When dealing with Islamic economics, many academicians seemed to have thoroughly explored the commercial side of such a subject, thereby forgetting its social side which has a profound impact on people welfare. However, this positive effect of Islamic social finance which can also be regarded as distribution of income in the economical term may not be achieved in the present time. According to Macroeconomics theory, the distribution of income has no impact on economic growth of the nation.

The previous address was delivered by Ir. Adiwarman Azwar Karim, M.B.A., M.A.E.P, prominent Islamic economist and author of the book “Ekonomi Makro Islam”, when presenting the Public Lecture on Islamic Social Finance named “IPIEF Dialogue and Intellectual Discourse (IDEAS)” which was organized by Islamic Economics Student Association (IESTAC) on Monday (12/3). Having taken place in Amphitheater Hall, Pascasarjana Building, this agenda was attended by nearly 150 students from various departments.

According to new Macroeconomics Theory as developed later by Keynesian School emphasized the opposite, Adiwarman highlighted: “It is right that the common Macroeconomics theory stated the distribution of income did not affect Gross Domestic Product (GDP), yet the new theory has argued that distribution of income—referred to Zakah, Infaq, Shodaqah and Waqf—is indeed enhancing the total utility of the nation at the present time. It can be illustrated as follows: when a certain amount of money, let say Rp 1000, of the rich was donated to the needy, thereby reducing the rich utility, at the same time it is very likely that the utility of the poor is increasing much higher than the reduced utility of the rich. This is the first fact regarding the leading role of Islamic social finance in the economy”.

He then threw the light on the second fact of the role of Islamic social finance, arguing that while receiving the little sums of money, the poor will be able to boost their consumption. To this end, it is worth noting that Consumption here is the main part of GDP—remember the simple equation represented GDP: Y = C + I + G, hence the increase in the people (the needy) consumption may certainly stimulate the considerable growth in the economy. This fact therefore has implicitly denied the notion accentuated by Macroeconomics theory stating that Zakah, Infaq and Shodaqah as social finance instrument have no impact on growth. Adiwarman said: ”It is right the Islamic social finance did not impact growth in the present time when is equal to 0, yet after the consumption of the poor increased at time t = 1, hence it can significantly promote economic growth”.

Finally, he explained the tremendous impact of Islamic social finance on economic growth as the real sector-driven by referring to the Irving Fisher’s formula on the relation between monetary and real sector, notably: M.V (monetary side) = P.T (real sector side—GDP). Exploring the Islamic social finance, he said: “We basically discuss about V (velocity of money) in Fisher equation. Once the wealth belonging to the rich people is distributed to the needy—through Islamic social finance instruments—by which they can afford proper goods and services, it may lead to the considerable growth in economy since the velocity of money for consuming goods and services rises. This condition is likely to stimulate the real sector side (GDP) to spur.”

These are the reasons why Islamic social finance can be the major contributor to the economic growth. [Aw]

Source: IPIEF