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R.I. Molla & M.M. Alam: Mainstreaming Third-Sector Economics by Adopting Islamic Principles of Entrepreneurship
Written by Professor Rafiqul Islam Molla, Multimedia University, Melaka, Malaysia & Md. Mahmudul Alam, National University of Malaysia
Tuesday, November 22, 2011
Essay published in Dialogue & Alliance, Vol. 25, No. 2, 2011
The ‘private’ and ‘public’ sector economics found their own strong places to play roles in the mainstream economy. At the end, however, these two systems – the private, popularly called the first-sector economy, and the public, called the second-sector economy – both individually and jointly have been found seriously inadequate and incapable of ensuring the wellbeing of societies nationally and globally.
Responding to such a situation, a number of non-conventional approaches such as cooperatives and social enterprises, waqaf, foundations, and other non-profit institutions, etc., together called the third-sector economy, were moved and promoted to ensure social justice and the wellbeing of mankind. Initially it emerged as a defensive strategy of the market-state model to meet the minimum of unmet requirements in the sectors where the market and state have grossly failed. It, thus, played only a subordinate role. As a result, it could not help much to solve the problem of economic inequity, concentration of wealth, and social divides. However, it is strongly felt that a broadly based third-sector economic model with both not-for-profit business-like enterprises and for-profit businesses blended with social justice is necessary to play a role as a mainstream model, not only for poverty alleviation but also for economic growth to bridge the economic and social divides. Mainstreaming the third sector is the urgent call of the day.
Islamic entrepreneurship, which is basically a community-centric mode of business initiative, is an antidote to the problem of intolerable economic and social dualism in the economies. It is a natural strategy against all forms of capitalist exploitations, such as European colonialism in the past and now American-led terrorism to control resources. Accordingly, it is the natural model for solving the problems of economic inequity, concentration of wealth, and social divides. Therefore, this study finds the Islamic mode of entrepreneurship to be most suitable and effective for widening and mainstreaming the third-sector economies, more particularly in the developing countries. Johor Corporation (JCorp) in Malaysia and Sheba Polly in Bangladesh are examples of two types of Islamic-style third-sector enterprises: one is a staunchly business-like initiative and the other is a cost-based charity initiative for social benefit. For the development and promotion of the community-centric third-sector economic model, the paper recommends establishing a research and development center on third-sector economics preferably under an Islamic Research and Development Institute in any reputed university. [i]
Puritan and Protestant Christian ethics declared wealth to be a gift from God; and pursuits of wealth were freed from social and religious stigma, though on condition that the wealth acquired would be used for righteous purposes. However, this opened the doors for wealth making, giving rise to a nascent form of capitalism. This sowed the seeds of capitalism by allowing unrestricted individualism. The law and legal structure were accordingly designed to nurture this nascent form of capitalism. This nascent capitalism formally grew at the hands of Adam Smith and other classical economists, and it fully blossomed and flourished at the hands of Alfred Marshall and other neoclassical economists.
Adam Smith, the father of modern economics, saw economics fundamentally as the effective utilization of society’s resources for the wellbeing of mankind. Over the time it grew and thrived for the purpose of best achieving that very fundamental goal – the wellbeing of mankind. Its development as a discipline was pursued through two different ideological and operational dominant modes – the market (private-sector) and the state (public-sector) economic systems. Private-sector economy relies on methodological individualism and the maximization of profit for individuals on the assumption that individual benefits added together maximize society’s benefits. Thus, it puts individual benefit at the center. Maximizing individual wellbeing maximizes society’s wellbeing. It is based on free-market competition under the strategy of ‘the strongest takes it all,’ following the Darwinist social philosophy of ‘survival of the fittest.’
On the other hand, the public-sector economy relies on the philosophy that society’s benefit is the summation of all individual benefits. When the society maximizes its benefits it necessarily maximizes individual members’ benefit. Maximizing society’s wellbeing is maximizing individual wellbeing. It puts society methodologically at the center.
At the hand of Marshall, during the last quarter of the 19th century, economics gained maturity as a social science. It gained greatly in mathematical and technical proficiency to qualify as a science and earn the name ‘darling queen’ of social sciences (Molla 2005). At that time, the market, consisting of competing for-profit firms, was conceived as the sole agent for efficient organization and management of the economy to ensure the growth and wellbeing of the community.
