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Let me treat this problem of Islam using the science of memetics. A Meme is an entity capable of multiplying with change and spread. All ideas are memes.
Islam is an idea. it originated from Muhammad and then spread. The moment it left mohammad, he lost the monopoly on that idea. He told it to people. It is not mandatory that people took it exactly the way he told. Different people perceive different experiences differently.. Thus, if say 10 people were first given that idea, in all probabilities, 10 people assimilated the same idea in 10 different ways. Thus we have 10 variants of same idea. So on and so forth.
Now, not all people can devise their own variant. So they follow one of the established variant of an idea. With time, new variants are created, few of old one's get extinct, few of them evolve further and all of this exist in complex dynamic equilibrium with other ideas which are competing with the one under consideration. For example, the sufi variant of Islam was treated with warmth by followers of Hindu variants as compared to the purist ones. And there are many complex factors working in favour or against a particular idea.
So now we have for example two variants of original idea in given space-time. One is liberal, other is conservative. In given circumstances, the variant which will ensure the sustainance of the idea optimally, is selected. In countries where Islam is minority, liberal variant of idea should be selected ideally. Because if the conservative one is followed aggressively, the local majority who have their own ideas which according them are the best and worth dying for, get offended and vicious cycle sets in.
Same thing happens when we eradicate a disease. It is impossible to kill each and every bacteria. What is done is that the proliferation of non-pathogenic variants/mutants/strains of bacteria is encouraged over pathogenic one. So the pathogenic variant dies out and equilibrium sets in.
1)There are such non-fanatical variants of Islam available.
2) These non-fanatical variants DO NOT follow Quran literally. For example, few of the finest artists in subcontinent were Muslims. Music and fine-arts. If Islam is followed in purest (strict Quranic) interpretation then these geniuses won't exist. These people have played very important role in creating and maintaining harmony of majority Hindus with Muslims because of shared experiences which foster sense of belonging.
3) According to me suppressing the artistic blooms in heart of sensitive and creative person is one of the most cruel things. Islam in purest variant, does not allow emergence of people like Ustad amir khan, Mohd Rafi, Nusrat fateh ali khan, Ghulam ali and many others, whose existence have helped a lot in creating an armosphere of harmony which allows the existence of Islam in Hindu India.
4) Same goes with painting, along with modern variant of photography. We feel bad on seeing the photo of lost loved ones, but we feel good as well, it is a subjective experience which differs with mood of the experiencer. This is no way an excuse of prohibiting the portrayal any worldly objects, which Islam does.
5) What do the followers of these liberal variants of Islam do? They overlook the nasty part in original idea (Quran) which does not allow zillion things. Honestly, the Don't Do list in Quran is so huge that if followed at its best, you really get medieval society like Taliban.
6) Followers of liberal variants overlook most of the things in Do not do list, and follow only those which are feasible for their optimal growth and sustainance. This means, they have ability and intellect to choose what is right for them in conditions they live in. This is the basis of rationalism.
7) In their heart they know that it is fallacy to say that Quran is infallible and that it applies to all people in all lands in all times, which is not the case. IMO, it is pure arrogance which does not allow any modification. This facilitates misinterpretation.
My solution - Religion should not be organized. It should be personal. Religion in modern times should deal with spirituality alone and nothing else. We have separate codes which are consistent with modern times for governing the behaviour of society. Like Constitution, penal code, and cultural ethics of local population.
Religion should not pervade anything beyond the domain of spirituality. It should NOT discuss the rules for marriage, love, sexual orientation, crime and punishment, dress code, language, script, profession, taxes, human rights (including women's rights), behaviour with people not following one's ideology, work culture, study culture etc.
There are elaborate laws available to address all these problems. which are different in different lands and cultures and are best suited for existence there. Follow them for questions pertaining to ANYTHING APART FROM sprituality, which is extremely personal endeavour. It is one's personal business alone, nobody else's.
Such variants of Islam are existing in form of many educated and moderate muslims which keep Islam just to themselves, just like Hindu, and uses it only for spiritual aspects, if any, in his life. For anything other than personal spiritual upliftment, they rely on law of land. These variants must be encouraged so that they outgrow the fanatical ones which try to influence every aspect of human life without consideration of space and time.
And this applies to every religious idea. Just that most of the ideas in most of the countries have allowed this modification or are in process of doing so.. The only exception being Islam.