Journal of the mental environment
“We’re running an uncontrolled experiment on the only home we have.”
Islamic Finance and the Possibility of Rebirth
We’ve never really grounded our financial culture in solid principles, other than the sole one of making as much money as possible.
- Thu, 09 Oct 2008 10:58 am — Posted by Joel Myers
- | 52 comments
With the financial markets in the gutter, and the trickle-down effect starting to be seen in many of our daily lives – friends and neighbors losing jobs (I especially see it around here in New York) – now seems like a good time to reflect on our financial culture here in the West.
A lot of us probably hate the idea of finance, think it’s a sleazy profession motivated by greed. But in many ways the developments in finance in Europe over the past five hundred years have been a crucial part of our development, helping to make possible a huge array of innovations, from the first clothing factories in England at the end of the 18th century, to the development of the iPod at the end of the 20th. Despite the gains facilitated by finance, the benefits to society have always been coupled with a wild irregularity, a boom-bust cycle, which Marx described as part of the inherent contradictions of capitalism, contradictions which would eventually lead to its demise. We’ve never really grounded our financial ideas in solid principles, other than the sole one of making as much money as possible.
Perhaps there’s another way. A shining example that has come out in the past fifty years, one that casts serious doubt on the Western no-holds-barred style, is the recent development of the principles of Islamic Finance. Based on Sharia law, which derives its authority from the Holy Qur’an, the principles of Islamic Finance have provided a beacon of clarity and common sense in good investment practices which are desperately needed here in the West.
What is at the core of the philosophy of Islamic Finance is the idea of money a measure of value, and not a real asset in itself. According to the principles of Islamic Finance, profiting from money–including charging interest on loans–is regarded as riba, or non-permissible investing activity under Sharia law. Instead, what Islamic Finance emphasizes is the idea that the investors should share the risks involved in whatever projects they are investing in, and that they should be investing in real things, whether it’s land improvement projects, housing, or helping start up a new business. This represents a glaring difference from daily activities of investment firms in the West, who get huge returns by hacking variations in currency exchange rates, legally manipulating stock prices, and engaging in the kind of risk-spreading and avoiding activities (through an ever-increasing range of derivatives) that have created the huge mess we’re in now.
We have to learn to differentiate between the legitimate function of finance, which is to provide money to start and expand a wide range of projects, and the activities that are really disconcerting: the hacking of the markets, currency trading, calls, puts, the entropic soup of Western instruments many of which do nothing, absolutely nothing to help start projects, nothing to help businesses stay afloat during the hard times and expand during the good, nothing to help people buy their first homes or first cars or, yes, even go to college. These do nothing at all except fatten the pockets of the financiers that carry them out. They’re like skimming off the top of a huge pot of resources made from the commonwealth, from the work of people who make an honest living. And at the end of the day this “skimming” leaves everyone a little bit poorer, with a little bit less left in the pot, and it’s a practice that really ought to provoke outrage.
At a time like this we need to start thinking about how to put real principles into the world of finance, ideals that are at the core of Islamic Finance and at the core of human decency.
In my idle time, I dream of the day when I can walk down Wall Street and see coffee shops, music halls, see kids busking on the street, see the hideous cigar store on Broad Street turned into a hangout space for artists and philosophers where they talk about the latest ideas and ideals while on break from the tedious job of handling finance. I dream of the day when flower vines grow over the grotesque naked buildings of the financial districts here and in London and in Tokyo and in Dubai, for the day when finance is again the pulsing heart of the coming Renaissance. I dream of the day when—as one of my friends put it—a tree grows from the New York Stock Exchange.
Comments
QUOTE: "which derives its authority from the Holy Qur’an"
Why call it "Holy"? Why call the Dalai Lama "your holiness" or the Bible the "Holy" Bible. These things are not holy. The Qu'ran's name is simply the Qu'ran. There's no need to lie about it and add the word "Holy" to it.
If I loaned my sister ten grand to start her shoe store, I eventually would only get my money back? I suppose the incentive would be that I could shrug my shoulders and tell my needy friends that my money is tied up in shoes?
You're talking about usury. http://en.wikipedia.org/wiki/Usury
I understand the argument and have sympathy for it. However, I would humbly refute the assertion that the 'principles of Islamic Finance have provided a beacon of clarity and common sense.' The principles of Islamic finance are not based upon argument and reason (clarity and common sense), but rather dictated by the irrefutable commands of Allah as recorded by his prophet and as interpreted by whichever mullah you happen to favor. So they are a beacon of obedience... which you could then argue is better (at least in part) to what we currently have.
Coincidental, for the longest time this is how christians/catholics felt and all throughout the middle ages there was a prohibition against money lending (for interest) because of . I have heard that this is one of the reasons jews are so heavily associated with banking, because (at the time) they did not have the religious prohibition from engaging in such practices.
Also of note, damn near every religion has principles critical of usury. A damn near every religious adherent routinely ignores these.
Thank you for writing this article.
Nothing is as it seems, my former boss did business in Dubai.
