April 26, 2006
Islamic Banking/Finance - Questions & Discussion
Not to depart too much from the important topical stuff, particularly discussion of the recent horrors in Egypt, but I want to solicit our brains trust to introduce me and other readers to a more general MENA-relevant concept I hear quite a bit about but know little of.
The concept is "Islamic banking" or "Islamic finance". A big subject to be sure, but my basic understanding is that most Islamic jurisprudence forbids the giving or receiving of loans which are to be repaid with interest (often called "usury"), and as a result, there is a problem with banks, institutions and individuals performing deposit (e.g. savings account interest), loan, and investment activities normally expected in non-Islamic financial situations and relationships. So "halal" (religiously permitted) modern Islamic financing as been developed, or tried at least. Can any of these issues be addressed for your humble and perhaps lazy interlocutor -- and for lurkers everywhere:
- the origins in law/scripture of such prohibitions
- the range of prohibitions
- the current practices, their prevalence and prognosis
- alternate interpretations of usury
- other useful relevant and interesting stuff
Sure it's a big assignment, but that's why we're here.
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I am knew here. Asalaamualaikum wa rahmatullahi wa barakatu? WHats MENA? Thanks for whoever mentioned the takfiris. THey should be exposed for who they are. Thanks...
Posted by: Bikhair at April 26, 2006 11:45 PM
Posted by: Bikhair at April 26, 2006 11:47 PM
MENA = Middle East/North Africa.
We say it so much that we have to economize.
Posted by: matthew hogan at April 27, 2006 12:04 AM
Mathew, reorganised this.
As to the questions, I am no expert in Islamic finance, but let me give some responses from the standard finance perspective.
most Islamic jurisprudence forbids the giving or receiving of loans which are to be repaid with interest (often called "usury"), and as a result, there is a problem with banks, institutions and individuals performing deposit (e.g. savings account interest), loan, and investment activities normally expected in non-Islamic financial situations and relationships.
Historically until the late 19th century or so, general Islamic jurisprudence held that all interest was usury and banned.
As the colonial encounter began jurisprudence loosened.
Contrary to most impression or general belief, most of the MENA banking and finance system is not organised on "Islamic" lines, but along Western lines - although there are features in the region that might be attributed to underlying discomfort with interest such as interest rate regulation.
So "halal" (religiously permitted) modern Islamic financing as been developed, or tried at least.
Well, Islamic finance began to emerge in the 1970s or so. With very few exceptions it has remained a marginal activity relative to standard financing.
Islamic facilities, windows, services or whatever have recently picked up although there is a lot of hype and not that much data.
* the origins in law/scripture of such prohibitions
The Quran. And of course the developed commentaries on the same.
* the range of prohibitions
Historically, non-Muslims did extend the state loans, so even in the classic period there was work arounds, and then of course during the 19th century the Med Basin states loaded up on debt from Western banks.
* the current practices, their prevalence and prognosis
As I noted already, most of the MENA region financial sector is not run on an Islamic finance basis. Islamic finance remains marginal, even in the Gulf, where it is most popular.
Ostensible "Islamic" banks and products, for example, don't even exist in Morocco and are marginal in the Maghreb generally.
Banking in general in the region isn't going to change anytime soon.
I don't know. It's certainly fashionable in Khalije and there is a demand for it. I presume we'll see a slow expansion to meet that demand, both in terms of those placing money (saving) and borrowing.
* alternate interpretations of usury
That would be the standard.
I would note that I just was reading a book by Timur Khan, Islam & Mammon, that speaks to these issues - well more to the emergence of "Islamic economics" than finance per se.
There is a discussion therein on the religious issues, but I always found Faqih talk boring and skipped that.
I shall perhaps try to look into this further.
But the shortest answer is that Islamic finance is not that big a deal.
Posted by: The Lounsbury at April 27, 2006 12:04 AM
3an at-takfirine, had kan ana l-dkerthoum.
Kander inta maghrebi, eyah?
MENA is an abbreviation of Middle East - North Africa.
It is very jargon and not common, I suppose we should explain it more often.
Posted by: The Lounsbury at April 27, 2006 12:08 AM
Matthew, you'll get a rather good explanation here:
Unfortunately, the modern confusion of usury and interests is one of the biggest displays of general ignorance by many Muslims today.
