1. Introduction

Economics is a social science. What to produce, how to produce, and for whom to produce are the main questions of economics. Each economic system provides different solutions to these problems. There are several schools of thought on how these questions are answered or how these functions are carried out. These schools vary from neoclassical economics to Marxian economics, of which the Keynesians and the monetarists were the famous ones until 1970s. New classical school and new Keynesian school are the popular ones in recent years. Although philosophical, ethical, and religious origins of these widely accepted schools of thought can be discussible, there are some less known schools as well. Amongst them Islamic economics, by its very religious character and appearance, is the most important and influential one. The purpose of this essay is threefold: First, to provide an overview of the basic principles of Islamic economics and finance. Second, to examine the factors motivating the development of Islamic economy and finance in the world. Third, to evaluate the recent performance of Islamic economy and finance in practice. The paper is organized as follows. In the first section, basic principles of Islamic economic doctrine, its emphasis on communal values and social justice, and major institutional elements necessary to establish an Islamic economic order are explained. In the second section, the roles of money and finance in Islamic economics are studied, Islamic banking system is compared with conventional banking system, and Islamic financial instruments are introduced. In the third section, institutional, moral, ideological and other factors, which influenced the development of Islamic economy and finance, are discussed. In the fourth section, recent developments in the area so-called Islamic economy and finance are surveyed and the Turkish experience is summarized. In the fifth section, some comments are made on the application side of the Islamic economy and banking over the last quarter of the twentieth century. This section also includes a short quantitative evaluation of the Turkish case. In the sixth section, challenges and problems given by the globalization process are briefly discussed. The seventh section concludes the paper. 2. Major Tenets of the Islamic Economics Islamic economics is presented as a superior alternative to existing economic doctrines and systems. It proposes a certain set of moral and institutional reforms based on the traditional sources of Islam and these reforms are designed to overhaul the existing economic systems. The prevailing economic systems neglect the moral dimension of human existence and feature aggressive opportunism, dishonesty, and mistrust. For example, corruption and cheating remain terrible problems of our economic lives. They altogether form a vicious circle and can not be eliminated completely. The main reason of this vicious circle is the selfishness inspired by Western individualism. Capitalist systems seek social efficiency through actions motivated by self-interest, and because of this they are occupied by unemployment, pollution, and uncontrolled poverty; and regulations to correct the shortcomings of capitalism are usually ineffective because those who implement them are governed by the wrong values (Kuran, 1997: p.26). However, Islamic economics insists that in a society whose members are endowed with Islamic values, the flaws of capitalism will be absent. Islamic economics emphasizes the encouragement of communal, non-individualistic values and fighting against selfishness. This is one of the distinguishing aspects of Islamic economics for it views communal values as critical to an economic system‟s operation. Economics as that part of man‟s activity, which deals with the production of goods, accumulation of wealth, labor, work, trade, and exchange of goods and services etc., has been important in every civilization. Economics was never considered as a separate discipline or a distinct domain of activity in Muslim societies like their Western counterparts (Taheri, 2000). Consequently, there is no even a word for economics in classical Arabic. The term Iqtisad (economic) is used as a fair translation of the modern term “economics” in Arabic. Iqtisad has a very different meaning in classical Arabic. Ihya-u-Ulum-id-Din, a famous book written by Imam Gazzali defines the term primarily as a principle of moderation (i.e., golden mean) where it means “neither too much nor too little” (Taheri, 2000, quoted from Gazzali, 1971: p.265). Early contributions to Islamic economics mostly came from Pakistanis, after the initial writings of Maududi, a famous Islamic activist. By 1975, about 75 percent of the contributions to Islamic economics are by Pakistanis. The share of non-Pakistani contributors has grown since then, but that of South Asians continues to dominate (Kuran, 1997: p.29). As Timur Kuran recognizes Pakistan is the only state founded with the special purpose of giving Muslims a place where they can govern themselves according to Islamic rules. Iran follows Pakistan in putting Islamic economics into practice. Therefore, it is reasonable to accept that these two countries made substantial contributions to Islamic economics.

According to Mohammed B. Sadr, three basic principles of Islamic economy are multi-faceted ownership, economic freedom within a certain limit, and social justice (Es-Sadr, 1980: pp.291-303). These are the three basic components of Islamic economic doctrine, according to which its theoretical content is defined. Islamic economics can also be distinguished from other economic regimes in terms of the broad lines given by these components.

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