July 14, 2006
Islamic Banking - Incoherent Whinging
It is not often I read something in The Financial Times that provokes me to think in contempt, what the fuck were they thinking, but today’s arty entitled Banks subvert Islam’s ban on usury by some cretin named Tarek el Diwany certainly did.
The commentary piece, which largely covers a truly superficial and irrelevant ‘history’ of
European lending institutions supposed origins, does put its finger on a real issue, the superficiality and conflict of interest ridden process by which “Islamic” products are being created today. Whatever one’s interpretation of the religious ban on usury (whether you have the economically illiterate if traditional penchant for seeing it cover all interest or whether you see it in the more rational and economically literate light of a ban on abusive lending), one can not deny that the current system which institutions are creating “Islamic” products is entirely incoherent and more than a bit of a sham; or at least that it is ridden with severe conflict of interest issues that are bound to result in debilitating corruption.
For all that I personally lack much fundamental respect for the rational behind “Islamic products” the practical side of me sees them as potentially useful for bringing numbers of Muslims into the modern economy and financial sector. Yes, as I have admitted in the past, the “Islamic products” are inferior to plain vanilla financing products, impose utterly unnecessary costs in both direct and indirect terms, rest on shaky rationalizations and economically irrational and illiterate theology, and generally speaking have a whiff of deception and dishonesty about them. However, all this being allowed, I am all for not letting the perfect (or the better) being the enemy of the good (or better). While I and many Muslims properly educated in the economic analysis of risk and with something of a respect for the injunction to use reasoning facilities find the interpretations of the ban on usury to cover, well usury, to be convincing, there are large numbers of superficial, economically illiterate traditionalists who do not. As I rather doubt that they will in any reasonable near term be convinced by rational analysis, preferring blind tradition (and the edification of the “Salaf” as more perfect than human) over reason, one has to work with the fact that in the near term and even medium term large portions of the population will try to avoid the appearance of paying the time value of money, and that the proper point of comparison for them is not the modern financial sector, but the medievalesque traditional practices. Thus, the “Islamic” products can represent a real gain – despite their highly dodgy nature; and therefore the current situation with its vast opportunities for corruption and clear conflict of interest is a legitimate problem.
However, all this being said, el Diwany’s article can best be characterised as retarded.
Soon, the money-lenders of Europe were adding to the church’s theological dilemmas with the Contractum Trinius. Here, the lending party would invest money with a merchant on a profit and loss sharing basis, insure himself against a loss of capital and sell back to the merchant any profit above a specified amount. In isolation each of these contracts was viewed as permissible by the church scholars, but their combination produced an interest-bearing loan in all but name.
Today, those who wish to make a living from lending money are adopting the same approach to defeat the usury prohibition in Islam. Combining Islamically permissible contracts to produce interest-bearing loans has become the specialism that is “Islamic banking”. The fact that some leading Islamic scholars are being paid hundreds of thousands of dollars to give religious judgments by the very institutions whose products they are judging is, to say the least, a conflict of interest. But the problems run deeper than this. Even if 98 out of 100 scholars judge that a product is prohibited, an Islamic bank can employ the two who permit it. In effect, the banks are able to choose the rules of the game while telling everyone else that they are only following scholarly advice.
There is something to this complaint, if of course one accepts the traditionalists irrationalist worship of medieval logic; certainly the fusing of the different contracts to create essentially synthetic interest is a work-around the traditionalist confusion of rational risk-based interest charges and usury.
The whinging on about the scholars is pure irrationalism – given (i) there is no such thing as a central body or analysis in Sunni Islam and never will be, (ii) there is really no rationality to whinging on about numbers of scholars, 98 ill-informed idjits are less valuable than one well-educated and serious scholar, (iii) legitimate difference of opinion.
Now, there certainly can and should be transparency with respect to who has authorised what so that individuals or bodies can comment and recommend authorisations.
In short, ratings. When a ratings body gains credibility, then you’ll have a workable mechanism, else it is all just pure whinging on that one’s own point of view has not won out.
Overarching these issues of moral hazard and legal semantics looms the more fundamental question of whether Islamic finance can be practised within an interest-based monetary framework.
Now this is at least rational – and indeed well-placed. Not his answer per se, but the posing of the over-arching issue.
The gestation of products within this very un-Islamic framework has resulted in the ultimate mutant, an Islamic personal loan at 7.9 per cent annual percentage rate courtesy of the Islamic Bank of Britain. How different this is from the original vision of Muslim economists.
By which he means “original vision of Islamist purist traditionalist who fabricated the essentially incoherent vision of ‘Islamic economics’ as a supposed field independent of economic sciences in general.”
That being said, of course it is dupery, everyone with the least bit of education in finance and economics can discern this if they’re honest with themselves.
However, our fellow apparently desperately needs the entirely irrational and illiterate pretension that money does not have a time value or that financing can work without it (either implicitly or explicitly):
I propose that by segregating the payment transmission and money-creation functions, and by sharing profits and losses instead of seeking interest payments come what may, bankers’ motivations would be much more closely aligned with those of their clients. A link would be re-established between the financial sector and the real sector, with beneficial consequences beyond the economic domain.
Note the oddball phrasing there: money creation he means (in a medieval sort of analysis) the cost of the risk of advancing capital against future payment – in short time-value of money.
The obsession with the pretence of an entirely artificial analytic structure re sharing risk as “sharing profits and losses” is quite frankly unworkable. It never has been workable and never will.
To undertake such financing one has to engage in equity financing – essentially venture capital/private equity financing – which is an entirely different and more expensive business than extending what we call debt financing (which has limited upside as well as somewhat more limited downside; when following standard regulatory frameworks re usury the debt financer has a limited upside participation, while the equity financer does not. On the downside, the debt financer gets more rights to recovery in recognition of the limited upside.)
However, our man, like every other person who advances these types of arguments, engages in an entirely magical thinking (I don’t even know what the bloody fuck he mans by “re-establish[ing]” a “link” “between the financial sector and the real [i.e. non-financial, probably in his mind essentially 19th and early 20th century style industry; the thinking breaks down badly re services] sector.”).
Bankers’ motivations are to profit – making financing more risky by restricting it to equity or quasi equity doesn’t align bankers more with the “real sector” but rather makes accessing finance more expensive and takes away one tool available. Which is not to say that private equity type financing is not good – I have often argued that it is a key component for growth in the region – but it is but only one part of the equation.
The resources and infrastructure of whole nations are increasingly being sacrificed on the altar of interest-bearing debt. If Islamic banking adopts a genuinely Islamic paradigm it can offer a solution to a world hungry for alternatives. If it does not, it will enjoy a brief life as a get-rich-quick bandwagon and then disappear into the relics of financial history.
This is simply incoherent.
The writer is author of The Problem With Interest; www.theproblemwithinterest.com
Which should be visited largely for the entertainment value and to learn our man has written this incoherent whinge as part of his effort to promote his bookie and consulting business.
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If Islamic banking adopts a genuinely Islamic paradigm it can offer a solution to a world hungry for alternatives.
Alternative for what? For getting screwed? This is just typical fucking econ-babble that merely obfuscates the issues in question while trying to make the author sound smart and in touch with the global economic zeitgeist.
Posted by: Meph at July 15, 2006 12:14 AM