However, from the beginning of the 20th century, it was realized that the market alone could not be trusted to ensure community wellbeing. State involvement and participation side by side with the market was considered necessary. The market was to produce and supply mainly the private goods, and the state was to produce and supply primarily the public and collective goods. As a result, a market-state partnership in the management of the economy was thought essential to achieve economic goals in the national and international spheres. This market-state mixed economy model was thought necessary to ensure community wellbeing at the national and global levels. Their strengths and limitations in performing at different sectors of the economy eventually made the ‘private’ and ‘public’ sector economies find their own strengths in the mainstream economy and play their roles most efficiently.
This market-state model gained continued acceptance by academics, professionals, and policy makers for some time. But its serious shortcomings surfaced when the income inequalities within and among nations continued to increase instead of decrease. Maximizing profit without concern for social justice led to exploitation and concentration of wealth in the hands of a small group of enterprises. The inherent inability of government to handle economic/business operations resulted in gross inefficiency and economic losses and vulnerability of the public-sector enterprises. Therefore, the private-public economic model failed to stop the widening of the income and social divides within and among the nations. Income inequalities significantly increased among citizens and among nations.
The World Development Indicator 2007 reported that 84% of the world’s population received less than half (46%) of the world’s income in 2005 (Todaro and Smith 2009). The Gini coefficients of global income and wealth distributions are 0.612 and 0.892 respectively, signifying an extremely high inequality of income and wealth distribution (Pinkovskiy 2010, Davies, et al., 2006). The richest 1% of adults in the world own 40% of the planet's wealth, and 2% own more than half of global household wealth. Even the wealth inequality within nations is too high, with the wealth Gini of Japan being 0.55 and USA about 0.8 (Davies, et al., 2006). This model even failed to eliminate the most acute forms of poverty in various countries and locations.
Excessive emphasis given to self-interest and competitive behavior has weakened the sense of brotherhood and thus the social bonds among people; it has diminished trust relations and cooperative behavior, heightening the sense of vulnerability and fears for the future (Borzaga, et al., 2009). Increased economic growth has not been matched by increased wellbeing and happiness at national and global levels. Therefore, at the end these two modes – the private, popularly called the first-sector economy, and the public, called the second-sector economy – both individually and jointly have been found seriously inadequate and incapable of ensuring the wellbeing of nations and societies. Various attempts were made to remedy the shortcomings of the market/state operated economy model by reducing the size of the public sector through privatization. Under this scheme, many public-sector enterprises were transferred to the private sector to avoid inefficiency. But it did not yield the expected results, pointing to how difficult it is to obtain socially responsible behavior from agents concerned only with the maximization of their self-interest.
Emergence of third-sector economies
Based on the failure [shortcomings] of the profit-maximization model, Blaug (1980) and Balogh (1982) observed that all was not well in the house economics had built; they emphasized the need for a new paradigm to effectively serve its purpose and goal. Stiglitz (2009) found it necessary to find a new balance between markets, governments, and other institutions, including not-for-profits and cooperatives, with the objective of building a plural economic system with several pillars. Other scholars of the same standing fully support that position. They see cooperatives and social enterprises as better suited to coordinate collective action and promote collaboration, enhance trust, and increase freedoms.
Responding to such a situation, a number of non-conventional approaches such as cooperatives and social enterprises, waqaf, foundations, and other non-profit institutions, together called the third-sector economy, were promoted as a way to make up for the deficiency of the two dominant models to ensure the wellbeing of mankind. Initially, the third sector emerged as a defensive and compensatory strategy of the market-state model to meet the minimum of unmet requirements in the sectors where the market and state grossly failed.
The third sector is typically conceived as an economic model comprising the various not-for-profit and other organizational forms able to perform well in the production of personal and collective services that cannot be provided so efficiently by for-profit or public organizations. It is the kind of social activity that is suitable to be carried out by non-profit and non-governmental organizations. It is also known as the voluntary sector or non-profit sector. Typically it consists of non-government and not-for-profit bodies, such as charities. Cooperatives and social enterprises are the two main movements of third-sector economies.
