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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.

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.

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104 comments on the article “Islamic Finance and the Possibility of Rebirth”

Displaying 91 - 100 of 104

Page 10 of 11

Anonymous

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

Anonymous

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

Steve0

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.

Steve0

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.

Anonymous

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.

Anonymous

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.

Moz

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

Moz

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

JMPerkins

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.

JMPerkins

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.

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