30 AN INTRODUCTION TO ISLAMIC FINANCE
in the Qur’an, operationalized by the sunnah of the Prophet
(pbuh) and extended to new situations by ijtihad) to deal with
allocation of scarce resources, production and the exchange of
goods and services and the distribution of the resulting income
and wealth.INSTITUTIONAL PERSPECTIVE OF ISLAMIC ECONOMICS
The collection of the rules of behavior prescribed for individuals and collec-
tivities in a given society constitute the institutional structure of that society
and defi ne the overall system to which the society adheres. The rules of
behavior—whether enshrined in instruments such as social contracts, con-
stitutions and legal framework, or embedded in social conventions, cus-
toms, habits and cultural values—are sustained by enforcement mechanisms
that provide proper incentives of rewarding compliance with and punishing
violations of the rules. The incentive structure must be such that the rules
of behavior become self-enforcing or, where this is not possible, that effec-
tive mechanisms (the courts, police, ombudsmen, and so on) are in place to
enable them to be enforced appropriately.
The institutional framework of the ideal economy is composed of
a collection of institutions—rules of conduct and their enforcement
characteristics—designed by the Law Giver, prescribed in the meta-framework
and operationalized by the archetype model (as outlined in Chapter 1) to
deal with allocation of resources, and so on. The objective of these institu-
tions is to achieve social justice (qist).
Rules of Conduct as “Institutions”
Rules of behavior are designed to accomplish three objectives: (a) to reduce
the cognitive demand on individuals in the face of uncertainty; (b) to specify
acceptable and unacceptable behavior; and (c) to make actions by individu-
als predictable. Together, they reduce uncertainty by making the response of
individuals to states of nature in their environment predictable.
Rules specify what kind of conduct is most appropriate to achiev-
ing just results when individuals face alternative choices and must take
action. They impose restrictions on what society’s members can do with-
out upsetting the social order on whose existence all members count in
deciding on their own actions and forming their expectations of others’
responses and actions. Compliance with the rules determines the degree
of certainty in the formation of these expectations, prevents confl ict,
reconciles differences, coordinates actions, facilitates cooperation, pro-
motes social integration and social solidarity, and strengthens the social
order.
To obtain these results, two conditions must exist; one is necessary and
the other suffi cient. The former requires that rule compliance is enforced,