A cooperative can be defined as a voluntary organization – a farm, business, or other organization – that is owned and managed jointly by its members for a common goal and whose members share the benefits among themselves. It follows the Rochdale principles. The modified Rochdale principles are: open and voluntary membership, democratic governance, limited return on equity, surplus belongs to members, education of members and public in cooperative principles, cooperation between cooperatives, and concern for community. The key element is that it is basically meant to serve the interest and benefit of its members. Rendering service to the community is only incidental for a typical cooperative.
Social enterprises, on the other hand, are ‘social-mission driven’ organizations. These include both non-profit and for-profit enterprises which apply market-based business approaches in their operations to achieve social objectives. These are business-like operations but not for business. A social enterprise must satisfy a social need, and at the same time its activities must be economically sustainable. These are organized under different names with different tendencies in different countries and societies. It may be interpreted as any for-profit or non-profit organization that applies capitalistic strategies to achieve philanthropic goals without any ulterior motive. These are not outright charities. They are, in fact, based on the principle of ‘doing charity by doing trade.’
Some recent theoretical developments have been helpful in strengthening the academic and analytical arguments for third-sector economies (Euricse’s Philosophy 2011):
- The new theories about business enterprises shift from profit maximizer to coordinator aimed at solving society’s problems through the production of goods or services. This new conception of the firm broadens its role to include production of public and collective-interest goods as well.
- Similarly, the new contributions of the behaviorist school and experimental economics to the analysis of individual behaviors question the hypothesis that every human action, and in particular every economic action, is governed exclusively by self-interest. This school maintains that human actions spring from a mix of motivations (intrinsic, extrinsic, self, others, etc.) and are influenced by a general inclination to help each other (brotherliness) and uphold justice and equity. These theoretical developments clearly point to the truth that men are fundamentally ‘ethical social beings’ and secondarily ‘economic beings.’ This has been the message of Islam and all other revealed religions.
These two theoretical developments have facilitated explanations of why the objective of an enterprise is, or can be, also the solution to a collective problem; these new theories propose to provide the rationale for third-sector economies. Thus, the inability of the dominant models to respond to numerous needs has, among other things, made room for the development and growth of cooperative and social enterprises created by groups of citizens and civic movements, especially during the past three or four decades. Under the circumstances, the third-sector economy can be a viable and needed economic model to ensure the realization of the fundamental goal of economics – the wellbeing of mankind in the national and global domains.
Similarities with the goals and objectives of Islamic economics
In terms of its objectives of collective benefit, balanced and just economic development, equitable distribution of income and wealth, narrowing the income gaps, closer understanding and trust among nations and societies, increased quality and standard of living of all, etc., the third sector is similar to Islamic economics.
The basic goals of economics are allocative distributive efficiency, justice, and balanced development for all. Distributive efficiency is a value-driven function. It includes the universally-desired socio-economic goals of need-fulfillment, full employment, optimum rate of economic growth, equitable distribution of income and wealth, economic stability, and ecological balance, all of which are generally considered indispensible for actualizing human wellbeing. Being driven by profit maximization, the mainstream market economics is highly deficient and inefficient for meeting these normative goals for the society.
Because of its secularist worldview with a materialist and social Darwinist outlook, conventional economics fails to specify the necessity of individual behavior to serve social interest. Third-sector economics emerged in order to make up for this deficiency. It makes a frontal attack on the problem by mobilizing its entrepreneurs and demanding that they work ultimately for the benefit of society. It considers social benefit to be the prime mover of entrepreneurial functions.
Islam’s commitment to brotherhood and justice makes the wellbeing (falah) of all human beings its principal goal. This wellbeing is the balanced fulfillment of both material and spiritual needs (Chapra 1993, pp. 6-7). Therefore, mere maximization of total output cannot be the goal of an Islamic society. Maximization of output must be accompanied by efforts directed at spiritual health, at the inner core of human consciousness and interactions. Economic development can be considered to be achieved only when the needs of all for equitable distribution of income and wealth, full employment, and environment protection are satisfied. Islamic economics is founded on the principle of goal realization rather than profit maximization. In an Islamic ideal, ethics dominate economics and not the other way around. Hence, the Islamic system differs from other economic systems by an ‘ethical factor’ (Naqvi 1981, pp.12-18).
