature on what shall be the correct response and attitude towards mainstream economics methodology. There are three varied responses among Islamic economists regarding the issue. First response is to use methodology of mainstream economics in Islamic economics as is. The second response is to modify it according to the needs and context of Islamic framework. The third response is to discard it altogether and devise a new methodological framework from scratch. Haneef and Furqani (2011) raise a pertinent point that the choice of methodology shall depend on whether the purpose of analysis is to understand, explain and predict or to persuade and transform the individuals. Addas (2008) argues that Muslim economists who favour discarding neoclassical economics methodology altogether had by and large misunderstood the purpose of economic


Mainstream economics framework

Islamic framework

The economic objective of a consumer endowed with some positive, but finite resources is to gain maximum satisfaction Decision horizon is confined to this life No cultural and institutional constraints beyond law of the land Consumption set in every period is unrestricted

Ultimate lifetime objective is to achieve falah in both worlds and please Allah and this govern all human choices and actions Decision horizon incorporates two-worldly view of life Besides the law of the land, the preferences are shaped and influenced by moral imperatives Moral filter on consumption choice set. Thus, some missing markets Endowments can be obtained by providing labour in permissible occupations Can use only Shari’ah-compliant investments to earn return on savings Can use only Shari’ah-compliant finance to obtain specific durable goods Encouragement for pure altruistic behaviour Old people cannot leave bequests which are more than one-third of their wealth Promoting Maslaha (social interest) and removing Mafsadah (social harm) govern policy

Endowments can be obtained by providing labour for any gainful employment Can use all means of investments to earn return on savings Can use interest based borrowings to increase/ maintain consumption Non-Satiation with respect to material goods Old people can dis-save all wealth by selfconsumption or leave bequests Policy intervention has to result in Pareto improvement in theory. Generally, practice uses ad-hoc intervention

theorizing. According to Addas (2008), the purpose of economic theorizing is to provide a framework as a foundation for understanding demand and supply behaviour in markets. Thus, the mainstream consumer theory does not attempt to define the purpose of life in its objective function, but a framework to explain response in choice variables because of changes in some relatively more important and measurable parameters. Thus, it will be inappropriate to compare the economic objective defined for the purpose of description of specific choices and outcomes in markets with the lifetime objective advocated by religious worldview. Siddiqui (2012) explains it further by arguing that demand and supply framework has remained a useful tool in guiding different sectors of the economy and economists. According to Siddiqui (2012), there is no alternative apparatus that provides a better explanation of exchange values in market economies. The difference of opinion is also partly caused by the varied understanding on self-interest and selfishness, i.e. whether all self-interested behaviour is similar to selfish behaviour or not. Hasan (2002) thinks that the pursuit of self-interest should not be equated with selfishness. According to Hasan (2002), self-interest can be pursued along with sympathy and benevolence. Hasan (2009) contends that self-interest can be pursued within the ambit of morality, whereas selfishness would always violate it. Siddiqui (2012) also shares this line of thought and maintains that self-interest does not necessarily imply greediness or selfishness. Hasan (1985) contends that a rational consumer allocates income among various uses in such a way that his satisfaction is maximized. These uses may serve materialistic or ethical desires. In another work, Hasan (2002) contends that maximization, per se, is not un-Islamic; what is maximized, how and for what purpose are the real issues to investigate. He prefers to include moral values and social considerations of Islam in the assumptions of economic theorems, rather than in the objective elements of the model. Hasan (2002) thinks that maximization as a notion is value neutral and the indiscrete condemnation of maximizing behaviour in Islamic economics is untenable. One of the pioneer Islamic economists, Kahf (2011) writing on this theme gives following suggestion:


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Table I. Distinction in consumption framework

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There are small matters which are common to all members of the human race regardless of their faith and views. These common matters must be treated as value-neutral. Consequently, many of the minute instruments and premises of analysis fall in the latter category and should be considered value neutral for all practical analyses.

Siddiqui (2012) thinks that rejection of old knowledge has no basis in Quran and Sunnah. Khan (1984) also argues that Islamic economics cannot discard the valuable insights of modern economics by a simple stroke of disgust. Khan (1984) maintains that some of the findings of Western economics is based on the study of human nature, which maybe the same everywhere and for all times. Zaman (2012) who is a staunch critic of neoclassical economics both for its lack of moral content in the analytical framework and for its descriptive deficiencies also concedes at one place: If we look at the actual Muslim behaviour in Islamic countries, we will find that it corresponds far better with the theories of economic texts and not much (if at all) with the Qur’anic ideals.

