Rather like the current mania for ‘socially responsible investment’ (not investing in ‘sinful’ industries), and carbon emissions trading, another strong trend in the financial world these days is sharia-compliant finance. There are sharia-focused hedge funds (I kid you not), sharia bonds, sharia companies. It all boils down to how devout Muslims who want to raise finance or invest in business can do so while negotiating the complexities of their religious code and its ban on usury.
On one level, I have no quarrel with any of this so long as no coercion is involved and there might even be unintended benefits. If the capital markets can make it possible for people to live their lives in ways they feel ethically comfortable with, then that surely demonstrates the enormous flexibility and benefits of the market (it is as well to remember that anti-capitalist ideologies, be they religious or secular, rarely return the compliment in this way). Of course, in as much as sharia financing does screen out interest on loans, one suspects that the returns on such investments must logically lag behind those of regular capitalist activity, if certain money-making practices are deemed off-limits but then if Muslims wish to surrender some money to comply with their own beliefs, they are entitled to do so, just as environmentalists sacrifice some returns by refusing to put money into businesses such as oil or whatever.
I cannot help but feel there is something rather rum about all this sharia financial wheeler-dealing. Many of the financial instruments that are used for the purposes of sharia-compliant finance look awfully similar to regular capitalism to me. In fact, it is hard to see what is really the difference on ethical grounds between speculating on certain types of assets, such as gold, and lending money to a company in the hope that the firm will profit and repay the interest. It strikes me as being the financial equivalent of splitting hairs.
I also suspect, as this article at Bloomberg lays out, that a lot of people putting themselves around as sharia ‘experts’ are making a huge amount of money out of this trend and yet their motives appear in some ways to be as ‘selfish’ as that of any regular capitalist, not that I have a problem with the honest pursuit of long-term self interest, quite the opposite.
The moral prejudice against usury always struck me as irrational. Here is a good piece on the subject.
Usury-free Islamic banking is actually preposterous and hypocritical… the way they avoid interest is to use ‘cash and carry’ transactions (i.e. using the differential between the price of a futures contract of a commodity and the spot price). And the major component of that differential is…(drum roll)… the interest rate derived cost of the duration of the futures contract. When interest rates are high, the differential between a futures price and the spot price tends to also be high.
Islamic banking is bullshit because they do indeed benefit from interest rates, just indirectly.
The FT money section last weekend had a page on Shariah bonds. It seems very trendy for people of all beliefs to invest in them at the moment. So much so that financial rationality is thrown out of the window.
The FT gave no disclaimer when the adviser they quoted stated how “good” an investment a recent Bahrainian bond was because it yielded the equivalent of 5.24%, “better” than 5.17% for a similar US government bond.
That is a risk premium of 0.07% for loaning money to a tiny middle-eastern state instead of the worlds most powerful economic and military power. There has been a lot of talk about investors discounting risk recently but this is getting rather ridiculous!
The moral prejudice against usury always struck me as irrational.
It does, however, seem to be an almost universal human trait. Prohibitions against usury show up in almost every pre-industrial culture. Even in the developed world today, few people seem to have an intuitive understanding of how loans and interest work in the greater economy.
I suspect the basic human intuition is to regard loans or investments as reciprocal gifting. Reciprocal gifting forms the basis of most resource transfers in pre-industrial culture. People expect to receive resources and then to compensate the giver with equivalent resources or favors down the road. Requiring interest damages this feeling of reciprocity.
Of course, this may also explain why so many cultures still have trouble supporting advanced economies or why anti-capitialistic feelings never really seem to die out but continually regenerate new intellectual rationales every couple of generations.
In any case, we shouldn’t laugh at the Muslims to hard. Christians once felt the same why and only learned otherwise through centuries of experimentation. We should probably view Sharia capitalism as a positive step towards a more economically sophisticated muslim culture.
The prohibition is based on the fact that usury used to be what we today would call loan-sharking. Finding people poor, desperate, and ignorant, loaning them money at criminal interest rates, and then effectively enslaving them when they couldn’t keep up repayments; and were “legally” forced to go to extremes like selling their only means of survival and their families to try to repay. It’s a common tactic of drug dealers, pimps, and credit card companies.