This difference is fundamental, because ethics epitomizes the common values of a society and determines the preferences of its members. The independence of economics from ethics has no place in this system. In the Islamic perspective, ethics sets the tone for economics, with the result that the rules of economic behavior are derived from the ethical norms of Islam. Therefore, it is a value-driven system that can meet the ethically determined and normative goals for the wellbeing of the society. It aims to establish a just and balanced social system – ‘a social environment that brings a sense of community and fellowship in human relationships’ – that demands recognition of justice, human dignity, and compatibility among man, his technology, and his natural environment.
Such a social environment requires much more than economic growth and prosperity, much more than the so-called efficient allocation of resources. Therefore, it supports the view of economic development described by Myrdal as an upward movement of the entire social system, or simply growth plus change in the redistribution of income in favor of the lower-income groups, so that economic dualism is avoided.
In Islam, however, economic development is viewed as only one element of the wellbeing of the society; it is important but only as it helps uplift human beings in the spiritual, material, and social spheres. Its entrepreneurship is geared to ensure the expansion of useful production for the benefit and improvement of the community (ummah), improving the quality of life, allowing for the enjoyment of conveniences and moderate amounts of luxuries, but avoiding extravagance (Molla, et al., 1988, pp. 199-200).
Therefore, to the extent that community rather than individual benefit is the focus and prime mover of the economic and entrepreneurial orientations, third-sector economics and Islamic economics have close similarities; both systems are driven by community benefit.
Limitations in spheres of operation
Unfortunately, conceptually, structurally, and functionally, these movements were designed from their inception to be special programs located primarily in the peripheral areas of the economy, such as poverty alleviation and rural and agricultural development, leaving the other two models to operate in all the dominant and growth-generating sectors of the economy. Some scholars like to insist that third-sector economics is best suited for the provision of personal and community care services (Borzaga and Bacchiega 2003). As a result, it remained outside the mainstream of the economy and could not play any dominant role in the economy. It failed to gain the necessary recognition and respectability. Even donors and international agencies promote cooperatives and social enterprises only as poverty-reduction and employment-generation tools (UNDP 2008).
Asia is fortunate to be the birthplace of several successful and large social enterprises (SEs) such as Grameen Bank, the Bangladesh Rural Advancement Committee (BRAC), and the Population and Community Development Association (PDA). These enterprises are respected and discussed widely. These few SEs are fortunate to receive extensive government and donor support. Unfortunately, the rest of the SEs are small or mid-sized. But in an increasing number of instances, these are accomplishing socioeconomic goals in both the for-profit and not-for-profit sectors (Shahnaz and Tan 2009). Moreover, Asian SEs are finding increasing opportunities to raise capital. It is very satisfying to note the rise in government interest, the availability of Islamic banking and financial services, and the availability of Shariah (Islamic principles)-compliant funds for promoting social enterprises as a new sector.
But in spite of the invaluable contributions of third-sector economics in bridging social divides and achieving community wellbeing, it is not receiving the attention and recognition it needs in order to become a dominant economic model for balanced and sustainable development nationally and globally. It is considered peripheral to national economic management. Broadening it and bringing it into the mainstream with the other two economic systems is the next step towards becoming a leading economic system.
The potential of the sector and call for its restructuring
With its community-centric conceptual base and social-justice-driven motivation, the third sector is the superior economic model. It has the best potential to effectively manage the economy with a human face and heart. It is best qualified to take the driver’s seat and steer the economy towards sustainable growth and development with equity that are essential to the wellbeing of the human community. Therefore, this study calls for its development and expansion in that direction.
Earlier we noted that the third-sector economy has remained peripheral conceptually and operationally rather than at the mainstream of the economy. It holds a subordinate position as non-vibrant, non-growth-generating, non-progressive, and non-challenging set of activities. Typically, it is comprised of non-government and not-for-profit bodies with cooperatives and social enterprises as its two main movements. With this narrow base, it includes only the non-governmental and not-for-profit economic activities that address social wellbeing.