The fact of these "interest-free" lending is that if you lend 100$, you only get 90$, and you have to pay back 100$.
So don't tell something as fact until you've done it yourself and can speak from experience.
The question of erosion in the value of money and hence the need for indexation is an interesting one. But the Islamic jurists have ruled out compensation for erosion in the value of money, or, according to Hadith, a fungible good must be returned by its like : 'gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, and hand to hand ...'
One must distinguish between profit and profiteering, and Islam has prohibited the latter as well.
Some writings have alluded to the 'unearned income' aspect of interest payments as a possible explanation for the Islamic doctrine. The objection that rent on property is considered lawful is then answered by rejecting the analogy between rent on property and interest on loans, since the benefit to the tenant is certain, while the productivity of the borrowed capital is uncertain. Besides, property rented out is subject to physical wear and tear.
Islamic banks engage in equity financing and trade financing. By its very nature, Islamic banking is a risky business compared with conventional banking, for risk-sharing forms the very basis of all Islamic financial transactions. To minimize risks, however, Islamic banks have taken pains to distribute the eggs over many baskets and have established reserve funds out of past profits which they can fall back on in the event of any major loss.
http://www.usc.edu/dept/MSA/economics/islamic_banking.html
This is true. It's a law of economics that money in the future is simply worth less than money in the present.
Lending money without interest can be a worthwhile project, but it should be considered a charitable donation. The lenders who operate under sharia law use special instruments like the one described above that are structured to obey the letter of the law. The wiki entry for "Islamic Banking"is decent.
I think the article's overall concept has good intentions and is valuable, but it's unlikely that a lending system that does not account for the difference between present value of money and future value of money and also include a fee to offset the risk of default would be sustainable. The lenders putting their money at risk would lose money over the long run.
You guys always attack religion and now your preaching the word of islam. religion doesnt work it brings hope but it brings war dont try to sell this crap off sure theres some good points but go over to the middle east and tell them your canadian... The middle east has been at war since the roman times and Irans leader denies the holocaust ever happended. Theres good and bad in every society in the world get over it blah blah blah rant
WOW, FINALLY something positive about Islam! :)
For an average Westerner who is chained to media’s images, brainwashed by centuries of Western disfiguration of Muslims and the West’s short term memory which peculiarly disregards Muslim civilization’s (once more powerful than the West itself) intellectual contribution to its Renaissance, this is quite disturbing to hear. I agree...
YET, Islam (and not how Muslims represent it which is more influenced by culture, bad politics, despotic leaders and ignorance than anything else) is truly the most rational “religion” (it’s not a religion in the Western sense of the word) out of all religions. At its core, it advocates morality at the individual level, justice, collectivism, democracy (as long as it does not go against prescribed morality), welfare-state and helping the needy, human rights, anti-capitalism, environmentalism, protection of minorities, inheritance laws that prevent concentration of wealth, etc. Moreover, despite the negative stereotypes, it has given women many rights such as the right to vote, right to property, divorce, etc, fourteen centuries ago- something European women at that time were just dreaming about...
As a 'westerner' who has lived in an islamic community for over a year I would say that I do not hate muslims but I do not trust or respect them. One thing my experience taught me is how fundamentally racist muslims are of all non-islamic people. And their attitude to women (muslim and non-muslim) is truly abhorrent. I have witnessed a woman being beaten in the street and when I attempted to intervene I was told to go away because the Qu'ran gave the man the right to beat his wife whenever he liked. I wonder how many of the rights the woman had she would gladly give up to live a life free of abuse.
Kalle, will there any commentary on Paul Krugman being awarded the Nobel Prize in Economics and how his basic principles help kick over the bucket of water?
There's no need to turn to Islamic Finance to find a "measure of worth" paradigm- We already have one; It's called The Gold Standard.
not a single country uses the gold standard anymore dude
Man.
You guys who are flipping out about the promotion of Sharia law need to CALM THE FUCK DOWN.
He's talking about ONE SINGULAR ASPECT of it.
He isn't advocating adopting it wholesale.
Grow up.
It may only be one aspect but if it was adopted it would be a foot in the door for Sharia Law.
The tenants of Islam are, just as with any religion, economic ideology, or political philosophy, tools. We can adopt whatever tools we wish and use them when they are useful. It is that old fashioned binary thinking, which is dangerous in the modern world.
Frankly, I am not afraid of sharia law, simply because, given the outlook of America, it is unlikely to ever be installed here.
It's about extracting a single idea that may benefit society. And Sharia isn't the only dogma to suggest the zero interest ideal in its economic blueprints. Plenty of non-muslim people have suggested it. People should judge the idea on its own merits.
Wow... TQFS...
I usually enjoy your blogs and articles, but promoting Sharia law? This makes me seriously question the motives of your campaign. For one thing, modern muslims have argued amongst themselves and their legal scholars as to how Sharia laws should be interpreted, so how is that supposed to apply to the largest financial system in the world? Also, I saw no mention of the "tax for non-muslims" a Sharia law financial principle meant for "subduing" people of different faiths. Are you promoting that as well? Adbusters missed the boat on this piece. One time, I can scratch my head and forgive your shortsightedness, but if the tone of your pieces continues in this manner-you've lost my support.
