It is an empirical observation that people desire to have smooth consumption through their lifetimes. Lifecycle income hypothesis and permanent income hypothesis try to explain that in microeconomic foundation based theories. Both negate the Keynes assertion that average propensity to consume (APC) falls as income rises. Microeconomic evidence is also consistent with lifecycle income hypothesis in various empirical studies in the literature.

In this article, we try to explain how consumption smoothing is achieved and supported in an Islamic economy through a set of institutions and behavioral norms given that people want to spend their lifetime resources fairly equally through their lifetimes.

Credit Image: Stock Xchng Salman Ahmed Shaikh Islamic finance is a growing industry almost everywhere. The key regional hubs of Islamic finance include Middle East, South Asia, East Asia and Europe. The industry is growing at a rapid pace and now, it has presence in Africa, Central Asia and North America. Despite the financial crisis [...]

Credit Photo: Stock Xchng Salman Ahmed Shaikh In this newsletter, we provide a brief literature review on the theory of firm in Islamic economics and how a firm’s objectives, role, rights and governing framework is different in Islamic Economic system as compared to neoclassical and value-neutral economic framework. Amin et al (2003) explained that in [...]

Agency conflict arises when the various parties have different incentives or objectives in a mutual relationship. Two main agency conflicts in commercial context are: Between shareholders and managers Between shareholders and creditors In the first agency conflict, the managers appointed by the shareholders may work in a manner that increases their own welfare, but which [...]

Credit Image: Xchng Stock Salman Ahmed Shaikh It is a fact that income inequality even in developed countries is high and has been increasing despite sustainable growth experienced in growing East Asian countries and also in Europe and North America in general. One of the explanations often given for presence of income inequality is that [...]