Market Structure in Islamic Economics

The examination of market regulations as laid down in the Quran and the Sunnah leads to an important conclusion: the Islamic market has the characteristics of a freely competitive market and that prices should be determined by the forces of supply and demand (Tuma, 1965). The Islamic market has, or should have, the following characteristics (Ibn-al-Ukhuwwah, 1939, Ibn-Taymiya, 1983):

1. The condemnation of monopoly: all forms of monopoly are condemned in the Sunnah. The Prophet is reported to have said, “Those who practice monopoly are wrong-doers” (Sahih Muslim), and in a stronger tone, “That who interferes in prices in order to increase them will be seated by God on a seat of fire on the Day of Judgment”, also, “That who hoards food for forty days is God’s enemy” (ibid). Hoarding food, or other commodities, is not always wrong, however, if hoarding is not for the purpose of controlling prices. Jurists have laid down conditions for monopoly, or hoarding, to be sinful (Al-Zuhaili, 1989):

a) The object hoarded is a surplus over what the person and his dependents need for a whole year, the person may hoard these needs for a maximum of one year.

b) The purpose of hoarding is to influence prices or with the intention of selling the object when prices increase.

c) The market shortage of the hoarded object.

d) It should be noted, therefore, that monopoly, or hoarding, per se is not regarded as a sin, rather, it is the purpose of hoarding and the consequences of monopoly that characterize a monopolist or a hoarder of being sinful or otherwise. For example, if monopoly appears as a result of one producer, or seller, becoming the only producer, or seller, of the product monopoly is not a sin providing that the producer does not use his monopolistic position to influence the market

2. Pricing: prices should be determined by market forces, demand and supply. The evidence of this rule is taken from the Sunnah where the Prophet is reported to have refused fixing prices, saying to the people who asked him to do so, “It is God who gives abundantly or sparingly, it is He who sets prices and I do not want to meet Him with someone’s complaint of me in body or wealth” (Abu-Yusuf). This is the general rule which, although accepted by all Muslim jurists, is conditioned by some. The Medieval jurist Ibn-Taymiya (1262–1328), for example, advocated that the Prophet’s saying was based on the conditions of the stability of the market, but if the market becomes unstable for reasons not related to fair dealing, the state has to step in to fix prices.

3. Information: the flow of information should be made available to both buyers and sellers. The Prophet is reported to have condemned meeting sellers outside the market place and finalizing deals with them before reaching the market (Sahih Muslim). This is to give the seller the opportunity to know the level of prices in the market place before finalizing a deal and the buyer the chance of buying goods at prices not influenced by the middle man. Also, when a deal between the seller and the buyer is struck, other buyers should refrain from offering a higher price to the seller in order to change the deal (Sahih Muslim). Before completing a deal, sellers and buyers are bound to follow the prices prevailing in the market.

4. The condemnation of future contracts if the quantity of the object is not known: this is because the seller is uncertain of his ability to honour the contract. It is the ambiguity surrounding the quantity to be delivered that makes a future contract invalid. On the other hand, if the quantity is known, or could be agreed upon, future contracts may be allowed. For example, if a seller and a buyer completed a deal that the former would sell to the latter the total production of an activity during a future period at a certain time in the future (the crops of a field, the fish caught in a span of time, the output of a dive, the offspring of an animal or animals etc.) the deal is illegitimate (Al-Giziri, 1972). This is because the quantity of production that is subject to the contract is not known for certain. On the other hand if the subject of the contract was a determined quantity of future production (certain measures of crops, fish etc.) the contract is regarded as legitimate. Thus it is what is called “sale of the uncertain”, or “Buyu al-Gharar”, which was condemned by the Prophet (ibid.).

It might be interesting to note that the awareness of market forces and their effect on prices by caliphs has been demonstrated more than once in Islamic history. During Caliph Umar’s reign (634–644), as a result of a short of supply in al-Medinah in around 639 A.C. the prices increased substantially. The second caliph did not try to fix the prices but instead instructed his viceroy in Egypt to send him supplies to bring the prices down, which he did (Tuma, 1965).

Another example can be learned from the time when the caliph al-Mansur was selecting a site for his new city, Baghdad, in 767 A.C. Al-Mansur is reported to have said that he wanted a site where people could earn a living, where prices could not be high or supplies scarce, because if he resides where supplies could not be reached by land or sea there would be scarcity, high prices and hardship for the people (ibid.). This awareness of the Heads of State of the role of market forces reflect an early recognition of the role of demand and supply in determining prices with no need for state intervention.

Even when the state intervenes in particular circumstances when the market is in a state of abnormality, a condition that requires intervention as Imam ibn Taymiya advocated, such intervention is not in negation of the recognition of the market forces. These forms of intervention, as Tuma suggests, are not in conflict with the competitive market structure or with competitive prices (ibid.) as long as they aim at stabilizing prices. But, when the market is stable, prices are determined in accordance with competitive market forces.

Excerpted from
Islamic Economics. A Short History (Themes in Islamic Studies) by Ahmed El-Ashker, Rodney Wilson

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