But profit seeking and profit making is the legitimate right of entrepreneurs. Without profit, no enterprise can survive and no entrepreneur can remain in business. That is why a normal profit, without which the entrepreneur will be unwilling and unable to continue in business, is factored into production cost. Therefore, third-sector economics should not remain confined to not-for-profit activities. On the basis of its spirit and essence, it needs to widen its sphere and domain of operations. However, seeking unreasonable and excessive profit or profiteering without due regard for social wellbeing is not desirable for society and cannot be the legitimate right of entrepreneurs from the point of view of third-sector economics. The narrow not-for-profit base limits expansion into the more challenging industrial sectors of the mainstream economy.
There were high expectations that third-sector economics would become the dominant model not only for poverty alleviation but also for economic growth that would bridge the economic and social divides. In recent decades, therefore, attention has been given to broadening its goals and objectives and expanding its spheres of operations as an effective economic model for producing development with social justice. To make its presence felt and play a significant role in ensuring social wellbeing, it has to rise out of its present subordinate position. It has to expand its conceptual base, domains of operations, and types of enterprises and their objectives to include businesses blended with social justice, in addition to the not-for-profit activities. Mainstream economic activities need not be purely not-for-profit or profit maximization; these may be regarded as limited and special cases. Mainstream economic activities should be done for profit with a human face and social justice.
The philosopher Adam Smith’s theory of moral sentiments states that people are endowed with two instincts: self-interest and sympathy. Sympathy refers to feelings for others in society. Sympathy constantly moderates self-interested behavior so that the interests of others are protected. This being the case, the natural behavior of entrepreneurs is expected to be doing business for earning profit but within the framework of social justice.
Therefore, the restructuring of third-sector economics should capitalize on this natural human behavior. Accordingly it should accommodate changes to include the following additional types of enterprises:
‘Social businesses’ that are basically profit-driven but some operations are social-benefit-driven
Public/private partnership enterprises with social benefit as a control factor
All Islamic business enterprises with ethics and social benefit as control factors
Cooperatives, basically for the benefit of the members but with some operations devoted to community benefit.
This will include all enterprises with policies and operations driven by community benefits. Thus, not-for-profit enterprises and for-profit ‘businesses blended with social justice’ could become the dominant economic model, with a status comparable to market-based first-sector economics in size and share of the economy.
With this expansion and restructuring, the third sector will be strong enough to influence the first sector to moderate and blend its profit-maximizing behavior with equity and social justice. This will produce the best and most desirable combination of economic models for ensuring balanced and sustainable growth with equitable distribution of income and wealth; it will achieve the ultimate goal of economics: the wellbeing of society nationally and globally.
Such restructuring will require regulatory provision for third-sector enterprises to register their commitment to social justice in their operations. Since for these enterprises profit maximization is not the basic reward, there should be regulatory provisions for designating these enterprises with a socially respected trademark, honoring successful enterprises and entrepreneurs, and guaranteed support in the event of a financial crisis or business failure. Penalties could include the withdrawal of the trademark, social and economic privileges, etc., in case of willful negligence in their commitments to social justice. Such new regulation may replace earlier regulations of NGOs, cooperatives, foundations, waqfs, etc.
Entrepreneurship and restructuring
Various western scholars highlighted the common personal qualities of successful entrepreneurs for market economics. These are scarce qualities available only in a tiny fraction of the members in the society. An entrepreneur is about more than just starting a business or two; it is about having the attitude and drive to succeed in business. All successful entrepreneurs have a similar way of thinking. These common qualities they possess can be summarized as follows:
Inner drive to succeed, ambition, strong belief in themselves, assertive personality, creativity and pursuit of new ideas and innovation, openness to change, dynamism, competitiveness, motivation, energy, acceptance of constructive criticism and rejection, positive attitude
But from the perspective of community wellbeing, the most essential qualities are missing from the above list. These are the motivation to serve social goals and values, and commitment to ethics and religious values. These personal qualities potentially differentiate Islamic entrepreneurs and entrepreneurs of third-sector economies from entrepreneurs in general.
Islam regards entrepreneurship as essential and indispensible for the progress of civilization. Entrepreneurship is essential for exploring and exploiting existing and potential resources for the sake of economic growth and development that will benefit the community. In Islam, to engage in business is to perform a duty (fardhukifayah); to have no entrepreneur in a community is regarded as sinful for the entire community. That is how seriously Islam encourages entrepreneurship. Profits are merely incidental in the fulfillment of this fardhukifayah. Emphasizing it as the prime mover, Islam has made entrepreneurship a social obligation that must be performed by at least one member of a society. However, entrepreneurial qualities are very special and rare, and few people have such qualities. That is why Islam made it a societal obligation and not a personal obligation. Thus, the few available entrepreneurs must pioneer ongoing changes through innovations in the economy. Since it is a societal obligation, it has to be for society’s benefit. The more people there are with this quality, the greater the wellbeing of the society.