Posted by: Shaheen at April 27, 2006 12:10 AM
Shaheen's link is interesting, but historically like the Xians, the Muslims regarding interest lending and usury as the same.
By the way, the article contains an error: "Most of the "Muslim" countries have various laws against interest
That's not correct. Most Muslim countries financial systems operate on a "Western" basis, and interest is fully operative.
Now, I agree with the initial reading of the author, but his or her reading is a bit ahistorical.
I would, of course, argue that while the historical aversion, like the Xian one, was quite understandable, modern finance should be understood along the lines of what the linked author argues.
That being said, there are a lot of Islamic scholars out there (utterly ignorant of finance, but worshipping at the alter of blind tradition) who argue for "Islamic Finance" and economics.
Again, the Timur Khan book cited - actually a collection of articles and more about the intellectual underpinning of Islamist connexions in "Islamic Economics - covers some of the historical grounds.
I should confess that I am of mixed feelings regarding the Khan book as I had expected it to delve more profoundly into Islamic finance, when it really covers rather different subject matter.
I might as well add my opinion that I professionally consider most Islamic finance to be simply disguising what should be perfectly acceptable "time value of money" payments. That being said, I can also see there is a genuine demand on both sell and buy sides for "Islamic" products, and a certain important percentage of Muslims who remain outside the modern financial system simply because of an aversion to interest (faida). While curing their ignorance might be an ideal solution, selling them a product that gets around their delicate sensibilities is another solution. My lack of deep morality in this area says to me, sell the product and make everyone happy, choice in other words.
Now, authors like Timur Khan hate the so-called Islamic finance because they see it as introducing an inefficient act of duplicity into the Islamic world. Certainly Islamic products seem to be, ceteris paribus, more expensive and less efficient that straight financial products, and the Muslim world hardly needs yet another weight around its neck. However, if, as in the Maghreb, some 50 plus percent of the population avoids interest finance, I would say, well, in the short term maybe one gains efficiencies by using it.
Posted by: The Lounsbury at April 27, 2006 12:26 AM
My Arabic isnt great. Are you asking me if I am from the Maghreb? No, I am not but if you can hook me up with a sister I would like to spend Eid there. InshaAllah, I will be in London.
Posted by: Bikhair at April 27, 2006 12:32 AM
You got it Bikhair, even if I was using dialect.
Hook you up with a Sister?
Ah my friend, you need only come to Morocco....
Presuming you have a handsome passport.
Posted by: The Lounsbury at April 27, 2006 12:42 AM
I am a sister. I need a sister to chill with. BTW I have the most handsomest passport: Wa Anta Al Yankiyah!
Posted by: Bikhair at April 27, 2006 12:58 AM
Well, Marheben bik ya ukhtna.
Leaving aside my natural scuminess, perhaps I can ectend you my JV partner. When she is not arguing with me over BTU rates on heating systems and the like, she can be most engaging.
Posted by: The Lounsbury at April 27, 2006 01:22 AM
My lack of deep morality in this area says to me, sell the product and make everyone happy, choice in other words.
I used to say the same thing until faced with a more active stupidity than I could take, which left me hating Islamic finance, cynicism or not.
Khan is very much right on target.
if, as in the Maghreb, some 50 plus percent of the population avoids interest finance, I would say, well, in the short term maybe one gains efficiencies by using it.
On the very very very short term only. Otherwise, another short term real solution is: introduce economics 101 at first grade and educate the fucking retards. Now. Also teach them precision in language. Repeat after me: Re-ba. Fa-2i-da. Two different words, chimps.
Posted by: Shaheen at April 27, 2006 01:39 AM
Returning to the subject at hand and leaving aside my pimping out my fine and excessively good natured JV partner to promote Sisterly visits and the like, let me draw attention to this annoying but typical article on Islamic finance by a moderately conservative Egyptian economist (based in the US): Primer on Islamic Finance. [PDF]
I read this over relatively rapidly, but it seems to me that the author, el Gamel, captures the dominant view on the issue among those who think Islamic Finance is, well, Islamic.
