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Based on the analysis presented here further studies can be undertaken to determine the scope of rent-seeking and their impact in Muslim-majority societies. Farooq, M. Published by Emerald Publishing Limited. Anyone may reproduce, distribute, translate and create derivative works of this article for both commercial and non-commercial purposes , subject to full attribution to the original publication and authors.

The Islamic finance industry is steadily growing across the Muslim world and beyond. Lawyers, in partnership with bankers and jurists, strive to provide them a re-engineered version of those products. El-Gamal, Since then, Islamic economics and finance literature has accrued some references to rent-seeking, but the industry has shunned El-Gamal.

Even where his work on rent-seeking is referenced, there is hardly any elucidation on the theme of rent-seeking theory, let alone the rentier economy Ahmed, Whether the Islamic finance industry itself is engaged in some form of rent-seeking i. Rather, rent-seeking behaviour is ubiquitous, and rentier economies are common. These terms refer to an entity or state that increases its wealth by leveraging political or legal control over something that already exists, e. Islamic finance exists and operates within such environments, and thus remains vulnerable.


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This is important because while achieving the latter requires achieving the former, achieving the former does not necessarily mean achieving the latter. The rest of this paper is organised as follows: the second section explains how the unearned dimension of income and wealth is broadly ignored; the concept of rent-seeking behaviour and the rentier economy is thereafter discussed.

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The following section notes some limitations and implications for further research; and finally, the conclusion is presented. This definition not only encompasses money interest as was the practice during the time of the Prophet but also prepaid transactions and credit transactions. Haneef, , p. Notably, even in the conventional context, usury has been identified as rent-seeking Ekelund et al.

Interest is understood as a stipulated excess extracted by the lender surplus unit for which the borrower deficit unit , arguably, does not get any reciprocal commercial benefit or value, except the use of the capital with a delayed payment period. Although the unearned dimension is commonly mentioned, neither its scope nor its implication is properly identified or appreciated. Rent-seeking behaviour and culture primarily relate to this unearned dimension of income, gain or other type of revenue.

In the modern world, with its increasing complexity, the widespread and powerful presence of rent-seeking behaviour and culture, often related to the rentier economy, calls for a better understanding of it. The term rent as in rent-seeking behaviour is not in the ordinary sense of the word, i. It is also not in the sense of a factor payment for land as one of the four factors of production.

Bibliographic Information

Rent in this context is used in a special economic sense. Notably, although the term rent-seeking is a more recent coinage, the concept of unearned income or unjust enrichment is not new to Muslim societies or to fiqh Islamic jurisprudence. Unfortunately, it has not emphasised the ubiquitous and serious role and effect of those practices that would be broadly identified as rent-seeking.

Thus, although Islamic legal discourse does deal with rent-seeking behaviour and practices, there is a serious gap between modern economic discourse about rent-seeking behaviour and culture, on the one hand, and the pre-modern discourse about prohibited anti-market practices, on the other. Not only modern societies and economies have become more sophisticated and complex but the modern discourse about rent-seeking has also become robust, nuanced and substantive from theoretical and policy perspectives.

Information Resources Management Association, The theme of rent-seeking behaviour is primarily in economics as well as public choice theory. In a competitive market, economic profit serves as a signal to attract new entry, whereas economic loss causes losing firms to exit the market. This means the theoretical long-run outcome of competition is zero economic profit also known as normal profit earned on average by the participating firms in an industry.

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In a dynamic, competitive, entrepreneurial economy, economic profits are generated by creating new products or methods through discovery, innovation or improvement that allows the contributing firm to earn economic profit. This is legitimate and fair return for the entrepreneurial value and wealth creation added to the real economy.

Economic rent Buchanan, ; Johnson, is quite different from economic profit. Competition can eventually reduce or eliminate economic profit for the advantage of the consumers and broader society. It thus creates more incentive for real value creation, as value creators will earn economic profit at least for a while. However, economic rent is protected by various institutional and legal means that prevent its elimination or reduction.

Thus it is unjust and unearned because it thwarts legitimate competition by artificially stifling the market. Let us elaborate with an example of piracy Marotta, A company shipping through the sea is expected to earn, say, 20 per cent profit.


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Notably, piracy is illegal, whereas economic rent is practiced more commonly in a legal environment. In modern democracies, lobbying by various business entities or constituencies to influence government policies is an example of rent-seeking behaviour. Consider, for example, the case of some of the leading companies in major sectors in the USA.

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Lobbying government cannot be always equated with rent-seeking, and therefore, a distinction should be made between rent-seeking and non-rent-seeking lobbying. However, should not corporate profits be solely from their business activities? This is not a charitable contribution, so what do they get out of it? One of the key goals of lobbying is to influence regulation. For example, pharmaceutical companies consider influencing the US Food and Drug Administration, the federal agency that regulates the pharmaceutical industry, vital to the extent that they spend an enormous amount of resources for this purpose Union of Concerned Scientists, In such a sheltered or protected market, profits are higher than they would otherwise be.

