Embededdness As a Feature of Islamic Moral Economy: Exploring the Divergence of Islamic Finance from Embeddedness

Abstract:

The rise of Islamic finance since the 1970s have brought the Islamic notion of economy and finance to the attention of the world; given that the sector has shown sustainable growth and resilience against financial crisis. However, behind this alternative financing is the moral based economic understanding of Islam, which can be termed as Islamic moral economy.

Moral economy is defined through how it is articulated: ‘as an approach to the study of an object’; ‘as a discipline defined by an object of study’; ‘as a particular kind of economy’.  While Islamic economics or Islamic moral economy can be defined as the sum of all these articulations, the everyday practice of Islamic moral economy can be expressed ‘as a particular kind of economy’ indicating that Islam suggests different modes of production in which a particular social formation of the society defines the behavioural norms of individual producers and consumers in order to deliver a moral economy based on ‘ihsani (beneficence) social capital’ on a societal level and ‘falah (salvation)’ on a micro or individual level.

The notion of moral economy rests on a central principle: ‘embeddedness’ (Booth, 1994), in terms of being embedded in real economy but also in values and norms derived, in this case, from Qur’an and Sunnah. As a pre-modern economy, Muslim economies were moral economies because they were/are an integral part of social relations and noneconomic institutions as indicated by its Islamic ontological sources and epistemology.Indeed, the way in which economic and social relations work together will differ depending on various contexts. The common thread runs through the understanding of a premodern moral economy in that the aims, objectives and processes were informed and directed by noneconomic factors, in this case by Islamic norms. Thus, moral economy’s features, in summary, are: ‘embeddedness or non-economic factors including values’, ‘reciprocity’, ‘community and charity’, ‘convention and coordination’, ‘collective action: cooperation including labour sharing’.

In a more analytical sense, ‘embeddedness’ suggests that in history, economy was ‘submerged’ in social relationships or a general structure of society (Polanyi, 1957; Lacher, 2007) implying that livelihood of pre-industrial economies, which was grounded on redistribution and reciprocity, and not on market exchange.

However, the emergence of market economy entailed a turning point in human history (Polyani, 1977; Tonnies, 1979) as the market breaks away from normative influences embedded in the non­economic factors. The market becomes disembedded, autonomous, self­regulating and entirely economic in nature, purpose and outcome. In modernity, for moral economists, the market takes on a life of its own which is represented by the ‘commodification’ of whole areas of social life. More recently, Sandel (2012) has spoken of the moral limits of markets, arguing that it is essential that some goods should not be traded in the marketplace because their value cannot be expressed in monetary terms.

However, the commodification process has entered into and, in some cases, consumes and overrides the values and norms of the non­economic realm. Rather than society being integrated via non­economic institutions of norms, family, mosque and community; the market becomes the integrative mechanism pervading all aspects of the non­economic life. In other words, the process of embeddedness is reversed; with modern society becoming embedded in the market, rather than the pre­modern market being embedded in society, and ‘refashioning its ethos and relations after its own image’ (Booth, 1994: 656).

In modern economies, the arms of the market society have extend to such an extent that the economics becomes the sole vehicle of analysis and all aspects of social life are objectified, quantified and couched in terms of maximising behaviour and efficiency. As a result, the human becomes understood only as homo economicus (Booth, 1994; Polyani, 1977) and the homo humanous disappears. As a consequence the economic system becomes detached from the reality (Habermas, 1987).

In relation to the moral economy movement, Islamic economics or Islamic moral economy is considered as another double-movement designed to re-embed financial transaction and economic activities into real economy according to the social norms of society and hence suggesting a particular modes of production. However, modern times do not allow us to identify any particular economy or economic behavioural norms as moral economy; currently the understanding of moral economy in the Muslim realm remains limited to the current practice of Islamic banks. Islamic banking and finance, on the other hand, has come under heavy criticism due to compromising on its ethical values by converging towards conventional financialisation through emphasising fiqh or form against substance, which can be defined as ‘moral deficiency’ in Islamic finance.

In indentifying the moral economic nature of Islamic economics, this paper investigates the essential principle of embeddeness of Islamic finance into real economy as the principles and axioms ontological and epistemological sources of Islam entail. Therefore, it suggests that Islamic banking and finance has to go back to the basic, namely Islamic moral economy, as intended in the original emergence as post-colonial discourse. As Muslim societies are in dire need of economic development rather that financialisation of their economies; and it seems that Islamic banks by using instrumental morality enhancing financialisation yet fails to contribute to the higher objective of ‘social good and justice’ through embeddeding financial activity through Islamic finance into the social formation of the society through substantive morality. This paper, therefore suggest that non-banking financial institutions should be allowed to emerge to realise embedded institutions which can make a positive impact on human emancipation and empowerment whereby substantive morality can be achieved. Civil society based experiments, such as BMTs in Indonesia, Islamic micro-finance and zakah funds in different parts of the world, seem to be contributing to such ideals through embedding their operations and consequences in the social formation of Islamic morality.