Islam endorses entrepreneurship regardless of whether it is driven by opportunity or necessity, as long as it stands on moral and ethical grounds and conforms to the Islamic code of conduct. Entrepreneurship in Western societies is mainly driven by the prospect of material rewards. Islam has nothing against seeking profit through creating or engaging in business ventures. The only condition is business people view their undertaking as a form of religious duty (Ibadah) intended firstly to please the Almighty Allah, secondly to satisfy the needs of society, and finally to generate a reasonable income for the owners of the enterprise. Islamic entrepreneurship is not against seeking a reasonable profit, but it puts ethical consideration and community interests at the forefront. Islam aspires to create high-quality entrepreneurs and productive Islamic entrepreneurship. Thus, Muslim entrepreneurs are permitted and encouraged to be involved only in morally accepted and socially desirable productive business activities. Haram (non-permissible) activities, involving alcohol, drugs, usury, prostitution, gambling, and highly speculative business behaviors, are strictly prohibited, despite the possibility of their economic viability.
In Islam, entrepreneurship is viewed from a larger perspective, and the entrepreneur is accorded an altruistic role that goes beyond satisfying immediate needs and personal interest. Thus, the ‘pursuit of self-interest ’and ‘self-centered wealth creation’ are not the primary motives behind Islamic entrepreneurial activity. Altruistic motives override personal considerations in the belief that self-interest will be fulfilled a natural outcome of advancing the common welfare of society (Kayed and Hassan 2010). The personal motives of entrepreneurs for starting their businesses are considered important indicators of the status and direction of entrepreneurship in a country. The ability of entrepreneurs to orchestrate and lead economic transformation and to carry out needed fundamental changes in the cultural, social, and economic structure of a country depends largely on the motives in starting businesses. Besides having a holistic approach, Islamic entrepreneurship means that the individual must first be a religious person, motivated by success which encompasses the present world and the hereafter. Entrepreneurial success, in Islam, is broader than the ‘bottom-line’ principle of earning profit and material wealth (Radiniz Site 2008).
The following philosophical principles describe the nature of Islamic entrepreneurship: it is an integral part of the Islamic religion; Islam encourages its ummah to venture into business; doing business is a part of Ibadah (good deed); a Muslim entrepreneur (like any other Muslim) is a Khalifatullah (Allah’s agent) guided by Islamic ethics and values prescribed by the Holy Qur’an and the traditions of the Prophet (Hadith).
Islamic entrepreneurship and entrepreneurs being imbibed with the Islamic spirit of community wellbeing as a priority fit very well into the proposed restructuring of the third-sector economic model. Applying the principles of Islamic entrepreneurship to this sector will enable it to develop a large number of enterprises operating in the mainstream and growth sectors of the economy. We propose this kind of mainstreaming of third-sector economies. Only then will they gain parity with the first sector and ensure sustainable growth with equity and social justice nationally and globally.
However, in most countries, few entrepreneurs have Islamic convictions and spirituality. In non-Muslim countries in particular, entrepreneurs cannot be expected to conform fully to the religious and material aspects of Islamic norms. Therefore, they cannot be reasonably called fully Islamic entrepreneurships. Under such circumstances, entrepreneurship which falls short of fully conforming to the religious elements of Islamic entrepreneurship but conforms reasonably well to its material aspects and community-centric spirit may be conveniently called Islamic-style entrepreneurship. Under the Islamic- style entrepreneurship, output maximization, profit maximization, employee benefits, etc., are all subject to considerations of community wellbeing. Profits for the equity holders and benefits for employees are residual matters. Therefore, this may be a suitable and useful model for third-sector economics that promote development with social justice in developing countries.
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[i] The paper was earlier presented at the 5th International conference on Islam, Education and Development, September 17-18, 2011, Dhaka, organized by the International Islamic University Chittagong, Bangladesh.