Siddiqui (2014) writes in his critical evaluation of Islamic economics literature thus far that there was a clear tendency to overestimate the power of good intentions and to ignore the tenacity of material interests. Siddiqui (2014) concludes that the end result has been unrealistic utopias. Khan (1987) thinks that the idealism of Muslim economists has also done some harm to the scope of Islamic economics. Khan (1987) laments that because the analysis is perceived in ideal Islamic conditions, most of the real world problems are simply assumed away. Shafey (1983) thinks that Islamic economics in its primary concern with “what ought to be” cannot ignore “what is” the actual reality in a given time and place. One of the pioneer Islamic economists and IDB Laureate Siddiqui (2008) is frustrated with self-imposed alienation in academic research on Islamic economics. Siddiqui (2008) writes: Our fixation with a particular history not only alienates us from current reality, it also isolates us from the rest of humanity. It reinforces Muslims’ sense of being different from others to undue proportions, making frank, sincere outreaching and interaction almost impossible. The normal process of learning from others’ experiences and contributions is replaced by, at the least, indifference and apathy, and often by suspicion and hostility. No wonder we get the same in response.

Khan (2013) is another staunch critic of mainstream economics and favours discarding mainstream methodology to replace it with a biological approach of harmonious interrelationships of different parts of the whole. His approach is another way to explain the ideation rather than the real world behaviour where one cannot ignore the encounter with frictions, disequilibrium, traps and transition paths. Khan (2013) argues that the mainstream economics tools are valid for analyzing animalistic desires and degrade humans to lower order animals. Yousri (2013) in his response to Khan (2013) asks why or how satisfaction (or even maximization of human beings supposedly in Halal manner (within Shari’ah boundaries) would downgrade humans to lower order animals? Other Islamic economists like Khan (1987) suggest that Islamic economics should not set aside the Western economic thought which accumulated over centuries. Instead, with a modesty of a learner, we should cast a critical look on this pool of knowledge and should try to identify and isolate those components of thought which do not conflict either with the hard core of Islamic economics or with the rational and empirical criteria. He thinks that it would be arrogance of the first order if we dismiss the entire economic thought as un-Islamic. Pioneer Islamic economists like Kahf (2003) thinks that Islamic economists may have to redefine a few fundamental concepts of economic theory, but they do not need to negate its inductive methodology and tools of analysis on any ideological ground. Zarqa


(2003) also explains that Islamic economics has a function distinguishable from that of Fiqh. It has a function to describe and diagnose real events, discover the relationships that link the various economic phenomena and to seek discovering the economic rationale of Shari’ah rules. Zarqa (2003) does not hesitate to hold in error those who define Islamic economics in such a manner as to strip it from its descriptive content and make it synonymous to jurisprudence of transactions. Saleem (2010) explains that the methodologies of Fiqh and Islamic economics also differ, as the former focuses on prescriptions. It prescribes what an individual should do or avoid. In contrast, Islamic economics is more concerned with describing economic phenomena. Islamic economics in its search for finding the truth should rely on a methodology that suits its social and descriptive nature. Islamic economics can adopt methods of reasoning and analysis developed by conventional economics. Khan (2014) in his recent work suggests that Islamic economics should not feel shy of adopting and using tools of analysis used by conventional economics or other contemporary social sciences. These tools are available in the present form after centuries of thinking and experimentation and are a common heritage of the humanity. Various Islamic economists recommend descriptive studies in the transitory stage of transformation rather than sitting content with only repeating the idealistic vision of Islamic teachings. Furqani (2015) argues that both microeconomics and macroeconomics become neglected and not properly explored, as more resources, thinking and funding have been mainly put in the sector of Islamic banking and finance. Arif (1985) suggests that the human behaviour should be duly recognized as the basis of the microfoundations of Islamic economic system. Siddiqui (2008) thinks it will do no harm to know the current state of affairs thoroughly. That needs to be done with regards to individual behaviour in all aspects relevant to economics. Addas (2008) also sees no reason why Islamic economics should concentrate on normative goals to the exclusion of how the economy is in fact working. Addas (2008) contends that the failure to understand this has often led Islamic economists into rhetoric and a self-righteous mode. Azid (2010) thinks that Islamic economics system is not centrally planned, and hence, it is very strongly affected by the behaviour of its individual economic units. Siddiqui (2014) holds it valuable if Islamic economists could explore the extent to which Muslims in various regions of the world are able to realize the Islamic economic goals. He thinks that even the instances of poor performance would have lessons to learn from. Jafari and Suredem (2011) agree that due attention shall be given to Muslims’ daily life practices in academic research. Finally, Hasan (2002) also wishes that an exploration of the life-cycle hypothesis or permanent income hypothesis for consumer behaviour from an Islamic viewpoint may prove to be rewarding. What could we conclude from the above discussion? We do not wish to give a verdict. The response shall depend on what we want to do? As argued by Haneef and Furqani (2011), the objective of analysis is vital to know and determine beforehand. In Table II, we discuss whether both the frameworks have any compatibility if the objective of analysis is to understand the consumption behaviour. The above discussion suggests that the mainstream economics framework can incorporate some of the distinctive characteristics of Islamic framework if the objective is to be able to understand and describe economic choices and outcomes. The concept of ordinal utility is a device to rank choices. The binary moral filter can help in deriving a restricted consumer choice set in which the ordinal preferences can be formed based on individual preferences. However, it shall be recognized that expenditure can be on self-consumption as well as on consumption of others including one’s dependents, family, neighbours, social


