May 23, 2007
The never ending list of new bans in Islamic finance
Before I mention this amusing theoretical case of a usurious zero interest rate, a few comments about today’s FT Alphaville’s entry on Islamic finance:
Islamic finance - based on a strict interpretation of the Koran that bans the use of interest in transactions
Usury. The Quran bans usury. What the Quran explicitly bans isn’t the topic of the Islamic finance debate. It’s whether any amount of interest constitutes usury.
Concepts such as derivatives and hedge funds, for example, are considered particularly controversial, given the Koran’s ban on gharar (speculation).
Ben Smith, the author of this entry really needs to get his info outside Tora Bora, because there’s no such ban whatsoever in the Quran. The discussion about gharar comes from some hardly known jurisprudence, and it's not even a prohibition. Even the obscure ramblings of those yawn provoking troglodytes have a more nuanced (well, confused) view on it than the one presented above.
Equity investors are allowed to buy only shares from certain industries. For example, insurance stocks are excluded because insurance involves a degree of uncertainty, risk or speculation, known as gharar, which is prohibited. (…) Stocks have to fit a certain financial profile, too. A debt-to-equity ratio of more than 33 per cent is unacceptable.
Thanks, Muslims need more ridiculous ideas to keep them backward.
The development has been driven by economic and political factors. The so-called “war on terror” in the aftermath of the September 11 2001 attacks helped to consolidate a sense of Islamic identity across the Muslim world, prompting many more to seek ways of expressing their religious convictions.
Identity politics turned wrong. Between those “reformers” who think that to be modern, one needs to stop being a Muslim, and those neo-salafis who think that to be Muslim one needs to be an Australopithecus, Muslims really need another proposal. One where not everything is forbidden until proven otherwise for example.
And the rise in the oil price has fuelled an unprecedented economic boom in the Middle East.
This is perhaps one of the greatest contemporary curses on Muslims. That such amounts of capital came through sheer geographical luck into the hands of the most backward among them, making their Bedouin superstitions and backward understanding of the world more visible and wider spread in fertile grounds.
But western banks have also spotted other reasons to embrace the sector. One is the fact that Islamic products can often prove to be distinctly lucrative. For, like any nascent, fast-emerging area of finance, the sector is so fragmented and opaque that it can often produce high margins – particularly where products are not commoditised.
So many suckers.
Moreover, contrary to what a casual onlooker might suspect, western investment banks do not appear to face any significant impediment as a result of their national affiliations – or lack of Islamic roots. That is partly because they tend to distribute their products through local Islamic banks, or act with a local partner.
An interesting remark by a friend who was more bothered by how Islamic banks operated than by the hypocrisy behind Islamic finance: his argument is an analogy with ISO 9001 certified companies. To obtain the label, all the production chain, providers included, must also fit certain quality requirements, preferably be certified ISO 9001 themselves. If a bank is to call itself Islamic compliant his argument goes, it should make sure its whole chain is also compliant.
However, the pattern also reflects a distinctive point about the way that Islamic finance operates: namely, that the religious “brand” of any product typically rests not in the reputation of the institution that has produced it – but with the religious scholars who have approved it. Thus, western banks have entered this field by engaging the service of esteemed religious scholars who can rule on the Islamic merits of products.
An incentive for the “scholars” to pimp the field of Islamic finance.
Unrelated to the FT Alphaville entry, this amusing theoretical case was brought up by the above mentioned friend, illustrating how a zero interest rate can be usurious. The case is based on deflation. When prices are falling, a zero nominal interest rate actually has a real interest component being paid. In theory, if the deflation is really strong, that interest component can be very high, to the point of being usurious even by normal standards.
Say, prices are falling by 20% a year and, in a zero percent nominal rate configuration that the interest-usury confusion illiterates are promoting, you borrow $100. Three years later, the actual value of whatever equivalent commodity is $51, approximately half of the original amount in terms of dollars. If you must give $100 back, then you’ve arguably paid some 25% in interest. Check this out for some much lower rates.
Though cases of deflation are relatively rare, they’re still real enough to make worth bringing them to the attention of the proponents of the interest-usury equivalence for a new ban.
TrackBack URL for this entry:
"Stocks have to fit a certain financial profile, too. A debt-to-equity ratio of more than 33 per cent is unacceptable."
I've always wondered how observant, interest-fearing Muslims could invest in equities at all. Paying interest is just as haram as collecting it, no? But corporate profits depend on both. If Muslims aren't supposed to invest in mortgage banks, how is it that they can invest in, say, Microsoft which has a pile of cash and earns on the order of 1.5 Billion USD annually just in interest?
Posted by: Anonymous at May 23, 2007 04:29 PM
I've recently been reading Bertram Russell on Aristotle, who also decried usury. According to Russell, the Greek word at the time denoted all lending at interest, not only excessive interest.
Aristotle wrote that money was only a means to an end and thus it was immoral to use money to make more money. It was only moral to use money to gain something 'real.' In his hierarchy, the only moral form of generating wealth was through landowning. Trade was immoral and usury, of course, was worst of all.
This reminded me a lot of Confuscian views of wealth.
Russell suggested that Aristotle's views on wealth were connected to the patronage of philosophers by landowners. Since landowners are frequently strapped for cash and the people who tide them over tend to want a return on their investment, there is always a natural resentment of the money classes by the landowning classes. This could well apply as far afield as China, despite the cultural differences.
Sorry for going WAAAYYY off topic with that, but I was wondering if there was any kind of similar class relationship with Islam? Mohammad, AFAIK, was a merchant, so it would be peculiar for him to be so unsympathetic to lenders, since that is such a vital component of trade. (Or if you prefer, the revelation to him would have to have been quite unambiguous that lending was wrong.) On the other hand, if later Islamic scholars depended on the landowning classes for patronage, or tended to be of that class, perhaps it is not surprising that they interpreted the Koran ever more strictly against mercantile interests.
Posted by: Antiquated Tory at May 24, 2007 11:46 AM
(Apologies for the double post. And for writing 'Bertram' for 'Bertrand.' I always make that mistake. Feel free to correct as you wish.)
Posted by: Antiquated Tory at May 24, 2007 11:49 AM
Interesting idea AT. People more knowledgeable than I about economic history in MENA can probably give a more accurate answer, but if memory serves, scholars were more from sedentary urban populations, mostly made of merchants/artisans. I don't know how much lending played a role traditionally there, but traditional Islamic jurisprudence is far from being as hostile to lending as today's as described in this previous entry or this google cached page.
My guess is the success of Islamic finance is a result of a mixture of factors, including but not limited to high levels of illiteracy, both general and/or specifically economic and religious, high levels of poverty creating those class tensions indeed and a fertile ground for 20th century socialism, as well as some misdirected identity politics which gained in strength with the globalization and increased visibility of conflicts.
Actually the FT Islamic Finance profile which I have in hand is far more interesting than the Alphaville arty/post.
I agree with Shahine Bey re his second para. More comments when I have more time.
Posted by: The Lounsbury at May 25, 2007 11:51 AM
L., I guess you're talking about the May 23rd report: http://search.ft.com/search?queryText=islamic+finance&aje=true&dse=&dsz=