I warn, the author is fastidiously tedious and writes things such as "Islamic scholars have long debunked the explanation of the prohibition of Rib¯a solely on the basis of its exploitative nature."
Well, Islamic scholars of his preference to be sure.
I should note that Timur Khan (as memory serves) goes off on the kind of thinking el Gamel represents. I have to say while reading Khan I was irritated with him as I wanted different discussions, but reading el Gamel I think I may have to return to Khan.
Posted by: The Lounsbury at April 27, 2006 01:42 AM
You are probably right, but my natural inclination to profit off of idiocy seduces me.
Part of the problem of course is not just precision in langauge, but the fact that religious scholars with all the economic literacy of a potato still control the of definitions. The el Gamel's type of people. I rather despise them myself, but to win the argument you need people to argue in the same vein.
Posted by: The Lounsbury at April 27, 2006 01:55 AM
I should restrain myself and get some sleep but rereading el Gamel has raised my blood pressure.
Let me quote this beauty from page 21:
In ’Ibn Al-‘Arab¯ı’s ’Ah. k¯am Al-Qur’¯an, he reports a specific argument given by the Arabs during the time of Prophet Muh.ammad (pbuh) to support their statement that “trade is like Rib¯a” [2:275]. They argued as follows: Consider a credit sale, with a price of 10 payable in a month. After a month, the buyer and seller agree to postpone for one more month, and increase the price to 11. The latter is forbidden Rib¯a. They then argued: is this not the same as an initial sale with the price of 11 deferred for two months? The answer in [2:275] was a decisive “but All¯ah has permitted trade and forbidden Rib¯a”. .... Therefore, we may use credit sales as a form of finance, and we must categorically avoid interest-bearing loans. Why one is permitted while the other is forbidden
can only be fully known by All¯ah and whomsoever he gave such knowledge. As a practical matter, we should know what is permitted and use it to our
advantage, and what is forbidden and avoid it.
Or in the alternative, one could admit that the hair splitting tortured legalisms of economically and commercially illiterate fuqaha from centuries ago lead to nonsensical and tortured readings of the Quran, while a simpler reading based on the spirit and direct language removes the need for authors like this one to blither on for ten pages in increasingly unconvincingly annoying tortured justifications.....
I may rupture an artery, best take me meds and leave it at this, people like el Gamel are part of the reason why Muslims labour under economic disadvantage. Bleeding hair-splitting self-dealing contemptible mutaslimine oppressive prigs.
(I can't resist adding this:
It is no secret (at least it should not be a secret) that the Islamic bank or financial institution will take into consideration the same factors when determining the rental payments and residual value that a regular bank would consider: the value of the financed item, its depreciation value, inflation, the credit-worthiness of the lessee, the opportunity-cost value of the money (as
reflected by market interest rates), etc. Of course, an implicit “interest rate” can trivially be calculated from the price, residual value, term of the lease and the lease payment. There is no need to hide this fact, and indeed, the intelligent Muslim customer .... must be encouraged to “shop-around” and ensure that the Islamic financial institution is not implicitly charging an interest rate which is not in line with the conventional market. However, in the final analysis, the difference will be in the form of the contract. If the lease is structured in accordance with the various conditions detailed in books of jurisprudence, it will contain no Rib¯a and will ensure that it cannot contain such forbidden Rib¯a in the future
(e.g. in terms of late payment fees, etc.).
So, as you can see, this mutaslim idiot has to admit that in reality all the Islamic lease is doing is dressig up the same transaction in some legal form that meets his dribbling tortured neo-Salafi whankers willfully obtuse reading of the Quran based on their deification of old traditions.
Still, the greedy side of me acknowledges that "Islamic" windows / products have proven pretty profitable as the yahoos who gun for Islamic products pay above odds on a consistent basis for the same product.
Brilliant for the "Islamic" banker, sucks for the consumer.
But hey, caveat emptor
PPS: as readers can see, I can only remain sanguine on the subject of Islamic finance when I either let greed take me over, or I haven't recently read the willfully obtuse (or dishonest or self deluded) writings of the people pimping the same.
Then I am reminded that they're mostly either neo-Salafi tradition diefying idjits or sharks.
I have a soft spot in my heart for sharks, I confess, but ....
