368 chapter nine
are based in effect on the rate of interest. Also, in Islamic banking
operations other than Murabaha, the same basis of comparison is
used: profit rate compared with LIBOR. To help Islamic banks solve
this problem a profit-index may need to be established which can be
used in Murabaha and other investment operations. A theoretical
framework for the establishment of such an index has been initiated
by El-Ashker, (El-Ashker, 1995), though additional work is still needed
to examine further the suggested models of the index and to test
their plausibility.
Despite the valuable work on Islamic banking up to the last quarter
of the twentieth century, the literature had two particular limitations:
first, writers based their analysis on the premise that Ribàwould be
absent from the economy, and second, they did not discuss, or at
least not thoroughly, issues concerning monetary and fiscal policy.
This was to come a decade or so later within the writing on an
interest-free economy and the Islamic banking system, that continued
to the end of the century.
Monetary and Fiscal Policies and Islamic Resource Allocation
The monetary policy became of interest to Islamic economists shortly
after the early waves of the establishment of Islamic banks. In 1978,
the first seminar on the monetary and fiscal economics of Islam was
held in Makkah followed by a second in Islamabad in 1981. The
proceedings of the two seminars, which were co-published by the
Institute of Policy Studies, of Islamabad, and International Centre
for Research in Islamic Economics, of Jeddah, included well focused
research papers. The general theme of the papers was whether a
fiscal policy is possible in an Islamic state and if it is, how it will
be different from other non-Islamic fiscal policies. The common
answer to the first part of the question among the writers is a pos-
itive reply in the sense that, yes, a fiscal policy is possible. Writers,
however, have slight differences in expressing their views on the sec-
ond part of the question as to how and what policies could be fol-
lowed to achieve these Islamic policies. To begin with there is a
general consensus that fiscal policy in an Islamic state should be
Islamic ideological oriented and in contrast to other policies of non-
Islamic policies it cannot be value-neutral (Ahmed et al., 1983). The
functions of the Islamic state would be more or less like those of
secular states except that in addition to these functions the Islamic
state has the duties and the responsibility to not only promote the
Islamic ideology, but also to defend it.