Yes!!!
We have to take a good look at Islam, beyond the hate speech. The power elite of the world want to destroy Islam for the finance reason alone. Islam is the last of the religions of the book to stand adamant against Usury. The Jews long ago embraced it. The Christians did so with the reformation. The followers of Zoroaster still call it "The worst sin" but they are few in number. Only Islam stands against Usury and if one does not believe the Prophet, pbuh, well... Just look at how nearly unregulated usury has done far more damage to your country than a thousand 9/11s... Yes, a thousand times, for look at the wars, the CIA terror, the lowering quality of life, the rape of the earth, a thousand times the damage is a mild guess, and all to make rich elite people richer.
I'd suggest pursuing the work of the philosopher Peter Lamborn Wilson aka "Hakim Bey". One of the books he's written is "Pirate Utopias" and another is "Dancings on the Margins of Islam". America is a lousy "Christian" nation, but it'd make a decent "Moderate Muslim" nation.
I know it Muslims finance is totally awesome! Who doe you tyhink stole the zero coupon bond strategy from the muslims, and used it to get around usery laws? The Crusaders of course! That's how industrial revelation in 1700;s started, stolen Muslim financiel techniques tricked out to Boost the man's plans to produce things. Took Muslim finance tools from them and made them impoverished
The trickle-down effect: kings steal from peasants to fill their tables with delicious food; the peasants get the crumbs that fall off the table.
The negative-trickle down effect? Let's see... you must be a supply side economist. "Wealth destruction" and "wealth creation" are your Friedmanian notions - but they are nonsense - the modern equivalent of astrology.
You guys believe in this, right? Mathematically, modern economists say that this is the same as "energy creation" and "energy destruction".
You won't find "energy creation" in any physics text - because energy (matter) is conserved; it can be converted from one form to another, but not created or destroyed. Economists don't even understand basic 19th century physics - it's not part of the curriculum.
Wealth is also conserved. Our planet has a limited amount of surface area; that surface area is land or water, and all wealth comes from the land or water. Sunlight keeps everything from freezing. That's our basic life-support system.
The wealth that we have relied on over the 20th century to fuel our economy is called fossil fuel - and while it provides us with useful energy, it also has been polluting and degrading our planet to the point where the life-support system itself is under increasing stress - meaning it will not be supporting as much life as before.
To economists, there is no problem with that - because an economist is incapable of looking more than about 5 years into the future. That's true naivety - but since it serves the interests of the modern-day aristocrats, economists get away with that kind of nonsense.
A supply-side economist is an even dumber version of a modern economist - one who believes that by controlling supply, one can control the economy. They are incapable of understanding the most simple of concepts, which is that a healthy economy is only possible if the underlying ecology is also healthy.
We are seeing a downturn in agricultural output due to global warming, we are seeing increased insurance losses due to more extreme weather events, we are seeing fuel riots all around the world over supply interruptions - because we've raided nature's pantry without replenishing it, trashed to oceans and the atmosphere, and now all we have left are scraps.
We are going to have to build a new economy, and the basis of the new economic paradigm is going to be the healthy ecology. That mean relying on sunlight and wind and photosynthesis as the basis of our energy platform, for starters.
We are simply not going to allow economic activity to undermine the health of the ecosystem, because that will also eventually destroy the economy. It's either that or go down in flames - unfortunately, many of our psychotically greedy and nihilistic billionaires and their wholly owned politicians and other trained monkeys (academic economists) are perfectly happy with the latter course.
That is a good comment. This reminds me of what is put forth in "Zeitgeist:Addendum". However, we really need to be thinking about structure, not just philosophy. What structures do we put in place to assure intelligent management of resources? To avoid mis-placed power?
Lovely article or comment. I think is not an ideal or utopian thought. The Anthroposophy, an spiritual philosophy based on the teachings of Rudolf Steiner, who as well create the Waldorf Pedagogy. Create the Social Banks. I invite all to check about this Banks. From Argentina Coco
naive
How old are you?
i dont know how applicable religion would be on finance, as it has no economic power to destroy, threaten or make capitalism nicer. marx was mentioned, and he makes a much better argument of creating a fair economy, arguing for making the working class who have to live under its conditions be in direct democratic control over it.
and the working class is doing the god damn work, therefor capitalists are dependent on workers to gain profits. that where power lies.
so get teached! at www.marxist.com or some other place, you would learn about what can make capitalism accountable to the people. its needed!
I think it's funny that you liberals are acknowledging the trickle-down effect, now when it's a negative trickle-down.
exactly
In order to acknowledge an effect you have to notice it first. The people at the bottom did not get much (or even anything) during the good times but they will surely be the worse off in the bad times.
that's because we never really noticed the benefits of it so much. I mean it's not like this country's gap btw the rich and the poor hasn't been widening for the last 30+ yrs..
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