I should also point to this el Gamel arty in PDF on interest where the author displays a rather more interesting critical eye, opening the article noting As quotations later in this article will illustrate, this dual role of jurists (condemning conventional interest-based financing, while supporting and personally profiting from its “Islamic” twin) is supported through excessively formalistic interpretation of the letter of the Law.
Posted by: The Lounsbury at April 27, 2006 02:22 AM
Shukran (that's thanks) to all, especially C. "Abu Dinar" Lounsbury.
I may add an update summarizing key points.
Others with additional/qualifying information, and links, please join in too. De-lurk if necessary.
Posted by: matthew hogan at April 27, 2006 10:05 AM
Here's a WSJ article I was geeky enough to save and read later, when it was posted on our company Intranet at the time it was published. Yay for anal-retentive legalisms of all sorts, both temporal and spiritual.
Posted by: Eva Luna at April 27, 2006 10:30 AM
Thanks Eva. May move to top when I get a chance, unless L or the other usual suspects offer that it is fundamentally deficient in some way.
Posted by: matthew hogan at April 27, 2006 10:49 AM
Bou l-Flous if you will.
I do hope someone besides me and Shaheen might comment.
As to the WSJ article, well, I don't care for it much, but it is a decent overview of what the Gulfies are selling as a viewpoint, plus the Western banks moving to cash in.
Perhaps later I will get Lounsburyish on it.
But thanks are due to Eva for sharing (although Eva's love of calling herself a geek escapes me entirely).
Posted by: The Lounsbury at April 27, 2006 10:56 AM
Well, to me "geek" is shorthand for a person with intellectual curiosity re: quirky and esoteric sorts of things, and therefore a compliment. Makes more sense if you know my oldest and closest friends, who were really harcore geeks (though mostly of the math/comp sci sort). One of our circle was even a certified genius.
Posted by: Eva Luna at April 27, 2006 11:34 AM
Historically until the late 19th century or so, general Islamic jurisprudence held that all interest was usury and banned.
An interesting exception to the above was the Ottoman jurist Ebu Su'ud's fatwas in the 16th century that justified the use of awqaf al-nuqud( interest-generating, ostensibly charitable endowments ). They became hugely popular, if still controversial, ways to generate revenue in the Ottoman state at its height and afterward.
Link to the front page of an article on this topic:
Posted by: Tamerlane at April 27, 2006 01:17 PM
[i]Repeat after me: Re-ba. Fa-2i-da.[/i]
While I have heard the riba/fa'idah distinction, I have also heard riba defined as fixed interest.
[i]Still, the greedy side of me acknowledges that "Islamic" windows / products have proven pretty profitable as the yahoos who gun for Islamic products pay above odds on a consistent basis for the same product[/i]
Similar to green products, perhaps, though as they become more commonplace that may be expected to go down
Henry & Springborg mention the trust factor and the role Islamic banking might play in integrating the informal economy into the formal. That seems reasonable to me
Posted by: mas at April 29, 2006 01:09 AM
Dont take this the wrong way but you scare me.
Posted by: Bikhair at April 29, 2006 01:46 AM
While I have heard the riba/fa'idah distinction, I have also heard riba defined as fixed interest.
Well, in that case, you should ask those who want to lump riba and fa2ida in the same bag to kindly tell you what the difference is between both and what the word for usury is in Arabic. You can also ask them why God is so confused as to not distinguish usury and interest and how He told them he actually meant fa2ida when he said riba. It would be nice to know how they can believe in a God who by forbidding interests, practically condemns Muslims to litterally remain in prehistoric economic structures (pre-monetary ones). It would be nice if you also could get an answer as to how comes God is so confused as to explicitely say that commerce is okay all the while forbidding interests in the same verses; when in fact there's pretty much an equivalence between both acts (any act of commerce can be expressed in terms of an interest based operation and vice versa)?
All rhetorical questions of course, but really, you can tell those half wits you've heard that definition from to actually get some of the basics before farting with a ridiculous sense of authority about things they are illiterate in. I'm not an expert in finance, but let's say I have some vague idea of the field. If that is enough for me to see how pathetic they are when they talk about "Islamic finance", then I can't even imagine how animal they can sound to the experts.