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Mainstream economics framework

Islamic framework

Desirability for consumption smoothing

Encouragement for Wasatiyyah (moderation), which in one sense also consistent with smooth consumption Can plan, save and leave bequests. Can also save for some religious acts: Hajj, Umrah, animal sacrifice and liquid savings to pay Zakat by avoiding asset drawdown Desire for aesthetic tastes, variety and spending on comforts recognized Instinct of substitution effect recognized. Total effect may still be altered by income effect Instinct of desiring immediacy recognized in intertemporal choice and exchange Preservation of wealth recognized after payment of Zakah and by using Shari’ah compliant investment options Besides essential needs, consumption of Halal comfort and convenience goods is recognized

People plan and save for contingencies, postretirement life and to leave bequests. Neutral towards the end-objective of saving


Desirability for variety and balanced consumption bundle Substitution effect of increased returns on financial investments increases savings Usually, a positive discount factor Preservation of wealth through profitable Table II. Points of compatibility investments in inter-temporal Consumption on needs and beyond needs consumption framework

circle and society in general. If the individual recognizes the ethical externalities, it will reflect in preferences and captured in their choices. If we look at the actual state of affairs in OIC countries, we find that there is need for realism, especially in the descriptive nature of studies. Table III gives the list of OIC countries in World Giving Index 2015. Each cell gives the count of number of OIC countries. At the very least, what we can say is that being generous is not special to OIC countries. In Table IV, we look at the difference in some of the values between Muslims and non-Muslims by taking data from World Values Survey 2014. Again, we could conservatively say that value differences between Muslims and non-Muslims are somewhat significant with regards to some religious values, but not with regards to some other socio-economic values. Therefore, in studying behaviour of Muslim consumers, it is important to accommodate ethically charged behaviour whereby certain consumption goods are disregarded from the choice set and budget is allocated on private goods for self-consumption as well as on spending for others. At the same time, it is important not to over-impose idealistic values and vision in a study of actual economic behaviour of Muslim consumers. 5. Towards an integrative theory of Muslim consumption behaviour In this section, we present an example of integrative theoretical framework for understanding Muslim consumption behaviour. The OLG model was developed by Diamond

Country group

Table III. OIC countries ranking in world giving index (WGI 2015)