This was before the rise of the bourgeoisie, when credit became a means of wealth-creation rather than wealth-redistribution.
The prohibition on medieval usury is quite understandable in context. The problem Sharia has is that the laws Mo set down are perfect and unchangeable for all time. So when the rest of us moved out of the 7th century and invented things like industrialisation and investment banking, Mo’s followers somehow have to bend and twist it all to fit within their framework, or get left behind. They are, of course, entirely standard capitalist financial products complete with interest rates, but surrounded by legalese and circumlocutions so they can handle the 21st century with a sort of medieval glovebox, and not get contaminated.
I’m not inclined to go for “slippery slope” “thin end of the wedge” arguments, so this is something I have absolutely no issues with. There should be no laws made against religious hypocrisy.
Sharia-banking is a sham. Instead of charging interest, they simply have the borrower ‘borrow’ more than he is actually given. Voila, no usury, but the effect’s the same.
I enjoyed first hearing about this last summer on the radio. The beeb news reader, no doubt with an eye at modern pieties, sounded exaggeratedly impressed with this scheme, and I was almost bowled along, until it became clear after about five minutes of feel-good waffle that the sultan had no clothing.
Actually, that means that you can’t pay the loan off “early” to avoid extra interest. It also means less paperwork and fewer calculations need to be done on the lender’s end. No real benefit for the borrower that I can see.
So much for the stereotype that Jewish bankers were supposed to be ripping everyone off.
Much Sharia banking is, as Perry explained, simply a manner of changed nomenclature. It makes no difference whether it is called a “service charge” or “interest” if the sum to be paid is the same.
Anyway, not surprisingly. The ducking and weaving to get past Islamic usury laws is controversial amongst muslims for the reasons Perry points out. Many imams etc regard it like one of their flock drinking wine and justifying it by saying, “it’s not wine, it’s processed grape juice”.
Pa,
I suspect the medieval usury laws (which began to fall out of fashion with the Renaisance) were a lot to do with maintaining the position of the feudal lords above the middle-classes. They may be understandable in that context but they were not justifiable. They held the march of civilisation back enormously because they maintained the status-quo. I guess it was the enormous profits that could be made from things like the spice trade that was really the tipping point.
Shannon,
Very interesting. You’ve got me thinking. Alas, I know little economics but… Here’s a related thing. I fix computers and do related stuff. Sometimes I have to advise people on what their machine is worth. I frequently get looks of horror when I give an honest appraisal. This is invariably followed by, “But I paid 600 quid for it at PC World!”
People seem to frequently have a very tenous grasp on the relationship between money, worth and time. Which is odd, considering how much in debt most Brits are and how (perhaps in ignorance) they seem very keen to pay a premium for having it NOW!. Perhaps, that’s why they are so in debt.
All attempts to play around like this surely depend on the proposition that God is easily fooled. So why worship him?
I read a brochure from an islamic bank pushing sharia compliant loans.
Observations:
1. They change the names for things. They still charge interest,
they just call it something else.
2. You can calculate the interest you pay in the usual way. Just plug the
time, principal and payments into the standard formula and out pops the rate.
3. Even the islamic bank admits they charge interest.
To comply with US bank regulations they have to state the rates they
charge on the required regulatory paperwork. Denying that they charge
interest would get them laughed out of the bank examiners office.
To get approval they calculate their interest charges the same way
every other bank does. When they get permission to open
they then rename all the things they do so there is not
intere
dearieme,
Islam is a juridicial religion. It is always possible to get off on a technicality. Conversely, it is always possible to be stymied by a technicality. It is about obeying the letter and not the spirit of the law. For example.
I’ve been told (by a far-left church historian) that the Catholic Church’s ban on usury stemmed from the notion that if one could help another at no cost, one was obliged to do so. To unsophisticated people, lending money seems costless–your box of gold is lighter for a while, but then it gets filled up when the loan is repaid. So profiting from a loan seemed immoral (much as if I were to charge a passing stranger asking for directions for pointing him in the right direction). Once the concept of opportunity cost was created, the “cost-free loan” notion became absurd, and the ban on usury was lifted. The problem with Muslims is that many of them are stuck in the middle ages.