That said, there's a market for Islamic finance, so I'm not against operating in it. I don't blame those who offer the products. I blame the ignorant idiots who demand them, and their criminally retarded references who tell them they're right.
Posted by: Shaheen at April 29, 2006 03:39 AM
"Henry & Springborg mention the trust factor and the role Islamic banking might play in integrating the informal economy into the formal."
This is true but the trust issue can work against people as well. Utah has one of the highest rates of fraud in the US because so many Mormons will blindly trust a fellow Mormon in investment schemes that are obstensively religion-driven but are actually just scams. Evidently "religious affinity fraud" is quite popular in the States.
Posted by: Djuha at April 29, 2006 01:15 PM
The Islamic mortgage market is massive in the UK and the alleged nuances of the transactions have even been integrated into the mandatory tests required for practice in financial services. What is rather intereseting is that upon follow up many of the banks that offer the service will just say that the mortgage has been ratified by this Sharia Council or that but fail to actually put you through to someone who will spell it out to a client and put their doubts to rest. They just assume that the guarantee is enough to motivate a client into paying for the service (in most cases more than what they would pay for a mortgage with a non-Islamic bank) and buy peace of mind. In addition, they employees (unless maybe those of The Islamic Bank of Britian which has very few products) are not up to speed on the religious technicalities and mostly reap the benefits of the marketing department. I suppose everybody wins, the intention of the clients is pure if intellectually deficient, the bankers profit and the illusion that the Islamic banking market is healthy is maintained.
On the other hand there is something to be said about the the pitfalls of high interest personal loan. The commercial impracticalities of conducting commerce while forbidding any form of debt are of course obvious but on a microlevel, easily available personal loans that are peddled to the needy do result in many defaulting, reposession of properties etc. The onus is upon the customer of course, however when the culture is saturated with easy money paid for later (at scandalous prices) the curbing of interest in its most extreme unregulated form may not seem such a bad idea (if purely to protect customers from themselves and not for any religious reason)
Posted by: Meph at April 29, 2006 02:10 PM
"This is true but the trust issue can work against people as well.'
I quite agree, charities and good will always seem to attract scam artists.
And I certainly met people who do not trust Islamic banking
However, if the banking system is largely state controlled cronyism developing an independent alternative has definate advantages.
"All rhetorical questions of course"
Not quite the adjective I would have chosen for your questions
It is not my language or my religion, and I certainly don't claim to know what God meant, but noting the different defintions of riba that people use or want to use I can only say that I put more credibility on the definition as "fixed interest" than I do the modernist defintion of "excessive interest/usury."
As for remaining in prehistoric economic structures, again I would have no idea what God has in mind. I think however there is possiblity that more open and responsive structures could be developed under the rubric of Islamic finance that would allow more people currently excluded, not only by moral qualms over interest but as the banking system is not serving their needs, to benefit.
Posted by: mas at April 29, 2006 04:16 PM
I want to point out that submission.org is not reliable, in my opinion. Their main principle is that only the Quran is a source of Islamic law, and they don't consider the Sunnah to be relevant; most of what they believe is not in accordance with the mainstream of Islamic scholarhsip.
Riba is very clearly prohibited in Islam, and it's a serious matter. Here are some quotes from the Quran and Hadith about riba: http://www.soundvision.com/Info/life/qandh.asp
It's true that most (if not all) Muslim countries have financial systems that are not based on Islamic financial guidelines. But there are Islamic banks, Islamic investments, etc., and religious Muslims have poured a great deal of money into them. The WSJ article focuses on Western involvement in Islamic finance, but there are major players that aren't mentioned - e.g., Kuwait Finance House, which has been arond for some time and offers full-service Islamic banking.
My understanding is that fixed interest rates are what's forbidden. I keep my money in an Islamic bank, and I get dividends based on how well the bank invested the money, not based on a predeterminded interest rate (which is similar to what happened when I used to keep my money in a credit union).
As for loans, from what I understand, the Islamic banks can't realistically loan money without making any money, because in the international financial systems that we have, they would actually be losing money. So they use a method where they actually buy the car/house/whatever and then sell it to the customer at a higher price. There are other conditions; for example, I think that if there are any late penalties, they have to be given to charity, etc.