Top 10 Top 20 Top 30 Top 40 Top 50 Bottom 50

WGI – Overall 1 4 6 8 11 17

No. of OIC members Money donation 1 4 7 8 9 23

Time donation

Helping strangers

1 5 7 8 8 21

3 8 11 15 16 13

Values

Response

Important in life: family

94.09% Muslims regard it “very important” as compared to 89.94% non-Muslims 70.61% Muslims regard it “very important” as compared to 43.29% non-Muslims 46.34% Muslims stated “often” as compared to 39.05% non-Muslims 39.24% high income scale individuals stated “very happy” as compared to 28.25% individuals with low income scale 31.07% Muslims stated “very happy” as compared to 32.69% non-Muslims 85.59% high income scale individuals stated “highly satisfied” as compared to 65.22% individuals with low income scale 67.21% Muslims stated “highly satisfied” as compared to 74.29% non-Muslims 30.30% Muslims mentioned it as compared to 31.77% non-Muslims 35.12% Muslims mentioned it as compared to 40.06% non-Muslims 3.98% Muslims stated they are “active members” as compared to 6.83% non-Muslims 3.30% Muslims stated they are “active members” as compared to 5.68% non-Muslims 12.87% Muslims stated “very much” likeness to a person who strives for it than 7.73% non-Muslims 43.60% Muslims “agreed” as compared to 40.30% non-Muslims 27.26% Muslims stated “very much” likeness to a person who strives for it than 21.78% non-Muslims 16.39% Muslims stated “very much” likeness to a person who strives for it than 15.35% non-Muslims

Important in life: religion Thinking about meaning and purpose of life Happiness and income Happiness and religion


Satisfaction and income

Satisfaction and religion Important child qualities: unselfishness Important child qualities: thrift saving money/things Membership: humanitarian/charitable organization Membership: self-help/mutual aid Richness and money Wealth accumulation: zero sum game Feeling important to do good for society Feeling important to help neighbours

(1965) who adds supply side to Samuelson’s (1958) original pure exchange model. OLG takes explicitly into account heterogeneity in the position over the lifecycle. This is important, as old and young individuals differ in their ability to supply labour and in their saving decisions. OLG can help in modelling agents’ interesting life cycles with low-income youth, high-income middle ages and retirement where labour income usually drops to zero. We attempt to augment OLG with Zakat. In our ZA-OLG model, there is turnover in the population. New individuals are continuously born and old individuals are continuously dying. Thus, agents are born at different dates and live for finite lifetimes. We assume time is discrete rather than continuous. Each individual lives for two periods, i.e. youth and old-age. The model incorporates some of the Islamic institutions like period-wise deduction of Zakat from endowments. It also incorporates bequests which could be significant given the Islamic injunctions on inheritance distribution and the significance placed on the institution of family. So, the lifetime resources constraint in the optimization problem is different from Diamond’s (1965) OLG model. Furthermore, the model incorporates the assumption that consumption opportunity set will axiomatically filter out the prohibited consumption goods from the consumption set in both contemporaneous and inter-temporal consumption. So, the consumer would only make choice among Halal commodities and Halal investment options.


143

Table IV. Socio-economic values in Muslims and nonMuslims

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Diamond’s (1965) OLG model assumes that people work only in youth. But, in the knowledge-based services economies, the working years of life could be much more extended than in the traditional economies. Also, as people still have to pay Zakat, offer animal sacrifice, perform Hajj/Umrah and leave familial bequests in old-age and the fact that Islam encourages charitable spending and avoiding dependence, we assume that individual could supply labour in both youth and old-age. In any period, there are L1,t young individuals and L1,t⫺1 old individuals. Thus, the total number of individuals in the economy is represented as follows: Lt ⫽ L1,t ⫹ L1,t⫺1

(1)


We assume that population grows at an exogenous rate “n”. Thus: L1,t ⫽ (1 ⫹ n)L1,t⫺1

(2)

We can also write equation (2) as follows: L1,t⫺1 ⫽

L1,t 1⫹n

(3)

Each individual supplies labour in youth and old-age. The individual receives exogenous labour income in both periods from positive labour supply, i.e. w1,t in the first period youth and w2,t⫹1 in the second period old-age. c1,t represents consumption when young and c2,t⫹1 represents consumption when old. Savings is represented by st. We assume that savings are invested in Shari’ah-compliant investment vehicles which yield an exogenous return on savings, rt⫹1 on first-period savings, i.e. st. In the old-age, the individual consumes the accumulated savings along with profits obtained on savings. In addition to that, the individual receives exogenous bequests (b1,t) in youth from previous generation and also leaves exogenous bequests in old-age for future generations, 1 ⫹ n(b2,t⫹1 ). For each old person in a given period, there are (1 ⫹ n) young people around. The individual also pays lump-sum Zakat in both periods, i.e. z1,t and z2,t⫹1. These could be negative for Zakat recipients. The budget constraint for the first period youth is given by: st ⫹ c1,t ⫽ w1,t ⫺ z1,t ⫹ b1,t