The actual problem for Muslims is that they have no mandate from the koran to look at the spirit, or intent, behind a law, but are stuck with the literal wording. Nor do they have general rules, like ‘Treat others as you would like others to treat you.” All their rules are specific laws. On the plus side, this should allow them to drink beer, since only wine was mentioned in the Koran. On the negative side, as others have said, where in the Koran are there plans for how to build planes? Should you build them, if they are not mentioned?
“The prohibition is based on the fact that usury used to be what we today would call loan-sharking. ”
From what i know the starting point for loans were the trading ship fleets in Mediterranean.
At Roman times loans were very comon to build a fleet or a couple of fleets.
I think we would be at XVIII Century developement level without usury.
sorry, should be couple of ships.
As various other people have said, don’t lets get het up about what other people want to do with their money.
There may also be unforseeable benefits in the use of ingenuity to get good results for superstition. Coping with ritual calendars gave us astronomy, and thus physics. The mediaeval Christian evasion of the Church’s usury prohibition resulted in the commenda contract, thus the bill of exchange, thus the cheque, thus modern banking and clearing systems. The route from Leviticus 25:37 to PayPal was traversed by a series of imaginative side-steps round convention. Who’s to say Sharia finance won’t do similar good (as Sharia-based prohibitions on wine may well have encouraged the art of distilling)?
I get the impression that being ‘Sharia compliant’ is (these days) as much about how you structure an arrangement as anything else. But just as corporate lawyers regularly structure a deal to be complaint with tax and other regulations, I don’t see it as particularly hypocritical if our muslim bretheren structure their deals to conform with (their view of) what Shariah demands.
There might even be advantages because like any niche product, their will be situations where this particular way of doing business is well adapted to certian types of transaction. I have heard it argued (I cannot confirm or refute) that there are lots of similarities between silicon valley VC funds and Shariah finance–you probably wouldn’t want to use either model to fund a ship-building enterprise that way, but possibly good at what it does.
The other advantage may be that being Shariah compliant might be a good marker for some other desirable trait. ‘Ethical’ funds often out-perfrom comparable regular ones. Why? Maybe because their is money in being ethical. Or maybe because it takes a high level of management competence to comply with ‘ethical’ requirements–so these funds tend to be better managed in general. Something similar could be going on here.
It’s all a lot of mumbo-jumbo to basically allow the orthodox to stay within the letter of their restrictive laws. It is no more or less daft than similar arcane constructs such as the Eruv(Link)
However the existence of these kinds of things indicates weakening of the orthodox tenets of the religion in question, and is therefore a welcome sign of creeping liberalization in those religions.
Shannon, you make excellent points and I am certainly not “laughing”, but expressing a bit of puzzlement. I genuinely don’t get what people who invest in these financial products think they are achieving ethically, given the sort of argument Perry made in the first comment on this thread.
Interest is no more than the charge you pay for hiring someone’s money. One would not expect Avis to let you hire a car for free just because you bring it back, so why should there be no charge to hire money?
I must say I have a problem with a religion which does not trust its adherents to know how to wipe their own bottoms. I know that Islam is about submission to the will of God, but I like to think the Creator has more important things to worry about than whether one wipes from front to back or back to front.
Johnathan,
Perhaps these non-Muslim investors are seeking out a market position that has a high correlation with “Muslim”. The only one that comes to mind is “backed by oil”, but I’m sure there must be more. They could see a rise in oil prices as benefiting Muslims and so they want a piece of the oil action by getting into sharia based products.
Just a guess.
John K: I wonder what Sheryl Crow’s position is on this.
Lindsay wrote:
‘The other advantage may be that being Shariah compliant might be a good marker for some other desirable trait. ‘Ethical’ funds often out-perfrom comparable regular ones. Why? Maybe because their is money in being ethical. Or maybe because it takes a high level of management competence to comply with ‘ethical’ requirements–so these funds tend to be better managed in general. Something similar could be going on here. ‘
Funny, but I can’t find any evidence that ‘ethical’ investment funds, as a class, out-perform comparable regular investment funds. Some ‘ethical’ funds outperform some ‘regular’ funds, to be sure, but the general trend seems to be that ‘ethical’ funds perform about as well or slightly less-well than comparable ‘regular’ funds.