A few comments:
First, least importantly, I scare one of our readers: Lounsbury, Dont take this the wrong way but you scare me.
Queer how common this is, but no worries, if I did not scare some of our readers, I would feel as I were not doing my job correctly, which is in fact to scare and even abuse some readers.
Regardless, I should note that it is highly unlikely I could actually rent out my JV partner for tourism purposes, as she neuter me.
Moving along to issues of finance:
I am afraid I found Meph's paragraph confusing and am not sure what the last part conveys. No doubt my reading skills are declining.
However, regarding Ann's note, some comments.
It's true that most (if not all) Muslim countries have financial systems that are not based on Islamic financial guidelines. But there are Islamic banks, Islamic investments, etc., and religious Muslims have poured a great deal of money into them.
Several billions, but regardless the majority of capital remains in traditional rather than Islamic finance circuits.
On the interest rate dance:
My understanding is that fixed interest rates are what's forbidden.
Shrug, for every scholar you hear a different logic, and frankly a logic that makes no bloody sense when one looks at it from a non-theological perspective.
A return is a return. The pissy legalism on this issue, as any good economist can show, soon twists itself up in logical knots.
I keep my money in an Islamic bank, and I get dividends based on how well the bank invested the money, not based on a predeterminded interest rate (which is similar to what happened when I used to keep my money in a credit union).
Or so they claim. I'd suggest that what is really happening is the deposit accounts are being paid a floating rate tied to outside money market rates, unless the bank has magically managed to fix the problem of asset-liability mismatch (deposits are typically short, investments/loans typically long relative to term of holding). As I don't believe the Islamic bank has magically fixed this issue (unless it's deposits are all in money market instruments, in which case it has merely transferred the A-L risk to someone else), short term variation on deposit accounts have nothing to do with supposed variation in investment returns in a real economic sense.
But what the hell, the "Islamic" consumer knows fuck all about these issues, and one can easily benchmark off the LIBOR and tell them it's variation. Just get a Mufti letter to make everyone comfortable.
As for loans, from what I understand, the Islamic banks can't realistically loan money without making any money, because in the international financial systems that we have, they would actually be losing money.
This statement I can't logically parse.
I would call it axiomatic - and having fuck all to do with "international financial systems - that if the bank extends loans and makes no money, it loses money. There are costs involved in extending loans, they go bad, and generally speaking if there is not recognition of the time value of money, you get misallocation.
But leaving aside the last point, it's fairly simple, if I, The Islamic Bank of Ripping Off Gullible Believers extend credit (however wrapped up) and I make no money on it, well, you the depositer are fucked, because I can't pay you back (let alone give you a return).
Banking system will fail... ba boom. You go back to not having a proper banking system to finance companies, economy grinds to a halt.... International finance hasn't the slightest to do with these very basic principles.
So they use a method where they actually buy the car/house/whatever and then sell it to the customer at a higher price. There are other conditions; for example, I think that if there are any late penalties, they have to be given to charity, etc.
They disguise an interest rate within the payments. Period. The operation of "buy and sell" is simply there to give it the right wrapper. The higher price - which obviously includes installment payments - is the overall rate of return done at a present value basis.
As the article I linked to supra indicated, it's trivial to calculate an interest rate (implied) for these operations, so all one has really done is disguise it for the religiously deluded.
I'd rather opt for the simpler method of going for the spirit of the Quranic text, which overall clearly aim to permit above-board commerce and the financing of the same, and outlaw abusive loan shark type financing. Translating 7th century practices directly to the modern world means allowing for new developments, new science in the area of finance, etc. Most of the Islamic finance merely tries to dress up 20th century financing with 7th century terminology w/o any real change.
In some ways that is good, if it gets the ignorantly pious to use more efficient (although not entirely efficient) financing; it's bad in that it is effectively an act of dupery and in the long run isn't efficient.
Posted by: The Lounsbury at May 2, 2006 12:46 PM
I am afraid I found Meph's paragraph confusing and am not sure what the last part conveys
Was merely re-stating the contemporary manifestations of the consequences of 'abusive loan shark type financing' mate.
No doubt my reading skills are declining.
Either that or my writing skills are, although I suppose I am on fewer drugs generally.
Posted by: Meph at May 2, 2006 01:58 PM