(4)

The budget constraint for the second period old-age is given by: (1 ⫹ n)b2,t⫹1 ⫹ c2,t⫹1 ⫽ w2,t⫹1 ⫺ z2,t⫹1 ⫹ (1 ⫹ rt⫹1 )st

(5)

Putting the value of st from equation (4) in equation (5), we get the inter-temporal budget constraint: c1,t ⫹

c2,t⫹1 w (1 ⫹ n)b2,t⫹1 ˜2,t⫹1 ⫽w ˜1,t ⫹ ⫹ b1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1 1 ⫹ rt⫹1

(6)

Where w ˜1,t ⫽ w1,t ⫺ z1,t and w ˜2,t⫹1⫽w2,t⫹1 ⫺ z2,t⫹1. We assume constant relative risk aversion utility. The utility function is strictly increasing, concave and twice continuously differentiable. The additively separable utility function is represented by:

Ut ⫽

1⫺␪ 1⫺␪ c2,t⫹1 c1,t 1 ⫹ 1⫺␪ 1⫹␳1⫺␪

(7)

The parameter ␳ is called the rate of time preference. It acts as a utility discount rate, whereas 1/1 ⫹ ␳ is the utility discount factor. Thus, ␳ indicates the degree of impatience with respect to utility. We assume ␪ ⬎ 0 and ␳ ⬎ ⫺ 1 to ensure that individuals give positive weight to the second-period consumption. We set up the Lagrangian utility maximization function as follows:


L⫽

1⫺␪ 1⫺␪ c2,t⫹1 c1,t 1 ⫹ 1⫺␪ 1⫹␳1⫺␪ w (1 ⫹ n)b2,t⫹1 c2,t⫹1 ˜2,t⫹1 ⫹␭ w ˜1,t ⫹ ⫹ b1,t ⫺ ⫺ c1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1 1 ⫹ rt⫹1

关

兴

(8)

The first order condition for c1,t and c2,t⫹1 are as follows: ⫺␪ c1,t ⫽␭

(9)

1 ⫺␪ ␭ c ⫽ 1 ⫹ ␳ 2,t⫹1 1 ⫹ rt⫹1

(10)

Equation (9) gives marginal utility of consumption today, while equation (10) gives marginal utility of consumption tomorrow, discounted to the present. Combining equation (9) and equation (10) by putting the value of ␭ from equation (9) into equation (10), we get: ⫺␪ c1,t 1 ⫺␪ c2,t⫹1 ⫽ 1⫹␳ 1 ⫹ rt⫹1

共

1 ⫹ rt⫹1 c2,t⫹1 ⫽ c1,t 1⫹␳

兲

(11)

1/␪

(12)

To express consumption as a function of labour income and profit rate, we multiply equation (12) by c1,t. We get:

共

c2,t⫹1 ⫽ c1,t

1 ⫹ rt⫹1 1⫹␳

兲

1/␪

(13)

It implies that consumption overtime is increasing if rt⫹1 ⬎ ␳ or decreasing if rt⫹1 ⬍ ␳, i.e. lower consumption in retirement. Now, we make use of equation (14) in the inter-temporal budget constraint equation (6).

c1,t ⫹

关

c1,t

共

c1,t

1 ⫹ rt⫹1 1⫹␳ 1 ⫹ rt⫹1

兲

1/␪

1

(1 ⫹ ␳ ) ␪ ⫹ (1 ⫹ rt⫹1 ) 1

(1 ⫹ ␳ ) ␪

⫽w ˜1,t ⫹ 1⫺␪

␪

兴

w (1 ⫹ n)b2,t⫹1 ˜2,t⫹1 ⫹ b1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1

⫽w ˜1,t ⫹

w (1 ⫹ n)b2,t⫹1 ˜2,t⫹1 ⫹ b1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1

(14)

(15)


145

H 33,2

c1,t ⫽

关

1

(1 ⫹ ␳ ) ␪ 1

(1 ⫹ ␳ ) ␪ ⫹ (1 ⫹ rt⫹1 )