What is your basis for this assertion?
llater,
llamas
These arrangements are the modern day Islamic construct of the medieval practice of contractum trinius. Even in medieval times intelligent people recognized that lending money came at a cost to the lender, and this cost should be paid by the borrower who was receiving the benefit of the capital. To get around the usury laws, the two parties would enter into three seperate contracts, I believe one was the loan itself, the second was a type of profit sharing contract for collateral, and the third was an insurance contract on the business, where the premium represented the interest. Someone should probably fact check that, but the point is that likeminded people who understand economic reality will always find a way to do business regardless of religous law. Interest is outlawed? Then call it something else.
Maybe I’m going on a tangent, but I feel our times are becoming more troubled financially. The vast chasm from the poor to the wealthy is growing, and as greed goes, the richest just want more. You can only get so much from a stone, and I think usury will be a last hurray for the greedy “You need money, I’ll lend some to you…at quite a cost.” The moral argument, I agree, on usury with the definition of any type of fee is weak, but the rates and loan types I’m seeing today is troubling and bring usury to the ugly level. For those in the states, here’s some good usury info.
Blimey, someone’s just woken up from their May Day revels.
Funny. I’m still seeing home loans at or about 6% for 30-year fixed (I just re-financed at that not long ago). And isn’t zero-interest auto financing still available?
Looked at my credit card contract: It’s around 15%. It’s academic, since I never carry a balance. And these are historically very expensive credit, as there’s a certain amount of risk to the creditor that doesn’t exist with a house or a car.
If you’re referring to the current noise about sub-prime home loans: VERY high risk loans. The borrowers would not likely be able to obtain enough credit to buy a house at any price a decade ago. Ditto payday loans. This happens a lot: we can choose between “too damn expensive” and “completely unavailable.” There may be sound reasons to not provide credit to people who only qualify for these types of loans. It’s often desireable to not prescribe Fentanyl to a guy with a pain medication addiction also, but we don’t ban painkillers because some people shouldn’t use them.
I love carbon emission trading. I trade my petrol for carbon emissions and my car MOVES! :O
I wonder what Sheryl Crow’s position is on this.
I imagine she has someone to do it for her.
Financing can be Sharia Law and pre-Calvin compliant if the financier is taking a direct risk in the enterprise/person he is working with.
If you put up capital and expect a fixed rate of return regardless of the success or failure of the venture that is usury in the Sharia system — not stewardship of capital.
If you put up capital and contract a repayment based on the revenue or profit of the venture that can be Sharia compliant. For example: if the contract stipulates that you will be repaid $105 on a $100 capital outlay based on receiving 10.5% of the first $1000 in sales of the venture, that would be compliant.
If the $105 comes in faster than expected you get a better rate of return than the contract was based on. Slower; a lower rate or return. No revenues and you could be out the full value of your capital outlay with possibly no recourse.
It it also very important to note that in a fiat money system where all loans create money out of thin air, thereby debasing the value of the existing money units in the system, all loans are a form of theft. Some of this theft is hidden if the venture using the money generates new wealth (i.e. increases the goods or services in the system that a fixed number of money units are chasing), but if the venture goes bust, the created money only benefited the banker/investor who, through the power of fractional reserve banking, gained the ability to loan additional money off the “value” of the first loan.
Fully understood, our Western debt-based usurious financial system is based on theft. Libertarians should reject it on principle.
The Sharia Law ban on usury affords a foundation for a financial system much more in line with the libertarian principles denouncing fraud and theft.
Usury is a topic worth further study:
http://www.jbs.org/node/4764
Most Sharia Law “banking” is indeed a sham. However…
Financing can be Sharia Law and pre-Calvin compliant if the financier is taking a direct risk in the enterprise/person he is working with.
If you put up capital and expect a fixed rate of return regardless of the success or failure of the venture that is usury in the Sharia system — not stewardship of capital.
If you put up capital and contract a repayment based on the revenue or profit of the venture that can be Sharia compliant. For example: if the contract stipulates that you will be repaid $105 on a $100 capital outlay based on receiving 10.5% of the first $1000 in sales of the venture, that would be compliant.
