Islamic wealth management, relevance in modern times

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Professor Shamsher Mohamad and Dr Ziyaad Mahomed

ISLAM has a unique dispensation on the concept of wealth, its ownership and distribution. Wealth is not regarded as an end per se, but a means to an end: the end being the paradise in the hereafter. Essentially, material possessions are considered the primary form of wealth, perceived to be generated, accumulated and/or invested by the one who acquired it. Inclusively, wisdom, knowledge, salvation and even contentment can all be categorised as wealth. From the Islamic perspective, Allah (to Him be Praise) is the true owner of all wealth and He entrusts it to man for beneficial use (Qur’an 20:6).
From the Islamic perspective, wealth is a means to living a beneficial existence and providing societal benefits and welfare to the members of the society. Islam allows for private ownership of wealth except for the three public goods declared by the Prophet (PBUH), namely water, herbage (grazing land, forest, mines) and fire (energy in the modern sense) that belongs to the community. The total assets of Islamic Wealth Management (IWM) is no more than a minute fraction (approximately two per cent) of the world’s conventional assets.
But the steady growth of this unique IWM system has made it on the global stage, practiced in more than 76 countries and adopted by secular governments in sovereign fund-raising. This article briefs on the concept and comparative notes of wealth from conventional and Shari’ah perspective.
From the Islamic perspective, all resources or wealth belong to their Creator (swt) who has provided these resources to mankind (Qur’an 45:13) with the expectation that they would be held in trust (Qur’an 33:72). Humanity is accountable for the manner in which wealth is created, amassed and distributed. This is a fundamental tenet of Islam and Islamic Wealth Management.
Wealth in Islam comprises both tangible and intangible assets, similar to modern meaning of wealth (Jusoh & Muhammad, 2005). The significant difference however, is that tangible (money, real estate, commodities, etc.) and intangible assets (intellectual capital, copyrights, patents, financial rights, etc.) have specific rules in Islamic jurisprudence that limit uncontrolled trade of these assets. For example, same currencies and commodities can only be exchanged at par and at spot, whilst differing currencies and commodities can be traded at agreed prices but at spot.
The concept of ‘spiritual’ wealth is also relevant here. In Islam, the spiritual precept is considered in the context of ‘zuhd’ or ensuring that love of wealth has not entered the heart (simply: greed). Here, specific prohibitions must be avoided to establish ‘zuhd’ or maintain spirituality of wealth in Islam: Al Bukhl or miserliness; Al Israf or wasteful expenditure in extravagance (Qur’an 7:31); Al Tabzeer or spending on prohibited items (Qur’an 17:27); Kanzul Maal or hoarding of wealth for the love of it.
In mainstream economics, wealth is defined by quantitative measurements of one’s material possessions. In the parlance of modern economics, wealth is defined as the owners’ potential capital that is employed to create more wealth. Wealth is “…the value of assets owned minus the value of liabilities owed at a point in time. Wealth can be categorised into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets, including real estate, stocks, bonds, and businesses.”
This definition forms the foundation of modern wealth management practise in the industry. This definition considers wealth as net assets with potential to generate income for the holders. Income, which is merely the periodic addition to wealth is product of the synergic combination of resources and labour-entrepreneur. This mainstream concept of wealth had moved away from the centuries-old Calvinist idea that wealth is a sign of God’s gift to the wealth holder, and that wealth is not an end in itself but a means to fulfil the needs of wealth holders and the community at large. The modern concept of wealth is now practiced in the context of personal wealth maximisation with a very thin-line between morality and ethical restrictions, except as dictated by the secular laws relating to acts of fraud, criminal breach, trust as stipulated in these laws.
Unlike mainstream wealth management practices, IWM is bound by restrictions to ensure it serves its objectives. The first restriction is that no wealth increase is permissible if the wealth is created through illegitimate production and/or investment activities. That is, it is only lawful to earn returns on permissible and risk-sharing based investments. From a Shari’ah perspective, impermissible earnings refer primarily to interest income and proceeds from other impermissible sources of income such as the sale of pork or alcoholic beverages (Elgari, 2000).
Although Shari’ah scholars provide a tolerance level for incidental gains from impermissible activities (less than five per cent), the purification of tainted or impure income cleansed through distribution to charity. The earning returns from permissible production and investment is expected to improve the well-being of communities and provide financial stability compared to the one-sided no-risk-shared investments under the current modern wealth management practices. The second restriction is on expenditure: the owner may not spend his wealth frivolously (Qur’an 17: 26-27) as he will be questioned on its use. He is however encouraged to spend on himself, his family and those in need. Beyond routine consumption and spending on others, he also has an obligation of alms-giving or Zakat to alleviate the suffering of his fellow beings, starting with the next of kin, then the orphans, those dispossessed of wealth, the poor and the wayfarer, in that order (Qur’an 9:60).
The objective of Islamic wealth management is economic justice through equitable distribution of wealth. This by no means restricts private ownership and entrepreneurship but a wider circulation of wealth (Qur’an 59: 7) and invested in socially beneficial economic activity (Qur’an, 62:10 and 73:20). The insights of these verses also imply that the poor have a rightful share in the wealth of the rich, which mandates annual reduction of the wealth by mandatory charity (Zakat of 2.5 per cent), further necessitating the productivity of wealth. This qualifier is important: the Calvinist idea under a secular concept of wealth enables wealth maximisation but with no requirement to spend other than on one’s needs and wants.
It is perhaps noteworthy to redefine wealth as a means not for fulfilling the needs/wants of the wealthy alone but also those deprived and are in dire need. Hence, IWM has much relevance in this modern world today and the future to help mitigate the inequality gap between the wealthy and the poor and serve social justice.
—(Courtesy: CPI Financial)

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