The study shows that regulation and lobbying in the USA have contributed almost as much to corporate profit 1.

An Overview Of Rent-Seeking Behavior

This means that in generating profit, rent-seeking lobbying is almost as important as capital, which is unjustified in the context of the real economy. In the absence of economic rent, costs would have been lower, and prices would have been lower.


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  4. Therefore, these rent-boosted profits result in a massive transfer of wealth from consumers regardless of rich or poor to company shareholders. In the case of economic rent, with a similarly negative impact on the economy and society, the unearned gain is without any stipulation. In other words, wealth or value transfer occurs without the common people even being aware of it.

    They are the consumers and the broader society that are the ultimate sources from which such economic rent is extracted. Another rent-seeking example is corruption in the public sector Coolidge and Rose-Ackerman, ; Lambsdorff, ; Khwaja and Mian, ; Aidt, ; Ferwerda et al. In many countries, it is all too common to award contracts to privileged parties based on bribes euphemistically, gifts. This is a form of economic rent charged by public officials. Also, public sector contracts are often offered at an inflated cost, which is a rent for contract-winning parties.

    ECON - Rent Seeking

    The banking and finance sector can be an integral part of such corruption. It is manifested in lending to related parties i. At the same time, less influential sectors are often ignored unless specific directions come from regulators. In many developing countries, the poor are more vulnerable to the consequences of corruption, and the rich and powerful have an interest in the perpetuation of poverty Chetwynd et al. In addition to legitimate profits, they can earn economic rent Jacobs, In this context, the reality that Muslim-majority countries rank high on the global Corruption Perception Index is relevant.

    In many countries, law enforcement agencies are involved in extortion against common people. Such unearned income is not just illegitimate but also immoral and constitutes unjust enrichment at the expense of others Suzuki and Miah, Apart from the sectors mentioned above, in developed countries, the financial sector has become a swamp for rent-seeking behaviour. In many oil-rich Gulf countries, labour visas are sold, even though this should not be the case Kuran, ; Louer, ; Hertog, Local sponsors and their agents often pocket the price of a visa, an example of unproductive, unearned income.

    Similarly, in these countries for expatriates to engage in business, they must have local sponsors or locals to gain a commercial licence. Rent-seeking behaviour encourages seeking income and wealth without work or contribution to value creation in the real economy. The behaviour can be understood as people being interested in getting a larger share of the pie without making an effort or contribution to make the pie larger. However, rent-seeking is tolerated, pursued or even facilitated.

    Part of the problem is that Islamic finance and Islamic commercial law are focused on the transactional level of corruption. From an efficiency and performance perspective, a transaction focus is important. Although the terms rentier states and rentier economies are used interchangeably, the latter is considered broader in scope. Such economies are in the grip of a few who control the corridors of both political and economic power, where government policies serve the privileged few Dauderstadt and Schildberg, ; Ahmed, The essence of the rentier society is rent-seeking behaviour and culture that lead to the exploitation of the broader, disadvantaged segment of the population.

    Only rather sparingly does one come across discourse on rent-seeking behaviour in the context of Islamic finance Facchini, ; Abedifar et al. It should be noted though that there are some major constraints regarding the theory of rent-seeking. One such constraint is that data that measure the magnitude of rent-seeking are not systematically collected. Accurate and precise data are thus not available. One reason for this state of affairs is that not all rent-seeking is explicitly observed Laband and McClintock, Yet, as the theory of rent-seeking has developed as part of public choice theory, the field has advanced considerably.

    As rent-seeking theory is yet to be adequately integrated into standard economics texts, it is understandable that newer fields like Islamic finance would have little coverage of this theory. But as articulated in this paper, the concept and theory of rent-seeking are highly relevant from an Islamic viewpoint. Islamic finance is already handicapped, as it operates in a global environment, structure and system that are not based on Islamic values and parameters. Meanwhile in the literature on Islamic economics and finance, there is sparse but growing recognition of rent-seeking behaviour Hassan and Mahlknecht, , p.

    Such societies foster and reinforce rent-seeking behaviour and culture. Consider for example the history of Islamic finance. The initial impetus came after Organization of the Petroleum Exporting Countries hiked the price of oil in in the aftermath of the Arab—Israeli war.

    It imposed an indirect oil embargo against a number of countries that supported Israel in the war. Overnight, the price of oil shot up per cent in these countries. Whatever the rationale for this oil embargo, it was a rent-seeking effort. Benefiting from the windfall profits a part of rent-seeking from the oil crisis, oil-rich Gulf countries were flush with oil revenues.