If the $105 comes in faster than expected you get a better rate of return than the contract was based on. Slower; a lower rate or return. No revenues and you could be out the full value of your capital outlay with possibly no recourse.
It it also very important to note that in a fiat money system where all loans create money out of thin air, thereby debasing the value of the existing money units in the system, all loans are a form of theft. Some of this theft is hidden if the venture using the money generates new wealth (i.e. increases the goods or services in the system that a fixed number of money units are chasing), but if the venture goes bust, the created money only benefited the banker/investor who, through the power of fractional reserve banking, gained the ability to loan additional money off the “value” of the first loan.
Fully understood, our Western debt-based usurious financial system is based on theft. Libertarians should reject it on principle.
The Sharia Law ban on usury affords a foundation for a financial system much more in line with the libertarian principles denouncing fraud and theft.
Another way of looking at it: If a person loans money, and wealth is created, every one is society benefits from their increased purchasing power – even the lender who only receives back his principal. Under our current Western banking system however, a lender has much less risk (like pawning off worthless mortgages to others) and often is the only beneficiary of the increase in money supply he created.
Usury creates a moral hazard. It is not only a religious issue.
It’s a a topic worth further study.(Link)
– The Problem –
This is an attempt to state it simply, because if you understand the problem, then you’re going to see the solution clearly as well. If it doesn’t make sense the first time you read it, try reading it again. Eventually, the whole picture will sink in…
A quick history of money
1) Once, gold and silver were considered the only ”real” money, but it was heavy and risky to carry around…
2) So people paid goldsmiths to store the money, and got paper receipts for it…
3) After a while, people used the receipts like money, and left the gold in the bank most of the time. So the bankers got clever and came up with a scam…
4) The banks printed off receipts for more gold than they actually had, and ”loaned” those receipts out to charge interest on it. They had to keep the truth about how much gold they really had a secret and hope that not too many people would ask. This let them make a lot of money charging interest, because they could charge interest on MONEY THEY DIDN’T HAVE.
An analogy can be made using property and titles. Here’s the scam in another way:
Step 1: Acquire a vacation home,
Step 2: Sell the title to the home to one person,
Step 3: Sell the title to the home to a DIFFERENT person,
Step 4: Hope they both don’t show up on the same weekend!
Fractional reserve banking lets a bank say to a depositor that all his money is safe and sound at the bank, while at the same time they get to loan most of it out to someone else to charge interest on it. So there are two people with a legitimate claim to the same pile of money. So whose is it, really? And where is it?
It gets stranger: when a borrower gets their money, it will end up deposited into a bank as well. This money then becomes backing for another loan, and that loan gets deposited, becoming backing for yet another. If you do the math, you will see that far more money is on deposit in all the banks than existed in the first place! Where does all this money come from? The answer: It is simply CREATED. Since money is not gold, but only paper, banks can ask the Federal Reserve system to just make more!
The story of the vacation home is a good analogy of how banking works today, except for one important thing: there is no home. Without gold, silver, or some other commodity backing it, we have all been trading titles to property that doesn’t exist! Paper backs paper, and all they represent are promises to pay. This is the reality of money, and is quite different from how most of us expect it to be.
What’s the result?
1) Loaning money while claiming it is still on deposit increases the money supply, essentially creating more money (otherwise deposits would vanish). In essence, for the bank to have your cake and loan it too, it must create more cake. This increase in money supply is the cause of inflation.
2) Almost every dollar that exists is owed to a bank somewhere, because at some time in history, it was created when it was loaned out.
3) The amount of money owed to banks is more than all the money in existence! So we cannot possibly get out of debt under this system. The bulk of this debt is in the form interest, which is an arbitrary amount of money banks demand in return, but never gave.
4) There is no money, in the real sense. Just checks, data stored on computers, and promises. It is all created by typing on a keyboard, and signing signatures. The only tangible assets in regard to money anymore is the collateral we pledge when we ask for a loan. The money they loan you comes from nowhere, but the assets you lose in foreclosure are real!