1⫺␪

␪

兴关

w (1 ⫹ n)b2,t⫹1 ˜2,t⫹1 ⫹ b1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1

w ˜1,t ⫹

兴

(16)

Let S(r) denote the fraction of income saved. Then we have:

关

146

˜1,t ⫹ c1,t ⫽ [1 ⫺ s(rt⫹1 )] w

w (1 ⫹ n)b2,t⫹1 ˜2,t⫹1 ⫹ b1,t ⫺ 1 ⫹ rt⫹1 1 ⫹ rt⫹1

兴

(17)


Thus, S(r) is given by: s( rt⫹1 ) ⫽

关

(1 ⫹ rt⫹1 )

1⫺␪

␪

1

(1 ⫹ ␳ ) ␪ ⫹ (1 ⫹ rt⫹1 )

1⫺␪

␪

兴

(18)

Equation (18) implies that ⭸s(rt⫹1 )/⭸rt⫹1 ⬎ 0 if and only if ⭸(1 ⫹ rt⫹1 )1⫺␪/␪/⭸rt⫹1 ⬎ 0. We have: ⭸(1 ⫹ rt⫹1 ) ⭸rt⫹1

1⫺␪

␪

⫽

关

1⫺␪ (1 ⫹ r) ␪

1⫺2␪

␪

兴

(19)

Thus, we could conclude that if ␪ ⬍ 1, ⭸s(rt⫹1 )/⭸rt⫹1 ⬎ 0 and if ␪ ⬎ 1, ⭸s(rt⫹1 )/⭸rt⫹1 ⬍ 0. The size of the parameter ␪ has important implications for how households respond to changes in the profit rate. The parameter ␪ measures the household’s willingness to substitute consumption across time. When r goes up, two effects occur. First, the relative cost of consumption in youth versus consumption in old-age will increase. This will tend to raise savings in youth and is referred to as the substitution effect. Second, when r goes up, it effectively increases budget resources. A given level of future consumption, c2,t⫹1, can be achieved with less savings and more consumption during youth. This effect is commonly known as the income effect. In other words, if ␪ ⬍ 1, the substitution effect dominates the income effect, while if ␪ ⬎ 1, the income effect dominates the substitution effect. The parameter ␪ indicates the strength of a person’s desire to smooth consumption. In our model, the institution of Zakat ensures contemporaneous redistribution from endowment surplus households (those having Zakatable endowments above Nisab) to endowment-deficient households (those having Zakatable endowments below Nisab). Bequests would affect inter-temporal redistribution. Even after incorporating some of these Islamic institutions, we arrived at a comparable Euler equation as in the original model. But, the difference is that the levels of choice variables would be different, i.e. the actual quantity of consumption today and tomorrow because the lifetime resources are scaled down for endowment surplus households because of the payment of Zakat in both periods and leaving bequests in old-age period, while the lifetime resources are scaled up for endowment-deficient households because of the receipt of Zakat in both periods and receiving the bequests in youth. So, a Muslim consumer who pays Zakat, who wants to leave family in a non-poor position after the end of his/her life and who wants to contribute in charity even during his/her lifetime in general would still use the (scaled down) lifetime income acquired from Halal sources whereby among the two substitute Halal consumption goods; he will buy the cheaper (all else equal); and among the two Shari’ah-compliant investment options, he will prefer the one with highest return over risk (all else equal). The difference will be in the levels of