5) Because the US government borrows from the Federal Reserve, bankers have the power to influence our society and government by controlling finance. They decide to create (or not create) money depending on who’s asking, and for what. They choose what projects get funded, and let other needs wither on the vine by starving them of working capital. This subtle yet immense power is more than enough to undermine democracy, and guide the course of a nation’s history.
So what’s the solution?
Simple. The public must demand that money must not be created by loaning it into existence. It must be something that is openly and publicly controllable, issuable, accountable, and interest-free. Otherwise, a class of parasites will rise to power in society by cleverly disguising the fact that the money they are creating, spending, and controlling us with is MONEY THAT ISN’T EVEN REAL.
I just wanted to share my thought as a Muslim. Being in the US, the shari’a law does sound almost the same as other banking/financing companies at first. Upon further reviewing, it has made me to think that there are some differences. It definitly is in its premature stages; therefore, it has to be bound to the usual laws (such as talking about interest rates before staring the bank) before it is accepted diversly and changes are made in current laws/policies/procedures. I just feel like the current widely system needs to be changed regardless. I am tired of the high variable interest rates and all the other things associated with it.
Another thing I wanted to share was that, the fact that I know I am investing or dealing as islamic as I can with my financial situation is a relief for me. In some cases it does not make a perfect sense because I am not an expert. So I rely on the expert opinion. If Muslim bankers say that Shari’a banking is my way of making sure that I am one step further to be compliant with my religion, then I will sleep better at night (I feel more comfortable). That’s all for now.
We all have our own separate Beliefs, founded in various religions, because we are individuals. It only makes sense that a situation such as this would produce various ways to praise OUR HEAVENLY FATHER, the Creator. I think my Beliefs are correct as much as you do yours.
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“Everyone thinks he’s right. And some of us are so convinced that we’re even willing to fight to the death for what we believe. And with all that conviction, sincere as it may be, we keep digging ourselves in, and making that [hole] deeper and deeper, because in the final analysis, if everyone is right, then no one is right.
So what’s the answer? Don’t be so sure of your beliefs. Don’t be so quick to jump to your belief, because what you believe may not be as true as you first thought. Have the courage to filter your beliefs through the filter of common sense. Don’t take your preconceived beliefs and try to justify them rationally. Instead, use rationality to come to your beliefs . . . And whatever doesn’t make sense, have the sense to let it go. . . And if we don’t get our heads straight, it will only get worse.” -Nissim Dahan
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I do not want to force anyone to believe as I do. Then it would not be your will, it would be my will. I accept Jesus Christ as my Savior. You may not. Whether you choose to believe or not is your decision, not mine. I have put my ’Beliefs’ through the ’Filter of Common Sense.’ Have You? We all are not going to have the same convictions about ‘Divinity‘, the same religion, or even the same beliefs about a common religion. Wanting to kill someone because they do not believe as I do, on anything, is not good. I should have the patience and tolerance to accept the fact we do not agree. Common sense.
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Furthermore, there are bad elements in every religion, culture, and nation. I can not say one religion, culture, or nation is bad because of some and not all. Thus, not all Muslims are bad when a few do wrong; not all Christians are bad when a few do wrong; not all Middle-Easterners are bad when a few do wrong; not all Americans are bad when a few do wrong; etcetera. Plus I can not blame the people for what their government does. We all, worldwide, have bad politicians, bad bureaucrats, and bad military leaders. And the same is true as before. All are not to be blamed for the actions of some. Common sense.
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So what is the answer? I personally agree we must stop ‘Extremism.’ Such things as killing, fighting to the death, and forcing your will upon others are extreme. I also personally agree with the ‘Golden Rule’ which should be common sense:
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“Do unto others as you would have done unto you.” -Jesus Christ
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We all will not agree on everything; we must accept that situation. So let people decide for themselves what is currently best for themselves. If someone wants to do something that does not affect you, then let them do it. You may not agree with what they are doing , but let them. OUR HEAVENY FATHER obviously does not want to control us. I believe we must follow that example. Do not force your will on someone else. If their actions will not affect you, then let them. Not advocating hedonism, let their will decide what is best for them. Common sense.
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I’m not forcing my will on you. Why are you forcing your’s on me? May OUR HEAVENLY FATHER’s Will Be Done.