consumption (contemporaneous and inter-temporal), but the analysis will be at the margin given the Islamic injunctions are satisfied and in the presence of Islamic institutions. 6. Conclusion In this paper, we made an attempt to integrate Islamic and mainstream economics framework towards a more realistic understanding of Muslim consumption behaviour. We gave a comprehensive account of the descriptive and prescriptive teachings of Quran and Sunnah on consumption and spending behaviour. We highlighted the points of distinction and compatibility between the Islamic and mainstream economics framework. Nevertheless, we showed how some of the Islamic principles and institutions can be integrated into the mainstream framework, especially in research studies where the objective is to understand and describe behaviour rather than persuasion and idealization. Finally, we presented ZA-OLG model to present an example of integrative theoretical framework for understanding Muslim consumption behaviour. The model incorporated some of the Islamic institutions like period-wise deduction of Zakat from endowments. It also included bequests which could be significant given the Islamic injunctions on inheritance distribution and the significance placed on the institution of family. Furthermore, the model integrated the assumption that consumption opportunity set will axiomatically filter out the prohibited consumption goods from the consumption set in both contemporaneous and inter-temporal consumption. Notes 1. Al-Bukhari, Book of Ar-riqaq, Vol. 8, Hadith No. 6436. 2. Al-Muslim, Book of Zakat, Vol. 3, Hadith No. 2410. 3. Jamai-at-Tirmidhi, Chapters on Zakah, Vol. 2, Hadith No. 680. Also, Sahih Al-Bukhari, Book of Zakah, Vol. 2, Hadith No. 1470. 4. Sunan Abu Daud, Book of Zakah, Vol. 2, Hadith No. 1648. 5. Jamai-at-Tirmidhi, Chapters on Zakat, Vol. 2, Hadith No. 653. 6. Al-Muslim, Book of Zakah, Vol. 3, Hadith No. 2378. 7. Sunan Ibn-e-Maja, Chapters on Asceticism, Vol. 5, Hadith No. 4210. 8. Al-Bukhari, Book of Virtues of the Quran, Vol. 6, Hadith No. 5025. Also in Al-Muslim, Book of Virtues, Vol. 2, Hadith No. 1894. 9. Al-Muslim, Book of Asceticism, Vol. 7, Hadith No. 7430. 10. Jamai-at-Tirmidhi, Chapters on Zuhd, Vol. 4, Hadith No. 2373. 11. Al-Muslim, Book of Zakat, Vol. 3, Hadith No. 2380. 12. Sunan Abu Daud, Book of Wills, Vol. 3, Hadith No. 2865. Also Sunan An Nisai, Book of Zakat, Vol. 3, Hadith No. 2543. 13. Al-Bukhari, Book of Commentary, Vol. 6, Hadith No. 4684. Also in Al-Muslim, Book of Zakah, Vol. 3, Hadith No. 2308. Also in Sunan Ibn-e-Maja, Chapters on Expiation, Vol. 3, Hadith No. 2123. 14. Al-Muslim, Book of Zakah, Vol. 3, Hadith No. 2322. Also in Al-Bukhari, Book of Al-Maghazi, Vol. 5, Hadith No. 4006. Also in Jamai-at-Tirmidhi, Chapters on Righteousness, Vol. 4, Hadith No. 1965. 15. Al-Muslim, Book of Zakah, Vol. 3, Hadith No. 2311. Also in Sunan Abu Daud, Book of Zakah, Vol. 2, Hadith No. 1691. 16. Al-Bukhari, Book of Al-Maghazi, Vol. 5, Hadith No. 4409. Also in Al-Muslim, Book of Wills, Vol. 4, Hadith No. 4215. 17. Jamai-at-Tirmidhi, Chapters on Zakah, Vol. 2, Hadith No. 641. 18. Sunan Ibn-e-Maja, Chapters on Charity, Vol. 3, Hadith No. 2396. 19. Al-Bukhari, Book of Wills, Vol. 4, Hadith No. 2742.


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Siddiqui, M.N. (2012), “Comments on crisis in Islamic economics: diagnosis and prescriptions by Zaman, A.”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 25 No. 1, pp. 173-175. Siddiqui, M.N. (2014), “Islamic economics: where from? Where to?”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 27 No. 2, pp. 59-68. Yousri, A.R. (2013), Comments on “Theorizing Islamic economics: search for a framework for Islamic economic analysis by Khan, M.F.”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 26 No. 1, pp. 269-277. Zaman, A. (2012), “Crisis in Islamic economics: diagnosis and prescriptions”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 25 No. 1, pp. 147-169. Zarqa, A. (2003), “Islamization of economics: concept and methodology”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 16 No. 1, pp. 3-42. Further reading Ariff, M. (1997), “The role of market in the Islamic paradigm”, IIUM Journal of Economics & Management, Vol. 5 No. 2, pp. 97-107. Siddiqui, S.A. (2012b), “Comments on crisis in Islamic economics: diagnosis and prescriptions by Zaman, A.”, Journal of King Abdul Aziz University: Islamic Economics, Vol. 25 No. 1, pp. 193-204.

Corresponding author Salman Ahmed Shaikh can be contacted at: [email protected]

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